Penske Automotive Group, Inc.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group third quarter 2020 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through November 4th, 2020 on the company's website under the investors tab at www.penskeautomotive.com. who 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. A press release detailing Penske Automotive Group's third 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 our operations, earnings potential, outlook, future events, growth plans, liquidity, and assessment of business conditions in light of the COVID-19 pandemic. We may also discuss certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization, or EBITDA. 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. Thank you, Tony. Good afternoon, everyone, and thank you for joining us this afternoon. I'm pleased to report all-time record results for our business. In the quarter earnings before taxes increased

Thank you for joining us. and related earnings per share increased 102% to $2.87. Foreign exchange benefited earnings in the quarter by 5 cents. Obviously, this outstanding performance was driven primarily by a 170% increase in retail automotive segment income as new vehicle, used vehicle, finance and insurance and fixed operation margins all expanded. Our SG&A expense declined 29 million in the quarter and SG&A has a percentage of gross profit improved 1,010 points to 67.3%. Our success in this area can be attributed to a reduction in travel and entertainment, advertising, vehicle maintenance, administrative costs and personnel costs. We initially furloughed approximately 15,000 employees or 54% of our workforce in March. At the end of the third quarter, approximately 3% remained on furlough. We've reduced our headcount by 14% as of today, or 3,700 people, to approximately 23,000 worldwide. Through the above efforts, we estimate approximately $125 to $150 million in costs have been reduced across our various businesses. During the first nine months, we generated $846 million in cash flow from continuing operations. Our net cap ex-expenditures year-to-date were down $87 million when compared to the same period last year. During the quarter, we repaid our $300 million 3.75 senior subnotes at maturity and we refinanced $550 million of the 575% senior subnotes by issuing $550 million in new notes at 3.5% due in 2025. We used the proceeds from the new notes to redeem $550 million of 5.75% notes due 2022 on October 1st. In the interim, we utilized the proceeds from the 3.5% senior subnote temporarily to pay down our floor plan, U.S. revolver, and mortgage revolver balances. We estimate the repayment and refinancing of our subordinated notes will reduce future interest expense by approximately $17 million annually. As of September 30th, debt to capitalization was 42.7% compared to 45.6% at December 31st. On a pro forma basis, on October 1st, we have $1.95 billion of non-vehicle debt, which is down approximately $407 million from December 31st. Let's look at the balance sheet at this point. It's in good shape. Total inventory is $3.2 billion, down $1.1 billion from December last year. New vehicle inventory is down approximately $800 million. Use vehicle inventory down approximately $100 million, and our commercial truck inventory is down $150 million. Our day supply on new is 45, and day supply on used is 40. Let me now turn to the quarter and give you the performance on Q3. In Q3, retail automotive segment income increased 170% and was driven by an increase in gross profit per unit retailed, selling general and administrative expense reductions, Lower interest costs due to reduction in inventory and overall lower debt levels. Total same-store new and used unit retail declined 4.5%. Retail automotive same-store revenue increased 3.6%, and same-store gross profit increased 15.3%. For the quarter, same-store retail automotive variable gross profit per unit increased $935, are 29% to $4,156. Let me move on to our used vehicle supercenter business. We operate 16 locations. During the third quarter, the supercenter sold 18,372 units at an average selling price just under $16,000, and we had a return on sales of 4.5%. The average supercenter sold approximately 1,100 units and earned $1 million in the third quarter. Through improved sourcing and inventory management, grosses per unit increased $618 per unit for 35% to $2,378. The improved sourcing as a result of using our scale in the U.K. has approximately 40% of our sales are from inventory acquired internally through our online auction. While in the U.S., buy-your-car-now purchases increased 47%, and represented 14% of our total vehicles sold. As we look at expansion, we opened two locations in 19. Both had successful openings and outperformed our initial expectation. The Glen Mill store in Pennsylvania forecasted to retail approximately 1,800 units per year. The Bristol location in the UK is forecasted to retail approximately 3,000 units per year. Both stores were profitable and their third month of operation. We have six additional sites planned with four under development, two in the planning process, which would increase our store count by 40%. We'll open up Nottingham store in the UK in December and Brunswick, New Jersey will open early in Q1 2021. We forecast super centers will retail 80,000 vehicles in 2021 and 100,000 vehicles in 2022. Let me move on to our digital initiatives. We continue to grow, expand, and enhance our digital footprint, including the introduction of new tools and technologies. We currently have 50,000 vehicles online, our digital channels, while our efforts in the US represented 52% of our unit sales in the third quarter. Our multi-channel marketing approach focuses on personalization, creating connection with our customers. Our fully F&I process through DocuPAD continues to drive higher F&I income with no physical exchange of documents. A key component of those efforts is our preferred purchase, our digital retailing system here in the U.S. Preferred purchase represents flexible car buying and can accommodate a customer wherever they are in their buying journey. Using our digital signing room, many customers can sign documents digitally to complete the transaction 100% online. In the UK, our digital used vehicle pilot, Buy Online, has now facilitated over 1,000 customer transactions since launching in May. In the quarter, approximately 2% of our sales were completed by either using our preferred purchase tool or online buying tool in the UK. We also are working on a new digital retailing initiative enabling by new technology that will automate the online buying process Strengthen our brand and enhance our future investment. We continue to focus on an omni-channel business model. Turning to retail truck dealership business, we operate 25 medium and heavy-duty dealerships across the U.S. and Canada. During Q3, we sold 4,480 new unused trucks compared to 2,836 in the second quarter, representing a sequential improvement of 58%. For the third quarter, same-store retail unit sales declined 15.5%, which compares favorably to the North American Class 8 truck market, which declined 31% during the same period. In fact, North American Class 8 market appears to be stronger than originally we had expected. Retail sales are expected to be $225,000, which is up Thank you for joining us. and truck leasing businesses as we go forward in Q4 and 2021. Turning to PTS Penske Transportation Solutions in Q3, PTS generated $2.3 billion in total revenue and income of $222 million or 9.6% on sales. As a result, our equity earnings were $64.5 million of 53% compared to Q3 of last year. Full service leasing and contract sales are up year over year. Rental demand continues to improve. After utilization rates in the rental fleet declined to the low 60s in the second quarter, our utilization has now returned to over 85%. In logistics, all of our automotive customers have returned to operations. Grocery and retail volumes are operating at a higher than previous expected levels. We expect operations to remain strong for the foreseeable future. Just as a point additionally, PTS completed a bond offering this week, securing $750 million in notes for five years at an interest rate of 1.2% all-in, reflecting the quality of our company. Turning to Australia, during the quarter, Penske Australia generated $123 million in revenue and a return on sales of 6.8%. I'm excited about the opportunities we have in this market for future growth and profitability, especially in the mining, energy and defense sectors. The Australian government has budgeted over 500 billion Australian dollars in defense spending over the next 10 years. We have contracts to supply power systems, equipment and service for offshore patrol vessels, combat vehicles, frigates and submarines. In addition, we recently signed contracts worth $120 million to supply power system engines to the key mining operators. In closing, I'd like to thank our team for their significant work and effort during these unprecedented times. As I look forward to the future, I remain confident about the opportunities I see across our diversified enterprise. Our disciplined approach to cost reductions of $125 to $150 million will help drive expense leverage in future periods. Retail automotive remains strong, and our super centers business were focused on driving significant growth to new locations and our goal to reach 100,000 units in 2022. The commercial truck business is poised to benefit from a recovering marketplace. There are many new opportunities on the horizon for Australian businesses. Let me thank you for joining us on our call today, and I'll turn it back to the operator for questions.