Penske Automotive Group, Inc. Q2 FY2022 Earnings Call

Good afternoon. Welcome to the Penske Automotive Group Second Quarter 2022 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through August 3, 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, Britney. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's record second 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 am 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, EVP Chief Financial Officer; and Tony Facione, our Vice President and Corporate Controller. Our discussion today may include forward-looking statements about 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, amortization or EBITDA; and our leverage ratio. We have prominently presented the comparable GAAP measures and have 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 and previously filed Form 10-Qs for additional discussion and factors that could cause results to differ materially. I will now 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 that our diversified business delivered an all-time record second quarter results for earnings before taxes, net income, and earnings per share compared to the second quarter last year. While revenue declined 1% to $6.9 billion, foreign exchange negatively impacted revenue by $245 million. Excluding FX, our revenue increased 2%. Earnings before taxes increased 8% to $500 million. Net income from continuing operations increased 10% to $374 million, and our earnings per share increased 17% to $4.93. If you exclude FX, EBT was up 10% to $511 million; our net income increased by 13%, up to $383 million; and earnings per share increased 20%, up to $5.04. Additionally, when we compare the first quarter of 2022, earnings before taxes, our net income and earnings per share all increased sequentially. Looking at our retail automotive operations on a same-store basis Q2 2022 versus Q1, despite the supply constraints that continue to impact new vehicle inventory and availability, demand remains strong and our pipeline of vehicles remains forward sold. Supply shortage has impacted total unit sales which declined 17% during the quarter. Our automotive revenue declined 8% and our gross profit declined 3%. However, if we exclude FX, revenue only decreased 3% and our gross profit increased 2%. Our Service & Parts revenue increased 4%, and without FX it was up 8%. And our variable profit per gross vehicle was up $841 or 16% to $5,999 from $5,158. Looking at CarShop during the second quarter, CarShop unit sales increased 7% to 20,000 units. And our revenue increased 15% to $468 million and our same-store unit sales were flat, and our same-store revenue increased 6%. Same-store variable gross profit per unit retail was $2,145 compared to $2,714 in the second quarter last year. Vehicle acquisition prices, our reconditioning costs along with logistics continue to impact our profitability at CarShop. In response to the current market conditions, we closed two satellite operations in the UK and are focused on improving the reconditioning efficiency, our logistics, and improving our cost structure overall. Let's turn now to the retail commercial truck dealership business. Our premier truck dealership business remains very strong. And during the second quarter, our unit sales increased to 4,174 units, up from 146 in the second quarter last year. When looking at total revenue, we increased 23% to $769 million, and gross profit increased 32% to $136 million. Our same-store revenue increased 11%, and that included a 23% increase in our Service & Parts business. Service & Parts represented 68% of the total gross profit and covered 133% of our fixed cost in the second quarter. Earnings before taxes increased 32% to $52 million. The new Class 8 truck market remains strong, and the backlog is 222,000 units as of June 30. Approximately 75% to 80% of new Class 8 sales are commercial trucks, and that market remains strong. In fact, our entire allocation for Class 8 product is sold out for 2022 and '23 orders will open up sometime in the September to October time frame. Let's turn now to Penske Transportation Solutions. As you know, we own 28.9% of Penske Transportation Solutions, which provides us with equity income cash distributions and cash savings. PTS currently operates a fleet of over 387,000 units, an increase of 21,000 compared to the end of last year. PTS produced a record quarter driven by strong performance from contract, commercial rental, our logistics business, and remarketing. Revenue increased 20% to $3.3 billion and profit increased 33% to $472 million. As a result, our equity earnings increased $34 million to $137 million year-to-date. We've also received $105 million in cash distributions. Now let me turn it over to Shelley, our Chief Financial Officer.

Thank you, Roger. Good afternoon, everyone. Our capital allocation strategy and record financial performance continues to leave our balance sheet in great shape. At June 30, we had $155 million in cash and over $1.1 billion in liquidity. Year-to-date, through July 26, we spent $363 million on repurchasing 3.5 million shares and acquired 148,000 shares from employees for $17.2 million. In July 2022, our Board of Directors increased the authority delegated to management to repurchase our outstanding securities by an additional $250 million, bringing the company's total repurchase authority to $331 million. We also paid $74 million in dividends. So far this year, our Board of Directors has authorized three increases to our dividend, growing the quarterly dividend from $0.46 to $0.53 per share or up 15%. In total, we've returned $437 million to shareholders so far this year, representing 59% of our net income. We've also spent $110 million on CapEx and an additional $30 million for land acquisitions for future growth. When looking at our future capital allocation, we maintain a disciplined approach that focuses on opportunistic acquisitions and investments across our retail automotive and commercial truck businesses; capital expenditures to support growth and our sustainability initiatives; delivering a strong dividend to our shareholders; accretive securities 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 June, our long-term debt remains below $1.5 billion, which is consistent with December 31 of last year. Our long-term debt consists of $1.04 billion of subordinated notes, which mature between 2025 and 2029; $416 million in mortgages; and $30 million under our Australian credit agreement. The average interest rate on our total fixed-rate debt is 3.8%, which we have secured for an average remaining term of 5.8 years. Debt to total capitalization was 26%, and our leverage sits at 0.7x. At the end of June, total inventory is $3.1 billion, which is consistent with December 31 of last year and up $118 million from June 2021, largely related to an increase in commercial vehicles and parts from acquisitions completed in the last 12 months. We have a 21-day supply of new vehicles with premium at 23, volume foreign at eight, and domestic at 21. New vehicle supply is at 12 days in the US and 32 days in the UK. 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 nine to 12 months. Used vehicle inventory is in good shape with a 42-day supply. At this time, I will turn the call back over to Roger.

Thank you, Shelley. Let's turn to business development. I'm pleased to report we've completed acquisitions and new open points representing $745 million in annual revenue so far this year. Additionally, this morning we announced we've signed an agreement to acquire five Mercedes-Benz dealerships and three after-sales locations in the UK from the factory. The acquisition includes our flagship dealership which is located adjacent to our existing Audi West London dealership, which is the largest Audi dealership in the UK. The acquired dealerships and after-sales locations are expected to generate approximately $550 million in revenue for the full year of 2022. We expect to close this transaction during the third quarter, subject to customary closing conditions. Turning to sustainability. Our sustainability initiatives are important to our strategy, and we've built a dedicated team 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. We've already installed over 1,300 charging stations across our network. To put electrification in perspective, through June 30, 2022, we sold 16,800 electrified vehicles in the US including 1,800 pure battery units which represent 3% of our new vehicle units, while in the UK we sold 4,700 units including 2,200 pure battery units where electrification is supported by lower taxes and government incentives. We're also focused on decarbonization through improved energy management, increasing the use of renewable energy, and recycling programs at our locations to reduce greenhouse gas emissions. Moving on to our additional initiatives. Our omnichannel strategy continues to focus on customer life cycle and evolves with the changing landscape. We're using digitization and automation wherever possible to improve the customer experience and drive satisfaction to improve loyalty and our customer retention. Additionally, we're using integrated digital solutions at our dealerships that automate and streamline document processing during the sales transaction, minimize physical paper output, and ensure consistency and more importantly compliance and quality control across our organization. We continue to focus on online reputation management, where our lifetime Google Star ratings for our US dealership is 4.7 stars. For sales, we continue to enhance our digital retailing strategy while embracing our OEM partner initiatives. We are currently supporting programs from BMW, MINI, Porsche, Toyota and Lexus, Honda, Lincoln, and Nissan. Our OEM initiatives offer some advantages versus an in-house solution as they enable a buy online function from OEM sites that also integrate with our captive finance company for online credit approvals rates and programs etc. In the UK, we have a proprietary system that supports digital retailing for our franchise operations including CarShop. In the second quarter, we generated 4,800 online transactions and approximately 2,400 sales which reflected 5% of our sales in the UK market. On the service side, we continue to encourage online appointments and payments to improve efficiency. Online payments have increased 27% when compared to the second quarter last year and online and BDC appointments were 515,000. In closing, our results reflect the dedication of the people that make our business one of the best companies to work for, and I want to thank all of them for the record results they produced so far this year. Also, I'd like to congratulate the 46 Penske dealerships that are being recognized by Automotive News on the list of the best 100 dealerships to work for in 2022. This is an outstanding achievement and continues to set us apart from everyone else. I continue to remain confident about the opportunities I see across our diversified enterprise. Thanks to all of you that joined us today, and I'll turn it over to the operator for any of your questions. Thank you.

Our first question comes from John Murphy with Bank of America. Please go ahead.

Hey John.

Good afternoon, Roger, Shelley, and Tony. Just – Roger, one of the big concerns I think people have is that eventually volumes are going to recover and grosses may come under a bit of pressure then which will be a market dynamic. But what you can control in a pretty significant way is your SG&A costs. So, I'm just curious as volumes recover and inventory rebuilds, probably not going to be until late 2023 that we figure this all out. But what kind of actions on SG&A do you think you can take to keep a lid on them inflating? And if you could just maybe remind us how sales comp plans are generally structured because that would be a big portion of variable that could theoretically inflate as volume comes back or maybe not?

Before COVID, our SG&A was at 78% of gross. Currently, it stands at 66%, which is a 3% increase from Q1. I expect it to stabilize in the low 70s as we return to normal operations. We've been affected by increased salaries and wages, and allowing our employees to travel has added to our SG&A. However, our marketing and advertising expenses have decreased. The positive news is that we reduced our workforce by 10% during COVID, which has helped lower our SG&A, not including the new additions from our acquisitions. Overall, I believe taxes have risen a bit, but we are currently managing our costs well. Our turnover rate is between 17% to 18%, depending on the region. In terms of compensation to growth, we’re at about 40%, consistent with last year. Our variable compensation represents about 25% of gross, and fixed compensation, primarily for parts and service, is also around 25%. These figures appear stable, with no factors indicating a significant increase, as much of our business is variable, particularly with flat rate mechanics and sales. On the sales front, the staff reduction has led to greater productivity, allowing us to increase the number of units sold per salesperson. Moving forward, our SG&A will likely be impacted by supply shortages in marketing and advertising, which we plan to manage carefully without significant growth in that area, especially considering potential new acquisitions. As we reevaluate our operations from a pre-COVID perspective, we have managed to restructure efficiently, positioning ourselves to maintain an improvement of around 500 to 700 basis points as we move towards normal operations while keeping our workforce reduced by 10%.

That's really helpful. I have another question, which is a bit nuanced. Your net leverage of 0.7 times is quite conservative compared to many of your peers. You've completed $1.3 billion in acquisitions and $275 million in buybacks so far this year, which indicates you are actively deploying capital. However, I'm wondering if there might be an opportunity to consider taking on more leverage to pursue increased buybacks or acquisitions, whether in new, used, or even in the commercial truck sector.

Considering the current business conditions and uncertainties, we prioritize safety and security. Since the end of 2020, we have eliminated almost $1 billion in debt, and we aim to maintain that flexibility. Our financial position shows a lower leverage ratio, which provides us with resources to make strategic moves. At this moment, we are evaluating whether to focus on share buybacks or acquisitions. Given the high prices, we will reassess our options on a quarterly basis. We see value in repurchasing our stock if necessary, and we have identified promising opportunities in lower-cost acquisitions across our global network. Over the past 18 months, we have invested $1.9 billion in acquisitions along with an 8% share buyback of our stock. The emphasis will likely shift between these options, and it is fluid enough that I can't specify which will take precedence. We will review all strategies on a monthly basis as we examine our overall capital structure.

Roger, if you were to think about sort of normal times without all the chaos that appears to be swirling at the moment. What would you think sort of net leverage could or should be? What would be the target that you and Shelley would be looking at there?

Well, I guess when things get back to normal, probably what two, somewhere at, Shelley?

Yes. I think two is accurate. I think certainly our target to remain below 2.5 on an adjusted basis, and we certainly have a lot of runway to get us there.

But we have flexed the balance sheet in the past to make acquisitions like we did with the PTS acquisition to go above three if we needed to.

That's right.

You might mention where we are from a credit rating perspective, what the expectations are from the agencies.

Yes. The discussions we've had indicate that if we can maintain an adjusted level below 2.5 to 3 times for the rest of the year, we might begin to consider investment grade status. As I noted, we have considerable capacity to reach that goal. Furthermore, everything we've discussed—acquisitions, share buybacks, and dividends—has been supported by cash flow from operations, allowing us to keep our debt at stable levels. Maintaining our leverage at 0.7 times certainly hasn't impeded our capital allocation efforts.

And we want to be very careful. We don't stray off road where we are. Obviously, we are seeing the benefit of our PTS investment. Australia continues to grow, and we look at what we're doing there from the standpoint of that business. And overall, we just had our Board of Directors in the UK and the ability for them to grow is a real opportunity there as people move forward. So overall, we're going to try to stay safe and secure, John. But I think we'd like to get to investment grade. We're certainly in a position to move on into bigger acquisitions. But they're going to come to us, and we're not going to overstretch if possible.

Okay. Thank you very much. I appreciate it. Thank you.

Thanks, John.

Thank you, Mr. Murphy. The next question comes from Rajat Gupta with JPMorgan. Please go ahead.

Hi, Rajat.

Hey. Good afternoon, Tony, Roger, Shelley. Just had a question on PTL, the first one. Really strong trends again in the second quarter, could you quantify like what the gain on sale impact was in the quarter? And excluding gain on sale how do you see trends for the remainder of the year? Maybe if you could give us some color across the different business lines how you see them progressing through the remainder of the year. And I have a follow-up. Thanks.

Yeah. Good. From a full-service lease perspective, our revenue was up 8% and commercial rental was up 35%. And remember 50% of our commercial rental business comes from our lease customers. And with the growth, we've had on that over the last three years that's paying real dividends for us for now. And I think vehicles on rent from a commercial rental perspective daily have been running about 65,000 if you can believe it. We have the largest rental fleet probably in the world when you look at it, and it probably is two to three times higher than our closest competitor when you look at the revenue coming out of that. And from overall – from the overall standpoint, our business was still up 7% to 8%, if you take out – if you just take out the gain on sale increase over the years. So again, it's still been a very big growth business. And we think that logistics impact we've had we were up 11% in the quarter. Our consumer rental was down, and that's the one where rent is here leave it there. But the good news is we're able to repurchase those trucks into our commercial rental fleet, which obviously we're getting markup and good margins on that. Probably, the biggest impact we have is we only have 4,000 units to sell because we're being backlogged from the truck manufacturers with over 60,000 units on order. And we get those – and as soon as we get them we either add them into our rental fleet or get an older unit out which will reduce our maintenance cost. So we're pushing hard on the OEMs and we still see that going to be probably through 2023 into 2024 before we get back to a normal supply chain capability for us on heavy trucks.

Got it. And the gain on sale in 2Q? And how much was that year-over-year?

Well, it was $140 million, and it was up $95 million. Now, we get in – from the standpoint of PAG, we get $27 million of that what would accrue to our profitability for the quarter. Tony?

Correct. Our ownership percentage of 28.9% times the $95 million is $27 million. That would have increased on a year-over-year basis in the second quarter.

Got it. Got it. And maybe just to follow-up on like the SG&A question. There's going to be a number of electric vehicles hitting the market in the next 12 months to 18 months. Maybe if you could give us a sense of how those models coming in changes just the headcount structure of the store, the composition, payroll just productivity given those units are going to require a little bit more of an educational experience and maybe a little bit more of hand-holding relative to the eyes of new customers. So maybe any thoughts on that how you see that progressing and changing just the look and feel of the dealership? Thanks.

Well, I think that's a good point. We see that training is necessary. We see the tools and also the facility changes we have to make to be able to handle a BEV vehicle because of electrification. And that will take some of the – at least initially it's going to be all under warranty. But as we go out into the longer life of a vehicle – electric vehicle, those will come back into the shops. So I feel that will be a benefit. We have to train our people based on OEM requirements. We talked about the number of electrification points we have from the standpoint of already – and that's to meet many of the OEMs' requirements for fast charging and we'll continue to add to that as we go forward. But from a training perspective, this is always accomplished arm in arm with the OEM.

Got it. Great. Thanks for the color. And I’ll jump back in queue.

All right. Thanks, Rajat.

Thank you, Mr. Gupta. Our next question comes from the line of Daniel Imbro with Stephens Inc. Please go ahead.

Hey, Daniel.

Congrats on the quarter.

Thanks, Daniel.

Roger I want to start on the demand side of the equation. Can you just maybe provide an update on however you measure it the amount of inventory presold or how much visibility you have basically into the back half of the year on to the demand side? And then maybe can you touch on auto and commercial truck and how that differs?

Let's examine the auto situation in the US. Currently, we receive allocations that last about 30 to 60 days, with an allocation of around 300 cars. However, within a week, that allocation can be reduced. This situation is quite variable. We're selling based on daily allocations and our inventory typically sits at around 12 days, with everything incoming also going back out. In fact, we're operating at approximately 95% of allocation turnover, which is how we manage our inventory. For high-priced vehicles like Corvettes and other luxury models, we have an inventory period of six months to a year. Conversely, in the UK, where customers often customize their vehicles, we currently have 35,000 forward sold orders amounting to roughly $130 million, with about a 30% flow-through anticipated moving forward, which is quite promising. Regarding trucks, we are sold out through 2022 for heavy-duty trucks, and as mentioned earlier, we expect to start seeing allocations for September and October 2023, consistent with the availability across our leasing business.

Got it. That's helpful. I wanted to touch on CarShop regarding the used auto segment. The slide indicated that same-store units were flat, but overall retail same-store sales were down 11%. How was this segment able to outperform significantly? Can you accelerate that growth or apply some of those insights to the rest of the dealership channel?

Today, CarShop in both the US and the UK is highly focused on its operations. Typically, we deal with vehicles priced around £12,000 to £15,000 in the UK, but we've found it increasingly difficult to acquire them. In the US, we've had to shift our target from $20,000 to $30,000 vehicles. We've attempted to explore options within the $8,000 to $12,000 range, but those are primarily wholesale vehicles. We've noticed that the customer experience in purchasing these cars has also deteriorated. As a result, we've had to pull back on acquisitions since we lack the capacity to buy the vehicles we prefer due to the declining new car volume, which is limiting the supply of used cars in the market. We expect to see reduced volumes in the coming months until the market stabilizes. However, we're committed to leveraging technology to potentially reduce the reconditioning time, as we believe there are losses occurring in logistics when bringing vehicles to our locations for proper preparation. There are numerous opportunities ahead. In the UK, we need to rely more on auctions, while in the US, we've improved our auction dependence to about 80% to 85%, which is promising. It remains a priority for us to stay in this business. Despite the current challenges, we believe this situation is enabling us to build a stronger foundation and we will continue seeking ways to improve our gross margin.

Great. Great. And last one for me just on the used commercial truck side, you mentioned new backlog is still real strong. But on the used side, are you seeing any softening of demand as the freight market softened, or anything changing there as we see prices begin to fall in the used truck side?

Well, I think right now the reason we're seeing price falling is because they're way too high. I mean just realistically, a lot of these trucks that were being purchased at these high margins were owner operators. But with freight rates or with freight availability being down, these people just can't afford these payments on these higher-priced used, and I think that's having some impact on the overall market. Right now, our big customers from PTG have been selling their trucks themselves. So we have the opportunity, as we go forward, to action some of those trucks into our inventory and we're pricing those today on a 30-day basis, meaning that we're not giving you a price on a trade more than 30 days out and we'll continue to adjust those accordingly. And we've seen that come down and yet we made an acquisition, southwest in Portland and Salem, and we took on some trucks, newer trucks what I would say, two to three years old or low mileage which obviously are at higher rates, and those seem to have some impact on some of our margins right now. But that's 100 to 150 trucks. So as we get through those, we'll be back pretty much at the level. On the other hand, when you look at PTS at our truck leasing business, I think I mentioned it earlier, that we're selling trucks that are four to five to six years old, and those margins continue to be very strong. We see very little deterioration on those at the moment. So I think overall we're in pretty good shape.

Great. Thanks so much, guys. Good luck going forward.

Thanks.

Thank you, Mr. Imbro. Our next question comes from the line of David Whiston with Morningstar. Please go ahead.

Hi, David.

Hi, everyone. I want to begin with a question about used vehicles. It's quite expensive to purchase a car for both consumers and retailers at this time. Are you experiencing any signs that this affordability issue is affecting the CarShop customer more than those at the franchise level?

I would say so for sure. Wouldn't you, Tony?

Yes, absolutely.

We're seeing that in the UK, CarShop vehicles are priced between £12,000 and £15,000, while in the US, prices range from $20,000 to $23,000. As a result, revenue per unit has significantly increased, which has removed some players from the market. Our acquisition costs are also squeezing our margins. In the UK, CarShop has an inventory of 6,000 cars, which they turn over in approximately 32 or 33 days, but overall sales costs have greatly impacted margins.

Yes, I hear you there. I guess on SG&A going back to that earlier discussion, is there any more you can take out without reducing headcount?

There is always more we can cut. When considering travel, we want our team out in the field. We've been operating this business mainly through Zoom and similar tools for the past 12 to 18 months, but our employees want to engage in person, and we encourage that. Training remains a priority, especially in our collaborations with OEMs, and we expect that to continue growing. There are certainly wage pressures due to current inflation, and people's living costs have risen. This results in additional expenses for us. Additionally, when you consider our company vehicles and fuel prices, we have several thousand loaner cars that we provide to customers, leading to increased costs. However, we are actively looking for ways to reduce these expenses through technology, which will enhance our efficiency and lower our overall costs, whether in new cars, used cars, or parts and services. At this moment, customers don’t even have to visit the shop for service; they can schedule appointments online, drop off their vehicles, and pay electronically. We can even deliver their cars back. These innovations will require fewer staff and improve shop efficiency. The training we've implemented in our parts and services has been beneficial, and our investment in technology for body shops, particularly in wheelwork, has made a significant impact on our margins.

David, this is Tony. There's also other processes that we're working on to improve automation that should help reduce some of the costs as we move forward too. So you can look for that to come in the future.

Yes. Do you think that's more of a six-month story or more won't be realized for another couple of years on the automation?

Both to that.

I believe it's happening every day, but we're also seeing an increase in costs. Remember, we were in the high 70s before COVID. We're currently at 63% in Q1. With the reopening of travel and higher rents, we've moved from 63% to 66%. As I mentioned earlier, we're aiming to stabilize around 70% to 71%, which still represents a 10% decrease from our previous levels, which is significant.

Yes. It's been really cool to see all the improvement both on costs and also on your balance sheet with the leverage ratio going down. Just one other quick one. On Australia, I'm just curious how you were able to grow EBT 5% despite a 14% top line decline.

We merged our off-highway and on-highway businesses into a single operation, which has helped reduce costs. Despite a decrease in volume, the margins from our truck business have significantly improved. The integration of parts and service for trucks within our after-sale network from the off-highway business has also contributed positively. We're currently holding about 50% of the market for gensets over 1,200 kW, which is crucial, and we continue to focus on repowers. We have around 650 trucks operating in Australia and New Zealand with large MTU 4,000 engines, and these repowers are boosting our margins even though the commercial truck business is down, impacting our overall volume. Parts and service are expected to provide stable revenue going forward, with fixed coverage in Australia at 160% and in New Zealand at 130%. We are confident in our business's stability. Additionally, with the government's projected $500 billion spending over the next decade, we've secured contracts related to power packs, combat vehicles, and offshore patrol vessels, and we're also engaged in repowering Collins class submarines. Many of these projects are compensated based on labor hours rather than sales dollars, which may explain some of the financial benefits observed. However, we expect fluctuations as we progress through the year.

Okay. Thanks a lot.

Okay. Thanks, David.

Thank you, Mr. Whiston. Our next question comes from the line of Glenn Chin with Seaport Global. Please go ahead.

Hi, Glenn.

Hi, Glenn.

Hi, Glenn.

Roger or maybe Shelley, given your underleveraged status and the abundance of capital you have to deploy, can you just fill us in on what you're seeing in the pipeline, just in terms of availability? Maybe what you're seeing on valuations whether or not they've come in at all? And then, what your preference maybe light vehicle versus commercial vehicle? And then, I guess further to that, given that you've done some deals up North what your preference may be U.S. versus Canada?

Sure, Glenn. I can address this. We've acquired $1.9 billion over the past 12 months, with a roughly even split between auto and truck. We have a favorable view on this mix. Trucks generally sell at a lower multiple, approximately 50% of what you see for automotive dealerships, and they also lack the customer identification requirements present in the auto sector. Nevertheless, we have made some great acquisitions in the auto segment at appealing valuations. For both the U.S. and Canada on the truck side, our acquisitions have been positioned along major highways, which is crucial for servicing truckers throughout their routes. In both countries, we see a 60% gross profit margin from service, which is very significant to us. Additionally, we’ve completed several acquisitions, including an announcement this morning related to the automotive sector. We previously acquired a dealership with BMW and are planning another with Mercedes before the end of Q3. So, it's a diverse portfolio. We're not adhering to any strict strategy; rather, we're assessing each opportunity individually. I know I sound repetitive when I emphasize our disciplined approach, but it has been effective for us.

Okay. And speaking of discipline, can you just speak to us about what you're seeing in terms of valuations recently? Have they come in versus last year? Holding up?

Let me answer that one, Glenn. I would say if you're looking at a premium luxury, German brand, so BMW, Mercedes, Porsche, Audi, you're looking at probably eight or nine times trailing 12 EBT for goodwill plus assets would be what we see. We've been able to make acquisitions for less than that where they're smaller and maybe not in the premium luxury side. Toyota and Honda are very strong. And to me, there are some people that just are going to get out of the business at this point. I think there is competition out there to buy these better points. But what's happening is many of us are running into what we call framework agreements which limit the amount of stores you can have in a particular market or with a particular brand. And on top of that, your CSI and some of the other components of customer satisfaction become a factor. So that will play into it as we go forward. But right now the premium side is at a high multiple, and we're all experiencing that. I don't think we're just the only one. On the other hand, as we go to Europe in the U.K., we see that down significantly from what we're paying here.

And it has to make sense from an SG&A perspective. We have our area markets and the acquisitions that we made have made sense, so that we're not taking on additional administrative costs but using them from what we have purchased. So BMW of Escondido is a great example. We already have presence in that auto mall. And it fits really nicely into our SoCal Management Group as well as the BMW and Mercedes dealerships in the U.K. holding really well to the structure that we already have there. So that is one way we'll continue to reduce costs is to make acquisitions that make sense for us from a cost standpoint too.

Okay. Very good. Thank you.

Thanks.

Thank you, Mr. Chin. Our next question comes from the line of Mike Ward with Benchmark. Please go ahead.

Hey, Mike.

Thank you very much. Good afternoon, everyone.

Hey, Mike.

I'm curious about the other dealers getting into financing and the recent acquisition you announced that brings in $0.5 billion in revenue from your Mercedes stores in the U.K. It looks like you have numerous growth opportunities with your new structure. I would like to know your thoughts on alternative businesses, such as captive financing or any other areas you are exploring.

We've been referring to ourselves as the big D diversified, and it's encouraging to see others following that path. However, each of us has our own reasons for how we grow our businesses within our peer group. I respect what they're doing, but I've discussed this with our Board numerous times over the past five or six years. We don't believe that establishing a captive finance company is the right move for us at this time. Our brand mix is primarily premium, which constitutes 70% of our business, and a significant portion of that involves leasing along with certified sales. Additionally, about one-third to one-fourth of our business operates in the UK. If we consider our CarShop business, we project selling around 12,000 to 20,000 units over the next year, but we simply do not have enough volume to support a captive financing model. The typical duration of customer financing is around 72 months, with average credit scores likely under 700. With delinquencies increasing across the retail sector, there's concern about inflating our balance sheet. Furthermore, the prospect of needing to sell that financing through securitization raises questions about the demand for 72-month or 60-month loans given the recent inflation in used car prices. While we may explore this option in the future, we currently believe it is not a viable idea. At this moment, we feel that this option does not align with our strategy.

Okay. That makes sense. Shelley, can you talk a little bit about the cadence of expected dividends from PTL? I think it was $105 million. Is that what it was in the second quarter?

Yes. So we received $105 million. So that related to our Q4 and our Q1 of 2022 earnings. And so it's a straight 50% dividend policy. And so we can just follow that cadence and we'll receive additional dividends in August and November.

August and November? Super. Thanks very much.

Thanks, Mike.

That concludes today's conference call. I hope you all enjoy the rest of your day.