Penske Automotive Group Inc (PAG) 2020 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Third Quarter 2020 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through November 4, 2020, on the company's website under the Investors tab at www.penskeautomotive.com.

I will now introduce Anthony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Jason. Good afternoon, everyone, and thank you for joining us today.

A press release detailing Penske Automotive Group's third 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 am available by e-mail or phone for any follow-up questions you may have.

Joining me for today's call are Roger Penske, our Chairman; J.D. 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 and amortization or EBITDA.

We have prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures in this morning's press release and investor presentation, which 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.

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 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 102% to $2.87.

Foreign exchange benefited earnings in the quarter by $0.05. Obviously, this outstanding performance was driven primarily by 170% increase in retail automotive segment income as new vehicle used, vehicle, finance and insurance and fixed operation margins all expanded.

Our SG&A expense declined $29 million in the quarter, and SG&A as a percentage of gross profit improved 1,010 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.

We initially furloughed approximately 15,000 employees or 54% of our workforce in March. At the end of the third quarter, approximately 3% remained on furlough. We've reduced our headcount by 14% as of today or 3,700 people to approximately 23,000 worldwide. Through the above efforts, we estimate approximately $125 million to $150 million in cost have been reduced across our various businesses.

During the first 9 months, we generated $846 million in cash flow from continuing operations. Our net CapEx expenditures year-to-date were down $87 million when compared to the same period last year.

During the quarter, we repaid our $300 million, 3.75 senior sub-notes at maturity, and we refinanced $550 million of the 5.75% senior sub-notes by issuing $550 million in new notes at 3.5% due in 2025. We used the proceeds from the new notes to redeem $550 million of 5.75% notes due 2022 on October 1. In the interim, we utilized the proceeds from the 3.5% senior sub-note temporarily to pay down our floor plan, U.S. resolver -- revolver and mortgage revolver balances.

We estimate the repayment and refinancing of our subordinated notes will reduce future interest expense by approximately $17 million annually.

As of September 30, debt to capitalization was 42.7% compared to 45.6% at December 31.

On a pro forma basis, on October 1, we have $1.95 billion of non-vehicle debt, which is down approximately $407 million from December 31.

Let's look at the balance sheet at this point. It's in good shape. Total inventory is $3.2 billion, down $1.1 billion from December last year. New vehicle inventory is down approximately $800 million, used vehicle inventory down approximately $100 million, and our commercial truck inventory is down $150 million. Our day supply on new is 45 and days supply on used is 40.

Let me now turn to the quarter to give you the performance on Q3.

In Q3, retail automotive segment income increased 170% and was driven by an increase in gross profit per unit retail, selling, general and administrative expense reductions, lower interest cost due to a reduction in inventory, and overall lower debt levels.

Total same-store new and used unit retail declined 4.5%. Retail automotive same-store revenue increased 3.6% and same-store gross profit increased 15.3%. For the quarter, same-store retail automotive variable gross profit per unit increased $935 or 29% to $4,156.

Let me move on to our used vehicle supercenter business. We operate 16 locations. During the third quarter, the supercenter sold 18,372 units at an average selling price just under $16,000, and we had a return on sales of 4.5%. The average supercenter sold approximately 1,100 units and earned $1 million in the third quarter.

Through improved sourcing and inventory management, grosses per unit increased $618 per unit or 35% to $2,378. The improved sourcing is the result of using our scale in the U.K., as approximately 40% of our sales are from inventory acquired through -- internally through our online auction.

Well in the U.S., Buy Your Car Now purchases increased 47% and represented 14% of our total vehicles sold. As we look at expansion, we opened 2 locations in '19, both had successful openings and outperformed our initial expectation.

The Glen Mills store in Pennsylvania forecasted to retail approximately 1,800 units per year. The Bristol location in the U.K. is forecasted to retail approximately 3,000 units per year. Both stores were profitable in their third month of operations.

We have 6 additional sites planned with 4 under development, 2 in the planning process, which would increase our store count by 40%. We'll open up Nottingham store in the U.K. in December, and Brunswick, New Jersey will open early in Q1 2021. We forecast supercenters will retail 80,000 vehicles in 2021 and 100,000 vehicles in 2022.

Let me move on to our digital initiatives. We continue to grow, expand and enhance our digital footprint, including the introduction of new tools and technologies. We currently have 50,000 vehicles online, our digital channels, while our efforts in the U.S. represented 52% of our unit sales in the third quarter.

Our multichannel marketing approach focuses on personalization, creating connection with our customers.

Further, our fully F&I process through docuPAD continues to drive higher F&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 U.K., our digital used vehicle pilot buy online has now facilitated over 1,000 customer transactions since launching in May. In the quarter, approximately 2% of our sales were completed by either using our preferred purchase tool, our online buying tool in the U.K.

We also are working on a new digital retailing initiative, enabling -- by new technology 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. and Canada.

During Q3, we sold 4,480 new and used trucks compared to 2,836 in the second quarter, representing a sequential improvement of 58%. For the third quarter, same-store retail unit sales declined 15.5%, which compares favorably to the North American Class 8 truck market, which declined 31% during the same period. In fact, North American Class 8 market appears to be stronger than originally we had expected. Retail sales are expected to be 225,000, which is up from $150,000 previously expected this year.

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 now, 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, Penske Transportation Solutions, in Q3, the PTS generated $2.3 billion in total revenue and 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 in the rental fleet declined to the low 60s in the second quarter, our utilization has now returned to over 85%.

In logistics, all of our automotive customers have returned to operations. Grocery and retail volumes are operating at a higher than previous expected levels. We expect the operation to remain strong for the foreseeable future.

This is deployed additionally, PTS completed a bond offering this week, securing $750 million in notes for 5 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 return on sales of 6.8%. I'm excited about the opportunities we have in this market for future growth and profitability, especially in the mining, energy and defense sectors.

The Australian government has budgeted over AUD 500 billion in defense spending over the next 10 years. We have contracts to supply power systems equipment and service for offshore patrol vessels, combat vehicles, frigates and submarines.

In addition, we recently signed contracts worth $120 million to supply power system engines to 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 the future, I remain confident about the opportunities I see across our diversified enterprise.

Our disciplined approach to cost reductions of $125 million to $150 million will help drive expense leverage in future periods.

Retail automotive remains strong, and our supercenters business are focused on driving significant growth through new locations in our goal to reach 100,000 units in 2022.

The commercial truck business is poised to benefit from a recovering marketplace. There are many new opportunities on the horizon for our Australian businesses. Let me thank you for joining us on our call today, and I'll turn it back to the operator for questions.

(Operator Instructions) Your first question comes from the line of John Murphy from Bank of America.

A couple of potential growth questions first.

I mean, on the used business, as you look at this with the supercenters, even what you're doing in your franchise dealerships, what you got with Penske Transportation Solutions and what you're doing online.

It just seems like you have a lot of the puzzle pieces than some of the other sort of pure online used vehicle retail start-ups, if you will, have, and you haven't quite knit them together, at least publicly with us. Is -- what are the efforts and the opportunities there over time?

I know you're still growing the physical footprint by 40%. But as you look at this, I mean, you just got a lot of pieces in it. It just seems like other folks are maybe tying up in a neater bow than you are or actually going after it a 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 -- it's called a bricks-and-mortar with our supercenters. And obviously, that -- we're looking at our new to use ratio at 1.3:1. And when you look at the number of units, 70,000, we sold in the quarter. A portion of that, obviously, was through our supercenters.

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.

And I think we got to look at our customization, how we personalize it and certainly creating a 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 couple of months, maybe into the first quarter, would be to have a pure online model and have a -- test sites that we can look at. But one of the things that I'm looking at, that we have 1,000 locations across the country that are connected with Penske Truck Leasing or PTS. It would be very easy to use those from a standpoint of delivery locations across the country.

So I feel that a customer coming to a location, to pick up his car that he bought online, versus maybe having a truck show up in his front door might be different and 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'll be able to be more open on 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, that bond offering at 1% is indicative of very low-cost of capital for PTS as well as PAG.

I'm just curious as you have access to capital, the way that you do in PTS and PAG, are there any plans to go out and maybe raise even more sort of incremental growth capital to drive the businesses? Or through the internal organic cash generation, do you think you have kind of all you can handle somewhat responsibly on growth going forward? Because it just seems like there's free capital and do they often need an entrepreneurial like you can really go out there and really create some pretty good growth.

Well, I guess, we got to look at -- if we generate net cash for the year between $400 million and $500 million, whether we can duplicate that in 2021, I'm not sure. But on the other hand, the Fed has said interest rates are going to be low for a while. I think I would pause right now with the COVID situation.

And also, when we look at what's coming up in the election, what are the taxes 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 growth mode from a purchasing standpoint or buy because we bought $1 billion in '18 and $1 billion in '19. And I think that the cash flow was so strong at the particular time, and we want to continue to pay down our debt to keep our interest costs lower, but obviously gives us a strong balance sheet and 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 it's PGS, not PAG, but we own 1/3 -- 30% of that through PAG, 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.

And then just lastly, real quickly on SG&A costs. Yes, I mean this cost reduction is very impressive. I'm just curious, as you go forward, do you think -- how much of it do you think is truly sticky and permanent? And how much of it is a portion of variable sales comp that might come back over time?

Well, we have variable sales comps. So as grosses 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've been left with the best salespeople. And 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'll be time back as we need them. But I think on the major pieces, we've got back.

So I would say personnel will stay pretty much 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 a big area. Because based on our ability to get cars through the shop quicker with our more experienced people, less loaner cars, less vehicle maintenance, better quality, less policy for our customers.

And then again, our T&E, when you think about travel and entertainment using the Zoom and what we're all using today to connect, they've reduced that significantly. I'm not sure what it was in the quarter, but I know it was several million dollars. So that should be able to give us some confidence that we can move the SG&A in an area where it is. And I think right now it's 67%. We looked at a model that if we took $500 to $1,000 off the gross profit, it would move us probably into the 70%, 71% or 72%.

So as we look at the model, I think that we're pretty strong on where we're going to be on our cost reduction as it affects SG&A.

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

I wanted to touch a little bit about your commercial truck dealer business. In particular, you made a comment, Roger, that expectations for units are now about $225,000 for 2020.

I'm curious because I'm also seeing reports where there's some constraints in production on the OEM front.

So maybe if you could talk a little bit about the supply and demand side of that business in the current environment?

Well, if you look at the numbers for September, the orders were 30,000. If you annualize that, that would be 360,000.

So there's definite demand out there. I know that Freightliners are back up to capacity. Some of the supply chain, however, has 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 of our retail truck business.

But to me, I think there'll be some constraint on supply base, really not because the 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 had canceled orders at the beginning of the year because the lower expectations are now coming back and placing those orders back.

So I think we're on the right side of the curve right now.

Great. And then switching gears, I want to talk a little bit about the U.K. business. Maybe you can speak of how that performance, how that business progressed throughout the quarter, what you've seen thus far in October? And how you feel it is positioned?

Well, let's really look at July, August and September. I think July probably had some pent-up demand. Remember, we were closed almost for 2.5 months there when you look at the business. So probably some pent-up demand in July.

The V actually goes down in August because it's looking forward to the registration month that's in September. But when you look 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 homogenize the 3 months, and we think that overall, 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 once we look at March and we look at September, but I think the -- overall, when we look at the future, we're getting some COVID hits in certain parts of the country, which, obviously, we know how to handle.

If we have that internally in our business, and also Brexit hangs out there, but it looks like at this particular time, from a Brexit perspective, 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 a trade deal. But a deal's in the both interests of both sides, they strike a deal, there's no question. And I think there might be a moratorium on tariffs. They're talking about let it look like Canada, let it look like Australia. The OEM's going to mitigate some of this, if there is a tariff.

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 October, November and December. I think that our used car business will certainly outperform 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, a high level, I'd love to hear your thoughts, Roger, about kind of the state of the new vehicle market here in the U.S., a lot of conversations about production constraints as well on that side. Maybe your thoughts on when do we think inventory levels will start to pick back up again, and then what that might mean for just the strength of the used market?

Well, look, let's just talk about -- we just saw a note come across here in the last few hours that Toyota now is up to 94%. So they're not even at 100%. That's their plants here in the U.S.

We see a short supply, obviously, through Q4, going into 2021 on the premium luxury side, where we're pretty much placed.

And I think we're going to continue to see that. The thing is to get the right mix at the vehicles that we could sell. But there's no question, overall, trucks and SUVs are certainly really -- 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 get the vehicles we want, point number one. Then on the other hand, from a market standpoint, I think we got to think a little bit socially what's really happening with the vehicle market and personal mobility.

One of the things we get the benefit of is we being in Penske Truck Leasing and Solutions, as we see what's going around with the mobility of the public, of people living in different parts of the country. Portland, Seattle, San Francisco, Los Angeles, 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 -- and we can look at it day after day, that people are moving out of the metro areas out into the country or out into other areas. Because we're seeing it from our truck demand perspective. In fact, if you have -- wanted a truck to go to Chicago from Cleveland, we probably -- you can rent it for $1. I mean, these are the things we're doing to try to determine what the demand is.

So I think that's going to drive the personal mobility a different way, which should create some more demand in used cars and also new cars now, not high luxury cars, but I mean, cars that we would use on a daily basis if you needed transportation, because I think combined transportation where 2 or 3 people are together, whether it's in a public transit, whether it's a rental car, whether it's Uber or Lyft, I think there's 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 will 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 it gives you some insight.

No. That's really helpful. And I think -- you reminded me, I think you said this in the past, did you give the percentage of the -- your locations that are located in suburban areas? Or have you -- could provide us something along those lines to quantify what you have?

We haven't. But we would not have businesses that are located inside the big cities. Maybe there's a few, but I think about San Francisco, we're out by the airport. We're really well placed because when you're in the truck rental and 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 were probably the legacy locations, but we can get that for -- I'll get Tony to get that for you.

Your next question comes from the line of Rick Nelson from Stephens.

Question for you here about supplies. You got into those a little bit as they normalize, where do you think the GPUs and the expense ratios would shake out? Do we go back to pre-COVID levels now with GPUs? Or are we potentially going to be at a higher level as we move forward?

Well, I think what we really have to look at, there will be -- with more inventory, there's no question. If you don't have the right inventory, then you're going to be selling vehicles just to dispose of them because the OEM has made you take them.

And I can't -- I don't want to comment on what the OEM's posture is going to be in Q4 into 2021. But I think internationally, we see good discipline not setting targets that are unrealistic because I think the OEMs and I hope the dealers have longer memories that we don't need to give cars away, and we can get these margins that we've been getting.

Obviously, we've been up about 800 on both new and used when we look at it across the board. So for me, I think that there'll be some deterioration, there's no question.

Can we be at this level? The answer probably is no. So from an SG&A perspective, we're going to have to be sure that we maintain the cost-outs that we've taken. So I think overall, we did a test, Tony did for me, looking at a $500 and $1,000 reduction in gross margin.

And I think it adds probably about 300 basis points to our SG&A if you look at it based on the current situation.

Okay. That's helpful. So you're throwing off a lot of free cash you've been after the balance sheet, reducing that. You pulled a lot of tops out. Should we expect more of the same, that you're going to continue to pile that free cash into reduced debt levels.

I recognize you got a new, a -- reinstated the dividends. So that will use up some of the cash. But -- your plans there? Is it going to be a while before we see acquisitions? Or do you think they're more imminent?

Well, I think, really, we were certainly not in a no-acquisition mode when we started 2020. But when we got to mid-March, we put our pencils down and said, at this point, let's look at liquidity. Let's look at the marketplace and look at our balance sheet, and there's no question at that point that we did that.

And furthermore, then we looked at how could we reengineer our balance sheet from the standpoint of the debt we had, I think we successfully -- our finance team has been able to take that down, and we're seeing that we'll see the benefits next year. Now from the standpoint of generating $300 million to $400 million to $500 million of net free cash flow, now our dividend is back, our 401(k) is back, so that will utilize some of that.

I think our CapEx still will be well controlled next year. So that will give us additional capital to utilize.

But to me, we got dividends, we've got other things that we can do. Share buyback. These are all areas or levers of opportunity, but we're going to continue to invest in the used car supercenters, as you know.

And I think when we look at those, we've traditionally, if you look at the quarter, they generate probably somewhere around $3 million to $3.5 million. So the return is about 25% on a $10 million to $12 million investment.

So that's certainly is an area that we're focusing on and want to execute. We cannot execute, however, at the speed of some of our other peers. We just can't -- because we're building larger sites, they have reconditioning. They have service because they wanted to be sticky to get repeat and referral. And then we're going to invest in our digital, the pure online piece, which is going to be more technology.

And obviously, will take some of our capital. But I would say this, if there's anything that's out there that fits our model, meeting key brands that we already have, markets where we have scale and certainly, from a retail truck perspective, the fact that we have this footprint today, we're very interested to grow that. So we would look at all of those as opportunities, but we're in a position to be able to go to the market, even get more capital if we have to.

Great. And finally, if I could ask you a near term question, how October sales might be tracking?

Well, I would say that October sales -- it's a hard time this time of the month to say where we're going to be. I think we came off of a very hot September. We are absolutely out of vehicles right now, which -- so if you looked at our numbers, we probably would look like we're down somewhat, but single digits, obviously.

Some brands might be more because we're just out of vehicles. So I think it's too soon to really tell you where that's going to be, but everybody's talked about availability. And I think I don't need to go over that again.

Presumably GPU is rock solid.

Your next question comes from the line of Rajat Gupta from JPMorgan.

I just had a broader question on electric vehicles. And how do you think the dealer channel is likely to be impacted going forward, as more of more of these OEMs start to offer a one price, no haggle, (inaudible) to their website. I mean how do you think this could change your profitability profile on the new vehicle side?

I'm assuming services will still be a key source of income. But just on the new vehicle sales profitability, do you see any disruption, maybe more efficiencies?

GMC, GM yesterday talked about trying to make some changes in the channel. So just curious as to how do you see this playing out? And I have a follow-up.

I guess you'd have to say it's taken Tesla $20 billion or more to get where they are today, to get to profitability. I think it's very difficult to -- and they have a complete -- from top to bottom, meaning when you look at the total journey from manufacturer, to delivery, to service and they're not using a franchise network. At this point, it would be difficult -- with the franchise laws we have in the U.S., I think that it would be difficult to go on a full scale.

Now maybe there's leverage that you have that I don't know about. But I think that GM would utilize the dealerships that would qualify to sell certain vehicles, and there might be stipulations that you have to have for electrification and other things that they might not have, in order to qualify. But from our perspective, these are all low volume.

And remember, all of these boutique brands that are coming out, excluding, maybe Hummer.

But when you think about it, if you sold 10 or 15 or 20 or 25 a month, you have no parts in service. You've got to have a facility. And then you think about the OEM having to support that either directly, it's going to take a lot of capital, and I don't think they're going to get the return that you would expect.

So to me, I think that overall, these are going to be boutique. At the moment, when we look at electrification and where it's going to be in 5 or 10 years, still with 300 million vehicles in the car park, I think it's still going to be a long time before we see it, 30% or 40% of the market.

We're investing in electrification. We think there's some very good vehicles out there, but they're typically high priced. If you look at the premium luxury, people primarily we're seeing, maybe other than Volkswagen, we're seeing these high-priced wares infrastructure. And again, what's the residual values on these? And if these new entrants, where are they going to have a captive finance company who's going to support the residuals?

So there's lots of questions before I think you're going to go to a separate channel.

Fair enough. And just on the used supercenters, you gave us some numbers around the economics of these stores and how they're tracking here in the third quarter.

It looks like, I mean, the return profile here is around 20%, 25% for the used supercenters. Like one of your peers that also has a stand-alone business, they've talked about returns like above 30%, 55% or so. I mean, just curious as to what the difference might be, why you could replicate something like that? Or are we missing something here? Just curious as to your thoughts on that. And then...

I think what we have to do is maybe some of the peers are using existing sites that they already have and they're repositioning those -- these might be previous dealerships, as some of these used car sites. We have a different path. As we say, bricks and mortar, we are going to have significant sites that have the ability for service. I think I mentioned it before, and also reconditioning, and they'll be larger.

So to build them, it takes at least a year, and we think 2 to 3 to 4 months they're profitable. And I think overall, we will continue on that path.

I don't want to overcommit and then not come back with the profitability. But we've seen it. Remember, we've got a mature -- I say, not mature, but a business that we've been running now for the last 3 years and growing. And it's been consistent. I think a bigger thing that we have to look at longer-term is acquisition. No one's talking about acquisition.

Now everybody is talking about how great this business is. But with acquisition, it's going to get tougher. The only benefit there is that residuals will go up on you, will help finance companies, help our OEMs and again, will we be able to still get the margin, or are we bumping against new car prices on some of the lower vehicles?

So to me, at this particular time for me, I think 25% return, certainly it would be good if we can sustain that and do it on a proper basis. I don't think that overall, that we can grow with the speed that some of them -- unless we have a bunch of business locations that we're not using. Certainly, when you look at the size that we're building in some of the locations.

And you've seen CarMax has been very, very successful from the standpoint of building their network around the country. They have a few smaller stores. But in most cases, these stores hold 300 to 400 to 500 vehicles, and that's kind of our model, both internationally and domestically.

So again, when you look at 100,000 vehicles that we'll sell through our supercenters now in 2022, and then we can grow from there. And I don't want to start forecasting '23, '24 and '25 because I want to know what's going to happen, what's going to be the new norm in transportation, et cetera, as we go through November and into 2021.

(Operator Instructions) Your next question comes from the line of David Whiston from Morningstar.

Just a few questions. First on service. It seems like for all the dealers, it hasn't come back yet or at least hasn't come back to the point that it's incrementally positive year-over-year in the quarters. There must be a huge pent-up demand. Do you agree with that? And when do you see customers coming back?

Well, I think we've got to look at miles driven. My understanding from the data that I'm looking at that some places up in the northern western part of the country, miles are down. Some of that's the fires, et cetera. But again, that's going to have some impact on it. We know for sure that our parts and service business is down, if you look at the aggregate of all the pieces, customer pay warranty to ready and body shop.

Body shops are off, for us, about 20%. And I think until we fill that work in process, we'll see that continue to be a drag on our business and the impact of fires in California, we know had impact. But again, the number of people we have -- people who are working at home, obviously, will be a different social change for us when we look at miles driven. But for us, what we've been able to do is take the level of service and take cost out and get more productivity.

And I think that's going to be key as we go forward, not knowing exactly what miles driven will be. But I guess we'll get more data on that over the next few months.

Our warranty was flat and our customer pay was down about 2% for the quarter.

Okay. And then there's been some public comments recently about a concern on the impact of a no-deal Brexit. I think it was Mercedes, in particular, that raised some alarm recently. Is there any kind of EPS estimate you could get for 2021? Should there be a no deal Brexit?

I don't have any data. No, I'd get Tony to maybe get with you and try to come up with some of that. I think we're going to look at these tariffs. I think that the opportunity, obviously, is the OEM, is the customer. We, as dealers, going to take a part of that.

But remember, in the U.K., 68% of our business is used cars. We're 2:1 when it comes new to used -- or used to new. So we're talking about 32% of our business that could be impacted.

So just tuck that away. So I think we've got we got somewhat of a cushion when we look at that. And there might be a situation where the OEMs even mitigate that increase and maybe the customer is going to take part of that, too.

Remember, we're premium luxury, and we've had higher costs because of gasoline guzzler and other taxes that they've been able to swallow without any real issue at this point.

Okay. And the question on a new niche of new vehicle segments, like that's kind of developing now is just premium, the all-electric pickup trucks. We had the Hummer unveiled this week, as you know, which, in my opinion, looked great, but there's also Rivian, Bollinger and Tesla in this space. I mean you're really in touch with the premium luxury customer. Do you think there's a lot of demand for this vehicle segment? It -- they're very expensive. Just would love to hear your thoughts on that segment and on the Hummer itself.

Well, these won't be everyday drivers for sure, will they? So these are, I call them boutique vehicles. And look, we make a lot of money on those in the premium luxury. You know that from the standpoint of Lamborghini and Porsche and Ferrari, et cetera.

I think that there's a certain niche for this. Remember, when Lincoln had a truck, that didn't go off so well, but obviously, it wasn't electric.

I think that it's going to be difficult to sell those ultimately once they go on, without some incentives. And again, what's the residual value, is going to be, a lot of our premium customers buy cars and they lease them. Now I don't know what the lease rates will be on some of these.

But again, what's the distribution channel going to look like? Is it going to be separate? Are we going to handle those as dealers? I don't know there was a question earlier today on that, that's up in the air.

But I think if they're all boutique brands or smaller volume, and they really won't make a big difference on our bottom line one way or the other. I think the OEMS, obviously, there'll be big stickers on those, and they'll make good profits on them. But I don't think that, that will pay the dividend for them.

And I should have checked this before the call, sorry, but do you have a GMC franchise?

Yes, we do.

There are no further questions at this time. I'd to turn the call back to Mr. Penske for closing remarks.

Jason, thanks for the support and everybody we've come through Q2 on into Q3 with great success, and we expect to carry it on through the rest of the year. So look forward to talking to you at the next quarter. Thank you.

That concludes today's conference call. You may now disconnect.