Penske Automotive Group Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2025
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Operator

Good afternoon. Welcome to the Penske Automotive Group Fourth Quarter twenty twenty four Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through 02/20/2025 on the company's website under the Investors tab at www.penskeautomotive.com. I'll now introduce Tony Porton, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Tony Pordon
Tony Pordon
Executive Vice President Investor Relations and Corporate Business Development at Penske Automotive Group

Thank you, Julianne. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's fourth quarter twenty twenty four financial results was issued this morning and is posted on our website along with a presentation designed to assist you in understanding the company's results. As always, I'm available by email or phone for any follow-up questions you may have. Joining me for today's call are Roger Penske, our Chair Shelly Hallgrave, EVP and Chief Financial Officer Rich Shearing, North American Operations Randall Seymour, International Operations and Tony Faccione, who is our Vice President and Corporate Controller.

Tony Pordon
Tony Pordon
Executive Vice President Investor Relations and Corporate Business Development at Penske Automotive Group

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. We have prominently presented the comparable GAAP measures and have reconciled the non GAAP measures to their 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 expectations because of risks and uncertainties outlined in today's press release under forward looking statements. I 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 events to differ materially from expectations.

Tony Pordon
Tony Pordon
Executive Vice President Investor Relations and Corporate Business Development at Penske Automotive Group

At this time, I would now like to turn the call over to Roger Penske.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. I'd like to begin with by thanking each of our team members for their hard work and commitment to exceeding expectations through their efforts at PAG and delivered a strong fourth quarter another outstanding year of profitability During 2024, PAG delivered 491,000 new and used vehicles and over 20,500 excuse me new and used commercial trucks. We increased our revenue by 3% to $30,500,000,000 We generated $1,240,000,000 in earnings before taxes, dollars $919,000,000 of net income and earnings per share of $13.74 We continue to grow our business by completing acquisitions of $2,100,000,000 expected annualized revenue, including expanding automotive operations in The U. S.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

And UK, entering the retail automotive market in Australia with three Porsche dealerships and adding a strategic commercial truck location in Wisconsin. In our press release this morning, we announced the seventeenth consecutive increase in our quarterly dividend. The increase was $0.03 per share to $1.22 per share. Since the end of 'twenty three, we have increased our dividend by 54%. We maintain strong balance sheet and debt capitalization with ratios of 26.2 and leverage of 1.2 X.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Now let's turn our attention to the latest quarter results. I'm very pleased with the financial performance during the quarter. Revenue increased 6% to a record $7,700,000,000 New and used automotive gross profit per unit retailed remained strong and overall gross margin was 16.3%, representing the sixth consecutive quarter of consistent gross margin. Our efforts to control costs drove a 70 basis point reduction when selling, general and administrative expenses as a percentage of gross profit when compared to the fourth quarter last year and a 90 basis points improvement sequentially when compared to the third quarter of twenty twenty four. In the fourth quarter of twenty twenty four, PAG generated $315,000,000 in income before taxes, dollars $236,000,000 in net income and income per share of $3.54 Income before taxes increased 23%, net income grew 24% and earnings per share increased 25%.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

On an adjusted basis, income before taxes increased six percent and income grew by 2% and earnings per share increased by 3% when compared to last year. Looking at our retail auto business, we delivered 120,530 units during the quarter up nearly 3%. Our same store units were flat new units delivered increased 11% Average new vehicle transaction price increased 5% to $60,288 Gross profit per new vehicle retail remained strong at $5,146 and increased sequentially by $74 from the third quarter of twenty twenty four and remained nearly $2,000 higher in 2019. Used units declined 6%. Gross profit per vehicle retail increased $349 quarter over quarter.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

The unit decline is associated with the disposal of three UK car shop locations as we transitioned The UK based car shop location to Sytner Select in 2024. The Sytner Select dealership sell fewer units, which contributed to the 6% decline in used vehicles retail during the fourth quarter. Excluding Sytner Select, dealerships in both period used vehicles retail would have increased eight percent. Variable gross profit per unit retail was $5,319 representing a $60 per unit increase versus Q4 'twenty three and a sequential increase of $2.00 $3 when compared to the third quarter of twenty four. Approximately one half of our gross profit is derived from our service and parts business.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

As we look to continue growing this important part of our business, we've increased our technician count by 7% during 2024 and our effective labor rate in The U. S. Has increased 6%. In the quarter, service and parts revenue increased 13% to $771,000,000 including 7% on a same store basis with customer pay up 3% already up 24% and collision repair up 4%. Fixed absorption in The U.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

S. Increased three twenty basis points to 87.5. In The U. S, the average age of vehicle service is six point one years, up from five point five in 2019 to 2019. The average miles on our vehicle service was 69,000.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Let me now turn over to Rick Shearing.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

Thank you, Roger, and good afternoon, everyone. In our U. S. Retail automotive operations, we experienced a surge in traffic post election. For the quarter, new units increased 10%, while used units increased 6%.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

During the quarter, 33% of the new units sold in The U. S. Were sold at MSRP demonstrating continued strength in demand. Although we've done a great job working with our OEMs to manage bev inventory to be more closely aligned with customer demand, the majority of bev units still require significant discounting. In Q4, the average discount on a bev from MSRP was nearly $6,900 per unit.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

Turning to our retail commercial truck business, we remain one of the largest commercial truck retailers for Diamond Trucks North America and the retail truck business is one of our core pillars of our diversified model. We operate 35 full sales and service facilities, 11 stand alone service and parts facilities and 12 collision centers. We believe Class eight commercial truck demand will continue to be driven primarily by replacement purchases in 2025. During Q4, North American industry Class eight retail sales were flat at 82,000 units. At the December, the current industry backlog was 145,500 units or approximately five months represented five months' worth of sales.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

Premier Truck Group sold 4,432 new and used units in Q4, which was down 18% when compared to Q4 last year. The year over year decline in sales is related to the timing of deliveries as supply shortages pushed out deliveries from the first half to the second half of the year in 2023. However, during that same period, gross profit per unit retail increased by 21%. Revenue was $774,000,000 and EBT was $45,000,000 for the quarter with a return on sales of 5.8%, up 10 basis points. Same store SG and A to gross profit was 60.8 and fixed absorption was 122%.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

As we look towards 2025 and 2026, we expect replacement demand to continue while the anticipated emissions change for 2027 and the recovery and freight market could help drive higher retail sales. Turning to Penske Transportation Solutions. During Q4, operating revenue increased 3% to $2,800,000,000 Full service revenue and contract increased 9%, logistics revenue increased 3%. Rental revenue declined 9% as the freight recession continued to impact the number of units on rent and our rental utilization. The PTS operating profit increased $32,000,000 but was offset by higher interest costs of $9,000,000 and a decline in gain on sale of $25,000,000 The PTS earnings before tax of $188,000,000 were consistent with Q4 last year.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

PAG's share of the PTS earnings was $52,300,000 up from $51,200,000 in the fourth quarter of the prior year. And for the year, PAG's share of PTS earnings totaled $198,000,000 and we received $98,400,000 in cash distributions. Would now like to turn the call over to Randall Seymour.

Randall Seymore
Randall Seymore
Chief Operating Officer of International Operations at Penske Automotive Group

Thanks, Rich. Good afternoon, everyone. Looking at The UK retail automotive market, our same store new units delivered in Q4 increased by 1.5%, which compares favorably with the 2.7% decline in The UK new vehicle market in Q4. New vehicle gross per unit remained resilient, increasing $428 per unit on a sequential basis when compared to the third quarter. Same store used units declined 18% as a result of the transition of The UK car shop locations to Sytner Select, which focuses on lower volume, but higher quality premium vehicles.

Randall Seymore
Randall Seymore
Chief Operating Officer of International Operations at Penske Automotive Group

Excluding those dealerships, same store used units in The UK would have decreased 2%, but pleasingly, used vehicle same store gross profit increased $542 per unit when compared to the fourth quarter in 2023. Service and parts same store revenue increased 8.6%. Turning to Australia. As you may recall, in December, we acquired our third Porsche location in Melbourne, the second largest city in Australia. We now operate three Porsche locations with an expected and annualized revenue of $260,000,000 and one Penske Select used car location.

Randall Seymore
Randall Seymore
Chief Operating Officer of International Operations at Penske Automotive Group

During the fourth quarter, these dealerships retailed four sixty eight new and used units, generated $53,000,000 in revenue with a return of 4.5% on sales. Turning to our on and off highway markets in Australia, we remain very pleased with our progress. In Q4, the business produced a record revenue and a reduction in SG and A to gross profit of six thirty basis points. Service and parts represent approximately 65% of our total gross profit, so our focus on increasing units and operation is a key driver of the business. In the on highway market, we delivered a record number of MAN trucks in 2024, boosted by our largest fleet sale ever.

Randall Seymore
Randall Seymore
Chief Operating Officer of International Operations at Penske Automotive Group

In the off highway sector, revenue and margin were driven by strong energy solutions, mining and defense business. The Energy Solutions order bank is over AUD 600,000,000 for delivery of in 2025 and beyond, predominantly related to the growth in large data center and battery energy storage solution business. We remain market leadership in the high horsepower generation segment with over 55% share. And in the defense market, we provide power and support for submarines, frigates and infantry fighting vehicles. I would now like to turn the call to Shelly Hogre.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

Thank you, Randall. Good afternoon, everyone. I will review our cash flow, balance sheet and capital allocation. Our balance sheet and strong cash flow provides 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 opportunistic securities repurchases.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

During 2024, we generated $1,200,000,000 in cash flow from operations and our EBITDA was $1,490,000,000 Our free cash flow, which is cash flow from operations after deducting capital expenditures was $811,000,000 dollars In our press release this morning, we announced the seventeenth consecutive increase in our quarterly dividend. The increase was $0.03 per share to $1.22 per share. Since the end of twenty twenty three, we have increased the dividend 54%. Using yesterday's closing price, our current yield is approximately 2.9 with a payout ratio of 36%. Dividends paid to shareholders during 2024 were $274,000,000 and we repurchased approximately 517,000 shares at $149.69 per share for $78,000,000 Combined, we returned approximately $352,000,000 to shareholders in 2024.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

In addition to the return to shareholders, we completed acquisitions of 23 retail automotive franchises and five commercial truck locations in 2024. Together, these acquisitions represent $2,100,000,000 in estimated annualized revenues, including $1,900,000,000 in retail automotive revenue and $200,000,000 in retail commercial truck revenue. Additionally, as we focus on strategic capital allocation, we also divested or closed 10 retail automotive locations in 2024, which represented approximately six fifty million dollars in estimated annualized revenue. Our strong cash flow has allowed PAG to keep its non vehicle debt and leverage low. At the December, our non vehicle long term debt was $1,852,000,000 up $223,000,000 from the December 2023.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

'70 '4 percent of the non vehicle long term debt is at fixed rate. Debt to total capitalization was 26.2% and leverage was 1.2 times. When including floor plan debt, we have $4,500,000,000 of variable debt. 55% of our variable rate debt is in The U. S.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

We estimate a 25 basis point change in interest rates would impact interest expense by approximately $11,000,000 As of December 31, we had $72,000,000 of cash and the liquidity available to us was $1,800,000,000 As we look ahead to the maturity of our $550,000,000 of 3.5% senior subordinated notes in September of this year, we currently expect to repay those notes from cash flows from operations or borrowings under our credit agreement. Total inventory was $4,600,000,000 up $350,000,000 from the December 2023. Floor plan debt was $4,000,000,000 New and used inventory remains in good shape. New vehicle inventory is at a forty nine day supply, which includes forty one days in The U. S.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

And sixty five days in The UK. Day supply of new vehicles for premium was 52 and volume foreign was 32. The day supply of new battery electric vehicles in The U. S. Is seventy six days at the end of twenty twenty four, down from eighty eight days at the June.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

Used vehicle inventory is at a forty seven day supply, which includes thirty five days in The U. S. And sixty days in The U. K. At this time, I'll turn the call back to Roger for some final remarks.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Yes. Thank you, Shelly, Rich and Randall. Twenty twenty four was a remarkable year for PAG and reflected record revenue and one of the strongest years of profitability in the company's history. I remain particularly pleased with the continued resilience of gross profit per new vehicle retailed and the focus on our cost controls. I'm very confident in our model and the performance of the business.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Appreciate you joining us today. Let's turn it over to the operator for questions. Thank you.

Operator

Our first question comes from Michael Ward from Freedom Capital. Please go ahead. Your line is open.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Hey, Mike.

Michael Ward
Managing Director at Freedom Capital Markets

Thank you

Michael Ward
Managing Director at Freedom Capital Markets

very much. Hi, Roger. Hello, everybody.

Randall Seymore
Randall Seymore
Chief Operating Officer of International Operations at Penske Automotive Group

Hi, Mike.

Michael Ward
Managing Director at Freedom Capital Markets

When I look at that chart on Page six of your slide deck, it's been pretty consistent since 2019 with your allocation strategy.

Michael Ward
Managing Director at Freedom Capital Markets

Has anything changed? I mean, is there anything when you look at it seems like we're in a wave where maybe acquisition opportunities are a little bit greater? And will that continue in 2025, '20 '20 '6? Will you continue to look at your core competencies, whether it's overseas, whether it's in trucks, whether it's US, is there anything shifting there or can we expect more of the same assuming that we're in a similar type environment?

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

Hey, Mike. It's Shelley.

Michael Ward
Managing Director at Freedom Capital Markets

Hey, Shelley.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

We've talked before about our capital allocation strategy about wanting to grow 5% through acquisition and 5% internally. We did a really good job of taking advantage of some of the opportunities that came available to us this year acquiring $2,100,000,000 in annualized revenue.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

So if you stay along that same line, 5% of revenue, I think that's a good target in terms of our acquisition strategy. We're of course going to balance that with multiples on our stock. But you're absolutely right. We're going to look at every corner of our business. And we did that this year, right?

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

We looked, we took a look at international to start the year with the acquisition in The UK. We expanded into the Australia retail market, which is a significant opportunity for us. We also expanded, domestically and we expanded with trucks. So we'll continue to do that. We we like being safe and secure, but for the right price and for the right opportunity, we will take advantage of that.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

On the other side of that, we've got our return to shareholders in over $350,000,000 this year return, which is important to us and and something that, you know, we're gonna continue to, prioritize. We've got 150,000,000 of authorization from our board to look at share repurchases. And so we'll just go on down the line.

Michael Ward
Managing Director at Freedom Capital Markets

Thank you, Shelly. Thank you very much.

Operator

Next question comes from John Murphy from Bank of America. Please go ahead. Your line is open.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Hey, John.

John Murphy
John Murphy
Managing Director at Bank of America Merrill Lynch

Good afternoon. Hey, Roger. Good afternoon, Roger and team. Roger, just a first question.

John Murphy
John Murphy
Managing Director at Bank of America Merrill Lynch

It seems like the business is particularly on the new auto side is hitting an inflection point. And I think this was the first time in a while we've seen the front end growth, as you mentioned, up sequentially and a year over year basis. There's constant fear that new GPUs are going to keep falling, but it's not what actually happened this quarter sequentially for sure. Do you think we're hitting an inflection point here in the auto business specifically and maybe in the total business as well and we're back to sort of this period of growth in front of us

John Murphy
John Murphy
Managing Director at Bank of America Merrill Lynch

for the next few years?

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Well, I think number one, I think as you look at PAG, you've got to look at our brand mix. And as you know, overall, we're about 77% premium. In The U. K, we're 95%. And when you look at brands like Mercedes, BMW, Porsche, Land Rover, where we have very high concentration, we see that those brands are maintaining the growth, which certainly helps us.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

And overall, when you look at the go back to July of last year on new, we were at 6,500 and we're at 6,600 when I look at the January number. So look, I'm not saying that there won't be some deterioration. That would not be the right thing to communicate today. But overall, I think that from what overall standpoint, we have the opportunity to continue to have the strong gross profit. Obviously, F and I is a piece of that and we're really flexing to have more product and probably less F and I are financed because of the mix of leasing coming back.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

That'll help us on the premium side because a lot of these cars will go out. They'll come back on a three year lease and we'll get those as good used cars. And I think we can also use the vehicles we had in the past, that we couldn't use new loaner cars and service. We're doing that now and those cars coming out or make terrific used cars. So I think the gross on used will continue to be strong.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Obviously, as we look at The UK, we've taken the day supply over 90 in The UK unused from 6.1% or 6.2% down to just over 1%. So that's driving a higher margin. And again, Toyota is very strong now, which could be some ability to determinate to some downward pressure because we're dealing with Toyota with a single day, a single digit supply of use of new cars right now. So, I feel good about it. I think interest rates coming down hopefully we'll see more.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

So affordability will be key. And again, I see the captive finance companies being very active right now also. So that helps us maintain the growth.

John Murphy
John Murphy
Managing Director at Bank of America Merrill Lynch

And maybe Roger just to follow-up on that. Your bevs have been a weight on that GPU for quite some time now. Do you see relief from that going forward? I know the automakers becoming more realistic about what they're going to be delivering to you with bevs and you're not going to be overburdened with those?

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Well, if you ask me that question six months ago, I would say that our inventories were 30% to 40% bevs and the two premium to high premium brands. Now that is now down to about 11%, which really is more active from the standpoint of what we're selling. We're at 8% last year. So they've made a big pivot. And Porsche, who had the new Macan that came out, which was fully electric, has already notified to the dealers that they're going to have a nice version, which is really key.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

When we look at the discount right now, just take MSRP across all the bevs that we sell, it's about $6,800 less than a nice vehicle in each brand.

John Murphy
John Murphy
Managing Director at Bank of America Merrill Lynch

That's helpful. And just lastly, on the technician hiring plus 7% for 2024, what do you think you're going to be able to hit in 2025 as far as tech growth and how scarce are these folks? Are you finding more and more people coming in?

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Well, I would say this and from talking across the network that we're seeing more applicants than we have in the past. Now do they meet our criteria? Probably the answer probably is no many of them. But we see filling this funnel with people that can move up in the organization and we team them up with an A Tech and it's really paid off because this is a great business. And when we look at the techs, they're generating about $30,000 of gross profit per tech per month, which really helps us.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

And we're driving efficiency and we're using technology obviously to get this as gross profit. And again, I think this is key to us. One of the areas that we're always concerned about is body shop. We're investing a lot in body shops, both on the auto side and also the commercial truck. And we see this as a secret sauce where we're staying in it, not divesting of our body shop.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

So because as we get into premium side, not many people can fix a BMW or a Porsche properly. So we get the benefit of negotiating a better rate with the insurance companies. And I think when we grow our own, we certainly have less turnover. And I would say our turnover for the company last year was about 18% on a worldwide basis. And I think on the text, it probably was somewhere in 12% to 13%.

John Murphy
John Murphy
Managing Director at Bank of America Merrill Lynch

That's very helpful. Thank you very much, Roger.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Yes. Thanks.

Operator

Our next question comes from Thomas Wendler from Stephens Bank. Please go ahead. Your line is open.

Thomas Wendler
Analyst at Stephens Inc.

Hey, good afternoon, everyone.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

How are you?

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

Hey, Tom.

Thomas Wendler
Analyst at Stephens Inc.

Yes. I wanted to start off with just the commercial truck demand in 2025. How impactful do you think some of the pre buying could be prior to the emission changes in 2027?

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

Yes, Thomas, Rich Shearing here. I think it's a little bit of a wait and see at the moment because obviously you've seen the Trump administration and the new head of the EPA taking a look at rescinding some of the waivers that are out there today, whether that's advanced clean truck, the truck true or transportation refrigeration unit regulation. And then also looking at a national standard, and taken away California's ability to have independent regulations. And so none of those things are turned around quickly or easily. But I think there's a lot of support around some of those initiatives.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

And so I think time will tell. But I think right now most of the OEMs have probably made a significant investment already in meeting the 2027 standards around the book. And so that's going to play into the results as well. So I think as it relates to 2025, I don't think we'll see much of a pre buy effect there. As we go into 2026%, we'll have better clarity than on what the regulations are going to look like in 2027 and maybe a little bit easier to answer that your question.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

I think the other thing that would temper a pre buy is this rate recession. There's been it's lasted a lot longer than any of the previous cycles because of the amount of capacity that's in the marketplace at the moment. Typically, when you have a freight recession, the capacity comes out fairly quickly. You have a big reduction in used truck pricing. And then you get to a new state of equilibrium where the capacity and the trucks available meet the loads that are there.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

And that's not the case at the moment. With the used trucks that were sold at very high prices in the 2021, '20 '20 '2 timeframe, we're not seeing those carriers come out of the market as fast as they did in the past. And so that's adding to the length of the freight recession. So there's still an excess capacity for the amount of freight in the market at the moment.

Thomas Wendler
Analyst at Stephens Inc.

That was perfect. Thank you. And then maybe shifting gears a little bit here over to SG and A, 70 bps of improvement year over year this quarter. How should we be thinking about the major kind of puts and takes to SG and A in 2025?

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

Hey, Tom, it's Shelley. Thanks for your question. Our teams, first off should be commended for their daily efforts in SG SG and A. And and they're continuing to fight against inflation by watching, you know, all of the costs that go into that, numerator of the equation. We saw some success this this quarter in terms of lowering our, vehicle maintenance for service owners.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

We saw, an improvement in our advertising as we streamline our approach there. So really great job by our team of of just a daily battle to keep those costs low. When you look at the other side of the equation though, we're looking at at growing margin and the more profitable business lines. So with fixed growth up 9% and that's got a 58%, gross margin to it, reducing inventory costs. So we get more out of those used vehicles.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

You know, we're kind of pulling on all levers there. In terms of 2025, I think we're still comfortable with that low 70s guidance. You know, we've maintained it for the last five quarters. So it certainly seems, to be more normalized as opposed to just a trend. And, you know, we continue to see some improvements quarter over quarter being down 90 basis points from the third quarter.

Shelley Hulgrave
Shelley Hulgrave
Executive Vice President & CFO at Penske Automotive Group

It feels really good about our efforts. And again, our team should be commended.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

I'd also

Thomas Wendler
Analyst at Stephens Inc.

All right. Thank you very go ahead.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

We're really watching our comp to growth. This is a metric that people don't talk about much. But to me, we're looking at somewhere between 25% on the variable side and 25% on the fixed. And this is how you balance your compensation and also the number of employees you have per location. So inventory controls, comp to growth and we talked about the technology obviously that we're doing.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

And I think all this is driving this. And if you look at us probably and you look at 2025, we're going to be in that low 70%. I don't think we want to say we're going below 70% at all. So to be realistic, as you're looking to maybe some support on guidance on that, I'd say it's probably somewhere around 70% to 71%.

Thomas Wendler
Analyst at Stephens Inc.

Perfect. Thank you for answering my questions.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Thank you.

Operator

Our next question comes from Rajat Gupta from JPMorgan. Please go ahead. Your line is open.

Rajat Gupta
Executive Director, Autos at JP Morgan Chase & Co

Great. Thanks for taking the question. I just had one quick one on the truck leasing business. It looks like the truck price was stabilizing. You mentioned the basin demand is very strong.

Rajat Gupta
Executive Director, Autos at JP Morgan Chase & Co

Could you give us a sense of your outlook there for 2025 keeping the moving parts in mind? I mean, could we expect to grow again despite some of the interest rate and having severance? And I have a quick follow-up on that.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Well, what I would say to you is number one, we have a headwind on gain on sale. When you look at that from this last year, it was about $160,000,000 down from the previous year and certainly our interest costs were up 124. I think we're going to still see higher interest costs in 2025 because we're replacing 3% bonds with 5%. Percent. We just did 700,000,000 here in the last ten to twelve days and those are across the higher rates, which have a five year term on them.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

From the standpoint of the used truck market, we think from the standpoint we're thinking it maybe we hit bottom. So obviously, we hope that that's going to turn in our favor. Remember, last year we sold 41,000 units, which was a record for us. And even as we look at January, February going forward, we expect to have a strong first quarter. And that will help us balance our rental fleet.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Our rental fleet was 88,000. And I think at the present time, we've taken out probably close to 10%. And to me, that's going to make a big difference on utilization, which is key. It doesn't take much. Remember, we don't have to buy more trucks at this point to get revenue or gross profit.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

We just got to move our utilization because once we balance our fleet, it's all about utilization. And that's where we're focusing today. Obviously, we're balancing the personnel around the rental business also. So from our perspective, I'd be looking at a little bit of headwinds still on gain, certainly on the interest side. But when you look, we're up in sales from a lease standpoint from a contract maintenance and also in logistics.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

So overall, I think that we're in good shape and the number is available. You can see it. We were I think we posted a pretax about $717,000,000 of pretax and net income was somewhere around $6.85. And I would say we'll be around that same area hopefully a little bit better. We'll get through 2025.

Rajat Gupta
Executive Director, Autos at JP Morgan Chase & Co

Got it. That's helpful. And then just on the auto business on the used car side. I mean, you're still going through the reset of The UK stores. Could you give us a sense of when you expect your used business to start growing again?

Rajat Gupta
Executive Director, Autos at JP Morgan Chase & Co

Maybe if you could break it apart across U. S. And U. K. In this context of the supply challenges of younger buyers, when you expect that business to start to grow again?

Rajat Gupta
Executive Director, Autos at JP Morgan Chase & Co

On a unit perspective, obviously, grosses have been very strong.

Randall Seymore
Randall Seymore
Chief Operating Officer of International Operations at Penske Automotive Group

Yeah. Hi, Rajat. It's Randall. I'll start with The UK. I would say it's going to continue to be challenged.

Randall Seymore
Randall Seymore
Chief Operating Officer of International Operations at Penske Automotive Group

The estimate for the market for new car next year in The UK is about flat. So I think we're going to be in a similar, a similar market condition. So that's why we've taken the strategy to really focus on how we organically get inventory instead of going to the auction and buying cars that are very difficult to make gross on. So it's more of a gross strategy given the available inventory. And look, we're really focused with our team too is how you maximize our retention of trades when people are buying a new vehicle or used vehicle.

Randall Seymore
Randall Seymore
Chief Operating Officer of International Operations at Penske Automotive Group

So those are some of the levers we're pulling to get more inventory given the market conditions.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

And when you strip out, Randall, you strip out the car shop closures

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

or actually our used vehicle business was up on a worldwide basis. Which you better comment.

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

Yes, Rajat, you look in The U. S. Market then just

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

as

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

a comparison, when the new market's up, that generates the used cars. And we saw that certainly when you compare fourth quarter and the activity level there compared to the full year. If you look at the fourth quarter, our used retail sales were up 6% and you had a new car SAR in the fourth quarter that was near $16,000,000 whereas for the full year twenty four hour used car retail was up 1%. So I think if we see the SAR that's being forecasted for this year in that $16,000,000 to $16,500,000 car range, I think we'll see used cars correspondingly from a retail standpoint up

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

as well.

Rajat Gupta
Executive Director, Autos at JP Morgan Chase & Co

We have that this is probably the last twelve months, right? The next twelve months would be the end of the difficult cycle of the lease returns, right?

Richard Shearing
Richard Shearing
Chief Operating Officer - North American Operations at Penske Automotive Group

So then when you go beyond '25 into '26, lease returns should start kicking back up.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Well, that's one of the issues we have today is lease returns because leasing went from, say, in the premium side from 55% probably down in the 30s. Our lease business has gone from 25% to 33%, but it takes three years before this really starts to impact us. And these are critical vehicles for us because they're young vehicles. We can get good margin on those plus we can certify them and makes a big difference, especially on the premium side.

Rajat Gupta
Executive Director, Autos at JP Morgan Chase & Co

Got it. Great color. Thanks for answering the questions.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Yes. Thanks,

Operator

Our next question comes from David Whiston from Morningstar. Please go ahead. Your line is open.

David Whiston
David Whiston
Equity Strategist - U.S. Autos at Morningstar

Good afternoon, everyone. Just two questions for me. First on affordability and somewhat related to that is negative equity. Given your clientele, is that really not a problem for you guys right now?

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Well, I think negative equity, when we saw people buying used cars, what twelve to eighteen months ago, a car we were selling for 30 sold for 40. Obviously, this is an issue from the standpoint of trade ins. Now, we don't see a lot of that in the premium side because we had a lot of leasing and the manufacturers obviously were taking the residual risk on those. So we want more of those vehicles coming back. So I think because of our mix and primarily premium, we don't quite have that customer.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

I don't know if our team agrees with that, but we're not dealing with that customer. When you look at our subprime business, it's only about 6% across the company.

David Whiston
David Whiston
Equity Strategist - U.S. Autos at Morningstar

Where is your subprime exposure, Ashley? Is that more on the import side or is it in the premiumluxury space too?

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

It would be on the volume Ford and used car. Primarily probably it's more used car than it is new.

David Whiston
David Whiston
Equity Strategist - U.S. Autos at Morningstar

Okay. And, it's been reported that you are working with the Cupra. If that deal were to come together, I mean, who do you envision that brand's demographic being to buy those vehicles?

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Well, you've read about the discussions we're having with Cooper. This is twenty four to thirty six month journey and we really have a lot of open items here. So we really can't comment on where we are. But we are talking with them. We felt that it would be proper to let the market know that we're in discussions.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

But we don't really have anything to report tangibly at this point.

David Whiston
David Whiston
Equity Strategist - U.S. Autos at Morningstar

Okay. Thank you.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Thank you.

Operator

We have no further questions. I'd like to turn the call back over to Mr. Penske for any closing remarks.

Roger Penske
Roger Penske
Chair of the Board & CEO at Penske Automotive Group

Thank you, operator. Thanks, everybody. We had a great quarter, a great year, and we're looking forward to 2025, hopefully to continue our progress. Thanks, everybody.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Executives
    • Tony Pordon
      Tony Pordon
      Executive Vice President Investor Relations and Corporate Business Development
    • Roger Penske
      Roger Penske
      Chair of the Board & CEO
    • Richard Shearing
      Richard Shearing
      Chief Operating Officer - North American Operations
    • Randall Seymore
      Randall Seymore
      Chief Operating Officer of International Operations
    • Shelley Hulgrave
      Shelley Hulgrave
      Executive Vice President & CFO
Analysts
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Earnings Conference Call
Penske Automotive Group Q4 2024
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