Earnings Call: Q1 2021

Apr 29, 2021

Quarterly report

Good morning, and welcome to the Sonic Automotive First Quarter 2021 Earnings Conference Call. This conference call is being recorded today, Thursday, April 29, 2021. Presentation materials, which management will be reviewing 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 8 ks 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. Good morning, everyone, and welcome to Sonic Automotive's Q1 2021 Earnings Call. I'm David Smith, the company's CEO. Joining me on the call today is our President, Mr. Jeff Dodik Our CFO, Mr. Heath Byrd our Executive Vice President of Operations, Mr. Tim Keane Our Chief Digital Retail Officer, Mr. Steve Whitman and our Vice President of Investor Relations, Mr. Danny Weiland. First, I'd like to thank all of our teammates, customers, manufacturers and vendor partners for helping us achieve another record quarter. During the Q1 of 2021, we continued to build on our strong momentum coming off record adjusted earnings in 2020. We generated record 1st quarter total revenues of $2,800,000,000 up 21% on a year over year basis and record first quarter EPS of $1.23 per share, tripling our adjusted EPS of $0.40 per share in the Q1 of last year. These results were driven by strong performance in our franchise dealerships and another all time record quarter for our EchoPark business, reflecting increasing consumer demand and continued execution by our team. I'm pleased to report the positive trends in the Q1 have continued into the 2nd quarter, and we continue to see strength in all facets of our business. We remain extremely confident and our long term growth targets based on our current results and near term outlook and the increasing number of Americans that are receiving vaccinations and beginning a return towards normalcy. Given these trends and our progress to date, We're confident we can attain our goal of more than doubling total revenues to $25,000,000,000 by 2025 and significantly increasing profitability going forward. In our core franchise dealership segment, 1st quarter revenues were $2,300,000,000 A 15% increase from last year. Total franchise pre tax income was $70,500,000 An increase of $47,900,000 or 2 11% compared to last year. On a 2 year comparison compared to the Q1 of 2019, same store franchise dealership revenues increased 14% and pre tax income increased by $49,800,000 which is a 2 40% increase, reflecting the impact of our lower expense structure as a result of strategic actions that were taken last year. Turning now to EchoPark, We continue to experience rapid growth during the Q1, achieving all time record quarterly revenues of $507,000,000 which was up 53% compared to the same period last year. We also achieved record quarterly retail sales volume of nearly 19,700 units, which is up 41% year over year and ahead of the 18,000 to 19,000 EchoPark model in the current used vehicle pricing environment drove total gross profit per unit of $2,339 and above our target of $2,150 Our first EchoPark delivery center in Greenville, South Carolina continues to outperform our model, Selling 160 vehicles in March at nearly $17.50 in total gross profit per unit, generating $100,000 in store level profit for the month. Our other new EchoPark stores and delivery centers also continue to ramp aggressively. With our Phoenix Hub selling 288 vehicles in its 1st full month in March, Driving $125,000 of store level profit. The integration of December's used CarKing acquisition It's already ramping up nicely, selling 3 0 5 units in the month of March at over $2,250 in total gross profit per unit. We continue to apply our learnings to each new EchoPark store we open or acquire and results are proving the scalability and momentum of the EchoPark model. We believe these results showcase the flexibility, Value proposition and consumer demand for EchoPark's unique pre owned vehicle shopping concept as more guests Choose to visit our stores and or shop atchopart.com for the incredible inventory selection, unbeatable pricing and a unique guest experience that we offer. As an update on our expansion of EchoPark's nationwide We opened 5 new locations in the Q1. And in April, we opened our latest retail hub in Birmingham, Alabama and our 3rd delivery center in Charleston, South Carolina. We remain committed to opening 25 new EchoPark locations in 2021 and we're on track for our 140 plus nationwide distribution network by 2025, which we expect to retail over 500,000 pre owned vehicles annually by that time. With our progress today and the continuing development of our omni channel retailing platform, We are confident that we can reach $14,000,000,000 in EchoPark Revenues by 2025. In addition to the year over year comparisons for the Q1, this morning's earnings press release includes comparisons to the Q1 of 2019 for certain key metrics. It's important to recall that Sonic actually grew EPS in the Q1 of last year compared to 2019 due to the strength of our January February results despite the initial impact of the pandemic in March of 2020. Since that time, we have substantially for 2021 and beyond. In the Q1 of 2021, total SG and A expenses as a percentage of gross profit We're 72.2 percent, representing an 8 30 basis point improvement compared to the Q1 of last year and 7.90 basis points better than the Q1 of 2019, which in dollar terms, while same store franchise Gross profit increased $34,500,000 from last year. Same store franchise SG and A expenses decreased $7,500,000 demonstrating the permanent expense reductions we have previously communicated. Turning now to our balance sheet. We ended the Q1 with $435,000,000 in available liquidity and set an all time high liquidity mark in April at $570,000,000 which included over $300,000,000 in cash on hand. More recently, the company Closed a new 4 year $1,800,000,000 credit facility. The credit facility was substantially oversubscribed with strong support from both new and incumbent financial partners. We are very pleased with this transaction, which has extended our debt maturities, Improved our borrowing costs and raised our total available liquidity and floor plan capacity to facilitate our growth plans. Reflecting our current business momentum and substantial liquidity resources, I'm very pleased to report that our Board of Directors recently approved 20% increase to the company's quarterly cash dividend to $0.12 per share payable on July 15, 2021 to all shareholders of record on June 15, 2021. Additionally, the Board increased our share repurchase authorization by $250,000,000 bringing our total remaining authorization to $277,000,000 In summary, our record first quarter performance reflects steadily increasing automotive retail demand as well as constantly improving operating conditions. EchoPark has rapidly become one of the leading success stories in the pre owned automotive retail industry and we look forward to continuing its rapid expansion in 2021. We expect to see continued strong demand for both new and pre owned vehicles In the near term, which should drive further growth for our franchise dealerships and the EchoPark brand. At the same time, our efficiency improvements have enabled us to operate in a much leaner, more profitable manner. Despite the challenges we all faced in the last year during this global pandemic, Sonic and EchoPark have emerged as much stronger, more efficient organization. We are encouraged by our successes to date and remain confident in our long term strategic plans. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you very much. Your first question comes from Rick Nelson with Citi. Thanks, Frank. It's a little choppy, Rick, but go ahead. We'll make you. Yes. I think I might be the operator When do you think inventory will normalize? Yes. So Rick, this is Jeff. We ended the Q1 with a 43 day Our inventory, so we're sitting in pretty good shape. I'd break it down into 3 buckets, luxury imports and domestic. Domestic is going to be hit the hardest, And I think May is going to be the toughest month in terms of that. It's really only about 12% of our business. So we're set up for the next Couple of quarters as this chip issue becomes more of a problem. The luxury inventory, which Obviously, it's a big chunk of our business, it's the biggest chunk of our business. We're just not going to be as effective. They're doing a great job bringing product in from other parts of the world. We've got inventory, so we should enjoy good new car volumes through the Q2 and of course great margins. Those margins are going to continue. I think they'll continue for the rest The year, import and domestic are going to get hit harder with domestic from our perspective being hit the hardest. I think the chips start rolling in and this all starts getting a lot better sort of the middle of June as we move forward. But again, our luxury mix is going to is really going to help us as we work through more difficult conditions in the second quarter. Yes. So really what you're seeing With EchoPark and the higher day supply, it's just a reflection of the number of stores that we're opening right now and we're carrying a lot of inventory to get those stores open. But our day supply in our more mature stores is still quite normal, 10 days in the pipeline, 20 days on the front line. If we're able to buy cars, I mean, look, the auction prices are going up, Wholesale is lacking retail. There's a little bit of pressure on operating margin, but business is good. If you look at the business And what happened January, February, March, April is just a fantastic month. Speaking for the overall organization, I think April is going to be better than March. It's just really, really good and I've been doing this for a long time. These last couple of months are some of the best auto retail months I've ever seen. So The auctions, we're paying more money for cars right now, but there's inventory out there to get, in particular in our 1 to 4 year old category. And our lots are full, our supplies are good and we're looking forward to a great even bigger second quarter than what you saw in the Q1 and continuing our growth pattern Over 100,000 cars for this year. Thanks for that color. Things are pretty choppy. Your next question is from Rajat Rustom with JPMorgan. Hey, good morning. Thank you for your question. Hopefully, it's a little better from here, but a little bit of a shot. Looking at 2019 levels in 2021, it's now from $20,000,000 to $22,000,000 Given the start you had for the first Your question was a little choppy, but I think I got it. And I think it's in relation to kind of the drag in the performance we got in the Q1 on EchoPark. And so the way I would look at that is we are ramping EchoPark quickly. We gave you guys guidance in the beginning or at the end of last year, the beginning of this year in February that we were going to Have about $12,000,000 to $14,000,000 drag. We only had $600,000 drag in the Q1, but we still expect to have that $12,000,000 to $14,000,000 drag for the year and still sell north of 100,000 cars. Our Phoenix store rent a lot faster than we thought it would. I mean, we nearly hit 100 cars, I think we did 2 88 cars in our 1st full month in March and we made $125,000 Usually that's taking a couple of months to get that done or 6 months to get that done. We're just moving a lot quicker than we had anticipated. And if we can see that happening in Birmingham now is all of a sudden ramping up a little faster, Maybe there's some good news there in terms of drag as we move forward, but our projections still right now are still have that $12,000,000 to $14,000,000 range and We can update you in the Q2 as to sort of what we're seeing on our newly opened stores. But certainly, the stores that we're opening right now We're improving a lot faster than the stores that we opened last year. We've just learned a lot. We're executing better. We have people in the pipeline to go in and lead our stores. We put a really good fully mature team in the Phoenix that had been it's been with our team for a while And it was just like turning on the light switch. We just went straight to almost 300 cars and made money. And hopefully, we'll be able to do that more and more often as we move forward. And I think the one thing, this is Danny, that I would add to that is that of the 5 locations we opened in the Q1, 4 of those were conversions of the acquisitions we did in New York and in the Maryland market. And one of the benefits of the acquisitions is that they do come online much more quickly. There's much less preopening, much less drag. So the remaining 20 stores that we have this year will be more greenfield like a Phoenix, like Birmingham, like Charleston, which we've opened in the last month and a So that's where the majority of that drag comes from. It is going to be back weighted. And that's again, that's one benefit of having the flexibility of doing acquisitions versus doing the traditional Yes. To add to that, the Syracuse platform just popped on and sold over 300 cars and was profitable just immediately there. So We're hoping that and expecting that our platform Baltimore will do the same. Rajiv, this is Heath Byrd. It was really choppy, but I think I heard of capital And again, our priorities have not changed. EchoPark will be the main area of capital allocation. But it is interesting because of the success of the franchise and what we're seeing as well as how quickly EchoPark is Becoming profitable and creating that EBITDA even with the drag, we do see opportunity. We get a lot of opportunities for Acquisitions on the franchise side. And for the first time, we're starting to get a little bit more active on that side. And because of the free cash flow we're producing, We've got the opportunity to continue growing EchoPark as well as look at some of these opportunities on the acquisitions on franchise. Of course, we raised the dividend, which we parted the capital allocation, 20%, returning capital to shareholders. And we did get the share repurchase authorization. I think you can see we bought almost 1,000,000 shares back in Q1, We like $44 we believe it's undervalued. We believe it's undervalued now. And so opportunistically, we'll continue looking at share repurchase as well. Thank you. Thank you. Your next question is from Mark Jordan with Cowen. On the EchoPark side, have you moved to increase your mix of purchases directly from customers? Hey, Mark. This is Jeff Dyke. Now, the problem with that is, is when you're buying cars off the street and we're in the 1 to 4 year old model, Customers aren't bringing in 1 to 4 year old cars to sell. Typically, they're still upside down, whatever. So you can see some of our competition is out there buying a lot of cars off But they're buying 5 to 10 year old cars, not 1 to 4 year old cars and the majority of those cars are going off to wholesale auction. So, it is a source for us. And right now that as a percentage of our overall sales is in the 10% range, but it is never going to be a big, big source for us because of the nature of the business and customers not selling that 1 to 2 year old car straight off the street. So Our sourcing is coming from the auctions where we're buying a lot of vehicles. Obviously, we're buying some of them off the street And then we're enjoying being able to buy some from our new car dealerships. So the combination of all that And this is Heathrow. I'll just add to this as well. When we buy from the auctions, we have a very predictable product. We buy at very high condition ratings and so that allows us to keep the recon low and to do it quickly. And as you know, we're we turn the vehicles very quickly. And so you've got a very predictable source of supply. And when you file out the street, you've got So that's another component of why we focus on the auction. And then I'd add one more thing to that. Our trade ratio at EchoPark is running almost 70%. And so we are getting inventory from trades. And then the great luxury of that is the trades Don't fit our 1.4 year old model are being moved over to our franchise side of the business and we're selling the heck out of those cars. That's just a big, big home run for us. Okay, great. And then can you talk about the differences in F and I from the EchoPark side between I think you're saying that F and I sorry, it's so I think you're saying that performance in F and I online versus in store and they're all the same. That's the one thing that We've learned a lot about is that we can sell off an eye products in particular when our e commerce platform comes on. It makes it even easier for Our consumer to use our platform, we're going to be we'll see that there's really not going to be a big difference between the F and I that you get Online versus F and I for selling in store. And Steve, would you like to add to that? Yes. Just to add to that, I mean, that's exactly right. We've seen the penetration of F and I products Online, be about the same or even a little bit better than in store because we offer that transparency to the consumer and they can really understand what the product does and how it helps them over the short and long term. Okay, great. And then just anything on the parts and service trends on the franchise side if you could? Yes, that's been a great positive So far this year, we're running up against 19% in the 1st 3 months of the year, about 9% in customer pay. Now, warranty is down about the same. But what's even better is we get into April and we're running up 15% in customer pay, and that's just a big home run. So We feel like fixed operations is back from a CP perspective. And that's just going to be huge for us as we move through the rest of this year and in particular the back half Last year, we're customers just really more traveling and it will be huge in California and obviously where we have a huge footprint. That California reopening will be a big addition to this. So, so far so good. That kind of growth in April versus 2019, not 2020, It's really fantastic for us. Great. Thank you. Thank you. Thank you. Good morning, guys. Hi, John. Good morning. I'll try The EchoPark inflection point sounds like it's right on the almost immediate horizon. Is that sort of a second or third quarter event or is that more like 2022 and 2023 when enough stores have been opened That opening 25 stores a year matters less on the cost ramp. I'm just trying to understand the inflection point on EchoPark. Yes. So 22, I mean, look, we are really having some great success with these stores that are opening right now And getting them profitable and then selling right immediately to 3 100 cars, but we're still going to open more stores this year than we started the year with And that will be the last time that that happens. So 'twenty two is going to be the it's really going to be the inflection point year where you really start seeing the profitability come through Carrying the drag and really not having as big of an impact on us as it's doing right now. But it's a foot down on the gas pedal. We know we have a model that produces both volume and profitability. We slowed down in order to speed up. We've done all that And we're going to open a bunch of stores this year and EchoPark is really taking off. It's a lot of fun to watch. A lot of years have gone into this, David and I were talking earlier today, we put A decade into getting this all right, and we've learned a lot and now we're going to reap the benefits of that. And so it's just going to be a great year, And John, this is David Smith. I think it's really important to emphasize Our team is really we've made so much progress in how we open stores both in The scalability of this, so the cost is going down and the speed to market is going up. Our training And the way we bring as Jack mentioned earlier, the Phoenix store is selling almost 300 cars in its 1st month. And then the addition of the acquisitions of these like used car king and these others that we brought online and quickly integrated into They are now EchoPark stores. And so the speed to market, I think, is a huge And the other thing I'll add to a little more to that, John. The other thing we're doing is building our management bench. And so there's a lot of Investments going into that right now, you didn't see quite as much in the Q1, but you're going to see more in the second and the third quarter. That's why the $600,000 drag in the Q1 was just sort of understated. That's why we still think we'll be in that range for the year. And if you want to look at anything, just look at Phoenix. When you put the right management team to strengthen on day 1, it just blows up and that's exactly what happened. And so We're adding more and more people in order to help with this aggressive rollout schedule that we have for the rest of the year. You anticipated Brian's next question On human capital, what is the process of developing general managers Either internally or searching them externally for all the stores that are being opened. Yes. We have several layers of management and we have plans to basically have each layer continue to move up as we open stores. We've had to go to the outside a few times. We bring them in 6 months early to work at that capacity in the stores for future openings. So we're ahead of that schedule and feeling pretty good about it and that's part of the drag that Jeff was talking about. And John, that was 17. Okay. Thank you. And then just lastly, on gross margins, How sticky do you think this brand is on the new side and on the new side? It seems like part of this is not just the next. I mean, I think I understood your question, John. Again, sorry, it's a little choppy, but The new car margin, one of the things that's great is the manufacturers are learning and have learned that they're going to keep day supplies tight. That Ford's made announcements, BMW's made announcements and supplies are going to stay tight, so keep margins up. So I think margins stick. Who knows if they're going to be quite as good as they are right now with the jets, but certainly they're not going back to pre pandemic days. I just don't see that happening. And the used car margins are good too. We sort of run it a little lower margin on the front. We had much higher margins on the back than many of our competitors. And when you combine that, it It's a total gross package on a per rig top basis that typically puts us up in the top 1 or 2 of our competitive set. And so I think you saw our margins are going to stay strong. And remember on the EchoPark model, our model is to have low margin. Our model is to drive traffic through Being $2,500 to $3,000 price below the retail market, sort of wholesale pricing at retail. And so you're going to see us in that Minus 100 to minus 300 sort of range, that may move around a little bit depending on what's going on in wholesale markets, But certainly, we'll continue to drive the big volumes that our model requires from an EchoPark perspective. Great. Thank you very much. You bet. Thank you. And there are no further questions at this time. Okay. Thank you very much everyone. Have a great day. This concludes today's conference call.