Ladies and gentlemen, good afternoon. Thank you for being here and welcome to the Penske Automotive Group Second Quarter 2023 Earnings Conference Call. This call is being recorded and will be available for replay approximately one hour after it concludes, until August 2, 2023, on the company's website under the Investors section at www.penskeautomotive.com. I will now introduce Anthony Pordon, the Executive Vice President of Investor Relations and Corporate Development. Please proceed, Anthony.

Thank you, Leah. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's second quarter 2023 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 our CEO; Shelley Hulgrave, EVP and Chief Financial Officer; Rich Shearing, North American Operations; Randall Seymore, International Operations; and Tony Facione, our Vice President and 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 displayed or 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 future results may vary from our expectations because of risks and uncertainties outlined in today's press release under forward-looking statements. I direct you to our SEC filings, including our Form 10-K and our previously filed Form 10-Qs for additional discussion and factors that could cause future results to differ materially from expectations. I will now turn the call over to Roger.

Thank you, Tony. Good afternoon, everyone, and thanks for joining us today. Before we discuss our second quarter results, I wanted to welcome Randall Seymore and Rich Shearing to the call today. As you may recall, earlier this year, we added additional depth to our leadership team. Randall Seymore, Former Executive Vice President, Global Operations for Commercial Truck and Power Systems, will now support our International Operations, and Rich Shearing, formerly President of Premier Truck Group, supports our North American Automotive and Commercial Truck Operations. These roles will work in tandem with me, our President, Rob Kurnik, and our executive leadership team while building further depth to ensure we have the best leadership team in place. Let me now discuss PAG's financial results for the second quarter. I'm really pleased to report strong second quarter performance from our diversified business model. As we will discuss, the quarter was highlighted by the performance of our automotive and commercial truck operations, partially offset with higher interest expense and lower equity earnings from our investment in Penske Truck Leasing. During the second quarter, total units delivered increased to 123,879 units, which includes 8,900 units in the U.K. Revenue increased 8% to a quarterly record of $7.5 billion. Our same-store retail revenue increased 6%, including an 11% increase in service and parts. Same-store variable gross profit per unit retailed increased by $163 compared to the first quarter of 2023. SG&A as a percentage of gross profit was 67.4% and improved by 10 basis points sequentially. Net income was $301 million and earnings per share was $4.41. Year-to-date through June 30, we've repurchased 2.6 million shares for $350 million. Let me now turn to our automotive operations. Demand for new vehicles remains strong and new vehicle availability is improving. However, we expect supply to remain below historical averages during 2023 for most of the brands that we represent. We continue to take forward orders and continue to see strong vehicle demand. In the U.K., our forward order bank represents 29,000 units. Grosses on these forward orders is approximately $132 million compared to $109 million at the same time in 2022. In the U.S., our current presold activity is approximately 50%. Beginning in the first quarter of 2023, we transitioned certain brands in the U.K. to an agency model for new vehicle sales. Under agency, we receive a fee from the manufacturer for the sale and delivery of each new vehicle, which is recorded in gross profit. We do not record revenue for the price of these vehicles. Looking at our retail automotive operations on a same-store basis for Q2 '23 versus Q2 '22, total units delivered increased 6%, new retail is up 9%, used retail is down 8%. Retail automotive revenue, however, increased 6%, including an 11% increase in service and parts. Service and parts is being driven by an increase of 10% in customer pay, 13% in our warranty business, and 14% in collision repair. In fact, many of our operations experienced record months in service and parts during the quarter. Total gross profit remained strong and higher than historical levels. For example, variable profit per vehicle was $5,612, which is more than $2,138 higher than it was in Q2 of 2019. Taking a look at CarShop, our unit sales were 18,206, down 10% as the continued availability of late model lower mileage vehicles remains very challenging. Revenue increased 2% to $475 million and variable gross profit per vehicle per unit declined 1%. We continue to focus on vehicle sourcing and cost improvement programs, including digitization to improve efficiency. We operate 20 locations and remain committed to the CarShop brand. We have one store ready to open in the U.K. when the used vehicle availability improves. Let's turn to our retail commercial truck business now. Our premier truck dealership business represents 44 locations in North America and is an important part of our diversification. During the second quarter, we expanded into the greater Winnipeg, Manitoba market area, acquiring five new locations and $180 million in estimated annualized revenue. New commercial truck demand remains solid, driven by replacement demand. In fact, our entire allocation of Class 8 products for 2023 is sold out. Through June 30, North American Class 8 retail truck sales were up 18% to 165,000 units. The current industry Class 8 backlog is 175,000 units, representing approximately six months of sales. During the second quarter, same-store unit sales were up 25%. Same-store revenue was up 19%, including a 4% increase in service and parts. Same-store gross profit increased 7%, looking at parts and service that represented 65% of total gross profit and covered 128% of the fixed cost for the business in the second quarter. Q2 EBT was $56 million, up $3 million compared to the second quarter last year. As a data point, June 2023 was the second-best month of EBT in the company's history. Let me now turn to Penske Transportation Solutions. PAG Group, as you know, owns 28.9% of PTS, which provides us with equity income cash distributions and cash savings. PTS currently manages a fleet of over 431,000 trucks, tractors, and trailers, with a goal of increasing the fleet to 500,000 by 2025. The second quarter operating revenue increased 6% to $2.7 billion. Full-service leasing contract revenue increased 14%, logistics revenue increased 6%, rental declined 6%. PTS generated $253 million of income, while our share at PTS declined by $63 million. The decline in earnings was mainly impacted by four particular items. We have over 40,000 units on order with a factory, which is the OEM factory as a result of supply constraints. We have 17,000 lease extensions so far this year and 36,000 extensions over the last 18 months. The older units in operation, obviously drove higher maintenance costs of $65 million in Q2. Our commercial rental utilization declined 410 basis points to 77.8%, which is still a strong number at 77% or 78%. Interest expense increased by $47 million due to a higher average outstanding debt resulting from the growth of the fleet combined with $1.5 billion in refinancing at overall high-interest rates. A lower gain on sale of $55 million was recorded when compared to the record performance in 2022. As we look forward, we believe the supply of new trucks is stabilizing, which will provide PTS an opportunity to replace from the lease extensions and certainly will lower maintenance expense. At this point, I'll turn it over to Randall Seymore to discuss our Penske Australia business.

Thank you, Roger. In Australia, New Zealand, and parts of the Pacific, we're the exclusive importer and distributor of Western Star heavy-duty trucks, MAN heavy and medium-duty trucks, and buses and Dennis Eagle, a refuse collection vehicle. We're also the leading distributor of diesel and gas engines and power systems, principally representing MTU, which is a Rolls-Royce company, also Detroit Diesel, Allison Transmission, and Bergen engines. Our business offers products across the on- and off-highway markets, including trucking, mining, power generation, defense, marine, rail, and construction sectors, and supports full parts and aftersales service through a network of branches, field service locations, and dealers across the region. The off-highway sector remains very strong, with nearly all heavy-duty engine allocations sold out for the remainder of 2023, predominantly serving the data center and mining markets. Some of these projects provide service contracts for five and all the way up to 20 years. Penske Australia also offers these mining engines through OEM mine haul trucks, excavators, loaders, and we also repower this equipment. In the Energy Solutions space, we recently delivered and commissioned the first 175-megawatt Bergen natural gas power station in Australia. Our current order bank for Energy Solution deliveries is over $275 million for the remainder of 2023 and through 2024. Approximately 80% of all of our gross profit in this region comes from service and parts operations. So increasing units in operation is a key driver of our business. I'd now like to turn the call over to Shelley Hulgrave.

Thank you, Randall. Good afternoon, everyone. I would now like to walk you through several key financial highlights and discuss the strength of our balance sheet. We maintain our drive and discipline to achieve operational efficiencies through cost reductions, automation, and other improvements gained over the last several years to help us maintain lower levels of SG&A to gross profit than historical averages. SG&A to gross profit was 67.4% in the second quarter, and this is 1,050 basis points below the 77.9% in 2019 prior to the pandemic. Most importantly, SG&A as a percentage of gross profit improved by 10 basis points sequentially when compared to Q1 of 2023. As a result of our efforts to control expenses in our U.S. automotive operations, our compensation to gross profit ratio improved by 30 basis points, and our service and parts absorption improved by 350 basis points over the second quarter of last year. Similarly, in the U.K., our compensation to gross profit ratio improved by 130 basis points, and service and parts absorption improved by 440 basis points. Looking to the future, we will continue to focus on simplification and optimization opportunities that will help deliver further efficiencies and cost reductions, particularly through automation. Looking at our cash flow, we generated over $600 million in cash flow from operations in the six months ended June 30, 2023. During this period, we repurchased 2.6 million shares for $350 million and returned $87 million in dividends to our shareholders. So far this year, we have increased the cash dividend by 26% from $0.57 to $0.72 per share. We continue to maintain a disciplined approach to capital allocation. Over the last 18 months, 60% of our cash flow from operations funded share repurchases, 23% to acquisitions, 12% to dividends, and 5% to CapEx for growth and expansion. Our trailing 12-month EBITDA is nearly $1.9 billion. At the end of the quarter, our long-term debt was $1.7 billion. Approximately $1 billion of the long-term debt represents subordinated notes with 55% maturing in 2025, while the remaining 45% matures in 2029. The average interest rate on these notes is 3.6%. We also have $586 million in mortgages and $160 million in other borrowings at subsidiaries. Debt to total capitalization was 28%, and leverage sits at 0.9x at the end of June and is consistent with March. At the end of the quarter, we have the ability to flex our leverage up to 4x compared to the 1.9x, but lease adjusted ratio, leaving us plenty of opportunity for acquisitions and returning capital to shareholders. During the second quarter, we amended our U.S. credit agreement to increase the facility borrowing capacity by $400 million. The amended agreement provides for up to $1.2 billion in revolving loans for working capital, acquisitions, capital expenditures, investments, and other corporate purchases. At June 30, we had $120 million in cash, $630 million in vehicle equity, and over $1.6 billion in availability under our credit agreement. Total inventory was $3.9 billion, representing an increase of $372 million from December 31. Floor plan debt was $3.2 billion. We had a 32-day supply of new vehicles, including 26 days in the U.S. and 36 days in the U.K. As a data point, our current day supply of new battery electric vehicles is 54 days in the U.S. and 52 days in the U.K. The days' supply of new vehicles for premium was 35 and for volume form was 15. Used vehicle inventory had a 45-day supply. At this time, I will turn the call back to Roger for some final remarks.

Yes. Thank you, Shelley. As Shelley mentioned, our balance sheet is strong, and I would say certainly safe and secure. The capitalization ratio of 28%. We have the ability to flex our balance sheet to maximize our future capital allocation. We're committed to offering convenient options to meet the shopping desires, of course, with all of our customers. This ranges from 100% online to our superior customer experience traditionally offered in-store. These digital options include a hybrid shopping solution, virtual test drives, remote signing for our customers, online scheduling and service, and photo and video, digital and approvals for upsell and service. One of our key efficient initiatives is leveraging artificial intelligence in both service and sales as we allow for automated interactions to answer basic service inquiries, set service and sales appointments using natural and conversational language even when our facilities are closed. Finally, I'm glad to say I'd like to announce that 44 of our U.S. dealerships have received notification from automotive news that they have been named to the best 100 dealerships to work for in 2023. I'd like to congratulate our team for their extraordinary efforts. In closing, I certainly remain confident in our business models. The results continue to demonstrate the benefits from our diversification across the retail automotive and commercial truck industries, our cost control, and a disciplined capital allocation strategy. Thanks for joining us today, and we'll turn it back to the operator. Thank you.

Thank you. And our first question is from John Murphy. Please go ahead.

Good afternoon, Roger and everybody. Just a first question on one of the standouts. I mean there's a lot of good stuff in the quarter, but the parts and service same-store sales are up almost 11%, following on a pretty good strength in parts and service. The comps get tougher, you're arguing that this might slowdown, but over time. But I mean, what is your view on the sustainability of the strength in parts and service? And are there any actions you can take on a micro basis that may support even further growth over time?

Well, hi guys. First on a same-store basis, John, our customer pay was up 10%, warranty was up 13%, and our PDI was up 27%. Body shops are now continuing to grow. As you know, during COVID, our body shop business really dropped. But I would say today, because of increased customer miles driven, it’s certainly driving more service. I think the use of AI that we're implementing across our network to interact with customers is really important because it allows us to schedule service appointments 24 hours a day. At 2 o'clock in the morning, our customers can call up and they can schedule an appointment. This gives us a clearer view of our daily operating capability through the number of sales available, and we do this certainly by AI, which has really opened up a new opportunity for us. I think with the car park and customer miles driven up, we've got an opportunity going forward, particularly in the premium/luxury side where the use of videos is providing great service as our technicians can video the car and communicate directly with the customer. Overall, we see a significant opportunity ahead, especially as cars are running longer due to pent-up demand. Again, we’re seeing strong performance on the auto side, and on the truck side, retail sales are also strong at Premier Truck.

Okay. One just second question real quick. On the SG&A, I mean, its great performance. I mean, I think there's some skeptics that say this is really a function of the grosses that may be inflated in the short run. But I mean, it is very good performance. I mean, how do you think about SG&A going forward and the sustainability at these levels, either as a percentage of gross or dollar value? How do you think about that going forward?

John, there are two levers, obviously, maintaining gross or growing gross profit. The SG&A for the last 12 months, the company generated $27 billion, with only a $40 million increase in SG&A over that period. When you look at it quarter-to-quarter, our SG&A is very impressive. We've improved sales efficiency - going from roughly 12.5 units per salesperson to over 13 recently. We’re focused on hiring better salespeople who can connect well with customers and leverage tools to be more effective. Our SG&A actually declined on a sequential basis. We’re implementing simplification and optimization strategies to take out further costs. Overall, our SG&A was only up $25 million on a same-store basis, and we remain focused on driving that effectively, knowing we'll have some pressure on gross profit.

Great. Thank you very much, Roger. Thanks everybody.

Thanks, John.

Next, we go to Rajat Gupta. Please proceed.

Hi, Rajat.

Hi, good morning. Thanks for taking the question. Just wanted to ask on PTS firstly. First quarter results were down about 30% year-over-year in the second quarter, down roughly 45%. You talked about some of the maintenance headwinds, lease extensions, and fewer gains on sales affecting profits. How should we expect the trajectory here into the second half compared to the prior year or the first half? What kind of trends should we expect as we move into the second half for PTS?

I think one of the things we've been navigating over the last 18 months is a higher gain on sale. While we've sold approximately 5,000 more units this year, our margin has decreased about $14,000 per unit. Overall, we anticipate a reduction in maintenance costs as we take out units. We have many lease extensions that have driven higher maintenance costs, and we believe it will stabilize as we complete this process. Looking at our rental side, while down, we believe we can optimize our fleet management by reducing certain units and improving our service delivery. We have a strong reputation and continue to outperform peers. Our first half profits equate to our entire profits from 2019, showing that our business is strong.

Got it. That's helpful. Maybe just on the used car business, unit comps were down roughly 8% in the quarter, but the grosses are very healthy. How should we strategize between units and gross profit margins into the third and fourth quarters? Should we expect similar unit declines while maintaining gross profit per unit? Or will there be a shift in strategy?

Let's look at the real world here. Everyone’s trying to acquire zero to four-year used vehicles, and availability will remain tight as trades for those vehicles have been limited over the last 18 months. We are working through our inventory of lease returns, but our ability to maintain gross profit margins is strong, as we plan to focus on this specific timeframe. We do anticipate more vehicles will come into the market over time, helping support this margin as we recover some trades from the OEMs.

One additional thing to consider is how we are sourcing vehicles too. We've put a concerted effort into buying more vehicles directly from consumers. In our franchise business in the U.S., sourcing from consumers has gone from around 4% in 2020 to 12% in 2023. When it comes to CarShop, sourcing directly from consumers has increased from 6% to 27%. We're actively changing our approach to sourcing vehicles to respond to current market demands.

Additionally, we incentivize our salespeople to ensure we acquire trades effectively, as access to the right inventory is key. The market will be slow to rebound, but we will continue to focus on traditional sourcing that works best for us, ensuring our growth going forward.

Got it. That's fair. Thanks for taking the question.

Thanks, Rajat.

Next, we'll go to the line of Daniel Imbro. Please go ahead.

Hi Daniel.

Hi. Good afternoon everybody. Thanks for taking the questions. Maybe to follow up actually on that topic you just touched on, Tony, around CarShop within this used business. Roger, you mentioned growth was hampered. Randall, I'd be curious if trends were any better or different internationally in sourcing? Is it just as tight?

If you go back three years ago, we were getting 22% of all our used cars from OEM programs, that’s down to 5%. Conversely, we've seen an increase in sourcing directly from consumers, going from 13% to 29%. When we combine self-sourcing directly from the consumer and trades, we've increased the figures significantly year-to-date.

We are committed to the CarShop brand with 20 unit locations and a particular focus on digitization to take costs out. We’re always prepared to take action if losses occur, which is why we closed an operation in Phoenix when necessary. We're maintaining our commitment to the business despite today’s challenges. We've estimates of needing 150-200 more units in the U.S. to achieve our goals.

Got it. That’s all really helpful color. Thank you. Then maybe shifting to the commercial truck side. Rich, the Class 8 backlog is substantial. Can you talk about risks into next year or how the freight backdrop might impact customers’ willingness to turn over their fleets?

Yes. Thank you, Daniel. Just to comment on the current environment, the backlog is still very robust at 176,000 units, representing about six months of retail sales, which will carry us through the balance of this year. Any allocations received this year remain completely sold out. Regarding emissions, regulations will go into effect in two steps for 2024 and 2027. The supply chain has restricted production capacity, which will support sales as fleets seek to replace older units with higher maintenance costs. Retail sales are projected to increase as these dynamics occur.

Thank you so much for the color. That’s all everyone.

All right. Thanks, Dan.

And next, we go to David Whiston. Please go ahead.

Hi David.

Hi, everyone. I guess first on PTS. I was curious if you could break up the difference between full service lease and maintenance versus commercial rental?

All our maintenance reflects both leasing and our logistics contract businesses. So, the total maintenance is up $65 million in the quarter.

Okay. And on the M&A market, do you expect to stay more skewed for the rest of the year?

We have a pipeline with a goal of five acquisitions this year, and we are pleased with what we see in the pipeline, but we remain selective based on strategic fit and potential for growth.

And finally, do you think there are too many EVs on the market right now, apart from Tesla?

In the U.K., government subsidies have pushed BEV adoption to around 16%. We are performing slightly better in this market with 20% of our sales in BEvs. However, exposure remains limited, and we are closely monitoring trade cycles.

Overall, we must balance the nature of the market, focusing on residual values and maintaining competitive pricing. While we have found some stability in our premium and luxury inventories, we will have to proceed with caution, given today's demand and affordability challenges.

I appreciate all the information. Thank you.

Great.

Mr. Penske, I'll turn it back to you for closing.

Thanks, everybody, for joining us. We'll see you next quarter. Thanks for the support from our team on the line. Thanks.

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