Keynote: Automotive on the Horizon

Chris Walsh: We thought we'd take the opportunity while everyone's enjoying lunch to have a special guest spend some time with us and the guest that we have to spend some time with us today is Rob Kurnick Jr. Rob is the vice chairman of the Penske Corporation and the president of Penske Automotive Group. Roger Penske owns the Indianapolis Motor Speedway so this is a little bit home base I guess for him or certainly for the Penske Corporation. But we wanted to have a discussion with Rob that I think is going to be relevant to everybody in the room. The challenges Penske face are very similar to all the challenges that we face in the room and we thought it would be a great idea to have that kind of a dialogue. So let's give a warm welcome to Rob Kurnick. Thank you, Rob. Thanks for coming in.

Rob Kurnick: Thank you.

CW: So jump right into it a little bit. So Rob, Penske Automotive Group is a massive auto retailer. But in many ways you have a unique perspective because of all the other businesses that Penske Corporation operates. Why don't we start off talking about these and how running these businesses can impact your decisions in retail?

RK: Yeah. Good afternoon everybody. Thank you for the invitation to be here today. I appreciate it. So yeah, when you look at the Penske Corp, I think so many people when they hear Roger's name they always say, “Roger Penske, he's into everything.” And, you know, our business is so big, but it's really not that way. Our business is really sort of strategically narrowed over the course of the last 20 years with just a heavy focus on the transportation sector and automotive retail in particular. So when you look at Penske Corp, Penske Corp is sort of the holding company that holds all of our interests and today we do about $41 billion of revenue there and employ 75,000 people when you look at it on a combined basis. And to put that in perspective, when I started, which my 30th year will be next year, we did less than a billion dollars of revenue. And even if you go back 20 years, we were less than $5 billion in revenue. So our growth has been absolutely monumental. And a lot of that has been driven by the automotive group in particular in terms of some of the growth that we've had there. I mean, if you look at the three segments that we operate in, there's PAG, Penske Auto Group, our Penske Transportation Solutions which you guys might know as the one-way yellow trucks that run down, and then Penske Entertainment which is this venue as well as our racing team. So those are sort of the three sectors we operate in and at PAG, PAG is a New York Stock Exchange traded company. We have 338 dealerships. A lot of people don't know that we operate both in the U.S. and internationally. We actually generate about 40% of our revenue overseas and most of that's in the UK. So we have our franchise dealership business in the U.S. and around the world and then we have our commercial vehicle business which is – we're the largest freightliner dealership group in the country and then we distribute trucks, MAN and Western Star in Australia/New Zealand as well as power systems for some interesting power applications including the Australian Navy and submarines, so. But all of that has under its very core is all transportation focused and that is the industry that we're fundamentally in. I mean, you look at PTS, Penske Transportation Solutions again, you see it as yellow trucks, but really if you see a Walmart truck, which is a Class A truck, you know, one of their Class A trucks, or a Target, chances are we own that truck. We have the largest fleet in the United States with about 413,000 vehicles and really work on sort of contract, full contract leasing of these big rigs. And then Penske Entertainment, which is really Roger’s hobby and sport, it consists of this venue and it consists of our race team. And when you look at our race team, sometimes he becomes apologetic for it because it's such a pleasure for him, but we've never spent a single dime on independently brand development. Our brand development has come from all the exposure we get through venues like this or all the exposure we get through the Indy Racing League or the NASCAR cars and that's how Penske has become sort of a household name is really through that. And it's quite a nice business nowadays. It’s really quite profitable. And when you talk about business challenges, I like to tell a story that we closed on this in January of 2020 and we all know what happened 3 months later COVID hit. And then all of a sudden you've bought the largest single day venue for a live sporting event and you can't hold a race. But, you know, I thought that was sort of a blessing in a lot of ways because Roger was able to sustain that. Our company was able to sustain making sure we can continue to run the race and continue to invest in a place like this and sort of keep the legacy of the speedway alive. And so, it may have been tough but, you know, last year – I was telling these guys at the table – last year at the race last May – my first INDY 500 was when I was 12 years old so I've been to a lot of them – it was hands down the most spectacular event that we've had here because of the investment we've made on-site as well as the weather helped of course, but the investment we made on-site, the racing was exciting with the rule changes. So, you know, it’s been quite terrific. So when you look at it as a whole, we're really very large. We like to say we operate like a small company and I think in a lot of ways we do. And when you have individual dealerships like we all run every single day, sort of the aggregation of that, how you have to hustle every day is how you really try to hustle. And even when your business becomes really very large scale. So I think there are a lot of things we learn by scale that we can apply down to even the smallest of retail stores.

CW: Interesting. So you mentioned the growth that's out there. The last few years have certainly been a roller coaster ride for automotive. I mean, kind of a roller coaster ride in our country in general. We're kind of starting to come out of that a little bit. Now we're – there’s always something that seems to kind of set us back a little bit now, but we’re also coming into an election year. What are some of the things that Penske is doing now to prepare in general for the things that you believe are coming in the future?

RK: Yeah. I think it's a very interesting time to be in the auto industry when the economy is a little bit unstable and I would say this back when we were in the middle of the of the supply chain crisis in terms of where inventories were and how tight they were. And I had said back then and I still believe it now and I think quite frankly we're experiencing some benefit from this is that the level of pent up demand that is built up by the inventory shortages really will help maybe for the first time in my career really help mitigate the effects of a recession should we get in a recession. I don't know if we're in one or not right now. But clearly you see the benefit of it given sort of all the pressure on the consumer when you have high inflation. You have the interest rates. We're all still primarily selling at full MSRP so cars are very expensive. I think car prices now are up 20% versus pre-COVID and the average payment is about $730. That’s expensive for the average consumer and I think in any other atmosphere that might have been a lot more impactful in a negative way to our businesses, but I think the impact of sort of that pent up demand and that need for replacement vehicles has really helped sort of stabilize that. And then of course, we'll get into service and parts a little bit, but the strength of service and parts has helped a little bit. But I think the biggest thing impacting us and probably many in the room would agree with this is just interest rate costs are, you know, they're debilitating to the consumer. But when you have a business that runs on floor plan, I mean it's really very difficult. So what our focus on is really balance sheet management in terms of cash management of – we carry a lot more vehicle equity than we maybe used to in the past just to keep our floor plan costs down and then we have worked over the course of the last three years very thankfully instead of doing sort of major acquisitions like so many people were out there acquiring like crazy we did a lot of balance sheet management. And I'd like to tell you that we knew that that was going to be the reason we did it, but in a lot of ways we were lucky and as a fact our debt levels are just so extraordinarily low. And so, managing that debt level I think is really really important. And managing floor plan I think is really really important. And then just people costs, too. I mean, I think that also becomes important. We took out about 8 to 10% of our – sustainable, of our workforce at the Covid era and we still are below 8 to 10% and I think making sure you don't reintroduce that expense is a really important aspect because you don't know what's coming in the next 12 or 18 months. So we focus on retention and we focus on making sure all our employees are properly trained and they stay with us. I think that's all really important. I used to say that November of 2008 was one of the worst months of my career because how many people we had to take out as the world fell apart and then March 2020 comes and it's almost like drop the mic because it was pretty tough back then. We're so much better operating leanly and so much better focusing on expense and focusing and managing that balance sheet and that really keeps us prepared to be – we can face head on the challenges that this industry can tend to bring to us.

CW: That's interesting. So let's talk about the one piece that's in the news everyone's really kind of talking about is we're into our second week, the UAW strike. I know your franchise mix is a little bit different, but tell me a little a little bit about how you see the strike playing out and what you're doing to kind of counteract the impact of it?

RK: Yeah. I mean, as you said, it doesn't impact us as much on the franchise side. About 1% of our business is with the domestic big three and the rest is with volume foreign and premium brands. So it doesn't impact us as much, but we of course carefully watch it. It does impact us in our logistics business where we have our--do all Ford’s inbound/outbound logistics as well as we manage a number of parts distribution centers for a lot of the OEs. So we're seeing some impact there right now. I think the answer there is duration. How long does it last for? Of course, the shorter the better for everybody. I think for the UAW as well as for manufacturing. For everybody along sort of the pipeline in the industry because a long strike could have some debilitating effects on the economy as a whole. So I hope it's careful. I mean it's a tough spot when you think about it because you look at sort of the asks from the UAW and you can say, you've heard Jim Farley and others say that the offers have been so extraordinary and the asks have been even more extraordinary on the opposite side and they're both right about that. But, you know, you have the UAW who believes that they deserve more and they have these record levels of profitability that the manufacturers have had over the course of the last three years. And so what's the right mix? And what's the right balance and how do they share that? And negotiations I'm sure are just very very difficult. You got to, you know, the companies always have to be really focused on making sure that they don't reinstitute these legacy costs that made them uncompetitive before and on the other hand the UAW needs to show its members that they can get a piece of sort of that profitability that's happened over the course of the last three years. So, I think it's going to be tough and I think it's all a matter of duration and hopefully reasonable heads and reasonable negotiators end it very soon.

CW: Yeah. Another big macro trend that's out there is the electric vehicles that's going on out there. So as we look at that, certainly it's starting to have an impact from a capital investment perspective with retailers and there were expectations coming from government and legislation and state and federal. How are you managing these expectations in a way that's realistic for Penske?

RK: So electric vehicle I think has really put the auto industry and probably the dealers just in the middle of a political firestorm. I mean, it is, you know, you see the EPA requirement is that two thirds of the cars sold in 2032 will be electric vehicles and you see countries and states within the United States leading efforts to completely ban the internal combustion engine. It's – those are difficult times. And then you have the reality of it. You have the expense of the electric vehicles being, you know, anything over $80,000 is just generally difficult to sell. You have a customer who's very afraid of range anxiety, very afraid of infrastructure and whether there's proper infrastructure there. So you have a government pushing one thing on you and you got the customer maybe not exactly where the government's at and I think in the middle you're probably seeing your electric vehicle inventory bloat like we are – in the middle sit the dealers and trying to figure out what it is exactly we need to do from a management perspective. So, I mean, I think there's a lot of unknowns that have to be worked out, but we're all in when it comes to an investment perspective. You know, no matter what these challenges are, I mean the electrification is here. I don't know if it's here as quick and as fast and as big as what the government wants it to be, but it's here and it's something I think we as dealers have to be ready for. So we've made – we've installed 1,800 charging infrastructure, you know, charging units through our dealership network and the idea of that is one, manufacturers are asking for it and secondly help to reduce a little bit that charging infrastructure to give at least an alternative. The offset to all that is, and you know you can put a unit in your garage and get really comfortable with that, but if you're out on the road I think there's 200,000 charging stations in the United States right now and I don't think all of them work quite frankly. And there's about a million vehicles that'll be sold this year that are fully electric. So there has to be bigger investment in that. We’re investing in consumer awareness, trying to explain to the customers what electrification is all about and then on the service side, it takes a big investment in terms of the proper tooling, proper software, and proper training to make sure that we're able to support the needs of the electrical customer. So, you know, we’re – I'm skeptical. I don't think it's going to happen as fast as everybody says it's going to happen and I wish everybody would focus on a hybrid strategy as opposed to a pure electric strategy which I think might be a solution to all these problems but you can't fight it. I think we got to get on board and be supportive of it.

CW: So you talked about the investments you made. So have you had, given the size of your organization and the mix that you have, so have you had to customize your approach based on the manufacturer and the geography of your stores on the investment side?

RK: Oh yeah, definitely. So I think everybody who's been in the dealership business for any time knows that no manufacturer is exactly alike. And you got--and they have different--CI is a perfect example. You have different CI among every single brand and then what's today is different two years from now. So, you know, it's always changing so it's something that we're very very used to. But yeah, we're getting the manufacturers tell us sort of what their specs are and I think like we are on the CI side I mean we're good partners on that and supportive of what their initiatives are. So yeah, I think there's no cookie cutter approach in my view from across the different brands.

CW: What about the demand perspective? I know you have lots of different geography that's out there so have you seen variations in demand across franchises and locations?

RK: Yes. Where we see our bestselling--best markets would be in the west coast. Phoenix, all across California just tends to sell better than what you see in the northeast or in the Midwest. One of the things that frustrates me about it too is everybody's looking at it as if our country is exactly the same across from border to border. And it's not. What fulfills a transportation need in San Francisco doesn't fulfill a transportation need in Detroit, Michigan, Atlanta, Georgia, or Indianapolis. Because there's more miles to travel. There's less—you know, much more ground to cover and it doesn't really satisfy. And I just think a little bit more targeted approach in terms of what--how you would focus or where you should focus on electrification I think would go a long way. It would be a lot more thoughtful approach to just trying to force it onto everybody who may not be a buyer of that. So yeah, there's definitely geography differences and I would tell you the west coast is the best. The northeast started off strong but it's okay. It would be second best, but we still ship a lot of cars from the east coast to the west coast.

CW: So staying on the EV side what is your perspective on – you've got organizations like Rivian and Lucid and VinFast that are solely electric manufacturers. What's your perspective on what they're doing and maybe what you believe the future holds for them?

RK: Yeah. Well, I mean, there's two dimensions to that question I think. The first one is, will they be competitive? They seem to be competitive. I had always said, even when Tesla – you know Tesla's had great success – but I used to say that Tesla will have great success until the traditional OEMs are in the electric business and electrification business and once they are, that everybody's going to take that perfectly fitted car that took years of development and research over sort of the concept of a Tesla. And that hasn’t proved itself to be true. I mean, Tesla still is generally on fire and you see places, you know, brands like Rivian gaining a little bit of ground here. So I think that there's probably a chance for success. Their approach in terms of the direct sales model I'll never be supportive of that for a couple reasons. One because we're in a different business and I think more than anything that's important to us all in this room is preservation of the franchise system and so we fight very strongly to make sure that we can help preserve that and do what it takes. But the thing that kills me, while they’re maybe having a little bit of success, Tesla had a little bit of success with it, there's this view that if you can do it, do it. And there isn't a question about if you do it, is it the right thing for the business in the long run. I mean, why all of a sudden after 100 plus years in the auto industry that had a dealer network you no longer need to worry about the customer interface on the ground in terms of car delivery, service? Everything that you do at the dealer level just doesn't matter, the car just shows up at your doorstep and that's okay. I just don't think in the long run that that is a model that will ultimately work or the customers will ultimately expect. And then you look at, you know, around the world, one of the benefits of our company is I get to understand automotive retail globally and not every country has franchise protection but every country has dealers. And when you go to dealers, I remember going to a dealer in inner Mongolia China, it was an Audi dealer and it runs exactly like what our dealerships run here. And it has no franchise protection. And there's a reason for that because that's the best model. That's the model that works. It works and people have tried to attack it over the course of the last 25, 30 years but you keep going back to the dealership model. So, they'll probably gain some success and they'll probably make some inroads but I wonder when they look back in 25 years whether or not that whole thing looks more like a traditional dealer network than what I think they're hoping they can get.

CW: Let's turn our attention to fixed ops a little bit. So obviously the inventory shortage that we've been experiencing and to some extent are still experiencing has had an impact on service operations. So what have you seen and what are you focused on when it comes to fixed ops?

RK: Yeah. So, I think inventory shortage was definitely a component of what created a little bit of pressure on the fixed ops business. But I think COVID was really what killed it – not killed it, but came close to it. It was – you know, that's when things really started to fall apart and that was really because miles driven it just fell off – nobody was on the road and nobody was on the road during COVID and then sort of what COVID changed in terms of our work culture also kept people driving less. And so you've had these years of fewer miles being driven which had an impact all across the way: fewer new cars, less warranty, fewer cars on the road in general, less customer pay, no accidents so less collision. So it's been under pressure for quite some while. But now, you know, I'm sure everybody here who's involved in the fixed ops side, it's changed. I mean miles driven are back up to where they were pre-pandemic and things feel really quite good. You know, customer pay, warranty, and collision are all up in our business and so we're experiencing some great successes there and hopefully it continues to drive. I think our biggest issue is infrastructure challenges and that would be from a facility perspective making sure we can accommodate to demand and then technicians. I think everybody would say that technicians generally are tough to come by and it's making sure we have the right sort of support to be able to support the size of our parts and service business.

CW: Yeah, it's a great segue into my next question which is going to be around technicians. Obviously there's been – there's a shortage now, there's been a shortage for a few years. So what are you doing to attract and retain the best technician talent that you have?

RK: Yeah it is definitely a challenge and it's a challenge today but it's been a challenge for as long as we've owned this business. In 20 years, it's always been a challenge. But I think there's a few things we do that are important and sort of the way I look at it is hiring technicians, but more importantly making sure you're retaining technicians. If you lose them, you have to hire more. So you need to recruit well and you need to retain well. We do some of the very traditional things. We've partnered with Lincoln Tech and UTI and we get a nice stream of technicians in from Lincoln Tech and UTI. We've done things like, which I really like, is a hiring bonus to our employees – referral bonus I guess you call it. A referral bonus to our employees who recruit in technicians if a technician’s there for 6 months. It's a fairly sizable amount, too. At first I thought, “Boy, that's a lot of money.” And then I thought it's very much worth it. And that's been great internally too because there's a little competition in terms of bringing in technicians. And then we have retention bonuses, we have tooling stipends, you know, things that make it all different. But I think probably the most important thing is that we give our technicians a career. And again, that's the benefit in my view of being associated with a company of our size is we can give a career. We’re very very much focused on make it hard to get in and hard to leave, very very focused on making sure we promote from within and because you're a technician doesn't mean that if you have aspirations to run the parts and service for us or to become a GM – we just put one of our parts and service managers into, as a GM of one of our stores – or above that, there's no reason why you can't do that. Your career path is as good or as able as anybody else's career path. So, and traditional benefits. great healthcare, 401K with matching. And so I think technicians feel like they have an opportunity for a career opportunity to progress and to build a better life for they and their family. And then lastly I think just facility wise, I mean, we – I think if anybody's been to our stores, we're not shy to invest in our stores and that includes on the fixed side and making sure that everything is climate controlled. You get into, you know, Arizona is a big market for us or Texas and you get into those markets and you really create a really comfortable working environment for the technician so that feel like they're treated well and treated on par as everybody else. So yeah, it's a challenge but – and there's not a lot you can do – but I think making sure you take care of them once you got them hired, it's just a critically important component of it.

CW: What about, so switching to sales, have you had to do anything different with salespeople in order to attract and retain the best sales talent?

RK: So our turnover rate is about 20% generally speaking and most of that turnover comes in sales. It has been – it's different than on the technician side. As a matter of fact, I think COVID changed sales, in my view, in a way differently than what you see with the technicians. In COVID, you know, we basically as many people had to shut down most everything and that included eliminating a good chunk of our sales force. When we brought back people, our strategy was we need to make our sales force more efficient. We need to make sure they're focused on sales. So instead of selling 10 cars a month, we're looking for the salespeople who can sell 12, 13 cars a month and really drive efficiency and bring in less people. So, you know, again today we're 8 to 10% less than we were pre-COVID and I think that's really because of the sales side of it. We’ve driven efficiency in the sales side and I think we work really hard towards continuing to drive efficiency in the sales side both through not bringing them back, making sure the higher demands and good sort of pay plans which make sure we incentivize them. So it's good for us in terms of our overall expense structure and it's good for the salespeople who are on board because they have opportunities to make more money.

CW: Yeah. So sticking on the sales side, we've had a couple conversations about this, you know, you and I, when it comes to online retailing. Right? There's so much discussion about online retailing. I think the manufacturers have a certain perspective on it. Consumers have a perspective on it and retailers have a perspective on it. So, what are you doing from an online retailing perspective and what significant changes have you seen and do you think you will see?

RK: Yeah. I think online retailing is interesting. Everybody over the course of the last 20 years, if I believed everybody who said the dealer franchise system is going to fall apart for this reason, we'd never be in business again. We continue to prosper. And this is one of them. This is sort of the newest one. Everybody says, well you can take the – you don't need the dealer body. What you'll do is you turn it into an Amazon-like business and just the door will pop up in your driveway and you'll be fine. Which is fine. I mean, if you could do it and the customer would be happy that would be great. But that doesn't really seem to be where all the customers are. We've invested a lot in online retailing. We have the capability on the new franchise side and then we developed, co-developed with Cox, a tool on the used car side in terms of creating an entire online experience from start to finish. And I got to tell you what we experience is that while everybody starts – almost everybody starts online in one way or another – very few people end up buying online. They end up – buying a car is the second largest purchase of any household – we're experiencing that most of our customers become informed, but then they come in or they pick up the phone and they want to have some interface and they want to have some knowledge and understanding and trust with respect to the dealer they're working for. So now, that might change over time. If you get used to, you know, Amazon was very foreign 25 years ago and people are very comfortable with it. I mean, that may change as people get more and more comfortable with sort of spending that much money and having it dropped in your driveway. But right now, I think our approach is we need to be where our customer is. So we need to offer that which we do. And we need to make sure that we can offer it to the customer and if they want to do it they can do it and if they don't want to do it we need to be where they are. And so that's been our approach to it. Making sure that we try to be as responsive to the customer from an online perspective as we possibly can. I think it's going to be a long time until you see just true Amazon-like buying in the car business because I think the complications are there and again the customer – I just don't see the customer being there. One of the other things that we're working on some with you is, as you know, I love docuPAD. And so I think docuPAD is a terrific tool for us. And, you know, docuPAD on the remote delivery side is going to be a terrific tool for us and that is essentially a great mix between online and in person delivery. You know, you make your decision, you bring the car to them, you walk them through docuPAD, you sell them the F&I products that they want and you give them the walk through of the car. So I think stuff like that to me is – are sort of the different variations that you're going to see and someday it will hook with a particular customer and you go from there. So, I think it's there. I think we use it as a tool. I think it's not going to destroy the dealer network, but I think it ultimately helps create a better experience for the customer.

CW: Yeah. I think – we've talked about this before. I think there's a lot of alignment between the way you see online retail and the way we do. We certainly are aligned in our belief that the franchise model is the best model for purchasing new and used vehicles. So, you know, we're all in on the franchise model. I know you have an obligation that you have to get to, I wanted to say thank you for our long-standing partnership with the Penske Automotive Group. It's really, really important to us that that continues and for you taking the time to come down and talk to all of us I think it's been very educational to hear your perspective and Penske’s perspective on where the business is going so I think we've touched on things that kind of everybody's thinking about every day as they go about trying to be successful. So thanks again, Rob. Appreciate it.

RK: Sure. Thank you.