Sonic Automotive, Inc. (SAH) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Sonic Automotive 2020 Annual Stockholders Meeting. This is David Smith, CEO of Sonic Automotive and also a member of our Board of Directors. It is my privilege to chair this year's annual meeting, which is the first virtual stockholder meeting in our company's history. I would like to welcome all of our stockholders participating in this meeting, and I hereby call this meeting to order. I'd first like to introduce my fellow executive officers who are participating in this meeting: Mr. O. Bruton Smith, the Executive Chairman; Mr. Jeff Dyke, President; Mr. Heath Byrd, Executive VP and Chief Financial Officer. I'd also like to introduce other Sonic Automotive executives who are here on the call. And rest assured, we are practicing 6 feet of social distancing. Mr. Tim Keen, our Executive Vice President of Operations; Mr. Steve Coss, Senior Vice President, General Counsel and Secretary; Ms. Angela Broadway, Vice President of Human Resources; Ms. Rachel Richards, our Chief Marketing Officer; Ms. Maren McGrane, our VP of Culture and Communications; Mr. C.G. Saffer, our Vice President and Chief Accounting Officer; Ms. Karen McKemie, Vice President of Guest Experience; and Mr. Danny Wieland, Director of Financial Reporting, Investor -- and Investor Relations. I would now like to turn the call over to the next part of the meeting to Mr. Steve Coss, our General Counsel and Corporate Secretary. Steve?

Thank you, David. Sonic Automotive has engaged Mr. Peter Friz of the independent firm of CT Hagberg LLC to serve as the inspector of elections for our company's 2020 Annual Stockholders Meeting. The inspector of elections is participating in the meeting via remote communication and has informed the chair that a quorum is present at this meeting via proxy cards submitted before this meeting for the purpose of voting on the following 4 items. Number one is to elect 10 directors to serve for a 1-year term beginning with this meeting and ending at the company's 2021 Annual Stockholders Meeting. The nominees, all of whom are present at this meeting via remote communication are as follows: Mr. William I. Belk; Mr. William R. Brooks; Mr. Victor H. Doolan; Mr. Jeff Dyke; Mr. John W. Harris, III; Mr. Robert Heller; Mr. David B. Smith; Mr. Marcus G. Smith; Mr. O. Bruton Smith; and Mr. R. Eugene Taylor. Number two, to ratify the appointment of KPMG LLP as the company's independent registered public accounting firm for the year ending December 31, 2020. Number three, to approve on an advisory basis, the company's named executive officer compensation in 2019 as disclosed in the proxy statement for the company's 2020 Annual Stockholders Meeting. And number four, to approve the amendment and restatement of the company's 2012 Formula Restricted Stock and Deferral Plan for Non-Employee Directors. As stated earlier, the inspector of elections has reported to the chair that a quorum is represented at this meeting via proxy cards submitted prior to this meeting. In addition, stockholders participating in this meeting may vote their shares electronically and submit questions during this meeting by following the directions on the meeting website. If you would like to vote your shares at this meeting, please do so now. And if you would like to submit questions, please also do so now. [Voting]

Okay. While we allow time for stockholders to vote their shares at this meeting, and before we receive the results of the stockholder votes, I would like to turn over this part of the meeting to my colleague, Mr. Heath Byrd, the company's Executive Vice President and Chief Financial Officer, to provide you with a report of operations and financial results for the company for the year ended December 31, 2019. Heath?

Thank you, Steve. For those of you all who want to follow along, and I'll be starting on Slide 8. Slide 9 actually illustrates all the records we had in 2019. We are very proud of what the team accomplished in 2019. It's arguably one of the best operational performances in the company's history. All of these are records: total revenue of $10.4 billion; used retail volume of 162,000 units; F&I gross of $477 million; F&I gross PUR of $1,743 per unit; total gross profit of $1.5 billion; net income of $144 million; adjusted EBITDA of 308 -- $308 million, which comes down to our adjusted continuing ops of $2.65. Again, all of these are records, all-time records for the company and a really, really good year overall. Slide 10 gets into our GAAP detail. You can see we did a really good job of leveraging our SG&A. Overall diluted EPS on a GAAP basis was $3.31, that is $2.09 better than the previous year. Slide 11 is our adjusted number. Adjusted EPS of $2.65, which is 48% better than the previous year. I think it is of note, on the note below, this was with 10 less stores from the previous year. Again, very good job of leveraging our SG&A and producing additional profit year-over-year. Slide 12 just graphically shows what you've seen before. Except for the adjusted EBITDA, you can see here, was up 19%. Slide 13. As I've mentioned before, a really good job in leveraging our SG&A across all categories, down 200 basis points year-over-year. Slide 14. The previous slides were for the consolidated entity, and I'm going to get into each of the segments. This is just for the franchise dealership. Again, very good job on leveraging our SG&A and the income for that segment was up 34.2%. Slide 15 illustrates EchoPark segment. You can see across the board, top line growth of 66%, gross profit growth of 93.7%, units increased by 68.2%, and total income was up 117%. We did just open up our ninth EchoPark store in Long Beach in December of '19, and we just opened the Tampa store in April in this current year. Slide 16. This will just show you the unit growth since the inception of EchoPark. It's noted that you can see that we were -- it went down a little bit from the third quarter of '19 to the fourth quarter. This is seasonality, and you'll see this because prior to previous shareholder meetings, we're actually going to get into a little bit of Q1 data. And so you'll see that the drop in the fourth quarter was really based on seasonality. It had nothing to do with capacity of EchoPark or slowing of that business. Slide 17. You can see the EBITDA that was created from the EchoPark segment from inception. Q4, again, I mentioned was a little bit lighter than Q3 because of seasonality, and we also had a drag of the Long Beach opening that I mentioned previously. Slide 18. This is a really good representation of what we believe is one of our core competencies, and that's selling used cars. You can see the volume throughput. This graph on the left illustrates where our franchise business is on a per store per month basis compared to our peer group at 105 per store per month. And then to the right, you can see where our EchoPark's compared to their peer group or to CarMax. And so you can see that the throughput of EchoPark is dramatically larger as well as our franchise which, again, that is part of our strategy and our pricing to create that throughput. On Slide 19, this slide illustrates what we believe is really our competitive advantage in what is our core competency and that is inventory management. Again, comparing to our peer group, you can see that the franchise business averages 28 days supply -- over that 28 days supply at the end of Q4 2019 compared to the peer group, and EchoPark was 33 compared to CarMax's 57. And so if you put the 2 slides together, we're basically turning, for example, at EchoPark, you're turning 469 cars 12 times a year. And that's really sort of the magic of why EchoPark is ramping so quickly and being profitable very quickly. Slide 20. How do we do that? We -- it's one of the key ingredients of how we make that happen and how we're able to put that kind of throughput through each store and turn 12 times a year is because we use analytics and data for our pricing, for our inventory selection and for our auction process. And this gives us an advantage. By using data, we can take advantage of that and know when it's the right time to buy, know what's the price, where to put it. And that kind of data is what helps us succeed in that throughput and that days supply. Slide 21. Balance sheet. You can see that at the end of the year, we had $280 million of liquidity. If you saw the press release that was released earlier today, we're currently at $418 million of liquidity. Obviously, during this time, that is the focus. And you can see that our efforts have strengthened our liquidity so that we will be prepared to get through the storm and recover that we see in June and July. Slide 22. As I mentioned before, we wanted to give -- because of the uncertainty at this time, we actually thought it'd be helpful to our shareholders if we showed some information on Q1. Obviously, we did a press release earlier today. And so I want to give you some details on the first quarter. Next slide is 23. This is our GAAP number. Obviously, again, if you read the press release, we did have a onetime noncash goodwill impairment. It was basically reconciling our internal equity valuation to the market cap of the stock market based on the decline that everyone has seen because of the pandemic starting in March 11 through March 30. It is a onetime charge and general entry and is not cash. That element factored out, you can see that we had an EPS of $0.40 for the quarter. The Street consensus was $0.22. So we very easily beat the expectations of The Street. We did that even with the impact of the last 20 days of the pandemic. You can see that hit our revenue and our gross profit. But again, we leveraged a little bit on the earnings -- I mean, excuse me, the expenses as much as possible, but still had an increase in our net income year-over-year and an increase in our diluted earnings per share year-over-year, which is -- we were really pleased with, especially in the environment that we're operating. Next slide is 25. This slide really illustrates how the quarter sort of unfolded. You can see from January to February, we were on a record pace well over last year, which was a record throughout the year. We were $22 million or 10% higher in total gross profit year-over-year through February. And then, of course, you can see the impact of March, which resulted in the Q1 results that you saw on the previous slide. Next slide. This is same-store data, and it's the same story. You can see how strong our February year-to-date was, and then the impact of March and the COVID-19 pandemic. Slide 27 and 28, you can go to 28. We wanted to show you what we are experiencing, what we're seeing since the COVID-19 and the impact it has on our business. This slide shows you the rolling 7-day average for new vehicles, for used vehicles and for our fixed ops gross profit. And the gray in the back is '19 and the red is current, this year. And what we are seeing is a bottoming out of each of those categories and actually starting to return our business. You can see the new vehicle, a little bit of that is seasonality, but we do see that climbing back up. Same with fixed ops. And on the used, we did some new pricing strategies on the franchise side, but you can see that, that is ramping up even quicker than the other 2 categories. Slide 19 -- excuse me, 29. These are some of the actions we've taken and we want to be sure our shareholders were aware of. Obviously, our number 1 concern was to ensure our guests and teammates are safe, and we've taken all the precautions necessary to do that. Number two, we have worked diligently to validate that we are an essential business. And I think that, that is without question. And we have seen, as we challenge specific orders that we truly are an essential business. Strengthening liquidity. At this point in time, obviously, liquidity is everything. We've done the things that are obvious, taking advantage of the deferral opportunities with the federal and state taxes, floor plan interest mortgages, leases. We meet daily, and we model the performance from the previous day, trim that out and actually correlate it to our liquidity so that we can project our liquidity going forward. We're optimizing our floor plan capacity and our facilities. And we also have additional opportunity that's not listed in any of the numbers that we've discussed, where we could increase our liquidity via unencumbered property. We've implemented expense reductions. 33% reduction in headcount, that was in terminations and furlough. A reduction of advertising and other operating expenses, right now it's approximately $14 million monthly savings through the reduction activities or actions that we've taken. And we've also started evolving as a company. It's been very interesting to see how we've innovated, and we're able to operate under these new restrictions. We've started doing no-contact delivery on site, so we can very safely sell a vehicle on site, keeping the social distancing in place. We're offering home delivery on all purchases, which actually is 15% of the total sales through April, 22nd of April. Pickup and delivery for service, 7% of that activity was actually pickup and delivered for all service. We rolled out CarCash. If you've been following the company, this is our appraisal app that allows our customers to appraise their trade-in or their vehicle for purchase. And we rolled that out across the country and has already ramped up to 30% of our total appraisals. So we're getting a brand-new audience where we can source inventory that we didn't have before. We're accelerating our robotic process automation. This is something that we're using to help our back office, our shared services, accounting business offices, be more efficient. We're finding opportunities to use that from a marketing perspective and in the operations area. And like many companies, we're also finding a permanent infrastructure for remote work, and I think we're all seeing that. With the technology available and with the right culture, we can actually foresee more remote workers in the future. And that obviously helps work-life balance for our associates. But it also allows us to start looking at capital expenditures differently. We actually have 1 location where we have our GEC, our Guest Experience Center, that because it's so successful, we would be expanding. And now that we can do remote workers, we probably will not have that CapEx spend. So those are some of the things that will stay in place well beyond the recovery from the pandemic. And lastly, we're maintaining our inventory management discipline that I illustrated on the previous slide. If you go to the next slide. This is very interesting. If you look at our days supply before the pandemic and after the pandemic, there's been very little, if any, change, and that is very difficult to do. And our team, our used vehicle team, our new vehicle team, they've been doing this for years. They know how to handle it. And so to have these levels of inventory positions us perfectly for the recovery that we're going to be seeing in June, July, August. Next slide. We wanted to give you some kind of idea of what we're hearing from the experts on what the recovery looks like. This slide is J.D. Power's and their forecast of how they see the recovery for the new vehicle sector of our business. You can see down 40% of their forecast in April. And then climbing back up in May and June, and that is very similar to what we see. If you go to the next slide, the red line indicates what we had forecasted for new vehicles for the year prior to the pandemic. And the black line is actual from January and February. And then the rest is what we anticipate and what we think is going to be the recovery. So you can see in the new vehicle category, April, May are going to be very challenging. And then we start climbing back in June, back up to our original forecast by August. Also note that January and February, we were well above what our original forecast was in actual. Next slide. This is our franchised stores on the used vehicle. Again, well above our expectations in January and February. We're modeling out the recovery for April, May, June. And you can see by July, we believe that our used vehicles on the franchise side will be back to normal. We also think that the economic environment is going to drive some used vehicles and also pent-up demand. And so now we actually believe that we will be ahead of our forecast at the end of the year. Next slide. Same story here. This is EchoPark. You can see a -- more of a V-shaped recovery based on the activity that we're seeing and the fact that EchoPark, we now have communities that are opening. And so EchoPark's decline, there was a lot more restrictions that are keeping them open because they didn't have the service sector. And so once those become open, you're going to start seeing a faster recovery on the EchoPark side, and that's why, there's a steeper V recovery than you saw on the franchise side. Back to our ordinary -- or excuse me, our original number in July, and then again, we believe we'll be over our original forecast for the month at the end of the year. And then lastly, next slide. Here you can see the fixed operations gross dollars is the same kind of V-shape back to our original forecast in August, September and over our forecast August through December. Next slide. And Mr. Coss that concludes my report.

Thank you very much, Heath. Before we receive the results of the stockholder vote, I would like to note that the management team will entertain questions after the formal part of the meeting is concluded. If you would like to submit a question for the Q&A, please do so on the website now. I note that we currently only have 1 question submitted, which we will answer after the formal meeting is concluded. At this point, I would like to ask the inspector of elections to report on the stockholder vote, Mr. Peter Friz.

Certainly. The required majorities of votes have been cast in favor of the recommendation of Sonic's Board of Directors on all matters upon which the stockholders have voted today. We have the exact counts of the votes in my possession, and I will deliver these counts to the Secretary of the corporation.

Thank you very much, Peter. The record will show that the inspector of elections has reported that all proposals before the stockholders have passed. As required by SEC rules, our company will file a current report on Form 8-K within 4 business days, reporting the exact voting tallies for each of the items before the stockholders at this meeting. I would now like to turn the meeting back over to our CEO, Mr. David Smith. David?

Thank you, Steve. There being no other business before the Board, I'll ask for a motion to adjourn.

Motion.

Second.

All taken? [Voting]

Annual Stockholders Meeting is adjourned. The management team will now answer questions that have been submitted by participating stockholders through the meeting website.

Thank you, David. We'll now answer stockholder questions that have been submitted online through the meeting portal. Please note that we may run out of time before answering all questions due to the need to end this meeting promptly at 4:45 p.m. Eastern. Also, we will group similar or like-minded questions together for a particular issue just for efficiency reasons. First question that we have right now is, in 2019, 10 franchise dealerships were disposed of along with 7 dealerships in 2018. Care to comment on these dispositions? And I'll turn it to Jeff Dyke, our President.

Thanks, Steve. We sold the stores in both '19 and '18, mostly because manufacturers were asking us to do huge facility projects that did not have a big return on investments. We took those dollars and we invested those dollars in EchoPark and we invested those dollars in reduction of debt, both moves of which have paid off for the company.

Thank you, Jeff. There are currently no other questions in the queue for the management team or Board of Directors. So we will conclude this meeting of [indiscernible] stockholders. We'd like to thank you for your investment in Sonic Automotive, Inc., and we hope to live up to that investment going forward.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.