Penske Automotive Group Inc (PAG) 2018 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group First Quarter 2018 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through May 2, 2018, on the company's website under the Investor Relations tab, at www.penskeautomotive.com. I will now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you, John, and good afternoon, everyone. Thank you for joining us today. As John mentioned, a press release detailing Penske Automotive Group's first quarter 2018 financial results was issued this morning and is posted on our website, along with the presentation designed to assist you in understanding our performance and company strategy. 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 Chairman; J.D. Carlson, our Chief Financial Officer; and Shelley Hulgrave, Corporate Controller.

On this call, we will be discussing certain non-GAAP financial measures such as earnings before interest, taxes, depreciation and amortization or EBITDA and have reconciled the non-GAAP measure in this morning's press release and investor presentation, which is available on our website, to the most directly comparable GAAP measures.

Additionally, on January 1, 2018, the company adopted ASC 606 for revenue recognition. The net impact of adopting ASC 606 in the first quarter of 2018 was an increase to net income of $400,000.

Also, we may make some forward-looking statements about our operations, earnings potential and outlook on the call today. Our actual results may vary because of risks and uncertainties outlined in today's press release, which may cause the actual results to differ materially from expectations. I direct you to our SEC filings, including our Form 10-K, for additional discussion and factors that could cause results to differ materially.

At this time, I'd now like to turn the call over to Roger Penske.

All right, Tony. Thank you, and good afternoon, everyone in, again, joining us today for our report.

I'm pleased to report another quarter of record results from PAG. Our record results were driven by an outstanding performance across each area of our business, I think, again, demonstrating the strength of our diversified transportation service model.

In the quarter, total revenues increased 13.1% to $5.7 billion, and earnings before taxes increased 15.7% to $145 million. 73% of our pretax came from retail automotive, 8% came from our retail commercial truck business and 19% came from Penske Truck Leasing investment, Australia and our other joint venture investments.

Income from continuing operations increased 29.8% to $108 million, and related earnings per share increased 29.9% to $1.26. Our EBITDA increased 16% to just under $200 million, and our tax rate for the quarter was 25.4% compared to 33% in 2017 Q1.

Additionally, I'm particularly pleased to report 100 basis point improvement in our SG&A as a percent of gross profit, and gross profit flow-through for Q1 was nearly 32%.

Looking at our capital allocation. For the quarter, we increased our cash dividend for the 27th consecutive time to $0.34 per share. We repurchased 1.1 million shares for $50 million. We completed acquisitions representing approximately $350 million of estimated annualized revenue, and we generated approximately $58 million in cash from the sale of 5 noncore dealerships.

Now let's turn to the performance of our retail automotive business in the first quarter. Our total automotive units retailed increased 6.4% and were flat on a same-store basis. However, same-store retail revenue increased 8.5%, or 2.7% when excluding foreign exchange. Same-store available gross profit per unit was $3,590, an increase of $183. Our same-store units -- new units retailed declined 1.6%. However, same-store gross profit per unit increased $110 to $3,039.

Same-store new vehicle gross margin was at 7.4%. Our supply in new vehicles was 54 days at the end of March compared to 51 days at the same time last year in Q1. Used units retailed decreased 17.6%, and our used-to-new ratio improved to 1.24:1. Same-store used units retailed increased 2.5%, and same-store gross profit per used unit improved $57 to $1,607. And our gross margin on used was 5.5%. Our supply used vehicles was 42 days at the end of March compared to 39 days the same time last year in Q1.

F&I increased 10.4% to $1,238 per unit, representing an increase of $113 on a same-store basis. Same-store parts and service increased 8%. And breaking it down, customer pay was up 9.5, warranty was up 5.1, our body shops and PDI up 5.1, for a total of 8%.

Today, in the U.S., we have approximately 3,300 technicians, with job openings for another 200. As I look at this, we estimate an (inaudible) can produce between 15,000 and 20,000 in fixed gross profit per month, we continue to focus on recruiting in this area.

We're also making great progress through our e-commerce initiatives and service. During the first quarter, we scheduled over 68,000 online service appointments. And last year, we collected nearly 21 million on online payments. So it's really working.

Moving to our standalone used vehicle supercenter business. As previously announced, in January 2018, we incurred The Car People in U.K., which operates 4 large-scale retail locations in Northern England. Including this acquisition, we expect our 14 location used-vehicle supercenter operations to retail more than 65,000 vehicles annually and will generate over $1 billion in annual revenue.

When you look at the first quarter, this business generated a 4% return on sales and a pretax return on invested capital, averaging over 15%. We believe these used vehicle supercenters further diversify PAG's business and provide an opportunity to capitalize on the highly fragmented used vehicle marketplace.

In the first quarter, these businesses retailed 18,673 units and had $331 million in revenue. The average transaction price was just under $15,000 at 14.9%. And the variable gross profit was $2,233 per unit. That margin was 15%. We also have identified 6 new greenfield locations and expect to have all these locations up and running by the end of 2020.

Turning to our retail commercial truck business. This market continued to experience improved condition, including strong freight metrics and heavy-duty truck utilization rates. Build rates remain strong. The industry backlog is increasing. 2018 ACT data forecast the North American Class 8--that's heavy-duty tractor -- retail sales at $315,000, and this would represent a 25% increase year-over-year.

Additionally, the North American Class 6 and 7, which is midrange, retail sales are forecasted to grow approximately 3% to over $150,000. For the quarter, our retail commercial truck group increased its new and used sales by 39.7% to 2,105 units and generated almost $300 million in revenue. On a same-store retail revenue basis, we were up 37%.

Service and parts represented 73% of total gross profit and covered 120% of our fixed costs and over 100% of our operating expenses.

Return on sales in this business was over 4% during the quarter. We believe these strong market conditions will continue and will help drive our business with improved sales and growing profitability.

Let me now turn to Penske Truck Leasing. As you know, we own 28.9% of PTL. This investment provides PAG with equity earnings and annual cash distribution and tax benefits. We made our initial investment in PTL back in July of 2008. Our total investment to date is approximately $957 million. We've received over $550 million in cash benefit and another $344 million at equity income.

Penske Truck Leasing operates really in 3 main segments: full-service truck leasing, which is about 50% of our revenue; our rental consumer and commercial rental is 27; and our logistics business is approximately 23%. For the 3 months ended March 31, Penske Truck Leasing generated $1.5 billion in operating revenue and net income of $55 million. Our ownership interest generated $16 million of equity earnings during the first quarter.

Turning to our Australian commercial vehicle business. We continue to experience improved conditions across Australia and New Zealand markets, which is contributing to our improved performance.

During the first quarter, our revenue was $158 million, up 40%, and our return on sales for the quarter was over 6%. Our power system product sales continue to be strong, especially in power generation and marine markets and defense.

Recently, we have won bids to place our products and to build armored combat vehicles and offshore patrol vessels, which will provide strong sales and profits for the life cycle of the used.

Let's look at the balance sheet. We had $53 million of cash at the end of March. Our floor plan was $3.8 billion, and our non-vehicle debt was $2.2 billion. 32% of our floor plan and non-vehicle debt is at fixed rates, while the remaining 68% is at variable. We had over $700 million in liquidity at the end of March.

Debt-to-capitalization ratio was 47.1%, and our leverage was at 2.85% at the end of March. New and used vehicle inventory was $3.4 billion, up $297 million when compared to March last year. If you look at a same-store basis, we were up $210 million, $116 million in new and $94 million in used. At the end of March, we have approximately $453 million in retail vehicle equity on our balance sheet.

In closing, our record results in the first quarter demonstrate again the strength and opportunity provided by PAG's diversified transportation services model. With a strong U.S. automotive market, with the strength of our premium/luxury automotive brand mix, protected growth of the Class 8 heavy-duty truck market in North America, our growing stand-alone used car supercenter operations and the benefits we continue to receive from the Penske Truck Leasing investment, I certainly do and our team remains confident and optimistic about our outlook for 2018 and beyond.

Thanks again for all of you joining our call today, and I'll turn it over to the operator. Thank you.

(Operator Instructions) And first go to the line of James Albertine with Consumer Edge.

If I may on the used stand-alone business, but also, I think this applies to your franchise stores as well, could you give us a sense of how the used sales performed sort of throughout the quarter kind of from fourth quarter into the end of 1Q and beginning of 2Q? And then as well, do you think used can outperform new in terms of sales growth in 2018 based on what you're seeing today?

Well, let me just answer the last piece. I guess if we're at 1.24:1, I guess we have to consolidate the supercenters along with our traditional business, we will sell more used during the year than we will new. So that would be 1 point. As far as Q4 and then going into Q1, we -- traditionally, our business continues to be strong on the used side because on the premium/luxury side, we have many initiatives by the big -- the premium/luxury OEMs to supply loaner cars to our customers in service. And we try to pull those out after 4,000 or 5,000 miles, and they become very strong used cars with all of the finance and leasing opportunities to go along with those. So we see that really as an offense in the businesses as we go forward.

Understood. And as a quick follow-up, as it relates to used vehicle margins, as we got into the latter part of the quarter and if you're willing to provide some insights into April so far, is your sense that margins in sort of -- across the industry are stabilizing? And if you can, I mean, do you have a view on sort of where margins can go from here looking ahead?

Well, what I -- look, it's hard to look in the middle of month where we are in April. But when we looked at our margins in Q1, I think that you have to take a look at the -- our front-end growth, that would be used vehicle front-end growth, was impacted by $120 per unit. And we break this out, the average selling price for our franchise dealerships is $29,000, and on the selling price on our stand-alone, it's about $14,900. And looking at the margin, say, 5.6% on the franchise, you go to 8% on our U.S. stand-alone supercenters, and we're about 7.8%. So when you pull this all together, it really drives a lower gross, and we'll probably see a little bit of that as we go forward over the next coming months. It's not that the business is deteriorating. It's just the fact that the mix of these lower MSRP sale used vehicles don't drive the margin. So overall, I think we're taking advantage, Jamie, of the used-car business because we've got cars coming off lease. Our guys understand it's another profit center for us. We get the margin on the -- certainly, as we look at our reconditioning on these vehicles, and our days supply is in very good shape. So overall, I think that the incentive environment is high on new cars. So we could tend to see some crossover there where the incentives are so high, we start to lose some of that higher-premium, higher-priced used cars. That would be the only concern I might have.

Next question is from Rick Nelson with Stephens.

The U.K., you lapped some very big numbers a year ago with that pull forward into March. If you could speak to first quarter performance and how you see the U.K. market kind of shaping up over the remainder of the year.

Well, remember, we have a couple of things going on in the U.K. Number one, we've got Brexit, and there's no question there's some uncertainty with those negotiations going on. Diesel registrations that are down 33%, that has some impact on people not knowing quite what to do with their used cars. There's a number of government policies, I'd say, that are in play. And remember, wages have increased probably about over -- just over 2%, and inflation is now 3.1%. And they've had the first interest rate rise in the U.K. since, I guess, 2009. So, when we think about the marketplace, it was down 12% in the first quarter, but that was really impacted by the pull ahead because of a tax last year. As we look at April, my early discussions with our team in the U.K. show that April, both new and used, are up over last year. So I think that's just a bounce back in the month of April against the pull ahead a year ago. So we see that probably pretty positive in April. Now how the quarter ends up, I can't tell you. The one thing that we -- I didn't mention was that the premium/luxury market was only down 7.8%. In fact, it grew 150 basis points to over 30%. So that's the pond that we fish in, and I think that's going to bode well for us as we go forward. So, again, good March. Obviously, in the U.K., was a registration month. It always is. We finished strong. We did again. And I think the used car superstores, when you look at it, really give us some real momentum as we go through the balance of the year, not only from a unit perspective but a profitability and margin. And one thing that I'm really focusing on with the team, and we're going to meet on this, is how can we grow parts and service in the stand-alones. They've really done a good job in the U.S. with CarSense. I think there's real opportunities in Car People and CarShop, and I think it's a focus as we have a number of things on our to-do list. But that's going to give us some real opportunity because the margin, certainly, when you think about it, these -- the brand -- the revenue really is only 1%. And you think about over here, it's 10% and it's 44% of our gross margin. So I see that as a real focus as we go forward. So that should really benefit us over in the U.K.

Next question is from John Murphy with Bank of America Merrill Lynch.

Just first question, I mean, the -- on the used cars superstores, you mentioned that you would open an additional 15 greenfield sites through 2020. That's pretty rapid. I'm just curious, as you think about the economics of those stores and the staffing of those stores, how will they compare and how fast will they ramp up relative to the existing store, 14 store base that you have right now?

Well, maybe you misunderstood my comment. I said that we would open 6, at least 6.

Oh, okay. I'm sorry.

Yes. No, it would be a little aggressive if...

Yes, okay. That's -- but as far as the economics and the staffing in the ramp, I mean, that's still -- I mean, how are those compared to your existing 14?

Well, I think that we bought Car People, and they have a location in Warrington that they built approximately 12 months ago. It took about 4.5 months for that to get in the black. And I think that -- and that's selling, what, 400 or 450 units a month. So these are big operations. And I think that in the U.K., we've been able to purchase or get commitments on some property, a DHL site, which we can convert in -- I think it's 2020, which is almost ready to go. It's a matter of putting our logos and playing it up, putting some lights up. But we're trying to look at it opportunistically. We've got sites in New Jersey. We have some sites potentially in Phoenix for the U.S. and also some around the key market where CarSense is, in Chester Springs, Pennsylvania, around the Wilmington area. So what we're trying to do is not just go all over the country for white spots. We're trying to grow where we have the impact of our digital and also our advertising, so we get that coverage. So to me, I think that this is a very good business from the standpoint of profitability. And I think 6 months is probably a pretty good data point as we open these, and, hopefully, they don't drain our profit. I know that some of our peers have looked at this business and they've had issues of trying to get to the level. But I think our process and the commitment, we're not trying to infect those businesses with the way we do business on the retail side, because when you look at the gross profit, we're running 15% on sale price. And in the traditional business here in the U.S., we're running 10%. And when you look at a compensation, the compensation is less because it's unit-driven, it's 1 price. So we've got some things to learn that I think can be beneficial across the whole enterprise.

That's helpful. And then just a second question. I mean, given the strength in the commercial truck sales, how do you think about the parts and service business going forward? Obviously, that was strong in the quarter for the commercial truck business, but it seems like you're growing this UIO base pretty, pretty rapidly here. I'm just curious when these vehicles flow back into the service bays. And, I mean, do they have a 5-year life or 10-year life of coming back in the service bays? How should we think about that?

Well, let's start with Freightliners, 40% of the market. So over the last 3 years, they've had 40% of the market. And really, Freightliner has not increased the number of locations or owners. They've really tried to consolidate. So that's certainly good news. An average tractor will run 1 million miles, and today, the -- probably, the warranties are in 200,000 to 300,000 to 400,000, depending on what you buy. So it really looks as if there's a very good income stream through parts and service. And one thing that we all have to remember, the complexity of these trucks today, when you open the hood, you really have to be a technician, electrician and everything else in order to take care of them. And I think that's driving the business to the OEM certified dealerships for service. So I see this as a revenue stream. And I mentioned in my prepared comments that when you think about fixed coverage, we were 120%. So parts and service generated that. And we look at all of our operating expenses, parts and service generated 100%, and I see that as a real benefit. And with our mix and the markets we're in, you think about Dallas and you think about Fort Worth and out in the Permian Basin, when you look at the Midland-Odessa and Amarillo and up into Oklahoma, then out over into Tennessee, we've got some very good market that we just made a major purchase up in the Toronto area, which, as you know, is a very hot market. So these all need transportation. And people got to remember that 85% of freight is moving on trucks, and it's been that way and we'll continue, not by our plane or not by intermodal. So to me, this gives us a real long-term benefit when you think about it. And our parts and service business in Q1 was up 16%, and to me, that's a key part of our business for the next several years. And the great thing is that the CapEx requirement here is minimal compared if we were building a dealership. And also, at the moment, I would say, the goodwill multiples are certainly reasonable.

That's great. And then just one last question. Can you just talk a little bit about the challenges you've had with the German lux being underweight on crossovers or trucks, however you want to say it? And it seems like that's going to ease with some pretty good product introductions in the last couple of years, but it seems like it's going to ramp up in spades. I mean, is that a real opportunity? And how are you going to deal with sort of the weak resids on some of these sedans coming back as people try to trade into the crossovers?

Well, that's -- you hit it right on the head because, remember, probably if I looked at BMW, they were 45% trucks versus 55% SUVs. Now that's flipped. It will be 60% to 62% as we go into Q2. That's a real benefit for us. But I think also, it's going to create some very good competition in the market that some of them didn't have because you'll have Audi, you'll have BMW, you'll have Porsche, you'll have Mercedes-Benz, all -- and Lexus, all with more SUVs. So all of a sudden, the battlefield is in SUVs, not between the sedans. And I think the traditional sedans certainly will be good by certain -- some of the brands, but it won't be the core product. I think one of the brands took maybe 40,000 sedans out of their mix as they go forward in 2018. But to me, for us, we think it's an opportunity. Now how do we deal with a customer that comes back in and has that unit that is probably a sedan, which has lower margins? That's going to have to be on an individual basis. And hopefully, many of these -- remember, one thing to mention, I think, John, is the lease mix is 60%. So that residual risk really isn't on the customer, it's on the individual themselves. So to me, that mitigates that a little bit, so -- from the standpoint of premium/luxury. And also, when you look at it, I think we got to think about that there's going to be a lot more hybrids as we go forward, and that's going to make a difference with -- I think that's the bridging technology to electric, fully electric.

And next, we go to John Healy with Northcoast Research.

Roger and Tony, I was hoping you guys can give some perspective on just the SG&A line. I thought it was a highlight this quarter and the leverage that you got there. And maybe even with some of the incentives I know that you've given to employees post tax reform, kind of maybe how you got that leverage and maybe what sort of revenue growth do we need to see in the business throughout the remainder of the year to keep that leverage to persist?

Well, let me be honest. I think the strong gross profit we generated across the enterprise certainly helped drive that. When you think about -- the increase just in the truck business at PTG certainly helped. We've also looked at the way we're doing our marketing. It's more targeted. And I think we've taken some costs out of that by being more targeted and specific, which certainly has helped us. And then I look at the -- our international business. We've had the opportunity to take cost out. We started that back as we looked at Brexit and some of those things that might be looming over us. We started taking cost out of the U.K., out of Sytner, and that has proved to be very beneficial for us in the first quarter. So I think it's looking at our costs. I think there's no question targeting our marketing, our higher growth. And then we also -- we sold some nonperforming businesses in the quarter that came out, which obviously would help us when you look at it on a global basis.

Great. And then just wanted to ask about the truck-leasing business. In the slide deck, I think you guys talked about 15% revenue growth there, but I think net income growth of kind of more mid-single digits. I was wondering if you could give us a little bit of color to what's going on the cost side or what's going on maybe in terms of business mix that might be causing the top line and the bottom line and that grow more balanced.

Well, I think one thing, you have to look at gain on sale of equipment, depends on the number of units that you're shelling during a quarter or for the annual year and depending on what that margin is. Now as the trucks have gotten more expensive, our margin has gone down. If you look at the business between Q1 '17 versus Q1 '18, from a gain-on-sale perspective, we had $2 million less. So if you add that back, we'd have a margin that would be probably around 8%. And our EBIT margin for the quarter was 9%. When you compare that to our largest competitor, he was at 5.4%. And our business grew at 15% and theirs grew at 9%. So we feel good about where we are. Our logistics grew over 20%. Rental is just off the charts. We added 3,000 more rental trucks this year over last year, and that business is up substantially. So to me, also, you have to consider that our interest costs are up because we've got the fleet -- per-unit fleet is higher. And obviously, the market, because of the interest rate that we've had claims here lately, will also impact that bottom line. But we're in great shape. Now remember, Q1 is our low quarter. We don't get the benefit out of our one-way fleet. But to me, I think we're going to have a very good year.

And next, we go to Michael Ward with Ward Transportation Research.

Two things. On the used-car superstores, is it cheaper to acquire or open up a greenfield site?

Well, I guess, we certainly -- if you look at what's happening, if you look at a 15% return on invested capital right out of the box and you're looking at a 4% return on sales, and, basically, we don't have the CapEx requirement that we have, the multiples are probably in the 4 to 5x versus if you're trying to buy a Mercedes store, something that could be 7, 8x, depending if it's one that you want in your particular market. So I think the multiples are reasonable. The CapEx -- I think our total CapEx or fixed assets we bought these is minimal. Now we did buy the real estate in The Car People acquisition. We had a chance to do a sale-leaseback. We decided because the -- our capital was available that we wouldn't do that, and we'll build equity in those properties. But I think, overall, it's a very good equation from the standpoint of use of capital. We get the benefits of our banking and our floor plan lines who have available to us in the U.S. at the lowest rates that cover that. And then we're obviously consolidating the back-offices so we can take SG&A out. So, to me, if you open a new point, we think it's probably 6 months, or at least that's what the indication has been. We haven't done that here in the U.S., but we have at Car People, and it took us about 6 months to get into the black. So to me, I think it's much better than if you bought an open point in the -- of a traditional business here in the U.S., because it takes us probably a year by the time you build a service background and you get your team together at building the market, I think that it's a better equation for us. So we'll see as we open up some of these new stand-alones. But I feel good about it. The good news is that we have a pretty good engine running ahead of time.

So it's not unreasonable to assume that superstore business could be $2 billion, $3 billion business by 2020?

Well, I would say that there's no reason we can't double it. Maybe not by 2020, but I didn't realize we'll make these acquisitions as fast as we did. And we're going to continue to look and see what's out there. But this is a very good business. And I'd have to take my hat off the CarMax. They'd built a business here over the last, what, 10 or 15 years, which has been terrific. So a single brand, large stores, good discipline, I think that's the same formula that we're trying to adopt ourselves. And we have some great people. When you think about the team at CarSense here in the U.S., they've been together for a long time. They're all still running the business. We're learning from them every day. And then our team in the U.K. has really, really done well. All the key people, the good news here, have stayed with the company, and they're all incentivized to build this to be a bigger business.

Turning to the service business on the automotive side. You're seeing the big increase in the installation rate of some of these advanced components. You assume that, at some point, that drives more business to these dealers for service. Are the insurance companies or the vehicle manufacturers making any comments on that? Or is there anything they're doing that will change that? Or is it just status quo?

Well, let me step back. The vehicles are much more sophisticated than they were in the past. So warranties with customers are going to come back, and I think they're going to have to come back when they're out of warranty. So I think they're going to drive that. Now technically, I'm not sure. As the OEMs look for revenue opportunities, are they going to put things on the cars that they can turn on or turn off and get a revenue stream and share that with the dealer? I don't know that. That might be one of the things they're going to look at as we go forward. But overall, I see, in most cases, the OEM trying to work with us to build our -- really, our customer satisfaction. And customer retention, we never really thought about that in the past. But our customer retention is probably paramount in all of our businesses, both on a new and used-car side, but certainly in parts and service because of the margin that we get on that business.

Next, we go to Brian Sponheimer with Gabelli & Company.

I had a question for you on the commercial vehicle side of the business. Now I was curious, how much of that -- of those Freightliner locations are you running as a bit of a fleet intermediary versus just pure retail business when you're selling to your customers?

Well, I would say it's some of both. I mean, we have fleets like Schneider and Knight and Max Fuller at U.S. Xpress, just to think of a couple of covenant people like that, that rely on us for their parts supply, rely on us for doing their warranty work. And in many cases, we have our people embedded at those fleets to do their PMs, or preventive maintenance. So from a parts and service standpoint, we're linked together very closely. From an overall business, what's happened is there was probably 170,000 too many tractors in the market in the last, say, 12 to 18 months. That's come down now where, probably, it's less than 50,000. So that's driving this new truck or the tractor momentum, I think, as we go forward. Plus, as I said earlier, the freight is on the road because when you're looking at the, really, growth of freight, it's up 4% in the quarter and it was up 3.8% last year. So with that kind of growth, that's driving a lot of this benefit on transportation. And again, this is the mode that we're using in this country, primarily is trucks. So to me, there's no question we've got strong freight trends. We've got the approving fuel economy and safety that the guys all want on their trucks, which is driving that. And then we have, there's no question, the tax reforms. There's -- I've seen that many of these carriers are now taking that benefit and spending the money on CapEx to buy new equipment, and I think this is driving some of the market.

I appreciate that. Kind of coming back and thinking strategically, there are really 4 arms now for this business. How do you weigh how you use your free cash flow going forward relative to the 4 arms here?

Well, let's look at how we are -- our capital allocation, I think, is key. When we look at that, there's no question that we're looking at return to our shareholder, would be first, and that would be looking at our dividends, which we talked about today. I think we've had our 28th consecutive quarter. And there's no -- or 27th. And I think that as we look at the use of our capital, we have certainly some CI requirements for both the stand-alone used cars and also the OEM dealers, which will be key. And also, we're looking at our opportunities from an acquisition standpoint, and we look -- today, we're an opportunistic buyer. And then, of course, you've got our share repurchase. So that would be to start with. Now, when you take the investment, I think what we will do is look at each one of these areas. When you look at the cash generation and capital generation in the truck -- the retail truck business, that can grow on its own. I think at the end of '19 -- or 2017, they only had $35 million worth of debt, including floor plan, and they'll paid that off this year. And that was really real estate. So they have enough cash flow to go forward and continue to grow. There's no question the PTL has the same benefit and the superstores will generate that. So I'm going to look at who's generating the cash flow and where do we want to allocate it. But when you think about the truck business, the retail auto business, certainly, the stand-alone used car businesses, we've got 4 really good pillars to operate. And today, with a used car opportunity, we're 1.24:1, guess what? We've got a real opportunity continuing to grow there. It could be 1.5. And you look at most of the people in the business that were -- the good ones are 0.7, 0.8, but this gives us a great opportunity. And then if you go back to 2008, I think that we were 0.5:1. So we're almost 3x what we were back in '08, and we'll continue to allocate capital there.

Next question is from David Whiston with Morningstar.

I guess 2 main things for me. First is on used vehicle. On the retail automotive side, used vehicle GPU was only down 0.9%. It was up nearly 4% same-store. That seems to be better than some of the other publics that have reported so far. So I just wanted to know, are you guys maybe procuring your pricing better? Is it something unique down on the premium brand mix perhaps?

I would say that the premium brand mix. Because if you look at some of the bigger premium guys, what they're doing, they're giving us -- as we put vehicles into loaner car service in our businesses, we get additional capital when we deliver those through our used car and they give us additional money. So there's a real good stream there. Take a new car, put it in service loaner, take it out at 4,000 to 5,000 miles. Then if you retell it to a retail customer, you get additional support. So I think that's had some of the impact on that because of the strength, especially in our BMW business, where we're probably about 1.6:1 used to new. And I think we manage our gross deal by deal. And what we've also looked at is double discounting. It's probably a new term we haven't thought about. But today, with the Internet being the target for everyone, say, 90% of our customers are on the Internet before they come to the stores, and they come in on, say, an X3 with a price, they come in on that car, we've got to have the discipline within our stores not to give them a discount automatically when they walk through the door. So we're managing double discounting. We're also trying to manage our discounting on the drive-thru lane for service. And we want to grow our effective labor rate the best we can. I think that's key. There's no question.

Okay. And can you also talk about your thoughts on doing vehicle subscription given your premium brand mix? Are your customers -- they're probably more likely to be willing to do a $1,500 a month type of plan. Can you manage that depreciation? And is this something you really want to pursue to try and get scale?

Look, I'm sitting in the front seat watching everybody do this. I think we've got a team of people now trying to understand subscription, car hailing, car sharing, et cetera, which is a big focus for us. But when I look at it today, I'm not sure the commercial model is going to make any money. Look, we can get in -- the nice thing about this is no one precludes us from getting in the business. So we -- let's let this thing mature a little bit over the next maybe 6 to 12 months. We've had an opportunity to join in subscription. At this point, we've not done that. And I think that, that's being done through dealer subscriptions, really. So we'll have an opportunity. And the OEMs are going to work with us on that, too. I think that's key. But we're trying to look at this thing even in our bigger business: What can we take across the country? What can we do to utilize all of our service locations? We have 900 captive shops at truck leasing that we operate from. We've got our stores here. So we're trying to look at a bigger impact on a global basis here if we can. And there's no question that the car hailing and car sharing is also a focus we have right now.

That's helpful. And just one last accounting question for me. Did something move out of equity income in Q1, because it's down by over half from Q4?

That's the timing of -- the Penske Truck Leasing only does about 15% of their profit in the first quarter versus 25% to 30% in the fourth quarter. That's the biggest difference.

So it'll ramp up later on in the year?

Yes, that's right. First quarter is always the lowest for that business.

The next question is from David Lim with Wells Fargo.

I just want to follow up on that subscription model. I thought a lot of the subscription stuff was being sponsored by the OEMs, whether it'd be Cadillac or some of these other luxury guys. And then in that kind of model, how do you guys make money? I mean, is it just simply like another like lease program, but then you guys get an additional $1 or $2 or whatever it is for cleaning up the vehicles before it gets to -- before it's handed off to the next customer? I just want to better understand that.

Well, I guess, the -- you've got silver car and you've got -- the Cadillac is doing some of this. I think that -- sure, they're doing it directly, but we want to be able to offer customers multiple vehicles. Maybe it's a Jeep one day, maybe it's a Ferrari one day or whatever it might be. And I think that they're going to need to be serviced. So we're going to play in that area. Now I think that at the end of the day, with the state franchise loss that we have, I would be very concerned if they start to go around us into the subscription business and we don't play a part in it. I'm making that as my own comment. I don't have any -- at this point, there's no question that it's out there. But we've got a task force looking at all this. But it's too new to rate for me because, at the moment, I've got -- not only quarter-to-quarter, but year-to-year on my shareholder, I've got to have a business that's commercially viable. And right now, when you look at the millions of dollars that many of these OEMs have put in to some of these businesses, I think we have to take a real good look at it. But remember, we can get in this business when we want to. We've got the capital, we certainly got the expertise, and we've got the best footprint in the United States from a service capability.

Aren't these OEMs relying on their retail network for the subscription model?

Well, they are. I'm saying, they're dialed into the dealer for service and providing the vehicles. I'm not sure -- I'm not involved in any at this point, so I can't give you the specifics. But I think there is a hand in glove together on the subscription. But -- then there's third parties doing it, too.

Understood. Can you also give us a little bit more color on how the automotive retail environment will operate in a rising interest rate scenario? Can you -- how would that affect demand? How would that affect mix, if you will?

Well, I think on the premium/luxury side, that customer, I don't think $5 to $10 a month on a premium/luxury side, at least if we're looking at 50 to 75 basis points over the next 12 to 18 months, is going to affect that. There's no question today, with a strong economy we have, a lease is 30% of our overall business. So to me, I think that's going to take care of some of it. Now leasing will become more prevalent at that point where the customer doesn't want to take the residual risk and really just be gas and go. He'll lease it for 24 or 36 months and move on and come back and make his choice. So I don't think the rates today when we're -- we're not talking about 300 basis points. We're talking about jumps of 25 at a time. And we've seen no impact. The only impact I have is my interest costs are up $10 million for the quarter. So I do feel it from our standpoint. But I don't see the impact on the payment to the customer.

And, Mr. Penske, no further questions in queue.

All right, John, thanks. Thanks, everybody, for joining us. See you next quarter. Bye-bye.

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