Penske Automotive Group, Inc.

good afternoon welcome to the penske automotive group first quarter 2022 earnings conference call today's call is being recorded and will be available for replay approximately one hour after the completion through may 4 2022 on the company's website under the investors tab at www.penskeautomotive.com i will now introduce anthony portin the company's Executive Vice President of Investor Relations and Corporate Development. Sure, please go ahead.

Thank you, Lori. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's record first quarter 2022 financial results was issued this morning and is 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, Shelly Holgrave, chief financial officer, and Tony Piccioni, 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, and our leverage ratio. We have prominently presented the comparable gap measures and have reconciled the non-gap measures in this morning's press release and investor presentation, which are available on our website, to the most directly comparable gap 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, for additional discussion and factors that could cause results to differ materially. At this time, I would now like to 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 all-time record quarterly results for the first quarter as earnings before taxes Net income and earnings per share more than doubled when compared to the first quarter of 2021. Our revenue increased 21% to $7 billion. Income before taxes increased 101% to $498 million. Our net income from continuing operations increased 102% to $368 million. And our earnings per share increased 111%. to $4.76. We repurchased 1.9 million shares of common stock for 184 million year-to-date, and we added approximately $665 million in annualized revenue. Over the last 12 months, we've completed acquisitions or opened new dealership points that represent approximately $1.9 billion in annualized revenue. Our strong Q1 results really came from all segments of our business. Retail automotive and commercial truck same-store revenue improved 11% and 47% respectively, coupled with record earnings from Penske Transportation Solutions. Earnings before taxes increased 93% from retail auto, 113% from North American commercial truck retail, 75% from Penske Australia, and 121% from Penske Transportation Solutions. Let's look at our retail automotive operations on a same-store basis, comparing Q1-22 with Q1-21. Unit sales continue to be impacted by supply shortages and declined 1% during the quarter. New decline 13%, however, use increased 8%. Our revenue increased 11%, and our gross profit increased 27%, including a 200 basis point increase in our gross margin. Our variable gross profit per unit increased 38% to $6,026 from $4,355. Demand remains strong across our retail automotive dealerships, with most allocations in new vehicle being pre-sold before they arrived at the dealership. Put that in perspective, at the end of March, we had 2,500 units in stock in the US and 14,900 a year ago, March in 2021. And in the UK, we had 3,200 vehicles in stock in March of 22 and had 8,350 units in stock at the end of 21. in March. Just to put it in perspective, Honda, we had 216 units in stock versus 3,700. And with Toyota, we only had 188 versus 2,500. So you can see the impact of supply. As we look out over the next 9 to 12 months, we expect the supply shortages of new vehicles to continue. I think unit grosses will remain strong, and the recovery of service and parts will continue. Looking at car shop during the first quarter, Car shop unit sales increased 71% to 19,500 units. Our revenue improved 113% to 516 million. Same-star unit increased 54%, and our revenue increased 89%. Same-star variable gross profit per unit retail was flat at 2,200. The supply shortages of new vehicles continue to impact the affordability of used vehicles. Wholesale prices continue to rise. However, retail prices are not necessarily rising at the same pace, impacting our margin. In some cases, the price of a one to three-year-old used vehicle is near or at above the price of a comparable new vehicle. As we look forward to the future, we remain optimistic about the car shop model. We will continue to grow car shop based on the ability to procure affordable vehicles which may impact our goal of retailing 150,000 by the end of 23, obviously reflecting our current market conditions. Turning to our retail commercial truck dealership business, we continue to expand our commercial truck operations, adding four new locations and $150 million in revenue during the first quarter. We now operate 41 commercial truck locations in North America, and during the first quarter, unit sales increased 78%. Revenue was up 82%, and gross profit was up 77%. On a same-store basis, revenue increased 47%, including a 26% increase in service and parts. Service and parts represented 59% of the total gross profit and covered 130% of our fixed costs in the first quarter. Earnings before taxes increased 113%, to 58 million. Approximately 75 to 80 percent of our new unit sales are Class 8 commercial trucks, and that market remains strong. In fact, our entire allocation of Class 8 product for 2022 is sold out. The Class 8 commercial truck backlog is 251,000 units as of March 31st and represents 12 months of sales. Let me now turn to Pesky Transportation Solutions. We own 28.9% of PTS, which provides us with equity income, cash distribution, and cash savings. PTS currently operates a fleet of more than 373,000 vehicles, up 38,000 units from the end of March last year. CTS produced a record quarter driven by strong performance across all product lines. Revenue increased 22% to 3.1 billion and profit increased 121% to 410. As a result, our equity earnings increased 121% to 119 million year to date. We've received 45 million in cash distributions. At this point, I'd like to turn the call over to Shelly, our Chief Financial Officer.

Thank you, Roger. Good afternoon, everyone. Our capital allocation strategy continues to leave our balance sheet in great shape. At March 31st, we had $170 million in cash and over $1.3 billion in liquidity. Year-to-date through April 26th, we spent $184.1 million on repurchasing 1.9 million shares. Our existing repurchase authorization has $46.3 million remaining. We also paid $36 million in dividends. In total, we've returned $220 million to shareholders so far this year and over $650 million since the beginning of 2021. We also spent $150 million on growth through CapEx and acquisitions. All of this was funded with cash flow from operations. When looking at our future capital allocation, we maintain a disciplined approach that focuses on opportunistic acquisitions and investments across both our retail automotive and commercial truck businesses, capital expenditures to support growth, delivering a strong dividend to our shareholders, share 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 March, our long-term debt was $1.46 billion, consisting of $1 billion of subordinated notes, which mature between 2025 and 2029, $327 million in mortgages, $22 million under the UK revolver, and $57 million in other items. Debt to total capitalization was 26.2% and leveraged 6% at 0.7x. At the end of March 2022, total inventory was $3.1 billion, which is down $158 million from March 31st of 2021. We have a 16-day supply of new vehicles with premium at 18 and volume foreign at five days. 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 9 to 12 months. Used vehicle inventory is in good shape with a 41-day supply. At this time, I will turn the call back over to Roger.

Thank you, Shelly. Turning to sustainability, our ESG initiatives are an important part of our strategy. and values. As many of you know, we published our inaugural ESG report in the fall of last year which lays out many of our activities to date. We focus on diversity and inclusion in our workforce. In addition to our general employee training, we also use small groups to train employees on the importance of diversity across our business. We're proud to be above the NAD average for a diverse and inclusive workforce. In addition, We have a task force in place to drive our future efforts on sustainability and decarbonization. We're 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. To date, we've installed over 1,100 charging stations across our network. However, to put electrification in perspective, in the first quarter, we sold 6,700 electrified vehicles in the US, including 646 pure battery units, which represent approximately 2% of new vehicle units. While in the UK, we sold 1,400 BEV units, 1,360 hybrids, where electrification is supported by lower taxes and government incentives. That was 22% of our sales in the UK. Moving on to our digital initiatives, our omnichannel strategy focuses on customer lifestyle and continues to evolve with the changing landscape. Online reputation management remains critically important and focused as we strive to exceed expectations of our customers. We focus on providing flexible buying options that allow customers to proceed at their own pace in buying their next vehicle or servicing their existing one. For sales, we continue to enhance our digital retailing strategy by embracing our OEM partner initiatives. We are currently supporting programs for BMW Mini, Porsche, Toyota, and Lexus, Honda, Lincoln, and Nissan. The OEM initiatives offer some advantages versus an in-house solution. They enable a buy online function from OEM sites, which is particularly important for new vehicle orders while inventory is low. They also integrate with a captive finance company for online credit approvals, rates and programs, etc. We also remain focused on a fully integrated end-to-end digital transaction system to execute online orders for car shops in the U.S. through our partnership with Cox Automotive. In the U.K., we have a proprietary system that supports digital retailing for our franchise operations and car shops. In Q1, we generated over 5,000 transactions and approximately 2,300 sales, which reflected 5% of our market. On the service side, we continue to encourage online appointments and payments to improve efficiency. Online payments have increased 22% when compared to Q1 last year and 90% when compared to Q1 of 2020. Online BDC appointments increased 18% to 441,000 when compared to Q1 of 2020. Before closing, as many of you know, providing a superior customer experience and exceeding expectation is an important part of our Penske culture. I'd like to congratulate the 11 Penske Auto Group dealerships that were recognized as a CARFAX 100 dealer for achieving superior star ratings of at least 4.9. In closing, I remain confident about the opportunities I see across our diversified enterprise, driven by our strong balance sheet, capital allocation priorities, and mostly our human capital. Thank you for joining us on the call today and for your confidence in PAG. At this time, I'll turn it over to the operator for questions. Thank you.

Thank you. And at this time, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, to ask a question, please press star 1. And our first question comes from the line of John Murphy of Bank of America. Your line is open.

Good afternoon, Roger. I wanted to ask a first question on cap allocation. I mean, given the buybacks and the acquisitions that you've made, on LTM basis, it seems like you've got at least a 12% bump EPS structurally going forward. You've been reasonably aggressive there, although the balance sheet is in more conservative shape, if you will, relative to some of your peers. So some of your peers have gotten a little bit more aggressive on redeploying capital and leveraging the balance sheet simply. Do you think there's a greater opportunity to maybe get more aggressive over time, or do you think we're on the point in the business cycle that this prudence is something that you'll maintain in the near term? Just trying to understand your view of redeploying capital and how aggressive you may or may not get.

Let's talk about capital allocation and maybe share buyback. At the present time, I think we announced today in our earnings that we've repurchased 1.9 million shares for the entire period of 2021. We've repurchased 3.1. So I think that with that kind of trajectory, it would look like we'll continue at that pace going forward. So I would say part of the capital allocation certainly would be share buyback. And from the standpoint of acquisitions, we feel good about it. We're not going to chase these high multiples as we've seen in the marketplace. I think that at the moment, as we add up what we've done To date, we're at $665 million, and it's a mix between auto retail and trucks. So we would continue that. We obviously are in the position to meet the CapEx requirements by the manufacturers. We have a couple open points, which we've been awarded, which we're building new locations. And again, the annual dividend or the quarterly dividend would be a focus. So I think we're, at this point, reviewing several opportunities from a a new opportunity to buy them in the marketplace as far as acquisitions. That would both be domestically and internationally, and both in the truck and in the retail auto side. We're going to watch valuations at the moment with Ukraine and with all the issues we have today, the continued supply chain disruption. I think that was a focus we had over the last 24 months. You can see that all of our acquisitions and dividends and share repurchase during the quarter were done by operating cash flow with no debt increase. And, you know, we're going to watch our balance sheet here and see what happens, I guess, what world impact we might have. But overall, I feel good where we are.

Got it. That's helpful. And just a second question. I mean, SG&A was very strong in the quarter. I'm just curious how we should think about that going forward and how much of that may be able to be retained. Maybe gross has come under a little bit of pressure or maybe not going forward. I mean, how should we think about SG&A to gross or even just the dollar number there?

Well, I think if you look at the last two quarters, we've been around $800 million. And on the same store basis, actually, we were down sequentially about $10 million, if I'm correct. So That's positive. We're still getting the benefit of the employee reduction we did back at COVID time. We were down approximately 9% to 10% on the same store basis. We continue to follow that. We've learned through technology to a certain point. Also, from a productivity perspective, our technicians were giving them more tools. I think we picked our better salespeople who picked up the units per salesperson maybe from 9% or 10% to now 12 to 13, which is key. And obviously, when you look at our costs, it's primarily people costs because you've got the variable going up because of the grosses of the business. And I think that at the end of the day, the compensation is up for their management because of the profitability.

And then just lastly, we're hearing these rumblings of some potential weakness in the consumer, particularly for companies. you know, like CarMax. I'm just curious in CardShop or in your dealerships, if you're hearing or seeing anything like that or it's a question of price, it just seems like a weird statement given that, you know, what appears to be an extreme supply-demand imbalance in favor of demand being much higher than supply. Just curious what your thoughts are there.

John, you know, one thing I think that we have to do, we're a different business than CarMax or Carvana or and some of these used car retailers. Because number one, we've got a large parts and service business which covers 60 to 70% of our fixed costs. We also have OEMs that we're tied to that give us an area of market that we operate in. And they provide us with all the umbrella advertising to drive customers both new and used to our stores. And then we have the relationship with the captive finance companies And then the lease returns that are coming in give us, in the future, when the cars are available, additional use. So looking at that, taking that as really a base to work from, we've got a short supply of new cars, which is driving used car prices up. And certainly our acquisitions have been very tough at the moment. When you think about just looking at car shop in the U.S. and the U.K. and the U.S., our cost of sales up $8,500. In the UK, it's up 44. And when you add that on to the existing number, it's really pricing us on the used side up into almost new car numbers. And then there is some affordability issues there, which obviously are going to have some impact on margin. But from an overall standpoint, the demand is strong. We're selling into our pipeline from the standpoint of our new car business. And sequentially, Our units are up from 101,000 to 114,000 if you look at Q4 to Q1. So we're not seeing it at the moment that we're having any impact negatively at this point. Great.

Thank you very much, Roger.

Great, John. Thanks.

Thank you. And our next question is from Stephanie Moore from TruList Securities. Your line is open.

Stephanie, hi.

Hi, good afternoon. I hope we could touch a little bit on the new vehicle industry environment and maybe what you're hearing from your OEMs in terms of, I think the key topics we're always looking for is, you know, production, you know, incentives, and also I think there's been a little bit of, you know, conversations around, you know, pricing and the spread between OEMs and the list the MSRP said dealers. So maybe if you could just give us a little bit of a pulse of how you view the relationship between the OEMs and the dealers are, you know, as we start this year.

Well, number one, the OEMs are not raising our costs without giving us the opportunity to have a corresponding increase in MSRP. That's point number one. Now, obviously, there are different discounts that we get based on performance. You have a basic discount maybe of But to earn that, you have to have your CSI. You have to have your market share. So some people might not get the full discount because of performance. And that's store by store, certainly OEM by OEM. But if you look today where we're going to be in Q2 from a vehicle availability, we're seeing from Mercedes-Benz perspective an increase of about 10%. And I would think that that would be what we would have as you go through Q2 into Q3. We're flat at Honda Acura. China shutdown is impacting that allocation, obviously. And we look at Toyota and Lexus to be slightly higher in Q1 based on the information we have from the OEM. Certainly from a Porsche perspective, we've been impacted and the market's been impacted because of the fire in that one ship. We lost 66 Porsches and I think 33 Audis. And then there was a second ship that had rough water where we lost another 33. So that is a personal impact we have for our company. But it's a better supply than we've had in the past, but it's all pre-sold. Audi will have a better allocation in Q2 than they had in Q1. JR will be flat and BMW will be flat with Q1. So I don't see anything If we say we're going to be stronger, I think you're going to have a slight increase with some of the manufacturers. I did my homework on this, hoping I might get a question. But you can see that the market is going to take time to recover. In fact, I talked to one of the OEMs at the end of the quarter, and they said, normally we have 250,000 units in dealer inventory at the end of the quarter. This year we had 25,000. So it's 10 times higher than than the 25, so you can see that it's going to take time to meet the current requirements, which were sold down the pipeline, and then try to build any sort of inventory. And I think the OEMs have learned the benefits of lower inventory, and I think that they'll hopefully keep that as a major mission plan, that we're not going to end up with excess inventory and have to discount and add incentives. So overall, I think we're going to see some of the same here through the next quarter.

Great. No, that's helpful. And then maybe if you could touch a little bit on the Penske Transportation Solutions, JV, just what you're seeing from the overall health of that business. There's been some tones about just seeing slightly moderating freight rates in the beginning of the year, how you view the health of the business and kind of the opportunity this year on leasing, rental, and some of the logistics on that side.

Well, I think the analysts are saying, the experts are saying that freight will be up 3% during 2022. Now, what that does to spot rates, I don't know. I think the biggest issue that most of the carriers have is drivers right now. And, you know, we're certainly not seeing any slowdown in rental units, you know, on the PTS side. So from an overall standpoint, you know, our truck leasing rental logistics business is had a terrific quarter. And from the standpoint of their revenue, they were up 22% to $3 billion. And their profitability was $418 million, up over 120%. So again, very strong from the standpoint of utilization. It might be interesting to note, we grew our revenue by 22%. And if you look a year ago, our debt was down $300 million. So what we've been able to do you know, by prudent use of our equipment and selling off our units. Instead of having 10 or 11,000 units up for sale, we're down to about 3,000. And that's taking the interest and depreciation off our costs and giving us that cash that we can use to purchase new trucks. So balance sheet's in good shape. You know, we're investment grade, as you probably know. And we have about 64,000 units on order right now. And to me, it's going to take some time to catch up. We had 62,000 rental units on rent at certain days over the last 30 days. And our consumer business, that's been driven by high profit, record pricing. This is the one way in local business. And I think overall, when you look at the business, it's never been stronger Vehicles on rent obviously up utilization. Consumer logistics rental was up 8%. We did have the benefit of the strong used truck market, so probably we wouldn't expect quarter by quarter going forward that we'd see quite our percentage was probably up about 20 to 25 million this quarter on gain on sale if they had because of the strong used market.

Perfect. And then just a housekeeping question for me, Shelly, could you remind us what the free cash flow generation was in the first quarter?

Yeah, certainly. So cash flow operations was just under $400 million. We paid $36 million in dividends. And then we talked about the share repurchase, $119 million within the quarter. Not a huge debt pay down there, about $10 million, Stephanie. Very strong. I expect the same out of Q2. As Roger mentioned, we've received $45 million in cash distributions from PTS, and we'll get about $105 million overall within the quarter.

CapEx was, what, about $56 million?

Thank you. CapEx was $56 million.

So I think that still gives you the pieces you need there, Stephanie.

Excellent. I can do that math. All right. Well, thanks, everybody. Appreciate it. Thanks. All right.

Thank you. And our next question comes from the line of Mike Ward from Benchmark Company. Your line is open.

Thanks very much. Shelly, could you remind me how the formula works for PTS?

The formula? Sure. It's a 50% dividend. So we receive that on a quarter lag. with the first one Q4 coming in April, and otherwise it's a quarter lag. So we received those May, August, and November for the preceding quarter. Okay.

And it was 165, 165 million last year. That's right. Okay.

And head and higher this year. Roger, we're kind of in this unprecedented time with the inventory and everything else, but the flip side of that is you have better visibility here on orders, and I would assume if somebody's pre-ordering a vehicle, the price portion of that transaction is resolved. Is that correct?

Well, when we're pre-ordering, obviously they take our orders in the factory and we don't have a price change. We do get a price change on trucks. If we order a new truck and it's not built, they typically can change the price on us. On the heavy-duty side, that's been the current business practice by the OEM. From a new car customer, you know, selling down the pipeline, they're able to preorder, and we get a fixed margin, a full margin on that typically, and he gets the components, or I guess the options would be a better word of what he wants. Today, when he goes in, a lot looks at a new vehicle. Sometimes he buys more than he needs, and it's less. Now, one thing that's happening, and some of the OEMs have done this, that vehicles that we're getting shipped, might have a lower MSRP for only one reason. That's because they've left out certain options which they can't provide because of the chip shortage.

But on the transaction with a customer that comes into the retail auto, the price is determined when they order that vehicle. There might be some trade-ins or whatever else to add on.

Well, you have to always look at the value of the trade which could move up or down. Right, that could go up or down. And as you look at our finance income, we've got two components. We've got the finance piece and we've got the product. Now, we would sell gap. We can sell tire and wheel. There's a number of things that we sell. So ultimately, the customer would possibly pay more for that. And I think that the after-sale opportunity where we would sell to prepaid maintenance companies is typically something that's a great product we sell to the customer. So basically, you know, they have one payment and they're on their way.

So am I thinking about it the right way? There's at least over the next six to nine months, as some of these orders turn into deliveries, there's less risk on the, on the growth side of new vehicle retail on just the gross margin part of it. And there has been historically.

That's a great point because obviously, uh, You know, we are selling into the pipeline at full margin. There's no question. So that's going to help us sustain this margin, you know, as we go forward. And I think that's, you know, obviously something both in the U.S. and the U.K. that we're seeing now.

Right. And then just my own personal experiences, I think it enhances the relationship with your customer at the dealer level. So the business is transformed.

The customer orders the car he wants. It's sticky. uh interesting on the lease side because you know on our premium side 55 of our customers are leasing what we're doing now is we're extending leases and when we extend offer the customer an opportunity to extend because basically we can have that car back now we then order the new car for him so we probably end up with less people moving from us to maybe at least of another competitive vehicle but that's been very very positive with the customers and again from a customer experience standpoint, it makes a big difference because they know that they'll have a car, what they want, and the lease price obviously is set at the time that we do that, order that new car.

Fantastic. Thank you. Thank you very much for your time. Appreciate it, Roger. Take care.

Thank you. And our next question is from Daniel Embro of Stevens Inc. Your line is open.

Hey, good afternoon, Roger, and congrats on the quarter. Thanks. Roger, I want to follow up on Stephanie's question on the OEMs. How do they feel about this consolidation going on across the industry? I mean, do they realize the benefit of having maybe fewer, larger dealer groups? And have there been any discussions or have you heard any discussions around changing or increasing the framework agreements to allow for larger scale M&A as all of you guys grow?

Well, you know, we've signed up for framework agreements probably What, 10 years ago, there were some with somebody, Honda, Lexus had it, and we've lived with those over time. Now, they are getting more active now when you look at BMW and other of these manufacturers are coming in now with probably not as much to try to curtail the growth, but more to be sure that the dealerships that you already have are meeting the CSI requirements and the CI and the market performance, and that's what they're looking at before they would allow you to grow. That probably is the biggest issue today. I don't think they're saying no. In fact, if you're a good dealer and you've got a good track record and you're in a market, they limit you to the number in a particular market, so you're not the only dealer in the marketplace. I think other than that, they're very appreciated when we come to them with an opportunity because they know we've got the capital. We've got a track record. We've got a management team that many of them know. And I've seen, well, you've seen the growth just in the publics. And they've been approved with big acquisitions. Now, in some cases, you might have a market where you have to sell something off. But I think that is easy. I mean, we made a move from Lexus over in New Jersey to buying the two Lexus stores in Austin. and we had to divest the two to get two more, but obviously I looked at the Jersey market versus the Austin market and felt on a longer-term basis it would be a better opportunity for the company. So those would be my comments.

Got it. That's helpful. And then one on the open points you guys are opening, Roger, I think historically that helps you get more allocations at first to maybe get the stores up and running. One, I guess, is that true? And then two, for how long do you get better inventory allocations at those new open points?

Well, on an open point, you know, they have a plan that says this is the planning potential for a point, let's say it's 1,500. And what they will do is preload you with those cars, you know, before you open. And you'll get those for about, I think, probably about 90 to maybe 180 days. But then you're on a run rate. based on your history. So it works out well. And I think after spending 15 or 20 million on a facility, you certainly need the cars to start the business. But I don't think it's fair. I think it's certainly good for future allocation because you continue to meet the requirements of the planning potential and they give you the cars or trucks to be able to meet that early on. So it's up to you to drive it and then maintain it.

Got it. And one last one for me on the parts and service on the commercial truck side. If we did go through a broader freight recession or pullback on the industrial side, could parts and service still organically grow and count positively through that? Or what have you seen through past industrial cycles on that part of the commercial truck?

I would say... the parts and service would grow because people would not be buying new vehicles. And we see that in our own truck leasing fleet. We run past a certain point of mileage, our maintenance costs go up. So that would always be an opportunity for the Freightliner dealer for us to give us more parts and service. So I think at the end of the day, it's very positive for us if there is, because we'll have more parts. We saw that during the last recession. I think we saw parts and service be pretty steady and solid.

Got it. Thanks so much for all the color and best of luck, guys.

Yeah, thanks.

Thank you. And our next question is from Rajat Gupta of JP Morgan. Your line is open.

Good job. Hi. Hey, thanks for taking the question. Just had a question on parts and services on the automotive side. Could you give us a sense of how the different segments in the quarter are in? How should we think about just the outlook for the rest of the year, given the trend you're seeing so far in 1Q and also in April? Thanks.

Well, when you look at – you're asking about the growth – ask me the question again. Unfortunately, I didn't get it, so I want to be sure I try to give you the right answer, sir.

Just within parts and services, the different components within that, customer pay, warranty, et cetera, how those did in the first quarter, and just how should we think about the progression to the rest of the year?

Well, I would say we're seeing more miles driven. There's no question because the country's opened up, which is driving more mileage, which will drive more parts and service. So I see that being key. Our repair orders were up 13% in the U.S., and up 11% in the U.K., and our body shop was up 22%. So customer pay was up. Warranty was down. Now, one thing, that had some impact on our PAG margin because we have a fixed margin on warranty, and on customer labor we haven't negotiated because you have different age vehicles coming in, and that obviously drove slightly. reduction in our in our in our total margin but still very strong at 59 percent our effective labor rate went up and this is a good one our effective labor rate went up about eight percent in the us during uh during the first quarter if you compare it to a year ago got it and in terms of like the just the outlook for the rest of the year uh any visibility uh we can get in terms of

how the progress should be for the business.

I mean, overall, the overall PAG business, you're saying, or parts and service?

Just parts and services on the retail automotive.

Oh, I think it's going to go up. I don't see it going down for sure. And the only thing will be if the parts supply, which we have had some impact on parts supply because of the supply chain, and that could have some impact on slowing it down. The other, which I didn't really mention, it came as a thought here now, is our loaner cars and the ability to offer you a loaner car. A lot of people don't want to come in for service if they don't have loaner cars. Well, all of us have reduced our loaner cars because availability of new cars to put into that service. In fact, we've used some used cars. That might have some ability to dumb down the strength of the business, but I'm not sure it's going to be major because people will wait. It puts the customer out. If you have a critical issue, we're going to try to take carry on the day. But overall, I think we're in really pretty good shape. Miles driven is recovering, but it's still lower than pre-pandemic. There's no question about that. So I think it's positive.

Got it. Just to follow up on PTL, you know, could you give us an update on, you know, where the utilization rates are, you know, what they were in the first quarter, you know, how do you expect that to trend, you know, this year, you know, maybe the next year? And then maybe if you could give us an update on just the fleet size and and what your plans are for the next couple years in terms of where you'd like to get in terms of just the long-term lease price for PPL?

Well, I think that we went up $38,000, and my goal, obviously, by 2025 would be to be at $500,000. If we can grow now, it's certainly based on availability and the amount of signing we're doing when you look on the full-service lease side. You know, that business, you know, was up 8% during the first quarter, and contract maintenance was up 14%. So, you know, that's very positive. And we still see where the requirement in transportation across the country or commercial rental is as strong as it's ever been, and that was up 55%. So we see that continuing to grow. We're held back a little bit because of supply of vehicles right now. So we'll add to those fleets. is those rental fleets as we go forward, which will make a difference. So our logistics business grew at about 8%, and when you look at the balance of the business, the one way continues to be strong. We get good pricing. Our full service is up, our contract maintenance, and we continue to add probably 15 to 16 locations a year new along with the – when we go in, we can take over the customer's and that gives us a chance to add another shop with a captive shop, we call that, with a customer. So I think in Q1, we benefited by a higher gain on sale. PAG, prospectively, got about $25 million, and I think it would be lower in Q2 and Q3 going forward because we've really reduced the vehicles available for sale, as I said earlier, from about $12,000 to $3,000. So I don't think we'll quite see that gain, but... Overall, the business should be strong.

Got it. Great. Thanks for the call and good luck. Yeah, thank you.

Thank you. And our next question is from David Whiston of Morning Star. Your line is open.

Hey, David.

Hey, Roger. Hey, everyone. First on equity income, if I remember right, normally Q1 is the weakest quarter. for equity income, but this year obviously outstanding growth of about 115%. So just curious if you are expecting Q1 to not be the weakest quarter this year.

Well, I think, you know, we'll have from an equity income perspective when you start looking at PTS, you know, when we get into the July, August, September because of the one-way business will drive that probably higher. And we continue to have some impact, as I just mentioned, Raju, that we had in the gain on sale. But I see it being equal here as we go forward, other than the gain on sale, you know, for the rest of the year. I feel good about it. Okay. I'm sorry.

How much was that gain on sale?

Gain on sale for PAG was up about 25 million. Am I right, Tony?

Year over year over year.

Year over year. So I wouldn't expect that every quarter. Because we had vehicles we wanted to run in rental, which there was such a demand at the end of Q4. We decided to run those vehicles through Q4, took them out in Q1 and sold those. And that's why we had the bigger gain.

Okay. And on car shop, the disclosure about the self-sourcing was helpful. The U.K. is the lowest there at 39%. How high do you think that can get over time?

Repeat that again.

So you're talking about just on car shop, David?

Yes, slide 30.

You broke up there. Sorry, you broke up. Go ahead. You there?

Yeah, sorry, was it slide 30?

Yeah, so you're looking at the sourcing coming out of what we're self-sourcing on used vehicles in the different markets. Yeah, we think that the UK is continuing to trend positive. If you look at just the traditional franchise business in the UK, they increased in the quarter on a year-over-year basis from 18% to 25% in terms of purchases direct from the consumer. And I think they've got a team of buyers working on this, and we would expect that to continue. On the car shop side in the UK, they're not sourcing nearly as many vehicles from consumers as we are in the US. And what we would see... happened there is that over time they would use the Sittner auction as more of a direction to help gain and get more cars. And that's been somewhat limiting right now because of the cars and trades coming off of either out of fleet or trades coming in from the overall business. So we do expect those to improve over time.

Okay, thanks. And just finally, I think it was slide 16 talks about your retail automotive brand mix. and BMW is a little more than double, say, in Toyota, 25% versus 11%. BMW is obviously a great brand, but over time, do you want to try and narrow that gap, or are you pretty much capped on the Audi-Toyota side so you can't?

No, when you take Audi and you add Porsche to it and Bentley and the other, we're probably getting close to 20% with them. I think that we have no limits with any one. I think the BMW is driven because we have the majority, we have double-digit market share with BMW in the UK, which probably drives it a little bit higher. We don't quite have that kind of number here in the US, but it is our number one brand, and we've been strong with many right from the beginning. But there's no limit. In fact, we just made acquisition of three stores, BMW stores, in the last 30 days in the UK, and we'd expect more in As we go through the rest of the year, we have some other possibilities in the pipeline. Okay.

Thanks, everyone. Thank you. You're welcome, David.

Thank you. And there are no further questions at this time. I will turn the call over back to Mr. Penske for closing comments.

Thank you, everyone. We had a great quarter. Appreciate the support, and our team's ready to take on Q2. We'll talk to you next quarter. Thank you.

this concludes today's conference call thank you for participating you may now disconnect