Penske Automotive Group Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 10 speakers on the call.

Operator

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 1 hour after completion through November 6, 2024 on the company's website under the Investors tab at www.penskeautomotive.com.

Operator

I will now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. 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 Q3 2024 financial results was issued this morning and is posted on our website along with the presentation designed to assist you

Speaker 2

in understanding the company's results.

Speaker 1

As always, I'm available by e 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 are Roger Penske, our Chair and CEO Shelly Hulgrave, EVP and Chief Financial Officer Rich Shearing, North American Operations Randall Seymour, International Operations and Tony Piccione, Vice President and Corporate Controller. 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. We may also discuss certain non GAAP financial measures such as earnings before interest, taxes, depreciation and amortization or EBITDA and our leverage ratio.

Speaker 1

We have prominently presented the comparable GAAP measures and have reconciled the non GAAP measures to the most directly comparable GAAP measures in this morning's press release and investor presentation, both of which are available on our website. Our future results may vary from our expectation because of risks and uncertainties outlined in today's press release and their forward looking statements. I direct you to our SEC filings, including our Form 10 ks and previously filed Form 10 Qs for additional discussion factors that could cause future results to differ materially from expectations. I will now turn the call over to Roger Penske.

Speaker 3

Thank you, Tony. Everyone, thank you for joining us today. In the Q3 of 2024, PAG generated $304,000,000 in income before taxes, $226,000,000 in net income and earnings per share of $3.39 Our overall revenues increased 2% to a 3rd quarter record of $7,600,000,000 including a 14% increase and service and parts to a record $778,000,000 61 percent of our revenue is derived in North America, 30% in the UK and the remaining 9% came from other international markets. Our retail automotive brand mix is a key differentiator with 72% of the revenue generated from premium brands, 21% generated from volume non U. S.

Speaker 3

Brands. Our gross margin was consistent in the quarter over quarter at 16.4%. Our SG and A expenses as a percentage of gross profit was 71.2% and remains well within the target range and is nearly 800 basis points below pre pandemic levels. 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. During the quarter, new and used automotive gross profit remained strong.

Speaker 3

Retail Automotive Service and Parts performed at record levels. The Retail Commercial Truck business performed well. SG and A expenses remained well controlled and equity income from Penske Transportation Solutions increased 14% sequentially despite continued freight challenges. Let's take a look at our retail automotive. We delivered 117,551 units during the quarter.

Speaker 3

Our new units increased 5%, same store new units declined 2%. We continue to take forward orders with pre sold activity averaging between 10% 20% in the U. S. 32% of our new vehicles sold in the U. S.

Speaker 3

Were at MSRP. The average new vehicle transaction price now has increased 2% to $57,880 Gross profit per new vehicle retailed remains strong at $5,072 and was only down $230 sequentially and remains nearly $2,000 higher than in 2019. Used units declined 13%. The availability of product has been impacted by the lower amount of new sales in previous years and the lack of trade ins. During 2024, we began transitioning the UK based CarShop locations to Sytner Select dealerships.

Speaker 3

These dealerships sell fewer units, which contributed to a 13% decline in used vehicle retails during the quarter. Excluding these dealerships, used vehicles retailed would have increased 1%. On the same store used retail declined 13%, but only decreased 4% when excluding these dealerships. Average used vehicle transaction price increased 4.6% to $36,785 Gross profit per used vehicle retailed increased $3.18 quarter over quarter and was up $60 sequentially. Variable gross profit per unit increased $8 sequentially.

Speaker 3

Approximately 1 half of our total gross profit is derived from service and parts. As we look to continue growing this important part of our business, We've added more than 7% more technicians during 2024. Our effective labor rate in the U. S. Has increased 5%.

Speaker 3

Service and parts revenue was at an all time record of $778,000,000 Same store retail automotive revenue decreased 5%, however, service and parts increased 7%, customer pay up 4% and warranty up 20% along with collision repair up 2%. Let me now turn the call over to Ritz Scharing.

Speaker 2

Thank you, Roger, and good afternoon, everyone. We are one of the largest commercial truck retailers for Daimler Trucks North America. Retail truck business is one of our core pillars of our diversified model. We operate 35 full sales and service facilities and 11 stand alone service and parts or parts only facilities. Since acquiring the retail truck business in 2014, we have grown revenue and EBT more than 6 times through a combination of organic growth and acquisitions and will continue to pursue acquisitions as a part of PAG's capital allocation strategy.

Speaker 2

We believe Class 8 commercial truck demand will continue to be driven primarily by replacement purchases. During Q3, North American Class 8 retail sales declined 1%, Year to date retail sales were 234,000 units or down 6%. At the end of September, the current industry backlog was 116,000 units or approximately 4 months of sales. This compares to a backlog of 161,300 units at the end of September last year. Premier Truck Group sold 6,331 new and used units in Q3, which is up 14% when compared to Q3 last year and same store units increased 9%.

Speaker 2

Same store SG and A to gross profit was 57.1% and fixed absorption was 126%. Premier Truck produced a solid Q3 with EBT of almost $57,000,000 As we look towards 2025 and 2026, the anticipated emissions change for 2027 and recovery in the freight market should help drive retail sales. 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 Q3 and we resumed processing transactions at that time. 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.

Speaker 2

Turning to Penske Transportation Solutions, I'm pleased to report a 14% increase in sequential earnings for PTS. During Q3, operating revenue increased 3% to 2,800,000,000 dollars Full service revenue and contract maintenance increased 11%. Logistics revenue increased 3%. Rental declined 11% as the continued freight recession impacted the number of units on rental. PTS earnings of $219,000,000 in Q3 increased sequentially by $27,000,000 but were down $81,000,000 or 27% compared to Q3 last year.

Speaker 2

Our share of the PTS earnings was $60,300,000 up from $32,500,000 in the 1st quarter $52,900,000 in the 2nd quarter. When we compare the PTS EBT in Q3 to the prior year, earnings were impacted by $21,000,000 in higher maintenance expense, principally due to lease extensions, a $44,000,000 increase in depreciation expense and a $23,000,000 increase in interest expense from higher rates related to bond refinancing and higher outstanding debt. And finally, a $29,000,000 decline in gain on sale of used trucks. 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.

Speaker 4

Thanks, Rich. Good afternoon, everyone. I will now discuss several activities taking place in our international operations. In the UK, we have been busy integrating the 16 dealerships and 1,000,000,000 dollars in estimated annual revenue we acquired earlier this year, coupled with the rebranding and transitioning of the U. K.

Speaker 4

Car shop operations to Sytner Select. With this change to Sytner Select, we can more closely align the used car operation with franchise dealerships to reduce our cost base. The U. K. New vehicle market remains challenging.

Speaker 4

Registrations increased 1% during Q3 with retail registrations down 4%. The decline in retail registrations is the result of the UK government's 0 emission vehicle mandate, which requires at least 22% of all vehicles registered to be 0 emission in 2024. These vehicles are primarily purchased by fleet customers due to payroll tax incentives and are often at lower gross margin. Same store new units delivered increased 7% with new units retail down 2% and agency units up 25%. Same store used units declined 22% as a result of the transition of U.

Speaker 4

K. Car shop locations to Sytner Select, which focus on lower volume, but higher quality vehicles. Excluding those dealerships, same store used units would have decreased 6%. However, service and parts same store revenue increased 8.5%. Turning to Australia.

Speaker 4

As you may recall, during the Q2, we expanded our retail automotive operations with the acquisition of 2 Porsche dealerships located in Melbourne, the 2nd largest city in Australia. During the Q3, these dealerships retail nearly 400 new and used units, generated nearly $50,000,000 in revenue at a 5% return on sales. Last week, we announced an agreement to acquire our 3rd Porsche dealership in Melbourne. We expect this dealership to add $130,000,000 in estimated annualized revenue and closing is expected by the end of this year subject to customary conditions. Turning to our on and off highway markets within the commercial truck and power system operations.

Speaker 4

We continue to sell products in trucking, mining, power generation, defense, marine, rail and construction sectors and support full parts and after sales service across the region. Service and parts represents approximately 70% of our total gross profit, so our focus on increasing units in operation is a key driver

Speaker 2

of the business.

Speaker 4

For 9 months in Australia, ending September 30 this year, we have generated record profitability through an increase in sales and a reduction in our SG and A to gross profit of nearly 500 basis points. In the on highway market, our Western Star and MAN brands have increased share and the forecast for Q4 looks solid. In fact, MAN is expected to achieve record sales results in 2024. Energy Solutions continues to perform strongly in the data center and battery energy storage solution markets. We continue to be a market leader in these segments with 55% market share of high horsepower generation.

Speaker 4

Our current order bank for large data centers and the battery storage systems is over $500,000,000 for 2024 and beyond. Additionally, the mining market remains strong as commodity prices generally remain high, resulting in a positive environment. I would now like to turn the call over to Shelly Holmgren.

Speaker 5

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. As a result, we continue to grow our business through acquisitions and return capital to shareholders through dividends and securities repurchases.

Speaker 5

During the 1st 9 months, we generated $962,000,000 in cash flow from operations and our trailing 12 months EBITDA was $1,400,000,000 On October 16, we announced an 11% increase in the cash dividend to $1.19 per share. So far in 2024, we have increased the dividend 4 times while increasing the cash payout from $0.79 per share at the end of last year to $1.19 a 51% increase. Using the closing price on October 28, the current yield is approximately 3.1%. The dividend payout ratio over the last 12 months is approximately 28%. We have also repurchased approximately 511,000 shares for $77,000,000 so far this year.

Speaker 5

Including the upcoming dividend distribution and year to date share repurchases, the company will have returned approximately $350,000,000 to shareholders so far this year. In addition to the return to shareholders, we have completed acquisitions representing $2,100,000,000 in estimated annualized revenues to date this year, including $1,800,000,000 in retail automotive and $200,000,000 in commercial trucks. Additionally, as we focus on effective capital allocation, we also divested or closed 5 underperforming locations so far this year, representing $500,000,000 in estimated annual revenue. Our strong cash flow has allowed PAG to keep its non vehicle debt and leverage low. At the end of September, our long term debt was $1,880,000,000 up $250,000,000 from the end of December 2023.

Speaker 5

22% of our long term debt is at fixed rates. Our variable debt is approximately $4,700,000,000 of which approximately 50% resides in the U. S. We estimate a 25 basis point change in U. S.

Speaker 5

Rates impacts interest expense by approximately $6,000,000 on an annual basis. Debt to total capitalization was 26.4% and leverage is 1.3 times. We have now determined that it is proper to classify our 2025 notes as current in our ninethirty balance sheet. As of September 30, we had $92,000,000 of cash and the liquidity available to us was $1,700,000,000 Our liquidity, strong cash flow and strong balance sheet provide us many options to repay or refinance as we look ahead to the September 2025 payoff date of our 5 year notes in the current interest rate environment. Total inventory was $4,800,000,000 up $530,000,000 from the end of December last year.

Speaker 5

Floorplan debt was $4,200,000,000 Despite the increase in new vehicle inventory, days supply for new vehicles was $53,000,000 for used. This compares to 52 for new and 40 for used at the end of June. Day supply of new vehicles for premium was 56 and volume foreign was 36. The day supply of new battery electric vehicles in the U. S.

Speaker 5

Has improved from 88 days at the end of June to 66 days at the end of September. At this time, I will turn the call back to Roger for some final remarks.

Speaker 3

Thank you, Shelly. As Shelly remarked, our balance sheet remains in great shape and provides us with the flexibility and capital allocation. In conclusion, our results continue to demonstrate the benefit from our diversification, disciplined capital allocation strategy, continued cost control and the efforts from our whole team. I'm very confident in our model and the performance of the business. Appreciate you being on the call today.

Speaker 3

We'll open it up for questions.

Operator

And our first line we will go to is John Murphy with Bank of America. Please go ahead.

Speaker 3

Hey, John.

Speaker 6

Hey, Roger. How are you? Just a first question, Roger, on the stop sales because it's kind of flowing through the business in a number of ways. I'm just curious if you can give us an idea of kind of the impact in the quarter and kind of what you expect near term 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, what do you actually think is going on here?

Speaker 6

Because it seems like it's pretty pervasive and not isolated to one specific manufacturer part.

Speaker 3

John, let me have Rich talk about the U. S. And then Randall talk about international. Okay, Rich?

Speaker 2

Yes. Hey, John, good afternoon. Yes, so I think like you mentioned, it's a detriment on one side and a benefit on the other. And certainly, as you look in the quarter, the amount of stop sales we saw were more pervasive than we've ever experienced. And so that's disappointing.

Speaker 2

And I'll talk to some of the reasons why at least from the feedback we've received from the OEMs in a minute. But I think I'll focus on BMW because obviously that was probably the one that got the biggest headlines and was the most impactful from an overall volume. When you look at 26% of our worldwide revenue being with BMW and that recall impacting about 1,500,000 units globally, it certainly impacted both the business here in the U. S. And our business internationally as Randall will talk to.

Speaker 2

So when the announcement came out, it was an impact to about 60% of our BMW ground stock and 100% of our Mini ground stock. And there's 2 things that we did proactively very early on. The first was to acquire vehicles from BMW that were kind of in their internal for offer sale that enabled us to source vehicles 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 1. Number 2, the teams, both at the dealerships regionally and with our brand management team, work very closely with BMW's parts and service organization, understand what was needed to make the repairs, what training was needed so that we could get ahead of it.

Speaker 2

And then we prioritize that work when the parts came available because the way BMW in the U. S. Was metering the parts is 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. So then if you look at the impact then from that, the sales was about a $6,000,000 gross impact from the sales side of it and then about a $4,000,000 net impact in gross when you factor in the warranty work that was necessary to get those stop sale vehicles updated and that's on a global basis.

Speaker 2

So that's kind of the approach we took here in the U. S. I'll hand over to Randall to talk about the international market.

Speaker 4

Yes. So it was other than the U. K. Was effectively a non issue. Italy and Japan, we have a decent BMW footprint, but we were able to get those vehicles back on the road.

Speaker 4

In the U. K, similar story to here to the U. S, parts availability and timing and they prioritized as you would expect customer vehicles, new vehicles and then used vehicles, which we're still in the process of addressing. So from a new standpoint, it's probably more of a push rather than a cancellation. But used, as you can imagine, we did have some cancellations as customers, if they wanted to buy a used car in early September, aren't going to wait until November.

Speaker 4

So that was really the effect in the UK.

Speaker 2

And then the second part of your question, John, what do we think is going on? So obviously, we've had discussions with, each of the OEMs, you know, to understand what's going on. There's 2 main reasons that we would point to based that's been consistent from the feedback we've received. 1, the increasing vehicle complexity in the software that goes into these vehicles these days because there is a lot of the recalls we've seen have been software related. Take the Porsche Macan, for example.

Speaker 2

And then just how deeply the supply base cut their costs and workforce during the pandemic. They're just having a hard time ramping back up the demand and their production forecasts have increased. So those are the two things that we hear from the OEMs as being consistent some of the underlying problems here.

Speaker 6

Got it. And then just maybe a second question that's very helpful. On upfront grosses, I mean, up $8 sequentially, everybody keeps thinking, your grosses in total are going to fall. And then specifically, the relative strength of even new GPUs down a little bit more than $200 on their own. It just seems like this is holding up better than anybody is fearing.

Speaker 6

Are we getting to a point and it was slower on the decline? Are we getting to a point where we're kind of getting to this asymptotic limit, where we might be normalizing now at these much higher levels or is there a reason as we progress through the next 18 months to 24 months why there might be further normalization lower?

Speaker 2

Yes. 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 the consumer is still, I think, challenged. The affordability remains to be, a question mark, as Roger alluded in his remarks, up 2% in the quarter to over $57,000 Now, obviously, we think the rate cuts of those come forward that will help with the high penetration of leasing in the U.

Speaker 2

S. Market. But it goes back to our teams as well. I mean, I think I give a lot of credit there to them making a deal that is holding on to the gross and being disciplined in what they're doing. We still have very short supply in Texas and Toyota and Lexus.

Speaker 2

And you're seeing the incentives increase and so 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 6

That's very helpful. I got a bunch more, but I'll get back in the queue. Thank you, guys.

Speaker 2

Thanks, John. Thanks, John.

Operator

Next, we go to Ron Jusiakow with Guggenheim Securities. Please go ahead.

Speaker 7

Hey, Ron. Hey, Roger, team. Thanks and good afternoon. 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 pretty healthy in the quarter.

Speaker 7

So just kind of if we could put a finer point on that. And maybe beyond that, there has been some freight market softness. So just kind of any updates you can provide on the order book and tone of conversations with your customers?

Speaker 2

Yes. Ron, good afternoon. So Rich here 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.

Speaker 2

So unlike our peers who had CDK in the automotive business, it's a smaller portion of our business, but still impacts probably on a proportional basis. Again, I'd give credit to our team and their responsiveness to implement manual processes as soon as possible so that we could at least sustain a business level that was acceptable. The biggest impact, as I said, was on our fixed operations, mostly from a productivity and efficiency standpoint where 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. We also took the decision to pay our employees on the trend prior to the CDK disruption because obviously it wasn't anything that they had control over. And then when we came out of that through the middle of August, 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.

Speaker 2

And we feel it's at minimum $7,000,000 whereas an impact in total with some of that being in the 2nd quarter and some in the Q3. 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. 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 2

And I think the customers are continuing to purchase out of replacement demand versus fleet growth. And I think the decision they're making there is that the capital expenditure is better than the increased maintenance expense that they'll see if they run those trucks and keep those trucks longer. And so, our allocation is completely sold out. We have seen more 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 2

As we look to 2025, the OEM we support Freightliner and Western Star, they have a quarterly reservation system. And so we know how many trucks we're going to be allocated on a quarterly basis. And then we're working with customers now to fulfill those orders. And we feel optimistic for the first time in 4 years that now there'll be production capacity to where we can go out and conquest business 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. So, existing customer portfolio.

Speaker 2

So, when you look at our grosses, I think both new and used, sequentially are hanging right in there. So, feel good overall about the performance in the quarter.

Speaker 7

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. Really strong quarter in the Q3, obviously. Q4 will have less service days, but I assume it's largely the same year over year.

Speaker 7

So just want to kind of get a sense of the potential benefit from stop sales and how it will flow through, in the Q4 and potentially beyond?

Speaker 3

Let me take that one. I think a couple of things. When we look at parts and service, our technician count is up 7% and our effective labor rate is up 5%, which obviously makes a big difference. Customer pay, when I look at it across the U. S.

Speaker 3

Was up about 5%, internationally was up 2%, so overall about 4%. Warranty, which was the strongest, was up 20% across both the U. S. And internationally. And our collision repair was up about 2.2%.

Speaker 3

So you can see it's across the board. And I think the fact that the premiumluxury cars are in, we looked at a number, and I don't have it exactly here from a BEV concern to an ICE vehicle and there's no question that the BEV vehicles now are taking more time because of programming and then they are in an ICE vehicle and I can't give you exactly from an RO perspective. But I think overall when you look at our stop sale impact, it was about $6,000,000 in sales and about $4,000,000 on the fixed side. So again, we're focusing because remember when you think about Randall's business about 70% is parts and service And in the we look at Rich's business, it's probably what 65% and 55% in the auto side. So when you look at those margins comparison to 6% 7% on new and used, I think the focus is right.

Speaker 3

We spent a lot of money on dynamometers in the truck business. 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 are for customer satisfaction and also then drives margin in our shops. So again and we're investing a lot of money in shops because we see as the VAV units come in, we're going to need to have more space because of much of the programming that has to take place.

Speaker 3

And when you look at the difference between today, this is probably over the last 2% of our repair orders, the difference between an ICE vehicle when you look at it from a total cost is about $700 and it's about $1300 per repair order for bev. So I'm not sure when that switches around, but 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 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 an epidemic on the car side.

Speaker 3

It's just so complicated and we're expecting so many things to get done. So I would say that overall parts and service is the heart of our business.

Speaker 1

Rich, could you clarify or I know you talked about the benefit on from stop sales on parts and service and the revenue that we would have received in the quarter. Can you go through those numbers one more time? Yes. So you're talking specifically BMW? BMW, yes,

Speaker 2

So on BMW, just to clarify then, we saw about a $6,000,000 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 4,000,000 dollars So you had, let's say, about $2,000,000 in fixed operations, that was a gain as a result of correcting the efficiency on those units.

Speaker 1

So Ron, that gives you the big picture piece there, okay?

Speaker 7

Yes. 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 1

Thank you.

Operator

Next we go to Rajat Gupta with JPMorgan. Please go ahead.

Speaker 8

Hi Rajat. Hi, good afternoon everyone. Hey, how are you? Thanks for taking the question. I have a question on the used car business.

Speaker 8

Obviously, a bit more than expected abrupt correction in the unit because of the consolidation of CarShop. I was just curious, looking forward from here, is the Q3 level a good baseline to look at the business both in terms of units and GPUs? Or was there some one time impact that hurt the business more than you'd expect because of the consolidation? So just curious if you could give us some guidance on that. And I have a follow-up.

Speaker 8

Thanks.

Speaker 3

Yes. 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 from CarShop to Sytner Select, we've taken away real estate in locations that we sold to 3rd parties, which now has given us a base run rate between $2,000 and $2,500 versus $5,000 Now that was done and I would say this, when you see the ultimate used car number come down, but I think from a gross profit perspective, even on the chassis, we're almost double than where we were before and we're gaining a lot of strength on our F and I, our finance products. And to me, the access to those vehicles now, these are vehicles that come from Sytner OEM Business that can't be retailed or certified where they were being put on our Sytner net, our exclusive, our auction block. We now take those vehicles and they're moved over to Sytner Select.

Speaker 3

And I can tell you this made a big difference because we're now sourcing a biggest portion of our vehicles through this process along with OEM. And I think that when you look at our overall gross profit just for the quarter, we were up $3.18 So I think some of that has a big factor and overall we're up 5%. So number 1, it's lower units, higher margin, less locations. 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 went took 2 down here in the U.

Speaker 3

S, 1 in New Jersey and 1 in Phoenix. 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 CarShop U. S, we look at Sytner Select, I think that we're going to have a business that's going to run somewhere between 2,500 in the UK and 11 to 1200 in the U. S.

Speaker 3

So you could say between 3,504,000 would be a run rate. And I think the margins are significantly higher than they were before. 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 8

Got it. That's very clear. And just a follow-up on capital allocation. You've done several acquisitions this year. You added modest leverage to the business and still like just 1.3 times.

Speaker 8

Curious how we should think about optionality around maybe increasing leverage, being more aggressive on buyback or even more M and A. Just curious what's the latest thought process around go forward capital allocation? Thanks.

Speaker 3

Let me let Shelly answer that for you. Okay, Shelly?

Speaker 5

Hey, Rajat. Thanks for the question. 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, acquiring $2,000,000,000 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.

Speaker 5

And so with the most recent dividend announcement, we'll have returned over $350,000,000 to our shareholders to date and continue to grow the business through CapEx. Roger talked about expanded service opportunities and we've opened a number of new stores and purchased about $37,000,000 in land for future growth. So I would say we certainly like the buyback. It's not something that we've turned away from. It just happened to be the opportunities that were presented to us this quarter.

Speaker 8

Understood. Great. Thanks for the color. How about the queue?

Speaker 3

Thanks, Raghav.

Operator

Next we go to David Whiston with Morningstar. Please go ahead.

Speaker 9

Hey, David. Hey, everyone. Sticking on the M and A and capital allocation question, I was just curious if you're seeing seller asking prices at Bram and A coming down as people are resetting their expectations given trailing 12 month profits have been coming down? Or do you still think when would you still consider them elevated?

Speaker 3

Well, let me say this, we've been at the highest levels over the last, say, 24 months. And but when you look at the premium brands, the BMW, the Toyota, the Lexus and these brands, we still see these things at high levels. Obviously, when we look at the truck operations, they're probably in some cases 50% less from a multiple basis and your volume foreign is somewhere in the middle. I think we look at it not so much what's the multiple, we look at what's the future opportunity from the standpoint of profitability and do we have synergies in the market where we are and that means do we have other stores, can we consolidate into a central office. And that's really been our focus.

Speaker 3

And on top of that then we're looking at stores which are not going to produce what we expect going forward. So I would say if we look, I think year to date, Shelly, it's about $200,000,000 of our $2,000,000,000 is truck balance and all of the divestitures are primarily on the auto side and some of that obviously is CarShop in the U. K. So to me, we're certainly going to continue to buy. Look at the 3 Porsche stores, I think in Australia, we'll generate probably what $220,000,000 $260,000,000 on an annualized basis.

Speaker 3

There we have the market, we have the capability 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. And I think the diversification that we have gives us the opportunity to pick what bucket we want to be in as we go forward. And certainly from a capital allocation standpoint, we look at where we are and we look at the dividend increases that we've done since November 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.

Speaker 3

So hopefully, we attract a shareholder with those types of metrics.

Speaker 9

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 4

Yes. It's a mix. So obviously, Mercedes, we've had many launch in various markets this year. BMW is still on schedule to launch in 2026. You have brands like JLR that have said they are not going to go agency.

Speaker 4

So and then Mercedes is delayed in some of the other markets. But I would say from the largest agency

Speaker 2

portion we have, obviously,

Speaker 4

is the Mercedes in U. K. And I would say, portion we have obviously is the Mercedes in the U. K. And I would say as we discussed on last call, it continues to be beneficial for us I think with the current market conditions with interest rates elevated not having to hold inventory and having that fixed price, we're seeing some growth on the after sales there.

Speaker 4

So, yes, that's kind of the status in the U. K. With Mercedes, we think it's been a good year.

Speaker 3

I would add to that. The great thing is that our PMA, being the size of it is in the U. K, all the inquiries that come in, either through the factory sites come to us. 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 the 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 U.

Speaker 3

K. I'm not sure they've got a great taste of it right now and what they're going to do worldwide, but they have some issues in Australia with it and other things. But at the moment, I think we were up 25% on agency, which would have been basically in the quarter would have been Mercedes Benz.

Speaker 1

Okay. Thanks a lot.

Speaker 4

Thank you.

Speaker 2

And I'll

Speaker 5

be turning the conference back

Operator

to Mr. Penske for final closing comments.

Speaker 3

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.

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 2024
00:00 / 00:00
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