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Sonic Automotive Inc (NYSE:SAH)
Q1 2021 Earnings Call
Apr 29, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Sonic Automotive's First Quarter 2021 Earnings Conference Call. [Operator Instructions] Presentation materials [Technical Issues] 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 the actual results to differ materially from the statements made. Those 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, Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

David Bruton Smith -- Chief Executive Officer and Director

This is Sonic Automotive. That was very choppy from our perspective. I want to be sure that the listeners can hear. That must a bad connection.

Operator

Yes. Everyone can hear.

David Bruton Smith -- Chief Executive Officer and Director

Okay. Thank you very much. Good morning, everyone and welcome to Sonic Automotive's first quarter 2021 earnings call. I'm David Smith, the Company's CEO. Joining me on the call today is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our Executive Vice President of Operations, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Danny Wieland. First, I would like to thank all of our teammates customers, manufacturers and vendor partners for helping us achieve another record quarter. During the first quarter of 2021, we continue to build on our strong momentum coming off record adjusted earnings in 2020. We generated record first quarter total revenues of $2.8 billion, 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 first quarter 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 positive trends in the first quarter have continued into the second quarter, and we continue to see strength in all facets of our business. We remain extremely confident in 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 toward normalcy.

Given these trends in our progress to date, we are confident we can attain our goal of more than doubling total revenues to $25 billion by 2025. And significantly increasing profitability going forward. In our core franchise dealership segment, first quarter revenues were $2.3 billion, a 15% increase from last year. Total franchise pre-tax income was $70.5 million, an increase of $47.9 million or 211% compared to last year. On a two-year comparison compared to the first quarter of 2019, same-store franchise dealership revenues increased 14% and pre-tax income increased by $49.8 million, which is a 240% increase, reflecting the impact of our lower expense structure as a result of strategic actions that was taken last year.

Turning now to EchoPark. We continue to experience rapid growth during the first quarter, achieving all time record quarterly revenues of $507 million, which is 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 18,000 to 19,000 units we guided to on our February call. In addition to top line growth, we have to -- build of our EchoPark model that currently use vehicle pricing environment during the total gross profit per unit of $2,339 and above our target of $2,150.

Our first active part delivery center in Greenville, South Carolina continues to outperform our model selling 160 vehicles in March at nearly $1,750 in total gross profit per unit. Generally $100,000 and store level profit for the month. Our outlook in the EchoPark stores and delivery centers also continue to ramp aggressively. With our Phoenix hub selling 228 vehicles in its full month in March, driving $125,000 of store level profit. The unit ratio of December's used car acquisition is already ramping up nicely selling 300 plus in total gross profit per unit. And we continue to apply our learnings to each new EchoPark store we opened or acquired. And results are proving the scalability and momentum of the EchoPark model.

We believe these results showcase the flexibility, value proposition and consumer demand or EchoPark's unique pre-owned vehicle shopping concept as more guests choose to visit our stores and or shop echopark.com for the incredible inventory selection on diesel pricing and a unique guest experience that we offer. As an update on our expansion of EchoPark's nationwide distribution network and omnichannel retailing platform, we opened five new locations in the first quarter. In April, we opened our latest retail hub in Birmingham, Alabama and our third 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 point nationwide distribution network by 2025, which we expect to retail over 0.5 million pre-owned vehicles annually by that time.

With our progress to-date and the continuing development of our omnichannel retailing platform, we are confident that we can reach $14 billion in EchoPark revenue by 2025. In addition to the year-over-year comparisons for the first quarter, this morning's earnings press release includes comparisons to the first quarter of 2019 for certain key metrics. It's important to recall that Sonic actually grew EPS in the first quarter of last year compared to 2019 due to the strength of our January and February results despite the initial impact of the pandemic in March of 2020. Since that time, we have substantially improved our expense structure, which was reflected in the current quarter's profitability and operating margins and our expectations for the remainder of 2021 and beyond.

In the first quarter of 2021, total SG&A expenses as a percentage of gross profit were 72.2% representing a 830 basis point improvement compared to the first quarter of last year and 790 basis points better than the first quarter of 2019 which in dollar terms, while same store franchise gross profit increased 34.5 [Phonetic] last year, same-store franchise SG&A expenses decreased $7.5 million, demonstrating the permanent expense reductions we had previously [Technical Issues].

Turning now to our balance sheet, we ended the first quarter with $435 million in available liquidity and set an all time high liquidity mark in April at $570 million which included over $300 million in cash on hand. More recently, the Company closed a new four-year $1.8 billion 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 fore-playing capacity to facilitate our growth plans.

Reflecting our current business momentum, expansion of 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 million, bringing our total remaining authorization to $277 million.

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 and had 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 has 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.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Rick [Technical Issues].

Rick -- Analyst

[Technical Issues] Thanks. Good morning. Great quarter. Can you hear me, OK?

David Bruton Smith -- Chief Executive Officer and Director

It's a little bit choppy Rick [Phonetic], but go ahead, we'll make new. Yeah, yeah, I think that [Technical Issues].

Jeff Dyke -- President and Director

Yeah. So, Rick, this is Jeff. We ended the first quarter with a 43 basis point new car inventory. So we're certainly in good shape. I [Indecipherable] three buckets. What's reinforcing domestic, domestic maybe the hardest. And I think May, it's going to be the toughest month in terms of that. Digitally only about 12% of our business. So we're set up for the next couple of quarters as the strip issue becomes more of a problem, the luxury plus inventory, which obviously is a big chunk of our business and the biggest of our business. We're just not going to be as effective -- want a great job and product in from other parts of the world.

We got inventory -- and so we should enjoy good new car volumes through the second quarter and of course great margins. Those margins are going to continue. I think will continue through the rest of the year. Imports and domestic are going to get harder with domestic from our perspective to being the hardest. I think the start rolling into this [Indecipherable] was getting a lot better, from the middle of June as we move forward. But again our luxury mix is going -- is really going to help us as we work through more difficult conditions in second quarter.

Rick -- Analyst

I have done [Technical Issues].

Jeff Dyke -- President and Director

Yeah. So, really what you're seeing with the EchoPark in the higher base supply is just a reflection of the number of stores and right now, we're carrying a lot of inventory to getting those stores open. But our main supplier, more materials stores is still quite normal 10 days in the pipeline, 20 days in the front line. And what [Indecipherable] are actually quite circling up, wholesale is lagging retail, it's a little bit of pressure from a margin. But this is just -- you look at the business and what happens, January, February, March, April is just a fantastic month. Speaking to the overall organization, I think it'll do better and more. It's just really, really good. And after this doing this for a long time, the last couple of months are something best, are retail month.

The auctions obtained more money for cars right now which is present, it's way up here to get. In particular in our 1 to 4 year-old category and our lots are pooled. Our supplies are good and looking forward to a break even bigger second quarter than what you saw in the first quarter, continuing growth pattern to over 100,000 cars this year.

Rick -- Analyst

[Technical Issues]

Jeff Dyke -- President and Director

Thanks.

Operator

Your next question is from Rajat Gupta [Phonetic] J.P. Morgan.

Rajat Gupta -- J.P. Morgan -- Analyst

Hey, good morning. Hopefully, a little better [Technical side] on the EchoPark [Technical side] can you talk about [Technical side] EBITDA levels are just to match 2019 levels in 2021. [Technical Issues] given the start we have to the first quarter, strict memory, and it's [Technical Issues] like, guidance.

Jeff Dyke -- President and Director

Yeah. Rajat, your questions is a choppy, but I think I got it. I think it's in relations to kind of the drag and the performace on EchoPork.Where I wi.. just the to is our trial. You might have. Yeah we your call. If your question was a little choppy. And so we're going to look at that, is we are ramping up EchoPark quickly. We gave you guidance in the beginning or at the end of last year, beginning of this year, February, that we're going to have about $12 million to $14 million drag. We only had $600,000 drag in first quarter, but we still expect to have that $12 million to $14 million drag for the year. And still sell more 100,000 cars are being store ramped a lot faster than we thought. We nearly hit 300 cars pro forma up in margin. We made $125,000. Usually that's taking a couple of months to get that done or six months to get that done. We're just moving a lot quicker, that we've anticipated.

And if we can see that happening in Birmingham, also ramping up a little faster. Maybe there is some good news there, in terms of drag as we move forward. But our projection still right now, are still have that $12 million to $14 million range. And we can update you in the second quarter as to sort of what we're seeing on our newly opened stores, but certainly, the stores are opening right now are improving a lot faster than the stores that we opened last year. We just learned a lot. We're executing -- we have people in the pipeline to go out and meet our stores have been a really good, fully mature team in the Phoenix, it's playing been for a while, and it was just like turn on the lights. We just went straight to -- almost 300 cars and made money, and hopefully we'll be able to do that more and more up as we move forward.

David Bruton Smith -- Chief Executive Officer and Director

And I think the one [Indecipherable] five locations, we opened in the first quarter, four days for conversions in the applications we get in New York and in [Indecipherable] margin. We won the benefit of the acquisitions [Indecipherable] online, much more quickly, there's much less pre-opening much less. And the remaining 20 stores that we have this year will be more greenfield like Phoenix, like Birmingham, like Charleston which we've opened in the last month or past.

So that's where the majority of drag comes from -- going to be back. And that's [Indecipherable] of having the flexibility and doing the acquisitions versus during the traditional greenfield that we do in the EchoPark.

Jeff Dyke -- President and Director

Yeah. After that the synergies platform, it just topped on, hold over 300 margin profitable is immediately very, and we're hoping that and expecting that in our platform in Baltimore.

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. [Indecipherable] that's big news [Indecipherable] anything [Indecipherable].

Heath R. Byrd -- Executive Vice President and Chief Financial Officer

Rajat, this Heath Byrd. Really choppy. I think heard capital allocation. And again our [Indecipherable] 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 net EBITDA even with the drag. We do see opportunity. We get a lot of opportunities for acquisition on the franchise side. And for the first time, we're starting to get a little more active on that side. And because of the free cash flow, we're producing, we 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 were part of the capital allocation, 20% returning capital to shareholders and we think if the share repurchase authorization, I think you can see we bought almost 1 million shares back in Q1 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.

Rajat Gupta -- J.P. Morgan -- Analyst

Got it. Great.

Heath R. Byrd -- Executive Vice President and Chief Financial Officer

Thank you.

David Bruton Smith -- Chief Executive Officer and Director

Thank you.

Operator

Your next question is from Mark [Phonetic] [Technical Issues].

Mark -- Analyst

Hi. On the EchoPark side as you move to increase your mix of purchases [Technical Issues].

Jeff Dyke -- President and Director

Hey, Mark, this is Jeff Dyke. Now, the problem with [Indecipherable] when you're buying cars off the street, we have one to four year old model. Customers are bringing one to four 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 the street. But they're buying 5, 15 year old cars, not one to to four year old cars. And majority of those cars are going to the wholesale markets [Phonetic]. It is not -- it is a source for us.

And right now there's as a percentage of our overall sales has been 10% range. But this is not going to be a big, big source for us, because of the nature of the business and customers not selling that. One to two year old car straight off the street. 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 dealership. So the combination of all that allows us kind of to carry the inventory levels we've prepared.

Heath R. Byrd -- Executive Vice President and Chief Financial Officer

And this is Heath. I just add to this as well. As -- when we buy from the auctions, we have a very predictable product we buy and very high condition range. And so that allows us to keep the recon low, and to do it quickly. As you know we've returned the vehicle very quickly. And so you get very predictable source of supply depending on the street, you've got some of that, that take a lot more -- a lot more time to get through the line. So that's another component of why we focus on the auction.

David Bruton Smith -- Chief Executive Officer and Director

And that's one more thing we got. Our trade ratio of EchoPark is running almost 70%. And so we are getting inventory from tranche. And then the great luxury of that is, the tranche that don't fit in one to four year old models are being moved over to our franchise side of the business. And we're selling the heck out of those bars. That's just a big home run for us.

Mark -- Analyst

Okay, great. And then can you talk about the differences in F&I on the EchoPark side between customer that might show up in store and some of them are [Technical Issues].

David Bruton Smith -- Chief Executive Officer and Director

I think you're saying that F&I had, I'm sorry to say, choppy, Mark, I think you're saying that performance in F&I Online versus in-store and -- that's the one thing that we've learned a lot about. It's -- we can sell up an iPhone, particular when e-commerce platform comes along to make it even easier for our consumer to use our platform. You know we're going to be, we'll see that -- there's really not going be a big difference between the F&I, online versus F&I selling stores. And Heath, can you do that?

Heath R. Byrd -- Executive Vice President and Chief Financial Officer

Just to add to that. I mean that's exactly what we've seen the penetration with F&I products online, about the same even a little bit better than in-store. We offer that transparency to the consumer. They can really understand what the product does and how it helps them over the short and long-term.

Mark -- Analyst

Okay, great. And then just any change on the part and service trend [Technical Issues].

Heath R. Byrd -- Executive Vice President and Chief Financial Officer

Yeah. That's been a great [Indecipherable] story for us so far this year. We're running up against 19 [Phonetic] in the first three months of the year, that up 9% in customer paying. Our warranty is down about the same, but it looks even better, if we get into April, we're running at 15% in customer pay. And that's just a big home run. So we feel like fixed operations is back from a CPE perspective. And that's just going to be huge for us as we move through the rest of this year, in particular, the back half of last year where customers are really more traveling. They will be huge in California, and obviously, we have a good footprint. That California reopening will be a big addition to this. So far so good. That kind of growth in April versus 19, not 20 [Phonetic] is really fantastic for us.

Mark -- Analyst

Great, thank you.

Heath R. Byrd -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions] And your next question is from John [Indecipherable].

John -- Analyst

Good morning, guys. Good morning.

David Bruton Smith -- Chief Executive Officer and Director

Hi, John. Good morning.

John -- Analyst

[Technical Issues] the EchoPark inflection point, it 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 '22 and '23, when enough stores have been open, opening 25 stores a year matters less on the cost ramp? I'm just trying to understand the inflection point on EchoPark.

David Bruton Smith -- Chief Executive Officer and Director

Yeah, so '22, I mean, look, we are really having some great success with these stores we're opening right now, and getting them profitable and then selling right immediately the three year cars, but we're still opening more stores this year than we started the year with. And that'll be the last time that happens. So 22 is going to be the, there's really going to be the inflection point here, when you really start seeing the profitability compared carrying the drag and really not having as big of an impact on us which is doing right now. But it's -- on 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 have a bunch of stores this year, and EchoPark is really picking up. It's a lot of fun to watch. Why years going into the -- we put a decade into getting this all right. We learned a lot and now we can reap the benefits back. And so -- it's just be a great year. Even that we have that $12 million to $14 million for the drag, the inflection point comes in '22.

Heath R. Byrd -- Executive Vice President and Chief Financial Officer

John, it's Heath. I think it's really important to emphasize that our team is really. We made so much progress in how we opened stores both the scalability of the -- the cost is going down and the speed to market is going up. But our training and the way we bring, as Jeff mentioned earlier, the Phoenix store track on those 300 cars in the -- and then the addition of the acquisitions are things still gives that we brought online quickly integrated. And they're now EchoPark stores and sort of the speed to market, I think, is a huge part of our growth story.

David Bruton Smith -- Chief Executive Officer and Director

The only thing I'll add more and more about John, the other thing we're doing is building our management bench and so there's a lot of and best going into that right now. We didn't see quite as much in the first quarter, but you're going to be more in the second and third quarter. I mean the 600,000 drag in the first quarter was just sort of under-stated. And that's why we told, that we'll still be in that range for the year. And if you want to look at anything sort of Phoenix when we put the right management team to strengthen on day one. It just up and that's exactly what happened. And so, we're adding more and more people in order to help this aggressive rollout that is going to be added the rest of the year.

John -- Analyst

You acticipated [Technical Issues].on human capital. What is the cost of developing General Managers either internally or certainly externally for all the stores are being opened.

David Bruton Smith -- Chief Executive Officer and Director

Net several layers of management, we have to basically at each layer continue to move up as we open stores. We've had a, going to be outside of a few times we bring them in six months early to looking at capacity in the stores for future openings. And so we're excited to schedule getting at it. That's part of the drag that Jeff was talking.

John -- Analyst

Okay, thank you. And then just last one. On gross margin, just how sticky, could you just -- on the new side. I mean it seems like part of this size.

David Bruton Smith -- Chief Executive Officer and Director

I mean I think I understood your question, John. Again, sorry, it's a little choppy. But the new car margin, one of the thing, that's great is the manufacturer for learning and have learned that they're going to, they're going to keep their supply side. The force announcement, BMW has made announcements and supplies are going to stay flat,, margins up. So I think more than stick and who knows, have been required is going to, they are right now but just, we're certainly not going back to pre-pandemic.I just see that happening. And the new store margins are good too. We sort of run at a little lower margin on the front, much higher margins on the back in many of our competitors and you combine that it gives us a total package on a per rig companies typically puts us in the top one or two of our competitors. And so I think you said margins are going to the stay strong. And remember in the EchoPark model, model is to have. Our models drive traffic through in being $2,500 to $3000 price point of the retail market sort of wholesale price in 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 wholesale markets that certainly will continue to try to drive the big volumes in our model requires from an EchoPark perspective.

John -- Analyst

Great. Thank you very much.

David Bruton Smith -- Chief Executive Officer and Director

You bet.

Operator

And there are no further questions in line.

David Bruton Smith -- Chief Executive Officer and Director

Okay. Thank you very much, everyone. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

David Bruton Smith -- Chief Executive Officer and Director

Jeff Dyke -- President and Director

Heath R. Byrd -- Executive Vice President and Chief Financial Officer

Rick -- Analyst

Rajat Gupta -- J.P. Morgan -- Analyst

Mark -- Analyst

John -- Analyst

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