Good morning, and welcome to the Sonic Automotive Second Quarter 2022 Earnings Conference Call. This conference call is being recorded today, Thursday, July 28th, 2022. 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 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 these 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.
Thank you so much, and good morning, everyone. Welcome to the Sonic Automotive second quarter 2022 earnings call. As she said, I'm David Smith, the company's CEO. Joining me on the call today is our President, Mr. Jeff Dyke, our CFO, Mr. Heath Byrd, our EchoPark Automotive Chief Operating Officer, Mr. Tim Keane, our Chief Digital Retail Officer, Mr. Steve Wittman, and our Vice President of Investor Relations, Mr. Danny Wieland. On behalf of our entire leadership team, we want to sincerely thank our guests, teammates, manufacturer partners, and communities we serve for helping us achieve another quarter of outstanding financial performance.
To briefly recap, during the second quarter of 2022, Sonic generated all-time record quarterly revenues of $3.7 billion, up 9% year-over-year, and net income of $94.8 million or $2.33 per diluted share. Excluding a $4.4 million one-time charge, we reported adjusted net income of $99.2 million or $2.45 per diluted share. Despite ongoing supply chain disruptions, rising inflation, and higher interest rates, in the second quarter, our team continued to execute at historically high levels and deliver another quarter of new vehicle GPU expansion, steady customer lead volume, and continued growth in our parts and service business. These results are also indicative of persistent consumer demand, both in store and throughout our digital network, despite a growing concern that macroeconomic headwinds.
This is not the first time Sonic has experienced such business conditions, and we recognize the importance of being prudent and adaptable in our approach to achieving our growth and profitability targets during such times. To bolster our short-term position and prepare for a range of potential economic conditions, we are very focused on maintaining our strong liquidity and balance sheet position, identifying additional cost management measures, and balancing our growth plans. Beginning with our franchise dealership segment results, second quarter 2022 revenues were $3 billion, up 8% from the prior year. Segment income was $162.1 million, down just 2%, and segment adjusted EBITDA was $216.3 million, up 9%.
On a same-store basis, franchise dealership revenues were down 12% year- over- year, while gross profit was lower by 2%, due primarily to a 20% decrease in industry new vehicle volume as a result of ongoing vehicle production constraints. Parts and service gross profit was up 4% on a same-store basis, improving as vehicle miles driven recover towards normal levels with an 11% increase in customer pay gross profit, offset partially by a 10% decrease in warranty gross profit. Same-store F&I gross profit was down 14% due to lower retail unit volumes, despite all-time record F&I per unit of $2,472 in our franchise dealership segment, which was up 17% year- over- year.
Franchise dealership segment adjusted SG&A as a percentage of gross profit was 59.9%, up 180 basis points year-over-year, but remains structurally lower than pre-pandemic levels due to the strategic actions we have taken over the past two years to better optimize our cost structure. Similar to the last few quarters, we continue to see limited new vehicle production and inventory levels due to supply chain disruptions and strong consumer demand for new vehicles. This contributed to a 33% decrease in same-store retail new vehicle unit sales volume, higher than the industry retail SAR decline of 20% due to our luxury and import-weighted brand mix, which continue to have lower day supplies inventory than domestic brands.
Offsetting the lower sales volume, though, same-store retail new vehicle gross profit per unit was $6,905, a 77% increase year-over-year and 2% sequential increase from the first quarter. As of June thirtieth, our new vehicle day supply at our franchise dealership was just 18 days, up from 15 days supply at the end of the first quarter. While production is improving somewhat, demand for new vehicles remains strong, as evidenced by stable new car pricing and continued expansion of new vehicle GPU. Our franchise dealership segment used vehicle inventory had approximately 31 day supply, down from 33 days at the end of the first quarter. We continue to be disciplined in managing our used inventory, volume, and pricing in the face of recent declines in wholesale market pricing and the current macroeconomic outlook.
Turning now to EchoPark, we reported all-time record quarterly revenues of $665.6 million, up 12% from the prior year. EchoPark retail sales volume for the quarter was 16,608 units, down 22% year-over-year, but up 11% from the first quarter. As we guided on our April earnings call, second quarter EchoPark segment loss of $34.9 million was flat compared to the first quarter, but showed monthly improvement exiting the quarter as the effect of strategic shifts in inventory mix and sourcing began to benefit the bottom line. Beyond these operating results, we continued the nationwide expansion of EchoPark, opening three new EchoPark locations during the second quarter, including two retail hub locations in Raleigh and St. Louis, remain on pace to reach 50% of U.S. population by the end of this year and 90% coverage by 2025.
Beyond our physical footprint, in June, we completed the rollout of our proprietary new e-commerce platform to 100% of our nationwide traffic at echopark.com. The new platform continues to produce positive results in consumer and customer feedback, accounting for 19% of our retail volume during the second quarter, with a 30% increase in our website conversion rate and out-of-market buyers representing 69% of our e-commerce sales. Going forward, we intend to continue EchoPark's expansion in a targeted, strategic manner. With our current rate of expansion and the success of our new e-commerce platform, we remain very confident in EchoPark's long-term prospects once the used vehicle market eventually reverts to historical norms.
In the interim, we have taken deliberate action to expand our inventory offering to include five plus year-old vehicles, which enables us to reach additional customer segments, improves consumer affordability, and allows us to source more vehicles from non-auction sources, benefiting profitability. In the second quarter, we increased our non-auction sourcing mix to 25% of EchoPark sales volume. In July to date, 57% of our acquired inventory has come from non-auction sources. With this improvement in sourcing, we are seeing better front end and combined GPU going into the third quarter, which we expect to drive an improvement in EchoPark losses in the second half of the year. In addition, we have taken steps to adjust our headcount and expense structure at EchoPark to better align with current volume levels and our near-term growth plan. We remain confident in EchoPark's long-term prospects.
However, the current market has caused us to adjust our projected revenue growth and push back our previously stated financial targets beyond 2025. Once we have gained more clarity on future used vehicle market conditions and the effects of the strategic adjustments we have made at EchoPark, we will then provide an updated EchoPark model and guidance. Lastly, on EchoPark, at this time, we are concluding the previously announced formal review process for EchoPark. Together with our advisors, we carefully evaluated a range of alternatives, and our board has determined that timing and current market conditions do not align with our value creation objectives for the business. We will continue to execute on our expansion plans for EchoPark, and we will continue to monitor market conditions and periodically consider potential opportunities to maximize long-term shareholder value as they arise. Now turning to our balance sheet.
We ended the second quarter with $755 million in available liquidity, including $453 million in cash and floor plan deposits on hand. Our consistently strong sales performance, cash flow generation, and balanced capital allocation strategy have all contributed to our solid financial position, enabling Sonic to return capital to shareholders through its quarterly dividend and share repurchases. During the second quarter, we bought back approximately 1.4 million shares of the company's stock for an aggregate purchase price of $59.4 million. Year to date, we have repurchased approximately 5% of shares outstanding at December 31, 2021. To that end, today, we announced that Sonic's board of directors increased the company's share repurchase authorization by $500 million to a total of $633 million in remaining authorization.
Further, I'm pleased to report that our board of directors approved a quarterly cash dividend of $0.25 per share payable on October fourteenth, 2022, to all stockholders of record on September fifteenth, 2022. In closing, our second quarter results demonstrate another period of solid and consistent financial performance despite macro headwinds. Moving ahead, we will continue to execute on our strategic growth plans for Sonic and EchoPark, capitalizing on the strength of our business model and flexibility to adapt in the short term so we continue towards our longer-term goals.
By following this course, we are confident in our long-term ability to deliver revenue growth, increase profitability, and build greater value for our guests, teammates, and stockholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.
If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Daniel Imbro with Stephens. Please go ahead.
Yes. Hey, good morning, guys. Thanks for taking our questions.
Morning.
I wanted to start on the EchoPark side, and really what's going on on the units. I think it makes sense, you know, affordability is a challenge, but trying to parse out, you know, how much of the unit weakness is due to softening demand in this backdrop, and how much of it is maybe due to a lack of supply? Are you able to see that within your business? Do you think demand still exceeds supply there? Just trying to figure out kind of the drivers of that unit softness there.
Yeah. This is Jeff Dyke. 100%, the demand is there. I mean, we pulled the business back just because we couldn't buy one to four-year-old vehicles. I mean, they're just very hard to get. As we announced in the first quarter, we retooled and said that it would take us four or five months to bring the five plus year-old vehicles into inventory. We're doing that now and starting to see some great results from that. I can refer you to slide 18. If you look at our Houston market, 32% of the vehicles that we sold were five plus year-old cars in June of 2022. That's just continuing to improve as we move into the third quarter. If you look, we did Denver and we did Dallas in July.
In those markets that were losing money in previous quarters are now going to be at least break even. Denver market should make in the $300,000 range in July. All of this is from the moves that we've made with the inventory. The demand is there, but the demand is not there for a $640 monthly payment for pre-owned, and that's what you're getting when you're selling a one to four- year-old car right now at $30,000-$31,000. Retooling to the five year-old plus cars, we're able to get that monthly payment back down into the $400 range, which is historically where it needs to be.
Consumers are buying a little higher mile car at a lower payment, and we've been able to continue to keep our warranty penetration up there. Not concerned at all about pre-owned demand. You know, the bigger concerns are just the availability of inventory, and we're procuring much more as a percentage of our inventory off the street now, and through trades than we were before. It was a really low number, you know, in the previous years. Now that number is over 50%, which is great. We'll continue to see that growth as we move into the third and fourth quarter, and we bolster our bottom line.
Our bottom line is gonna get better in Q3 than it was in Q1 and Q2, and then we expect Q4 to be better than Q3. As we move into the first, second, and third quarters of next year, you know, we expect EBITDA to be back to breakeven or to profitability as moving forward.
Yeah, this is Heath. I would just like to add, if you look at slide 18, you know, I think it's important to note the pretty dramatic impact that that change has made on profitability that Jeff mentioned. You know, that Houston market was the first market we transitioned to five plus vehicles, and you can see they went from losing $1.1 million to June 2022, they're losing $300,000. We're seeing the same thing at the other locations as we transition. I agree with Jeff. It's gonna have a big impact on the profitability of EchoPark going forward.
Yeah. This is David Smith. One of the things to remember too is our guest experience. Our team, our EchoPark team is delivering just the world-class guest experience. The demand from those guests, you know, from people out there wanting a five plus year-old car, you know, to be able to buy one from EchoPark, we've seen that increase drastically as well. I think that it's important to note, to remember that this transition to retooling the inventory is a four to five month process, and we started that in the middle of May, as we told you we would do coming out of the first quarter's call. You know, a few more months.
We've got Houston done, we've got Dallas done, we've got Denver done, and we'll start adding the five plus cars to the other markets. You're retooling technicians and reconditioning processes and all kinds of things, advertising and pricing, to get to a more traditional type of model. We'll ride this wave until the one to four-year-old market comes back and we have, you know, inventory that we can buy either at auction or off the street in that category.
Really, really helpful color. A follow-up on that. The profitability is higher, and it sounds like a big portion of it is this non-auction sourced volume. How much of that do you think is sustainable? I guess the thought being it's easier to buy a car off the street from a consumer when they have positive equity in the car right now. But as v ehicle values normalize and the consumer is back to negative equity, it's probably a lot harder to buy them out of that car without attaching a sale to it. Curious, you know, how you guys think about that trend feeding into next year and future years, but also obviously impacting the profitability of this older cohort when it's harder to buy that from a consumer.
Yeah. Well, when that happens, you're back to traditional used car model, and we'll see one to four-year-old cars begin to drop in valuation and price. We're already seeing it, but to then begin to drop in the auction lanes, and then we're back to buying those vehicles, sourcing those vehicles both from off the street and to auction. That will bring the volume back, you know, from an EchoPark perspective in the one to four category. Yeah, you're gonna be down into the. Right now, if you're looking at what we're paying at auction, you know, three or four weeks ago, it was at $31,000 price point. Today, you're in the $27,000-$28,000 price range, so it is dropping. I expect that to get back down below $25,000.
That makes a big deal because then you're back down into the $400s from a monthly payment for the consumer, and that is what we're looking for. That's the big issue right now for everybody in pre-owned is the monthly payments are too high in the $100-$400 category.
Daniel, to add one more point. This is Danny. I think the other piece of that is if when you see that happening and used pricing starts to come down, you could have this potential for negative equity. You're gonna be in a position where lessees are not buying out their leases at the end of the term as they are to date, which historically has been less than 10% of leases, and it's somewhere in the neighborhood of 50% today. That would benefit both the one to four-year coming back through auction, as well as on the franchise side, kind of the organic inventory sourcing that we're missing out on a lot, particularly in our BMW and Honda brands to date.
Yeah. If you look at our BMW and Honda brands, they comprise 30%-35% of our total revenue. In the second quarter, combined, those two brands were off about 6,000 used cars year-over-year. We were off 4,000 cars, so they were more than the company was off, and that's 100% coming from off-lease cars, not coming back to consumer. Typically, we buy 95% of those off-lease cars back. Today, it's less than 50%, and that's where you see the difference in terms of our overall used car performance on the franchise side being different than everybody else's. It's just those two brands are causing us some havoc right now in terms of used car supply coming back off of lease.
Got it. Last one for me, just talking about used pricing normalizing. Are you seeing any lenders tighten in this environment just given, you know, prices are so high and maybe are coming down? Are you seeing any change in? I know you guys don't take balance sheet risk, but any change in your financing partners or ability for customers to get financing at this point in the cycle?
Daniel, this is Heath. We haven't seen that, and we get asked that a lot. You see a little bit of cracks with the subprime, but above that, we haven't seen any tightening from our lenders. You know, we keep hearing some macro data that actually correlates with that as well. You know, there is obviously the chance that if we hit a recession that's too difficult that we may see something, but so far, we've not seen any of that.
Thanks for all the color this morning, and good luck.
Thank you.
Thank you.
Thank you, Mr. Imbro. Again, to ask a question, please press star followed by one on your telephone keypad. Our next question comes from the line of Rajat Gupta with JP Morgan. Please go ahead.
Well, great. Thanks for taking the question. David, just wanted to pass on my condolences to you and your family as well.
That's nice. Thank you so much.
Yeah. Thanks. Just first question on EchoPark, you know, following up on Daniel's question. Like, you know, you mentioned that the exit rate on those losses had gotten better in Q2. You know, just curious if you could provide us with any visibility on the trajectory of EchoPark, you know, EBITDA in the near term. You know, when can we expect that business to turn to profitability, you know, just based on the actions you're taking around, you know, mix, you know, the higher GPUs and also maybe cost? And I have a follow-up. Thanks.
Yeah. You bet. Jeff Dyke here. As we told you in the first quarter, the second quarter was kind of gonna mirror the first quarter in terms of EBITDA, and that's exactly what happened. It was almost identical. As we retooled, started that in May, the third quarter is going to be. I mean, we're gonna lose less money in the third quarter from an EBIT perspective than we did in the first two. We'll improve again in the fourth quarter from that.
It would be my guess that in the first or second quarter of 2023, if nothing changes and inventory continues to kind of stay in this $27,000-$29,000 price range for one to four-year-old cars, and we don't improve from an overall used car availability perspective, then I would tell you we'll be fully retooled in the next two to three months, and profitability, at least from a break-even basis on EBITDA in the first couple of quarters. I'd say the second quarter of next year, somewhere in that ballpark, if not sooner. If inventory starts to become more plentiful, off-lease cars kind of return, consumers start selling us those cars instead of buying them out, that's gonna change the valuation process on pre-owned.
We'll get that price point down into the $400-$450 price point range for the consumer as a monthly payment. The profitability will come back a lot faster. It's kind of a wait and see to see what's gonna happen with pricing on pre-owned inventory. If nothing changes, first couple of quarters of next year, at least back to break even.
Rajat, this is Heath. I would just add that we are still fully committed to hitting our goal of 90% coverage by 2025. We're gonna have the infrastructure in place as the market turns. The speed of the market returning and us retooling is really going to define that trajectory, going forward. I think it's important to know that the infrastructure will be there as the market turns. We have not backed down on that 90% coverage by 2025. If you do look at just, you know, sequential month-to-month, our EchoPark from June to July, you know, we don't even have but two, three of the markets transition to this new model, and we're seeing $2 million-$3 million differences in pre-tax.
Yeah. I would add that. You know, the five plus inventory is temporary. It's not abandoning the one to four-year program long term. That's still a major part of our plan. We think, as inventory comes back, it doesn't mean that we won't sell the five plus year vehicles, but it just won't be as big a percentage of the mix as it's going to be right now, while we work our way through this inventory tone. I think it's also important to remember, as we said earlier, our Denver market, which we just retooled this month, that was losing in the $300,000-$400,000 a month range, it's gonna make $300,000 in the month of July.
In our Dallas market that we also retooled this month, it was losing $600,000-$700,000. It is gonna be $0-$100,000 loss, so massive improvements. Then he talked about page 18 earlier, where we've gone in Houston from a $1 million, $1.1 million, maybe even a low of a $1.3 million, all the way up to a $300,000 loss and continuing to improve there. It doesn't take long to retool. It's a few more months, and then EBITDA is just gonna continue to get much better than what you've seen in the first two quarters.
I think. This is Heath. I think it's important, you know, that's one of the beauty of having the diversification. You know, we've been doing this on the franchise side, you know, for decades, and so we had the capability and knowledge that we could easily go over to EchoPark and do the five-plus with the reconditioning and the processes that need to be in place.
Got it. That's very helpful color. Maybe, you know, shifting gears to parts and services. You know, same store growth was strong, but, you know, slightly below, you know, what your peers have reported. Anything to flag there, on the drivers? You know, is it more regional or brand dynamics or perhaps, you know, just lower reconditioning because of, you know, a weaker new and used units? Maybe if you could just help us unpack that a bit and what your expectations are for the remainder of the year. Thanks.
Yeah. I mean, actually, we're really excited about what we're doing in fixed operations. We're up 11% in customer pay, which is, you know, for the other peers that have given that data, we're in line with that. I think brand mix plays a role there. I think if you look at Penske and what they're doing, I think our numbers were about the same. The internals are hurting a little bit because of the used car volume being off. That typically runs about 15% over our overall fixed gross, and then that's off 14% or 15%, so because of the volume being down. That's playing a role in that somewhat.
Warranty is offsetting it a little bit, but we're very focused on growing our market share by op code in our service business, and we are gaining market share, and particularly in the BMW brand. I expect that to continue to pay dividends for us as we move through the next few quarters and into next year. We're very excited about where we are on fixed. I think just when you compare to the competitors, the brand mix plays a little bit of a role there versus our brand mix.
Yeah. This is David. As you can imagine, you know, as with the discussion of used cars being more expensive, you know, it will cause customers to keep their existing vehicle and will then help our fixed operations. As Heath mentioned, you know, having the diversification in our business really helps.
Got it. That's helpful color. Thanks a lot.
Mr. Gupta, there are no additional questions waiting at this time. I would like to pass the conference back to David Smith for any closing remarks.
Thank you very much. Thank you, everyone. We appreciate your time, and have a great day.
That's the Sonic Automotive second quarter 2022 earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.