Sonic Automotive Earnings Call INSIGHTS: SIMS Launch, iPad Pluses for Employees

On Monday, Sonic Automotive Inc (NYSE:SAH) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

SIMS Launch

N. Richard Nelson, Jr. – Stephens: I have to deal about the incremental training for IT, those costs that you’ve absorbed in 2Q, was there anything unusual and your expectations for the SIMS launch in August from a cost standpoint?

David Cosper – VC and CFO: No, Rick, this is Dave. The cost for the IT and training were basically flat with Q1, and it’s roughly in the $3 million neighborhood incremental year-to-year, and frankly Jeff, I don’t see any increase with the SIMS launch.

Jeff Dyke – EVP, Operations: No, I mean, we’ve been absorbing the SIMS costs on a monthly basis. Rick, starting in January, it’s all expected, costs are all right in line with what we had projected them to be. We are just very excited to get SIMS up and running in the store. We are launching it, it’s been an little bit disruptive because you’re really moving from a decentralized pricing and appraisal model to a centralized pricing and appraisal model, so you are really changing the culture of all of our stores. So I’m real pleased with where we are with the product, we’re real excited to get it launched and all the costs are right in line with what we projected them to be.

David Cosper – VC and CFO: So we get the cost and now the revenue, the margin and the volume, we’ll look forward to seeing.

N. Richard Nelson, Jr. – Stephens: The other G&A in your breakout was up about $5 million. Is that incremental IT or I guess where exactly those debt tender cost show up in the financial statement, does that…?

David Cosper – VC and CFO: Debt tender costs really haven’t hit our income stream yet. A lot of those will be amortized over the life of the deal.

N. Richard Nelson, Jr. – Stephens: Perhaps you called out $0.03 in EPS related to about…?

David Cosper – VC and CFO: Yeah, I’m sorry, that’s in the other income and that’s related to the $20 million we bought back, back in April and that was before we even undertook this latest strategy to issue long-term debt and do a tender offer. That was part of our normal retirement program of the convertible notes and you are exactly right, that was worth a $0.03.

N. Richard Nelson, Jr. – Stephens: Then In terms of priorities for the free cash flow, how would you rank those buybacks on (or simple) properties other CapEx?

David Cosper – VC and CFO: Our three priorities, of course, that we’ve been on for several years now; base business number one; owning our property, number two; and reducing our debt, number three. So, we are going to take care of the base business first and we are going to own properties as they present themselves and those actually would be ahead of reducing debt. Now, this structure that we are undertaking right now, of course, pulls ahead our effort to reduce – to take out the converts if our tender is successful and gives us a nice long-term funding tenure at a good rate. Now, the cash we had targeted for the converts over the next two years, of course, is – we are going to look at all options and what’s best for the Company, but we clearly are focused on making sure dilution is handled well over time.

N. Richard Nelson, Jr. – Stephens: Of course you are raising more capital than the converts will require. Should we assume that type differential would be buybacks?

David Cosper – VC and CFO: Yeah, and you probably saw in our press release, we got $100 million authorization for repurchase of common stock. So, it’s about as close as – it’s close to a yes, as you are going to get from here, Rick.

IPad Pluses for Employees

Brett Hoselton – Keybanc: I wanted to dive into the SIMS a little bit the investments there. I guess my first question is, it sounds like you are kind of at a run rate of around 3 million, I presume that’s the run rate you are probably going to continue out through the remainder of this year. Is that a fair assumption?

David Cosper – VC and CFO: That’s correct.

Brett Hoselton – Keybanc: As we get into the first quarter of next year does that investment essentially go away in its entirety or does it continue and ramp down over some period of time?

David Cosper – VC and CFO: I think it continues and starts to ramps down probably in the second half of 2013, that’s a lot more than SIMS. I mean, there is a lot of things going on here at Sonic in each part of our business.

Jeff Dyke – EVP, Operations: Right. We’ve got the service pad which is iPad rollout on all of our service drives, which makes life a lot more convenient for our customers and helps us execute better. We’ve got sales pads, iPads that are going in the hands of all of our sales associates which is a long-term part of our customer experience process. So, all of those dollars – all of those projects wrap into that dollar amount and those dollars will ramp down over time, but when you look at SG&A as a percent of gross, the lift that we’re going to get by centralizing and the early results that we are getting back in some of these stores is – it won’t be felt anymore. You sort of get bloody little bit going through the door because you’re launching all of these activities that we want to have in the store with value of new IT products that are out there and the processes that we want in place and at the same time you are changing the culture, that’s going on in the store. It’s very rare for an automotive company to have all their appraisals done centrally and all their pricing done centrally, that’s not something that’s happened in our industry, but we’re going to have such great control over our inventory and our pricing that it’s going to make us a heck of a lot more effective, our margins will go up, our volume will go up, and we’re seeing that in our test stores and where volumes are up and our margins are up. So, it’s going to make a big difference for us moving down the road.

Brett Hoselton – Keybanc: As you think about the iPads both in service department and the sales department and the rollout there. How does it benefit let’s say the service writer or assistant service manager, how does it benefit them or how does it benefit the sales associate?

David Smith – EVP: First of all, it makes life a lot easier if you ever spend any time in a service drive and you saw what a service writer has to do now with the Big Chief tablet and number two pencil or some sort of form that they have to fill out with a clipboard and run back to the computer and put information in which inconveniences the customer. Now you can take a service pad and it actually forces the service writer to do the full walk around at the car with the customer. (I was really in) the store the other day and the customer has actually taken the service pad out of the service writers hands and filling it out themselves. It makes a big difference, our effective labor rates are growing, the number of hours per RO are growing significantly. So it’s just an overall easier process using technology and process to enhance how we do business, which in our industry has been a little bit archaic over time. Then the same thing on the sales side, you can imagine how long it takes you to buy a car. I don’t care where you go, the average is somewhere between 2.5 and 2.5 hours once you’ve made a decision to buy a car. With the process that we are putting in place, we’re going to be able to – after you have made the decision to buy a car, our target is to be below one-hour, we’ll have you out the door. That’s a big significant difference, especially if you think about the generation of buyers that are coming along that have no time. You think about your children and how they use technology today, they spend all their time on their iPads and their iPhones and texting and doing all those things. They don’t have a heck of a lot of time at least in their minds. I am not so sure what they are so busy doing, but at the end of day it’s going to make the buying process a heck of a lot easier for the consumer. You just have to come, experience it and I advise you to come in to one of our stores here over the next few months and enjoy the process, I’ll say (indiscernible) at it.

Brett Hoselton – Keybanc: Then just thinking about used vehicle gross profit per unit, in the past couple of years you have kind of ranged around that $1,400 to $1,500 per unit, your down more in the $1,300 this past quarter, is there anything in particular going on there and what your expectation is going forward, do you see a kind of stay in that $1,300 range or do you expect, you are going to kind of push back up into that more typical $1,400 to $1,500 range?

David Cosper – VC and CFO: I expect us to be somewhere between $1,400 and $1,450 somewhere in that ballpark. Really we came out of March with a lot of current year model and one-year old and Honda and Toyota product and Honda and Toyota are running incredible specials on their new vehicle, Camrys and Accords and Corollas and so it’s put a lot of pressure on that product almost to a point where you can sell new cheaper than you can sell used. So it created little bit of a mess for us, that’s why you want to have a centralized inventory management process in place because it stops all that and I think you’ll see margin shrinkage in a lot of different, not just us, I mean you saw it in others – you’ll see in another too. I expect it to bounce back anywhere around the $1,400 mark is where we sort of target to be, that’s our sweet spot. We are already seeing the numbers back up, $75 maybe even close to $100 a car for March and it’ll keep marching north after that, just – it was just a little bit of a blip there for us.