Q3 2020 Penske Automotive Group Inc Earnings Call
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Introduce Anthony Port on 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 Twentytwenty financial results was issued this morning and is posted on our website along with the 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 JD 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.
Okay, and then amortization or EBITDA we.
We have prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures in this mornings 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.
Helps to differ materially from expectations I direct you to our SEC filings, including our form 10-K for additional discussion factors that could cause results to differ materially.
I would now like to turn the call over to Roger Penske.
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 97% to 312 million.
Income from continuing operations increased to 112% to 246.5 million and related earnings per share increased to 116% to $3.07.
After excluding a tax benefit from various U.S. and foreign tax legislation changes adjusted income from continuing operations increased 99% to 231 million and related earnings per share increased to 102% to $2.87.
Foreign exchange benefited earnings in the quarter by five cents.
Obviously this outstanding performance was driven primarily by 170% increase in retail automotive segment income.
No vehicle.
Used vehicle finance and insurance and fix operation margins all expanded.
Our restaurant expenses declined 29 million in the quarter and that's DNA as a percentage of gross profit improved a thousand and 10 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.
Well initially furloughed approximately 15000 employees.
Or 54% of our workforce in March at the.
We ended the third quarter, approximately 3% remained on furlough weve reduced our headcount by 14% as.
As of today are 3700 people to approximately.
23000 worldwide.
Third the above efforts, we estimate approximately 125 to 150 million in cost had 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 three.
3.75, senior sub notes at maturity.
We refinanced 550 million of the 575% senior sub notes by issuing 550 million a new notes.
A 3.5% due in 2025.
We used the proceeds from the new notes to redeem.
550 million or 5.75% notes due 2022.
On October Onest.
In the interim we utilized the proceeds from the 3.5% senior sub notes temporarily to pay down our floor plan.
Us resolve or revolver and mortgage revolver balances we.
We estimate the repayment and refinancing of our subordinated notes will reduce future interest expense.
Approximately 17 million annually.
As of September Thirtyth debt to capitalization was 42.7% compared to 45.6 at December 34 first.
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 [noise].
Let's look at the balance sheet at this point, it's in good shape total inventory of 3.2 billion.
Down 1.1 billion from December last year, new vehicle inventories down approximately 800 million used vehicle inventory down approximately 100 million and our commercial truck inventory is down 150 million our day.
Our days supply on new is 45 day supply on use is 40.
Now turning to the quarter to give you the performance on Q3 and Q3 retail automotive segment income increased 170% and was driven by an increase in gross profit per unit retailed selling.
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 retailed declined 4.5%.
Retail automotive same store revenue increased 3.6%.
And same store gross profit increased 15.3% for the.
For the quarter same store retail automotive variable gross profit.
Per unit increased $935.
29% the fourth.
The $4156.
Let me move on to our used vehicle Super Center business, we operate 16 locations during the third quarter. The Supercenter sold 18372 units at an average selling price just under 16000, and we had a return on sales of 4.5%.
The average Supercenter sold approximately 1100 units entered $1 million in the third quarter.
Through improved sourcing and inventory management grosses per unit increased $618 per unit or 35% to 2300 $78 the approach.
The improved sourcing as a result of using our scale in the UK has approximately 40% of our sales are from inventory required to enter internally through our online auction well in the U.S. by your current out purchases increased 47%.
And represented 14% of our total vehicle sold.
As we look at expansion, we opened two locations in 19 wells had successful openings and outperformed our initial expectation.
Glen Mills store in Pennsylvania for cash to retail approximately 1800 units per year. The Bristol location in the UK is forecasted to retail approximately 3000 units per year most.
Oh stores were profitable in the third month of operation.
We have six additional sites plan with four under development to in the planning process, which will increase our store count.
By 40%.
We will open up Nottingham store in the UK in December and Brunswick, New Jersey will open early in Q1 2021, we feel.
We forecast supercenters or retail 80000 vehicles in 2021, and 100000 vehicles and 2022.
Let me move onto our digital initiatives, we continue to grow expand and enhance our digital footprint, including the introduction of new tools and technologies. We currently have 50000 vehicles online our digital channels, while our efforts in the U.S. represented 52% of our unit sales and.
In the third quarter.
Multi channel marketing approach focuses on personalization, creating connection with our customers further are fully up funnye process through document pad continues to drive higher ethanol 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 by online has now facilitated over a thousand customer transactions since launching in may.
In the quarter or approximately 2% of our sales were completed by either using our preferred purchase tool.
Online buying tool in the UK.
We also are working on a new digital retailing initiative, enabling by new technologies 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. in Canada. During Q3, we sold 4480, new and used trucks compared to 2800 36 in the second quarter, representing a sequential and.
Prove but a 58 per.
58%.
For the third quarter same store retail unit sales declined 15.5%, which compares favorably.
To the North American class eight truck market, which declined 31%.
During the same period in fact, North American class eight market appears to be stronger than originally we had expected.
Retail sales are expected to be 225000, which is up from 150000 previously expected this year and Q.
In Q3, our revenue was almost 600 million and we had a return on sales of 4%.
Our service and parts operations represented nearly 72% of the total gross profit.
And our fixed cost absorption was 137% in the quarter right.
Right now freight the freight market is strong we expect this will provide strong tailwinds to our commercial truck and truck leasing businesses as we go forward in Q4 and 2021.
Turning to Pts Trent Penske transportation solutions in Q3, Pts generated 2.3 billion in total revenue.
Income of $222 million or 9.6% on sales as a result, our equity earnings were 64.5 million up 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 and the rental fleet declined to the low sixtys in the second quarter. Our utilization has now returned.
So over 85% and love.
And logistics all of our automotive customers have returned to operations gracefully grocery and retail volumes are operating at a higher than previously expected levels. We expect operations remained strong for the foreseeable future.
Just as a point. Additionally, Pts completed a bond offering this week so.
Securing 750 million a 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 re.
And a return on sales of 6.8%.
Excited about the opportunities we have in this market for future growth and profitability, especially in the mining energy and defense sectors, Yes.
Trey and government has budgeted over 500 billion Australian dollars in defense spending over there.
Over the next 10 years, we have contracts to supply power systems equipment and service for offshore patrol vessels combat vehicles frigates in submarines. In addition, we recently signed contracts worth a $120 million to supplies power system engines, 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 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.
Retail automotive remains strong and our Super centers business were focused on driving significant growth through new locations. Our goal to reach 100000 units and 2022.
Commercial truck business is poised to benefit from a recovering marketplace. There are many new opportunities on the horizon for our Australian businesses.
Thank you for joining us on our call today, and I will 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.
Pause for just a moment to compile the Q and a roster.
Your first question comes from the line of John Murphy from Bank of America. Your line is open.
Good afternoon Roger.
John couple of couple of potential growth.
Potential growth questions first on the used business you look at this with the.
Super centers, even what you're doing in your franchise dealerships.
You got with Tinchy Penske.
Transportation solutions.
And what you're doing on line. It just seems like you have a lot of the puzzle pieces that some.
Some of the other sort of pure online used vehicle retail startups, if you will.
And you Havent quite get them together at least publicly with us.
There over time, I know youre growing the physical footprint by 40%, but if you look at this and then you just got a lot of pieces that it just seems like.
Roger maybe tying up any need or both and you are already going after the little more explicitly.
Well look let's first start we really have a two pronged approach I'd have to say number one are we this call a bricks and mortar marder with our super centers and obviously that.
We're looking at are new to use ratio at 1.3 to one and when you look at the number of units 70000, 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 it and I think we got to look at our customization, how we personalize it.
And certainly create 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 Uh huh.
A couple of months, maybe end of the first quarter would be to have a pure online model and have it have a test sites that we can look at but one of the things that I'm looking at that we have a thousand locations across.
Across the country that are connected with.
With Penske truck leasing or Pts.
It would be very easy to use those from the standpoint of delivery locations across the across the country. So.
So I feel that the customer coming to a location to pick up his car the bought online versus maybe have a truck show up in this front door might be different in 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 will be able to be more open and 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, but 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.
Bond offering at 1%.
Indicative of a very low cost of capital for Pts as well.
EG.
Just curious as you have access to capital the way that you do.
In Pts and PHG are there any play.
Are there any plans to go out maybe raise even more sort of incremental growth capital to drive the businesses or get through the internal organic cash generation. Do you think you have kind of all you can handle somewhat responsibly on growth going forward can you just seem that this this free capital and what else.
Needs an entrepreneur, we like you can can really go out there and and.
Great some pretty good growth.
Well I guess, we got to look at fleet.
If we if we generate net cash for the year between four and 500 million now whether we can duplicate that and 2021 I am not sure but on the other hand. The fed is that interest rates are going to be low for a while I think I would pause right now with the slogan situation and also what when we look at what's coming up in the election what are the two.
Texas is 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 we're still going to be in the in the growth mode from a purchasing standpoint or by because we bought a billion and 18 into billion, a 19 and I think that.
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, we can pivot and make a considerable acquisition if we'd want to so I think that being safe and secure right now from my perspective, certainly doesn't hurt us.
But if something comes up that we need to move on we can move pretty quickly and just the street itself. When you look at the interest in the company and I realize its PGS not P.G., but we own a third of our 30% of that through P.A.G.
Gives us a strong indication of what people think about our paper and would give us flexibility. So again, let's take our interest costs down my goal is to have our debt probably in a position where we go back almost to 16 or 17 and we'd be in a position to be equal to where we were then which obviously would be positive going into 21.
Okay and then just lastly, thank you for that real quickly on SDMA costs.
Yeah, I mean this cost reduction in is very impressive I'm just curious as you afford you see how much of that do you think is is truly sticky.
And permanent and how much of it is a portion of variable sales comp.
I come back over time.
Well you know we have variable sales comp sales growth has come down obviously, the compensation would come down and I think that when we look at cost reductions what we're seeing is by reducing our sales force.
We have been left with the best sales people, what we're getting is better productivity from a sales perspective and quite honestly, that's helped us not only from a growth 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 will be time back as we need them, but I think on the major pieces. We've got back. So I would say personnel will say pretty much a 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 up.
It's a big area because based on our ability to get deal cars through the shop quicker with our more experienced people less loaner cars less vehicle maintenance.
Better quality less policy, you know for our customers and then again, our t. a knee when you think about travel entered and enter entertainment using the zoom in what we're all using today to connect degree do said significant I'm not sure what it was in the quarter, but I know it was several million dollars so that should be.
That should be able to give us some confidence that we can move the SG in a in an area where it is and I think right now at 67, we looked at a model that we took 500 to a $1000 off the gross profit it would move us probably into the 70 71 or 72%. So as we look at the model life.
I think that we're we're pretty strong on where we're going to be on our cost reduction as it affects as today.
That's very helpful. Thank you very much Roger.
Thanks, Sean.
Your next question comes from the line of Stephanie Benjamin Truest. Your line is open.
Hi, Stephanie.
Hi, good afternoon.
I wanted to touch a little bit about your commercial truck dealers dealer base.
In particular.
Dealer he made a comment Roger that.
Haitians for units are now about 225000 for Twentytwenty I'm curious because I'm also seeing reports where there is some constraints in production on the OEM. So maybe if you.
If you could talk a little bit about the supply and demand side of that business.
In the current environment.
If you look at the numbers for September.
The orders were 30000, if you if you have.
Annualize that.
The 360, so there's definite demand out there I know that freightliner, they're back up to capacity some.
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.
All of our retail truck business, but to me I think there'll be some constraints.
On supply base really not because of production at the OEM plants more because of the supply chain and we look forward to a good market in 21, as we're seeing people coming in and really people to cancel orders at the beginning of the year because the lower expectations are now coming back and placing or charter back. So I think we're on the right right side of the.
Herb right now.
Great. Thank you so much and then switching gears I wanted to talk a little bit about the UK business, maybe you can speak to how that performance how that business progressed throughout the quarter, what you've seen thus far in October.
How you feel and it positions.
Well, let 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 actually goes down in August because it's looking forward to the registration month is that since.
Timber, but when you when you look at the 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.
Three the three months and we think that overall we.
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 cold kits in certain parts of the country, which obviously, we know how to handle it.
If we have that internally in our business and also Brexit hangs out there, but it looks like at this particular time from Brexit perspective, there's good 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 in a trade deal but.
Deals into both interest of both sides. The strike additional question and I think there might be a moratorium on tariffs are talking about let it looked like Canada, let it looked like Australia.
Mhm Oems going to mitigate some of this if there is a term those are things I think that we have to look at going forward, but at this point, it's not disrupting any of the any of our business. So we look for a good good October November and December I think that our used car business will certainly output.
Form what it did last year, our superstores, 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 a high level I'd love to hear your thoughts Roger about kind of the state as the new vehicle market here in the U.S.. So you know a lot of conversations about.
Production constraints as well on that side that maybe your thoughts on when do we think we think inventory levels will start to pick back up again, and then what that might mean for just the strength in the market.
Well, let's just talk about we just.
We just saw node come across here in the last few hours at Toyota now is up to 94% so they're not even at a 100%. That's our plans here in the U.S., we see a a a a short supply obviously through Q4 going into 2021 on the premium luxury side were paid.
Any much placed and I think we're going to continue to see that the thing is.
The thing is to get the right mix, that's the vehicles that we could sell but theres no question overall trucks and issue. These are certainly the really hard still hard to get and those are the premium vehicles that we make our money on so I would say, we're going to have a supply pressure to.
To get the vehicles, we want point number one and then on the on the other hand from a market standpoint, I think we got to think a little bit socially what's really happening you know with the vehicle market.
And personal mobility, one of the things we get the benefit of is were being in Penske truck leasing and solutions as we see whats going around with the mobility.
The public of people living in different parts of the country.
Portland, Seattle, San Francisco, Los Angeles.
Did I not 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 we can look at a day after day.
People are moving out of the metro areas out into the country were out into other areas because we're seeing it from our truck demand perspective. In fact, if you have a true wanted truck to go to Chicago from Cleveland, We probably got rented for a dollar I mean these are the things we're doing to try to determine what the demand is so I think thats going to do.
Drive the personal mobility, a different way, which should create some more demand and used cars and also new cars now not hi, hi, luxury cars, but I mean cars that we would use on a daily basis. If you needed transportation, because I think combined transportation, where two or three people were together, whether it's <unk>.
Trent public transit, whether it's a rental car, whether it's uber or Lyft I think there is some softness in those businesses, which will drive more automotive sales for us both in new and used so I think these are things that.
Personal use.
We'll be help us drive a bigger part of the share of the auto business in the future and I could be wrong, but there's definitely a flight to safety I think because some of the issues that people are dealing with in these bigger cities, maybe that's not a good answer but.
Gives you some insight no that's really helpful and I think keeps reminding me I think you said this in the past. It did you give the percentage of your locations that are located in suburban areas.
Good provided something along those lines to quantify though we have.
Habit, but we would not have businesses that are located inside the big cities, maybe there's a few by thinking about San Francisco, we're out by the airport.
We were really well placed because when you're in the truck leasing business, we need to be close to the interstates and the highway so we wouldn't be.
Down in some of the deep Metro areas now we have a few that would probably to legacy locations, but we can get that for I'll get Tony to get that for you.
Got it thanks, so much everybody. Thanks.
Thanks. Thanks.
Your next question comes from the line of Rick Nelson from Stephens. Your line is open.
Hey, Rick.
Good afternoon, Roger Tony.
Hi, Rick.
Question for you here about supplies he got into those a little better.
Normalized.
Where do you think that Gpus.
Okay peer expense ratios were tricked out.
Do we go back to pre color.
Level, our trip per user.
Yes, potentially giambi had a higher level.
We moved forward.