Sonic Automotive Inc (SAH) 2021 Q1 法說會逐字稿

Good morning, and welcome to Sonic First Quarter 2021 Earnings Conference Call. This conference call is being recorded today, Thursday, April 29, 2021. Presentation materials which management will be reviewing on conference call can be accessed at the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the safe harbor statement under the Private Securities and Litigation Reform Act of 1995.

During this conference call, management may discuss financial projections, information or expectations about the company's products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation table and the company's current report on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

This is Sonic Automotive. That was very choppy from our perspective. I want to be sure that the listeners can hear. There must be a bad connection.

Yes. Everyone can hear.

Okay. Thank you very much. Good morning, everyone, and welcome to Sonic Automotive's First Quarter 2021 Earnings Call. I'm David Smith, the company's CEO. Joining me on the call today is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our Executive Vice President of Operations, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Mr. Danny Wieland.

First, I'd like to thank all of our teammates, customers, manufacturers and vendor partners for helping us achieve another record quarter.

During the first quarter of 2021, we continued to build on our strong momentum, coming off record adjusted earnings in 2020. We generated record first quarter total revenues of $2.8 billion, up 21% on a year-over-year basis, and record first quarter EPS of $1.23 per share, tripling our adjusted EPS of $0.40 per share in the first quarter of last year. These results were driven by strong performance in our Franchised Dealerships and another all-time record quarter for our EchoPark business, reflecting increasing consumer demand and continued execution by our team.

I'm pleased to report the positive trends in the first quarter have continued into the second quarter, and we continue to see strength in all facets of our business. We remain extremely confident in our long-term growth targets based on our current results and near-term outlook and the increasing number of Americans that are receiving vaccinations and beginning a return towards normalcy.

Given these trends and our progress to date, we're confident we can attain our goal of more than doubling total revenues to $25 billion by 2025 and significantly increasing profitability going forward.

In our core Franchised Dealerships segment, first quarter revenues were $2.3 billion, a 15% increase from last year. Total franchise pretax income was $70.5 million, an increase of $47.9 million or 211% compared to last year. On a 2-year comparison compared to the first quarter of 2019, same-store Franchised Dealerships revenues increased 14% and pretax income increased by $49.8 million, which is a 240% increase, reflecting the impact of our lower expense structure as a result of strategic actions that were taken last year.

Turning now to EchoPark. We continue to experience rapid growth during the first quarter, achieving all-time record quarterly revenues of $507 million, which is up 53% compared to the same period last year. We also achieved record quarterly retail sales volume of nearly 19,700 units, which is up 41% year-over-year and ahead of the 18,000 to 19,000 units we guided to on our February call.

In addition to top line growth, the adaptability of our EchoPark model in the current used vehicle pricing environment drove total gross profit per unit of $2,339 and above our target of $2,150.

Our first EchoPark delivery center in Greenville, South Carolina continues to outperform our model, selling 160 vehicles in March at nearly $1,750 in total gross profit per unit, generating $100,000 in store-level profit for the month. Our other new EchoPark stores and delivery centers also continued to ramp aggressively, with our Phoenix hub selling 288 vehicles in its first full month in March, driving $125,000 of store-level profit. The integration of December's Used Car King acquisition is already ramping up nicely, selling 305 units in the month of March at over $2,250 in total gross profit per unit.

We continue to apply our learnings to each new EchoPark store we opened or acquired, and results are proving the scalability and momentum of the EchoPark funnel. We believe these results showcase the flexibility, value proposition and consumer demand for EchoPark's unique preowned vehicle shopping concept, as more guests choose to visit our stores and/or shop EchoPark.com for the incredible inventory selection, unbeatable pricing and a unique guest experience that we offer.

As an update on our expansion of EchoPark's nationwide distribution network and omnichannel retailing platform, we opened 5 new locations in the first quarter. And in April, we opened our latest retail hub in Birmingham, Alabama and our third delivery center in Charleston, South Carolina. We remain committed to opening 25 new EchoPark locations in 2021. And we're on track for our 140-plus point nationwide distribution network by 2025, which we expect to reach out over 0.5 million preowned vehicles annually by that time.

With our progress today and the continuing development of our omnichannel retailing platform, we are confident that we can reach $14 billion in EchoPark revenues by 2025.

In addition to the year-over-year comparisons for the first quarter, this morning's earnings press release includes comparisons to the first quarter of 2019 for certain key metrics. It's important to recall that Sonic actually grew EPS in the first quarter of last year compared to 2019 due to the strength of our January and February results despite the initial impact of the pandemic in March of 2020. Since that time, we have substantially improved our expense structure, which is reflected in the current quarter's profitability and operating margins and our expectations for the remainder of 2021 and beyond.

In the first quarter of 2021, total SG&A expenses as a percentage of gross profit were 72.2%, representing an 830 basis point improvement compared to the first quarter of last year and 790 basis points better than the first quarter of 2019, which in dollar terms, while same-store franchise gross profit increased $34.5 million from last year, same-store franchise SG&A expenses decreased $7.5 million, demonstrating that permanent expense reductions we have previously communicated.

Turning now to our balance sheet.

We ended the first quarter with $435 million in available liquidity and set an all-time high liquidity mark in April at $570 million, which included over $300 million in cash on hand. More recently, the company closed a new 4-year $1.8 billion credit facility. The credit facility was substantially oversubscribed, with strong support from both new and incumbent financial partners. We are very pleased with this transaction, which has extended our debt maturities, improved our borrowing costs, and raised our total available liquidity and floor plan capacity to facilitate our growth plans.

Reflecting our current business momentum and substantial liquidity resources, I'm very pleased to report that our Board of Directors recently approved a 20% increase to the company's quarterly cash dividend to $0.12 per share payable on July 15, 2021, to all shareholders of record on June 15, 2021. Additionally, the Board increased our share repurchase authorization by $250 million, bringing our total remaining authorization to $277 million.

In summary, our record first quarter performance reflects steadily increasing automotive retail demand as well as constantly improving operating conditions. EchoPark has rapidly become one of the leading success stories in the preowned automotive retail industry, and we look forward to continuing its rapid expansion in 2021. We expect to see continued strong demand for both new and preowned vehicles in the near term, which should drive further growth for our Franchised Dealerships and the EchoPark brand. At the same time, our efficiency improvements have enabled us to operate in a much leaner, more profitable manner.

Despite the challenges we've all faced in the last year during this global pandemic, Sonic and EchoPark have emerged as much stronger, more efficient organization. We are encouraged by our successes to date and remain confident in our long-term strategic plans.

This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you very much.

(Operator Instructions) Your first questions comes from [Rick Elton with Bernstein].

Great quarter, can you hear me okay?

It's a little bit choppy, [Rick], but go ahead. We'll make you out.

Yes. I think that's (technical difficulty) over the near term. And when do you think inventory will normalize?

Yes. So Rick, this is Jeff. We ended the first quarter with a 43-day supply of new car inventory. So we're sitting in pretty good shape. I break it down into 3 buckets. Luxury imports and domestic. Domestic would be at the hardest. And I think May is going to be the toughest month in terms of that. It's really only about 12% of our business. So we're set up for the next couple of quarters as this chip issue becomes more of a problem. The luxury inventory, which obviously is a big chunk of our business, the biggest chunk of our business, we're just not going to be as effective. They're doing a great job bringing product in from other parts of the world.

We've got inventory. And so we should enjoy good new car volumes through the second quarter, and of course, great margins. Those margins are going to continue. I think they'll continue for the rest of the year. Import and domestic are going to be hit harder, with domestic from our perspective being hit the hardest. I think the chips start rolling in, and this all starts getting a lot better sort of the middle of June as we move forward. But again, our luxury mix is really going to help us as we work through more difficult conditions in the second quarter.

(technical difficulty)

Yes. So really what you're seeing with EchoPark and the higher day supply is just a reflection of the number of stores that we're opening right now, and we're carrying a lot of inventory to get those stores opened. But our day supply in our more mature stores is still quite normal, 10 days in the pipeline, 20 days in the front line. And we're able to buy cars and we look the auction prices are going up, wholesale is lagging retail. There's a little bit of pressure on probably margin. But business is good. If you look at the business, and what happened January, February and March, April is just a fantastic month.

Speaking for the overall organization, I think April did better than March. It's just really, really good. And I've been doing this for a long time, and the last couple of months are some of the best auto retail months I've never seen. So the auctions, we're paying more money for cars right now, but there's inventory out there to get, in particular, in our 1- to 4-year-old category. And our lots are full. Our supplies are good. And we're looking forward to a great even bigger second quarter than what you saw in the first quarter and continue our growth pattern to over 100,000 cars for this year.

Your next question is from Rajat Gupta with JPMorgan.

Hopefully, it's a little better from here, but I'll give it a shot. On the EchoPark, the EchoPark side, you talked about, Jeff, the EBITDA level (inaudible) 2019 levels in 2021, from $20 million to $22 million. Given the start you had for the first quarter, the $6 million in EBITDA and (technical difficulty)

Your question is a little choppy, but I think I got it. And I think it's in relation to kind of the drag in the performance we got in the first quarter on EchoPark. And so the way I would look at that is we are ramping up EchoPark quickly. We gave you guys guidance in the beginning -- or at the end of last year, the beginning of this year in February that we were going to have about a $12 million to $14 million drag. We only had $600,000 drag in the first quarter, but we still expect to have that $12 million to $14 million drag for the year and still sell north of 100,000 cars.

Our Phoenix store ramped a lot faster than we thought it would. I mean we nearly hit 300 cars after hitting 288 cars in our first full month in March, and we made $125,000. Usually, that's taking a couple of months to get that done or 6 months to get that done. We're just -- we're bit moving a lot quicker than we'd anticipated. And we can see that happening in Birmingham now is all of a sudden ramping up a little faster, maybe there's some good news there in terms of drag as we move forward. But our projections still right now still have that $12 million to $14 million range.

And we can update you in the second quarter as to sort of what we're seeing on our newly opened stores. But certainly, the stores that we're opening right now are improving a lot faster than the stores that we opened last year. We've just learned a lot. We're executing better. We have people in the pipeline to go ahead and lead our stores. We've got a really good, fully mature team into Phoenix that's been with our team for a while. And it was just like turning on the light switch. We just went straight to almost 300 cars and made money. And hopefully, we'll be able to do that more and more often as we move forward.

And I think the one thing -- this is Danny, that I would add to that is that, of the 5 locations we opened in the first quarter, 4 of those were conversions of the acquisitions we did in New York and in the Maryland market. And one of the benefits of the acquisitions is that they do come online much more quickly. There's much less preopening, much less drag. So the remaining 20 stores that we have this year will be more greenfield like Phoenix, like Birmingham, like Charleston, which we've opened in the last 1.5 months. So that's where the majority of that drag comes from. It is going to be back weighted. And again, that's one benefit of having the flexibility of doing acquisitions versus doing the traditional greenfield build that we've been doing at EchoPark.

Yes. To add to that, the (inaudible) platform, it just popped on and sold over 300 cars and was profitable just immediately there. So we're hoping that and expecting that our platform in Baltimore will be the same.

Got it. That's definitely helpful. (technical difficulty)

Rajat, this is (inaudible). I think it's really Choppy, but I think I heard capital allocation. And again, our priorities have not changed. EchoPark will be the main area of capital allocation. But it is interesting because of the success of the franchise and what we're seeing as well as how quickly EchoPark is becoming profitable and creating that EBITDA, even with the drag, we do see opportunity. We get a lot of opportunities for acquisitions on the franchise side.

And for the first time, we're starting to get a little bit more active on that side. And because of the free cash flow we're producing, we've got the opportunity to continue growing EchoPark as well as look at some of these opportunities on the acquisitions on franchise. Of course, we raised the dividend which will be part of the capital allocation, 20%, returning capital to shareholders. And we did get the share repurchase authorization. I think you can see we bought almost 1 million shares back in Q1. We -- like $44. We believe it's undervalued. We believe it's undervalued now. And so opportunistically, we'll continue looking at share repurchase as well.

Your next question is from Mark Jordan with Jefferies.

On the EchoPark side, have you moved to increase your mix of purchasing directly from customers?

Hey Mark, this is Jeff. Right now the problem with that is when you're buying cars off the street, and we're into 1- to 4-year-old model, customers aren't bringing in 1- to 4-year old cars to sell. Typically, they're still upside down, whatever. So you can see some of our competition that's out there buying a lot of cars off the street, but they're buying 5- to 10-year-old cars, not 1- to 4-year-old cars. And the majority of those cars are going off the wholesale auction. So it's not -- it is a source for us. And right now, that as a percentage of our overall sales is in the 10% range, but it is never going to be a big, big source for us because of the nature of the business and customers not selling the 1- to 2-year-old car straight off the street. So our sourcing is coming from the auctions where we're buying a lot of vehicles, obviously, buying some of them off the street. And then we're enjoying being able to buy some from our new car dealerships. So a combination of all that allows us to kind of carry the inventory levels that we're carrying.

And this is Heath. I'll just add to this as well. As when we buy from the auctions, we have a very predictable product. We buy at very high condition ratings. And so that allows us to keep the recon low and to do it quickly. And as you know, we're -- we turned the vehicles very quickly. And so you've got a very predictable source of supply. And when you buy off the street, you've got some that take a lot more recon, a lot more time to get through the line. So that's another component of why we focus on the auction.

And then I'd add one more thing to that. Our trade ratio at EchoPark is running at almost 70%. And so we are getting inventory from trades. And then the great luxury of that is the trades that don't fit our 1- to 4-year old model are being moved over to our franchise side of the business, and we're selling the heck out of those cars. That's just a big, big home run for us.

Okay. Great. And then can you talk about the differences in F&I from the EchoPark side between customers that might show up in store and someone who is actually buying online?

I think you're saying that F&I -- sorry, it's so choppy, Mark. I think you're saying that performance in F&I online versus in-store. And they're both the same. That's the one thing that we've learned a lot about, is that we can sell F&I products, in particular, when our e-commerce platform comes on. It makes it even easier for our consumer to use our platform. We're going to be -- we'll see that there's really not going to be a big difference between the F&I that you get online versus F&I that you're selling in store. Steve Wittman will add to that.

Yes, just add to that. I mean that's exactly right. We've seen the penetration of F&I products online maybe about the same or even a little bit better than in-store. Because we offer that transparency to the consumer, they can really understand what the product does and how it helps them over the short and long term.

Okay. Great. And then just anything on the parts and service trends on the franchise side, if you could?

Yes. That's been a great positive story for us so far this year. We're running up against 19% in the first 3 months of the year, about 9% in customer paying down. Warranty is down about the same. But what's even better, as we get into April, and we're running up 15% in customer pay, and that's just a big home run. So we feel like fixed operations is back from a CP perspective. And that -- that's just going to be huge for us as we move through the rest of this year, and in particular, the back half of last year where customers are just really more traveling. And it will be huge in California, obviously, where we have a huge footprint, that California reopening will be a big addition to this. So, so far so good. That kind of growth in April versus '19, not '20, is really fantastic for us.

(Operator Instructions) And your next question is from John Murphy with Bank of America.

I'll try (technical difficulty). The EchoPark inflection point sounds like it's right on the almost immediate horizon. Is that sort of a second or third quarter event? Or is that more like '22 and '23 when enough stores have been opened, that opening 25 stores a year matters less on the cost ramp? I'm just trying to understand the inflection point on EchoPark.

Yes. So '22, I mean, look, we are really having some great success with these stores we're opening right now and getting them profitable and then selling right immediately 300 cars. But we're still going to open more stores this year than we started the year with. And that will be the last time that, that happens. So '22 is going to be the -- is really going to be the inflection point here, where you really start seeing the profitability come through and carrying the drag and really not having as big of an impact on us which it's doing right now.

But it's foot down on the gas pedal. We know we have a model that produces both volume and profitability. We slowed down in order to speed up. We've done all that. And we're going to open a bunch of stores this year, and EchoPark has really taken off. It's a lot of fun to watch. And a lot of years have gone into this. Dave and I were talking earlier today. We've put a decade into getting this all right, and we've learned a lot. And now we're going to reap the benefits of that. And so it's just going to be a great year. Even though we're going to have that $12 million to $14 million worth of drag, the inflection point comes in '22.

John, this is David Smith. I think it's really important to emphasize that our team is really -- we've made so much progress in how we open stores, both -- and the scalability of this. So the cost is going down and the speed to market is going up. Our training and the way we bring it. As Jeff mentioned earlier, the Phoenix store, we're selling almost 300 cars in the first month. And then the addition of the acquisitions of these like Used Car King and these others that we brought online quickly integrated into, they're now EchoPark stores. And so the speed to market, I think, is a huge part of our growth story.

And the other thing I would probably add a little more to that, John. The other thing we're doing is building our management bench. And so there's a lot of investment going into that right now. You didn't see quite as much in the first quarter, but you're going to see more in the second and third quarter. That's why the $600,000 drag in the first quarter was just sort of understated. That's why we still think we'll be in that range for the year. And if you want to look at anything, just look at Phoenix. When you put the right management team to strengthen on day 1, it just blows up, and that's exactly what happened. And so we're adding more and more people in order to help with this aggressive roll-off schedule that we have for the rest of the year.

You anticipated my next question on human capital. What is the process developing general managers, either internally or searching them externally for all the stores that are being opened?

Yes. We have several layers of management. And we have plans to basically have each later continue to move up as we open stores. We've had to go to the outside a few times. We bring them in 6 months early to work in that capacity in the store for future openings. So we're ahead of that schedule. We're feeling pretty good about it, and that's part of the drag that Jeff was talking about.

And John, that is [same team].

Okay. And then just lastly, on gross margin, how sticky you think this trend is on the new side (inaudible) on the new side. It seems like part of it is not just inventory.

I mean I think I understood your question, John. Again, sorry, it's a little choppy. But the new car margin, one of the things that's great is the manufacturers are learning and have learned that they're going to keep their supplies tight. That's Ford made announcements. VW's made announcements. And supplies are going to stay tight, it's going to keep margins up. So I think margins stick. Who knows if they're going to be quite as good as they are right now with chips. But certainly, they're not going back to pre-pandemic days. I just don't see that happening.

And the used car margins are good, too. We sort of run at a little lower margin on the front. We had much higher margins on the back than many of our competitors. And when you combine that, it gives us a total gross package on a forward go basis, that typically puts us up in the top 1 or 2 of our competitors. And so I think used car markets are going to stay strong.

And remember, on the EchoPark model, our model is to have low margin. Our model is to drive traffic through being $2,500 to $3,000 priced below the retail market, sort of wholesale pricing in retail. And so you're going to see us in that minus 100 to minus 300 sort of range. That may move around a little bit depending on what's going on in wholesale markets. But certainly, we'll continue to drive the big volumes that our model requires from an EchoPark perspective.

And there are no further questions at this time.

Okay. Thank you very much, everyone. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.