Penske Automotive Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, good afternoon. Welcome to the Penske Automotive Third Quarter 2023 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through November 2, 2023, on the company's website under the Investors tab at www.penskeautomotive.com. You may remove yourself from the queue by repeating the same one-zero command. I'd now like to introduce Anthony Pardon, the company's Executive Vice President of Investor Relations and Corporate Development.

Operator

Sir, please go ahead.

Speaker 1

Thank you, Leah. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's 3rd 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 e mail or phone for any follow-up questions you may have. Joining me for today's call is Roger Penske, our Chair and CEO Shelly Hulgrave, EVT and Chief Financial Officer Rich Shearing of North American Interoperations Randall Seymour, International Operations and Tony Piccione, our Vice President and Corporate Controller.

Speaker 1

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 and our leverage ratio. We have prominently presented the comparable GAAP measures and have reconciled the non GAAP measure in this morning's press release and investor presentation, which are available on our website to the most directly comparable GAAP measures. Our future results may vary from our I'd also direct you to our SEC filings, including our Form 10 ks and previously filed Form 10 Qs for additional discussion and factors that could cause future results to differ materially from At this time, I'll now turn the call over to Roger.

Speaker 2

Thank you, Tony. Good afternoon, everyone, and thanks for joining us today. Our diversified business really produced another solid quarter driven by strong performance from our North American Automotive and Commercial Truck Operations. The strong performance in North America was partially offset by lower earnings from our U. K.

Speaker 2

Automotive operations, Higher interest expense and lower equity earnings from our investment in Penske Transportation Solutions. As previously announced, 3rd quarter results include approximately $6,200,000 of cost related to the loss of inventory, Property damage and business disruption from a hailstorm in Austin, Texas had impacted our Toyota, Honda and Hyundai dealership 750 vehicles worth $27,000,000 in inventory. During the Q3, total units delivered increased 12% 122,000 which includes 8,695 agency units. Good news is revenue increased 8% to 7,400,000,000 At our same store retail revenue, automotive increased 9%, including a 9% increase in service and parts. Same store retail automotive variable gross profit per unit declined $4.66 sequentially From the Q2 of 'twenty 3 to $5,180 Same store retail commercial truck gross profit increased 6%.

Speaker 2

Our net income was $263,000,000 and earnings per share was $3.92 Last week, we increased the dividend by $0.07 or $0.10 to $0.79 per share. Let me now turn to our auto operations. Demand for new vehicles remains solid and availability, I would say, is improving. We continue to take forward orders. Our U.

Speaker 2

S. Pre sold inventory remains approximately 40% to 50%. In the U. K, our forward order book is 24,000 300 units in gross is only down 2%, representing about 98,000,000 Automotive operations in the UK during the Q3 were impacted by supply challenges, stopped sales, Challenging used vehicle market and of course March is a registration month so it's awful key for us from the standpoint of our operation and profitability. Orders for 493 new vehicles were unable to be delivered in September.

Speaker 2

In addition, same store used vehicle gross profit declined 30% As pricing challenges impacted the used market. Let's look at our retail automotive business on a same store basis for Q3. Total units delivered increased 10%, service and parts revenue increased 9% and gross profit by the way was up 10%. Service and parts revenue growth has been driven by an increase of 10% in customer pay, 7% in warranty and 14% in collision repair. Our variable gross profit remains strong and the higher than historical levels obviously.

Speaker 2

For example, variable gross per unit of $5,180 is $2,000 per unit higher And it was in Q3 2019. Let me now talk a little bit about Penske Transportation Solutions. PAG owns 28.9 percent of PTS, which provides us with equity income, cash distributions and cash tax savings. PTS currently manages a fleet of over 442,000 trucks, tractors and trailers. In the 3rd quarter, Operating revenue increased 4 percent to $2,800,000,000 Full service contract revenue increased 13%, Logistics revenue increased 2%, while rental declined 9%.

Speaker 2

PGS generated 291,000,000 Net income, our share of PTS earnings was $84,000,000 which declined by $51,000,000 compared to Q3 last year. However, the good news is our share of PTS earnings increased $11,000,000 sequentially when compared to Q2 of 2023. The decline in PTS earnings over the prior year period was mainly impacted, let me look at 4 items particularly, supply constraints And lease extensions increased the number of older units in operation and drove higher maintenance costs of 40,000,000 in Q3. We also granted 18,000 lease extensions so far this year and 37,000 if you look over the last 21 months. Interest expense increased $64,000,000 due to higher average outstanding debt, obviously, from the growth of our fleet Combined with $1,500,000,000 in refinancings and overall higher interest costs.

Speaker 2

A lower gain on sale of $61,000,000 when compared to the record performance in 2022 as used truck values declined from historically high levels in the past. Commercial rental utilization was 80% compared to 84% in the 3rd quarter. Our full service long term contract business remains very strong, increasing 13% in Q3. We believe the supply of new trucks It's stabilizing and will provide PTS with an opportunity to replace the older vehicles in the fleet in the near future. And this obviously will drive lower maintenance expense.

Speaker 2

Also, we believe freight rates will begin improving in the near future, which has historically helped our remarketing profitability. Let me now turn the call over to Rich Shearing to discuss our commercial retail operation trucks.

Speaker 1

Thank you, Roger. Our Premier Truck Group Dealership business represents 44 locations in North America and is an important part of our diversification. Earlier this year, we Including the acquisition, our operations in Canada are approaching $1,000,000,000 in annualized revenue. These new dealerships have been fully integrated into our Existing operations in Canada and are performing to expectations, adding an important new market and significantly expanding our operations in Canada. We remain one of the largest commercial truck retailers for Daimler Trucks North America.

Speaker 1

New commercial truck demand remains solid and continues to be driven by replacement demand. Our Class 8 allocation for 2023 remains sold out. Through September 30, North American Class 8 retail Truck sales were up 13% to 248,000 units. The current industry Class 8 backlog is 161,000 units representing approximately 6 During the Q3, same store retail unit sales decreased 11% when compared to prior year due to production timing and delivery delays in calendar year 2022, resulting in higher than normal retail sales later in the year. However, same store gross profit increased 6% as gross margin increased on both new and used truck sales.

Speaker 1

Service and parts represented 65% of total gross profit and covered 132 percent of fixed costs in the 3rd quarter. Q3 EBT increased 16% to a record $61,000,000 and was the highest EBT quarter in the company history. As we look forward to 2024, our order book recently opened and we are There's also good news on the freight front after nearly 2 years of declining Freight rates and recovery is also forecasted in calendar year 2024. Lastly, I'd like to congratulate the team at Premier Truck Group for being recognized as Truck Dealer of the Year for 2023 in its areas of customer responsiveness, workforce improvement and civic engagement. I would now like to turn the call over to Shelly Hulgrave.

Speaker 3

Thank you, Rich. Good afternoon, everyone. I would now like to walk you through several key financial highlights and discuss the strength of our balance sheet. We continue to focus on operational efficiencies through cost reductions, Automation and other improvements gained over the last several years to help us maintain lower levels of SG and A to gross profit than historical averages. SG and A to gross profit was 69.9% in the 3rd quarter and is 800 basis points below the 77.9 percent in 2019.

Speaker 3

SG and A includes costs related to hail damage sustained during the quarter, which represented approximately 50 basis points of SG and A to gross profit. As a result of our efforts to gain efficiencies and control expenses in our U. S. Automotive operations, Compensation to gross profit ratio has improved by 30 basis points, while service and parts absorption has improved 240 basis points when compared to last year. Looking at our cash flow, we generated over $1,000,000,000 in cash flow from operations in the 9 months ended September 30, 2023.

Speaker 3

During this period, we repurchased 2,700,000 shares for 3 $5,000,000 and returned $136,000,000 in dividends to our shareholders. Last week, we increased the dividend by almost 10% to $0.79 per share. So far this year, we've increased the cash dividend by 39% from $0.57 to $0.79 We continue to maintain a disciplined and balanced approach to capital allocation. Year to date, we have acquired 320,000,000 For the 1st 9 months of 2023, 36% of our cash flow from operations funded share repurchases, 27% went to CapEx for growth and expansion, 21% to acquisitions and 13% to dividends. The remaining 3% of our cash flow from operations was used to repay non trade floor plan.

Speaker 3

Our Trailing 12 month EBITDA is nearly $1,800,000,000 At the end of the quarter, our long term debt was 1,700,000,000 Approximately $1,000,000,000 of the long term debt represents our subordinated notes with $550,000,000 maturing in 2025 and the other $500,000,000 maturing in 2029. The average interest rate on these notes is 3.6%. We also have $504,000,000 in mortgages and $160,000,000 in other borrowings at subsidiaries. Debt to total capitalization improved to 27.3% from 28.3% at the end of the second quarter. Leverage sits at 1x at the end of September.

Speaker 3

We also have the ability to flex our leverage up to 4x on a lease adjusted basis, leading significant opportunity for acquisitions and returning capital to shareholders. Our U. S. Credit agreement provides for up to $1,200,000,000 in revolving loans for working capital, acquisitions, capital expenditures, investments and other corporate purposes and was fully available at the end of September. At September 30, we had $104,000,000 in cash, dollars 415,000,000 in vehicle equity and $1,400,000,000 in availability under our credit agreements.

Speaker 3

Total inventory was 3 700,000,000 representing an increase of $200,000,000 from December 31. Floorplan debt was 3,000,000,000 We had a 34 day supply of new vehicles, including 30 days in the U. S. And 34 days in the U. K.

Speaker 3

Day supply of new vehicles for premium was 37 and volume foreign was 19. Our current day supply of new battery electric vehicles is 52 days in the U. S. And 38 days in the U. K.

Speaker 3

Used Vehicle Inventory had a 38 day supply. At this time, I will turn the call back to Roger for some final remarks.

Speaker 2

Thank you, Shelly. She mentioned our balance sheet is strong, safe and secure obviously with a capitalization ratio of 27% Our leverage ratio of 1.0x, we have the ability to flex our balance sheet to maximize capital allocation. As we said earlier, since 2018, we returned over $2,500,000,000 to our shareholders. For 9 months ended September 30, 2023, we generated $1,200,000,000 in earnings before taxes and that's approximately, if the benefit of our diversification across retail automotive, commercial truck industries, cost control and a disciplined capital Allocation strategy. We continue to challenge our costs while focusing on simplification and optimization and digitization to drive efficiency.

Speaker 2

I remain confident in our model and the performance of the business. Thanks for joining us today. I look forward to your questions.

Operator

And our first question is from John Murphy. Please go ahead.

Speaker 4

Good afternoon, Roger and team.

Speaker 5

Hi, John.

Speaker 4

Roger, just a first question. You guys talked about this a bit and Shelly gave us some numbers. But as far as inventory levels, as we think about the light vehicle business in the U. S. And the U.

Speaker 4

Yes. How much were you hampered by shortages? I mean, some of the numbers don't sound too bad, and I think people are thinking the chip shortage is done. But Reality is I think there's some hiccups still there. And then on the commercial side as well, I mean it sounds like you got real shortages there.

Speaker 4

When do you think those get resolved and will take some time and what kind of impacts are these having on the business?

Speaker 2

Okay. Let's put it in perspective, John. Our total inventory at the end of 9 months Only went up $200,000,000 So obviously, we're still in a tight inventory situation. And then the impact in the Q3 because it's a registration month in the UK, the almost 500 units that hit us there, obviously, We had some impact. And I think that at this point, we look at U.

Speaker 2

S. Inventory today Is it 2,000,000 units and pre pandemic is it 3.6? And our inventory obviously is only up, I don't know what it is on a cost per sale, but obviously It's not up much when you look at 9 months, but I think right now remember we're premium, so we don't get the big swings In the domestics that they might have in other companies and are vying for and obviously Toyota is one of our lowest days supply Along with Honda and it continues to be there. So anyhow, let Rich talk about Rich, what do you think about the truck inventory? Where you see it as we go forward on heavy trucks?

Speaker 1

Yes, John, just a clarification on the comp. So we've seen a steadier supply this year of The commercial trucks. The comparison to Q3 of last year was related to the peak in supply chain challenges at the beginning of 2022, Mostly related to semiconductors and the commercial vehicles from a production And so those delays early last year pushed more retail sales into the 3rd Q4 of last year than what would have They normally occur. And so now that we're back to a more normal and even distribution of delivery from the OEMs, The comps look in comparison were down compared to Q3 of last year. So from an and then from an inventory standpoint, We're still, as I said, sold out on every truck that's being given to us.

Speaker 1

We've had minor cancellations that have been Sucked up by other customers who haven't got enough trucks over the last couple of years. And we're seeing the delays come down In bodybuilders, this is a cab chassis manufacturing that goes to some sort of body company after the fact. Their supply chain is improving somewhat as well. And then if you look at overall commercial truck inventory just from a numbers We ended last year at $506,000,000 in inventory and we're at $494,000,000 today, so fairly flat across the board.

Speaker 4

Okay. And then just a second one real quick. Your parts and service was particularly strong in the quarter. Roger, I don't know if you can talk about sort of the different channels, customer Pay warranty, I may have missed some of those numbers, but how should we think about that going forward? Because that remains a significant bright spot For the business and it seems like there's even more opportunity going forward.

Speaker 2

Well, I think the same store, let's talk same store, that's really meaningful. Revenue was up 9.5% and our gross profit was up 10.3%. And I think the key thing here is that we're implementing AI It's driving higher after hour appointments, which we didn't have before. We're tech video. In fact, 74% of our arrows in the West We are using tech video now.

Speaker 2

So we're not only getting better clarification of the service, but also ability to upsell. And then our ELR, Our rate of that we charge the customer effective labor rate is up 5%. And we don't see bev also not being a detriment to our fix. In fact, it's really better right now because the parts costs are higher And many of these cars have to be in the shop for a longer period of time. So I think the other good news is that our tech count is up 4% in the U.

Speaker 2

S. And 3% up overall.

Speaker 4

And just one follow-up on that, the ELR for warranty work, is that up in a similar rate or is that different between customer pay and warranty? No.

Speaker 2

I would say the warranty rate is We have to go to the manufacturer on it, at least on 12 to 18 months and we have to show established door rate Then they give us a rate. So we probably could move the door rate to the customer higher faster than we would get it from the OEM, but It somewhat follows that continuously.

Speaker 1

Okay. That's

Speaker 4

very helpful. Thank you very much.

Speaker 2

All right. Thanks,

Operator

John. Next, we will go to the line of Michael Ward. Please go ahead.

Speaker 2

Hey, Mike.

Speaker 6

Thanks. Hey, Roger. Thanks very much for doing the call. So it looks like basically some

Speaker 7

of the supply constraints on

Speaker 6

the heavy duty truck side are hitting you both on PTS and auto retail truck. I'm just curious on PTS. If I did my math right, the fleet, the managed fleet has grown about 8% annually over the last decade. Is there any reason we won't continue to see that type of growth? And then you've also had exponential growth in the profitability despite it being down year over year for some quirky things.

Speaker 6

But Is that what we can expect from PTS going forward?

Speaker 2

Well, I can say this, I think I've said it on the call, we want to be at 500,000 units By 2025, now that will move up and down a little bit on rental utilization because right now We're at 18,000 say tractors in the rental fleet, probably moving it down to say 14,000 here while we go through a little slower period to maintain our 80% to 85% utilization, but I see no reason not to continue the continued growth. And now that's a mix, remember now, of straight trucks, Light duty trucks, tractors and trailers and I think the our tractor fleet is the biggest in the world right now And we continue to grow. The problem is from our main vendors is getting the equipment. And there We get one gives us trucks and the next one has a stop sale, etcetera. So I think when you look at our contract business, Remember, if we're up 13% in contract, that's for 1 year.

Speaker 2

And typically, these contracts now would go forward For 3 to 4 to 5 years, so we really have a trailing opportunity here. So I see this revenue continuing to grow. And obviously, It's easy for us to grow the fleet. We're not limited by franchise laws or any other things you might have on the automotive side.

Speaker 6

And have you seen any easing in some of the constraints in the industry?

Speaker 2

Let me let Rich, You want to answer that?

Speaker 1

Yes. So Mike, you look at the parts side of the business, which really is an indicator of the challenges on the supply side of the business. And at its peak, there was 250,000 nationwide back orders from the dealers. And we at any given time as an entity Premier We've had about 10% of those nationwide backorders. To put that number in perspective, it was Less than 10,000 would have been pre pandemic level, less than 10,000 national back orders for all of the Daimler Truck North American dealerships.

Speaker 1

So right now, as we sit here today, it's just below $100,000 So it's come down significantly and the supply chain is improving on componentry, But still 10x where it was, say pre COVID levels. And then when you look at equipment, I just want to go back to our new unit sales. So we're up 8 On a through 9 months on a year to date basis, it's down 13% for the quarter. And that's the dynamics related to the supply chain of 2022 where A lot of retail sales got pushed later in the year. So we're still up on a year to date basis 8% in retail sales on the truck side.

Speaker 7

And the pricing is still strong and so that's another good indication?

Speaker 1

That's correct. Yes.

Speaker 6

Okay. Thank you very much.

Speaker 2

All right, Mike. Thanks.

Operator

Next, we go to a question from Daniel Imbro. Please go ahead.

Speaker 2

Daniel, hi.

Speaker 8

Hey, good afternoon everybody. Roger, maybe starting one on the new vehicle side, just thinking about GPUs have been strong, they did step down a bit more. I wanted to Maybe double click on that. EV demand has been pretty tepid maybe at best. Can you talk about the GPU degradation or parse out what ICE GPUs are doing It was in the first half into 3Q and then what EV GPUs did and maybe is that part of the reason for this deeper step down in profitability here we saw a little bit in the quarter?

Speaker 2

Well, we see gross as rationalizing. I think we've talked about it together before. We're not going to return It's a pre pandemic for sure in the near future, I don't believe. And when you look at in our business today, 52% of our business is at MSRP. So and again, me, a premium luxury player like we are, We're not in the volume games.

Speaker 2

We don't have, as I said earlier, we might have 300 BMW stores and 1 of the big three has 6,000 dealers, so a lot more competition in the market. So I think that at the present time, our decline was about 450 sequentially. Again, when you looked at the Q1 of 'twenty 3 versus 2019, we're only or excuse me, Q1 this year, we're down 140. The key thing is here that the average transaction price It's gone from 40,000 in the Q3 in 2019 to 56.6. So a certain amount of benefit we're getting is because of higher cost base and I think this gives us a higher base margin.

Speaker 2

Well, obviously, it's got to be inventory driven. There's no question about it. But overall, I think the margin will stay pretty much the same We will start to decline slightly based on more availability. I'm going to let Randall talk a little bit about what you see internationally. Yes.

Speaker 2

I think on

Speaker 9

the new car side, remember that the market in the U. K. Is nearly 17%, 16.8 Bev, which is up slightly versus last year. We're because of our mix, we're higher than that. We're going to be Depending on the brand, we range between 20% 25% on an average.

Speaker 9

So interestingly as well, We're seeing the bev margins erode a bit. We wrote some business last year with deliveries this year towards the beginning of the year With better grosses, but on the bev side for some of the brands, it's a little bit weaker. Interesting on Mercedes as agency, We have a fixed commission obviously margin on that and typically the bevs are more So our margin on those with Mercedes are bucking the trend a little bit better.

Speaker 2

And I think also when you look at bev sales Here in the U. S, we're selling at 80% or under MSRP, am I right? Talk a little bit Probably about inventory on bevs here, Rich.

Speaker 1

Yes. So we've seen sequentially an improvement actually on inventory from the Q2. At the end of the second quarter, we were about 15 Our overall inventory was bev, that's down to just over 11% through the end of the third quarter. Shelly alluded to the day supply earlier being about 14 days more than comparable ICE inventory. And then you look at the percentage of our sales, it represents on a year to date basis that sales about 6.7%.

Speaker 1

That's up slightly 112 basis points from our percentage of sales through the 2nd quarter. And to Roger's point earlier, we're seeing kind of on average with the brands that we represent about a $2,400 lower gross Process the unit on the bev sales, and we've got to discount them to move them and as the OEMs are putting a bunch of money on there to try and drive customer demand.

Speaker 2

Yes. I think talking about where we're selling them too, I think it's interesting. It's interesting.

Speaker 1

Yes. So if you just look at an industry Year to date, 73 sorry, 37% of year to date vet sales are in California, but Of our sales, the PAG sales, 51% are going to California. 70% of our sales are actually through our West region, which is Texas, Arizona and California. So you've got only 3 states right now in the United States That are above the national average sales rate, which is 8%, and that's Texas, California and New Jersey. And then if you look at California sales in Q3 is 23% overall of sales were in the California.

Speaker 1

So at some point, those markets are going to get saturated And it's going to be a little more challenging in the other markets that currently have a lower adoption rate of bevs compared to the national average.

Speaker 2

Yes. Randall, talk a little bit about bev sales in the U. K. And the rest of Europe.

Speaker 9

Yes. So look, it's like I said, Little bit challenging. I think an interesting statistic is specific in the U. K. The market's up, Like we said, but retail is only up 2%.

Speaker 9

Fleet's really driving this. And the bevs are really coming through those fleet purchases as you get the As you get the tax incentive through the scheme they have in the U. K. And then you look at countries like Italy and Spain where there's very, very little Government incentives and you've got bev percentages between 3.5% 6% penetration. It's really followed the incentives and the challenge that we've seen from an infrastructure standpoint and range anxiety, all the usual items.

Speaker 1

Randall, it's important to note too that the UK just within the last couple of months decided to push back The mandatory adoption of BEVs from 2,030 to 2,035. So I think that comes into play and we should watch that carefully too. So ICE will continue to be a more prominent player in that market, we think, for a longer period of time. Well, similarly, Tony, too, California pushed

Speaker 2

So I think today we've got a lot of people who bought the premium side have bought their EV. There's still discussion about range, correct? Yes. Obviously, that is critical. And then infrastructure, about half of it's working.

Speaker 2

And I think that you're reading it in the papers today. I mean, we're pushing back. I would have to say that Every day we talk to our field and we're talking about bev inventory and it's not about how much more do you want, it's what do you have and we're very careful On used pricing also, what's your inventory in the U. S?

Speaker 1

Inventory of used fabs is 134 units. So What

Speaker 2

would it be in? You don't know what is in the U. K. But again, we're really watching and I think the interesting We can actually take a bev in on trade and sell it and get more for a used one gross profit than we can on a new one. There's so many moving parts, we can spend an hour here and talk about it.

Speaker 8

No, that was all extremely helpful. I'll follow-up with 1 on the commercial truck side. Obviously, overall solid profit quarter, but we did see service and parts growth Maybe moderate a bit. I'm trying to understand that in the context of what we said about PTS. Fewer delivery at the PTS means that fleet is spending $40,000,000 more year over year on maintenance costs.

Speaker 8

So I would think if fleets are spending more on maintenance, that would drive maybe more Service and parts growth. Can you just maybe talk about why service and parts growth may be moderated and kind of what the buckets were within that piece on the commercial truck side?

Speaker 1

Yes. So if you look at fixed operations in the Premier Truck Group business, year to date we're up 8%. For the quarter we were Up 4% versus prior year. So definitely a slowdown slightly compared to prior year. If you look into that then a little bit deeper and the constituents of that are service and parts, the majority of It's going to be related to the retail and wholesale parts side of the business.

Speaker 1

So you've got on the wholesale side, we've got a big business there where we're selling to Independent repair centers. Then on the retail side, a lot of Carriers transition or transport goods down the federal highway system. So You've seen as the freight rates have declined year over year that the activity and utilization of some of the assets has declined as well. And so that's You're seeing a slight softening in the fixed operation side of the business.

Speaker 2

I think we had a benefit out of price increases. We had

Speaker 1

some parts appreciation in calendar year 2022 as well that would not be in those comparables this year.

Speaker 3

Daniel, we're still covering 132 percent fixed absorption. So not a bad story by any means.

Speaker 8

That's really helpful. I appreciate all the color and best of luck going forward guys.

Speaker 2

Thanks, Dan. Thanks, Dan.

Operator

Next, we go to Rajat Gupta. Please go ahead.

Speaker 2

Rajat, hi.

Speaker 7

Great. Hi, Roger. Thanks for taking the question everyone. Could you unpack the SG and A to growth in The quarter a little bit, how much of the sequential move was driven by just the GPU weakness versus Some of the delivery delays in UK for BMW, Volkswagen. We heard from one of the peers that that was an issue.

Speaker 7

And just like any other items that you might want to call out that might have influenced the SG and A to growth? And I have a follow-up. Thanks.

Speaker 3

Hey, Brzad, I can take that. As I mentioned, SG and A to growth was 69.9%. Those 300 basis points, we've really whittled it down to 3 main areas. So as we mentioned, dollars 5,500,000 or 50 basis points related to the hail damage within the quarter. So, we've got that.

Speaker 3

The other there's another 100 basis points that relate to service loaners in vehicle maintenance, so up 11,000,000 But as we've talked about, service owners represents an opportunity for us. It's a way to cater to our service customers And improve our service gross profit as we saw as a result, but then it's also an excellent source of used cars. And as all of the peers have talked about, we're Certainly struggling sourcing used cars. So the fact that we've got almost 7,400 of service loaners available Affordability concerns, if somebody comes in wanting to buy a new X5 and can't quite stomach the higher payment, We can turn to our service loaner fleet and that not only helps the customer, he's walking away with a almost brand new But his team is more in line with what he's used to. So sometimes those costs aren't always a bad thing.

Speaker 3

And then the other 160 basis Point or so is increased costs related to our personnel. But as we've talked, Simon, again, we're still very comfortable that everything will eventually normalize. It's Out in that 70 ish percent range, and there's some seasonality in there here and there, but overall, we think We'll ultimately get to that low 70% range.

Speaker 1

Some of that personnel cost was related to some of the vehicles that couldn't be delivered That Randall spoke to earlier.

Speaker 5

Yes. That's

Speaker 2

why our gross was down. Probably say $4,000,000 or $5,000,000 of gross that we didn't get. We're up $3,000,000 growth for the quarter year over year, but we lost $4,000,000 or $5,000,000 in that one point. And then of course, we had a higher cost. The only thing we've really talked about was the hail stuff.

Speaker 2

Right. And there's other little things in there where we just don't talk about at this point.

Speaker 7

Got it. That's clear. And then just in the UK, any updated learning From the Mercedes agency model, it looks like the GPU actually went up sequentially Darragh from 2Q to 3Q. What drove that? Any other learnings you can share on sports profitability, SG and A changes, etcetera?

Speaker 7

Yes. I'll talk about

Speaker 9

yes, sure. Yes, you're right, Rajat. The gross profit has gone up. And again, with the fixed commission, That's going to be predicated on the sell price of the car. So we were at £3,278, so £3,278 per unit, which was up.

Speaker 9

If I look at 2019, it was £1,595 per unit. Interestingly, in the acquisition we made about a year ago, the London stores, That's at £3,564 per unit. So you get that richer mix of car, obviously we get the benefit from that. So our challenge And what the team has done a nice job and continues to do is we just got to reduce our cost base as we have a bit of a paradigm shift in How the customers transact, you see the traffic foot traffic into the stores down, but Our digital, our Internet traffic is way up. So it's really trying to convert and we've improved our conversion ratio on those leads by 8 points Year to date compared to last year.

Speaker 9

So that's the kind of stuff we're working on. We see service and parts continue to be strong there And Gro, so look at those margins are good. We just got to continue to work on those costs underneath and Drive those opportunities to the store both digitally and walking in.

Speaker 2

Yes. I think the good news here is that we were the first guys in the barrel With agency, we're shifting to more product specialists and salespeople, which are the lower cost. We're getting a lot more inquiries by significantly higher than we had before because 95% We're coming out of our PMA as we call it over here, which is a real positive. We've got 13,000 vehicles that are on-site From the standpoint that the customer can look at, they've given us now some stock cars, which we didn't have at the beginning and there's some incentive to sell off So it's very interesting. We had no idea interest rates are going to go where they are.

Speaker 2

We're complaining about agency. But I can tell you one thing. We have no cost and they're paying for our marketing cost to a certain extent. So I think our understanding our cost base, The fixed margin, which is good, by the way, on BEVs, getting an extra 100 basis points correct on BEVs. So I would say that At the moment, we're learning and I'm certainly Mercedes is learning too.

Speaker 2

Now they've backed up a little bit, we understand Other parts of the year where they were going to introduce it, they're pushing it back because they're learning a lot about what's going on in the U. K. So it might be a little bit about like Bev did that. Overnight, they're going to say we're going that way everywhere. So I think we've got many coming up next year and we'll see in 'twenty six we have BMW, but We're all over it.

Speaker 7

Got it. Thanks for the color.

Operator

Next, we go to the line of John Healy. Please go ahead.

Speaker 2

Hey, John.

Speaker 5

Thanks for taking my question, guys. Hey, guys. Roger, just wanted to ask just kind of Early thoughts in the last month or so on just the UAW impact maybe on the industry as a whole. Obviously, I know you guys have minimal exposure to the big three, but

Speaker 1

Part of me feels like

Speaker 5

there is a cross current that someone's looking for an Explorer, they might be looking for a CRV or as well or Something along those lines. So any sort of thought about grosses in Q4? Do you think that There's a magic number in terms of the strike last for so long that maybe it has a little bit of a sequential bump on grosses. And You subscribe to a theory that the strike ends up maybe taking margins higher in the short run and we start next year maybe at a higher level than maybe where we're at today?

Speaker 2

This is one time when I read the paper, it doesn't affect us because when you look at our brand mix, we only have 1% of our total Revenue comes out of the big three and Toyota, Honda, we're not at this point affected and most of the German brands are already dealing with their Unions that they have overseas, but look, having owned Detroit Diesel and adding UAW, look, what's happening is They see all these profits, the union does and the workers. And I think the unfortunate thing is that there's a cost base It has been put in place, which is much higher than the competition and that's the biggest concern I think they have and they're trying to Mitigate that with good negotiations with the big three and with cola with new hires coming in And melding into the top rate instead of 6 years, 3 or 4 years, all these things are probably ways that you can kind of get together. But I don't think we've seen the last page of this. And unfortunately, it's going to put higher costs for the big three and I'm glad where we are with our brand mix.

Speaker 5

Got it. And you brought up Toyota, I think in the last couple of days there was an issue with 1 of Toyota's coil service suppliers. Does that have any sort of meaningful or risk to you guys in Q4 or 1Q of next year? Have they communicated anything to be wary of on just their production outlook?

Speaker 2

Well, look, what's your debt base in FY 10 or 12 days on? Less than 10. Yes. Look, if they get an issue with the supplier, obviously, and for the U. S.

Speaker 2

Plants, our stuff comes out of Parts of the world for them, it could impact us for sure.

Speaker 5

Thanks, Chris.

Operator

And our next question is from David Whiston. Please go ahead.

Speaker 2

Hi, David. Hey, everyone.

Speaker 10

Couple of questions. First, I think, Shelly, you were talking earlier about the example of customer blocking in a new X5. You could get Tell them one of your loaners as they use. I guess my question to that would be how quickly can you then replenish that loaner?

Speaker 2

Well, I think that's what we're seeing today. Everybody's looking at our used cars. I said, look, we were Hampered by not being able to turn loaners, we turn loaners typically in 90 to 120 days. Now that supply is Coming, we're going to suck up some of that availability in the loaner cars. So it's all going to be Done by based on availability, but in the premiumluxury side, it's really key because I can turn that 21,000 loaners Three times a year, that's really a 21,000 more used cars, but I think we fill the pipeline based on the individual OEM.

Speaker 2

I mean, that's not what you want, but it's kind of what my thoughts are.

Speaker 10

Okay. And

Speaker 1

Our loaner cars were up about 10% at least from where

Speaker 5

they were? Yes.

Speaker 2

They're 7,300 versions. Yes.

Speaker 1

So that's a big change and that's going to help drive more Of the used vehicle turn for the business.

Speaker 2

Think about it, David, we you have an MSRP And you say we depreciate the vehicles at 2% per month, some higher, some lower, but say 2%. So you get 6% Off of invoice and typically the new card program for the financing or whatever it is Go along on this vehicle that's coming out of loaner as long as it has a certain limited number of miles. So we get newer car rates, We have a depreciated vehicle and we take a customer that didn't want to step up maybe to the X5, what have you, we can give an X3, it's a loaner car, That was a lower cost base.

Speaker 3

And the OEMs want us to have these service loaners, so we're incentivized to have them.

Speaker 1

We're also starting to see a return of CPO business too because of the CPO business, certified pre owned used sales are up Year over year

Speaker 2

because of because we're having more availability. We got other impact we've had is lease returns. There hadn't been a lot of leasing, so leasing went down to 21%, I think overall, right? In the premiumluxury side, we were as high as 55% where we were

Speaker 1

at some months. We were 27% leasing this past quarter.

Speaker 10

I'm sorry, what was your leasing penetration this quarter?

Speaker 1

27% leasing this past quarter. That's up from 20.3 a year ago, David.

Speaker 10

You said those are from 2020, Tony?

Speaker 1

2021.

Speaker 10

21. And then

Speaker 5

going back to

Speaker 10

the EV discussion from a few minutes ago, what is your Team's opinion on especially next year once a lot of OEMs get access to the Tesla supercharger network and over time we get more non Tesla charging outlets out there in the U. S. Do you think that's enough to get EV demand moving? Or do we also need a lot more affordable models? Or is it still just way too early for EVs?

Speaker 1

Well, I think you hit on a couple of different things. I think the price points right now are still substantially higher with certain models Then compared to ICE. And so when you combine that with the interest rate environment we're in, that's problematic. So That's one thing that hurts the demand for EVs. Roger talked about the infrastructure.

Speaker 1

So you've got The charging network that's out there from a public standpoint, you got about 20% success rate Of the charger being successful when you pull into it, which is pretty alarming, when you think about it. So that reduces the confidence, still got the range anxiety. And then I think as it relates to all these other OEMs signing up on Tesla's Charging network, I'm interested to see how that plays out with the Tesla owners today because obviously that was a network that was Exclusive to them at some at one point. Now it's been opened up to everybody else. I don't know off the top of my head how many additional chargers Tesla is Stalling on a monthly basis as to whether or not they'll keep up with this additional brands and Other OEM EVs that have access to that network now.

Speaker 1

But if I'm a Tesla owner, that would Upset me a little bit that I had this proprietary network to the vehicle that I purchased that gave me some assurances that Charging was going to be more convenient. Now I've got to compete with all these other OEMs on the same network. So I think it's going to be a while before we get to Critical mass where the charging infrastructure really supports mass adoption of the vehicles.

Speaker 3

And David, if it helps, you heard Randall's Penetration numbers on EVs in the U. K. And it almost gives us a preview of what it's like in the U. S. And over in the U.

Speaker 3

K, I can tell you they still have the same range anxiety. They still have the broken chargers. So even despite a much higher EV penetration, There's still that range anxiety and those issues with the infrastructure. So it may help next year, but I don't think it solves the problem.

Speaker 10

Okay. Thanks for all the detail.

Speaker 1

David, thanks. Thanks.

Operator

And we have no other questions. I will turn the conference back over to Mr. Penske for closing remarks.

Speaker 2

All right. Thanks, everybody, for joining us. We'll see you at the end of the next quarter. Have a great day.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Penske Automotive Group Q3 2023
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