Penske Automotive Group, Inc. (NYSE:PAG) Q1 2024 Earnings Call Transcript

Penske Automotive Group, Inc. (NYSE:PAG) Q1 2024 Earnings Call Transcript April 30, 2024

Penske Automotive Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. And welcome to the Penske Automotive Group First Quarter 2024 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately one hour after completion through May 7, 2024 on the company’s website under the Investors tab at www.penskeautomotive.com. I will now introduce Tony Pordon, the company’s Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Tony Pordon: Thank you, Leah. Good afternoon, everyone, and thank you for joining us today. As you know, a press release detailing Penske Automotive Group’s first quarter 2024 financial results was issued this morning and it’s 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 and CEO; Shelley Hulgrave, our EVP and Chief Financial Officer; Rich Shearing, North American Operations; Randall Seymore, International Operations; and Tony Facione, our Vice President and Corporate Controller. Our discussion today may include forward-looking statements about our operations, earnings potential, outlook, acquisitions, future events, growth plans, liquidity and assessment of business condition.

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 the most directly comparable GAAP measures in this morning’s press release and investor presentation, 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-K and previously filed Form 10-Qs for additional discussion and factors that could cause future events to differ materially from expectations.

At this time, I’ll now turn the call over to Roger Penske.

Roger Penske: Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. During the first quarter of 2024, PAG delivered 126,800 new and used vehicles and over 4,500 new and used commercial trucks. We increased revenue by nearly 2% to $7.4 billion. Our gross margin was 16.7%, which increased 40 basis points when compared to Q4 last year. We generated $295 million in income before taxes, $215 million in net income and earnings per share of $3.21. During the first quarter, our U.S. and U.K. retail operation faced headwinds from portholes, product recalls, supply and production issues on premium vehicles that impacted product availability. Additionally, a strike at a plant in Mexico that builds the Audi Q5 SUV impacted availability as well.

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Q&A Session

Income and earnings per share were also negatively impacted by higher interest costs for the quarter of $17.4 million, driven primarily by an increase in interest rates and higher inventory levels and lower equity earnings from the company’s investment in Penske Transportation Solutions. Lower equity earnings from PTS were driven by lower commercial rental utilization, lower consumer rental revenue, that’s one way, higher interest rates on average debt balances and a lower gain from sale of used revenue earning equipment vehicles, partially offset by approved results in our full-service leasing business and our distribution center logistics management business. Looking at corporate development during Q1, we added 24 automotive franchises, including 19 in our international markets and five in the U.S. Estimated annual acquired revenue is $1.1 billion.

We also closed one car shop location in the U.S. In 2024 in April, we entered into an agreement to acquire two Porsche dealerships and one Ducati motorcycle dealership in Melbourne, Australia, which is expected to close in the second quarter of 2024, obviously, subject to customary conditions. Let me now turn the attention to automotive operations. During the quarter, total automotive units delivered increased 4% to 126,864 units, which includes 8,932 agency units in the U.K. New units increased 6% and used units increased 2%. We continue to take forward orders with pre-sold activity averaging between 10% and 20% in the U.S. depending on brand or region and 36% of the new vehicles sold in the quarter in the U.S. were at MSRP. While 87% of the BEVs sold in the quarter required significant discounting, we estimate 90% of the BEVs sold were leased.

In the U.K., the forward order book is healthy at 19,000 units versus 18,000 at the end of December and 22,000 at the same time last year. Same-store retail rev — automotive revenue increased 1%. However, our service and parts increased 5%. Customer pay was up 5%. Warranty was up 6%. Our collision repair business was up 6%. It all continued to grow during the first quarter. Gross profit for new unit retail declined only $302 sequentially, while gross profit per user in retail increased during the quarter sequentially when compared to Q4 last year. Let me now turn to Penske Transportation Solutions. At March 31st, PTS managed a fleet of over 442,000 trucks, tractors and trailers, compared to 418,000 at March 31st last year. Although, the overall fleet size increased, we reduced our commercial rental fleet by 4,800 units during Q1 of 2024 due to lower utilization at a continued weak freight market.

In Q1, PTS operating revenue increased 3% to $2.7 billion. Full service contract revenue increased 12%. Our logistics revenue increased 4%, but our rental revenue declined 13%. PTS generated net earnings of $112 million. Our share of the PTS earnings was $32.5 million, which declined by $48 million compared to Q1 last year. Decline in PTS earnings over the prior year was due to, number one, a $49 million increase in interest expense from higher rates related to bond refinancing and higher outstanding debt, a $66 million decline in the gain on sales of used trucks. We sold 11,667 used trucks in Q1 of 2024 compared to 36,000 for all of 2023 to expedite the disposal of older units. Our rental revenue fell 13% and utilization rate fell 310 basis points when compared to Q1 of 2023 as weak freight rates and lower one-way consumer rental demand.

Higher maintenance costs of $12 million compared to Q1 last year, but importantly, the sequential increase was only $3 million as we continue to replace the older fleet at lease extensions. Our new units on order we have placed with various OEMs are down 50%. That’s really from 60,000 to 30,000. We’ve nearly 12,000 units currently for sale, compared to 8,400 at the end of March last year. As we look at Q2, we expect a sequential increase in earnings from PTS from the reduction in the rental fleet to 4,800, which improves utilization coupled with new replacement vehicles and reducing maintenance expense. Let me turn it over to Rich Shearing now. Thank you.

Rich Shearing: Thank you, Roger. Our Premier Truck Group dealership business represents 43 locations in North America and is an important part of our diversification. We are one of the largest commercial truck retailers for Daimler Trucks North America. During quarter one, Class 8 net orders increased 18% while retail sales declined 6% from the strong pace of 2023. At the end of March, the current backlog was 162,600 and represents approximately five months to six months worth of sales. Premier Truck Group sold 4,500 units in Q1, down 12% overall, driven by new retail sales down 23%, but used up 60% for the quarter. However, a strong mix of new units and our fixed operations business drove an increase in gross margin of 190 basis points.

Same-store SG&A to gross profit remain well controlled at 59.2% and fixed absorption was 130%. Premier Truck Group produced a solid Q1 EBT of $51 million and a return on sales of 6.4%. We believe commercial truck demand will continue to be driven primarily by replacement needs and we also see strength across private fleets, rotational segments and Class 6, 7 medium duty. As we look towards 2025 and 2026 anticipated emissions changes should drive a strong order book and retail sales. I would now like to turn the call over to Randall Seymore.

Randall Seymore: Thank you, Rich. I will now cover our business in Australia. Penske Australia offers products across the on- and off-highway markets, including in the trucking, mining, power generation, defense, marine, rail and construction sectors, and supports full parts and after sales service across the region. Service and parts represents approximately 75% of our gross profit, so our focus on increasing units and operation is a key driver of the business. In fact, in the month of March, it was the single best month in the history of our business in Australia with return of sales of 7.6%. During the three months ended March 31, 2024, the Australian and New Zealand heavy truck market increased 4.8% and 2.8 — 2.7%, respectively, from the same period last year.

In off-highway, our power system operations continue to grow with turnkey solutions for hyperscale data centers, battery storage, mining and military applications. We continue to be a leader in critical standby power, especially for data centers and continue to make significant deliveries of generators into prime power and hybrid applications. In addition, we have started to deliver large-scale battery energy storage solutions with recent government contracts adding more than $50 million to the existing pipeline. Our current order bank for hyperscale data centers and battery storage systems combined is over $550 million for 2024 and beyond. I would now like to turn the call over to Shelley Hulgrave.

Shelley Hulgrave: Thank you, Randall. Good afternoon, everyone. I will review our cash flow and balance sheet and discuss our capital allocation strategies. I’m pleased to report that we generated $456 million in cash flow this quarter and our trailing 12-month EBITDA was $1.55 billion. At the end of March, our long-term debt was $1.68 billion up approximately $50 million from the end of December. $1.05 billion of the long-term debt represents our subordinated notes with $550 million maturing in September 2025 and the other $500 million maturing in 2029. The average interest rate on these notes is 3.6%. We have the intent and ability to refinance the 2025 notes. Under U.S. GAAP, we do not plan to present the 2025 notes in current liabilities through maturity.

We also have $360 million in mortgages and $193 million in other borrowings at our international subsidiaries. Debt-to-total capitalization was 25.7% and leverage sits at 1.1x. As you can see, our balance sheet remains strong, safe and secure. Our approach to capital allocation balances investing for growth through capital expenditures, investing in diversified and opportunistic acquisitions and returning capital to shareholders through dividends and securities repurchases. Since the end of 2022, we have raised the dividend 5 times from $0.57 per share to $0.87 per share, representing a 53% increase. During the first quarter, we paid $59 million in dividends, invested $103 million for growth through capital expenditures and repurchased approximately 221,000 shares for $33 million.

It’s important to reiterate that we have the ability to flex our leverage up to 4 times on a lease-adjusted basis. New vehicle inventory increased $50 million from the end of December. Total inventory was $4.4 billion, up $100 million from the end of December. Floor plan debt was $3.9 billion. Importantly, we had a 40-day supply of new vehicles and a 36-day supply of used. Day supply of new vehicles for premium was 41 and volume foreign was 29. The day supply of new battery electric vehicles in the U.S. was 91 days. At this time, I will turn the call back to Roger for some final remarks.

Roger Penske: Yeah. Thank you, Shelley. With the acquisitions we completed during the first quarter, we continue to demonstrate the flexibility we have with our capital allocation. These acquisitions strengthen our premium brand footprint in our international markets and are expected to generate approximately $1 billion estimated annual revenue. Most recently, our geographical diversification provided us with the opportunity to expand our partnership with Porsche. Today, we have 22 Porsche stores throughout the network. We recently entered into an agreement to acquire two Porsche centers, one in Brighton, the other one Porsche Center of Doncaster, along with the Ducati Melbourne in Australia. For over 10 years, we strategically built a diverse commercial vehicle and power system business in Australia.

And with this significant acquisition, we will leverage that existing infrastructure and our significant experience in the retail automotive industry to drive growth with a Porsche brand in Melbourne. Our results continue to demonstrate the benefit of our diversification across retail automotive, commercial truck, cost control and disciplined capital allocation strategies. I remain confident in our model and the performance of the business. Thanks for joining us today and your continued confidence in PAG.

Operator: [Operator Instructions] And first, we go to John Murphy with Bank of America. Please go ahead.

Roger Penske: Hey, John. How are you?

John Murphy: Hey, Roger. Good afternoon, everybody. Roger, I just wanted to touch on first on the new GPUs, which are obviously a very hot topic for everybody for quite some time now. They’re holding up better than people have been fearing. I’m just wondering if you could talk about that being brand-mix driven, luxury-mix driven or your management on focusing on keeping these GPUs where they are. Just curious if you could talk about that?

Roger Penske: So why don’t I have Rich Shearing talk about the U.S. and then Randall can talk about International. Rich?

Rich Shearing: Yeah. Thank you, John. Look, yeah, I think, you touched on it. The first thing I would highlight is certainly our premium mix. We definitely think that plays a role in the grosses. And so then if you look at the new side, in the U.S., down $364 and used up $323 sequentially. So I think, as Shelley touched on, our data supply as well. So that’s been a very key focus for us to make sure that we’re turning the inventory that we are getting. And then frankly, I think, our operating team has done a fantastic job, too, of balancing the volume of achieving the OEM scorecard compliance with the best deals that are out there that are available and you see that, obviously, in the numbers.

Roger Penske: I think also, John, what we’ve been able to do is we’ve come out of COVID, we’ve looked at our sales team and we’ve really taken the utilization. And obviously, the productivity has gone from 12 units per salesperson to 14. So I think we have our best people on the front line now, which is making a difference. And I do agree, certainly with Rich, that the premium luxury side has given us that opportunity and yet we had headwinds with the Porsche brand. They were down 26% in the quarter. We were down 26%. They were down 23%. So we even had some impact on higher gross units and from that perspective, we’re discounting those about $6,000 below MSRP. So that had additional headwind. When you look at it overall, that would have increased our margin overall during the quarter. So, Randall, why don’t you kick it?

Randall Seymore: Yeah. It’s a similar story in the U.K. I mean, new gross all in was down $265 per unit, which isn’t bad. And if you look at BEV in the U.K., which represents 19% of all of our new car sales, our BEV gross per unit was about £1,400 less per unit than ICE. So a little bit of that headwind. But I think, look, at the other point here, it’s a common conversation with the team running the dealerships about gross profit and keeping the inventory where it is at a 40-day supply certainly helps that. So it’s a massive focus every day.

Roger Penske: And also the mix. So John, when you pull it all together, you take the U.S. and you take the U.K., we were down $302 on a company-wide basis on new, but up $428 on used. So I’m really glad to report that for the quarter. But it was a byproduct, I think, of keeping our day supply down and our premium mix properly in line to be able to get the maximum gross.

John Murphy: And then sort of another sort of similar hot topic on the SG&A front. I mean, I think we had a $30, $35 million step up sequentially in the dollars. But it’s 70.7% SG&A gross. It’s still 600 basis points to 700 basis points back from where we were pre-COVID. So things are certainly remaining under control here. I’m just curious, Roger, where you think you want to manage that to mid- to long-term? I mean, you’ve been good at paying people well and keeping turnover low. So that’s one reason to keep SG&A a little bit higher than other folks. But just curious how you’re thinking about that now you and particularly with the acquisitions of Rybrook and the other dealerships, if that could get a little bit more inflated over time and then get work back down.

Roger Penske: Well, I think one point you hit was the human capital side. Our turnover is only 18% through the end of the first quarter, which is world-class. Let me let Shelley give you some color on the SG&A, okay?

John Murphy: Sounds good.

Shelley Hulgrave: Hey, John. Yeah. It’s — as Randall mentioned, it’s a daily battle and our teams are doing a great job controlling expenses. So we were very proud to report that on a sequential basis we were down 30 basis points. You mentioned that we were up overall in SG&A, but when you look at it on a same-store basis, we were only up $5 million year-over-year. And so when I take a look back at that, there were about $4 million of expenses related to our acquisition and a legal settlement that we had in the quarter. And so really, SG&A was relatively flat and that’s the byproduct of our teams just grinding every day. We remain committed to keeping headcount below pre-COVID levels. Our executives are scrutinizing all our new hires.

We’re managing those pay plans. We want to keep those employees, but we also don’t want to have any leakage when it comes to grosses. We’ve got an executive leadership team that’s focused on streamlining and efficiencies across the Board. So, the other expenses that we did incur, we had an increase in vehicle maintenance in the quarter of about $4 million. That’s our service loaner business. We look at that as very productive. We had an additional $34 million in service and parts gross profit and that’s the result of a lot of efforts. Service loaners being one of them. One of our teams was able to bring down the days outstanding in terms of when we could get an appointment for a service loaner appointment from 14 days to 7 days.

So it’s really paying dividends.

John Murphy: And maybe if I could sneak one last one in. I mean, Australia seems to be a growing focus and you’ve been there for a while. So, I mean, I wouldn’t necessarily conflate it directly with sitting there in the U.K., but, I mean, do you kind of view this, Roger, as a growth platform where we’re going to be hearing more and more about acquisitions in Australia? And you don’t want to, I wouldn’t say control the market, but you could be a big, big player in the market in many ways down there, even outside the power business and the dealership business as well.

Randall Seymore: Yeah. John, it’s Randall. I’ll take that one. Look, we’ve — for the past 10 years, we’ve had other opportunities to get into automotive retail and made a strategic decision to focus on the core of the commercial vehicle and power system and really grow that. But with this opportunity with Porsche, it was a significant one we’ve been working on for several months and were able to get it over the line and certainly view that as a springboard for more opportunities. In fact, we’ve already had some knocks on the door. But having 1,300 people over in that part, 1,300 people there, we can leverage the infrastructure that we have from a finance standpoint, legal, HR, IT. So it’s a tuck in then that we can continue to grow. And the Australia market just as a population and Melbourne being one of the best places in the world, we thought it was a great first step.

John Murphy: Great. Thank you very much, everybody.

Roger Penske: Thanks, John.

Operator: Next we move on to Michael Ward with Freedom Capital. Please go ahead.