Penske Automotive Group, Inc.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group First Quarter 2021 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through May 5, 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, Maria. Good afternoon, everyone, and also thank you for joining us today. A press release detailing Penske Automotive Group's first quarter 2021 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 phone or email for any follow-up questions you may have. Joining me for today's call are Roger Penske, Chairman, J.D. Carlson, Chief Financial Officer, and Shelley Hulgrave, 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. 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 are 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, 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 would now turn the call over to Roger.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us this afternoon. I'm pleased to report an all-time record first quarter for Penske Automotive Group. Income from continuing operations before taxes increased 246%, 247.6 million, and income from continuing operations increased 254%, to 182.5 million and related earnings per share increased 253% to $2.26. The earnings growth was largely driven by higher gross profit per unit retailed or expense leverage and lower interest costs due to a reduction in inventory and lower overall debt levels when compared to the same time last year. Further, our commercial truck dealerships improved their profitability by 101% while the earnings from our investment in Penske Transportation Solution increased 295%, demonstrating the strength of the company's diversified business model. For the quarter, same-store retail automotive unit sales increased 5.5% to 110,000. New was up 25.5% in the U.S. and up 7.8% in the U.K. Used was up 14.5% in the U.S. and we were down 18.2% in the U.K. Despite the U.K. dealership showrooms being closed for the entire first quarter due to COVID restrictions, our team used digital tools and business development centers to deliver 40,000 New and Used Vehicles in the UK market for the quarter. In fact, our same-store unit sales in the UK increased nearly 8% during the first quarter, substantially outperforming the UK market, which declined 12%. Our total revenue increased 15% to $5.8 billion, including a 19% increase in retail automotive same-store revenue. Retail automotive same-store gross profit increased 19%, new is up 49%, used up 29%, F&I up 18%, and service and parts up 2%. Same-store retail automotive variable gross profit increased $880 per unit for 25% to $4,368. I'm particularly pleased with the continued expense discipline driving a 990 basis point improvement in SG&A as a percent of gross profit for the quarter. Let me move on to CarShop, our used vehicle super centers. As many of you know, we operate used vehicle super centers in the U.S. and the U.K. And during the quarter, we renamed the U.S. super centers from CarSense to CarShop and now operate one brand on a global basis. This business represents a significant future growth opportunity. We currently operate 17 locations and expect to open two new car shop locations in the second quarter this year and at least two more locations by the end of the year. During the first quarter, car shops sold 11,400 units including a 25% increase in the U.S. and a 43% decline in the U.K. as volume was impacted by COVID-related showroom closures. Despite the unit decline in the UK, our variable gross profit per unit increased as we improved vehicle sourcing by increasing the volume of trade-ins purchased from the franchise dealership using our proprietary internal online transfer portal. Based on current sales rates since the reopening of the UK Supercenter showrooms on April 12th, we're forecasting a monthly run rate of 5,000 units. Let me turn to retail to commercial truck dealership. We completed the acquisition of Kansas City Freightliner on April 12th and now operate 29 medium and heavy duty truck dealerships in the U.S. and Canada. We expect this acquisition to add $450 million in annualized revenue. During Q1, we sold 3,000 new and used trucks generating $450 million in revenue and earned 6.3% Return on Sales. New and used truck margin increased in Q1 versus the same time last year due to stronger market conditions. Service and parts operation represented 66% of our total gross profit and our fixed cost absorption was 125%. March 2021 was the third best fixed operation month in the history of our truck crew. As a result of these items, Our profitability from commercial truck dealerships increased 101% to $27.5 million. During the first quarter, North American Class 8 net orders increased 226% while retail sales increased 18%. At March 31st, the Class 8 heavy-duty truck order backlog was at 237,000 units, which represents 137% increase when compared to March 31st last year. As a result, ACT Research is forecasting a 28% increase in retail sales to approximately 283,000 units for the North American Class A truck market compared to 233,000 last year. We expect the strong market will provide tailwinds to our commercial truck and truck leasing business in 2021 and 22. Turning to Penske Transportation Solutions, we own 28.9% of PTS, which provides us with equity income, cash distributions, and cash savings. And Q1 PTS currently operates a fleet of 333,600 vehicles that generated $2.1 billion in total revenue and income of $189 million, or 9% return on sales. As a result, our equity earnings increased 295% to $53.7 million. Full-service leasing and contract sales were up 8%, and rental increased 14%, and demand remains very strong, particularly in our consumer rental business. Our logistics business increased 26%, including the recent Black Horse Carriers acquisition, which is expected to contribute 600 million in additional annualized revenue in PTS for 2021. The gain on sale of used trucks is much stronger than it was last year, at this time due to the resurgence of the North American Class 8 heavy-duty truck market. Lastly, within the last six months, PTS has issued 1.5 billion in five-year notes at an average rate of 1.5% to finance their increasing levels of business. Looking at our balance sheet, the balance sheet remains strong and in great shape. Total inventory is 3.3 billion, which is down approximately 148 million from December and down 1 billion from March of 2020. Retail automotive inventory is 2.8 billion when compared to $2.95 billion in December of 2020. New vehicle inventory is down 140 million and remains in short supply for most brands. We expect this short supply to continue. Used vehicle inventory was down 28 million. Commercial truck and power systems inventory was up 24 million. Looking at our day's supply, new was 40 days and used was 35. At the end of March, our long-term debt is down 111 million, largely from repayments under our U.S. credit agreement. At the end of March, Our debt to capitalization was 31.2% compared to 33.7 at December 31st and 49.2 at the same time in 2020. Our leverage ratio sits at 1.4 times an improvement from 2.9 at the end of 2019. In Q1, we invested $42 million in capital expenditures, including $6 million to acquire land, for future car shop expansions. We entered the first quarter with approximately $1.1 billion in liquidity under our credit agreements. Moving on to our digital initiatives, our omnichannel approach focuses on convenience and creating a connection with our customers, especially in the digital space. We continue to grow and expand and enhance our digital footprint, including introduction of new tools and technologies. This allows us to offer customers a hybrid type shopping model for the 40,000 vehicles we have online. Depending on their specific needs, customers can purchase either fully online, in-store, or any combination of the two. In the first quarter, our digital marketing efforts drove over 18 million visitors to our website. Our digital retailing tool in the U.S. is called Preferred Purchase. It's implemented at every dealership and offers flexible buying options accommodating customers at any point. and their buying journey. We retailed 2,745 vehicles or approximately 4% of our US unit sales directly to preferred purchase and 12% of our customer use preferred purchase in some way during their buying journey. In the UK, a customer may reserve a car for 99 pounds, apply for financing through our proprietary platform, receive instant credit approval, Obtain a guaranteed trade-in price and pay online. During the quarter, we sold 4,200 vehicles through these channels in the UK, or 10% of our unit sales. Our online service scheduling tools continue to gain momentum. In Q1, over 100,000 service appointments were scheduled online, and another 370,000 were scheduled to our business development centers. Additionally, more and more customers are opting for online payments which we saw an increase of over 50% during the first quarter. So when you combine our online buying tools in the US and the UK along with our online service scheduling, online pay, we have the tools to allow a customer to perform any part of the transaction online or to shorten their visit to the dealership. Looking at corporate development, as previously noted, we completed the acquisition of Kansas City Freightliner which is expected to add $450 million in annualized revenue. Additionally, we will add three new retail automotive franchise dealerships this year which are expected to add another additional $150 million in annualized revenue. This includes a LEED-certified second-force dealership serving the Washington, D.C. metro area which 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 car shop used vehicle super centers. For the opening of Nottingham dealership in the UK in December, we have started the next phase of our expansion plan. We plan to open two additional car shop locations in the second quarter and another two locations by the end of 2021. We plan to execute a growth plan to increase the car shop footprint from 17 locations to 40 by the end of 2023. At that time, we expect CarShop will generate at least 150,000 in unit sales and between 2.5 and 3 billion in total revenue, doubling the size of the current business. We're targeting CarShop to earn 3.5 to 4% return on sales while generating income from continuing operations before taxes of approximately $100 million. And finally, as we look across our diversified portfolio of businesses, we're targeting organic and acquisition growth coupled with operating efficiencies to drive income from continuing operations before taxes to at least $1 billion by the end of 2023, which compares to $708 million last year. And lastly, recently, Carfax awarded 114 of our U.S. Penske Automotive dealerships It's top-rated dealer award based on customer reviews. I'd like to congratulate the management and the employees at every one of those dealerships for that special recognition and for their ongoing commitment to excellence and customer care. Again, thanks all of you for joining the call today, and I'll turn it back to the operator. Thank you.