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spk00: Good morning and welcome to the Sonic Automotive 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 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 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.
spk09: 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 Dyck, our CFO, Mr. Heath Bird, our Executive Vice President of Operations, Mr. Tim Keene, our Chief Digital Retail Officer, Mr. Steve Whitman, and our Vice President of Investor Relations, Mr. Danny Weiland. 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 40 cents per share in the first quarter of last year. These results were driven by strong performance in our franchise dealerships and another all-time record quarter for our Echo Park 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 franchise dealership segment, first quarter revenues were $2.3 billion, a 15% increase from last year. Total franchise pre-tax income was $70.5 million, an increase of $47.9 million, or 211% compared to last year. On a two-year comparison compared to the first quarter of 2019, same-store franchise dealership revenues increased 14% and pre-tax 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 out of the Echo Park, 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 Echo Park 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 Echo Park 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 Echo Park stores and delivery centers also continue 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 keying 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 Echo Park store we open or acquire, and results are proving the scalability and momentum of the Echo Park model. We believe these results showcase the flexibility value proposition, and consumer demand for Echo Park's unique pre-owned vehicle shopping concept as more guests choose to visit our stores and or shop at echopark.com for the incredible inventory selection, unbeatable pricing, and a unique guest experience that we offer. As an update on our expansion of Echo Park's nationwide distribution network and omnichannel retailing platform, we opened five 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 Echo Park locations in 2021. And we're on track for our 140 plus point nationwide distribution network by 2025. which we expect to retail over half a million pre-owned 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 Echo Park 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 the 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 four-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 12 cents 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. Echo Park has rapidly become one of the leading success stories in the pre-owned 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 pre-owned vehicles in the near term, which should drive further growth for our franchise dealerships and the Echo Park 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 Echo Park have emerged as much stronger, more efficient organizations. 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.
spk00: As a reminder, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Rick Nelson. Thanks. Good morning.
spk01: Greg Porter. Can you hear me okay?
spk10: It's a little choppy, Rick, but go ahead. We'll make do.
spk01: Yeah. Yeah, I think I must pay the operator, actually, because I heard you all start. Okay. So, yeah, I guess to start with, Jeff, Jeff, inventory is a hot topic in the industry. I'm curious where you stand with base supply now, where you see that going over the near term, and when do you think inventory will normalize?
spk02: Yeah, so Rick, this is Jeff. You know, we ended the first quarter with a 43-day supply of new car inventory, so we're sitting in pretty good shape. I'd break it down into three boxes, buckets, you know, luxury, imports, and domestic. Domestic is going to 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, you know, 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 affected. They're doing a great job bringing product in from other parts of the world. We've got inventory. 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 get 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, you know, more difficult conditions in the second quarter. Okay.
spk01: Supply there is heavier. We'd like to run that model. If you could comment on what's happening.
spk02: Really what you're seeing with Echo Park 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 open. But our day supply in our more mature stores is still quite normal, 10 days in the pipeline, 20 days on the front line. And we're able to buy cars. I mean, look, the auction prices are going up. Wholesale is lacking retail. It puts a little bit of pressure on the front end margin. But business is good. If you look at the business and what happened January, February, March, April is just a fantastic month. Speaking for the overall organization, I think April is going to be better than March. It's just really, really good. And I've been doing this for a long time. These last couple of months are some of the best auto retail months I've ever seen. The auctions, you know, we're paying more money for cars right now, but there's inventory out there to get, in particular in our one- to four-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, you know, what you saw in the first quarter and continuing our growth pattern to over 100,000 cars for this year.
spk01: Thanks for that, Collar. Things are pretty choppy out here. I'll let somebody else help out.
spk02: Thanks. Thanks, Rick.
spk00: Your next question is from a job group that was J.P. Morgan.
spk08: Hey, good morning. Thank you for watching. Hopefully, it's a little better from here, but I'll give it a shot. On the equity part, we talked about, you know, EBITDA levels that matched 2019 levels in 2021, around $20 to $32 million. Given the start we've had to the first quarter with $6 million in EBITDA, Your question was a little choppy, but I think I got it. I think it's in relation to the drag and the performance we got in the first quarter on Echo Park.
spk02: The way I would look at that is we're ramping Ecopar quickly. We gave you guys guidance at the end of last year, the beginning of this year in February that we were going to have about a $12 to $14 million drag. We only had $600,000 drag in the first quarter, but we still expect to have that $12 to $14 million drag for the year and still sell north of 100,000 cars. You know, our Phoenix store ramped a lot faster than we thought it would. I mean, we nearly hit 300 cars. I think we did 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 six months to get that done. We're just moving a lot quicker than we anticipated. And if we can see that happening and 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 are still to have that 12 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 in and lead our stores. We put a really good, fully mature team into Phoenix that has 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.
spk05: I think the one thing, Mr. Danny, that I would add to that is that of the five locations we opened in the first quarter, four 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 pre-opening, much less drag. So the remaining 20 stores that we have this year will be more greenfields, like a Phoenix, like Birmingham, like Charleston, which we've opened in the last month and a half. 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 platform.
spk02: Yeah, to add to that, the Syracuse platform just popped on and sold over 300 cars and was profitable just immediately there. So we're hoping and expecting that our platform in Baltimore will do the same.
spk08: Got it. Got it. Got it.
spk07: This is Ebert. It was really choppy, but I think I heard capital allocation. And again, our priorities have not changed. Echo Park 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 Echo Park 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 Echo Park, as well as look at some of these opportunities on the acquisitions on franchise. Of course, we raised the dividend, which was 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 a million shares back in Q1, 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.
spk08: Got it. Thank you. Thank you. Thank you.
spk00: Your next question is from Mark Jordan.
spk06: On the Echo Park side, have you moved to increase your mix of purchases directly from customers?
spk02: Hey, Mark. This is Jeff Dyke. Now, the problem with that is when you're buying cars off the streets and we're in the one to four-year-old model, you know, customers aren't bringing in one to four-year-old cars to sell. Typically, they're still upside down, whatever. You can see some of our competition that's out there buying a lot of cars off the street, but they're buying five to 10-year-old cars, not one to four-year-old cars, and the majority of those cars are going off to wholesale auctions. It is a source for us, and right now that is 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 a one to two-year-old car straight off the street. Our sourcing is coming from, you know, the auctions where we're buying a lot of vehicles. Obviously, we're buying some of them off the street. And then we're enjoying, you know, being able to buy some from our new car dealerships. So the combination of all that, you know, allows us to kind of carry the inventory levels that we're carrying.
spk07: And this is Heath, but I'll just add to this as well. 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 turn 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.
spk02: And then I'd add one more thing to that. Our trade ratio at Echo Park is running almost 70%. And so we are getting, you know, inventory from trades. And then the great luxury of that is the traits that don't fit our one-to-four-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.
spk06: Okay, great. And then can you talk about the differences in F&I from the Echo Park side between a customer that might show up in-store and someone who might be buying on their own?
spk02: 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 about 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'll see that there's really not going to be a big difference between the F&I that you get you know, online versus F&I through selling in-store. And Steve, would you like to add to that?
spk03: Just to add to that, I mean, that's exactly right. We've seen the penetration of F&I products online be about the same or even a little bit better than in-store because we offer that transparency to the consumer and they can really understand what the product does and how it helps them over the short and long term.
spk06: Okay, great. And then just anything on the parts and service trend and franchise side, if you could.
spk02: Yeah, that's been a great positive story for us so far this year. We're running up against 19 in the first three months of the year, about 9% in customer pay. Now, warranty is down about the same. But what's even better is 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'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 just really weren't 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.
spk06: Great. Thank you.
spk00: Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that is star, then the number one. And your next question is from John Moseley, Chief Bank of America.
spk04: Good morning, guys. Good morning. The Echo Park 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 Echo Park.
spk02: Yeah, so 22, I mean, look, we are really having some great success with these stores that are opening right now and getting them profitable and then selling right immediately to three-year cars, but we're still going to open more stores this year than we started the year with, and that'll be the last time that that happens. So 22 is going to be the It's really going to be the inflection point year where you really start seeing the profitability come through and carrying the drag and really not, you know, having as big of an impact on us as it's doing right now. But, you know, it's a 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 Echo Park has really taken off. It's a lot of fun to watch. A lot of years have gone into this. David 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.
spk09: 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 the stores, both in 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, as Jack mentioned earlier, the Phoenix store is selling almost 300 cars in its first month. And then the addition of the acquisitions of these, like Used Car King and these others, that we brought online and quickly integrated into their now Echo Park stores. And so the speed to market, I think, is a huge part of our growth story.
spk02: And the other thing, I'll 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 strength in on day one, 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 rollout schedule that we have for the rest of the year.
spk04: You anticipated my next question on human capital. What is the process of developing general managers, either internally or sourcing them externally for all the stores that are being opened?
spk11: We have several layers of management. We have plans to basically have each layer continue to move up as we open stores. We've had to go to the outside a few times. We bring them in six months early to work at that capacity in the stores for future openings. So we're ahead of that schedule and feeling pretty good about it, and that's part of the drag that Jeff was talking about.
spk04: John, that was 17. Okay, thank you. And then just lastly, on gross margins, how sticky do you think the strength is for On the new side, it seems like part of this is not just transit.
spk02: 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 day supplies tight. Ford's made announcements, BMW's made announcements, and supplies are going to stay tight. It's going to keep margins up. So I think margins stick. You know, who knows if they're going to be quite as good as they are right now with the 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. You know, we sort of run at a little lower margin on the front. We have much higher margins on the back than many of our competitors. And when you combine that, it gives us a total gross baggage on a per-rooktop basis that typically puts us, you know, up in the top one or two of our competitive set. And so I think used car margins are going to stay strong. And remember on the Echo Park model, our model is to have low margin. Our model is to drive traffic through being $2,500 to $3,000 price below the retail market, sort of wholesale pricing at 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 echo farm perspective.
spk04: Great. Thank you very much.
spk02: You bet. Thank you.
spk00: And there are no further questions at this time. Okay.
spk09: Thank you very much, everyone. Have a great day.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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