Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive Second Quarter 2021 Earnings Conference Call. This conference call is being recorded today, Thursday, July 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 8K 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, and good morning, everyone, and welcome to Sonic Automotive's second quarter 2021 earnings call. As she said, I'm David Smith, the company's CEO. Joining me on the call today is our president, Mr. Jeff Dyke, 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. Dan Weiland. We're excited to publicly announce today record-breaking operating and financial performance for our company during the second quarter of 2021. This performance would not have been possible without the tremendous effort and execution by our valued Sonic and Echo Park teammates. Congratulations and thank you all. We'd also like to thank our customers, manufacturers, and vendor partners for helping us achieve another record quarter. During the second quarter of 2021, Si continued to deliver exceptional performance in our franchise dealership segment. We also posted a fourth consecutive quarter of record revenue in retail unit sales volume for our Echo Park business. On a consolidated basis, we reported all-time record quarterly revenues of $3.4 billion, up 59% year-over-year. When compared to the second quarter of 2019 to exclude the effects of the onset of the pandemic, total revenues were up 28 percent. We generated all-time record quarterly income from continuing operations before taxes of $151 million, up 303 percent on year-over-year basis and up 310 percent when compared to the second quarter of 2019. We also reported all-time record quarterly earnings from continuing operations of $114 million or $2.63 per diluted share, compared to second quarter 2020 earnings from continuing operations of $31 million or 71 cents per diluted share, and adjusted earnings from continuing operations of $28 million or 64 cents per diluted share. These results reflect the strong consumer demand environment we've seen across all of our business lines since the latter part of 2020, but also showcase Sonic's continued ability to maximize operating efficiency at our franchise dealerships, as well as the continued successful expansion of Echo Park's nationwide network. We are confident that our strong operating performance can be sustained throughout the balance of 2021 and well into 2022. And we are well positioned to grow total annual revenues to $25 billion by 2025, while continuing to significantly increase our profitability. In our core franchise dealership segment, second quarter revenues were $2.8 billion, a 53% increase from last year, which reflects rebound in consumer demand since the height of the pandemic in 2020. Gross profit for the second quarter was $475 million, up 69% from the prior year. Total franchise pre-tax income was $165 million, an increase of $131 million, or 375% compared to last year. Same-store franchise dealership revenues rose 55% on a year-over-year basis, while gross profit was up 74%. On a two-year comparison, same-store franchise dealership revenues increased 25%, while gross profit grew 40% compared to the second quarter of 2019. Franchise dealership total variable gross per unit was nearly $5,100 per unit, 43% year-over-year and up 58% from the second quarter of 2019, benefiting from strong vehicle margins and all-time record F&I per unit of $2,110. Our franchise dealership performance has been enhanced by execution against our plan, including discipline around SG&A spend, focus on our parts and service business, and our continued ability to efficiently manage our inventory. Looking forward, we remain committed to optimizing our franchise dealership business, both through organic growth initiatives and through strategic acquisitions. To that end, earlier this week, we completed the acquisition of Subaru and Volkswagen franchises in Grand Junction, Colorado. These acquisitions enhance our brand portfolio and complement our overall growth strategy, and we expect to announce additional franchise dealership acquisitions in the near term as we drive toward $25 billion in total revenues by 2025. Turning now to Echo Park, the combination of our below-market pricing, efficient inventory procurement, logistics and reconditioning processes, and digital-enabled sales channel has allowed us to offer tremendous value to consumers, and our top-line growth reflects this growing brand recognition. We generated all-time record quarterly Echo Park revenues of $596 million, up 89% on a year-over-year basis, and a 104% increase compared to the second quarter of 2019. During the second quarter, Echo Park achieved all-time record quarterly retail sales volume of nearly 21,300 units, up 61% year over year. On a two-year comparison, Echo Park retail unit volume increased 69% compared to the second quarter of 2019. We are already halfway to our Echo Park network expansion goal of opening 25 new locations in 2021. Based on our success to date and plans for future markets, we expect Echo Park to achieve 25% population coverage by the end of 2021 and 90% population coverage by 2025. Further driving our expansion opportunity, we have made excellent progress with our proprietary digital retail platform, and are on track for a fourth quarter 2021 launch at Echo Park. In the meantime, we continue to drive market share gains in our existing Echo Park markets, and we anticipate our market penetration and brand recognition will continue to grow rapidly over the next decade as we expand our nationwide distribution network. Looking now at market share in more detail, Echo Park has shown a consistent trajectory from launch, indicating that our expansion is performing to plan. Within Echo Park's one- to four-year-old vehicle category, markets with Echo Park locations open for less than two years average a 5 percent share, while markets with Echo Park locations open for two to three years average an 8 percent share. And markets with Echo Park locations open for more than five years average a 14 percent share. In addition, our below market pricing drive sales opportunities on both ends of the one to four year old spectrum, where we compare favorably on price to both new vehicles and five to six year old vehicles, allowing us to expand our addressable market. In the longer term, we expect to continue to drive market share growth within Echo Park to an achievable target of 10% of that core market of one to four year old vehicles network-wide, which combined with the adjacent vehicle age segments positions the business for a potential volume of 2 million units annually at maturity. With our progress to date and the continuing development of our omnichannel retailing platform, we remain confident we can reach our interim goal of 575,000 units and $14 billion in Echo Park revenues by 2025. In addition to our top line results and continued expansion of Echo Park, our team remains committed to improving operating margins and managing expenses throughout the organization. In the second quarter of 2021, total SG&A expenses as a percentage of gross profit were 62.8%. an all-time quarterly record and a 1,210 basis point decrease from 74.9 percent in the second quarter of 2020. Franchise segment SG&A expenses as a percentage of gross profit were just 58.1 percent in the second quarter, a 1,660 basis point decrease from 74.7 percent in the second quarter of 2020. On a two-year comparison, this represents a 1,900 basis point improvement from 77.1% in the second quarter of 2019. With this expense leverage, we realized second quarter adjusted EBITDA margin of 5.7% of 220 basis points year over year and a 280 basis point improvement compared to the second quarter of 2019. These results reflect the permanent expense reductions we have previously communicated. While current operating results reflect a higher gross margin environment due to constraints on new vehicle inventory, we do not expect new vehicle GPUs to fully regress to pre-COVID levels once inventories begin to build. Assuming normalized new vehicle GPU of $2,500 and used vehicle GP of $1,300, without assuming additional unit sales volume or further parts and service growth, our pro forma franchise dealerships SG&A is expected to be in the 62% to 63% range, representing a 1,000 basis point improvement from pre-COVID levels as a result of the permanent changes in our expense structure. In addition to operating expense leverage, we continue to focus on strengthening our balance sheet. We ended the second quarter with over $600 million in available liquidity, including approximately $315 million in cash and deposit balances on hand. During the early part of the quarter, as we mentioned on our last earnings call, the company closed a new four-year, $1.8 billion credit facility which allowed us to extend our debt maturities, improved our borrowing costs, and raised our total available liquidity and floor plan capacity at attractive terms. With our available liquidity resources, we believe Sonic is well positioned to continue executing on our Echo Park growth plans while also strategically investing in the future of our franchise ownership business and continuing to return capital to shareholders through our dividend and share repurchase programs. I'm pleased to report that our Board of Directors approved a quarterly cash dividend of $0.12 per share, payable on October 15, 2021, to all stockholders of record on September 15, 2021. In closing, our all-time record quarterly results demonstrate the company's continued focus on execution with strong franchise dealership performance, the continued expansion of Echo Park's nationwide footprint, and our success in maximizing operating efficiency throughout our organization, driving long-term earnings growth potential. Our strategic growth plan is based on demonstrating unique value to current and future customers through our pricing, guest experience, and growing nationwide reach at both Echo Park and our franchise dealerships. We believe that this consumer-focused approach will continue to deliver strong results for our shareholders and maintain Sonic and Echo Park's position as leaders in an evolving automotive retail environment. And before we turn the call over for your questions, I'd like to comment on today's announcement that the company has initiated a review process to evaluate potential strategic alternatives for our Echo Park business. As detailed in our press release, working together with our advisors and our board, we will explore a range of value creating alternatives for the business. No timetable has been established for the completion of the review, and allow me to remind you that there can be no assurance of a specific action or outcome. As the review progresses, we will remain committed to executing our accelerated expansion plan for Echo Park, bringing this unique and competitive offering to new markets to deliver value for our guests while also supporting the teammates that are central to cultivating the Echo Park experience. We are focused on continuing to build upon the positive momentum in the business and remain confident in the long-term growth opportunity ahead. As the review is ongoing, we will not speculate on any particular outcome or make any further comments related to the process. This concludes our opening remarks. We look forward to answering any questions you may have. Thank you very much.

At this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. Again, that is star 1 for any questions. Our first question comes from the line of Rick Nelson with Stevens. Please go ahead.