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

Good morning, and welcome to the Sonic Automotive Third Quarter 2024 Earnings Conference Call. This conference call is being recorded today, Thursday, October 24, 2024. Presentation materials, which accompany management's decision -- discussion on the conference call can be accessed at the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the safe harbor statement under the Private Securities and Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or market or otherwise make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Thank you, very much, and good morning, everyone. And as you said, welcome to Sonic Automotive's third quarter 2024 earnings call. Again, I'm David Smith, the company's Chairman and CEO. Joining me on the call today is our President, Jeff Dyke; our CFO, Heath Byrd; our EchoPark Chief Operating Officer, Tim Keen; and our Vice President of Investor Relations, Danny Wieland. We would like to open the call by sincerely thanking our amazing teammates for continuing to deliver a world-class guest experience for our customers. Our EchoPark Automotive teammates have once again earned the top spot as the #1 pre-owned automotive dealer and guest satisfaction ranked by reputation.com. And our Sonic Automotive franchise teammates continue to achieve among the highest customer satisfaction scores in our company's history. Our teammates are truly living our Sonic purpose to deliver an experience for our guests and our teammates that fulfills dreams, enriches lives and delivers happiness. We believe our strong relationships with our teammates; our manufacturer and lending partners and guests are key to our future success. And as always, I would like to thank them all for their support and loyalty to Sonic Automotive team. Our company remains focused on our ability to adapt to changing market dynamics in the near term, while positioning Sonic to achieve our long-term strategic goals. I'm pleased to report that we continued to make great progress in our EchoPark segment performance in the third quarter, reporting all-time record quarterly gross profit, segment income and adjusted EBITDA. Overall, the Sonic Automotive team continued to execute at a high level, despite operational disruptions related to the functionality of certain CDK customer lead and inventory management applications, as well as manufacturer stop-sale orders in certain key brands. Amid the continuing normalization of new vehicle margins and increased vehicle production. Third quarter GAAP EPS was $2.13 per share and excluding the effect of certain items as detailed in our press release this morning. Our adjusted EPS was $1.26 per share, a 38% decrease year-over-year due primarily to the continued normalization of new vehicle GPU, and the carryover effects of the CDK outage in July. Our reported results for the quarter included a $31 million tax benefit associated with an out-of-period adjustment, correcting an error recorded in connection with the impairment of franchise assets in the prior period. In addition, as a result of the business disruption caused by the CDK outage, we estimate that our third quarter GAAP income before taxes was negatively impacted by approximately $17.2 million or $0.36 in diluted earnings per share, which includes approximately $1.8 million or $0.04 in EPS related to excess compensation paid to our teammates who have reduced income potential due to the CDK outage. Turning now to third quarter franchise dealership trends. We saw stability in average new vehicle inventory levels, ending the third quarter with a 57-day supply of inventory, in line with the days' supply at the end of the second quarter after accounting for the CDK related sales disruption at the end of Q2. Third quarter same-store new vehicle GPU was $3,049 per unit, down $540 per unit from the second quarter. The rate of new vehicle GPU decline accelerated somewhat in the third quarter due primarily to larger GPU, headwinds from electric vehicle sales compared to the second quarter and the effects of stop-sale orders on certain high-margin models. However, we are affirming our guidance to exit the fourth quarter in the low $3,000 range due to the seasonal benefits of our luxury weighted portfolio in the fourth quarter. Looking beyond 2024, we continue to believe that the new normal level of new vehicle GPU will remain structurally higher than it was pre-pandemic, normalizing in the $2,500 to $3,000 per unit range in 2025. Additionally, our teams continue to work closely with our manufacturer partners to manage new vehicle inventory levels and better align powertrain options with evolving consumer demand, which should benefit inventory days' supply, floor plan interest costs and new vehicle GPU. In the used vehicle market, wholesale auction prices for 3-year-old vehicles increased nearly 1% during the third quarter, while our franchise dealerships average retail used pricing decreased 1% compared to the second quarter, driving a sequential decrease in used GPU to $1,386 per unit on a same-store basis. Elevated used retail prices remain a challenge for consumers, contributing to affordability concerns amid the current interest rate environment. However, the return to normal seasonal trends in used vehicle wholesale pricing are positive for our business outlook. And when combined with potential further interest rate cuts, should begin to benefit affordability and used vehicle sales volume in 2025. In the meantime, our team remains focused on driving incremental used inventory acquisition and retail sales opportunities, driving upside in this line of the business, alongside the expected normalization of used car pricing and volume over time. Our F&I performance continues to be a strength, despite elevated consumer interest rates with same-store franchise F&I GPU of $2,339 in the third quarter, down 3% year-over-year but well above historical levels. The continued stability of F&I in these levels supports our view that F&I per unit will remain structurally higher than pre-pandemic levels, even in a challenging consumer affordability environment. Our parts and service or fixed operations business remains very strong, with an 8% increase in same-store fixed ops gross profit in the third quarter. We are very proud of the success our team has had in this area, and we believe there are remaining opportunities to grow our fixed ops business, as we finish 2024 and look ahead to 2025. As we have previously discussed, in March, we launched an initiative to increase our technician head count by a net 300 techs in 2024, which we expect would contribute an additional $100 million in annualized fixed ops gross profit. To date, we have increased our technician head count by a net 216 techs and paced, adding 15 net techs per week in the last few weeks, positioning us to achieve this goal as we approach the end of 2024. Turning now to the EchoPark segment. We are very excited to report all-time record quarterly EchoPark segment adjusted EBITDA of $8.9 million, consistent with our previous guidance for a seasonally strong third quarter. For the third quarter, we reported EchoPark revenues of $545 million, down 13% from the prior year, and all-time record quarterly EchoPark gross profit of $55 million, up 5% from the prior year. EchoPark segment retail unit sales volume for the quarter was approximately 17,800 units, down 7% year-over-year, but up 7% sequentially from the second quarter, outpacing the industry growth rate of 2% sequentially from the second quarter. On a same market basis, which excludes closed stores. EchoPark retail unit sales volume was up 2% year-over-year, revenue was down 3% and gross profit was up 21%. EchoPark segment total gross profit per unit was $3,111 per unit, up $344 per unit year-over-year and up $33 per unit from the second quarter, despite marginal increases in used wholesale market pricing as a result of improving inventory sales velocity and higher F&I gross profit per unit. EchoPark used vehicle day supply finished the third quarter at 33 days compared to 38 days at the end of the quarter -- of the second quarter, which -- with faster inventory turns benefiting GPU. As discussed on our previous earnings calls, the reductions to our store footprint since the first quarter of 2023 allowed us to better allocate inventory across the platform, driving higher unit sales volume per rooftop, better total variable GPU and improved overall profitability. Our unwavering confidence in EchoPark's long-term potential has allowed us to weather the challenges in the used vehicle market in recent years, and we believe our performance in the third quarter demonstrates a tremendous opportunity for the brand. A third consecutive quarter of 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 over the next several quarters. Turning now to our Powersports segment. For the third quarter, we generated revenues of $59.4 million, gross profit of $17.7 million and segment adjusted EBITDA of $5.8 million. As expected, the Powersports selling season accelerated in the third quarter, and this year's Sturgis Rally was an overwhelming success, benefiting from the new processes and technology we recently began to integrate into this segment. We continue to focus on identifying operational synergies within our current Powersports network, while fine-tuning our operating playbooks. In the near term, we look forward to finalizing the implementation of our refined F&I sales strategy, centralized marketing and inventory management and the recent rollout of sonicpowersports.com. While we are taking a disciplined approach to expansion in this segment, we remain optimistic about the future growth opportunities in this adjacent retail sector when the time is right. Finally, turning to our balance sheet. We ended the third quarter with $834 million in available liquidity, excluding unencumbered real estate and $418 million in combined cash and floor plan deposits on hand. We continue to maintain a conservative balance sheet approach with the ability to deploy capital strategically as the market evolves. Additionally, I'm pleased to report today that our Board of Directors approved a 17% increase to the quarterly cash dividend to $0.35 per share payable on January 15, 2025, to all stockholders of record on December 13, 2024. As you can see in the investor presentation, we released this morning, we have updated certain limited financial guidance for 2024 following our third quarter results. We continue to believe that our lower franchise dealership segment earnings can be at least partially offset by significant improvements in EchoPark segment results, returning to positive EchoPark segment adjusted EBITDA for the year and setting the stage for continued growth in 2025 and beyond. 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 any industry-driven margin headwinds we may face in the franchised business, minimizing the earnings downside to our consolidated Sonic results over time. We remain confident that we have the right strategy, the right people and the right culture to continue to grow our business and create long-term value for our stakeholders. This concludes our opening remarks, and we look forward to answering any questions you may have. Thank you.

[Operator Instructions] And our first question comes from John Murphy with Bank of America.

I just have a couple, but just a very simple one, and I apologize, there's a lot of earnings and noise today. So just trying to understand, when you think about the adjusted EPS on an operating basis, that you want folks to focus on, ex CDK, storms and stop-sale, what do you think is the correct number? Because I think there's some questions about comparability to what the consensus number was, and we may have had this off. So I just want to get clear on this.

Yes. This is Heath. Real quickly on the CDK impact, we are estimating this around $17 million. It's a $0.33 impact by the CDK and BMW is $2.6 million impact for this quarter, and that's $0.05 of EPS. So a total between the 2 is $0.38.

Okay. That's incredibly helpful. I mean I think you're being a little -- I mean, was there any storm impact? I mean, what was sort of the net of the storms? I know that's always hard to tease out. But I mean is there something you could give us on storms, Heath, or do you think that's not big enough?

First, I'd like to say we were very, very fortunate. And none of our teammates were hurt, and we did have some damage. But I think Jeff Dyke has some color on that for you.

Yes, John, we were prepared -- unfortunately, David says [indiscernible] that we're getting really good at this, unfortunately. And so we were really prepared. We didn't lose any inventory. We had 1 air conditioning unit on top of a store that had an issue. But overall, it did not really slow us down either of the storm.

That's good to hear from a people and property perspective. Just quickly on the GPUs. I mean you highlighted that EVs -- stop-sales is a way, but EVs are certainly a wait. Can you give us a breakdown of EV versus ICE new GPU, if you can. I'm not -- I'm sure want to disclose quite that level of detail, but we'd love to hear it.

Yes, I've got a couple of numbers of the headwinds related to EVs. In Q1, it's $400 headwind to the funding GPU. Q2 is $170 headwind to new GPU, and Q3 was $440 million.

And that difference in the second quarter, the incentives were much higher, in particular, on the West Coast with certain luxury brands that helped the GPU and the headwinds there. Those incentives lessened in the third quarter, and therefore, you saw kind of a return to normal that we saw in the first quarter.

And look -- if you look at the difference sequentially, I think it's $530, $540. About half of that is related to the EV, the incremental. So $270 was EV, the other $270 was from normal ICE.

And John, this is Danny. If you look at Slide 8 in our deck, we've got the relative GPU broken out between EV hybrid and ICE by our luxury import and domestic. And you can see that hybrid is equal to or better than ICE across that platform. And EV is still significantly underperforming. And there's no structural reason why in the same price point an EV, a hybrid or an ice vehicle should make a different GPU. It's all about the imbalance of supply and demand. And so while we've seen some improvement in days' supply of EV relative to demand, we still had a 15 days -- 15% of our inventory with EV, while only 10% of our sales. So we're still relatively oversupplied. And I think the OEMs are moving in the right direction. We've just got some work to do.

And do you think they're going to step back in with those kind of [indiscernible] they had in the second quarter, or is it still head in the sand kind of stuff?

There are some aggressive incentives out there. BMW is really aggressive right now. That's a lot just to do with the inventory buildup because of the stop-sale in the third quarter. Mercedes continues to be decently aggressive on EVs. So I expect the fourth quarter, in particular, with the stop-sale of BMW. I mean you look at October for us, our BMW business on fire, were up plus 20%. And I expect that to continue on into the November and December time frame as well. So it should be a great fourth quarter.

Great. And then just one last one on 300 techs. I mean the run rate sounds like it's pretty awesome, adding 15 a week, and that's pure gravy. I -- I mean it's not pure gravy, but it's a lot of gravy there. As you think about the potential beyond those 300 techs, could you keep going? Do you think there's any reason that you couldn't keep going in that 15 per week or some pretty hot pace? And is there any issue with actual stall capacity and adding folks at this point?

Yes, it does become an issue over time, but we'll add more stall capacity. It's the best capacity -- the best thing we can do at a dealership to add stall capacity, right? And so -- yes, once we change the culture in the stores and got everybody believing that we needed more techs, that's one of the big things, not so much you can't go out and get a technician. It's you got to get the culture in the store to want more technicians because technicians are working in the stores, they'll want you to hire more technicians, right? There's more food to feast on. Once we got that changed in the stores, that's made a big difference for us. And now we're beginning to see the -- really the doors open, and things unlock for us. So sure, that could continue on in the first quarter. We'll probably get the 300 techs hired in this calendar year, take a little breather, do a much better job of retaining our technicians than we've done in the past and really kind of shift our focus there. And then we can grow from there. But the fixed operations business is just fantastic. And of course, warranty played a big role in all that with BMW, but customer pays there, too. And so it -- '25 should be fantastic. The fourth quarter is going to be great from a fixed ops perspective, and we'll see how things go from there.

Our next question comes from Rajat Gupta with JPMorgan.

I just wanted to follow-up on John's question there. BMW, I think you mentioned just $2.5 million impact. I mean that seems much lower than what we would have thought given the stop-sales. Is that net of like any recovery you might have seen on the recall side? Or were you just able to get more out the door? And just curious like what happened if you could dissect that a little more? And then just on CDK, are you able to give us what kind of unit impact it had on both new and used for the quarter, or maybe just in July, that would be helpful. And I have like 1 or 2 quick follow-ups.

Yes. The BMW impact, it's seem 500, 550 cars somewhere in there during the quarter, from a new car perspective, and obviously hurt pre-owned business as well. Our team did an outstanding job selling what we could sell, getting the vehicles that we -- that were on stop-sales sold, but waiting for the part to come in. And that's why we're seeing the huge increases that we're seeing, and we will see for October and November. I also tip my hat to BMW. I mean they were faced with a very difficult situation. They did an amazing job communicating with us. And really, we're on top of this. So all the way around, we just executed at a really high level. We're getting good at this kind of stuff. And we've got a great tenured BMW team, and those 15 stores really did just an amazing job getting us through that time. So we expect it to be a little bit tougher, too, to be honest with you, but our team raised up and did their job, and we got a lot of cars sold during the period. Again, it really cost us about 500, 550 units. That's not the end of the world, and we're certainly going to make all that up in the month of October. Do you want to...

Yes. This is Heath. On new units, we calculated that the impact was $482 on new units, GPU was down about $370 on new and used units was $920 with it impacting our F&I GPU $153. We also...

Got it.

Obviously, our F&I as well because trying to do deals very quickly, and that was around $124 on the front end of -- on the F&I for GPU.

Understood. And then just on BMW, for the fourth quarter, you obviously -- you talked about the October sales look good. Is there going to be like a big pickup on the service side as well, moving forward?

Yes. We still have about 25% or so of the inventory that needs to be corrected. So -- the warranty business will continue to grow, and then we'll make up what we couldn't get done from a CP perspective. So it's going to be a really good BMW quarter, and it should be a great quarter overall. The business is there. And now with no recalls really going on and no CDK and whatever else was thrown at us during the last couple of quarters, we're able to operate without any of those distractions. And so we'll see what we can do in the fourth quarter.

Understood. And just like on SG&A to gross for the fourth quarter, you obviously have a full year guidance that's been pretty consistent through the course of the year. The year-to-date numbers look a little better than expected, you typically see a seasonal drop in the fourth quarter always just given how the comp structure works. Curious, anything to keep in mind here, specifically given like all the changes around BMW that are happening? How should we think about SG&A to gross here in the fourth quarter specifically?

I think we always have like a better SG&A to gross in the fourth quarter because we're very -- over 50% luxury and the fourth quarter is always big for us. So you should continue to see that kind of drop. But our guidance would be the same in the low 70s for the franchise. And of course, EchoPark, you may note that we changed our guidance there, we're guiding in the 80s and now we're guiding in the high 70s because of the performance we're seeing. So -- but yes, the normal seasonality, you'll see some of that like you always have in the fourth quarter.

Our next question comes from Jeff Lick with Stephens.

With respect to the new units in Q3, given your brand mix and the fact that you're operating pretty dark in your CRM because of CDK. I was a bit surprised plus 2 same-store units, can you talk about why it was as good as it was, because it's quite an outlier based on what your brand mix said it should have been.

This is David. I'd like to take that opportunity. It's kind of a layup because it's -- our teammates -- the way our organization is structured, our teammates really did a fantastic job. We talked about our guest experience a lot. Our tenure, we've got a lot of veteran leaders. And that has a huge amount to do with it. We actually knew, and we talked about it on our operations calls that when the CDK issue hit, we talked about -- well, our teammates are going to step up and deliver and they did.

Yes. And I would add to it. This is Jeff, Jeff. I would add to it. Honda, we did a great job with Honda. The import brands did very well. I mean a little tight on inventory with Toyota. The luxury brands were strong. Even BMW. I mean, on a year-over-year basis, I think we were down 103% or something like that. So we really did a great job there. And then luxury, I mean then in the domestic business, Ford and GM flat. Stellantis continues to be a case study for the universities in this country and how to screw up the number of brands, the brands that they have, it's just amazing. We're selling a lot of cars, and they played a big role. I mean, we're selling -- we're now starting to sell a bunch of vehicles for Stellantis, but at the end of the day, the margins are absolutely horrible. And it's because of the overday supply. We woke up in July and August had a 1,000 more cars than we did the prior year on the ground. And they're really paying you. They're couponing you to buy cars, instead of really giving the incentives to the consumers and doing things away, we're supposed to do it today. So ultimately, good volume pretty much across the board in luxury and in import and in domestic. And we look forward to that really continuing on, in particular with our luxury mix in the fourth quarter.