PENSKE AUTOMOTIVE GROUP, INC. quarterly report, Q2 FY2023

Penske Automotive Group, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited. PAG operates automotive and commercial truck dealerships in the U.S., U.K., Canada, Germany, Italy, and Japan, distributes commercial vehicles and power systems in Australia and New Zealand, and owns 28.9% of Penske Transportation Solutions.

Business context

As of June 30, 2023, PAG operated 337 franchised automotive dealerships, 20 CarShop used-vehicle dealerships, and 44 Premier Truck Group locations.
In June 2023, PAG acquired Transolutions Truck Centres in Manitoba, adding three full-service dealerships and two service and parts centers.
Beginning in 2023, certain Mercedes-Benz U.K. dealerships transitioned to an agency model. PAG records only a manufacturer fee rather than the full vehicle selling price, with no corresponding vehicle cost of sales.

Financial performance

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Total revenue	$7,468.5 million	$6,906.9 million	$14,807.5 million	$13,882.3 million
Gross profit	$1,273.0 million	$1,237.0 million	$2,525.3 million	$2,468.7 million
Operating income	$380.8 million	$387.6 million	$754.3 million	$789.6 million
Income before taxes	$400.3 million	$499.6 million	$807.2 million	$997.2 million
Net income attributable to PAG	$300.8 million	$374.0 million	$599.1 million	$741.9 million
Diluted EPS	$4.41	$4.93	$8.72	$9.70
Operating cash flow	Not separately provided	Not separately provided	$604.5 million	$879.2 million

Calculated consolidated margins were approximately 17.1% gross, 5.1% operating, and 4.0% net in Q2 2023, compared with approximately 17.9%, 5.6%, and 5.4%, respectively, in Q2 2022. Six-month gross, operating, and net margins were approximately 17.1%, 5.1%, and 4.0%, compared with 17.8%, 5.7%, and 5.4% in the prior-year period.

Revenue and operating trends

Q2 revenue increased 8.1%; six-month revenue increased 6.7%. Excluding foreign-currency effects, management reported increases of 8.5% and 9.0%, respectively.
Retail automotive revenue increased 6.8% in Q2 and 5.7% for six months. New-vehicle revenue increased, while used-vehicle and finance-and-insurance revenue declined.
Retail automotive service and parts revenue increased 14.8% in Q2 and 15.6% for six months, supported by customer-pay, warranty, vehicle-preparation, and body-shop activity.
New commercial truck revenue increased 37.8% in Q2 and 32.4% for six months, driven by higher unit sales and selling prices.
Used commercial truck revenue declined 33.4% in Q2 and 43.1% for six months, reflecting lower selling prices and weaker used-truck values.
Penske Australia revenue declined 2.7% for six months, but gross profit increased 2.7%, supported by higher-margin remanufacturing and service and parts activity.

Material changes versus the prior comparable period

Net income attributable to PAG declined 19.6% in Q2 and 19.2% for the first six months; diluted EPS declined 10.5% and 10.1%, respectively, partly reflecting substantial share repurchases.
Equity in earnings of affiliates declined 46.0% in Q2 and 39.2% for six months. PTS earnings were pressured by lower rental utilization and vehicle-sale gains, plus higher interest and maintenance costs.
Floor-plan interest expense increased 242.2% in Q2 and 255.8% for six months, reflecting higher interest rates and greater average borrowings. Other interest expense increased 42.4% and 34.3%, respectively.
SG&A expense increased 4.9% in Q2 and 5.4% for six months; SG&A as a percentage of gross profit increased to 67.4% from 66.1% in Q2 and to 67.4% from 65.4% for six months.
New-vehicle gross profit per unit declined 8.8% in Q2 and 8.2% for six months, while used-vehicle gross profit per unit declined 14.9% and 17.9%, respectively.
Foreign-currency translation generated $59.9 million of other comprehensive income for six months, compared with a $144.3 million loss in the prior-year period.

Cash flow, debt, and liquidity

Six-month operating cash flow was $604.5 million, down from $879.2 million. The decline primarily reflected lower earnings and a $274.2 million inventory investment. Operating cash flow including all floor-plan activity was $602.1 million versus $763.6 million.
Investing cash outflow was $261.4 million, including $185.5 million of capital expenditures and $80.5 million for acquisitions.
Financing cash outflow was $329.6 million, including $328.1 million of share repurchases and $87.2 million of dividends, partly offset by net debt borrowings.
Cash and cash equivalents were $119.6 million at June 30, 2023, compared with $106.5 million at December 31, 2022.
Total long-term debt was $1,743.7 million, including $546.9 million of 3.50% notes due 2025, $495.4 million of 3.75% notes due 2029, $585.6 million of mortgage facilities, and borrowings under Canadian and Australian facilities.
PAG reported no borrowings under its U.S. or U.K. revolving credit facilities. Available borrowing capacity included $1.2 billion under the U.S. facility, £200.0 million under the U.K. facility, CAD $79.6 million under the Canadian facility, AU $38.8 million under the Australian facility, and $74.4 million under the revolving mortgage facility.
Management stated that operating cash flow, PTS and joint-venture distributions, and existing resources should fund operations and current commitments for at least the next twelve months. PAG was in compliance with its credit and lease covenants.

Guidance, outlook, risks, and unusual items

No formal numerical earnings or revenue guidance is provided in the filing.
Management expects new-vehicle availability to improve during 2023, but cautions that higher supply may reduce new- and used-vehicle gross profit per unit. Commercial truck demand is expected to remain strong through the remainder of the year, supported by replacement demand and a large industry backlog.
Management highlights affordability pressure from inflation and higher interest rates, lower used-vehicle availability, supply-chain and labor disruptions, foreign-currency volatility, and cyclical demand.
The Mercedes-Benz U.K. agency model reduces reported revenue and floor-plan financing needs, while its longer-term impact and the effect of additional manufacturer agency models remain uncertain.
PTS expects strong full-service leasing demand, partly offset by lower rental utilization, lower used-vehicle sale gains, and higher maintenance and interest costs.
Lease commitments totaled approximately $5.2 billion on an undiscounted basis, with $2.4 billion of recognized operating lease liabilities at June 30, 2023.
PAG reported no legal proceedings reasonably expected to have a material adverse effect, but unfavorable outcomes could still materially affect results. The company had $26.1 million of letters of credit, $13.0 million of bank guarantees, and $21.6 million of surety bonds outstanding.
A 100-basis-point change in variable rates was estimated to affect annual other interest expense by approximately $4.9 million and annual floor-plan interest expense by approximately $28.1 million.

Investor verification priorities

Verify whether improving vehicle availability causes further compression in new- and used-vehicle gross profit per unit.
Monitor floor-plan and other interest expense as variable rates and inventory balances change.
Assess the sustainability of PTS distributions and equity earnings amid higher maintenance and financing costs.
Review the revenue, margin, and cash-flow effects of the Mercedes-Benz U.K. agency model and any broader agency-model adoption.
Track used-vehicle values, customer affordability, finance-and-insurance revenue per unit, and used-truck pricing.
Evaluate liquidity after share repurchases, dividends, capital expenditures, acquisitions, and debt maturities, particularly the 2025 senior subordinated notes.
Review covenant compliance, lease obligations, manufacturer and franchise relationships, litigation contingencies, and regulatory developments affecting vehicle sales and emissions.