Penske Automotive Group, Inc.

Your conference will begin momentarily. Please continue to hold. Ladies and gentlemen, thank you for standing by. Your conference will be underway shortly. Please continue to hold. Ladies and gentlemen, good afternoon. Welcome to the Penske Automotive third quarter 2023 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through November 2nd, 2023 on the company's website under the investors tab at www.penskeautomotive.com. If you would like to ask a question during today's conference, you may press 1, then 0 on your telephone keypad. You will hear acknowledgement that your line has been placed in queue. You may remove yourself from the queue by repeating the same 1, 0 command. I'd now like to introduce Anthony Pardon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Leah. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's third 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 is Roger Penske, our chair and CEO, Shelley Holgrave, EVT and chief financial officer, Rich Shearing of North American Interoperations, Randall Seymour, International Operations, and Tony Ficcione, 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 and our leverage ratio. We have prominently presented the comparable gap measures and have reconciled the non-gap measure in this morning's press release and investor presentation, which are available on our website to the most directly comparable gap measures. Our future results may vary from our expectation because of risks and uncertainties outlined in today's press release under forward-looking statements. I'd 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 results to differ materially from expectations. At this time, I'll turn the call over to Roger.

Thank you, Tony. Good afternoon, everyone, and thanks for joining us today. Our diversified business really produced another solid quarter driven by strong performance from our North American automotive and commercial truck operations. The strong performance in North America was partially offset by lower earnings from our UK automotive operations, higher interest expense, and lower equity earnings from our investment in Penske Transportation Solutions. As previously announced, third quarter results include approximately $6.2 million of costs related to the loss of inventory, property damage, and business disruption from a hail start in Austin, Texas. It impacted our Toyota, Honda, and Hyundai dealership, 750 vehicles worth $27 million in inventory. During the third quarter, total units delivered increased 12% to 122,000, which includes 8,695 agency units. Good news is revenue increased 8% to $7.4 billion, and our same-store retail revenue, automotive, increased 9%, including a 9% increase in service and parts. Same-store retail automotive variable gross profit per unit declined $466 sequentially from the second quarter of 23 to $5,180. Same-store retail commercial truck gross profit increased 6%. Our net income was $263 million and earnings per share was $3.92. Last week, we increased the dividend by $0.07 or $0.10 to $0.79 per share. Let me now turn to our auto operations. Demand for new vehicles remains solid, and availability, I would say, is improving. We continue to take forward orders. Our U.S. pre-sold inventory remains approximately 40% to 50%. In the U.K., our forward order book is 24,000, 300 units and gross is only down 2% representing about 98 million automotive operations in the UK during the third quarter were impacted by supply challenges, stop sales, a challenging used vehicle market. And of course, March is a registration month. So it's awful key for us from the standpoint of our operation and profitability orders for 493 new vehicles were unable to be delivered in September. In addition, same-store used vehicle gross profit declined 30% as pricing challenges impacted the used market. Let's look at our retail automotive business on a same-store basis for Q3. Total units delivered increased 10%, service and parts revenue increased 9%, and gross profit, by the way, was up 10%. Service and parts revenue growth has been driven by an increase of 10% in customer pay, 7% in warranty, and 14% in collision repair. Our variable growth property remains strong, and the higher than historical levels, obviously. For example, variable growth per unit of $5,180 is 2,000 per unit higher than it was in Q3 2019. Let me now talk a little bit about Penske Transportation Solutions. PAG owns 28.9% of PTS, which provides us with equity income cash distributions, and cash tax savings. PTS currently manages a fleet of over 442,000 trucks, tractors, and trailers. In the third quarter, operating revenue increased 4%, to $2.8 billion. Full service contract revenue increased 13%. Logistics revenue increased 2%, while rental declined 9%. PTS generated 291 million of net income. Our share of PTS earnings was 84 million, which declined by 51 million compared to Q3 last year. However, the good news is our share of PTS earnings increased 11 million sequentially compared to Q2 of 2023. The decline in PTS earnings over the prior year period was mainly impacted. Let me look at four items particularly. Supply constraints, and lease extensions increased the number of older units in operation and drove higher maintenance costs of $40 million in Q3. We also granted 18,000 lease extensions so far this year and 37,000 if you look over the last 21 months. Interest expense increased $64 million due to higher average outstanding debt, obviously, from the growth of our fleet, combined with $1.5 billion in refinancings and overall higher interest costs. A lower gain on sale of $61 million when compared to the record performance in 2022 as used truck values declined from historically high levels in the past. Commercial rental utilization was 80% compared to 84% in the third quarter. A full service long term contract business remains very strong, increasing 13% in Q3. We believe the supply of new trucks is stabilizing and will provide PTS with an opportunity to replace the older vehicles in the fleet in the near future. And this obviously will drive lower maintenance expense. Also, we believe freight rates will begin improving in the near future, which has historically helped our remarketing profitability. Let me now call over to Rich Shearing to discuss our commercial retail operation trucks.