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.

Excellent. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We will 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. Your line is open.

Good afternoon, Roger. Hey, John. Startups, if you will, have, and you haven't quite met them together, at least, you know, publicly with us. What are the efforts and the opportunities there over time? I know you're growing the physical footprint by 40%, but, you know, as you look at this, I mean, you just got a lot of pieces in. It just seems like other folks are maybe, you know, tying up in a neater bow than you are or actually going after it a little more explicitly.

Well, look, let's first start. We really have a Two-pronged approach, I'd have to say. Number one, it's called a bricks and mortar with our super centers, and obviously we're looking at our new-to-use ratio at 1.3 to 1, and when you look at the number of units, 70,000 we sold in the quarter. A portion of that, obviously, was through our super centers, and I think we'll continue that approach, John, and with the new technology and the things that we're working on, we need to also pivot and have an online pure online that we can market the brand and approach as we go forward but as we all know we can't go all the way without using outside tools from the standpoint of delivering a pure online delivery and that's something that we're focusing on and I think we got to look at our customization how we personalize it and certainly creating a connection for our customer all the way through the journey now one of the things that We're looking at, and we'll pilot probably here over the next couple of months, maybe into the first quarter, would be to have a pure online model and have a test site that we can look at. But one of the things that I'm looking at, that we have a thousand locations across the country that are connected with Penske Truck Leasing or PTS. It would be very easy to use those from the standpoint of delivery locations across the country. So I feel that a customer coming to a location to pick up his car that he bought online versus maybe have a truck show up in his front door might be different and a better personal experience. So we're looking at that. We're going to pilot it in certain areas. And then I think that we'll be able to be more open on exactly what we want to do from a functionality standpoint and the technology that we would use going forward. So I think you're right. We're not behind. I think we're just trying to come out with the fastest car when we come out.

That's incredibly helpful. And then when we look at PTS, that bond offering at 1%, it's indicative of very low cost of capital for PTS as well as PAG. I'm just curious, as you have access to capital the way that you do in PTS and PAG, are Are there any plans to go out and maybe raise even more sort of incremental growth capital to drive the businesses, or through the internal organic cash generation, do you think you have kind of all you can handle somewhat responsibly on growth going forward? Because it just seems like there's free capital, and that often means an entrepreneur like you can really go out there and really create some pretty good growth.

Well, I guess we've got to look at if we generate net cash – for the year between $400 and $500 million. Now, whether we can duplicate that in 2021, I'm not sure. But on the other hand, the Fed has said interest rates are going to be low for a while. I think I would pause right now with the COVID situation. And also, when we look at what's coming up in the election, what are the taxes going to be? What are the other things? And there might be real opportunities for us to buy things that are adjacent to us Retail dealership, truck dealerships, and also, obviously, we're looking at acquisitions at PTS. So, you know, we're still going to be in the growth mode from a purchasing standpoint or buy because we bought a billion in 18 and a billion in 19. And I think that the cash flow is so strong at the particular time when we want to continue to pay down our debt to keep our interest costs lower, but obviously gives us a strong balance sheet and we can pivot and many more. Thank you very much.

and how much of it is a portion of variable sales comp that might come back over time?

Well, you know, we have variable sales comp, so as grosses come down, you know, obviously the compensation would come down. And I think that, you know, when we look at cost reductions, what we're seeing is by reducing our sales force, we've been left with the best sales people. What we're getting is better productivity from a sales perspective and and quite honestly, that's helped us not only from a gross perspective, but a quality of sale and other things, the same thing we're getting productivity from mechanics. But I see personnel being pretty solid. We have 3%, which is about 600 people still out. John, I think we'll see probably a good portion of those come back, but there'll be time back as we need them. But I think on the major pieces we've got back, so I would say personnel will stay pretty much solid. I think from an advertising perspective, I think that we will be able to continue to have that at a lower rate as we use our digital tools. And vehicle maintenance is a big area because based on our ability to get cars through the shop quicker with our more experienced people, less loaner cars, less vehicle maintenance, better quality, less policy for our customers. And then again, our T&E, when you think about travel and entertainment using the Zoom and what we're all using today to connect, we've reduced that significantly. I'm not sure what it was in the quarter, but I know it was several million dollars. So, you know, that should be able to give us some confidence that we can move the SG&A in an area where it is. And I think right now it's 67%. We looked at a model. If we took $500 to $1,000 off the gross profit, it would move us probably into the 70%, 71%, or 72%. So as we look at the model, I think that we're pretty strong on where we're going to be on our cost reduction as it affects SG&A.

That's very helpful. Thank you very much, Roger.

Thanks, John. Your next question comes from the line of Stephanie Benjamin from Truist. Your line is open.

Hi, Stephanie.

Hi. Good afternoon. I wanted to touch a little bit about your commercial truck dealer business. In particular, you made a comment, Roger, that expectations for units are now about $225,000 for 2021. I'm curious because I'm also seeing reports where there's some constraints in production on the OEM front. So maybe if you could talk a little bit about the supply and demand side of that business in the current environment.

Well, if you look at the numbers for September, the orders were 30,000. If you annualize that, that would be 360. So there's definite demand out there. I know that Freightliner, they're back up to capacity. Some of the supply chain, however, is not kept up with the demand. So a lot of these fleets maybe that we're pausing are now coming back into the market, which is a good situation for us from the standpoint of our retail truck business. But to me, I think there'd be some constraint on supply base, really not because of production at the OEM plants, more because of supply chain. and we look forward to a good market in 21 as we're seeing people coming in and really people that canceled orders at the beginning of the year because the lower expectations are now coming back and placing those orders back. So I think we're on the right side of the curve right now.

Great, thank you so much. And then switching gears, I want to talk a little bit about the UK business. Maybe you can speak on how that performance, how that business progressed throughout the quarter, what you've seen thus far in October, and how you feel it is positioned.

Well, let's really look at July, August, and September. I think July probably had some pent-up demand. Remember, we were closed almost for two and a half months there when you look at the business, so probably some pent-up demand in July. The V actually goes down in August because it's looking forward to the registration month that's in September. But when you look at the market during the quarter, the market was down 3.4% and we were up 7% when you look at the brands that we represent. So we outperformed the brands and we outperformed the market. So I think it was pretty much you homogenized the The three months, and we think that, you know, overall, we had a very good quarter. Now, you won't have the same bang in the fourth quarter because we don't have the registration month. We look at March and we look at September. But I think the overall, when we look at the future, we're getting some COVID hits in certain parts of the country, which obviously we know how to handle if we have that internally in our business. and also Brexit hangs out there but it looks like at this particular time from a Brexit perspective they're continuing to talk about it and hopefully they'll have some confidence in what they where they come up from the standpoint of the negotiations and a trade deal but a deal in both interests of both sides to strike a deal is no question and I think there might be a moratorium on tariffs they're talking about let it look like Canada let it look like Australia OEM is going to mitigate some of this if there is a tariff. Those are things I think that we have to look at going forward. But at this point, it's not disrupting any of our business. So we look for a good October, November, and December. I think that our used car business will certainly outperform what it did last year, our super stores. So that should give us a positive quarter based on where we are today, what we can see through the windshield.

Got it. And then lastly, you know, at a high level, I'd love to hear your thoughts, Roger, about kind of the state of the new vehicle market here in the U.S. You know, a lot of conversations about production constraints as well on that side. Maybe your thoughts on when we think inventory levels will start to pick back up again and then what that might mean for just the strength of the used market.

Well, look, let's just talk about... We just saw a note come across here in the last few hours that Toyota now is up to 94%, so they're not even at 100%. That's their plants here in the U.S. We see a short supply, obviously, through Q4 going into 2021 on the premium luxury side where we're pretty much placed, and I think we're going to continue to see that. The thing is to get the right mix. That's the vehicles that we can sell. but there's no question overall trucks and SUVs are certainly still hard to get and those are the premium vehicles that we make our money on. So I would say we're gonna have a supply pressure to get the vehicles we want, point number one. Then on the other hand, from a market standpoint, I think we gotta think a little bit socially what's really happening with the vehicle market and personal mobility. One of the things we get the benefit of is with being in Penske Truck Leasing and Solutions is we see what's going on with the mobility of the public, of people living in different parts of the country. Portland, Seattle, San Francisco, Los Angeles, Detroit, New York, and some of these cities. We can't get enough trucks back into those cities in order for people coming out, so there's Definitely, and we can look at it day after day that people are moving out of the metro areas out into the country or out into other areas because we're seeing it from our truck demand perspective. In fact, if you have a truck to go to Chicago from Cleveland, we probably can rent it for a dollar. I mean, these are the things we're doing to try to determine what the demand is. So I think that's going to drive demand. Thank you very much. Thank you very much. Maybe that's not a good answer, but it gives you some insight.

No, that's really helpful. And I think you reminded me, I think you said this in the past. Did you give the percentage of your locations that are located in suburban areas? Have you provided something along those lines to quantify in the past?

No, we haven't. But we would not have businesses that are located inside the big cities. Maybe there's a few, but I think about San Francisco. We're out by the airport now. You know, we're really well placed because when you're in the truck rental and leasing business, we need to be close to the interstates and the highways so we wouldn't be, you know, down in some of the deep metro areas. Now, we have a few that were probably the legacy locations, but we can get that for you. I'll get Tony to get that for you.

Got it. Thanks so much, everybody.

Thanks. Thanks.

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

Hey, Rick. Thanks. Good afternoon, Roger, Tony.

Hey, Rick.

Good question for you here about supplies. You got into this a little bit. You know, as they normalize, you know, where do you think the GPUs and the expense ratios would shake out? Do we go back to, you know, pre-COVID levels with GPUs or, you know, are we and potentially going to be at a higher level as we move forward.

Well, I think what we really have to look at, there will be, with more inventory, there's no question, if you don't have the right inventory, then you're going to be selling vehicles just to dispose of them because the OEM has made you take them. And I don't want to comment on what the OEM's posture is going to be in Q4 into 2021, but I think Thank you very much. So from an SG&A perspective, we're going to have to be sure that we maintain the cost out that we've taken. So I think overall, we did a test, Tony did for me, looking at a $500 and $1,000 reduction in gross margin. And I think it adds probably about 300 basis points to our SG&A, if you look at it based on the current situation.

That's helpful. So you're throwing off a lot of free cash. You've been, after the balance sheet, reducing debt. You've pulled a lot of costs out. Should we expect more of the same, that you're going to continue to plow that free cash into reduced debt levels? I recognize you've got a new reinstated the dividends, so that'll use up some of the cash. But your plans there, does it going to be a while before we see acquisitions, or do you think they're more imminent?

Well, I think really we were certainly not in a no-acquisition mode when we started 2020, but when we got to mid-March, we put our pencils down and said, at this point, let's look at liquidity, let's look at the marketplace and look at our balance sheet and there's no question at that point that we did that. And furthermore, then we looked at how could we re-engineer our balance sheet from the standpoint of the debt we had. I think we successfully, our finance team has been able to take that down and we're seeing that we'll see the benefits next year. Now, from the standpoint of generating three to four to 500 million of net free cash flow, now our dividend is back, our 401k is back, so that'll utilize some of that. I think our CapEx, still will be well controlled next year. So that'll give us additional capital to utilize. But to me, we got dividends. We got other things that we can do. Share buyback. These are all areas or levers of opportunity. But we're going to continue to invest in the used car super centers, as you know. And I think when we look at those, we've traditionally, if you look at the quarter, they generate probably somewhere around three to three and a half million. So the return is about 25% on a $10 to $12 million investment. So that certainly is an area that we're focusing on and want to execute. We cannot execute, however, at the speed of some of our other peers. We just can't because we're building larger sites. They have reconditioning. They have service because they want it to be sticky to get repeat and referral. And then we're going to invest in our digital, the pure online piece, which is going to be more technology and obviously will take some of our capital. But I would say this, if there's anything that's out there that fits our model, meeting key brands that we already have, markets where we have scale, and certainly from a retail truck perspective, the fact that we have this footprint today, we're very interested to grow that. So we would look at all of those as opportunities, but we're in a position to be able to go to the market and even get more capital if we have to.

Thanks. And finally, if I could ask you a near-term question, how October sales might be tracking?

Well, I would say that October sales, it's a hard time this time of the month to say where we're going to be. I think we came off of a You know, a very hot September We are absolutely out of vehicles right now So if you looked at our numbers, we probably would look like we're down somewhat But single digits, obviously Some brands might be more because we're just out of vehicles So I think it's too soon to really tell you where that's going to be But everybody's talked about availability And I think I don't need to go over that again

Presumably GPU is rock solid. Thanks a lot. Appreciate it. Yeah, thanks, Rick.

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

Hi, Rajat.

Hi, good afternoon. Good afternoon, Tony, and good afternoon, Roger. Thanks for taking my questions. I just had a broader question on electric vehicles and how do you think the dealer channel is likely to be impacted going forward as more of these OEMs start to offer a one price, no haggle vehicle through their websites. How do you think this could change your profitability profile on the new vehicle side? I'm assuming services will still be a key source of income. But just in the new vehicle sales profitability, do you see any disruption, maybe more efficiencies? GM yesterday talked about trying to make some changes in the channel. So just curious as to how do you see this playing out and how to follow up?

Thanks. I guess you'd have to say it's taken Tesla $20 billion or more to get where they are today to get to profitability. I think it's very difficult to They have a complete from top to bottom, meaning when you look at the total journey from manufacturer to delivery to service, and they're not using a franchise network. At this point, it would be difficult with the franchise laws we have in the U.S. I think that it would be difficult to go on a full scale. Now, maybe there's leverage that you have that I don't know about, but I think the GM would utilize the dealerships that would qualify to sell certain vehicles. And there might be stipulations that you have to have for electrification and other things that I might not have in order to qualify. But from our perspective, these are all low volume. And remember, all of these boutique brands that are coming out excluding maybe Hummer, but when you think about it, if you sold 10 or 15 or 20 or 25 a month, you have no parts in service. You've got to have a facility. And then you think about the OEM having to support that Thank you very much. We think there's some very good vehicles out there, but they're typically high-priced. You look at the premium luxury people, primarily we're seeing, maybe other than Volkswagen, we're seeing these high-priced. Where's infrastructure? And again, what's the residual values on these? And if these new entrants, where are they going to have a captive finance company, and who's going to support the residuals? So there's lots of questions before I think you're going to go to a separate channel.

Fair enough. Thanks for that. And just on the used supercenters, you gave us some numbers around the economics of these stores and how they're tracking here in the third quarter. It looks like the return profile here is around 20-25% for the used supercenters. One of your peers that also has a standalone business They've talked about returns above 30%, 55% or so. Just curious as to what the difference might be, why you could replicate something like that, or are we missing something here? Just curious as to your thoughts on that.

I think what we have to do is maybe some of the peers are using existing sites that they already have. and they're repositioning those, these might be previous dealerships, as some of these used car sites. We have a different path. As we say bricks and mortar, we are gonna have significant sites that have the ability for service, I think I mentioned it before, and also reconditioning, and they'll be larger. So to build them, it takes at least a year. and we think two to three to four months they're profitable and I think overall we will continue on that path. I don't want to over commit and then not come back with a profitability but we've seen it. Remember we've got a mature, I say not mature, but a business that we've been running now for the last three years and growing and it's been consistent. I think a bigger thing that we have to look at longer term is acquisition. No one's talking about acquisition now. Everybody's talking about how great this business is. But with acquisition, it's going to get tougher. The only benefit there is that residuals will go up on use, will help finance companies, help our OEMs. And again, will we be able to still get the margin or are we bumping against new car prices on some of the lower vehicles? So to me, at this particular time, for me, I think 25% return Certainly, it would be good if we can sustain that and do it on a proper basis. I don't think that overall that we can grow at the speed that some of us, unless we have a bunch of business locations that we're not using. Certainly, when you look at the size that we're building in some of the locations, and you've seen CarMax has been very, very successful from the standpoint of building their network around the country. They have a few smaller stores, but in most cases, these stores hold three to four to 500 vehicles. And that's kind of our model, both internationally and domestically. So again, when you look at 100,000 vehicles that will sell through our super centers, that's through our super centers now in 2022, and then we can grow from there. And I don't want to start forecasting three, four, and five, because I want to know what's going to happen, what's going to be the new norm in transportation, etc., as we go through November into 2021. Understood.

Makes sense. Thanks a lot, and good luck.

All right, Roger. Thanks.

Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of David Whiston from Morningstar. Your line is open.

Hi, David. Hey, Roger. Hey, Tony. Hey, David. Just a few questions. First on service, it seems like for all the dealers it hasn't come back yet or at least hasn't come back to the point that it's incrementally positive year over year in the quarters. There must be huge kind of demand. Do you agree with that? And when do you see customers coming back?

Well, I think we've got to look at miles driven. My understanding from the data that I'm looking at that some places up in the northwestern part of the country, miles are down. Some of that's the fires, et cetera. But again, that's going to have some impact on it. We know for sure that our parts and service business is down. If you look at the aggregate of all the pieces, customer pay warranty, get ready, and body shop. Body shops are off for us about 20%. And I think until we fill that work in process, We'll see that continue to be a drag on our business and the impact of fires in California we know had impact. But again, the number of people we have, people who are working at home, obviously will be a different social change for us when we look at miles driven. But for us, what we've been able to do is take the level of service and take cost out and get more productivity. And I think that's gonna be key as we go forward, not knowing exactly what miles driven will be, but I guess we'll get more data on that over the next few months. Our warranty was flat and our customer pay was down about 2% for the quarter.

Okay, thank you. And then there's been some public comments recently about a concern on impact of a no deal Brexit. I think it was Mercedes in particular that raised some alarm recently. Is there any kind of EPS estimate you could give for 2021 should there be a no-deal Brexit?

I don't have any data now. I'd get Tony to maybe get with you and try to come up with some of that. I think we're going to look if there's tariffs. I think that the opportunity, you know, obviously is the OEM, is the customer. Are we as dealers going to take a part of that? But remember, in the UK, 68% of our business is used cars. We're two to one when it comes new to used or used to new. So we're talking about 32% of our business that could be impacted. So just tuck that away. So I think we've got, you know, we've got somewhat of a cushion when we look at that. And there might be and a situation where the OEMs even mitigate that increase and maybe the customer is going to take part of that too. Remember, we're premium luxury and we've had higher costs because of gasoline, guzzler and other taxes that they've been able to swallow without any real issue at this point.

Okay, and the question on a new niche of new vehicle segments that's kind of developing now is just premium all-electric pickup trucks. We had the Hummer unveiled this week, as you know, which, in my opinion, looked great, but there's also Rivian, Bollinger, and Tesla in this space. I mean, you're really in touch with the premium luxury customer. Do you think there's a lot of demand for this vehicle segment? They're very expensive. Just love to hear your thoughts on that segment and on the Hummer itself.

Well, these won't be everyday drivers for sure, will they? So these are, I call them, boutique vehicles. And look, we make a lot of money on those in the premium luxury. You know that from the standpoint of Lamborghini and Porsche and Ferrari, etc. I think that there's a certain... Niche for this, remember when Lincoln had a truck, that didn't go off so well, but obviously it wasn't electric. I think that it's going to be difficult to sell those ultimately once they go on without some incentives. And again, then what's the residual value is going to be a lot of our premium customers buy cars and they lease them. Now, I don't know what the lease rates will be on some of these, but again, what's the distribution channel going to look like? Is it going to be separate? Are we going to handle those as dealers? I don't know. There was a question earlier today on that. That's up in the air. But I think if they're all boutique brands or smaller volume and they really won't make a big difference on our bottom line one way or the other, I think the OEMs obviously will be big stickers on those and they'll make good profits on them. But I don't think that that will pay the dividend for them.

And I should have checked this before the call, sorry, but do you have a GMC franchise?

Yes, we do. Thank you, guys. All right. Thank you.

There are no further questions at this time. I turn the call back to Mr. Penske for closing remarks.

Jason, thanks for the support and everybody. We've come through Q2 on into Q3 with great success, and we expect to carry it on through the rest of the year. So look forward to talking to you at the next quarter. Thank you.

That concludes today's conference call. You may now disconnect.