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Operator: Good afternoon. Welcome to the Penske Automotive Group Second Quarter 2024 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately one hour after completion through August 7, 2024, on the Company’s website under the Investors tab at www.penskeautomotive.com. [Operator Instructions] I will now introduce Tony Pordon, the Company’s Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Tony Pordon: Thank you, Leah. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group’s second quarter 2024 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 e-mail or phone for any follow-up questions you may have. Joining me for today’s call are Roger Penske, our Chair and CEO; Shelley Hulgrave, our EVP and Chief Financial Officer; Rich Shearing from North American Operations; Randall Seymore from International Operations, and Tony Facioni, Vice President and Corporate Controller. Our discussion today may include forward-looking statements about our operations, earnings potential, outlook, acquisitions, future events, growth plans, liquidity 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 GAAP measures and have reconciled the non-GAAP measures to their most directly comparable GAAP measure in this morning’s press release and investor presentation, both of which are available on our website. Our future results may vary from our expectations because of risks and uncertainties outlined in today’s press release under forward-looking statements. I 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 will now turn the call over to Roger Penske.

Roger Penske: Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. In the second quarter of 2024. PAG generated $326 million and income before taxes and $241 million in net income and $3.61 of income per share. Our revenues grew 3% to $7.7 billion and were the highest quarterly revenue in the Company’s history. The Company’s financial performance for the three months ended June 30, 2024, and again, was driven by its diversification, which included continued strong performance of our retail automotive and our commercial truck business. Highlights during the second quarter include record total quarterly revenue of $7.7 billion and a 10% increase in service and parts revenue to a record $753 million. When compared to the first quarter, retail automotive gross profit for new vehicle retail improved $73 in our focus on efficiency and controlling costs drove a sequential decline in selling and general and administrative expenses as a percentage of gross profit by 50 basis points to 70.2%.

Also, our equity earnings from Penske Transportation Solutions increased 63% sequentially. As a result, earnings before taxes increased 10% and earnings per share increased 12%, when compared to the first quarter of 2024. Let me now turn our attention to the automotive operations during the second quarter. Total automotive units delivered increased 2% to 126,653 units, which includes 10,221 agency units. New units increased 3% and used units were flat. Average new vehicle transaction prices increased 3% with $58,400, while used transaction prices declined 3% to $34,700. We continue to take forward orders with presold activity averaging between 10% and 20% in the U.S. depending on brand and region. 35% of the new vehicles sold in the U.S. were at MSRP, while approximately 90% of the BEVs were sold in the U.S. during the quarter required significant discounting.

Same-store retail automotive revenue increased 1%. However, service and parts increased 5%. Our customer pay was up 3%, already increased 12% and collision repair is up 5%. As previously mentioned, gross profit per new unit retail increased $73 sequentially, demonstrating the strength of our premium mix, while gross profit per user at retail already declined $54 sequentially, representing the stability that we see in the used vehicle market right now. Let me turn to Transportation Solutions at this point. I’m pleased to report another sequential increase in earnings for PTS. During the second quarter, revenue increased 3% to $2.8 billion full-service contract revenue increased 11%. Logistics revenue increased 2%, but rental declined 13%. However, utilization of the rental fleet increased 50 basis points to 79.2% versus 78.7% in Q2 last year, and utilization increased 480 basis points sequentially when compared to the first quarter of 2024.

PTS earnings of $183 million in Q2 increased sequentially by $71 million, but we’re down 28% when you still compare it to the second quarter of last year. Our share of PTS earnings was $52.9 million, up from $32.5 million in the first quarter representing a $20.4 million sequential increase or as noted 63%. The client PTS earnings over the period due mainly to a $43 million increase in interest expense from higher rates related to bond refinancing and higher outstanding debt. Also, a $40 million decline in gain on sale of used trucks. We sold 10,330 used trucks in Q2 2024, which is 28% and more than we did last year in the second quarter. However, a weaker freight market has reduced demand for tractors and medium-duty trucks resulting in lower values, which obviously contributed to the reduction in gain.

New units on order with various OEMs is down 50% to $21,700 compared to 41,500 in June of 2023, and 60,000 in March of 2023. We currently have 12,000 units for sale compared to 10,500 at June last year. Let me now turn the call over to Rich Shearing.

Rich Shearing: Thank you, Roger, and good afternoon, everyone. We are one of the largest commercial truck retailers for Daimler Trucks in North America, and the retail truck business is one of the core pillars of our diversified model. During the second quarter, we acquired three Freightliner and Western Star dealerships and two independent repair facilities from River States Truck & Trailer operating in Wisconsin and Minnesota, representing $200 million in estimated annualized revenue, bringing PTG’s operating locations to 48 in North America. Since acquiring the retail truck business in 2014, we have grown revenue and EBT more than 6x from approximately $600 million in revenue and $35 million in EBT to an estimated $4 billion in revenue and $225 million of EBT in calendar year 2023.

During the second quarter, North American Class 8 net orders increased 21%, while retail sales declined 12% from the strong pace — 12% from the strong pace of 2023. At the end of June, the current industry backlog was 127,900 units, representing approximately five months of sales. This compares to a backlog of 175,200 at the end of June 2023. We believe sales of Freightliner and Western Star Trucks were impacted by availability challenges during Q2 as a fire at [indiscernible] factory disrupted production. But the good news is that this disruption was temporary and has been resolved. Premier Truck sold 5,248 new and used units in Q2, which was flat with Q2 last year, and same-store units declined 4%. Same-store SG&A to gross profit remained well controlled at 57.8% and fixed absorption was 127%.

And Premier Truck Group produced a solid Q2 with EBT of $52 million and a return on sales of 5.7%. We believe commercial truck demand will continue to be driven primarily by replacement demand throughout the remainder of the year. As we look towards ’25 and ’26, the anticipated emissions change for 2027 should drive a strong prebuy and retail sales. Lastly, our Premier Truck business was temporarily impacted by the CDK cybersecurity incident in June of 2024. Our teams quickly implemented our incident response plan and alternative processes to keep operations open. Systems were restored in early July, and we resumed processing transactions through the CDK system. We do not believe the financial impact to be material in the quarter. I would like to thank our incredible team and their collective efforts for working through this disruption.

I’d now like to turn the call over to Randall Seymore.

Randall Seymore: Thanks, Rich. Good afternoon, everyone. I’ll now discuss several activities taking place in our international operations. As most of you know, earlier this year in the U.K., we added 16 dealerships with $1 billion in estimated annualized revenues. The integration of those dealerships continued and we are very pleased with the initial returns. Also in the U.K., we rebranded and transitioned the operations of CarShop to Sytner Select to more closely align the used car operation with franchise dealership and to reduce our cost base. We successfully transitioned nine locations and sold the remaining three locations to a third party. Going forward, we will operate nine Sytner select locations in the U.K. market. Turning to Australia.

For over 10 years, we have strategically built a diverse commercial vehicle and power systems business. During the second quarter, we expanded our retail automotive operations with the acquisition of two Porsche dealerships in Melbourne, Australia, one of the largest cities. With this acquisition, we expand our worldwide Porsche footprint to 24 locations. With our scale, we will leverage our existing infrastructure to drive growth and further efficiencies. These two dealerships are expected to generate about $130 million in estimated annual revenues. Turning to the on- and off-highway markets. We continue to sell products in the trucking, mining, power generation, defense, marine, rail and construction sectors and support full parts and aftersales service across the region.

Service and parts represent about 70% of our gross profit. So, our focus on increasing units in operation is a key driver to the business. In the on-highway market, the brand-new Western Star X Series truck we sell was named the Truck of the Year in Australasia, and MAN truck sales are expected to be a record number for units sold in 2024. In off-highway, our power system operations continued to grow with turnkey solutions for hyperscale data centers, battery storage solutions, mining and military applications. We continue to be a market leader in critical standby power, especially for data centers and continue to make deliveries of generators into prime power and hybrid applications. We are the market leader with 55% market share of the high horsepower power generation segment.

Our current order base for hyperscale data centers and battery storage systems is over $550 million for 2024 and beyond. I’d now like to turn the call to Shelley Hulgrave.

Shelley Hulgrave: Thank you, Randall. Good afternoon, everyone. I will review our cash flow and balance sheet and discuss our capital allocation strategy. Our balance sheet and cash flow remain strong while we continue to grow our business through acquisitions and return capital to shareholders through dividends and securities repurchases. As of June 30, we had $115 million of cash and our liquidity was $1.7 billion. During the first six months, we generated $691 million in cash flow from operations, and our trailing 12 months EBITDA was $1.5 billion. Just last week, we announced an 11% increase in the cash dividend to $1.07 per share. So far, in 2024, we have increased the dividend three times while increasing the cash payout from $0.79 per share at the end of last year to $1.07, a 35% increase.

So far, in 2024, we have repurchased 511,000 shares for $76 million. Including this dividend distribution and the Company’s security repurchases, we will have returned approximately $271 million to shareholders so far this year. In addition, for the return to shareholders, we have completed acquisitions representing $2 billion in estimated annualized revenues. Our strong cash flow has allowed PAG to keep its non-vehicle debt and leverage low. At the end of June, our long-term debt was $1.77 billion, up $137 million from the end of December 2023. Debt to total capitalization was 26.2% and leverage sits at 1.2x. It’s important to reiterate that we have the ability to flex our leverage up to 4x on a lease-adjusted basis. New vehicle inventory increased $251 million from the end of December.

Total inventory was $4.7 billion, up approximately $400 million from the end of December last year. Floor plan debt was $4.1 billion. Importantly, we had a 52-day supply of new vehicles and a 40-day supply of used. Day supply of new vehicles for premium was 55% and volume foreign was $33 million. The day supply of new battery electric vehicles in the U.S. was 89 days. At this time, I will turn the call back to Roger for some final remarks.

Roger Penske: Thanks, Shelley. Our results continue to demonstrate the benefit of our diversification across the retail automotive and commercial truck businesses, our cost control and a disciplined capital allocation strategy. I remain confident in our model and the performance of the business. Finally, I’d like to announce that 80 of our U.S. dealerships have received notification from automotive news that they have been named to the Best 150 Dealerships to work for in 2024. I’m incredibly proud of this achievement. We are committed to creating a culture that fosters teamwork and opportunity while carrying ourselves to the highest level of integrity. Congratulations to our team for their commitment, drive and efforts in working together to be the very best. Thanks all for joining the call today. I’ll turn it back to the operator. Thank you.

Operator: [Operator Instructions] And we go to John Murphy with Bank of America. Please go ahead.

John Murphy: Roger. Good afternoon, everybody. Roger, just a first question on this very large acquisition of Bill Brown. It’s a little bit different because it’s a Ford dealership and it’s the largest Ford dealership in the country. I’m just curious what you see in this, obviously, it’s opportunity. And if this could be potentially sort of a change in direction or a new opportunity, particularly as is focus much more on commercial vehicles and through its Pro division?

Roger Penske: Well, you mentioned we’re opportunistic. I’d have to say that we were contacted by the family that owned that business — and initially, I didn’t think we’d be interested, but — we signed an NDA. We went through the numbers. We saw the volume and the fact that they we’re a port pro dealer, which is a commercial — really a commercial truck year also was really important because that gave us, able to leverage our business knowledge and capabilities within the truck leasing and rental business, obviously, now in the sales business. The business is located near a majority of the Ford support plants and also the world headquarters. So almost 80% of the business that goes through that is employee business and family.

So obviously, that’s a great sustained opportunity for continued doing business. We felt that the used car business had a real upside when we were probably six new to one used because that’s part of our sweet spot in the business and basically had a great management team. I think the opportunity there, obviously, will be for us to grow the facilities. I think we need to make an investment there. But the bottom line is people ask us, what are the multiples, what are you paying for the businesses in premium luxury or internationally domestically? And I would say this transaction was — and the goodwill is 50% of what we normally would pay for premium — so again, I think it’s an opportunity for us. It’s in our hometown. And I think that as part of our $2 billion of acquisitions that we’ve done so far for the year, again, 75% of that new volumes is going to be premium.

So, we’re still on track there. Obviously, you saw where we purchased two for stores in Australia.

John Murphy: That’s very helpful. And then just a second question. pricing remains very strong. GPUs were up. Our new GPs were up sequentially, everybody kind of seems to keep doubting this, but maybe forgetting that all this strength is happening in a much higher interest rate environment up almost 400 basis points over the last two years. So, what is your take and the potential maybe for you to sustain these higher GPUs and we might be stabilizing it at these levels, just given your business mix, how you operate the business and just sustainability is really the big question here?

Roger Penske: Well, I think, number one, you look at our SG&A, you look at our comp to gross on sales, what we’ve been able to do is reduce the number of salespeople that we have has given most of our better sales team an opportunity to have more business and make more money. So, they’re focused. And I think one of the other things, because of the premium 35% of our Q2 sales were at MSRP versus 57% last year. That will come down. We realize that. Our presold business is about 20% depending on the brand or the region. More importantly, when you think about our brand mix, 32% of all of our business was leased. And that’s back to where it was over the last couple of years, which is powerful. It gives us these lease returns, which help us to feed our used car apartment.

And I think when you look at it on the premium luxury side, it’s probably 50%. So, to me, that helps us stabilize our margins as we go forward. So, to me, the only thing that would be a negative, and I don’t think that there’s hundreds of dollars up or down that we’re going to see over the next couple of quarters. The only thing would be that the BEV vehicles has the highest discount right now, probably about $6,000 under MSRP. And if you look at a normal ICE vehicle, it’s somewhere between 2,500 and 3,000. So, I think overall, when you look at the gross profit and you compare it, I went back — Tony, that he went back from me, and we looked at 2019. And when you look at this, the selling price, obviously, is up almost 14,000. When you look at back to ’19 to where it is today and you look at the gross margin that we have today, it’s up 2,000.

So, we’re holding the growth. Some of that has to be the increase in the MSRP. But sequentially, we think we’re in good shape. But again, it’s deal by deal. We’re not in a volume race — and I think depending on the mix of our business, we don’t have a lot of volume for them. We don’t have — we have very little of the big three. They could pull down your — obviously, your grosses. But because our inventory is in such good shape, and we’re going to keep it there. Chile, we’re sitting with 11 days, one of our bigger volume foreign. And certainly, when we look at the premium side, we’re managing that quite well, still waiting for vehicles that are on stop sale around the world with portion some of the other key vehicles, which are going to help drive some better results, hopefully, in Q3.

John Murphy: And Roger, sorry, just to follow up, but in the rate environment that we may be heading into of rates actually starting to help a bit? I mean, I know, obviously, we can all run the — what is your kind of take on if we see another 100, 200 basis points or we see 100 to 200 basis point decline in rates in the next one to two years, how much that could actually help maybe support pricing and these grosses and the demand levels in total. What’s your take on this Roger?

Roger Penske: I think it will help the used car buyer for sure. I think right now that the OEMs in order to maintain were up when you look at it now, we’re up about 4% year-to-date. If you look at six months are actually through yesterday and up about 2% on used. I think the use will continue to grow because of affordability, which has been a problem. On the news side, because of our leasing, the finance companies have been taking some of that interest rate hit by increasing residuals. So, I think that will balance out. But definitely, from a consumer perspective, I think it’s going to help us. Again, what we’re seeing in Europe some of the high-priced cars, the Ferraris and Lamborghinis, and the Porsche where people could buy them, driving from here and bring them back and get most of their money back.

That hasn’t been the case. So, we’ve lost some business I think, on a temporary basis because the cost of interest and the cost to do business. So, to me, I don’t think the SAAR right now certainly is not as a pre-cohort level and that’s — which is over $17 million. And the [indiscernible] monthly payment, if you look at that average is really over $700. So that has to come down to make a big difference. So, we think that benefit we’re going to get for the business is the service business because today, we’ve gone from a five-year average current service to a six year roughly. So that combined with, I think, some stability on the top line. As long as we keep our inventory, it gives you too much inventory, you’re going to discount it, and you’re going to lower your grosses and it would be mix.

But interest rates, I assume where the Fed held today, hopefully, they’re going to make some noise here in the next month or so, we’ll see that benefit will help us on our floor plan and obviously, on a finance deal, it will help immensely. So, it can’t hurt us for sure.

Operator: Next, we go to Mike Ward with Freedom Capital. Please go ahead.

Mike Ward: When I look at the dividend increase year-to-date, you’re up 35% and you compare that to the increase in share repurchase. Should I read anything into that as a shift in how you’re allocating capital? Or is that — what is your thinking there?

Roger Penske: Go ahead, Shelley, why don’t you take that one.

Shelley Hulgrave: Sure. So, Mike, our favorite word around here on capital allocation is opportunistic, and Roger talked a bit about the Bill Brown Ford acquisition and — it’s one of those lifetime opportunities. We’ve really had a lot of those opportunities. And so, to be able to acquire $2 billion in revenue and do it internationally, do it with the top and expand and get a new presence in Australia, that was our key focus in terms of dividends versus share purchases. We had said all along when the multiples on the stock were less than the multiples on the Street for an acquisition that was where we were going to focus have seen those level out a bit, but dividends have always been a high priority for us. We’ve looked across what is it, five, six on our presentation, and we’ve hovered around a 60-40 split in terms of growth versus acquisition, a little bit higher than that this year, year-to-date, but the dividends remain a key part of our strategy.

Mike Ward: Okay. So, it’s just more of the same. So, it’s just the timing and maybe there’s a little catch up on the dividend just what the return rate, but don’t read too much into it?

Shelley Hulgrave: Yes. No. I think if you look at our payout ratio, you look at our dividend yield, in particular, that’s remained fairly steady. We like being the highest tier space. So that’s also something that we look at from a metric point. And we’ll continue to focus on returning capital to shareholders through an acquisition.

Mike Ward: Randall, has the rebranding been completed with the CarShop stores? And what was the thinking behind keeping the nine and getting rid of three? What was kind of the dividing line with that?

Randall Seymore: Yes. So, we did the first one in April, the last one we just finished last week, six of the nine were done in Q2, but we are — we’re 100% finished now. We had an opportunity. Somebody actually came to us and said, “Hey, would you be willing to look at three of these locations to sell? And geographically, two of the three really made sense in other ones. So, we ended up making a deal. And the other benefit of that is going from — and we closed one. So, the other benefit of having less is the sourcing of these vehicles instead of buying them at auction we’re able to take the trades from our contiguous franchise dealerships. So, we went from CarShop to Sytner Select, number 1, Sytner has a cachet has a very high-quality reputation within the U.K. market.

So, we thought we’d get some benefit from that. Number two was the sourcing, which is huge. So, we get the trades from the franchise dealerships. And we’re already seeing a pretty significant increase in our gross profit per unit because of the sourcing of those vehicles. And when I say getting the trades, it’s a noncertifiable cars. So, if you’ve taken the trade at Audi, it’s a little bit higher on mileage or has a reason you can’t certify it. Historically, we were wholesaling those through our electronic auction. You make a couple of hundred pounds. But now we’re able to take them at Sytner Select and retail them, increase our gross profit. We can sell more F&I products with it. And so that’s the benefit. And then the third point of this was we had a head office or centralized infrastructure for CarShop, which we were able to eliminate and leverage the infrastructure — current infrastructure within our franchise business.

So, we were able to really make our business model or our expense model much more efficient too.

Roger Penske: I think, Mike, as we look at the business, we got to continue to trim and look at areas where we’re not making the returns we want. And we had great expectations on CarShop in the U.S. and in the U.K., but we saw the sourcing. Obviously, timing during the last 36 months was tough to source the right vehicles. But we were trying to source a 9,000, 10,000, 11,000 pound car. And with the issues you have with that customer following and policy and buybacks, we just couldn’t get the traction we wanted as a quality company. So, feeling that we could file them into our OEM side because if you think about it. Now when you go to BMW, Sytner, you’ll see at BMW that are certified and you go all the way down and see maybe a $30,000 BMW has not — that’s not at the OEM store Sytner Select.

So, they feel like they’re doing business. with the same organization. So, there’s lots of benefits there. Then we also have the ability to do used car reconditioning, for the OEM locations that are contiguous because we’ve got small locations. Don’t have a lot of body shops. So, we’ll start to use those big operations that we’re doing this other reconditioning and we’ll utilize those for reconditioning of our used cars, plus even do some maybe work or some of the leasing companies that we do business with. So, I see it as a real opportunity to expand our parts and service plus I think we’ll have a very good return. I spent a couple of days with Randall there a week or so ago, you walk in it’s professional. Ironically, we’ve had very little few people leave.

In fact, they’re more excited to work for Sytner than they were, I think, for CarShop. Let me let Rich talk a little bit about the CarShop change in the U.S.

Rich Shearing: Yes. Thanks, Roger. Mike. If you look at the U.S., similar actions. If you recall, last year, in January, we closed the Scottsdale location. January of this year, we made the decision to close the South Brunswick location. And I think if we’re honest, we probably overbuilt those, and certainly, the market didn’t help us with the timing that those open. But by doing — I’ve taken those actions, we’ve been able to mitigate our operating expenses, along with all the other actions that the team have taken the headcount is tight, advertising under control, inventory has been managed very well. And so now that we see some of the traditional sourcing channels opening up, we’re up 10 percentage points in vehicle sourced through dealers and fleet and flat on auction, which has traditionally been the lowest gross profit per unit source we have.

We’ve seen four consecutive months now of GPU above $3,000 unit. Our sales are trending 20% to 25% above prior year on a monthly basis. And as we look to the second half of the year, we feel good about sustaining the current performance that we have there. So, in good shape.

Mike Ward: Is it something — assuming you have success with Center, do you look at transitioning to like more of a direct brand in example using the Penske name in the U.S.? Or do you stick with CarShop? Are the benefits the same in the U.S. that you would get in the U.K. if you started pulling them together closer to the new vehicle locations?

Roger Penske: Mike, I don’t think they’re quite the same. We’ll continue for the car branding here. We have it a successful — remember a CarShop was in place for a number of years. And I think at this point, we would look at area maybe to open up under the right cost structure. I think we just overbuilt — and I think that we can tell all brands in the U.S. stores, too. So, I think that there’s really good opportunity here that we have. And I think the acquisition — the management team has done a terrific job in their costs. I think our comp plans, I think the reconditioning we have over here is almost site by site, where in the U.K., it was more one big major site like buzzard, we’re going to use for fleet preparation.

Mike Ward: Can I just clarify one thing? Roger, you said — did you say 80 of your locations were in the automotive news top 50. So, 80 of the 150 automotive news top 150 dealers for Penske?

Roger Penske: I was concerned because last year, we were — I think we had 60 out of 100 and they raised the bar on 80 out of 150, correct.

Operator: And next, we will move to Rajat Gupta with JPMorgan. Please go ahead.

Rajat Gupta: Great question. Roger, I had one on parts and services, a pretty good resilient trend there. I was curious if you could dissect the U.S. versus the U.K. in that business. And also in the U.K., where there are more electric vehicle sales and more work being done on those vehicles. Curious if you could give us some metrics around just repair order size, frequency, severity? Anything else that you’re seeing that would be helpful. And I have a follow-up.

Roger Penske: When I look at the same-store performance in parts and service. Our customer pay was up approximately 3.5%. I think in the U.S., it was up just over 2% internationally, which gave us a 3.1% increase. Our warranty obviously was up, we talked about it significantly, up almost 9% and up 18% internationally. And then our collision repair was up 2.2% in the U.S. and 9% internationally. I think the good news is when we look at our effective labor rates, in our dealerships, we were up $8.43, though the discipline of not discounting has made a big difference. And we talk about numbers of mechanics, we’re up 8% year-over-year on mechanics, which I think is terrific. And certainly, we look at our over six months, our repair order counts up 2%.

Rajat Gupta: That’s helpful. And just like on the severity side of things on electric vehicles versus ICE. Any color on the dollars there? Like how different it is? And maybe how that’s changed over the last couple of years?

Roger Penske: Well, let’s be honest with each other. I think all the OEMs, if we were sitting here two years ago were preponing their chest on what they had invested in electric vehicle, we’re going to be fully by 2030 Mercedes and GM and some of the other domestics had big opportunities. They felt to grow market share with us. Obviously, when you look at it, the EV market, certainly, the expectation hasn’t grown. So, we don’t have the customers coming in. And I think at the end of the day, we don’t have the infrastructure, we’ve talked about that. Consumer acceptance, obviously, range anxiety. And the selling price today for us is $6,400 less than an MSRP, and I’m sure that the margin that the domestics we’re hoping to get has been here because Tesla certainly has taken downward pricing offense to which affects us.

And I think long-term aspects, when you look at it, we really have to look at what’s the bridging strategy for it. And I think the bridging strategy will be plug-in hybrids. We see it. [indiscernible] has talked about it. And I think that what we have a long time before we get to anybody fully electric. Look, I’ve driven them. They’re nice to drive. But again, if it’s a hub and spoke for trucks, it works, heavy-duty trucks right now, we think it’s a long on pole because basically, you put 5,000 or 6,000 battery weight into a tractor trailer that reduces your economic payload, which is obviously not good. But again, when we look at our BEV inventory, we’ve got about 2,200 in the U.S. We’ve got 91 days supply in the U.S. and in the U.K., we’ve got a couple of thousand also 99 days versus 33 days roughly on us.

In fact, we can buy users and make more money than we can on the new. Rich, you got to?

Rich Shearing: Yes. Rajat, I’ll just add something from the fixed top side relative be. I think early on, there was concerns that all the fixed operations business would go away with respect to battery electric vehicles. Obviously, it’s still early in their deployment and there’s still a low percentage overall the total market. But what we see presently is the opposite of that. If you look at our hours per RO, we’re at 3.1 hours per RO on the battery electric vehicles compared to 2.7 hours as an average across all 1.8 million repair orders we’ve done to date. And then you look at the dollars per RO, we’re at 11 — 1,160 for a battery electric vehicle versus about $715 for comparative ICE repair. So right now, BEVs are more taking longer to repair and are costing more money. So, we’ll see if that normalizes over time. But at present, it’s certainly different than the ICE we have…

Roger Penske: Which also cost on the tractors more money than I thought to I can tell you the majority of the work we’re doing in the shops is already correct. It’s not customer pay.

Rajat Gupta: That’s helpful. And just one follow-up on the CDK outage. I was curious if you sense any benefit on that to your business during the end of June, early July some of the outages occurring at the CDK stores. Curious, if there was any benefit to the business in the automotive business in the U.S.?

Roger Penske: Well, I think there was definitely a benefit of not being on CDK on the automotive side. Obviously, we were impacted on the commercial truck side of our business. But I think I go back to the comments I made in the opening remarks that the reaction by our team, whether it was our operational staff or IT folks was really benchmark in my opinion of what they accomplished in a short period of time to get us back to an operating level within 48 hours to where we could open repair orders, generate parts tickets and book truck deal. So overall, for the outage period we had from the middle of June to the end of the quarter, we didn’t see it as a material impact.

Rajat Gupta: But you’ve not sent any increased traffic at your automotive dealerships from consumers you might have otherwise gone through a CDK store?

Roger Penske: No, no, nothing that we could measure.

Operator: Next, we move to David Whiston with Morningstar. Please go ahead.

David Whiston: Hi, everyone. Tony, just curious on used vehicles first. Your customers are generally more affluent. So, are they — just on the used side, though, are they would you say they’re still struggling much with use affordability like a lot of Americans are — or can they handle the higher rates and higher prices better in the used market than the typical used consumer?

Tony Facioni: So, David, this is Tony. So, I think affordability is definitely a concern when you look at the used vehicle prices that are out there. I think we see a more stable market today than we did six months ago. So that’s a good thing. And when you take a look at our overall sourcing of vehicles today on our franchise stores, we’re self-sourcing about 85% of those vehicles. We get most of our sourcing comes from trades and lease returns. But we’re also doing a little bit in terms of buy your car directly from the Street. And then, loaner is a pretty big part of our strategy in terms of taking those loaners and turning them into great used cars that become available for sale in our dealerships. I think in the U.S., we have got about 7,000 loaners.

If you turn these things every three months to six months or 5,000 miles or so, they become a great used car and they help with that affordability concerns. So, I think we have to look at all those available sources and what we’re doing with that business to try to make it more affordable for consumers.

Roger Penske: I think, David, when you look at the success that the guys who had in CarShop by not having to use the auction we’ve seen better cars, more availability, and we’re getting higher margin. Now that’s in a, say, 15,000, 18,000 to 20,000 MSRP car. I think Tony mentioned the loaner cars it’s really hurt us really the last couple of years because we’ve been putting used cars and loaners, where we take a new car, which is spec properly, and we depreciated 2% to 2.5%, over three months, you’ve got a 4%, 5%, 6% or 7% depreciation from cost plus the OEM allows us to use all of the end market incentives, i.e., leasing or buying on those cars. And think about 7,000 of those that we can turn, it’s a tremendous benefit for us.

Tony Facioni: One other point, David, is that when you take a look in the U.S. at the number of certified preowned units that we sell as a result of some of these programs, it’s 38%, 39% of our overall used vehicle sales in the U.S. market that are certified preowned. So that helps drive our service and parts too.

David Whiston: On equity income, I know Q1 is generally seasonally weak for this year, at least, is it still fair to think of second half equity income probably being higher than first half? Or is something different this year?

Roger Penske: Well, the major part of the income is Penske Truck Leasing investment. And I think we talked about it in some of my notes we had both a revenue of about 3%. Obviously, full-service leasing and maintenance contract maintenance and also logistics all grew as we can stabilize the rental revenue and we keep our cost structure, and we see some light end of the tunnel on used trucks. Remember, we sold 10,000 trucks in the quarter with us eight a year ago, we de-fleeted 9,000 of our rental trucks. Those would just eat us some in depreciation, interest and maintenance. So, we think that we’ll continue to see a benefit in the second half Obviously, we have in June, it’s always a big quarter because kids going coming out of school, et cetera, with our one-way business.

But overall, I think that we’re in good shape, we’ve grown are lastly 4,200 units or 2.5%. So, as we brought the rental fleet down, we’ve also brought the lease fleet up. I think I mentioned it earlier that the funding is done by bonds primarily and some retail and paper, we’ve been commercial paper. We’ve been able to keep our debt stable at about $15 billion in that company to cover our 440,000 units that we have, but we had thought that would go up. And then if we — if the Fed does the move, sure, that’s going to help us from an interest because when you look at the quarter, we had a $40 million impact on gain on sale year-over-year, and we had $43 million hit on interest. So, $83 million, nothing to do with operations, and we were down only 70.

So obviously, we had good operating capability.

David Whiston: And then just quickly on the automotive news list. I know as you mentioned the bar got raised now it’s top 150 stores. You guys have always done really well on this list, and you’re probably why they had to change it in the first place. But I’m just curious, in addition to the overall count going up 50 stores, did they — do you guys in the past year, instituted any kind of new employee benefit that might have driven an increase in the number of stores to making the list?

Tony Facioni: David, nothing I could point to, but obviously, every year, we do an employee survey to gain feedback from our employees on what we’re doing well as an organization and what can be approved upon. Out of that annual employee survey, we form employee involvement committees that are aimed at focusing on the areas that the business needs to improve upon. And so, it’s a culture of continuous improvement learning. And we see our turnover, obviously, which we would consider benchmark at just under 20% for the last couple of years. So, I think we’re doing a good job of keeping the employees happy and making sure that we’ve got an environment that people want to stay with us in.

Roger Penske: I think also when you look at our facilities and you take the back end of parts and servicing, we actually spend extra back there for our technicians and also the people in our parts operations. I think in giving them good parts trucks and clean equipment makes a big difference in the image for the Company. So, it’s just not all front-end loaded.

Operator: And we have a follow-up from Rajat Gupta with JPMorgan. Please go ahead.

Rajat Gupta: I just wanted to follow up on the PTS comment. You mentioned, excluding the gain on sale and interest in how the business actually grew year-over-year, curious if you could share any color into the second half or next year? Has that business normalized from an earnings perspective? And should we should we continue to expect any year-over-year pressure in the second half? Just curious any forward-looking thoughts that you get there?

Roger Penske: Let’s look at the business fundamentally. I think about 85% of the business is contractual. That’s both on logistics and leasing. So, we have economic escalators that drive that. And what’s hurt us over the last say, 12 to 18 months has been the fact that we couldn’t replace vehicles because of supply challenges. That’s gone away. It’s going away now, I said we have about 20,000 vehicles that we have. I think when you look at the — our used truck business, there’s no question that we’re hoping that, that market will stabilize. We’ve been actually probably impacting it because the number of tractors that we’re selling, I think the fundamentals are going to continue. We get a little bit of help. And remember, when you look at commercial rental, you have the pure rental where you go in to want to rent a truck for a week.

So, then you have the extra vehicles that are run by our lease customers. That business was down $150 million when you look at it year-over-year for the second quarter. So that means the general marketplace for transportation is flat to down. And when that turns, that’s going to benefit us. And I think that we look at the next six months as — our fleet is in good shape. Interest rates, hopefully, will go in our direction we had a bond that we were going to probably $500 million that we were going to place in the second — in the next six months, probably won’t need to do that because of our capital allocation and the ability for us to deliver due to the sale of some of our equipment. So, I would say that we will continue to grow the business during the next six months and have a better return.

Operator: And we will turn the conference back to Mr. Penske for closing remarks.

Roger Penske: Thank you very much, everybody. We had a great quarter. I look forward to the next quarter, and we’ll see you then. Thanks. All the best.

Operator: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.