Penske Automotive Group, Inc.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group fourth quarter 2020 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through February 17th, 2021 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, Regina. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's fourth 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'm 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, 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 also may discuss certain non-GAAP financial measures such as adjusted earnings before taxes, adjusted selling general and administrative expenses, adjusted income from continuing operations, adjusted earnings per share, and Earnings Before Interest Taxes Depreciation Amortization or EBITDA and Adjusted 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 do direct you to our SEC filings, including our Form 10-K, for additional discussion and factors that could cause results to differ materially. At this time, I will now turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. This morning, we reported record results for our business in 2020, including a very strong fourth quarter. For the quarter, earnings before taxes increased 89%. Thank you for joining us. Our success in this area can be attributed to a reduction in T&E, advertising, vehicle maintenance, administrative, personnel, and other fixed costs. We estimate that approximately $125 to $150 million in SG&A costs have been eliminated across our various businesses. During Q4, our retail automotive segment income increased This increase was driven by higher gross profit per unit retailed, expense leverage, and lower interest costs due to a reduction in inventory and lower overall debt levels. Retail automotive same-store revenue increased 1%. Same-store gross profit increased nearly 6%, including an 80 basis point increase in our overall gross margin to 15.5%. On a same-store basis, gross profit increased $870, or 25%, to $4,427. Total same-store new and used unit retail declined 8.6% as COVID impacted the U.S. and U.K. new vehicle markets, including a complete lockdown of our showrooms in the U.K. in November. Moving on to our used vehicle supercenters, this business represents A significant future growth opportunity. We expanded to 17 locations after opening Nottingham in the UK in December. This new supercenter is expected to retail approximately 6,000 units and earn between 4 and 5 million EBT annually. During the fourth quarter, our supercenter sold nearly 12,000 units down 23% as volume was impacted by COVID. Despite the decline, Variable grosses increased 19% as we improved vehicle sourcing by using our internal online auction and Buy Your Car Now purchases. Turning to the retail commercial truck dealership business, we currently operate 25 medium and heavy-duty truck dealerships in the U.S. and Canada. During the fourth quarter, we sold 4,300 new and used trucks compared to 3,700 in the same period last year, representing an increase of 16%. Our new units were up 1.4%, used units were up 106%. The increase in new units compares favorably to the North American Class 6-8 truck market, which declined 10% during the same period. Our Q4 revenue was $579 million and our return on sales was 4.4%. Use truck margins have really improved. They were up 730 basis points, and it was steadily improved since the first half of 2020. Service and parts operations represented 66% of our total gross profit and fixed cost absorption as 128%. Right now, we feel the freight market is very strong, and as a result, ACT is forecasting a 25% increase in retail sales to 290,000 units for the North American Class 8 truck market in 2021. At December 31st, the Class 8 heavy market backlog was 178,000 units, which represents a 44% increase from the same period a year ago. We expect the strong market will provide tailwinds to our commercial truck and truck leasing businesses this year. Turning to Penske Transportation Solutions, as you know, we operate a fleet of over 327,000 vehicles. In Q4, PTS generated $2.4 billion in revenue and had income of $196 million, or an 8.3% return on sales. As a result, our equity earnings increased 55% to $56.5 million, and our full-service leasing and contract sales were up 8%. Commercial and consumer rental demand continues to be strong with utilization rates in many of our classes over 88%. Today, we have almost 80,000 trucks in our rental fleet. When we look at logistics, automotive, grocery, and retail volumes are operating at higher than previously expected levels. And the gain on sale of used trucks is much stronger as the North American Class 8 Heavy Duty market continues to improve. In the fourth quarter, PTS acquired Black Horse Carriers which is expected to generate approximately 600 million in annualized revenue which represents a revenue growth overall of 7%. For the year, PTS generated 8.9 billion in total revenue and income of 569 million. As a result, our equity earnings increased 16% to 164.5 million compared to 142 in the prior year. For 2020, The PGL investment provided $137 million in cash flow through distributions and tax benefits. If we look at the balance sheet and cash flow, our balance sheet's in great shape. Our total inventory is $3.4 billion, which is down $835 million from December last year. Our new vehicle inventory is down $535 million and really remains in short supply for most of the brands, and we expect this to continue throughout the beginning of the year. The used inventory was down approximately $60 million, and our commercial truck inventory was down over $240 million. You look at our day's supply, we have a 50-day supply for new and a 48-day supply for used. In 2020, we generated $1.2 billion in cash flow from operations, and as of December 31st, debt to capitalization was 33.7% compared to 45.6%. We used the cash flow obviously to help reduce our long term debt during the year by $670 million. We generated $943 million in EBITDA during 2020 and finished the year with a leverage ratio of 1.8 and improvement from 2.9 at the end of 2019. We also refinanced $550 million of 5.75% subordinated notes due in 2022 with $500 million of new notes at 3.5% reducing interest rate by 225 basis points. We estimate the debt repayment and refinancing of our subordinated notes will reduce future interest expense by $27 million annually. We invested a net $145 million in capital expenditures including $13 million to buy and lease property and $11 million to acquire land for future expansion. as we returned $103 million to shareholders throughout dividends and share purchases during the year. We ended December with $1 billion in liquidity under our various credit agreements. Moving 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 54,000 vehicles online, and our digital marketing efforts in the U.S. represented 50%. for our unit sales in the quarter. Our multi-channel marketing focuses on creating a connection with our customers through various channels. Our digital retailing tool in the US is called Preferred Purchase. It's implemented at every dealership and offers flexible buying options. The tool can accommodate a customer at any point in their buying journey and generated sales of 2,600 vehicles in the fourth quarter with a 24% closing ratio. And our online schedule tools continue to gain traction in service and parts. In Q4, we had 100,000 service points that were scheduled online and another 400,000 that were scheduled to our business development centers. In the UK, our multi-channel process, click and collect, allows a customer to complete each step of the buying process digitally. The customer can reserve a car for $99, apply for finance through a proprietary platform, receive instant credit approval, and obtained a guaranteed trade-in price. Transactions are processed digitally and the customer can choose from over 100 locations to collect their vehicle. Through these channels, we delivered 12,000 cars in November when all showrooms were closed in the UK. We now are going to introduce to our channel of used car supercenters the same capability as with the next step on online sales. So when you combine preferred purchase buy online, click and collect, online scheduling, and bill pay, we have the tools to allow our customer to perform any part of the transaction online or to shorten their visit to our stores. Looking at growth and expansion, we currently are constructing new franchise dealerships and have identified acquisition targets. We're expected to add $600 million in annualized revenue, and this would include and lead certified second Porsche dealerships serving the Washington, D.C. metro area we opened in January, a new Audi dealership in Southern California and a Honda dealership in Texas, both of which are currently under construction. We also intend to grow our super center business. With the opening of Nottingham dealership in the U.K. in December, we have started the next phase of our expansion plan. We expect to open a new location in the U.S. in May. In fact, on March 1st, are changing the name of the U.S. business from CarSense to CarShop will have one global brand to drive the business forward. In Q1, we intend to incorporate an automated buying process within the U.S. Supercenter business offering an end-to-end 100% online capability. As we look across the next three years, we plan to execute a growth plan to increase CarShop Supercenter footprints From 17 locations to 40 by the end of 2023. At that time, we expect Supercenter business will generate at least $150,000 in unit sales, revenue between $2.5 and $3 billion. That would be doubling the size of our current business. Our goal for Supercenters is to earn between 3.5 and 4% on sales while generating earnings before taxes at that time of approximately $100 million. and finally, as we look across our diversified portfolio of businesses over the next three years, our goal is to grow earnings before taxes, EBT, to over one billion through the combination of acquisitions, super center expansions and organic growth. Before closing, I'd like to mention our performance and highlight some of our achievements from the recently completed year in 2020. 2020 PHE retailed more than 400,000 new and used vehicles, while increasing our new-to-use ratio to 1.3 to 1. Earnings before taxes increased 20% to a record $708 million, increased income from continuing operations by 25% to $543 million, and earnings per share increased 28% to $6.74. We reduced our selling, general and administrating expenses as their percent of gross profit by 360 basis points. We drove cost reductions that are anticipated to yield $125 to $150 million in annual savings. We generated strong cash flow of $1.2 billion and reduced long-term debt by $670 million. We returned $103 million to shareholders through dividends and stock repurchases. Before I close here, 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. Thanks again for joining us on the call today and for your continued support of PAG. At this time I'd like to turn the call back to the operator and she'll open up the line. Thank you.