PAG - NYSE

Ladies and gentlemen, good afternoon. Welcome to the Penske Automotive Third Quarter 2023 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately 1 hour after completion through November 2, 2023, on the company’s website under the Investors tab at www.penskeautomotive.com. [Operator Instructions] I’d now like to introduce Anthony 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 third 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 am available by e-mail or phone for any follow-up questions you may have. Joining me for today’s call is Roger Penske, our Chair and CEO; Shelley Hulgrave, EVP and Chief Financial Officer; Rich Shearing of North American Interoperations; Randall Seymore, International Operations; 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 future results may vary from our expectation because of risks and uncertainties outlined in today’s press release under Forward-Looking Statements. I’d 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.

Yeah. Thank you, Tony. Good afternoon, everyone, and thanks for joining us today. Our diversified business really produced another solid quarter, driven by strong performance from our North American Automotive and Commercial Truck Operations. The strong performance in North America was partially offset by lower earnings from our U.K. Automotive Operations, higher interest expense and lower equity earnings from our investment in Penske Transportation Solutions. As previous announced, third quarter results include approximately $6.2 million of costs related to the loss of inventory, property damage and business disruption from a hailstorm in Austin, Texas. It impacted our Texas -- Toyota, Honda and Hyundai dealership, 750 vehicles worth $27 million in inventory. During the third quarter, total units delivered increased 12% to 122,000, which includes 8,695 agency units. Good news is revenue increased 8% to $7.4 billion and our same-store retail revenue automotive increased 9%, including a 9% increase in service and parts. Same-store retail automotive variable gross profit per unit declined $466 sequentially from the second quarter of 2023 to $5,180. Same-store retail commercial truck gross profit increased 6%. Our net income was $263 million and earnings per share was $3.92. Last week, we increased the dividend by $0.07 per share or $0.10 per share to $0.79 per share. Let me now turn to our auto operations. Demand for new vehicles remains solid and availability, I would say, is improving. We continue to take forward orders. Our U.S. presold inventory remains approximately 40% to 50%. In the U.K., our forward order book is 24,300 units and gross is only down 2%, representing about $98 million. Automotive operations in the U.K. during the third quarter were impacted by supply challenges, stop sales and a challenging used vehicle market, and of course, March is a registration month, so it’s awful key for us from the standpoint of our operation and profitability. Orders for 493 new vehicles were unable to be delivered in September. In addition, same-store used vehicle gross profit declined 30% as pricing challenges impacted the used market. Let’s look at our retail automotive business on a same-store basis for Q3. Total units delivered increased 10%, service and parts revenue increased 9% and gross profit, by the way, was up 10%. Service and Parts revenue growth has been driven by an increase of 10% in customer pay, 7% in warranty and 14% in collision repair. Our variable gross profit remains strong and the higher than historical levels, obviously, for example, variable gross per unit of $5,180 is $2,000 per unit higher than it was in Q3 2019. Let me now talk a little bit about Penske Transportation Solutions. PAG owns 28.9% of PTS, which provides us with equity income, cash distributions and cash tax savings. PTS currently manages the fleet of over 442,000 trucks, tractors and trailers. In the third quarter, operating revenue increased 4% to $2.8 billion. Full service contract revenue increased 13%. Our logistics revenue increased 2%, while rental declined 9%. PTS generated $291 million of net income. Our share of PTS earnings was $84 million, which declined by $51 million compared to Q3 last year. However, the good news is our share of PTS earnings increased $11 million sequentially when compared to Q2 of 2023. The decline in PTS earnings over the prior year period was mainly impacted, let me look at four items particularly, supply constraints and lease extensions increased the number of older units in operation and drove higher maintenance costs of $40 million in Q3. We also granted 18,000 lease extensions so far this year and 37,000 if you look over the last 21 months. Interest expense increased $64 million due to higher average outstanding debt obviously and the growth of our fleet, combined with $1.5 billion in re-financings and overall higher interest costs, a lower gain on sale of $61 million when compared to the record performance in 2022 as used truck values declined from historically high levels in the past. Commercial rental utilization was 80%, compared to 84% in the third quarter. Our full-service long-term contract business remains very strong, increasing 13% in Q3. We believe the supply of new trucks is stabilizing and will provide PTS with an opportunity to replace the older vehicles in the fleet in the near future and this obviously will drive lower maintenance expense. Also, we believe freight rates will begin improving in the near future, which has historically helped our remarketing profitability. Let me now turn the call over to Rich Shearing to discuss our commercial retail operation trucks.

Thank you, Roger. Our Premier Truck Dealership business represents 44 locations in North America and is an important part of our diversification. Earlier this year, we expanded into Greater Winnipeg, Manitoba market area, acquiring five new locations and $180 million in estimated annualized revenue. Including the acquisition, our operations in Canada are approaching $1 billion in annualized revenue. These new dealerships have been fully integrated into our existing operations in Canada and are performing to expectation adding an important new market and significantly expanding our operations in Canada. We remain one of the largest Commercial Truck retailers for Daimler Trucks North America. New Commercial Truck demand remains solid and continues to be driven by replacement demand. Our Class 8 allocation for 2023 remains sold out. Through September 30th, North American Class 8 retail truck sales were up 13% to 248,000 units. The current industry Class 8 backlog is 161,000 units, representing approximately six months of sales. During the third quarter, same-store retail unit sales decreased 11% when compared to prior year due to production timing and delivery delays in calendar year 2022, resulting in higher-than-normal retail sales later in the year. However, same-store gross profit increased 6% as gross margin increased on both new and used truck sales. Service and parts represented 65% of total gross profit and covered 132% of fixed costs in the third quarter. Q3 EBT increased 16% to a record $61 million and was the highest EBT quarter in the company history. As we look forward to 2024, our order book recently opened and we are securing orders and expect another strong year of Class 8 sales. There’s also good news on the freight front. After nearly two years of declining freight rates, a recovery is also forecasted in calendar year 2024. Lastly, I’d like to congratulate the team at Premier Truck Group for being recognized as the Truck Dealer of the Year for 2023 for its -- in its areas of customer responsiveness, workforce improvement and civic engagement. I would now like to turn the call over to Shelley Hulgrave.

Thank you, Rich. Good afternoon, everyone. I would now like to walk you through several key financial highlights and discuss the strength of our balance sheet. We continue to focus on 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 69.9% in the third quarter and is 800 basis points below the 77.9% in 2019. SG&A includes costs related to hail damage sustained during the quarter, which represented approximately 50 basis points of SG&A to gross profit. As a result of our efforts to gain efficiencies and control expenses in our U.S. automotive operations, compensation to gross profit ratio has improved by 30 basis points, while service and parts absorption has improved 240 basis points when compared to last year. Looking at our cash flow. We generated over $1 billion in cash flow from operations in the nine months ended September 30, 2023. During this period, we repurchased 2.7 million shares for $365 million and returned $136 million in dividends to our shareholders. Last week, we increased the dividend by almost 10% to $0.79 per share. So far this year, we have increased the cash dividend by 39% from $0.57 to $0.79. We continue to maintain a disciplined and balanced approach to capital allocation. Year-to-date, we have acquired $320 million in estimated annualized revenue and we have a pipeline of more than $2.5 billion under consideration. For the first nine months of 2023, 36% of our cash flow from operations funded share repurchases, 27% went to CapEx for growth and expansion, 21% to acquisitions and 13% to dividends. The remaining 3% of our cash flow from operations was used to repay non-trade floor plan. Our trailing 12-month EBITDA is nearly $1.8 billion. At the end of the quarter, our long-term debt was $1.7 billion. Approximately $1 billion of the long-term debt represents our subordinated notes with $550 million maturing in 2025 and the other $500 million maturing in 2029. The average interest rate on these notes is 3.6%. We also have $504 million in mortgages and $160 million in other borrowings at subsidiaries. Debt-to-total capitalization improved to 27.3% from 28.3% at the end of the second quarter. Leverage sits at 1x at the end of September. We also have the ability to flex our leverage up to 4x on a lease-adjusted basis, leaving significant opportunity for acquisitions and returning capital to shareholders. Our U.S. credit agreement provides for up to $1.2 billion in revolving loans for working capital, acquisitions, capital expenditures, investments and other corporate purposes and was fully available at the end of September. At September 30th, we had $104 million in cash, $415 million in vehicle equity and $1.4 billion in availability under our credit agreement. Total inventory was $3.7 billion, representing an increase of $200 million from December 31st. Floor plan debt was $3 billion. We had a 34-day supply of new vehicles, including 30 days in the U.S. and 34 days in the U.K. Days supply of new vehicles for premium was 37 and volume foreign was 19. Our current days supply of new battery electric vehicles is 52 days in the U.S. and 38 days in the U.K. Used vehicle inventory had a 38-day supply. At this time, I will turn the call back to Roger for some final remarks.

Yeah. Thank you, Shelley. She mentioned our balance sheet is strong, safe and secure, obviously, with a capitalization ratio of 27% and a leverage ratio of 1.0x, we have the ability to flex our balance sheet to maximize capital allocation. As we said earlier, since 2018, we returned over $2.5 billion to our shareholders. For nine months ended September 30, 2023, we generated $1.2 billion in earnings before taxes and that’s approximately, if you can believe it, double the earnings before taxes we generated for the full year in 2019. I think our results continue to demonstrate the benefit of our diversification across retail, automotive, commercial truck industries, cost control and a disciplined capital allocation strategy. We continue to challenge our cost while focusing on simplification and optimization and digitization to drive efficiency. I remain confident in our model and the performance of the business. Thanks for joining us today. I look forward to your questions.

[Operator Instructions] And our first question is from John Murphy. Please go ahead.

Good afternoon, Roger and team.

Hi, John.

Just a first question. You guys talked about this a bit and Shelley gave us some numbers. But as far as inventory levels, as we think about the light vehicle business in the U.S. and the U.K., how much were you hampered by shortages? I mean some of the numbers don’t sound too bad and I think people are thinking that chip shortage is done, but reality is I think there’s some -- the hiccups still there. And then on the commercial side as well, I mean, it sounds like you got real shortages there. When do you think those get resolved, it will take some time and what kind of impacts are these having on the business?

Okay. Let’s -- I put it in perspective, John. Our total inventory at the end of nine months only went up $200 million. So, obviously, we are still in a tight inventory situation. And then the impact in the third quarter because it’s a registration month, in the U.K., almost 500 units that hit us there, obviously, that had some impact. And I think that at this point, we look at U.S. inventory today, is at 2 million units and pre-pandemic is at 3.6 million. And our inventory, obviously, is only up, I don’t know what it is on a cost for sale, but obviously, it’s not much when you look at nine months. But I think right now, remember, we are premium, so we don’t get the big swings in the domestics that they might have in the other companies and our volume foreign, obviously, Toyota is one of our lowest day supply along with Honda and it continues to be there. So anyhow, I will let Rich talk about, Rich, what do you think about the truck inventory, where you see it as we go forward on heavy trucks.

Yeah. John, just clarification on comps. So we have seen a steadier supply this year of the Commercial Trucks. The comparison to the third quarter of last year was related to the peak end supply chain challenges at the beginning of 2022, mostly related to semiconductors and the commercial vehicles from a production standpoint and so that -- those delays early last year pushed more retail sales into the third quarter and fourth quarter of last year than what would have, say, normally occurred. And so now that we are back to a more normal and even distribution of delivery from the OEMs, the comps look -- in comparison were down compared to Q3 of last year. So from an inventory standpoint, we are still, as I said, sold out on every truck that’s being given to us. We have had minor cancellations that have been sucked up by other customers who haven’t got enough trucks over the last couple of years. And we are seeing the delays come down in body builders. This is a cab chassis manufacturing that goes to some sort of body company after the fact their supply chain is improving somewhat as well. And then if you look at overall Commercial Truck inventory, just from a numbers perspective, we ended last year at 506 million in inventory and we are at 494 million today. So fairly flat across the Board.

Okay. And then just a second one real quick. Your parts and service was particularly strong in the quarter. Roger, I don’t know if you can talk about sort of the different channels, customer pay, warranty. I may have missed some of those numbers. But how should we think about that going forward, because that remains a significant bright spot for the business and it seems like there’s even more opportunity going forward.

Well, I think, the same truck saw same-store is really meaningful. Revenue was up 9.5% and our gross profit was up 10.3%. And I think the key thing here is that, we are implementing AI that’s driving higher after-hour appointments, which we didn’t have before. Tech Video, in fact, 74% of our roads in the West are using Tech Video now. So we are not only getting better clarification of the service but also ability to upsell. And then our ELR, our rate of -- that we charge the customer effective labor rate is up 5%. And we don’t see BEV also not being a detriment to our fixed. In fact, it’s really better right now because the parts costs are higher and many of these cars have to be in the shop for a longer period of time. So I think the other good news is that our tech count is up 4% in the U.S. and 3% up overall.

And just one follow-up on that. The ELR for warranty work, is that up in a similar rate or is that difference between customer pay and warranty...

Well, no, you are – the -- I would say the warranty rate is, we have to go to the manufacturer at least on a 12 months to 18 months and we have to show established door rate, then they give us a rate. So we probably could move the door rate to the customer higher faster than we would get it from the OEM, but it somewhat follows that continuously.

Okay. That’s very helpful. Thank you very much.

All right. Thanks, John.

Next we will go to the line of Michael Ward. Please go ahead.

Hey, Mike.

Hey, Roger. Thanks very much for doing the call. So it looks like, basically, some of the supply constraints on the heavy-duty truck side are hitting you both on PTS and auto retail truck. And I am just curious on PTS. If I did my math right, the fleet -- the managed fleet has grown about 8% annually over the last decade. Is there any reason we won’t continue to see that type of growth? And then you have also had exponential growth in the profitability, despite it being down year-over-year for some quirky things. But is that what we can expect from PTS going forward?

Well, I can say this. I think I have said it on the call, we want to be at 500,000 units by 2025. Now that will move up and down a little bit on rental utilization, because right now, we are at 18,000, say, tractors in the rental fleet, probably, moving it down to, say, 14,000 here while we go through a little slower period to maintain our 80% to 85% utilization. But I see no reason not to continue the continued growth and now that’s a mix. Remember now, the straight trucks, light-duty trucks, tractors and trailers, and I think the -- our tractor fleet is the biggest in the world right now and we continue to grow. The problem is from our main vendors is getting the equipment. And their –we give -- one gives us trucks and the next one has a stop sale, et cetera. So I think when you look at our contract business, remember, if we are up 13% in contract that’s for one year and typically these contracts now would go forward for three years to four years to five years. So we really have a trailing opportunity here. So I see this revenue continuing to grow, and obviously, it’s easy for us to grow the fleet. We are not limited by franchise loss or any other things you might have on the automotive side.

And have you seen any easing in some of the constraints of the industry?

Let me let Rich. Do you want to answer that?

Yes. So, Mike, if you look at the parts side of the business, which really is an indicator of the challenges on the supply side of the business. And at its peak, there was 250,000 nationwide back orders from the dealers and we -- at any given time, as an entity Premier Truck, we have had about 10% of those nationwide back orders. To put that number in perspective, it was -- less than 10,000 would have been pre-pandemic levels, less than 10,000 national back orders for all of the Daimler Truck North American dealerships. So right now, as we sit here today, it’s just below 100,000. So it’s come down significantly and the supply chain is improving on componentry but still 10x where it was, say, pre-COVID levels. And then when you look at equipment, I just want to go back to our new unit sales. So we are up 8% on a -- through nine months on a year-to-date basis. It’s down 13% for the quarter and that’s the dynamics related to the supply chain of 2022, where a lot of retail sales got pushed later in the year. So we are still up on a year-to-date basis, 8% retail sales on the truck side.

Yeah. And the pricing is still strong and so that’s another good indication.

That’s correct. Yeah.

Yeah.

Okay. Thank you very much.

All right, Mike. Thanks.

Next we go to a question from Daniel Imbro. Please go ahead.

Daniel, hi.

Yeah. Hey. Good afternoon, everybody. Roger, maybe sort of one on the new vehicle side, just thinking about GPUs have been strong and they did step down a bit more. I wanted to maybe double-click on that. EV demand has been pretty tepid maybe at best. Can you talk about the GPU degradation or parse out what ICE GPUs are doing maybe from the first half into 3Q and then what EV GPUs did? And maybe is that part of the reason for this deeper step down in profitability here we saw a little bit in the quarter?

Well, we see growth is rationalizing. I think we have talked about it again before. We are not going to return to pre-pandemic for sure in the near future, I don’t believe. And when you look at our business today, 52% of our business is at MSRP. So, and again, being a premium luxury player like we are, we are not in the volume game. So we don’t have, as I said earlier, we might have 300 BMW stores and one of the Big Three has 6,000 dealers. So a lot more competition in the market. So I think that at the present time, our decline was about 450 sequentially. Again, when you look at the first quarter of 2023 versus 2019 or early or excuse me, first quarter this year, we are down 140. The key thing is the average transaction price has gone from $40,000 in the third quarter in 2019 to $5,660. So a certain amount of benefit we are getting is because of a higher cost base and I think this gets us to a higher base margin. Well, obviously, it’s got to be inventory driven. There’s no question about it. But overall, I think, the margin will stay pretty much the same, but will start to decline slightly based on more availability. I am going to let Randall talk a little bit about what you see internationally.

Yeah. I think on the new car side, remember that the market in the U.K. is nearly 17% -- 16.8% BEV, which is up slightly versus last year. We are -- because of our mix, we are higher than that. We are going to be, depending on the brand, we range between 20% and 25% on an average. So interestingly as well, we are seeing the BEV margins erode a bit. We wrote some business last year with deliveries this year towards the beginning of the year with better grosses. But on the BEV side, for some of the brands, it’s a little bit weaker. Interesting on Mercedes as agency, we have a fixed commission, obviously, margin on that, and typically, the BEVs are more expensive. So our margin on those with Mercedes was bucking the trend a little bit better.

And I think also when you look at BEV sales here in the U.S. we are selling at 80% or under MSRP, am I right, talk a little bit probably about inventory on BEVS here, Rich.

Yeah. So we have seen sequentially an improvement actually on inventory from the second quarter. At the end of the second quarter, we were about 15% of our overall inventory with BEV. That’s down to just over 11% through the end of the third quarter. Shelley alluded to the days supply earlier being about 14 days more than a comparable ICE inventory. And then you look at the percentage of our sales, it represents on a year-to-date basis that sale is about 6.7%. That’s up slightly 112 basis points from our percentage of sales through the second quarter. And to Roger’s point earlier, we are seeing -- and on average, with the brands that we represent about $2,400 lower gross profit per unit on the BEV sales. We have got to discount them to move them and as the OEMs are putting tons of money on there to try and drive customer demand.

Yeah. I think talking about we are selling them too. I think it’s interesting definition...

Yeah. So if you just look at it at an industry year-to-date 73, sorry, 37% of year-to-date BEV sales are in California, but of our sales, the PAG sales, 51% are going to California, 70% of our sales are actually through our West region, which is Texas, Arizona and California. So you have got only three states right now in the United States that are above the national average sales rate, which is 8% and that’s Texas, California and in New Jersey. And then if you look at California sales in Q3, it is 23% overall of sales were into California. So at some point, those markets are going to get saturated and it’s going to be a little more challenging in the other markets that currently have a lower adoption rate of BEVs compared to the national average.

Yeah. Randall, talk a little bit about BEV sales in the U.K. and the rest of Europe.

Yeah. So look, like I said, a little bit challenging. What I think an interesting statistic is it, specific in the U.K., the market’s up, like we said, but retail is only up 2% and fleet’s really driving this and the BEVs are really coming through those fleet purchases as you get the tax incentive through the scheme they have in the U.K. And then you look at countries like Italy and Spain, where there’s very, very little government incentives and you have got BEV percentages between 3.5% and 6% penetration. So it’s really followed the incentives. And the challenge that we have seen from an infrastructure standpoint and range anxiety, all the usual items.

Randall, it’s important to note, too, that the U.K. just within the last couple of months decided to push back the mandatory adoption of BEVs from 2030 to 2035.

Yeah.

So I think that comes into play and we should watch that carefully, too. So ICE will continue to be a more prominent player in that market we think for a longer period of time.

Most similarly, Tony, too California pushed back the ban of ICE vehicles as well.

They did. That’s right.

So I think today we have got a lot of people on premium side have bought their EV. There’s still a discussion about range, correct?

Yeah.

Obviously, that is critical. And then infrastructure, about half of it is working.

Yeah.

And I think that you are reading it in the papers today. I mean we are pushing back, I would have to say that every day we talk to our field, we are talking about BEV inventory and talking about how much more do you want. It’s what do you have and we are very careful on used pricing also. What’s your inventory in the U.S.?

Inventory of used BEVs is 134 units.

Yeah. What would it be -- you don’t know what is in the U.K. But again we are really watching it and I think the interesting we can actually take a BEV in on trade and sell it and get more for a used one gross profit than we can on a new one. So it’s -- there’s so many moving parts we can spend an hour here and talk about it.

No. That was all extremely helpful. I will follow up with one on the Commercial Truck side. Obviously, overall solid profit quarter, but we did see service and parts growth maybe moderate a bit. I am trying to understand that in the context of what we said about PTS, fewer delivery for PTS means that fleet spending $40 million more year-over-year on maintenance costs. So I would think if fleets are spending more on maintenance, that would drive maybe more service and parts growth. Can you maybe talk about why has service and parts growth moderated and kind of what the buckets were within that piece on the Commercial Truck side?

Yeah. So if you look at fixed operations in the Premier Truck Group business, year-to-date, we are up 8% for the quarter. We were up 4% versus prior year. So definitely a slowdown slightly compared to prior year. If you look into that then a little bit deeper in the constituents of that of service and parts, the majority of that is going to be related to the retail and wholesale parts side of the business. So you have got -- on the wholesale side, you have got a big business here where we are selling to independent repair centers. Then on the retail side, a lot of planned business [ph] carriers transition or transport goods down the federal highway system. So you have seen as the freight rates have declined year-over-year that the activity and utilization of some of the assets has declined as well and so that’s where you are seeing a slight softening in the fixed operations side of the business.

I think we had a benefit out of price increases.

Yeah. We have some parts depreciation in calendar year 2022 as well that would not be in those comparables this year.

Daniel, we are still covering 132% fixed absorption. So not a bad story by any means.

Yeah. That’s really helpful. I appreciate all the color and best luck going forward guys.

Thanks, Dan.

Thanks, Dan.

Next we go to Rajat Gupta. Please go ahead.

Rajat, hi.

Great. Hi, Roger. Thanks for taking the question everyone. Could you unpack the SG&A to gross in the quarter a little bit? How much of the sequential move was driven by just the GPU weakness versus some of the delivery delays in U.K. for BMW, Volkswagen? We heard from one of your peers that, that was an issue and just like any other items that you might want to call out that might have influenced the SG&A to gross? And I have a follow-up. Thanks.

Hey, Rajat. I can take that. As I mentioned, SG&A to gross was 69.9%, those 300 basis points, we have really whittled it down to three main areas. So as we mentioned, $5.5 million or 50 basis points related to the hail damage within the quarter. So we have got that. The other -- there’s another 100 basis points that relate to service loaners in vehicle maintenance. So up $11 million. But as we have talked about, service loaners represents an opportunity for us. It’s a way to cater to our service customers and improve our service gross profit as we saw as a result but then it’s also an excellent source of used cars. And then all of the peers have talked about, we are certainly struggling sourcing used cars. So the fact that we have got almost 7,400 of service loaners available really will be future gross profit for us, but it also helps with servicing our customers right now. So as they have affordability concerns, if somebody comes in, wanting to buy a new X5 and can’t quite stomach the higher payment, we can turn to our service loaner fleet and that not only helps the customer, he’s walking away with an almost brand-new X5. But his team is more in line with what he’s used to. So sometimes those costs aren’t always a bad thing and then the other 160 basis points or so is increased costs related to our personnel. But as we have talked time and again we are still very comfortable that everything will eventually normalizes out in that 70%-ish range. And there’s some seasonality in there -- here and there. But overall, we think we will ultimately get to that low 70% range.

Some of that personnel cost was related to some of the vehicles that couldn’t be delivered that Randall spoke to earlier.

Yeah.

That’s why gross was down.

Correct.

But probably say, 4 million or 5 million of gross that we didn’t get. We are up 3 million growth for the quarter year-over-year, where we lost 4 or 5 in that one, and then, of course, we had a higher cost. The only thing we have really talked about with the hailstorm.

Right.

And there’s other little things in there where we just don’t talk about at this point.

Got it. That’s clear. And then just in the U.K., any updated learnings from the Mercedes agency model. Looks like the GPU actually went up sequentially there from 2Q to 3Q. What drove that? Any other learnings you can share on profitability, SG&A changes, et cetera?

Yeah. Talk about...

Yeah. Sure. Yes. You are right, Rajat, the gross profit has gone up, and again, with a fixed commission, that’s going to be predicated on the sell price of the car. So we were at 3,278, so £3,278 per unit, which was up, if I look at 2019, it was £2,595 pounds per unit. Interestingly, in the acquisition we made about a year ago, the London stores, that’s at £3,564 per unit. So you get that richer mix of car. Obviously, we get the benefit from that. So our challenge and what the team has done a nice job and continues to do is we just got to reduce our cost base as we have a bit of a paradigm shift in how the customers transact. You see the traffic -- foot traffic into the stores down, but our digital, our Internet traffic is way up. So it’s really trying to convert and we have improved our conversion ratio on those leads by 8 points year-to-date compared to last year. So that’s the kind of stuff we are working on. We see service and parts continue to be strong there and grow. So look -- those margins are good. We just got to continue to work on those costs underneath and drive those opportunities to the store both digitally and walking in.

I think the good news here is that, we were the first guys in the barrel with agency. We are shifting to more product specialists than salespeople, which lower our cost. We are getting a lot more inquiries by significantly higher than we had before, because 95% are coming out of our PMA as we call it over here, which is a real positive. We have got 13,000 vehicles that are on site from the standpoint that the customer can look at. They have given us now some stock cars, which we didn’t have at the beginning and there’s some incentive to sell off the floor. So it’s very interesting. We had no idea interest rates are going to go over there. We are complained about agency. But I can tell you one thing, we have no cost and they are paying for our marketing cost to a certain extent. So I think our understanding of our cost base, the fixed margin, which is good. By the way, on BEVs, getting an extra 100 basis points, correct on that.

Right.

So I would say that, at the moment, we are learning and I am certainly Mercedes is learning too. Now they backed up a little bit, we understand other parts of Europe where they were going to introduce it, they are pushing it back because they are learning a lot about what’s going on in the U.K. So it might be a little bit about like BEV. overnight, they are going to say we are going that way everywhere. So I think we have got many coming up next year and we will see in 2026 we have BMW, but we are all over it.

Got it. Got it. Thanks for the color.

Next we go to the line of John Healy.

Hey, John.

Thanks for taking my question, guys. Hey. Roger, I just wanted to ask just kind of early thoughts in the last month or so on just the UAW impact maybe on the industry as a whole. Obviously, I know you guys have minimal exposure to the Big Three, but part of me feels like there is across, I mean, that, if someone is looking for an Explorer, they might be looking for a CRB [ph] as well or something along those lines. So any sort of thought about grosses in Q4. Do you think that there’s a magic number in terms of the strike last for so long that maybe it has a little bit of a sequential bump on grosses? And do you subscribe to a theory that the strike ends up maybe taking margins higher in the short run when we start next year maybe at a higher level than maybe where we are at today.

This is one time when I read the paper, it doesn’t affect us, because when you look at our brand mix, we only have 1% of our total revenue comes out of Big Three. And Toyota, Honda, we are not at this point affected and most of the German brands are already dealing with their unions that they have overseas. But look, having owned Detroit Diesel and adding UAW, look, what’s happening is they see all these profits the union does and the workers. And I think the unfortunate thing is that there’s a cost base that has been put in place which is much higher than the competition and that’s the biggest concern I think they have, they are trying to mitigate that with good negotiations with the Big Three and Koyalta [ph] with new hires coming in and melding into the top rate instead of six years, three years or four years, all these things are probably ways that you can kind of get together. But I don’t think we have seen the last page of this, and unfortunately, it’s going to put higher cost for the Big Three and I am glad where we are with our brand mix.

Got it. And you brought up Toyota. I think in the last couple of days, there was an issue with one of Toyota’s Koyalta suppliers. Does that have any sort of meaningful or risk to you guys in Q4 or 1Q of next year? Have they communicated anything to be aware of on just their production outlook?

Well, look, Rich, days apply. Can you tell days on Toyota?

It’s like…

Less than 10.

Yeah.

Yeah. Look, if they get an issue with a supplier, obviously, for the U.S. plants, stuff comes out of different parts of the world for them, it could impact us for sure.

Thanks, guys.

And our next question is from David Whiston. Please go ahead.

Hi, David.

Hey, everyone. A couple of questions. First, I think Shelley, you were talking earlier about the example of customer booking a new X5, you could get -- sell them one of our loaner as a use. I guess my question on that would be, how quickly can you then replenish that loaner?

Well, I think that’s what we are seeing today. Everybody is looking at our used cars and I said, look, we were hampered by not being able to turn loaners. We turn loaners typically in 90 days to 120 days.

Yeah.

Now that supply is coming we are going to suck up some of that availability in the loaner cars. So it’s all going to be done by based on availability. But in the premium luxury side, it’s really key because I can turn that 21,000 loaners 3 times a year, that’s 20 -- really that’s 21,000 more used cars. But I think we fill the pipeline based on the individual OEM. Maybe that’s not what you want, but that’s kind of what my thoughts are.

I mean, okay, let’s…

And our loaner cars were up about 10% at least from what they were.

Yeah.

7,300 million so it’s a normal [ph].

So that’s a big change and that’s going to help drive more of the used vehicle turn for the business.

Think about it, David, you have an MSRP and you say we depreciate the vehicles at 2% per month, some higher, some lower than say, 2%, so you get 6% off of invoice, and typically, the new car programs, whether it’s financing or whatever it is, go along on this vehicle that’s coming out of loaners, lot of them has a certain limited number of miles. So we get newer car rates, we have a depreciated vehicle, we take a customer that didn’t want to step up maybe to the X5 what have you, we can give an X3, it’s a loaner car with a lower cost base.

And the OEMs want us to have these service loaners. So we are incentivized to have them.

We are also starting to see a return of CPO business, too, because of the CPO business, certified preowned used sales are up year-over-year because of -- because we are having more availability.

We got our other impact we have had is lease returns.

Right.

We hadn’t been a lot of leasing. So leasing went down to 21%, I think, overall, right? In the premium luxury side, we were high 55% in some months.

Right. And we were 27% leasing this…

Quarter.

… this quarter.

Right.

I am sorry, what was your leasing penetration this quarter?

27% leasing this past quarter. That’s up from 24% a year ago, David.

You said that was up from 2020, Tony?

From 2021.

2021. And then going back to the EV discussion from a few minutes ago. What is your team’s opinion on especially next year once a lot of OEMs get access to the Tesla Supercharger network, and over time, we get more non-Tesla charging outlets out there in the U.S.? Do you think that’s enough to get EV demand moving or do we also need a lot more affordable models or is it still just way too early for EVs?

Well, I think you have hit on a couple of different things. I think the price points right now are still substantially higher with certain models than compared to ICE. And so when you combine that with the interest rate environment we are in, that’s problematic. So that’s one thing that hurts the demand for EVs. Roger talked about the infrastructure. So you have got the charging network that’s out there from a public standpoint, you got about 20% success rate of the charger being successful when you pull into it, which is pretty alarming when you think about it. So that reduces the confidence, still got the range anxiety. And then I think as it relates to all these other OEMs signing up on Tesla’s charging network, I am interested to see how that plays out with the Tesla owners today, because obviously, that was a network that was exclusive to them at some -- at one point. Now it’s been opened up to everybody else. I don’t know off the top of my head how many additional chargers Tesla is installing on a monthly basis as to whether or not they will keep up with this additional brands and other OEM EVs that have access to that network now. But if I am a Tesla owner, that would upset me a little bit. I had this proprietary network to the vehicle that I purchased that gave me some assurances that charging was going to be more convenient. Now I have got to compete with all these other OEMs on the same network. So I think it’s going to be a while before we get to a critical mass where the charging infrastructure really supports mass adoption of the vehicles.

And David, if it helps, you heard Randall’s penetration numbers on EVs in the U.K. and it almost gives us a preview of what it’s like in the U.S. And over in the U.K., I can tell you they still have the same range anxiety, they still have the broken chargers. So even despite a much higher EV penetration, there’s still that range anxiety and those issues with the infrastructure. So it may help next year, but I don’t think it’s also a problem.

Okay. Thanks for all the detail.

David, thanks.

Thanks.

And we have no other questions. I will turn the conference back over to Mr. Penske for closing remarks.

All right. Thanks everybody for joining us. We will see you at the end of the next quarter. Have a great day.