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Penske Automotive Group Inc (NYSE:PAG)
Q2 2019 Earnings Call
Jul 30, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Second Quarter 2019 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through Tuesday, August 6, on the company's website under the Investors tab at www.penskeautomotive.com.

I will now introduce Anthony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Anthony Pordon -- Executive Vice President Of Investor Relations and Corporate Development.

Thank you, Justin. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's second quarter 2019 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 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, our Controller. On this call, we may be discussing certain non-GAAP financial measures such as earnings before interest, taxes, depreciation and amortization, or EBITDA.

We prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures in this morning's press release and investor presentation, which is available on our website to the most directly comparable GAAP measures. Also, we may make 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 in factors that could cause results to differ materially.

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

Roger Penske -- Chairman and Chief Executive Officer

Thank you, Tony, and good afternoon, everyone. Thanks for joining us for our call. Today, PAG reported income from continuing operations of $118 million and related earnings per share of $1.42 for the second quarter. We also announced a commercial truck dealership acquisition, which is expected to add $1.1 billion in annualized revenue and nearly double the size of our retail commercial truck dealership operations, which I will talk more about later. During the second quarter, our U.S. retail automotive business, our North American commercial truck dealership business and our investment in Penske Truck Leasing performed well during the quarter, in fact, driving a 6% improvement in earnings before taxes.

However, weak market conditions in the U.K. from Brexit and the timing of customer deliveries in Australia impacted our second quarter results. In the U.K. market, new vehicle registrations declined approximately 5%, including 7% decline in private retail registration, which significantly impacted our new vehicle sales volume. Additionally, the oversupply of used vehicles in the U.K. market negatively impacted used vehicle market values and our margins. In fact, industry statistics show a 2% drop per month in used car values during Q2. Including exchange, gross profit in the U.K., decline of $19 million in the second quarter, and the company's second quarter earnings were negatively impacted by approximately $0.16.

Despite the impact from these items, strong performance we had in our U.S. operations, the reoccurring revenue stream provided by Service and Parts, which continue to generate between 45% and 50% of our overall gross profit, and our investment in Penske Truck Leasing helped produce a strong cash flow for the quarter. During the first 6 months of this year, we generated $300 million in cash flow from operations. This allowed us to increase our dividend 2x. Presently, we yield 3.4%. We repurchased 3 million shares for $130.6 million. And we invested $123 million into our business through net capex, including $15 million of land, while keeping our vehicle debt relatively flat -- our nonvehicle debt relatively flat with December last year. Turning to the details of our retail automotive. Same-store retail units were down 4.4%.

New is down 9% or 5,400 units. Looking at the U.S. by itself, we were down 6.9% on units or 2,400, driven by Honda down 1,000 units and Audi down 500 units. International was down 12% or 3,000 units. The U.K. was down 1,800 units, driven by declines with Audi and BMW. Italy and Germany were driven continued lower unit volume because WLTP pressure on Porsche and Audi vehicles. Looking at used vehicles. Same unit sales were flat with last year. The traditional dealership business increased 1.3% while used supercenters declined 1,057 units mainly due to market conditions in the U.K. Although same-store total unit sales were down in the U.S., I'm pleased that our U.S. same-store variable gross profit per unit increased nearly 4% to $125 per unit during the quarter. Same-store retail automotive revenue declined 4.6%. However, when excluding the impact of foreign exchange, same-store revenue was down 2.1%. New was down 6.2%, used was up 1.2% and F&I was up 5%. Turning to Service and Parts revenue, it increased 3.1% during the quarter. Customer pay was down 0.6% versus a high comp last year of almost 9% while warranty was up 14.8%. As many of you know, our highest-margin business is Service & Parts, which represents 42% of our retail gross profit. And 64% of our truck dealership gross profit comes from our Service and Parts business. Let's move on to our used vehicle supercenters.

We operate 14 dealerships, including 5 in the U.S. and 9 in the U.K., plus 1 reconditioning center in the U.K. These operations use a one-price, no-haggle approach. In the second quarter, we retailed nearly 18,000 vehicles and generated a revenue of $312 million. Our unit volume was down 5.6% or 1,057 mainly due to market conditions in the U.K. Variable gross profit was down $142 in the U.K. but was flat in the U.S. at $3,036. The decline in gross profit per unit in the U.K. relates to the oversupply of used vehicle in the U.K. market, which is driving down used vehicle market values and grosses. Turning to the retail commercial truck dealership business. The medium and class 8 heavy-duty market continues to experience strong conditions. In the second quarter, class 8 retail sales in North America were up 13% to 86,000. The backlog at the end of June was 195,000. In the second quarter, same-store commercial truck retail unit sales increased at Premier Truck Group by 23.2%, generating $427 million of same-store revenue, up 26% with a strong return on sales of 4.4%. Service & Parts gross margin increased 50 basis points, represented 64% of the total gross profit of the company and covered 119% of our fixed cost in the quarter.

As I mentioned earlier, we completed a commercial truck dealership acquisition in July, which enhances our nonauto diversification and provides future growth and increased profitability. Warner Truck consists of 6 locations mainly operating in the Northern and Central transportation corridor of Utah and Idaho, a major crossroad for East-West transportation. Coupled with our existing location across the South Central U.S. and Toronto, our presence stretches across several key transportation corridors in North America. This acquisition is expected to generate over $1.1 billion in revenue, bringing our revenue from $1.4 billion to $2.5 billion on an annualized basis. With this acquisition, we now operate 25 dealerships and now the largest Freightliner and Western Star dealership group in North America. When compared to traditional car dealerships, a truck dealership business has a return on sales that are typically 2x higher than the traditional car dealerships.

Due to higher fixed cost absorption of 119% in Q2 and lower fixed assets to revenue, which are about 50% less than the auto business and lower SG&A to gross profit of 64%, in fact, our business generally has averaged a pre-tax annual return in our truck dealership business between 23% and 25% on our acquisition costs. Turning to our leasing business. Our 28.9% ownership in PAG with equity earnings and cash distribution and tax benefits. PTL now managing a fleet of over 310,000 vehicles in the second quarter. Revenue was up 10% to $2.3 billion. Net earnings for PTL increased 9% to $132 million. Accordingly, we recognized $38 million of equity earnings, an increase of $3 million or 8.6% over the second quarter of last year. Over the last 12 months, our investment in PTL has provided cash benefits of $75 million through distributions in cash tax savings. Let me turn now to Australia and New Zealand.

We operate a commercial truck and power system distribution business, where we sell Western Star, MAN and Dennis Eagle commercial trucks. And on the power systems side, we distribute to marine, defense, power generation and the construction industrial segments of the market. The key to driving a commercial vehicle and power system distribution business is units in operation. The units in operation will drive future Service & Parts opportunities. In fact, we expect parts and service gross profit to represent approximately 80% of the total gross profit in this portion of our business. As such, we continue to collaborate with the OEMs to drive sales across the on-highway marine, military and construction markets. Although our profitability was down approximately $3 million during the second quarter, and this was due to a large sale of defense service and defense contract equipment last year, we expect the second half to be strong and will make up the difference that will meet our budget. Digital initiatives. We continue to improve and enhance our digital capabilities.

Across the enterprise, we have almost 60,000 vehicles online ready to purchase. In the second quarter, 33% of our new and used unit sales in the U.S. were from digital sources, and we continue to reduce our reliance on third-party leads. The enhanced tools we introduced for our service department customers for online service appointment scheduling and online payments continue to perform well. During the quarter, our business development centers and online inquiries produced 400,000 service appointments for our dealerships. Every service customer in the U.S. is sent an invitation to pay by online. As a result, our online payments increased in the quarter by 68%. We continue to pilot new digital rebuilding tools that focus on improving the customer experience such as online estimating for our collision centers, video and digital pictures for our customers for service updates and upsell and an enhanced Preferred Purchase, our online buying tool. Also, we're on track to complete the docuPAD integrated document management software rollout by the end of the year with 70% now. docuPAD is an interactive tool that allows us to engage customers digitally through menu presentation and document processing.

We have approximately a $5 million investment for this at the moment. So far, our customers and employees are favorably responding to a digital experience, transparency, and we're driving higher F&I profits where implemented. We continue to enhance our proprietary online closed bid auction site in the U.K. We have over 3,500 active online bidders. And we wholesaled over 11,000 vehicles in the first half of the year. Further, our U.K. franchise dealership began the initial launch of its new digital dealership platform in the third quarter. This launch will occur in phases, ultimately resulting in the capability to complete a total vehicle purchase 100% online. Looking at our balance sheet at the end of June, we had $44 million in cash, and our total inventory declined $62 million to just under $4 billion. We have 1,215 vehicles on stop sale, representing 705 new and 510 used vehicles for a total of 44 million. Our supply of new vehicles was 78 days at the end of June compared to 72 at the same time last year. Our supply of used vehicles is 47 days at the end of June compared to 45 days at the same time last year. Floor plan was $3.8 billion, and nonvehicle debt was $2.2 billion, of which 35% was in fixed rates. At the end of the quarter, we had no money outstanding on our U.S. revolver and only $92 million outstanding in the U.K.

And we have the ability to bring forward $900 million from the U.K. without any tax consequences in the U.S. Our total debt to capitalization was 45.6%, and the leverage ratio was 2.7x, flat with December last year. At the end of June, we had over $800 million in liquidity for acquisitions, dividends and share repurchases and other corporate opportunities under our credit agreement. Before I close, I'd like to congratulate the 33 U.S. dealerships that were recently named by Automotive News, through the 100 Best Dealership to Work For, for listing. We're honored for this accomplishment. This is a team effort. I'd like to thank all of your employees for their contributions. Just before I close and open up for call, I just want to point out that for the quarter, we had $300 million of cash flow. Again, we paid $65 million of dividends with a return of 3.4%. We bought $130 million worth of stock back. And we had capex of $123 million, and our debt was flat. So this shows the strength of our cash flow this business. PTL had a 10% increase in earnings to $132 million. We had $38 million of that, that we took on our income statement.

And we were 30% higher than our biggest peer during the quarter. We also made the acquisition in the Warner Truck business, which obviously shows a much stronger return on sales than we do on our traditional business, giving us the ability to grow that business. And typically, we think we can grow that business to nearly where we are in Premier over the next 12 to 18 months. One other thing, I think, to point out with the truck business. We don't have the peer and interbrand competition on trucks. There's 134 partners across United States. So we think we bode well with this strategy of diversification. And again, we think our used car superstores are in good shape as we add 2 more stores before we end the year, 1 in the U.K. and 1 in the U.S.

In closing, I'd like to thank you for joining us and open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] And first, it looks like we have the line of John Murphy of Bank of America. Your line is open.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Good afternoon, Roger and thanks for the time. I appreciate it.

Roger Penske -- Chairman and Chief Executive Officer

Hi, John.

John Murphy -- Bank of America Merrill Lynch -- Analyst

The first question I have is when we look at the $0.16 headwind that you guys highlighted from Europe as well as the Australian power business, I'm just curious if you can break that out for us between new, used and maybe the power business so that we can understand sort of how that will develop over time from market dynamics and your efforts to cut costs.

Roger Penske -- Chairman and Chief Executive Officer

Let me take the 3% -- or the $0.03 basic that was Australia. This was basically profitability on big service jobs that were built in the second quarter last year in Australia. This was defense. And then we had some big equipment sales that went through in the second quarter last year. As I said in my text, I think, earlier, we expect that to flatten out and we'll hit budget at the end of the year. From the standpoint of used, we've looked at that carefully. And it's about 50-50 new car impact versus used car.

John Murphy -- Bank of America Merrill Lynch -- Analyst

So the opportunity on the used side, I mean is there just something in the business in the market other than the pricing dynamic? Or is this a question of working through some inventory that got hit from sort of the dynamics and pricing in the market? I'm just curious about how fast you think that will work through to then how fast the cost actions on the new vehicle side may help out.

Roger Penske -- Chairman and Chief Executive Officer

Yes. Good question. I think that, obviously, with pricing dropping as fast as it did, 2% per month for the 3 months, we were caught with a lot of vehicles that were overpriced. And obviously, it slowed down our sales. In order to move those out, we have to reduce that. And we're on an inventory reduction on overage vehicles today. I would say it's going to take probably 60 days, maybe 90 days, by the end of the quarter to get where we want to be for overage vehicles. And again, then we can go out and buy vehicles so we can make our normal margin back. Something else you have to remember that with diesel sales being almost 50% of the market over the last 3 to 4 years, a lot of those cars are coming back.

And they're really not vehicles that we want to buy and try to resell because people don't know whether they can drive them into London or other places in the U.K. So that also has an impact. So I feel strong that we can rightsize ourselves. Obviously, we're going to have the addition of Bristol, which will help us from the used car perspective and our traditional business. On the newer side, I think it's a little more complex because we have the OEM manufacturers pushing for registrations. And we end up prearranging in some cases some brands in order to meet our bonus targets. And with that, we have young used cars really with no miles on them.

And those cars are sold really at lower costs. Just to give you an actual point. At the end of the quarter, there was approximately 23,000 used BMWs online at the end of the quarter. 17,000 of those were less than a year old. So that pressure at the higher end of the used pushes all the way down, and that's some of the impact we're seeing on the used car values. And I think we're going to work our way out of those hopefully over the next 3 months.

John Murphy -- Bank of America Merrill Lynch -- Analyst

That's helpful. And then on parts and service, it seems like customer pay was close to flat, but warranty was up 14%. That's a bit different than we've seen from other dealers. Is there something going on with the mix of the business there? It seems like customer payout prices for other gears was a bit stronger.

Roger Penske -- Chairman and Chief Executive Officer

I've seen those comps. And that made us look pretty hard at ours, too, to be honest with you. And with that, we had a big comp on customer labor last quarter -- the second quarter last year. Also when you think about today, we're about 55% premium luxury. And with the premium luxury, we sell these maintenance packages and also try to give you maintenance care, auto care, I think it's called. And with those, that margin and that profit goes into war. It doesn't go into customer labor. So I think the full circle programs that they have, have some impact on that.

But again, it's something that we're continuing to look at. But overall, our parts and service business is good. We've reduced the number of technicians we need by 200 through the first 6 months. And we continue to train. We just announced that we'll have a partnership with some of the Army bases, where we can access military that are coming out of service and are looking to get into our type of technology. So we think that's a good partnership that we've developed with UTI.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Got it. That's pretty helpful. And then just lastly, this is kind of combined with the Warner acquisition. I mean if we think about what you had a slight near-term hiccup with Brexit, but that's Brexit. There's only so much you can do about that. But you still had very strong cash flow, and you have this high-class issue of how to allocate that free cash flow and that capital and we kind of look at the 3 major buckets being sort of investing back in the core auto business or the core truck dealership business or the stock and sort of the 3 big buckets.

You did the Warner acquisition, so it seems like you're kind of leaning a little bit more to the truck side. But if you think about cap allocation in your diverse portfolio, what direction are you kind of more leaning at this point? And should we expect more aggressive buybacks than we've seen? Or should we see more truck dealers? I'm just trying to understand which direction the business is going to head maybe in the near term.

Roger Penske -- Chairman and Chief Executive Officer

Well, I think our management team, along with the directors, of course, look at the value of our stock in the marketplace. And opportunistically, we would continue to buy stock back. Obviously, we're committed to a dividend policy, which we've continued to grow each quarter. And then from an auto perspective, we'll look at the strategic acquisitions such as the Lexus businesses in Austin and markets like that, that we would continue to add. But when you start to look at the metrics -- and this Warner truck thing came together quite quickly, when you start to look at the SG&A to gross profit, the return on sales, the capital that's required, the capex required to revenue, it's a much better picture. And with less interbrand competition,

I think that we'll continue to grow that business. We're exclusive with Freightliner. It's a great brand. They've got 40% to 41% of the market. So I would see us continuing to look at that. We got a strong balance sheet also when you think about it. Our leverage is 2.7x. And by taking on the Warner acquisition, we're going to go to 2.8x, projected to 2.8x. And I think that we're committed to growth in all 3 of these particular capital allocations. And I think we'll look at it on a quarter-by-quarter basis. There's lots of activity, people calling us on acquisitions, which I'm sure is part of the peer group activity today. And I think that we're going to continue to diversify. We think having the PTL, as I mentioned earlier, the truck businesses. Certainly, the stand-alone used car centers, we took a little bit of a hit in the U.K., as we talked about earlier.

But we feel very good about it. We're opening a new store between Philadelphia and Wilmington, a large store. We'll do the same in Bristol in the U.K. and we'll have 2 open in the first quarter next year. So we're on the ability to grow that. We're going to grow it in the right markets where it might be contiguous, where we can take advantage of our marketing and advertising.

John Murphy -- Bank of America Merrill Lynch -- Analyst

It seems like it's more opportunistically, the deal flow and the opportunity to come -- stay [Indecipherable] disciplined on share buybacks and dividends. And then the other channels are as returns on high rate that's a safe way to say kind of it's opportunistic over time?

Roger Penske -- Chairman and Chief Executive Officer

I think it's opportunistic, but we're going to look at the core values that we have built already. Premium luxury today, when you look at us overall, we're 66%. Volume foreign is roughly 25%. So we're going to stay in that probably mix. Then of course, the truck dealership business, which has continued to grow, is a great opportunity for us because, remember, we were on the largest truck fleet in the world with 316,000. So our expertise internally is very strong. A lot of the things that we're learning from the standpoint of predictive maintenance, the technology and what we're able to do with our mechanics, a lot of these, we'll be able to carry it over to certainly in our auto side. And I think that's, to me, going to be very good for us in the 20%-plus return on our investments. At least that's the history. I hope we can return that or will continue to return that, what we've had on Premier Truck since 2014 when we bought that business.

John Murphy -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much Roger.

Roger Penske -- Chairman and Chief Executive Officer

Yes, John.

Operator

Next in queue, we have the line of Rick Nelson of Stephens. Your line is open.

Rick Nelson -- Stephens -- Analyst

Thanks. Good afternoon, Roger and Tony.

Roger Penske -- Chairman and Chief Executive Officer

Hi, Rick.

Rick Nelson -- Stephens -- Analyst

To follow up on the Warner acquisition, if you could tell us where their margin structure, how that might compare to Premier Truck today, the 4.4% and any opportunities to improve there. And I'd like to learn about the acquisition multiple as well and how you plan to finance it.

Roger Penske -- Chairman and Chief Executive Officer

Well, we'll use our working capital -- we did use our working capital line to finance it. Obviously, we had nothing out on our line at the end of the quarter. From an overall standpoint, this was a fourth-generation business. And obviously, things that they had inside their businesses expenses, we obviously would pull out. But as I said earlier, hopefully, it won't be until we're mature. And when I say mature, when we get the consolidated completed, which might take 12 to 18 months to have it completely mature. We would hope to approach that 4% number. But I think it would be lower than that from the standpoint that we started out of the gate, we got some interest costs.

You probably have some other costs that we'd have to deal with from the stand point to build that. But from a gross profit, we think that there's a real opportunity from an SG&A perspective to drive that. Plus, we got technology. Plus, we got the ability to market one brand across our whole network when you think about 25 locations. And the good news is from a real estate perspective, we bought no real estate. And our rent as a percent of sales will be half of what it is on our traditional U.S. auto businesses. So overall, I think we're in good shape. And the multiple was reasonable from the standpoint. A multiple like this was probably around 5x.

Rick Nelson -- Stephens -- Analyst

But why would you pay for an auto dealership without the capex requirements?

Roger Penske -- Chairman and Chief Executive Officer

Well, the capex requirements, we had $2.5 million of capex -- excuse me, of fixed assets. And remember, no interbrand competition. We don't have any of the requirements on the CI, which you have, obviously, on the retail auto side. So that's a big factor. And then again, I talked about assets employed other than inventory is half of what is in auto. So you put it on paper side by side, there's no comparison. Now you don't get a deal like this every day. It's the same thing. You don't -- you're not able to buy Lexus in Austin every day. So continuing -- as I said earlier to John, we're going to continue to look at those as a Board and as a management team to see what we do. But this is a strong acquisition for us. Driving revenue of $1 billion for us will be strong as we go out to the next 12 to 18 months.

Rick Nelson -- Stephens -- Analyst

And you've almost doubled your size now at Premier Truck with this deal. Are there any framework agreement challenges now to grow from here?

Roger Penske -- Chairman and Chief Executive Officer

Well, obviously, we have certain framework agreements that you have with the OEMs and we're in discussion. We're not at the top of our limit right now, which was made, remember, a number of years ago when we got into business. So we think there's obviously ability to grow. And we're going to continue to talk to the customer or to the OEM.

Rick Nelson -- Stephens -- Analyst

And finally, if I could ask you about PTL. Really strong performance there. I know the public peer reported today, and they took our guidance down. Just curious your perspective on the outlook for PTL.

Roger Penske -- Chairman and Chief Executive Officer

Well, as I say, we had a 30% increase over our peer pre-tax for the quarter, revenue being up 10% and certainly from the standpoint of our pre-tax. But looking at the slowdown in the truck industry, light- and medium-duty market remains strong due to e-commerce and final-mile delivery. So medium duty, we don't see anything impacting that over the next 12 months because obviously it's final mile. And when you look at our business, our leasing and contract maintenance, typically these are 3- to 4- to 5-year contracts with economic escalators. So we're not in any risk there from the standpoint of losing that business. Certainly, we have the benefit of defleeting in rental. And remember, our logistics has 2- to 3-year contracts also but we can defleet.

And we looked at this marketplace over the last -- really since the beginning of the year because we have such a strong year in rental last year. And we could see the fleets now accessing the additional trucks they needed. So we could see some downward pressure on our rental, our utilization. However, we got the numbers over 90%, which is not good. We need to be around 80% to 85%. That's our model. So we started defleeting our rental fleet probably back 90 days ago. And we'll be down over 3,500 trucks. We're up over 18,500. So this will bring us down to probably around 15,000 in our rental fleet. And we're still getting good utilization. And I think that we feel good about the full service lease business because what's happening is many of the people that we access that are in ownership don't have the technology advantages that we have in our business, and also that's guided repair, that's voice-activated PMs and vehicle diagnostics. So we take that, and that gives us cost reduction from the standpoint of heading the fleet. Plus, we have the ability to find technicians.

We talked about people coming out of the service, things like that, that we can drive our business. And they have a difficult time disposing of their trucks. So we can tie that together with the packages that we sell. So overall, I see the market coming down. But still when you think about the -- today, the backlog is almost 200,000. I think it's 195,000. So we'll see some downturn in the heavy side, tractor side. But I see the midrange pretty much static through the next 12 months.

Rick Nelson -- Stephens -- Analyst

All right. Thanks and good luck.

Roger Penske -- Chairman and Chief Executive Officer

Thanks Rick.

Operator

Next up, we have Stephanie Benjamin of SunTrust. Your line is open.

Roger Penske -- Chairman and Chief Executive Officer

Hi, Stephanie.

Stephanie Benjamin -- SunTrust -- Analyst

Hi, good afternoon. Hi, Roger. Hi, Tony. I just wanted to follow up on your used U.S. -- your used supercenters in the U.S. I think the ability to see kind of flat GPU despite a negative volume environment is really positive. So can you talk a little bit about what you're seeing from just a demand perspective and the levers that you're able to pull to kind of -- to protect profitability even in this environment?

Roger Penske -- Chairman and Chief Executive Officer

Okay. Number one, CarSense has had a DNA, a history of providing the best used vehicle at around $20,000 MSRP. And they're very selective of what they're able to buy. So there's been some pressure on trying to find the right vehicles. There's no question about that. But during that time, we still maintained our margin with the front-end growth and also F&I as I said earlier at $3,000. So I think it's a discipline. I think we have low turnover of our salespeople. It's a salary plus unit bonus.

There's no margin being pressed. We price the cars to market. And again, we've been able to stabilize that. Plus, we have a good parts and service business there. So overall, it's about execution, which I think they've been able to do consistently since we bought the business. And the good news is we're going to now open up new locations, which will give us overall growth in the company. And really when you look at units, we're down 2% year-to-date through today and we're up 6% in July.

So when you think about this, I think we're on the right rotation now from the standpoint of what we can buy and what we can sell. And with that, I think that we'll be able to lead our business through the third quarter with both year-to-date and for the quarter. So at least that's what's reflected today. And the return on sale on this business is again over 4%.

Stephanie Benjamin -- SunTrust -- Analyst

Great. Thanks so much for the color as always.

Roger Penske -- Chairman and Chief Executive Officer

Thanks.

Operator

Next up, we have Armintas Sinkevicius of Morgan Stanley. Your line is open.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Great. Thank you for taking the question. My question is as we start to think about RDE in September, what are you hearing from your partners with regards to the supply of vehicles that you'll have access to?

Roger Penske -- Chairman and Chief Executive Officer

Well, this is the new standard. We had WLTP and RDE as real driving emissions where the WLTP did all of those tests on dynamometer. So now, we'll get into looking at fuel consumption. And certainly, CO2 and NOx will be part of that. To me, we're still not getting through from an Audi or Volkswagen group, Audi, Porsche, the vehicles that we would expect to get through the first 6 months. So that's still an overhang. So I can't give you a clear path. I don't have a clear path on what's going to happen between now and the end of the year especially with RDE. I would put a caution light on because they certainly haven't lived up to what we had expected to have through the first 6 months.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

And then the other question in a bit of a different direction with digital. You mentioned 33% of new and used from digital sources. Does that mean 33% of the retail automotive units sold come from PenskeCars.com and third-party lead generators? So just trying to get a sense of how many vehicles have you sold through PenskeCars.com this quarter.

Roger Penske -- Chairman and Chief Executive Officer

Probably from our owned -- obviously, we're using websites, OEM sites, and probably somewhere around 8% to 10% of our -- would be through PenskeCars.com and preferred purchase.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. That's 8% to 10% of your retail automotive units?

Roger Penske -- Chairman and Chief Executive Officer

Right.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. Much appreciated.

Operator

Next up, we have Derek Glynn of Consumer Edge Research. Your line is open.

Derek Glynn -- Consumer Edge Research -- Analyst

Thanks and good afternoon.

Roger Penske -- Chairman and Chief Executive Officer

Hi, Derek.

Derek Glynn -- Consumer Edge Research -- Analyst

As we think about SG&A in the back half of the year, we're in this backdrop of various potential headwinds in the U.K. but also the Warner acquisition and some cost savings initiatives you just announced. What did the trajectory of expenses look like in the second half? And do you think you can drive leverage on SG&A in the next couple of quarters?

Roger Penske -- Chairman and Chief Executive Officer

Just to make a point on -- if you compare Q1 of '19 to Q2, we were down 120 basis points on a sequential basis. Obviously, we had some costs that we don't call out during -- in our information that we provide you during the second quarter. But we think, certainly, with Warner being somewhere in the 60s, that should help us. And there's no question that Darren Edwards and the team in the U.K. have got a prescriptive plan on cost reduction that we expect to take out significant cost over the last 6 months. And also, it's not just about SG&As. We also got to drive growth. And obviously, when you look at our new car grosses, really, we're flat at 7.5%. Our used was down. That was primarily driven by the U.K. supercenters because of the oversized used car inventory plus the pricing that we had that was high due to the lowering of the used car prices, 2% a month during the quarter. So that drove us an inability to sell some of those vehicles. And we expect to have that out during the rest of the year. So overall, we expect to get leverage for sure.

Derek Glynn -- Consumer Edge Research -- Analyst

Got it. Thanks for all the commentary.

Roger Penske -- Chairman and Chief Executive Officer

Thank you.

Operator

Next up, we have the line of Rajat Gupta of JPMorgan. Your line is open.

Rajat Gupta -- JP Morgan -- Analyst

Hi, thanks for taking my questions. I just wanted to start with the U.K. new vehicle business. One of your peers recently talked about electing to forgo certain volume bonuses by not registering new vehicles. Is that something that you plan on doing? Or is that in the thought process?

Roger Penske -- Chairman and Chief Executive Officer

Well, this is I think what was mentioned. It was preregistration because what happens in the U.K., you've got quarterly targets. And if you hit these targets, it unlocks a significant amount of bonus. The problem is if you prereg these cars -- and I think I heard that same comment. What it has, you then have a young used car, really, that has no mileage on it. And I said earlier that -- and BMW as an example had 17,000 out of 23,000 on the Internet at the end of the quarter that were less than a year old. So obviously, it's a case-by-case basis depending on what the OEM is. Particularly, I know BMW was much tougher this past quarter. We've been able to manage that because of the size.

We're the number one retailer in the U.K. and Northern Ireland, about $8 billion in revenue. So obviously, we have more locations to spread some of those vehicles over. But we're going to be very disciplined, I would say this. We've talked to the OEMs about changing some of their programs to reducing these targets because if the targets are too high, it impacts them too because obviously it hurts their margins. It hurts their residual on a going-forward basis. So we'll continue to manage that, but I think it's going to be on a case-by-case basis. And again, the OEMs are going to have to manage inventory based on sales because when you look at the OEMs in the U.K., the actual retail in some cases is only 40% of what's being sold. You've got mobility plans. You've got a rental car. You've got corporate deals and these sometimes in brokers. And the brokers end up selling cars that they buy cheaper at the end of the quarter. They sell those retail, and we got to get the OEMs and stop that. That to me is a key option for them in the future.

Rajat Gupta -- JP Morgan -- Analyst

Got it. And then you talked about some of the cost-saving initiatives. Could you give us a sense of the actions that you're planning to take? Will there be any costs associated with that initially? And then what kind of savings are you expecting from those?

Roger Penske -- Chairman and Chief Executive Officer

Well, it's going to be several million when you think about it. Obviously, when you look at cost savings, I think there's opportunities for us with our loaner car programs, our demonstrators. Certainly, there's a lot more of that in the U.K. We don't have -- we have loaners obviously for service over there, but we don't have demos. We use cars that we would have in stock for a quick demo ride. Certainly, head count will also -- we'll look at do we stop hiring. Do we replace people that tread out of their business? This will be an opportunity. We can look at other activities plus there's outside services.

Today, when we move a car from 1 location to another, we have a third party to do that. From a standpoint, we'll probably do that with our salespeople on a going-forward basis, training and certainly other things that we'll be able to look at from a standpoint of cost. But I think Darren has got a good plan. It's several million dollars in savings when we look at it, as I said earlier, over the next 6 to 12 months. And also we had costs. We had costs in the U.K. for the building of our 2 new supercenters there. We have to carry people, redundant people when we're doing that, and be sure they're trained to move into the next location. So there is some cost associated with -- we don't call out those costs obviously because they're not material in our numbers.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Got it. Got it. Just last one for me just in the balance sheet capacity. You probably ended 2Q around 2.7. It probably goes up slightly with the Warner acquisition. How much -- I mean you generate good free cash flow every year. But how much could you stretch that leverage to -- for the right deal in the future? Is there like a rough range you could go to or you think you want to be at?

Roger Penske -- Chairman and Chief Executive Officer

Well, right now, we were 2.7 at the end of the quarter, but we'll be at 2.8 as we talked

based on the acquisition. But the cash flow out of that will be strong. And we're expecting profitable business between now and the end of the year. We don't have a number. I guess we would have to sit down with our Board at any time there is a significant acquisition that would put us in a position. But I guess you could stretch it to 3.3, the way we're calculating today. And again, when we did PTL, we were at 3.3.

Rajat Gupta -- JP Morgan -- Analyst

Got it, OK. Thanks a lot.

Operator

Next in queue, we have the line of Michael Ward of Seaport Global. Your line is open.

Michael Ward -- Seaport Global -- Analyst

Thanks very much. Good afternoon, Roger. Good afternoon, Tony.

Roger Penske -- Chairman and Chief Executive Officer

Hi, Michael.

Michael Ward -- Seaport Global -- Analyst

If I'm looking on the chart on page five showing your operating cash flow and $300 million in the first half. But on an annualized basis, you basically doubled over the last 5 years with operating cash flow. And if I got those right, about 1/3 of that has come from retail auto, 1/3 of it from PTL and 1/3 of it from retail truck. Is that about right?

Roger Penske -- Chairman and Chief Executive Officer

I'd have to look at the numbers exactly, but I'm assuming you've done the calculation right.

Michael Ward -- Seaport Global -- Analyst

But directionally, that's about right.

Roger Penske -- Chairman and Chief Executive Officer

Right.

Michael Ward -- Seaport Global -- Analyst

Okay. So if I look at that, then the sustainable portion of that operating cash flow that is left subject to cyclical risk has grown closer to 3x because of the parts and service and PTL?

Roger Penske -- Chairman and Chief Executive Officer

Well, when you think about the PTL cash flow, I think I said earlier it's $76 million of cash benefits to PAG for the last 12 months. That's cash and also tax cash savings. That will continue as PTL continue to buy equipment, and we get the benefit of the accelerated depreciation that lands on our portion of that partnership. And then, of course, with the truck business, it's 64% to 65% parts and service gross profit. That will continue even if we have some softening in the top line and on the new and used truck sales. So overall -- then you look at Australia with 80% coming out of parts and service, and that's certainly sustainable. So I think we got a good model. And that cash flow, I think, will continue to be strong even with some slight movement in the new car SAAR and maybe even the U.K. Brexit issue that we'll have to face here for the next probably 3 to 6 months until we see about Brexit once this -- again, Boris Johnson solve it, or will they go to a hard Brexit and have to have another election.

Michael Ward -- Seaport Global -- Analyst

So is that what you look at? Just the ultimate goal to have a higher level of more sustainable cash flow, the ultimate goal of your global transportation services business?

Roger Penske -- Chairman and Chief Executive Officer

Well, I think you have to look at your cash flow from the standpoint of any business. And remember, we started this business back in '99...

Michael Ward -- Seaport Global -- Analyst

Not everybody in auto looks at it that way.

Roger Penske -- Chairman and Chief Executive Officer

Well, I think that cash flow is very important. Now obviously, we've been aggressive in investing in facilities from the very beginning. I think some of our peers find out now as you get into premium luxury, some of these numbers are pretty big. I think we're being probably a little -- we'll scrutinize some of these deals a little further. We push back on the OEMs in some cases. But from a cash flow, today, obviously, we're not running 1:1. And we need to be sure that we have cash flow to cover our dividends. Corporate CI obviously is something that we do. The stock buybacks, which we talked about earlier in the conversation to date certainly is -- it's certainly something that the directors look like. And I think that the most important is that we're giving a payout of 30%. So we need to manage the cash flow. And I think with the 45 to 60 and the 80, when you start looking at parts and service as part of our total gross profit, that's going to continue to allow us to get good cash flow.

Michael Ward -- Seaport Global -- Analyst

Perfect. Thank you. Thank you very much for your time, Roger.

Roger Penske -- Chairman and Chief Executive Officer

Thanks, Mike.

Operator

And next in queue, we have the line of David Whiston of Morningstar. Your line is open.

Roger Penske -- Chairman and Chief Executive Officer

Hey, David.

David Whiston -- Morningstar -- Analyst

Thanks. Hi guys. I wanted to go back to the issue of preregistering in the U.K. Group 1 in their call specifically said they didn't want to pursue these targets. You guys at least this quarter did. And I know there's probably a different brand mix between the 2 of you guys. You guys are on the premium and more. But just how important is getting that quarterly bonus for you guys every quarter? And just can you talk a little bit about the thought process that you and the leadership team have as to do you want to take that route each time?

Roger Penske -- Chairman and Chief Executive Officer

Well, look, we've been taking advantage. We've earned that big bonus for the last -- since 2001 or '02 when we bought the business. That's been a component of the profitability in some of the larger German luxuries. Now obviously with the market changing today and the pressure to move vehicles and our targets are higher than -- in many cases, than the market growth is, obviously we have a decreasing market. When we get a higher growth target, it pushes it. I think that the guys at Group 1 maybe had a smaller number. And we've looked at it ourselves. I will say we did hit the bonus number.

But what we do have is a reciprocal of that is we have more what I call young used cars, 0-kilometer cars that we have to sell out. We've got 17 BMW stores. So we can do that probably pretty proficiently. But again, we would rather have -- we had purchased at market and not be in this young used car business. So I think it's really OEM by OEM. Other OEMs, we're fine. We don't have any of that. So I've met lately with the BMW people specifically to talk about targets. And I think it's an ongoing negotiation. We had some of these in Spain. We were able to negotiate that. Italy is fine. And now we're talking about the U.K. And I think they understand that the management, that the senior levels in Munich understand that they can push these targets. On the other hand, when you look at the U.S., I think it's very well balanced.

David Whiston -- Morningstar -- Analyst

Okay. Moving on to trucks. The new vehicle volume was obviously very, very good but F&I suffered. Can you just talk about why F&I was down so much?

Roger Penske -- Chairman and Chief Executive Officer

That's obviously because of the more units we sold. You see, you got to look at -- we sold considerably more units in the quarter when you look at it. I think that today, we probably had a little more fleet business. And the customer finance area of this is basically they do their own. Many have come to us with their own financing. Now the one good thing is that we have a strong F&I department at Premier. And we expect to take that same capability into Warner. And I think that this varies quarter-to-quarter.

David Whiston -- Morningstar -- Analyst

Okay. And on the M&A environment, is it fair to say you might have a preference toward the truck side now versus light vehicle? Or does it just depend on the deals that come up?

Roger Penske -- Chairman and Chief Executive Officer

I said, look, this Warner deal came up probably -- came up and closed in the last 90 days. We're not going to -- we're not getting out of the auto business for sure. But again, you remember we made the acquisition at the end of December to get the 2 Lexus stores in Austin, which we think was strategic. And we sold 2 stores in New Jersey. We're going to continue to prune the underperforming dealerships out on an ongoing basis, similar to our peers. And we're going to look for opportunities where we can glue them on, where we have market scale already. And I think that we're not going to sit here just saying it's trucks. We're going to be cars.

And I think that's the importance of our diversification is there are more opportunity out in Asia and the Pacific area where we are. There could be real opportunities out there that we would be able to add to our business in that part of the world. Again, as we look at the truck business, I know that Freightliner is continuing to consolidate. They have 134 partners. I know they want to bring that down. So -- and some of the people are willing to sell. We could add to that. So it will be a balancing discussion. But really, our Board really comes into that discussion from the standpoint of where we want to put our capital. I said earlier, I think, to Mike Ward, look, it's dividends, it's corporate identity, it's stock buyback. And I think it's acquisitions. And I think all of those take priority of each other, depending on what the requirement might be and the opportunity.

David Whiston -- Morningstar -- Analyst

Thanks. And since you mentioned opportunities in Asia, do you have interest in going into China?

Roger Penske -- Chairman and Chief Executive Officer

This time, no. We looked at that a number of years ago. We do not have interest going to China. I'm thinking more of areas where -- can we add Indonesia, where we have business today with Eranjay [Phonetic] the big mining there. We're doing a lot of business there, and we established a dealer group there. These are things we can do out of Australia with very little cost that would give us good coverage. I think there's opportunities there.

David Whiston -- Morningstar -- Analyst

Okay. Thanks guys.

Roger Penske -- Chairman and Chief Executive Officer

Thank you.

Operator

And with no further questions here in queue, I'll be happy to turn it back to the company for any closing remarks.

Roger Penske -- Chairman and Chief Executive Officer

Okay, Justin, thanks for the time. And we'll see you folks on the call next quarter. Thanks.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Anthony Pordon -- Executive Vice President Of Investor Relations and Corporate Development.

Roger Penske -- Chairman and Chief Executive Officer

John Murphy -- Bank of America Merrill Lynch -- Analyst

Rick Nelson -- Stephens -- Analyst

Stephanie Benjamin -- SunTrust -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Derek Glynn -- Consumer Edge Research -- Analyst

Rajat Gupta -- JP Morgan -- Analyst

Michael Ward -- Seaport Global -- Analyst

David Whiston -- Morningstar -- Analyst

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