Penske Automotive Group, Inc.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group first quarter 2020 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through May 13th. It's on the company's website under the investors tab at www.penskeautomotive.com. I will now introduce Anthony Pordon, the company's executive vice president of investor relations and corporate development. Sir, please go ahead.

Thank you, John. Good afternoon, everyone, and again, thank you for joining us today. A press release detailing Penske Automotive Group's first quarter 2020 financial results was issued this morning and is posted on our website along with a first quarter earnings presentation designed to assist you in understanding the first quarter and our results. As always, I'm available by email or phone for any follow-up questions you may have. Joining me for today's call is Roger Penske, our chairman. J.D. Carlson, the Chief Financial Officer, and Shelley Hulgrave, our Corporate Controller. Our discussion today may include some forward-looking statements about future events, including the impact, length, and financial expectations related to COVID-19. Also, we may make forward-looking statements about our operations, earnings potential, and outlook on the call today. We may also discuss certain non-GAAP financial measures such as earnings before interest, taxes, depreciation, and amortization, or EBITDA, and free cash flow. We have prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures in this morning's press release and investor presentation, which is available on our website, to the most directly comparable GAAP measures. Our actual results may vary because of risks and uncertainties outlined in today's press release. which may cause the actual results to differ materially from expectations. I direct you to our SEC filings, including our Form 10-K, for additional discussion and factors that could cause results to differ materially. At this time, I'll now turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. Before discussing our first quarter performance, I would like to make a few comments about COVID-19. This has been an extremely challenging time for all of us, and our thoughts are with those most affected. Our first priority is to provide a safe environment for all our employees and customers. We have quickly implemented enhanced cleaning protocols, enforced social distancing, and taken other actions to protect our employees and our customers. I'm proud of how our team has responded. The COVID outbreak across the world has adversely impacted the global economy, causing a significant disruption to our business. In March, it began to impact all our markets. Many of our U.S. and Germany dealerships faced shelter-in-place orders. While operations in Italy, Spain, and the U.K. were closed, as a result, our overall same-store automotive retail unit sales for the month declined 40%. In the last half of March and all of April, our automotive dealership sales and service operations were limited due to related restrictions. In response, we implemented a hiring freeze, initiated expense reduction, and deferred approximately $150 million in capital expenditures. We also furloughed approximately $15,000, representing 57% of our worldwide workforce, and initiated pay cuts for executives. We believe these actions will help us overcome the challenges of COVID-19 pandemic. We will continue to actively monitor the situation and adjust our business model to adapt to the changes presented by COVID-19. In the quarter we focused on liquidity and preserving cash. During the first quarter we generated $212 million of cash flow provided by Operating Activities, and $145 million of free cash flow and reflects a $30 million decrease in CapEx compared to the first quarter of last year. As of March 31, 2020, we had access to $1.3 billion in liquidity, including $432 million of cash, $450 million of availability through revolving credit facilities, and access to $450 million in potentially financeable real estate. We have $2.6 billion in non-vehicle debt. Net debt to total capitalization was 44.7% compared to 46% at December 31st. Net non-vehicle debt to EBITDA was 2.9 times. Looking at the PAG balance sheet at the end of March, The balance sheet remains in good shape. Total inventory is $4.3 billion, which is flat compared to December 31st last year. Our floor plan was $3.9 billion. We have approximately $350 million in vehicle equity on our balance sheet. Let me now turn to the details of the first quarter of 2020. In the U.S. during January and February, same store new and used unit sales increased 7.5%. Internationally, same-store unit sales declined 1.1%. Due to COVID-19 in March, total same-store total unit volume declined 40%, while fixed operations declined 23%. As a result, in the entire first quarter, our revenues were down 10% to $5 billion. Income from continuing operations was $52 million and earnings per share was $0.64. Our income was impacted by the closure of all dealerships in the UK starting on March 24th. As you know, March is a registration month in the UK and is typically the largest sales month of the year. During a registration month, we would normally deliver 30% of our new and used volume during the last week. Nearly 5,000 units, which represent approximately $13 million of gross, went undelivered. We also could not deliver another potential 2,000 units representing $2.5 million gross in our used car super centers. Income was also impacted by a decline in used commercial truck gross profit from pressures on value due to the changing market conditions. Looking at the details of our retail automotive, same-star units declined 15%. In the U.S., January and February, we were up 8%. International was down 1%. In March in the U.S., we were down 41%, and international was down 39%. Same-star gross profit per unit retail performed well. New vehicle, $3,211 flat with last year. On the used vehicle side, we were at $1,375, up $48, or 4%. Our finance and insurance was $1,363, up 6%, or $87 per unit. Variable gross profit per unit was $3,493, up $86, or 2%. Our service and parts revenue declined 6%. We were down 4.4% in customer pay, we were down 10.2% in warranty, and our collision was up 1.4. We also had, in our same store, a warranty decline in our international markets of 16%. Moving on to our used vehicle supercenter businesses, the 16 supercenter locations closed in March and remained closed through the majority of April. During the quarter, revenue declined 3% to $305 million. Same-store unit sales increased 2% in February, but declined 49% in March, including 56% in the U.S. and 47% in the U.K. Our average transaction price in our supercenters increased 4% to $15,158, and the variable gross profit Thank you for joining us. Moving on to our digital initiatives, the performance of DocuPads exceeding our expectations. With enhanced training and a focus on improving product penetration, F&I per unit in the U.S. increased $93, or 7%. Our digital initiatives continue to grow online sales. Today, we have over 56,000 vehicles online through our digital channels. In Q1, under 50% of our sales in the U.S. were attributed to our digital efforts. Offsite deliveries are increasing, with many dealerships reporting over 20% during this period. Our preferred purchase engagement increased more than 50% in April when compared to last year, while several lender partners made policy changes to allow digital signing, remote identification verification, and e-contracting. We enhanced PenskeCars.com and Carsense websites to provide an enhanced digital experience, including updating technology to encourage more online vehicle transactions. Let me turn now to our retail commercial truck dealership business. We experienced steady demand during the quarter, retailing over 3,500 trucks and generating almost $500 million in revenue with a return on sales of 3%. New unit sales increased 49% while same-store unit sales only declined 2%, which when compared to the overall North American market, which was down 26% in the first quarter. Same-store service and parts revenue declined 6%, but our fixed absorption was 125%. Turning to Penske Transportation Solutions, in Q1, PTS generated $2.2 billion in total revenue, and had income of $47 million. PTS's net income declined $42 million in the quarter from a $20 million reduction in gain on sales of used revenue equipment due to market conditions, 11% decline in rental from lower utilization and the benefit PTS had last year from a legal settlement of $11 million. As a result, our equity earnings were $13.6 million compared to 25.8 in Q1 of last year. In closing, our team around the globe is working tirelessly. I'm encouraged by the many positive action taken by our team to address the changing marketplace. Our digital initiatives continue to grow our online sales. Further, we've adapted sales processes to facilitate a greater e-commerce focus, curbside or home delivery, pick up and drop off for our service customers, and a remote F&I process through DocuPAD. As a result, we've seen businesses improve from week to week as we believe customers have become more comfortable with buying vehicles under the current conditions. In fact, unit sales were up 40% in the U.S. in the last 10 days of April when compared to the last 10 days of March. We believe the many actions taken will help us overcome the challenges of COVID-19. Thanks for joining us on the call today and for your confidence in our company. At this time, I'll open up for the operator for your questions.