Penske Automotive Group - Q2 2024

Transcript

Operator (participant)

Good afternoon. Welcome to the Penske Automotive Group's Q2 2024 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through August 7th, 2024, on the company's website under the Investors tab at www.penskeautomotive.com. If you would like to ask a question, you may press one, then zero on your telephone keypad. You will hear acknowledgment that your line has been placed in queue. To remove yourself from queue, please repeat the same one-zero command. I will now introduce Tony Pordon, the company's executive vice president of investor relations and corporate development. Sir, please go ahead.

Thony Pordon (EVP of Investor Relations and Corporate Development)

Thank you, Leah. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's Q2 2024 financial results was issued this morning and is posted on our website along with a 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 CEO; Shelley Hulgrave, our EVP and Chief Financial Officer; Rich Shearing from North American Operations; Randall Seymore from International Operations; and Tony Facione, 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, and assessment of business conditions. We may also discuss certain non-GAAP financial measures such as earnings before interest, taxes, depreciation, and amortization, our 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 now turn the call over to Roger Penske.

Roger Penske (Chair and CEO)

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. In the Q2 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, and we're the highest quarterly revenues in the company's history. The company's financial performance for the three months ended June 30th, 2024, again was driven by its diversification, which included continued strong performance of our retail automotive and our commercial truck business. Highlights during the Q2 include record total quarterly revenue of $7.7 billion and a 10% increase in service and parts revenue to a record $753 million.

When compared to the Q1, retail automotive gross profit for new vehicle retail improved $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%. Also, our equity earnings from Penske Transportation Solutions increased 63% sequentially. As a result, earnings before taxes increased 10% and earnings per share increased 12% when compared to the Q1 of 2024. Let me now turn our attention to the automotive operations during the Q2. Total automotive units delivered increased 2% to 126,653 units, which includes 10,221 agency units. New units increased 3%, and used units were 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 pre-sold activity averaging between 10% and 20% in the US, depending on brand and region. 35% of the new vehicles sold in the US were at MSRP, while approximately 90% of the BEVs sold in the US during the quarter required significant discounting. Same-store retail automotive revenue increased 1%. However, service and parts increased 5%. Our customer pay was up 3%, warranty increased 12%, and collision repair was up 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 unit retail only declined $54 sequentially, representing the stability that we see in the used vehicle market right now. Let me turn to Transportation Solutions at this point. I'm pleased to report another sequential increase in earnings for PTS.

During the Q2, revenue increased 3% to $2.8 billion. Full-service contract revenue increased 11%. Logistics revenue increased 2%, but rental declined 13%. However, utilization of our rental fleet increased 50 basis points to 79.2% versus 78.7% in Q2 last year, and utilization increased 480 basis points sequentially when compared to the first quarter of 2024. PTS earnings of $183 million in Q2 increased sequentially by $71 million, but were down 28% when you still compare it to the Q2 of last year. Our share of PTS earnings was $52.9 million, up from $32.5 million in the first quarter, representing a $20.4 million sequential increase, or as noted, 63%. Decline in PTS earnings over the period due mainly to a $43 million increase in interest expense from higher rates related to bonds refinancing and higher outstanding debt. Also, 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 Q2. However, a weaker freight market has reduced demand for tractors and medium-duty trucks, resulting in lower values, which obviously 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 of 2023 and $60,000 in March of 2023. We currently have 12,000 units for sale compared to $10,500 at June last year. I now turn the call over to Rich Shearing.

Rich Shearing (President of North American Operations)

Thank you, Roger. Good afternoon, everyone. We are one of the largest commercial truck retailers for Daimler Truck in North America, and the retail truck business is one of the core pillars of our diversified model. During the Q2, we acquired three Freightliner and Western Star dealerships and two independent repair facilities from River States Truck and 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 six times 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 Q2, North American Class 8 net orders increased 21%, while retail sales declined 12% from the strong pace of 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 mirror 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 pre-buy and retail sales. Lastly, our Premier Truck business was temporarily impacted by the CDK cybersecurity incident in June of 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.

Randall Seymore (President of International Operations)

Thanks, Rich. Good afternoon, everyone. I'll now discuss several activities taking place in our international operations. As most of you know, earlier this year in the UK, we added 16 dealerships with $1 billion in estimated annualized revenues. The integration of those dealerships continues, and we are very pleased with the initial returns. Also, in the UK, we rebranded and transitioned the operations of CarShop to Sytner Select to more closely align the used car operation with franchise dealership 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 UK market. Turning to Australia, for over 10 years, we have strategically built a diverse commercial vehicle and power systems business.

During the Q2, 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. Turning to the on- and off-highway markets, we continue to sell products in the trucking, mining, power generation, defense, marine, rail, and construction sectors and support full parts and after-sales service across the region. Service and parts represent about 70% of our gross profit, so our focus on increasing units and 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 continue 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 55% market share of the high-horsepower power generation segment. Our current order bank 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.

Shelley Hulgrave (EVP and CFO)

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 30th, 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-month 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. So far, in 2024, we have repurchased 511,000 shares for $76 million.

Including this dividend distribution and the company security repurchases, we will have returned approximately $271 million to shareholders so far this year. In addition to 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 1.2 times. It's important to reiterate that we have the ability to flex our leverage up to four times 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. Day supply of new vehicles for premium was 55, and volume foreign was 33. The day supply of new battery electric vehicles in the US was 89 days. At this time, I will turn the call back to Roger for some final remarks.

Roger Penske (Chair and CEO)

Thanks, Shelley. Our results continue to demonstrate the benefit of our diversification across the retail automotive and commercial truck businesses, our cost control, and the 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 US 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 to all of you for joining the call today. I'll turn it back to the operator. Thank you.

Operator (participant)

Thank you, ladies and gentlemen. Once again, if you would like to ask a question, please press 10 on your telephone keypad. One moment, please, for the first question. And we go to John Murphy with Bank of America. Please go ahead.

Roger Penske (Chair and CEO)

Hey, John.

John Murphy (Managing Director)

Hey, Roger. Good afternoon, everybody. Roger, just a first question on this 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 opportunity. And if this could be potentially sort of a change of direction or a new opportunity, particularly as Ford is focused much more on commercial vehicles and through its Pro division.

Roger Penske (Chair and CEO)

Well, you mentioned the word opportunistic. I'd have to say that we were contacted by the family that owned that business. Initially, I didn't think we'd be interested, but we signed an NDA. We went through the numbers. We saw the volume. The fact that they were a Ford Pro dealer, which is really a commercial truck dealer also, was really important because that gave us the ability to leverage our business knowledge and capabilities within the truck leasing and rental business, obviously now in the sales business. The business is located near a majority of the Ford support plants and also the world headquarters. Almost 80% of the business that goes through that is employee business and family. Obviously, that's a great sustained opportunity for continued doing business.

We felt that the used car business had a real upside when we were probably 6 new to 1 used because that's part of our sweet spot in the business. And basically had a great management team. I think the opportunity there, obviously, will be for us to grow the facilities. I think we need to make an investment there. But the bottom line is people ask us, "Well, what are the multiples? What are you paying for the businesses in premium, luxury, either internationally or domestically?" And I would say this transaction was, and the goodwill is 50% of what we normally would pay for premium. So again, I think it's an opportunity for us. It's in our hometown.

I think that as part of our $2 billion of acquisitions that we've done so far for the year, again, 75% of that new volume is going to be premium. So we're still on track there. Obviously, you saw where we purchased two Porsche stores in Australia.

John Murphy (Managing Director)

Yep. That's very helpful. And then just a second question. Pricing remains very strong. GPUs were up, or 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 2 years. So what is your take and the potential maybe for you to sustain these higher GPUs? And we might be stabilizing it at these levels, just given your business mix, how you operate the business, and just sustainability is really the big question here.

Roger Penske (Chair and CEO)

Well, I think number one, you look at our SG&A, you look at our comp to growth on sales. What we've been able to do is reduce the number of salespeople that we have, which has given most of our better salespeople 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. We realize that. Our pre-sold 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. And that's 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.

I think when you look at it on the premium luxury side, it's probably 50%. So to me, that helps us stabilize our margins as we go forward. So to me, 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 has the highest discount right now, probably about $6,000 under MSRP. And if you looked at a normal ICE vehicle, it's somewhere between $2,500-$3,000. So I think overall, when you look at the gross profit and you compare it, I went back, Thony P went back for me, and we looked at 2019.

When you look at this, the selling price, obviously, is up almost $14,000 when you look back to 2019 to where it is today. You look at the gross margin that we have today, it's up $2,000. So we're holding the growth. 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. And I think depending on the mix of our business, we don't have a lot of volume for them. We have very little of the Big Three. They could pull down obviously your grosses, but because our inventory is in such good shape and we're going to keep it there. China, we're sitting with 11 days, one of our bigger volume foreign.

Certainly, when we look at the premium side, we're managing that quite well. Still waiting for vehicles that are on stop sale around the world with Porsche and some of the other key vehicles, which are going to help drive some better results, hopefully, in Q3.

John Murphy (Managing Director)

Roger, sorry, just to follow up on, but in the rate environment that we may be heading into, of rates actually starting to help a bit. I mean, I know obviously we can all run the math. What is your kind of take on if we see another 100, 200 basis point, or we see 100-200 basis point decline in rates in the next one to two years, how much that could actually help maybe support pricing and these grosses and the demand levels in total? What's your?

Roger Penske (Chair and CEO)

I think it'll help the used car buyer for sure. I think right now that the OEMs, in order to maintain, we're up, when you look at it now, we're up about 4% year to date. If you look at six months, or actually through yesterday, and up about 2% on used. I think the used will continue to grow because of affordability, which has been a problem. And on the new side, because of our leasing, the finance companies have been taking some of that interest rate hit by increasing residuals. So I think that'll balance out. But definitely, from a consumer perspective, I think it's going to help us.

Again, what we're seeing in Europe, some of the high-priced cars, the Ferraris and Lamborghinis and the Porsches, where people could buy them, drive them for a year and bring them back and get most of their money back, that hasn't been the case. So we've lost some business, I think, on a temporary basis because of the cost of interest and the cost to do business. So to me, I don't think the SAAR right now, certainly it's not at the pre-COVID level, which is over 17 million. And the annual monthly payment, if you look at that average, is really over $700. So that has to come down to make a big difference. So we think that the benefit we're going to get for the business is the service business because today we've gone from a 5-year average car and service to a 6-year, roughly.

So that combined with, I think, some stability on the top line. As long as we keep our inventory, because if you have too much inventory, you're going to discount it and you're going to lower your grosses, then it would be mixed. But interest rates, I see where the Fed held today. Hopefully, they're going to make some noise here in the next month or so. We'll see that benefit. It'll help us on our floor plan. And obviously, on a finance deal, it will help immensely. So it can't hurt us for sure.

John Murphy (Managing Director)

Great. Thank you very much. Appreciate it.

Roger Penske (Chair and CEO)

Thanks, John.

Operator (participant)

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

Mike Ward (Analyst)

Thanks. Good afternoon, everyone.

Roger Penske (Chair and CEO)

Hi, Mike.

Mike Ward (Analyst)

When I look at the dividend increase year to date, you're up 35%, and you compare that to the increase in share repurchase, should I read anything into that as a shift in how you're allocating capital, or what is your thinking there?

Roger Penske (Chair and CEO)

Well, go ahead, Shelley. Why don't you take that one?

Shelley Hulgrave (EVP and CFO)

Sure. So you know, Mike, our favorite word around here on capital allocation is opportunistic. And Roger talked a bit about the Bill Brown Ford acquisition, and it's one of those once-in-a-lifetime opportunities. We've really had a lot of those opportunities. And so to be able to acquire $2 billion in revenue and do it internationally, do it with a truck, and expand and get a new presence in Australia, that was our key focus in terms of dividends versus share purchases. We had said all along when the multiples on the stock were less than the multiples on the street for an acquisition, that was where we were going to focus. I've seen those level out a bit, but dividends have always been a high priority for us.

Roger Penske (Chair and CEO)

We've looked at, what is it, slide 6 on our presentation, and we've covered around a 60/40 split in terms of growth versus acquisition. It's a little bit higher than that this year, year to date, but the dividends remain a key part of our strategy.

Mike Ward (Analyst)

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 with the return rate, but don't read too much into it.

Roger Penske (Chair and CEO)

No. Yeah, 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 the highest in the share 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 and acquisitions.

Mike Ward (Analyst)

Okay. Randall Seymore, 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?

Roger Penske (Chair and CEO)

Yeah. So we did the first one in April. The last one we just finished last week. 6 of the 9 were done in Q2, but we're 100% finished now. We had an opportunity. Somebody actually came to us and said, "Hey, would you be willing to look at 3 of these locations to sell?" And geographically, 2 of the 3 really made sense in other ones. So we ended up making a deal. And the other benefit of that, going from, and we closed one. So the other benefit of having less is the sourcing of these vehicles. Instead of buying them at auction, we're able to take the trades from our contiguous franchise dealership. So we went from CarShop to Sytner Select. Number one, Sytner has a cachet, has a very high-quality reputation within the UK market. So we thought we'd get some benefit from that.

Number two was the sourcing, which is huge. So we get the trades from the franchise dealerships, and we're already seeing a pretty significant increase in our gross profit per unit because of the sourcing of those vehicles. And when I say getting the trades, it's a non-certifiable car. So if you take in a trade at Audi, it's a little bit higher on mileage or has a reason you can't certify it. Historically, we were wholesaling those through our electronic auction. You make a couple hundred GBP, but now we're able to take them at Sytner Select and retail them, increase our gross profit. We can sell more F&I products with it. And so that's the benefit.

Then the third point of this was we had a head office or a centralized infrastructure for CarShop, which we were able to eliminate and leverage the current infrastructure within our franchise business. So we were able to really make our business model or our expense model much more efficient too. I think, Mike, as we look at the business, we got to continue to trim and look at areas where we're not making the returns we want. And we had great expectations on CarShop in the US and in the UK, but we saw the sourcing. Obviously, timing during the last 36 months was tough to source the right vehicles. But we were trying to source a GBP 9,000, 10,000, 11,000 pound car.

With the issues you have with that customer following and policy and buybacks, we just couldn't get the stock when we wanted as a quality company. So feeling that we could tie them into our OEM side, because think about it, now when you go to BMW Sytner, you'll see BMWs that are certified, and you'll go all the way down and see maybe a $30,000 BMW that's not at the OEM store. It's at Sytner Select. So they feel like they're doing business with the same organization. So there's lots of benefits there. Then we also have the ability to do used car reconditioning for the OEM locations that are contiguous because we got small locations, don't have a lot of body shops.

So we'll start to use those big operations that we're doing this other reconditioning, and we'll utilize those for reconditioning of our used cars, plus even do some maybe work for some of the leasing companies that we do business with. So I see it as a real opportunity to expand our parts and service. Plus, I think we'll have a very good return. I spent a couple of days with Randall there a week or so ago. You walk in, it's professional. Ironically, we've had very little few people leave. In fact, they're more excited to work for Sytner than they were, I think, for CarShop. Let me let Rich talk a little bit about the CarShop change in the US

Rich Shearing (President of North American Operations)

Yeah, thanks, Roger. Mike, if you look at the US, similar actions. If you recall last year in January, we closed the Scottsdale location. January of this year, we made the decision to close the South Brunswick location. And I think if we're honest, we probably overbuilt those, and certainly the market didn't help us at the timing that those opened. But by taking those actions, we've been able to mitigate our operating expenses along with all the other actions that the team have taken. The headcount is tight. Advertising is under control. Inventory has been managed very well. And so now that we see some of the traditional sourcing channels opening up, we're up 10 percentage points in vehicle source 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 a unit. Our sales are trending 20%-25% above prior year on a monthly basis. And as we look to the second half of the year, we feel good about sustaining the current performance that we have there. So in good shape.

Mike Ward (Analyst)

Okay. Assuming you have success with Sytner, do you look at transitioning to more of a direct branding, example, using the Penske name in the US, or do you stick with CarShop? And are the benefits the same in the US that you would get in the UK if you started pulling them together closer to the new vehicle locations?

Rich Shearing (President of North American Operations)

Mike, I don't think they're quite the same. We'll continue with the CarShop branding here. We have it as successful. Remember, that CarShop was in place for a number of years. And I think at this point, we would look at areas maybe to open up under the right cost structure. I think we just overbuilt, and I think that we can sell all brands in the US stores too. So I think that there's real good opportunity here that we have. And I think the acquisition, the management team has done a terrific job in their costs. I think our comp plans, I think the reconditioning we have over here is almost site by site where in the UK it was more one big major site in Leighton Buzzard we're going to use for fleet preparation.

Mike Ward (Analyst)

I see. Can I just clarify one thing? Roger, did you say 80 of your locations were in the Automotive News Top 50? So 80 of the 150 Automotive News Top 150 dealers were Penske?

Roger Penske (Chair and CEO)

I was concerned because last year we were, I think we had 60 out of 100, and then they raised the bar on it. So 80 out of 150, correct.

Mike Ward (Analyst)

Wow. Congratulations on that. That's impressive.

Roger Penske (Chair and CEO)

Thanks.

Operator (participant)

Next, we will move to Rajat Gupta with J.P. Morgan. Please go ahead.

Roger Penske (Chair and CEO)

Great.

Rajat Gupta (Equity Derivatives Structuring)

Rajat, thanks for the question. Hey, Roger. Hey, everyone. Thanks for taking the question. I had one on parts and services. A pretty good resilient trend there. I was curious if you could dissect the US versus the UK in that business. Also in the UK, where there are more electric vehicle sales and more work being done on those vehicles, I'm 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. Thanks. I have a follow-up.

Roger Penske (Chair and CEO)

Well, when I look at the same store performance in parts and service, our customer pay was up approximately 3.5%. I think in the US, it was up just over 2% internationally, which gave us a 3.1% increase. Our warranty, obviously, was up. We talked about it significantly. Up almost 9% and up 18% internationally. And then our collision repair was up 2.2% in the US and 9% internationally. I think the good news is when we look at our effective labor rates in our dealerships, we were up $8.43. So the discipline of not discounting has made a big difference. And we talk about numbers of mechanics. We're up 8% year-over-year on mechanics, which I think is terrific. And certainly, we look at our over six months, our repair order count's up 2%.

Rajat Gupta (Equity Derivatives Structuring)

Got it. Got it. That's helpful. And 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?

Roger Penske (Chair and CEO)

Well, let's be honest with each other. I think all the OEMs, if we were sitting here two years ago, were pounding their chests on what they had invested in electric vehicles. They were going to be fully EV by 2030. Mercedes and GM and some of the other domestics had big opportunities, they felt, to grow market share with us. Obviously, when you look at it, the EV market, certainly the expectation hasn't grown. We don't have the customers coming in. And I think at the end of the day, we don't have the infrastructure. We've talked about that. Consumer acceptance, obviously, brings anxiety. And the selling price today for us is $6,400 less than an MSRP. And I'm sure that the margin that the domestics were hoping to get has been hit because Tesla certainly has taken downward pricing offense, which affects us.

And I think long-term aspects, when you look at it, we really have to look at what's the bridging strategy for it. And I think the bridging strategy will be plug-in hybrids. We see it. Toyota's talked about it. And I think that we'll only have a long time before we get to anybody fully electric. Look, I've driven them. They're nice to drive. But again, if it's a hub and spoke for trucks, it works. Heavy-duty trucks right now, we think it's a long pull because basically you put 5,000 or 6,000 battery weight into a tractor trailer. It reduces your economic payload, which is obviously not good. But again, when we look at our BEV inventory, we've got about 2,200 in the US We got 91 days supply in the US

In the UK, we've got 2,000 also, 99 days versus 33 days roughly on used. In fact, we can buy used ones and make more money than we can on the new. Rich, you got a question?

Rich Shearing (President of North American Operations)

Yeah. Rajat, I'll just add something from the fixed-op side relative to BEV. I think early on, there were concerns that all the fixed operations business would go away with respect to battery electric vehicles. Obviously, it's still early in their deployment, and they're still a low percentage overall of the total market. But what we see presently is the opposite of that. If you look at our hours per RO, 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. And 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. So we'll see if that normalizes over time.

But at present, it's certainly different than the ICE vehicles.

Roger Penske (Chair and CEO)

It's also costing the factories more money than they thought too. I can tell you the majority of the work we're doing in the shops is warranty. It's not customer pay.

Rajat Gupta (Equity Derivatives Structuring)

Got it. Got it. That's helpful. Just 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 some of the outages occurring at the CDK stores. Curious if that was any benefit to the business in the automotive business in the US Thanks. Well, I think there was definitely a benefit of not being on CDK on the automotive side. Obviously, we were impacted on the commercial truck side of our business. I think I go back to the comments I made in the opening remarks.

Roger Penske (Chair and CEO)

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 to where we could open repair orders, generate parts tickets, and book truck deals. So overall, for the outage period we had from the middle of June to the end of the quarter, we didn't see it as a material impact.

Rajat Gupta (Equity Derivatives Structuring)

But you've not sensed any increased traffic at your automotive dealerships? For consumers, you might have otherwise gone to a CDK store?

Roger Penske (Chair and CEO)

No. No. Nothing that we could measure. Understood. Great. Thanks for all the color and good luck.

Thanks, Rajat.

Operator (participant)

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

Roger Penske (Chair and CEO)

Hey, David.

David Whiston (Analyst)

Hi, everyone. Starting, hey, Tony. Just curious on used vehicles first. Your customers are generally more affluent. So are they just on the used side, though? Would you say they're still struggling much with used affordability like a lot of Americans are? Or can they handle the higher rates and higher prices better in the used market than the typical used consumer?

Thony Pordon (EVP of Investor Relations and Corporate Development)

So David, this is Tony. So I think affordability is definitely a concern when you look at the used vehicle prices that are out there. I think we see a more stable market today than we did six months ago. So that's a good thing. And when you take a look at our overall sourcing of vehicles today on our franchise stores, we're self-sourcing about 85% of those vehicles. Most of our sourcing comes from trades and lease returns. But we're also doing a little bit in terms of buy your car directly from the street. And then loaners is a pretty big part of our strategy in terms of taking those loaners and turning them into great used cars that become available for sale in our dealerships. I think in the US, we've got about 7,000 loaners.

If you're turning these things every 3 months to 6 months or 5,000 miles or so, they become a great used car, and they help with that affordability concern. So I think we have to look at all those available sources and what we're doing with that business to try to make it more affordable for consumers.

I think, David, when you look at the success that the guys have had in CarShop by not having to use the auction, we've seen better cars, more availability, and we're getting higher margin. Now, that's in a, say, 15-18 to 20 thousand MSRP car. I think Tony mentioned the loaner cars. It's really hurt us really the last couple of years because we've been putting used cars in loaners where we take a new car, which is specced properly, and we depreciate it 2%-2.5%. Over three months, you've got a 4%, 5%, 6%, or 7% depreciation from cost. Plus, the OEM allows us to use all of the in-market incentives, i.e., leasing or buying on those cars. And to think about 7,000 of those that we can turn, it's a tremendous benefit for us.

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

David Whiston (Analyst)

Okay. Thanks. On equity income, I know Q1 is generally seasonally weak. For this year at least, is it still fair to think of second-half equity income probably being higher than first-half? Or is something different this year?

Roger Penske (Chair and CEO)

Well, the major part of the equity income is Penske Truck Leasing and investment. I think we talked about it in some of my notes. We had growth in our revenue of about 3%. Obviously, full-service leasing and maintenance, contract maintenance, and also logistics all grew as we can stabilize the rental revenue and we 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 versus 8,000 a year ago. We depleted 9,000 of our rental trucks. Those would just eat us up in depreciation, interest, and maintenance. We think that we'll continue to see a benefit in the second half. Obviously, in June, it's always a big quarter because kids are going and coming out of school, etc., with our one-way business.

But overall, I think that we're in good shape. We've grown our lease fleet 4,200 units or 2.5%. So as we've brought the rental fleet down, we've also brought the lease fleet up. And I think I mentioned it earlier that the funding is done by bonds primarily and some retail and paper. We've been commercial paper. We've been able to keep our debt stable at about $15 billion in that company to cover our 440,000 units that we have. But we had thought that would go up. And then if the Fed does some moves here, that's going to help us from an interest because when you look at the quarter, we had a $40 million impact on gain on sale year-over-year. We had a $43 million hit on interest. So $83 million, nothing to do with operations. We were down only $70 million.

Obviously, we had good operating capability.

David Whiston (Analyst)

Thank you. And then just quickly on the Automotive News list, I know as you mentioned, the bar got raised. Now it's top 150 stores. You guys have always done really well on this list. You're probably why they had to change it in the first place. But I'm just curious, in addition to the overall count going up 50 stores, did you guys in the past year institute any kind of new employee benefit that might have driven an increase in the number of stores making the list?

Roger Penske (Chair and CEO)

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 that are aimed at focusing on the areas that the business needs to improve upon. And so it's a culture of continuous improvement and learning. And we see our turnover, obviously, which we would consider benchmark at just under 20% for the last couple of years. So I think we're doing a good job of keeping the employees happy and making sure that we've got an environment that people want to stay with us in.

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

Randall Seymore (President of International Operations)

Okay. Thank you very much.

Roger Penske (Chair and CEO)

Thanks, David.

Operator (participant)

We have a follow-up from Rajat Gupta with J.P. Morgan. Please go ahead.

Rajat Gupta (Equity Derivatives Structuring)

Great. I just wanted to follow up on the PTS comment. You mentioned excluding the gain on sale and interest. The business actually grew year-over-year. Curious if you could share any color into the second half or next year, has that business normalized from an earnings perspective? And should we continue to expect any year-over-year pressure in the second half? Curious any forward-looking thoughts you could give to this? Thanks.

Roger Penske (Chair and CEO)

Well, let's look at the business fundamentally. I think about 85% of the business is contractual. That's both in logistics and leasing. So we had economic escalators that drive that. And what's hurt us over the last, say, 12-18 months has been the fact that we couldn't replace vehicles because of supply challenges. That's gone away. It's going away now. I said we have about 20,000 vehicles that we have. I think when you look at our used truck business, there's no question that we're hoping that that market will stabilize. We've been actually probably impacting it because the number of tractors that we're selling. I think the fundamentals are going to continue. We get a little bit of help. And remember, when you look at commercial rental, you have the pure rental where you go in to want to rent a truck for a week.

So then you have the extra vehicles that are run by our lease customers. That business was down $150 million when you look at it year-over-year for the Q2. So that means the general marketplace for transportation is flat to down. And when that turns, that's going to benefit us. And I think that we look at the next six months as our fleet's in good shape. Interest rates hopefully will go in our direction. We had a bond that we were going to probably $500 million that we were going to place in the next six months. Probably won't need to do that because of our capital allocation and the ability for us to deliver due to the sale of some of our equipment. So I would say that we will continue to grow the business during the next six months and have a better return.

Rajat Gupta (Equity Derivatives Structuring)

Got it. Got it. Great. Thanks for all the color and good luck.

Roger Penske (Chair and CEO)

Thank you.

Operator (participant)

We will turn the conference back to Mr. Penske for closing remarks.

Roger Penske (Chair and CEO)

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 of us.

Operator (participant)

Ladies and gentlemen, that does conclude your conference for today.