Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive second quarter 2023 earnings conference call. This conference call is being recorded today, Thursday, July 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 8K 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 very much, and good morning, everyone. And welcome, as she said, to the Sonic Automotive second quarter 2023 earnings call. Again, I'm David Smith, the company's chairman and CEO. Joining me on the call today is Mr. Jeff Dyke, our president, our CFO, Mr. Heath Bird, our Echo Park Chief Operating Officer, Mr. Tim Keene, our Chief Digital Retail Officer, Mr. Steve Whitman, and our Vice President of Investor Relations, Mr. Danny Weiland. Earlier this morning, Sonic Automotive reported second quarter financial results, including record quarterly total revenues of $3.7 billion, a 4% increase from last year. Second quarter EPS was $0.65 per share, which includes the effect of $75 million in charges related to our previously announced plan to indefinitely suspend operations at eight Echo Park retail hubs and 14 delivery and buy centers, as well as three Northwest Motorsports stores in the Echo Park segment, offset partially by a $21 million gain on the disposal of three franchise dealerships. Excluding these items, adjusted EPS was $1.83 per share, a decrease from $2.45 in the prior year, due primarily to normalizing new vehicle margins and higher interest rates. We are proud of our team's performance in the second quarter, and we remain focused on maximizing profitability in the near term, while positioning Sonic to achieve our long-term strategic goals. We would like to thank our amazing teammates, manufacturer and lending partners, and of course our customers for their continued support. Turning out the second quarter results, The industry continued to see improvement in new vehicle production and inventory levels, which resulted in incremental new vehicle sales volume and lower new vehicle gross profit per unit sequentially as expected. This decline in new vehicle GPUs should continue as we progress through the second half of 2023 and into 2024. But we continue to 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 decreased 6% in the second quarter, unwinding the surprise increase we saw in the first quarter. And this is important. July month to date, three-year-old wholesale prices are down nearly 4%, consistent with our expectations for continued price normalization in the third and fourth quarters, which will ultimately benefit consumer affordability and demand for used vehicles once retail pricing follows the wholesale trend in the same direction. Lower lease turn-ins at our franchise dealerships continue to limit our used vehicle volume in the second quarter, but we were able to maintain higher used GPUs to somewhat offset the lower volume. We expect used vehicle prices to decline further in the remainder of the year. Now to our franchise dealerships. Our franchise dealerships F&I gross profit per unit improved $156 sequentially from the first quarter to an all-time record $2,516 per unit. And we reiterate our previously issued guidance for the full year 2023, franchised F&I per unit at or above $2,400 per unit. Our parts and service or fixed operations business remains very strong with another quarter of all time record fixed ops gross profit at our franchise dealerships up 9% year over year, driven by 11% growth in our customer pay business. We are proud of the success our team has had in this area, and we believe there are remaining opportunities to optimize our fixed ops business as we progress through 2023. Turning to the Echo Park segment, in this morning's press release, as I mentioned, we provided additional details around the previously announced suspension of operations at certain Echo Park locations and the closure of three Northwest Motorsports locations. In total, we suspended operations at eight Echo Park retail hubs and 14 related Echo Park delivery and buy centers, as well as three Northwest Motorsports stores. In the second quarter, the suspended operations represented 14% of our Echo Park segment unit sales volume, approximately $74 million in revenues, and incurred a segment loss of $13.2 million. Going forward, we expect $2.5 to $3 million in ongoing quarterly expenses associated with these non-operating locations. Suspending operations at these stores was a very difficult but necessary decision given the current used vehicle market conditions and our near-term outlook. As we've continued to develop the Echo Park model, our team has learned how to adapt the business to the unique challenges we have faced over the past three years. While we believe that delivery and buy centers remain a key opportunity for Echo Park growth down the road, The success of the delivery center model is dependent upon broader Echo Park brand awareness to drive organic e-commerce traffic to EchoPark.com and generate sufficient delivery center sales volume to meet our required returns. In light of the inventory constraints we are facing in the current environment, we do not feel it is prudent to invest in this level of brand marketing at this time. However, As market conditions improve, we'll begin to roll out our Echo Park National Branding Strategy, which will enable us to selectively invest in delivery center growth to facilitate our goal of reaching 90% of the U.S. population at maturity. We believe that the decision to suspend operations at these stores will substantially improve our near-term financial performance and allow us to reach our goal of break-even ECHOPARK segment adjusted EBITDA by the first quarter of 2024, while maintaining the viability of our long-term strategic plan for ECHOPARK once used market conditions normalized. Turning back to our second quarter ECHOPARK financial results, we reported record revenues of $601 million and gross profit of $27 million, down 44% due in part to the volatility in wholesale auction pricing I mentioned earlier. Echo Park segment retail unit sales volume for the quarter was approximately 17,100 units, up 4% year-over-year. Second quarter Echo Park segment adjusted EBITDA was a loss of $31.8 million, compared to an adjusted EBITDA loss of $36.9 million in the first quarter and $27.3 million in the year-over-year period. We expect to see continued improvement in adjusted EBITDA losses through the second half of 2023, both due to the reduced store footprint and through improved profitability at our remaining operating stores as we are better able to allocate inventory and management resources across the entire platform. As for our power sports segment, the second quarter kicked off the summer power sports selling season, and we expect peak seasonal profitability in the third quarter, highlighted by the Sturgis motorcycle rally next month. We are continuing to identify operational synergies with our growing power sports network, and we remain optimistic about the future growth opportunities in this adjacent retail sector. Finally, turning now to our balance sheet, we ended the fourth quarter with $864 million in available liquidity, including $407 million in combined cash and floor plan deposits on hand. Additionally, I'm pleased to report today that our Board of Directors approved a quarterly cash dividend of 29 cents per share, payable on October 13, 2023, to all stockholders of record on September 15, 2023. In closing, our team remains focused on near-term execution and adapting to changes in the automotive retail environment and macroeconomic backdrop while making strategic decisions to maximize long-term returns. Furthermore, we believe 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 our consolidated Sonic results over time. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. Again, that's star 1 if you do have a question or comment. Please hold as we poll for questions. And we'll take our first question from Daniel Imbrow from Stevens. Please go ahead, Daniel.