Q3 2024 Penske Automotive Group Inc Earnings Call
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Speaker Change: Ladies and gentlemen, good afternoon. Welcome to the Penske Automotive Group third quarter 2024 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through November 6, 2024 on the company's website under the investors tab at www.penskeautomotive.com. I will now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.
Tony Pordon: Thank you, Leah. Good afternoon, everyone, and thank you for joining us today.
Tony Pordon: A press release detailing Penske Automotive Group's third quarter 2024 financial results was issued this morning and is posted on our website along with a presentation designed to assist you in understanding the company's results.
Tony Pordon: 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, Shelley Hulgrave, EVP and Chief Financial Officer.
Tony Pordon: Rich Shearing, North American Operations, Randall Seymour, International Operations, and Tony Ficcioni, Vice President and Corporate Controller.
Tony Pordon: Our discussion today may include forward-looking statements about our operations, earnings potential, outlook, acquisitions, future events, growth plans, liquidity, and assessment of business conditions.
Tony Pordon: We may also discuss certain non-GAAP financial measures such as earnings before interest, taxes, depreciation, and amortization, or EBITDA, and our leverage ratio.
Tony Pordon: We have prominently presented the comparable gap measures and have reconciled the non-gap measures to the most directly comparable gap measures in this morning's press release and investor presentation, both of which are available on our website.
Tony Pordon: Our future results may vary from our expectation because of risks and uncertainties outlined in today's press release and your forward-looking statements.
Tony Pordon: I direct you to our SEC filings, including our Form 10-K and previously filed Form 10-Qs.
Tony Pordon: for additional discussion factors that could cause future results to differ materially from expectations.
Speaker Change: I will now turn the call over to Roger Penske.
Roger Penske: Thank you, Tony. Everyone, thank you for joining us today. In the third quarter of 2024, PHE generated $304 million in income before taxes.
Roger Penske: $226 million in net income and earnings per share of $3.39.
Roger Penske: Overall revenues increased 2% to a third quarter record.
Roger Penske: of $7.6 billion, including a 14% increase in service and parts to a record $778 million.
Roger Penske: 61% of our revenue is derived in North America, 30% in the U.K., and the remaining 9% came from other international markets.
Roger Penske: A retail automotive brand mix is a key differentiator with 20, 72% of the revenue generated from premium brands.
Roger Penske: 21% generated from volume non-U.S. brands.
Roger Penske: Our gross margin was consistent in the quarter, over quarter, at 16.4%. Our SG&A expenses as a percentage of gross profit was 71.2%.
Roger Penske: It remains well within the target range and is nearly 800 basis points below pre-pandemic levels.
Roger Penske: I'm pleased with the financial performance during the quarter despite the impact from stop sale of certain vehicles and residual impact from the CDK cyber security incident.
Roger Penske: Thank you.
Roger Penske: During the quarter, new and used automotive gross profit remained strong. Retail automotive service and parts performed at record levels.
Roger Penske: The retail commercial truck business performed well, SG&A expenses remained well-controlled, and equity income from Penske Transportation Solutions increased 14% sequentially despite continued freight challenges.
Roger Penske: Let's take a look at our retail automotive. We delivered 117,000.
Roger Penske: 551 units during the quarter. Our new units increased 5%. Same store new units declined 2%.
Roger Penske: We continue to take forward orders with pre-sold activity averaging between 10 and 20 percent in the U.S.
Roger Penske: 32% of our new vehicles sold in the U.S. were at MSRP. The average new vehicle transaction price now has increased 2%.
Roger Penske: to $57,880.
Roger Penske: Gross profit per new vehicle retailed remains strong at $5,072. It was only down $230 sequentially. It remains nearly $2,000 higher than in 2019.
Roger Penske: Thank you.
Roger Penske: Use units declined 13 percent. The availability of product has been impacted by the lower amount of new sales in previous years.
Roger Penske: and the lack of trade-ins.
Roger Penske: During 2024 we began transitioning the UK-based car shop locations to Sittner Select dealerships.
Roger Penske: These dealerships sell fewer units, which contributed to a 13% decline in used vehicle retails during the quarter.
Roger Penske: Average used vehicle transaction price increased 4.6 percent.
Roger Penske: Gross profit per used vehicle retailed increased $318 quarter over quarter and was up $60 sequentially. Variable gross profit per unit increased $8 sequentially.
Roger Penske: We operate 35 full sales and service facilities and 11 stand-alone service and parts or parts-only facilities.
Roger Penske: Since acquiring the retail truck business in 2014, we have grown revenue and EBT more than six times through a combination of organic growth and acquisitions and will continue to pursue acquisitions as a part of PAG's capital allocation strategy.
Roger Penske: We believe Class VIII commercial truck demand will continue to be driven primarily by replacement purchases.
Roger Penske: During Q3, North American Class 8 retail sales declined 1%, year-to-date retail sales were 234,000 units or down 6%.
Roger Penske: Lastly, as you may recall, Premier Truck Group was temporarily impacted by the CDK cybersecurity incident in June 2024. The system outage was restored in the third quarter and we resumed processing transactions at that time.
Roger Penske: The outage impacted the efficiency and productivity of fixed operations, leading to lower fixed absorption ratio and lower than expected parts and service gross profit during Q3.
Roger Penske: Turning the Penske Transportation Solutions, I'm pleased to report a 14% increase in sequential earnings for PTS.
Roger Penske: During Q3, operating revenue increased 3% to $2.8 billion. Full service revenue and contract maintenance increased 11%. Logistics revenue increased 3%.
Roger Penske: Our share of the PTS earnings was $60.3 million, up from $32.5 million in the first quarter and $52.9 million in the second quarter.
Speaker Change: Used truck sales were flat at 8,849 sold units compared to Q3 2023. I would now like to turn the call over to Randall Seymour. Thanks, Rich. Good afternoon, everyone. I will now discuss several activities taking place in our international operations.
Randall Seymour: In the UK, we have been busy integrating the 16 dealerships and $1 billion in estimated annual revenue we acquired earlier this year, coupled with the rebranding and transitioning of the UK car shop operations to Sittner Select.
Randall Seymour: With this change to Sit and Select, we can more closely align the used car operation with franchise dealerships to reduce our cost base.
Randall Seymour: These vehicles are primarily purchased by fleet customers due to payroll tax incentives and are often at lower gross margin.
Randall Seymour: Last week, we announced an agreement to acquire our third Porsche dealership in Melbourne. We expect this dealership to add $130 million in estimated annualized revenue, and closing is expected by the end of this year, subject to customary conditions.
Randall Seymour: Energy Solutions continues to perform strongly in the data center and battery energy storage solution markets.
Speaker Change: Thank you, Randall. Good afternoon, everyone. I will review our cash flow, balance sheet, and capital allocation. Our balance sheet and cash flow provide us with opportunities to maximize capital allocation.
Speaker Change: Using the closing price on October 28th, the current yield is approximately 3.1%. The dividends payout ratio over the last 12 months is approximately 28%.
Speaker Change: We have also repurchased approximately 511,000 shares for $77 million so far this year.
Speaker Change: Twenty-two percent of our long-term debt is at fixed rates. Our variable debt is approximately $4.7 billion, of which approximately 50 percent resides in the U.S.
Speaker Change: Hey, John. Hey, Roger. How are you?
John: Just a first question Roger on the stop sales because it's kind of flowing through the business in a number of ways. Yeah I'm just curious if you can give us an idea of kind of the impact you in the in the quarter and kind of what you expect near term.
John: Potentially, though, also on the flip side, the coming benefits on parts and service and when that may hit. And maybe just more broadly, because you've been in the industry for a long time.
John: and our business internationally, as Randall will talk to. So when the announcement came out, it was an impact to about 60% of our BMW ground stock and 100% of our mini.
John: that were not a part of the stop sale, so that our retail teams had some units to sell, not knowing how long this stop sale was going to occur. So that was number one. Number two,
John: They would only give you more parts if all the vehicles from the first parts they ship were updated. And so we felt it was necessary to prioritize those repairs and get as many vehicles updated as soon as possible.
Speaker Change: Got it. And then just maybe a second question that's very helpful on upfront grosses. I mean, up $8 sequentially, everybody keeps thinking grosses in total are going to fall. And then specifically, the relative strength of even new GPUs down a little bit more than $200.
Speaker Change: on their own, it just seems like this is holding up.
Speaker Change: better than anybody is fearing. Are we getting to a point, and it was, you know, slower on the decline, are we getting to a point where we're kind of getting to this asymptotic limit where we might be, quote-unquote, normalizing now at these much higher levels? Or is there, you know, a reason as we progress through the next 18 to 24 months why there might be, you know, quote-unquote, further normalization lower?
Speaker Change: Yeah, I mean, I think we feel good about where the grosses are at right now, John, and as you pointed out, sequentially, the compression is slow. There's no doubt.
Speaker Change: You know, the consumer is still, I think, challenged. The affordability remains to be...
Speaker Change: A question mark is, as Roger alluded to in his remarks, up 2%.
Speaker Change: in the quarter to over $57,000 now. Obviously, we think...
Speaker Change: The rate cuts, if those come forward, that will help with the high penetration of leasing in the U.S. market. But it goes back to our teams as well. I mean, you know, I think I give a lot of credit there to, you know, them making a deal that.
Speaker Change: is holding on to the gross and being disciplined in what they're doing. We still have very short supply in Texas and, or Toyota and Lexus.
Speaker Change: And you're seeing the incentives increase from the OEM. So with that, it helps move the iron without us having to discount at a higher rate to move the inventory.
Speaker Change: That's very helpful. I got a bunch more about to get back in the queue. Thank you guys. Thanks John.
Speaker Change: Next we go to Ron Juzikow with Guggenheim Securities. Please go ahead. Hey Ron. Hey Roger, team. Thanks and good afternoon.
Speaker Change: Um...
Ron Juzikow: I was wondering if we could start on, you called out the residual impact of CDK on the business. I thought the retail truck numbers, I guess, looked good.
Ron Juzikow: Thank you.
Ron Juzikow: yeah
Speaker Change: Ron, good afternoon. So Richard again, let me take the first one on CDK. So I think just as a reminder I think you're aware that we use CDK in our commercial retail truck business So unlike our peers who had CDK in the automotive business, it's a smaller portion of our business, but you know still impacts probably on a proportional basis
Speaker Change: manual processes as soon as possible so that we could at least sustain a business level that was acceptable.
Speaker Change: The biggest impact, as I said, was on our fixed operations, mostly from a productivity and efficiency standpoint where
Speaker Change: You know, things slowed as a result of having to generate repair orders manually, generate parts tickets manually, instead of that automatically filling through our retail management system with the OEM.
Speaker Change: We also took the decision to pay our employees on the trend prior to the the CDK disruption because obviously it wasn't anything that they had control over and then when we came out of that you know through the
Speaker Change: middle of August.
Speaker Change: We look back on a 3-month, 12-month, and 18-month trend basis to determine what we thought the impact to our business was during that time, and we feel it's at minimum $7 million, whereas an impact in total, with some of that being in the second quarter and some in the third quarter.
Speaker Change: So that's CDK. Then as you look at the freight environment, your second question, certainly it's lasted longer than any other freight recession that we've had in the past.
Speaker Change: and we're still in the heights of that at the moment. But I think despite that, you look at our new vehicle sales up 16%, 10% on a same-store basis, used up 5%, 4% on a same-store basis.
Speaker Change: And I think the customers are continuing to purchase out of replacement demand versus fleet growth.
Speaker Change: And I think the decision they're making there is that the capital expenditure is...
Speaker Change: is better than the increased maintenance expense that they'll see if they run those trucks and keep those trucks longer.
Speaker Change: And so...
Speaker Change: More, you know, smaller customer cancellations this year. I'd say it's nothing material that we haven't been able to replace those trucks with other customers where there is demand. And the demand is still healthy in medium duty, private fleets, and vocational business.
Speaker Change: As we look to 2025...
Speaker Change: You know, the OEM we support, Freightliner and Western Star, they have a quarterly reservation system.
Speaker Change: And so we know how many trucks we're going to be allocating on a quarterly basis, and then we're working with customers now to fulfill those orders.
Speaker Change: And we feel optimistic for the first time in four years that now there'll be production capacity to where we can go out and conquest business.
Speaker Change: that we haven't been able to go after in the past simply because all the trucks we were allocated were being used to satisfy our existing customer portfolio.
Speaker Change: You know, when you look at our grosses, you know, I think both new and used, you know, sequentially are hanging right in there. So I feel good overall about the performance in the quarter.
Speaker Change: Okay, that's super helpful and I appreciate all the color. And then I was just wondering if we could talk about parts and service from here a little bit more as a follow-up to the stop sale discussion.
Speaker Change: Let me take that one. I think a couple things, when we look at parts and service, our technician counts up 7% and our effective labor rates up 5% which obviously makes a big difference.
Speaker Change: Customer pay, when I look at it across, the U.S. was up about five, internationally was up two, so overall about four percent.
Speaker Change: Warranty, which was the strongest, was up 20% across both the U.S. and internationally, and our collision repair was up about 2.2%. So you can see it's across the board.
Speaker Change: And I think the fact that the premium luxury.
Speaker Change: cars are in. We looked at a number, and I don't have it exactly here, from a BEV concerned to a ICE vehicle, and there's no question that the BEV vehicles now are taking more time because of programming.
Speaker Change: And then they are in an ice fickle, and I can't give you exactly from an RO perspective. But I think overall, when you look at our stop-sale impact,
Speaker Change: It was about $6 million in sales and about $4 million on the fixed side. So, again, you know, we're focusing. Because you remember, when you think about Randall's business, about 70% is parts and service.
Speaker Change: And we look at Rich's business as probably, what, 65%?
Speaker Change: and 55% in the auto side. So, when you look at those margins in comparison to...
Speaker Change: 6 and 7% on new and used.
Speaker Change: I think the focus is right. We spent a lot of money on dynamometers in the truck business.
Speaker Change: We've got ways to adjust or look at your tires as you come in the drive-thru. We have equipment now that will tell us about and be able to show the customer their alignment. So a lot of these things...
Speaker Change: are for customer satisfaction and also then drives margin in our shop. So again, and we're investing.
Speaker Change: A lot of money in shops because we see as the
Speaker Change: VAV units come in we're going to need to have more space because of much of the programming that has to has to take place and when you look at the difference between today, this is probably you know over the last two percent of our repair orders
Speaker Change: The difference between a ICE vehicle
Speaker Change: When you look at it from a total cost is about seven hundred dollars
Speaker Change: And it's about $1,300 per order for VEV. So I'm not sure when that switches around. But you know, the stop sales and the complexity around this software, it's interesting. I see it here in the car business. And I can tell you that.
Speaker Change: On our race cars, we're using a lot of software, and we spend more time with it sitting there than we do on the track in many days, so this isn't just a epidemic on the car side. It's just so complicated.
Speaker Change: And we're expecting so many things to get done. So I would say that, overall, the parks and service is the heart of our business. So hey, Rich, could you clarify, or I know you talked about the benefit on.
Speaker Change: from Stop Sales on the parts and service and the revenue that we would have received in the court. Can you go through those numbers one more time?
Speaker Change: Yeah, so you're talking specifically BMW? BMW, yeah.
Speaker Change: So on BMW, just to clarify them, we saw about a $6 million impact to gross profit in sales. And then when you factor in the warranty repairs to correct those vehicles, to prepare them for sale, the net impact was about $4 million.
Speaker Change: You know, so you had, let's say, about two million in fixed operations that was a gain as a result of correcting the deficiency on those units.
Ron Juzikow: So, Ron, that gives you the big picture piece there, okay? Yeah, that's super helpful as we move forward and appreciate all the color on kind of the increasing complexity as we, looking more and more like computer on wheels, I guess. Appreciate it, though.
Speaker Change: Thank you.
Speaker Change: Next we go to Rajat Gupta with J.P. Morgan. Please go ahead.
Rajat Gupta: I have a question on the used car business.
Rajat Gupta: You know, obviously, a bit more than expected, abrupt, you know, correction in the unit because of the consolidation of car shop. I was just curious, you know, looking forward from here.
Rajat Gupta: Is your third quarter level a good baseline to look at the business, both in terms of units and GPUs?
Rajat Gupta: or were there some one-time impacts that hurt the business more than you'd expect because of the confrontation? So, just curious if you could give us some guidance on that. And I have a follow up. Thanks.
Speaker Change: I think in our press release we talked about, even though we showed our used car business down, if we took out 9,000 units that would have put us up 1% on an overall basis. But as we transitioned
Speaker Change: from Car Shop to Sittner Select.
Speaker Change: We've taken away real estate in locations that we sold to third parties, which now has given us a base run rate between two thousand and twenty five hundred.
Speaker Change: versus 5,000. Now that was done, and I would say this...
Speaker Change: So you see the ultimate used car number come down, but I think from a gross profit perspective...
Speaker Change: Even on the chassis, we're almost double than where we were before, and we're gaining a lot of strength on our F&I, our finance products. And to me, the access to those vehicles now, these are vehicles that come from Sittner OEM business.
Speaker Change: that can't be retailed or certified, where they were being put on our SittnerNet, our exclusive, our auction block. We now take those vehicles, and they're moved over to Sittner Select.
Speaker Change: And I can tell you that it's made a big difference because we're now sourcing.
Speaker Change: a biggest portion.
Speaker Change: of our vehicles through this process, along with OEM, and I think that when you look at our overall gross profit.
Speaker Change: Just for the quarter, we were up $318, so I think some of that, you know, has a big factor. Overall, we're up 5%. So, number one, it's lower units, higher margin.
Speaker Change: less locations
Speaker Change: But I think when we look at the product now, where we had a loss in it last year, we're looking as we go forward and do our business plans for 2025, we should see Sittner in the UK with positive. We also took two down here in the U.S., one in New Jersey.
Speaker Change: and one in Phoenix.
Speaker Change: And those costs were, I think, from an operating standpoint, were higher than the business could afford. And those have been divested during the year. So when we look at the car shop U.S., we look at Sittner Select, I think that, you know, we're going to have a business that's going to run somewhere between
Speaker Change: 2,500 in the U.K. and 1,100 to 1,200 in the U.S., so you could say between 3,500 and 4,000 would be a run rate. And I think the margins are significantly higher than they were before.
Speaker Change: And we'll continue to look at our sourcing, but I can tell you this, we want to buy on the service drive, we want to buy from the OEM, and obviously trades are a big portion of this.
Speaker Change: Thank you.
Speaker Change: You added modest leverage to the business, and so on, just 1.3 times.
Speaker Change: I'm curious how we should think about, you know, optionality around maybe increasing leverage, you know, being more aggressive in buyback or even more M&A. Just curious, you know, what's the latest, you know, thought process around go-forward capital allocation.
Speaker Change: Let me let Shelly answer that for you, okay Shelly?
Shelly: Hey, Rajat. Thanks for the question. You know, when we look at this quarter and we start all these capital allocation discussions with the word opportunistic, and I think we exemplify that this quarter and this year. So if you look at page 6 of our slide deck,
Shelly: You know, acquiring $2 billion in annualized revenues year-to-date, a big chunk of that came from Bill Brown Ford, which we acquired in July, certainly not a cheap date. But then we also wanted to take care of our shareholders, and so with the most recent dividend announcement, we'll have returned over $350 million to our shareholders to date and, you know, continue to grow the business through CapEx. Richard talked about expanded service opportunities, and we've opened a number of new stores and purchased about $37 million in land for future growth. So
Shelly: I would say, you know, we certainly like the buyback. It's not something that, you know, we've turned away from. It just happened to be the opportunities that were presented to us this quarter.
Shelly: Thanks for the call and I hope I've helped you.
Speaker Change: Next we go to David Whiston with Morningstar. Please go ahead.
Speaker Change: Hey, David.
David Whiston: Hey everyone, thinking on the M&A and capital allocation question, I was just curious if
David Whiston: You're seeing seller asking prices for M&A coming down as people are resetting their expectations given trillion 12-month profits have been coming down, or do you still think, would you still consider them elevated?
Speaker Change: 24 months. But when you look at the premium brands, the BMW, the Toyota, the Lexus, and these brands, we still see these things at, you know, at high levels. Obviously, when we look at the truck...
Speaker Change: operations are probably in some cases 50% less from a multiple basis.
Speaker Change: and your volume four is somewhere in the middle. I think we look at it, not so much what's the multiple,
Speaker Change: We look at what's the future opportunity from the standpoint of profitability and do we have synergies in the market.
Speaker Change: Where we are and that means do we have other stores? Can we consolidate into a into a central office?
Speaker Change: And that's really been our focus.
Speaker Change: And on top of that, then we're looking...
Speaker Change: at stores which are not going to produce what we expect.
Speaker Change: you know, going forward, so.
Speaker Change: I would say, if we look, I think, here today, Shelly, it's...
Speaker Change: About $200 million of our $2 billion is truck balance, and all of the...
Speaker Change: Divestitures are primarily on the auto side.
Speaker Change: And some of that, obviously, is car shop.
Speaker Change: in the UK. So, to me, we're certainly going to continue to buy. Look at the three Porsche stores, I think, in Australia will generate probably, what, $220 million? $260 million on an annualized basis.
Speaker Change: There we have the market, we have the capability.
Speaker Change: because we have our headquarters for our Penske Australia power system business there and our truck business. So we get the benefit of the legal, we get benefit of the HR, and certainly the finance. So these are things which I think are really key.
Speaker Change: And I think the diversification, you know, that we have gives us the opportunity to pick what bucket we want to be in, you know, as we go forward. And certainly from a capital allocation standpoint, you know, we look at, you know, where we are and we look at the...
Speaker Change: dividend increases that we've done since November.
Speaker Change: In 2020, we've made 17 straight dividend increases to $1.19, and when you think about it, it's a 28% payout with about a 3% return. So hopefully we attract a shareholder with those types of metrics.
Speaker Change: Thanks for that. And then on the agency system in Europe, that's been going on for some time now. I'm just curious, are you hearing from other OEMs that they want to do that, or is it just sticking to the brands that are already doing it?
Speaker Change: Yeah, it's a mix, so obviously Mercedes, we've had many launch in various markets this year.
Speaker Change: BMW is still on schedule to launch in 2026. You have brands like JLR.
Speaker Change: And then Mercedes is delayed in some of the other markets.
Speaker Change: portion we have obviously is the Mercedes in the UK.
Speaker Change: It continues to be beneficial for us, I think, with the current market conditions.
Speaker Change: and having that fixed price we're seeing.
Speaker Change: some growth on the after sales there.
Speaker Change: So, yeah, that's kind of the status.
Speaker Change: You know, in the UK with Mercedes, we think it's been a good year.
Speaker Change: I would add to that, the great thing is that our PMA, being the size of it is in the UK, all the inquiries that come in...
Speaker Change: either through the factory sites, come to us.
Speaker Change: And about 90% of the sales that we have, right, Randall, are really in our PMA, which is exactly what agency is trying to do a better connection with a customer. So I'd have to say, even though we were somewhat negative on it, we've worked very hard with Mercedes to make it work in the UK. I'm not sure they've got a great taste of it right now and what they're going to do worldwide. But, you know, they have some issues in Australia with it and other things.
Speaker Change: You know, I think we were up 25% on agency, which would have been basically in the quarter would have been Mercedes-Benz.
Speaker Change: Okay, thanks a lot.
Speaker Change: Thank you. And I'll be turning the conference back to Mr. Penske for final closing comments.
Roger Penske: I just want to thank everybody for joining us today. We think we had a great quarter based on all the headwinds we were facing, but thanks for your support. We'll see you next quarter. Thank you.
Speaker Change: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.