Sonic Automotive, Inc.

Good morning and welcome to the Sonic Automotive second quarter 2024 earnings conference call. This conference call is being recorded today, Monday, August 5th, 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 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, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you very much, and good morning, everyone. Welcome to the Sonic Automotive second quarter 2024 earnings call. Again, I'm David Smith, the company's chairman and CEO. Joining me on the call today is our president, Jeff Dyke, our CFO, Heath Bird, our Echo Park chief operating officer, Mr. Tim Keene, and our vice president of investor relations, Mr. Danny Weiland. We would like to open the call by sincerely thanking our amazing teammates for delivering a world-class guest experience for our customers. Our Echo Park Automotive teammates achieved the top spot as the number one pre-owned automotive dealer in guest satisfaction, ranked by reputation.com. And our Sonic Automotive franchise teammates have achieved among the highest customer satisfaction scores in our industry and in our company's history. Our teammates are truly living our Sonic purpose to deliver an experience for our guests and our teammates that fulfills dreams, enriches lives, and delivers happiness. We believe our strong relationship with our teammates, our manufacturer and lending partners, and our guests are key to our future success. And as always, I would like to thank them all for their support and loyalty to the Sonic Automotive team. We remain focused on our ability to adapt to changing market dynamics in the near term while positioning Sonic to achieve our long-term strategic goals. I'm pleased to report that we continue to make great progress in our Echo Park segment performance in the second quarter with record second quarter adjusted EBITDA that outpaced our previous projections and sets the stage for continued growth in the second half of 2024 and beyond. Overall, the Sonic Automotive team continued to execute at a high level despite operational challenges in the last 12 days of the second quarter. as a result of the previously announced CDK software outage. As of today, Sonic's access to the information systems provided by CDK has been restored. However, we continue to experience operational disruptions throughout July related to the functionality of certain CDK customer lead applications, inventory management applications, and related third-party applications integrations with CDK. As a result of the business disruption caused by the CDK outage, we estimate our second quarter gap income before taxes was negatively impacted by approximately $30 million or 64 cents in diluted earnings per share, which includes approximately $11.6 million or 25 cents in EPS related to excess compensation paid to teammates who had reduced income potential due to the CDK outage. Second quarter EPS was $1.18 per share on a reported basis, and excluding the effect of certain charges as detailed in our press release this morning, adjusted EPS was $1.47 per share, a 20% decrease year over year due to the effects of the CDK outage on our second quarter financial results. Prior to the CDK outage, we were tracking to have another great quarter of operating performance and financial results. And I'm confident that our team will continue to execute at a high level moving forward. Turning now to second quarter franchised dealership trends. We continued to see expansion of new vehicle inventory levels across our brand portfolio, ending the quarter with a 59 day supply of inventory up from 50 days at the end of the first quarter. This increase was driven in part by slower sales rate in the last 12 days of the quarter. as well as certain models that were subject to top sale order from the manufacturer. The rate of same-store new vehicle gross profit per unit declined moderated somewhat in a quarter to $3,590 per unit. We expect this decline in new vehicle GPUs to continue throughout 2024 and exiting the fourth quarter in the low $3,000 range, but we continue to believe that the new normal level of new vehicle GPUs will remain structurally higher than it was pre-pandemic, normalizing around $2,500 to $3,000 per unit range in 2025. Additionally, our team continues to work closely with our manufacturer partners to manage new vehicle inventory levels and better align powertrain options with evolving consumer demand, which should benefit inventory day supply, floor plan interest costs, and new vehicle GPU. In the used vehicle market, wholesale auction prices for three-year-old vehicles decreased 5% during the second quarter, while our franchise dealerships average retail used pricing was flat compared to the first quarter, providing stability in the used GPU at $1,524 per unit on a same store basis. 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 the used vehicle wholesale pricing are positive for our business outlook and should benefit affordability and used vehicle sales volume going forward. Our team remains focused on driving incremental used 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 $2,380 in the second quarter, down 6% year over year, but up 1% sequentially from the first quarter. The continued stability in F&I 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 a 2% increase in same store fixed ops gross profit, despite lost productivity at the end of June due to the CDK outage. We are very proud of the success our team has had in this area, and we believe there are remaining opportunities to grow our fixed-ops business as we progress through 2024. As we mentioned previously, in March, we launched an initiative to increase our technician headcount by a net 300 technicians in 2024, which we expect would contribute an additional $100 million in annualized fixed-ops gross profit. Today, we have increased our technician headcount by a net 131 techs and paced nearly 30 new techs per month in Q2, positioning us well to achieve this goal in the remainder of 2024. Turning now to the Echo Park segment, we are excited to report second quarter record Echo Park segment quarterly adjusted EBITDA of $7.2 million. Excluding closed stores, Echo Park segment adjusted EBITDA was $9 million in the second quarter, in line with the first quarter and ahead of our previous guidance for a seasonally lighter second quarter, despite headwinds from the CDK outage at the end of June. For the second quarter, we reported Echo Park revenues of $517 million, down 14% from the prior year, and second quarter Echo Park gross profit of $51 million, which was up 91% from the prior year, despite a significant reduction in store count year over year. Echo Park segment retail unit sales volume for the quarter was approximately 16,600 units, down 3% year over year. However, on a same store basis, which excludes closed stores, Echo Park retail unit sales volume was up 23% in the second quarter. Revenue was up 10% and gross profit was up 81%. Echo Park segment total gross profit per unit was $3,078 per unit, up $927 per unit year to year, and up $123 per unit from the first quarter, driven by marginal improvements and used wholesale market pricing, improving inventory sales velocity, and higher 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 total variable GPU, and a second consecutive quarter of positive adjusted EBITDA. Our unwavering confidence in Ecopark's long-term potential has allowed us to weather the challenges in the used vehicle market in recent years, and we believe our performance in the second quarter demonstrates a tremendous opportunity for this brand. A second consecutive quarter of positive segment adjusted EBITDA for Ecopark validates the strategic adjustments we've made over the past few quarters, and we look forward to resuming disciplined long-term growth for Ecopark as used vehicle market conditions continue to improve in the coming years. Turning now to our power sports segment. For the second quarter, we generated revenues of $39.6 million, gross profit of $10.7 million, and segment adjusted EBITDA of $2.3 million. As expected, the power sports selling season began to ramp up in April, and we are really looking forward to maximizing the benefits of this year's Sturgis rally, which kicked off this past week. We continue to focus on identifying operational synergies within our current power sports network while fine tuning our power sports playbooks. In the near term, we look forward to implementing our refined F&I sales strategy, centralized marketing, and inventory management, and the rollout of sonicpowersports.com. While we are taking a disciplined approach to expansion in this segment, We remain optimistic about the future growth opportunities in this adjacent retail sector when the time is right. Finally, our diversified cash flow streams continued to benefit our overall financial position in the second quarter, despite operational disruptions from the CDK outage. Turning to our balance sheet, we ended the second quarter with $885 million in available liquidity, including $467 million in combined cash and floor plan deposits on hand, We continue to maintain a conservative balance sheet approach with the ability to deploy capital strategically as the market evolves. Additionally, I'm pleased to report today that our board of directors approved a quarterly cash dividend of 30 cents per share, payable on October 15th, 2024 to all stockholders of record on September 13th, 2024. As you can see in the investor presentation we released this morning, we are reaffirming our limited financial guidance for 2024 following our second quarter results. We continue to believe that lower franchise dealership segment earnings can be at least partially offset by significant improvements in the 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. Prior to the CDK outage, we were projecting a second quarter a second consecutive quarter of year-over-year EPS growth, demonstrating the value of our diversified business model in the current environment compared to a traditional franchised-only model. 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 eco parking and power sports segments that may help offset any industry driven margin headwinds we may face in the franchise business, minimizing the earnings downside to 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 stakeholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.

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. The confirmation tone will indicate that 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. One moment, please, while we poll for questions. Our first question comes from Brett Jordan with Jefferies. Please proceed with your question.