Penske Automotive Group, Inc.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group's second quarter 2020 earnings conference call. Today's call is being recorded and will be available for replay approximately two hours after completion through August 6th 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, Jason. Good afternoon, everyone, and thank you for joining us today. As Jason said, a press release detailing Penske Automotive Group's second quarter 2020 financial results was issued this morning and is posted on our website, along with a presentation designed to assist you in understanding the company's results. As always, I am available by email or phone for any follow-up questions you may have. Joining me for today's call are Roger Penske, our chairman, J.D. Carlson, our chief financial officer, and Shelley Hulgrave, our corporate controller. Our discussion today may include forward-looking statements about future events, including the impact, length, and financial expectations relating to COVID-19. Also, we may make some forward-looking statements about our operations, earnings potential, liquidity, and outlook on the call today. We may also discuss certain non-GAAP financial measures, such as free cash flow, and Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA. We have prominently presented the comparable gap measures and have reconciled the non-gap measures in this morning's press release and investor presentation, which is available on our website to the most directly comparable gap 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. I will now turn the call over to Roger Penske.

Roger Penske Thank you, Tony, and thank you, everyone, for joining us this afternoon. Today we reported income from continuing operations for the second quarter of $45 million and related earnings per share of $0.56. This is at the top ends of the range. We pre-announced two weeks ago. Second quarter results are very challenging April, followed by an improvement to profitability in May and a very strong June. During April and May, our operations in the UK, Italy, and our CarSense Supercenter locations in Pennsylvania were completely closed. Operations in Northeast US and portions of California were significantly reduced. However, the situation turned around in June as total revenue declined just 1% when compared to last year, while same-store retail revenue for automotive operations increased nearly 2%. Before discussing our second quarter performance in detail, I'd like to express how thankful I am to the PAG team for their efforts during this unprecedented time. The past several months have been some of the most challenging times in our company's history. Our team responded by meeting these challenges head on while adapting to changing demands in the workplace. I'm proud of how our team has responded. In fact, in many respects, we've adapted the way we do business. We focused on safety and security of our employees and guests. Many of our employees worked remotely. We increased our digital performance rates and increased our online sales through home curbside delivery and click and collect initiatives. Starting in late March, we began furloughing approximately 15,000 employees percent of our workforce. We strategically returned furloughed employees to active status as business conditions improved. At July 1st, 14% of our employees remained on furlough. We reduced SG&A expenses by $215 million in the quarter, highlighted by SG&A to gross profit that was approximately 64% in June this year compared to 72% last June. And in the quarter, we focused on liquidity and preserving cash. In fact, our cash flow is very strong. As of June 30, 2020, we had $1.2 billion in liquidity 150 million in cash and over 1 billion of availability through our revolving credit facilities. Both the U.S. and U.K. revolvers were fully available at the end of June. During the first six months of this year, we generated 474 million in cash flow, and free cash flow was 428 million. For the first half of 2020, NetCapX, was down $65 million compared to the first six months of last year. We paid down $223 million of long-term debt when compared to December of 2019. Today we have $2.1 billion in non-vehicle debt. Net debt to total capitalization improved 370 basis points to 41.6% at June 30th when compared to December 31st of last year. We'll be repaying the 300 million in senior subordinated notes due August 15th with the availability under our U.S. credit agreement. Looking at our balance sheet at the end of June, it remains in great shape. Total inventory is 3.4 billion, down over 800 million from March 31st. New vehicle down approximately 500 million and used vehicle inventory down approximately $238 million. Vehicle floor plan was $2.8 billion, and we have approximately $380 million in vehicle equity on the balance sheet. Let me now turn to the details of our financial performance. If you remember, the year started strong. In fact, through February, chain store unit sales had increased by 3.4%, and the first two weeks of March were still strong. However, that changed quickly due to COVID-19. Due to shelter-in-place and government orders in April, total same-store units were down 71%, while fixed operations growth declined 64%. We saw sequential improvement in May, with units down 50% and fixed growth down 46% when compared to May of last year. As dealerships began to open up, June 1st, we had a strong June with units down 1% and fixed gross flat when compared to June of last year. For the quarter, all-in retail automotive gross profit per unit was up $452 to $5,007. Used vehicle was down $172 per unit to $2,475. In June, Retail automotive groups per unit, including F&I, was up $328 to $5,245, and used vehicles were up $21 to $2,864. Moving on to our used vehicle supercenter business, the 16 supercenter physical locations closed in March and remain closed through April and May, most reopened in June. As a result, unit sales declined 63% during the quarter. For the quarter, the U Supercenter sold 6,600 units and generated $133 million in revenue. However, during June, unit sales were almost 5,600 compared to 5,700 last year, and revenue was $106 million versus $99 million last year. Through improved sourcing and inventory management, grosses per unit increased 7% when compared to last year. As we look at expansion, we had opened two locations late in 2019, one in the U.S. and one in the U.K. Both had successful openings that outperformed our initial expectations. The Glenn Mills store in the U.S. is expected to retail approximately 1,800 units per year and was profitable in its third month of operation. The Bristol location in the UK is expected to retail approximately 3,000 units per year and was also profitable in the third month of operation. We have four additional sites under development which will increase our store count by 25%. Our plan is to open three in 2021 with a fourth one first part of 22 due to permitting delays from COVID-19. As we look beyond 2021, the U Supercenter business is a key driver of growth for PAG. We plan to grow this business even faster. Moving on to our digital initiatives, we continue to grow online sales. We have 42,000 vehicles online through our digital channels. During Q2, we used video and social media to promote social distancing. and our sanitation process to ensure a safe environment. We also continue to pilot new technologies such as videos and digital pictures for service updates and customer approval. In the US, our digital F&I process through DocuPAD enhanced our ability to sanitize and social distance. No physical exchange of documents and services are wiped down between transactions. We also introduced digital signatures by online signing room for key sales documents for a truly virtual transaction when the customer does not want to visit our dealership. This is a natural extension of preferred purchase and complements the other digital enhancements such as standardizing and updating F&I documents and allowing customers to lock in their terms online. Approximately 58% of our sales were tied together to our digital efforts, and we've seen Thank you for joining us. at the Car Shop Used Car Supercenters, customers may reserve a vehicle online for 99 pounds and collect it later at the store or at the curb. In July, approximately 60% of the sales are made this way compared to 46% last July. We continue to enhance our proprietary online closed bid auction site in the UK. Today, we have approximately 3,900 active online bidders and we sold 21,000 vehicles there last year. We now provide the opportunity for car shop to have greater visibility into the auction. Let me turn to the retail truck commercial dealership business. As you know, we operate 25 medium and heavy duty truck dealership locations in US and Canada. During Q2, we sold 2,063 new and 773 used trucks and generated almost 400 million in revenue with a return on sales of 3.7%. For the second quarter, retail sales in the North American Class A truck market declined 51%, which is in line with our same-star unit decline of 52%. The North American Class A market appears to be stronger than predicted earlier this year. According to ACT, using the past three months, the annual sales rate run is approximately 174,000. Profitability was impacted during the quarter by a 20% decline in used truck prices, which obviously impacted our gross profit. Service and parts operations represented 82% of our total gross profit, and fixed cost absorption was once again strong at 136%. With a strong return on capital and solid cash flow, we intend to continue to grow this business through acquisition. Turning to transportation solutions, our truck leasing business, in Q2, PTS generated $2 billion in total revenue and had income of $104 million. As a result, our equity earnings were $29.9 million in the second quarter compared to $38 million in Q2 last year. During the quarter, PTS improved profits sequentially as it adapted to the changing conditions and business began to reopen. Full-service leasing contract sales are up year over year, and rental demand continues to improve. Utilization rates of the rental fleet declined to a low 60% in April, but now it's a return to over 80%, as I sit here today. In logistics, all automotive customers have returned to operations. Grocery volumes continue to grow at a strong pace. However, Starbucks retail volumes remain below normal. We expect a strong third quarter from our PTS operations. Let me turn now to Australia and our power system and distribution business. During the quarter, Australia generated $100 million in revenue and a return on sales of 5%. Eighty percent of the gross profit comes from after-sales parts and service in this market. The mining, energy, and defense markets are driving new business opportunity. We are in the final negotiations for an $80 million supply contract Thank you for joining us. Thank you for your continued confidence in PAG. At this time, I'll turn it back to the operator.