Sonic Automotive, Inc. (SAH) Q3 2022 Earnings Call Transcript

Sonic Automotive, Inc. (SAH)

Q3 2022 Earnings Conference Call

October 27, 2022, 11:00 AM ET

Company Participants

David Smith - Chairman and CEO

Jeff Dyke - President

Heath Byrd - CFO

Tim Keen - COO, EchoPark

Steve Wittman - Chief Digital Retail Officer

Danny Wieland - VP of IR

Conference Call Participants

John Murphy - Bank of America Merrill Lynch

Joe Enderlin - Stephens

Rajat Gupta - JPMorgan

Presentation

Operator

Good morning and welcome to the Sonic Automotive Third Quarter 2022 Earnings Conference Call. This conference call is being recorded today, Thursday, October 27, 2022. Presentation materials, which accompany management's discussion on the conference call can be accessed at the company's website at ir.sonicautomotive.com.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities 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 findings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined in the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables and the company's current record 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.

David Smith

Thank you very much and good morning, everyone, and welcome to Sonic Automotive's third quarter 2022 earnings call. As she said, I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our EchoPark Chief Operating Officer, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Mr. Danny Wieland.

I'd like to begin by sincerely thanking all of our amazing teammates, customers, manufacturer, and vendor partners for helping Sonic Automotive achieve another period of record-breaking financial performance, including record third quarter revenues, gross profit, net income, and earnings per share.

Highlights from our quarterly results include record third quarter revenues of $3.4 billion, which is up 12% year-over-year. Sonic also posted record third quarter gross profit of $581 million, up 23% year-over-year. This drove us to achieve record third quarter net income of $87 million or $2.23 per diluted share.

During the third quarter, we continued to see strong new vehicle pricing, consistent consumer demand for new vehicles, and sustained growth in our parts and service business. While we experienced lower new vehicle sales volume on a year-over-year basis due to ongoing supply chain constraints and limited vehicle inventory, we also continued to see strong new vehicle GPU and a sustained pre-order bank.

Our used vehicle volume was consistent with industry trends year-over-year, reflecting ongoing affordability concerns as a result of near-record high used car prices and a rising interest rate environment. I'm happy to say that since quarter-end, we have continued to see stability in our overall business despite macroeconomic headwinds and concerns around rising interest rates, heightened inflation, and ongoing global supply chain constraints.

Our financial results reported earlier today demonstrate the fundamental strength of our diversified automotive model, as well as our teams unwavering commitment to creating long-term value for our guests, manufacturer partners, and stockholders. While we remain optimistic about our long-term prospects and growth trajectory, we realize that we are not operating in a vacuum.

As I mentioned on our last earnings call, this is not the first time Sonic has had to navigate through adverse economic cycles. Our team is well aware of the current challenges we are all facing and is monitoring our operations daily to adjust for any near-term obstacles related to the overall industry and economic environment while maintaining a long-term strategic view for our business. As such we remain adamant in maintaining our strong balance sheet position, which we consider to be essential in today's world.

Our team remains very focused on maintaining high levels of profitability, generating strong cash flows, and proactively managing our cost structure. To this end, we are continuing to take a strategic measured approach to our expansion plans, both with our Franchised Dealerships, as well as with EchoPark as we balance our commitment to long-term growth with our current priority to maintain a strong liquidity position in light of uncertain macroeconomic outlook. Turning now to our Franchised Dealerships segment results.

Third quarter 2022 revenues were $2.8 billion, up 18% from the prior year period. Segment income was $146 million, up 1% year-over-year, and segment adjusted EBITDA was $198 million, up 10% from the prior year.

On a same-store basis, Franchised Dealerships revenues were up 3% from the prior year, while gross profit was up 5%. Parts and service gross profit increased by 10% year-over-year with same-store customer pay gross profit up 12% and same-store warranty gross profit up 7%. Same-store F&I gross profit was down 5% on lower unit sales volume despite an all-time record quarterly Franchised Dealership segment F&I gross profit per retail unit of $2,473, which was up 7% from prior year.

Despite persistent new vehicle demand, sales volumes during the quarter continued to be impacted by ongoing vehicle production constraints. Same-store retail new vehicle unit sales volume was down 6% even as same-store retail vehicle gross profit per unit was up 28% year-over-year to $6,571. Same-store retail used vehicle unit sales volume was down 12%, while same-store retail used vehicle gross profit per unit was lower by 9% year-over-year to $1,669.

As of September 30, our Franchised Dealerships segment at approximately 18 days supply of new vehicle inventory unchanged from the second quarter. Production continues to improve slowly, while demand for new vehicles remain strong, which continues to drive strong new vehicle GPU.

Our Franchised Dealerships segment had approximately 31 days supply of used vehicle inventory, again unchanged from the second quarter. Given ongoing new vehicle inventory constraints, recent declines in wholesale market pricing, and our current macroeconomic outlook, we continue to be disciplined in managing our used vehicle inventory, volume, and pricing.

Now let's turn to EchoPark. For the third quarter of 2022, we reported revenues of $608 million, down 8% from the prior year. Despite this, we reported record third quarter EchoPark gross profit of $49 million, up 88% year-over-year. EchoPark retail sales volume for the quarter was 15,422 units, down 27% for the prior year as we continue to focus on executing our strategic adjustments to include five-plus-year-old vehicles in EchoPark inventory.

Digging a little deeper here, five-plus-year-old vehicles represented 19% of EchoPark retail used vehicle unit sales volume in the third quarter, which was up from 9% in the second quarter of 2022. And our non-auction sourcing mix grew from 25% in the second quarter to 32% of sales in the third quarter.

As we expected from the third quarter, we reported EchoPark segment loss of $29.9 million compared to $34.9 million in the second quarter, and $32.9 million in the prior year quarter. EchoPark reported an adjusted EBITDA loss of $21.4 million in the third quarter, an improvement from a loss of $27.9 million in the second quarter and a loss of $28.5 million in the year ago period. This sequential improvement from the second quarter demonstrates the benefits of strategic shifts in inventory mix and sourcing that I mentioned earlier.

At the end of September, our EchoPark segment had approximately 57 days supply of used vehicles. For EchoPark branded locations though, the days supply was just 40 days excluding new locations opened during the third quarter, positioning us well as we head into the fourth quarter....

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