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Edited Transcript of PAG earnings conference call or presentation 6-May-20 6:00pm GMT

Q1 2020 Penske Automotive Group Inc Earnings Call

Bloomfield Hills May 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Penske Automotive Group Inc earnings conference call or presentation Wednesday, May 6, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony R. Pordon

Penske Automotive Group, Inc. - EVP of IR & Corporate Development

* Roger S. Penske

Penske Automotive Group, Inc. - Chairman & CEO

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Michael Patrick Ward

The Benchmark Company, LLC, Research Division - Senior Equity Analyst

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Rajat Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group First Quarter 2020 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through May 13. It's 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.

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Anthony R. Pordon, Penske Automotive Group, Inc. - EVP of IR & Corporate Development [2]

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Thank you, John. Good afternoon, everyone, and again, thank you for joining us today. A press release detailing Penske Automotive Group's first quarter 2020 financial results was issued this morning and is posted on our website, along with the first quarter earnings presentation designed to assist you in understanding the first quarter on our results. As always, I'm available by e-mail or phone for any follow-up questions you may have.

Joining me for today's call is Roger Penske, our Chairman; J.D. Carlson, the Chief Financial Officer; and Shelley Hulgrave, our Corporate Controller.

Our discussion today may include some forward-looking statements about future events, including the impact, length and financial expectations related to COVID-19. Also, we may make forward-looking statements about our operations, earnings potential and outlook on the call today.

We may also discuss certain non-GAAP financial measures such as earnings before interest, taxes, depreciation and amortization or EBITDA and free cash flow. 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, 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.

At this time, I'll now turn the call over to Roger Penske.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [3]

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Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. Before discussing our first quarter performance, I would like to make a few comments about COVID-19. This has been an extremely challenging time for all of us, and our thoughts are with those most affected. Our first priority is to provide a safe environment for all our employees and customers. We have quickly implemented enhanced cleaning protocols, enforced social distancing and taken other actions to protect our employees and our customers. I'm proud of how our team has responded.

The COVID outbreak across the world has adversely impacted the global economy, causing a significant disruption to our business. In March, it began to impact all our markets. Many of our U.S. and Germany dealerships face shelter-in-place orders, while operations in Italy, Spain and the U.K. were closed. As a result, our overall same-store automotive retail unit sales for the month declined 40%. In the last half of March and all of April, our automotive dealership sales and service operations were limited due to related restrictions.

In response, we implemented a hiring freeze, initiated expense reduction and deferred approximately $150 million in capital expenditures. We also furloughed approximately 15,000, representing 57% of our worldwide workforce and initiated pay cuts for executives. We believe these actions will help us overcome the challenges of COVID-19 pandemic. We will continue to actively monitor the situation and adjust our business model to adapt to the changes presented by COVID-19.

In the quarter, we focused on liquidity and preserving cash. During the first quarter, we generated $212 million of cash flow provided by operating activities and $145 million of free cash flow and reflects a $30 million decrease in CapEx compared to the first quarter of last year. As of March 31, 2020, we had access to $1.3 billion in liquidity, including $432 million of cash, $450 million of availability through revolving credit facilities and access to $450 million in potentially financeable real estate. We have $2.6 billion in non-vehicle debt. Net debt to total capitalization was 44.7% compared to 46% at December 31. Net non-vehicle debt-to-EBITDA was 2.9x.

Looking at the PAG balance sheet at the end of March, the balance sheet remains in good shape. Total inventory is $4.3 billion, which is flat compared to December 31 last year. Our floor plan was $3.9 billion. We have approximately $350 million in vehicle equity on our balance sheet.

Let me now turn to the details of the first quarter of 2020. In the U.S. during January and February, same-store new and used unit sales increased 7.5%, while internationally, same-store unit sales declined 1.1%. Due to COVID-19 in March, total same-store total unit volume declined 40%, while fixed operations declined 23%. As a result, in the entire first quarter, our revenues were down 10% to $5 billion, income from continuing operations was $52 million, and earnings per share was $0.64.

Our income was impacted by the closure of all dealerships in the U.K., starting on March 24. As you know, March is a registration month in the U.K. and is typically the largest sales month of the year. During a registration month, we'd normally deliver 30% of our new and used volume during the last week. Nearly 5,000 units, which represent approximately $13 million of gross, went undelivered. We also could not deliver another potential 2,000 units, representing $2.5 million gross in our used car supercenters. Income was also impacted by a decline in used commercial truck gross profit from pressures on value due to the changing market conditions.

Looking at the details of our retail automotive. Same-store units declined 15%. In the U.S., January and February, we were up 8%, international was down 1%. In March, in the U.S., we were down 41%, and international was down 39%. Same-store gross profit per unit, retail performed well. New vehicle, $3,211 flat with last year. On the used vehicle side, we were at $1,375, up $48 or 4%. Our finance and insurance was $1,363, up 6% or $87 per unit. Variable gross profit per unit was $3,493, up $86 or 2%.

Our service and parts revenue declined 6%. Ex-FX, we were down 4.4% in customer pay, were down 10.2% in warranty and our collision was up 1.4%. We also had, in our same-store, a warranty decline in our international markets of 16%.

Moving on to our used vehicle supercenter businesses. The 16 supercenter locations closed in March remained closed through the majority of April. During the quarter, revenue declined 3% to $305 million. Same-store unit sales increased

2% in February but declined 49% in March, including 56% in the U.S. and 47% in the U.K. Our average transaction price in our supercenters increased 4% to $15,158 and the variable gross profit was $1,953, down 2%.

As we look at expansion, we had opened 2 locations in 2019, 1 in the U.S. and 1 in the U.K. Both had successful openings and outperformed our initial expectations. Today, we have 4 sites under development. But due to the pandemic, we ceased construction and moved the completion of these sites out to 2021.

Moving on to our digital initiatives. The performance of docuPAD is exceeding our expectations. With enhanced training and a focus on improving product penetration, F&I per unit in the U.S. increased $93 or 7%. Our digital initiatives continue to grow online sales. Today, we have over 56,000 vehicles online through our digital channels. In Q1, under 50% of our sales in the U.S. were attributed to our digital efforts. Off-site deliveries are increasing with many dealerships reporting over 20% during this period. Our preferred purchase engagement increased more than 50% in April when compared to last year, while several lender partners made policy changes to allow digital signing, remote identification verification and e-contracting. We enhanced penskecars.com and CarSense websites to provide an enhanced digital experience, including updating technology to encourage more online vehicle transactions.

Let me turn now to our retail commercial truck dealership business. We experienced steady demand during the quarter, retailing over 3,500 trucks and generating almost $500 million in revenue with a return on sales of 3%. New unit sales increased 49%, while same-store unit sales only declined 2%, which when compared to the overall North American market, which was down 26% in the first quarter. Same-store service and parts revenue declined 6%, but our fixed absorption was 125%.

Turning to Penske Transportation Solutions. In Q1, PTS generated $2.2 billion in total revenue and had income of $47 million. PTS' net income declined $42 million in the quarter from a $20 million reduction in gain on sales of used revenue equipment due to market conditions, 11% decline in rental from lower utilization and the benefit PTS had last year from a legal settlement of $11 million. As a result, our equity earnings were $13.6 million compared to $25.8 million in Q1 of last year.

In closing, our team around the globe is working tirelessly. I'm encouraged by the many positive actions taken by our team to address the changing marketplace. Our digital initiatives continue to grow our online sales. Further, we've adapted sales processes to facilitate a greater e-commerce-focused curbside or home delivery, pickup and drop-off for our service customers and our remote F&I process through docuPAD. As a result, we've seen businesses improve from week to week as we believe customers would become more comfortable with buying vehicles under the current conditions. In fact, unit sales were up 40% in the U.S. in the last 10 days of April when compared to the last 10 days of March. We believe the many actions taken will help us overcome the challenges of COVID-19.

Thanks for joining us on the call today and for your confidence in our company. At this time, I'd open up to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to the line of Michael Ward with Benchmark.

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Michael Patrick Ward, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [2]

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A couple of questions on the U.K. Was the parts and service shutdown throughout March and April as well? And what is the status of that? And then the second thing is, did you have 5,000 units on your lots ready to be delivered? Or are you still waiting delivery from manufacturers? And if you're still waiting on deliveries, are there additional units that are contracted to be delivered?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [3]

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Well, let me answer that question. As you know, in the U.K., most of the new inventory is stored on the OEM premises, but they would -- they are sold units and will be brought into the dealerships, done a PDI then delivered to the customer. Some of the used units, obviously, would be on site. Then we have the normal pipeline that's coming in. But that's not very strong as we look at the current situation. From the standpoint of the business from a service perspective, we were closed. And when you look at the U.K. registrations that came out yesterday, the market was down 97%. We had a few of our locations open for service but mainly on emergency basis from the standpoint of service. And as we look at the business today, with roughly 9,700 people in our U.K., we had 90% of them on furlough for most of the period since the pandemic started. And we're putting back 300 this week to start up our parts and service business, hopefully, on March -- excuse me, on May 11, and we'll add another 300 in the next 10 days and another 300 at the end -- towards the end of the month. And that would be based on the government opening up the ability for us to deliver cars from our sales locations.

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Michael Patrick Ward, The Benchmark Company, LLC, Research Division - Senior Equity Analyst [4]

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Okay. So as we look at the U.K. market, typically, you get this blip in March and then September. Will some of those be pushed as far back as September? Or they just kind of come trickling out over the next few months as it opens up?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [5]

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Well, I can tell you that our guys are motivated to move these as fast as they can. This is a -- that's a 6 months different, and you have a different cycle of trades, and people would be ready to -- some of these are company cars, which would then cycle in the delivery sector that we'd have in the March -- at the end of March. So these cars are sold. They're on the ground in the U.K. and will be delivered as we look at it. And when you look at it in total, we have the ability to deliver, and there's probably -- I think I mentioned it before, $13 million of gross profit that's tied up on these vehicles being on the ground that we didn't deliver in the month of March. And when you just take the month of March by itself, just to put it in perspective, we had 7,000 vehicles that we didn't deliver on a same-store basis in the month of March in the U. K., which was $20 million less in vehicle gross profit, and we had $6 million less in parts and service, and our bottom line was GBP 20 million less in March of this year versus last year, just to put it in perspective, the impact of that COVID situation in the last roughly 10 days of the month.

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Operator [6]

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Next, we'll go to John Murphy with Bank of America Merrill Lynch.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [7]

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I just wanted to ask a first question. If you think about the cost saves that you're implementing at the moment, how much of this do you think is going to be sticky on the other side of the crisis? And similarly, are there any business practices or things you're learning as you're going through this crisis that you think might help the business on the other side?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [8]

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Well, I think that we're looking at it in a number of different ways and not to break it out from the standpoint of compensation or certain fixed pieces, but I think there's $75 million to $100 million worth of cost saves that we'll have as we come out of this, which would be on an annualized basis. I know that's a rounding number at this point, but I can tell you we're focused on it. And probably, currently, in the next couple of months, we'd probably see at least $8 million to $9 million a month coming out based on things that have taken place. Some of that's due to interest saved on floor plan. Part of that might be marketing and advertising expenses, other costs we've taken out, demos, vehicle maintenance and things like that, which will -- obviously, some of that will come back. Loaner cars, obviously, is a big expense that we don't have. I'm just counting on a few of them that come to mind right now. But we would expect that to continue in many of those cases. But overall, I think there's $75 million to $100 million. That's our minimum goal that we would take out on a global basis, so it would continue on, on an annual basis once we get through maybe as we get into the third quarter.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [9]

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That's very helpful. And then a second question, and this seems a little odd to ask at the moment because inventory currently isn't too low because there's not a lot of sales going on. But I'm just curious, if we go through the month of May and even June, where production is not ramped up fully, yet there is some level of sales, similar to what we saw here in the U.S. go on in April, and inventory is going to get pretty darn tight. I'm just curious how you're managing that -- thinking about that with not getting a lot of deliveries to your dealerships in the context of managing the inventory, but also in the context of GPUs, which appear to be fairly resolute -- resilient, I should say, for both you and the industry?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [10]

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Well, look, number one, let's talk about our inventory right now. If you go back to the end of March, our new car inventory on a global basis is down $100 million. And our used inventory is also down $100 million since the end of March now. It's probably only down $100 million, if you look at 3/31.

We obviously, when you look at our used inventory, we got 11% of our inventory over 90 days, and we got 25% of our inventory new vehicles over 120. Now that was exacerbated because we did no business when you think about the month of April. But I think we're going to -- could have a big issue on incoming inventory from all the manufacturers. You've seen the German manufacturers starting and then stopping from the standpoint of new production. I know from Daimler's perspective in Mexico, they pushed off heavy-duty trucks by 2 months. It is not the fact that they don't want to open or not meeting the protocols in the plants, it's the fact that the supplier base -- in the old days, maybe back in '08, '09, these OEMs were more vertical from the standpoint of the supply of their parts to their vehicles. Well, that's not the case today. So they have to rely on many, many suppliers. And I think that's going to be key. The only good news out of that is when they do go back, they're going to build the cars we want, the ones that they make most of the money on the SUVs. And unless the whole marketplace has changed socially because of maybe Uber and Lyft and things like that won't be on first choice, people will be looking for some type of transportation. They might go back to the smaller sedans. But I think we've got to watch inventory. And for sure, we're going to watch our gross profit. And I think that to me, that's going to be key. On the other hand, if you're sitting here today and want to buy a car, to me, the 0 for 60, 72 or 84 months is there, extending lease payments, all the things that the OEMs are doing to try to attract new customers. And there's no question that all these things will emerge at some point. But your question on inventory, I know I gave you a long answer. I think it's something we got to watch both domestically and internationally.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [11]

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That's incredibly helpful. And then just maybe lastly, on parts and service. I mean there's going to be some pent-up demands on deferred maintenance that gets released to some degree as we get out of this mess. But also, it does seem like there may be an opportunity for you to attract some talent on the technician side to bolster your manned capacity, if you will. I mean how do you think about that? I know you've done a lot of work on training. Is there maybe opportunity even to train some of your folks that are on furlough that might not be hired back as different kinds of workers that might come back as techs? Or is there a broader opportunity in the economy now that more folks out of work for you to get them trained and really take advantage of this parts and service work that's out there even beyond this crisis?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [12]

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Well, I think, really, what we've done in the past, we bring in apprentices many, many students from UTI, which, obviously, they've gone through good training. And we would expect that we could extend that through our own training, working side-by-side with A and B mechanics. But remember, what we have to do today is we have to balance our manpower, match our manpower with our demand, whether it's on the sales side or parts and service. We're seeing through our BDC centers, both internationally, specifically in the U.K., that we're making a lot of appointments for people to come back, so there will be a surge. I'm not sure it's an initial surge, people haven't been driving in their car, but what will happen as we come out of this in maybe 60 to 90 days. So I want to be careful that we don't add people back. But in the meantime, we can offer to our people to have additional training. And I think some of that might not be available now unless we did it in-house. And I think, quite honestly, I don't think we have a program set up specifically to start that today because the main thing we're doing is trying to get ready to move service into gear. In fact, in the U.K., I think I mentioned before, we have 300 people just back in the U.K. in our shops; number one, to clean them properly to meet the specifications required by the government; and number two, to recalibrate our machine as we go back. So that's where we're spending our time with people that are back to work and not on layoff at this point. So again, the last couple of weeks, we've seen sequential increases here in the U.S. of about 9% per week increase in our parts and service business.

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Operator [13]

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Our next question is from Rick Nelson with Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [14]

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Question for you about online. As digital continues to grow, how do you see the profitability there compared to an in-store transaction? Do you get similar F&I per unit? And as you envision over time that this could, in fact, be a lower cost transaction?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [15]

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Well, it depends on, if we're going to have remote sales people in the future, that would be a new model. Obviously, everybody has been operating remote. Some people might rather work from home. We'll find that out as we bring people back. But as we've looked at our grosses, that we've been able to sell. I know in the U.K., we've looked at over 1,200 transactions. The grosses are in line with the current, say, January, February numbers. And we see the same thing in the U.S. And what we have done is taken our docuPAD with the use of Zoom, and we're actually going to the customer through Zoom and able to sell the back-end products quite profitably. So we see probably more interest in our salespeople. They're getting more comfortable using these tools rather than just a face-to-face in the dealership. So I think, overall, we see an increase in F&I. And I think probably from a front-end perspective, there's so much action right now from the OEMs. It's probably hard to know what we'll get in bonuses in order to see what the all-in gross profit is. But I think the process is good. I think the customer is coming in with more information because he's spending more time online. And what we have to do is make the time to market to deliver this car. We need to take that cycle time down, which we're going to be able to do with the current technology. And I think from docuPAD, it's made a tremendous impact on us from the standpoint. We put that across our entire enterprise here in the U.S.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [16]

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And home delivery, you mentioned that is a growing part of your business. Do you think customers prefer the home delivery to, say, a curbside pickup in a store?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [17]

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Well, look, I think right now, with the social distancing and all of the mandates coming federally, statewide, locally, people, I think, are confused to a certain extent. We're going to go to restaurants now, how are we going to sit? What are we going to do in movie theaters? But right now, we're using it as a tool, obviously, until these markets open up. We always price on the premium side. I think we've always offered pickup and delivery of service cars and certainly, the same thing from the standpoint of new vehicle. But there still will be a connection, I think, with the dealership from the franchise perspective due to identification, due to other wet signatures that are needed in the future. The other thing is that the protocol that we've established using a partner we have, obviously, safety claim that we used on the race teams, they've really come to the party with us across the country. And we really have a process. We've had some positive cases in the service departments in some of our locations. We shut them down immediately and within 24 hours, safety comes in. So we can give the customer some sense of comfort that we are addressing the protocol, and that's what we would expect to do. And we obviously, whether we're delivering at home or not, we sanitize the vehicles.

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Operator [18]

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Our next question is from Stephanie Benjamin with SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [19]

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I was hoping, Roger -- I was hoping you guys could just touch on an improvement that you saw in just gross profit per unit really across both new and used in the quarter, despite the declines in revenue in March? So maybe just you can speak to what initiatives were put in place to drive such a year-over-year improvement?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [20]

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Well, I think it's been a constant focus not on volume. And remember, we're in the premium luxury side. A lot of these are leases, probably 50% to 55% of our business is leases on the luxury side. And from a percent -- we were at 7.7% last year on our gross margin. On new, we went to 7.5%, not a big reduction. We kept our volume 4% and flat, and obviously, domestic went up. So to me, with the used moving up, I think it's a focus and having the right inventory, and everybody is looking at days' supply. And I think that our reduction in inventory, when you look at it from the standpoint of used, we're not in a position, we're just wholesaling at the retail level.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [21]

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Got it. And then just sticking on the used -- the standalone stores, and the -- you're really opinion in terms of seeing the demand return from as store -- as a lot of government start to open back up in areas. So could you just maybe speak to the demand you saw prior to COVID? And then as you start to rebound, what you think those stores can really start to see an improvement when the stores open?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [22]

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Let me just position our supercenters. In the U.K., they've been shut down since the last 10 days of March. They're still not open. And from a U.S. perspective, they've been closed from the 21st of March, and they're just -- we've just opened 1 store just to deliver cars in Pennsylvania. So anything we've done since February really has been under some duress. But when you look at February quarter-to-date, we were up 19%. On a same store, we were up 4%. And internationally, we were up 9%. And on a same-store basis, we were up 2%. So the good news is when we see the total, we were up because we -- both of the new stores we won in Bristol, England and the other in Glen Mills, Pennsylvania, both had good openings, and there was a lot of interest. So we see that, as all of our peers do, used being a real focus. We don't have the CapEx to worry about. And when I talk about CapEx, just as a data point, I look at that in the future. We're expecting to reduce CapEx by $150 million, $30 million of it came out already. We're going to work with the OEMs, what I call, reduce the cosmetic CapEx and let's look at the operating CapEx, i.e., electrification or something like that. So we feel in the used car side, the supercenters, that, that number is considerably less. But I think demand is there. I think the fact that we might see people getting out of third-party show for cars, i.e. Uber, Lyft. Do we see them buying lower-priced used, which would fall right into our supercenter vehicles that we're selling somewhere between 15,000 and 20,000 MSRP.

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Operator [23]

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And next, we'll go to the line of Armintas Sinkevicius with Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [24]

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I was hoping we've spent a lot of time talking about March and April, and I know we're just in the early days here of May. But maybe you could talk about the trends you're seeing in May? And what you expect over the next week or 2? I'm sure there's not much visibility beyond that. But if you could speak to sort of the current trends as you're bringing -- particularly, as you're bringing back employees in the U.K., that would be helpful?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [25]

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I was hoping you were going to ask that question. I'm just kidding. No, on a serious note, if you look at April, I'm talking about the U.S., we were down 53% on new. And through yesterday, we were down 28.5%. And on the used side, we were down 42% in April, and we're down 17.7% through yesterday on used, and that's the entire U.S. Of course, we're not open in the U.K. So really, there's no number to talk to you there. So that gives you some idea what the market is doing. And obviously, we're putting technicians back in. We're going to put about 500 people back in the U.S. And the majority of those would be on the parts and service side with certainly aligning the demand on sales with the number of salespeople we bring back and still keep some people, obviously, on the roll working from home.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [26]

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Okay. And then I was hoping you could talk a little bit more about Penske Truck Leasing, that was down year-over-year. Last year, there was some onetime gain on sales, and there's some mix dynamics taking place in that business with deliveries up these days, but other parts of the business down a bit. If you could speak to that, that would be helpful as well. Just how we should be thinking about that business going forward as well?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [27]

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Well, I think for the first 3 months, I think we reported that we were up 2.8% in revenue to $2.2 billion. All product lines, obviously, were active. First, let me talk about -- you talked about used truck pricing. When you think about the overall...

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [28]

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Sorry, I meant Penske Truck Leasing, not the commercial business.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [29]

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No, I was just going to talk about used trucks, how it impacted truck leasing from a gain on sale. We were down $20 million on gain on sale for the quarter. And the majority of that really is impacted because what happened to the market, the overall heavy-duty market was a banner year last year, one of the largest, over 300,000. Well, that pushed a number of used trucks into the first quarter from a used perspective, which drove values down from 4,000 to 6,000 on tractors. Then with the pandemic that came out, there really wasn't any wholesale market. So with the number of vehicles we have, we got to continue to divest of the off-lease vehicles or rental vehicles. And therefore, we had $20 million less in gain. We had a good gain, but $20 million less for the quarter. And also on the rental side, we had reduced our rental fleet by about 6,000 units, if you go back a year. And of course, with a lower rental fleet, it generated less rental revenue. And when you look at our business, the rental side, we call it lease extras, most of our lease customers don't lease the maximum number of units that they need, they'll do a minimum, and then we offer a lease extra at a reduced price. But with business being down here for the last 4 to 6 weeks, let's say, all of those lease extras have come back. So we have those in our fleet. So that's reduced revenue. So you've had lower used truck prices, lower rental revenue, obviously. And then we had the gain of $11 million that was part of a pension issue that we solved from a legal standpoint, and we picked up $11 million last year, which we reported during the quarter last year.

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Operator [30]

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(Operator Instructions) And we'll go to Rajat Gupta with JPMorgan.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [31]

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I just wanted to get a sense about the online transactions. I mean, you talked about a large portion of the sales being done because of your digital efforts. I mean how do we think this impacts the trade-ins? I mean, like if you were delivering the vehicles online and through home delivery, what kind of impact are you seeing on the trade-ins? Because a lot of these transactions are typically traded-in with the used vehicle. And then relatedly, what kind of impact are you seeing on the F&I from the online transaction? And I have a follow-up.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [32]

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Let me talk about the online transactions from the back end. I think that's exactly what I tried to cover earlier. With the use of docuPAD and Zoom, we've been able to connect those with a customer remotely and be able to go through the same process that we would do sitting across from each other at the sales desk. So that's been very, very helpful. And in fact, from an overall standpoint, I think that we've been in good shape.

From the standpoint of trades, obviously, when you're doing an online transaction, the customer on his own has the opportunity to look at what its trade value is. And then there's some negotiation online with our consultant and the customer. But in the meantime, we would pick up the trade when we delivered. If it was a delivery we made directly to the home or business, we would pick up the trade at that point and bring it back to our location, so that would be normal anyhow. As I said earlier, we've done -- built home delivery many times over the past years. I think it's accelerated a little bit right now, not a little bit probably because everybody is sitting at home. There's no question that we're up overall, but I think we'll mean to go back probably to a more leveled pace there. The one good thing that's happened I think all of our sales associates and consultants are now much more comfortable using the online tools. We've seen more traffic on preferred purchase in our case at penskecars.com. And all of these, I think, are going to help us be better and also take some costs out of the sales process along with cycle time for the customer but I don't think we lose $0.01 of gross profit by doing business online.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [33]

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Got it. That's super helpful. And then as a follow-up, I just wanted to get your views on industry consolidation. And how do you view the space post this crisis? I mean, did you expect consolidation to pick up as some of the independents on the used side find it hard to invest in digital capabilities and compete in online omnichannels?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [34]

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Well, let me just say that we certainly, as a company, are learning every day, but we don't know about omnichannel and how we can take care of the customer on the used side. There's no question, and we certainly have some lead horses out there that are doing that. Obviously, many of these products that we have that are customized that we do ourselves, people like Cox and other people are going to have products going to be available to all dealerships from an OEM perspective. Where they're available, obviously, for used car dealerships? I don't know. But typically, small used car operators are under real pressure. They don't have the OEM captive support on used car financing for the customers. And I see some of that -- well, just probably, they will go out of business and we'll pick that up individually or collectively around the country. But from a consolidation basis of the industry, and I'm thinking more of dealerships that would be available, when you go back to the crisis -- financial crisis, at that time, the OEMs, we were in a fist fight with them. They wanted to reduce the number of dealers. You remember there were lawsuits, General Motors and Chrysler, et cetera. And at this point, the OEMs are being so supportive. So it's really the dynamics are entirely different. On top of that, at that point, we had the parts and service open. But I think we're going to be opportunistic. We're certainly not going to go into a market we don't have scale. I don't know what our peers will be doing, but I think they probably think the same way.

On the other hand, we were able to buy the 2 Lexus businesses in Austin, Texas. If they came up again, we'd probably move quickly on that. So I think it's going to be brand-by-brand where you have your strengths and also where you have scale, where you can consolidate some of the fixed costs. But I think it's too soon to look at that. There has been some big deals out there that have not been completed, but that doesn't mean they weren't good deals at the time. So we certainly are looking at our capital allocation. We can look at certainly, whatever CapEx we have. We've got our dividends, we've got our stock buyback. And these are things that we can look at then and what do we want to use for our acquisitions. And we would focus today probably investing in the used car business from the superstore perspective and also look at expanding our footprint on the commercial truck side.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [35]

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Got it. Just one last one for me. Just a follow-up on an earlier question on the cost saves. From the furlough actions, can you help us quantify what the savings are just from the furlough actions? I thought you mentioned $8 million to $9 million per month, but I assume those were like outside the headcount reduction. But would you be able to give us a sense of just the headcount-related cost saves in the near term?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [36]

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Well, I don't know that it's near term. I think what we have to do is understand what will be the footprint of our business? How much will be digital? How much will be done from home? How many people we have actually working in the operations, and any of this compensation will have to be looked at based on the model. What I do think as we look at the overall cost saves, if I look at the next 12 months annually or sequentially by month, I think that we can get somewhere between $75 million and $100 million out completely. Now again, we don't have a lot of data on that. But as we see the number of people we have furloughed, and as the business all going to be decided by how business comes back. I can assure you, we are concerned about our people. In many cases here in the U.S., we provided extra support on the health care side, so on the benefits, and we'll continue to do that where possible.

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Operator [37]

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And Mr. Penske, no further questions in queue.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman & CEO [38]

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All right, John. Thank you, and thanks, everyone, for joining the call. We'll see you next quarter.

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Operator [39]

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Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.