Penske Automotive Group Inc

NYSE:PAG

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Second Quarter 2020 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately two hours after completion through August 6th 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, Jason. Good afternoon everyone, and again thank you for joining us today. As Jason said our press release detailing Penske Automotive Group's second 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 is 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 future events, including the impact links and financial expectations related to COVID-19. Also, we may make some forward looking statements about our operations, earnings potential, liquidity and outlook on the call today. We may also discuss certain non-GAAP financial measures such as free cash flow and 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'll now turn the call over to Roger Penske.

[Roger Penske, Chairman and CEO]

Thank you, Tony and thanks everyone for joining us this afternoon. Today we reported income from continuing operations for the second quarter of $45 million and related earnings per share of $0.56. This is at the top end of the range we pre-announced two weeks ago.

Second quarter results are very challenging April followed by an improvement of profitability in May and a very strong June. During April and May our operations in the UK, Italy and our CarSense supercenter locations in Pennsylvania were completely closed. Operations in northeast U.S. and portions of California were significantly reduced.

However, the situation turned around in June as total revenue declined just 1% when compared to last year while same store retail revenue for automotive operations increased nearly 2%.

Before discussing our second quarter performance in detail, I would like to express how thankful I am to the PAG team for their efforts during this unprecedented time. The past several months have been some of the most challenging times in our company's history. Our team responded by meeting these challenges head on while adapting to changing demands in the workplace. I am proud of how our team has responded. In fact, in many respects we've adapted the way we do business. We focused on safety and security of our employees and guests. Many of our employees worked remotely. We increased our digital performance rates and increased our online sales through home curbside delivery and click and collect initiatives.

Starting in late March, we began furloughing approximately 15,000 employees [percent] of our workforce. We strategically returned furloughed employees to active status as business conditions improved. At July 1, 14% of our employees remained on furlough.

We reduced SG&A expenses by $215 million in the quarter highlighted by SG&A to gross profit that was approximately 64% in June this year compared to 72% last June. And in the quarter we focused on liquidity and preserving cash. In fact, our cash flow was very strong. As of June 30, 2020 we had $1.2 billion in liquidity, $150 million in cash and over $1 billion of availability through our revolving credit facilities; both the U.S. and UK revolvers were fully available at the end of June. During the first six months of this year we generated $474 million of cash flow and free cash flow was $428 million. For the first half of 2020 net CapEx was down $65 million compared to the first six months of last year. We paid down $223 million of long-term debt when compared to December of 2019.

Today we have $2.1 billion in non-vehicle debt. Net debt to total capitalization improved 370 basis points to 41.6% at June 30 when compared to December 31 of last year. We'll be repaying the $300 million in senior subordinated notes due August 15 with the availability under our U.S. credit agreement.

Looking at our balance sheet at the end of June it remains in great shape. Total inventory is $3.4 billion down over $800 million from March 31. New vehicle down approximately $500 million and used vehicle inventory down approximately $238 million. Vehicle floor plan was $2.8 billion and we have approximately $380 million in vehicle equity on the balance sheet.

Let me now turn to the details of our financial performance. If you remember the year started strong. In fact, through February same store unit sales had increased by 3.4% and the first two weeks of March were still strong. However, that changed quickly due to COVID-19. Due to shelter in place and government orders in April, total same story units were down 71% while fixed operations growth declined 64%.

We saw sequential improvement in May with units down 50% and fixed gross down 46% when compared to May of last year. As dealerships began to open up June 1, we had a strong June with units down 1% and fixed growth flat when compared to June of last year. For the quarter all in retail automotive gross profit per unit was up $452 to $5,007. Used vehicle was down $172 per unit to $2,475. In June, retail automotive gross per unit including F&I was up $328 to $5,245 and used vehicles were up $21 to $2864.

Moving on to our used vehicle supercenter business, the 16 supercenter physical locations closed in March and remain closed through April and May most reopened in June. As a result unit sales declined 63% during the quarter. For the quarter the U.S. supercenter sold 6,600 units and generated $133 million in revenue. However, during June unit sales were almost 5,600 compared to 5,700 last year and revenue was $106 million versus $99 million last year.

To improve sourcing and inventory management grosses per unit increased 7% when compared to last year. As we look at expansion, we had opened two locations late in 2019, one in the U.S. and one in the UK. Both had successful openings that outperformed our initial expectations.

The Glen Mills store in the U.S. is expected to retail approximately 1,800 units per year and was profitable in its third month of operation. The Bristol location in the UK is expected to retail approximately 3,000 units per year, it was also profitable in the third month of operation. We have four additional sites under development which will increase our store count by 25%. Our plan is to open three in 2021 with a fourth one first part of ‘22 due to permitting delays from COVID-19. As we look beyond 2021, the U.S. supercenter business is a key driver of growth for PAG we plan to grow this business even faster.

Moving on to our digital initiatives. We continue to grow online sales. We have 42,000 vehicles online through our digital channels. During Q2 we use video and social media to promote social distancing on our sanitation process to ensure a safe environment. We also continue to pilot new technologies such as videos and digital pictures for service updates and customer approval.

In the U.S., our digital F&I process through docuPAD enhanced our ability to sanitize and social distance. No physical exchange of documents and services are wiped down between transactions. We also introduced digital signatures by online signing room for key sales documents for a truly virtual transaction when the customer does not want to visit our dealership.

This is a natural extension of preferred purchase and complements the other digital enhancements such as standardizing and updating F&I documents allowing customers to lock in their terms online. Approximately 58% of our sales were tied together to our digital efforts and we've seen the highest number of sales to-date. Preferred purchase sales increased more than 40% when compared to the first quarter last year.

We are also being promoting buy your car now initiative for procuring inventory which is gaining traction at both CarSense and the traditional franchise stores. Over in the UK our click and collect option accounted for 5,000 units or over 25% of the units delivered in the quarter. At the CarShop used car supercenters customers may reserve a vehicle online for £99 and collect it later at the store or at the curb. In July, approximately 60% of the sales are made this way compared to 46% last July.

We continue to enhance our proprietary online closed bid auction’s site in the UK. Today we have approximately 3,900 active online bidders and we sold 21,000 vehicles there last year. We now provide the opportunity for CarShop to have greater visibility into the auctions.

Let me turn to retail truck, commercial dealership business. As you know we operate 25 medium and heavy duty truck dealership locations in U.S. and Canada. During Q2 we sold 2,063 new and 773 used trucks and generated almost $400 million in revenue with a return on sales of 3.7%. For the second quarter, retail sales in the North American classic truck market to glide 51% which is in line with our same star unit decline of 52. The North American classic market appears to be stronger than prediction earlier this year. According to ACT using the past three months the annual sales rate run is approximately 174,000.

Profitability was impacted during the quarter by 20% decline in used truck prices which obviously impacted our gross profit. Service and parts operations represented 82% of our total gross profit and fixed cost absorption was once again strong at 136%. With a strong return on capital and solid cash flow we intend to continue to grow this business through acquisition.

Turning to transportation solutions. Our truck leasing business in Q2, PTS generated $2 billion in total revenue and had income of $104 million. As a result our equity earnings were $29.9 million in the second quarter compared to $38 million in Q2 last year.

During the quarter PTS improved profit sequentially as it adapted to the changing conditions and business began to re-open. Full-service leasing contract sales are up year-over-year and rental demand continues to improve. Utilization rates of the rental fleet decline to a low 60% in April but now is to return to over 80% as I sit here today. In logistics, all automotive customers have returned to operations. Grocery volumes continue to grow at a strong pace. However, Starbucks retail volumes remain below normal. We expect the strong third quarter from our PTS operations.

Let me turn now to Australia and our power system and distribution business. During the quarter Australia generated $100 million in revenue and a return on sales of 5%. 80% of the gross profit comes from after sales parts and service in this market. The mining energy and defense markets are driving new business opportunity. We are in the final negotiations for an $80 million supply contract to provide engines for a power station to one of the largest mining operators in the world. They won a contract worth $40 million to supply 79 repower engines to a mining operator through 2024. Government stimulus programs have increased. Defense spending budgets now provide our business with additional after sales opportunity in the market.

While the second quarter environment was challenging, I'm pleased with our success in handling the adversity created by COVID-19. Our team across the globe continues to work tirelessly to adapt to the changing conditions while driving growth and profitability. I want to thank all of you on the call today for your continued confidence in PAG. At this time we'll turn it back to the operator.

[Operator]

[Operator Instructions] Your first question comes from the line of John Murphy from Bank of America Merrill Lynch. Your line is open.

[John Murphy, Bank of America Merrill Lynch]

Good afternoon, Roger. I just wanted to ask first question on the used car business maybe short term and then ultimately the long-term opportunity. I mean there were some ebbs and flows in the profitability through the quarter and sounds like it ended a lot better than the full quarter. So just curious as you look at the third and fourth quarter do you think that business is somewhat normalizing and you'd expect grosses to be better going forward and then sort of -- just sort of longer term as this appears to be a great opportunity you've got two stores that were open recently that are profitable within three months, why not maybe press the gas harder on opening up more stores near term? Is there some gating factor or some rationale that you're using for going maybe a little bit slower there than other folks?

[Roger Penske, Chairman and CEO]

Well. John. Let's start just first the position where we are. We made an acquisition of CarSense in ‘17. We had the acquisition of a CarShop in ‘18 and then car people in ‘19 in the UK now branded CarShop. We've added more stores and when I look at the business today and look forward, I see a hundred thousand units that will be able to retail between the U.S. and the UK with the stores we expect to open up here in the next 12 months.

Probably at about a $16,000 MSRP with a 4% return on sales now, I put that kind of as, maybe a medium term goal. On the other hand as we looked at our business in Q2, we had 11,400 units there were stales sitting for almost two and a half months between the UK and the U.S. that we really couldn't retail or wholesale and I think at that point over the last, I guess June and into July we've been able to retail out. Now that's had some impact as you saw that our used car gross profit was down in the quarter but from a standpoint of July and going forward we see an uptick over last year for sure from a used car perspective just on our traditional business and what we have today from our used car supercenters with margins continuing to get better based on availability of units at the right price as far as the market is concerned.

From a long-term view we definitely see this as one of our strategic pillars that will continue to grow in the business and our problem is finding the right sites from the standpoint of building bricks and mortar and I think there's two schools of thought is it all online or is it some of its bricks and mortar. We think you'll probably need a combination of both but the sites that we have we're integrating parts and service. We want our used car business to be sticky. We want those customers to come back for parts and service and we think that's one thing while we buy a little bigger pile of land and maybe it's more complex to build these in some of the parts of the world where we're trying to do this business.

I think there's an online strategy ultimately that we're looking at. We're trying to perform in our businesses today, not only in our new but in our use that we can be online and have a transact that completes 100%. I think the decision has to make, what is the marketing commitment to that? Is it a new brand? Can we utilize facilities that we have within the Penske group? These are all things that we're going to look at as we go forward over the next quarter to quarter and we'll certainly want to report that back into the group on the phone today as we have our final plans put together.

[John Murphy, Bank of America Merrill Lynch]

Okay. That's very helpful and then just second on SG&A, there's good performance in the quarter all things considered but as you look at more of the business going online over time and sort of the lessons you learned in the last a few months, is there a greater opportunity over time and as you move more of the business online? Can you structurally reduce the SG&A burden on sales and is there a real opportunity there may be structurally over time?

A - Roger Penske

Well, let's start out. Listen we were 64% which I would never thought we'd be in the 60s with SG&A when looking at July 77% last year, I think with the momentum we have and back to norm in the UK and with our supercenters up and remember we've taken 2,000 people out of our workforce we're sitting today with 21,000 out of 27,000 with another 3,600 that are on furlough and I think you're going to see anywhere from $100 million to $125 million of benefit from the human capital perspective as we go forward but more important is we're more efficient.

We see less sales people necessary to drive the business. The same thing on the fixed side. We're seeing better utilization of our people. Productivity has gone from maybe 95% in our shops now to 120 and I think with T&E down ironically it's a number that I was surprised.

T&E down in the quarter worldwide 6.4 million. So obviously utilizing the tools that are available to us to connect with our workforce and our team members we're able to do that a lot more efficiently without traveling around.

I think advertising is moving from traditional to obviously online which obviously is less costly. Vehicle maintenance will be down. We think that with more efficiency in our shops cars will not be in the shop as long less loaner cars which will drive vehicle maintenance down. So those are things that just come off the top of my head right now that I think could make a big difference.

We're certainly managing our shops where we had general sales managers. We've cut out some of those positions in the smaller stores and I think we're more efficient when you think about some of the things we're able to do online with our consumer. Make your reservation online for service, pay online, just go to a spot and pick up your car and this doesn't take many of the maybe variable people that we would have typically in a dealership. We've taken that level out and we expect to be able to operate the business with that type of workforce going forward.

[John Murphy, Bank of America Merrill Lynch]

Okay. That's helpful and then just lastly you've had a very strong relationships with automakers, your partners over time but you're -- you continue to allocate capital towards other avenues other than new vehicle dealership acquisitions when you look at some of your peers they're getting very aggressive in making these acquisitions.

So just curious as you look at the business going forward, has anything changed in relationship with the automakers where they're either better partners and more sort of accepting the partnership with the distribution channel being you guys the dealers or is it sort of more of the same and this sort of sweeping up and building of these large networks is something you're just not as interested in versus what you opportunities you have on the truck and the used car side? It just you're doing it going in a different direction than some other players and just seems like there's some changes here in the OEM attitudes to the larger groups and trying to understand what your take is on that?

[Roger Penske, Chairman and CEO]

Well, number one we have a much more diversified portfolio not just retail automotive. So we're looking at how we allocate our capital across all of these measures but I would say this from an OLEM perspective, all the OEMs are working well with us. They've deferred a lot of our payments to our customers and to us on capital loans, on inventory, etc. but that's going to go away.

What I do see is probably internationally probably more interest in looking where we might have multiple locations that are contiguous, is there the opportunity to consolidate which certainly would be a help to us taking up SG&A and making us more profitable at a key location.

We're also looking from a CapEx and I think this is where I have seen the U.S., at least OEMs come in where we're looking at our CapEx. They're being very rational today rather than pushing cosmetic. They're looking mainly for operational CapEx which will be a help but I would be awful careful to think that they're going to break and we wouldn't want them to break the franchise agreement. That's one of the strengths of our franchises today and that's why we can get the goodwill for buying or selling when we do this.

So I think they're going to stay with that. You're going to have to have good CSI. You're going to have to have market coverage; all these things are going to be important as we go forward but I say at the moment it's a good relationship. I am sure it'll be tested in many different ways by a lot of innovative people in the auto business here in the U.S. and internationally. So at the moment with COVID being maybe the umbrella more things can be discussed. Now whether that's going to be a long-term process I can't say.

[John Murphy, Bank of America Merrill Lynch]

Very helpful. Thank you very much Roger.

[Roger Penske, Chairman and CEO]

Thanks John.

[Operator]

Your next question comes from the line of Stephanie Benjamin from SunTrust. Your line is open.

[Stephanie Benjamin, SunTrust]

Hi good afternoon.

A - Roger Penske

Hi Stephanie.

[Stephanie Benjamin, SunTrust]

I was hoping Roger maybe you could talk a little bit about your UK performance in June both on the new side with your traditional dealers and then the rebound that you've seen once you were able to open up the used door. So any additional color there would be helpful.

[Roger Penske, Chairman and CEO]

Well, I think when you look at June registrations in the UK, the market was down 35%. We were down 4% when you look at June at all and looking at it just to pick out BMW was down 47%. We were down 17% just to give you an idea and even Audi was down 43%, we were up 18%. So premium luxury bode well during the time COVID and also June on snapback.

I think one thing should be noted, we've got 7,900 of our employees back out of 9,700 still with almost 1,600 on furlough. So we're able to execute in June, a very positive month with less people and we expect to have that be probably the future as we look forward across the company on the size of our enterprise but I think we had the used car business open with CarShop which made a big difference when you think about the number of vehicles they delivered in the month of June compared to what we did during April and May that was similar to what we had here in the U.S.

And I think when you look at international from a consistency just the market where we were, our new units were down 96% in April and in June they were down only 10% and when you look at used, again we were down 95% and we were up 17% on used. So that was driven obviously by a strong used car rebound. I would drive a lot of that with CarShop.

[Stephanie Benjamin, SunTrust]

In the same vein, are you seeing a lot of the same June trends continue into July?

[Roger Penske, Chairman and CEO]

I would say, yes. Remember it was the end of a quarter both U.S. and internationally so there are probably some bonuses and things that were paid and even waived some of the criteria in the UK which gave us maybe a little bit gross margin but at the moment we see our parts and service business through yesterday on par where it was a year ago. So that's a good sign even with body shops down because the work in process was drained during the COVID crisis.

So I think from a parts and service business, I think it's where it was last year and trending up. I think the 4th of July weekend had some impact when you look at July from the standpoint year-over-year primarily because we have that and we have a tougher inventory; no question both internationally and in the U.S. our inventories are tighter from the standpoint of the premium side but yes parts and service, use is stronger from the standpoint of CarShop and I think our new retail is really back in business and we're doing it with less people so from an SG&A perspective I think we'll see benefits in Q3.

[Stephanie Benjamin, SunTrust]

Got it. Thank you so much.

[Roger Penske, Chairman and CEO]

Thank you.

[Operator]

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

[Roger Penske, Chairman and CEO]

Hi Rick.

[Rick Nelson, Stephens]

Hi. Thanks. Good afternoon Roger, Anthony. So we're hearing across the sector about some tight new vehicle inventory supplies. If you could comment there and when you see inventories normalizing and how long do you think you're going to be able to hang on to these GPUs as inventories do normalize?

[Roger Penske, Chairman and CEO]

Well, let's take a look at, we're down $800 million in inventory new and used from the standpoint of where we were in March to the end of June. It's obvious, BMW has told us, Mercedes has and Toyota really in Lexus gave us heads up back as we ended going into April that we'd have some tough sledding during the months of July, August and September. I think that's the case.

All the good cars are probably been delivered and we maintain high grosses and it's interesting to see the whole industry both in the U.S. and the UK being patient and getting all the money for the cars. Now let's say that level I doubt it. I think we'll see some deterioration but if you look at our margin on premium luxury, we did 8%, I think we're up 30 basis points.

Our used was down because we had the stale inventory from the closed downs of the CarShop and car CarSense operations both in the U.S. and the UK but availability of used cars, we've had the opportunity to buy vehicles from the rental car manufacturers during this time.

We are making large buys from the OEMs internationally that we help fill our pipeline there. So I think availability at this point has been good and when you look at the mix people say, well where do you get your cars and I think at the end of the day, we've got about between trades and lease returns we probably got 54% - 55% and when you look at auctions and buy your car we're probably at about 20%. Then you get into OEM and loaners and things like that we turn but at the moment our day supply is running on use somewhere between 30 and 35 days depending on the location.

[Rick Nelson, Stephens]

Thanks. That's helpful. And as the commercial truck side of the business. Interested in your crystal ball there, we did see some used vehicle GPU pressure. And on the new side, do you think we're close to an inflection point here? Just any comments on the outlook could be helpful.

[Roger Penske, Chairman and CEO]

Well, look number one the heavy duty tractor market was down 51%. We were down 52%, so pretty much I think I said in line with the market. Now, overall we're seeing some activity in talking to the people this week our key people at premier truck they're seeing fleets that had canceled orders in Q1 and early Q2 coming back and wanting to put those orders back in the market for us.

So that's positive. The used truck side is a little different story. If we go back and remember last year we sold 350,000 heavy-duty tractors in the market probably one of the highest SARS in history and there were many trades associated with those new trucks. That bulge came into 2020 in Q1, we have COVID and at the end of the day there's no use truck market. So that had a precipitous drop of used tractor prices probably by 4,000, 5,000 or 6,000 and I can say this that we've had the benefit of really going from about $6,000 loss on the front end, down to about 2,400 in June and we see that getting better in July.

So I think we've bottomed out, obviously we got back end margin on those used trucks anyhow but that's been significantly impacting us. Yet, we still had almost a 4% return on our sales during the quarter but I think that the light duty business will continue to grow because of all the retail delivery activity going on. We've seen it in our truck leasing business where people like Fed Express and UPS want thousands of trucks in order to meet the demand that they have.

So that's all going to bode well when you think about 85% of all the freight that moves on the U.S. is by truck, I think we're in a very good position and freightliner who is dominant market position of almost 40% and our 135% fixed coverage, I think the business is one we want to continue to invest in. So I think the lights are all green.

[Rick Nelson, Stephens]

Okay, thanks and good luck.

[Roger Penske, Chairman and CEO]

All right. Thanks Rick.

[Operator]

Your next question comes from the line of Armintas Sinkevicius from Morgan Stanley. Your line is open.

[Armintas Sinkevicius, Morgan Stanley]

Great. Thank you for taking the question. If I look at the slide 10 of your presentation, it really stands out the underperformance that you had as a used car supercenters with them being closed in April and May. Same thing goes for the UK. How should we be thinking about those as potential tailwinds into July and beyond?

[Roger Penske, Chairman and CEO]

Well, I think it's going to, you are going to have a good tailwind because basically we were shut down. There was some pent-up demand. We did some internet sales that we couldn't deliver obviously as we got into early part of June that we got the benefit from but at the moment as we see this business it will be up over last year as we look at Q3 for sure plus we'll see the opportunity to see the margins increase and when you look at Q2 of last year versus Q2 of this year we were down 63%. So we think this is a real opportunity for us to grow this as we're into Q3 and again when you look at the variable margin we're sitting about 14% last year and we're 14% this year. So we haven't deteriorated from a margin perspective and I think the used vehicle supercenters are going to be a positive for us in Q3.

[Armintas Sinkevicius, Morgan Stanley]

All right. And do you anticipate these tailwinds to be greater than anything happening in the rest of your business because I'm just thinking about relative to the peer group how you may be set up moving forward.

[Roger Penske, Chairman and CEO]

Well, let's -- I think what we have to do all of us have got to step back here with the recent outbreaks of the pandemic in certain markets. We're seeing some softness probably in northern California, some in Texas and some of these cities that have these outbreaks and some maybe we see in Florida. So I have no idea if we're going to have to go back to close down. If that happens August and September could be a completely different situation but with July 4th as one of our weekends, I think that we're going to have to look at where our sales are going to be from a July perspective then hopefully August it's a summer month obviously with people on vacation and then we have a strong delivery month in the UK which is a registration month which should be strong.

So I think on the new side, we'll be in good shape. I hope we can meet what we did last year. It might be slightly less in the quarter but however on the new side I would think that some customers might be turning to used cars which should drive that. I think there's some great deals out there but with the OEM still offering 0% financing and things like that I think you're going to drive the new but inventory is going to be the challenge.

[Armintas Sinkevicius, Morgan Stanley]

Okay. Just maybe as we think about the rest of this year you mentioned what if we have a close down in August and September we're also thinking about the election outcome and what are some other drivers that that you're really on high alert for you into year end?

[Roger Penske, Chairman and CEO]

Well, I think number one, I think interest rates we've seen the Fed conversation. I think interest rates are going to be in line. I think credit availability is certainly even from the subprime standpoint is good. Leasing is strong across all of the premium luxuries. So I see those fundamentals being the same as we go through the end of the year. The question is being shut down. Now we've had positive tests where we've had to shut down certain dealerships not for a long period of time. We shut it down. We do the proper cleaning and we're also back in business and we quarantine anybody that might be associated with that individual.

So I think that's certainly a risk availability. On the other hand, the consumer confidence to me is going to be key and product is going to be really important the new product coming out. Now you've got cars that are being, vehicles are being delayed for certain reasons and from a supplier source let's think more about the supply chain for the OEMs.

Many of these supply chain -- suppliers have gotten into trouble financially during this shutdown. So I've seen that be a reason that we're not getting certain models but so credit, I think is fine. There's no question that product's going to drive it. Inventory availability could be a concern and then obviously the marketplace based on the pandemic could have some impact and that's not it just in the U.S. I can't really give a prediction on the election.

[Armintas Sinkevicius, Morgan Stanley]

Yes. Okay. Great. Appreciate it Roger.

[Roger Penske, Chairman and CEO]

Thanks.

[Operator]

Your next question comes from the line of Michael Ward from Benchmark. Your line is open.

[Michael Ward, Benchmark]

Thanks a lot. Good afternoon Roger. Good afternoon Tony. Roger first off, could you walk me through a little bit, I'm just non-floor planned debt came down in the first half to the tune of I think from year end by over $300 million to $350 million and then as we go forward, can you talk a little bit about some of the big pieces you're going to pay down $300 million of debt. You're going to borrow against floor plan for that or I'm sorry against the credit line for that. What are some of the big pieces on maybe talk a little bit about cash flow as we go out and we head into ‘21?

[Roger Penske, Chairman and CEO]

Well, number one when we look at December we had about $2.3 billion in floor plan or non-vehicle debt and that's down now $223 million. So that was paid down based on cash flow we talked about. Our net debt to capital was down 370 basis points at 41 I think 41.6% when compared to June. So from the standpoint of floor plan, we still have equity in floor plan. I think I said somewhere around $400 million and if that inventory grows well of course we'd floor plan that's really a variable financing that's provided by the OEMs.

From the standpoint of going forward with our lines open completely, you will have the ability to pay down our existing $300 million that's due in August and then we're going to look forward to see if there's any other opportunistic refinancing that we could do that is out there.

It would be impacting us beneficially in ‘21 or ‘22. Also when you think about the cash flow we've been able to generate because the lower CapEx $65 million in the first six months and I would assume it's similar in the second six. So $130 million and this will probably be the first time that I can remember in a number of years where amortization and depreciation will be equal to our CapEx spending which is a very good thing for us. So I see availability for acquisitions. I think from a CapEx perspective, I said it before we're going to focus not on cosmetic CapEx. We're going to focus on operational. I said it before more like the opportunity for electrification and things like that.

[Michael Ward, Benchmark]

Thanks and with that in mind as we look out, what are some of the things that we can track as the board or you as you, I know shareholders returns are important to you. What are some of the things that we can track that maybe the dividend gets reinstated or sharing purchase comes back? What are some of the things that we can look at as outsiders?

[Roger Penske, Chairman and CEO]

Well, number one we felt that with delaying the dividend and taking out the 401(NYSE:K) that we shouldn't be buying stock back number one. Number two, if I see the plan that we have for Q3 the turnaround in June certainly you'd look at this as positive inflections that we can look at with the board when we get to our October meeting and at that point we would make that decision but I just still want to be sure we're focusing on safe and secure because I can't tell you today with the environment out there, with the disturbances and things like this that are taking place. So the good news is we can turn it back on and certainly as a large shareholder I'd like to see a dividend but it's got to be in collaboration with the board.

[Michael Ward, Benchmark]

Okay. So if we see status quo, it would be your bet that the board might lean towards reinstating it. There's nothing else preventing it in that regard. If we're at the status quo as we are today.

[Roger Penske, Chairman and CEO]

Well, again I'll let the board make that decision.

[Michael Ward, Benchmark]

You are right. I hear you. Thank you Roger. Thank you Tony.

[Roger Penske, Chairman and CEO]

Okay Mike.

[Operator]

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

[Roger Penske, Chairman and CEO]

Hey Rajat, hi.

[Rajat Gupta, JPMorgan]

Hi. Good afternoon. Thank you for taking my question. I just wanted to follow up a little bit on just the July comments. Could you give us a sense just quantify it a little bit like what you're seeing so far in July across the three different business lines? I mean have things continue to improve like from the run rate scene in June but both in the UK and U.S. and specifically around -- in regions like Texas and Florida, have you seen the year-over-year progression deteriorate versus June or has it pretty much held up? And I have a follow-up. Thanks.

[Roger Penske, Chairman and CEO]

Well, let me say this, quite honestly it's interesting the east coast businesses seem to be pretty much in line month to-date with last year. Central is in decent shape but when you start looking at our western region and you look at Texas and you look in northern California there's some maybe impact in Florida that we see some maybe slow down from the standpoint of new vehicle sales.

Now when I look at what I'm using is a benchmark because we started off as everybody know January, February was a good start to the year and you go back and you look at those numbers.

Our parts and service business, as we look our forecasting in July in the U.S. this is, I see other than the dip that we have in the body shops would be pretty much consistent from a used car sale we'd be pretty much consistent looking at the forecast.

On the other hand we see probably some deterioration in new. Again when you think about the gross profit from service and parts, we had $127 million worldwide deterioration in Q2 but in June we're only down $2 million. So I would say parts and service are back to order going forward. So parts and service on par. I feel the same way in the UK. The other international businesses we can look at later. Certainly we're seeing some positive effects in Australia and the truck market is what you'd expect. I think we've got lower use truck prices. We hope that that again stabilizes but so truck prices or used trucks would be are a concern right now going forward. I think new businesses picked up parts and service is strong and certainly when you look at our supercenters from a used car perspective are good. So used up, I think that with July 4th weekend here in the U.S. you're going to see some deterioration on new and some of that has to do as I said earlier about availability.

[Rajat Gupta, JPMorgan]

Got it. That's great color and then just on the SG&A, the gross question just follow up with the previous question, with 100 million to 125 million personnel reduction, maybe some advertising coming down. It looks like you can get to of sub 75% SG&A to growth level. With those actions is that reasonable to assume and by when can we see you get to that kind of level? Can it be as soon as a third quarter, just some color and that would be helpful to frame like [indiscernible]. Thanks.

[Roger Penske, Chairman and CEO]

Well, I never believed as I said earlier we'd be in the 60s. So I'm not going to jump into the 60s but I think there's my goal now this isn't saying we'll get there, my goal would be somewhere between 71% and 75% as we move out into third and fourth quarter. That's where I would be. So again we got to maintain, I think the preciseness on who we bring back. We've got to maintain these cost reductions, we already have in place and then of course gross is the other component of that. We've got to maintain our gross. So but I think that's reasonable. I think that's reasonable. I hope I can surprise you.

[Rajat Gupta, JPMorgan]

Great. This is really helpful and good luck.

[Roger Penske, Chairman and CEO]

Thank you very much.

[Operator]

Your next question comes from the line of David Whiston from Morningstar. Your line is open.

[Roger Penske, Chairman and CEO]

Hey David.

[David Whiston, Morningstar]

Hey guys. Good afternoon. I guess first on consumer confidence and sentiment, in particularly with the premium luxury customer that generally that's more of a wealth effect than that they always have the money to buy a car but sometimes they just don't feel good about it. Can you just talk about what is the state of that customer in both the U.S. and UK and is it any difference between the two regions?

[Roger Penske, Chairman and CEO]

Well, I think when you look at the U.S. market during the quarter it was down about 30%, we were down 27% from the standpoint of new. I think and that some of it has to do with as I talked about earlier has to do with the availability of product but at this point margins are good. The new products that both Mercedes, BMW have, Porsche obviously would take on, you can't get those Jag, Land Rover maybe we have a little more inventory that we want but when you think at the end of the day 35% in the UK, the market was down we're only down 4. So that bodes well and that we're primarily 90 plus percent premium luxury over there.

[David Whiston, Morningstar]

Okay and staying on the light vehicle side with the introduction of the Tesla model Y on the market have you seen any headwinds on your crossover demand particularly in the German Three or Lexus stores?

[Roger Penske, Chairman and CEO]

I really haven't. I've been surprised quite honestly that the residual value of the Tesla product has gotten better which means there's some traction in the marketplace, some interest on the used side. But I haven't seen it take over with E-Tron we've been selling E-Trons obviously we talked about every one of our Taycans are spoken for. We have a back order on those they expect to move that volume up significantly next year but I think that there's no question that the electric vehicles will have a future for us because the mission requirements and the cafe requirements not only here in the U.S. but obviously there's big penalties when you look at Europe if you don't meet some of these standards. So Cayenne is strong X3, XS5 so these are hot vehicles for us.

[David Whiston, Morningstar]

Okay and given we are in a recession but you do want to make acquisitions when possible. In 2020 is it still possible to make a like especially on the light vehicle side? Would you want to do a deal if it came along or is liquidity just much more important right now?

[Roger Penske, Chairman and CEO]

Well, I guess the word I always use opportunistic. We're open. We're looking at car deals right now in a pipeline that we could look at. I think that our diversification that we have gives us opportunities for different avenues to invest in and I think number one we're certainly looking at retail automotive. We've got some truck retail, big truck operations that would be potential acquisitions this year. There's no question about it and then our continued investment in the supercenter. So kind of you looked at capital allocation, I got to be careful mentioned dividends yet but obviously that could be something that we'd see in the fourth quarter.

[David Whiston, Morningstar]

But in terms of bringing the dividend back you'd want to bring 401(K) back first right?

[Roger Penske, Chairman and CEO]

Well, I'm not sure which would come back first or come back together. I think we got to look at supporting our employees along with our shareholders. I would hope that we'd do that in conjunction with one another be honest with you.

[David Whiston, Morningstar]

Okay. Thank you.

[Roger Penske, Chairman and CEO]

Great David. Thanks.

[Operator]

That concludes Q&A for today. I turn the call back to management for any closing remarks.

[Roger Penske, Chairman and CEO]

Thanks everyone for joining us and we'll see you next quarter. Thanks for the support.

[Operator]

That concludes today's conference call and webcast. Thank you very much for participating and have a wonderful day.