Penske Automotive Group, Inc. Q3 FY2022 Earnings Call

Good afternoon. Welcome to the Penske Automotive Group Third Quarter 2022 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through November 2, 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, Hanna. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's record third 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 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 and Chief Financial Officer; and Tony Facione, our 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 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. At this time, I would now like to turn the call over to Roger Penske.

Good afternoon, everyone. Thank you, Tony, and all of you for joining us today. I'm pleased to report record revenue and earnings per share in the third quarter, which was driven by our diversified business model. Our revenue increased 7% to $6.9 billion, EBT decreased 2% to $467 million and net income declined 4% to $340 million. Earnings per share increased 3% to $4.61. Our third quarter results were negatively impacted by foreign exchange. Excluding FX, revenue increased 12% to $7.3 billion, EBT increased 1% to $481 million, net income decreased 1% to $351, and our earnings per share increased 7% to $4.75. Looking at our Retail Automotive operations on a same-store basis for Q3 '22 versus Q3 '21, new units declined 6% as we saw supply constraints continue to impact new inventory availability. We expect the current supply to remain at these general levels for the next 9 to 12 months. However, demand for new vehicles remains strong, and our pipeline of vehicles remains forward sold. For example, in the U.K., our forward order bank is over 60% higher than it was the same time last year and represents 36,000 units and $101 million worth of gross profit. Used units declined 11%, largely due to the challenges in acquiring affordable inventory to meet customer expectations. Retail automotive revenue declined 3%. However, when we exclude FX, our revenue increased 4%. Variable gross profit increased $70 per unit to $5,830. If you exclude the FX, variable gross profit increased $427 from the third quarter of last year. Our service and parts revenue increased 4% driven by increases in both customer pay and warranty. However, excluding FX service and parts revenue increased 10%. Looking at CarShop during the third quarter, CarShop unit sales were 16,400 and our revenue was $380 million. On a same-store basis, variable gross profit per unit retail was $2,127. Vehicle acquisition prices, reconditioning costs and logistics continue to impact our profitability at CarShop. In response to the current market conditions, we've implemented a cost improvement program focused on improving retail sales execution and our overall cost structure. Let me now turn to our Retail Commercial Truck dealership business. As you know, premier truck dealership business represents a strategic advantage for PAG. It's an important part of our diversification and the business remains strong. During the third quarter, total unit sales increased 25% to 6,031 and same-store unit sales increased 14%. Our revenue increased 42% to $1 billion and gross profit increased 21% to $140 million. Same-store revenue increased 29%, including a 23% increase in our service and parts business. Service and parts represented 68% of the total gross profit and covered 135% of all of our fixed costs in the third quarter. EBT increased 9% to $53 million. Approximately 75% to 80% of our new unit sales are Class 8 commercial trucks. In fact, our entire allocation of Class 8 product for 2023 has sold out. The new Class 8 truck market remains strong and the backlog is 220,000 units as of September 30, and the industry cancellation rates remain very low. During the third quarter, retail sales increased 27% to almost 80,000 units, currently forecasting North American sales of approximately 300,000 units in '22 and 287,000 for 2023. Turning to Penske Transportation Solutions, we own 28.9% of PTS, which provides us with equity income, cash distributions and cash savings. PTS currently operates a fleet of over 400,000 trucks and tractors and trailers with the goal of increasing its fleet to 500,000 by 2025. PTS has over 70,000 trucks currently in order to meet expected customer demands across its various business areas. PTS produced a record quarter driven by strong performance from full-service leasing, our commercial rental business, logistics and remarketing. Revenue increased 19% to $3.5 billion, and profit increased 15% to a record $468 million. In the third quarter, equity earnings increased 15% to $136 million, and year-to-date, we received $173 million in cash distributions from PTS. Let me now turn the call over to Shelley Hulgrave, our Chief Financial Officer. Shelley?

Thank you, Roger. Good afternoon, everyone. As Roger indicated, we had another strong quarter driven by our diversification and our commitment to maintain operational efficiencies achieved through cost reductions beginning in 2020. SG&A to gross profit was 66.8% in the third quarter compared to 65% in the third quarter last year and was only 70 basis points higher sequentially when compared to the 66.1% in the second quarter of 2022. As we look to the future, we expect the ratio of SG&A to gross profit to be in the low 70s, which is significantly lower than prior to the pandemic. Year-to-date, we generated $1.6 billion in EBITDA, representing an increase of 21% when compared to the same period of last year. On a trailing 12-month basis, EBITDA reached $2.1 billion through September 30. So far this year, we have completed acquisitions and new open points, representing approximately $1.3 billion in annual revenue, including $550 million of annualized revenue for 2022 from the five Mercedes-Benz dealerships and three after sales locations in the U.K. we acquired in September. During the third quarter, we repurchased 2.8 million shares of common stock for $309 million. Year-to-date through October 25, we have repurchased 6.4 million shares of stock for $675 million and acquired 148,000 shares from employees for $17.2 million. We have repurchased more than 8% of the shares that were outstanding at the beginning of the year. In October, our Board of Directors increased the authority delegated to management to repurchase our outstanding securities by an additional $250 million, bringing the total available repurchase authority to $268 million. In addition to share repurchases, our Board has increased the dividend four times in 2022, growing the quarterly dividend 24% to $0.57 per share. Through September 30, we have paid $114 million in dividends to our shareholders. In total, we have returned $789 million to shareholders so far this year representing 73% of our net income. We have also spent $166 million on CapEx and an additional $29 million on land acquisitions for future growth. As you can see, our capital allocation strategy includes disciplined acquisitions in each of our business lines, investments for future growth and shareholder return. At the end of September, our long-term debt was $1.6 billion, representing an increase of approximately $164 million when compared to December 31 of last year. The increase in long-term debt is related to an increase in mortgages on properties of $170 million. Our debt is 35% fixed. The average interest rate on our total fixed-rate debt is 3.8%, which we have secured for an average remaining term of 5.7 years. Debt to total capitalization was 29% and leverage sits at 0.8x at the end of September. This is consistent with the end of 2021. At the end of September, total inventory is $3.1 billion, which is consistent with December 31 of last year. New vehicle supply is 15 days in the U.S. and 30 days in the U.K. We had a 23-day supply of new vehicles with premium at 25, volume foreign at 10 and domestic at 30. Used vehicle inventory had a 44-day supply. In conclusion, our balance sheet is in great shape. At September 30, we had $92 million in cash and over $1.1 billion in liquidity. We remain confident in our ability to manage through the macro challenges that may lie ahead. At this time, I will turn the call back over to Roger.

Thanks, Shelley. As Shelley mentioned, we're committed to implementing operational efficiencies, what we believe will lead to a lower cost structure. We're also piloting artificial intelligence in both service and sales sides of our businesses. The AI allows for automated interactions with our customers to answer basic customer inquiries and set service and sales appointments using natural conversational language. That allows our employees to be more efficient and particularly useful providing quality support after hours. We continue to integrate digital solutions at dealerships to automate and streamline processing, while ensuring consistency, compliance and quality control. We also continue to pursue digital sales by focusing on our preferred purchase program, our OEM digital programs and our proprietary site in the U.K. In Q3, digital sales represented approximately 5% of our total unit sales. Looking at sustainability. Our initiatives are important as part of our new strategy. As mentioned previously, we've built a dedicated team to drive our future efforts on this important responsibility. Our efforts are focused on measurement and monitoring to establish a solid baseline for future reporting. We are also focused on sustainable facilities, LEED certified to be specific and decarbonization efforts across our businesses. In fact, we are working with our OEM partners to build an infrastructure to supply the sale and service of electric vehicles throughout their life cycle. We've installed over 1,500 charging stations across our network. We're also focused on improving energy management, increasing the use of renewable energy, recycling programs at our locations to reduce greenhouse gas emissions. Our results reflect the dedication of the people that make our business one of the best to work for. I want to thank all of them for the record results that continue to produce for our shareholders of our company. And I personally continue to remain confident in our business model and about the opportunities I see continuing to drive our businesses forward. Thanks for joining the call today. At this time, I'll turn it back to the operator for questions.

The first question is from John Murphy with Bank of America. Please proceed.

Thanks for all the info here. First question that we get a lot from investors, it seems to be one of the biggest fears, but there's also a massive positive here in the short run is new vehicle grosses. And I'm just curious, Roger, what your view is on how long they're going to stay as high? Are we in a somewhat of a new paradigm, I mean, I think you indicated that you expect inventory to be relatively tight for the next 9 to 12 months. So I mean that would indicate that gross is probably would stay relatively high for that period of time. But what's your view on grosses? When do they normalize and what do they normalize at?

Let's position ourselves where we are now. If we look back to the third quarter of 2021, we were at approximately $5,948. Now, if we exclude foreign exchange effects, we are at around $7,000 or $7,100. We have not observed any deterioration. In fact, in the second quarter of 2022, it was $6,800 and then $7,000 in the third quarter. Examining our backlog, particularly in the U.K. with 36,000 units, these are all custom orders from our customers. We anticipate strong demand for the next three quarters. Additionally, with the day supply that Shelley mentioned, we expect consistency throughout the new cycle as we approach the first quarter and the first half of 2023. Microchip shortages continue to create supply chain challenges, and inventories are limited across all our brands. Currently, our day supply for premium luxury vehicles is just 4,500 units in the U.S. When reflecting on 2019 and 2020, we had significantly more.

We have about 14,000.

10,000. And I think we had 2,200 or 2,300 so last year at this time. So inventory really, really is critical. And I think at the end of the day, the premium luxury, the good news for us from a gross perspective, they're building the cars they make the most money on. And basically, with our mix being 70% premium, we're getting the benefit of those higher-priced cars with a big margin for us, and I think that will help us as we go through the next 6 to 12 months to maintain a higher gross margin as we have shown here in the last couple of quarters.

That's helpful. And then just a second question around used vehicles. Obviously, there's a bit of a shortage there, and that shortage may get worse as new vehicle sales have been depressed for a number of years. How do you think about, one, how volumes and grosses there will trend but also, two, how you reinvest and run that business right now? I mean, sort of a skeptic would say, 'Hey, back away, things are tough, don't invest there right now.' But an optimist might say, 'Hey, listen, this is a huge opportunity because at some point, three or four years out, the market is going to recover pretty significantly. There's a lot of depressed players and there might be an opportunity to take share either through organic openings or maybe even acquisitions?' I mean, how do you think about sort of the near-term volume and grosses and the structural opportunity over time?

Let's divide the discussion into two main areas. First, regarding the OEM business and the used car sector, we're facing several challenges. On the premium side, our lease returns have dropped significantly, from 50% to 55%, as more customers are choosing to buy out their vehicles rather than trade them in. This trend has notably affected our inventory levels. For instance, in the West, we transformed 2,000 loaner cars into low-mileage used cars in the first half of 2019, but we haven't achieved similar results in the last year. This lack of availability is impactful. Additionally, we've shifted from a range of about zero to four years for vehicles to five and six-year models. The reconditioning costs are high, and the vehicles we acquire from auctions are often subpar, which can hurt our brand since we have increased buybacks and policy issues. Moving on to the second area, CarShop, both in the U.S. and U.K., we find ourselves outside of our core strength as the cost of sale has surged by $4,000 to $5,000. Consequently, we lack the necessary customer base and leads for these vehicles, forcing us to lower our prices. As a result, we often need to invest in reconditioning these cars to make them sellable, yet they don't always meet our customers' expectations, leading to more buybacks. In response, we are leveraging technology to manage customer appointments and services, with AI playing a supportive role. Although we won't hit our targeted sales of 80,000 at CarShop, we're optimistic about the business, especially with strong locations in the U.K. and dedicated personnel in that market. We remain focused on maintaining both availability and affordability, while being cautious not to compromise our brand value by settling for older vehicles.

I'm sorry, just a follow-up, do you think there might be an opportunity to make some acquisitions there to expand the store base as other folks might be under pressure and not have the financial and resources and the cash flow you're getting from the rest of the business to go after it?

Well, we have two or three locations, land that we've really purchased that we can build on. In fact, we have one or two locations in the U.K. that are almost completed that we can open up. But we've kind of tapped the brakes on those at the moment to see what happens here over the next few months. But at this point, we certainly are wide open to go forward. We're not going to back off. But they say we're going to build 10 locations or 15 locations over the next four to five months, it would not be us.

The next question is from the line of Michael Ward with Benchmark. Please proceed.

Could you elaborate on the chart from Slide 11 that indicates your brand mix, showing 70% premium luxury and over 50% comprising German luxury brands? There are concerns in the market about a potential decline in consumer spending, particularly in the U.S. and the U.K. What trends are you observing with respect to these consumers? Are orders and pricing remaining robust despite concerns about volumes, especially with regard to imports?

Well, let's just take the U.K., 90% of our business there is premium luxury, and we got 36,000 units on preorder with very good margins. So at this point, we've not seen a deterioration, very few cancellations when we look at it. So again, I think overall, the premium luxury customer is certainly even in the U.S. side. it's affordable. This morning, I think Mercedes made a comment how good their business was going to be based on the higher line, the quality and obviously, the technology that goes there. So when we look at our days supply, really premium luxury is 25 days. And again, when you look at new, it's 15 days here in the U.S. So again, I think the customers that we have all want these vehicles. And again, we're not charging over list price for these MSRP, I think, which is important as we go forward. But I think we have the right mix. We've been a premium player right from the beginning. And when you have 21 Porsche stores, and we've got 21 or 22 Mercedes stores just in the U.K., we're definitely dealing with a premium customer. And our big market shares with BMW on a worldwide basis were almost 23% of our total business.

Mike, this is Tony. Usually, with those brands too, those premium luxury brands, that consumer tends to be a little more resilient for longer in the purchasing cycle, too. So, we think our brand mix is in a really good spot.

Well, also, Tony, we talked a little bit about leasing. That lease customer has gone to buy because of the cash in his pocket. We got the benefit of coming back, and they'll offset some of that residual at the finance company with BMW Finance and Mercedes. I think we've got a great offense there as we go back into the market as leasing becomes more of a mainstream play for our premium customer.

Can you talk a little bit about the acquisition you made in the U.K. with the Mercedes?

Yes, it's a great opportunity. Neater Lawson refers to the factory stores in Europe, and Mercedes has decided to divest from those globally. We successfully negotiated the purchase of five locations in Northwest London along with three service centers, which aligns perfectly with our existing operations, especially since we have a large Audi dealership there and a Jaguar Land Rover store in North London. By bringing these businesses together, we anticipate generating $550 million in revenue. This acquisition is the largest we've made since we established Sytner from the very beginning.

That's right.

Yes, in the U.K. So we're pretty excited about that. And to me, the sites are amazing. The one on the M4 coming in from the airport is world-class. So it gives us a real opportunity to grow in that brand.

Are the multiples paid apples-to-apples with the U.S. acquisition or...?

Well, there are a lot of veterans in the U.S. a lot of veterans.

Your next question is from Daniel Imbro with Stephens, Inc. Please proceed.

I want to start on the PTS side of the business. Obviously, there's a lot of moving parts there, but surprisingly strong, kind of driving nice upside versus consensus. Can you just talk about within that, I would guess, one way was slower because moving has slowed, but kind of how you move that capacity and how you utilize it and then what your outlook is for the fourth quarter and into 2023 for the PTS business?

Revenue increased by 21% to $3.5 billion, achieving a record $476 million in earnings before tax, which is a 14% rise. Breaking it down by product lines, full service leasing brought in $1 billion, up 10%. This includes our contracts with clients for equipment, making it the largest segment of our business with annual economic adjustments. Our commercial rental revenue reached $653 million, up 24%. Notably, about half of this revenue comes from our lease customers who require additional equipment as their demand fluctuates; for instance, Coca-Cola increases its truck needs in summer while battery companies need more supplies in winter. Our rental utilization stood at 82%, with 77,000 units in our fleet, meaning almost 65,000 of those units are rented out daily. Compared to our largest competitor, we have nearly twice the rental business, bolstered by having the best equipment. This positions us well, especially with favorable pricing. The consumer rental market, particularly one-way rentals, has slowed down due to decreased movement among people, especially in certain capitals. However, we have effectively repurposed those units for daily rentals in our markets, which has supported our commercial rental growth. Logistics revenue rose by 13%, and we've made substantial strides in that area. Notably, housing market slowdowns have also impacted one-way rentals. Overall, full service leasing, rental utilization, and logistics are performing well. Importantly, we've scaled our fleet from 300,000 to 400,000 in recent months and have more trucks available for sale over the next few years, enhancing remarketing opportunities. Our sales increased from $74 million to a gain of $120 million, with around $21 million attributed to our PHE segment. The truck market is currently strong, and while it's uncertain how gross per unit will evolve, we expect to sell more units as we grow. We have a workforce of 40,000 people, operate 950 fully owned locations, and utilize around 2,000 agents for some of our rental operations. Our brand remains robust with a capable management team. As we progress, we can discuss the advantages we derive from the tax base associated with PTS.

Sure. As Roger mentioned, we've received $173 million in cash distributions this year. We also benefit from substantial cash tax savings due to all the trucks and trailers currently in operation. This year, there are over 400,000 units, with more than 70,000 trucks on order. As that capital is spent, the resulting depreciation is reflected in our tax returns as a partnership. This allows us to defer significant cash tax savings and leverage that advantage as well.

Okay. Great. Appreciate all the color. And then for a follow-up, Roger, I wanted to ask one on the F&I side of the business. Obviously, during the quarter, some SEC headlines just around potentially cracking down on that side of the industry. Can you just talk about a bit what you think the risks are that could be for your business or the broader industry from what you've seen so far from the proposed legislation?

I suppose this is the only race where I didn't want to be first when considering the F&I gross profit per deal. These are proposed rules, and I fully support the removal of unfair deceptive practices. This is not the kind of business we want to engage in, and I believe my peers feel the same way. Currently, about 40% of our reserve comes from finance, while 60% comes from product. If these rules are enacted, I think disclosure will be critical. Being a major player in leasing, we don't have much to offer lease customers since they typically have two or three leases. We need to wait and see what the government decides on this matter, but we definitely need to improve practices in the industry. It can only enhance our sector.

But for you guys, where you think you are maybe not doing as much as that the practices. Is there a big financial risk for you guys? Or is it still too early to know?

Too early to know, what do you think, Tony?

I actually, I think it's too early to know. They're just proposed rules. So it's too hard to speculate in terms of what the final adoption of the rules will be and any impact that would have on us, Daniel.

But I think having a true price of a vehicle and disclosure, so there's complete transparency, there's a lot of merit to that. And I think we have to understand how does that affect us from the standpoint of the business. In the old days, you had a payment book. They just gave you a payment, you know what you paid for the car. So we certainly come a long way. And I think we need to continue to make our business better and more transparent to our customer.

I believe another aspect to consider, Roger, is the docuPAD process we have implemented in all our U.S. stores, which facilitates digital transactions. Customers are presented with everything upfront and required to sign all documents we currently have. This could give us a potential advantage as these new regulations may be put in place.

When you look at our Google scores, our Google stores are world-class. So again, I think from a turnover standpoint, too, we have very, very low turnover with our salespeople. And one of those reasons is because they've got the right people, and they're delivering the right message to the customer.

The next question is from the line of Rajat Gupta with JPMorgan. Please proceed.

Do you hear me okay?

Yes, I hear you fine.

Great. Regarding SG&A, could you provide any updated metrics on productivity levels, sales force productivity, or store-level productivity? How should we anticipate the Company maintaining some of these as supply begins to normalize or inventory increases at the store? Additionally, earlier you mentioned some initiatives related to AI and automation. Are these efforts helping to reduce transaction times for the consumer? Any insights on that and how it's further enhancing productivity? Lastly, if we consider the possibility of GPUs returning to pre-pandemic levels for new and used products, what might the SG&A to gross ratio look like for the Company?

That's a complicated question, but I'll do my best to address it. From a gross profit perspective, we've previously discussed our consistent year-over-year increases from pre-pandemic levels to today, and we monitor this quarterly and sequentially. Currently, we're over $7,100 in gross profit. Supply dynamics are going to drive this change, and there's been a learning experience for dealers and manufacturers. For example, manufacturers like Toyota are unlikely to have 250,000 vehicles in dealer inventory again. A tighter supply will help us maintain our inventories. Regarding selling, general, and administrative expenses, we've reduced costs by 10% at our same-store businesses. It’s also worth noting that our turnover rates have decreased significantly. As we normalize, we anticipate SG&A will settle between 70% and 72%, compared to 78% previously. In looking at the quarterly increase, personnel expenses have risen by about $20 million, primarily due to employees returning post-COVID. The hiring market is competitive and impacts our compensation strategies, influenced by rising inflation. Additionally, other costs such as travel, utilities, and policies have increased, along with expenses related to rented properties. We expect SG&A to continue in that range. Gross profit will be influenced by availability and actions from original equipment manufacturers. On the topic of AI, we're implementing virtual scheduling for service appointments across 30 stores, enabling 24/7 availability for inbound calls, often answered within a minute. This tool has led to an increase in scheduled appointments at participating stores. We can also use our live team for outbound sales calls, which is crucial and will be rolled out to all stores in the coming months. AI also helps us engage with internet leads, providing two-way communication through text or email to schedule customer appointments. The implementation of these tools aims to enhance our service response time. Over the past 12 to 18 months, our salespeople have improved their productivity; where they used to sell 8 to 10 vehicles, they are now selling 11 to 13. The performance of our sales team is certainly improving.

Yes. And from an automation standpoint, we are just scratching the surface, but we have a lot of opportunities working both in the U.S. and the U.K. to improve efficiencies through automation, in the front part of our business and certainly in the back. So it certainly helps to improve our efficiency and our costs, as you mentioned, but it also helps us from a consistency standpoint and a compliance standpoint as well. So we look to continue to make further investments in that area.

It's a huge opportunity for us.

It really is.

Got it. That's helpful. Just a follow-up on capital allocation. Any updated thoughts there? The pace of buyback has been pretty strong, 9% to 10% float reduced. Is that still the number one priority in the near term for the Company. Curious if you could give us your latest and greatest on that.

I'll let Shelley answer that for me.

Thanks, Roger. So as I mentioned, we hit $2 billion in trailing 12-month EBITDA for the first time in September here. So we have a lot of priorities, Rajat. But it's all about being balanced. If you look at how we've spent our capital allocation over the last couple of years, it's roughly 50-50 in terms of growth and return to shareholders. As Roger mentioned, we just made our largest acquisition in the U.K. with the Mercedes-Benz dealerships, and we've grown and we continue to grow on our diversified path. So we've made those acquisitions in truck. We've made significant acquisitions in our auto side, both internationally and domestically. And we continue to spend CapEx approximately $200 million year-to-date on manufacturer CI requirements, supporting our EV development, both from a manufacturing standpoint and for our customers, IT like we talked about and that land for future development. From a return-to-shareholders standpoint, we continue to remain strong, and I would look on average over the next few years to be 50% growth, 50% return to shareholders. But so far, returning almost $800 million is certainly providing excellent shareholder returns.

Got it. And just maybe just follow-up on that. Based on the leverage you have today adjusting for the leases, how many more turns can you add today to make sure you're still within the bonds of rating agencies?

Yes. With our current rating, we could increase lease adjustments up to 4 times, while we ended the quarter at 1.8. This gives us plenty of room from a leverage perspective and regarding our other debt covenants. We've been higher in the past, and when the bond market is favorable, we could take advantage of it. However, at this moment, considering our EBITDA and current liquidity, there is no urgency for us to do so.

And we have 35% of our debt at fixed rates, too, right now.

I think we've discussed this already. As we entered COVID and explored our options concerning the acquisition costs of some businesses, we decided to minimize leverage within the Company. Over the past 12 to 18 months, we've reduced nearly $1 billion in debt from our working capital, putting us in a strong position. By the end of the quarter, the only debt remaining from our bonds was $400 million in mortgages, which we are managing through financing companies that are supportive of our business. We believe we have the right strategy in place and are prepared for significant opportunities. However, keep in mind that we are looking broadly across various sectors, including trucks and our operations in Australia. We recently received a $75 million order for data center standby power using our MTU products. These successes are beginning to emerge due to our Company’s reputation, and our diversification strategy, as Tony describes it, is certainly paying off.

And those leverage efforts saved us $40 million in annual interest. So that is not a small amount for us.

The next question is from David Whiston with Morningstar. Please proceed.

I wanted to first start on the Mercedes deal in London. Do you have to divest anything with this? Or is there a cap on the number of stores that you may be approaching, anything like that?

No, we don't have a framework agreement in the U.K. At this point, it gives us 21 Mercedes stores in the U.K. plus the additional service centers that they had a from a factory perspective. So it puts us in great shape.

Okay. And CarShop revenue comps are down 12% same-store. Obviously, I know there's a big problem with used vehicle affordability both in the U.S. and U.K. Is that basically the entire reason for that decline? Or is there anything else going on?

It's all related to vehicle availability and our ability to acquire affordable products for consumers. It's very difficult to find the right product that aligns with that one price model.

We discussed the need to go deeper into our analysis. By that, I mean looking at vehicles that are zero to six years old or zero to eight years old. We're purchasing quite poor-quality vehicles and then attempting to rebuild them, which increases our policy costs. As a result, we've decided to refrain from this strategy. On the OEM side, we've taken a lot of loaner cars out, but we remain fully committed to the brand. We continue to grow, as mentioned earlier; we have properties and stores in the U.K. that we plan to open. However, the used vehicle market is challenging, and it's difficult to determine who has the right approach. While vehicles are available, issues like logistics costs and reconditioning complicate the process. Additionally, with rising interest rates and changes in online business and credit scoring, the situation is precarious. We want to use this time to streamline our operations, eliminating anything that might hinder our efficiency. We are on the right path, as our individual stores are profitable, but when you factor in our overheads, it's crucial that innovations like AI help us improve overall business handling, which is affecting our profitability. Would you agree, Tony?

Absolutely.

That's not just in the U.S., but it's in the U.K. also.

The guys in the U.K. are working on a big project to automate the processes at CarShop to drive more efficiencies there as well.

Yes. In the past, many people would come in on the weekends to buy cars. Now, they can easily schedule appointments for Tuesday, Wednesday, or Thursday, which results in fewer people on-site and a better transaction experience. Guests feel more satisfied when they drive away in a new car. These improvements help us build the brand while also reducing costs.

So David, one of the things we're focusing on is changing how we source our vehicles, moving away from auctions to buying directly from consumers. These would be individuals who may not buy from us but are looking to sell their car. Instead of going to third parties, they're coming to us for evaluation, and then we purchase these cars for our business. These tend to be some of the most profitable vehicles we can acquire and later resell in our stores. It's an ongoing effort, and in the U.K., we also utilize the Sytner closed bid auction to obtain off-branded vehicles that would typically go through the franchise business, allowing us to channel those into the CarShop operations in the U.K. We have many initiatives underway to boost sales and enhance efficiencies in that business, but it will take time as affordability remains a challenge.

I understand. You mentioned logistics. And I know for everybody that's really gotten terrible, especially for trucking. I mean you have a really unique angle into the trucking industry. Is there any opportunity for you guys to get some trucking savings through the related party business? Our challenge is that all vehicles are highly specialized equipment. In the trucking industry, achieving utilization is key. When we can't acquire enough used cars and only transport two or three at a time with a car hauler, it becomes very inefficient and costly. We faced similar issues long ago with Anchor Motor Freight and ultimately couldn't make it work. To transport cars across the country, many have invested in their own equipment. We tend to focus on a more localized area for our operations. Once we try to source cars beyond a 200-mile radius, the costs rise significantly. Unfortunately, we don’t have a straightforward solution for that issue, and our logistics operations wouldn’t work in that market due to insufficient specialized equipment.

Correct. Okay. And just one more question. If the macro situation gets a lot worse, would you be likely to continue buying back stock? Or would you prefer to hold onto cash, following the cash is king principle?

Well, I think we're going to look at our options, quite honestly. Harding cash, I trust, I would say that. I think what we would do is continue to look at what are the options. We will have a certain amount of CapEx as necessary. I think the market should understand that we've increased our dividend 24% four times so far this year. So we are certainly trying to pay back to the shareholder. Obviously, being a shareholder myself, we like it. And I think that we'll continue to look at what's best for the shareholders, and that will be what will drive our decisions.

There are no additional questions waiting at this time. So, I will turn the call over to Mr. Penske for closing remarks.

Ana, thank you, and everyone, thanks for joining the call today. We'll see you at the end of the next quarter. All the best. Thank you.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.