Penske Automotive Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Feb 2021

[Operator:]

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 17, 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.

[Anthony Pordon:]

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 the 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.

[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% to 263 million, and income from continuing operations increased 97% to 200 million and related earnings per share increased 99% to $2.49. SG&A expense as a percentage of gross profit declined 940 basis points to 69.7% and declined 800 basis points on an adjusted basis to 71.1%. 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 million to 150 million in SG &A costs have been eliminated across our various businesses. During Q4, our retail automotive segment income increased 127%. 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 US and UK new vehicle markets including a complete lockdown of our showrooms in the UK in November.

[Operator:]

Our first question will come from the line of Rajat Gupta with JP Morgan. Please go ahead.

[Roger Penske:]

Hi, Rajat.

[Rajat Gupta:]

Hi, good afternoon, Roger, Tony. Thanks for taking my question. I just had the first question on just the growth – the new growth plan, specifically the franchise dealer acquisition. The 600 million in revenue, could you give us a sense of just the timeline of that? What kind of brands are you looking at? What regions you are specifically targeting? Or any color you can give us on just the multiples you're looking to pay for the ones that you're acquiring? And then on the used business – sorry, go ahead. I'll follow up there.

[Roger Penske:]

Let me let me just try to answer the first question, as you think about the growth between now and 2023, we're estimating about a billion in EBT. And I think they're really probably three areas. One would be our commercial vehicle business and transportation solutions would be – gross would be about 25% in that area. And then our organic growth would be – our US and UK businesses on the retail side would grow at 30%. And we'd have acquisitions, including our superstores at about 45%. So that gives you the three buckets of growth. I think when we look at the return on investment, we're seeing probably on the use car superstores will invest about 200 million, and we think the return on those would be about 30%. On the truck side, we probably see 20 to 25. And today, I think, if you look at it nationally, here at least in the US, I'm not talking about to UK, it's probably 10% to 15% return on capital. So we're going to focus for the right businesses giving us the right returns.

[Rajat Gupta:]

No, that's super helpful. On the 450 million, I mean, what are you seeing out there in terms of like the deal environment and just the kind of multiples or the pricing for some of those assets out there?

[Roger Penske:]

Well I think its location and brand and size. There's been some real good purchases made by some of our peers. I don't know what the numbers are, but I'm assuming that you're looking at six to eight times for some of these really premium sites and then we look on the truck side, we're probably paying half that. When you look at that and you don't have the CapEx, you don't have the CI you have to deal with. So we're going to be very selective and obviously when you can build a store up from the ground, you're certainly in better shape. But I would say this there's lots of activity right now.

[Rajat Gupta:]

Got it, that's super helpful. And just one more from a modeling standpoint, from an SG&A to gross profit ratio perspective, you reiterated the 125 million to 150 million in cost out. Once you're through with some of these near-term gross margin tailwinds especially on the new side, and you're back to a more normalized level, how should we be thinking about the SG&A to gross profit level more on a runway basis going forward? Thanks.

[Roger Penske:]

I think we're in the 73 to 74. We should still be down 300 to 400 basis points when you look at our traditional.

[Rajat Gupta:]

Got it, okay, great. Thanks so much for all the color. I'll get back in queue.

[Roger Penske:]

Thank you.

[Operator:]

Your next question comes from the line of John Murphy with Bank of America. Please go ahead.

[Roger Penske:]

Hey, John.

[John Murphy:]

Good afternoon, Roger. Thanks for all the info. Just the first question, maybe staying on the used car business, I mean, obviously, you're making a big commitment going from 17 to 40 outlets here, but the way you're talking about the numbers is a little bit linear sort of with the expansion in the physical footprint. So I'm just curious as you overlay your digital efforts, and then maybe leverage some of your other assets whether it be in PTS, in the logistic side or whether it be your other locations, whether it be new vehicle dealers. Is there a potential to maybe really – you've bent the ball a little bit more than just sort of on a linear basis here, because you've got a lot of different assets that you might be able to leverage in addition to these CarShop centers.

[Roger Penske:]

Well, let's just – I'm talking about CarShop now. And because we saw rocky during 2020 as far as you really expect – look at exactly what is the – where we are from a steady state, let's say 50,000. And we're looking to grow that. At this point we're looking to grow to 150,000 during the three year period and with that we've talking about 200 million roughly in CapEx and investment. But one thing that – obviously, by doing that we're going to continue to increase our capability technically through our tools that we have certainly online. But when you talk about delivery locations, we certainly have the opportunity. PTL has over 800 locations in the US. And there's no question that we could activate those in a model going forward that we could use those for delivery locations. And then in our logistics capability, we have the ability to move vehicles anywhere across the country. So I think, as you said, can we stretch or can we leverage those other assets we have? I would say definitely. And then of course, the systems and we're able to test many of these – some of these in the UK. So in the US the good news, we have one global brand. And with that brand, we can continue to build that across many of the markets. And I think that when we look at the scale of our footprint, where we'll be, and we'll have some will be large, we look there's one, I think in the material that Tony sent out this morning, there's information on one in the UK where we'll have 900 cars in stock, and they'll do 500 cars monthly. So it's less than a 60 day supply. So to me, when we pull all that together, it's going to be able to drive and meet that goal we have. It's in our plan. We have the metrics. We have the CI identified. We have our marketing plans. And I think tying that together with best in class tools that we have in the UK that we can also can pivot and move those into a CarShop US. I think it'll give us a real start in the business.

[John Murphy:]

Yeah and then just a second question, I mean, right now you're seeing incredibly strong pricing and as a result big GPUs for you on the used and the new side. It seems like things are going to remain kind of tight here at this chip shortage on the new vehicle side and that'll probably overflow into tightness in the used market. Just curious how much longer do you think the industry and you specifically in your dealerships can manage what is really great performance in sort of challenging volume environments?

[Roger Penske:]

Well, I think that we probably felt at the end of Q1, we started to see some deterioration on new. There's been a little bit on used I'd say, but not any great degree as we look even into January because our margins were up 1.2% on new and 1.4 on used last year. I think with this chip announcement and some of the news that have come out here in the last few days, I think it's going to be probably Q2 to Q3 before the supply chain starts to meet the demand. And with that case, we're going to have less inventory. So we'll have less cost of floor plan. And certainly, in our sales people are used to getting big grosses, and getting – they're on a variable pay plan, most of them, so I don't really see much deterioration as we look at – we're in a premium luxury side, there's probably less there than we'd see in a high volume. I think that's important. One of the benefits we got during – if you got any benefit at all, during the COVID situation is where we reduced headcount about 11%. On the sales side, we actually took out the lower performers, and we're seeing that we're getting more units per sale per salesman and the margins are higher. So I think that dynamic will continue. And I think the chip really, is really going to be the question mark what we can drive them. But I think you see that pretty much in over – we had a nice increase almost $900 last year on new. So to me, I think what we have to really look at – if you look at January, from the standpoint of where we are our new unit volume was up 3%, which I think we saw good grosses. And when you think overall in the US to have it up 3%, during what's going on, I think that's key. And certainly when you look at overall – from an overall percentage, I think you're probably going to see some deterioration in the UK with the stores closed. But if we can utilize the click and collect that we have to deliver the 11,000 units in January. And when I look at the March order board, which is a registration John, we're saying grosses are up on that order board and we're also seeing an increase of 11% over '19, which would be the best benchmark versus talking about '20.

[John Murphy:]

Yeah, seems like a pretty good environment, even though it looks a little bit choppy. Just lastly, on the debt pay down, I appreciate you're going to be in a good position to save a lot on interest. Yet, there's a lot of opportunity, as you're kind of highlighting in front of you to deploy capital and capital right now, particularly even on the debt side is relatively inexpensive. So I'm just curious if there's a an appetite to reload and maybe leverage the additional above and beyond a $1 billion plus of liquidity you have right now to really go after some of these opportunities, maybe more aggressively than you're talking about now.

[Roger Penske:]

Yeah, I would say this that under the right circumstance and that's how we built the business. We take our leverage to 2.5, maybe to 3, 3 times if we had to. We don't have a door closed at all. But I think when you really look back, what we did in '20 – our balance sheet, we invested about 450 million in revenue of non-performers, or at least they didn't meet our benchmark requirements. And I think and that's following about 450 million the previous year. So we've called out a number of underperforming businesses in the US and also in the UK. And I think that's paid off. So once we've done that and you start to look at the quality of our management team and what they're able to perform. And even with January, quite honestly, the only thing I see, and I think I've mentioned it before, there's probably some deterioration from the parts and service because talking to the OEM key people, they're saying there's about a 14% less miles driven, if you look at the last 90 days. So you have to factor that. I can't tell you what that's going to do to our margin and gross profit in parts and service in Q1. But I think it's something that we all got to talk about.

[John Murphy:]

Okay. That's very helpful. Thank you very much.

[Roger Penske:]

Thanks John.

[Operator:]

Your next question comes from a line of Rick Nelson with Stephens.

[Roger Penske:]

Hi, Rick.

[Rick Nelson:]

Thanks. Good afternoon, Roger Tony. You provided a nice roadmap to get to those $1 billion in pretax income for 2023. I'm curious how you're going to fund the growth? Do you see debt ratios picking up to do that or can you fund the bulk of it with your internally generated cash flow?

[Roger Penske:]

Well, I would say right now, I mean, when the cash flow we generated last year, the net cash flow to pay down 670. We've reinstituted our dividend so that will take some. I think our CapEx plan, we've been very I think judicious on our CapEx plan to keep that in line. I think that we'll be able to utilize our cash flow from operations in all cases. And I think that the only big impact would be if I looked at it right now, over the three year period would be 50 million or 250 million for the SuperCenters and then any other acquisitions. And we would probably in many cases, where we had to build a building, the OEMs, are giving us long-term money 10 and 15 year money through their captives, which is quite attractive. So from a real estate perspective, I don't see any reason we'd have to go into markets. But on the other hand we've had very good rates both at the PTS side and the PAG side here in the last say couple of deals that we put in the market. So I think that when you – if you looked at acquisitions, we probably have 400 million to 500 million that we could have available for acquisitions over the three year period, easily.

[Rick Nelson:]

Great and just to follow up on acquisitions in the environment, US, UK, commercial trucks is – potential for add on segments that you're not in today, or you're looking to fill out current segments, where is the shopping most fertile, I guess, at the moment?

[Roger Penske:]

So I guess I said it earlier, I think we want to – what's the best return on our capital employed. And we're seeing the SuperCenters, we don't have the CI, we don't have a lot of the restrictions market areas and certain framework agreements. So that would be – that's going to certainly be a focus and continue and we'll grow that CarShop, both in the US and the UK. On the other hand there's been consolidation going on in the heavy duty truck business, and we would expect to see us active in that area. And then as I said earlier, we're not out of the auto business at all. And I think that we're just not – we're going to be mindful and not overpay for potential CapEx. And I would say we really had the lights off on CapEx assuming on acquisitions in 2020, because we really wanted to focus on building the balance sheet, being sure that we were able to remediate or dispose of non-performing assets and then being – having to be able to deal with the UK particularly. We haven't had it here in the US when they say every one of your showroom is closed. And I would tell you that the job that our people have done in the UK, Darren Edwards and his team has been amazing. To think about delivering 12,000 vehicles in a month and you don't have your showroom open. I mean, this is a great, great effort that was given by those guys. And I think, from our perspective, in the US, obviously, our people here have been able to deal with COVID because we had this close down locations, we had people out, and many times four or five people in the same location. So I think that with the job that we've done in that area has really been amazing. So I think that when I look at where we're going, all markets really are open for us. I like contiguous. I like as you notice the open points we're getting. This is where we already have scale. I think you'll see that on the auto side.

[Rick Nelson:]

Great color, thanks, Roger, Tony, and good luck.

[Roger Penske:]

Thanks Rick.

[Operator:]

Your next question comes from the line of Stephanie Benjamin with Truist.

[Roger Penske:]

Hi, Stephanie.

[Stephanie Benjamin:]

Hi, good afternoon. Hi, Roger. Hi, Tony.

[Anthony Pordon:]

Hi, Stephanie.

[Stephanie Benjamin:]

I wanted to switch gears here at premier truck group division, maybe you can talk a little bit about what you believe are the key drivers of just the demand that we've seen, particularly on the used unit side, but also on new and what your expectations for parts and service in this – for this segment as we go through 2021? Thanks.

[Roger Penske:]

Well, I think number one with all the commerce going on, whether it's small boxes or big boxes the freight market is up. Spot rates are up. We can see that the carriers are now switching where they were really trying to deflate, they're fleeting up and that that bodes well for us as a retailer of heavy duty trucks and I think we're seeing the benefit of that. And where the used value is going? Guys sit on their trucks when the values in the market, I mean, are underwater with those numbers go up on a heavy duty tractor, we've seen a move up 5,000 to 6,000 units. And with that there's no question or $1,000 where that gives them the ability to sell their trucks in the market. And that's been a big, big help to us when we look at doing deals going forward, but I would say as freight, there's no question that now there's a pent up demand for equipment and the new technology, the emissions, the fuel economy, some of the telematics is all driving this. And for me, from our perspective, the parts and service that's really the heart of the truck business, because when you're running 120, to 130, to 140, coverage, your fixed costs, in many months, we cover all our costs in parts and service. And when you look at a return on sales, certainly when we look in Q4, we're at 4.5% and when the market is going to be close to 300,000. Remember, we had 320, 330, I think it was in the '19. And we thought that '20 was down which it was, but this really snapped back. I just see it's a trait. It's some pent up demand. It's better used truck prices and technology.

[Stephanie Benjamin:]

That's really helpful. And just as a follow up, I know you've talked broadly about M&A on the retail auto side, as well, as discussing your expansion to build out your used vehicle stores. What's your appetite of continuing to build out your presence on the commercial truck dealership side?

[Roger Penske:]

I would say it's one of our three pillars going forward in order to go forward, we have the team and I think the appetite is strong.

[Stephanie Benjamin:]

Got it. Well, that's it for me. Thank you so much.

[Roger Penske:]

Thank you, Stephanie.

[Operator:]

We do have a follow up from the line of Rajat Gupta with JP Morgan.

[Rajat Gupta:]

Hey, sorry. Thanks for getting me back in the queue. I just was curious, like you provided some color on 2021one earlier, anything we could get on PTL specifically, given how strong the exit rate has been. Is it just more of a temporary benefit than we should expect in the near term? Or are we at this new run rate of like roughly – you did like 169 million in equity income last year. So is that kind of like a good base to work off of as the economy recovers?

[Roger Penske:]

So when you looked at the business and our business did 569 million, I think is the number for the year. I think the return on sales was 6%, almost 9% in the quarter. And our – all guns are loaded. And we are absolutely – from a rental utilization there is absolutely no question that the market is strong, driven by used truck prices. I think the fact that we have the flexibility. We're signing many, many long-term leases. Interest rates are down. Obviously, our borrowing costs are in great shape. And I think our overall footprint is key. We're seeing our one way business this is rented here leave it there, is way up because people are fleeing some of these major cities, which I think is really key. And when we look at that we're getting margin now that we've never seen before. So I think with the contract sales, the rental business, I think we had out to some of the people like FedEx and UPS, DHL, we had almost 20,000 units on rental out to them during the holiday. And some of those haven't come back, because there's so much traffic going on in the lighter freight area. I think the remarketing, which is gain on sale is much better than we would have expected and we have a big turn of fleet as we go into '21 and '22. So I would assume – and thinking that we were under some real lockdowns earlier there in March and April. And you just take that out, look at the run rate to last six months and figure 200 million what they did in the fourth quarter, you look at that and fast forward that we really have a real strong market going forward. And I think our team got almost over 30,000 people in the locations we have. CapEx has been stronger, continues to be and we're executing and I think the brand is strong, and we've got great culture. And when we look at liquidity, obviously, we did a bond offering, I think 700 million right around 2% for five years, which is really good for us from an acquisition capital perspective. The Black Horse, which is a logistics operation, it was out in Chicago, well regarded in the industry and that was a negotiated bid at 600 million revenue for 2021 that will move our revenue up to 7% alone. So we'll continue to invest properly there, but right now one of our problem is going to be that we've probably reduced our fleet down on the rental side, maybe a little too low. And we're going to have to try to get slots in order to get trucks in order to fill those as we go forward in the second and third quarter. So overall, I would say that that business has never been better. And we're setting all time records in many of these areas every month.

[Rajat Gupta:]

Great, thanks for that color. And good luck.

[Roger Penske:]

Thanks for the support.

[Operator:]

And there are no further questions at this time. I'll turn the call back over to Mr. Penske for any further remarks.

[Roger Penske:]

Well, thanks everybody for joining us. Great year in 2020 other than what we're dealing with on COVID et cetera. I hope everybody's safe and healthy. And we feel good about our business. We got a great team here in the US that have really done a superb job. Internationally there's no question, we when you think about Spain and Germany and Italy and Australia, every one of these areas is created another opportunity and also issues we had to deal with. So I want to thank the team. Hopefully some are on the line here, but we'll see you next quarter. Thanks.

[Operator:]

Ladies and gentlemen, that will conclude today's call. Thank you all for joining and you may now disconnect.