Sonic Automotive, Inc.

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.

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.

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.