Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive Second Quarter 2020 Earnings Conference Call. This conference call is being recorded today, Thursday, July 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 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 tables in the company's current reform on Form 8K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Sonic and EcoParks Chief Executive Officer. Mr. Smith, you may begin your conference.

Thank you and good morning, everyone, and welcome to Sonic Automotive's second quarter 2020 earnings call. Again, 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, and our Executive VP of Operations, Mr. Tim Keene. Today, in addition to discussing results for the second quarter of 2020, I'll also provide an update on trends we saw within the second quarter and into July. as well as an announcement on our latest digital partnerships and accelerated expansion plans for Echo Park. After that, we'll be happy to take your questions. As the second quarter progressed, we continued to see substantial improvement in operating conditions and automotive retail consumer demand. While April was a challenging month that weighed on our quarterly results, May improved greatly and we saw a dramatic acceleration in the rate of recovery during the second half of June with rising consumer demand for new and used vehicles and service repairs in the majority of our markets. Limited new vehicle inventory in certain brands drove higher gross per unit and actions we took in April to manage our used inventory allowed us to take advantage of used vehicle sourcing opportunities benefiting used vehicle GPU in May and June. Some noteworthy operating improvements sequentially from May to June 2020 include a 22% increase in new vehicle GPU, a 35% increase in franchised used vehicle GPU, a 16% increase in franchise F&I per unit, a 16% increase in franchise fixed operations gross profit per day, a 32% increase in Echo Park combined used and F&I gross profit per unit, and a 154% increase in consolidated pre-tax profit. Above all, we remain disciplined in improving our financial liquidity, controlling expenses, and enhancing profitability at both our franchise dealerships and Echo Park stores throughout the quarter. These factors contributed to Sonic achieving adjusted EPS of $0.64 compared to $0.62 for the second quarter of 2019. On a GAAP basis, we reported EPS of $0.71 for the second quarter of 2020, including a $0.07 benefit from a non-recurring tax item. In addition to EPS growth year over year, other second quarter operating highlights include SG&A has a percent of gross profit of 74.9%, a decrease of 230 basis points. Total SG&A reduction of $64 million, or 22%, compared to the second quarter of 2019. Echo Park revenues of $315 million, which is up 8%. Echo Park retail sales volume of 13,207 units, up 5%, Echo Park segment income of 2.6 million, up 52%, and available liquidity of $455 million as of June 30, 2020, an increase from $312 million as of March 31, 2020. During the second quarter, we continued to improve our operating efficiency building on our experiences during the last financial crisis as well as more recent lessons learned during this pandemic. We are very pleased with the success of these efforts which have enabled us to operate in a much leaner, more profitable manner. Through these initiatives, Sonic expects to decrease SG&A expenses by approximately $7 million per month or $84 million annualized as compared to pre-COVID-19 levels. I'd like to emphasize that this represents over 50% of our adjusted pre-tax profit in 2019, indicating tremendous earnings upside as we return to more normalized business levels. Moving on to our operating segments, our franchise dealerships' year-over-year performance reflects the challenges we faced in April and early May as a result Thank you for joining us today. Now turning to Echo Park, as expected, Echo Park sales experienced a V-shaped recovery in sales volume and improved profitability as the second quarter progressed. By June, Echo Park had surpassed our original pre-pandemic unit volume forecasts for the month. As noted in our press release this morning, second quarter Echo Park segment income increased 52%, demonstrating the operating leverage and profit potential of this model. Notably, all of our Echo Park stores were cash flow positive in June 2020, including our Tampa store in just its second full month of operation. This momentum has continued into July as more and more guests realize the tremendous value in the pricing, quality, and convenience that our Echo Park stores offer, enabling our guests to enjoy a modern, hassle-free car buying experience. Moving on to our digital retail initiatives, as we announced this morning, we are very excited about our historic strategic partnership with Cox Automotive and Darwin Automotive to develop a first of its kind proprietary e-commerce platform and user interface by the fourth quarter of this year. This digital retailing partnership will be key to accelerating our Echo Park expansion plans We are dedicated to elevating our online retail guest experience to match the great guest experience our guests have come to expect onsite at our franchise dealerships, at Echo Park stores, and at EchoPark.com. As you can tell, we are very excited about Echo Park's performance in this challenging environment and believe these quarterly results speak to the strength of this unique business model. Echo Park continues to outperform our original expectations Demonstrating the revenue growth, operating leverage, and profit potential of this brand. Further, Echo Park is a unique and scalable business model that has not yet begun to reach its full potential. Earlier this year, we announced that Sonic planned to grow its total revenues to $20 billion this decade. Since that time, we have actually revised our original Echo Park expansion strategy to achieve more rapid growth of the Echo Park brand. Based on Echo Park's extraordinary success to date and after an extensive review of our growth strategy over the past several quarters, we are dramatically accelerating our expansion of the Echo Park brand. While we remain committed to managing capital expenditure levels in the short term, the flexibility of the Echo Park model has proven greater than we originally anticipated. By capitalizing on Echo Park's highly trained guest experience center team, our centralized appraisal, inventory, and pricing procedures, as well as the development of the newly announced proprietary e-commerce user interface, we can strategically and efficiently build out a national footprint by opening new Echo Park delivery and buy centers in adjacent markets to our existing locations in a very capital efficient manner Realizing returns on investment in excess of 55%. By utilizing enhanced online sales capabilities and a next-to-last-mile delivery model, this will allow us to quickly expand Echo Park into new markets across the country with minimal capital outlays or overhead costs, as our customers nationwide will now be able to shop on EchoPark.com through our Echo Park mobile app, or on site at an Echo Park retail hub location. Based on these expansion plans, by 2025, we expect to have a nationwide distribution network consisting of 140 plus Echo Park retail hubs and delivery and buy centers generating over half a million retail vehicle sales annually and $14 billion in annual Echo Park revenues. The plans that we've announced today are based on internal modeling we've been conducting for the past several months. Even by our most conservative models and taking into account the more recent events of COVID, we believe these objectives are quite achievable and we have the team and tools in place to execute our plan. Our first delivery and buy center in Greenville, South Carolina, opened last Friday and delivered its first vehicles on Monday. Progress is well underway for opening the next several markets, and we look forward to providing updates on our progress and results over the coming months. Before we get to questions, I would like to take a moment to express how proud I am of the way our team continues to focus on meeting the needs of our guests, our teammates, and our business partners during these challenging times and beyond. I want to personally thank each of our teammates for all of their efforts and continued commitment to taking care of our guests as well as their dedication to the future of Sonic and Echo Park. This concludes our opening remarks and we'll be happy now to take your questions.

And ladies and gentlemen, at this time, if you do have a question, please press star then a number one on your telephone keypad. Again, that star then a number one for any questions. And your first question is from the line of Rick Nelson with Stevens. Please go ahead, sir.