PENSKE AUTOMOTIVE GROUP, INC. Q3 FY2024 earnings call

• Financial Performance: PAG generated $304 million in income before taxes, $226 million in net income, and earnings per share of $3.39. Overall revenues increased 2% to a third-quarter record of $7.6 billion. Gross margin was 16.4% in the quarter. SG&A expenses as a percentage of gross profit was 71.2%, well within target range.
• Retail Automotive: Delivered 117,551 units during the quarter. New units increased 5%, same-store new units declined 2%. Used units declined 13% due to product availability issues. Service and parts revenue was a record $778 million, with same-store retail automotive revenue down 5% but service and parts up 7%, customer pay up 4%, warranty up 20%, and collision repair up 2%.
• Commercial Truck: Retail truck business is a core pillar. Premier Truck Group sold 6,331 new and used units in Q3, up 14% from last year, with same-store units up 9% and EBT of almost $57 million. The commercial truck business expects recovery in the freight market and emissions change in 2027 to drive retail sales.
• International Operations: In the U.K., integrating acquired dealerships and transitioning CarShop locations to Sytner Select. In Australia, expanding retail automotive operations with acquisition of Porsche dealerships and expecting more growth. Service and parts represent approximately 70% of total gross profit in on and off-highway markets.
• Capital Allocation: Generated $962 million in cash flow from operations in the first nine months. Announced an 11% increase in cash dividend to $1.19 per share. Repurchased approximately 511,000 shares for $77 million so far in 2024. Completed acquisitions representing $2.1 billion in estimated annualized revenues, including $1.8 billion in retail automotive and $200 million in commercial trucks. Divested or closed five underperforming locations.

Penske Automotive Group (PAG) had overall revenues of $7.6 billion in the third quarter, up 2%. 61% of revenue was from North America, 30% from the U.K., and 9% from other international markets. Retail automotive brand mix: 72% of revenue from premium brands, 21% from volume non-U.S. brands. Service and parts revenue reached a record $778 million, a 14% increase. North American Class 8 retail sales declined 1% in Q3, year-to-date down 6%. Premier Truck Group sold 6,331 new and used units in Q3, up 14% from last year. Penske Transportation Solutions had operating revenue increase 3% to $2.8 billion in Q3, with earnings up 14% sequentially but down 27% year-over-year. In the U.K., used vehicle retails declined 13% due to transitioning CarShop locations to Sytner Select, but excluding those dealerships, used vehicles retail would have increased 1%. In Australia, acquired two Porsche dealerships in Q3, which retailed nearly 400 units and generated nearly $50 million in revenue, and announced acquisition of a third Porsche dealership expected to add $130 million in annualized revenue.

• Continue to pursue acquisitions as part of capital allocation strategy. Anticipate recovery in the freight market and emissions change in 2027 to drive commercial truck retail sales. The acquisition of the third Porsche dealership in Australia is expected to add $130 million in estimated annualized revenue. The company will continue to focus on effective capital allocation and returning value to shareholders through dividends and share repurchases.

• Impact from stop sale of certain vehicles, with a $6 million gross impact on sales and $4 million net impact on gross including warranty work globally. Residual impact from CDK Cyber Security incident on commercial retail truck business. U.K. new vehicle market impacted by zero-emission vehicle mandate leading to lower retail registrations. Freight market softness affecting rental in Penske Transportation Solutions. Interest rate changes impacting debt expense. Changes in vehicle inventory and day supply levels, such as day supply of new vehicles for premium being 56 and volume foreign being 36.

Q: John Murphy asked about the impact of stop sales in the quarter and near-term expectations, as well as the broader industry situation.

A: Rich Shearing and Randall Seymore discussed that stop sales had a $6 million gross impact on sales and $4 million net impact on gross including warranty work globally, with efforts to source vehicles and work with OEMs' parts and service organizations. Rich also mentioned discussions with OEMs about increasing vehicle complexity and supply base challenges post-pandemic.

Q: Ron Jewsikow inquired about the residual impact of CDK on the business, retail truck numbers, freight market softness, and parts and service from stop sales.

A: Rich Shearing said CDK impacted commercial retail truck business with manual process implementation, and the retail truck numbers were healthy. He also discussed freight market softness with customers focusing on replacement demand, and Roger Penske talked about parts and service being the heart of the business with technician count increase and effective labor rate increase, and stop sale impact on parts and service.

Q: Rajat Gupta asked about the used-car business baseline and capital allocation.

A: Roger Penske and Shelley Hulgrave said the used-car business has lower units but higher margins with transition to Sytner Select, and the company is opportunistic in capital allocation, acquiring $2 billion in annualized revenues year-to-date, returning over $350 million to shareholders, and continuing to grow the business through CapEx.

Q: David Whiston asked about M&A seller asking prices and the agency system in Europe.

A: Roger Penske and Rich Shearing discussed that M&A seller asking prices vary by brand, with premium brands still at high levels, and the agency system in Europe is a mix with Mercedes having launch in some markets, BMW on schedule to launch in 2026, and JLR not going agency in some cases.