All right, moving along. Another great privilege to have Tony Pordon back from Penske Automotive Group. One of the most unique companies within the automotive and vehicular space. Company has 66 million shares. Trades around $160, about $10.7 billion equity cap. Has $1.5 billion in net debt and also owns 28.9% of Penske Transportation Solutions. Total enterprise value is in the $10 billion range. Apart from being one of the largest dealership groups in the country, Penske has also grown and is now one of the largest commercial vehicle dealership groups and has a host of other businesses that we'll talk about. My one mistake was not booking Tony for longer than 30 minutes. We're going to get right into Q&A. Tony, thank you very much for being here.
Brian, you're welcome. Glad to be here as always. You and Mario put on a great show. I think this has got to be, what, 20 years or so?
This is my 18th.
Yeah.
49 total. You want to take a couple of minutes just to talk about the business? Just give a better overview than I did?
You did a great job. But I mean, I will quickly talk about our business. So retail automotive, we have 356 franchises, predominantly premium luxury. We're based in the U.S., U.K., Germany, Italy, Japan, and now Australia selling automobiles. We just expanded into Australia with three Porsche dealerships. We sell about 20,000 commercial trucks every year through 45 different dealerships that we have. It's all, unlike Rusty, who's got these various brands, we're specifically Freightliner. We're 100% Freightliner, Freightliner dedicated, looking to grow in that. We're both in Canada and in the United States. Based out of Dallas. And then we have a 28.9% ownership interest in Penske Transportation Solutions. There's three partners to that business. Us, Mitsui, who owns 30%, and our parent, Penske Corporation, who owns that business i s the 50% dividend policy that they have.
So they pay us 50% dividend every year, and then they generate tax. A partnership that generates tax losses, those tax losses pass to us via the partnership, and we get to pay less federal income tax because of that. And then we hang it up on the balance sheet as a deferred tax liability. So it's a brilliant play with respect to doing that. And then with the one big beautiful bill, as you guys were just talking about with Rusty, I think Mario's question was talking about the accelerated depreciation of things. We estimate conservatively that the one big beautiful bill will give us an extra $120 million-$150 million a year in cash flow from the deductions that PTO will get in terms of expensing the trucks at 100% for all their purchases on an annual basis.
That's based off of roughly $300 million of purchases or, I'm sorry, $3 billion of truck purchases that they will do every year. So I left off a couple of zeros there. I apologize. And then i t's amazing when you think about the cash that that will throw out. We made our first investment, believe it or not, on July 1st, 2008. What happened in September? Everything went to hell, right? But w e bought 9% of the business, and then we bought two more tranches to get up to 28.9% in 2016 and 2017. And in total, we have $956 million in cash invested in that business. We've taken out $2 billion in cash. $2 billion in cash. Why do you think our debt's where it is? Right? I mean. We're in great position with that business.
Now, there's some trials and tribulations going on with there right now, but Penske Truck Leasing this year has been relatively flat in terms of performance. We've taken out people. We've cut the vehicle fleet by 40,000, gone from 445,000 to 405,000. And what you see in terms of the pressure is in our rental business, our commercial rental and consumer rental. And once t he economy turns around or the capacity, as Rusty was talking about, comes out of the marketplace, you're going to see a company like Penske Truck Leasing become a first mover because people aren't going to be able to order and get trucks and have them built on time. They're going to come to us, have us rent them the trucks. We're going to be moving along pretty quickly right away.
On top of that, I didn't talk about the small business that we have in Australia. What's really interesting about that business is not only are we both providing on-highway trucks, we're doing an off-highway business. I'm really, really interested in our energy solutions business today because we're providing the power plant that's going in and building data centers in Australia that's part of the AI revolution. We've got AUD 1 billion under contract by 2030 to be able to supply these power systems into these big data centers. Honestly, it's less about that AUD 1 billion. It's more about the service contracts that we get from those engines that are in service. Once they start hitting their useful life and they need to start having their service intervals, it's like printing money.
Yeah. And just as a rule of thumb, you mentioned the $125 million or so a year in free cash flow. About $100 million buys about $400 million-$500 million of revenue in a.
Yeah, depending on what it could be a little less than that. If it's super luxury or Porsche stores, BMW, Mercedes, those types of stores will cost a little bit more. Toyotas and Hondas will cost a little less. Honestly, if it's a truck dealership, it costs even less.
Yeah. I guess the broader point I'm trying to make is that's just a growth engine for you to be able to increase your own profitability.
Right. We just announced on our call last week that we have approximately $1.5 billion in the hopper to close before the end of the year.
Yeah. You just opened the or you just bought the Ferrari Modena, so.
We did. We bought Ferrari Modena, yeah. It might be the smallest acquisition with the biggest influence in the overall company.
Let's take a step back and just talk about your core retail automotive business. In the U.S., it's predominantly luxury. We've heard a couple of comments about there being some excess inventory. With some of the luxury OEMs. Maybe just talk about what you're seeing in that higher-end business.
First of all, let's back up. Let's look at the industry in total. I don't know if this has been talked about today or not, but the industry's got about 2.6 million units of inventory right now. That 2.6 million compares to 3.6 million, 3.7 million, 4 million prior to the pandemic. The inventory is still down about 35% from where it was. Now, you bifurcate that and you look at what we have. We have 49-day supply in the U.S., 51-day supply in the U.K. I think our inventory is in good shape. We have 20 days of Toyota, 18 days of Lexus, 70, 80, 90 days of Audi. Audi is a brand that doesn't have a lot of cachet right now. It's very tough to manage because they don't have a lot of new product.
BMW, while their inventory got a little bit longer, I think, in the month of October, what we're comparing it against is a year ago where they were recovering from a stop sale that took place over 12 months ago. The numbers in October last year were pretty darn high. We're down on a year-over-year basis in October for BMW. Nothing to get worried about yet. I do think that we have to watch the inventory closely and see what it does, but I'm not overly concerned because the compare is really tough.
Broadly speaking, we just went over $50,000 in average transaction price. Your average ticket is obviously higher given.
Yeah, we're 60.
Given your mix. When you are examining strength of your customer base, whether it's FICO score, whether it's anything that within your F&I business you can get some color on. What's your sense of the tranches of strength with the consumer?
Our subprime business is only about 6%-7%. We really aren't even qualified to talk about that part of the business. I think every customer out there is a little squeamish with respect to affordability. I mean, our average used vehicle transaction price is $40,000, new $60,000. That's up from $42,000 prior to the pandemic. You take a look at that, higher interest rates, even though they've started to come back a little bit, you return to a dealership to lease a new car or purchase a new car, and you get sticker shock. You really do. I'm not going to say it's a symptom of a customer or a problem with customers. What my symptom is, or that I look at, and the only thing that bothers me is that customers are now financing cars beyond six years, seven years, and eight years. That's the part that bothers me.
That's the part that we're watching very, very carefully and trying to dissuade people. Ultimately, right, I want to sell a car. If a customer wants to finance a car at eight years, even though I don't want them to, because I want that customer back, I don't want to create a negative equity situation for that customer. That's really what concerns me more. They're pushing out that financing term more and more. Now, how can we combat that? Lower interest rates. We've got 50 basis points of rate decline so far in the last few months, and that's going to help. We do 32% leasing. That's down from 40%. Leasing can be more affordable because you don't have to pay for the whole car, right? We think that leasing will increase.
The other thing that we see is that it's right around 26% of our customers right now are paying cash for their car. They're trying to not finance it at the higher rate and pay for that car. I still don't see a huge distress in customers if 26% can still pay cash for the car.
Where is that relative to where it's been in the past?
Oh, it's much higher. It's down from its peak. We were 32%, 33%, 35%, 36%.
When you're talking about an average sales price that is now $60,000.
60,000, right.
versus $40,000. I mean, it's basically your new car or your used car now is the price of what a new car was before COVID, within a couple of thousand dollars.
It's not, I mean, we're making bigger grosses off of those, obviously, because the selling price is higher. We got to think about the strength of the OEMs. If you look at all the OEMs that you follow, right, the OEMs have a better product lineup. They're not selling as many of the loss leaders that they had before. We've got a mix shift to 84% SUV and truck. That's driving the business as well. Yeah, Mario?
Yes. I've got a four-year-old BMW. I'm trading it in. I'm getting a higher price. So is it my net cost? Hunched? Yes, no, maybe?
Your net? It depends on what you have.
Yeah, I agree with that.
The miles on it. You're not driving very much, right?
I only do 15,000 mi a year.
That's still a lot. Okay. So that's not the issue.
I made that up, but it's probably more than that.
It's definitely more than that.
My concern is the customer that buys a Toyota Camry or Honda Accord, right?
Yeah, no, I got it.
Yeah.
The second question for me is, I got interest expense that everybody focused on. That insurance company all of a sudden is hitting me hard too.
Oh, yeah, they are.
How much? What?
Yes, they are.
Do you have a number like for what it would be today versus two or three years ago?
I don't.
That's okay.
Yeah, I don't. I can look at my personal insurance, right, and it's probably up $1,000.
I don't blame them.
Yeah, for me, for sure. Yeah, exactly.
You talked about how I drive.
Before, you talked about enormous cash flow from the various rules that have changed. That doesn't impact PAG's book tax. It helps your cash flow, but your book tax.
It doesn't help my tax rate.
Correct.
My tax rate stays the same.
Yeah. It helps your cash flow enormously.
Correct. I end up putting the deferred tax liability on the balance sheet.
Absolutely.
Yeah. Oh, yeah.
I just want to make sure we understand the difference between the book tax, effective cash, and the cash flow that shows up on a balance sheet, not a three-year P&L. Thanks.
That's right.
Talk about the used market. Franchise model is a lot different than maybe that which the Carvanas and CarMaxes face. What are you seeing as far as availability on the used side, quality, your ability to secure off-lease, which has to be down.
Yeah. It's a really good question, Brian. I think that's probably the toughest part of the business today, is trying to acquire the right used car to sell in our dealerships, whether it's a standalone used business or in the franchise dealerships. We have very low lease returns. As a matter of fact, I think they've bottomed out. I think from here, they're probably going to start getting a little bit better over the next few years. It's not going to be like a huge jump, but it will be better, right? It'll be better than what it is today. We source 84% of the vehicles that we sell, self-sourced. Those come from various different sources. The highest percentage is trade-in, which is about 55%. Our challenge is that we like the zero- to- four-year-old marketplace. We are not going after the five, six, seven, eight, nine, 10-year-old cars.
The zero- to- four-year-old marketplace is particularly difficult because everybody's looking for those, and the prices tend to be elevated there. The question then becomes, "Well, Tony, why aren't you expanding your view and going after older cars?" Number one is I don't think we're good at it. Number two is those are the cars that end up causing high warranty rates, failure rates, costing more to get them ready for sale. Our customers, premium luxury customers, just don't want that.
Yeah. You mentioned it effectively, the zero- to- four-year-old car population is smaller because of lower.
It is. Yeah.
Lower sales in 2020.
Right. One of the things you look at, if you take and you go to our service business, right, that's growing very nicely, and we target mid-single digits in terms of overall revenue growth there. Quite frankly, we're growing our gross profit at a higher rate, so our margin's increasing. Our challenge on the service side is to get that tier two group of vehicles and to bring them back in. These are the cars that would be five, six, seven years old and might be beyond their second ownership cycle, where you sort of lose track of that customer. That's our focus on the used side and on the servicing side, to try to get more of those Tier 2 customers and Tier 2 vehicles.
Lesser talked about is the U.K. and just maybe a couple of minutes on just the market there and how that market's evolved.
We do about $9 billion in revenue in the U.K. It is about 35% of our business. Great business. For the past 20 years that we have been over there. Right now, it is a bit challenged, I think, because of government policy. Mario, I know that probably does not surprise you at all. The government policy is making it very difficult on consumers over there. Whether or not it is an EV policy that is increasing every year and saying, "Look, if you do not get to a certain percentage of sales, you are going to have to pay a fine for not hitting a BEV target." That fine can be excessive, up to, what is it? I think it is GBP 15,000 a car. Yeah, right? GBP 15,000 a car for not hitting some arbitrary target. The target rate now went from 22% last year to 28%.
Next year it goes to 32%. The year after it goes to 38%. They are going to ban the sale of ICE cars by 2035 and ban the sale of hybrids by 2030. They do not want hybrids because, guess what, they found out the customers were buying the hybrid car to get the tax credit but never plugging it in. On top of it, you have got higher taxes. We have got higher taxes for social programs. Our SG&A was a little bit higher this last quarter until we can start anniversary and take some more cost out because they have added healthcare taxes, minimum wage taxes that cost us probably $3 million each quarter right now. The consumer, I am not sure if you guys know this or not, but mortgages in the U.K. are much different than they are in the U.S.
In the U.K., the mortgages, I think they reprice every five-ish years or so. Everybody has had their mortgage repriced at much higher rates, where over here we can finance it at 15 or 30 years and not have to worry about it. That, energy prices, and that have caused some challenge with the U.K. consumer. The market is still not bad, but there are some challenging factors behind it that we just have to continue to work through. Service and parts is really good over there. F&I is really good. We have restructured how we do our used business over there and how we do aging of used cars. We closed our CarShop locations because they were not making any money. We had too much overhead. We went to this—you have heard us talk about this thing called Select.
The Select is a used-only business that ties into the dealership itself. Long story short with that is we have been able to increase our used vehicle grosses per car by several hundred dollars by just changing what we sell over there.
Yes.
Yeah. Hey, Tony.
Hey.
Do you have any updated thoughts on the competitive threat of direct sales to the dealerships?
We are working through agency for two brands in the U.K. right now. We are 100% agency with Mercedes. Mercedes is somewhat struggling with that. MINI went direct on March 1st. We are waiting to hear what BMW will do. Jag, Land Rover came back and said they are not going direct, that they do not like it. In the U.S., no direct sales whatsoever. The franchise laws are still in place. Do I think the manufacturers want to do it? Some probably do. Others do not. Others like the dealership mix that they have and the fact that we can handle the customers themselves directly. It is a mixed bag out there. I would say that Mercedes struggled a lot with it. Hundreds and hundreds of additional changes that they did not anticipate that we had to help them out with.
One of the big voids was lack of used cars in the marketplace. We still struggle with that today. The other part, believe it or not, is they came to us. For those of you that do not know, when the manufacturer decides to go sell agency and go direct to the consumer in the U.K., they are controlling the selling price. They go from a negotiated transaction to, "Here is a one-price model." Bottom line. Everybody pays the same. I can talk more and more about that, but basically, that gives us an advantage if we are in population centers because the consumer then no longer goes out and negotiates. The problem with it is when they go direct, the manufacturer has said, "We will take over and pay the marketing expenses. You do not need to pay any of those traditional expenses that you have had to pay.
You do not have to pay floor plan, blah, blah, blah," stuff like that. When sales were not materializing, they came back to us and said, "We need your help to sell more cars. We need you to go to the market, discount some cars." We kind of went, "Yeah, sorry. This is what you wanted. You guys have to figure this out. We will help you, but you have to figure this out. We are not—you cut our margin." What we are doing, what I can tell you, is that we are making more per car on a net basis under agency for Mercedes than we were when we were selling the car ourselves.
Brian, did you have a question? Can we get the microphone over here? Thank you.
Hey, Tony. I just want to go back to one of the questions Brian asked on the luxury demand. If I heard you correctly, I mean, it sounds like there's some idiosyncratic moves between the brands with Audi, BMW, etc. Are you seeing—if you step back—are you seeing a weaker consumer demand for luxury lately?
Look, if we look at the last several months, I would say that it's probably a little weaker than it was in the first part of the third quarter. I would say, as it went through the quarter, September was probably a little weaker than July or August were. Now, I'm not sure that if that's because people were out buying BEVs or if it was something more symptomatic than that. The other thing is we look at the month of October, we sold 130 BEVs. 130 in the U.S. Again, I'll say that again, 130. In the third quarter in the U.S., we sold 4,200 BEVs. So the demand dried up. Over 50% of the BEVs that we sold were BMW.
And then on top of it, with that recall that BMW had the year before, I think it's too early to make a decision exactly what's going to happen there. Now, if it's Audi, again, I'll say this again, Audi is a brand that is very, very, very challenging right now. I'd be surprised if anybody told you anything differently. It's just they've got to get their act together. Porsche is solid. Jag, Land Rover is solid.
Thanks.
You're welcome.
Over here. Go ahead, George.
Hey, Tony. I was just wondering if you could comment a little bit about the addition of the Chinese dealerships in the U.K. I know that you said the CapEx will be pretty limited because of the splurging taken over. Could you just talk a little bit about the strategy you have in adding those?
For those of you that do not know, we announced last week that we are adding eight Chinese brands into our dealerships in the U.K. We are putting in three Chery locations and five Geely stores. It is nothing more than trying something different, right? Trying something in the marketplace. They are clearly gaining share in the U.K. market. If you go back to the third quarter and you look at the market itself, I believe if you pulled out the Chinese brands, the market would have been down. Because the Chinese brands were there, I think the market was flat. We think that there is some type of potential growth perspective that is there. We are putting them into these Sytner Select dealerships.
These are used-only dealerships, or what we have been treating them as used-only dealerships. We are literally slapping a Chery or a Geely sign on the front of the building. We are dedicating a little bit of the service area for Geely, doing a little bit of spit shining based on their corporate identity image and trying to sell cars. It is 40 cars a month.
What's the average transaction price delta between what they're selling and what the average alternative in the U.K.?
It's probably what we're selling there is probably GBP 30,000. A lot cheaper. A lot cheaper. It's nothing more than just trying to get our hands around to see what's going to happen. We're going to put in two additional stores, one with BYD, one with MG in Germany, to see if any of this makes sense. If it does, if it makes sense and we can grow, great. If it doesn't, we don't have much invested in it, and we pull back from there. I tend to think that they're going to do okay, though.
Thinking about your parts and service business, obviously a major profit driver. You've grown it really nicely despite the fact that your four-year-old car population is smaller that you're addressing. As that population rises again, isn't that kind of a double boost for you?
I think so. Yeah, I think so. We hit record levels. I think the entire peer group has. Our parts and service revenue, if you look at Q3, what we just finished, and you compare that back to where we were in 2019, it's up 35%. All-time record parts and service. Revenue growth. Our margins as high, I think, as it's ever been. It is driven by warranty and customer pay. Right now, warranty is probably a little bit higher than customer pay. It just keeps getting bigger and bigger. I do not know if you guys saw on Friday, Toyota and Lexus recalled a million cars. A million. Right? A million cars. We are going to have to service those.
You get it. Warranty has obviously been a major growth driver for five or six years now. I'll wrap up soon. How much brand damage are these warranty issues doing relative to maybe what you would have thought they would have done? It doesn't seem like there's massive brand dilution from them over time.
It's not. It depends on what the recall is, I think, too. Right? This Toyota and Lexus thing is a rearview camera issue. It's not like there's a catastrophic failure of the entire car. Look, if exploding airbags didn't cause your market share to go down and cause a big issue for you, I don't think anything will. I mean, it's always something to be cognizant of. The biggest issue we have with recall is the government process behind it. When a recall is announced and notifications to consumers take place, they want the damn car fixed. We don't even know what the fix is by the time it's announced or when parts will become available.
We've all been part of that. Next year, you're getting 45 minutes.
I'm going to keep going.
I know, but we.
I know. I know.
Out of respect for Harold, we're going to shut it down. I appreciate you coming to.
No, you're welcome. I'm glad to be here. Remember, Rusty said something. The truck business is a little tough right now. Everything in this country moves on a truck. Once we get the capacity taken out of the marketplace, whether it's everything he was talking about, and I didn't hear him mention the legals and the CDLs that are being granted and shouldn't be there, when that all gets aligned and gets better, that's going to take a lot of capacity out. Look, these businesses are all going to shine. Thank you very much for your time. I appreciate it.
Thank you. Thank you very much.