Sonic Automotive, Inc.

And welcome to the Sonic Automotive second quarter 2022 earnings conference call. This conference call is being recorded today, Thursday, July 28, 2022. 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 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 so much. Good morning, everyone. Welcome to the Sonic Automotive second quarter 2022 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 Echo Park Automotive Chief Operating Officer, Mr. Tim Keene, our Chief Digital Retail Officer, Mr. Steve Whitman, and our Vice President of Investor Relations, Mr. Danny Weiland. On behalf of our entire leadership team, we want to sincerely thank our guests, teammates, manufacturer partners, and communities we serve for helping us achieve another quarter of outstanding financial performance. To briefly recap, during the second quarter of 2022, Sonic generated all-time record quarterly revenues of $3.7 billion. up 9% year-over-year, and net income of $94.8 million, or $2.33 per diluted share. Excluding a $4.4 million one-time charge, we reported adjusted net income of $99.2 million, or $2.45 per diluted share. Despite ongoing supply chain disruptions, rising inflation, and higher interest rates, in the second quarter our team continued to execute at historically high levels and deliver another quarter of new vehicle GPU expansion, steady customer lead volume, and continued growth in our parts and service business. These results are also indicative of persistent consumer demand both in-store and throughout our digital network, despite a growing concern about macroeconomic headwinds. This is not the first time Sonic has experienced such business conditions, and we recognize the importance of being prudent and adaptable in our approach to achieving our growth and profitability targets during such times. To bolster our short-term position and prepare for a range of potential economic conditions, we are very focused on maintaining our strong liquidity and balancing position, identifying additional cost management measures, and balancing our growth plans. Beginning with our franchise dealership segment results, Second quarter 2022 revenues were $3 billion, up 8% from the prior year. Segment income was $162.1 million, down just 2%. And segment adjusted EBITDA was $216.3 million, up 9%. On the same store basis, franchise dealership revenues were down 12% year over year, while gross profit was lower by 2%. due primarily to a 20% decrease in industry new vehicle volume as a result of ongoing vehicle production constraints. Parts and service gross profit was up 4% on a same-store basis, improving as vehicle miles driven recovered towards normal levels, with an 11% increase in customer pay gross profit, offset partially by a 10% decrease in warranty gross profit. Same store F&I gross profit was down 14% due to lower retail unit volumes, despite all-time record F&I per unit of $2,472 in our franchise dealership segment, which was up 17% year over year. Franchise dealership segment adjusted SG&A as a percentage of gross profit was 59.9%, up 180 basis points year over year, but remain structurally lower than pre-pandemic levels due to the strategic actions we have taken over the past two years to better optimize our cost structure. Similar to the last few quarters, we continue to see limited new vehicle production and inventory levels due to supply chain disruptions and strong consumer demand for new vehicles. This contributed to a 33% decrease in same-store retail new vehicle unit sales volume, higher than the industry retail SAR decline, of 20% due to our luxury and import weighted brand mix, which continued to have lower day supply inventory than domestic brands. Offsetting the lower sales volume though, same store retail new vehicle gross profit per unit was $6,905, a 77% increase year over year and 2% sequential increase from the first quarter. As of June 30th, our new vehicle day supply at our franchise dealership was just 18 days, up from 15 days supply at the end of the first quarter. While production is improving somewhat, demand for new vehicles remains strong, as evidenced by stable new car pricing and continued expansion of new vehicle GPU. Our franchise dealership segment used vehicle inventory had approximately 31 days supply, down from 33 days at the end of the first quarter. We continue to be disciplined in managing our used inventory, volume and pricing in the face of recent declines in wholesale market pricing and the current macroeconomic outlook. Turning now to Echo Park, we reported all-time record quarterly revenues of $665.6 million, up 12% from the prior year. Echo Park retail sales volume for the quarter was 16,608 units, down 22% year-over-year, but up 11% from the first quarter. As we guided on our April earnings call, second quarter Echo Park segment loss of $34.9 million was flat compared to the first quarter, but showed monthly improvement exiting the quarter as the effect of strategic shifts in inventory mix and sourcing began to benefit the bottom line. Beyond these operating results, we continued the nationwide expansion of Echo Park, opening three new Echo Park locations during the second quarter, including two retail hub locations in raleigh and st louis and remain on pace to reach 50 of u.s population by the end of this year and 90 coverage by 2025. beyond our physical footprint in june we completed the rollout of our proprietary new e-commerce platform to 100 of our nationwide traffic at echopark.com the new platform continues to produce positive results in consumer and customer feedback accounting for 19% of our retail volume during the second quarter, with a 30% increase in our website conversion rate and out-of-market buyers representing 69% of our e-commerce sales. Going forward, we intend to continue Echo Park's expansion in a targeted, strategic manner. With our current rate of expansion and the success of our new e-commerce platform, we remain very confident in Echo Park's long-term prospects once the used vehicle market eventually reverts to historical norms. In the interim, we have taken deliberate action to expand our inventory, offering to include five-plus-year-old vehicles, which enables us to reach additional customer segments, improves consumer affordability, and allows us to source more vehicles from non-auction sources, benefiting profitability. In the second quarter, we increased our non-auction sourcing mix to 25% of Echo Park sales volume, And in July to date, 57% of our acquired inventory has come from non-auction sources. With this improvement in sourcing, we are seeing better front end and combined GPU going into the third quarter, which we expect to drive an improvement in Echo Park losses in the second half of the year. In addition, we have taken steps to adjust our headcount and expense structure at Echo Park to better align with current volume levels and our near-term growth plans. We remain confident in Ecopark's long-term prospects, however, the current market has caused us to adjust our projected revenue growth and push back our previously stated financial targets beyond 2025. Once we have gained more clarity on future used vehicle market conditions and the effects of the strategic adjustments we have made at Ecopark, we will then provide an updated Ecopark model and guidance. Lastly on Ecopark, at this time we are concluding the previously announced formal review process for Echo Park. Together with our advisors, we carefully evaluated a range of alternatives and our board has determined that timing and current market conditions do not align with our value creation objectives for the business. We will continue to execute on our expansion plans for Echo Park and we will continue to monitor market conditions and periodically consider potential opportunities to maximize long-term shareholder value as they arise. Now turning to our balance sheet, we ended the second quarter with $755 million in available liquidity, including $453 million in cash and floor plan deposits on hand. Our consistently strong sales performance, cash flow generation, and balanced capital allocation strategy have all contributed to our solid financial position, enabling Sonic to return capital to shareholders through its quarterly dividend and share repurchases. During the second quarter, we bought back approximately 1.4 million shares of the company's stock for an aggregate purchase price of $59.4 million. Year-to-date, we have repurchased approximately 5% of shares outstanding at December 31st, 2021. To that end, today we announced that Sonic's Board of Directors increased the company's share repurchase authorization by $500 million to a total of $633 million in remaining authorizations. Further, I'm pleased to report that our board of directors approved a quarterly cash dividend of 25 cents per share, payable on October 14, 2022, to all stockholders of record on September 15, 2022. In closing, our second quarter results demonstrated another period of solid and consistent financial performance despite macro headwinds. Moving ahead, we will continue to execute on our strategic growth plans for Sonic and Echo Park, capitalizing on the strength of our business model and flexibility to adapt in the short term so we continue towards our longer-term goals. By following this course, we are confident in our long-term ability to deliver revenue growth, increase profitability, and build greater value for our guests, teammates, and stockholders. 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 one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question, It comes from a line of Daniel Embro with Stevens. Please go ahead.