Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive First Quarter 2024 Earnings Conference Call. This conference call is being recorded today, Thursday, April 25, 2024. 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 markets, or otherwise make statements about the future. Such statements are forward-looking and are 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, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you very much, and good morning, everyone. And as you said, welcome to the Sonic Automotive first quarter 2024 earnings call. I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Jeff Dyke, our CFO, Heath Byrd, our Echo Park Chief Operating Officer, Tim Keene, and our VP of Investor Relations, Danny Weiland. Earlier this morning, Sonic Automotive reported first quarter financial results, including first quarter total revenues of $3.4 billion, which was down 3% from previous year. First quarter gap EPS was $1.20 per share. which includes the effect of certain charges as detailed in our press release this morning. Excluding these items, adjusted EPS was $1.36 per share, a 2% increase year over year, due primarily to our commitment to returning capital to stockholders via share repurchases, along with significant operating improvement at our Echo Park segment, which offset lower profit in our franchise dealership segment, demonstrating the value of our diversified business model. We are very proud of our team's performance in the first quarter, and we remain focused on adapting to the 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, our manufacturer and lending partners, and our guests are keys to our success, and I would like to thank them all for their continued support. Turning now to first quarter franchise dealership trends. We continue to see expansion of new vehicle inventory levels across our brand portfolio, ending the quarter with a 50-day supply of inventory, which was up 37 days at the end of the fourth quarter. As a result, same store new vehicle gross profit per unit continued its sequential decline to $3,716 per unit in the first quarter. We expect this decline in new vehicle GPUs to continue throughout 2024, exiting the fourth quarter in the low $3,000 range. But we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre-pandemic. Additionally, our team continues to work closely with our manufacturer partners to align inventory levels and powertrain options with evolving consumer demand. In recent months, we've seen increasing consumer demand for hybrid electric vehicles as a more cost-effective and convenient alternative to fully electric vehicles, and we are turning our hybrid inventory faster and at more traditional gross profit levels than fully electric vehicles. In the first quarter of 2024, fully electric vehicle sales reduced our reported new vehicle GPU by approximately $400, consistent with the fourth quarter headwind due primarily to price discounts to push sales volume and manage EV inventory day supply. At the end of the first quarter, EV day supply averaged 70 days, increasing our overall reported day supply by two days, while hybrid vehicles averaged just 26-day supply. In the used vehicle market, wholesale auction prices for three-year-old vehicles increased 2% during the first quarter, which is consistent with historical seasonal trends. While our franchise dealerships average retail used pricing declined 5% sequentially from the fourth quarter, elevated used retail prices remain a challenge for consumers contributing to affordability concerns amid the current interest rate environment. However, The return to normal seasonal trends in used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume in the remainder of 2024. Fewer lease turn-ins at our franchise dealerships continued to restrict supply and limit our used vehicle volume in the first quarter. And lower used retail selling prices drove a 3% year-over-year decline and same store used retail GPU to $1,585 per unit. Our team remains focused on driving incremental use inventory acquisition and retail sales opportunities in 2024, driving upside in this line of the business alongside the expected normalization of used car pricing and volumes over time. Our F&I performance continues to be a strength despite elevated consumer interest rates. with same-store franchised F&I GPU of $2,350 in the first quarter, down 1% year-over-year, but up 1% sequentially from the fourth quarter. Furthermore, our franchise dealerships' F&I penetration rates increased sequentially from the fourth quarter, demonstrating our teammates' ability to navigate the high-interest rate market with our best-in-class F&I playbook processes. The continued strength in F&I performance supports our view that F&I per unit will remain structurally higher than pre-pandemic levels, even in a challenging consumer affordability environment. Our parts and service or fixed operations business remains strong with all-time record quarterly fixed operations gross profit at our franchise dealerships, up 6% year over year on a same store basis, driven by 6% growth in our customer pay business and 13% growth in our warranty 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 2024. As we mentioned on our fourth quarter earnings call, we launched a net 300 initiative with the goal of adding 300 incremental technicians in 2024. which we expect to contribute an additional $100 million in annualized fixed ops gross profit. Turning now to the Echo Park segment, we are very excited to report that Echo Park returned to positive segment adjusted EBITDA in the first quarter. We reported all-time record Echo Park segment quarterly adjusted EBITDA of $7.3 million, exceeding our previously stated target of break-even adjusted EBITDA. Excluding closed stores, Echo Park segment adjusted EBITDA was $9.4 million in the first quarter, significantly improved from a loss of $22.2 million last year on the same market basis. For the first quarter, we reported Echo Park revenues of $559 million, down 14% from the prior year, and first quarter Echo Park gross profit of $52.6 million which was up 34% from the prior year, despite a significant reduction in our store count year over year. Echo Park segment retail unit sales volume for the quarter was nearly 18,000 units, down 10% year over year. However, on a same market basis, which excludes closed stores, Echo Park retail unit sales volume was up 13% in the first quarter. Revenue was up 11%. and gross profit was up 79%. Echo Park's same market total gross profit per unit was $3,018 per unit, which is up 65% year over year, driven by marginal improvements in used vehicle market pricing, improving inventory sales velocity, and a 10% increase in F&I gross profit per unit. As discussed on our previous earnings calls, the reductions to our store footprint since the first quarter of 2023 allowed us to better allocate inventory across the platform, driving higher unit sales volume per rooftop, better variable GPU, and a return to positive adjusted EBITDA. Our unwavering confidence in Echo Park's future potential has positioned us as one of the few remaining nationwide used vehicle retailers creating a tremendous long-term opportunity for this brand. A return to positive segment adjusted EBITDA for Echo Park validates the strategic adjustments we made over the past few quarters, and we look forward to resuming disciplined long-term growth for Echo Park as used vehicle market conditions continue to improve in the coming years. Turning now to our power sports segment. For the first quarter, we generated revenues of $27.7 million, gross profit of $7.8 million, and a segment-adjusted loss of about $800,000. Given the seasonal variability in the power sports industry and our geographic presence with the Black Hills platform in the Sturgis, South Dakota area, our first quarter results were in line with our projections. As we begin the power sports selling season in April, we continue to focus on identifying operational synergies within our current power sports network and remain optimistic about the future growth opportunities in this adjacent retail sector when the time is right. Finally, turning out to our balance sheet, we ended the first quarter with $847 million in available liquidity, which includes $335 million in combined cash and floor plan deposits on hand. During the first quarter, we repurchased approximately half a million shares of our common stock for $27 million. And I'm pleased to report today that our Board of Directors approved a quarterly cash dividend of 30 cents per share, payable on July 15th, 2024, to all stockholders of record on June 14th, 2024. As you can see in the investment presentation we released this morning, we are reaffirming our limited financial guidance for 2024 following first quarter results. We continue to believe that lower franchise dealership segment earnings can be partially offset by significant improvement in our Echo Park segment results, returning to positive Echo Park segment adjusted EBITDA for the year, as well as a moderate increase in power sports segment income year over year. In closing, our team remains focused on near-term execution and adapting to ongoing 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 significant earnings growth opportunities in our Echo Park and PowerSports segments that may help to offset an industry-driven margin headwinds we may face in the franchise business, minimizing the earnings downside to our consolidated Sonic results over time. We remain confident that we have the right strategy and the right people and the right culture to continue to grow our business and create long-term value for our stockholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you very much.

Thank you. We will now 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'd like to remove your question from the queue. The participant using speaker equipment may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from John Murphy with Bank of America. Please proceed with your question.