Penske Automotive Group, Inc. (PAG)

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Penske Automotive Group (PAG)

Q2 2013 Earnings Call

July 31, 2013 2:00 pm ET

Executives

Anthony R. Pordon - Executive Vice President of Investor Relations and Corporate Development

Roger S. Penske - Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of Penske Corporation and Chief Executive Officer of Penske Corporation

Analysts

John Murphy - BofA Merrill Lynch, Research Division

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

N. Richard Nelson - Stephens Inc., Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Ravi Shanker - Morgan Stanley, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Scott L. Stember - Sidoti & Company, LLC

David Whiston - Morningstar Inc., Research Division

Brian Sponheimer - Gabelli & Company, Inc.

Simeon Gutman - Crédit Suisse AG, Research Division

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group Second Quarter 2013 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through August 7, 2013 on the company's website under the Investor Relations tab at www.penskeautomotive.com.

I will now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Anthony R. Pordon

Thank you, Craig, and good afternoon, everybody. A press release detailing Penske Automotive Group's second quarter 2013 results was issued this morning and is posted on our website, along with the financial presentation designed to assist you in understanding our financial results. Joining me for today's call are Roger Penske, our Chairman; and David Jones, our Chief Financial Officer.

On this call, we will be discussing certain non-GAAP financial measures, such as EBITDA. We've reconciled these items to the most directly comparable GAAP measures in this mornings press release that is available on our website. Also, we may make forward-looking statements on this call. Our actual results may vary because of risks and uncertainties, which may cause the actual results to differ materially from expectations. Additional discussion and factors that could cause results to differ materially are contained in our public SEC filings, including our Form 10-K.

At this time, I'll now turn the call over to Roger Penske.

Roger S. Penske

Thank you, Tony. Good afternoon, everyone. Thank you for joining us today. I'm pleased to report that our business produced an outstanding second quarter. We delivered solid growth across each area of our business, and we earned the highest income and earnings per share for any quarterly period in the company history.

The record results were driven by a 14.1% increase in total retail unit sales and 11.6% increase in total revenue to $3.7 billion. We also leveraged our selling, general and administrative expenses as a percent of gross profit by 190 basis points and improved our operating income by 24.9%. As a result, income from operations increased 27.4% to $64 million, and related earnings per share increased 26.8% to $0.71.

Let me now turn to the specifics of our record second quarter. Total retail unit sales increased 14.1% to 93,600 units, and total revenues increased 11.6% to $3.7 billion.

On a same-store basis, revenues increased 11.5%, including 13.2% increases in our U.S. market and 8.5% internationally.

Foreign exchange rates negatively affected our same-store revenue growth in Q2 by 110 basis points or approximately $37 million. Excluding the effect of foreign exchange, same-store retail revenue increased 12.6%, including 11.7% for international markets.

Our total revenue mix in the quarter was 66% in the United States and 34% internationally. Our brand mix was consistent with last year. Premium/Luxury at 68%, volume foreign at 28% and Big Three at 4%.

Looking at new vehicles, we retailed 51,300 units, representing 11.6% increase, including 11.3% improvement in the U.S. and a 12.3% increase internationally. We outperformed both the U.S. and the U.K. markets during the quarter. Breaking that down, Premium/Luxury was up 14.7%, volume foreign up 9.4% and the Big Three was up 4.9%.

Total same-store new units retailed increased 10.2%. U.S. was up 8.9%, and international was up 13.6%.

Total new vehicle revenue increased 12.7% to $1.9 billion. New vehicle average selling prices improved 1.1%, while new vehicle gross profit per unit was $2,807. And our gross margin was 7.5% compared to 8% in 2012.

Our days supply of new vehicles was 63 days at the end of June compared to 56 days last year.

Looking at used vehicles, we retailed 42,300 units in the quarter, a 17.4% increase. Our Premium/Luxury used increased 15.7%; our volume foreign, 20.4%; and our Big Three, 6.5% for a total, again, of 17.4%.

Our used-to-new ratio was 0.83:1, which increased from 0.78:1 in the second quarter of last year.

Total same-store used unit retail increased 14.9%. In the U.S., it was up 15.2%. And internationally, it was up 14.4%. Used vehicle revenue increased 15.5% to $1.1 billion.

Our used vehicle average transaction price has declined 1.6%, while the used vehicle gross profit per unit was $1,928, and our margin was 7.5% this year versus 7.7% last year. Our days supply of used was 42 days at the end of June compared to 43 days last year.

I'm pleased to report we're making great progress on our initiatives to improve our finance and insurance revenue.

During the second quarter, revenue increased 17.9%, including 16.4% on a same-store basis. F&I improved 3.3% per unit to $1,024 or approximately $33 per unit. F&I per unit was $1,001 in the U.S. and $1,077 internationally.

In the second quarter, 69% of our F&I revenue was generated in the U.S. and 31% was generated in our international markets.

Turning to service and parts. Our business had another solid quarter with revenue improving 8.1%, including 6.6% on a same-store basis. Customer pay was up 3.8% on a same-store basis, warranty up 15.6%. Our body shop increased 9.4% and our pre-delivery inspection was up 9%. Our gross margin for service and parts increased 160 basis points to 60.1%.

In total, overall gross profit increased 12.7% to $569 million and gross margin improved 20 basis points to 15.4%, up from 15.2% last year. For the quarter, we generated a 190 basis point improvement in SG&A to gross profit to 77.4%. Our SG&A flow-through was 38%. If you exclude our rent, our SG&A as a percentage of gross profit was 69.5%.

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