Penske Automotive Group, Inc. (NYSE:PAG) Q4 2023 Earnings Call Transcript

Penske Automotive Group, Inc. (NYSE:PAG) Q4 2023 Earnings Call Transcript February 7, 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 Fourth Quarter 2023 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately 1 hour after completion through February 14, 2024, 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.

Anthony Pordon: Thank you, Brad. Good afternoon, everyone, and thank you for joining us today. As you know, a press release detailing Penske Automotive Group’s fourth 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 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, future events, growth plans, liquidity, and assessment of business conditions.

We may also discuss certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation, and amortization or EBITDA, adjusted EBITDA, adjusted earnings before taxes, adjusted income from continuing operations, adjusted earnings per share, and our leverage ratio. We have prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures to the most directly comparable GAAP measures in the press release and investor presentation, which are available on our website. Our future results may vary from our expectation because of risks and uncertainties outlined in today’s press release under forward-looking statements. I direct you to our SEC filings, including our Form 10-K, and previously filed Form 10-Qs for additional discussion and factors that could cause future results to differ materially from expectations.

I’ll now turn the call over to Roger.

Roger Penske: All right, Tony. Thank you, and good afternoon, everyone. And I appreciate everyone joining us today. 2023 was a strong year for PAG and reflected our third best year of net income in our company’s history. Our performance was driven by a resilient new car market, our premium brand mix, the performance of our retail commercial truck dealerships, and our capital allocation. During 2023, we delivered 486,000 new and used vehicles and over 21,000 commercial trucks. We increased our revenue 6% to almost $30 billion. We generated $1.4 billion in earnings before taxes and nearly $1.1 billion of net income and earnings per share of $15.50. We continue to grow our business announcing acquisitions of $1.3 billion in expected annualized revenue including Rybrook in the UK, which closed early in January 2024.

See also 15 Highest Quality Makeup Brands In The World and 10 Best Stocks To Invest In 2024 For Beginners.

Q&A Session

We repurchased 2.8 million shares or approximately 4% of the shares outstanding at the beginning of the year. We increased our cash dividend paid to shareholders by 53% since the end of 2022 and from $0.57 to our current dividend of $0.87. We maintained a strong balance sheet and debt to capitalization ratio of 26% and a leverage ratio of 1 time. Now, let’s turn our attention to the fourth quarter that we announced earlier today. Excluding a non-cash impairment charge as noted in our press release, adjusted EBT was just under $300 million, $297 million. Adjusted income from continuing operations was $231 million and related adjusted earnings per share was $3.45. In our automotive operation, we believe demand for new vehicles remains solid and inventory availability continues to improve.

We continue to take forward orders with pre-sold activity averaging between 10% and 20% in the U.S. depending on brand and the region. The UK Ford order book is healthy at 20,300 units. Although the order book is slightly less than last year, UK new vehicle registrations increased 18% in 2023 and the availability of inventory improved when compared to the same time last year. During the quarter, total automotive units delivered increased 8% to 117,000 units, which includes 8,113 agency units. Same-store retail automotive revenue increased 4%, including a 7% increase in our service and parts business. Same-store gross profit only declined 1%. Same-store retail commercial truck gross profit only declined 1%, and earnings before taxes in Q4 was a record of over $51 million.

Unfortunately, our profitability was impacted by $21 million in additional interest costs, resulting from higher interest rates and greater inventory levels combined with lower equity earnings for our investment in Penske Transportation Solutions. Turning to PTS, December 31st PTS managed a fleet of over 439,000 vehicles that includes trucks, tractors, and trailers. In 2023, PTS operating revenue increased 6% and produced the third highest EBT of all time, just over $1 billion, and Q4 PTS operating revenue increased 3% to $2.7 billion. Full service lease and contract revenue increased 13%. Logistics revenue increased 5%, but our rental business declined 13%. PTS generated $177 million in net income. Our share of PTS earnings was $51 million, which declined by 48% or $48 million compared to Q4 of last year.

The decline in PTS earnings over the year period was impacted by the following: a $57 million increase in interest expense from higher rates related to bond refinancings and higher outstanding debt; a $58 million decline in gain on sale of used trucks when compared to the record performance. In 2022, as used truck values continued to be impacted by the lower freight demand, we sold nearly 36,000 trucks used in 2023, an increase of 60%. Rental revenue fell 13%, including 400 basis points decline in commercial utilization rates at 82%. Higher depreciation holding costs on older vehicles we had, because we’re holding to replace the fleet. As we look into Q1 2024, PTS continues to be impacted by similar headwinds. We expect PTS earnings to decline at least 50% in the first quarter due to higher interest costs, lower gain on sale of used trucks, and higher depreciation.

Units on order now are at 29,000 compared to 71,000 at the start of last year and continue to trend lower. We have nearly 18,000 units currently available for sale. In January, we sold 3,900 units, which was 27% higher than January 2023, and similar to the pace of Q4. I’d now like to turn it over to Rich Shearing.

Richard Shearing: Thank you, Roger. Our Premier Truck dealership business represents 34 locations in North America and is an important part of our diversification. We have one of the largest commercial truck retailers for Daimler Trucks North America. As most of you may know earlier last year, we expanded into the greater Winnipeg, Manitoba market area, acquiring 5 new locations representing $180 million in estimated annualized revenue. The North American Class 8 retail truck had a strong year in 2023, with a 7% increase in retail sales to 331,000 units. At the end of December, the backlog was 178,000, which compares to a backlog of 244,000 at the same time last year, and the current backlog represents approximately a 5- to 6-month rate of retail sales.

In 2023, our business generated over 21,000 new and used truck sales, $3.7 billion in revenue, and almost $600 million in gross profit, an improvement of 7% year-over-year. Premier Truck Group had a record year generating $225 million in EBT and more than a 6% return on sales. I am pleased that the business produced a solid Q4 with EBT of $51 million, as Roger referenced the record, despite new unit sales for the quarter being down 13% related to later than normal deliveries in 4Q 2022 due to supply chain disruptions earlier that year. On the same-store basis, gross margin increased 140 basis points to 15.8%, and SG&A to gross profit remained well controlled at 58.8%, fixed absorption was solid at 123%. We believe commercial truck demand remains solid and will continue to be driven primarily by replacement demand, and we see strength across private fleets in Class 6-7 medium duty as well.

I would now like to turn the call over to Randall Seymore.

Randall Seymore: Thanks, Rich. 2023 was also a record year for our business in Australia. As you know, we are the exclusive importer and distributor of certain heavy and medium duty trucks and buses, and a leading distributor of engines and power systems in Australia and New Zealand. We offer products in the trucking, mining, power generation, defense, marine, rail, and construction sectors, and support full parts and after-sales service through a network of branches, field service locations, and dealers across the region. In our Australia business, service in parts represents approximately 80% of all of our gross profits, so our focus on increasing units in operation and a key driver of the business. In 2023, the Australia business grew its revenue by 10%, largely due to the off-highway markets, which remain strong, particularly in the data center, energy solutions, and mining segments.

In the Energy Solutions space, we continue to lead the market in critical standby power, especially for data centers, and make significant deliveries of generators into prime power and hybrid applications. In addition, we have started to deliver large-scale battery energy storage solution systems as well. Our current order bank for energy solution delivery stands at over $500 million for 2024 and beyond. In mining, we continue to deliver repowers with the fuel-efficient MTU Series 4000 engines, and we’re working with one of the world’s largest miners to develop a hybrid repower solution, which will reduce fuel consumption by 20%. I would now like to turn the call over to Shelley Hulgrave.

Shelley Hulgrave: Thank you, Randall. Good afternoon, everyone. I’m pleased to report that we generated $1.1 billion in cash flow last year, and our EBITDA was nearly $1.7 billion. In 2023, we continue to maintain a disciplined and balanced approach to capital allocation, and our balance sheet remains strong, safe, and secure. At December 31, we had $96 million in cash, $529 million in vehicle equity, and $1.7 billion in availability under our credit agreement. Our approach to capital allocation balances investing for growth through capital expenditures, diversified and opportunistic acquisitions, while also returning capital to shareholders through dividends and share repurchases. Since the end of 2022, we have raised the dividend 5 times from $0.57 to $0.87 per share, representing a 53% increase.

We returned $189 million in dividends to shareholders last year. We also repurchased 2.8 million shares for $382 million. Total inventory was $4.3 billion, representing an increase of $800 million from the end of 2022. Floor plan debt was $3.8 billion. We had a 39-day supply of new vehicles and a 48-day supply of used. Days’ supply of new vehicles for premium was 42, and volume foreign was 24. At December 31, our supply of battery electric vehicles in the U.S. was 54 days for new and 50 days for used. In the UK, our supply of battery electric vehicles was 67 days for new and 45 days for used. At the end of December, our long-term debt was $1.6 billion, essentially flat year-over-year. Approximately $1 billion of the long-term debt represents our subordinated notes with $550 million maturing in 2025 and the other $500 million maturing in 2029.

The average interest rate on these notes is 3.6%. We also have $403 million in mortgages and $182 million in other borrowings at our international subsidiaries. Debt to total capitalization improved to 26% from 28% at the end of 2022 and our leverage sits at 1 time. It’s important to reiterate that we have the ability to flex our leverage up to 4x on a lease-adjusted basis. Therefore, we have room under our credit agreement to deploy our capital allocation strategies. Our U.S. credit agreement provides for up to $1.2 billion in revolving loans for working capital, acquisitions, capital expenditures, investments, and other corporate purposes and was fully available at the end of December. SG&A to gross profit was 71% in the quarter and remains 700 basis points below the pre-pandemic level of 77.9% in 2019.