Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive third quarter 2023 earnings conference call. This conference call is being recorded today, Thursday, October 26, 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. And 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 very much, and good morning, everyone, and welcome to the Sonic Automotive third quarter 2023 earnings call. As you said, I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our president, Jeff Dyke, our CFO, Heath Bird, our Echo Park chief operating officer, Tim Keene, and our vice president of investor relations, Danny Weiland. Earlier this morning, Sonic Automotive reported third quarter financial results, including record third quarter total revenues of $3.6 billion, a 6% increase from last year. Third quarter EPS was $1.92 per share. which includes the effect of certain charges related to the previously announced store closures in the second quarter. Excluding these items, adjusted EPS was $2.02 per share, a decrease from $2.23 in the prior year, due primarily to normalizing new vehicle margins and higher floor plan interest rates. We're very proud of our team's performance in the third quarter, and we remain focused on leveraging our diversified business model adapt to changing market dynamics in the near term while positioning sonic to achieve our long-term strategic goals we believe our strong relationships with our teammates manufacturer and lending partners and guests are key to our future success i would like to thank them all for their continued support turning now to third quarter trends We continue to see improvement in new vehicle production and inventory levels across our brand portfolio, despite headline risk related to the UAW strike. As expected, new vehicle gross profit per unit declined sequentially to $4,678 per unit on a same store basis, in line with our projection to exit 2023 in the low to mid $4,000 range. This steady decline in new vehicle GPUs should continue into 2024, but we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than pre-pandemic levels in the $2,000 range. Furthermore, our luxury weighted portfolio generally runs a lower inventory day supply, and our luxury manufacturer partners have been disciplined in inventory production to date, potentially minimizing new GPU compression relative to industry trends, which would continue to benefit the earnings power of our franchise business. In the used vehicle business, wholesale auction prices for three-year-old vehicles decreased 5% in the third quarter, following a 6% decline in the second quarter. October to date, the three-year-old Mannheim index declined another 3.6%. despite headlines indicating that blended used car prices across all age and mileage bands have begun to rise again. While used retail prices remain elevated, contributing to affordability concerns amid the high interest rate environment, the downward trends we are seeing in used vehicle wholesale pricing are positive for our business and for the fourth quarter and beyond. Few release turn-ins at our franchise dealerships continued to limit our used vehicle volume in the third quarter, but we were able to maintain higher-than-expected used GPUs at $1,668 per unit on a same-store basis to somewhat offset the effects of lower volume. Our team remains focused on driving incremental inventory acquisition and retail sales opportunities in the fourth quarter and into 2024, driving upside in this line of the business alongside the expected normalization of used car pricing and volumes over time. Despite an elevated consumer interest rate environment, our F&I performance continues to be a strength. Our franchised dealerships' F&I penetration rates were stable quarter to quarter, and we reiterate our previously issued guidance for a full year 2023 franchised F&I GPU at or above $2,400 per unit. Our parts and service or fixed operations business remains strong, with record third quarter fixed ops gross profit at our franchise dealerships up 8% year over year on the same store basis, driven by 10% growth in our customer pay business. We are very 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 the fourth quarter and into 2024. Turning now to the Echo Park segment, as discussed on our second quarter earnings call, we made the difficult but necessary decision to suspend operations at 50% of our Echo Park segment locations back in June and July. We believe that the decision to suspend operations at these stores would substantially improve our near-term financial performance without sacrificing our long-term strategic plan for Echo Park. In the third quarter, our financial results reflect the expected initial benefits of these strategic adjustments to our Echo Park business model. We reported revenues at Echo Park of $627 million, up 6% from the prior year, and all time record Echo Park gross profit of $53 million, up 22% from the prior year. Echo Park segment retail unit sales volume for the quarter was 19,050 units, up 25% year over year, and up 12% from the second quarter. As discussed on our July earnings call, reducing our store footprint allowed us to better allocate inventory across our platform, driving higher unit sales volume, better GPU, and significantly lower operating losses. Third quarter Echo Park segment adjusted EBITDA was a loss of $5.2 million compared to an adjusted EBITDA loss of $31.8 million in the second quarter and $23.3 million in the third quarter of 2022. Based on recent market trends, we remain confident in our path to break even adjusted EBITDA in the first quarter of 2024 and look forward to resuming our disciplined long-term growth plans for Echo Park as used vehicle market conditions continue to improve. Turning now to our power sports segment, the third quarter is the peak seasonal sales period for our power sports portfolio, highlighted by the Sturgis Motorcycle Rally in August. Our team welcomed over 150,000 rally attendees to our Black Hills Harley-Davidson locations. selling 550 new and used motorcycles during the rally, making it one of the highest volume events in the dealership's history. Combined with our Texas power sports stores, this drove $7.9 million in adjusted EBITDA from our power sports segment in the third quarter. We are continuing to identify operational synergies within our growing power sports network and remain optimistic about the future growth opportunities in this adjacent retail sector. Finally, turning to our balance sheet, we ended the third quarter with $797 million in available liquidity, including $335 million in combined cash and floor plan deposits on hand. The strength of our balance sheet allowed us to repurchase 1.7 million shares of our Class A common stock in the third quarter for nearly $87 million, bringing our year-to-date share repurchase total to 3.3 million shares, or 9% of shares outstanding at the beginning of the year. At the end of the third quarter, our remaining share repurchase authorization was $287 million, representing over 15% of today's equity market cap. Share repurchases are an important part of our capital allocation strategy, and we remain focused on opportunistic share repurchases as our liquidity allows. Additionally, I'm pleased to report today that our Board of Directors has approved a 3.4% increase to our quarterly cash dividend to $0.30 per share, payable on January 12, 2024, to all stockholders of record on December 15, 2023. In closing, our team remains focused on our 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 continue to believe our diversified business model provides earnings growth opportunities in our Echo Park and Powersports segments that may offset any industry-driven margin headwinds we may face in our franchise business, minimizing the earnings downside to consolidated Sonic results over time. We remain confident that we have the right strategy, the right people, and culture to grow our business and create long-term value for our key stakeholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you very much.

Thank you. And at this time, we will be conducting a question and answer session. If you would like to ask a question, please 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 Emerald with Steven Think. Please proceed with your question.