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.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of John Murphy from Bank of America, Merrill Lynch. Your line is open.

Good afternoon, Roger. I just wanted to ask a first question on the used car business, maybe short-term and then ultimately the long-term opportunity. I mean, there were some ebbs and flows in the profitability through the quarter, and it sounds like it ended a lot better than the full quarter. So just curious, as you look at the third and fourth quarter, do you think that business is somewhat normalizing and you'd expect grosses to be better going forward? and then sort of longer term as this appears to be a great opportunity. You've got two stores that were open recently that are profitable within three months. Why not maybe press the gas harder on opening up more stores near term? Is there some gating factor or some rationale that you're using for going maybe a little bit slower there than other folks?

Well, John, let's start just first to position where we are. We made an acquisition of CarSense in 17. We had the acquisition of CarShop in 18, and then CarPeople in 19 in the U.K., now branded CarShop. We've added more stores. And when I look at the business today and look forward, I see 100,000 units that we'll be able to retail between the U.S. and the U.K. with the stores that we expect to open up here in the next 12 months, probably at about a 16% Thank you very much. and many more. From a long-term view, we definitely see this as one of our strategic pillars that will continue to grow in the business. And our problem is finding the right sites from the standpoint of building bricks and mortar. And I think there's two schools of thought. Is it all online or is it some of it's bricks and mortar? We think you probably need a combination of both. But the sites that we have, we're integrating parts and service. We want our used car business to be sticky. We want those customers to come back. for parts and service, and we think that's one thing why we buy a little bigger pot of land and maybe it's more complex to build these in some of the parts of the world where we're trying to do this business. I think there's an online strategy ultimately that we're looking at and we're trying to perform in our businesses today, not only in our new but in our used, that we can be online and have a transact that completes 100%. I think the decision has to be made. What is the marketing commitment to that? Is it a new brand? Can we utilize facilities that we have within the Penske Group? These are all things that we're going to look at as we go forward over the next quarter to quarter, and we'll certainly want to report that back into the group on the phone today as we have our final plans put together.

Okay, that's very helpful. And then just second, you know, on SG&A, there's good performance in the quarter, all things considered, but as you look at more of the business going online over time, and sort of the lessons you learned in the last, you know, few months. You know, is there a greater opportunity over time? And as you move more of the business, you know, online, can you, you know, structurally reduce the SG&A burden, you know, on sales? And is there a real opportunity there maybe structurally over time?

Well, let's just start out. Listen, we were 64%, which I would never thought we'd be in the 60s with SG&A, you know, when looking at – July 77% last year. I think with the momentum we have and back to norm in the UK and with our super centers up and remember we've taken 2,000 people out of our workforce. We're sitting today with 21,000 out of 27 with another 3,600 that are on furlough and I think you're going to see anywhere from 100 to 125 million of benefit from the human capital perspective as we go forward. But more important is we're more efficient. We see less salespeople necessary to drive the business. The same thing on the fixed side. We're seeing better utilization of our people. Productivity has gone from maybe 95% in our shops now to 120. And I think with T&E down, ironically, it's a number that I was surprised. Our T&E was down in the quarter worldwide, 6.4 million. So obviously utilizing the tools that are available to us to connect with our workforce and our team members were able to do that a lot more efficiently without traveling around. I think advertising is moving from traditional to obviously online, which obviously is less costly. Vehicle maintenance will be down. We think that with more efficiency in our shops, cars will not be in the shop as long, less loaner cars, which will drive vehicle maintenance down. So those are things that just come off the top of my head right now that I think could make a big difference. We're certainly managing our shops where we had general sales managers. We've cut out some of those positions in the smaller stores, and I think we're more efficient when you think about some of the things we're able to do online with our consumer. Make your reservation online for service. Pay online. Just go to a spot and pick up your car. And this doesn't take many of the maybe variable people that we would have typically in a dealership. We've taken that level out, and we expect to be able to operate the business with that type of workforce going forward.

Okay, that's helpful. And then just lastly, you've had very strong relationships with automakers and your partners over time, but you're continuing to allocate capital towards other avenues other than new vehicle dealership acquisitions. When you look at some of your peers, they're getting very aggressive in making these acquisitions. So just curious, as you look at the business going forward, has anything changed in relationship with the automakers where they're either better partners and more sort of accepting the partnership with the distribution channel being you guys, the dealers, or is it sort of more of the same and this sort of sweeping up and building of these large networks is something you're just not as interested in versus what opportunities you have on the truck and the used car side? You're going in a different direction than some other players, and it just seems like there's some changes here in the OEM attitudes to the larger groups. I'm just trying to understand what your take is on that.

Well, number one, we have a much more diversified portfolio, not just retail automotive, so we're looking at how we allocate our capital across all of these measures. But I would say this from an OEM perspective. All the OEMs... are working well with us. They've deferred a lot of our payments to our customers and to us on capital loans, on inventory, etc. But that's going to go away. What I do see is probably internationally, probably more interest in looking where we might have multiple locations that are contiguous. Is there the opportunity to consolidate, which certainly would be a help to us taking up SG&A and making us more profitable at a key location. We're also looking from a capex. And I think this is where I've seen The U.S., at least OEMs, come in where we're looking at our CapEx. They're being very rational today. Rather than pushing cosmetic, they're looking mainly for operational CapEx, which will be a help. But I'd be awful careful to think that they're going to break, and we wouldn't want them to break the franchise agreement. That's one of the strengths of our franchises today, and that's why we can get the goodwill if we're buying or selling when we do this. So I think they're going to stay with that strategy. You're going to have to have good CSI. You're going to have to have market, you know, market coverage. All these things are going to be important as we go forward. But I say at the moment it's a good relationship. I'm sure it will be tested in many different ways by a lot of innovative people in the auto business here in the U.S. and internationally. So at the moment, with COVID being maybe the umbrella, more things can be discussed. Now, whether that's going to be a long-term process, I can't say.

Very helpful. Thank you very much, Roger.

Thanks, John.

Your next question comes from the line of Stephanie Benjamin from SunTrust. Your line is open.

Hi, good afternoon.

Hi, Stephanie.

I was hoping, Roger, maybe you could talk a little bit about your UK performance in June, both on the new side with your traditional dealers and then the rebound that you've seen once you were able to open up the used stores. Any additional color there would be helpful.

Well, I think when you look at June registrations in the UK, the market was down 35%. We were down 4% when you look at June at all. and just to pick out, BMW was down 47%. We were down 17% just to give you an idea. And even Audi was down 43%. We were up 18%. So premium luxury bode well during the time of COVID and also June on a snapback. I think one thing should be noted. We've got 7,900 of our employees back out of 9,700 still. with almost 1,600 on furlough. So we're able to execute in June a very positive month with less people, and we expect to have that be probably the future as we look forward across the company on the size of our enterprise. But I think we had the used car business open with Car Shop, which made a big difference when you think about the number of vehicles they delivered in the month of June compared to what we did during April and May. That was similar to what we had here in the U.S. And I think when you look at international from a consistency, just the market where we were, our new units were down 96% in April, and in June they were down only 10%. And when you look at used, again, we were down 95%, and we were up 17% on used. So that was driven, obviously, by a strong used car rebound. I would drive a lot of that with Car Shop.

In the same vein, are you seeing a lot of the same June trends continue into July?

I would say yes. Remember, it was the end of a quarter, both U.S. and internationally, so there were probably some bonuses and things that were paid and even waived some of the criteria in the U.K., which gave us maybe a little bit more gross margin. but at the moment we see our parts and service business through yesterday on par where it was a year ago so that's a good sign even with body shops down because the work in process was drained during the COVID crisis so I think from a parts and service business I think it's where it was last year and trending up I think the 4th of July weekend has some impact when you look at July from the standpoint year over year primarily because we have that and we have a tougher inventory. No question, both internationally and in the U.S., our inventories are tighter from the standpoint of the premium side. But, yes, parts and service use is stronger from the standpoint of car shop, and I think our new retail is really back in business, and we're doing it with less people. So from an SG&A perspective, I think we'll see benefits in Q3.

Got it. Thank you so much.

Thank you.

Your next question comes from the line of Rick Nelson from Stevens. Your line is open.

Hey, Rick. Thanks. Good afternoon, Roger, Tony. So we're hearing across the sector about some type new vehicle inventory supplies. If you could comment there and when you see inventories normalizing and how long do you think you're going to be able to hang on to these GPUs as inventories do normalize?

Well, let's take a look at, you know, we're down $800 million in inventory, you know, new and used from the standpoint of, you know, where we were in March to the end of June. It's obvious, you know, BMW has told us, Mercedes has, and Toyota really, and Lexus gave us heads up back as we ended going into April that we'd have some tough sledding, you know, during the months of July, August, and September. I think that's the case. You know, all the good cars have probably been delivered, and we maintain high grosses. And it's interesting to see the whole industry, both in the U.S. and the U.K., Thank you very much. We've had the opportunity to buy vehicles from the rental car manufacturers during this time. We're making large buys from the OEMs internationally that we help fill our pipeline there. So I think availability at this point has been good. And when you look at the mix, people say, well, where do you get your cars? And I think at the end of the day, you know, we've got about between trades and lease returns, we've probably got 54 or 55 percent. Thank you for having me.

We did see some used vehicle GPU pressure. And on the new side, do you think we're close to an inflection point here? Just any comments on the outlook could be helpful.

Well, look, number one, the heavy-duty tractor market was down 51%. We were down 52%, so pretty much, I think I said, in line with the market. Now, overall... We're seeing some activity and talking to the people this week, our key people at Premier Truck. They're seeing fleets that had canceled orders in Q1 and early Q2 coming back and wanting to put those orders back in the market for us. So that's positive. The used truck side is a little different story. If we go back and remember last year, we sold 350,000 heavy-duty tractors in the market, probably one of the highest SARS in history. There are many trades associated with those new trucks. That bulge came into 2020 in Q1. We have COVID, and at the end of the day, there's no used truck market. So that had a precipitous drop of used truck tractor prices probably by $4,000 or $5,000 or $6,000. And I can say this, that we've had the benefit of really going from about $5,000, $6,000 loss on the front end down to about $2,400 loss Thank you for joining us. and UPS want thousands of trucks in order to meet the demand that they have. So that's all going to bode well when you think about 85% of all the freight that moves on the U.S. It's by truck. I think we're in a very good position. And Freightliner with its dominant market position of almost 40% and our 135% fixed coverage, I think the business is one we want to continue to invest in. So I think the lights are all green.

Okay, thanks, and good luck.

All right, thanks, Rick.

Your next question comes from the line of Armentis Syncovus from Morgan Stanley. Your line is open.

Great, thank you for taking the question. If I look at the, you know, slide 10 of your presentation, you know, it really stands out, you know, the underperformance that you had as a used car super centers person. with them being closed in April and May. Same thing goes for the UK. How should we be thinking about those as potential tailwinds into July and beyond?

Well, I think you're going to have a good tailwind because, you know, basically we were shut down. There was some pent-up demand. We did some Internet sales that we couldn't deliver, obviously, as we got into the early part of June that we got the benefit from. But at the moment, as we see this business – It will be up over last year as we look at Q3 for sure. Plus, we'll see the opportunity to see the margins increase. And when you look at Q2 of last year versus Q2 of this year, we were down 63%. So we think this is a real opportunity for us to grow this as we're into Q3. And again, when you look at the variable margin, we're sitting about 14%. Last year, and we're 14% this year, so we haven't deteriorated from a margin perspective, and I think the used vehicle super centers are going to be positive for us in Q3.

And do you anticipate these tailwinds to be greater than anything happening in the rest of your business? Because I'm just thinking about relative to the peer group, how you may be set up moving forward.

Well, I think what we have to do, all of us have got to step back here with the recent outbreaks of the pandemic in certain markets. We're seeing some softness probably in Northern California, some in Texas, and some of these cities that have these outbreaks, and some maybe we see in Florida. So I have no idea if we're going to have to go back to close down if that happens. August and September could be a completely different situation. But with July 4th, as one of our weekends. I think that we're going to have to look at where our sales are going to be from a July perspective, then hopefully August. It's a summer month, obviously, with people on vacation. And then we have a strong delivery month in the U.K., which is a registration month, which should be strong. So I think on the new side, we'll be in good shape. I hope we can meet what we did last year. It might be slightly less in the quarter, but however, on the new side, I would think that some customers might be turning to used cars, which should drive that. I think there's some great deals out there. But with the OEM still offering zero percent financing and things like that, I think you're going to drive the new. But inventory is going to be the challenge.

Okay. Just maybe, you know, as we think about the rest of this year, you mentioned we have a close down in August and September. We're also thinking about the election outcome. What are some other drivers that are really on high alert for you into the year end?

Well, I think, number one, I think interest rates. We've seen the Fed conversation. I think interest rates are going to be in line. I think credit availability is certainly, even from the subprime standpoint, is good leasing rates. is strong across all of the premium luxuries. So I see those fundamentals now being the same as we go through the end of the year. The question is, is being shut down. Now, we've had positive tests where we've had to shut down certain dealerships, not for a long period of time. We shut it down, we do the proper cleaning, and we're also back in business and we quarantine anybody that might be associated with that individual. So I think that's certainly a risk. Availability On the other hand, the consumer confidence, to me, is going to be key, and product is going to be really important, the new product coming out. Now, you've got cars that are being, vehicles that are being delayed for certain reasons, and from a supplier source, let's think more about the supply chain for the OEMs. Many of these supply chain suppliers have gotten into trouble financially during the shutdown, so Thanks, Roger. Thanks.

Your next question comes from the line of Mike Ward from Benchmark. Your line is open.

Thanks a lot. Good afternoon, Roger. Good afternoon, Tony. Mike, can you talk a little bit about some of the big pieces? You're going to pay down $300 million of debt. You're going to borrow against a credit line for that. What are some of the big pieces on that? Maybe talk a little bit about cash flow as we go out and we head into 2021.

Well, number one, when we look at December, we had about $2.3 billion in floor plan or non-vehicle debt and That's down now $223 million, so that was paid down based on cash flow we talked about. Our net debt to capital was down 370 basis points at 41.6% when compared to June. From the standpoint of floor plan, we still have equity in floor plan. I think I said somewhere around $400 million. As that inventory grows, of course, we floor plan it. That's really a variable financing that's provided. Thank you very much. Also, when you think about the cash flow we've been able to generate, because the lower CapEx, $65 million in the first six months, and I would assume it's similar in the second six, so $130 million. And this will probably be the first time that I can remember in a number of years where amortization and depreciation will be equal to our CapEx spending, which is a very good thing for us. So I see availability for acquisitions. I think from a CapEx perspective, I said it before, we're going to focus not on cosmetic CapEx. We're going to focus on operational. I said it before, more like the opportunity for electrification and things like that.

With that in mind, as we look out, what are some of the things that we can track as the board or you? I know shareholders' returns are important to you. What are some of the things that we can track that maybe the dividend gets reinstated or share repurchase comes back? What are some of the things that we can look at as outsiders?

you'd look at this as positive inflections that we can look at with the board when we get to our October meeting and at that point we would make that decision but I just still want to be sure we're focusing on safe and secure because I can't tell you today you know with the environment out there with the disturbances and things like this that are taking place so the good news is we can turn it back on and certainly as a large shareholder I'd like to see a dividend but it's got to be in collaboration with the board.

Okay, so if we see status quo, it would be your bet that the board might lean towards reinstating it, that there's nothing else preventing it in that regard. If we're at the status quo as we are today.

Well, again, I'll let the board make that decision. Yeah, right.

I hear you. Thank you, Roger. Thank you, Tony.

Okay, Mike.

Your next question comes from the line of Rajat Gupta from JP Morgan. Your line is open.

Hey, Rajat, hi.

Hi, good afternoon. Thanks for taking my question. You know, I just wanted to follow up a little bit, you know, on just the July comments. Could you give us a sense, you know, just quantify it a little bit, you know, like what you're seeing so far in July across, you know, the three different business lines? I mean, have things continued to improve, like, from the run rate seen in June, both in the UK and US, and and specifically in regions like Texas and Florida, have you seen the year-over-year progression deteriorate versus June or has it pretty much held up? I have a follow-up. Thanks.

Well, let me say this. Quite honestly, it's interesting. The East Coast businesses seem to be pretty much in line month to date with last year. Central is in... is in decent shape. But when you start looking at our western region and you look at Texas and you look in northern California, there's some maybe impact in Florida that we see some maybe slowdown from the standpoint, you know, of new vehicle sales. Now, when I look at what I'm using as a benchmark because we started off, as everybody knows, January, February, you know, was a good start to the year. And you go back and you look at... You look at those numbers, our parts and service business, as we look at our forecasting in July in the U.S., this is, you know, I see other than the dip that we have in the body shops, we'll be pretty much consistent. You know, from a new used car sale, we'd be pretty much consistent looking at the forecast. On the other hand, we see probably some deterioration in new. Again, when you think about gross profit from service and parts, We had $127 million worldwide deterioration in Q2, but in June, we were only down $2 million. So I would say parts and service are back to order going forward. So parts and service on par. I feel the same way in the UK. The other international businesses we can look at later, certainly we're seeing some positive effects in Australia. And the truck market is what you'd expect. I think we've got lower used truck prices. We hope that that, again, stabilizes. So truck prices or used trucks are a concern right now going forward. I think new businesses picked up parts and service is strong. And certainly when you look at our super centers from a used car perspective are good. So used up, I think that with July 4th weekend here in the U.S., you're going to see some deterioration on new. And some of that has to do, as I said earlier, about availability.

Got it. That's a great color. And then just on the SG&A to gross question, just follow up with the previous question, with 100 to 125 million personnel reduction, maybe some advertising coming down, it looks like you can get to a sub-75% SG&A to gross level. With those actions, is that reasonable to assume? And by when can we see you get to that kind of level? Can it be as in the third quarter? You know, just some color on that would be helpful to frame like ideal term models.

Thanks. Well, I never believed, as I said earlier, we'd be in the 60s. So I'm not going to jump into the 60s. But I think there's, you know, my goal, now this isn't saying we'll get there. My goal would be somewhere between 71% and 75%. I think that's reasonable. I hope I can surprise you.

Great. This is really helpful, and good luck.

Thank you very much. Thanks, Rashad.

Your next question comes from the line of David Liston from Morningstar. Your line is open.

Hey, David.

Hey, guys. Good afternoon. I guess first on consumer confidence and sentiment, particularly with the premium luxury customer, That generally, that's more of a wealth effect in that they always have the money to buy a car, but sometimes they just don't feel good about it. Can you just talk about what is the state of that customer in both the U.S. and U.K., and is it any different between the two regions?

Well, I think when you look at the U.S. market, you know, during the quarter, it was down about 30%. We were down 27% from the standpoint of new. I think that, and that's something that has to do with as I talked about earlier has to do with the availability of product. But at this point, margins are good. The new products that both Mercedes-BMW have, Porsche obviously would take on. You can't get those. Jag Land Rover, maybe we have a little more inventory that we want. But when you think at the end of the day, 35% in the U.K., The market was down. We were only down four, so that bodes well. And we're primarily 90-plus percent premium luxury over there.

Okay. And staying on the light vehicle side, with the introduction of the Tesla Model Y on the market, have you seen any headwinds on your crossover demand, particularly in the German 3 or Lexus stores?

You know, I really haven't. You know, I've been surprised, quite honestly, that the residual value of the Tesla product has gotten better, you know, which means there's some traction in the marketplace, some interest on the used side. But I haven't seen it take over. You know, with e-tron, you know, we've been selling e-trons. Obviously, we talked about, you know, every one of our TICONs are spoken for. We have a back order on those. They expect to move that volume up significantly next year. But I think that there's no question that electric vehicles have a future for us because of emission requirements and the CAFE requirements, not only here in the U.S., but obviously there's big penalties when you look at Europe if you don't meet some of these standards. So Cayenne is strong, X3, X5. These are hot vehicles for us.

Okay, and given we are in a recession, but you do want to make acquisitions when possible, in 2020, is it still possible to make a light, especially on the light vehicle side? Would you want to do a deal if it came along, or is liquidity just much more important right now?

Well, I guess the word I always use is opportunistic. You know, we're open. We're looking at car deals right now in a pipeline that we could look at. I think that, you know, our diversification that we have gives us opportunities for different avenues to invest in. And I think, number one, we're certainly looking at retail automotive. We've got some truck retail, big truck operations that would be potential acquisitions this year. There's no question about it. And then our continued investment in the super centers. So kind of you looked at capital allocation. I've got to be careful to mention dividends yet, but, you know, obviously that could be something that we'd see in the fourth quarter.

But in terms of bringing the dividend back, you'd want to bring 401K back first, right?

Well, I'm not sure which would come back first or would come back together. I think we've got to look at supporting our employees along with our shareholders. I would hope that we'd do that in conjunction with one another, to be honest with you.

Okay, thank you.

Great, David, thanks.

That concludes today's conference call and webcast. Thank you very much for participating and have a wonderful day.