Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive first quarter 2023 earnings conference call. This conference call is being recorded today, Thursday, April 27, 2023. 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.

Thanks very much, and good morning, everyone. Welcome to Sonic Automotive's first quarter 2023 earnings call. As he said, I'm David Smith, the company's chair and the CEO. Joining me on the call today is our president, Jeff Dyke, our CFO, Heath Bird, our Echo Park chief operating officer, Tim Keene, our chief digital retail officer, Steve Whitman, and our VP of investor relations, Danny Weiland. Earlier this morning, Sonic reported first quarter financial results, including record first quarter total revenues of $3.5 billion and record first quarter Echo Park segment revenues of $651 million. First quarter gap EPS was $1.29 per share and adjusted EPS was $1.33 per share. I am very proud of our team's performance in the first quarter, and we're excited to build on last year's success as we move forward in 2023. Despite ongoing challenges in the automotive retail industry, including rising interest rates and vehicle affordability concerns, we remain focused on delivering an exceptional guest experience and executing our long-term strategic plan. Our strong relationships with our teammates, our manufacturer and lending partners, and our guests are key to our long-term success, and I would like to sincerely thank them for their continued support. Turning now to the first quarter, the industry continued to see improvement in new vehicle production and inventory levels, which resulted in lower new vehicle GPUs sequentially and year over year as we expected. This decline in new vehicle GPUs should continue as we progress through 2023, but we believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre-pandemic. In the used vehicle business, wholesale auction prices for three-year-old vehicles unexpectedly rose over 6% since the beginning of the year, as nearly new inventory continued to face elevated demand from rental car companies and dealers at auction. Conversely, used vehicle retail average selling prices declined approximately 1% year-to-date, reflecting continued affordability challenges for consumers affecting retail demand. This, combined with a lower level of lease turn-ins at our franchise dealerships, limited our used vehicle volume potential during the first quarter, but we were able to maintain higher GPUs than expected to somewhat offset the lower volume. Used vehicle retail price levels continue to drive monthly payment affordability concerns for the average buyer at current interest rates and despite the uptick in wholesale prices in the first quarter. We expect used vehicle prices to resume their decline as we progress through 2023. Despite an elevated interest rate environment that has reduced our finance contract penetration rate, F&I performance continues to be a strength, and we want to reiterate our guidance for full year 2023 F&I per unit at or above $2,400 per unit. Our parts and service or fixed operations business remains strong with an all-time record quarterly fixed operations gross profit at our franchise dealerships up 12% year over year. We are very proud of the success our team has had in this area and believe there are remaining opportunities for growth in our fixed ops business as we progress through 2023. As we said on our fourth quarter call back in February, We believe ongoing macroeconomic uncertainty and concerns around the effects of rising interest rates on the average consumer could drive volatility in consumer demand and vehicle margins through at least the first half of 2023. This coupled with our luxury-weighted franchise business contributed to our decline in earnings from the fourth quarter to the first quarter, which is consistent with the historical seasonality of our business. However, we continue to believe that our diversified automotive retail model positions us favorably to adapt our business to changes in market conditions as we progress through 2023. As new vehicle inventory supply grows, we expect it to take pressure off of used vehicle pricing and rental car company demand at auction, which should benefit both consumer affordability and cost of inventory. Turning now to Echo Park segment results, We reported record first quarter revenues of $651 million, up 5% from the prior year, and gross profit of $39 million, down 9%, due in part to the increase in wholesale vehicle pricing I mentioned earlier. Echo Park segment retail unit sales volume for the quarter was a first quarter record of 19,980 units, up 15%, from the fourth quarter and up 34% year over year. Echo Park segment average used vehicle selling price decreased 3% from the fourth quarter, but at $28,650 per unit, still remains 10 to 15% above targeted affordability levels. We continue to focus on optimizing our inventory sourcing mix and expanding our inventory affordability by including five plus year old vehicles and Echo Park inventory amidst the ongoing auction demand for nearly new inventory. For the first quarter, five-plus-year-old vehicles represented 16% of Echo Park segment retail unit sales volume, and our non-auction sourcing mix was 20% of sales in the first quarter. First quarter Echo Park segment adjusted EBITDA was a loss of $36.9 million compared to an adjusted EBITDA loss of $25.4 million in the fourth quarter and $29.5 million in the year-ago period. First quarter 2023 segment results include a $12.5 million adjusted EBITDA loss related to other used vehicle businesses within the Echo Park segment, including the Northwest Motorsport business acquired as part of the RFJ acquisition. We are in the process of implementing our standard playbooks and processes at these locations, including inventory management and pricing strategies, and expect the losses associated with this transition to improve sequentially in the second quarter. Excluding these losses, our core Echo Park branded locations generated an adjusted EBITDA loss of $24.4 million, an improvement of $11.8 million from the first quarter of 2022. Our Echo Park first quarter results were in line with our internal projections, and we maintain our guidance for breakeven adjusted for the Echo Park segment by the first quarter of 2024. Furthermore, we believe in any industry driven margin headwinds we may face in the franchise business should be a tailwind to Echo Park segment revenue growth and profitability. minimizing the earnings downside to consolidated Sonic results over time. As we announced in February, we are very excited about our newly created Power Sports operating segment, which further diversifies Sonic's retail portfolio. The integration of Black Hills Harley-Davidson into the Sonic family is off to a great start, and the team is currently gearing up to make this year's Sturgis motorcycle rally better than ever. We believe their operational synergies with our growing PowerSports network, leveraging the Team Mancuso and Horny Toad Harley-Davidson teams to maximize the financial benefits of this event. As we continue to develop our relationships with the PowerSports OEMs, we are increasingly optimistic about the future growth opportunities in this adjacent retail sector. Finally, turning now to our balance sheet and capital allocation, we ended the fourth quarter with $893 million in available liquidity, including $432 million in combined cash and floor plan deposits on hand. As an update on our share repurchase activity, during the first quarter, we repurchased approximately 1.6 million shares of the company stock for $91 million, representing approximately 5% of shares outstanding at the end of 2022. As of today, we have a total of $374 million in remaining share repurchase authorization representing approximately 20 percent of Sonic's current market cap. Additionally, I'm pleased to report today that our Board of Directors approved a 3.6 percent increase to our quarterly cash dividend to 29 cents per share, payable on July 14, 2023, to all stockholders of record on June 15, 2023. In closing, our team is prepared to continue to execute at a high level while remaining adaptable to changes in the automotive retail environment and macroeconomic backdrop. Further, we continue to operate our business with a long-term view and remain committed to a disciplined, return-based balance capital allocation strategy to maximize long-term stockholder returns. This concludes our opening remarks, and we look forward to answering any questions you may have. Thanks very much.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Daniel Embro with Stevens. Please proceed with your question.