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spk02: 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.
spk04: 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.
spk02: 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.
spk01: Yeah. Hey, good morning, guys. Thanks for taking our questions.
spk06: Morning.
spk01: I want to start on the Echo Park side and really what's going on on the units. I think it makes sense. You know, affordability is a challenge. But trying to parse out, you know, how much of the unit weakness is due to softening demand in this backdrop? And how much of it is maybe due to a lack of supply? Are you able? to see that within your business? Do you think demand still exceeds supply there? Just trying to figure out kind of the drivers of that unit softness there.
spk03: Yeah, this is Jeff Dye. 100% the demand is there. I mean, we pulled the business back just because we couldn't buy one- to four-year-old vehicles. I mean, they're just very hard to get. And so as we announced in the first quarter, we retooled and said that it would take us four or five months to – bring the five plus year old vehicles into inventory. We're doing that now and starting to see some great results from that. I can refer you to slide 18. If you look at our Houston market, 32% of the vehicles that we sold were five plus year old cars in June of 22. That's just continuing to improve as we move into the third quarter. And if you look, we did Denver and we did Dallas in July. And those markets that were losing money in previous quarters are now going to be at least break even. Denver markets should make in the $300,000 range in July. All of this is from the moves that we've made with the inventory. So the demand is there. But the demand is not there for a $640 monthly payment for pre-owned, and that's what you're getting when you're selling a one- to four-year-old car right now at $30,000, $31,000. And so retooling to the five-year-old plus cars, we're able to get that monthly payment back down into the $400 range, which is historically where it needs to be. So consumers are buying a little higher model car at a lower payment. And we've been able to continue to keep our warranty penetration up there. So not concerned at all about pre-owned demand. The bigger concerns are just the availability of inventory. And we're procuring much more as a percentage of our inventory off the street now. and through trades than we were before. It was a really low number in the previous years. Now that number is over 50%, which is great. We'll continue to see that grow as we move into the third and fourth quarter, and we bolster our bottom line. Our bottom line is going to get better in Q3 than it was in Q1 and Q2, and then we expect Q4 to be better than Q3 as we move into the first, second, and third quarters of next year We expect EBITDA to be back to break even or to profitability as we move forward.
spk05: Yeah, and this is Steve. I would just like to add, if you look at slide 18, I think it's important to note the pretty dramatic impact that that change has made on profitability that Jeff mentioned. That Houston market was the first market we transitioned the 5-plus vehicles, and you can see they went from losing $1.1 million to, you know, June, 2022, they're losing 300,000 and we're seeing the same thing at the other locations as we transition. So, uh, I agree with Jeff's going to have a big impact on, um, on the profitability of Echo Park going forward.
spk04: Yeah. And, uh, this is David Smith. One of the things to remember too, is our guest experience. Our, our, our team, our Echo Park team is delivering just the world-class guest experience. So the demand from those guests, you know, from people out there wanting a five-plus-year-old car to be able to buy one from Echo Park, we've seen that increase drastically as well.
spk03: I think that it's important to note, to remember that this transition to retooling the inventory is a four- to five-month process. We started that in the middle of May, as we told you we would do coming out of the first quarter's call. A few more months, we've got Houston done, we've got Dallas done, we've got Denver done. We'll start adding the 5 Plus cars to the other markets. You're retooling technicians and reconditioning processes and all kinds of things, advertising and pricing, to get to a more traditional type of model. We'll ride this wave until the 1 to 4-year-old market comes back and we have inventory that we can buy either at auction or off the street in that category.
spk01: really, really helpful color and a follow-up on that. The profitability is higher and it sounds like a big portion of it is this non-auction source volume. How much of that do you think is sustainable? And I guess the thought being it's easier to buy a car off the street from the consumer when they have positive equity in the car right now, but as vehicle values normalize and the consumer is back to negative equity, it's probably a lot harder to buy them out of that car without attaching a sale to it. So curious, you know, how you guys think about that trend now, feeding into next year and the future years, but also obviously impacting the profitability of this older cohort when it's harder to buy that from a consumer?
spk03: Yeah. Well, when that happens, you're back to traditional used car model, and we'll see one to four-year-old cars begin to drop in valuation and price. And we're already seeing it, but to begin to drop in the auction lanes. And then we're back to buying those vehicles, sourcing those vehicles both from off the street and at the auction. and that um will bring the volume back you know from an echo park perspective in the wonderful category yeah you're going to be down into the right now uh if you're looking at what we're paying at auction you know three or four weeks ago it was at 31 000 price point today you're in the 27 28 000 price range so it is dropping um and i expect that to get back down below 25 000 that makes a big deal because then you're back down into the 400s from a monthly payment for the consumer, and that is what we're looking for. That's the big issue right now for everybody in pre-owned as the monthly payments are too high in the one to four category.
spk00: And Daniel, to add one more point, this is Danny. I think the other piece of that is if when you see that happening and used pricing starts to come down, you could have this potential for negative equity. You're going to be in a position to where lessees are not buying out their leases at the end of the term as they are today, which historically has been less than 10% of leases, and it's somewhere in the neighborhood of 50% today. So that would benefit both the one to four year coming back through auction, as well as on the franchise side, kind of the organic inventory sourcing that we're missing out of a lot, particularly in our BMW and Honda brands to date.
spk03: Yeah, if you look at our BMW and Honda brands, they compromise 30% to 35% of our total revenue. And in the second quarter combined, those two brands were off about 6,000 used cars year over year. We were off 4,000 cars, so they were more than the company was off, and that's 100% coming from off-lease cars, not coming back to consumer. Typically, we buy 95% of those off-lease cars back. Today, it's less than 50%, and that's where you see the difference in terms of our overall used car performance on the franchise side being different than everybody else's. It's just those two brands are causing us some havoc right now in terms of used car supply coming back off of lease.
spk01: Got it. And last one for me, just talking about used pricing normalizing. Are you seeing any lenders tighten in this environment, just given prices are so high and maybe are coming down? Are you seeing any change? I know you guys will take balance sheet risk, but any change in your financing partners or ability for customers to get financing at this point in the cycle?
spk05: Daniel, this is Heath. We haven't seen that, and we get asked that a lot. You see a little bit of crack for the subprime, but above that, we haven't seen any tightening from our lenders. And, you know, we keep hearing some macro data that actually correlates with that as well. You know, there is obviously the chance that if we hit a recession that's too difficult that we may see something, but so far we've not seen any of that.
spk01: Thanks for all the color this morning and good luck. Thank you.
spk06: Thank you.
spk02: Thank you, Mr. Ambrose. Again, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from the line of Rajat Gupta with JP Morgan. Please go ahead.
spk06: Great. Thanks for taking the question. And David, I just wanted to pass on my condolences to you and your family as well.
spk04: That's nice. Thank you so much.
spk06: Oh, yeah. Yeah, thanks. Just the first question, Echo Park, you know, following up on Daniel's question. You know, you mentioned that the exit rate on those losses were getting better, had gotten better in Tokyo. You know, just curious if you could provide us with any visibility on the trajectory of Echo Park, you know, EBITDA in the near term. You know, when can we expect that business to turn to profitability? you know, just based on the actions you're taking around, you know, mix, you know, the higher GPUs and also maybe cost. And I have a follow-up. Thanks.
spk03: Yeah, you bet. Jeff Dyke here. So as we told you in the first quarter, the second quarter was kind of going to mirror the first quarter in terms of EBITDA, and that's exactly what happened. It was almost identical. As we retooled, started that in May, the third quarter is going to be, I mean, we're going to lose less money in the third quarter from an EBIT perspective than we did in the first two. We'll improve again in the fourth quarter from that. And it would be my guess that in the first or second quarter of 23, if nothing changes and inventory continues to kind of stay in this $27,000, $28,000, $29,000 price range for one- to four-year-old cars, and we don't improve from an overall used car availability perspective, And I would tell you we'll be fully retooled in the next two to three months and profitability, at least from a break-even basis on EBITDA in the first couple of quarters, I'd say the second quarter of next year, somewhere in that ballpark, if not sooner. And then if inventories start to become more plentiful, off-lease cars kind of return, consumers start selling us those cars instead of buying them out, that's going to change the valuation process on pre-owned. We'll get that price point down. into the 400, the 450 price point range for the consumer as a monthly payment, the profit will come back a lot faster. So it's kind of a wait and see to see what's going to happen with pricing on pre-owned inventory. But if nothing changes, first couple of quarters of next year, at least back to break even.
spk05: This is Heath. I would just add that we are still fully committed to hitting our goal of 90% coverage by 2025. So we're going to have the infrastructure in place as the market turns. And so the speed of the market returning and us retooling is really going to define that trajectory going forward. But I think it's important to know that we will be, the infrastructure will be there as the market turns. We have not backed down on that 90% coverage by 2025. And if you do look at just, you know, sequential month to month, Our Echo Park from June to July, you know, we don't even have but two, three of the markets transitioned to this new model, and we're seeing two to three million dollar differences in pre-tax.
spk03: Yeah, I would add that adding, you know, the five-plus inventory is temporary. It's not abandoning the one- to the four-year program long-term. That's still a major part of our plan, and we think, you know, as inventory comes back, it doesn't mean that we won't sell the five-plus-year vehicles. but it just won't be as big a percentage of the mix as it's going to be right now while we work our way through this inventory time. And I think it's also important to remember, as we said earlier, our Denver market, which we just retooled this month, that was losing in the $300,000 to $400,000 a month range, it's going to make $300,000 in the month of July. And our Dallas market that we also retooled this month, it was losing $600,000 to $700,000 is going to be zero to $100,000 loss, so massive improvements. And then he talked about page 18 earlier where we've gone in Houston from a million, million one, maybe even a low of a million three, all the way up to a $300,000 loss and continuing to improve there. It doesn't take long to retool. It's a few more months, and then EBITDA is just going to continue to get much better than what you've seen in the first two quarters.
spk05: And I think this is neat. I think it's important. You know, that's one of the beauty of having the diversification. You know, we've been doing this on the franchise side, you know, for decades. And so we had the capability and knowledge that we could easily go over to Echo Park and do the five plus with the recon and the processes that need to be in place.
spk06: Got it. So that's a very helpful color. Maybe shifting gears to parks and services, the same firm group was strong, but slightly below what your peers have reported. Anything to flag there on the drivers? Is it more regional or brand dynamic? Or perhaps just lower reconditioning because of a weaker new and used unit? Maybe if you could just help us unpack that a bit and what your expectations are for the remainder of the year.
spk03: Yeah, I mean, actually, we're really excited about what we're doing in fixed operations. We have 11% in customer pay, which is, you know, for the other peers that have given that data, we're in line with that. And I think brand mix plays a role there. I think if you look at Penske and what they're doing, I think our numbers were about the same. Internals are hurting a little bit because of the used car volume being off. That typically runs about 15% of our overall fixed gross, and then that's off. 14% or 15% because of the volume being down. And so that's playing a role in that somewhat. Warranty is offsetting it a little bit. But we're very focused on growing our market share by opcode in our service business. And we are gaining market share, particularly in the BMW brand. And I expect that to continue to pay dividends for us as we move through the next few quarters and into next year. So we're very excited about where we are on fixed. And I think just when you compare to the competitors, the brand mix plays a little bit of a role there versus our brand mix.
spk04: Yeah, and you can – this is David. As you can imagine, with the discussion of used cars being more expensive, it will cause customers to keep their existing vehicle and will then help our fixed operations. As Heath mentioned, having the diversification in our business really helps.
spk06: Got it, got it. That's helpful, Color. Thanks a lot.
spk02: Mr. Gupta, there are no additional questions waiting at this time. I would like to pass the conference back to David Smith for any closing remarks.
spk04: Thank you very much. Thank you, everyone. We appreciate your time, and have a great day.
spk02: the Sonic Automotive Second Quarter 2022 Earnings Conference Call. I hope you all enjoy the rest of your day. You may now disconnect your lines.
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