PENSKE AUTOMOTIVE GROUP, INC. quarterly report, Q3 FY2023

Penske Automotive Group, Inc. — Q3 2023 Form 10-Q Summary

Business context and reporting period

Penske Automotive Group is a diversified international transportation-services company operating automotive dealerships, commercial truck dealerships, commercial vehicle distribution and power-systems businesses, and a 28.9% equity investment in Penske Transportation Solutions (PTS). Operations span the United States, United Kingdom, Canada, Germany, Italy, Japan, Australia, and New Zealand. The filing covers the unaudited three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.

At September 30, 2023, the company operated 336 franchised automotive dealerships, 20 used-vehicle dealerships, and 44 Premier Truck Group locations. It employed more than 28,000 people and held $14.8 billion of total assets.

Key financial metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Total revenue	$7,447.8 million	$6,920.7 million	$22,255.3 million	$20,803.0 million
Gross profit	$1,220.4 million	$1,186.9 million	$3,745.7 million	$3,655.6 million
Operating income	$331.5 million	$362.7 million	$1,085.8 million	$1,152.3 million
Income before taxes	$356.5 million	$467.2 million	$1,163.7 million	$1,464.4 million
Net income attributable to PAG stockholders	$263.4 million	$340.1 million	$862.5 million	$1,082.0 million
Diluted EPS	$3.92	$4.61	$12.64	$14.31
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$1,022.2 million	$1,208.2 million

Q3 gross margin was approximately 16.4%, versus 17.2% in the prior-year quarter. Operating margin was approximately 4.5%, versus 5.2%, and net margin attributable to PAG stockholders was approximately 3.5%, versus 4.9%. For the nine-month period, gross margin was approximately 16.8%, operating margin 4.9%, and net margin attributable to PAG stockholders 3.9%.

Q3 revenue increased 7.6%, while gross profit increased 2.8%. Nine-month revenue increased 7.0%, while gross profit increased 2.5%.
Retail automotive revenue increased 9.9% in Q3 and 7.0% year to date. Retail commercial truck revenue decreased 5.4% in Q3 but increased 7.7% year to date. Commercial vehicle distribution and other revenue increased 10.0% in Q3 and 1.5% year to date.
Q3 equity earnings of affiliates were $85.0 million, down from $136.2 million. Nine-month equity earnings were $241.6 million, down from $393.8 million, primarily because of lower PTS earnings.
Q3 floor-plan interest expense increased 157.2% to $35.5 million; nine-month expense increased 210.9% to $94.2 million. Other interest expense increased 36.9% in Q3 and 35.2% year to date.
Cash and cash equivalents were $104.4 million at September 30, 2023, compared with $106.5 million at December 31, 2022.
Total debt, including current and long-term portions, was $1,707.3 million, compared with $1,622.1 million at year-end 2022. Floor-plan notes payable totaled $3,043.1 million.
Capital expenditures were $272.1 million, acquisitions used $211.3 million, share repurchases totaled $341.2 million, and dividends paid totaled $135.8 million during the nine months.

Material changes versus the prior comparable period

Automotive revenue benefited from higher new-vehicle volumes and selling prices, but new-vehicle gross profit per unit declined. In Q3, same-store new-vehicle gross profit per unit decreased 13.9% and same-store used-vehicle gross profit per unit decreased 22.0%.
For the nine months, used automotive retail units declined 3.5% on a same-store basis and used-vehicle gross profit declined 22.2% on a same-store basis. Management cited limited availability of newer used vehicles, inflation, higher interest rates, and affordability pressures.
Automotive service and parts remained a source of growth: Q3 revenue increased 12.4% and nine-month revenue increased 14.5%; nine-month gross profit increased 13.2%.
New commercial truck unit sales increased 7.7% year to date, while same-store new-truck gross profit increased 14.3%. Used-truck revenue declined 32.7% and used-truck gross profit declined 18.9% year to date because of lower resale values and selling prices.
SG&A increased 7.7% in Q3 and 6.2% year to date. SG&A as a percentage of gross profit increased to 69.9% in Q3 and 68.3% year to date, partly due to vehicle loaner, advertising, utility, and insurance-deductible costs related to approximately 750 hail-damaged vehicles with $27 million of inventory value.
PTS equity earnings declined substantially because of lower commercial and consumer rental utilization, lower gains on used-vehicle sales, and higher interest and maintenance costs.
The company transitioned Mercedes-Benz U.K. dealerships and certain other U.K. dealerships to an agency model. Under this model, PAG records a fee rather than the full vehicle selling price and does not hold the vehicle in inventory, reducing reported revenue but also eliminating corresponding cost of sales. The longer-term effect remains uncertain.
PAG acquired two U.S. automotive franchises and three Canadian full-service truck dealerships plus two service-and-parts centers. It also closed nine locations during the nine months.
The company repurchased 2.5 million shares for $341.1 million under its repurchase program; $233.1 million remained available at September 30, 2023. The quarterly dividend increased to $0.72 per share, and a $0.79 per-share dividend was announced for December 2023.

Guidance, outlook, risks, contingencies, and unusual items

Management stated that operating cash flow, distributions from PTS and joint ventures, and existing credit and floor-plan resources should fund operations and current commitments for at least the next twelve months. At September 30, available borrowing capacity included $1.2 billion under the U.S. credit agreement, $237.9 million under the U.K. facility, $28.7 million under the Canada facility, $15.0 million under the Australia facility, and $127.6 million under the revolving mortgage facility. The company reported compliance with its debt and lease covenants and expects to remain compliant over the next twelve months.

Management expects U.S. and U.K. vehicle markets to remain supported by improving new-vehicle availability, but expects gross profit per vehicle to face pressure as supply normalizes.
Commercial truck demand is supported by replacement demand and a reported Class 6-8 backlog of 256,043 units, although supply constraints and delivery timing remain risks.
Used-vehicle operations face risks from limited supply of one- to four-year-old vehicles, fewer lease returns, higher financing costs, inflation, and affordability constraints.
Higher interest rates materially affect variable-rate debt and floor-plan financing. Management estimated that a 100-basis-point change would change annual other interest expense by approximately $5.1 million and annual floor-plan interest expense by approximately $28.3 million.
Foreign exchange remains material; a 10% change in average exchange rates against the U.S. dollar would have changed nine-month revenue by approximately $945.0 million.
Major risks include vehicle supply disruptions, manufacturer franchise and agency-model changes, direct-to-consumer competition, electric-vehicle and emissions regulation, economic and credit conditions, labor disruptions, cybersecurity, foreign exchange, PTS performance, covenant compliance, lease obligations, litigation, and the ability to refinance debt.
The company was not party to legal proceedings reasonably expected to have a material adverse effect, individually or in the aggregate, but unfavorable outcomes remain possible. It had $25.8 million of letters of credit, $14.0 million of bank guarantees, and $26.5 million of surety bonds outstanding.
Operating lease obligations totaled $5.2 billion on an undiscounted basis, with $2.4 billion recognized as operating lease liabilities.

Most important facts for investors to verify

Whether new- and used-vehicle gross profit compression continues as inventory availability improves.
The effect of the Mercedes-Benz U.K. agency model and any additional manufacturer agency-model transitions on revenue, margins, inventory, and floor-plan interest.
PTS operating trends, including rental utilization, used-vehicle resale gains, maintenance costs, interest expense, and future distributions.
Exposure to higher variable interest rates, particularly on floor-plan financing and revolving debt.
Used-vehicle supply, affordability, consumer credit conditions, and the sustainability of service-and-parts growth.
Compliance with debt and operating-lease covenants and the company’s ability to refinance the $547.3 million of 3.50% notes due 2025.
Capital allocation among acquisitions, facility investments, dividends, debt repayment, and the remaining $233.1 million share-repurchase authorization.