Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive third quarter 2021 earnings conference call. This conference call is being recorded today, Thursday, October 28th, 2021. Presentation materials which accompany management's discussion on the conference call can be accessed at the company's website at ir.sonicautomotive.com. At this time, I'd 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 very much, and good morning, everyone. Welcome to Sank Automotive's third 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 VP of operations, Mr. Tim Keene, and our chief digital retail officer, Mr. Steve Whitman, and our vice president of investor relations, Mr. Danny Wilder. We're very excited to announce another record-breaking quarter. This performance would not have been possible without the amazing effort and execution by our Sonic and Echo Park teammates. Congratulations and thank you all. We would also like to thank our customers, manufacturer, and vendor partners for helping us achieve another record quarter. During the third quarter of 2021, Sonic delivered another quarter of record revenue and an 11th consecutive quarter of year-over-year EPS growth. On a consolidated basis, we posted record third quarter revenues of $3.1 billion, up 21 percent, and record third quarter gross profit of $472 million, up 25 percent, driven by strong performance across the board in new, used, fixed operations and F&I. Going beyond our top line growth, our third quarter results continued to validate our permanent expense reductions. achieving record third quarter SG&A expense as a percentage of gross profit of just 68.1 percent. On a franchise dealership segment basis, though, SG&A as a percentage of gross profit was just 60.1 percent, a 760 basis point decrease year over year and down from 76.9 percent in the third quarter of 2019. Turning to earnings, we reported record third quarter pre-tax income from continuing operations of $112 million, up 39% year-over-year, and earnings from continuing operations of $85 million, or $1.96 per diluted share. Diving deeper into our core franchise dealership segment, third quarter 2021 revenues were $2.4 billion, compared to $2.2 billion in the prior year, which reflects the ongoing recovery in consumer demand we've seen since the height of the pandemic. On the same store basis, franchise dealerships' third quarter revenues were up 11% year over year, while gross profit improved by 27%, driven by record new and used vehicle gross per unit, a 21% increase in customer pay fixed operations gross profit, an all-time record franchised segment F&I gross profit per retail unit of $2,303, up 27% from the third quarter of 2020. As a result of ongoing supply chain disruptions that limited new vehicle production and inventories, we believe that third quarter new vehicle unit sales volume was negatively impacted by the low supply of new vehicle inventory, despite continued consumer demand. Our franchise dealerships new vehicle inventory was approximately 2,400 units or just a 10 day supply down from nearly 13,000 new vehicles at this same time last year. Comparatively used vehicle inventory was in line with our target level of 27 days supply or 8,200 units. Turning out to our Echo Park business, we reported all time record quarterly revenues of $663 million. of 72% from the prior year and representing our fifth consecutive quarter of record Echo Park revenues. We achieved record third quarter Echo Park retail sales volume of 21,255 units of 41% year over year. During the third quarter of 2021, Echo Park market share increased 110 basis points to approximately 4% of the one to four year old vehicle segment in our current markets. At the end of the quarter, Echo Park used vehicle inventory was approximately 9,800 units for a 41-day supply. For the third quarter, we reported an Echo Park pre-tax loss of 32.9 million and adjusted EBITDA loss of 28.5 million. This includes new market-related losses of 18 million and 16.8 million, respectively. The effects of new vehicle inventory shortages have continued to drive used vehicle wholesale pricing higher, which negatively impacted Echo Park margins and profitability in the near term. While we continue to strategically manage our pricing and volume amidst this temporary disruption in the used market pricing environment, we remain very confident that Echo Park margins and profitability will rebound once these market conditions normalize, which we anticipate will occur in mid-2022. Despite these short-term challenges, we continue to believe in the long-term potential of the Echo Park brand and remain very committed to growing our nationwide distribution network. With our progress to date, we remain confident in attaining our goals of 25% population coverage by the end of 2021 and 90% population coverage by 2025. In addition, the launch of our proprietary digital retail platform at Echo Park continues to progress And we remain on track to go live by the end of this year and roll out to our entire network in early 2022. As we announced earlier this month, the Echo Park team is pleased to welcome Dino Bernacchi, Chief Marketing Officer, and Tin Truong as Chief Revenue Officer. The addition of these key roles to our team reflects our continued focus on executing our long-term growth plans at Echo Park. And we are excited to see their expertise contribute to Echo Park's promising future. Returning now to our franchise business, we recently announced several strategic acquisitions to further accelerate our growth plans. In September, we signed a definitive agreement to acquire RFJ Auto Partners, a top 15 U.S. dealer group by total revenues. With 33 locations in seven states and a portfolio of 16 automotive brands, The transaction will add six incremental states to SONIC's geographic coverage and five additional brands to our portfolio, including the highest volume Chrysler Dodge Jeep Ram dealer in the world in Dave Smith Motors. This acquisition, which is expected to close in December of this year, is projected to add $3.2 billion in annual revenues to the company which are an incremental to Sonic's previous stated target of $25 billion in total revenues by 2025. In addition to RFJ Auto, during the third quarter, we announced the acquisition of four Audi, Subaru, and Volkswagen franchises in Colorado, further enhancing our automotive sales and service network in that state. More recently, we continued the expansion of our franchise dealership network with the acquisition of Bobby Ford Chrysler Dodge Jeep Ram in the greater Houston market. Turning now to our balance sheet, we ended the third quarter with $618 million in available liquidity, including approximately $320 million in cash and $4 billion deposits on hand. More recently, in connection with our pending acquisition of RFK Auto, we announced a significant upsize to our credit facilities, increasing total capacity to $2.95 billion, and completed an oversubscribed senior note offering with an aggregate principal amount of $1.15 billion, capitalizing on the favorable market conditions and an upgraded corporate credit rating to refinance our existing debt maturities at attractive terms with lower borrowing costs. These transactions demonstrate the strength of our business and positive outlook for the future as we continue to expand our nationwide reach and maximize operating efficiencies across our operations. With our improved balance sheet and additional liquidity resources, we believe Sonic is well-positioned to pursue further growth opportunities in our franchise dealership business, as well as to keep executing on our Echo Park growth plans. Lastly, given our strong balance sheet, I'm pleased to report that our board of directors approved a quarterly cash dividend of $0.12 per share, payable on January 14, 2022, to all stockholders of record as of December 15, In summary, our quarterly results reflect Sonic's continued operating improvements despite industry-wide challenges stemming from the pandemic. These results demonstrate ongoing strong consumer demand, tremendous improvements in our franchise dealership performance, our success in maximizing operating efficiencies throughout our operations, and our teammates' unwavering dedication to delivering for our guests. Going forward, we will continue to execute on our strategic growth plans in both our franchise dealership and Echo Park business segments, including the rollout of our new digital platform beginning this quarter. We believe that by following this course, we will continue to achieve strong revenue growth, increase profitability, and build long-term value for our shareholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you very much.

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. And when preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from John Murphy of Bank of America. John, your line is open. Please go ahead.