Penske Automotive Group, Inc. (NYSE:PAG) Q2 2023 Earnings Call Transcript

Penske Automotive Group, Inc. (NYSE:PAG) Q2 2023 Earnings Call Transcript July 26, 2023

Penske Automotive Group, Inc. beats earnings expectations. Reported EPS is $4.93, expectations were $4.18.

Operator: Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the Penske Automotive Group Second Quarter 2023 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through August 2, 2023, on the company's website under the Investors tab at www.penskeautomotive.com. [Operator Instructions] I will now introduce Anthony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Anthony Pordon: Thank you, Leah. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's second quarter 2023 financial results was issued this morning and is posted on our website, along with the presentation designed to assist you in understanding the company's results. As always, I'm available by email or phone for any follow-up questions you may have. Joining me for today's call are Roger Penske, our Chair and our CEO; Shelley Hulgrave, EVP and Chief Financial Officer; Rich Shearing, North American Operations, Randall Seymore, International Operations; and Tony Facione, our Vice President and Controller. Our discussion today may include forward-looking statements about our operations, earnings potential, outlook, future events, growth plans, liquidity and assessment of business conditions.

We may also discuss certain non-GAAP financial measures such as earnings before interest, taxes, depreciation and amortization or EBITDA and our leverage ratio. We have prominently – we displayed or presented the comparable GAAP measures and have reconciled the non-GAAP measures in this morning's press release and investor presentation, which are available on our website to the most directly comparable GAAP measures. Our future results may vary from our expectations 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-K and our previously filed Form 10-Qs for additional discussion and factors that could cause future results to differ materially from expectations.

I will now turn the call over to Roger.

Roger Penske: Thank you, Tony. Good afternoon, everyone, and thanks for joining us today. Before we discuss our second quarter results, I wanted to welcome Randall Seymore and Rich Shearing to the call today. As you may recall, earlier this year, we added additional depth to our leadership team. Randall Seymore, Former Executive Vice President, Global Operations for Commercial Truck and Power Systems will now support our International Operations, Rich Shearing formerly President of Premier Truck Group supports our North American Automotive and Commercial Truck Operations. These roles will work in tandem with me, our President, Rob Kurnik and our executive leadership team while building further depth to ensure we have the best leadership team in place.

Let me now discuss PAG's financial results for the second quarter. I'm really pleased to report strong second quarter performance from our diversified business model. As we will discuss, the quarter was highlighted by the performance of our automotive and commercial truck operations was partially was offset with higher interest expense and lower equity earnings for our investment and Penske Truck Leasing. During the second quarter, total units delivered increased to 123,879 units, which includes 8,900 units, which were agency in the U.K. Revenue increased 8% to a quarterly record of $7.5 billion. Our same-store retail revenue increased 6%, including an 11% increase in service and parts. Same-store variable gross profit per unit retailed increased $163 when compared to the first quarter of 2023.

SG&A as a percentage of gross profit was 67.4% and improved 10 basis points sequentially. Net income was $301 million and earnings per share was $4.41. Year-to-date through June 30, we've repurchased 2.6 million shares for $350 million. Let me now turn to our automotive operations. Our demand for new vehicles remain strong and new vehicle availability is improving. However, we expect supply to remain below historical averages during 2023 for most of the brands that we represent. We continue to take forward orders and continue to see strong vehicle demand. In the U.K., our forward order bank represents 29,000 units. Grosses on these forward orders is approximately $132 million compared to $109 million at the same time in 2022. In the U.S., our current presold activity is approximately 50%.

Beginning in the first quarter of 2023, we transitioned certain brands in the U.K. to an agency model for new vehicle sales. Under agency we received a fee from the manufacturer for the sale and delivery of each new vehicle, which is recorded in gross profit. We do not record revenue for the price of these vehicles. Looking at our retail automotive operations on a same-store basis for Q2 '23 versus Q2 '22, total units delivered increased 6%, new retail up 9%, used retail down 8%. Retail automotive revenue, however, increased 6%, including an 11% increase in service and parts. Service and parts is being driven by an increase of 10% in customer pay, 13% in our warranty business and 14% in collision repair. In fact, many of our operations experienced record months in service and parts during the quarter.

Total gross profit remained strong and higher than historical levels. For example, variable profit per vehicle were $5,612 is more than $2,138 higher than it was in Q2 of 2019. Taking a look at CarShop, our unit sales were 18,206, down 10% as the continued availability of late model lower mileage vehicles remains very challenging. Revenue increased 2% to $475 million and variable gross profit per vehicle per unit declined 1%. We continue to focus on vehicle sourcing and the cost improvement programs, including digitization to improve efficiency. We operate 20 locations and remain committed to the CarShop brand. We have one store ready to open in the U.K. when the used vehicle availability improves. Let's turn to our retail commercial truck business now.

Our premier truck dealership business represents 44 locations in North America and is an important part of our diversification. During the second quarter, we expanded into greater Winnipeg, Manitoba market area, acquiring five new locations and $180 million in estimated annualized revenue. New commercial truck demand remains solid as being driven by replacement demand. In fact, we look at our entire allocation of Class 8 product for 2023 is sold out. Through June 30, North American Class 8 retail truck sales were up 18% to 165,000 units. The current industry Class 8 backlog is 175,000 units, representing approximately six months of sales. During the second quarter, same-store unit sales were up 25%. Same-store revenue was up 19%, including a 4% increase in service and parts.

Same-store gross profit increased 7%, looking at parts and service that represented 65% of total gross profit and covered 128% of the fixed cost for the business in the second quarter. Service and parts represented 65% of total gross profit and covered 128% as I said earlier, in the second quarter. Q2 EBT was $56 million, up $3 million when compared to the second quarter last year. As a data point, June 2023 was the second best month of EBT in the company's history. Let me now turn to Penske Transportation Solutions. PAG Group, as you know, owns 28.9% of PTS, which provides us with equity income cash distributions and cash savings. PTS currently manages a fleet of over 431,000 trucks, tractors and trailers, with a goal of increasing the fleet to 500,000 by 2025.

The second quarter operating revenue increased 6% to $2.7 billion. Full-service leasing contract revenue increased 14%, logistics revenue increased 6%, rental declined 6%. PTS generated $253 million of income, our share at PTS declined by $63 million. The decline in earnings was mainly impacted by four particular items. We have over 40,000 units on order with a factory that's the OEM factory as a result of supply constraints. We have 17,000 lease extensions so far this year and 36,000 extensions over the last 18 months. The older units in operation, obviously drove higher maintenance costs of $65 million in Q2. Our commercial rental utilization declined 410 basis points to 77.8%, really, that's still a strong number at 77% or 78%. Interest expense increased $47 million due to a higher average outstanding debt from the growth of the fleet combined with $1.5 billion in refinancing of the overall high interest with overall high interest rates.

A lower gain on sale of $55 million when compared to the record performance in 2022. As we look forward, we believe the supply of new trucks is stabilizing, which will provide PTS an opportunity to replace from the lease extension and certainly will lower maintenance expense. At this point, I'll turn it over to Randall Seymore to discuss our Penske Australia business.

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Randall Seymore: Thank you, Roger. In Australia, New Zealand and parts of the Pacific, we're the exclusive importer and distributor of Western Star heavy-duty trucks MAN heavy and medium-duty trucks and buses and Dennis Eagle a refuse collection vehicle. We're also the leading distributor of diesel and gas engines and power systems, principally representing MTU, which is a Rolls-Royce company, also Detroit Diesel, Allison Transmission and Bergen engines. Our business offers products across the on and off highway markets, including trucking, mining, power generation, defense, marine, rail and construction sectors and supports full parts and aftersales service through a network of branches, field service locations and dealers across the region.

The off-highway sector remains very strong, with nearly all heavy-duty engine allocations sold out for the remainder of 2023, predominantly serving the data center and mining markets. Some of these projects provide service contracts for five and all the way up to 20 years. Penske, Australia also offers these mining engines through OEM mine haul trucks excavators, loaders and we also repower these equipment. In the Energy Solutions space, we recently delivered and commissioned the first 175-megawatt Bergen natural gas power station in Australia. Our current order bank for Energy Solution deliveries is over $275 million for the remainder of 2023 and through 2024. Approximately 80% of all of our gross profit in this region comes from service and parts operation.

So increasing units in operation is a key driver of our business. I'd now like to turn the call over to Shelley Hulgrave.

Shelley Hulgrave: Thank you, Randall. Good afternoon, everyone. I would now like to walk you through several key financial highlights and discuss the strength of our balance sheet. We maintain our drive and discipline to achieve operational efficiencies through cost reductions, automation and other improvements gained over the last several years to help us maintain lower levels of SG&A to gross profit than historical averages. SG&A to gross profit was 67.4% in the second quarter and is 1,050 basis points below the 77.9% in 2019 prior to the pandemic. Most important, SG&A as a percentage of gross profit improved by 10 basis points sequentially when compared to Q1 of 2023. As a result of our efforts to control expenses in our U.S. automotive operations, our compensation to gross profit ratio improved by 30 basis points and our service and parts absorption improved 350 basis points over the second quarter of last year.

Similarly, in the U.K. our compensation to gross profit ratio improved 130 basis points, and service and parts absorption improved 440 basis points. Looking to the future, we will continue to focus on simplification and optimization opportunities that will help deliver further efficiencies and cost reductions, particularly through automation. Looking at our cash flow. We generated over $600 million in cash flow from operations in the six months ended June 30, 2023. During this period, we repurchased 2.6 million shares for $350 million and returned $87 million in dividends to our shareholders. So far this year, we have increased the cash dividend by 26% from $0.57 to $0.72 per share. We continue to maintain a disciplined approach to capital allocation.

Over the last 18 months, 60% of our cash flow from operations funded share repurchases, 23% to acquisitions, 12% dividend and 5% to CapEx for growth and expansion. Our trailing 12-month EBITDA is nearly $1.9 billion. At the end of the quarter, our long-term debt was $1.7 billion. Approximately $1 billion of the long-term debt represents subordinated notes with 55% maturing in 2025, while the remaining 45% matures in 2029. The average interest rate on these notes is 3.6%. We also have $586 million in mortgages and $160 million in other borrowings at subsidiaries. Debt to total capitalization was 28% and leverage sits at 0.9x at the end of June and is consistent with March. At the end of the quarter, we have the ability to flex our leverage up to 4x compared to the 1.9x, but lease adjusted ratio, leaving us plenty of opportunity for acquisitions and returning capital to shareholders.

During the second quarter, we amended our U.S. credit agreement to increase the facility borrowing capacity by $400 million. The amended agreement provides for up to $1.2 billion in revolving loans for working capital, acquisitions, capital expenditures, investments and other corporate purchases. At June 30, we had $120 million in cash, $630 million in vehicle equity and over $1.6 billion in availability under our credit agreement. Total inventory was $3.9 billion, representing an increase of $372 million from December 31. Floor plan debt was $3.2 billion. We had a 32-day supply of new vehicles, including 26 days in the U.S. and 36 days in the U.K. As a data point, our current day supply of new battery electric vehicles is 54 days in the U.S. and 52 days in the U.K. Days supply of new vehicles for premium was 35 and volume form was 15.

Used vehicle inventory had a 45-day supply. At this time, I will turn the call back to Roger for some final remarks.

Roger Penske: Yes. Thank you, Shelley. As Shelley mentioned, our balance sheet is strong, and I would say certainly safe and secure. The capitalization ratio of 28%. We have the ability to flex our balance sheet to maximize our future capital allocation. We're committed to offering convenient options to meet the shopping desires, of course, with all of our customers. This ranges from 100% online to our superior customer experience traditionally offered in store. These digital options include hybrid shopping solution, virtual test drives, remote signing for our customers, online scheduling and service, photo and video, digital and approvals for upsell and service. One of our key efficient initiatives is to leveraging artificial intelligence in both service and sales as we allow for automated interactions to answer basic service inquiries.

Set service and sales appointments using natural and conversational language even when our facilities are closed. Finally, I'm glad to say - I'd like to announce 44 of our U.S. dealerships have received notification from automotive news that they have been named to the best 100 dealerships to work for in 2023. I'd like to congratulate our team for the extraordinary efforts. In closing, I certainly remain confident in our business models. The results continue to demonstrate the benefit from our diversification across, the retail automotive commercial truck industries, our cost control and a disciplined capital allocation strategy. Thanks for joining us today, and we'll turn it back to the operator. Thank you.

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