Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive first quarter 2020 earnings conference call. This conference call is being recorded today, Thursday, April 30, 2020. Presentation materials which management will be reviewing on the 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 filing with the Security 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 tables in the company's current report on Form 8-K filed with the Securities and Exchange Commission yesterday. I would now like to introduce Mr. David Smith, Sonic and Echo Park's Chief Executive Officer. Mr. Smith, you may begin your conference.

Thank you very much, and good morning, everyone, and welcome to Sonic Automotive's first quarter 2020 earnings call. Again, I'm David Smith, company CEO. Joining me on the call today is our president, Jeff Dyke, our CFO, Heath Byrd, and our executive VP of operations, Tim Keeney. Today, in addition to discussing highlights from the first quarter of 2020, I'll also provide a business update with respect to the COVID pandemic. We continue to see our record 2019 performance carry over well into the first quarter of 2020. Our earnings press release and investor presentation discuss our first quarter results in great detail. While it's not our normal practice, I'd like to offer a More information on our operating performance in the first two months of the quarter before we began to see the impact of the COVID-19 pandemic on our business. Then I'll talk about how that has changed in recent weeks. During the first two months of 2020, same store total revenues increased 17% versus the comparable two-month period in 2019. driven by an 11% increase in new vehicle unit sales volume, a 27% increase in used vehicle unit sales volume, and an 8% increase in fixed operations revenues. Additionally, Echo Park revenues grew by 61% in the first two months of the year and was on pace to retail over 16,000 vehicles for the first quarter. While we all know the world has changed dramatically since that time, I think this information is very important as it speaks to the strength of our business and the momentum we carried over from 2019. Sonic Automotive and Echo Park have been built for the long term. We have a seasoned team that has already overcome prior historic challenges, like the financial crisis of more than a decade ago. While the effect of the COVID-19 pandemic has had a sudden and severe impact on the global economy. Our team and our business are in a position to recover quickly and continue on our path to achieving our long-term goal of $20 billion in total annual revenues this decade. Of course, we cannot ignore the reality we are facing in the near term. The pandemic is having a widespread effect on the automotive industry as a whole, from the parts suppliers to the OEMs to the dealers and to the consumers. Our team has been working day and night monitoring all aspects of our business and making operational changes as necessary, and we will continue to do so as the situation evolves. As you know, from the day the COVID-19 pandemic was declared, many areas across the country enacted stay-at-home orders. which significantly reduced consumer traffic at our stores. During this period, our overall vehicle sales volumes fell roughly 40% compared to the prior year. Customer facing parts and service gross profit decreased 15% during the same period and experienced nearly 40% year over year declines in early April as more states declared stay at home orders. In the past week, though, the year-over-year vehicle sales declines have improved to roughly 30%, with used vehicle sales being slightly more resilient than new vehicle sales. Parts and service growth has also improved over the past week as states begin to relax their stay-at-home orders and customers begin to return for delayed repair and maintenance work. The investor presentation we posted yesterday includes several slides on our outlook for the rest of 2020 which we believe will recover to our original expectations sometime during the third quarter. Now returning to the first quarter, I'd like to briefly mention some operating highlights and other notable items, which include an all-time record quarterly Echo Park revenues of $332 million, which was up 33% from the first quarter of 2019. We also had record Echo Park retail volume of nearly 14,000 units, which is up 27% from the first quarter of 2019. We had Echo Park segment income of $2.1 million, which was in line with the first quarter of 2019. Our franchise segment income of $22.8 million was up 9% from the first quarter of 2019. We had a 0.8% increase in franchise same-store gross profit despite lower vehicle sales volume and a 2.0% decrease in same-store revenue. We had an all-time record quarterly F&I gross profit per unit of $1,885 on a total sonic consolidated basis. Our adjusted SG&A to gross profit was 80.5% for the first quarter of 2020, up just 40 basis points from the first quarter of 2019. Our adjusted EPS from continuing operations was 40 cents for the first quarter of 2020, compared to 39 cents for the first quarter of 2019. Our current available liquidity is $418 million. This is an increase from $311 million as of March 31st and up from $280 million as of December 31st, 2019. As described in our press release, during the first quarter of 2020, we were required to recognize a non-cash, that's non-cash goodwill impairment charge of $268 million as a result of a decrease in the company's stock price to $13.28 on March 31st due to the COVID-19 pandemic's effect on the overall stock market. We note that this non-cash impairment charge is not indicative of Sonic's current financial position, financial outlook, or long-term prospects for our franchise dealerships or Echo Park. For more information on our first quarter results, see our press release and investor presentation that were posted yesterday and we will be happy to expand on that in the Q&A portion of this call. What's most important at Sonic & Echo Park is that we continue to ensure the health and safety of our guests and teammates. Since this pandemic began, we've implemented processes to ensure that first responders and others responsible for providing essential services continue to have access to safe, reliable transportation. In addition to the enhanced Thank you. Thank you. We recognize the importance of continuity and stability during these challenging times, and we have put great thought into how we can best provide this for our guests, our teammates, and our business partners. We continue to monitor new developments related to COVID-19 and the eventual reopening of our nation's economy on a daily basis. While we have taken the actions necessary to manage these short-term challenges, It's very important to recognize that we have always focused on a long-term plan for our business. When this pandemic first began, Sonic already had many of the systems in place to operate in the current environment. We have executed our crisis preparedness plan, allowing us to migrate to a working structure that facilitates enhanced safety and productivity with all systems and operations functioning seamlessly. In addition, we have taken prudent, although some very difficult and unfortunate measures to fortify our business while reducing our expenses to match the current environment. This includes a 33% reduction in current headcount, freezing of new hires, reducing advertising and other operating expenses, ensuring we have continued access to additional resources of liquidity, and postponing certain capital expenditures. Despite significantly reducing our planned capital expenditures, we expect to be able to move ahead with some key strategic projects, such as our new Echo Park store in Tampa, Florida, which successfully opened last week. We also plan to open two more Echo Park stores later this year, bringing our total to 12 locations nationwide by the end of the year. While we are focused on our capital expenditure levels in the near term, We continue to execute on our growth plans for Echo Park and believe the low initial capital outlays and flexibility of the model will allow us to continue to grow as planned. We have also taken several proactive steps to bolster our liquidity position, provide additional financial flexibility, and strengthen our balance sheet, including drawing down $210 million of additional funds on a revolving credit facility in March of this year in maximizing availability under other borrowing facilities in order to prepare our business for the worst if needed. Our liquidity currently stands as I mentioned at $418 million which is up nearly 50% from the end of 2019. In closing, we are prepared to safely and efficiently operate in the current and we have taken practical actions to position the business for the future. We believe that we have the financial resources in place to manage these near-term challenges and to quickly recover when normal commerce resumes as early as the third quarter of this year. Lastly, before we go to questions, I'd like to thank each of our teammates for their extraordinary efforts, continued dedication and commitment to Sonic and Echo Park, and to their fellow teammates and to our guests. We believe that our team will be able to manage through this challenge and emerge from the pandemic as an even stronger company and team than we were before. Special thanks to our manufacturer partners, finance partners and vendors for your unwavering support and teamwork. This concludes our opening remarks now and we'll be happy to take your questions.

To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question is from Rick Nelson with Stephen.