Q2 2021 Penske Automotive Group Inc Earnings Call
Welcome to the Penske automotive group second quarter 2021 earnings conference call. Today's call is being recorded and will be available for replay approximately 1 hour. After completion through August for 2021 on the company's website under the Investor tab at Www Dot Penske automotive.
Tom.
I will now introduce Anthony reported the company's executive Vice President of Investor Relations and corporate development. Sir. Please go ahead.
Thank you Sarah and good afternoon, everyone and thank you for joining US today, a press release detailing Penske automotive group's second quarter 2021 financial results.
<unk> was issued this morning and is posted on our website along with a presentation designed to assist you in understanding the company's results as always I'm available by email or phone for any follow up questions. You may have joining me for today's call are Roger Penske, Our chair and CEO Shelly Hall group, our Chief Financial Officer, and Tony Petrone Vice President.
Didn't and corporate controller.
Our discussion today may include forward looking statements about our operations earnings potential outlook future events growth plans liquidity and assessment of business conditions. We may also discuss certain non-GAAP financial measures such as adjusted income from continuing operations and related adjusted.
Per share earnings before interest taxes, depreciation and amortization or EBITDA and adjusted EBITDA. We have prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures in this morning's press release and the Investor presentation, which are available on our website to the most directly comparable.
Earnings 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 on factors that could cause results to differ materially I'd now like to turn.
GAAP over to Roger.
Thank you Tony and good afternoon, everyone and thank you for joining US today I am pleased to report all time record second quarter results for Pag. These.
These results were driven by outstanding performance across all parts of our business our revenue increased 91%.
The $7 billion and income from continuing operations before taxes increased.
658%.
The $464 million.
And income from continuing operations increased 653%.
To 339 million.
And related.
On the calls per share increased 650%.
A $4.20.
Earnings growth was driven by strong business conditions across all areas of our operations.
Including stronger unit sales higher gross profit per unit retailed increasing services.
Earning parts gross profit.
And the continuing expense leverage and lower interest costs.
I'm, particularly pleased today with continued expense discipline, driving an 860 basis point improvement.
And SG&A as a percentage of gross profit to 63, 4%.
Servicing Additionally earnings before taxes from our commercial truck dealerships and.
Improved 172%.
And the earnings from Penske Transportation solutions increased.
243%.
Demonstrating the strength.
The company's diversified business.
Total.
Looking at our retail automotive operations.
On a same store basis for Q1, 'twenty 1 versus Q2.
20 <unk>.
Unit sales increased 82%.
131000.
Our new was up 92% on a same store basis.
<unk> was up 75%.
Retail revenue increased 98%.
New vehicles up a 105% used vehicles up 99.
Finance and insurance increased 119%.
On the service and parts was up 60%.
Our gross profit increased 120.
<unk>.
Including a 69% increase.
And service and parts.
Variable gross profit increased 45%.
$5169 per unit.
Compared to $3562 a unit.
Comparing Q.
For for 'twenty, 1 to Q2 thousand 19.
Same store retail revenue.
Units increased 6% revenue increased 23%.
Unit vehicle was up 26% used vehicles up 26%.
Finance and insurance was up 29%.
Q2 in service and parts was up too.
Our gross profit increased 35%, including 5.5% and service and parts.
I might note that during the second quarter of 'twenty, 1 we experienced showroom closures in the U K and Europe, which obviously impacted our comparisons.
We opened 2 locations for car shop during the second quarter.
And we now operate 19 locations.
During the second quarter car shop unit sales increased to 184%.
To 18742 units and revenue improved.
200.
<unk> percent to over $400 million and gross profit per unit retailed increased.
17% to $2700.
We improved vehicle sourcing by increasing the volume of trade ins purchased and also from the consumers.
And our franchise dealerships using our proprietary internal.
On an 8 online transfer portal.
Based on current sales rates since reopening in the U K supercell.
Supercenter showrooms on April 12, we're forecasting on current run rate of approximately 80000 units annually.
Turning to our retail commercial truck dealership business.
Eternal Hamer truck group represented 9% of our revenue.
On a return on sales in the quarter was 6.3%.
During the quarter, we completed the acquisition of Kansas City, Freightliner, which is expected to add $450 million in annualized revenue.
We sold over.
We're 4100, new and used trucks and vehicle margin increase versus the same time last year due to a stronger market conditions same.
Same store service and parts gross profit increased.
18%.
Total services parts of operations represented 65%.
Of the total gross profit in fixed costs.
Absorption.
It was 133%.
As a result of these items our earnings before taxes for our Premier truck increased to 172%.
<unk> $39.7 million for the quarter.
The class 8 commercial truck market remains very strong.
As expected to continue.
For the near future.
During the second quarter.
North American class, a net orders increased 205% retail.
Sales increased 63%.
And the backlog increased to 253000, which represents approximately.
10 months supply.
ACG research is forecasting a 29% and retail sales increase to approximately 300000 units compared to 233000 in 2020.
We expect the strong market will provide tailwind to our commercial truck and our truck.
Continuing businesses for the remainder.
'twenty 1.
And 'twenty 2 moving.
Moving on to Penske Transportation solutions as you know we own 28, 9%.
Pts, which provides us with equity income.
Cash distributions and cash savings.
<unk> currently on.
<unk> has a fleet of over 330000 vehicles.
In Q2, Pts generated $2.8 billion in revenue.
And income of $354 million.
Or a return of 15, 4% on sales.
As a result, our equity earnings.
Lease increased 243%.
$102.5 million.
Our full service leasing and contract sales were up 11%.
Our commercial rental rental revenue was up 62.
We had a utilization all time high of 87%.
Consumer 1 way.
<unk> income was up 71%.
And the demand remains very strong.
Our logistics increased 45%, including the recent black horse carriers acquisitions, but should we expect to add at least $600 million on revenue for Pts this year and the.
The gain on sale of used trucks is up.
245% to 45 million us strong freight environment and shortage of buyer of used trucks in new trucks is driving demand for used vehicles.
I'd now like to turn the call over to Shelly <unk>, who assumed the chief financial officer role on June 1 to discuss the balance sheet and cash flows.
We're very fortunate to have someone with her experience and tenure with our company to assume the CFO rule.
Kelly brings significant financial management expertise and experience and strong leadership qualities and will benefit the company into the future Shelly.
Thank you Roger good afternoon, everyone I'm pleased to accept us Raul.
Having been on the corporate controller over the past year.
And spent 15 years in total with ph D. I look forward to continue working with our team and each of you.
The opportunities in front of us.
Looking at the pag balance sheet and cash flow our balance sheet remains in great shape.
June 30, we have 100.
$65 million in cash and we ended the second quarter with approximately $1.1 billion in liquidity under our credit agreement.
When looking at our capital allocation, we maintain a disciplined approach that focuses on opportunistic investments capital expenditures to support growth.
100 on a strong dividend to our shareholders, reducing debt whenever possible and share repurchase.
Year to date, we repurchased nearly 500000 shares and as we announced today our board of directors increased the repurchase authority to $250 million.
Year to date.
Deliver generated $917 million in cash flow from operations, and we invested 91 million in capital expenditures, including $6 million to acquire land for future car shop expansion.
At the end of June our long term debt was $1.5 2 billion.
We repaid $842 million of long term debt.
At the end of 2019.
In addition, we've either repaid or refinanced our senior subordinated debt to lower rates, while lengthening the terms to take advantage of current market conditions.
These initiatives.
We have lowered our debt to total capitalization to 28, 7% compared to 33, 7% at December 31, and 45, 6% at the end of 2019.
Our leverage ratio sits at 1.0 times an improvement from 2.9.
Headwinds at the end of 2019.
At the end of June total inventory at $2.9 billion, which is down approximately 500 million from December 31, and June 30 of last year.
Retail automotive inventory $2.3 billion.
We haven't.
<unk> thousand 6 day supply of new vehicles, and we expect the current supply demand imbalance to continue into 2022.
Our day supply of premium is 30, well volume foreign is 14.
Used vehicle inventory is in good shape with a 38 day supply at this time I will turn.
The call back over to Roger.
Thank you Shelly moving on to our digital initiatives.
To grow.
Ed and enhance our digital footprint, including the introduction of new tools and technologies to offer our customer a hybrid customer driven shopping model.
Adding on their preferences customers can purchase either.
Have a totally online and.
Store or any combination of the 2.
Last week, we announced a fully automated technology platform to facilitate on.
Online retail sales of our used vehicles. This platform driven by Cox automotive patent pending artificial intelligence.
Either from currently being used exclusively at car shop to provide consumers with the ability to complete and automated 100% online vehicle purchase.
For this new technology customers can outperform the following 100% online.
<unk> approval for financing at.
Net after.
As protection products.
Receive personalized payments for all eligible vehicles based on each consumer's credit profile, including tax title on other fees complete and electronically sign deal paperwork make any required down payment and even when we provide an online notary.
We intend to expand.
Market for this technology to our franchise dealerships as well.
Looking at our other digital tools, we retailed almost 3000 vehicles or approximately 4% of our U S unit sales directly through preferred purchase and 14% of our customer use preferred purchase in some way during their buying journey.
And us using.
Using the sitting here by online tool in the U K a customer can reserve a car for 99 pounds apply for financing receive interest in credit approval obtained a guaranteed trade in price and pay online all through our proprietary platform.
During the quarter, we sold $4000.
Ernie 100 vehicles or 9% of the <unk>.
U K unit sales using this platform. So when you combine our online buying tools in the us in the U K.
Along with our online service scheduling and online pay in the new technology available car shop.
Have the tools to allow our customer reform any parts of the.
The transaction online grew shorten our visit to the dealership.
Let's look at corporate development.
So far this year, we've completed acquisitions totaling 600 million on an annualized revenue.
We opened a new Porsche dealership earlier this year in Washington D C and have 2 open points under construction combined the new points represent.
<unk> had approximately $150 million in annualized revenue.
We have another $7 million to $800 million on annualized revenue of deals on our pipeline, representing retail automotive or commercial truck dealerships.
We also opened 2 car shop used vehicle supercenters this year to date and plan to open 4 additional.
<unk> locations by the end of the year.
We plan to execute our growth plan to increase car shot on car shop footprint from its COVID-19 locations to 40 by.
By the end of 2023.
At this time, we expect car shop will generate at least.
150000 unit sales.
Additional food and a half to $3 billion in total revenue doubling the size of the current business and we are targeting a 3.5% to 4% return on sales.
And $100 million of EBT.
As we look across our diversified portfolio of businesses, we continue to target organic and acquisition.
And as well as further operating efficiencies to continue to grow and expand our business.
I'd like to thank our team for the outstanding results in Q2.
Producing an all time record results for pag.
Thanks for joining us this afternoon on a call on your continued confidence this time, we'll open the call up to the operator.
<unk> group of questions.
Thank you to ask a question you would need to press Star then 1 on your telephone to withdraw your question. Please press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of.
John Murphy with Bank of America. Your line is now open.
Good afternoon Roger.
Just a first question on sustainability of current market dynamics, which is a tough 1 to answer.
But as far as the Gpus are grosses.
For vehicle.
Cool.
And the very low SG&A or.
Yeah.
And last year.
Youre there.
Operator are you there.
Pardon me.
I will go ahead, we lost you there I want you to go back you had talked about sustainability on that.
And you went blank sorry go ahead, sorry, so if you think about the grocers, which appear to be a little bit high at the moment and they might normalize over time as well as the SG&A to gross being very good performance right now, but there is some concern.
Kent will inflate a little bit over time I'm. Just curious you could talk about the sustainability of those 2 parts of the equation. So first on grosses and then second on structural savings on the SG&A side.
I think basically economics says.
Low inventory, obviously rosa demand and we get.
The strong gross profit.
<unk> will continue.
A big question there is cash.
Can we keep the discipline at the OEM level from the standpoint of day supply on the 30 to 40 days, which I think.
Many of them are talking to us about they see what it does for them from a profitability standpoint, and obviously its been key for us at the dealer level.
Obviously.
<unk> gross comes down it impacts SG&A I think the most important thing is what we've done we've taken 11, 5% of our work force out we've reduced other costs significantly.
Which is taken.
SG&A down to 63, 4% at the end of the day, we will continue to commit to those.
We see it there should reductions on our people are finding out we've got better productivity or mechanics are all over 120%, we see sales now per unit.
For sales associate going from 9 day, maybe 12 or 13.
When we look in the service side, we see our vehicle maintenance us down John Leslie.
Always try owner cars less comebacks faster churn from the mechanics because of better mechanics are taking on work in today. So I think from a parts and service standpoint will sustain and continue to grow that because we're really not at a point now where everybody is fully back driving so I think we have some leverage on SG&A.
Youre going to see some deterioration.
<unk> what is that you, Mike we did a little bit of back of the envelope.
Here. This morning, we said, we said 131000 units and let's say at 5200, it's about <unk>.
66, $66 million and if you take $500 worth of gross out.
And then take 30%.
Less low emission you'd end up probably with about $45 million of loss gross profit and then you look at growing your parts and service business up 5% would be about 25 million. So we're really looking in the $18 million to $19 million of loss gross even if we dropped our margin $500 I'd say it would be 10%.
I think where the increased opportunity on parts and service acquisitions were making that we can earn net back but it's easy to say, but I think thats. Just gives you a little bit of sense on some of the elasticity on the growth side.
That's incredibly helpful. And then just a second question on on the used car.
Opportunity I mean, obviously car shop.
And.
Youre looking at double a little bit more than double the store count.
But you also have this relationship or.
Just on that you are running with Cox in car shop.
The way you were talking about the car shop business, it's almost like a linear increase with the store base.
As opposed to getting any real power with online.
<unk> tool from from Cox or what.
That cost will might mean for your your dealerships directly on used cars. So I'm just curious as you think about that business.
So youre under shooting I appreciate the conservatism and realism, but I mean is there a much bigger opportunity for you.
<unk> on the US side as you grow the network, maybe you get a little bit more productivity out of the Disney stores, and then you kind of turbocharged it with the online efforts.
Well I think we all have to look at what we what we look at as a retail sale used cars I mean, we're operating at about $2700 per unit.
If we look across our network today and I think the growth that we've had has been excellent we've been shut down obviously.
Showroom shut down.
In the UK, we had to shut downs in Pennsylvania here last year. So we've had some noise in the system from the standpoint of the Cox tool.
I mentioned.
Before we looked at the landscape and quite honestly when we look at used cars on line, we look at technology pretty much gotta be plain vanilla as we go forward and to me we wanted to partner with someone that had the toolbox that could help us.
To be able to construct something.
And that would give us 100% digital transaction and we've had our preferred purchase tool for years, which they've been working with us on and what we did is we brought our human capital our domain expertise. They brought their toolbox generic capability together and we said we wanted to build the best tool in the industry and I think when you look at debt it's unique.
<unk> technology.
It features so obviously the ability to compare multiple vehicles.
Personalized payments on needing to go through all of this but you can see when you actually operate and use the tool what it has and to me it was away from us to get into the market.
Spending millions of dollars on the.
Other hand, utilizing our capability with Cox now on the other hand, you really got to look at the 3 pillars. We have 1 would be obviously today would be car shop. We will also start to bring in our used car and the OEM network into this car shop.
Our population so we have more vehicles for sale online.
<unk>, which will happen as we go through the next few months and then after that you look at the preferred purchase product that we have at Penske cars and also in the U K, so the sitting or online and I think our growth strategy.
Right, 1 will have bricks and mortar and will also have online and I think at the end of the day I cant.
If you that we're going to grow it.
Multiple it's higher than it is realistic and I think that our growth target today of 150000 by 2023, I think us really realistic and we're going to be doubling the size of our business during that period going from 19 to 40 locations.
Gotcha.
That's helpful. And then just lastly on the M&A front, which I mean, you're constantly do but you don't get a lot of air time on.
During the quarter, you did $600 million.
Between cash and a.
A couple of dealerships I mean, you talked about.
What's in the pipeline, but if we think about our full year and you know this is kind of.
On a tough thing to do because valuations and deals are a little bit squirrelly.
Get over the hurdle and finish but I mean, as you think about the full year I mean, what would you roughly think.
Our run rate on acquisitions would be I mean, because we were hearing a lot of targets from other companies.
But you don't really talk about the targets you just do it so I'm just curious.
What do you think about for this year and how we should think about acquisitions going forward.
It's hard for me to tell you what we're gonna do in 'twenty 2 'twenty 3 'twenty 4 but I can say this that we think that will have annualized revenues.
Not including the open points. So we have a $1 billion in 'twenty, 1 and we have a pipeline that's.
It's more than that from the standpoint of the additional 400, and we already have going into 'twenty..2 so we feel good about it but on the other hand, we wanted to be very selective from the standpoint of what we're going to do from the standpoint of our of our purchasing.
On a dealership because if the multiples today I think we've got to look at.
Just exactly where we are what's the benefit of is there a consolidation in the market. The back office. So because we had driven because of the scale, we want to focus on premium luxury and probably volume foreign.
To grow our commercial truck footprint as we've talked about before because the returns on those is better than <unk>.
Retail auto at the moment and certainly the multiples in some cases are half with little or more capex, which obviously is something we need to take a look at and then we got to look at the value proposition between stock buyback and.
And and acquisitions, both in truck and car.
Got it today, if we were.
We're rolling those 2 open points.
On what you think youre going to get done on the M&A front, I mean, youre talking about north of $1 billion, probably the $1..1 on $1.2 billion in acquisitions and open points. This year roughly is that is that correct characterization on timing. That's correct. Yeah. That's correct. Okay. Great alright. Thank you very much guys I appreciate it thank you Roger.
Thanks, John.
Thank you. Our next question comes from the line of Michael Ward with benchmark.
Your line is now open.
Maybe just to follow on with the channel was dressing.
Roger can you talk a little bit about how you evaluate some of these growth investments how are you prioritizing.
Yeah.
You have a unique position you can go U S retail U K the heavy duty truck car shop cash returns how do you evaluate them is it just straight return on capital.
Well I think it is there a synergy because we have that same brand in the market. We bought the 2 lexus stores in Austin, which would be a.
A perfect example of moving into a market, where we already had capability on the premium luxury we would always look for those types of acquisitions.
I don't think we have big acquisitions in mind, because many times.
There's 2 or 3 that maybe don't fit your model.
Certainly look at what is the requirement.
<unk> for Capex.
This particular time, when we are going in paying the kind of multiples you have to and then at the end of the day, we got to be sure that this is an acquisition that fits our scale from our standpoint. It was a truck dealership and does it fit our network because today as we look across the country for the Freightliner business to have a.
Network is really key for us as we go forward and the acquisitions always gotta be lifetime I've, just got 1 do we buy today on sell Tomorrow, which I think is key and then of course, you'll look at it the return and we're saying the cash returns are just to book returns and to me that's going to be key but it's again as I look at it and what is also that people.
Today, it's easy to buy something it's hard to run them and what kind of people human capital you could get with these acquisitions and I would say that now is becoming more and more important because the seller wanted to stay with you. What's the management team. These are all key and then you also have to deal with a framework agreement all of us have framework agreements, which limit us by the way.
Certain acquisitions in certain markets and also the total acquisition we might have was on OEM. So many of us are going to be bumping up into those types of ceilings.
Ceilings as we go forward and I think that's going to be key along with certain stringent CSI requirements.
Thank you Roger.
I wonder.
Under if you could talk a little bit about the balance sheet restructuring that's taken place over the last 12 months.
Specifically it seems like your maturity profile of us greatly improved.
What impact does it have on the income state going forward.
Sure. Thanks, Mike.
Consider our refinancing.
To be very successful, we reduced our interest rate by 175 basis points.
Extended our term out 8 years. So all of that you know secures lower rates well into the future on.
That refinance resulted in annual savings of $8.8 million annually and when you look at that company.
Combined with our <unk>.
Refinancing repayments from 2020, we're looking at annualized savings of about $36 million or <unk> 33 per share.
We also had $12 million on Floorplan interest savings year to date, that's down about 40%.
So.
So if I look out on the next 18 months.
Cash flow on the.
First half was through the roof.
Even if we don't assume that's going to continue when you kind of look at your capacity and your current liquidity you debt capacity.
Cash flow.
It seems to me that there is $2 billion to $3 billion on kind of firepower is that the right way to think about it.
Yeah, you know like you said, we generated $900 million on cash flow from operation. So we are able to self fund $280 million on acquisitions.
We returned 110 million to our shareholders.
The $90 million in Capex.
Particularly for the car shop expense expansion on those.
Those open points and still repaid $170 million on that so we will continue to focus on that we like our strategy as Roger said dividends remain a priority and we have those acquisitions in the pipeline.
Complete those open points.
And we're incredibly focused on the car shop expansion.
So.
Yeah, I think your estimate is correct.
Okay and then just.
Lastly, I think a while back.
I think Tony you guys put out a target of pre tax income of about $1 billion and I think youre blowing through that a lot sooner than expected.
Is there a new target to think about it.
Too early for.
I think when we talk about the target that.
We had talked about at the $1 billion in 2023.
Mike We certainly had a great year, so far this year and we will surpass our 1 billion PBT target maybe sooner than we anticipated group.
Year to date, EBT us 728 million.
$449 million from 133 last year the business is strong we think based.
Based on maybe supply chain issues are still going to remain strong through the balance of the year and based on the current environment.
Inventory supply of light vehicles, and commercial trucks sales could be challenging.
But.
We think on.
Our business to continue will grow well beyond 1 billion EBIT target, but however, we're not going to give you a number today not just yet okay.
That wouldn't be the right thing to do based on where the all the things that are circling at the moment, but our focus is going to be remain expanding our car shop businesses.
And making strategic and operating opportunistic acquisitions, driving and driving further cost reduction. So again I think all the levers we've been pulling the market.
Inventories the products, we represent in our Pts investment are heavy truck investment all of this has certainly paid off.
To get Us where we are this for 6 months.
Well. Thank you. Thank you everyone.
Thank you.
Our next question comes from the line of Stephanie more with Truest. Your line is now open.
Hi, good afternoon, and congrats on a good quarter.
Thanks, Stephanie.
I was hoping you could talk a little bit about what you're seeing particularly with your U K business, both from a supply standpoint, as well as demand, obviously come back pay tremendously and up year over year, but.
Any impact from spikes in Covid cases, or how would you care cancer.
The overall environment, especially compared to the us. Thanks.
Well I think when you when you look at.
This year.
We just opened the dealer reopened on April 12.
And I think he would say business has been brisk through to registration.
100.
Or is it 4000 versus 56 in the second quarter of 2020, and our business at Sidner was up 153% versus last year and to me that bodes well for the future still we're seeing.
The parts and service.
Third and fifth recover slowly.
People are just told not to move around the countries you've seen that it's been blocked down to people coming from Europe et cetera. They just opened it here in the last I think 24 hours from a used car perspective.
On our showrooms were closed we really had an impact on us even in car shop lease.
For selling about 5000 units the way back to about 2500, that's kicked back into gear here in June and going into July we feel good about debt, we still see a shortage of product obviously.
When you think about <unk>.
Right hand drive vehicles have to be made special so we're going to continue to see some shortage of vehicles based.
We apply say supply chain disruption, but.
Similarly on supply to the US I think the consumer there is pent up demand. There is no question about it and certainly on the premium luxury side.
We have leadership in all the key brands, there and continue to hold debt.
Just on <unk>.
Excellent and then just switching gears here at Penske Transportation solutions joint venture, obviously had a record quarter and pretty tremendous result, but I think you've called out not only from nice top line trends, but from gain on sales force, but used trucks as well I mean can you call out anything in the quarter that you thought was kind.
Hi specific or unique suggests this environment or really just given the strong freight environment. We're seeing now should a lot of us continue I'd be kind of go through the balance of the year just any help any color there would be helpful.
I think what I would call out as we're now up to over 330000 vehicles, which is a big growth from that.
On a 1 point.
You know of units and generating profit and remember that when you look at our logistics business.
When you look at our leasing and contract maintenance business all of those have multiple year contracts with economic escalators. So this is not just the rental business. So we see that growth is really strong.
On the Black horse acquisition of $600 million in revenue at the end of 2020, certainly has kicked a lot into gear. There's a question about debt and that has helped us but when you look at what might be different I think the 87% utilization across our rental fleet with all.
The action in the marketplace today, we don't have enough trucks, and we've added more trucks into the fleet. So that's given US obviously margin and also sales. So I'd say that would be 1 thing that would be key from a consumer and all this is the 1 way rented here leave it there with all of the people moving out of the core cities Portland and Seattle.
<unk>, San Francisco L. A New York Chicago.
We're seeing that product line really on fire people want to move out of these big cities and their rental distance is longer obviously, the RPT wishes raila per transaction has gone up significantly. So those 2 are rental products probably have driven.
On the driven from bottom line benefit that we might not have seen to the extent we saw during the second during the second quarter, our gain on sale quite honestly was $45 million, which was nothing really.
On a site from the standpoint of the future and I think that at the end of the day we've.
We've seen.
That being steady, but again because of utilization, we don't see us many used trucks right now that we have available for sale. So we will see that even grow as we take some of these new units and as we add new customers. We have over 20000 units today believe it on order, where the Oems are big challenges to get those.
On time to meet our customer demands.
Got it well really appreciate everything thanks, so much thanks Stephanie.
Thank you. Our next question comes from the line of Rick Nelson with Stephens. Your line is now open.
Good.
Roger Tony Shelley.
So Roger.
No Roger C O E M.
As well as anybody on the bits and us.
Carrying us here thoughts when suppliers do normalize do you think they're getting run tighter on that.
Tori than they have in the past us.
Everybody is more profitable.
On the environment.
Curious your thoughts.
Reengineer, our businesses take deeper look at costs.
It's 1 thing to look at cost, but it's always also to look at margin.
Margin and bottom line and I think with us inventory.
Issue and for many different reasons, not all micro chips or is that okay. I understand on on heavy trucks, a day is hires even but at the present time.
<unk> that I'm talking to at higher levels understand it they understand it there.
There are costs are down on supporting inventories.
Being able to not have to support our extra bonuses for the theater.
For customers buying down rates. This all its been very attractive to them.
I hope that they see this and we certainly are preaching that throw them today because.
What happens is us wave is raising all boats and hopefully at that point. They will understand that we don't need to push the problem is if they start building units fulfill lease plants that aren't the ones that customers want. We're then going to start to see on inventory pickup of vehicles that are not ones that people want to buy and thats.
It's going to start turning us back into the same direction, we were before so I think that the.
The main focus should be what is selling what has sold and really reducing many of the product lines that they have now that's me talking not.
The Oems around the table, but Rick I do think that there is a conscious effort.
Effort not to have to be the leader in the clubhouse, let's be the leader for the customer at the dealership level with where the consumer our guests and also with a shareholder and I think that's got to be the focus and I think the street will expect debt. We expect the profitability on top of that <unk> got billions of dollars.
They are committing now to electrification and hydrogen adjacent so to me. This is 1 way to be able to generate that cash flow.
Okay. Thanks.
Thanks for the color also on E.
I'm curious, how you see that impacting us.
Some parts segment.
Any.
Early learnings along those lines.
Well.
Let's think about 3.
300 million vehicles.
And in the marketplace and.
The average age is approximately 12 years old and the line over.
Over the last 5 years, what the market you know it better than I do is solar.
3 million vehicles, and 98% of that's been Ice's, So the Bev Park.
2%.
And I think that we're supporting shortly our our Oems with EV EV is going to be driven.
By political it's by governmental we see it much much.
About 80 pressure in Europe than we do obviously in this country and I think the national infrastructure is going to be something thats going to make a big impact on net now from them from us.
The dealership standpoint.
Till we get a significant market of Evs I don't see a big issue from our standpoint on my parts and service.
Much more of us, it's going to take a different technician.
Also going to be from a safety perspective has to be done.
At a at an OEM compliant dealership and I think that.
Initially we might see.
More work because of the technology remember if you go to Hudson Toyota over.
Service because he city, we were supplying most of the previous us.
In New York for cabs for a number of years and we learned how to take care of that but there was warranty along with us and I think that we will see some interface.
With Evs now.
I don't know what the actual impact.
Roger will be when will be the shift 1 will be the pivot, but the warranty will have to be done by us and we will also obviously have to deal with the complexity. So I hate to jump ball right now certainly it's not going to take anything away from us over the next 12 months to 24 months for sure and again I say the national infrastructure is going to drive that.
Net.
Thanks for all the great commentary and good luck. Thanks, Rick Thanks, Rick.
Yes.
Thank you.
Reminder, to ask a question you would need to press Star then 1 on your telephone.
Our next question comes from the line of Rajeev Gupta.
<unk> with J P. Morgan Your line is now open.
Oh, Hey, great. Thanks, guys, well, thanks, Roger on Germany.
Taking the question.
Just a quick question you know on the parts and services and just following up on Rick's question, you know any commentary on you know how the law.
Linearity was in the quarter.
April may and June.
This month's progress Judah.
Through the quarter in the business and how are you seeing you know only <unk> tracking.
In that business any color on cross like you know the different segments, you know customer pay warranty.
Body shop would be helpful. Thanks sure.
Well when you look at let's look at the quarter and when we look at the company globally, we understand that the UK was shut down in certain cases, because of showrooms that would've impacted our our internal business.
There is no question that we're seeing over the last 3 months growth and customer law.
Labor.
We see warranty.
Warranty is really down and where it came from a low base.
After Q1, and the body shop, and we see that all coming back in fact, we had some locations in the us that I know for sure they actually were better than they were.
<unk> last year from the standpoint of a parts and service gross profit so I would say trajectory wise.
It's coming back people are now starting to drive vehicles in fact were out.
Calling our customers paying them, it's not just the miles driven time, you need to bring your vehicle in for service so moving.
Very.
Proactive on that and I think from a quality standpoint.
Even though we see these recalls every day on the paper I think we're seeing many of the Oems who've given us from a better quality product, which in some cases is driving on warranty down.
Got it got it no that's helpful.
I have a question on just the U K market in general.
A lot of the Oems and the recent be talking more about like the agency model day.
Just curious as to what kind of conversations you're having on the Oems right now you know anything going on behind the scenes.
That might be changing.
You know how the structure might look like there and then just curious on Github.
What kind of impact.
Can that have on the business to put it on in perspective, we won't see an agency model here in the US and I don't think we'll see an agency model in China, I think continental Europe numbers.
<unk> has been invoicing cars for their dealers.
Changes in Germany for a number of years I'm not sure how that ties into complete agency model They've had agency models for for Big fleets and in fact, when you look at even our truck business here in the us from a leasing perspective that you could say us on an agency model right now as I said I think they are applicable to continental Europe.
We have on we're having on going discussions to understand.
What impact that would have on.
On the customer on our customer experience, but I think we're a long way off.
And in the UK today us up so having that came across.
They're even going to look at the competition level within the Gulf.
Europe see if agency models have any impact on what you would call on retail franchise. So I stay tuned and I think there's many labs to go before this ratios over as far as agency agreement.
Got it got it.
And just lastly on electric vehicles.
You know, obviously, a very small sample size today.
And for the business, but any anything that you see thats different in terms of.
The F&I attach rates or just the F&I per unit or anything like from leasing worsening by mix from those.
Vehicles.
Thanks.
I don't.
Can I be honest weighted outlet, let Tony call you on that 1.
Do they give you anything on the phone here today that would be probably important answer to that particular question. No. We're located evs, obviously quite honestly when we look at <unk> from the standpoint, I think residual value is going to be the most important thing the big or what's it going to be you buy once a day that has a 300 mile range.
I can't the same vehicle 2 years from now we've got 500, what she is going to be worth and I can turn on the OEM is not going to give you a different battery. So that's going on obviously have an impact.
From the standpoint of pricing and a lot of these are second vehicles at least the premium ones are.
People want to turn those on a lease basis are not volume. So I think there is going to have.
And certain amount of support from the OEM themselves to support a lease program on Evs I can tell you that.
Once I've driven had been real sporty I think that.
The infrastructure application is going to be is going to be critical in order to be able to support debt long term and that's to me is not going to.
Because we do at the dealership level we're committed.
The brands like Porsche and Audi and some of these big BMW to have capability short and long term capability for fast charging and we're investing in those today. So we're not certainly walking away from the product we're supporting it.
Got it great. Thanks.
What will the color and good luck.
Thanks Roger.
Thank you.
Last question comes from the line of David Whiston with Morningstar. Your line is now open.
Hey, David.
Thanks, Hi, everyone.
I guess first on the Roger you made a comment on framework.
Merck agreements earlier on hitting a ceiling.
Obviously, everyone knows on this industry and that's the largest groups are going to keep consolidating and getting open points on factories. So I think what those largest groups on the open points. So are we at a point right now in 2021, we're the largest groups maybe need to be a bit more.
Thanks, a lot aggressive in demanding change these framework agreements to facilitate growth.
Well I think a framework agreement as individual it's not it's not the same for everyone. It's based on your size your capital.
Maybe the brand experienced at the OEM might have but I think it's.
Right now.
These are.
1 is that you sign up data side over a period of time to change that obviously.
That could be could be key but it might be on how you are performing I mean this is just not having 6 Toyota dealerships in 1 city is how many are meeting our sales targets, how many meeting the service how we're meeting the customer status.
Pretty much action show that there's more than just what I would call performance data from the standpoint of units and maybe us parts and service sales I think there's other metrics that come into play, but I think that theyre going to look at this now it's been said before because.
Let's say I'm going to take the peer group that whether we're in the public companies.
The investments that we're making in technology all of us.
I think everyone has done a great job.
Real commitment on facilities.
Talking about hundreds of millions of dollars in Capex drives probably a real discussion about to open those up.
Based on.
Experienced based on performance, so I don't think youre wrong, and I'm not sure we'd get aggressive wouldn't be the word I would use I think that you can have a pretty good reasonable conversation about what.
What you might want to do on your on your framework now today.
They've got a framework agreement I'm sure for for Hummer.
And there is our agreement to have a bronco Shepherd site.
These are all things that will be looked at now on the truck side.
Quite differently.
I know that.
Freightliner has decided they would rather have more partners and less or less partners and more because then they can.
Can take into consideration this network of capability and utilizing obviously the technical capability to take care of their customers because it's not just a local customer with a truck.
Customer, it's 1 that travels the country. So I think it's a little bit different on the truck side, but certainly based on performance I think is.
As you said you could have a conversation, but we do have framework agreements and I don't think theyre going to abandon them just overnight because you want to buy 6 more stores in a market.
Okay. Thanks, that's helpful and then on the.
The cost of essential platform.
I guess can you just talk a little bit about.
The rationale for us.
We're getting on partners supposed to joining us up on yourself is that purely timing.
Time and money trade off that you.
You've thought about.
Were there some other variables because essentially asking us for new vehicles and could it eventually replace preferred purchase.
Well look number 1.
We all go back.
<unk> 12.
2014 months, maybe 18 months ago, and we're all talking about buying online you can buy all the way from a to Z.
We looked at it there were a number of products out there, but at the time.
We decided that.
Based on getting to market with a proper product, let's look around.
It really is the real leader in capability around the auto business that we talked to a number of people and finally, we landed with Cox because they've been the ones that it helped us develop our.
Preferred purchase product. So we went to them and we determined that.
With our human capital and are really.
Our domain expertise and along with what they were able to do that we put a team together and they work for 12 solid much I mean I was in a number of the meetings and it was it was roll up your sleeves and go and I think what we agreed to do is come out with the best product that gave us the ability to have that working as we continue to run our business from a cost perspective.
It was our people supporting the process and the outcome. Obviously, we think we have a world class product from the standpoint of going forward. We now have only our car shop us.
Used car businesses.
Using that product, we will expand debt into our OEM network used car business where are we.
So from a new perspective at this point, we have not made that decision.
I'm sorry, so you're saying you are eventually going to go on annuity on your mind on that.
Yes.
I think we got US step 1 was car shop step to obviously us integrate all our used cars that we.
Have online within our OEM.
US business and at this point, we've not made a decision on where we're going to go from a standpoint of view that will be something that we'll look at it in the future.
Okay, and just 1 last question probably for Shelly or Tony.
I know it's maybe.
Early to ask but its the by the administration does increase the U S. Federal corporate tax rate I know you've got some internet large international exposure can you stay on on what your sensitivity on your tax rate would be say for every 100 net increase in the us rate.
Sure so.
There's a lot of subjectivity and a lot of discussion going on but if the rate we're doing.
Increased 25%.
Blended tax rate would increase by a minimum of 374%.
We would also need to take a look at revaluing, our deferred tax liabilities and that impact would be about $130 million at 25% and so just like we took them down a few.
So we'd have to take those liabilities back up if it went to 28, we're looking at 6.5% to 7% percentage points. When you combine that with the increase of the U K.
Okay. Thank you very helpful.
Thank you there are no further.
Further questions I will now turn the call over to Mr. Penske for closing remarks.
Thank you everybody for joining us we look forward to.
Thanks, you after Q3 have a great day. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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