Penske Automotive Group Inc (PAG) Q2 2020 Earnings Call Transcript

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Penske Automotive Group Inc (NYSE:PAG)
Q2 2020 Earnings Call
Jul 29, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 six 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 R. PordonExecutive Vice President, Investor Relations And Corporate Development

Thank you, Jason. Good afternoon, everyone, and thank you for joining us today. As Jason said, a 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 am available by email or phone for any follow-up questions you may have. Joining me for today’s call are Roger Penske, our Chairman; 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, linked and financial expectations relating to COVID-19 also. 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 will now turn the call over to Roger Penske.

Roger S. PenskeChair Of The Board And Chief Executive Officer

Thank you, Tony. And thank you, 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 ends of the range we preannounced two weeks ago. Second quarter results are a very challenging April, followed by an improvement of profitability in May and a very strong June. During April and May, our operations in the U.K., 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’d 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’m 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, 57% 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 is 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 U.K. 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 nonvehicle 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 of $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-store units were down 71%, while fixed operations growth declined 64%. We saw a 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 $2,864. Moving on to our used vehicle supercenter business. The 16 supercenter physical locations closed in March and remained 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. Through improved sourcing and inventory management, grosses per unit increased 7% when compared to last year. As we look at expansion, we had opened two locations in late in 2019, one in the U.S. and one in the U.K., both had successful openings and 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 U.K. 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 plans 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 used 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 used video and social media to promote social distancing as 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, or 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 U.K., 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 GBP99 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 site in the U.K. 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 auction. 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 Class eight truck market declined 51%, which is in line with our same-store unit decline of 52%. The North American Class eight 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 a 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 reopen. Full-service leasing contract sales were up year-over-year, and rental demand continues to improve. Utilization rates of the rental fleet declined to a low 60% in April, but now it’s a 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 remained below normal. We expect a 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. We 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 aftersales 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.

Questions and Answers:

Operator

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

John MurphyBank of America Merrill Lynch — Analyst

Good afternoon. Roger, I just wanted to ask a 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. It 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 longer term, as this appears to be a great opportunity, you’ve got two stores that were opened 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, for going maybe a little bit slower there than the other folks?

Roger S. PenskeChair Of The Board And Chief Executive Officer

Well, John, let’s start just first to position where we are. We made an acquisition of CarSense in 2017. We had the acquisition of CarShop in 2018 and then CarPeople in 2019 in the U.K. and now a branded car shop. We’ve added more stores. And when I look at the business today and look forward, I see 100,000 units that we’ll be able to retail between the U.S. and the U.K. with the stores that 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 maybe a medium-term goal. On the other hand, as we looked at our business in Q2, we had 11,400 units that were stale, sitting for almost 2.5 months between the U.K. 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 because 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 it’s bricks and mortar? We think you 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 why 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 used, that we can be online and have a transact that completes 100%. I think the decision it 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 MurphyBank of America Merrill Lynch — Analyst

Okay. That’s very helpful. And then just second, on SG&A, it was 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 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 maybe structurally over time?

Roger S. PenskeChair Of The Board And Chief Executive Officer

Well, let’s start out listen, we were 64%, which I would never thought we’d be in the 60s at SG&A. When looking at July, 77% last year. I think with the momentum we have in back to norm in the U.K. 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 salespeople 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. Our T&E was 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 were 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 MurphyBank of America Merrill Lynch — Analyst

Okay. That’s helpful. And then just lastly, you had very strong relationships with automakers and your partners over time, but you’re you continue to allocate capital toward 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 had opportunities you have on the truck on the used car side. It’s just you’re doing going in a different direction than some other players, it just seems like there’s some changes here in the OEM attitudes to the larger group. I’m just trying to understand what your take is on that.

Roger S. PenskeChair Of The Board And Chief Executive Officer

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 OEM perspective. All the OEMs are working well with us. They 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’ve 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’d be awful careful to think that they’re going to break, and we wouldn’t want them to break the franchise agreement. It’s one of the strengths of our franchises today, and that’s why we can get to goodwill if we’re 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 to as we go forward. But I say at the moment, it’s a good relationship. I’m sure it will 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 MurphyBank of America Merrill Lynch — Analyst

Very helpful, thank you very much. Roger.

Roger S. PenskeChair Of The Board And Chief Executive Officer

Thanks, John.

Operator

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

Stephanie BenjaminSunTrust — Analyst

Hi, good afternoon. I was hoping, Roger, maybe you could talk a little bit about your U.K. 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 stores. So any additional color there would be helpful.

Roger S. PenskeChair Of The Board And Chief Executive Officer

Well, I think when you look at June registrations, in the U.K., the market was down 35%. We were down 4%, when you look at June at all. And looking at 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 of COVID and also June on a snapback. I think one thing should be noted, that 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 opened 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 BenjaminSunTrust — Analyst

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

Roger S. PenskeChair Of The Board And Chief Executive Officer

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 waive some of the criteria in the U.K., which gave us maybe a little bit more 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 fourth of July weekend had some impact when you look at July from the standpoint year-over-year, primarily because we have that and then 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 BenjaminSunTrust — Analyst

Got it. Thank you so much.

Operator

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

Roger S. PenskeChair Of The Board And Chief Executive Officer

Hi, Rick.

Rick NelsonStephens — Analyst

Thanks and afternoon Roger. So we’re hearing across the sector about some type of 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 S. PenskeChair Of The Board And Chief Executive Officer

Well, let’s take a look at we were down $800 million in inventory in our 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, and Lexus gave us heads up back as we ended going into April that we’d have some tough sliding 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 in the U.K. being patient and getting all the money for the cars. Now let’s stay in on 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 closedowns of the CarShop and CarSense operations, both in the U.S. and the U.K. But availability of used cars, we’ve had the opportunity to buy vehicles from the rental car manufacturers during this time. We’re making large buys from the OEMs internationally that will 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, that we turn. But at the moment, our day supply is running on used somewhere between 30 and 35 days, depending on the location.

Rick NelsonStephens — Analyst

That’s helpful. And at the commercial truck side of the business, I’m interested in looking at 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 S. PenskeChair Of The Board And Chief Executive Officer

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 SAARs in history. And there are many trades associated with those new trucks. Now that bulge came into 2020 in Q1, we have COVID. And at the end of the day, there’s no used truck market. So that had a precipitous drop of used tractor prices probably by $4,000 or $5,000 or $6,000. And I can say this, that we’ve had the benefit of really going from about $5,000, $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 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 with its 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 NelsonStephens — Analyst

Thanks and good luck.

Roger S. PenskeChair Of The Board And Chief Executive Officer

Thanks, Rick.

Operator

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

Armintas SinkeviciusMorgan Stanley — Analyst

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 the used car supercenters with them being closed in April and May, same thing goes for the U.K. How should we be thinking about those as potential tailwinds into July and beyond?

Roger S. PenskeChair Of The Board And Chief Executive Officer

Well, I think it’s going to you’re 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 to 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 were 14% this year. So we haven’t deteriorated from a margin perspective. And I think the used vehicle supercenters are going to be positive for us in Q3.

Armintas SinkeviciusMorgan Stanley — Analyst

Okay. 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 S. PenskeChair Of The Board And Chief Executive Officer

Well, let’s I think what we have to do, all of us have got to step back here with a 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 closedown. If that happens, August and September could be a completely different situation. But with July four 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 than hopefully, August, it’s a summer month, obviously, with people on vacation. And then we have a strong delivery month in the U.K., 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 them. 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 SinkeviciusMorgan Stanley — Analyst

Just maybe as we think about the rest of this year, you mentioned what we have a closedown in August and September, we’re also thinking about the election outcome. And what are some other drivers that are really on the on high alert for you into year-end?

Roger S. PenskeChair Of The Board And Chief Executive Officer

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 luxury. So I see those fundamentals being the same as we go through the end of the year. The question is, 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, I think more about the supply chain for the OEMs. Many of these supply chain suppliers have gotten into trouble financially during the 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 is going to drive it. Inventory availability will be could be a concern. And then obviously, the marketplace based on the pandemic could have some impact. And that’s not just in the U.S. I can’t really give you a prediction on the election.

Armintas SinkeviciusMorgan Stanley — Analyst

Okay, great. I appreciate it. Roger thanks.

Operator

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

Mike WardBenchmark — Analyst

Thanks a lot. Good afternoon, Roger.

Roger S. PenskeChair Of The Board And Chief Executive Officer

Good afternoon.

Mike WardBenchmark — Analyst

Roger, first off, could you walk me through a little bit just nonfloor plan debt came down in the first half to the tune of I think from year-end by over $300 million, $350 million? And then as we go forward, Mike, can you talk a little 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 credit line for that? What are some of the big pieces on that? And maybe talk a little bit about cash flow as we go out and we head into 2021.

Roger S. PenskeChair Of The Board And Chief Executive Officer

Well, number one, when we look at December, we had about $2.3 billion in floor plan, our nonvehicle debt. And that’s down now $223 million. So that was the paydown based on cash flow we talked about. And 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 as if that inventory grows, well, of course, we floor plan it, 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 that would be impacting us beneficially in 2021 or ’22. Also, when you think about the cash flow we’ve been able to generate because of the lower capex, $65 million in the first six months, and I would assume it’s similar in the second 6, so $130 million. And this will probably be the first time that I can remember in a number of years where our 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.

Mike WardBenchmark — Analyst

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 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 share repurchase comes back? What are some of the things that we can look at as outsiders?

Roger S. PenskeChair Of The Board And Chief Executive Officer

Well, number one, we felt that with delaying the dividend and taking out the 401(k), that we shouldn’t be buying stock back, number one. And 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.

Mike WardBenchmark — Analyst

Okay. So if we see status quo, it would be your bet that the Board might lean toward reinstating it? That there’s nothing else preventing it in that regard, if we’re at the status quo as we are today?

Roger S. PenskeChair Of The Board And Chief Executive Officer

Well, again, I’ll let the Board make that decision.

Mike WardBenchmark — Analyst

Yes, right. Okay. All right. I hear you. Thank you, Roger. Thank you, Anthony.

Roger S. PenskeChair Of The Board And Chief Executive Officer

Fine. Mike.

Operator

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

Roger S. PenskeChair Of The Board And Chief Executive Officer

Hey Rajat Hi.

Rajat GuptaJPMorgan — Analyst

All right, good afternoon. Thanks 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 continued to improve like from the run rate seen in June, both in the U.K. 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? I have a follow-up.

Roger S. PenskeChair Of The Board And Chief Executive Officer

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, and there’s some maybe impact in Florida, that we see some maybe slowdown 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 at our forecasting in July in the U.S., this is I see other than the dip that we have in the body shops, we’ll be pretty much consistent. From a new 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 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 U.K. 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 would expect. I think we’ve got lower used 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 four 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 GuptaJPMorgan — Analyst

Got it. That’s great color. And then just on the SG&A to gross question. Just follow-up to the previous question. With $100 million to $125 million personnel reduction, maybe some advertising coming down. It looks like you can get to a 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? Or can it be happening in the third quarter? Just some color on that would be helpful to frame like how you judge your models.

Roger S. PenskeChair Of The Board And Chief Executive Officer

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 the third and fourth quarter, that’s where I’d be. So again, we’ve 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 of course, growth is the other component of that, we’ve got to maintain our growth. So but I think that’s reasonable. I think that’s reasonable. I hope I can surprise you.

Rajat GuptaJPMorgan — Analyst

Great. This is, this is really helpful. And good luck. Thank you very much.

Operator

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

Roger S. PenskeChair Of The Board And Chief Executive Officer

Hey, David.

David WhistonMorningstar — Analyst

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

Roger S. PenskeChair Of The Board And Chief Executive Officer

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 that 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 with Taycan, you can’t get those Jag Land Rover, maybe we have a little more inventory than we want. But when you think at the end of the day, 35% in the U.K., 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 WhistonMorningstar — Analyst

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 S. PenskeChair Of The Board And Chief Executive Officer

I really haven’t. We’ve 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, expect to move that volume up significantly next year. But I think that there’s no question that the electric vehicles have a future for us because of emission 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, X5, so these are hot vehicles for us.

David WhistonMorningstar — Analyst

Okay. And given we are in a recession, but you do want to make acquisitions when possible, is it in 2020, is it still possible to make a light 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 S. PenskeChair Of The Board And Chief Executive Officer

Well, I guess what we are now is just opportunistic. Our 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 if you looked at capital allocated. I got to be careful mentioning dividends yet, but obviously, that could be something that we’d see in the fourth quarter.

David WhistonMorningstar — Analyst

But in terms of bringing the dividend back, you’d want to bring 401(k) back first, right?

Roger S. PenskeChair Of The Board And Chief Executive Officer

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

David WhistonMorningstar — Analyst

Okay, thank you.

Roger S. PenskeChair Of The Board And Chief Executive Officer

Great. David, thanks.

Operator

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

Roger S. PenskeChair Of The Board And Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Anthony R. PordonExecutive Vice President, Investor Relations And Corporate Development

Roger S. PenskeChair Of The Board And Chief Executive Officer

John MurphyBank of America Merrill Lynch — Analyst

Stephanie BenjaminSunTrust — Analyst

Rick NelsonStephens — Analyst

Armintas SinkeviciusMorgan Stanley — Analyst

Mike WardBenchmark — Analyst

Rajat GuptaJPMorgan — Analyst

David WhistonMorningstar — Analyst

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