Sonic Automotive, Inc. (SAH)

Q2 2012 Earnings Conference Call

July 23, 2012 11:00 AM ET


David Smith - Executive Vice President, Director

David Cosper - Vice Chairman, Chief Financial Officer

Jeff Dyke - Executive Vice President, Operations


Rick Nelson – Stephens

Brett Hoselton – KeyBanc

Colin Langan – UBS

Scott Stember - Sidoti & Company

Clint Fendley – Davenport

John Murphy – Bank of America Merrill Lynch



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Good morning and welcome to the Sonic Automotive’s Second 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, Monday, July 23, 2012. Presentation materials which management will be reviewing on the conference call can be accessed on the company’s website at by clicking on the Investor Relations tab under our company and choosing Webcast and Presentations on the right side of the page.

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 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 risk and uncertainties that could cause actual results to differ materially from those 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. David Smith, Executive Vice President of Sonic Automotive. Mr. Smith, you may begin your conference.

David Smith

Thank you, good morning and welcome to Sonic Automotive’s second quarter 2012 earnings call. I am David Smith, the company’s Executive Vice President. Joining me on the call today are Dave Cosper, our CFO and Jeff Dyke, our Executive Vice President of Operations.

I will start today’s call with an overview of the quarter, after which I’ll turn it over to Dave for his review of our financial results, followed by Jeff with a look at our operating results. We’ll then have closing comments and open the call for your questions.

With that, please turn to the next slide. Our business model and strategy continue to yield positive results. Our team delivered a record setting sales performance with nearly $2.2 billion in sales during the quarter, an increase of over $239 million, or over 12% from the prior year quarter. All of our revenue lines experienced sales growth, particularly our new retail vehicle sales improving over 22% versus a SAAR improvement of only 16%. We continue to keep expenses in line with our yearly expectations, and collectively we were able to increase net income from continuing operations nearly 20%.

There were two items affecting our reported results, as can be seen from the slide, and Dave will speak to those in his comments. We have been very busy over the last several months and we were implementing a plan that we believe will benefit our shareholders and strengthen our company. If our outstanding tender offer for our 5% convertible notes is successful, we believe the benefits from an improved capital structure will be an important step toward higher overall profitability. We are excited about how these actions will affect the future of Sonic Automotive.

Now, I will hand the call over to Dave Cosper to review our financial performance.

David Cosper

Thank you David. As David mentioned, revenue increased 12% for the quarter and reached $2.2 billion. Gross profit was up 5% and operating profit increased to $60 million. After tax profit was $28 million, up 20% from last year and EPS was $0.46 for the quarter, up 21% from last year.

During the quarter, we repurchased $20 million of our 5% convertible notes, and recorded a loss of $1.6 million after taxes. This reduced EPS by $0.03 for the quarter. We also successfully resolved the state tax matter that resulted in favorable tax accrual and valuation allowance adjustments, and this increased EPS by $0.06 for the quarter.

Next slide please. SG&A as a percentage of gross profit was 77.8% for the quarter and this is in line with our full-year projection of 78%. The slight increase from last year is much about softer gross PURs [ph] as anything else. Our investment in technology and training remains on track as we move to substantially improve our sales effectiveness and shopping experience for our customers. Jeff will have some details on that in just a few minutes.

Next slide. Net CapEx after mortgage funding was $24 million for the first six months of the year. Full-year expenses is expected at $95 million. Presently, we have three new stores under construction, and these are all are known property. And as these stores are completed, we plan to secure mortgage funds --

Next slide, please. This slide shows our bank covenants and as you can see, we’re comfortably compliant with all of them. David mentioned our efforts on improving our capital structure and basically we have a two set process to do this. For step 1, on July 2


we closed on $200 million of 10-year notes with a 7% coupon, and we are in the middle of step 2, which is a tender offering for all of our 5% convertible notes, and the tender offer period ends this Friday.

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