Executives
Scott Smith – President and Co-Founder
Dave Cosper – Chief Financial Officer
Jeff Dyke – Executive Vice President, Operations
Analysts
Mike Kimlat – JPMorgan
Rick Nelson – Stephens
Scott Stember – Sidoti
Colin Langan – UBS
John Murphy – Bank of America/Merrill Lynch
Sonic Automotive, Inc. (SAH) Q3 2011 Earnings Conference Call October 25, 2011 11:00 AM ET
Operator
Good morning and welcome to Sonic Automotive Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, October 25, 2011.
Presentation materials which management will be reviewing on the conference call can be accessed on the company’s website at www.sonicautomotive.com by clicking on the For Investors tab and choosing Webcast and Presentations.
At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss expectations about the company’s products or markets or other make statements about the future. Such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company’s filings with the Securities and Exchange Commission.
Thank you. I would now like to introduce Mr. Dave Cosper, CFO of Sonic Automotive. Mr. Cosper, you may begin your conference.
Scott Smith – President and Co-Founder
Thank you, (Brook). It’s actually Scott Smith. Good morning everybody. Welcome to Sonic Automotive’s third quarter 2011 earnings call. I am Scott Smith, the company’s President and Co-Founder. Joining me on the call today are Dave Cosper, our CFO; Mr. Jeff Dyke, our Executive Vice President of Operations; Greg Young, our Vice President of Finance; and the company’s Vice President, David Smith.
I’ll start the call today with an overview of the quarter after which I will turn it over to Dave for his review of our financial results followed by Jeff with an outlook of our operating results. We’ll then open the call to your questions. With that please turn to the first slide.
Overall results, our third quarter results reflected the continuing recovery in the retail automotive sector combined with our focus on being predictable, repeatable, and sustainable. Our EPS from continuing operations was $0.33 per share compared to $0.25 with prior year quarter saw strong growth across all of our business volumes. Our new vehicle volume was up 8% over Q3 last year which again outpaced the industry growth. Our used volume grew 16% over the prior year quarter. With 10 consecutive quarters of double-digit growth, you’ve proven our ability to consistently grow this core piece of our business through difficult economic and pricing cycles.
Our parts and service business continues to grow steadily with revenues up 5% over third quarter of last year despite having one less service day in the current period. SG&A as a percentage of gross profit at 78.8% was 150 basis point improvement over the third quarter last year. As we continue to leverage our cost, the strong growth profit dollar growth. Our result this quarter continued to reflect the hard work that our teams put into executing a predictable repeatable and sustainable strategic plans and operating playbooks.
As a result, our earnings this quarter and our expectations is fairly stable fourth quarter operating environment we are increasing our full year continuing operators, earnings per share expectation to a range of a $1.33 to $1.37 per share.
With that, I’ll turn the call over to Dave to provide more color on the financials.
Dave Cosper – Chief Financial Officer
Thank you, Scott and good morning everyone. As Scott mentioned, we grew revenue of 13% in the quarter, operating profit improved 15%, and with our continued improvement in our interest cost we grew after-tax profit by 39%, EPS was $0.33 for the quarter up 32% from last year. We remained focus on our three priorities of growing our base business, owning our property, and reducing our debt. We’re making good progress on all fronts.
During the quarter, we retired the remaining $43 million of our (indiscernible) and that have been the key one of ours. Also as Jeff will discuss our operating performance continues to improve in all fronts and the view of this performance and the improved Japanese product availability. We are increasing our earnings guidance for the year to a $0.33 to a $0.37 per share. Next slide please.
SG&A as a percent of growth were 78.8% for the quarter down from 80.3% last year. We continue to see leverage from our ability to grow revenue and gross while controlling expenses. This is frankly particularly pleasing as we are investing much more in technology and training to support our team even greater growth in the future.
Next slide. The slide shows our capital spending for 2011, which is projected at $84 million net of mortgage proceeds. And as you can see the majority of spending was in the first nine months of the year. This was driven heavily by the purchase of five stores in the first quarter that had been least and spending to complete a luxury store in California.
With that, I’ll turn the call over to Jeff.
Jeff Dyke – Executive Vice President, Operations
Thanks, Dave, and good morning everyone. I appreciate the opportunity to share the Sonic Automotive third quarter 2011 operating results. We continue to see success with our new car playbook rollout. As you can see on the slide, we once again outperform the industry and when you look that our mix of brands versus the same industry mix, the gap widened even more.
Our market share levels are at an all time higher for the quarter. Our plan is to have our new car playbook and start complete by the end of 2012. Our gross profit per unit was $2391, up $124 per unit as gross profit rose 14.3%. We expect to saw to be in the range of $12.5 million to $12.7 million units, right in line with our projections for the year. Japanese inventories continue to improve and as I do we expect to take advantage of the increased inventory levels. New vehicle base supply was 39 days, domestic was a 61, import was at 23 days, and luxury at 41 days. Next slide please.
This marks our 10th consecutive quarter of double-digit growth in pre-owned volume as our team continues its march towards averaging 100 used per store per month. We averaged 81 units for the quarter. As you can see on the chart, we were up 16% in volume for the quarter while revenue was up 17%. If you look at the third quarter of compounded since 2008, we’ve grown our used car volume by 64%. We’ve also grown our gross by 44% when you include retiring and pre-owned F&I.
Our used PUR was down for the quarter, but in line with our quarterly expectations as purchase inventory was more expensive than normal due to the new car inventory shortages. The retail market stayed competitive during the quarter. So, we saw some margin erosion in the front end, but overall still had great growth when including F&I and internal.
The good news is as new car inventory levels are improving and prices are on premium are coming down, we’ll see margins return to normalized levels. Our used car are used in new ratio was 0.95 to 1.0 as we continue to demonstrate excellent performance in this important measurement. Our days supply at the end of the quarter was 29 days. Certified pre-owned was 28% of the mix that’s right in line with our strategy. Next slide please.
As you can see on the chart fixed operations, revenue was up 5% while gross profit grew 3% for the quarter as marked our second best quarter in company history as we stayed on record phase for 2011 in both revenue and gross. Customer pay revenue was up 4% while customer pay gross was up 2.6% for the quarter as our customer paid business continues to build on the back of strong new and pre-owned volume growth and aggressive parts and service special driving customers to our business from local mom-and-pop services, tire, and quick lube centers.
Warranty revenue was down 5.1% and warranty gross was down 4.8% for the quarter and represented about 15% of your fixed operations revenue. It’s my pleasure to lead the Sonic Automotive operations team I’d like to take this moment to thank each and every technician for their hard work and dedication to helping build one of America’s greatest companies to work and shop.
And with that, I’ll turn the call back over to our President, Mr. Scott Smith.
Scott Smith – President and Co-Founder
Thank you, Dave and Jeff. In summary, Q3 was in line with our original performance expectations despite low availability of new inventory from our Japanese manufacture partners. Our new car value the market share continued to outperform the industry. Our used car volume and associated gross continues to grow at double-digit rates was the 10th consecutive quarter. Fixed operations continue its record phase for 2011. Our operating strategy is simply and successful. Our focus on creating predictable, repeatable, and sustainable processes and our dealership are producing results in every area of a business.
As we continue to focus our attention on developing our culture, developing our leaders, all levels of our team, our new and used volumes are exceeding the industry growth, driving growth and related fixed ops in F&I businesses. We are forecasting full year 2011 saw in the range of $12.5 million, $12.7 million in line with our original estimate, raising our EPS estimate for full year 2011 to a $1.33 to a $1.37 based on continued strong execution of our playbooks priority.
It’s my honor and the privilege to lead our great team. Before we take questions, I want to take a minute to thank all of our Associates and vendor partners to join together every day to help us build one of the America’s greatest companies to work and shop.
With that, we’ll now open the call for your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Himanshu Patel with JPMorgan.
Mike Kimlat – JPMorgan
Hey guys, how are you. This is actually Mike Kimlat in for Himanshu today.
Jeff Dyke
Hey Mike.
Mike Kimlat – JPMorgan
So, just a quick one here, I noticed you guys are typically outperformed the industry by middle or high single digits in the first half of the year. Looking at this quarter it seems that the outperformance was closer to 2%, what (indiscernible) behind the weaker outperformance of their certain brands or certain regions that are experiencing any kind of weakness in the quarter.
Jeff Dyke
No, I mean all of the brands are stronger at the end of the day, Mike, its Jeff Dyke, just a lack of inventory day supply on the import brands was got really low during the quarter and that’s created some volume issues there. But other than that is those inventory levels fixed backup, we expect to see our new core volumes gain attraction.
Mike Kimlat – JPMorgan
If you look at the industry, our mix adjusted as the performance is really quite strong. It’s really which brands are performing well within the industry versus what we’re selling.
Jeff Dyke
Yeah, I think if you go back to the slide that I did on new retail vehicles shows that the mix adjusted for the industry, we took our brands with the industry, industry was down 2.9%, Sonic was up 8.4% so that gap is pretty much in line with where we’ve been pretty all your loan and that’s driven by lack of inventory.
Mike Kimlat – JPMorgan
Okay, great. Thanks. And just a quick follow-up just looking at your parts and services growth, it seemed that there is no signs of any material slowdown just looking out first quarter to third quarter, it’s been up 5% to 6% year-over-year each quarter. What your outlook for I guess 2012 and beyond and any signs of a slowdown at all.
Jeff Dyke
I mean, we don’t see any slowdown, we feel like the fourth quarter of ’11 will be in line with where we’ve been and we’ll see how 2012 goes, but as long as our volume keeps driving the way is especially from the premium perspective that business is going to be there for us and continue to grow. We said that at the end of last year that it was going to grow this year and we feel comfortable with the level that we’re going at right now.
Mike Kimlat – JPMorgan
Great, Thank you very much.
Operator
Your next question comes from Rick Nelson with Stephens.
Rick Nelson – Stephens
Thank you and good morning. I will ask you about the new car playbook, Terra, how many stores are having incorporated that playbook and what is the performance there to roll out plan for that?
Jeff Dyke
You know Rick, I said that we would be finished rolling out by the end of 2012. We have about 35 to 40 stores rolled out currently. And I mean you’ve seen it all your long, our performance is well ahead of the industry and we continue to see that kind of growth in the stores that we have rolled out. There has been no change since we reported last quarter. I mean, it’s just been excellent. We hope to keep that going as we move into 2012.
Rick Nelson – Stephens
Can you talk about your margin expectations about the new cars side and the used cars side, you are driving volume, but seemed to be giving up some margin to do so?
Jeff Dyke
Yeah, everybody is always focused on that margin percentage number and we sort of look at our business a little differently. We are driving fixed operations F&I with the volume. So the total gross dollars for us are way up and that’s what we are focused on. We think we are creating a lot of more customers for long-term success there building our book of business. And so, our margin percentages, they fluctuated on pre-owned, just because inventory was more expensive during the summer and we didn’t move our prices up. We stayed very competitive. And we did a little bit of that on new, but our margins were – our PURs were up about 125 bucks on new and margin percentages were flat.
So, I expect on new for to stay about that way. And on used as long as we start getting some import inventory in the fourth quarter and it gives us a little relief there, then we will be in good shape and used margins will return to a more normalized level. If it takes a little longer then there will still be a little pressure on used car margins. But again we are driving a lot more gross dollars, that’s what you take of the bank and we are creating a lot more customers for long-term. Our F&I was up 20% during that timeframe. So, we feel real comfortable where we are.
Rick Nelson – Stephens
Inventory based supply where does have stand today, when do you think inventories will normalize?
Jeff Dyke
Well, I am hoping that the inventories begin to normalize a little bit here in the fourth quarter. Our days supply on new is at 39 days. And when you break that down and you look at import, our day supply was at 23 days. That’s driven heavily by the large number of founder stores that we have, where we have a range from 4.5-day supply all the way up to a 38-day supply. We average 21-day supply for Honda. So, right now, we’d like to see that obviously grow this quarter, but probably realistically returning to more normalized levels in the first quarter of 2012.
Used car day supply is in great shape to 29 days probably come down a little bit in October, but as we start moving towards the end of November, what we typically do, we will start buying inventory when everybody else is selling off and use that inventory to help bolster margins in the first quarter.
Rick Nelson – Stephens
Okay, thanks a lot and good luck.
Jeff Dyke
Thank you very much.
Operator
Thank you. Your next question comes from Scott Stember with Sidoti.
Scott Stember – Sidoti
Good morning.
Scott Smith
Hey, Scott.
Scott Stember – Sidoti
You guys breakout a little bit more parts and service prep work in the quarter warranty and what the wholesale number was as far as same-store sales?
Jeff Dyke
Yeah, in terms of revenue, customer pay growth owned revenue was 4.1%, warranty was down 5.1%, wholesale parts was up nearly 15%, and then sub like we have reported sublet internals really grown there up 17% and yeah up double-digit for both of those categories. So, the volume is really driving. The volume and now our customer pay are really driving our business from a fixed perspective.
Scott Stember – Sidoti
And on the warranty side strictly a function of last year’s or a tough comparison with last year’s total?
Jeff Dyke
It is and it’s all over the board. Next quarter, I may have a recall and it goes right back up, but it’s 15% of our revenue. Traditionally, it ranges between 17% and 18% of our revenue. It’s been as low as 14.5%, but it’s not something that we can control and so it’s not something that we count on. We are driving our business from an internal perspective and from a customer pay perspective and those numbers are growing nicely.
Scott Stember – Sidoti
Last quarter, you gave some details about used vehicle sales per location where you are, could you update us as of the third quarter where you are and…
Jeff Dyke
Yeah, we ended up – sure, we obviously our ultimate goal and we have been saying is to get to a 100 per store per month. We finished the quarter at 81. That where we were in the second quarter which is fine. A lack of used car inventory in the marketplace slowed us down a little bit, but we are still able to grow our volume by 16%, our revenue by 17%, so, right in line 10 straight consecutive quarters of double-digit growth. It’s right in line with our plan and what we are trying to do is import inventory starts picking back up. It’s going to make it and becomes more available and make it a little easier to continue our growth there.
Scott Stember – Sidoti
Yeah. What was that number last year the sales store for location?
Jeff Dyke
Great question. It was less. I think it was 74, 75, 76 somewhere in there. It was like I said it was less. We are growing. This can be an all-time record year in volume for used cars for us and we have been bigger each quarter.
Scott Stember – Sidoti
Right. And just last question on the capital deployment front, are we still in the same mindset of working on our internal operations over looking at outside growth?
Jeff Dyke
Yes, we are Scott. And we are going to stay focused on those three priorities that I mentioned the base business owning our property and reducing our debt for at least a couple of years. Unless there is some open point that falls in our lap at a low cost, we are going to stay focused.
Scott Stember – Sidoti
Gotcha. That’s all I have. Thank you.
Jeff Dyke
Thank you, Scott.
Operator
Your next question comes from Colin Langan with UBS.
Colin Langan – UBS
Good morning. Could you provide you mentioned parts and services 15% is warranty, what is the mix of the others?
Jeff Dyke
Yeah, no problem. Customer pay is about 46% of the business, warranty 15% of the business, wholesale parts is about 13%, sublet internal combined for the balance, sublet in total and kind of other combined for the balance about 27% something like that.
Colin Langan – UBS
Has that changed? I mean it seems like the margins there were weak and I guess on the wholesale is that a larger percent on quarter three?
Dave Cosper
No, I mean, you are calling them, we are calling, but we are not. We are being more aggressive on our service drives to drive customer pay and bring customers in from mom and pop dealers, tire houses that have traditionally got that business. We are trying to driving our service drives. So, we are driving a lot more growth and take a lot more dollars to the bank. We don’t take percentages to the bank and we don’t look at it like that. One of these days we’ll get that message across.
Colin Langan – UBS
Okay. So, I mean, if we were looking just the comment on the margin here, but I mean if you are going to looking at the margin going forward, you might see stronger growth that the margins might not be as strong as you are moving?
Jeff Dyke
I think if you landed somewhere between where we are today and 50%, it’s probably a pretty good margin outlook and the kind of growth that we are at today. It’s going to fluctuate based on the promotions that we run with the different products that we have on our service drives, but it’s not a reflection of warranty. I mean, warranty is moving around a little bit from like I said 15% to 18% of our business and that’s – it’s not something that we can control. That’s out of our control. So, we are focused on what we think is going to drive our business which is customer pay and driving more volume through new and used.
Colin Langan – UBS
And on the used margin, I think, I guess the wireless margin quarter (indiscernible) inventory shortages, how would that affect margins?
Jeff Dyke
Yeah, let me explain that to you. Throughout the summer, the import brands because of shortages on new cars, the import vehicles were just a lot more expensive. So, we were paying heck and your retail prices for used car inventory and we chose to buy that inventory and sell at a lower margin. One, so we had inventory on our lot for our used car machine to keep growing, and two, to keep our sales associates engaged. One of the things that we want to do is end up with not a lot of inventory on our lot. So, we are very aggressive in buying used car inventory during the summer months. As a result, they were more expensive. Their retail prices did move up enough to cover the increase in the expenses and push the margin dollars and percentage down, but that’s a one-time. We had a tsunami, vehicle inventory got short, it got more expensive phenomena and margins will return to the normal $1450 to $1500 a copy where we like to run our business in the coming months.
Colin Langan – UBS
Okay. I mean that would I mean for the Q4, the question be whether the pricing of those import vehicles continue to come down?
Dave Cosper
Yeah, what’s going to happen is it’s going to build over the quarter. So, it’s going to start out probably in October similar to where it’s been and then it will get stronger in November and should be really strong in December as we move forward.
Colin Langan – UBS
And then last question, your guidance implies sort of a quarter-over-quarter earnings increase which is abnormal given usually seasonally before is a bit weaker, what is giving that confidence. Is it really the view that you are going to outperform on the import side and recovers or is that really cost-cutting that’s going to help fourth quarter?
Dave Cosper
Well, the normal seasonalities become imploded over time Colin is what we have seen is point number one. Point number two is I mean clearly we were held back because of the Japanese situation in Q3. And if you recall, we held our guidance flat at the end of last quarter because of the uncertainty around what was going on with the supply situation on the Japanese brands. We have worked our way through that. And even at that time we had indicated that we would take our guidance up and we are – and there is couple of things. I mean, one the performance on the operations side is there. We are driving volumes. We are getting growth. And so we are very comfortable raising the guidance.
Jeff Dyke
Yeah. Costs are in line and should stay in line through Q4, but the other thing Colin is that our brand mix plays a big role here. Our December’s are just unbelievably fantastic with the BMW, Mercedes high line mix that we have in this company and like just is amazing what happens around here in the four weeks of that month. So, we traditionally have some real great performances then and have over the last couple of years and we expect it to be the same moving forward. It’s going to be a good quarter.
Colin Langan – UBS
Okay. All right. Thank you very much.
Jeff Dyke
All right, Colin.
Operator
(Operator Instructions) Your next question comes from John Murphy with Bank of America/Merrill Lynch.
John Murphy – Bank of America/Merrill Lynch
Good morning guys. John, first question on the new guidance, I mean, if you look at the midpoint of the range, you’ve raised the range about 10% versus where you were at the end of July? Obviously, first half was in the bag at that point, where you are only looking at the second half, there is a delta here? So, really kind of implies that you think your running power is almost 20% higher than it is back then. I am just trying to understand, I mean, you haven’t changed the industry forecast and you’ve raised the guidance pretty substantially just based on new information in the second half of the year? I mean, you guys really think your earnings power is 20% improved from where it was in the midpoint of this year. And just trying to see is that a macro – I mean, that’s not macro-driven, because you are not changing your macro forecast. It just seems like your earnings power is really spiking at pretty low level of SAR?
Dave Cosper
Yeah, you heard my answer to the prior question to Colin. We kept it low and we kind of do is low and indicated that if we work through the Japanese issue we’d be looking much better and we’ll be raising our guidance versus where we thought we would be at the beginning of the year, our performance is much better than our internal estimates, our new and used and it’s really driving F&I and that’s helping our business. So, shame on us, we are doing a good job. So, I don’t feel bad at all, but taking our guidance up. And as Jeff mentioned, Q4 is very strong, happens in the last week as of the month. And we are comfortable with it.
Jeff Dyke
John, our business just continues to get stronger and whether the SAR is at 12.5 to 12.7 we are outperforming the SAR and we are still projecting it to be at the 12.5 to 12.7 level and obviously we are projecting that we are going to continue to outperform that level. And we haven’t been outperforming it by just a little bit now. When you look at our mix and you look at that chart that we put up there, we are outperforming it by double-digit and that’s a lot, because it drives a lot of used car trades for us. And that drives used car trades, our used car volume goes up and in fact we are selling almost one-to-one used to new and it just makes a big difference as that volume goes up, our business gets a lot better. We leverage our cost and this machine really starts to crank. So should be a really good fourth quarter and all indications are that’s exactly what’s going to happen. We have got $0.97 through nine months. And if we just repeat Q3 with no adjustment for Christmas or any other performance item, we would be at a $1.30. So, I don’t think it makes sense given the way we have been performing and what we saw in Q3.
John Murphy – Bank of America/Merrill Lynch
(We are quite) surprised that wasn’t trying to suggest anything other than that. Second question when we look at your current cost structure, you’ve kept a lot of sales folks around in tough times to really invest in your human capital which it seems like it would be a good thing in the long-term. I am just trying to understand as the SAR does recover, really how much can it recover before you need to do hiring? Really, is it a 13 or 14 million unit SAR that you can run up to with your current cost structure?
Jeff Dyke
John, we don’t have to hire any more people. I mean, our structure and the way we are today the traditional volumes that you get out of each sales associate in this company throughout the window, our technology and the things that we have been doing with our culture, we don’t as SAR can go on up to $14.5 million or $15 million, we are not going to need to hire any more sales people or anymore people to get the job done. So, we made that investment two years ago when we are going through all of this stuff and we are set, we can just keep on raising the wave and that’s why we are so excited about 12 and 13, it should be a lot of fun.
John Murphy – Bank of America/Merrill Lynch
Okay. And then just lastly Dave on the cap structure, you took out the five 8s in the quarter, is there anything else in the near term that you think you are going to take or is this sort of a methodical long-term refinancing some of your operating leases into mortgages and slowly working down that. Just trying to understand if there is any big chunk in the near term?
Dave Cosper
Well, the beautiful thing is we don’t have any near-term maturities which I am very thrilled about. I personally don’t think there is going to be a double dip but you never know, but it’s nice not have any near-term maturities. The closest thing we have is the convert and that has potential to call date in 2014. Yeah, we are focused on our property and we have got a plan there. It’s nothing big bang. We will just work our way into it over time as leases mature. And then we will poke at the convert and other goods of our debt over time. We are not in any rush. We feel we are headed in the right direction and we are just going to stay focused on it.
John Murphy – Bank of America/Merrill Lynch
Right. Thanks a lot guys. Keep it up.
Dave Cosper
Thanks John.
Operator
Thank you. I will now turn the conference back to Scott Smith for closing remarks.
Scott Smith – President and Co-Founder
Great, thank you (Brook). I’d like to thank everyone for taking time to be on our call today. You have a wonderful day.
Operator
Thank you. This concludes the conference. You may now disconnect.
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