Sonic Automotive, Inc.

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.

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.

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.