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spk01: Good morning, and welcome to the Sonic Automotive fourth quarter 2021 earnings conference call. The conference is being recorded today, Wednesday, February 16, 2022. Presentation materials accompanying the management's discussion on the conference call can be accessed at the company's website, ir.sonicautomotive.com. At this time, I would like to refer to the Safe Harbor Statement under Private Securities and Mitigation 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 by 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.
spk06: Great. Thank you very much. Good morning, everyone. And welcome to Sonic Automotive's fourth quarter and full year 2021 earnings call. As you said, this is David Smith, the company's CEO. Joining me on the call today are Sonic President Jeff Dyke, our CFO Heath Bird, our Chief Digital Retail Officer Steve Whitman, and our Vice President of Investor Relations, Danny Weiland. Also joining us is Mr. Tim Keene, who was recently promoted to Echo Park Automotive Chief Operating Officer. Today, Sonic Automotive reported all-time record results, delivering all-time record revenues for both the fourth quarter and the full year 2021. We are very proud of our team's performance for the quarter, which capped off a year of significant growth for our company. In addition to our record financial performance, we achieved several important milestones that positioned Sonic for continued growth in 2022 and beyond. On a consolidated basis, Sonic delivered record revenues of $3.2 billion for the fourth quarter of 2021 and $12.4 billion for the full year, up 14% and 27% respectively. We continue to see increased customer traffic at our stores and robust consumer demand, which combined with our sales and marketing activities and improved digital channels, drove our strong sales growth during the quarter. This was achieved despite the challenging conditions which have persisted throughout the industry, including inventory constraints and supply chain issues. At the same time, we continue to see benefits from the steps we took in both 2020 and 2021 to permanently reduce our expense structure, enhancing operating efficiency throughout our organization. For the fourth quarter, adjusted SG&A expenses as a percentage of gross profit were 63.3%, a 480 basis point improvement year over year. This contributed to fourth quarter adjusted EPS of $2.66 per diluted share compared to fourth quarter 2020 adjusted EPS of $1.50 per diluted share, a 77% increase. This represents our 12th consecutive quarter of year over year EPS growth. For the full year, we delivered adjusted EPS of $8.46 per diluted share compared to adjusted EPS of $3.85 per diluted share in 2020, a 120% increase in our third consecutive year of record-setting adjusted EPS. In the fourth quarter, we took significant measures to continue the strategic expansion of our nationwide footprint. Our landmark acquisition of RFJ Auto, one of the largest transactions in automotive retail history, is projected to add $3.2 billion in 2022 revenues, which are incremental to Sonic's previously stated target of $25 billion in total revenues by 2025. With 33 locations in seven states and a portfolio of 16 automotive brands, this strategic acquisition has added six incremental states to Sonic's geographic coverage, and five additional brands to our portfolio, including the highest volume Chrysler, Jeep, Dodge, Ram dealer in the world in Dave Smith Motors. Through this single transaction, we have substantially increased our geographic footprint, brand presence, and added considerable upside to our growth trajectory. In addition to RFJ Auto, we also completed several other strategic acquisitions to drive further growth in our franchise dealership segments. We would like to welcome our newest teammates at Momentum Chrysler Dodge Jeep Ram in the greater Houston market, Volkswagen in Fallston in Maryland, and Sun Chevrolet in upstate New York. These follow our earlier acquisitions of four Audi, Subaru, and Volkswagen franchises in Colorado during the previous year, or previous quarter, rather. With these strategic additions, we have significantly enhanced our geographic coverage and brand portfolio, while ensuring that we remain disciplined in investing in the right businesses at the right return. We want to take this opportunity to sincerely thank all of our manufacturer partners for their amazing support and dedication to our industry, without which we couldn't have achieved our record growth in 2021. Turning now to our Echo Park business, In the fourth quarter, we continued the nationwide expansion of our unique pre-owned vehicle concept, adding five locations in four states, bringing our Echo Park brand to over 30% of the U.S. population, which is ahead of our target of 25% reach by the end of 2021. With our progress to date and growing our Echo Park distribution and digital network, we are well positioned to achieve our previously stated goal of 90% U.S. population coverage by 2025. In the interim, we have continued to invest in the human capital necessary to support the long-term success of Echo Park. With the promotion of Tim Keene, the Chief Operating Officer of Echo Park, and the addition of Tim Truong, Chief Revenue Officer, Dino Bernacchi, Chief Marketing Officer, Steve Whitman, Chief Digital Retail Officer, and a Chief Technology Officer, which will be appointed shortly. As an update on the development and launch of our proprietary e-commerce platform at EchoPark.com, starting late in 2021, we have now gone live with a percentage of web traffic in select markets. Early results are very positive with a 68% increase in website car sold conversion rate, which is overwhelmingly positive feedback from our guests and better than expected F&I sales via the new platform. To date, over 90% of the end-to-end online transaction were out-of-market sales and were completed in as little as 10 minutes. Our rollout continues to progress, and we expect to roll out our new digital platform to our entire Echo Park network later this year, allowing us to market our entire Echo Park inventory nationwide. Turning now to our balance sheet. During the fourth quarter, we continued to strengthen Sonic's balance sheet and liquidity resources, including an amendment to increase the total capacity of our credit facilities to $2.95 billion. We also took advantage of attractive capital markets conditions and a corporate credit rating upgrade to refinance our existing debt maturities at favorable terms, lowering our borrowing costs and supporting our long-term growth plan with the issuance of $1.15 billion of unsecured senior notes to complete the RFJ auto acquisition and for other general corporate purposes, including the repayment of debt. We ended the year with over $700 million in available liquidity, including approximately $400 million in cash and deposits on hand. As part of our balanced capital allocation strategy, since the end of the third quarter of 2021, We purchased over 1 million shares of Class A common stock for an aggregate purchase price of $50.4 million. In addition, I'm pleased to report that our Board of Directors approved a quarterly cash dividend of $0.25 per share, which is a 108% increase from its previous level of $0.12 per share, payable on April 14, 2022, to all stockholders on record on March 15, 2022. This dividend increase reflects the strong performance and cash flow generation of our business, our positive outlook for the future, and our commitment to delivering returns to our stockholders. Our fourth quarter and full year 2021 results demonstrate the strong consumer demand we've continued to experience despite pandemic-related headwinds, our success in maximizing operating efficiencies at our franchise dealerships, continued expansion of the Echo Park brand, and the constant commitment and diligence of our valued team members. We are especially grateful to our teammates for their continued dedication and commitment to Sonic and Echo Park, which ultimately makes our success possible. Our distinctive guest-centric culture that is at the heart of everything we do, combined with our enhanced operating model, has enabled us to post another year of record results in 2021. Looking ahead, we remain focused on implementing our strategic plans to fuel further expansion throughout our franchise dealerships, as well as Echo Park. We are very excited to enter 2022 with a strong foundation to increase profitability and drive our future growth. We look forward to effectively executing our roadmap to deliver long-term value for our guests, our teammates, and stockholders alike. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.
spk01: If you would like to ask a question, please press star followed by 1 on your telephone keypad. Our first question today comes from Rick Nelson at Stevens. Rick, please go ahead. Your line is now open.
spk00: Thanks a lot. Good morning and great quarter. I'd like to, I guess, start by asking about inventory, you know, supplies on the new car side. When you think the challenges will abate and is there any visibility into an inventory area? you know, might start to normalize. Maybe you could speak to BMW, Honda, you know, two big brands of yours, what you're hearing from them.
spk06: Hey, Rick, it's Jeff Dyke. Thanks for the question. Look, new car inventories, from our perspective, are going to continue to be tight. We ended the quarter at about 11-day supply. That's where we are right now. Got some unfortunate news yesterday from some of the manufacturers, Toyota, Lexus, BMW included, that they're cutting back some of the allocation for February and March due to microchip shortages. So we expect this to kind of ebb and flow as we move through the first and second quarter. But all indications are that as we move towards the end of the year, things are going to start to get better. That's with all of our brands, including BMW, including Honda. Yesterday was a bit of a surprise, to be quite honest with you. We were not expecting that. But so it goes, you know, we've dealt with that for the last couple of quarters. And as you can see what happened in the fourth quarter, we've made adjustments. Obviously, our SG&A is in great shape. We've moved our margins up. We had record front-end margins, over $6,500 a copy and a new car for the quarter or for December. And we see that continuing. We had a great January. The margins are still high. And that's going to persist on as long as the day supply is going to stay tight. I said this before. I don't think new car supply is going to come back ever to where it was prior to the pandemic starting. I look for B&W to get to a 16 to 20-day supply. For us, they're at about a 10-day supply now as we move towards the summer. You know, hopefully without any more of the announcements that we had yesterday. But new inventory is going to be tight. We think it's going to get better as the year goes on, and then progressively get better as we move into 2023.
spk00: Thanks, Jeff. Where do you think GPUs settle once inventories do recover until we go back to pre-pandemic levels, or do you think OEMs will manage things tighter and some of those elevated GPUs can carry on?
spk06: Yeah, I'm the biggest cheerleader sitting on as many brand meetings as I can, and we're pressing very hard for them not to bring inventory levels back to pre-pandemic levels, and so margins are going to stay high. The margins prior to the pandemic are low. We should be selling cars at MSRP. I mean, this industry needs to get away from doing all the negotiating. It's a hell of a lot less complex, much easier, and it brings the right value for the vehicle. So I think that, you know, prior to the pandemic, you saw Sonic Automotive somewhere in the $2,000 to $2,300 range in terms of front-end margin. That number is going to stay north of $4,000, if not higher, as we move forward. And I would work that into all the models. I just don't see margins coming back, going back to pre-pandemic levels ever. I certainly don't see them coming back in 22 or 23. And that's great. It's great for the industry. It keeps us healthy. It puts lots of cash in the bank, lets us make investments like we did in RFJ and make investments in Echo Park and continue to what we're doing. So as David said in his opening with the permanent reduction of SG&A, it just makes up for a really great run here these next few years if we can keep our manufacturers, partners in line with day supply, which we're all working on. I think that's the only thing that can screw this up is if they bring day supply back to the, you know, 60, 70, 80-day levels that we used to see. I just don't see that happening. And, Rick, this is Steve. I'll just add to, if you look at Sonic specifically, you know, all of our models indicate the same thing that Jeff is saying, that, you know, it's going to stay well over 4,000 at least in 2022. And some of it's going to be impacted by RFJ's mix. Their mix is a little bit different than ours, so that brings the GPU down a bit. So it's going to be a combination of that lower inventory driving the higher GPU, maintaining it higher, and a little bit of an impact of RFK's mix that reduces ours.
spk00: Could be here. Yeah, speaking of RFK, I'd like to – about any early learnings, any positive or negative surprises that come about there?
spk06: Yeah, fortunately, this is David Smith. Fortunately, everything has been very, very smooth. We've so far been very pleased with the team and Rick Ford and his leadership team that are still in place, and everything has been going very smoothly. Yeah, the only thing I would add to that is I think that we can learn a lot from each other. They do a fantastic job, you know, running smaller stores in mid to small markets. And so they've got a lot to offer there. Also might open the door for us to do some tuck-in acquisitions of those type of stores that really have not been on our radar in the past that might be on our radar now. But overall, as David said, you know, them coming into our culture. The cultures were so similar already. Rick Ford, Myron, Geronimo, and that whole team are doing a fantastic job running their platform. Early results have been fantastic, beat our expectations. So we're very, very excited and bullish on this acquisition. It was a fantastic acquisition for our organization at this time. Just an absolute great addition to the family at Sonic Automotive.
spk00: All right. Good to be here. I'm curious also on your appetite for additional acquisitions. Do you go slower now while you integrate RFJ, or are you in the market to do more deals?
spk06: This is David. We are very focused on integrating RFJ and also focused on Echo Park and continue our growth there. And so we're going to be very disciplined on further acquisitions. That's not to say that if something came along that we wouldn't, take a look at it because that's really what happened with RFJ, and that deal came together in record time over only about a three-month period. But it was a great team, and we knew a lot of those people, and so it was a very special deal. But I think barring something like that, I think you're going to see us really focused on driving the growth of our existing businesses and continuing on the growth path that we've already announced.
spk00: Thanks for that, David. Finally, if I could ask on Echo Park, I believe you previously had targeted a possibility in late 2022. I'm curious if that expectation has changed. I don't see it in your slide deck.
spk06: Yeah. This is Jeff. In our mature stores, that's true. Obviously, with the used car market right now, the margins are really difficult. The average retail selling price has moved from about $21,000 to about $29,000, which is moving the average payment for the customer up from $400 to $500. And that's been a bit of a challenge. But as the new car inventory levels begin to come back, The price of these, we've seen price of these about $2,000 or far over the last six weeks in what we've been able to buy at the auctions. You know, we're going to see our stores that are three to five years old begin to get profitable. Our five-year-old plus stores certainly do that as we move towards the end of the year in us getting sort of the EBITDA back on track. I do think that the first quarter and the second quarter are going to continue to be tough. We've already started a little bit with the five-year-old model car. At Echo Park, there's some requests from our consumers for us to sell more than the one- to four-year-old model. So we're looking at five- and six- and seven-year-old cars. We do that in a handful of stores now. We'll see how that goes. We've got some retooling to do because of the complexities and reconditioning in order to do that. But we're taking it one quarter at a time here. We'll see how things progress as we go through the year and if we need to make some adjustments like that. We'll do that. We are going to expand, continue to expand Echo Park. We'll reach 50% of the nation by the end of the year. We're also introducing, with Dino Bernacchi joining our team, We'll start our marketing and branding campaigns this summer. So you can expect a drag on the stores and the marketing spend somewhere in the $40 million to $50 million range for the year when you combine those two things added into our plan as we move forward. And that's what we have in our forecast internally here. But, yeah, you know, if the markets continue to come down like we think they're going to from a pre-owned perspective, where we can get that average retail selling price at least below $25,000, it really puts a lot of wind in our sails for Echo Park. And we're just one quarter of the time watching that. We need to add another year or two to drop the average retail selling price. We will. But it's a quarter-by-quarter watch here before we start making some of those moves. Yeah, and this is David Smith, and some of our guests may want to chime in on this, but we achieved the number one position in our reputation.com surveys from our customers, and as Jeff said, our customers are telling us what they want, and they want more than just the one- to four-year-old cars in many markets. So I don't know if you guys want to touch on that, but that was just an incredible performance to be able to open as many additional stores as we did and still achieve that number one spot and be able to deliver that guest experience to all of our customers is absolutely incredible. I guess the only thing I would add is it's becoming more than just about price. That's how we really drove a lot of our traffic, and now the guest experience is really taking hold. The rest of the nation, or half the nation this year, will be able to experience Echo Park. We project it. We think the margins continue to improve. Inventory levels continue to improve, although it's going to be slow until those new car inventory levels come back and the rental car companies get out of the auction lanes for buying cars and start selling cars again. You know, it's just going to be a little bit of a slow drag here for the next few months. But it's nothing. It's short-term. Used cars are not going to continue to appreciate. That's just not typical. We'll be in a depreciating market if we're not already in it as we move forward here over the next couple of quarters, and we look to get back to normal from an EBIT perspective at Echo Park. And, Greg, this is Steve. I'll just add it. You know, I knew 2022 is really the – coming out party for Echo Park. We've got, you know, as Jeff mentioned and David mentioned, our branding has begun with Dino. We're building the infrastructure to make that happen.
spk03: And we're also getting the digital retail platform being rolled out this year.
spk06: And so once you combine that branding and it becomes a household name coupled with the ability to buy online, that's going to be a tipping point for us.
spk03: And so from my perspective, this is really a Coming out here for 2022.
spk06: And Steve Whitman, I think, needs to comment here on where we are from an e-commerce perspective. Rick, for you guys in our digital retailing platform.
spk04: Steve? Yeah, sure. So as David mentioned in his opening comments, we've launched a website and proprietary digital retailing tool in North Carolina. We've expanded to South Carolina recently as well. Overall, the results are very positive. The new site is driving 68% incremental cars versus the old site, cars sold versus the old site. Of those cars sold end-to-end online, financing penetration is 100%. And extended warranty penetration is 50%. Additionally, we've enabled nationwide shipping on our new website. So the consumer can go onto our website, find a car in Long Beach, and have it shipped to Charlotte, and we enable the consumer to do that. And that's really interesting. What we've seen is that 90% of the cars we've sold online have been shipped from outside of North Carolina. So that new ability to shop nationwide inventory is really driving incremental volume for us. Additionally, we're seeing very strong technical internals on the website. It's 30% faster than the old site. Bounce rate is down 70%, and time on site is up 75%. Lastly, we've talked to consumers who have used the new tool. They love it. They talk about the simplicity of it, the ability to go end-to-end online in an automated way with no human interaction. and also the transparency. We're very transparent about the price, the payments, the products we sell to the consumer, and we're getting great feedback from them early on here. So it's going to be a huge enhancement to our overall business.
spk00: Thanks a lot for all the commentary there. Much appreciated, and good luck.
spk01: Thank you. Thank you, Rick. The next question comes from John Murphy from Bank of America. John, please go ahead. Your line is open.
spk08: Good morning, guys. I just wanted to follow up on used and echo parts specifically. I mean, Jeff, as you look at this, I mean, I think your target is that the vehicle sold here would be basically 40% less or 60% of the value of a new or the pricing would be sort of that kind of a gap, which is kind of more normal. Where would you say that relative gap is right now? Is it like half that or maybe even less in the used market on used to new pricing?
spk06: No, I mean, that's a great question. That's the big issue is the new car prices are budding up closer and closer to new car prices. In the 50% range, 55% range, it's now pushing up towards 70%, 67% a lot easier.
spk03: In particular, if there was inventory out there, I think it would even be tougher. But we've got to get back down to that 55% range and bring that monthly payment down closer to $400,000. That's where Echo Park and the wind really kicks in. And we're in such really good shape with our day supply. You know, we don't have a lot of inventory.
spk06: This is on the franchise side and the Echo Park side. We're sitting at a 36-day supply, something like that, a little higher maybe at Echo Park for store openings. But we're in really good shape with the inventory. What you worry about is The rest of the market out there that might have a 60, 80, 90-day supply, they're still sitting on cars that they paid at the height of the market. They're going to have issues. So all that inventory needs to bleed through, and that average cost of sale needs to come down on pre-owned. That's going to put us back closer to that 55% level. That's going to drive the big, big volumes that we're very accustomed to at Echo Park. So we're being very patient. You know, we've got this great franchise business that's printing a lot of money. It gives us a lot of flexibility. And, you know, given what's going on in this appreciating used car environment.
spk03: But if we have to, and we're being asked to by our customers, as David said, hey, could you guys start selling some five- and six- and seven-year-old cars? We're looking at it. We put that inventory into the Tampa market, and that store took off. We put it in Birmingham, and that store is taking off. So we're going to play around with it a little bit.
spk06: That will drop that average retail selling price, and it needs to get below $25,000 and really get to $22,000 or $23,000. That's when we really start seeing the volumes come back.
spk08: So Jeff, when we think about the 2021-22 new vehicle sales, I mean, you know, our estimate for 2022 is $14,500. So I mean, we're lower than most folks. But let's say we're going to have three years of push into sort of four- to five- to six- to seven-year-old vehicles. in the coming years just because, I mean, the vehicles won't be there, right, in the one to three-year bucket. So I'm just curious, you know, I mean, what did that change in your model? I mean, you were talking about sort of on the production side, you know, there might be some changes. But, I mean, other than that, is it really just, you know, getting, you know, good vehicles at lower price points that just happen to be a year or two older? I mean, you could deliver a good product at that age. I'm just curious, what's the difference in what you need to run in the business model?
spk06: Yeah, it's real simple. We've got to retool our reconditioning system. One to four-year-old car is a lot easier to recondition than a five-, six-, and seven-year-old car in the parts availability issue that's out there. So we've got to have a different level check. And we can retool very quickly to do that. It would take us 90 to 120 days. to begin to sell that six, seven, eight-year-old car. That's not something that we can't do. But I'll tell you, there are more off-lease cars coming back this year than last, about 25% to 30% more. And you might think that next year they're not, but there's a lot of customers that stayed in their leases. They bought their leases out. So the car is going to come back in a different way. They're not going to come back through the traditional lease lanes or swim lanes. They're going to come back from the customer returning that car via us buying the car off the street. We've also been able to increase Echo Park's purchases off the street from, call it in the fourth quarter, around 10%, 11%, 12%.
spk03: We're pushing January, February. 18% range. We think we can get that number up to 30%.
spk06: But John, if you're being logical, yes, the answer is yes. We can retool and sell that five, six, seven-year-old car. It's a lot easier and a lot less complex if we can just sell one to four. But you're probably right. You're probably going to see us move, maybe talk a little more in the second quarter about selling some of that six, seven, eight-year-old inventory. and buying those cars off the street. They're a lot easier to buy off the street. We do it every day at our franchise stores. And we can also leverage our franchise stores to buy more of those cars off the street to feed Echo Park, something we've never done before. But the inventory is there for us to do that. Customers are coming in every day for us to do that. We can utilize our service lanes to buy more and more cars. And so logically, probably yes, as we move into the middle of the summer and into the third quarter, you'll see us making some of those moves. And, John, this is Heath. Just to add a couple of the differences in that model, it's basically the way you make, when you look at the unit economics, the way you make money on a 1 to 4 compared to a 5 to 8 will be different. You'd see on the 5 to 8, you would be seeing a higher front-end GPU and less F&I because the underwriting, obviously, is different for those 5 to 8-year-olds for warranties.
spk08: Got it. Okay. And then just put them back to the franchise side. I mean, the parking service recovery is pretty good, but it seems like there's a lot of legs left there. I mean, how do you see that progressing through 22 and maybe even 23 is the world, you know, knock on wood, hopefully normalizes. I mean, it just seems like there's a huge opportunity still there in the backlog.
spk06: Yeah, we agree 100%. Our customer pay grew over 18% in the fourth quarter, which is great. Really can't control warranty. That's down. I think it was 11%, if I'm not mistaken. But we agree with you 1,000%. There's a lot of room there. We're hiring technicians left and right right now, adding capacity into several of our brands, and there's a lot of upside, in particular on the West Coast. They were sort of first in and last out of all of this. So there's certainly opportunity to grow there, and we're budgeting that way. As the supply chain improves, We're going to see a lot more growth there.
spk03: There's been a historically high work in process in our dealerships.
spk06: It's really been not only the parts but the shipping of those parts that has been an issue, but as that clears up, which we think it will over time, that will improve. Yeah, and we did. We got hit in the fourth quarter. We had a ton of techs that were out sick with COVID. It really smacked us around a bit. So there's plenty of upside in the fixed business.
spk08: And then just lastly, real quick on rising rates. I mean, is this an issue? I mean, you've got a one-for-one just because of the duration of the loans and leases. You don't go up one-for-one with Fed funds rates. So I'm just curious how you think about rising rates. I mean, have you just gauged the backlog? both new and used, is just so strong and not supplied at the moment that, like, this is going to be largely subsumed or overwhelmed with the backlog of demand? I mean, how do you think the balance of power is there?
spk06: Well, from a demand perspective, you know, I think that, you know, we budgeted in four rate hikes for the year. And, you know, as long as those are moderate, we don't think that it's going to become an affordability issue. Actually, the actual vehicle prices becoming more of an affordability issue than financing. And from a standpoint of expenses, from our perspective, obviously we factored in those increases if it impacts our floor plan, et cetera. But at this point, you know, we think the demand is so high and the supply is so low that rate increases are not going to impact the demand to the point that it's material for the industry.
spk08: Great. Thank you very much, guys. Appreciate it.
spk01: You bet. Thank you, John. Thank you, John. The next question today comes from Rajat Gupta of J.P. Morgan. Rajat, please go ahead. Your line is now open. Great. Thanks for taking the question.
spk06: I just wanted to follow up again on the USPAR market. We're hearing some mixed commentary there around demand and growth. The industry data continues to suggest a pretty bleak picture to date. Can we get a sense of what you're seeing at your franchise stores on the used car side? You know, maybe quality date, you know, what the demand backdrop really looks like, particularly as we head into the tax season here, and maybe relatedly any views on pricing. I mean, you did suggest earlier that you do expect it to correct over the next couple of quarters, but do you see another leg up here uh into the tax season you know before we start to see the leg down i'm just curious how you view that dynamic here in the near term and then how to follow up yeah certainly the used car volume is going to pick up in march and april and may from where it was in in january and what we're seeing in february as it always does um the demand is there i mean we're going to sell 40 million used cars in this country this year and that's you know 36 to 40 million is pretty consistent for the last decade, it's the price point, right? You know, that's pushing demand up for new cars, really, because the used car price points are so high. And that's got to give. And it's got to give. I mean, that's going to happen. Used cars are not, like I said earlier, are not going to continue to appreciate. We do believe we're starting to see the depreciation cycle start if the last six weeks are any indication of that. And so the used car demand is there. It's still very strong. It's just a matter of providing the inventory at the right price payment that you can get for the consumer, because most of our consumers are payment buyers, both on the Echo Park side and the franchise side. And we've got to hit that right price point. Our stores have literally gone from selling an average retail selling price of $23,000 on the franchise side to $30,000 or $31,000. And it's just too high. It's butting up too close to the new car pricing and the payment that you can get on a new car. So we're going to battle that headwind here for the next couple of quarters for sure, first quarter, second quarter, maybe even into the third quarter. But it is going to slowly and progressively get better. And that's the message. That's the message we've been getting from the manufacturers. That's what our economist teammates are telling us. And that's what we've budgeted for. And this is David. As you can imagine, as the new car they supply is, you know, 10, 15 days, you know, naturally customers who can't get a new car are going to buy. you know, a car from our franchise stores that's a, you know, two- or three-year-old, you know, pre-owned car that's in great shape because that's just the only thing they can get. And, you know, so it may be closer to the price of a new vehicle, but they're still going to, you know, they need a new vehicle. So they're going to go for the, you know, two- or three-year-old pre-owned vehicle. Got it. Great. And then maybe just to follow up on Echo Bargain, maybe you can do, like, the full-year fix and takes. You mentioned that you expect this kind of like, you know, reduced unit volume. You could put around that, you know, in terms of like volume expectations or, you know, just EBITDA, see a continued improvement on that EBITDA loss or, you know, should stay at this kind of level like for some time, you know, just maybe some numbers around. And maybe if you could tie that into like just some other puts and takes for the full year, you know, for the overall business as well. Yeah, so let's just call, depending on what happens with the inventory, this is a little bit of a guess, but 110,000 to 120,000 cars, somewhere in that ballpark for Echo Park. This year EBITDA progressively getting better as each quarter goes through the year and we get to the fourth quarter positive EBITDA probably maybe even in the third quarter. I think the first quarter is going to be tough. It's certainly going to be tough just because of where the inventory levels are right now. getting a little better in the second quarter, progressively getting better in the third, and then in the fourth quarter. But some of the EBITDA is dragged from moving to 50% coverage in the country, so dragged from opening the stores, that $10 million to $15 million range we've been talking about on an annualized basis. And then the investment of that $30 million to $35 million, maybe even $40 million, we'll see how it goes in our – marketing and branding campaigns that Dino's working on that we'll launch this summer. So this is, as he said earlier, a coming out party kind of year for Echo Park. We're very, very bullish on what our customers are telling us. Our reputation.com scores, as David said earlier, we rank number one in the nation. for a pre-owned dealership group in those reputation.com scores. And so when you add it all together, this is just a great year. It's going to be a great year for Echo Park. We're going to increase our revenue, increase our volume.
spk03: EBITDA is going to continue to improve as we move through the year. Inventory is going to get better.
spk06: It's going to roll us into being in an even better position when we roll to 23 as inventories come back to hopefully a 25- to 30-day supply level. So hopefully that gives you enough insight on what Echo Park is going to look like as we move forward. Yeah, and this is David. And as Jeff was talking about earlier, the fact that we've kept our day supply in line and been disciplined about that, It's sure a whole lot easier to crank pre-owned vehicles drops.
spk03: We can crank up that volume rather quickly versus if we were carrying a large day supply going into that situation.
spk06: It's a real drag on performance. Yeah, that's right. I mean, we could have sold more cars in the fourth quarter on pre-owned. There's no question about that. But we had no idea from September through December or January what the appreciation issue was going to be as new car inventories were tighter and tighter. So we maxed out our gross profit, had the biggest grossing quarter fourth quarter we've ever had in pre-owned and the biggest grossing year we've ever had in pre-owned and took advantage of the market we can do that because our day supply is so nimble we've carried 10 days in the pipeline 20 days on the front line and we can move very very quickly to adjust for the market versus some of those competitors that are out there that are sitting at 70 80 90 day supply product there's a lot of water in that inventory that they're going to have to deal with and one one of the things that's um a big positive for echo park for this year is The rollout of the digital retailing platform not only creates the incremental opportunity for consumers, but the efficiencies are going to really show through the SG&A because it truly is a humanless transaction. There's no one behind the scenes that's doing paperwork, and it is done completely automated. And so that will get us from 25 units per associate per month to hire 30, 35 because the work is being done by the consumer online. We look forward. We'll have a day where we get to really show the tool, and we look forward to really rolling that out and showing everybody. It is a very special tool. Whitman and the team and Bottle Rocket, our business partner, just did a fantastic job with the development of the tool. And when we get to the point where we're ready to display it, we'll put it out there for everybody to really see first time where you've got a tool that someone can buy online beginning to end with no human interaction. robots or bots as we call them, and a lot of great technology driving what is a fantastic guest experience. And we'll be excited to share that with you in the coming quarter or two. Yeah, and we will be setting up an analyst day to walk all of you through that as well. Got it, got it. And you just clarified the advertising number, you know, $30 to $50 million, that's a year-over-year number. I think you spent like $36 million for the full year in Echo Park advertising in 2021. Yeah, that's totally incremental. Yes, it is. That's all incremental.
spk01: Okay. Got it. Yeah, I just used that $30 million number.
spk06: Got it, got it. And just lastly, you know, you gave us some call on the Echo Park Diva Dash, which is actually – You mentioned like 4,000-plus new GPUs per year, services continue to recover. Where do you think, like, any range around what SG&A to gross might look like for the company for 2022 in the ballpark or just for modeling? You know, I think if you do the modeling and look at the math, understanding that there's a couple of things that's dragging on SG&A. If you look at wages, you know, everyone's experiencing this, but it's an incredible increase in wages from a standpoint of merit increases and retaining good talent. And so that's up about 6.4% from a corporate perspective. So that's going to be a drag on your SG&A. And then you add in the $50 million that Jeff was talking about, about the investments with Echo Park. And then finally, we've got a little bit, it's probably $5 million to $10 million of what I would call RFJ transition work that we need to do to run through SG&A. We've got a lot of opportunity with synergies with RFJ, but there needs to be some double work to get that in place. So it will definitely have a return, but you'll have that drag in the SG&A as well. So you've got 6.4% increase in the wages there. That's not the total comp that you see in reports, but that's our corporate team, coupled with the investments that Jeff mentioned, and 5 to 10 on expenses for RFJ transition, and that gets you to the number that we're expecting for 2022. Got it. That is extremely helpful. Thanks, and good luck. And I think one thing more just to be aware of, as you look at SG&A and overall, I think it's very important that everyone understands sort of the sequencing of our earnings. In Q1, it is always around 15%. It's never been more than 19% of the total year. Second quarter and third quarter runs around 25%. each quarter, and then the fourth quarter is the remaining profitability. We've run that type of percentages and cadence for the last 15 years. And so as you model, you know, our bottom line, that is typically the way that it works. Yeah, and I think if you guys refer, this is Jeff, I think if you guys refer back to Heath's comments last year, we gave the same kind of guidance. And for whatever reason, the third and fourth quarter always get tossed up. They're always wrong. And I can't be stated any more clear. Here's the secret sauce. It's 15% in the first quarter, 25% in the second quarter, 25% in the third quarter, and 35% or better in the fourth quarter. That's how our profit works. And we've been very, very consistent in that over the years. And it played out exactly like that in 21. And guess what? It's going to play out like that in 22. I mean, ultimately, it depends a lot on the new vehicle gross margin cadence, I guess, right? I mean, it's such a big mover, but that's helpful. I'm sorry, can I repeat that? I was just saying, like, I mean, the new vehicle gross GPU is such a big, you know, unknown, or I would say that has such a big influence on, like, the cadence or the seasonality of it.
spk01: which just makes it a little difficult. But I appreciate all the color. Thanks so much.
spk06: Yes, sir. Keeping in mind is the new vehicle GPU that we mentioned earlier, if it decreases, we're also going to increase volume of new vehicle sales as well. Yeah, it's going to be 15, 25, 25, and 35. It's going to be right in that ballpark.
spk03: Got it. Thank you.
spk05: Thank you.
spk03: Great.
spk01: Thank you, Rajat. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question comes from Brett Jordan from Jefferies. Brett, your line is open.
spk07: Good morning. Did you say what percentage of your Echo Park product came from auction in the quarter?
spk06: Yeah, so about 82%, 83%, somewhere in there. That number is pushing up or pushing down going into the first quarter. We're buying about 18% of our cars off the street now, keeping about 18% of our cars in trade-ins and vehicle purchases off the street. So that's been a big focus for us. It's a little harder to buy 1- to 4-year-old cars off the street than it is to buy 5-, 6-, 7-year-old cars off. off the street, as John Murphy was talking about earlier from V of A. But we believe we can move that number up to about 30% of our overall inventory, and we're working diligently on that. We've launched our first marketing and branding plan around that. That went out sort of December-ish timeframe. And that continues to gain strength. We're getting a lot more traffic into our site to buy vehicles. So you can expect that number of purchases off the street and trades kept for Echo Park to grow to the 30% range, expand the portfolio to selling five and six and seven-year-old cars.
spk07: Okay. And on pricing, I mean, obviously your deck shows that you're selling three-year-old or four-year-old cars at prices that would be comparable to five or six. As you sell five to eight, are you pricing more in line with the market, or are you still trying to be below, you know, the... the competitive price, you know, significant.
spk06: We'll still be below the competitive. We'll still have a competitive price advantage, but we'll have positive margin on those vehicles. And we see that right now in the stores that we're selling those vehicles that our margins are much better overall in the stores from a front end perspective in the stores that we sell one to eight than we do the stores that sell one to four. It's just the one to four year old stores. The volume is significantly higher because the price advantage is so much greater in normal times.
spk07: The smaller front-end loss, but smaller F&I on the back-end. That's how you look at it.
spk03: But for a blended number overall, it's about that same, you know, $2,500 range.
spk07: Okay. And as you see more of the Echo Park online, you know, test market, are you seeing the F&I attachment comparable to what you saw in the original larger in-person F&I, which is in line with what we're seeing in-store?
spk02: And what consumers are saying is the value reframing we do with them online. We talk about how much the extended warranty costs versus repairs and our F&I penetration has exceeded our expectations to date.
spk03: Yeah, that's been the fascinating part.
spk06: That's been the best single – I mean, the performance of the website is fantastic from a metric perspective. But, man, it sure is a great relief given our model. We rolled that side out, and here comes our warranty penetration, and here comes our finance penetration. And for those to really improve over what we've seen at the store level, it's just great. That's fantastic news for us. It gives us a lot of energy and role. And that's really – To highlight, that's our benchmark, right? That's our benchmark for success. Seeing that new website work in that way where we're making at least, if not more than we are in an in-person transaction, that's the key. And that's what we're seeing. That's a big takeaway from this call.
spk07: Okay. And then I guess I might have missed this, but, I mean, obviously you talked a few quarters ago or a couple quarters ago about sort of evaluating Eichelpark and alternatives.
spk03: Is the disruption in the market and obviously the craziness or that strategy? This is David. No, we don't have any additional comment on that disclosure. Okay, great.
spk07: And one last question, and this goes back to the prior as far as the breakout on a quarterly profit contribution, the 15, 25, 25, 35. Is your feeling, I guess, the read-through and, you know, obviously GPUs at very high levels, is your feeling, I guess, on the full year that GPUs will stay relatively consistent in the sense of your outlook as far as the supply that we're going to be running these front ends that are still at very high levels and relatively stable?
spk06: Jeff, if you look at our internal models, they're basically flat, you know, across the board. Again, the RJ impacts and their mix has a little bit of an impact. It's just going to be sort of the mirror image of 2021. You know, you're going to end up, if you put them together, they're going to be sort of a mirror image when it comes to new growths.
spk05: And, Brett, this is Danny. I mean, I think to Heath's point, if you look at what the second quarter of last year looked like, when we were in the high 30-day supply, we were running just shy of 4,000 new GPU, but it was close to an 18 million SAR because we had the inventory to support that. And as GPUs come down, that's going to imply that inventory, or at least production, is increasing. So we believe, as David just said, that the volume could offset, from an overall earnings perspective, the volume could offset the GPU compressions. to where it may affect the overall earnings level for next year, but it doesn't affect the cadence, in our view, from the quarter to quarter.
spk06: Yeah, and, Brett, if you look at it, I don't care what brand it is, we are substantially sold through the pipeline on all new vehicles that we have at Sonic. Just substantially sold through. So the demand is there. A little more inventory. I believe the margins may tell you. So, you know, we don't want 60-day supply inventory. We don't even want 45-day supply inventory. If they could just get it back to the 20- and 30-day supply, you've got great demand, great margin, and it sets up 22 and really 23 for just to be fantastic years for the industry.
spk07: Okay, great. Thank you.
spk01: Thank you, Brett. No further questions registered, so I will now pass the conference back over to David Smith for closing remarks. David, please go ahead.
spk06: Thank you very much, and thank you everyone, and you all have a great rest of your week. We appreciate you attending the call.
spk01: This concludes the Sonic Automotive fourth quarter 2021 earnings conference. Thank you for your participation. You may now disconnect.
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