Penske Automotive Group, Inc. (PAG) CEO Roger Penske on Q2 2022 Outcomes – Earnings Name Transcript

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Penske Automotive Group, Inc. (NYSE:PAG) Q2 2022 Earnings Conference Call July 27, 2022 2:00 PM ET

Company Participants

Anthony Pordon – Executive Vice President, Investor Relations & Corporate Development

Roger Penske – Chair & Chief Executive Officer

Shelley Hulgrave – Executive Vice President & Chief Financial Officer

Tony Facione – Vice President & Corporate Controller

Conference Call Participants

John Murphy – Bank of America

Rajat Gupta – JPMorgan

Daniel Imbro – Stephens Inc.

David Whiston – Morningstar

Glenn Chin – Seaport Global

Mike Ward – Benchmark

Operator

Good afternoon. Welcome to the Penske Automotive Group Second Quarter 2022 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately one hour after completion through August 3, 2022 on the company’s website under the Investors tab at www.penskeautomotive.com.

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 Britney. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group’s record second quarter 2022 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 am 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; Shelley Hulgrave, EVP Chief Financial Officer; and Tony Facione, our Vice President and Corporate Controller.

Our discussion today may include forward-looking statements about 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, amortization or EBITDA; and our leverage ratio. We have prominently 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 actual results may vary because of risks and uncertainties outlined in today’s press release, which may cause the actual results to differ materially from expectations. I direct you to our SEC filings including our Form 10-K and previously filed Form 10-Qs for additional discussion and factors that could cause results to differ materially.

I will now turn the call over to Roger Penske.

Roger Penske

Thank you Tony. Good afternoon, everyone, and thank you for joining us today. I’m pleased to report that our diversified business delivered an all-time record quarter results, second quarter for earnings before taxes, net income and earnings per share compared to the second quarter last year. While revenue declined 1% to $6.9 billion, foreign exchange negatively impacted revenue by $245 billion. Excluding FX, our revenue increased 2%.

Earnings before taxes increased 8% to $500 million. Net income continuing — from continuing operations increased 10% to $374 million and our earnings per share increased 17% to $4.93. If you exclude FX, EBT was up 10% to $511 million; our net income increased by 13%, up to $383 million; and earnings per share increased 20%, up to $5.04. Additionally when we compare the first quarter of 2022 earnings before taxes, our net income and earnings per share all increased sequentially.

Looking at our retail automotive operations on a same-store basis Q2 2022 versus Q1, despite the supply constraints that continue to impact new vehicle inventory and availability, demand remains strong and our pipeline of vehicles remains forward sold. Supply shortage has impacted total unit sales which declined 17% during the quarter. Our automotive revenue declined 8% and our gross profit declined 3%. However, if we exclude FX revenue only decreased 3% and our gross profit increased 2%. Our Service & Parts revenue increased 4% and without FX it was up 8%. And our variable profit per gross vehicle was up $841 or 16% to $5,999 from $5,158.

Looking at CarShop during the second quarter. CarShop unit sales increased 7% to 20,000 units. And our revenue increased 15% to $468 million and our same-store unit sales were flat and our same-store revenue increased 6%. Same-store variable gross profit per unit retail was $2,145 compared to $2,714 in the second quarter last year. Vehicle acquisition prices our reconditioning costs along with logistics continue to impact our profitability at CarShop.

In response to the current market conditions, we closed two satellite operations in the UK and are focused on improving the reconditioning efficiency, our logistics and improving our cost structure overall.

Let’s turn now to the retail commercial truck dealership business. Our premier truck dealership business remains very strong. And during the second quarter, our unit sales increased to 4,174 units, up from 146 in the second quarter last year. When looking at total revenue, we increased 23% to $769 million and gross profit increased 32% to $136 million. Our same-store revenue increased 11% and that included a 23% increase in our Service & Parts business.

Service & Parts represented 68% of the total gross profit and covered 133% of our fixed cost in the second quarter. Earnings before taxes increased 32% to $52 million. The new Class 8 truck market remains strong and the backlog is 222,000 units as of June 30. Approximately 75% to 80% of new Class 8 sales are commercial trucks and that market remains strong. In fact, our entire allocation for Class 8 product is sold out for 2022 and ’23 orders will open up some time in the September to October time frame.

Let’s turn now to Penske Transportation Solutions. As you know, we own 28.9% of Penske — of PTS which provides us with equity income cash distributions and cash savings. PTS currently operates a fleet of over 387,000 units, an increase of 21,000 compared to the end of last year. PTS produced a record quarter driven by strong performance from contract, commercial rental our logistics business and remarketing. Revenue increased 20% to $3.3 billion and profit increased 33% to $472 million. As a result our equity earnings increased $34 million to $137 million year-to-date. We’ve also received $105 million in cash distributions.

Now let me turn it over to Shelley, our Chief Financial Officer.

Shelley Hulgrave

Thank you, Roger. Good afternoon everyone. Our capital allocation strategy and record financial performance continues to leave our balance sheet in great shape. At June 30, we had $155 million in cash and over $1.1 billion in liquidity. Year-to-date, through July 26, we spent $363 million on repurchasing 3.5 million shares and acquired 148,000 shares from employees for $17.2 million.

In July 2022, our Board of Directors increased the authority delegated to management to repurchase our outstanding securities by an additional $250 million, bringing the company’s total repurchase authority to $331 million. We also paid $74 million in dividends. So far this year, our Board of Directors has authorized three increases to our dividend, growing the quarterly dividend from $0.46 to $0.53 per share or up 15%.

In total we’ve returned $437 million to shareholders so far this year representing 59% of our net income. We’ve also spent $110 million on CapEx and an additional $30 million for land acquisitions for future growth. When looking at our future capital allocation, we maintain a disciplined approach, that focuses on opportunistic acquisitions and investments, across our retail automotive and commercial truck businesses; capital expenditures to support growth and our sustainability initiatives; delivering a strong dividend to our shareholders; accretive securities repurchases, especially in light of elevated valuations of current acquisition opportunities in the retail automotive market; and reducing debt where possible.

At the end of June, our long-term debt remains below $1.5 billion, which is consistent with December 31 of last year. Our long-term debt consists of $1.04 billion of subordinated notes, which mature between 2025 and 2029; $416 million in mortgages; and $30 million under our Australian credit agreement. The average interest rate on our total fixed rate debt is 3.8%, which we have secured for an average remaining term of 5.8 years. Debt to total capitalization was 26% and our leverage sits at 0.7x.

At the end of June, total inventory is $3.1 billion, which is consistent with December 31 of last year and is up $118 million from June 2021, largely related to an increase in commercial vehicles and parts from acquisitions completed in the last 12 months. We have a 21-day supply of new vehicles with premium at 23, volume foreign at eight and domestic at 21.

New vehicle supply is at 12 days in the US and 32 days in the UK. We continue to sell into our future new vehicle pipeline to support our customers, maximize inventory turn and minimize our inventory costs. We expect the current supply challenges coupled with strong demand to keep our new vehicle supply at low, but manageable levels for at least the next nine to 12 months. Used vehicle inventory is in good shape with a 42-day supply.

At this time, I will turn the call back over to Roger.

Roger Penske

Thank you, Shelley. Let’s turn on to business development. I’m pleased to report we’ve completed acquisitions and new open points representing $745 million in annual revenue so far this year. Additionally, this morning we announced we’ve signed an agreement to acquire five Mercedes-Benz dealerships and three after-sales locations in the UK from the factory. The acquisition includes our flagship dealership which is located adjacent to our existing Audi West London dealership, which is the largest Audi dealership in the UK.

The acquired dealerships and after-sales locations are expected to generate approximately $550 million in revenue for the full year of 2022. We expect to close this transaction during the third quarter, subject to customary closing conditions.

Turning to sustainability. Our sustainability initiatives are important to our strategy and we’ve built a dedicated team to drive our future efforts on sustainability and decarbonization. We are committed to electrification and are working with our OEM partners to build infrastructure to support the sale and service of electric vehicles throughout their life cycle. We’ve already installed over 1,300 charging stations across our network.

To put electrification in perspective through June 30, 2022 we sold 16,800 electrified vehicles in the US including 1,800 pure battery units which represent 3% of our new vehicle units, while in the UK we sold 4,700 units including 2200 pure battery units where electrification is supported by lower taxes and government incentives. We’re also focused on decarbonization through improved energy management, increasing the use of renewable energy and recycling programs at our locations to reduce greenhouse gas emissions.

Moving on to our additional initiatives. Our omnichannel strategy continues to focus on customer life cycle and evolves with the changing landscape. We’re using digitization and automation wherever possible to improve the customer experience and drive satisfaction to improve loyalty and our customer retention.

Additionally, we’re using integrated digital solutions at our dealerships that automate and streamline document processing during the sales transaction minimize paper — physical paper output and ensure consistency and more important compliance and quality control across our organization. We continue to focus on online reputation management, where our lifetime Google Star ratings for our US dealership is 4.7 stars.

For sales we continue to enhance our digital retailing strategy, while embracing our OEM partner initiatives. We currently are supporting programs from BMW, MINI Porsche, Toyota and Lexus, Honda Lincoln and Nissan. Our OEM initiatives offer some advantages versus an in-house solution as they enable a buy online function from OEM sites that also integrate with our captive finance company for online credit approvals rates and programs etcetera.

In the UK, we have a proprietary system that supports digital retailing for our franchise operations including CarShop. In the second quarter, we generated 4,800 online transactions and approximately 2,400 sales which reflected 5% of our sales in the UK market. On the service side, we continue to encourage online appointments and payments to improve efficiency. Online payments have increased 27% when compared to the second quarter last year and online and BDC appointments were 515,000.

In closing, our results reflect the dedication of the people that make our business one of the best companies to work for and I want to thank all of them for the record results they produced so far this year. Also, I’d like to congratulate the 46, Penske dealerships that are being recognized by Automotive News on the list of the best 100 dealerships to work for in 2022. This is an outstanding achievement and continues to set us apart from everyone else. I continue to remain confident about the opportunities I see across our diversified enterprise.

Thanks to all of you that joined us today and I’ll turn it over to the operator for any of your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of John Murphy with Bank of America. Please go ahead.

Roger Penske

Hey John.

John Murphy

Good afternoon, Roger – Roger, Shelley and Tony. Just – Roger, one of the big concerns I think people have is that, eventually volumes are going to recover and grosses may come under a bit of pressure then which will be a market dynamic. But what you can control in a pretty significant way is your SG&A costs.

So, I’m just curious as volumes recover and inventory rebuilds, probably not going to be until late 2023 that we figure this all out. But what kind of actions on SG&A do you think you can take to keep a lid on them in inflating? And if you could just maybe remind us how sales comp plans are generally structured because that would be a big portion of variable that could theoretically inflate as volume comes back or maybe not?

Roger Penske

Well John, first let’s go back and look at pre-COVID, our SG&A was running 78% of gross. Today it’s at 66%. It’s up 3% from Q1 sequentially. And I think that we’re going to end up somewhere in the low 70s as we tend to get back to normal — to a normal business. Now obviously, we’ve had some impact due to salaries and wages. There’s pressure on that. We’ve had the opportunity to open up our people to be able to travel, which has increased some of our SG&A. Our marketing costs and advertising is down.

The good news is we took 10% of our people out during the COVID, which has reduced our SG&A from that standpoint, not including, obviously, the additions we’ve had from our acquisitions. Overall, I think that taxes have increased some. But I think that today we are really tight. Our turnover right now is at 17% to 18%, depending on which area of the country you look at.

When you talk about comp to growth, we’re running at about 40% overall and that’s consistent with what it was last year. When you look at our variable compensation, it runs about 25% of gross and on the fixed side, which is parts and service, it runs about 25%. So overall, I think those are steady. They’re in line and we don’t see really anything driving those higher, because a big part of our business is variable, when you think about flat rate mechanics, you think about sales.

And the good news on the sales side, with the reduction of our people, we’ve been able to get more productivity and that’s helped us drive some of these grosses from the standpoint of reducing the number of sales people, but adding more units per person, which has been key.

So again, we’re going to be driven here from an SG&A probably — with the supply shortages from a marketing and advertising standpoint, we’re going to keep that pretty much in hand and not grow that and expect where we need to maybe on a new acquisition in the marketplace.

We think that as we look at the business pre-COVID, we really looked at how we would restructure the business and we’ve kept those parts of our business in line, and that’s given us I think the ability to maintain probably anywhere from 500 to 700 basis points better as we get into a more normal operation and again with a 10% reduction in people.

John Murphy

Okay. That’s incredibly helpful. And then just a second question, and this is kind of a high-class problem, and it’s kind of a little bit tough to give you a hard time about this. But 0.7 times, your net leverage, I mean that’s pretty — that’s reasonably conservative relative to what a lot of your peers are running at.

Admittedly, you did $1.3 billion in acquisitions and $275 million in buybacks year-to-date. So you are actually deploying capital. So, you’re pushing it. But I’m just curious if there may be an opportunity to maybe even take on leverage and get a little bit more aggressive on buybacks or acquisitions whether it’d be in new, used or maybe even in the commercial truck side.

Roger Penske

Well, I think right now in the current business conditions and a lot of the uncertainties, we want to be safe and secure. And basically, we’ve driven almost $1 billion worth of debt out since, I think, the end of 2020, and we want to continue to have that flexibility. I think we’ll see within our numbers here that with that lower — I think it was 0.7 times gives us really a war chest to do something.

But right now, we’re going to look at buyback versus acquisitions. And right now, with the high prices, I think that we’ll have to look at that even further quarter-by-quarter. But we continue to, like our stock from the standpoint of buying it back, if it’s necessary. And we’ve seen some great opportunities on underperforming maybe lower costs for some of these acquisitions that we’re making throughout our total network around the world.

So, overall, if you look at acquisitions, we made $1.9 billion over the last 18 months plus the share buyback, which was about 8% of our stock. So, I think that it’s going to balance between that. And it’s so fluid, it’d be hard for me to say, which is going to be the main focus. I think we’re going to look at all of them on a monthly basis as we look at our overall capital structure.

John Murphy

Roger, if you were to think about sort of normal times without all the chaos that appears to be swirling at the moment. What would you think sort of net leverage could or should be? What would be the target that you and Shelley would be looking at there?

Roger Penske

Well, I guess when things get back to normal, probably what two, somewhere at, Shelley?

Shelley Hulgrave

Yes. I think two is accurate. I think certainly our target to remain below 2.5 on an adjusted basis, and we certainly have a lot of runway to get us there.

Anthony Pordon

But we have flexed the balance sheet in the past to make acquisitions like we did with the PTS acquisition to go above three if we needed to.

Shelley Hulgrave

That’s right.

Roger Penske

You might mention where we are from a credit rating perspective, what the expectations are from the agencies.

Shelley Hulgrave

Yes. So the conversations that we’ve had, if we can keep that adjusted level below 2.5 to three times for the remainder of the year, we could start talking about investment grade. And as I mentioned, we’ve got a lot of room. We’ve got a lot of runway to get there. And all the things that we’ve mentioned, the acquisitions, the share buybacks, the dividend, all of that has kept — has been able to finance that through cash flow from operations and keep our debt at steady levels. So, it certainly hasn’t — keeping our leverage at 0.7x, certainly hasn’t hindered us from a capital allocation standpoint.

Roger Penske

And we want to be very careful. We don’t stray off road where we are. Obviously, we are seeing the benefit of our PTS investment. Australia continues to grow, and we look at what we’re doing there from the standpoint of that business. And overall, we just had our Board of Directors in the UK and the ability for them to grow is a real opportunity there as people move forward. So overall, we’re going to try to stay safe and secure John. But I think we’d like to get to investment grade. We’re certainly in a position to move on into bigger acquisitions. But they’re going to come to us, and we’re not going to overstretch if possible.

John Murphy

Okay. Thank you very much. I appreciate it. Thank you.

Roger Penske

Thanks, John.

Operator

Thank you, Mr. Murphy. [Operator Instructions] Next question comes from the line of Rajat Gupta with JPMorgan. Please go ahead.

Roger Penske

Hi, Rajat.

Rajat Gupta

Hey. Good afternoon, Tony, Roger, Shelley. Just had a question on PTL, the first one. Really strong trends again in the second quarter, could you quantify like what the gain on sale impact was in the quarter? And excluding gain on sale how do you see trends for the remainder of the year? Maybe if you could give us some color across the different business lines how you see them progressing through the remainder of the year. And I have a follow-up. Thanks.

Roger Penske

Yeah. Good. From a full-service lease perspective, our revenue was up 8% and commercial rental was up 35%. And remember 50% of our commercial rental business comes from our lease customers. And with the growth, we’ve had on that over the last three years that’s paying real dividends for us for now. And I think vehicles on rent from a commercial rental perspective, daily have been running about 65,000 if you can believe it. We have the largest rental fleet probably in the world when you look at it and it probably is two to three times higher than our closest competitor when you look at the revenue coming out of that.

And from overall – from the overall standpoint, our business was still up 7% to 8%, if you take out – if you just take out the gain on sale increase over the years. So again, it’s still been a very big growth business. And we think that logistics impact we’ve had we were up 11% in the quarter.

Our consumer rental was down and that’s the one where rent it here leave it there. But the good news is we’re able to repurchase those trucks into our commercial rental fleet, which obviously we’re getting markup and good margins on that. Probably, the biggest impact we have is, we only have 4,000 units to sell, because we’re being backlogged from the truck manufacturers with over 60,000 units on order. And we get those – and as soon as we get them we either add them into our rental fleet get an older unit out which will reduce our maintenance cost. So we’re pushing hard on the OEMs and we still see that going to be probably through 2023 into 2024 before we get back to a normal supply chain capability for us on heavy trucks.

Rajat Gupta

Got it. And the gain on sale in 2Q? And how much was that year-over-year?

Roger Penske

Well, it was $140 million and it was up $95 million. Now, we get in – from the standpoint of PAG, we get $27 million of that what would accrue to our profitability for the quarter. Tony?

Anthony Pordon

Correct. Our ownership percentage of 28.9% times the $95 million is $27 million. That would have increased on a year-over-year basis in the second quarter.

Rajat Gupta

Got it. Got it. And maybe just to follow-up on like the SG&A question. There’s going to be a number of electric vehicles hitting the market in next 12 months to 18 months. Maybe if you could give us a sense of how those models coming in changes just the headcount structure of the store, the composition, payroll just productivity given those units are going to require a little bit more of an educational experience and maybe a little bit more of hand-holding relative to the eyes of new customers. So maybe any thoughts on that how you see that progressing and changing just the look and feel of the dealership? Thanks.

Roger Penske

Well, I think that’s a good point. We see that training is necessary. We see the tools and also the facility changes we have to make to be able to handle a BEV vehicle because of electrification. And that will take some of the – at least initially it’s going to be all under warranty. But as we go out into the longer life of a vehicle – electric vehicle those will come back into the shops. So I feel that will be a benefit. We have to train our people based on OEM requirements. We talked about the number of electrification points we have from the standpoint of already – and that’s to meet many of the OEMs’ requirements for fast charging and we’ll continue to add to that as we go forward. But from a training perspective this is always accomplished with – arm in arm with the OEM.

Rajat Gupta

Got it. Great. Thanks for the color. And I’ll jump back in queue.

Roger Penske

All right. Thanks, Rajat.

Operator

Thank you, Mr. Gupta. Our next question comes from the line of Daniel Imbro with Stephens Inc. Please go ahead.

Roger Penske

Hey, Daniel.

Daniel Imbro

Congrats on the quarter.

Roger Penske

Thanks, Daniel.

Daniel Imbro

Roger I want to start on the demand side of the equation. Can you just maybe provide an update on however you measure it the amount of inventory presold or how many – how much visibility you have basically into the back half of the year on to the demand side? And then maybe can you touch on auto and commercial truck and how that differs?

Roger Penske

Well, let’s look at auto here in the US. Right now, we get allocations and — giving it now maybe 30 to 60 days and they might give an allocation of 300 cars. And within a week, they pull it back. So again it’s really a variable. We’re selling into that allocation, on a day-to-day basis. And typically, as we look at our inventory at 12 days, everything that’s coming in is going back out. In fact, when I look at — I think we’re running at 95% of allocation we’re turning and that’s how we’re driving obviously, the inventory.

From a lookout, some of the high-priced cars Corvettes and some of the fancier luxury cars we probably have six months to a year. On the other hand, if we go to the UK, where people typically spec their car and build it, we have 35,000 forward sold orders in the UK today representing about US$130 million when you look at it from a standpoint. And we have a 30% flow-through on that roughly, as we look at it going forward.

So quite positive. From the truck side, again we’re sold out through 2022 on the heavy-duty truck side. And we’re all — as I said earlier, I think we’re going to be starting to have allocation September, October into 2023 and we can even see that from the standpoint of what’s available across our leasing business.

Daniel Imbro

Got it. That’s helpful. And maybe on the used — on the auto side, I wanted to touch on CarShop. I think of the slide that said same-store units were flat but obviously, overall retail same-store was still I think down 11%. So how was that segment able to outperform so materially? And can you accelerate that growth or use some of those learnings back across the rest of the dealership channel?

Roger Penske

Well, I would say today CarShop, both in the US and the UK has a huge focus, because where we normally farm within the say £12,000 to £14,000 or £15,000 vehicle in the UK we just can’t buy them. And in the US, we’ve had to move up from a $20,000 cost car to a $30,000. We tried to back up and look at these $8,000 to $10,000 to $12,000 vehicles. But to me, they’re really wholesale.

And we just told our people the customer experience, the guest experience, buying those cars along we’ve seen our policy go way up on those types of vehicles. So we’ve really had to pull back, because we just don’t have the ability to buy the cars that we want because of the lower new car volume that’s reducing the number of used into the market. And therefore, that we’re really looking at volumes being down over the next several months, until this whole market changes.

But we’re going to use technology. We’re going to shorten up the time potentially between reconditioning, because we think we’ve got money there that we’re losing because of just logistics, getting cars into our locations to be able to recondition them properly for the customers. So, there’s quite a bit of opportunity. I think that self-sourcing is key.

In the UK, we’ve got to use more — we’re using more of auctions. We’re — here in the US, we’ve been able to move that up. We’re up to about 80% to 85%, which is certainly good. But it’s a focus for us. We’re in the business. We’re staying in it. But I would have to say, that with all the turmoil right now I think the best thing we’re doing is it’s making us better building a stronger foundation, and we’ll continue to look for ways that we can enhance our gross margin.

Daniel Imbro

Great. Great. And last one for me just on the used commercial truck side, you mentioned new backlog is still real strong. But on the used side, are you seeing any softening of demand as the freight market softened, or anything changing there as we see prices begin to fall in the used truck side?

Roger Penske

Well, I think right now the reason we’re seeing price falling is because they’re way too high. I mean just realistically, a lot of these trucks that were being purchased at these high margins were owner operators. But with freight rates or with freight availability being down, these people just can’t afford these payments on these higher-priced used and I think that’s having some impact on the overall market. Right now, our big customers from PTG have been selling their trucks themselves. So we have the opportunity, as we go forward, to action some of those trucks into our inventory and we’re pricing those today on a 30-day basis, meaning that we’re not giving you a price on a trade more than 30 days out and we’ll continue to adjust those accordingly.

And we’ve seen that come down and yet we made an acquisition, South west in Portland and Salem and we took on some trucks, newer trucks what I would say, two to three years old or low mileage which obviously, are at higher rates and those seem to have some impact on some of our margins right now. But that’s 100 to 150 trucks. So as we get through those, we’ll be back pretty much at the level.

On the other hand, when you look at PTS at our truck leasing business, I think I mentioned it earlier, that we’re selling trucks that are four to five to six years old and those margins continue to be very strong. We see very little deterioration on those at the moment. So I think overall we’re in pretty good shape.

Daniel Imbro

Great. Thanks so much, guys. Good luck going forward

Roger Penske

Thanks.

Operator

Thank you, Mr. Imbro. Our next question comes from the line of David Whiston with Morningstar. Please go ahead.

Roger Penske

Hi, David

David Whiston

Hi, everyone. I guess, I want to start with a used vehicle question. Obviously, it’s very expensive to buy a car for both consumers and for the retailers right now. But is that affordability issue? Is that — are you seeing any indication that’s hitting the CarShop customer more than it is at the franchise level customer?

Roger Penske

I would say, so for sure. Wouldn’t you Tony?

Anthony Pordon

Yes absolutely.

Roger Penske

Basically we’re remember that CarShop with someone — and I’m talking about — in the UK, we’re talking say £12,000 to £15,000. And in the US, we’re looking at a car being sold between $20,000 and $23,000. Well, obviously, the revenue per unit has gone up considerably as we look at the business right now and that’s just taking some people out of the market. And I always say with our acquisition costs, it’s squeezing our margin too at the same time. And in the UK, obviously, they’re looking at buying — they have 6,000 cars in inventory and turning it about I’d say 32 or 33 days, but the margin has really been impacted because of the overall cost of sale.

David Whiston

Yes, I hear you there. I guess on SG&A going back to that earlier discussion, is there any more you can take out without reducing headcount?

Roger Penske

Well, look, there’s always more that we can take out. I mean, I think that when we think about people traveling now, we want our people out. We run this business with Zoom and some of these other things for the last 12 to 18 months and our people want to get out. We want them to. We think training is important, a lot of the things we’re doing with the OEMs and that’s going to continue to grow from a standpoint.

I said, there’s certainly wage pressures with inflation right now. People are living in a different environment. So we’re having additional costs there. And certainly when you look at our company vehicles, you look at the cost of — fuel costs just I don’t know how many — I forget how many loaner cars we have, but several thousand and we are providing those to our customers. So these costs will continue to go up.

On the other hand, we’re going to be looking for ways to — certainly through our technology that we’ll be able to reduce costs time to customer and other things that we’re doing that will reduce our overall margin, I mean, our overall costs as we do business across whether it’s new used or parts and service. And I think we can do that.

Right now the customer on service doesn’t even have to come in the shop. We got to a point where he makes his appointment online, he drops his car off, he pays online and either we can deliver it. So these are things that will take less people, and we’ll be more efficient in our shops.

And I think the training that we’ve been able to do from the standpoint of our parts and services made a big difference. And our commitment and technology in body shops where we’re doing a lot of wheelwork now, which we hadn’t been doing before across all the high — the German brands are quite honestly, they’re really piling it in the UK, but made a big difference as far as margin.

Anthony Pordon

David, this is Tony. There’s also other processes that we’re working on to improve automation that should help reduce some of the costs as we move forward too. So you can look for that to come in the future.

David Whiston

Yes. Do you think that’s more of a six-month story or more won’t be realized for another couple of years on the automation?

Anthony Pordon

Both to that.

Roger Penske

I think it’s happening every day, but we’re also getting costs going up. So, it’s — remember we were in the high 70s pre-COVID. We’re at 63% in Q1. We’ve opened up travel and what have you. We got some higher rents that have come in. And we’re now — we went from 63% to 66%. I said earlier in our conversation, we’d be looking to settle somewhere around 70% to 71%, which still is a 10% reduction on where we were before which is significant.

David Whiston

Yes. It’s been really cool to see all the improvement both on costs and also on your balance sheet with the leverage ratio going down. Just one other quick one. On Australia, I’m just curious how you were able to grow EBT 5% despite a 14% top line decline.

Roger Penske

Well, I think, basically, it was again as we merged the businesses — we had two businesses there before our off-highway and on-highway. We merged those together so we’re using single facilities, which has helped us from a cost perspective and the margins that we’re getting on our truck business has made a big difference even though the volume is down. And I think that the mix is better and fusion, of course, is where we’re doing the parts and service on trucks within our own what I would say the after-sale network that we had available to us for the off-highway business.

And again, the margins we’re getting on when you think about right now when we look at gensets over 1,200 kW, we probably got 50% of the market, which is really key and we continue to get repowers. We’ve got about 650 trucks running in Australia and New Zealand with big MTU 4,000 engines. And we’re doing a lot more repowers, which are giving us more margin even though the truck business is down meaning the commercial truck business is down, which would hurt our overall volume.

Again parts and service will be the annuity. When you think about the fixed coverage in Australia is 160% and the fixed coverage in New Zealand is 130%. So we think we got a solid business. Then you take the — when you look at the $500 billion of spend that the government is going to have over the next 10 years and you think about the things that we’ve won there from the standpoint of our contracts, on power packs, on combat vehicles, the offshore patrol vessels and we’re working on the Collins class repower submarines, all of these things are key as we go forward.

And many of those don’t have a sales dollar. We’re getting paid on some of those just for the labor hours that we provide for the government. So this might be some of the reasons you see that benefit. But it will ebb and flow as we go through the rest of the year.

David Whiston

Okay. Thanks a lot.

Roger Penske

Okay. Thanks, David.

Operator

Thank you, Mr. Whiston. Our next question comes from the line of Glenn Chin with Seaport Global. Please go ahead.

Glenn Chin

Great. Thank you. Good afternoon folks.

Roger Penske

Hi Glenn.

Tony Facione

Hi Glenn.

Shelley Hulgrave

Hi Glenn.

Glenn Chin

Roger or maybe Shelley given your underleveraged status and the abundance of capital you have to deploy, can you just fill us in on what you’re seeing in the pipeline, just in terms of availability? Maybe what you’re seeing on valuations whether or not they’ve come in at all?

And then, what your preference maybe light vehicle versus commercial vehicle? And then, I guess further to that, given that you’ve done some deals up North what your preference may be U.S. versus Canada?

Shelley Hulgrave

Sure Glenn I can take this one. We’ve acquired $1.9 billion in the last — in the trailing 12 months. It’s roughly 50-50 auto and truck. And we really like it there. Trucks are a cheaper multiple typically about 50% of the multiple of an automotive dealership. They don’t have the CPI — or the CI requirements that we see on the auto side.

However we’ve made some really great acquisitions on the auto side, at valuations that are attractive to us. So U.S. and Canada both of those on the truck side our acquisitions have been along major highway routes.

So it’s very important to us from a customer standpoint to be able to take care of that trucker from start to finish on his run. And all — both Canada and the U.S. we see a 60% gross profit related to service. So that’s really important to us.

We also have made quite a few acquisitions and we announced one this morning [indiscernible]. And that’s on the automotive side. We made one earlier with BMW and plan to make the Mercedes one here before the end of Q3.

So it’s really a mixed bag. There’s no script. We’re not following any particular discipline only that we’re evaluating each opportunity as they come up. And I know I sound like a broken record in saying we’re disciplined, but it really has proven out for us.

Glenn Chin

Okay. And speaking of discipline, can you just speak to us about what you’re seeing in terms of valuations recently? Have they come in versus last year? Holding up?

Roger Penske

Let me answer that one, Glenn. I would say if you’re looking at a premium luxury, German brand, so BMW and Mercedes, Porsche, Audi you’re looking at probably eight or nine times trailing 12 EBT for goodwill plus assets would be what we see.

We’ve been able to make acquisitions for less than that where they’re smaller and maybe not in the premium luxury side. Toyota and Honda are very strong. And to me, there are some people that just are going to get out of the business at this point.

I think there is competition out there to buy these better points. But what’s happening is many of us are running into what we call framework agreements which limit the amount of stores you can have in a particular market or with a particular brand.

And on top of that your, CSI and some of the other components of customer satisfaction become a factor. So that will play into it as we go forward. But right now the premium side is at a high multiple and we’re all experiencing that. I don’t think we’re just the only one. On the other hand as we go to Europe in the U.K. we see that down significantly from what we’re paying here.

Shelley Hulgrave

And it has to make sense from an SG&A perspective. We have our area markets and the acquisitions that we made have made sense, so that we’re not taking on additional administrative costs but using them from what we have purchased. So BMW of Escondido is a great example.

We already have presence in that auto mall. And it fits really nicely into our SoCal Management Group as well as the BMW and Mercedes dealerships in the U.K. holding really well to the structure that we already have there. So that is one way we’ll continue to reduce costs is to make acquisitions that make sense for us from a cost standpoint too.

Glenn Chin

Okay. Very good. Thank you.

Shelley Hulgrave

Thanks.

Operator

Thank you, Mr. Chin. Our next question comes from the line of Mike Ward with Benchmark. Please go ahead.

Roger Penske

Hey, Mike.

Mike Ward

Thank you very much. Good afternoon, everyone.

Tony Facione

Hey, Mike.

Mike Ward

I’m just curious about — you see some of the other dealers getting into financing and an acquisition that you just announced is $0.5 billion of revenue from with Mercedes stores in the U.K. It seems like you have a lot of growth opportunities with your additional structure. I’m just curious what you think about alternate businesses whether it’s captive financing or anything else that makes — that you’re looking at.

Roger Penske

We’ve been calling ourselves the big D diversified. I’m glad to see other people now are following — calling the same route. But look all of us have different reasons. We’re growing our business in our peer group. And look I’d take my hat off to them but I’ve talked to our Board over the last five or six years many, many times. We’ve looked at it but we just don’t think at this time that a captive finance company really makes sense for us because when you look at our brand mix 70% of it is premium. And in the premium side leasing is a big factor of that along with certified. And when you look at half – on-third or one-fourth of our business is in the UK. And when we look at it from the standpoint of our CarShop business, we’re doing — we’ll do say 12000 to 20000 units over the next say 12 months in that business we just don’t have enough volume.

And when you look at the average length of the customer financing it’s probably 72 months. And the credit score is probably below 700. And today with delinquencies going up on retail across all other markets I wonder — and then you’re going to blow up your balance sheet. And on top of that you’re going to have to take that and sell it into the market securitize it.

And I think today the people that buy that are going to say is this really what we want to buy 72-month or 60-month paper from the standpoint in the car business with the inflation that we’ve had on used car prices? So not that we won’t ever get into it but we think it’s a bad idea. Right now we don’t think that glove fits our hand.

Mike Ward

Okay. That makes sense. Shelley, can you talk a little bit about the cadence of expected dividends from PTL? I think it was $105 million. Is that what it was in the second quarter?

Shelley Hulgrave

Yes. So we received $105 million. So that related to our Q4 and our Q1 of 2022 earnings. And so it’s a straight 50% dividend policy. And so we can just follow that cadence and we’ll receive additional dividends in August and November.

Mike Ward

August and November? Super. Thanks very much.

Roger Penske

Thanks, Mike.

Operator

Thank you Mr. Ward. [Operator Instructions] Currently, there are no questions waiting at this time. I would like to pass the conference back to Mr. Penske for any final comments.

Roger Penske

Bethany, thank you. Thanks everyone for joining us and we’ll see you at the end of the next quarter. Have a good day. Bye-bye.

Operator

That concludes today’s conference call. I hope you all enjoy the rest of your day.

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