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Penske Automotive Group Inc
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Good afternoon, ladies and gentlemen. Welcome the Penske Automotive Group First Quarter 2018 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through May 02, 2018 on a 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 a presentation designed to assist you in understanding our performance and company's strategy. 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 Chairman; J.D. Carlson, our Chief Financial Officer; and Shelley Hulgrave, the 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 01, 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 10K 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 and 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 the retail commercial truck business and 19% came from Penske Truck Leasing investment, Australia and other joint venture investments.
Income from continuing operations increased 29.8% to $108 million and related earnings per share increased 29.9% to a $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 am particularly pleased to report 100 basis point improvement in our SG&A as a percent of gross profit and 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 five non-core 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 2.71 excluding foreign exchange.
Same store variable gross profit per unit was $3,590, an increase of $183. Our same-store units, new units retail 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 increased 17.6% and our used and new ratio improved to 1.24% to 1%. Same-store used units retail increased 2.5% and same-store gross profit per used unit improved $57 to $1,607 and our gross margin unused was 5.5%.
Our supply of 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 $1238 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 US we have approximately 3300 technicians with job openings for another 200. As I look at this, if we estimate and [indiscernible] can produce between 15,000 and 20,000 in fixed growth profits per month, we continue to focus on recruiting in this area.
We're also making great progress on our e-commerce initiatives and service. During the first quarter, we scouted 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 acquired the Car People in U.K., which operates four 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 business 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 six 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 continues to experience improved condition including strong freight metrics and heavy duty truck utilization rates. Build rates remained strong in the industry, but industry backlog is increasing.
2018 Ag data forecast that North American Class VIII, that's heavy duty tractor retail sales of $315,000 and this would represent a 25% increase year-over-year. Additionally, the North American Class VI and VII, 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 cost 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 the improve 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 received over $550 million in cash benefits and another $344 million in equity income. Penske Truck Leasing operates really in three main segments, full-service truck leasing, which is about 50% of our revenue. our rental, consumer and commercial rental was 27% and our logistics business is approximately 23%.
For the three 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 and product sales continue to be strong, especially in power generation and marine markets and defense. Recently we have one bids to place our products into wheeled armored combat field vehicles and offshore patrol vessels which will provide strong sales and profits for our lifecycle of use.
Let's look at the balance sheet. We had $53 million of cash at the end of March. Our floor plan was $3.8 million and our non-vehicle debt was $2.2 billion. 32% of our floor plan in 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 the same-store basis, we were up $210 million, $116 million in new and $94 million in used. At the end of March we had 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, projected growth of the class VIII 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 remain confident and optimistic about our outlook for 2018 and beyond.
Thanks again for all of you joining our call and I'll turn it over to the operator. Thank you.
Thank you. [Operator Instructions] And first we'll go the line of James Albertine with ConsumerEdge. Please go ahead.
Great. Good afternoon and thank you for taking the question.
Hey Jamie.
Hi. If I may on the used standalone 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?
Let me just answer the last piece, I guess I've heard 1.24 to 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 do. So that would be one point.
As far as Q4 and then going into Q1, you know 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 lot of 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 opportunity 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 insight into April so far, is your sense that margins and sort of across the industry are stabilizing and if you can, I mean do you have a view on where margins can go from here looking ahead?
Well, when I look, look it's hard to look in the middle of the month where we are in April, but when we looked at our margin in Q1, I think that you have to take a look at our frontend growth that would be used vehicle frontend growth was impacted by $120 per unit and when you break this out, the average selling price for our franchised dealerships is 29,000 and on the selling price on our standalone, it's about 49 and looking at the margin say 5%, 6% on the franchise, you go to 8% down on our U.S. standalone supercenters and we're about 7.8%.
So when you pull this all together, it really drives a lower, 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 use of our business because we got cars coming off lease. Our guys understand it's another profit center for us. We get the margin on certainly as we look at in our reconditioning on these vehicles and our day supply is in very good shape.
So overall I think that the incentive environment is high on new car. 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.
Understood, well thanks again and best of luck.
Thanks.
Next question is from Rick Nelson with Stephens. Please go ahead.
Thanks. Good afternoon.
Hi Rick.
U.K. you lapped some very big numbers a year ago with that full power to March, if you could speak to first quarter performance and how you see the U.K. are shaping up over the remainder of the year?
Well, remember we have a couple things going on in the U.K. Number one we've got Brexit and there's no question there's some uncertainty with those negotiation going on. Diesel registrations are down 33% that has some impact on people not knowing quite what to do with their used cars.
There is 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 attacks 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, we see that probably pretty positive in April. Now how the quarter ends up, I can't tell you. The one thing that 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 have bode well for us as we go forward.
So again a 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 had a meet on this is how can we grow parts and service in the standalone? They’ve really done a good job in the U.S. at 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 to do this, but that's going to give us some real opportunity because the margin certainly when you think about it, 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.
Sounds good. Thanks a lot and good luck.
Thanks Rick.
Next question is from John Murphy with Bank of America Merrill. Please go ahead.
Good afternoon, Roger and Tony.
Hey John.
Hey John.
Just a first question, I mean on the used car superstores, you mentioned that you had opened an additional 15 Greenfield sites through 2020. That's pretty rapid, I am 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 stores, the 14 store basis that you have right now?
Well maybe you misunderstood my comment. I said that we would open six at least six.
Oh, okay. I am sorry.
So it would be a little aggressive.
Yeah okay. But as far as the economics and the staffing in the ramp, I mean that's still I mean how will those compare to your existing 14?
Well, I think that we want Car People and they have a location in Warrington that they build approximately 12 months ago. It took about 4.5 months for them to get in the black and I think that and that's selling about 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, get commitments on some property at DHL site, which we can convert in and I think it's 2020, which is almost ready to go.
It's a matter of putting our logos and cleaning 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 that 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 six months is probably a pretty good data point as we open these and hopefully they don't drain our process.
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 one price. So we got some things to learn and I think can be beneficial across the whole enterprise.
That's helpful and then just a second question, 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 based pretty rapidly here. I am just curious when these vehicles flow back into the service base and you know do they have a five year or 10-year life come back in the service base. How should we think about that?
Well, let's start with Freightliner's 40% of the markets. So over the last three 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 a million miles and today probably the warranties are in the 200,000 to 300,000 or 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 this 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 in the markets we're in you think about Dallas and you think about Fort Worth than out in the Permian Basin when you look at the Midland Odessa and Amarillo and up in Oklahoma they're not over into Tennessee, we've got some very good markets that we just made a major purchase up in the Toronto area, which 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 will continue, not by airplane or not by intermodal. So to me, this gives us a real long-term benefit when you think about it.
In our parts and service business and 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 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 lots being underweighted 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 speed.
I mean is that a real opportunity in how you're going to deal with sort of the weakness on some of these today and coming back as people try to trade into the crossovers?
You hit it right on the head because remember probably if I looked to be about their 45% trucks versus 55 SUVs, now that 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 got to create some very good competition in the market that some of them didn't have because they don’t have Audi, they don’t have BMW, you don’t have Porsche. You don’t have Mercedes-Benz, all and Lexus, all with more SUVs.
So all of a sudden, the battlefield within SUV is not between the sedans and I think that traditional sedans certainly will be good by 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 a unit that is obviously which has lower parts and that's going to have to be on an individual basis and hopefully many of these remember one thing to mention I John is the least mix is 60%. So that residual risk really isn’t on the customer. It's on the individual themselves. So to me, that mitigates down 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 is going to be a lot more hybrids as we go forward and that's going to make a difference with I think let's say ridging technology to electric, fully electric.
Great. Thank you very much. That's very helpful.
Thanks John.
And next we'll go to John Healy with Northcoast Research. Please go ahead.
Thanks. Roger or Tony. I was hoping you guys can us some perspective on the jus the SG&A line. I thought it was the 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 as more targeted and I think we've taken some cost out of that by being more targeted and specific, which certainly has helped us.
And then I look at our international business. We've had the opportunity to take cost out. We started that back as we look at Brexit and some of the things that might be looming over us. We started taking costs out of the U.K. out of sitting there and that has proved to be very beneficial for us in the first quarter.
So I think it's looking at our cost, I think there's no question targeting our marketing, our higher gross 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, 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-digit. I was wondering if you could give us a little bit of color of what's going on the cost side or what's going on maybe in terms of the business mix that might be causing the top line and the bottom line and the Nakamura more balanced?
Well, I think one thing you have to look again on sale of equipment depends on the number of units that you're selling 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 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 there's 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 we have to consider that our interest costs are up because we got the fleet per unit fleet is higher and obviously the market because of the interest rate that we've had climbs here lately will also impact that bottom line, but we're in great shape. Now remember Q1 was a 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.
Okay. Thank you, guys.
Thanks John.
And next we'll go to Michael Ward with Ward Transportation Research. Please go ahead.
Thanks very much. Good afternoon. 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 you know what happening and 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 multiple is probably in the four to five times versus what you're trying to buy a Mercedes store or something that could be seven, eight times, depending if it's one to two, in your particular market.
So I think the multiples are reasonable. The CapEx I think our total CapEx or fixed assets we bought and these as minimal. Now we did buy the real estate I the Car People acquisition, we had a chance to do a sale-leaseback. We decided because 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 were obviously consolidating the back office and so we can take SG&A out. So to me the opening new point, we think is probably six months, at least that's what the indication has been. We haven’t done that here in the U.S. but we have Car People and it took us about six months to get into the black.
So to me I think it's much better than if you bought an open excuse me 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 to build in the market I think that is a better equation for us. So we'll see as we open up some of these new standalone, but I feel good about it. The good news is that we have a pretty good engine running at a time.
So it's not unreasonable to assume that that superstore business could be $2 billion $3 billion 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 would have to take my head out the CarMax, they’ve built a business here over the last like 10 or 15 years which has been terrific.
So single brand, large stores, good discipline I guess that's the same formula that we're trying to adapt ourselves and we have some great people when you think about the team at CarSense here in the U.S., they been together for a long time. They're all still running the business. We're learning from every day and then our team in the U.K. is really, really done well.
All the key people the good news here who have stayed with the company and they're all in sanitized to builders to be a bigger business.
Turning to the service business on the automotive side, A, you're seeing the big increase in the insulation rate of some of these advanced components. You assume that at some point that drives more business to the dealers for service. Are the insurance companies or the vehicle manufacturers making any comments on that or is there anything they are doing that will change that, or is it just status quo.
Well let me step back, the vehicles are much more sophisticated than we're in the past. So wherein the customer is 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 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 it 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, the OEM trying to work with us to build our are 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 our new and used car side, but certainly in parts and service because of margin we get on that business.
Very good. Thank you very much.
All right. Thanks Mike.
Next we'll go to Brian Sponheimer with Gabelli & Company. Please go ahead.
Hey Brian. How are you?
I had a question for you on the commercial vehicle side of the business and 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 when you're selling to your customers?
Well, I would say, it's a sum of both. We have fleets like Schneider and Knight and Max [ph] U.S. expected to give a couple covenant people like 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 in those fleets to do their PM, their preventive maintenance.
So from a parts and service standpoint, we're linked together very, 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, 18 months. That come down now or 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 on the road because when you're looking at 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 were using in this country primarily as truck. 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 reform, I am seeing 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, then kind of turning back and thinking strategically, there really forms now for this business, how do you weigh, how your free cash flow going forward relative to the forearms here.
Well, let's look at how we are, our capital allocation I think is you know is key. When we look at that and there is no question that we were looking to return to our shareholder would be first and that would be looking at our dividends which we talked about today.
I think we had our 28 consecutive quarter and there is no question or 27 and I think that as we look at the use of our capital, we have certainly some CI requirements for both the standalone used cars and also the 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 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 they'll pay 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 that PTL has the same benefit and the superstores will generate that's I am going to look at who's generating the cash flow and where do we want allocate it but when you think about the truck business retail auto business certainly the standalone used car businesses we've got four really good pillars to operate and today with a used car opportunity, we're 1.24 to 1 guess what. We've got a real opportunity to continue to grow that.
It could be 1.5 and you look at most of the people in the business that were good ones are at 0.7, 0.8, but this gives us a great opportunity and then if you go back to 2008, I think that we're 0.5 to 1. So we're almost three times than we were back in '08 and we'll continue to allocate capital there.
Congratulations on a great quarter and you guys continue to impress.
Thank you very much.
Next question is from David Whiston with Morningstar. Please go ahead.
Hey David.
Hey Roger, hey Tony guess two main things from me, first is on used vehicle on the retail automotive side, used vehicle GPU was only down 0.9% and was up nearly 4% same-store. That seems to be better than some of the other publics have reported so far. So I just wanted to know are you guys maybe procuring your pricing better? Or is it something unique on the premium brand mix perhaps?
I would say that the premium brand mix because if you look at some of the bigger, 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 to our used car and they give us additional money. So there's a real good stream there to take a new car and put it in service loaner, take it out in 4000 to 5000 miles and then if you retail it to a retail customer you get additional support.
So I think that had some of the impact on that because of the strength especially in our BMW business where we're probably about 1.6 to 1 used to new and I think we managed 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 a say the next three with a price. They commit on that car, we've got to have the discipline within our stores not to give him a discount automatically when they walk through the door.
So we are managing double discounting. We're also trying to manage our discounting on the drive through lane for service as we want to grow our effective labor rate the best we can. I think that's key. There is no question.
Okay. And can you also talk about your thoughts on doing vehicles subscription given your premium brand mix. Are your customers probably more likely to be willing to do a $1500 a month type of plan, can you manage that depreciation and there is something you really want to pursue trying to 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 healing, car sharing etcetera, 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, but we can into the…
The nice thing about this is no one precludes us from getting in the business so we less about 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 are 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 you know even in a bigger business. What can we take across the country? What can we do to utilize all of our service locations. We have with 900 captive shops and truck leasing that we operate from where we got our stores here.
So we're trying to look at a bigger impact you on a global basis here if we can and there is no question that the car healing and car sharing is also a focus on we have right now.
Thanks that's helpful and just one last accounting question for me on did something move out of equity and coming Q1 because it's down by over half from Q4.
That's the timing of the Penske truck leasing only dose about 15% of their profit in the first quarter versus 25% to 30% in the fourth quarter, that's the biggest difference.
Now sort of it will ramp up later in the year.
Yeah. First quarter is always the lowest for that business.
Okay. Thanks guys.
The next question is from David Lim with Wells Fargo. Please go ahead.
Hey, good afternoon Roger and Tony. I just want to follow-up on that subscription model. I thought that a lot of the subscription stuff was being sponsored by the OEMs whether it be Cadillac or some of these other luxury guys and that kind of model. How do you guys make money? Is it just simply like another like lease program but then you guys get it an additional dollar or two or whatever it is for cleaning up the vehicles before you get to before it's handed off the next customer. I just wanted to better understand that?
Well, I guess the, you’ve got the silver car and you’ve got the Cadillac is doing some of this. I think that when they sure they're doing it directly but we want to be a Laufer a customer’s multiple vehicles if I may to Jeep one day maybe it's a Ferrari one day 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 laws that we have, I would be very concerned if they start to go around us into the subscription and we don’t play a part in it. I am making that is my own, I don't I don't have any, at this point there's no question that business out there, but we got a task force looking at all this.
But it's too new to rate for me because at the moment, not only quarter to quarter but year to year my shareholder, I've got a business that's commercially viable and right now when you look at the millions of dollars, that maybe these OEMs have put in, in some of these businesses. I think we have to take a real good look at it, but remember we can get in this business and how do 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 of 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 is 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 environment -- rising interest rate scenario. How would that affect a man? 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 say 12 to 18 months is going to affect that. There's no question today with a strong economy we have and lease is 30% of over 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 will lease it for 24 or 36 months and move on and come back and make his choice.
So I don't think they're rates today, we're not talking about 300 basis points. We're talking about jumps of 25 at a time and we've seen no impacts. The only impact I have is my interest cost were up $10 million from the quarter. So I do feel it from our standpoint, but I don't see the impact on that payment to the customer.
Great. Thanks for answering my questions.
Yeah, that will be super thanks.
And Mr. Penske there are no further questions in queue.
All right, John thanks. Thanks to 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.