Red Cat Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 10 speakers on the call.

Operator

Good afternoon. Welcome to the Penske Automotive Group 4th Quarter 2023 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through February 14, 2024.

Operator

On the company's website under the Investors tab at www.penskeautomotive.com, I will now introduce Tony Partan, company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Speaker 1

Thank you, Brad. Good afternoon, everyone, and thank you for joining us today. As you know, a press release detailing Penske Automotive Group's 4th 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, 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, our EVP and Chief Financial Officer Rich Shearing, North American Operations 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, adjusted EBITDA, adjusted earnings before taxes, adjusted income from continuing operations, adjusted earnings per share and our leverage ratio. We have prominently presented the comparable GAAP measures and have reconciled the non GAAP measures to the most directly comparable GAAP measures in the press release and investor presentation 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 under forward looking statements. I 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 expectations.

Speaker 1

I'll now turn the call over to Roger. All

Speaker 2

right, Tony. Thank you and good afternoon everyone and appreciate everyone joining us today. 2023 was a strong year for PAG and reflected our 3rd best year of net income in our company's history. Our performance is driven by resilient new car market, our premium brand mix, the performance of our retail commercial truck dealerships and our capital allocation. During 2023, we delivered 486,000 New and used vehicles had over 21,000 commercial trucks.

Speaker 2

We increased our revenue 6% to almost $30,000,000,000 We generated $1,400,000,000 in earnings before taxes and nearly $1,100,000,000 of net income and earnings per share of $15.50 We continue to grow our business announcing acquisitions of $1,300,000,000 An expected annualized revenue including Rybrook in the UK was closed early in January 2024. We repurchased 2,800,000 shares or approximately 4% of the shares outstanding at the beginning of the year. We increased our cash dividend paid to shareholders by 53% since the end of 2022 and from $0.57 to our current dividend of $0.87 We maintained a strong balance sheet and debt to capitalization ratio of 26% and a leverage ratio of 1 time. Now let's turn our attention to the Q4 that we announced earlier today. Excluding a non cash impairment charges that noted in our press release, Adjusted EBT was just under $300,000,000 at $2.97 Adjusted income from continuing operations was $231,000,000 and related adjusted earnings per share was $3.45 In our automotive operation, we believe demand for new vehicles remains solid and inventory availability continues to improve.

Speaker 2

We continue to take forward orders with pre sold activity averaging between 10% 20% in the U. S. Depending on brand and the region. The UK Ford order book is healthy at 20,300 units. Although the order book is slightly less than last year, UK new vehicle registrations increased 18% in 2023 and the availability of inventory improvement compared to the same time last year.

Speaker 2

During the quarter, total automotive units delivered increased 8% to 117,000 units, which includes 8,113 agency units. Same store retail Automotive revenue increased 4%, Including a 7% increase in our service and parts business, same store gross profit only declined 1%. Same store retail commercial truck gross profit only declined 1% and earnings before taxes in Q4 was a record of over $51,000,000 Unfortunately, our profitability was impacted by $21,000,000 in additional interest costs resulting from higher interest rates and greater inventory levels combined with lower equity earnings from our investment and Penske Transportation Solutions. Turning to PTS, December 31, PTS managed a fleet of over 439,000 vehicles that includes trucks, tractors and trailers. In 2023, PTS operating revenue increased 6% and produced the 3rd highest EBT of all time just over 1,000,000,000 In Q4 PTS operating revenue increased 3% to $2,700,000,000 full service lease and contract revenue increased 13%, Logistics revenue increased 5%, but our rental business declined 13%.

Speaker 2

PTS generated $177,000,000 in net income. Our share of PTS earnings was 51,000,000 which declined by 48% or $48,000,000 compared to Q4 of last year. A decline in PTS earnings over the year period was impacted by the following: a $57,000,000 increase in interest expense from higher rates related to bond refinancings and higher outstanding debt, a $58,000,000 decline in gain on sale of used trucks when compared to the record performance. In 2022, as used truck values continued to be impacted by the freight the lower freight demand. We sold nearly 36,000 trucks used in 2023, an increase of 60%.

Speaker 2

Rental revenue fell 13%, including 400 basis points decline in commercial utilization rates at 82%. Higher depreciation and holding costs on older vehicles we had because we're holding to replace the fleet. As we look into Q1, 2024, PTS continues to be impacted by similar headwinds. We expect PTS earnings to decline at least 50% In the Q1, due to higher interest costs, lower gain on sale of used trucks and higher depreciation. Units on order now are at 29,000 compared to 71,000 at the start of last year and continue to trend lower.

Speaker 2

We have nearly 18,000 units Currently available for sale, in January we sold 3,900 units, which was 27% higher than January 2023 and similar to the pace of Q4. I'd now like to turn it over to Rich Shearing.

Speaker 3

Thank you, Roger. Our premier truck dealership business represents 34 locations in North America and is an important part of our diversification. We have one of the largest commercial truck retailers for Daimler Trucks North America. And as most of you may know, earlier last year, we expanded into the Greater Winnipeg, Manitoba market area acquiring 5 new locations representing $180,000,000 in estimated annualized revenue. The North American Class 8 retail truck had a strong year in 2023 with a 7% increase in retail sales to 331,000 units.

Speaker 3

At the end of December, the backlog was 178,000 which compares to a backlog of 244,000 same time last year and the current backlog represents approximately a 5 to 6 month rate of retail sales. In 2023, our business generated over 21,000 new and used truck sales, dollars 3,700,000,000 in revenue and almost $600,000,000 in gross profit, an improvement of 7% year over year. Premier Truck Group had a record year generating $225,000,000 in EBT and more than a 6% return on sale. I'm pleased that the business produced a solid Q4 with EBT of $51,000,000 as Roger referenced the record Despite new unit sales for the quarter being down 13% related to later than normal deliveries in 4Q 2022 due to supply chain disruptions earlier that year. On a same store basis, gross margin increased 140 basis points to 15.8% And SG and A to gross profit remain well controlled at 58.8 percent fixed absorption was solid 123%.

Speaker 3

We believe commercial truck demand remains solid and will continue to drive be driven primarily by replacement demand and we see strength across private fleets and Class 6.7 medium duty as well. I would now like to turn the call over to Randall Seaborn.

Speaker 4

Thanks, Rich. 2023 was also a record year for business in Australia. As you know, we are the exclusive importer and distributor of heavy certain heavy and medium duty trucks and buses a leading distributor of engines and power systems in Australia and New Zealand. We offer products in the trucking, mining, power generation, defense, marine, rail and construction sectors and support full parts and after sales service through a network of branches, field service locations and dealers across the region. In our Australia business, service and parts represents approximately 80% of all of our gross So our focus on increasing units in operation is a key driver of the business.

Speaker 4

In 2023, the Australia business grew its revenue by 10%, largely due to the off highway markets, which remain strong, particularly in the data center, energy solutions and mining segments. In the Energy Solutions space, we continue to lead the market in critical standby power, especially for data centers and made significant deliveries of generators into prime power and hybrid applications. In addition, we have started to deliver large scale battery energy storage solution systems as well. Our current order bank for energy solution delivery stands at over $500,000,000 for 2024 and beyond. In mining, we continue to deliver repower with the fuel efficient MTU Series 4000 engines and we're working with 1 of the world's largest miners develop a hybrid repower solution, which will reduce fuel consumption by 20%.

Speaker 4

I would now like to turn the call over to Shelly Hildreth.

Speaker 5

Thank you, Randall. Good afternoon, everyone. I'm pleased to report that we generated $1,100,000,000 in cash flow last year and our EBITDA was nearly $1,700,000,000 In 2023, we continue to maintain a disciplined and balanced approach to capital allocation and our balance sheet remains strong, safe and secure. At December 31, We had $96,000,000 in cash, dollars 529,000,000 in vehicle equity and $1,700,000,000 in availability under our Our approach to capital allocation balances investing for growth through capital expenditures, diversified and opportunistic acquisitions, while also returning capital to shareholders through dividends and share repurchases. Since the end of 2022, we have raised the dividend 5 times from $0.57 to $0.87 per share, representing a 53% increase.

Speaker 5

We returned $189,000,000 in dividends to shareholders last year. We also repurchased 2,800,000 shares for $382,000,000 Total inventory was $4,300,000,000 representing an increase of $800,000,000 from the end of 2022. Floorplan debt was 3,800,000,000 We had a 39 day supply of new vehicles and a 48 day supply of used. Day supply of new vehicles for premium was 42 and volume foreign was 24. At December 31, our supply of battery electric vehicles in the U.

Speaker 5

S. Was 54 days for new and 50 days for used. In the U. K, our supply of battery electric vehicles was 67 days for new and 45 days for use. At the end of December, our long term debt was $1,600,000,000 essentially flat year over year.

Speaker 5

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 $403,000,000 in mortgages and $182,000,000 in other borrowings at our international subsidiaries. Debt to total capitalization improved to 26% from 28% at the end of 2022 and our leverage sits at one time. It's important to reiterate that we have the ability to flex our leverage up to 4x on a lease adjusted basis.

Speaker 5

Therefore, we have room under our credit agreement to deploy our capital allocation strategies. Our U. S. Credit agreement provides 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 December. SG and A to gross profit was 71% in the quarter and remain 700 basis points below the pre pandemic level of 77.9% in 2019.

Speaker 5

We continue to focus our efforts on efficiencies and cost control. As part of our ongoing efforts, We continue to challenge our costs and focus on simplification, optimization and digitization to drive further efficiency and lower cost structure. In fact, our U. S. Same store headcount remains down 11% when compared to pre COVID headcount levels.

Speaker 5

Further, in our U. S. Automotive operations, variable compensation to gross profit improved 30 basis points and service and parts absorption improved 120 basis points when compared to Q4 last year. At this time, I will turn the call back to Roger for some final remarks.

Speaker 2

Thanks, Shelly. As Shelly mentioned, our balance sheet is strong and we have the ability to flex our capital Allocation opportunistically. We demonstrated that flexibility in January by expanding our brand footprint in the UK As we completed an acquisition of 16 premium brand dealerships representing approximately $1,000,000,000 in estimated annual revenue. Our U. K.

Speaker 2

Team is currently integrating these dealerships into our operations and we are thrilled to add the Rybrook team to our business. Lastly, I'm pleased to report that Penske Automotive Group was recently named as a Fortune World's Most Admired Company for 2024 and was recently honored by Glassdoor as the best place to work in 2024. Our results continue to demonstrate the benefit our diversification across the retail automotive and commercial truck industries, our cost control and disciplined capital allocation strategy. I remain confident in our model and the performance of our business. Again, thanks for joining us today and we'll open the call up for questions.

Speaker 2

Thank you.

Operator

And we can first go to John Murphy with Bank of America. Please go ahead.

Speaker 6

Good afternoon, Roger and everybody. Just I just wanted to start Roger with a question on the state of play on EVs. And I appreciate you giving us those inventory numbers. They're helpful. I was just wondering if you could talk about sort of the pace of sales, the mood of consumers as they're buying or not buying These EVs, they're just the general environment with the automakers and what kind of capital requirements they're making you invest in either from charging or facilities to support the sales.

Speaker 6

Just trying to get your general view on the state of play here and how much it actually matters to you if you might be able to offset that by selling hybrids and ICE vehicles if we are really stalled here on the EV front?

Speaker 2

Okay, John, let me take a shot to have Rich make a comment. But there's no question that demand for bevs has slowed. And when you Look at our business, 51% of our bev business is in California and of that business, 90% is leased. So right now, the OEMs in order to push the business in the luxury side at least, They're having to lease it and have a residual risk. We think the bridging strategy is certainly going to be as hybrid and that's been proven with what Toyota is committed to now going forward with Camry at 100%.

Speaker 2

7% of the market was bev Obviously last year and when we look at our day supply, we're running at about 53 days as of the end of the year. In the U. K, bev units were really at that point, they were much higher at 36% of the market. The bev day supply in the U. K.

Speaker 2

Is 67. So when we step back and look at it, right now in California, We can't even get chargers installed at our locations because there's not power available obviously to supply them. We see that not only on the retail car side, but also on the truck side. But those are a couple of comments from Rich, you want to follow-up?

Speaker 3

Yes, John, I think we're at an inflection point where early on we had customers that were early adopters Certainly went out and bought the bevs. Those early adapters now already have them and you're getting to the point where you're trying to convince the customer to find their first bev or their last ice. And so going back to what Roger said about our overall best sales in the U. S. Being in California, Earlier this week talking to our management team there, we're starting to think that that market is getting saturated.

Speaker 3

When you look across The balance of the country, certainly the bev adoption percentages are much, much lower rate. And so we see that in our inventory starting to climb with bev inventory in the U. S. Just under 1500 units, 12% of our total inventory, that's up 34% from the end of Q3, which is indicative of the sales rate starting to slow down a little bit.

Speaker 6

That's very helpful. Just a second question on GPUs that have been holding in better than Many people have feared and obviously that goes along with pricing. I'm just curious if you can talk about sort of your expectations there for pricing and new GPUs and You maybe put that in the context of how negative weight the GPUs are on EVs relative to sort of your total?

Speaker 2

Tony, you want to give us some?

Speaker 1

Sure, Roger. John, thanks for the question. So when you take a look at how our gross Looked at the overall business from Q4 to Q3. So when you look at the sequential side of things, we actually did quite well. New was down 257, used was down 123 and F and I was up on a total basis.

Speaker 1

When you look at our overall business in total, we were selling somewhere around 40 ish percent of the cars at MSRP. So we're very happy with that and about 28% of the deals that we have right now are in cash. So when you look at the total variable gross profit that we generated on a sequential basis from Q3 to Q4, we were up in that $80 $90 range per unit. So we're very pleased with our overall performance on the gross profit side.

Speaker 6

And Tony, just any color on how much of a weight that the EVs are on that or where they're kind of landing for you on GPUs?

Speaker 1

Yes. So they're running somewhere in the neighborhood of $5,000 or so below

Speaker 3

MSRP. Yes. So, John, Tony said 41% or 40% of our cars last year at MSRP. If you look conversely at bev, 83% of our best sales were below MSRP at more than $48,000,800 And if you look at just across All the brands we represent on a weighted average, the ICE GPPU is almost $2,200 less Than a comparable ice? The discount is.

Speaker 3

GPU. GPU, yes.

Speaker 2

And also, John, I would have to say that We have action on bevs probably 60,000 and below and when you start looking at inventory above 60, EQS, EQE, 120, 115 days, am I correct? Correct. A day supply. So there's no question. We're starting to see even in the UK that is another 1% discount for us on those vehicles last year or Last month, do you have any comment on it at all from internationally?

Speaker 4

Yes. In the UK, bev was flat year over year. In fact, it was down 10 basis Looking at January, it was down another 180 basis points from a market share standpoint. So look at it, a little bit different there because it's there's the retail bevs would be de minimis. Meanwhile, it's all through Corporate fleet programs because of the tax breaks.

Speaker 4

So it's a little bit apples to oranges. And then you look at other parts of Europe like Italy and Spain and it's 4% market share because there's no government incentive. So Germany, the government incentives finished at the end of the year. So it's going to be interesting see what happens there without this intervention by the government.

Speaker 6

It's incredibly helpful. Thank you very much guys.

Speaker 1

All right. And John, thanks.

Operator

And next we can go to Mike Ward with Freedom Capital. Please go ahead.

Speaker 7

Hey, Mike.

Speaker 8

Hey, Roger. Good afternoon, everyone. Thank you.

Speaker 1

Hi, Mike.

Speaker 8

Starting on CarShop. It wasn't long ago that everybody wanted CarShop spin off and go to a separate polyc entity. And we've had major disruption in the market over the last few years. Does that change how you look at it structurally? How big is the advantage being part of PAG?

Speaker 8

Is it just part of the portfolio? And with this reset or this adjustment tax adjustment in the UK, Is this a chance to accelerate on the pedal or is it just reconfiguring it or changing the strategy? How are you looking at it?

Speaker 5

Hey, Mike, it's Shelly. I'll take that question. We had mentioned in our press release that we had an impairment related to our CarShop UK question or our CarShop UK business. And when you dig into the details and you try to establish a fair value, it became very clear that Though we initially looked at these businesses separate from the franchise dealerships, if you will, there's so many synergies that we've put in place over Time, we've moved systems. We've incorporated a lot of the same franchise F and I products and the like.

Speaker 5

So I think there's a great benefit To looking at the car shop businesses consistent with the franchise stores, there's also a lot of sourcing opportunities and similarities there. Buying off the curb, if you will, purchasing cars from customers directly, that's had a huge benefit to us as well. So I think there's a lot of benefits. Certainly those that have spun off have not always succeeded as we've seen this year. And as we look forward to the future and looked at this from a calculation standpoint, our focus isn't so much on What the used car market is doing right now, but really what's available from a new car perspective.

Speaker 5

Excuse me, and as you see the SAAR growing, We expect to see a similar used car, SAR, if you will grow as well and have more affordable cars available for our car shop locations.

Speaker 8

So as we look forward, then it becomes more of a partnership with the retail automotive?

Speaker 5

I think it's been for a long time, Mike.

Speaker 2

But even more of this charge, obviously, Technically, when they look at it and Shelly's team along with the auditors look at this, so it wasn't something that we didn't expect. And obviously, We reduced 2 locations in the U. S. This year, which had been losing money and we have been able to sell one location and One will move over to PTS from the standpoint from a leasing and rental location. But as far as the UK is concerned, we think it's a valued brand.

Speaker 2

And as we go forward, we'll continue to operate it. I think we had, what, dollars 150,000,000 value and we took 7%.

Speaker 5

That's right.

Speaker 2

It's a goodwill impairment on that. So look, it's part of doing business, but I'm so glad that we didn't listen to people about spending it off.

Speaker 8

Myself included. On TTS, one of the things you try to do is The last couple of years again have been highly unusual. But when you look at the growth path, particularly if you go back to 2019, 2018 and those sorts of things, There are a lot of positive changes. So even if we're down again in 2024, some of the disruption we've seen in the last 2 to 3 quarters Are more market related? And is there anything that stops this company from once we get through 2024, getting back onto a growth phase?

Speaker 2

Not at all. And when you look at it right now, I think we mentioned it earlier, our lease business was up 21% And our logistics business was up 5%. Unfortunately, we've drawn our rental fleet to almost 90,000 units. And of course as the market slowed, spot rates came down, our utilization went down from 88 down to roughly 82 And I think that gave us an excess supply. On top of that, a lot of those pieces were being used to support leases that we had written When we were at 70,000 units on order and couldn't get them from the manufacturers, we were using some rental units.

Speaker 2

So those have now come back as we've seen the supply start to come in. Our issue is that we have approximately 18000 16000 to 18000 units for sale and to get those out that sets about $8,000 more than we had a year ago. We're paying depreciation interest and maintenance on those as they sit. So we'll have to pull that stuff through. And I would say that impact will continue through the Q1.

Speaker 2

So I would say we'd be similar as far as value and actually earnings in the Q1 similar to what we had In Q4 based on lower rental volume both and on the consumer side, which is our one way business, there's less people moving because of house prices and when they do move, it looks like the mileage is down. So that's really hit us. And then we had the company had 2 $13,000,000 I think roughly of total interest cost increase in 2023, 100 of that based on new debt and 100 on refinance. So gain on sale, financing, lower revenue and rental really impacted us. But from an energy standpoint, meaning from an offense and sales, we were up in our core products.

Speaker 1

So Roger, Mike, we want to add to that that when you look at Q4, we actually saw the year over year change in maintenance. Good point. It became more favorable to us. So maintenance at BPS down $11,000,000 in the Q4 when you compare it to the prior year. So that means this process is working, Taking the trucks out of the fleet is working.

Speaker 1

So we hope that that continues into the future.

Speaker 2

With the extension Mike of some 28,000 Older units that we had to extend from say 6 to 12 months, those just think each up on maintenance number 1. And number 2, we don't get any margin on that extension revenue. So that had a double impact on us.

Speaker 8

Thank you very much. Really appreciate it.

Speaker 1

Thanks.

Operator

And next we can go to Daniel Imbro with Please go ahead.

Speaker 7

Hey, Daniel. Hey, good afternoon, everybody. Thanks for taking our questions.

Speaker 8

Welcome. Roger, I

Speaker 7

want to expand a little bit on the last topic. I think we started with CarShop there. Maybe just to expand the broader used business on the franchise side. Can you talk about the headwinds on that business that are weighing on same store units kind of close to flat this quarter? It seems like obviously there's demand headwinds, but you guys having historically a high lease penetration.

Speaker 7

Are we starting to see more supply issues, maybe lack of the lease returns coming back? I'm just curious As you look at those headwinds, how that plays out through 2024?

Speaker 2

Well, look, number 1, we know the market stabilized because as we look In our wholesale units both in the UK and the U. S, we were profitable in Q4 as point number 1 and point number 2. I think availability, one of the things that's impacted us is getting the right car at the right price. It's really as CarShop, We were looking in the U. S.

Speaker 2

At somewhere between say, $192,000 Well, those cars that we could get were almost $10,000 more From the standpoint of being able to get them to purchase and then sell them, same thing in the UK. Well, I think what's going on now is we're starting to see those numbers come down as I guess you say deflation on unused vehicles in the UK. But more importantly, with leasing being down to somewhat 25% in the past 2 years And we haven't had obviously the lease returns have not come back. And probably even more important is in the premium side, I think we have what Shelly, 6,000 or 7,000 loaner cars in the premium side.

Speaker 9

That's right.

Operator

I can't

Speaker 2

give you exact number. We're returning those units Anywhere from 60 to 90 to 120 days and those are great used car units. We really didn't have those because I can tell you in our big BMW W Store and at Grolier in California, they're running used cars almost 12 months. So we didn't have the ability to take them out and those would become really prime used cars. So that's going to help us as we go forward.

Speaker 2

And certainly on the overall, it gives us a chance to have more units, 7,200 units, maybe more that we could sell and we put through the system, which is key for us. Rich, any other comment you have?

Speaker 3

No, I think the availability you mentioned demand versus availability and I think the demand is still there. It's just availability of Cars with the new car start being down cumulatively almost $9,500,000 in the last 4 years. The best Source for used cars is new car purchasers on trade and that just hasn't been there. You combine that with the low lease rates that Roger mentioned, It certainly has been a challenge. And then I think we've been more disciplined as well to make sure that we're not buying cars in segment to segment 3 just to keep sales rates up because you end up with customer service issues and policy goodwill expense.

Speaker 7

That's all helpful color. Maybe if I could follow-up on the commercial truck side of the house, obviously a strong Full year result, but if I look at 4Q parts and service, I mean, it slowed a little bit more than we thought it would, Roger, or stayed lighter. Can you just maybe talk through the puts and takes Of what is going on there, maybe some of it the wholesale part side and then same question, kind of how that plays out through 2024 2025 as you guys see the market developing?

Speaker 2

Yes, I'll let Rich answer that one directly.

Speaker 3

Yes, Daniel, you're definitely right. We did see a slowdown in the second half of last year. Obviously, the freight was very robust, utilization of assets was very high. You had a lot of owner operators, single truck Operators coming into the market to take advantage of those rates because they could make substantial money. They generally were getting their trucks at independent repair centers and that creates big parts revenue and profit opportunities for us.

Speaker 3

So we've seen a decline in our wholesale parts sales and then our just our general retail traffic of parts sales over the counter. If you look at our service shops, We're still busy. We don't have the backlog of service work that we had previously, but we're still steady with the number of ROs that We're generating on a monthly basis. And then because of the freight decline and the asset utilization down, you've got some carriers that would park trucks and maybe pull another truck from the fence versus having the expense of repairing it. So we're seeing some of that as well until some of that capacity tightens in

Speaker 2

the marketplace. I think Rich also when you look at Our fixed coverage, we're running at 120 plus percent. Yes, almost 100

Speaker 7

and 30%.

Speaker 2

And I think we're utilizing tools To be more efficient, we've also been able to fill a lot of the mechanics requirements that we couldn't get during The COVID time, we're now seeing them come in and our turnover really has been down. So I would say we've put more service trucks on the road going out to the customers 2, which has certainly also been a benefit. So I think through our acquisitions that we'll see that we'll start to get some more traction there to putting in some same conditions and action plans we have in the core business.

Speaker 7

Makes sense. I appreciate all the color. Best of luck guys.

Speaker 3

Thanks, Daniel.

Operator

We'll go next to Rajat Gupta with JPMorgan.

Speaker 2

Hey, Rajat.

Speaker 9

Hey, great. Thanks for taking the question. Just had one question on new GPUs and then one on Hi. Based on how things have trended over the last few months and quarters, including what you may have seen in January, Is the recent quarterly cadence like roughly $250,000,000 $300 of sequential declines in new GPU Good rule of thumb. For as you progress through 2024, if you could give us any color or guidance around that would be helpful.

Speaker 9

I have a quick follow-up on F and I. Thanks.

Speaker 1

So Rajat, this is Tony. I'll handle that one. When you take a look at the year over year decline from Q4 2022 to Q4 2023, New gross was down about $9.56 a car. That's on a same store basis across the portfolio. And I think as I previously mentioned, when we looked at it sequentially, it was down 257 from $57.75 down to $55.18 So I think we're able to manage the gross very well.

Speaker 1

Some of it will be dependent upon how the mix might change from one period to the next and the level of BEV sales, I think Rich made the comment that we were down over $5,000 versus MSRP on the BEV side of things. So I think we're very happy with how the new vehicle gross has performed so far in the past 12 months.

Speaker 2

I'd make one comment, Rajat, that we're seeing internationally Ferrari and Porsche, Lamborghini, some of those big cars that are now in the $200,000 $300,000 range, people could drive them for a year and come back and trade them and be able to get into the next car. We're seeing some people saying, look, I'll keep my car for another year. So that's having some impact on canceled orders where we have to resell those at a lower margin, but I wouldn't say it's dramatic, but I think it's something that we should note. Because of the used vehicle That happened in the Q4? Yes, in the Q4, yes.

Speaker 9

Got it. That's helpful. And then on S and I, very strong Performance here in the Q4, despite what we're hearing that leasing is coming back, we can see that in the data. What drove the strength there? And how should we think about sustaining these kind of F and I and gross levels into 2024?

Speaker 9

Thanks.

Speaker 1

Well, Rajat, this is Tony. If you look at the Q4 on a same store basis, we did $18.97 a unit That was up from $18.66 and then sequentially it was up about $76 a unit from 18/21 to 18/97. I think it's important to point out that when you look at the U. S, Our overall product sales are about 68% of the total. Therefore, reserves are about 32.

Speaker 1

And then you look at some of the different penetration rates, we've increased our captive penetration again. Leasing is up a little bit. And then when you look at some of the different programs that we're selling like prepaid maintenance and Protection products, tire and wheel, that stuff has stayed real strong for us. So I think overall, our team is doing a really strong job On the F and I side of things.

Speaker 2

And those are products that we can sell to the premium lease customer too, which is helpful.

Speaker 9

Got it. Got it. So you feel okay about sustaining these kind of like levels on a same store basis? Obviously, like pricing Might play a role there, but like the penetration level do you think are sustainable at these levels into 2024?

Speaker 1

Some of it will depend upon the absolute lease level that we have particularly in the U. S. And then we also have to look at any potential affordability concerns that customers may have with respect to extended service contracts. But I think if you look at the second half of the year and you see any rate reduction that might happen in interest rates, so that could actually help the F and I side of the business as well, making vehicles more affordable.

Speaker 2

But it's only 32 percent of our revenue is coming from the actual reserves. Correct. And flats we would get on leasing.

Operator

Correct.

Speaker 9

Got it. That's helpful color. Thank you and good luck.

Speaker 2

Yes, thanks.

Operator

And next we'll go to David Whiston with Morningstar.

Speaker 1

Two questions like kind of the capital allocation front. First on M and A, Can you say what your preference would be this year on M and A in terms of would it be light vehicle, car shop or trucks? And on top of that, what geographic areas would be your first choice?

Speaker 2

Well, I guess, let's look at the different businesses. We are actively Looking in the premier truck side, there's no question in Europe we had the opportunity With Rybrook, the 16 locations, we have a number of opportunities here in the U. S. And I would say we look primarily where we already have scale. So we can consolidate our back offices.

Speaker 2

Our management team with Rybrook, we looked at The business at Pendragon and when we looked at that business in conjunction with Hedden, we had a central office that we'd have to deal with Rybrook. We just bought the stores and plugged them right in. So we want to look where we have the least amount of additional SG and A That would be a key factor. And I think right now, we're seeing the prices coming down to a more realistic timeframe. And obviously with $1,700,000,000 of capital available, we've got plenty of fire proper to make a big move or small moves, but again, they're going to be strategic.

Speaker 1

But you don't have a strong preference then on truck versus light vehicle that doesn't really matter?

Speaker 2

I think we look at them 1 at a time. I mean, we're it's not we don't have a goal to grow the truck at some speed or else I want to see a minimum of $1,000,000,000 worth of new business that we would generate For 2024 on an annualized basis, that would be across the entire portfolio.

Speaker 1

Okay. And on buybacks, can you talk about how you guys are feeling about buybacks this year relative to the 2023 spending level?

Speaker 2

Well, look, I think as we've done before, we look at CapEx, we look at dividend, we look at acquisition, we look at buybacks. And I think that we certainly will look at that to continue. The Board has to approve those buybacks and make recommendations to us. But at this point, we would continue with our buybacks.

Speaker 1

Okay. And just one last thing on used vehicles. In the press release, you guys Specifically called out that how pleased you were on that sequential GPU performance Q4 versus Q3. Is it kind of for lack of a better word, is that like a green shoot that maybe the worst of this is over? You're talking on used vehicles, David?

Speaker 7

Yes.

Speaker 1

So Randall, I'll tell you, Randy, you might want to comment about what we're seeing in the U. K. Because that was, one of the big headwinds, if you will. So So

Speaker 4

as all the valuations went significantly up over 'twenty one, 'twenty two and then obviously starting April last year, They were going down anywhere from 2% to 4% a month. In the Q4, it was down 4%, 4% and 2% from October, November, December. So look, it was a challenge without a doubt, you had to turn the inventory quickly. Otherwise, you're caught with that at a lower number you can sell it. But as we've come into the New Year in January, it's absolutely stabilized and we're seeing that in February as well.

Speaker 4

Our gross per unit will definitely be up in January for the first handful of trading days in February the same thing. I'll make one other point. When we When we were rightsizing the inventory, we wholesaled 10,000 cars, but our wholesale, we actually made about £370 per unit, which was down from £400 per unit Q4 last year. So wasn't down much. You think about the market going down that in the way it did.

Speaker 4

So there certainly wasn't a fire sale. But conversely to that, we In late November December went out and acquired a bunch of used cars strategically as the market was deflated. And now as the market stabilize and hopefully goes up some, that's part of the reason we're seeing better grosses this month. So I think we were a bit advantageous there with our team.

Speaker 2

Well, look, I think, Dan, the key thing, David is that we were paying money for used cars. It was almost In some cases, near what they could buy a new car for. So the amount of gross profit that was available to us From an advanced rate from the finance company, remember, we finance a lot of the used cars, left us a very small margin. As the Cost of sale comes down now, it's going to give us a chance. Now we've got interest rates pushing that up on a finance deal.

Speaker 2

But I think we're going to see Our margins will increase as we go forward and I feel good about the used car business. We'll be able to turn the loaner cars, all these things are going to help us as we go forward, especially on the premium side. And hopefully we'll start to get some lease returns. You talked about advantageous buying 2 50 cars from Mercedes, I think in last year in Q4. So these things will start to help us that we can execute on.

Speaker 1

And our average transaction price last year was over $34,000 a used car. That's high.

Speaker 2

And what was it, what it was a year before?

Speaker 1

It was flat on a year over year basis roughly. So it really when you go back I think to 2019 prior to the pandemic, It was $25,000,000 CarShop

Speaker 2

numbers coming down. We can see the sale price of CarShop. So I'm not sure exactly what it is, but I know it's coming down And that's going to help us get back in the sweet spot.

Speaker 5

That's right.

Speaker 2

So we're not competing with what I call the OEM dealership, right? Because we've done in this different market that we have.

Speaker 1

Sorry, was that 34,000 at car shop or the retail stores? That's the Total consolidated number, that's everybody. If you look at CarShop, the average transaction price was just under 21,000 in the Q4. Okay. Thank you very much.

Speaker 2

All right. You're welcome. David, thank you.

Operator

And with no further questions in queue, I'd like to turn the call back over to Mr. Penske for closing remarks.

Speaker 2

Brett, thanks. Good quarter. We had some headwind obviously, but feel good about the balance of the year. Obviously, We talked about battery electric vehicle that's going to be a big focus on us and how we deal with that as we go forward here. So thanks again.

Speaker 2

We'll talk to you next quarter.

Operator

And that does conclude the call for today. Thanks for your participation. You may now disconnect.

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Earnings Conference Call
Penske Automotive Group Q4 2023
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