Q3 2021 Penske Automotive Group Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, welcome to the Penske Automotive group third quarter 2021 earnings Conference call. Today's call is being recorded and will be available for replay approximately one hour. After completion through November three 2021 on the company used.
Website under the investors tab.
W. W. W thought Penske automotive dot com.
I will now introduce Anthony for that the company's executive Vice President of Investor Relations and corporate development. Sir. Please go ahead.
Thank you Jerome good afternoon, everyone and thank you for joining US again today, a press release detailing Penske automotive group's record third quarter 2021 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 and as always I'm available by email.
Our phone for any follow up questions. You may have joining me for today's call are Roger Penske, our chairman and CEO Shelly haul Graf, our chief Financial Officer, and Tony <unk>, Our Vice President 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 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 are available on our website to the most directly comparable GAAP measures are 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.
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 Alright. Thank you Tony and good afternoon, everyone and thank you for joining us today.
I am pleased to report all time record third quarter results for Pag.
<unk> the best quarter in the history of the company.
Our total revenue increased 9% to.
$6 5 billion and income from continuing operations before taxes increased 53% to $476 million and income from continuing operations increased 44%.
$355 million and related earnings per share increased 45% to $4 46.
Although unit sales were impacted by supply charter shortages in both our retail automotive and.
In commercial truck dealership operations.
Earnings growth was driven by a 39% increase in retail automotive.
135% increase in commercial trucks.
Gross profit per unit retailed also a 4% increase in retail automotive service and parts gross profit.
And a 230 basis point reduction in SG&A to gross profit.
And $15 million and lower interest costs.
Coupled with an increase in commercial truck dealership PBT of 106%.
And an 83% increase in earnings from Penske Transportation solutions.
Demonstrated the continued strength.
Of our investment and the benefit provided by our diversified business model.
Looking at our retail automotive operations on a same store basis.
For Q3, 'twenty, one versus Q3 'twenty.
Units declined 8%, however revenue increased 7%.
Gross profit increased 18%.
Including 180 basis point increase.
And our gross margin.
Our variable gross profit increased 39% to $5769 per unit compared to.
$41 52 last year.
Looking at car shop, we now operate 22 locations and expect to open one additional location.
By the end of the year, we recently added locations and Leighton buzzard and Wolverhampton in the U K.
And our Scottsdale location opened this week.
During the quarter car shop unit sales increased approximately 1% to 18451 units revenue improved 24% to $438 million and gross profit per unit increased 12% to $2668.
Our current annualized run rate is approximately 70 to 75000 units representing revenue of $1 6 billion and an EBT between 45 and $50 million.
Turning to the retail commercial truck dealership businesses, our Premier truck group represented 11%.
Of our total revenue in the third quarter.
Retail revenue increased approximately 26% <unk>.
Including a 6% on a same store basis.
The same store basis retail gross profit increased 40%, including a 10% increase.
Service and parts.
Earnings before taxes increased 106% to.
To $48 million and the return on sales was six 7%.
The class eight commercial truck market remains very strong and.
And during the third quarter, North American class eight net orders increased 28% and the backlog increased to 179% to 279000 units, representing a 13 month supply.
Based on the current industry forecast retail sales are expected to increase over the next two years and provide tailwind to our commercial truck and truck leasing businesses.
Turning to Penske transportation solution, especially on 28, 9%.
<unk> provides us with equity income cash distribution and cash tax savings. Pts currently operates a fleet of over 350000 vehicles for the nine months ended September 30th Pts generated $8 2 billion in revenue and 904.
$49 million in income or a 12% return on sales in Q3, Pts generated $2 9 billion in revenue and income of $409 million or a 14% return on sales.
As a result, our equity earnings in Q3 increased 83%.
$118 million.
Full service leasing and contract sales were up 8%.
Our commercial rental revenue was up 51%.
And our utilization hit 88% with an additional 14000 units on rent or consumer rental was up 27%.
And our logistics revenue increased 27%.
Our gain on sale of used structures up 143%.
As the strong freight environment and a supply shortage of new trucks is certainly driving a demand for used vehicles.
I would now like to turn the call over to Shelly haul graves, our Chief Financial Officer Shelley.
Thank you Roger good afternoon, everyone looking at the balance sheet and cash flows the balance sheet remains in great shape at September 30, we have $119 million in cash and we ended the third quarter with over $1 2 billion in liquidity.
When looking at our capital allocation, we maintain a disciplined approach that focuses on opportunistic investments across both our retail automotive and commercial truck businesses.
Capital expenditures to support growth, including our car shop growth strategy, delivering a strong dividend to our shareholders, reducing debt whenever possible and share repurchases in fact year to date, we have repurchased two 5 million shares representing approximately 3% of the total shares outstanding.
Year to date, we generated $1 3 billion in cash flow from operations, we invested $157 million in capital expenditures, including $18 million to acquire land for future car shop expansion.
Net capex was $84 million.
At the end of September our long term debt was $1 4 billion, we have repaid $922 million of long term debt.
At the end of 2019.
In addition, we have either repaid or refinanced our senior subordinated debt to lower rates, while lengthening the terms to take advantage of current market conditions, which has contributed to a $34 million dollar reduction in interest expense. So far this year.
These initiatives have lowered our debt to total capitalization to 27% compared to 33, 7% at December 31, and 45, 6% at the end of 2019.
Our leverage ratio sits at <unk>, an improvement from $2 Nymex at the end of 2019.
At the end of September our total inventory was $2 6 billion.
Retail automotive inventory is $2 billion, which is down $937 million from December last year.
<unk> 19 based supply of new vehicles, our days supply of premium is 'twenty, two and volume foreign is nine we.
We expect the current supply challenges coupled with strong demand to keep our new vehicle supply at low but manageable levels.
Used vehicle inventory is in good shape with a 40 day supply at this time I will turn the call back over to Roger. Thank you Shelly moving onto our digital initiatives, we continue to grow expand and enhance our digital footprint.
<unk>, the introduction of new tools and technologies to offer customers a hybrid customer driven shopping model depend.
Depending on their preferences customers can purchase either fully online in store or any combination of the two we will also deliver vehicles directly to a location desired by our customers.
As part of our omni channel customer experience, we strive to be a leader in.
And online reputation, including online customer reviews and star ratings on Google.
Looking at our other digital tools, we retailed 2550 vehicles or four 3% of our U S unit sales and 14% of our customers used preferred purchase and their buying journey.
Using the Sidner bion tool in the U K, a customary reserve a car for 99 pounds.
Fly for financing risk.
We see this in credit approval obtained a guaranteed price and pay online during the quarter. We sold 3700 units using this platform.
When you combine all of our digital tools, including new technology available at car shop.
A customer may perform any part of the transaction online or used these tools to shorten our visit to the dealership.
Looking at corporate development. In addition to the $220 million of year to date share repurchases, we completed acquisitions.
<unk> $600 million in annualized revenue through September 30.
In October we acquired the remaining 51% of our Japanese based joint venture of premium luxury automotive brands, which will add $250 million and consolidated annual revenue and we have another $300 million in annualized revenue of deals in our pipeline that we expect to close either in the fourth quarter or early in <unk>.
<unk> thousand 22.
Also opened up a new Porsche dealership in Washington, DC earlier, this year and we have three other open points under construction.
We increased our car shop locations by five and expect to open one additional location by the end of the year, bringing our total.
The 23 locations.
We remain on track with car shop to recall to retail 150000 unit sales and generate two $5 billion to $3 billion in total revenue and earned a $100 million of EBT.
By the end of 2023.
As we look across our diverse portfolio of businesses, we continue to target.
Organic and acquisition growth as well as further operating efficiencies to continue to grow and expand our businesses.
Before I close I'd like to congratulate the.
The 35 U S dealerships.
There were named by automotive news to the 100 best dealerships to work for listing we had more dealerships on the list than any other automotive retailer, including six of the top 10 12 of the top 25 in the 2021 ranking our Audi of charged stores ranked number one in the country.
Additionally, seven pag dealerships were ranked in the top 10 nationally, including the top three places for their efforts to promote diversity equity and inclusion.
We are honored by these accomplishments and are extremely proud of our team for their commitment to drive the passion and the efforts in working together to be one of the very best.
I'm also pleased to announce the Penske automotive group was ranked first in the listing of U S. Public dealerships teams and the 2021 automotive reputation report published by reputation Dot com.
In closing our business remains strong and our record performance demonstrates the benefit of our diversification.
To thank our team for their outstanding results and producing all time record year for Penske automotive group. Thank.
Thank you again for joining us on the call today for your continued confidence in <unk> at this time I will turn it back over to the operator. Thank you.
Thank you ladies and gentlemen at this time, if he would like to ask a question. Please press star one on your telephone keypad and do we draw your question correct.
<unk>.
One moment for your first question.
Your first question comes from Rick Nelson Stephens incorporated your line is open.
Thanks, a lot good afternoon, Roger Tony.
Hey, Rick.
Yes.
Cause car pag.
Ben.
We see some major.
So across the landscape now exclusively James has been less active.
It had been strengthening.
Balance sheet.
<unk> got quite a bit I'm curious.
The M&A environment.
A multiple.
The pipeline.
Okay.
Well I think it's been an active marketplace.
Greg certainly with some large deals taking place across the automotive retail space as we know there is 18000 dealerships and 32000 franchises. So it's a big sandbox obviously.
I think fragmentation provides opportunity for consolidation.
With the investment required today I think there's a number of smaller dealerships will become available I think the deals that we see the bigger deals are expensive.
And many of them require Capex and also then would provide some input from the standpoint of framework agreements with the manufacturers.
Basically over the last.
12 months to 18 months I think we've looked at our balance sheet.
We've looked opportunistically at things that we could buy and invest in it and I think you've seen that with roughly $850 million of revenue that we've completed as of today with another 300 under contract we're growing car shop organically.
Add to six locations that we have as I mentioned earlier in my in my remarks, three dealerships under construction or new points and I think what we'll do over the next.
12 months to 18 months is look at growing probably at about 10% that's $2 billion a year and that would be divided not only on a same store basis, but also an acquisition and at the moment.
We see the opportunity from the commercial truck standpoint that these multiples are quite a bit less than the retail auto and <unk>.
Freightliner, who is our lead OEM looking at consolidation, we're taking advantage of that as we go forward. When you are looking at businesses that are returning over 6% on sales so I think that.
At the end of the day, we will continue our capex from a capital allocation I think Shelly mentioned dividends and share repurchases, but we.
We're going to be opportunistic, we certainly are not getting out of the retail auto business for sure.
Our commitment to car shop to grow that I think is key with our.
Our.
Mission that we have to reach 150000 units.
By the end of 2023, so I think the deals that are done are great for the for our peers.
To me it just shows you the opportunity and the profitability in this business.
Thanks, Roger for that color.
I was kind of inventory.
Topline new 19 days.
Visibility at all.
Into future flows.
I think we're at a low watermark.
Here with inventory or two.
You're starting to decline.
Well, we were 12 days here in the U S. As you look at the international add it all together to get to our total number.
<unk> had conversations as late as yesterday talking about.
Inventory going out I think we will see in the premium luxury side, we will see some opportunity where more vehicles coming in November December, but it's a smaller amount and quite honestly everybody and it comes off the truck is sold or selling into the pipeline and I think we're going to see that.
For the next 12 months I don't think the supply.
<unk> change is going to get fixed and the Oems are prioritizing the models, which where they make the most money we see that in the U K market was down 33% there.
Lately and.
When you look at that its not because theres not demand, they're just not building the small people cars because they don't have they don't get the margin on those so I think theres different levers that the Oems are pulling at this point, but.
I think it's going to be business as usual here tied inventory all the dealer groups were all looking at ways. We can sustain our customers who are looking to finance companies and leasing companies to extend leases. So we can keep our customers stickier with us as we go forward and being able to order cars to them when they are available so at the moment.
I think the premium luxury people and everyone else in our focused on supply chain and are building cars that don't have some of the maybe the additions in accessories than we normally would have but overall, we outperformed the market here.
We're really looking at the market was down 13, and we were only down three so we feel good where we are and I think that the market.
We will certainly be a little choppy here for a while.
Helpful I'll turn it over.
Thanks, and good luck.
Thanks, Rick.
And your next question is Kenneth.
John Murphy with Bank of America Merrill Lynch. Your line is open.
Good afternoon, Roger Tony and Charlie Thank you for the comments here.
First question and following up on.
Rick first question on cap allocation.
The other dealer groups are being much more aggressively and actually taking on leverage and right now you're you're taking down leverage by repaying debt.
Yeah.
But you are allocating capital towards growth. So I'm just curious wondering if you can maybe just give us a quick summation mean that 12 months to 18 months goal of 10% revenue growth how much of that is same store and how much of that is acquisition.
In two weeks, if you decided to get more aggressive with the balance sheet. I'm curious if you would consider doing that where you think the capital would be allocated in.
Are you kind of loading up here for something.
Bigger or better opportunity I mean, whats the whats the thought process versus other dealers that we cover that are kind of laying it out on the balance sheet to put up lately.
Let me let me say this we are diversified so we've got a number of areas that we can.
Actually apply our capital and I think from a capital allocation perspective, right now we're looking at the cost of acquisitions. There is no question on the commercial side truck side, we see that as certainly.
An opportunity for US I mentioned it earlier that Freightliner is positive about us growing I think from a growth standpoint in the 10% I talked about it I think you'd look at 50 50, just to keep it simple and there is no question that when you look at our liquidity.
We're at about $1 2 billion, plus we've got $100 million of cash. So we're in a great position nothing out on our credit lines.
The end of the quarter, we have our two bonds, which is roughly $1 billion to those or six years I think before they.
They are paid off and 375. So the rates are good and we have some mortgages have a couple of hundred so at the end of the day I think we're in great shape, but from our standpoint I'm looking at the market right now.
Our supply chain.
Interruptions, not knowing where these multiples are going to go because I don't think when youre looking at.
Pricing some of these deals and looking at a trailing 12 youre looking at probably the biggest market and most profitable market. We've had in many years, so I think I.
Want to stay keep my leverage down in my opportunities in front of US we can move right.
Right away and we could lever up.
Two five to three if we wanted to for a big deal, but I have nothing right now that would say that we're in that mode, but we get a chance to look at these.
In the past, we passed and I think it will be very selective and if we have areas, where we can add on where we have scale and consolidate we will be in there with a big number but at the moment I think we're going to take a patient look and try to understand what this market is going to bring us over the next 12 months.
And just a follow up to that I mean, if you think about 5% growth via acquisitions over the next.
12 months or so and is that is that a.
Is it kind of redeployment you think would be something we should think about go forward beyond that or because you have taken leverage down that might be somewhat conservative and then over time as opportunities avail themselves.
The balance sheet firepower to go after them that may end up proving being.
Somewhat conservative way to think about acquired revenue growth going forward.
Yes, I would say, it's conservative and I think if you look we have to put a number down and work towards a number.
I think thats realistic when youre looking what our same store revenue is from from.
Year to date and looking into 2022, and then looking at what we have.
From an acquisition standpoint, and I think thats realistic we got these new points opening we've got the opportunity from a car shop perspective to grow same store and on the other hand, if there is a big deal out there. That's how we built our company remember we were in a pretty much of a buying mode early on and I think that what we'll do is.
Just exactly what's available to us I think the.
Right now when you look at car shop.
The ability to grow that many times over with capital and it's a lot less so we don't have the the structure in front of us as framework and some of the areas that we have to deal with the Oems with car shop, but I think the brand has really taken off both here domestically and internationally. So that's certainly going to be a focus.
Got it.
And then just a second question on SG&A.
Taken a lot of heads out I'm just curious.
Where you think yesterday costs will go I mean, I don't know if you could talk about in absolute terms or a percent of.
Gross I know thats kind of hard to there's a lot of moving pieces, but I mean, how do you think we should think about SG&A to gross or SG&A cost and in total going forward.
Well I think I looked at SG&A, and where it was or during during the quarter and it's interesting that.
Overall, we've taken about 8% of our people out six.
Pre COVID-19 just from a from an overall standpoint, and almost 2000 almost 2000 people. When you look at SG&A and our comp was up about $100 million during the quarter net basically was based on variable comp.
The margins that we have but when we look at SG&A will probably be in the low seventies.
We're better than that today, we've come down from 77, but I don't want to mislead anybody I think the growth is driving a much better looking number though it might be on a going forward basis, but I would say longevity.
Got it that's.
That's helpful and then just lastly.
I mean I appreciate the.
The details on digital initiatives.
I'm just curious if you could talk about a little bit what youre doing with Cox now because it's.
Our newer much newer initiatives, but also as you think about that and your other efforts and how they ultimately will dovetail with some of the efforts of the automakers that are kind of trying to create a digital overlay.
Any interaction with the consumer which is almost analogous where similar to what a lot of dealers are investing in.
Just curious how you think one way youre doing near term with Cox in Q longer term, how do these systems ultimately each of the interacts or maybe compete with what the automakers.
We are doing to some extent, they're getting pretty.
Heavily invested as well in their digital efforts.
Well I think that.
We kind of have a hybrid approach really when you look at it we've got third party sites, we got the OEM digital sites and then.
We're also using social media.
At the end at the end of the day and you look at the Cox.
Piece, we spent about a year or so with caution I think.
Anybody has used the product at all at this point, it's excellent to we only have 2000 units on the platform right now because it's very much in the early stages and we've done about 300 units.
Sales into both either people getting off the site and moving into the dealership or directly all away from end to end, which we think is a good start with very little issue from a CSI perspective, we've got lots of.
Compliments on that platform and I know Cox as Scott.
We're looking at it they are watching it is very important to them that is successful but on the other hand, one of the things that ive cautioned our people we see all of these opportunities, but probably the thing that I wanted to do most is <unk>.
Partner with the Oems because they're all rolling out.
And E Commerce platform, so it's going to be part.
Of your relationship with like your floor plan is like some of your financing I think youre going to want to use their platform and today.
Iot has smart pass and Lexus has monogram and many has anywhere. So these are all in a position today.
I think we got to take a good look at and we're in the process of signing up for those as we as we go forward. So to me I think that's going to be key and I think the internet sales are going to be key, but we're still going to have people because of the premium luxury brands that we have we're going to come in and kick the tires for sure but.
I think the omni channel certainly is just not selling vehicles do you think about <unk>.
Service appointments online payments.
This is key we had today.
Between our Bdcs and our online service appointments over 500000.
When you look at that in the quarter and the online payments continue to grow I think we collected almost $50 million.
During the quarter on online payment. So to me. This is key because the average payments almost $1000. So we are using this online channel obviously for more than just selling new and used vehicles.
Great. Thank you very much.
Thanks, Sean.
Your next question comes from Stephanie more.
Your line is open.
Stephanie.
Hi, good afternoon.
Thanks, Stephanie.
I wanted to talk a little bit you did speak on just what we're seeing from these underlying trends on the auto retail side and supply chain disruptions, but maybe you could touch a little bit on what we're seeing on the commercial truck side in the freight environment, obviously, having a nice benefit for both your JV as well as <unk>.
She'll shop retail business right now, but maybe you could talk about the longevity.
Some of these trends as well as maybe some of the positive attributes that might come out.
As a result of that.
Our pricing or.
The used truck market anything like that thank you.
Well I think we Gotta go back a little bit.
As you know we have electronic logs now for drivers and that was instituted here several months ago, and what happens where people are running two log books and being able to run maybe 12 months to 18 hours a day, they're able to do that now without breaks and what that's done that certainly certainly in a position that is created.
Our driver requirements and yet we can't get drivers right now and with that.
There is a shortage to move goods and 85% of the goods are moved by truck here in the U S and from my perspective, we see the truck business is core.
When you look at the demand with the Oems.
It's a 13 month backlog.
For heavy duty from the standpoint of 279000 units at this point and that's going to drive this business for the next 12, maybe even 24 months and that's what's driving the used truck prices up.
Today, most of the fleets can't get their new trucks right now and so they are running their old trucks, maybe another five to six months and Thats also helping drive this use this used truck value, but I don't see it slowing down and to me right now the biggest the biggest issue is the number of trucks that are sitting at these Oems without <unk>.
Parts and I know Freightliner right now is making a big having a big focus on completing the trucks that are on the ground, which will help us and I think that's going to take some of this backlog down but based on what we're hearing the first quarter, we're probably going to end up be delivering trucks. It should have been delivered in the fourth quarter. So that's going to push this whole supply chain.
At least 90 to 120 days late from where it should've been so.
I see it obviously being a positive for us from the standpoint of our rental business on the truck leasing side, because people need extra equipment and that's the business. We're in is commercial rental.
Absolutely that's really helpful. And then I think over the last year really.
<unk> weather and the capital allocation.
<unk> shares obviously, raising the dividend debt paydown.
We look forward I think opportunistic M&A.
On the call, but where do you stand in terms of continued debt paydown share repurchases.
Look out for the next 12 months.
Well from a debt Paydown perspective, we really have mortgage debt that we have that.
Thats variable that we can pay some of that down, which we would and I think we've got dividends, which.
We continue to grow the dividend base and from a from a.
A share repurchase perspective.
Going to be something that we have $70 million right now with what's rotation from the board and we just really moved that to 250 back in July. So we will sit with our board in December and we will look at that allocation going forward. So we've got share buyback, we certainly got M&A, which we've talked about.
Strategically maybe from a commercial truck perspective, opportunistically when we look at it to retail automotive side, and then we're going to absolutely develop and invest in the car shop part of our business. So I think theres plenty of areas to use our capital, but again, we're going to keep our leverage where it is and if there's a big.
Deal, we can step up we don't need to go to the market for extra capital, we have $1 billion two to $1 three right now available from our standpoint, and our credit lines and Thats without any other leverage of any other assets. We only got about 24% of the book value of our real estate being being mortgage at the moment.
Great well. Thank you so much as Ali.
Thank you.
Your next question comes from Mike wanted.
Benchmark company your line is open.
Thanks, very much good afternoon, everyone.
Hey, Mike.
Is there a way to rank the capital requirements. When you look at these growth investments, whether they're open points truck distribution car shop, M&A is there a way to rank, which ones are from either hydro with lower low to high as far as capital requirements. When you do those.
Well from a car shop perspective, I'm going to just take them as they come to mind.
We have significantly less investment in a car shop location, we're just opening one in Phoenix.
We just opened one this week.
Which probably the investment is about $12 million total.
And the one over in New Brunswick was about the same and I think when you look at those locations and the returns.
There are much greater than they would be if we had to build a shaft.
Premium luxury store in the same place but.
I think a slower investment.
When you look at return on sales were in the say, 234% on the retail side.
I think from a truck perspective.
Commercial truck is looking at somewhere between five and 7% return on sales so.
It certainly would become also a priority for us so.
The opportunity also which we haven't talked much about is in Australia as we start to grow that continue to grow that business. As we have defense, we have big power Gen capabilities. There. We have certainly have are on a highway and our mining business is there and we continue to invest in equipment and facilities out there.
We have some single source contract with the government on defense going forward, so our capability there to get more vertical.
The government will be certainly an area, we would spend some money on our to have those long term five and 10 year contracts and those are quite profitable also.
So what's your joint ventures, bringing them in from Japan does that open up additional opportunities in Japan with your partners.
There is no question, we really wanted to maturity as a partner of ours, we're a big player with Toyota and Honda. So we wanted to be in that market.
We made it we did a joint venture with Nikko RFK. There are a number of years ago and what we wanted to do was getting our feet. What theyre understand what was the requirement from accounting perspective from a controls and risk we've operated in that business now for probably about five or six years.
To obtain a distributor for all of Japan.
Big BMW dealers, there and we have rolls Royce and Ferrari.
And along with many.
When you look at it the Oems who have come to us for a number of times wanting to us add to our platform and we would expect to do that with the management team we have in place.
Our former partners move to Nonexecutive chairman, so we still have some oversight with him, but we have a gentleman that's been there now for four years really.
Turning the business came from the OEM side.
America is learn Japanese shows the Japanese wife, and has really done a great job. So we think we're in a position where the controls in place now.
We will go forward and that will be a growth area for us.
A couple of questions for Shelley.
So maybe starting off first.
When you look at your debt ratings.
Youre right on the cusp of investment grade is there any plan or does it benefit you to get.
We moved up to investment grade or is it just irrelevant.
Now given the strength of our balance sheet. We can certainly have those discussions with rating agencies like you said S&P upgraded us to double the Boston may.
VA, one with Moody's just below investment grade right now, it's not a priority for us, but it never hurts to have those discussions.
Yeah.
Our lease adjusted leverage ratio is now at to act when the requirement of three so we do have some cushion as Roger had mentioned earlier.
Clearly there is upside from an interest rate perspective, probably about 100 basis points on future bond offering.
Yeah, we're just evaluating the potential of <unk>.
Policy restrictions so as we look at our capital allocation strategy, we wouldn't want to risk a potential downgrade, but we wouldn't want to pass up a significant opportunity either.
What is the impact on cash flow inventories replenished over the next year or two.
Well, we still are the majority of our inventory purchases. So the impact is really eliminate it and we're not expecting as Roger mentioned, a quick return to inventory if at all to prior levels. So.
We continue to see a buildup with pent up demand, particularly with the lease returns starting to come off the strongest our peers.
As we've seen the production returns will be gradual.
Any minimal impact.
And just one last one some of your peers are starting to get into the finance business.
<unk>.
Given you're generating so much cash and it looks like it's going to be at similar levels at least through the end of 'twenty two.
Are you considering that at all or if you looked into it the pluses and minuses of starting a financial.
We have from time to time evaluated those pros and cons, Mike the decision typically comes down to the return of capital.
As we've talked about we're experiencing some pretty great returns on P. T. All our PTT acquisitions and even our recent Mercedes store that we acquired here in April so.
Plus the majority of our transactions on the premium luxury side or in the leasing side and we have an 80% penetration rate with our new vehicle sales.
When you look at that in our small subprime business I'm not sure starting with finance company really makes a lot of flexibility right now Mike we've looked at it in fact, it was a discussion item.
Latest strategy meeting, we can borrow money like the banks can.
So in order for us to get the kind of return we want we're going to have to go down in credit rating in order to be able to attract the kind of returns we want.
Charged to burdening, our balance sheet, certainly we can securitize over time, and then the lease accounting or the accounting requirements, we have to take into income.
<unk> 30, much 40 months or 16 months, depending on the term of the contract. So I would say right now when you look at our subprime business only 6%. So I think we're in a good position is something we continue to look at we've seen other people take that on and we.
We are different.
And I think that.
We'll probably not be getting into that business at this particular time.
And just to follow up earlier when you talk about these open points and I think you have three open points.
Is that something we can expect to see more of and that's not just U S right.
Europe as well.
Right.
Obviously, we've got open points in car shop, which we can designate ghansham.
We've been in it.
With the Oems that gets some we've got two open points in Austin.
She had the option.
<unk>, we've got a golf open points in the U K, So I Wouldnt say youre going to get three or four every year, but.
We have scale and where we have proven to be a good operator, we've we've had this opportunity we apply for those and we've been successful. So we see those as a good way to grow we're growing OIBDA long, we're able to build purpose built facilities.
Meet the Ci and not have to jump into it.
Much of corporate identity, when youre buying a bunch of stores that are not brand new so we see that obviously is a positive.
Thank you. Thank you very much.
Thanks, Mike Thanks.
Your next question comes from Rajat Gupta.
With Jpmorgan your line is open.
Great. Thanks for taking the question I'm, sorry to ask you once again on capital allocation.
Balance sheet leverage.
You're going to be generating significant amount of free cash flow.
And the next year or so given this elevated margin profile.
It doesn't look like.
Multiples on the automotive retail side seem attractive.
You already have some capital committed for car shop, which is kind of well understood.
Given like we are in this like on the <unk>.
Much longer.
Would you would you consider like a big buyback.
Yes.
You don't even have to add a ton of leverage to do like maybe even close to $1 billion, given youre generating more than <unk> hundred minimum free cash flow just.
Just curious.
What's your take on that and what.
Would you consider doing like a big buyback.
In the interim given given this extra level of free cash flow and then I have a couple of follow ups. Thanks.
I think sure.
Share buyback is something that we discussed with the board the board and as I said earlier that we will have that discussion in our December meeting that's always an option for us on a going forward basically we have been pretty much consistent.
Increasing our dividend a penny a share as we've gone forward over many quarters and.
We had $250 million buyback authority, we thought when you started looking at options for our capital that share buyback was certainly prudent during the last quarter now those same conditions could take place in the future and that would be reviewed by the board and we'd make those decisions at that time.
Got it.
Just.
Shifting gears to Gpus.
The new vehicle side.
I'm, assuming that the absolute GPU continue to get better through the course of the quarter and youre likely exiting.
Third quarter at a higher run rate than your average.
Just based on what Youre hearing from Oems.
Our supply.
Can you sustain this kind of like high 5000 number for a few more quarters or do you see this.
Coming back to more normal not normal, but do you think.
Third quarter is the peak year for you.
Yes.
Well I think it does.
I've had that question before and when I look at the entering the quarter and exiting the quarter. There was no question that grosses new vehicle grosses went up month to month.
July August and September also are used went up I think at the end of the day.
When you look at MSRP.
That's a manufacturer sales price suggested sales price there.
Some people are selling above that.
That's very dangerous territory right now because what it does to your customer over a long period of time, you really don't know so I think that on the used car side, we're probably closer to the top.
And because we have nothing on the ground and you're selling into the pipeline you are going to continue you're going to continue to hold good margins now whether it's within a $100 of what we have today I think that.
The sustainability of the grocers right now will be dependent on on.
On supply.
Got it got it that's helpful. Thanks for all the color Orange I'm back and jump back in.
Thank you.
Once again, if you would like to ask a question. Please.
One on your telephone keypad. Your next question comes from David.
Tom.
Morningstar Your line is open.
Hey, David.
Number one thank you.
First on the on the on the truck space.
Rodney you talked earlier about there is just it's just taking too long for new trucks orders given that so.
Is that purely the chip shortage or is there are there is some supply chain issues.
On top of that that are more of a problem.
Yeah listen people don't realize their air Freighting tires, you know lots of things other than just shifts.
On the heavy duty truck side. So I think the key thing here is we look at it.
When you look at the manufacturing businesses and plants are losing our people they've lost people in trying to crank back up again, there is some human capital requirements at their meeting and again they have to be trained I've talked to one OEM. The other day and I said any one day, they could be down 25% of their workforce. So how do you run your plant.
On a quarter your people won't show up on Monday morning, So I'm not saying this is any particular truck OEM, but this is pretty much what you'd see.
In the marketplace, but right now there's a big demand.
For heavy and medium duty trucks.
The supply isn't there and quite honestly, we've seen the.
The impact of that on our Penske transportation solution business because.
Our 88% yield.
Utilization rate on our tractor base, which was up 14000, when you look at total units.
Amazing and we don't see that slowing down really some of it.
The consumer rental which is the one way that will come back probably 15% to 20% in Q4, but overall I think youre starting to see the deliveries of the heavies youre going to be pushed out into Q1, and Q2 and that's just strictly availability of all components and when you have tens of thousands of units sitting on the lots of the OEM.
Amazon finished they've got a focus on those before they build more new trucks. They just don't have the space.
Yes.
Thanks, that's helpful and then in the U K consumers are dealing with on a shortages, particularly even fuel is that causing a lot of havoc at your stores in store in terms of people not wanting to buy a vehicle.
We don't I don't see that I think electric electrified vehicles have gone up if you look I don't have the numbers right here in front of me, but there is no question.
Demand is still strong and there's been a movement a bigger movement to electrification, maybe somebody has to do with the shortage of fuel, but the big issue there as drivers to drive some of these big rigs because a lot of them went back to two.
Western and eastern Europe.
When COVID-19 hit and haven't come back in fact, I think Johnson was giving some permits for 5000 people to come in as drivers in order to drive some of this equipment, which certainly has had an issue hybrids seem to be what's.
Whats the hottest sector in the UK right now because that gives you the opportunity to go into cities like Los Angeles, and Birmingham and places like assuming the London and Birmingham.
With a hybrid vehicle and most people have to pay a tax when they buy an IC engine and if you have electric vehicle you pay no taxes and Thats in the company cars Thats, a big factor from the standpoint of what they pick so that's also driving electrification.
Okay and Pts.
Press release cited operating expense reductions where are those primarily coming from.
Sorry say that again.
Yes.
Yes.
Any expense reduction cited in the press release I was just curious if that was coming from.
Operational moves around or headcount reduction.
Head count.
Efficiency and head count.
Across our businesses.
We've got Roger mentioned, we're down about 2000 people or eight 9% David across our business.
It's not just it wasn't specific to Pts it was specific to our overall business.
Okay and last question.
I'm asking everybody this or are you seeing any change compared to a few months ago whether it.
Car shop, where on the traditional side, our consumers just getting fed up with the shortages and just saying I'm not going to getting used I'm going to wait until you have more new inventory or Conversely, our people more desperate.
I think one of the things on the used side as the prices are getting so high it's almost like sticker shock that can almost by a new car, but of course, they're not available. So some people might be sitting.
Sitting on the side in order to get pricing right and then availability of new vehicles to have another option, that's what I see right now.
Okay. Thank you.
Alright, David Thank you.
Once again, if you would like to ask a question. Please press star one on near downtown key part.
Okay.
There are no further questions at this time I'll hand, the call back to Roger Penske.
Thank you Jerome and thanks, everyone for joining US today, we'll see you next quarter.
Thank you and that concludes today's conference. Thank you all for joining you may now disconnect.
Okay.
Okay.