Sonic Automotive Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 25, 2024

There are 7 speakers on the call.

Operator

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.

Operator

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 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.

Operator

I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Speaker 1

Thank you very much, and good morning, everyone. And as we say, 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 EchoPark Chief Operating Officer, Tim Keane and our VP of Investor Relations, Danny Weiland. Earlier this morning, Sonic Automotive reported 1st quarter financial results, including 1st quarter total revenues of $3,400,000,000 which was down 3% from previous year.

Speaker 1

1st quarter GAAP 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 EchoPark 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 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. I would like to thank them all for their continued support.

Speaker 1

Turning now to 1st 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 4th quarter. As a result, same store new vehicle gross profit per unit continued its sequential decline to $3,716 per unit in the Q1. We expect this decline in new vehicle GPUs to continue throughout 2024, exiting the 4th 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.

Speaker 1

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 Q1 of 2024, fully electric vehicle sales reduced our reported new vehicle GPU by approximately $400 consistent with the 4th quarter headwind due primarily to price discounts to push sales volume and manage EV inventory day supply. At the end of the Q1, EV day supply averaged 70 days, increasing our overall reported day supply by 2 days, while hybrid vehicles averaged just 26 day supply. In the used vehicle market, wholesale auction prices for 3 year old vehicles increased 2% during the Q1, which is consistent with historical seasonal trends, while our franchise dealerships average retail used pricing declined 5% sequentially from the 4th quarter.

Speaker 1

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 Q1 And lower used retail selling prices drove a 3% year over year decline in same store used retail GPU to $15.85 per unit. 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 and I performance continues to be a strength despite elevated consumer interest rates with same store franchised F and I GPU of $2,350 in the first quarter, down 1% year over year, but up 1% sequentially from the 4th quarter.

Speaker 1

Furthermore, our franchise dealerships F rates increased sequentially from the 4th quarter, demonstrating our teammates' ability to navigate the high interest rate market with our best in class F and I playbook processes. The continued strength in F and I performance supports our view that F and 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 paid 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 Q4 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 $100,000,000 in annualized fixed ops gross profit.

Speaker 1

Turning now to the EchoPark segment. We are very excited to report that EchoPark returned to positive segment adjusted EBITDA in the Q1. We reported all time record EchoPark segment quarterly adjusted EBITDA of $7,300,000 exceeding our previously stated target of breakeven adjusted EBITDA. Excluding closed stores, EchoPark segment adjusted EBITDA was $9,400,000 in

Speaker 2

the first

Speaker 1

quarter, significantly improved from a loss of $22,200,000 year on a same market basis. For the Q1, we reported EchoPark revenues of $559,000,000 down 14% from the prior year and 1st quarter EchoPark gross profit of $52,600,000 which was up 34% from the prior year despite a significant reduction in our store count year over year. EchoPark 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, EchoPark retail unit sales volume was up 13% in the first quarter, revenue was up 11% and gross profit was up 79%. EchoPark 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 and I gross profit per unit.

Speaker 1

As discussed on our previous earnings calls, the reductions to our store footprint since the Q1 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 EchoPark'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 EchoPark validates the strategic adjustments we made over the past few quarters and we look forward to resuming disciplined long term growth for EchoPark as used vehicle market conditions continue to improve in the coming years. Turning now to our Powersports segment. For the Q1, we generated revenues of $27,700,000 gross profit of $7,800,000 and a segment adjusted loss of about $800,000 Given the seasonal variability in the powersports 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.

Speaker 1

As we begin the powersports selling season in April, we continue to focus on identifying operational synergies within our current powersports network and remain optimistic about the future growth opportunities in this adjacent retail sector when the time is right. Finally, turning now to our balance sheet, we ended the Q1 with $847,000,000 in available liquidity, which includes $335,000,000 in combined cash and floorplan deposits on hand. During the Q1, we repurchased approximately 500,000 shares of our common stock for $27,000,000 And I'm pleased to report today that our Board of Directors approved a quarterly cash dividend of $0.30 per share payable on July 15, 2024 to all stockholders of record on June 14, 2024. As you can see in the investor presentation we released this morning, we are reaffirming our limited financial guidance for 2024 following the Q1 results. We continue to believe that lower franchise dealership segment earnings can be partially offset by significant improvement in our EchoPark segment results, returning to positive EchoPark segment adjusted EBITDA for the year as well as a moderate increase in Powersports segment income year over year.

Speaker 1

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 EchoPark 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.

Operator

Thank you. We will now be conducting a question and answer session. Our first question is from John Murphy with Bank of America. Please proceed with your question.

Speaker 3

Good morning, everybody. Just a quick question on the statement you said about optimizing fixed ops. I understand the focus on hiring these 300 techs this year. I was wondering if you can give us an idea of the cadence and where you are on those. But if there's any other opportunities to optimize fixed ops?

Speaker 3

And ultimately, what do you think that drives besides those 300 tax and that incremental profit you talked about? Are there other opportunities even above and beyond that?

Speaker 2

Hey, John, it's Jeff. Yes, I mean, look, we're 30 5 to 40 incremental techs so far for the year. We expect to hit our 300 number. Each of those techs is generating 21,000 or so in gross a month per stall per bay. So, that's a huge opportunity for us.

Speaker 2

We have approximately 1,000 open bays across the organization. And you really run into a culture effect because technicians like to operate 2 bays. And we're breaking that culture down. That's something that the industry deals with. We're breaking that culture down and we've got stores out there that are every day has a technician in them.

Speaker 2

And it's something that we've really been focused on and we'll continue to focus throughout the rest of this year. So, great opportunities to continue to grow in the mid upper mid growth rate for the rest of this year. And I think into 2025 and 2026, the business is there, the customers are there. With the advent of EV and the opportunities that we have there, we see electric vehicles coming back more often than we do ICE. So I think there's plenty of opportunity.

Speaker 2

The thing is, is that we've got to break some culture down. We've got to work on that within the stores and our leadership team, and add those 300 techs. And then we'll focus next year on adding even more techs on top of that. So, it's a big push for us. I think you're beginning to see some of those returns.

Speaker 2

Our fixed operations business is strong and we expect that to continue.

Speaker 3

Super helpful. Then just on EchoPark and the used business in general, I mean, we're girding to continue shrinkage of sort of 0 to 6 or 0 to 7 or even 0 to 4 year old vehicles as we kind of grind through the depressed years from COVID new vehicle sales. I'm just curious how you are managing that, how much that constrains your ability to get EchoPark turned even more than you already have And how you're going to deal with that? What does that mean for EchoPark?

Speaker 2

Yes. I mean, look, we think that 2024 is going to be a great year. Sure, there are less lease returns with their calls and puts. There's cars coming in from rental car companies. There's delinquencies out there and we're getting vehicles back that way.

Speaker 2

So there's plenty of inventory out there for us to buy. And remember, we're only buying for 18 stores right now. So we can very easily handle the amount of inventory we need for those 18 stores. We're going to be very smart about how we grow EchoPark. We will not open any more stores this year, and we'll look to that as we move into 2025.

Speaker 2

We are not concerned at all about inventory in the 1 to 5 year old category throughout this year to support our EchoPark stores. That's something that we're going to be able to easily do, and we'll continue to see the kind of returns that we got in the Q1. I think in terms of cadence, the 2nd quarter, the margins will be down a little bit. 3rd quarter should be a gangbuster, and Q4 might look a little bit like the Q2. So, it's going to be a great 24 and EchoPark is off to the races.

Speaker 2

We said that last year, we said, look, this is what's going to take. There's new car inventories growing like crazy. You saw we went from a mid-30s day supply to a 50 day supply. I expect that to continue to grow. Manufacturers are building new cars left and right.

Speaker 2

That's just common sense. It's going to put pressure downward pressure on used vehicle pricing. It's going to allow us to buy more cars in the lanes. It's going to allow us to buy more cars from rental car companies. And so, this is tailor made for us.

Speaker 2

This is what we've been talking about. It's what we've been waiting for. It's what we've been saying is going to happen. And sure as heck did happen in the Q1 and it's going to happen again throughout the rest of this year. It's going to be bumpy waters between now and probably the end of next year, but it's going to marginally get better as we go forward.

Speaker 2

Then 2026 is off to the races as lease maturities begin to come back and we were able to take advantage of those. The bad times for used vehicle inventory behind us, that was end of 2022, beginning in 2023. It's just not going to go back to that, not with the way manufacturers are building new cars.

Speaker 3

And if I could sneak one more in, you just mentioned that consumers are coming in asking for hybrids. Is that across all brands or is that essentially code for Toyota's inventories coming back, the Camry is all hybrid this year, There's more they're putting more hybrids back in the market. So really this is more Toyota specific or are you actually getting this in all of the brands that you guys rep?

Speaker 1

It's an industry wide. If you see some of our other peer group, they're saying the same thing. It's a consumer demand for hybrids is greater at the moment than EVs. Yes.

Speaker 2

And it's a stair step to EV, right? And I think that's how you got to look at it. And some of the hybrid vehicles that are coming now are just absolutely amazing. Just back from the Mercedes meeting in Germany last week, some amazing hybrid inventory coming in 'twenty six. But it's a stair step as consumers get used to that.

Speaker 2

And but it's across all brands, as David said, 100%.

Speaker 3

Okay. Thank you very much. Appreciate it.

Speaker 2

Thank you. You got it.

Operator

Our next question is from Rajat Gupta with JPMorgan. Please proceed with your question.

Speaker 4

Great. Thanks for the question and congrats on a strong quarter.

Speaker 2

Thank you.

Speaker 4

Just a question on EchoPark first. The $7,000,000 EBITDA in the Q1, you mentioned that 2Q might see some reduction in the GPUs. But we're curious like how should we think about the total EBITDA dollar cadence through the course of the year? Any more granularity you can give there outside of just the positive EBITDA commentary in the slide deck?

Operator

And I have a follow-up. Thanks.

Speaker 4

Yes. I mean, it's going

Speaker 2

to move around, Rajeev. The Q1 is always your strongest front end margin quarter, seasonally adjusted, right? So, if you just kind of get rid of the last couple of years and go back to normalized sales, we always have the best margins in Q1. Q2 sinks a little bit as prices flatten out. And so, I would expect certainly positive EBITDA for the quarter, maybe not as strong as Q1.

Speaker 2

Then I expect Q3 to be real strong, again, maybe like Q1. And then, Q4 to be look a little bit like Q2. So that's kind of how I would look at it. A little up and down as we go through the year, but marginally getting better as we go into 2025. And then, of course, I think 26 is just going to be a huge breakout year for EchoPark.

Speaker 2

So, we're back. It's fun to be back and it's fun to put our inventory skill sets to work and that's happening right now. And again, with 18 stores, it's not a problem. With 50 stores, maybe a little bit more of an issue because of the lack of total inventory out there. But there are less people that we're bidding against in the auction lanes and that's where 80% of our inventory comes from, because some didn't unfortunately didn't make it through all of this and that goes along with David's comment.

Speaker 2

We feel like we're some of the last ones standing on a national basis and it's going to make it fun for us throughout the rest of this year and going forward.

Speaker 1

It's also this is David. This is also something to emphasize is that what we're seeing from the demand standpoint, we've got some stores where we're needing to hire additional sales people because the demand is extremely strong. We have some stores that are selling over 30 cars per salesperson, which is fascinating. And if you look at our reputation dot com scores, we are getting virtually every review is a 5 star review.

Speaker 5

And I think this is Danny. That's key David's point on having the right headcount and the right productivity per sales associate. That's part of the variability in EBITDA for the remainder of the year is how do we invest this positive EBITDA that we've flipped to in supporting ourselves further growth as we go through the year, as we go into 2025, even just at this existing store base as pricing and affordability begin to improve, that should drive more volume, more potential there. And so we'll think about having the right headcount to support that growth and there may be some investments ahead of the growth coming or on the brand marketing side of things having that optionality with positive EBITDA may let us begin to invest in and develop the EchoPark brand as we had intended to do a couple of years back and obviously had to make some adjustments on the fly, but continue to build that as we build out that nationwide network over time.

Speaker 4

Got it. Got it. That's helpful color. And just broader question on the used car market. I mean, you had positive comps in the franchise business.

Speaker 4

Obviously EchoPark is starting to see some traction on the volume. But if you look at like some results from some of your peers like independent to me, it seems like there's still some pressure that they might be facing in their same store numbers. I'm curious like what in your view is driving that diversion? Is it because having the advantage of the franchise stores or how would you explain that kind of disconnect because you seem to be not having or not you seem to not be complaining about the 1 to 5 year old vehicles at all. So just curious like what's driving that divergence?

Speaker 4

Thanks.

Speaker 2

I can't speak for them. At the end of the day, I think we boast some of the best inventory management skill sets in the industry. We know where to get the cars, how to get the cars. And with inventory coming back on the new car side, it just opens the doors for us. And we just don't see I've read a lot of the comments that are out there for the rest of this year.

Speaker 2

I know lease returns are going to drop off a cliff, but there's other ways to procure inventory. And we just don't see it as having some massive effect on the used car business. We expect to grow our used car business from the low to mid single digit range for the year. And I expect that to continue into the second, third and fourth quarters and to grow from there. And so, I can't explain some of the commentary.

Speaker 2

I was sitting with Tim Keane earlier this morning asking this exact question is I just don't get the commentary on the pre owned inventory. The bad days are behind us. They're not in front of us. And there's inventory out there to procure. We're seeing that.

Speaker 2

And I expect us to continue to grow with good margin throughout the rest of this year. It's not going to be gangbusters or significantly marginally better, but marginally better throughout this year.

Speaker 4

Got it. Got it. I'll get back in queue for more follow ups. But thanks for the clarification.

Speaker 2

You got it. Thank

Speaker 4

you.

Operator

Our next question is from Bret Jordan with Jefferies. Please proceed with your question.

Speaker 6

Hey, good morning guys. This is Patrick Buckley on for Bret. Thanks for taking our questions.

Speaker 2

Hey, Patrick. Good morning.

Speaker 6

On the new GPU side, with the estimated 24x range of about 3,000, should we expect a pretty steady progression throughout the year? And I guess into 2025, how does that compare to what you guys expect the new normal to be?

Speaker 2

Yes. So, it's Jeff. I think between $200 $2.50 a quarter reduction as we move forward getting us into that exiting $24,000 in the $3,000 range. And I think it's going to kind of hang there. There is a new normal for front end margin.

Speaker 2

I don't expect the manufacturers just I mean, while they are going a little bit nuts right now, they're going to pull back. I don't expect them to just continue to go crazy on new car production, although EVs are going to play a role in all this. But I'm quite confident that in and around that 3,000 range exiting this year, we'll be there. And then I expect it to be in and around that range for 25 as well.

Speaker 6

Got it. That's helpful. Thank you. And then I guess on that note, were there any notable callouts from a brand or region mix within new GPUs this quarter?

Speaker 2

No. EVs continue to be a little bit of a drag as we announced in David's opening comments, that's about a $400 drag on the overall PUR And that's being driven by a handful of brands. Our day supply on EV is fine. You really can't look at the day supply overall numbers. You got to look at the actual units.

Speaker 2

I mean, we have a 60 day supply of BMW EVs on the ground, but it's 600 units and they're cutting back significantly on EV production and coming more with hybrid. So I think the manufacturers recognize that they're doing the right things, and I think that stabilizes everything as we move forward.

Speaker 6

Great. That's all from us. Thanks guys.

Speaker 5

You bet.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to David Smith for any closing comments.

Speaker 1

Thank you very much. And thank you everyone for joining us. And we'll talk

Speaker 4

to you in the next quarter. Thanks a lot. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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