SAH - Earnings call transcript Q3 2019

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Operator

Good morning, and welcome to the Sonic Automotive Third Quarter 2019 Earnings Conference Call. This conference call is being recorded, Thursday, October 24th, 2019. Presentation materials, which management will be reviewing on the conference call, can be accessed at the company's website at www.sonicautomotive.com by clicking on Our Company, then Investor Relations, then Webcasts & Presentations.

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.

and could a to cause from statements forward-looking and of differ are the that uncertainties the made. statements subject number to risks materially Such actual results with detailed the are Commission. uncertainties and and Exchange risks company's These filings the Securities in

today. discuss Please filed Exchange In Commission. current measures as and to report the with company's the and non-GAAP on non-GAAP defined addition, certain earlier financial X-K the the by Securities Commission management Securities in Form may refer Exchange reconciliation tables

would introduce Mr. and you I to EchoPark's Chief may conference. Sonic like David Smith, now Mr. your Executive Smith, Officer. begin

David Smith

much. Mr. and David Keen. third Smith, very Dyke; Heath Mr. Jeff today me our to I'm quarter CEO. company's Sonic call And joining our VP Tim CFO, Thanks Automotive's Mr. Good and of morning Operations, the on Byrd; call. President, XXXX Executive our earnings the welcome are

excited We all. are the you very results with to share

thank manufacturer quarter. us customers, would teammates, and like we and an to achieve vendors, First, helping our outstanding for partners third

Automotive year $X.XX Sonic over the the share $X.XX to per to diluted operations share continuing diluted share compared XX% quarter from prior the per share third prior Earnings continuing in year operations by per compared from were diluted in quarter. per quarter. increased earnings

annual XXXX, its would and from now of increase quarter the represent continued will to EchoPark a build upon believe which XXXX we for over year success revenues. full revenues the prior exceed billion XX% $X.X

during up unit by quarter third of third is XXXX to was of EchoPark $X.X the increase sales XX.X% for third XXXX. of quarter compared EchoPark's revenue retail the pretax of million improved the XXXX. by its XX.X%. million, million third of quarter quarter improvement a or profits also driven up $XXX.X XXX.X% the $XXX.X compared to increased which This

just Echopark.com not disproportionate States note the about It's our only locations. traditional through the story grow EchoPark existing important the across from to profit bricks-and-mortar and of our to we store new openings, of to we effect that our locations, expect drawing very continue flow the website, absent markets revenues, bottom-line. number of customers amount through technology topline United eight a gross XXX we is As are the our proprietary to EchoPark over growth

very Our our travel customers industry-leading have shown our to locations experience. for to they're happy EchoPark guest

our growth open up While California, in mature, Florida ramping that Georgia, a potential profit stores we XXXX. to we will more also excited by and believe in as strategy very existing end much EchoPark as and markets footprint growth metro revenue they EchoPark we'll are give we announce of us major locations have be our the nationwide

Our outstanding core quarter. also stores third an had franchise

from higher $XXX retail, increases up income, quarter. with year the $XX.X coupled million a in pretax per and improved unit up active XX.X%. franchise operations, These Our prior was third XXXX. million F&I from from This gross profit stores the gross benefited during used which $XX.X F&I Notably, management in XX.X% in of profit expense quarter to improvement an store fixed is increase resulted of quarter. the overall vehicles, franchised compared gross

increase gross unit Some third all-time an include of XX,XXX Sonic record on of highlights quarter or from all-time F&I gross other third an quarterly record total million $XXX.X XXXX XX.X% F&I record of of units; million, unit for all-time $XX.X quarter per of a the XXXX. the sales $X,XXX; pre-owned consolidated quarterly retail an quarterly basis of an

period. of to the quarter prior XXXX, operations store third the gross to Our an profit improvement XXXX. quarter of third in points ratio in the XX.X% compared of XXX gross same during X.X% year fixed increased basis SG&A XX.X%

year days' only quarter. XX from XX just days, was days for units supply Inventory new for prior down four units was days' days. the supply Inventory pre-owned

approved dividend stockholders a Directors XXXX. Lastly, to of payable Board XXth, record January per of we share $X.XX all December are also quarterly on XXXX on pleased cash of our XXth, that

would like call point, the this At to to open we questions.

Operator

Instructions] [Operator

Please your with And America. go ahead. first line of Murphy question is the John of Bank from

John Murphy

guys. morning Good

Jeff Dyke

Good morning.

John Murphy

there question focusing on you're headroom understand the the that there's mean what it's there. transaction of what going get other the best seems individual into about it sort on of number. any it's you of origin. it components sounds think are. scenario, fee, sort can $XXX like sort understand but a of or average? there's like strength curious like highest incremental F&I, if point or First I'm I'm it on you So maybe PVR on it, and F&I, because lot you case on but is a we stuff this origination the think I some to maybe opportunity of $XXX of trying

Jeff Dyke

is at Last sitting This a $X,XXX. quarter, I upside think were of was left. warranty there's they quarter. they The the drives announced. what is is that We're Dyke. piece out $X,XXX sitting of number Jeff and there we penetration lot a haven't big and I AutoNation mean

there. of certainly could I there's I number. $X,XXX So, see upside mean a plenty

better warranty upside almost on the penetration run We've we're they get the mid-XXs XX% on side running franchised even today. side. We penetrations than are there. Our could EchoPark and of got plenty

we'll the on but Ally so for that plenty sort where getting rate with penetration. product and much plenty [ph] So, is There's settled upside of product JMNA the and opportunity we there the for better. is we're upside that and us. of partners, there's penetration as get train there of not It's better our in,

John Murphy

new you heading helpful. deck and XX guys of talked think next show into, then new put out are very Long slide stores. how the market you Beach, you is think look I the you're and you -- was mean that identify medium morning, that's California it I what market. When you going on mean you this I question as second into, I market? a identifying EchoPark. at you Okay, When large when markets about

this better into go format to thinking profits understand the new returns growth. be to and the want about doing of nexus and process decision-making markets trying you there. I'm getting seem where because would the sort how of larger you're you're it And you're stores

Jeff Dyke

at data-driven. the Number market, Long largest old it's zero look the to When market or four-year country. that's one, the L.A. market in Beach you

So, a for opportunity us. huge it's

Our started continues X%, sort off at grow And in market share these market of X%, markets. we share. X% to

we're Now sort seeing more mature stores. double-digit share in of our

across So, markets we're big And plenty called country. four-year-old David to but those are zero there's for going that where markets big, market the out more is. potential earlier, the us,

We're And so us this to higher. a into drive great locations percentage other that gives are the those in now to a point the markets continue markets across across just stepping U.S. footprint country, to eight out us all over just for country. those selling the reach markets to XXX-plus

John Murphy

I versus large a And the store format you on consider slide doing mean Greenfield XX, you you as would why of the if your have-- sort medium have medium. facilities, of

Jeff Dyke

we to estate. buy to when have around able real be come Opportunities

little done. a we well that and it in speed drives So, of which to get the bit as that can move

John Murphy

on between really two? less just or can you you not And share of versus any conflict you all vehicle EchoPark business the I'll cannibalization than Okay. across at as can found vehicle have here sort inside your When look of your something Or at follow any maybe you showed be a that come kind used big issue that this. optimal? new of franchise dealers, existing

Jeff Dyke

the trades huge all. selling a of I mean cars years opposite lot the taking job more those all the old push freights--. older at a all at we're cars. EchoPark, that stores, than It's because into we're the Not are Sonic four it's we and

are and are in Sonic store located. Colorado our trades Denver, to that stores the over is have that huge a stores. where for example, been now, a For EchoPark selling is stores from It's EchoPark XXX help coming the cars markets lot from us well

John Murphy

and there's or Okay. -- then been there the automakers you more about of either some is Do seeing just the their question. dealers has on going seems Nissan the there It random in or I lastly quo? a that And in sort with it change But and see else good of status talked change automakers? support. that the any kind relationship in mean you're is last dealer I quarter between you is bad? or two relationship in anything mean

Jeff Dyke

think I focused more dealer of technology on a the that. our lot been and so are I I'll much facilities, participate think never And have efficiencies. of are huge boards it's you not manufacturers these thinking tell better. getting box better outside No, I in mean actually and the I relationships

getting as we partnerships Our And I see downside move are it great that I to forward. just think no and keeps better.

David Smith

since together David is like partners are we seen this would better ever I've with working Sonic with we the It in seems Smith. went public Yes, that. than echo manufacturing it XXXX. I

John Murphy

than are that companies might you a large, willing make of customer necessarily smaller they're a they leaning players like the -- up. Do mean any And experience you it past? into as some and have capital can't good understand the versus I keep well-run that I more in large you to advantage feel create

Jeff Dyke

that technology, when more we're very cars. experience selling And now. pre-owned for lot leaning breeds more you you. become selling for think in guest success interested We're certainly certified big on new seeing that a a that cars. I I us opportunity. right And mean on is cars, lot that. they're and a sell We're they

Our service good. is

it's and all clicking makes good that And a so difference.

John Murphy

Okay, very much. great. Thank you

Jeff Dyke

sir. Yes

Operator

Please is Nelson from go Stephens. question Your next Rick the of line with ahead.

Nels Nelson

guys. morning Good Thanks.

Jeff Dyke

Hey Rick.

Nels Nelson

not added than the an back, there better at even you Is was adjusted that this what EchoPark that were printed morning? impairment results

Heath Byrd

$X.X Byrd. Rick, had to accurate. real this a is million We is about estate. related That Heath impairment

Nels Nelson

EchoPark, store We're dollar the-- that a expense what is per And I'm in standpoint. accurate? it. from a looking of XX.X%. out ratio, creeping the guess decline I Got SG&A at seeing Is

Heath Byrd

you didn't to SG&A it stores because is Rick, franchised that this Heath. stores. can the improving EchoPark accurate But get I everything. compared of on is hear leverage is the

Nels Nelson

SG&A per lower? store And is actually

Jeff Dyke

than is yes. EchoPark stores, At Sonic it at

Nels Nelson

in But store? at also seeing declines SG&A per you're EchoPark,

Jeff Dyke

that's also of that. is gross the Yes, up, driving so part

Heath Byrd

That's correct.

Nels Nelson

you. got Okay,

Heath Byrd

obviously, a company expense there's And of have lot creep management as side. the more not we on locations

it So, a that's percent of SG&A gross. stayed opened. of many how help pretty we -- that Therefore, will same regardless stores as the

Jeff Dyke

Yes, company. if next going the we we're to opened to operating not these add, three markets; any

So, and part That's better flow-through model. you of efficiencies. the more just have

David Smith

And and it. and up I a four, last it speed this, team five a about takes would has to since that open profitable and our time get this started running lot more it Rick, changed efficient and years David. the the ton the over location is say And it getting we has new a better and gotten

Nels Nelson

expect the fourth Would dilutive to in quarter? Beach Long you be

David Smith

some. costs, opening of the and drag bit of the quarter, about on once million There's little first Not a of front be the months. right? the couple $X mean I a a carrying we some of worth opened for fourth going get million It's sort quarter and lot. to $X but maybe it

fourth the and then in So, on there's the quarter dilution going to quarter. into be some first

Nels Nelson

And about about XQ share to XQ, the count was I'm it also. shares. From curious million up X

Heath Byrd

the That's buy as correct. any didn't We see back slides. can on you

because where at And time. standpoint so does an incentive compensation we increase are from it the of current

So, additional we had accounting shares. for going the start to in

David Smith

you $X million a As we open market to drag. markets more each about EchoPark, can for have expect

million drag for the to sort So, and move these should $X XXXX is as what in for open of new target next locations. year $X of new we markets million into you terms

Nels Nelson

plan the next still for is three And year? stores

David Smith

for this the three now doesn't been has in quarter continue -- will three other in won't then That But base opportunities year, mean We'll great. rooftop grow profitability. And markets. see. that store us. just be Yes, And the we've right range. each seen which to you're some current there

with really at somewhere a about have to can't runway half mark what We're stores is left grow. that maturity thinking. of lot we're We understand existing

we're stores markets have, XXX into selling in we a locations got and grow. to selling that's grew eight And had more a lot clear, that of total in It Beach, of top just call. the so is markets time we've additional Again, of to into markets. going and those last Long on continue locations, eight over to a So, four. upside be we the number XX three

Nels Nelson

haul you How for stores long many do to--? many do EchoPark? you how And over think the right. need Right,

Jeff Dyke

to these that place strategically you of not those of what really where it's we It's throughput you we that just a that lot rooftop want out Again, can and count there's on. focus penetrate locations. just rooftops. can we Yes, get

on And further just knows? strategically I the put base we around knows? locations could so Who we that depends the be the out up and as country, so can markets stores it penetrate penetration further the could on. we XXX. number mean who It open be our XX, that from

we much. we way really because can that you're it's guests that's incredible have important that's And hey, technologies and real markets are doing guest travel what move -- not we'll we to fact to have. penetrate come saying, important forward. a the a the so long as that experience many using rooftop we like how It's we And count, great you

Nels Nelson

Great, and--

David Smith

they and that's us. key is customers and to The this our see Rick, they actually David. come prefer before to the transaction car would the really that what is they're telling complete --

Nels Nelson

lot and luck. a Thanks good

Jeff Dyke

Thank you.

Operator

Your Stanley. is from Armintas the next of Sinkevicius Morgan question line ahead. Please go with

Armintas Sinkevicius

significantly you the growth you. look being F&I interesting here as at taking online-only surprises at Appreciate to to your that and I is compare Thank your getting GPU profitability here. comparable at growth me percentage It's about X,XXX here. the here SG&A lower see last I X,XXX. Great. and them. quarter, When your you're EchoPark, of competitors question a roughly And is the what to running the

lower in gross. compare -- the think lower gross you on if line? is driving the it just you versus I SG&A where call are SG&A that more XX% that SG&A conference, you online to where to be to would center to are How reps expect XX% the we efficiencies the see to the able SG&A platform And at compare level? it you the employee two, can effectively If because store

Jeff Dyke

to I around bunch to to complexity. in whole cars customer's don't lot less those and We lot people a our lot the and a model, of don't platform coming operating us. individual going of a cheaper mean complexities is of a We trying and clients. operate our way have creates That have expense to complicated. deliver

close heck a We lot spend a the or operate. dollars. to it's anywhere don't ad So, of to dollars ad easier

sales guides units The allows around is as or average through sell them, XX lot And us associate. we average technology associate is more our per a what our -- we sell to approaching And nine. experience call cars associates. industry our

So, higher. a our lot are efficiencies

lot and model effective is Our a perspective. our less complex more a lot from

not the over the We complex. very see going That move see to each just very, very forward, part I'm how be model don't expensive, we don't -- all we is but of saying as delivering us unit not it's ever model country. very, individual operating

because complexity to we're built perspective, at have SG&A, way. from be much my always able of operate lower operating of And least we we the a And in going that the that model. to our amount model

and our better. yet. we as to best in these you continue see going throughput eight So, the stores, get throughput had That's to

That doesn't because have model going efficient to as and trying on to much opened drag accomplish. we a more we're mean stores but perspective be that we would from $X said, we're in million $X million what next our effective to year,

David Smith

to CapEx a it's section, not lower the than as in but theirs well. SG&A ironically to is add that, lot our And

Armintas Sinkevicius

is Okay. have don't What I'm cost. hearing you the from here logistics you

sold, logistics look You running it and XX% profit. I'm quarter SG&A at more some of because logistics back of goods included out don't in some advertising it advertising, percentage a If call of their last gross the I back results, of have their expense. I model as cost out out is back and at

to You're XX%. XX% still optimizing

the down in here SG&A talk reconditioning just -- see I model. person Just coming couple better Maybe the nuggets are side to the the of cost/benefit efficient? it it the you and it on September, in efficiency appreciate of where other really is there dynamic. understand to a employees Maybe side? can more Is on the gross

David Smith

more lot and with are our have a doing that lot to happen. less We people. allowing a technologies people a We're lot less

And so--

Jeff Dyke

third It like the people. was looks number of of it a

David Smith

That they have.

Jeff Dyke

have. That we

David Smith

of third people a of they the Yes, have. we that number have

We're it be We model sell whole not I'm is costs helps a the -- them day, to for them as going a not them. cost overall for it model a in their industry. sell the it doesn't car. us it's so because of saying want cheering to work car And it to them. much at successful end lot to But the less. us costs our

customer a to, we stays we really, sure And down. point that our to focused really really say making we important. can them And out try price what provide us. on that's coming really really figure to so no our that expenses our and to with effective keep keeps can really low efficient, also model we're

that at Our drive down We that we're stores makes difference. point a astronomical. is price traffic. prices leads are got to that incredibly these competitive Amount of to big lower and keep getting

Our Dallas store, we're seeing over leads month. industry. XX,XXX our a in of individual That's unheard

So, our operating less is expensive simply model more efficient. run and less complex, to

Armintas Sinkevicius

Great. Much appreciated.

Jeff Dyke

the you. Thank Appreciate Yes, sir. question.

Operator

with Jefferies. go line Your of ahead. the Jordan next Brett question from Please is

Mark Jordan

This is on Brett. Mark Jordan Good morning. for

Jeff Dyke

Good morning.

Mark Jordan

remainder the the off and Thinking around from of was sourced that The primarily is and mentioned it auctions, inventory EchoPark, previously CarCash. of is I from sourced XX% Street believe

I the that to sourced at margins? stand? And have if mix still mix impact front of on will over auctions of decline time? expect am that we sort wondering so, So, end should What vehicles

Jeff Dyke

yes, the Yes, is thing scratched in app we to impact side with is up. are streets. surface yet. more margin new cars here car just coming on Charlotte launched go on location one great the in our work and haven't to we and app the drive CarCash, off the to going to even from That's us beginning the

them. it expect time now, not mix you XX% only to well that app other efficient. grow to for for using dealers So, consumer, And are as goes now for vehicles us the use to our on app app, is set we're should as below more appraise becomes but and the a so beginning for but that competitive providing

There's doing vehicles. that can We application for companies the use just different in there World. they're out trading that are Camping of also a lot

time. don't know we know that trade happen, at So, What a margin you go when door, yet. it. number of margins your you bigger We'll become up. that car expense a to when percentage auction There's the mix. does less all is, for through transportation, over see name that fees, we But that expect we our

by our margins And on doing end front can improve that. so, the

prices good Costco can a said, at that for that experience retail a because model, price get down great offer to looking really we're competitive more low always consumer That really of our sort that drive value, to just ways price.

way so cars door prices to they where for and the the application the updating the competitive. or the of time we're will goes But as stay more on. other, And trade because more if at get you going are, margins keep we'll one

Mark Jordan

buyers prepared mentioned visit the during markets are EchoPark. from XXX you just And great. to Okay, remarks, over coming

you market buyers between market So, I'm and mix out of maybe curious of state buyers. sort out the local have of or if

Jeff Dyke

way So, the drive it time. the we're looking at is

but you look market sales got minutes that's sort an of balance to if kind from from country. XX% as the over store So, across away and And our it. to how is market as that's XX defining our And then to at looking really who we're customers And multiple the we've they're of of outside the country, come of that. hour, as far the are business coming Dallas each we XX% Alaska. all about

Mark Jordan

Thank you much. very great. Okay,

Jeff Dyke

sir. Yes

Operator

Instructions] [Operator

question is next from ahead. Gupta of with Rajat JPMorgan. go the Our Please line

Rajat Gupta

the Thanks related appreciate taking I on had question. store the my and that. Hi, for follow-ups color just guys. openings the in of I next couple drag year. from to a new QX

curve you the you stores quarter of in Firstly, have? profitable terms next where the in and I year. keep fourth existing assuming more those mean getting the should EchoPark that maturity that And are of

what to saw what stores quarter of you have fourth be easily should opened? of quickly going Thanks. I some new And next can I'm earlier the get that how rate the And how stores up, kind at of year? in just sense come then your be and run to a we be EBITDA looking a of that profitable much follow-up. and going offset you drag with they are Basically trying versus can into

Jeff Dyke

This existing is our Jeff about Dyke. stores think at are maturity. We XX%

just a left there's earlier, [Indiscernible] upside. so lot lots And of David the point upside was Smith of making

took full at the Charlotte month look six its timeframe, store profitable at can you of it's a months. six-month operation. If be outmost, about Houston our in We're within first thinking our store, profitable.

guide of we to kind that's you So, look. where

Rajat Gupta

it. Got

the fourth the $X.X at mean looking I quarter, just had third you quarter. EBITDA in so And million

we in, assuming quarter improve, fair than run With stores that the third in the the quarter, mean characterization I'm a would store given I the Long existing or higher fourth be you -- rate a expect Beach should coming that what step-down? did is

Jeff Dyke

In terms volumes? of

Rajat Gupta

of terms EBITDA? in Just

Jeff Dyke

In income? terms of

Heath Byrd

EBITDA.

Jeff Dyke

flat EBITDA, versus the QX is yes that flat, for way at I would look to say sort QX. of

Rajat Gupta

okay. it. Got

Heath Byrd

$X You've drag $X we million before average. each drag and million open for open after on store got you

Rajat Gupta

Got it.

new Okay. the free year franchisee the EchoPark cash the all And then It you line four funded free enough flow next be I like stores. EchoPark self-funding to of and three get is cash potentially the store cash in or a we terms generate that growth? Just be trying from the of down flow line. down just future the not just going by to store seems the opening When free down would expect when of looking a to are line? to sense franchisee years drag at mean years it's on the flow. funding

Heath Byrd

the exact Yes, Heath. overall sticking plan, an this allocation From as is priority. EchoPark a still with plan is same we're capital

We will which we're And again in the reduction, We EBITDA franchise off. million in acquisitions. look $X.X mentioned kicked QX. debt off we at kicking before, opportunistically

think we supporting XXXX, we have once is four on, going then So, own to still after mature, have the I support into EchoPark going you're growth. franchise to that, start new to stores -- going but its some are get stores

Rajat Gupta

it. makes Thanks And I'll lot. it pass a Got That on. sense.

Jeff Dyke

much. you Thank very

Operator

call back And Mr. Smith to I at no now questions. this time, the will for turn there are remarks. closing further

David Smith

much. your Thank you Thank questions. great day. for We a very appreciate your you Have everyone time.

Operator

this and conference XXXX for Sonic conclude your quarter Automotive earnings you Thank gentlemen, call. Ladies does participation. third the

You may disconnect. now

Sonic Automotive (SAH) 24 Oct 192019 Q3 Earnings call transcript