Sonic Automotive Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 10 speakers on the call.

Operator

Welcome to the Sonic Automotive Second Quarter 2023 Earnings Conference Call. This conference call is being recorded today, Thursday, July 27, 2023. Presentation materials, which accompany management's discussion on the conference call, can be accessed at the on 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 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 with the Securities and Exchange Commission. In addition, management may discuss certain non GAAP financial measures as defined by the Securities and Exchange 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. I would now like to introduce Mr.

Operator

David Smith, Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference.

Speaker 1

Thank you very much, and good morning, everyone, and welcome, as she said, to the Sonic Automotive's 2nd quarter 2023 earnings call. Again, I'm David Smith, the company's Chairman and CEO. Joining me on the call today is Mr. Jeff Dyke, our President our CFO, Mr. Heath Byrd our EchoPark Chief Operating Officer, Mr.

Speaker 1

Tim Keane Our Chief Digital Retail Officer, Mr. Steve Whitman and our Vice President of Investor Relations, Mr. Danny Weiland. Earlier this morning, Sonic Automotive reported 2nd quarter financial results, including record quarterly total revenues of $3,700,000,000 A 4% increase from last year. 2nd quarter EPS was $0.65 per share, which includes the effect of $75,000,000 in charges Related to our previously announced plan to indefinitely suspend operations at 8 EchoPark retail hubs And 14 delivery and buy centers as well as 3 Northwest Motorsports stores in the EchoPark segment, offset partially by a $21,000,000 gain on the disposal of 3 franchise dealerships.

Speaker 1

Excluding these items, adjusted EPS was $1.83 per share, a decrease from $2.45 in the prior year, due primarily to normalizing new vehicle margins and higher interest rates. We are proud of our team's performance in the 2nd quarter and we remain focused maximizing profitability in the near term, while positioning Sonic to achieve our long term strategic goals. We would like to thank our amazing teammates, Manufacturer and lending partners and of course our customers for their continued support. Turning now to the 2nd quarter results, The industry continued to see improvement in new vehicle production and inventory levels, which resulted in incremental new vehicle sales volume and lower new Gross profit per unit sequentially as expected. This decline in new vehicle GPUs should continue as we progress Through the second half of twenty twenty three and into twenty twenty four, 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

In the used vehicle business, wholesale auction prices For 3 year old vehicles decreased 6% in the 2nd quarter, unwinding the surprise increase we saw in the 1st quarter. And this is important, July month to date 3 year old wholesale prices are down nearly 4%, consistent with our expectations for continued price normalization in the 3rd and 4th quarters, which will ultimately benefit consumer affordability and demand for used vehicles Once retail pricing follows the wholesale trend in the same direction. Lower lease turn ins at our franchise dealerships continue To limit our used vehicle volume in the Q2, but we were able to maintain higher used GPUs to somewhat offset the lower volume. We expect used vehicle prices to decline further in the remainder of the year. And to our franchise dealerships, our franchise dealerships F and I gross profit per unit improved $156 sequentially From the Q1 to an all time record $2,516 per unit and we reiterate our previously guidance for full year 2023 franchised F and I per unit at or above $2,400 per unit.

Speaker 1

Our parts and service or fixed operations business remains very strong with another quarter of all time record fixed Gross profit at our franchise dealerships, up 9% year over year, driven by 11% growth In our customer pay 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 2023. Turning to the EchoPark segment, in this morning's press release, as I mentioned, we provided additional details around the previously announced suspension of operations at certain EchoPark locations and the closure of 3 Northwest Motorsports locations. In total, we suspended operations at 8 EchoPark retail hubs and 14 related EchoPark delivery and buy centers, as well as 3 Northwest Motorsport stores. In the 2nd quarter, we suspended operations I'm sorry, the suspended operations represented 18% of our EchoPark segment unit sales volume, approximately $74,000,000 in revenues and incurred a segment loss of 13,200,000 Going forward, we expect $2,500,000 to $3,000,000 in ongoing quarterly expenses associated with these non operating locations. Spending operations at these stores was a very difficult but necessary decision given the current used vehicle market conditions and our near term outlook.

Speaker 1

As we've continued to develop the EchoPark model, our team has learned how to adapt the business to the unique challenges we have faced over the past 3 years. While we believe the delivery and buy centers remain a key opportunity for EchoPark growth down the road, The success of the delivery center model is dependent upon broader EchoPark brand awareness to drive organicecommerce traffic toechopark.com and generate sufficient delivery center sales volume to meet our required returns. In light of the inventory constraints we are facing in the current environment, we do not feel it is prudent to invest in this level of brand marketing at this time. However, as market conditions improve, we'll begin to roll out our EchoPark national branding strategy, which will enable us to selectively invest And delivery center growth to facilitate our goal of reaching 90% of the U. S.

Speaker 1

Population at maturity. We believe that the decision to suspend operations at these stores will substantially improve our near term financial performance And allow us to reach our goal of breakeven EchoPark segment adjusted EBITDA by the Q1 of 2024, While maintaining the viability of our long term strategic plan for EchoPark once used market conditions normalize. Turning back to our Q2 EchoPark financial results, we reported record revenues of $601,000,000 And gross profit of $27,000,000 down 44%, due in part to the volatility in wholesale auction pricing I mentioned earlier. EchoPark segment retail unit sales volume for the quarter was approximately 17,100 units, up 4% year over year. 2nd quarter EchoPark segment adjusted EBITDA was a loss of $31,800,000 compared to an adjusted EBITDA loss of $36,900,000 in the 1st quarter $27,300,000 in the year ago period.

Speaker 1

We expect to see continued improvement in adjusted EBITDA losses through the second half of twenty twenty three, both due to the reduced store footprint And through improved profitability at our remaining operating stores as we are better able to allocate inventory and management resources across the entire platform. As for our powersports segment, the 2nd quarter kicked off The summer of powersports selling season and we expect peak seasonal profitability in the 3rd quarter highlighted by the Sturgis Motorcycle rally next month. We are continuing to identify operational synergies with our growing powersports network and we remain Optimistic about the future growth opportunities in this adjacent retail sector. Finally, turning now to our balance sheet, We ended the 4th quarter with $864,000,000 in available liquidity, including $407,000,000 and combined cash and floorplan deposits on hand. Additionally, I'm pleased to report today that our Board of Directors approved a quarterly cash dividend Of $0.29 per share payable on October 13, 2023 to all stockholders of record on September 15, 2023.

Speaker 1

In closing, our team remains focused on near term execution And adapting to changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long term returns. Furthermore, we believe any industry driven margin headwinds we may face in the franchise business Should be a tailwind to EchoPark segment revenue growth and profitability, minimizing the earnings downside to our consolidated Sonic results This concludes our opening remarks and we look forward to answering any questions you may have. Thank you.

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. And we'll take our first Question from Daniel Imbro from Stephens. Please go ahead, Daniel.

Speaker 2

Hey, good morning, everybody. Thanks for taking our questions.

Speaker 1

Good morning.

Speaker 3

Good morning.

Speaker 2

I want to start maybe on the EchoPark kind of restructuring side. I guess, Jeff or Heath, if we look at the portfolio today, How did you arrive at those 8 locations? Are there more in maybe a second tier of challenging markets that could close if the market stayed tougher for longer? And then there's a clarifier on the numbers. Is there right implication of your cost commentary that it's like 40 ish million Of annual savings or $40,000,000 of accretion towards EBITDA?

Speaker 3

Yes, the $40,000,000 is correct. And sure, we did. We took up we looked at the Stores across the board and this is Jeff by the way. We looked at the stores across the board and we took the stores that We might have had more difficulty getting inventory to buying inventory in the market areas around those stores and really pared it down from the 50 level down to 25 that we feel given the market conditions today that we can buy enough inventory to support the volume that these You need to all remember that you go pre COVID, these stores basically this group of stores, I think it was 12 or 13 pre COVID, Was averaging about 500 to 5.50 units per rooftop per month. And today, you're just not able to buy enough Inventory in the 1 to 5 segment to support as many stores as we have.

Speaker 3

So we pared down to the number of stores that we knew we could buy inventory for. If the market conditions change, we certainly have the ability and the leverage to pull to adjust store counts In either direction, because we've got the stores hibernated, the market comes back faster than we think it's going to, we can open stores back up. Certainly, if we see a jog in the inventory valuations that we saw in March where prices went from basically What we were buying at $24,000 up to $29,000 if that happens again, then we can certainly make other adjustments and pull other levers to get us to our target Of being EBITDA positive in the Q1 of 'twenty four.

Speaker 4

And this is Heath. I think just a couple of things to add. Your $40,000,000 is correct from an annual That is the savings that we have, but the bigger benefit is to Jeff's point is the fact that We can sell more units out of the 25 remaining locations Then the 50 units because you can stock the shelves properly. And so because of these moves and the limitations of getting inventory, We can now do a better job of inventory mix of those 25 resulted in more units at a higher gross Our GPU that we had with the 50, if that makes sense.

Speaker 3

Yes. So on a go forward basis, if you guys are looking at modeling this, As we get to the Q1 and breakeven EBITDA, we're going to sell more cars out of the remaining 25 locations than we did out of the 50 locations In the first and second quarter and our margin improvement should be in and around $500 better In the Q3 and the Q4 versus what you saw in the Q2. And it's simply because we can buy enough car, sell enough volume. We're seeing that happen in July. We are going to turn our inventory almost 2 times in the month of July, which is fantastic and getting back to that big volume pre COVID A level that this what these stores are built on and what the model is built about.

Speaker 3

So we can definitely buy enough inventory right now to support the remaining stores As long as the market stays where it's at. Now the market we think is going to get is going to continue to get better, right, meaning prices are going to continue to drop And inventories become more available as we move from now to the end of the year.

Speaker 2

That's helpful to And kind of your assumption, so if pricing just to make sure I understand, if pricing were to move higher in the wholesale side, that would get more challenging and that wouldn't necessitate potentially further actions On the storefront?

Speaker 3

That's correct. Yes. We don't anticipate that though. That's just not in the cards. The manufacturer producing more cars, New car inventory across the board from everybody's announcements is going up from a day supply perspective.

Speaker 3

No sales in the auction lanes are real high, north of 50% right now, which is a good sign That inventory is building and prices are going to come down. So there's going to be more volume to buy. The rental car companies Pretty much now are out of the lanes from buying cars, and that's what really caused a big issue in March for us and for the industry. So all indicators are that we're headed certainly in the right direction.

Speaker 2

That's helpful. And then maybe one last one for me. If we look at the franchise F and I per unit, it was much stronger. I think you made some changes Over the last year, I think you brought on some new financing partners. Can you think and parse out what the drivers were of the sequentially stronger F and I per unit on the franchise dealer side And maybe sustainability of that level going forward?

Speaker 3

Yes. I mean, look, we're not the number 1 in the peer group. I think AutoNation is out there $2,800 We're a little over $2,500 and our warranty penetration is just getting better and better every month. And so we reiterated in David's announcement north $2,400 a copy and we're going to hit those numbers. We're doing it now and had an all time record quarter.

Speaker 4

Yes, this is Heath. If you look at our penetration to just 1, our new finance penetration was up 2 50 basis points, Warranty penetration was up 200 basis points on new and used warranty penetration was up 50 basis points. Great.

Speaker 2

I appreciate it so much. Best of luck.

Speaker 3

Thank you. Thank you.

Operator

Thank you. And we'll take our next question from Rajat Gupta from JPMorgan. Please go ahead, Rajap.

Speaker 5

Great. Good morning. Thanks for taking the questions. Just wanted A bit of a further clarification on EchoPark. You mentioned that you're going to be you're going to get better throughput from the remaining stores.

Speaker 5

So is the assumption that if we adjust by the $32,000,000 loss in the Q2 or like or $20,000,000 loss

Speaker 6

Adjusting for the store count reduction, going from

Speaker 5

the $20,000,000 loss to the breakeven, is that

Speaker 6

You mentioned the $500 of gross profit per unit, that would

Speaker 5

be better. Is the remaining coming from Volume growth going forward, so is the assumption that sequentially volumes keep going up from here or Just trying to understand like with a little more granularity, how do we get to that breakeven or the past there?

Speaker 1

Yes, this is David. It's interesting, Jeff touched on it a second ago and I'll let him touch on it. But it's interesting to note that Our capacity to grow our volume, in the past, as he mentioned, we did 5.50 cars per store, whereas Where we're sitting now is less than 300 units per store. So we easily have the capacity in our team and our structure to sell far more cars with this remaining group of stores and also deliver the world class guest experience that EchoPark Has been delivering really

Speaker 4

for the last nearly 10 years.

Speaker 3

Yes, the breakeven I think we gave you all last quarter was or the quarter Around 9,000 cars given the changes that we've made that breakeven number now for the segment is 7,200 cars. And we feel that between now and the end of the year, we're going to be in a position to make that happen. Remember, A lot more throughput means we've got to hire more people, hire more technicians. Our average experienced sales associate at EchoPark this month is going to be in the 27.5 to 28 range. Pre COVID, we were doing well over 30.

Speaker 3

So that's coming back. So the volume the inventory there's Plenty of inventory to support the stores that we have left open, and we think we can continue to grow that. We will continue to grow that Through the 3rd Q4 and hit our breakeven target for Q1 of 2024.

Speaker 4

Yes. And to sum it up, It's basically those three components. It's the reduction in expenses of the $10,000,000 a quarter plus the increase in volume and the increase in GPU.

Speaker 3

And we are seeing that occur in July. Yes.

Speaker 5

Got it. Got it. That's helpful. And just on the inventory revaluation charge in the Q2 of the 10,000,000 Would that just mean that the front end gross profit in EchoPark This has a much more favorable base here, into the 3rd Q4 and does that kind of like drive In that $500 GPU increase sequentially as well. Just wanted to make sure like we're thinking about that correctly.

Speaker 3

Yes, it's certainly a part of that, but more importantly, it's the 1 to 35 day old car that we're selling. We're turning our inventory so much faster, Buying cars cheaper, so our margin is significantly better on our fresh inventory. The $10,000,000 really went against our aged inventory And a lot of the inventory that we bought in March that depreciated a lot faster than probably we've ever seen before in history. And so that's where those dollars took care of some of that inventory. But the bigger news is, is the margin that we're making on our fresh inventory now, That's back to normal for us and actually better than normal for us, which is just fantastic.

Speaker 3

We're in the $5.50 to $600 range on fresh inventory, which is well above where we've been even pre COVID. So that's the exciting news as we know Margins improving on our fresh inventory. We're turning our inventory really fast, probably turning our inventory faster than we've ever turned it, because We're going to be nearly 2 times turn in July. And the faster you turn your inventory, the higher your margins are going to be.

Speaker 5

Right, right. That makes sense. And last one on the franchise SG and A to gross. The prior guidance was, I believe, like mid-60s. Just curious if you're reiterating that and maybe like any updated thoughts on how you Back new and used car GPUs to trend in the second half.

Speaker 5

Thanks.

Speaker 4

Yes. We reiterate that we believe that the franchise will be in that mid-60s from SG and A as a percent of gross And that will equate to a total of around 65 to 70 for the year.

Speaker 3

And Margins should be consistent from a used vehicle perspective from what you saw in the Q2, and new car margins, mid-four thousand range, Somewhere in that ballpark between now and

Speaker 7

the end of the year.

Speaker 5

Understood. Great. Thanks for all the color.

Operator

And next, we'll take a question from Bret Jordan from Jefferies. Please go ahead, Bret.

Speaker 6

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

Speaker 3

Hey, Patrick. Hey, good morning. Good morning.

Speaker 6

Just digging a bit more into the used GPUs, How should we think about what the new normal is there moving forward? Given the rebound in the past couple of quarters, should we think about 1400 as a new low or more

Speaker 3

I think if the market keeps dropping like it's dropping, then we're going to be real comfortable in that 1400 range. If the market keeps moving around a lot, margins are going to move around, and that's just keeping up with the depreciation. But I don't think the markets are going to maybe another 4 or 5 weeks of drops, but it's got to flatten out here at some point because we've gone from $29,000 a car or $27,000 a car in the 1st part of June. Now we're buying cars below $25,000 That trend is just not going to continue at that Steep level. So if that happens and things begin to flatten out, margin should sustain itself between now and the end of the year in and around where we today from a franchise perspective.

Speaker 1

And this is David. I think it's important to touch on that our team has been very Disciplined in selling through our inventory as that market has dropped, right. And so it has put a little pressure on margin, but As it levels out, as Jeff was saying, margin shifts improve.

Speaker 6

Got it. That's helpful. Thank you. And then just moving over to the parts and service side, could you talk a little bit more about where your capacity levels are at? I imagine labor continues to be constraint there, but curious to hear that compares to your overall physical capacity and how much room, less there is to grow?

Speaker 3

Yes, we're full. Every stall, we need more technicians. We're actively building stalls in many of our locations today Or we'd have further upside in terms of our year over year growth. This is a long runway. We've been really working on our market share as we said last quarter from an OpCo perspective and growing our share across all our brands.

Speaker 3

We've got BMW done now. We've got Honda done now. That will continue throughout the rest of the brands and growing share by specific OpCo And that's given us a great return. We've had just an amazing performance from fixed ops perspective, another record breaking quarter, and we expect that To continue to grow, but we need more stalls and we need more techs. There's no question about that.

Speaker 6

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

Speaker 1

Thank you.

Operator

And we'll take our next question from John Murphy from Bank of America. Please go ahead, John.

Speaker 8

Good morning, guys. I just wanted to follow-up on the EchoPark restructuring from an operating standpoint, maybe from an accounting standpoint. So if we think about these 25 locations or maybe the 22 and ex out the motorsports stuff, should we really think about these as the lights kind of being turned off? And then if market conditions in 12 plus months improve, that you might be able to turn these lights back on pretty quickly?

Speaker 3

Yes, that's the exact idea.

Speaker 1

Yes. That's one of the things that I'd like to brag on our team here a little bit that Our team does an amazing job of hiring and training and getting these stores open. I think that It's actually going to be an easier job as the market improves and because of the experience of our existing leaders at EchoPark To ramp up these stores and get them going again, again as the market improves.

Speaker 3

Yes. The lights are definitely out in the stores that we closed, But doesn't mean they can't be turned right back on, and that would be the intention if the market improves Like we think it's going to do, it's just not going to happen in this calendar year, right. We've got a long way to go to get back down to the $21,000 $22,000 Price level, if we do, but certainly rapidly improving prices and rapidly improving availability is occurring right now. And we're seeing that in this month. We're selling a lot more cars per rooftop, because we can buy and fill the shelves, at the remaining stores that we have.

Speaker 3

But if that more inventory becomes available at the right prices, then absolutely we have the ability to pull those triggers and levers And open more stores and open them quickly obviously because they already exist.

Speaker 1

And a key takeaway is that the stores that were closed Only represented 14% of the volume.

Speaker 8

Yes. No, that's pretty resounding, right, given it's the same number of stores that you're going to keep I mean, it clearly shows you chose the right stores or at least appears you chose the right stores. Just a follow-up on the accounting side on this. Why would you keep an ongoing expense for something that's put in disc ops? Wouldn't that have been put into the charge?

Speaker 8

And then sort of The follow on on the accounting side, when you talk about the inventory write down, is that write down for vehicles that are then dispersed to the other locations And then sold at a higher gross, so they help you out in the short run. I'm not trying to be a wise guy, I'm just trying to understand the accounting and how this is all flowing.

Speaker 7

Yes, John, this is Danny. Two pieces of that. The ongoing expenses are the pieces that we couldn't accrue and recognizing that one time charge you've got ongoing maintenance, Security utilities at those leased and owned properties going forward. Other things like the rent depreciation We're contemplated in the $75,000,000 of charges in the 2nd quarter. When you think about the $10,000,000 inventory adjustment, as we noted in the release, About $7,700,000 of that's related to the remaining the operating stores.

Speaker 7

Again, as Jeff noted, just cleaning up some aging with the rate of depreciation That we saw in the Q2. The remaining 2.3%, you're exactly right, with the aged inventory as well as then just valuing that to What the retail market value is as we reassign that either to other EchoPark locations or at wholesale.

Speaker 8

Okay. But that but Given that inventory write down in operating stores and then $2,300,000 in the disc ops stores, like that will help, I mean that will flatter the margins in the short run as you're going through the next quarter. Is that correct? I just want to make sure I understand

Speaker 3

Yes, this is Jeff. It's certainly going to help the aged inventory. Let's call aged inventory anything north of 45 days because you bought cars 45 days ago. They're down a couple of $1,000 a car already. So yes, it will shorten there.

Speaker 3

But the more important thing is what's the margin on the cars That are 1 to 35 days old now that we're seeing on July. And of course, those dollars aren't going to that inventory. And what's happening in that inventory is our margins are significantly higher than the pre COVID run rates that we had in margins where the stores were making all the money That they were making. So that's the great news. The great news is the margins on the fresh inventory is back, and back better than it was pre COVID.

Speaker 3

So That's what we hope to see continue happen between now and the end of the year and why we're so confident in Positive EBITDA in the Q1 of 'twenty four. I'm sorry. And just one last one

Speaker 8

on this. Does this mean that you will not open any new stores Until these stores come back on or could these stay in disc ops and you say, hey, listen, we just found a new market or newer markets that are just really attractive and we can add a couple of stores here and there, So we could see EchoPark grow store counts, even with these kind of stores in disc ops for now?

Speaker 3

Yes. I mean, some of those stores and disc ops Could be there forever, right, and we might end up selling, but and find new markets that are bigger, better, we've got inventory resources there, You name it, it will be a combination of what you said.

Speaker 8

Okay. All right, great. Thank you very much, guys.

Speaker 2

You bet. Thank you.

Operator

And our next question comes from David Whiston from Morningstar. Please go ahead, David.

Speaker 9

Hi, good morning. I had a question on your franchise business. Just looking at the reported versus same store on the used side, Your used GPUs were actually up 14%, but on a same store basis, they were down 3%. And so You seem to be bucking a pretty strong industry headwind here, which is great to see, but it looks like maybe you're favoring profit over volume on the used side on the franchise Sorry, but also do you have some newly acquired stores not yet in the same store base that were just outperforming the industry unused to cause that difference?

Speaker 3

There is some of that going on, but we are bucking the trend. We're being very conservative. I mean, we sold 75 to 80 units per rooftop and we typically run over 100. But you just can't buy the inventory. There's no off lease cars coming.

Speaker 3

So we're really trading for cars and buying cars off the street. And we did take a much more conservative approach Than we normally have in terms of holding on to our GPU and selling a little less volume. We could sell more cars, there's no question, but the margins would really drop If we had to go buy more cars in the auction and we see that at EchoPark with our lower margins. So, yes, that was strategic And we'll continue to balance that through the rest of this year before we start opening any of our buyers to go back into the auction lanes to buy cars for the franchise stores. We're going to live off of vehicles that we buy off the street and our trade ins, keep our trade ratios really high, which is running in the 55% to 60% range Right now, and we'll live off that until we really get a handle on what's going to happen in this used car market.

Speaker 4

And one of the big differences It's really just the brand mix of what we acquired last year and what we disposed this year. So that's also some noise in those numbers.

Speaker 1

And this is David. We mentioned it earlier. I mean, it was from all accounts a historic drop in Valuations of used cars in the market. So we think that strategically it's really smart to keep that inventory tight. And as Jeff said, maybe miss a few retail deals until that market starts to flatten out more consistently and then we can crank up the volume.

Speaker 3

Yes. We're seeing prices drop in the wholesale market for the mix that we buy. 2 weeks ago, we were buying cars over 26,000 Last week, we bought cars under 25,000 and you have to adjust your retail pricing on your lot to account for that. And so we're just being very, very careful, turning our inventory a lot faster, getting our cars through reconditioning quicker and executing our playbooks at a really high level. It's given us more growth, No question and we're seeing that both at EchoPark and on the franchise side.

Speaker 4

Thanks for that. So Just

Speaker 9

out of curiosity, do you have any store GMs complaining to you guys though that they'd like to get more volume on the used side?

Speaker 3

No, not at all. We buy all our inventory. Yes, we buy our inventory and trade for inventory centrally. Our teams are executing their playbooks and we don't have any of that.

Speaker 9

Okay. And just curious On the Tesla Model Y aggressive discounting, how badly is that hurting not only your premium brands, if at all, but also your volume brand stores?

Speaker 3

It certainly played a role if you had a bunch of Teslas in stock in any of the franchise Stores are pre owned, right, that hurt. But overall, I mean, it's certainly playing a role against electric vehicles From a new car perspective, because they're having to get more aggressive in terms of their pricing, but the quality of the product that the manufacturers Producing now is simply amazing. I don't care if it's Mercedes, BMW, Audi, you name it, Lexus, Toyota, they're just producing an amazing product And it's a better product than Tesla. And as the pricing gets right, the inventory levels come up, you're going to see a higher mix of electric vehicle sales Throughout the category.

Speaker 9

Do you think consumers are catching on though that is a better product than Tesla because Penske was complaining they

Speaker 3

have too many EQSs. Yes. I think it's a little early yet To make that comment, right? Let's see what happens as we move through the next 6 months, shelves begin to get filled And we put some electric loaner vehicles in and let the customer get used to driving other electric vehicle dealing with the range issues that kind of go with the consumers' concerns. And so let's see what happens.

Speaker 3

I think we've got another 6 months to a year of sort of crossing some new boundaries With the electric vehicle and if the manufacturer could get the pricing right and they keep their day supply in line, which are 2 big questions That they really need to focus on, then I think they can do very, very well. But if they're going to launch vehicles that are $112,000 When the counterpart combustion engine vehicle is $200,000 $30,000 cheaper, they're going to have a problem. And they're very well aware of that. Some manufacturers are doing a better job than others, but everybody is learning the electric vehicle business right now and that includes the manufacturer, How to launch it, what product to put out there, how to compete against Tesla, and we're nowhere near that limit. I think Mercedes, BMW in the 17,000 to 20,000 vehicles versus Tesla, 600,000 maybe this year from a U.

Speaker 3

S. Perspective. So there's a whole lot to learn and a long way to go Before we can claim any victories from an electric vehicle perspective.

Speaker 1

Yes. I think it's worth noting, you mentioned the EQS and that we've got the number one Mercedes dealership in the country out in California that's in the EQS model. It is Regional where it's like that part of the country has been faster to adopt that car. And so that store has actually been buying EQS is from other parts of the country and shipping them out there.

Speaker 9

Okay. I appreciate all the detail. Thank you.

Speaker 3

You bet. Thank you.

Operator

And we'll take another question from Rajat Gupta from JPMorgan. Please go ahead, Rajat.

Speaker 5

Great. Thanks for taking another question. Just wanted to get your updated thoughts on capital allocation, buyback, M and A. Obviously, a big focus in converting cash At EchoPark in the near term, but as you get more comfortable with the line of sight towards profitability and like lower cash When in EchoPark, how should we think about use of excess cash and like just reluctant capital allocation? Thanks.

Speaker 1

Yes. This is David and I know Heath has a comment about this, but we think that Our focus on our balance sheet, making sure we have the strongest balance sheet possible, we deliberately this is a strategic decision to not buyback shares in the Q2 and we'll see where we go opportunistically from here. As you see, we've got a fantastic balance sheet, a lot of cash And we'll look at strategically at various opportunities for acquisitions and share buybacks. But we just thought that it is important to focus on we've had quite a few acquisitions and a lot going on with EchoPark There's a focus on those operationally and we've got our power sports business and the RFJ dealerships and putting into our Playbooks and making sure that we execute properly. And so there'll be plenty of opportunities in the future for our Capital allocation, but Heath, did you have anything to add?

Speaker 4

Yes, and I'll just reiterate, we believe that cash is king when you have uncertainty with economic conditions. So we want to have dry powder That, number 1. Number 2, we also have a strategic initiative to bring our debt down. And so we've reduced our debt about $60,000,000 For the year, so that's a big important part of our capital allocation plan. We're reinvesting in our IT infrastructure and innovation as well as our facilities.

Speaker 4

So that's a priority. We don't have anything that is pressing the material from an M and A perspective in the near term. We want to be prepared and have capital available to start growing EchoPark again as we start seeing that market normalize. And then again, as always, we will return capital to shareholders primarily through our dividends and opportunistically through share repurchase.

Operator

Okay. There appear to be no further questions at this time. I'd like to turn the floor back over to management for closing remarks.

Speaker 1

Thank you all so much for

Speaker 5

attending the call and we'll talk

Speaker 1

to you next quarter. Thank you. Thank you. Thanks.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.

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Key Takeaways

  • Management reported record quarterly total revenues of $3.7 billion in Q2, with adjusted EPS of $1.83 per share versus $2.45 last year, reflecting normalizing new-vehicle margins and higher interest rates.
  • The industry saw improved new-vehicle production and inventory, driving incremental sales volume, though gross profit per unit declined sequentially and is expected to stabilize at a structurally higher level than pre-pandemic.
  • In the used-vehicle business, wholesale auction prices for three-year-old vehicles fell 6% in Q2 and are down nearly 4% month-to-date in July, with further price normalization anticipated to enhance consumer affordability and demand.
  • Sonic’s finance & insurance gross profit per unit reached a record $2,516 and fixed operations gross profit rose 9% year over year, supporting the reaffirmed full-year F&I guidance of at least $2,400 per unit.
  • The EchoPark segment suspended operations at 8 retail hubs and 14 delivery centers (18% of unit volume), incurred $75 million of charges, expects $40 million of annual savings, and aims for break-even EBITDA by Q1 2024.
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Earnings Conference Call
Sonic Automotive Q2 2023
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