Penske Automotive Group, Inc. Q2 FY2024 Earnings Call

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

Thank you, Leah. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's second quarter 2024 financial results was issued this morning and is posted on our website, along with the presentation designed to assist you in understanding the Company's results. As always, I'm available by e-mail or phone for any follow-up questions you may have. Joining me for today's call are Roger Penske, our Chair and CEO; Shelley Hulgrave, our EVP and Chief Financial Officer; Rich Shearing from North American Operations; Randall Seymore from International Operations, and Tony Facioni, Vice President and Corporate Controller. Our discussion today may include forward-looking statements about our operations, earnings potential, outlook, acquisitions, future events, growth plans, liquidity assessment of business conditions. We may also discuss certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization, or EBITDA and our leverage ratio. We have prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures to their most directly comparable GAAP measure in this morning's press release and investor presentation, both of which are available on our website. Our future results may vary from our expectations because of risks and uncertainties outlined in today's press release under forward-looking statements. I also direct you to our SEC filings, including our Form 10-K and previously filed Form 10-Qs for additional discussion and factors that could cause future results to differ materially from expectations. At this time, I will now turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. In the second quarter of 2024, PAG generated $326 million in income before taxes and $241 million in net income, and $3.61 of income per share. Our revenues grew 3% to $7.7 billion, marking the highest quarterly revenue in the Company's history. The Company's financial performance for the three months ended June 30, 2024, was driven by its diversification, which included the continued strong performance of our retail automotive and commercial truck business. Highlights during the second quarter include record total quarterly revenue of $7.7 billion and a 10% increase in service and parts revenue to a record $753 million. Compared to the first quarter, retail automotive gross profit for new vehicle retail improved by $73, while our focus on efficiency and controlling costs drove a sequential decline in selling and general administrative expenses as a percentage of gross profit by 50 basis points to 70.2%. Equity earnings from Penske Transportation Solutions increased 63% sequentially, resulting in a 10% increase in earnings before taxes and a 12% increase in earnings per share compared to the first quarter of 2024. Total automotive units delivered increased 2% to 126,653 units, which includes 10,221 agency units. New units increased 3% while used units remained flat. Average new vehicle transaction prices increased 3% to $58,400, while used transaction prices declined 3% to $34,700. We continue to take forward orders with presold activity averaging between 10% and 20% in the U.S., depending on brand and region. 35% of the new vehicles sold in the U.S. were sold at MSRP, while approximately 90% of the BEVs sold in the U.S. during the quarter required significant discounting. Same-store retail automotive revenue increased 1%, however, service and parts increased 5%. As previously mentioned, gross profit per new unit retail increased $73 sequentially, demonstrating the strength of our premium mix, while gross profit per used retail unit declined $54 sequentially, reflecting stability in the used vehicle market. I'm pleased to report another sequential increase in earnings for Penske Transportation Solutions. During the second quarter, revenue increased 3% to $2.8 billion; full-service contract revenue increased 11%. Logistics revenue increased 2%, but rental revenue declined 13%. However, utilization of the rental fleet increased by 50 basis points to 79.2% compared to 78.7% in Q2 last year, and utilization increased 480 basis points sequentially when compared to the first quarter of 2024. Share of PTS earnings was $52.9 million, up from $32.5 million in the first quarter, representing a sequential increase of $20.4 million or 63%. Client PTS earnings decreased mainly due to a $43 million increase in interest expense from higher rates related to bond refinancing and a $40 million decline in gain on sale of used trucks. We sold 10,330 used trucks in Q2 2024, which is 28% more than we did last year in the second quarter. However, a weaker freight market has reduced demand for tractors and medium-duty trucks, resulting in lower values, which contributed to the reduction in gain. New units on order with various OEMs is down 50% to 21,700 compared to 41,500 in June 2023 and 60,000 in March 2023. We currently have 12,000 units for sale compared to 10,500 in June last year. Let me now turn the call over to Rich Shearing.

Thank you, Roger, and good afternoon, everyone. We are one of the largest commercial truck retailers for Daimler Trucks in North America, and the retail truck business is one of the core pillars of our diversified model. During the second quarter, we acquired three Freightliner and Western Star dealerships and two independent repair facilities from River States Truck & Trailer operating in Wisconsin and Minnesota, representing $200 million in estimated annualized revenue, bringing PTG's operating locations to 48 in North America. Since acquiring the retail truck business in 2014, we have grown revenue and EBT more than sixfold from approximately $600 million in revenue and $35 million in EBT to an estimated $4 billion in revenue and $225 million of EBT in calendar year 2023. During the second quarter, North American Class 8 net orders increased by 21%, while retail sales declined by 12% from the strong pace in 2023. At the end of June, the current industry backlog was 127,900 units, representing approximately five months of sales. This compares to a backlog of 175,200 at the end of June 2023. We believe sales of Freightliner and Western Star Trucks were impacted by availability challenges during Q2 as a fire at a factory disrupted production. But the good news is that this disruption was temporary and has been resolved. Premier Truck sold 5,248 new and used units in Q2, which was flat with Q2 last year, and same-store units declined 4%. Same-store SG&A to gross profit remained well controlled at 57.8%, and fixed absorption was 127%. Premier Truck Group produced a solid Q2 with EBT of $52 million and a return on sales of 5.7%. We believe commercial truck demand will continue to be driven primarily by replacement demand throughout the remainder of the year. As we look towards 2025 and 2026, the anticipated emissions change for 2027 should drive a strong prebuy and retail sales. Lastly, our Premier Truck business was temporarily impacted by the CDK cybersecurity incident in June 2024. Our teams quickly implemented our incident response plan and alternative processes to keep operations open. Systems were restored in early July, and we resumed processing transactions through the CDK system. We do not believe the financial impact to be material in the quarter. I would like to thank our incredible team and their collective efforts for working through this disruption. I'd now like to turn the call over to Randall Seymore.

Thanks, Rich. Good afternoon, everyone. I'll now discuss several activities taking place in our international operations. Earlier this year in the U.K., we added 16 dealerships with $1 billion in estimated annualized revenues. The integration of those dealerships continued, and we are very pleased with the initial returns. In the U.K., we rebranded and transitioned the operations of CarShop to Sytner Select to more closely align the used car operation with franchise dealerships and to reduce our cost base. We successfully transitioned nine locations and sold the remaining three locations to a third party. Going forward, we will operate nine Sytner Select locations in the U.K. market. In Australia, for over ten years, we have strategically built a diverse commercial vehicle and power systems business. During the second quarter, we expanded our retail automotive operations with the acquisition of two Porsche dealerships in Melbourne, Australia, one of the largest cities. With this acquisition, we expand our worldwide Porsche footprint to 24 locations. With our scale, we will leverage our existing infrastructure to drive growth and further efficiencies. These two dealerships are expected to generate about $130 million in estimated annual revenues. In the on- and off-highway markets, we continue to sell products in trucking, mining, power generation, defense, marine, rail, and construction sectors, supporting full parts and aftersales service across the region. Service and parts represent about 70% of our gross profit, so our focus on increasing units in operation is a key driver to the business. In the on-highway market, the brand-new Western Star X Series truck we sell was named the Truck of the Year in Australasia, and MAN truck sales are expected to be a record number for units sold in 2024. In off-highway, our power system operations continued to grow with turnkey solutions for hyperscale data centers, battery storage solutions, mining, and military applications. We continue to be a market leader in critical standby power, especially for data centers and continue to make deliveries of generators into prime power and hybrid applications. We are the market leader with a 55% market share of the high horsepower power generation segment. Our current order base for hyperscale data centers and battery storage systems is over $550 million for 2024 and beyond. I'd now like to turn the call to Shelley Hulgrave.

Thank you, Randall. Good afternoon, everyone. I will review our cash flow and balance sheet and discuss our capital allocation strategy. Our balance sheet and cash flow remain strong while we continue to grow our business through acquisitions and return capital to shareholders through dividends and securities repurchases. As of June 30, we had $115 million of cash and our liquidity was $1.7 billion. During the first six months, we generated $691 million in cash flow from operations, and our trailing 12 months EBITDA was $1.5 billion. Just last week, we announced an 11% increase in the cash dividend to $1.07 per share. So far, in 2024, we have increased the dividend three times while increasing the cash payout from $0.79 per share at the end of last year to $1.07, a 35% increase. Thus far, in 2024, we have repurchased 511,000 shares for $76 million. Including this dividend distribution and the Company's security repurchases, we will have returned approximately $271 million to shareholders so far this year. In addition, for the return to shareholders, we have completed acquisitions representing $2 billion in estimated annualized revenues. Our strong cash flow has allowed PAG to keep its non-vehicle debt and leverage low. At the end of June, our long-term debt was $1.77 billion, up $137 million from the end of December 2023. Debt to total capitalization was 26.2%, and leverage sits at 1.2x. It's important to reiterate that we have the ability to flex our leverage up to 4x on a lease-adjusted basis. New vehicle inventory increased $251 million from the end of December. Total inventory was $4.7 billion, up approximately $400 million from the end of December last year. Floor plan debt was $4.1 billion. Importantly, we had a 52-day supply of new vehicles and a 40-day supply of used. The day supply of new vehicles for premium was 55%, and volume foreign was $33 million. The day supply of new battery electric vehicles in the U.S. was 89 days. At this time, I will turn the call back to Roger for some final remarks.

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

And we go to John Murphy with Bank of America. Please go ahead.

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

We were approached by the family that owned the business, and initially, I didn't think we would be interested, but we signed a non-disclosure agreement. After reviewing the financials, we recognized the volume and the significance of them being a port pro dealer, which is important for our truck leasing and rental operations. The business is strategically located near most of the Ford support plants and the world headquarters, meaning that nearly 80% of their clientele is made up of employees and their families, presenting a solid opportunity for ongoing business. We believed the used car segment had considerable potential, especially given the ratio of six new to one used, aligning well with our core business interests and benefiting from a strong management team. Our plans include expanding the facilities, which will require some investment. In terms of pricing, people often inquire about the multiples we pay for businesses in premium luxury versus domestically and internationally. I can confirm that this transaction's goodwill is 50% of what we typically pay for premium, highlighting its attractiveness. This is a local opportunity that fits into our $2 billion acquisition strategy for the year, with 75% of the new volumes expected to be in the premium sector. We're on track with our goals.

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

Well, I think number one, you look at our SG&A, you look at our comp to gross on sales, what we've been able to do is reduce the number of salespeople we have, which has given most of our better sales team an opportunity to have more business and make more money. So, they're focused, and I think one of the other things, because of the premium, 35% of our Q2 sales were at MSRP versus 57% last year. That will come down, and we realize that. Our presold business is about 20%, depending on the brand or the region. More importantly, when you think about our brand mix, 32% of all of our business was leased, which is back to where it was over the last couple of years, which is powerful. It gives us these lease returns, which help us to feed our used car department. On the premium luxury side, it's probably 50%. So, to me, that helps us stabilize our margins going forward. The only thing that would be a negative, and I don't think that there's hundreds of dollars up or down that we're going to see over the next couple of quarters. The only thing would be that the BEV vehicles have the highest discount right now, probably about $6,000 under MSRP; whereas a normal ICE vehicle is somewhere between $2,500 and $3,000. So, I think overall, when you compare the gross profit, I went back, and we looked at 2019. When you look at this, the selling price is up almost $14,000, and when you look at gross margin, we have today, it's up $2,000. Some of that has to be the increase in the MSRP. But sequentially, we think we're in good shape. But again, it's deal by deal; we're not in a volume race. Depending on the mix of our business, we don't have much volume for the big three; they could pull down your grosses. But because our inventory is in such good shape, we're going to keep it there.

Roger, can you follow up on the potential impact of the rate environment we might be entering? Specifically, if rates were to increase by 100 to 200 basis points or decline in the next one to two years, how significantly could that support pricing, gross margins, and overall demand levels? What are your thoughts on this?

I think it will help the used car buyer for sure. Right now, we are up about 4% year-to-date. If you look at our used numbers through yesterday, we are up about 2%. I think the used will continue to grow because of affordability, which has been a problem. On the new side, because of our leasing, finance companies have been taking some of that interest rate hit by increasing residuals. So, I think that will balance out. But definitely, from a consumer perspective, I think it's going to help us. Again, we're seeing in Europe some of the high-priced cars, Ferraris, Lamborghinis, and Porsches, where people could buy them, drive them home and bring them back and get most of their money back. That hasn't been the case. So, we've lost some business temporarily because of the cost of interest and the cost to do business. I don't think the SAAR right now is at a pre-COVID level, which is over 17 million. If you look at the average payment, it's really over $700, so that has to come down to make a big difference. We think that benefit will come from the service business because we've gone from a five-year average current service to roughly six years. So, combined with some stability on the top line, as long as we keep our inventory, it gives you too much inventory, you're going to discount it and lower your grosses.

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

When I observe the dividend increase for this year, which is 35%, and compare it to the rise in share repurchase, should I interpret that as a change in your capital allocation strategy? What are your thoughts on this?

Go ahead, Shelley, why don't you take that one.

Sure. Our approach to capital allocation is focused on being opportunistic. As Roger mentioned, the Bill Brown acquisition represents a unique opportunity for us. We have had many such opportunities. Acquiring $2 billion in revenue internationally and establishing a new presence in Australia has been our primary focus, especially when considering dividends versus share repurchases. We have consistently stated that when our stock's multiples are lower than the market's, we aim to prioritize acquisitions. While those multiples have stabilized, dividends have always remained a top priority for us. This year, we've slightly increased our focus on growth compared to acquisitions, but dividends are still a crucial element of our strategy.

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

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

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

Yes. We completed the first rebranding in April and finished the last one just last week. Six of the nine locations were completed in Q2, and now we are fully finished. We had an opportunity when someone approached us about selling three of these locations, which led to a deal. One advantage of this is that it allows us to source vehicles from our existing franchise dealerships instead of purchasing them at auction. This change took us from CarShop to Sytner Select, which has a strong reputation in the U.K. market, so we anticipated some benefits from that transition. We are already witnessing a notable increase in our gross profit per unit due to improvements in vehicle sourcing. Additionally, we streamlined our operations by eliminating the head office for CarShop and utilizing the infrastructure of our franchise business, making our business model more efficient.

Mike, as we look at the business, we have to continue to trim and look at areas where we're not making the returns we want. We had great expectations for CarShop in the U.S. and in the U.K., but we saw the sourcing. The timing during the last 36 months was tough to source the right vehicles. We were trying to source a 9,000, 10,000, 11,000 pound car. With the issues you have with that, customer following and policy and buybacks, we couldn't gain traction as a quality company. We feel that we can fold those into our OEM side because if you think about it, now when you go to BMW Sytner, you will see a BMW certified and all the way down to a $30,000 BMW, where it is not at the OEM store Sytner Select. So, they feel like they are doing business with the same organization. There are lots of benefits there. We have the ability to do used car reconditioning for the OEM locations that are contiguous. So, I see it as a real opportunity to expand our parts and services, plus I think we'll have a very good return.

Yes. Thanks, Roger. Mike, if you look at the U.S., similar actions. We closed the Scottsdale location last year in January, and this January, we made the decision to close the South Brunswick location. If we're honest, we overbuilt those, and certainly, the market didn’t help us with the timing those opened. But by doing those actions, we mitigated our operating expenses, along with all the other actions that the team has taken to keep a tight headcount, advertising under control, and inventory managed well. Now that we see traditional sourcing channels opening up, we're up 10 percentage points in vehicles sourced through dealers and fleet and flat on auction, which has traditionally been the lowest gross profit per unit source we have. We've seen four consecutive months now of GPU above $3,000 per unit. Our sales are trending 20% to 25% above the prior year. As we look to the second half of the year, we feel good about sustaining the current performance we have there. So, in good shape.

If you find success with Center, will you consider transitioning to a more direct brand under the Penske name in the U.S., or will you continue with CarShop? Are the benefits in the U.S. similar to those in the U.K. if you start to integrate them more closely with the new vehicle locations?

Mike, I don't think they're exactly the same. We will continue with the CarShop branding since it has been successful for several years. We're considering potential expansions if the cost structure is right. I believe we may have overbuilt, and this applies to all our brands in the U.S. stores as well. There is a significant opportunity here for us. The acquisition management team has done an excellent job managing costs. Our compensation plans and the reconditioning processes we have are almost handled site by site, whereas in the U.K., we relied on one major site like Buzzard for fleet preparation.

Can I just clarify one thing? Roger, did you say 80 of your locations were in the automotive news top 150? So, 80 of the 150 automotive news top 150 dealers for Penske?

Yes, I was concerned because last year, we had 60 out of 100, and they raised the bar to 80 out of 150.

Next, we move to Rajat Gupta with JPMorgan. Please go ahead.

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

When I look at the same-store performance in parts and service, our customer pay was up approximately 3.5%. In the U.S., it was up just over 2% internationally, which gave us a 3.1% increase. Our warranty was significantly up, almost 9% and up 18% internationally. Our collision repair was up 2.2% in the U.S. and 9% internationally. The good news is when we look at our effective labor rates in our dealerships, we were up $8.43. The discipline of not discounting has made a big difference, and we talk about the number of mechanics, as we are up 8% year-over-year on mechanics.

That's helpful. Just on the severity side of things on electric vehicles versus ICE. Any color on the dollars there? How different it is? And maybe how that's changed over the last couple of years?

Let's be honest with each other. I think all the OEMs, if we were sitting here two years ago, were boasting on what they had invested in electric vehicles, 2030 was the year they expected to be fully electric. Obviously, when you look at the EV market, the expectation hasn't grown. We don't have the customers coming in. At the end of the day, we don't have the infrastructure; we've talked about that. Consumer acceptance, obviously, range anxiety. The selling price today for us is $6,400 less than MSRP, and I'm sure that the margin that the domestics hoped to get has decreased as Tesla has taken downward pricing action, which affects us. Long-term aspects, we need to consider the bridging strategy. I think this strategy will be plug-in hybrids. We see it. We have about 2,200 BEV vehicles in the U.S. with 91 days supply and in the U.K., we have a couple of thousand with 99 days versus 33 days roughly on us. In fact, we can buy used vehicles and make more money than we can on the new ones.

I think early on, there were concerns that all the fixed operations business would go away with respect to battery electric vehicles. It's still early in their deployment, and there's still a low percentage of the total market. But what we see is the opposite. If you look at our hours per repair order, we're at 3.1 hours per RO on the battery electric vehicles compared to 2.7 hours as an average across all 1.8 million repair orders we've done to date. Then you look at the dollars per RO; we're at $1,160 for a battery electric vehicle versus about $715 for comparative ICE repair. So, right now, BEVs are taking longer to repair and are costing more money. We'll see if that normalizes over time, but at present, it's certainly different than ICE.

That's helpful. One follow-up on the CDK outage. I was curious if you sensed any benefit to your business during the end of June, early July, from the outages occurring at CDK stores. Curious if there was any benefit to the automotive business in the U.S.?

I think there was a benefit from not being on CDK on the automotive side. We were impacted on the commercial truck side of our business. But I think the reaction by our team, whether it was our operational staff or IT folks, was really benchmark in my opinion of what they accomplished in a short period of time to get us back to an operating level within 48 hours, being able to open repair orders, generate parts tickets, and book truck deals. For the outage period we experienced from the middle of June to the end of the quarter, we didn't see it as a material impact.

But you've not seen any increased traffic at your automotive dealerships from consumers you might have otherwise gone through a CDK store?

No, nothing that we could measure.

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

Hi, everyone. Tony, I'm interested in used vehicles. Are your customers, who are generally more affluent, still facing challenges with used vehicle affordability like many Americans, or are they managing the higher rates and prices in the used market better than typical consumers?

So, David, this is Tony. I think affordability is definitely a concern when you look at the used vehicle prices. We see a more stable market today than we did six months ago. That's a good thing. Our overall sourcing of vehicles today on our franchise stores has us self-sourcing about 85% of those vehicles. Most of our sourcing comes from trades and lease returns; we're also doing a bit in terms of buy your car directly from the street. Also, loaner vehicles are a big part of our strategy in terms of taking those loaners and turning them into great used cars for sale in our dealerships. We have about 7,000 loaners, and if you turn these every three to six months or 5,000 miles or so, they become great used cars that become available for sale and address affordability concerns. We are looking at all those available sources and what we are doing to try to make it more affordable for consumers.

David, when you look at CarShop's success by not having to use the auction, we've seen better cars, more availability, and we're getting higher margins. This is in the $15,000 to $20,000 MSRP car range. The loaner cars have really hurt us the last couple of years; we've been putting used cars into loaners. We take a new car, properly spec it, and depreciate it by 2% to 2.5%. Over three months, you've got 4%, 5%, 6%, or even 7% depreciation from cost plus the OEM allows us to use all end market incentives, i.e., leasing or buying those cars. Think about how impactful it is to have 7,000 of those that we can turn; it's a tremendous benefit for us.

One other point, David, is that when you look in the U.S. at the number of certified pre-owned units we sell as a result of some of these programs, it's 38% to 39% of our overall used vehicle sales in the U.S. market that are certified pre-owned, which helps drive our service and parts as well.

On equity income, I know Q1 is generally seasonally weak for this year. Is it still fair to think of second-half equity income probably being higher than the first half? Or is something different this year? The major part of the income is from Penske Truck Leasing investment. I think revenue is about up 3%. Obviously, full-service leasing, maintenance contracts, and logistics all grew as we stabilize rental revenue and keep our cost structure. We see some light at the end of the tunnel on used trucks. Remember, we sold 10,000 trucks in the quarter compared to eight a year ago; we de-fleeted 9,000 of our rental trucks. These would have incurred depreciation, interest, and maintenance. We hope that market will stabilize. It's our intention to grow the business in the second half of the year and see better returns.

And just quickly on the automotive news list. You mentioned the bar got raised now it's top 150 stores. You guys have always done well on this list, and you're probably why they had to change it in the first place. Did you guys institute any kind of new employee benefits that might have driven an increase in the number of stores making the list?

David, nothing I could point to, but obviously, every year we do an employee survey to gain feedback from our employees on what we're doing well as an organization and what can be improved upon. Out of that annual employee survey, we form employee involvement committees aimed at focusing on the areas that the business needs to improve upon. It's a culture of continuous improvement and learning, and we see our turnover, obviously, which we consider benchmark at just under 20% for the last couple of years. So, I think we're doing a good job of keeping employees happy, ensuring we have an environment where people want to stay with us.

When you look at our facilities, if you take the back end of parts and service, we actually spend extra back there for our technicians and also for the people in our parts operations. Giving them good parts trucks and clean equipment makes a big difference in the image for the company. It's just not all front-end loaded.

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

I wanted to follow up on the PTS comment. You mentioned, excluding the gain on sale and interest about how the business actually grew year-over-year. Curious if you could share insight into the second half or next year. Has that business normalized from an earnings perspective? Should we expect any year-over-year pressure in the second half? Just curious any forward-looking thoughts you have?

Let's look at the business fundamentally. About 85% of the business is contractual, both on logistics and leasing. What has hurt us over the last 12 to 18 months has been the fact that we couldn't replace vehicles due to supply challenges; that's going away now. We have around 20,000 vehicles in operation. When you look at our used truck business, there's no question we're hoping the market will stabilize. We've been impacting it due to the number of tractors we're selling. I think the fundamentals are going to continue, and we expect a little help as the market improves. Remember, with commercial rentals, you have the pure rental where you go to rent a truck for a week, and then you have the extra vehicles run by our lease customers. That business was down $150 million year-over-year for the second quarter, which means the general marketplace for transportation is flat to down. We will continue to grow the company during the next six months and note a better return.

And we'll turn the conference back to Mr. Penske for closing remarks.

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

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