Penske Automotive Group, Inc. Q1 FY2022 Earnings Call

Good afternoon. Welcome to the Penske Automotive Group First Quarter 2022 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after the completion through May 4, 2022, on the Company's website under the Investors tab at www.penskeautomotive.com. I will now introduce Anthony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Laurie. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's record first quarter 2022 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 email 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, Chief Financial Officer; and Tony Facione, Vice President and Corporate Controller. Our discussion today may include forward-looking statements about our operations, earnings potential, outlook, future events, growth plans, liquidity, and 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 reconciled the non-GAAP measures in this morning's press release and investor presentation, which are available on our website to the most directly comparable GAAP measures. Our actual results may vary because of risks and uncertainties outlined in today's press release, which may cause the actual results to differ materially from expectations. I direct you to our SEC filings, including our Form 10-K, for additional discussion and factors that could cause results to differ materially. At this time, I would now like to turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report all-time record quarterly results for the first quarter as earnings before taxes, net income, and earnings per share more than doubled when compared to the first quarter of 2021. Our revenue increased 21% to $7 billion. Income before taxes increased 101% to $498 million. Our net income from continuing operations increased 102% to $368 million, and our earnings per share increased 111% to $4.76. We repurchased 1.9 million shares of common stock for $184 million year-to-date, and we added approximately $665 million in annualized revenue. Over the last 12 months, we've completed acquisitions or opened new dealership points that represent approximately $1.9 billion in annualized revenue. Our strong Q1 results really came from all segments of our business. Retail automotive and commercial truck same-store revenue improved 11% and 47%, respectively, coupled with record earnings from Penske Transportation Solutions. Earnings before taxes increased 93% from retail auto, 113% from North American commercial truck retail, 75% from Penske Australia, and 121% from Penske Transportation Solutions. Let's look at our retail automotive operations on a same-store basis comparing Q1 '22 with Q1 '21. Unit sales continue to be impacted by supply shortages and declined 1% during the quarter; new declined 13%. However, used increased 8%. Our revenue increased 11%. And our gross profit increased 27%, including a 200 basis point increase in our gross margin. Our variable gross profit per unit increased 38% to $6,026 from $4,355. Demand remains strong across our retail automotive dealerships, with most allocations in new vehicles being presold before they arrive at the dealership. Put that in perspective, at the end of March, we had 2,500 new units in stock in the U.S. and 14,900 a year ago in March 2021. And in the U.K., we had 3,200 vehicles in stock in March of '22, compared to 8,350 units in stock at the end of March of 2021. Just to emphasize, with Honda, we had 216 units in stock versus 3,700. And with Toyota, we only had 188 versus 2,500; so you can see the impact of supply. As we look out over the next 9 to 12 months, we expect the supply shortages of new vehicles to continue. I think unit grosses remain strong, and the recovery of service and parts will continue. Looking at CarShop during the first quarter, CarShop unit sales increased 71% to 19,500 units. Our revenue improved 113% to $516 million. Same-store unit sales increased 54%, and our revenue increased 89%. Same-store variable gross profit per unit retail was flat at $2,200. The supply shortages of new vehicles continue to impact the affordability of used vehicles. Wholesale prices continue to rise. However, retail prices are not necessarily rising at the same pace, impacting our margin. In some cases, the price of a one- to three-year-old used vehicle is near or at above the price of a comparable new vehicle. As we look forward, we remain optimistic about the CarShop model. We will continue to grow CarShop based on the ability to procure affordable vehicles, which may impact our goal of retailing 150,000 by the end of '23, obviously reflecting our current market conditions. Turning to our retail commercial truck dealership business, we continue to expand our commercial truck operations, adding four new locations with $150 million in revenue during the first quarter. We now operate 41 commercial truck locations in North America. And during the first quarter, unit sales increased 78%, revenue was up 82%, and gross profit was up 77%. On a same-store basis, revenue increased 47%, including a 26% increase in Service & Parts. Service & Parts represented 59% of the total gross profit and covered 130% of our fixed cost in the first quarter. Earnings before taxes increased 113% to $58 million. Approximately 75% to 80% of our new unit sales are Class 8 commercial trucks, and that market remains strong. In fact, our entire allocation of Class 8 product for 2022 is sold out. The Class 8 commercial truck backlog is 251,000 units as of March 31 and represents 12 months of sales. Let me now turn the call over to Shelly, our Chief Financial Officer.

Thank you, Roger. Good afternoon, everyone. Our capital allocation strategy continues to leave our balance sheet in great shape. At March 31, we had $170 million in cash and over $1.3 billion in liquidity. Year-to-date through April 26, we spent $184.1 million on repurchasing 1.9 million shares. Our existing repurchase authorization has $46.3 million remaining. We also paid $36 million in dividends. And in total, we've returned $220 million to shareholders so far this year, and over $650 million since the beginning of 2021. We also spent $150 million on growth through CapEx and acquisitions. All of this was funded with cash flow from operations. When looking at our future capital allocation, we maintain a disciplined approach that focuses on opportunistic acquisitions and investments across both our retail automotive and commercial truck businesses, capital expenditures to support growth, delivering a strong dividend to our shareholders, share repurchases, especially in light of elevated valuations of current acquisition opportunities in the retail automotive market, and reducing debt where possible. At the end of March, our long-term debt was $1.46 billion, consisting of $1 billion of subordinated notes which mature between 2025 and 2029, $327 million in mortgages, $22 million under the U.K. revolver, and $57 million in other items. Debt to total capitalization was 26.2%, and leverage at 0.7x. At the end of March 2022, total inventory was $3.1 billion, which is down $158 million from March 31, 2021. We had a 16-day supply of new vehicles with premium at 18 and volume foreign at five days. We continue to sell into our future new vehicle pipeline to support our customers, maximize inventory turn, and minimize our inventory costs. We expect the current supply challenges, coupled with strong demand, to keep our new vehicle supply at low but manageable levels for at least the next 9 to 12 months. Used vehicle inventory is in good shape with a 41-day supply. At this time, I will turn the call back over to Roger.

Thank you, Shelly. Turning to sustainability. Our ESG initiatives are an important part of our strategy and values. As many of you know, we published our inaugural ESG report in the fall of last year, which lays out many of our activities to date. We focus on diversity and inclusion in our workforce. In addition to our general employee training, we also use small groups to train employees on the importance of diversity across our business. We're proud to be above the NAD average for a diverse and inclusive workforce. In addition, we have a task force in place to drive our future efforts on sustainability and decarbonization. We are committed to electrification and are working with our OEM partners to build infrastructure to support the sale and service of electric vehicles throughout their life cycle. To date, we've installed over 1,100 charging stations across our network. However, to put electrification in perspective, in the first quarter, we sold 6,700 electrified vehicles in the U.S., including 646 pure battery units, which represent approximately 2% of new vehicle units. While in the U.K., we sold 1,400 battery electric vehicle units, 1,360 hybrids where electrification is supported by lower taxes and government incentives, and that was 22% of our sales in the U.K. Moving on to our digital initiatives. Our omnichannel strategy focuses on customer lifestyle and continues to evolve with the changing landscape. Online reputation management remains critically important as we strive to exceed customer expectations. We focus on providing flexible buying options that allow customers to proceed at their own pace when buying their next vehicle or servicing their existing ones. For sales, we continue to enhance our digital retailing strategy by embracing our OEM partner initiatives. We are currently supporting programs for BMW/MINI, Porsche, Toyota and Lexus, Honda, Lincoln, and Nissan. The OEM initiative offers some advantages versus an in-house solution. They enable a buy online function from OEM sites, which is particularly important for new vehicle orders while inventory is low. They also integrate with a captive finance company for online credit approval rates and programs, etc. We also remain focused on a fully integrated end-to-end digital transaction system to execute online orders for CarShop in the U.S. through our partnership with Cox Automotive. In the U.K., we have a proprietary system that supports digital retailing for our franchise operations and CarShop. In Q1, we generated over 5,000 transactions and approximately 2,300 sales, which reflected 5% of our market. On the service side, we continue to encourage online appointments and payments to improve efficiency. Online payments have increased 22% compared to Q1 last year and 90% compared to Q1 of 2020. Online BDC appointments increased 18% to 441,000 when compared to Q1 of 2020. Before closing, as many of you know, providing a superior customer experience and exceeding expectations is an important part of our Penske culture. I'd like to congratulate the 11 Penske Auto Group dealerships that were recognized as a CARFAX 100 Dealer for achieving superior star ratings of at least 4.9. In closing, I remain confident about the opportunities I see across our diversified enterprise driven by our strong balance sheet, capital allocation priorities, and mostly our human capital. Thank you for joining us on the call today and for your confidence in PAG. At this time, I'll turn it over to the operator for questions. Thank you.

And our first question comes from the line of John Murphy of Bank of America. Your line is open.

Roger, I wanted to ask the first question on cap allocation. I mean given the buybacks and the acquisitions that you made on an LTM basis, it seems like you've got at least a 12% bump, EPS structurally going forward. You've been reasonably aggressive there, although the balance sheet is in more conservative shape relative to some of your peers. So, some of your peers have gotten a little bit more aggressive on redeploying capital and leveraging the balance sheet simply. Do you think there's a greater opportunity to maybe get more aggressive over time? Or do you think we're in the point of the business cycle that this prudence is something that you'll maintain in the near term? Just trying to understand sort of your view of redeploying capital and how aggressive you may or may not get.

Let's discuss capital allocation and share buybacks. Currently, we've announced that we've repurchased 1.9 million shares, with a total of 3.1 million shares repurchased for all of 2021. This trend suggests we'll continue at this pace moving forward, with share buybacks being a significant part of our capital allocation. Regarding acquisitions, we're cautious and not pursuing high multiples seen in the market. So far, we've committed $665 million across auto retail and trucks, and we plan to maintain this direction. We're also prepared to meet the capital expenditure needs from manufacturers and are building new locations based on awarded projects. The quarterly dividend remains a priority as we explore various acquisition opportunities both domestically and internationally in the truck and retail auto sectors. We'll be vigilant about valuations, especially given current global issues like the situation in Ukraine and ongoing supply chain disruptions which have shaped our focus over the last two years. All acquisitions and share repurchases this quarter were financed by operating cash flow without increasing debt. We'll closely monitor our balance sheet and any potential global impacts, but overall, I'm optimistic about our position.

Got it. That's helpful. And then just a second question. I mean SG&A was very strong in the quarter. I was just curious on how we should think about that going forward, and how much of that may be able to be retained as maybe growth comes under a little bit of pressure or maybe not going forward. I mean, how should we think about SG&A to gross, or even just the dollar number there?

Looking at the last two quarters, we've maintained around $800 million. On a same-store basis, we saw a sequential decrease of about $10 million, which is a positive sign. We continue to benefit from the employee reduction made during the COVID period, with a decrease of approximately 9% to 10% on a same-store basis. We're leveraging technology to some extent, and from a productivity standpoint, our technicians are equipped with more tools. We've also improved our sales team's performance, increasing units sold per salesperson from around 9 or 10 to between 12 and 13, which is crucial. When examining our costs, the primary concern is personnel expenses, as variable costs have risen due to the overall growth of the business. Ultimately, management compensation has increased due to profitability.

And then just lastly, I mean we're hearing these rumblings of some potential weakness in the consumer, particularly for companies like CarMax. I'm just curious in CarShop or in your dealerships, if you're hearing or seeing anything like that, or is it a question of price? It just seems like a weird statement given what appears to be an extreme supply/demand imbalance in favor of demand being much higher than supply. Just curious what your thoughts are there.

John, one thing I think that we have to do. We're a different business than CarMax or Carvana and some of these used car retailers. Because, number one, we've got a large parts and service business, which covers 60% to 70% of our fixed costs. We also have OEMs that we are tied to which give us an area of market that we operate in. They provide us with all the umbrella advertising to drive customers, both new and used, to our stores, and then we have the relationship with the captive finance companies. And then, the lease returns that are coming in give us, in the future when the cars are available, additional used vehicles. So, looking at that and taking that as really a base to work from, we've got a short supply of new cars, which is driving used car prices up. And certainly, our acquisitions have been very tough at the moment when you think of just looking at CarShop in the U.S., in the U.K. and the U.S. are our cost of sales up $8,500 and the U.K. is up 44. And when you add that on to the existing number, it's really pricing us on the U.S. side, up into almost new car numbers. And then, there are some affordability issues there which are going to have some impact on the margin. But from an overall standpoint, the demand is strong; we're selling into our pipeline from the standpoint of our new car business, and sequentially in our units are up from 101,000 to 114,000. If you look at Q4 to Q1, so we're not seeing it at the moment that we're having any negative impact at this point.

Thank you. And our next question is from Stephanie Moore from Truist Securities. Your line is open.

I hope we could talk a little bit on the new vehicle industry environment and maybe what you're hearing from your OEMs in terms of, I think the key topics we're always looking for is production and incentive, and also, I think there's been a little bit of conversations around pricing and spread between OEMs in the MSRPs and dealer margins. So maybe if you could just give us a little bit of a pulse of how you view the relationship between the OEMs and the dealers as we start this year?

The OEMs are not increasing our costs without allowing for a corresponding increase in MSRP. There are various discounts based on performance, with a basic discount of around 15%. To qualify for that, you need to meet certain metrics like customer satisfaction index and market share. Some may not receive the full discount if they don't perform well, which varies from store to store and OEM to OEM. Looking ahead to Q2, we anticipate a 10% increase in vehicle availability from Mercedes-Benz, which we expect to carry into Q3. Inventory remains flat for Honda and Acura, affected by the shutdown in China. Toyota and Lexus may see a slight increase in Q1 based on current OEM information. Porsche has faced challenges due to a fire on a ship resulting in a loss of 66 vehicles, and an additional ship incident cost us another 33. While we're in a better supply situation than before, the inventory is pre-sold. Audi's allocation for Q2 is better than Q1, while JR and BMW will remain flat compared to Q1. Overall, we expect some manufacturers to show slight improvements, but the market remains slow to recover. One OEM mentioned a significant drop in dealer inventory from 250,000 units to just 25,000 this year, indicating it will take time to fulfill current demands and rebuild inventory. The OEMs have realized the advantages of maintaining lower inventory levels and will likely focus on avoiding excess that could lead to discounts and incentives. Thus, we foresee the current trends continuing into the next quarter.

Great. No, that's helpful. And then maybe if you could touch a little bit on the Penske Transportation Solutions JV. Just what you're seeing alter the overall health of that business. There's been some tones about just seeing slightly moderating freight rates in the beginning of the year; how you view the health of the business and kind of the opportunity this year on leasing, rental, and some of the logistics on that side.

I believe the analysts are suggesting that freight will increase by 3% in 2022. The impact on spot rates is uncertain, but I think the primary challenge for many carriers is the availability of drivers. We are not experiencing any decrease in rental units on the Penske Transportation Solutions side. Overall, our truck leasing, rental, and logistics sectors had an excellent quarter, with revenue rising 22% to $3 billion and profitability reaching $418 million, up over 120%. It's worth noting that we improved our revenue by 22%. A year ago, our debt was reduced by $300 million. We have effectively managed our equipment and reduced our available units from 10,000 or 11,000 to about 3,000, which has lowered our interest and depreciation costs, allowing us to generate cash for purchasing new trucks. Our balance sheet remains strong, and we hold an investment-grade rating. Currently, we have about 64,000 units on order. It will take time to catch up. Recently, we had 62,000 rental units in use during peak days in our commercial or consumer business, driven by high profits and record pricing. This performance is primarily in one-way and local business. Overall, the business has never been stronger, with an increase in vehicles rented and utilization rates, while consumer, logistics, and rental segments rose by 8%. We benefited from a strong used truck market, so we likely won't see the same increase quarter-over-quarter going forward; our gain on sale was probably up about $20 million to $25 million this quarter due to the robust used market.

Perfect. And then just a housekeeping question for me, Shelly, could you remind us what the free cash flow generation was in the first quarter?

Yes, certainly. So cash from operations was just under $400 million. We paid $36 million in dividends. And then we talked about the share repurchase, $119 million within the quarter, not a huge debt pay down there, about $10 million, Stephanie, so very strong. I expect the same out of Q2. As Roger mentioned, we've received $45 million in cash distributions from PTS, and we'll get about $105 million overall within the quarter.

And CapEx was, what, about $56 million.

Yes. Thank you. CapEx was $56 million.

So I think that still gives you the pieces you need there, Stephanie.

Excellent, I can do that math. All right, well, thanks everybody. We appreciate it.

Thank you. And our next question comes from the line of Mike Ward from Benchmark Company. Your line is open.

Shelly, could you remind me how the formula works for PTS, for the cash?

The formula is a 50% dividend. We receive that on a quarter lag, with the first one coming in April. Otherwise, it's a quarter lag, so we receive those in May, August, and November for the preceding quarter.

And it's in the $165 million last year.

That's right.

Okay, and hadn't hired up this year. Roger, we're kind of in this unprecedented time with the inventory and everything else. But the flip side of that is you have better visibility on orders. And I would assume if somebody's preordering a vehicle, the price portion of that transaction is resolved. Is that correct?

Well, when we're preordering, obviously, they take our orders in the factory, and we don't have a price change. We do get a price change on trucks. If we order a new truck and it's just not built, they typically can change the price on us. On the heavy-duty side, that's been the current business practice by the OEM. But from a new car customer, selling down the pipeline, they're able to preorder and we get a fixed margin, a full margin on that typically, and he gets the components or I guess the option would be a better word of what he wants. Today, when he goes in, a lot looks at a new vehicle, sometimes he buys more than he needs, and it's less. And one thing that's happening and some of the OEMs have done this, the vehicles that we're getting shipped might have a lower MSRP for only one reason. That's because they've left out certain options, which they can't provide because of the chip shortage.

The price for a vehicle ordered by a retail auto customer is set at the time of ordering, and there may be additional elements such as trade-ins included.

You always need to consider the value of the trade, which can fluctuate. Looking at our finance income, we have two components: the finance aspect and the product. We offer different products such as GAP and tire and wheel protection. Ultimately, customers may end up paying more for these options. Additionally, the opportunity to sell prepaid maintenance after the sale is a valuable service we provide to customers. This allows them to make one payment and be on their way.

So, am I thinking about it the right way? There's at least over the next six to nine months as some of these orders turn into deliveries. There's less risk on the growth side of new vehicle retail on just the gross margin part of it than there has been historically.

That's a great point because obviously, we are selling into the pipeline at full margin; there's no question. So that's going to help us sustain this margin as we go forward. And I think that's obviously something both in the U.S. and the U.K. that we're seeing now.

Right. Based on my personal experiences, I believe it strengthens the relationship with customers at the dealer level. So, the business is quite positive.

The customer orders what carries wants; it's sticky, interesting on the lease side because on our premium side, 55% of our customers are leasing. What we're doing now is we're extending leases. And when we extend we offer the customer an opportunity to extend because basically, we could have that car back now, we then order the new car for them. So, we will probably end up with less people moving from us to maybe the lease of another competitive vehicle, but that's been very positive with the customers. And again, from a customer experience standpoint, it makes a big difference because they know that they'll have a car, what they want. And the lease price obviously is set at the time that we do that order that new car.

Thank you. And our next question is from Daniel Imbro of Stephens Inc. Your line is open.

Roger, I would like to follow up on Stephanie's question regarding the OEMs. What is their perspective on the ongoing consolidation in the industry? Do they see value in potentially having fewer, larger dealer groups? Additionally, have you heard any discussions about altering or expanding the framework agreements to facilitate larger-scale mergers and acquisitions as your businesses grow?

We've been working under framework agreements for about 10 years with companies like Honda and Lexus. Recently, manufacturers like BMW are becoming more engaged. They aren’t necessarily trying to limit growth but want to ensure that existing dealerships meet customer satisfaction and market performance standards before considering expansion. This is currently the main challenge. They're not outright rejecting new opportunities; in fact, if you're a solid dealer with a good record in a restricted market, that's more favorable. Generally, they appreciate when we present them with opportunities because we have the necessary resources and a knowledgeable management team. We've demonstrated growth publicly and have received approval for significant acquisitions. Occasionally, this may require divestitures in certain markets, but we managed to switch from two Lexus stores in New Jersey to two in Austin by making that strategic decision based on long-term potential.

Got it. That's helpful. And then one on the open points you guys are opening, Roger. I think historically, that helps you get more allocations at first to maybe get the stores up and running. One, I guess, is that true? And then, two, for how long do you get better inventory allocations at those new open points?

They have a plan indicating that the potential for a point is around 1,500. What they will do is preload you with those vehicles before you open, providing them for approximately 90 to 180 days. After that, you will be on a run rate based on your previous performance. This arrangement works well. Given the investment of $15 million to $20 million in a facility, it's essential to have the cars to start the business. I believe this is a fair approach. It’s beneficial for future allocations as you continue to meet the planning potential requirements, which allows you to receive the vehicles or trucks early on. Ultimately, it's your responsibility to drive and maintain that performance.

Got it. And one last one for me on the parts and service on the commercial truck side. If we did go through a broader freight recession or pullback on the industrial side, could parts and service still organically grow and comp positively through that? Or what have you seen through past industrial cycles on that part of the commercial truck side?

I would say the parts and service would grow because people would not be buying new vehicles. And we see that in our own truck leasing fleet. We run past a certain point of mileage, and our maintenance costs go up. So that would always be an opportunity for the Freightliner dealer for us to give us more parts and service. So I think at the end of the day, it's very positive for us if there is because we'll have more parts. And we saw that during the last recession. I think we saw parts and service be pretty steady and solid.

Thank you. And our next question is from Rajat Gupta of JPMorgan. Your line is open.

I have a question regarding parts and services in the automotive sector. Can you provide insights on how the various segments performed during the quarter and what the outlook looks like for the remainder of the year based on the trends observed so far in Q1 and also in April?

I apologize, but I didn't fully understand your question about growth. Could you please repeat it? I want to ensure I provide you with an accurate response.

Just within parts and services, the different components within that customer pay, warranty, etc., how those did in the first quarter? And just how should we think about the progression through the rest of the year?

We are observing an increase in miles driven, which is attributed to the country opening up. This rise in mileage is expected to lead to higher demand for parts and services. In the U.S., repair orders for Kia increased by 13%, and in the U.K., they were up by 11%. Our body shop business grew by 22%. Customer-pay has risen, while warranty claims have decreased. This shift has impacted our PAG margin since we maintain a fixed margin on warranty and customer labor, and with varying ages of vehicles coming in, this resulted in a slight reduction in our overall margin, which remains robust at 59%. Our effective labor rate has also increased, showing an 8% rise in the U.S. during the first quarter compared to the previous year.

Got it. And in terms of like the outlook for the rest of the year, any visibility we can get in terms of how the progress should be for the business?

Overall, are you referring to the entire PG business or to parts and service?

Yes, just parts and services, on the retail automotive.

I believe it's going to increase. I don't expect it to decrease. The only concern might be related to parts supply, which we've already experienced some issues with due to the supply chain, and that could potentially slow things down. Another point that came to mind is our loaner cars and the ability to provide them to customers. Many people are hesitant to come in for service without a loaner car. We have all had to reduce the number of loaner cars available because of the shortage of new vehicles. In fact, we've even used some used cars for this purpose. This may have some effect on the business, but I don't think it will be significant because customers are willing to wait. If there's a critical issue, we will try to resolve it on the same day. Overall, I think we're in a pretty solid position. Miles driven is recovering, but it remains below pre-pandemic levels, and that's a definite reality. So, I'm optimistic.

Got it. Got it. Just a follow-up on PTS. Could you give us an update on where the utilization rates are? Or where they were in the first quarter? How do you expect that to trend this year, maybe into next year? And then maybe if you could give us an update on just the fleet size, and what your plans are for the next couple of years in terms of where you would like to get in terms of just a long-term fleet for PTS?

I believe we increased by 38,000, and my target for 2025 is to reach 500,000 if we can facilitate that growth. This will depend on availability and how much signing we are doing. On the full-service lease side, that business saw an 8% increase in the first quarter, while contract maintenance rose by 14%. That's very encouraging. With the demand for transportation across the country, our commercial rental has reached its highest level ever, increasing by 55%. We anticipate this growth continuing. We've been somewhat cautious due to the current supply of vehicles, but we will expand our rental fleets as we move forward, which will have a significant impact. Our logistics business grew around 8%. The one-way segment remains strong, especially when pricing is favorable. Our full service and contract maintenance are also on the rise, and we are likely to open approximately 15 to 16 new locations each year. Additionally, we can take over customer locations, which allows us to add another shop in collaboration with the customer. In the first quarter, we experienced a higher gain on sale with PAG prospectively earning about $25 million, though I expect that figure to decrease in the second and third quarters due to a reduction in available vehicles for sale, from around 12,000 to 3,000. Therefore, I don't expect to see that same gain moving forward. Overall, the business should remain strong.

Thank you. And our next question is from David Whiston of Morningstar. Your line is open.

First on equity income. If I remember correctly, normally, Q1 is the weakest quarter for equity income. But this year, obviously, you had outstanding growth of about 116%. So just curious if you are expecting Q1 to not be the weakest quarter this year?

I believe that from an equity income perspective, when we look at PTS in July, August, and September, the one-way business will likely drive that higher. Furthermore, as I mentioned to Rajat, we will experience some impact from the gain on sale. However, I expect it to remain stable for the rest of the year aside from the gain on sale. Overall, I feel optimistic about it.

Okay. And sorry, how much was that gain on sale?

The gain on sale for PAG was up about $25 million. Am I right, Tony?

Yes, year-over-year.

Year-over-year. So I wouldn't expect that every quarter because we had vehicles we wanted to run in rental, which was such a demand at the end of Q4. We decided to run those vehicles through Q4, take them out in Q1 and sell those. That's why we had the bigger gain.

Okay. And on CarShop, the disclosure about the self-sourcing by division was helpful. The U.K. is the lowest there at 39%. How can you think that can get over time?

Repeat that again.

So you're talking about just on CarShop, David?

That's on Slide 30.

You broke up there. You broke up. Go ahead. You're there?

Yes. We are focusing on self-sourcing used vehicles in various markets. We believe that the U.K. market continues to show positive trends. If you examine the traditional franchise operations in the U.K., there was an increase in direct purchases from consumers year-over-year, going from 18% to 25% this quarter. They have a team of buyers dedicated to this effort, and we anticipate that this will persist. On the CarShop side in the U.K., they are sourcing fewer vehicles from consumers compared to what we do in the U.S. Over time, we expect them to rely more on the Sytner auction to help acquire more cars, but currently, this has been somewhat limited due to the vehicle trades available from fleet or overall business trades. We do expect improvements in this area over time.

Okay. And just finally, I think it was on Slide 16, talks about your retail automotive brand mix, and BMW is a little more than double on Toyota, 25% versus 11%. And BMW is obviously a great brand. But over time, do you want to try and narrow that gap? Or are you pretty much capped on the Audi, Toyota side so you can?

No. When you take Audi, and you add Porsche to it and Bentley and the other, we'd probably get close to 20% with them. I think that we have no limits with anyone. I think the BMW is driven because we have the majority. We have double-digit market share with BMW in the U.K., which probably drives a little bit higher. We don't quite have that kind of number here in the U.S. But it is our number one brand, and we've been strong with many, right from the beginning. But there's no limit. In fact, we just made an acquisition of three stores, BMW stores in the last 30 days in the U.K. And yes, we'd expect more. And as we go through the rest of the year, we have some other possibilities in the pipeline.

Thank you. And there are no further questions at this time. I will turn the call over back to Mr. Penske for closing comments.

Thank you, everyone. We had a great quarter. I appreciate the support, and our team is ready to take on Q2. We'll talk to you next quarter. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect.