Earnings Call
Penske Automotive Group, Inc. (PAG)
Earnings Call Transcript - PAG Q3 2020
Operator, Operator
Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Third Quarter 2020 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through November 4, 2020 on the Company's website under the Investors tab. I will now introduce Anthony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.
Anthony Pordon, Executive Vice President of Investor Relations and Corporate Development
Thank you, Jason. Good afternoon everyone and thank you for joining us today. A press release detailing Penske Automotive Group's third quarter 2020 financial results was issued this morning and is posted on our website along with the presentation designed to assist you in understanding the Company's results. As always, I'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 our operations, earnings potential, outlook, future events, growth plans, liquidity and assessments of business conditions in light of the COVID-19 pandemic. We may also discuss certain non-GAAP financial measures such as earnings before interest, taxes, depreciation and amortization, or EBITDA. We have prominently presented the comparable GAAP measures, and have reconciled the non-GAAP measures in this morning's press release and investor presentation that 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
Thank you, Tony. Good afternoon everyone and thank you for joining us this afternoon. I'm pleased to report all-time record results for our business. In the quarter, earnings before taxes increased 97% to $312 million. Income from continuing operations increased 112% to $246.5 million and related earnings per share increased 116% to $3.07. After excluding a tax benefit from various U.S. and foreign tax legislation changes, adjusted income from continuing operations increased 99% to $231 million. And related earnings per share increased 102% to $2.87. Foreign exchange benefited earnings in the quarter by $0.05. Obviously, this outstanding performance was driven primarily by a 170% increase in retail automotive segment income as new vehicle, used vehicle financing, insurance and fixed operation margins all expanded. Our SG&A expense declined $29 million in the quarter and SG&A as a percentage of gross profit improved 1,010 points to 67.3%. Our success in this area can be attributed to a reduction in travel and entertainment, advertising, vehicle maintenance, administrative costs and personnel costs. We initially furloughed approximately 15,000 employees or 54% of our workforce in March. At the end of the third quarter, approximately 3% remained on furlough. We've reduced our headcount by 14% as of today or 3,700 people to approximately 23,000 worldwide. Through the above efforts, we estimate approximately $125 million to $150 million in costs have been reduced across our various businesses. During the first nine months, we generated $846 million in cash flow from continuing operations. Our net CAPEX expenditures year-to-date were down $87 million when compared to the same period last year. During the quarter, we repaid our $300 million 3.75 senior subordinated notes at maturity and we refinanced $550 million of the 5.75% senior subordinated notes by issuing $550 million in new notes at 3.5% due in 2025. We'll use the proceeds from the new notes to redeem $550 million of 5.75% notes due 2022 on October 1. In the interim, we utilized the proceeds from the 3.5% senior subordinated notes temporarily to pay down our floorplan, U.S. revolver and mortgage revolver balances. We estimate the repayment and refinancing of our subordinated notes will reduce future interest expense by approximately $17 million annually. As of September 30, debt to capitalization was 42.7% compared to 45.6% at December 31. On a pro forma basis on October 1, we have $1.95 billion of non-vehicle debt, which is down approximately $407 million from December 31. Let's look at the balance sheet at this point. It's in good shape total inventory of $3.2 billion, down $1.1 billion from December last year; new vehicle inventories down approximately $800 million, used vehicle inventory down approximately $100 million and our commercial truck inventory is down $150 million. Our day supply on new is 45 and day supply on used is 40. Let me now turn to the quarter to give you the performance on Q3. In Q3, retail automotive segment income increased 170% and was driven by an increase in gross profit per unit retailed. Selling, general and administrative expense reductions, lower interest costs due to reduction in inventory and overall lower debt levels. Total same-store new and used unit retail declined 4.5%. Retail automotive same-store revenue increased 3.6% and same-store gross profit increased 15.3%. For the quarter, same-store retail automotive variable gross profit per unit increased $935 or 29% to $4,156. Let me move on to our used vehicle SuperCenter business. We operate 16 locations. During the third quarter the SuperCenter sold 18,372 units at an average selling price just under 16,000. We had a return on sales of 4.5%. The average SuperCenter sold approximately 1,100 units and $1 million in the third quarter. To improve sourcing and inventory management grosses per unit increased $618 per unit or 35% to $2,378. The improved sourcing is a result of using our scale in the U.K. Approximately 40% of our sales are from inventory acquired through our online auction. While in the U.S., 'buy your car now' purchases increased 47% and represented 14% of our total vehicles sold. As we look at expansion, we opened two locations in 2019. Both had successful openings and outperformed our initial expectations. The Glen Mills store in Pennsylvania is forecasted to retail approximately 1,800 units per year. The Bristol location in the U.K. is forecasted to retail approximately 3,000 units per year. Both stores were profitable in their third month of operation. We have six additional sites planned with 400 in development, two in the planning process, which will increase our store count by 40%. We’ll open up a Nottingham store in the U.K. in December and Brunswick, New Jersey will open early in Q1 2021. We forecast SuperCenter retail to reach 80,000 vehicles in 2021 and 100,000 vehicles in 2022. I move on to our digital initiatives. We continue to grow, expand and enhance our digital footprint including the introduction of new tools and technologies. We currently have 50,000 vehicles online. Our digital channels and our efforts in the U.S. represented 52% of our unit sales in the third quarter. Our multi-channel marketing approach focuses on personalization, creating connection with our customers. Further, our fully F&I process to docuPAD continues to drive higher F&I income with no physical exchange of documents. A key component of those efforts is our preferred purchase, our digital retailing system here in the U.S. Preferred purchase represents flexible car buying and can accommodate a customer wherever they are in their buying journey. Using our digital signing room, many customers can sign documents digitally to complete the transaction 100% online. In the U.K., our digital Used Vehicle pilot by online has now facilitated over 1,000 customer transactions since launching in May. In the quarter, approximately 2% of our sales were completed by either using our preferred purchase tool or online buying tool in the U.K. We are also working on a new digital retailing initiative enabled by new technology that will automate the online buying process, strengthen our brand and enhance our future investment. We continue to focus on an omni-channel business model. Turning to retail truck dealership business, we operate 25 medium and heavy-duty dealerships across the U.S. and Canada. During Q3, we sold 4,480 new and unused trucks compared to 2,836 in the second quarter representing a sequential improvement of 58%. For the third quarter, same-store retail unit sales declined 15.5% which compares favorably to the North American Class 8 truck market which declined 31% during the same period. In fact, the North American Class 8 market appears to be stronger than we originally had expected. Retail sales are expected to be 225,000, which is up from 150,000 previously expected this year. In Q3, our revenue was almost $600 million and we had a return on sales of 4%. Our service and parts operations represented nearly 72% of the total gross profit and our fixed cost absorption was 137% in the quarter. Right now, the freight market is strong. We expect this will provide strong tailwinds to our commercial truck and truck leasing businesses as we go forward into Q4 and 2021. Turning to PTS Penske Transportation Solutions in Q3, PTS generated $2.3 billion in total revenue and income of $222 million or 9.6% on sales. As a result, our equity earnings were $64.5 million or 53% compared to Q3 of last year. Full-service leasing and contract sales are up year-over-year, rental demand continues to improve. After utilization rates in the rental fleet declined to the low 60s in the second quarter, our utilization has now returned to over 85%. In logistics, all of our automotive customers have returned to operations; grocery and retail volumes are operating at levels higher than previously expected. We expect operations to remain strong for the foreseeable future. This is the point additionally, PTS completed a bond offering this week, securing $750 million in notes for five years at an interest rate of 1.2%, all in reflecting the quality of our company. Turning to Australia, during the quarter, Penske Australia generated $123 million in revenue, and a return on sales of 6.8%. I'm excited about the opportunities we have in this market for future growth and profitability, especially in the mining, energy, and defense sectors. The Australian Government has budgeted over 500 billion Australian dollars in defense spending over the next 10 years. We have contracts to supply power systems equipment and service for offshore petrol vessels, combat vehicles, frigates, and submarines. In addition, we recently signed contracts worth $120 million to supply power system engines to key mining operators. In closing, I'd like to thank our team for their significant work and effort during these unprecedented times. As I look forward to the future, I am confident about the opportunities I see across our diversified enterprise. Our disciplined approach to cost reductions of $125 million to $150 million will help drive expense leverage in future periods. Retail automotive remains strong, and for our SuperCenter’s business, we're focused on driving significant growth with new locations and our goal to reach 100,000 units in 2022. The commercial truck business is poised to benefit from a recovering marketplace. There are many new opportunities on the horizon for Australian businesses. Let me thank you for joining us on our call today. And I'll turn it back to the operator for questions.
Operator, Operator
We will take a moment to prepare the Q&A list. The first question is from John Murphy at Bank of America. Your line is open.
John Murphy, Analyst
Good afternoon, Roger.
Roger Penske, Chairman
Hey, John.
John Murphy, Analyst
A couple of potential growth questions, firstly, on the used business. If you look at this with the SuperCenter’s even what you're doing in your franchise dealerships, what you got with Penske Transportation Solutions. And what you're doing online, it just seems like you have a lot of the puzzle pieces that some of the other sort of pure online used vehicle retail startups have, and you haven't quite put them together, at least publicly with us. What are the efforts and the opportunities there over time? I know you're growing the physical footprint by 40%. But as you look at this, I mean you just got a lot of pieces. And it just seems like other folks are maybe tying up in a more competitive race than you are or actually going after it a little more explicitly?
Roger Penske, Chairman
Well, let's first start, we really have a two-pronged approach. I'd have to say number one, it's called a bricks-and-mortar with our SuperCenter’s. And obviously, we're looking at our new to used ratio at 1.3 to 1. And when you look at the number of units 70,000 we sold in the quarter, a portion of that was obviously through our SuperCenter’s. And I think we'll continue that approach, John. And with the new technology and the things that we're working on, we need to also pivot and have an online pure online model that we can market the brand and approach as we go forward. But as we all know, we can’t go all the way without using outside tools from the standpoint of delivering a pure online delivery. And that's something that we're focusing on. I think if we got to look at our customization, how we personalize it, and certainly creating a connection for our customer all the way through the journey. Now one of the things that we're looking at, and we'll pilot probably here over the next couple of months, maybe into the first quarter would be to have a pure online model and have test sites that we can look at. But one of the things that I'm looking at, we have 1,000 locations across the country that are connected with Penske Truck Leasing or PTS; it would be very easy to use those from the standpoint of delivery locations across the country. So I feel that the customer coming to a location to pick up his car he bought online versus maybe having a truck show up at his front door might be different and a better personal experience. So we're looking at that; we're going to pilot it in certain areas. I think that we'll be able to be more open and exactly what we want to do from a functionality standpoint and the technology that we would use going forward. So I think you're right, but we're not behind. I think we're just trying to come out with the fastest car when we come out.
John Murphy, Analyst
That's incredibly helpful. And then when we look at PTS, that bond offering at 1% was a very low cost of capital for PTS as well if PAG. I'm just curious as you have access to capital the way that you do in PTS and PAG, are there any plans to go out and maybe raise even more sort of incremental growth capital to drive the businesses? Or are you through the internal organic cash generation? Do you think you have kind of all you can handle somewhat responsibly on growth going forward? Because it just seems like there's free capital and that often means an entrepreneur like you can really go out there and really create pretty good growth.
Roger Penske, Chairman
Well, I guess we got to look at, if we generate net cash for the year between $400 million and $500 million, whether we can duplicate that in 2021. I'm not sure. But on the other hand, the Fed has said interest rates are going to be low for a while. I think I would pause right now with the COVID situation. And also when we look at what's coming up in the election, what are the taxes going to be? What are the other things? There might be real opportunities for us to buy things that are adjacent to us: retail dealership, truck dealerships, and also, obviously we're looking at acquisitions at PTS. So we're still going to be in a growth mode from a purchasing standpoint or buy because we bought a $1 billion in 2018 and $1 billion in 2019. I think that the cash flow was so strong at the particular time and we want to continue to pay down our debt to keep our interest costs lower; but obviously, it gives us a strong balance sheet, so we can pivot and make a considerable acquisition if we want to. So I think that being safe and secure right now from my perspective certainly doesn't hurt us. But if something comes up that we need to move on, we can move pretty quickly. And just the street itself, when you look at the interest in the company, and I've realized its PTS not PAG, but we own 30% of that through PAG, gives us a strong indication of what people think about our paper and would give us flexibility. So again, let's take our interest costs down; my goal is to have our debt in a position where we go back almost to 2016 or 2017. And we'd be in a position to be equal to where we were then, which obviously would be positive going into 2021.
John Murphy, Analyst
And then just lastly, thank you for that real quickly on SG&A costs. I mean this cost reduction is very impressive. I'm just curious if you how forward, you think? How much would you think is truly sticky and permanent? And how much of it is a portion of variable sales comp, that might come back over time?
Roger Penske, Chairman
Well, we have variable sales comp; sales growth has come down, obviously, the compensation would come down. When we look at cost reductions, what we're seeing is by reducing our sales force, we've been left with the best salespeople. What we're getting is better productivity from a sales perspective. Quite honestly, that's helped us not only from a growth perspective but quality of sale and other things. The same thing; we're getting productivity from mechanics. I see personnel being pretty solid. We have 3%, which is about 600 people still out. John, I think we'll see probably a good portion of those come back; but there'll be time back as we need them. I think on the major pieces we've got back, so I would say personnel will stay pretty much solid. I think from an advertising perspective, I think that we will be able to continue to have that at a lower rate as we use our digital tools. Vehicle maintenance is a big area, because based on our ability to get deal cars through the shop quicker, with our more experienced people, less loaner cars, less vehicle maintenance, better quality, less policy for our customers. Our T&E, when you think about travel and entertainment, using Zoom and what we’re all using today to connect, we reduced that significantly; I'm not sure what it was in the quarter, but I know it was several million dollars. This should give us some confidence that we can move SG&A in an area where it is. I think right now it's 67%; we looked at a model; if we took $500 to $1,000 off the gross profit, it would move us probably into the 70%, 71% or 72%. So as we look at the model, I think that we're pretty strong on where we're going to be on our cost reduction as it affects SG&A.
John Murphy, Analyst
That's very helpful. Thank you very much, Roger.
Roger Penske, Chairman
Thanks, John.
Operator, Operator
Your next question comes from the line of Stephanie Benjamin from SunTrust. Your line is open.
Roger Penske, Chairman
Hi, Stephanie.
Stephanie Benjamin, Analyst
Hi, good afternoon. I wanted to touch a little bit about your commercial truck dealer business. In particular, you made a comment, Roger, that expectations for units are now about 225,000 for 2020. I'm curious, because I'm also seeing in reports where there's some constraints and production on the OEM front. So maybe, if you could talk a little bit about the supply and demand side of that business in the current environment?
Roger Penske, Chairman
If you look at the numbers for September, the orders were 30,000. If you annualize that, that would be 360. So there's definitely demand out there. I know that Freightliner is back up to capacity. Some of these supply chains, however, are not keeping up with the demand. A lot of these fleets that were pausing are now coming back into the market, which is a good situation for us from the standpoint of our retail truck business. I think there will be some constraint on the supply base really not because of production at the OEM but more because of supply chain. We look forward to a good market in 2021 as we're seeing people coming in and really those people that canceled orders at the beginning of the year because of lower expectations are now coming back and placing their orders. So I think we're on the right side of the curve right now.
Stephanie Benjamin, Analyst
Great, thank you so much. And then switching gears, I want to talk a little bit about the U.K. business. Maybe you can speak to how that performance, how that business progressed throughout the quarter. What you've seen thus far in October, and how you feel it is positioned?
Roger Penske, Chairman
Well, let's really look at July, August, and September. I think July probably had some pent-up demand. Remember, we were closed almost for two and a half months. When you look at the business, there was probably some pent-up demand in July. The volume actually goes down in August because it's looking forward to the registration month that's in September. But when you look at the market during the quarter, the market was down 3.4%. We were up 7% when you look at the brands that we represent. So we outperformed the brands, and we surpassed the market. I think it was pretty much homogenized across the three months. We think that overall, we had a very good quarter. You won't have the same bang in the fourth quarter because we don't have the registration, but when we look at March and we look at September. Overall, when we look at the future, we're getting some COVID hits in certain parts of the country, which we know how to handle if we have that internally in our business. And Brexit hangs out there. But it looks like at this particular time, from a Brexit perspective, they're continuing to talk about it. Hopefully, they'll have some confidence in what they come up with from the standpoint of negotiations and a trade deal. From our perspective, there might be a moratorium on tariffs. Those are things I think we have to look at going forward. But at this point, it's not disrupting any of our business. Look for a good October, November, and December. Our used car business will certainly outperform what it did last year. Our superstores should give us a positive quarter based on where we are today, and what we can see through the windshield.
Stephanie Benjamin, Analyst
Got it. And then lastly, a high level I'd love to hear your thoughts, Roger about the state of the new vehicle market here in the U.S., a lot of conversations about production constraints as well on that side and maybe your thoughts on when we think inventory levels will start to pick back up again. And then what that might mean for just the strength of the used market.
Roger Penske, Chairman
Well, let's just talk about, we just saw a note come across here in the last few hours that Toyota is now up to 94%. They're not even at 100%. That's their plan here in the U.S. We see a short supply, obviously through Q4 going into 2021 on the premium luxury side. We're pretty much placed. I think we're going to continue to see that the thing is to get the right mix of vehicles that we could sell. But there's no question overall that trucks and SUVs are still hard to get, and those are the premium vehicles that we make our money on. I would say we're going to have a supply pressure to get the vehicles we want. On the other hand from a market standpoint, I think we have to think a little bit about what's happening with a vehicle market and personal mobility. One of the things we benefit from is being in Penske Truck Leasing and Solutions as we see what's going on with the mobility of the public, people living in different parts of the country. We can’t get enough trucks back into those cities in order for people coming out. There’s definitely, and we can look at it day after day that people are moving out of the metro areas into other areas because we're seeing it from our truck demand perspective. In fact, if you want a truck to go to Chicago from Cleveland, we probably you can rent it for $1. I mean, these are the things we're doing to try to determine what the demand is. So I think that's going to drive the personal mobility in a different way, which should create some more demand in both used and new cars. Not high luxury cars, but cars that people would use on a daily basis. I think there is a flight to safety because of some of the issues people are dealing with in these bigger cities. Maybe that's not a good answer, but that gives you some insight.
Stephanie Benjamin, Analyst
No, that's really helpful. And I think you've said this in the past. Did you get the percentage of your locations that are located in suburban areas, or have you been provided something along those lines to quantify in the past?
Roger Penske, Chairman
No, we haven't, but we would not have businesses that are located inside the big cities. Maybe there are a few, but think about San Francisco: we're out by the airport. We’re really well-placed because when you're in the truck rental and leasing business, we need to be close to the interstates and the highway. We wouldn't be down in some of the deep metro areas. We have a few that would be the legacy locations. But we can get that, and I'll get Tony to get that for you.
Stephanie Benjamin, Analyst
Got it. Thanks so much, everybody.
Roger Penske, Chairman
Thanks, Stephanie.
Operator, Operator
Your next question comes from the line of Rick Nelson from Stephens. Your line is open.
Roger Penske, Chairman
Hi, Rick.
Rick Nelson, Analyst
Thanks. Good afternoon. Roger, Tony. Question for you here about supplies. You got into this a little better than normal. Yes, where do you think the gross profit is? And take the expense ratios, which shakeout do we go back to pre-COVID levels? How would you pay used or are we potentially going to be at a higher level as we move forward?
Roger Penske, Chairman
Well, I think what we have to look at is that with more inventory, there’s no question that if you don't have the right inventory, you're going to be selling vehicles just to dispose of them because the OEM has made you take them. I can't comment on what the OEM’s posture is going to be in Q4 into 2021. But I think, internationally, we see good discipline, not setting targets that are unrealistic. The OEMs and I hope the dealers have longer memories, so we don't need to give cars away. And we can continue to achieve the margins we've been getting; we've been up about 800 on both new and used when we look at it across the board. For me, if you look at the SG&A perspective, we're going to have to be sure that we maintain the cost out as we've taken. Overall, we did a test; Tony did for me, looking at a $500 and $1,000 reduction in gross margin, and I think it adds probably about 300 basis points to our SG&A based on the current situation.
Rick Nelson, Analyst
Okay, great. That’s helpful. So you're throwing off a lot of free cash, and you have been after the balance sheet reducing debt; you've pulled a lot of costs out. Should we expect more of the same? That you're going to continue to pile that free cash into reduced debt levels. I recognize you got a new reinstated dividend, so that’ll take some of the cash. But are your plans to continue this for a while before we see acquisitions, or do you think they are more imminent?
Roger Penske, Chairman
Well, I think we were certainly not in acquisition mode when we started 2020. But when we got to mid-March, we put our pencils down and said at this point, let's look at liquidity. Let's look at the marketplace and our balance sheet. There’s no question, at that point we did that. Furthermore, then we looked at how could we reengineer our balance sheet from the standpoint of the debt we had. I think our finance team has been able to take that down successfully. We'll see the benefits next year now, from the standpoint of generating $300 million to $400 million to $500 million of net free cash flow. Our dividend is back, our 401-K is back. So that’ll utilize some of that. I think our CapEx still will be well controlled next year, so that'll give us additional capital to utilize. We have dividends; we have other things we can do, share buybacks — these are all areas or levers of opportunity. But we're going to continue to invest in the used car SuperCenter’s, as you know, and I think when we look at those, they generate probably somewhere around $3 million to $3.5 million. The return is about 25% on a $10 million to $12 million investment. That certainly is an area that we're focusing on. We cannot execute at the speed of some of our other peers because we’re building larger sites. They have reconditioning, they have service, because we want to be sticky to get repeat referrals. We’re going to invest in our digital pure online piece, which is technology and will take some of our capital. If there's anything out there that fits our model — key brands that we already have — markets where we have scale — and certainly from a retail truck perspective, the fact that we have this footprint today, we're very interested to grow that. We would look at all of these as opportunities, but we're in a position to be able to go to market and even get more capital if we have to.
Rick Nelson, Analyst
Great, thanks. Finally, if I could ask a near-term question: how are October sales tracking?
Roger Penske, Chairman
Well, I would say that October sales — it's a hard time this time of the month to say where we're going to be. I think we came off of a very hot September. We are absolutely out of vehicles right now, which so if you looked at our numbers, we probably would look like we're down somewhat; single digits obviously, some brands might be more because we're just out of vehicles. It's too soon to tell you where that's going to be. But everybody's talked about availability. I don't need to go over that again.
Rick Nelson, Analyst
Presumably GPU is rock solid. Thanks a lot. Appreciate it.
Roger Penske, Chairman
Yes. Thanks, Rick.
Operator, Operator
Your next question comes from the line of Rajat Gupta from JP Morgan. Your line is open.
Roger Penske, Chairman
Hi, Rajat.
Rajat Gupta, Analyst
Hi, good afternoon. Hi good afternoon, Tony. Good afternoon, Roger. Thanks for taking my questions. I just had a broader question on electric vehicles. How do you think the dealer channel is likely to be impacted going forward? As more OEMs start to offer a one price, no haggle model into their websites. I mean, how do you think this could change your profitability profile on the new vehicle side? I’m doing services will still be a key source of income, but just a new vehicle sales profitability? Do you see any disruption? Maybe more efficiencies? GMC — GM yesterday talked about trying to make some changes in the channel. So just curious as to how you see this playing out? And I have a follow-up, thanks.
Roger Penske, Chairman
I guess you'd have to say it's taken Tesla 20 billion or more to get where they are today to get to profitability. I think it's very difficult. They have a complete — from top to bottom, meaning when you look at the total journey from manufacturer to delivery to service, and they're not using a franchise network at this point, it would be difficult with the franchise laws we have in the U.S. I think that it would be difficult to go on a full scale. Now, maybe there's leverage that you have; I don't know about. But I think GM would utilize the dealerships they would qualify to sell certain vehicles, and there might be stipulations that you have to have for electrification, other things they might not have in order to qualify. From our perspective, these are all low volume. Remember, all of these boutique brands that are coming out — excluding maybe a Hummer — but when you think about it. If you sold 10 or 15 or 20 or 25 a month, you have no parts and service, you've got to have a facility. The OEM having to support that either directly is going to take a lot of capital. I don't think they're going to get the return that you would expect. Overall, each are going to be boutique at the moment when we look at electrification and where it's going to be in 5 or 10 years. Still with 300 million vehicles in the car park I think it's still going to be a long time before we see it at 30% or 40% of the market. We're investing in electrification — we think that there are some very good vehicles out there, but they're typically high price. If you look at the premium luxury people primarily, we're seeing, maybe other than Volkswagen, high price large infrastructure. Again, what's the residual values on these? And if these new entrants, where are they going to have a captive finance company? Who is going to support the residual? So there's lots of questions before I think you're going to go to a separate channel.
Rajat Gupta, Analyst
Fair enough. Thanks for that. And just on the used SuperCenters. You gave us some numbers around the economics of the stores and how they're tracking. In the third quarter, it looks like the return profile here is around 20%, 25% for the used SuperCenters. Like one of your peers that also has a stand-alone business, they've talked about returns above 30%, 55% or so. Just curious as to what the difference might be? Why you could replicate something like that, or are we missing something there? Just curious as to your thoughts on that.
Roger Penske, Chairman
I think what we have to do is maybe some of the peers are using existing sites that they already have and they're repositioning those. These might be previous dealerships, as some of these used car sites. We have a different path. As we say bricks and mortar, we are going to have significant sites that have the ability for service. I mentioned it before, and also reconditioning, and they’ll be larger. Building them takes at least a year. We think two to three to four months — they're profitable. We’ve been running now for the last three years and growing, and it's been consistent. A bigger thing that we have to look at longer term is acquisitions. No one is talking about acquisition now, everybody's talking about how great this business is, but with acquisition, it's going to get tougher. The only benefit there is the residuals will go up on use, which will help finance companies help our OEMs, and again we'd be able to still get the margin or bumping against new car prices on some of the lower vehicles. For me, I think a 25% return certainly would be good if we can sustain that. I don't think we can grow at such speed unless we have a bunch of business locations that we're not using, certainly when you look at the size that we're building in some of the locations. CarMax has been very, very successful from the standpoint of building their network around the country. They have a few smaller stores, but in most cases these stores hold between 300 to 500 vehicles and that’s kind of our model, both internationally and domestically. When you look at 100,000 vehicles that we’ll sell through our SuperCenters now in 2022, we can grow from there. I don't want to start forecasting three, four, and five years ahead, because I want to know what's going to happen, what's going to be the new norm in transportation as we go through November and into 2021.
Rajat Gupta, Analyst
Understood, makes sense. Thanks a lot and good luck.
Roger Penske, Chairman
All right, Rajat. Thanks.
Operator, Operator
Your next question comes from the line of David Whiston from Morningstar. Your line is open.
Roger Penske, Chairman
Hi, David.
David Whiston, Analyst
Hey, Roger. Hey, Tony.
Anthony Pordon, Executive Vice President of Investor Relations and Corporate Development
Hi, David.
David Whiston, Analyst
Just, I'll keep the questions first one on service. It seems like for all the dealers it haven't come back yet, or at least haven't come back to the point that it's incrementally positive year-over-year in the orders. There must be huge pent-up demand; do you agree with that? And when do you see customers coming back?
Roger Penske, Chairman
I think we've got to look at miles driven. My understanding from the data that I'm looking at, some places in the northern, western part of the country, miles are down; some of that is due to the fires, etc. But again that's going to have some impact. We know for sure that our parts and service business is down. If you look at the aggregate of all the pieces — customer pay, warranty, and get ready in body shop — body shops are off for us about 20%. Until we fill the work in process, we'll see that continue to be a drag on our business. The impact of fires in California has affected us. The number of people we have working from home, obviously will cause a different social change when we look at miles driven, but for us what we've been able to do is take the level of service and take cost out and get more productivity. That's going to be key as we go forward, not knowing exactly what miles driven will be, but we'll get more data on that over the next few months. Our warranty was flat, and our customer pay was down about 2% for the quarter.
David Whiston, Analyst
Okay, thank you. And then there's been some public comments recently about a concern on the impact of a no-deal Brexit. I think it was Mercedes in particular that raised an alarm recently. Is there any kind of EPS estimate you could get for 2021, should there be a no-deal Brexit?
Roger Penske, Chairman
I don't have any data now. I'd get Tony to maybe get with you and try to come up with some of that. I think we're going to look — if there are tariffs, the opportunity is the OEM. The customer in this is going to take a part of that. In the U.K., 68% of our business is used cars, where it's 2-to-1 when it comes to new to used or used to new, so we're talking about 32% of our business that could be impacted. So I think we've got somewhat of a cushion when we look at that. There might be a situation where the OEMs even mitigate that increase and maybe the customer is going to take part in that too. Remember, we're premium luxury, and we've had higher costs because of gasoline, guzzler, and other taxes that they've been able to swallow without any real issue at this point.
David Whiston, Analyst
Okay. And the question on a new vehicle segments so that's kind of developing now is just premium, all-electric pickup trucks. We have the Hummer unveiled this week, which in my opinion looked great. But there are also Rivian, Bollinger, and Tesla in this space. I mean, you're really in touch with the premium luxury customer? Do you think there's a lot of demand for this vehicle segment? If they're very expensive, just love to hear your thoughts on that segment and on the Hummer itself.
Roger Penske, Chairman
Well, these won't be everyday drivers for sure, will they? These are I call them boutique vehicles. We make a lot of money on those in the premium luxury segment. That from the standpoint of Lamborghini and Porsche and Ferrari, etc. I think that there's a certain niche for this. Remember when Lincoln had a truck that didn't go over so well? Obviously, that wasn't electric. I think that it's going to be difficult to sell those ultimately once they go on without some incentives. What's the residual value going to be? A lot of our premium customers buy cars and they lease them. I don’t know what the lease rates will be on some of these, but again what’s the distribution channel going to look like? Is it going to be separate? Are we going to handle those at dealerships? I don't know; there was a question earlier today on that. I think all the manufacturers will make big profits on them, but I don't think that will pay the dividend for them.
David Whiston, Analyst
Okay, thank you, guys.
Roger Penske, Chairman
Jason, thanks for the support. Everybody, we've come through Q2 and into Q3 with great success, and we expect to carry it on to the rest of the year. I look forward to talking to you at the next quarter. Thank you.
Operator, Operator
That concludes today's conference call. You may now disconnect.