Q2 2023 Penske Automotive Group Inc Earnings Call
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Your conference will begin momentarily please continue to hold.
Yeah.
[music].
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Okay.
Ladies and gentlemen, good afternoon. Thank you for standing by and welcome to the Penske Automotive group second quarter 2023 earnings Conference call. Today's call is being recorded and will be available for replay approximately one hour. After completion through August 2nd 2023 on the company's website under the Investor.
Tab at Www Dot Penske automotive dot com.
If you would like to ask a question. Please press one then zero on your telephone keypad, you may remove yourself from Q by repeating the same one zero command I will now introduce Anthony porting, the company's executive Vice President of Investor Relations and corporate development. Sir. Please go ahead.
Thank you Leah and good afternoon, everyone and thank you for joining US today, a press release detailing Penske automotive group's second quarter 2023 financial results was issued this morning and is posted on our website along with the presentation designed to assist you in understanding the company's results.
As always I'm available by email or phone for any follow up questions. You may have joining me for today's call are Roger Penske, our chairman and CEO shelling hungry EVP and Chief Financial Officer, Rich sharing North American operations Randall C. More international operations until he petrone, our vice President.
Controller.
Our discussion today may include forward looking statements about our operations earnings potential outlook future events growth plan 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.
And our leverage ratio, we have prominently displayed are 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.
The most directly comparable GAAP measures are future results may vary from our expectations because of risks and uncertainties outlined in today's press release under forward looking statements I direct you to our SEC filings, including our Form 10-K, and our previously filed form 10, Qs for additional discussion and factors that could cause.
Future results to differ materially from expectations I will now turn the call over to Roger.
Tony Good afternoon, everyone and thanks for joining us today.
Before we discuss our second quarter results I wanted to welcome Randall C more and risk sharing to the call today as you may recall earlier. This year, we added additional depth to our leadership team, where I don't see them are formed by executive Vice President Global operations for commercial trucks and power system will now support our international operations rich sharing.
Formerly president of Premier Truck group supports our North American automotive and commercial truck operations.
Rolls will work in tandem with me, our President Rob Kearney got our executive leadership team while building further depth to ensure we have the best leadership team in place.
Let me now discuss our.
Financial results for the second quarter.
I'm really pleased to report strong second quarter performance from our diversified business model. It's Wade will discuss the quarter was highlighted by the performance of our automotive and commercial truck operations was partially was offset with higher interest expense and lower equity earnings from our investment in Penske truck leasing.
During the second quarter total units delivered increased cause.
123879 units, which includes 8900 units, which were agency in the U K revenue increased 8% to a quarterly record of $7 5 billion, our same store retail revenue increased 6%.
Including an 11% increase in <unk>.
Service and parts.
Same store variable gross profit per unit retailed increased $163 nine compared.
Through the first quarter of 2023.
SG&A as a percentage of gross profit was 67, 4%.
And improved 10 basis points sequentially net income was $301 million and earnings per share was $4 41.
Year to date through June 30th we've repurchased two 6 million shares for $350 million.
Let me now turn to our automotive operations are demand for new vehicles remained strong and new vehicle availability is improving however, we expect supply to remain below historical averages during 2023.
For most of the brands that we represent.
We continue to take forward orders and continue to see strong vehicle demand.
In the U K, our Florida Order Bank represents 29000 units groceries on these forward orders is approximately 132 million compared.
$309 million at the same time in 2022.
In the U S. Our current pre sold activity is approximately 50%.
Beginning in the first quarter of 2023, we transitioned certain brands in the UK to an agency model for new vehicles safe sales.
And our agents they receive a fee from the manufacturer or the sale and delivery of each new vehicle.
Which is recorded in gross profit.
We did not record revenue for the price of these vehicles.
Looking at our retail automotive operations on a same store basis for Q2, 'twenty three versus Q2, 'twenty two totally units delivered increased 6%.
New retail up 9%.
Used retail down 8%.
Retail automotive revenue, however, increased 6%, including an 11% increase.
In service and parts.
And parts is being driven by an increase of 10%.
And customer pay.
<unk>, 13% in our warranty business and 14% in collision repair in fact, many of our operation experienced record months in service and parts during the quarter.
Variable gross profit remains strong.
At higher than historical levels for example, variable profit for a profit per vehicle.
With $5612 is more than $2138 higher than it was in Q2 of 2019.
Taking a look at car shop, our unit sales were 18206 down 10%.
<unk> continued availability of late model lower mileage vehicles remains very challenging.
Revenue increased 2% to $475 million and variable gross profit per vehicle per unit declined 1%.
We continue to focus on vehicle sourcing and cost improvement programs, including digitization to improve efficiency.
Operate 20 locations or remain committed to the car shop brand. We have one store are ready to open in the U K when they used vehicle availability improves.
Let's turn to our retail commercial truck business now our Premier truck dealership business represents 44 locations in North America and is an important part of our diversification during the second quarter, we expanded into greater Winnipeg, Manitoba market area acquiring five new locations.
And $180 million in estimated annualized revenue new commercial truck demand remains solid.
Being driven by replacement demand in fact.
Our entire allocation classic product for 2023.
Sold out.
At June 30th North American class eight retail truck sales were up 18%.
365000 units.
The current industry class eight backlog is 175000 units representing approximately <unk> <unk>.
Six months of sales during the second quarter same store unit sales were up 25% same.
Same store revenue was up 19%, including a 4% increase in service and parts.
Same store gross profit increased 7%.
At parks have tariff it represented 65% of total gross profit and covered 128%.
The fixed cost for the business in the second quarter.
Service and parts represented 65% of total gross profit and covered 128% as I said earlier in the second quarter.
Qt.
<unk> was $56 million up 3 million when compared to the second quarter last year as a data point June 2023 was the second best month of EBT in the company's history.
Let me now turn to passenger transportation solutions P. G group as you know owns 28, 9% of Pts which provides us with.
So the equity income.
Cash distributions and cash savings.
<unk> currently manages a fleet of over 431000 trucks tractors and traders with the goal of increasing the fleet to 500000.
By 2025.
Excuse me in.
In the second quarter operating revenue increased 6% to $2 7 billion.
Full service lease and contract revenue increased 14%.
Logistics revenue increased 6% rental declined 6%.
<unk> generated $253 million of income our share at Pts declined by $63 million. The decline in earnings was mainly impacted by four particular items, we have over 40000 units on order with a factory.
The OEM factory as a result of supply constraints, we have 17000 lease extension so far this year and 36000 extensions over the last 18 months.
The older units in operation, obviously drove higher maintenance costs of $65 million in Q2.
Commercial rental utilization declined 410 basis points to 77, eight really that's still a strong number at 70, 778%.
Interest expense increased $47 million due a higher average outstanding debt from the growth of the fleet combined with $1 5 billion and refinancing of the overall high interest with overall high interest rates.
And a lower gain on sale of 55 million when compared to the record performance in.
In 2022.
As we look forward, we believe the supply of new trucks is stabilizing which will provide ptas and opportunity to replace kind of the least extension. It certainly will lower maintenance expense at this point I'll turn it over I'll segue to discuss our Penske Australia business.
Thank you, Roger and Australia, New Zealand and parts of the Pacific, We're the exclusive importer and distributor of Western Star heavy duty trucks.
In heavy and medium duty trucks, and buses and Dennis Eagle, our refuse collection vehicle.
We're also the leading distributor of diesel and gas engines and power systems, principally representing empty you, which is the Rolls Royce company also Detroit diesel Allison transmission and Bergen engines.
Our business offers products across the on and off highway markets, including trucking mining power generation defense Marine rail and construction sectors and supports full parts and after sales service through a network of branches field service locations and dealers across the <unk>.
Region.
The off highway sector remains very strong with nearly all heavy duty engine allocations sold out for the remainder of 2023 predominantly serving the data center and mining markets.
Some of these projects provide service contracts for five and all the way up to 20 years.
Penske Australia also offers these mining engines through OEM mine haul trucks excavators loaders, and we also repower these equipment.
And the energy solution space, We recently delivered and commissioned the first 175 megawatt Bergen natural gas power station in Australia.
Our current order bank for energy solution deliveries is over $275 million for the remainder of 2023 and through 2024.
Approximately 80% of all of our gross profit in this region comes from service and parts operation. So increasing units in operation is a key driver of our business.
I'd now like to turn the call over to Shelly whole grades.
Thank you Randall and good afternoon, everyone I would now like to walk you through several key financial highlights and discuss the strength of our balance sheet.
We maintain our drive and discipline to achieve operational efficiencies through cost reductions automation and other improvements gained over the last several years to help us maintain lower levels of SG&A to gross profit than historical averages.
SG&A to gross profit was 67, 4% in the second quarter, and there's 1050 basis points below the 77, 9% in 2019 prior to the pandemic.
Most important SG&A as a percentage of gross profit improved by 10 basis points sequentially when compared to Q1 of 2023.
As a result of our efforts to control expenses in our U S. Automotive operations, our compensation to gross profit ratio improved by 30 basis points and our service and parts absorption improved 350 basis points over the second quarter of last year.
Similarly in the UK, our compensation to gross profit ratio improved 130 basis points and service and parts absorbed absorption improved 440 basis points.
Looking to the future we will continue to focus on simplification and optimization opportunities that will help deliver further efficiencies and cost reductions, particularly through automation.
Looking at our cash flow, we generated over $600 million in cash flow from operations in the six months ended June 30th 2023.
During this period, we repurchased two 6 million shares for $350 million and returned $87 million in dividends to our shareholders.
So far this year, we have increased the cash dividend by 26% from 57 cents.
To 72 cents per share.
We continue to maintain a disciplined approach to capital allocation over the last 18 months, 60% of our cash flow from operations funded share repurchases, 23% to acquisitions, 12% to dividends and 5% to capex for growth and expansion.
Our trailing 12 months EBITDA is nearly $1 9 billion.
At the end of the quarter, our long term debt was one 7 billion.
Approximately $1 billion of the long term debt represents subordinated note with 55% maturing in 2025, while the remaining 45% matures in 2029.
The average interest rate on these notes is three 6%.
We also have $586 million in mortgages and $116 million and other borrowings at subsidiaries.
Debt to total capitalization was 28% and leverage sits at nine X at the end of June and is consistent with March.
At the end of the quarter, we have the ability to flex our leverage up to forex compared to the $1 Nymex.
Lease adjusted ratio, leaving us plenty of opportunity for acquisitions and returning capital to shareholders.
During the second quarter, we amended our U S credit agreement to increase the facility borrowing capacity by $400 million via.
The amended agreement provides for up to $1 $2 billion in revolving loans or working capital acquisitions capital expenditures and investments and other corporate purposes.
June 30th we had $120 million in cash $630 million in vehicle equity and over one $6 billion and availability under our credit agreement.
Total inventory was $3 9 billion, representing an increase of $372 million from December 31st.
Floor plan debt was $3 2 billion.
We had a 32 days supply of new vehicles, including 26 days in the U S and 36 days in the U K.
As a data point, our current day supply of New battery electric vehicles is 54 days in the U S and 52 days in the U K.
Days supply of new vehicles for premium was 35 volume foreign was 15.
Used vehicle inventory had a 45 day supply at this time I will turn the call back to Roger for some final remarks, yes. Thank you Shelly as Shelley mentioned, our balance sheet is strong and I would say certainly safe and secure with a capitalization ratio of 28% we have the ability to flex our balance sheet too.
Maximize our future capital allocation, we are committed to offering convenience to opportunities to meet the shopping desires of course with all of our customers. This ranges from a 100% online to our superior customer experience traditionally offered in store.
These digital options include hybrid shopping solution virtual test drive remote signing for our customers online scheduling and service photo and video digital and approvals for for upsell and service.
One of our key initiatives is to.
Leveraging.
Artificial intelligence in both service and sales as we allow for automated interactions to answer your basic service inquiries. So it service and sales appointments using natural conversational language, even where our facilities are closed.
Finally, I'm glad to say I'd like to announce that 44 of our U S dealerships have received notification.
Some automotive news that they have been named to the best 100 dealerships to work for in 2023.
I'd like to congratulate our team for the extraordinary efforts in closing I certainly remain confident in our business models.
The results continue to demonstrate the benefit from our diversification across the retail automotive commercial truck industries, our cost control and a disciplined capital allocation strategy. Thanks for joining us today, and we'll turn it back to the operator. Thank you.
Thank you, ladies and gentlemen, once again, if you'd like to ask a question you May press. One then zero on your telephone keypad.
One moment please for our first question.
And our first question is from John Murphy. Please go ahead.
Hey, John .
Good afternoon, Roger and everybody.
Retro just a first question on one of the standouts I mean, there's a lot of good stuff in the in the quarter, but parts and service same store sales up almost 11%.
Follows on pretty good string of strength in parts and service.
The comps get tougher you argue that this might slowdown, but overtime, but I mean, what what's your view on the sustainability of the strength in parts and service and is there stuff that you.
Your actions you can take on a micro basis.
Hey, Matt support even further growth over time.
Well I think I touched on a same store basis, John our customer pay was up 10 or he was up 13 in our PDI up 27 and body shops are now continuing to grow as you know during COVID-19, where our body shop business really dropped but I would say today because of customer mileage is being driven it certainly driving more more service.
And I think the use of AI that we're using from the standpoint of interaction across our network, where the customers quite honestly is giving us the chance to schedule 24 hours a day two o'clock in the morning, our customer and call up and they can scan schedule appointment, which to me is really important because it gives us.
A cleaner look at our.
Daily operating capability for the number of installs available and we do that certainly by AI, which has really been a new opportunity for us I think where the car park $290 million and shortly today and miles driven are up I think on the premium luxury side, we continue to see.
The use of videos, we are using video from the standpoint of our technicians actually video weighing the car and coming back directly to the customer. So I think this is again high Tech high touch when you look at our service or the customers certainly in the U K, we see the shame of just a pent up demand one thing its a negative howie.
Because of our used car business is down we're certainly not seeing the opportunity and reconditioning we'd have.
Here's our inventory was up and we sold more used cars I think overall, we have an opportunity going forward because the opportunity is cars are running longer because of the pent up demand, we're going to still see this experience certainly and certainly in the automotive side and on the truck side. There's no question that we're seeing.
And our retail truck side at Premier truck. So again the car Park is shortly strong and I think at the end of the day, we've been able to increase our effective labor rate, which obviously is what we charged to the customer are up 6% from the standpoint in the U S and approximately 7% overall.
Overall and at Premier truck were up 4%. So again, we get also get the benefit as we increase to customer rates, we get that same increase scale overnight, but ultimately from the OEM. So I think those are all things that are driving our parts and service.
Okay second question real quick on the SG&A I mean, its great performance I mean, I think there's some skeptics Davidson. This is really a function of there's some.
Grocers that maybe.
<unk> in the short run, but I mean, it is very good performance.
How do you how do you think about SG&A going forward in sustainability.
At these levels or set of gross order dollar value I mean, how do you how do you think about that going forward.
John there's two levers obviously, maintaining gross you're growing gross profit.
We've we've been accustomed to that for the last 18 months, that's going to be.
Shortly under pressure as we go forward, but when.
When you think about just cold hard SG&A over the last 12 months and our.
Company doing 27 billion had $40 million more in SG&A over 12 months. So to me that really when you look at it for the quarter sorry, when you look at it quarter to quarter when you look at it.
Amazing because to me I think.
We're trying to balance our business costs associated with the volume of our of our business similar to what G. M. I think said about their inventory with inventory down and the ability for us to get better yield out of our sales people. We've gone from roughly 12 and a half unit for a salesperson to over 13, I think theres an opportunity there we get better.
Salespeople better connection with a customer and using tools, we're able to take some of the sales costs out and why on a sequential basis, our SG&A actually went down and I think the real costs, where some people about 8 million and we had some.
So rent costs, but basically we're going to continue to drive that and through the simplification and optimization that we're looking at I think it's a really key as we go forward I sat down with the management team. The last couple of days and we've got a plan.
We did take significant money out of our cost system, we're rolling that out over the next over the next few weeks and I think when you look at the overall 67, 4%.
Really from a SG&A and on a same store basis really the SG&A was really only up $25 million. So it's a matter of hitting all the buttons and certainly we're going to try to drive that because we know we will have some pressure on.
Grosses.
Great. Thank you very much Roger thanks, everybody. Thanks, John Thanks, John .
Next we go to a rigid Gupta. Please go ahead.
Hi.
Hi, good morning, Thanks for taking the question.
Just wanted to ask on PPL firstly.
First quarter results were down like 30% year over year in the second quarter down roughly 45%.
You talked about some of the maintenance headwind.
These extensions.
Gain on sale.
By selling fewer trucks.
Way to think about the.
The trajectory here into the second half maybe relative to the prior year or relative to the first half.
What kind of areas of the second quarter or should we expect to unwind.
Any other trends that you can share.
Handicapping, the second half and gotten levels working together.
I think one of the things we were riding it over the last 18 months.
It was the higher gain on sale now we've sold already through six months approximately 5000 more units. However, our margin is down about 14000 per unit. So that certainly drove a big portion of.
Obviously of the decline in gain on sale, which was $55 million I think for the quarter I think overall from from the standpoint of the business, we will see a reduction in maintenance costs as we take out as we've talked about earlier, we had 17000 of lease extent.
So far this year and we had 36000 over last 18 months out these drive higher maintenance costs. There's no question and we also have the issue of trying to bring that many units and at one point and taking units out because you have to prep. These units going out and it takes time in our shops. So again it is taking longer than we had expected.
Because of the huge surge of these units coming in we think that's going to flow through it will be more in a steady state here as we get into Q3 and certainly Q4.
They're all from a rental perspective, when you look at commercial rental.
That's down $31 million, you know really are 6%.
Talked about utilization, but what we'll do we'll flex that fleet will take out about 4000 tractors and when we do that that will reduce those and take the depreciation interest and costs out and what will happen will take 2000 or those are now replace somebody's high mileage units, obviously, which we're calling us from.
A maintenance standpoint, and then what we'll do we'll also give 2000 of those units to our sales team and they'll sell the newer units is somewhat like selling a loaner car and the auto side will run it for three or four months and then we'll sell it into the market and our guys would obviously.
Lease shows we've been very successful doing that on a shorter leash, sometimes between two and four years certainly when we look at the consumer around OLED rent the truck in New York take into Philadelphia, the only different carriers that link.
The route and it's been shorter mileage is in those one way moves which have impacted us. So we've got interest we got to used truck values, which obviously have declined just like used car values have over the last several months and we have obviously the higher maintenance sort of key areas that we have to deal with but you know that.
Company has a terrific.
<unk> reputation in the market. If you look at it against our peers. We continued out distanced them in all areas of the business and certainly from the standpoint, where we have an investment grade as we go into the market for our for our financing of our of our vehicles and I think the.
When you look at.
Our first half if you can believe it the first half profits really equal.
Equals the entire amount of profits in 2019, so the business is certainly on a roll.
Got it got it.
It's helpful. Maybe just on the used car business.
Unit costs were down roughly 8% in the quarter.
The grocers are very healthy.
Relative to pre pandemic, even versus the first quarter.
How should we think about the tradeoff between the units.
And Gpus.
Due to the third quarter and fourth quarter.
Should we expect a similar kind of decline and youre able to maintain the gross profit per unit or <unk>.
Or should we expect anything to change your strategy.
Right.
Look at the real World here, we know everybody is trying to get here to for your used vehicles. There that's still going to be tight because we have less trades on vehicles over new vehicle sales over the last say 18, like 18 months and where all fishing in the zero to four times and we had a number of lease returns that didn't come back.
During that period due to customer buying out our extending leases, but what I see is probably the cost of sales going down in the market.
But on the other hand, I think we can maintain our grosses because we're going to stay in the zero to four year timeframe. We've done it in the past and hopefully when we look at the opportunity here, we'll get some hopefully some some cars coming off lease which before obviously, we're going to have customers who are buying those so we see that being an opportunity.
You'll have some railcars coming into the market and when you look at the marketplace on leasing where we actually got a lot of our used cars on the premium side.
We were at 55% and those cars would always come back to the dealer at this point, we've not had a lot of that because cash has been really actually mentioned it earlier today in a conversation that we still have 22% of our buyers are cash buyers today. So that's up from where we've been with you any comment on that Shelley.
Now, let's start the consumer remains very healthy and they're obviously trying to avert some of these higher finance costs, but yeah, they're up 2% over where they were last year, which was a historic high to begin with so I see probably lower cost of sale I see us maintaining our margins quite honestly.
And I see our pipeline for us from a premium perspective, having the opportunity to see more trades and when you think about our volume foreign business Honda Toyota and Hyundai right now we're running anywhere between 10 and 15 days supply so as that picks up with obviously, the OEM picking up supply.
We're going to get more trades from them, which will be really hot merchandise for us. So one additional thing to consider is how we are sourcing vehicles to we've put a concerted effort into buying more vehicles directly from consumers. So on our franchise business in the U S. There's only about 4%.
What we bought in 2020.
In 2023, so far it's 12% and when you look at car shop. When you go back and look at where they were in 2020. It was 6% and today. They are up to 27%. So we're really doing a good job of changing the way that we source, but with 6 million fewer cars sold into the marketplace.
Over the past three plus years the amount of cars that are available for us to buy is really challenging and also were now compensating our sales people in many cases, it one way or the other to make sure we get the trade show the customer doesn't go out and sell it personally and that's what's happened that's been kind of a run for Alaska.
Two or three quarters, so, we're hoping that's going to slowdown but.
Look the market is going to be slow coming back because there's just not the right cars and you know we're not going to go to the auction because they seem to be the cars that had been Paul it over over the last period of time, we're going to we're not going to bite off youre going to stake our traditional way, we have and I think thats going to pay dividends on growth.
Got it got it that's great.
Thanks for taking the questions.
Thanks, Josh.
And ladies and gentlemen, just as a reminder, if you would like to ask a question you May press. One then zero on your telephone Keypad next we'll go to the line of Daniel <unk>. Please go ahead.
Yeah, Hey, Daniel Thanks for taking the question.
Maybe if I could follow up actually on that topic, you just touched Antoni van around car shop within this use business. Roger you mentioned growth was hampered you know Randall I'd be curious if trends were any better or different internationally is sourcing just as tight there and then stepping back I mean, how does this near to intermediate term challenging backdrop, maybe change your thinking about.
The viability of the Standalone concept or kind of commitment to growth in the Standalone <unk> concept.
So I'll touch on the sourcing first in the U K. So similar shift if you go back three years ago.
We were getting 22% of all of our used cars from.
We via some program, that's down to 5%, but Conversely, 13% of our cars three years ago, we got directly from the consumer meaning not a trade, but we were out proactively buying that's up to 29%. So from 13 to 29, then as Roger said focus on our trade has gone from 32%.
To 40% of all of our are used.
He used inventory so if we call it self source you put a direct from consumer trade.
How we're focusing intergroup by bucket all those together, that's 82% of all of our trades year to date are coming from that versus 58% three years ago.
Now looking at.
Amendment to the brand. There's no question, we're committed to the brand we have 20 units now we've got.
Our location in the U K, we're planning to open up as soon as the supply opens up for us. So we can be prudent from the standpoint of caution in fact to be honest with you we had and we had an operation in Phoenix that we opened up.
And because we didn't have the supply and quite honestly it was turning into a loss for US we closed and sold a building. So look we're not afraid to take the action one way or the other but.
I would say its supply both in the U S and the UK, we need 150 to 200 units more than the U U S to get where we want to go and I think we're doing 5000 units in my right Randall and in the U K on a monthly basis. So it's a big business right now and we're going to try to look at Digitization and the U K to.
Take costs out and we can do that by certain things that we haven't done in the past by giving certain functions or the sales process and theyre doing a technically are giving it to one person rather than having multiple managers and sales and delivery people handling and we think thats going to take some additional costs out over the next step.
Third and fourth quarter, so to me.
It's a great business, we got a great brand when you look at car shop, both here and also in the U K and we think it's an independent business, we run it that way and quite honestly overall, we're just looking for volume.
Got it that's all really helpful color. Thank you and then maybe shifting to the commercial truck side, Richard the class eight backlog is substantial but that'll support sales at least through this year and into next year. How do you think about it can you talk about the risks into next year or maybe the freight backdrop remaining tough how does that impact your freight customers willingness to turn.
Their fleets and how does that way with the emission changes and obviously your service and parts of the natural hedge if you can just talk through the moving pieces.
And as we think through how the industry works through its backlog.
Yeah. Thank you Daniel.
Comment then on current environment as you mentioned the backlog is still very healthy at 176000 units representing about six months of retail sales. So that's going to carry us through the balance of this year.
And so any allocation that we've received this year.
Completely sold out.
As you mentioned the emissions, there's there's a greenhouse gas regulations go into effect in two steps 2024.
<unk> 2027 for 2024.
Normally have.
In advance of an emissions year.
A pre buy effect and of course that the Oems aren't able to produce the vehicles due to supply chain challenges to take advantage of that so I think that's gonna be a buffer against what you would normally have as the hangover of year one.
When new emissions.
Vehicles are launched which would be next year I think you combine that with the fact.
Similarly to the auto sides of the last three years, there's been a.
Lower supply.
Supply of vehicles coming into the marketplace.
Certainly Roger talked about it on the maintenance cost side for Pts a lot of our carriers around the retail truck side experienced the same thing so their maintenance costs were up as well and theyre going to be.
Eager to replace those vehicles so over the last two years.
The sales have been driven by the robust rate environment I think this year, certainly and going into next year, it's going to be driven by replacement demand to get older higher cost units from an operating standpoint out of the marketplace and so you would see that with.
With the Q2 sales up 13% for the industry.
In your opening comments you saw were up 29%.
For the quarter on a retail sales basis, and so I think the fundamentals right now for us.
Bode well for certainly this year and looking into the next year and the last comment I would make on the freight rates.
Certainly the spot market has come down from its historical highs.
And we feel have bottomed out we think there could be some more correction on the contract side through the end of the year, but the forecast is for freight rates to start trending back up for it over the next six months and so as the as the.
Freight cycle recovers I think thats going to act as a natural buffer to.
So the retail sales in the commercial truck side.
Thank you so much for all the color and best of luck everybody alright.
Alright, Thanks, Tim Yeah, that's great.
And next we'll go to David Whiston. Please go ahead, Hey, Dave.
I would.
Hey, everyone.
I guess the first one on Pts.
I was just curious on slide 27, the <unk>.
Break out the difference for me between.
Full service lease and maintenance versus commercial rental.
You are talking to me the the maintenance on the equipment Youre, saying.
I mean is it your pie charts as full service lease and maintenance.
I mean are you referring to truckloads dealer versus commercial rental truck truck leasing of compensation, that's why management at.
All our maintenance when we talk about maintenance, it's not only on leasing on our logistics.
Trucks are contract maintenance business, and our consumer and our commercial rental fleet. That's our total maintenance number. So it includes tires and and maintenance. So that's a total number that you saw it was up 65 million in the quarter.
Okay and on the M&A market do you expect to stay more skewed for the rest of the year. If you do do a deal on the truck side or do you have a pretty robust light vehicle pipeline too.
Well look I would say we have a pipeline you. Our goal is to be up five from a branding standpoint at least five acquisition I think we're tracking in that area. We have some some things in the pipeline, which I think look promising but we're going to be very very selective whether it's internationally or domestically to be sure. It fits in areas, where we have scale.
Also we wanted to fit in what we call a premium luxury and volume foreign brand mix. So that's going to be important as we go forward and I think at the end of the day. We've followed that that's why you look at us even in the U K, where 95% premium luxury we made that acquisition of the <unk> of the.
North London Mercedes businesses is now under agency and we had a 25% market share in the month of June So that's starting to really pay off so strategically and brand will be critical when we look at this as we make acquisitions, obviously affordability from a standpoint of our return will also be key plus.
Today, what's the Capex requirement.
And finally do you use in your opinion outside of Tesla do you think there are too many evs on the market right now.
Well [laughter].
Okay.
Getting into electrification.
I'm glad I'm not running the business and what I'm gonna make on electric vehicles right at least for the rest of the year, but why does it ran will talk a little bit about <unk>.
Cash flow and what's going on in the Evs and the U K I think he's got good color on that yes. So in the U K, there's been government subsidies for several years now in the total market is about just over 16% be EV, our business year to date, 20% be EV with our premium luxury mix.
Well, it's interesting on that as well as.
Since they've been so venting the government for four years, where that's the first market worrying, where we're seeing a bonafide trade cycle of used be evs, but we've been hovering about a 50 50 253 day supply of <unk>, which is about 375 units and that only represents about 6% of our total used inventory so our.
Those are there's not massive but interestingly at the beginning of the year late January we had north of 600 units in stock and when Tesla announced their price reduction that had a ripple effect on the use side as well, even though we weren't exposed to Tesla says a brand unused certainly hit all be EV. So.
We just need to be eyes wide open we got to turn these things quicker and then as a consumer if you buy a four year old VEB. It's just interesting to say, what's the range gonna be like after that time from a degradation standpoint, and then if theres a warranty situation.
What are the associated costs, there excuse me if it's an out of warranty situation what are the associated costs. So look at were.
And then I just hit a couple of other markets, Germany is about 16% as well.
And the government subsidies interestingly you go to a country like Italy, where there's not a lot of government subsidy and the market's only 4% and we would even be less than that from a from a pag standpoint, so interesting between the different markets.
I think that also when you look at it talk a little bit about in the international markets. The impact of the governmental support I think thinking about that from a from a tax perspective in the UK well. It's it's a follow the money scenario so in the U K.
A lot of people will have their vehicle as a company benefit and they provide a significant tax relief. If you have a b E V which is.
No not quite zero, but you know maybe 50 pounds for tax where if you got a say a BMW three series that maybe $300 per month intact. So there's a real benefit to.
To have that be EV from a tax standpoint, similar in Germany, like I said I mean, the government subsidies there some of these other countries, where it's not so you could call a little bit artificially buoyed on where the government subsidies are yes, I think when you look at the U S. A.
EQM for Mercedes We got 190 day supply right today as we sit here overall on Bev for N. B. We had 113, so were seeing affordability and pricing.
A critical period from the standpoint of our business and I know theres been some questions in the past I've heard this week from the other of our peers talking about you know what.
Part of our business or do we sell from a.
100% of MSRP, we're running at about 54% year to date, if you take out if.
You take out both hybrid.
<unk>, we're at 70% so you can see that.
The noise around the business the PR from the Oems and the supply is much greater than the marketplace. So I think it's something that we really have to look at.
As we as we go forward over the next several quarters. So we're watching their used car pricing, we're being careful one of the things it's going to have to take place like we've already seen it in the UK. We're on are with Mercedes Benz on a commissioner of agency fee they've already raised at 100 basis points on.
On Evs, we're seeing discounts and also incentives here in the U S to remove this you've seen what's happened domestically here with forward if everything just slightly here in the papers. So I think we're in that kind of environment. So we're going to watch it carefully but the OEM captives at least on the premium side are going to have to step up and put residual.
These things if theyre going to move on I would just say that there's no other way to move these because right now I think its sticker shop for the customer.
And real quickly.
MSRP ratio you just mentioned is interesting because that's higher than what I've heard from some other dealers do you think that's sustainable for the next few quarters or is it going to crash hard soon as inventory growth starting with a higher batting order.
I wanted to get it up obviously Medicare at MSRP of retail.
Theres going to be pressure, let me be honest with you, but remember we don't have a domestic portfolio today, where 1%. So if this particular fine with a day's supply we have and in premium luxury what we have in volume foreign and I still think we've got a model right now at least to a market that strip, providing us the opportunity to hold price.
Missing.
Okay I appreciate all the information thank you Greg.
Mr. Penske I'll turn it back to you for clothing.
Well, thanks to everybody for joining US we'll see you next quarter. Thanks for the support for our people that are on the line. Thanks.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.
Conference recording has stopped.