Penske Automotive Group, Inc. (NYSE:PAG) Q4 2018 Earnings Conference Call February 7, 2019 2:00 PM ET
Anthony Pordon - EVP, IR & Corporate Development
Roger Penske - Chairman, CEO & Director
Conference Call Participants
John Murphy - Bank of America Merrill Lynch
Nels Nelson - Stephens Inc.
Stephanie Benjamin - SunTrust Robinson Humphrey
Armintas Sinkevicius - Morgan Stanley
Derek Glynn - Consumer Edge Research
David Whiston - Morningstar Inc.
Rajat Gupta - JPMorgan Chase & Co.
Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Fourth Quarter 2018 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through February 14, 2019, 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.
Thank you, John, and good afternoon, everyone, and thank you for joining us. As John indicated, a press release detailing Penske Automotive Group's fourth quarter 2018 financial results was issued this morning and is posted on our website, along with the presentation designed to assist you in understanding our performance and our strategy. As always, I'm available by e-mail or phone for any follow-up questions you may have.
Joining me for today's call are Roger Penske, our Chairman; J.D. Carlson, Chief Financial Officer; and Shelley Hulgrave, the Corporate Controller. On this call, we will be discussing certain non-GAAP financial measures, such as adjusted income from continuing operations, adjusted earnings per share from continuing operations and earnings before interest, taxes, depreciation and amortization, or EBITDA, and adjusted EBITDA. We have 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 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. As always, I direct you to our SEC filings, including our Form 10-K for additional discussion and factors that could cause results to differ materially.
I'll now turn the call over to Roger.
Good afternoon, everyone, and thank you for joining us this afternoon. I'm pleased to report another quarter of record results and the best year in PAG history. In 2018, PAG retailed 518,000 new and used units. Our revenue was almost $23 billion, and we increased our earnings before taxes by 10% to $604 million. We earned $471 million in income from continuing operations and that generated $5.52 in earnings per share. We completed acquisitions or opened new dealerships, representing approximately $800 million in estimated annualized revenue.
We increased the dividend paid to shareholders each quarter by providing a sector leading 3.2% yield. We also returned $190 million or 40% of our income to shareholders through share repurchases and dividends. We increased return on average equity to 18%, up from 16% in 2017. We improved our leverage ratio to 2.7x versus 2.9x in 2017. Also our credit rating was raised to BA1 by Moody's, while Standard & Poor's placed our rating on a positive watch in November. Results continue to highlight the diversification strategy of our company in the standalone used, commercial truck retail, distribution and Penske Truck Leasings investment.
In 2018, we generated earnings before taxes again of $604 million, 65% through retail auto, 10% through our commercial truck businesses and 25% through our nonautomotive investment, such as Penske Truck Leasing and our operations in Australia and New Zealand. To exclude the one-time items from both comparable periods, which are noted in our press release tables and earnings presentation, adjusted income from continuing operations increased 23% for the year, and earnings per share were up 24%.
I'd like to thank all of PAG team for their hard work and dedication this past year, leading to the best year in the company's history. Let me now turn to the fourth quarter and a few of its highlights. We retailed 121,000 units, up 1%. Our revenue was $5.4 billion, up 1%. And income from continuing operations was $98 million, and related earnings per share was $1.15. There is no foreign exchange impact during the fourth quarter. On an adjusted basis, as detailed in the non-GAAP reconciliation of our press release, PAG had a record quarter with 10% growth in both income from continuing operations and earnings per share.
Turning to the details of the retail automotive business in Q4. Total units increased by 1%, but declined by 2% on a same store basis. Same store new was down 7%. Same store used was up 3%. On an ongoing product shortages and product mix and worldwide harmonization in light vehicle testing procedures, which is called WLTP, impacted new unit sales in our international businesses in Q4. Specifically, in the U.K. in Q4, Audi was down 46%, Porsche was down 42%. In fact, if you look at January, which just was reported in 2019, the U.K. Audi the business was down 30% and Porsche was down 40%. And we had similar numbers in the rest of Western Europe. We estimate these ongoing product shortages impacted our operations by approximately $5 million or $0.06 a share in the fourth quarter, which is approximately about 4,000 units.
Same store gross profit retail was $2,994, down $190. Used vehicle retail at $1,306 was up $6, and our finance & insurance gave us $1,250 per unit, up $37. Service and parts revenue increased 3.9% on a same store basis. Customer pay was up 4.3%. Our warranty was up 5.5% and our body shop was down 4.3%. Looking at our standalone used vehicle supercenter business, we operated, as we said before, 14 dealerships; 5 in the U.S.; and 9 in the U.K.; plus 1 reconditioning center in the U.K. These operations, as we said before, are one priced and no-haggle approach. in 2018, we retailed 71,000 vehicles through these supercenters and generated nearly $1.3 billion in revenue at a return on sales of 3.4%. The average transaction price is about $15,000, and the variable gross per unit for 2018 was $2,121, a margin of 14.2%. We expect to grow the standalone used business through a combination of e-commerce initiatives and new market introduction. We remain on track with the development of 4 new standalone sites, which we anticipate opening in the second half of the year.
Looking at our commercial retail truck business, the medium duty and Class 8 heavy-duty market continue to experience strong conditions. Class 8 retail sales in North America increased 25% in '18 to nearly 315,000 units. Net orders rose at an all-time record and build rates remained strong in 2019. The end of December, the backlog was 279,000 units compared a year earlier of 134,000. We believe this strong market condition will continue to help drive our business with improved sales and growing profitability in 2019. Looking at the results in the fourth quarter for Premier Truck Group. The retail units were up 15% to 2,641 units, and that generated $358 million of revenue and a return on sales of 4.2%. Same store revenue in the quarter increased 13.9%. And our service and parts business increased by a margin of 110 basis point, and that represented 63% of total gross profit and covered 112% of our total fixed cost in the business during the quarter.
Turning to Penske Truck Leasing. A 28.9% ownership provides PAG with equity earnings, quarterly cash distributions and tax benefits generally associated with accelerated depreciation. For the 3 months ended December 31, 2018, PTL generated $1.8 billion in operating revenue and income of $131 million and a return on sales of 7.3%. For the year, they made $460 million, accordingly recognized $37.8 million of equity earnings in the fourth quarter of 2018. Looking at our PAG balance sheet at the end of December. We had approximately $40 million in cash. Our total vehicle inventory was $4 billion compared to $3.9 billion last year. We had 257 vehicles representing $10.5 million on stop sale. And our supply of new vehicle was 72 days at the end of December compared to 67 on a worldwide basis. Our supply of used was 57 days this year compared to 55 last year. Our floor plan was $3.8 billion and our nonvehicle debt was $2.2 billion, with 33% is at fixed rates.
Our debt to capitalization was 45.7%. And our capital expenditures for the year included about $96 million in land acquisitions for future development and $209 million for facility and CI development and expansion. The end of December, we had $700 million of liquidity. Further, we had the ability -- we have the ability to repatriate $900 million in cash from international operations on a tax-free basis in the future. In closing, I think our record in 2018 demonstrate the benefit provided by PAG's diversified model through the strength of our premium and luxury brand, the growth at our used car supercenters, the strength of our truck dealership business in North America and, certainly, the earnings and benefits we get from our Penske Truck Leasing investment.
Further, today, our service and parts operation generated nearly 50% of our total gross profit for the company in 2018. Our business has continued to demonstrate that PAG is much more than monthly new vehicle sales associated with a SAAR. In fact, if you look at the company in detail, we really have 4 pillars. The first pillar, obviously, is the new and used car sales at retail, both in the U.S. and international. The second pillar would be our standalone used car business. The third pillar would be our truck business, both in the U.S. and Australia and New Zealand. And the fourth, obviously, is our investment in Penske Truck Leasing. So as such, we remain confident and optimistic about the future of our business.
Thanks again for joining us today, and we'll open it up the call with the operator.
[Operator Instructions]. First, we'll go to the line of John Murphy with Bank of America Merrill Lynch.
Just a first quick question on the WLTP disruption in the fourth quarter. But really, when do you think that is going to be worked out? It sounds like January is still a little bit tough. But are you seeing anything from VW as far as deliveries or clearances there that will hopefully break the logjam on units?
Well, I think our communication with both Audi and Porsche says that they hope to be back to normal by the end of Q1. One thing that I think most people haven't heard about is the RDE, and that's real driving emissions, which will be another hurdle that all the European manufacturers have to meet by the end of the third quarter. And that's a driving emission where they have to take the vehicles on the road and compare the statistics that come from those tests compared to the bench testing they did for the WLTP 1. But it's my understanding that they feel that they're ahead of that. So I guess, we'll have to wait and see. But obviously, with the number of vehicles we had -- we didn't have during Q4 made a significant impact on our earnings and EPS. But again, I think we're under control. And most of these units, as you would expect, are high gross margin units that we didn't have in the quarter.
So it will be -- so is it fair to assume that around the end of the first quarter, give or take, is when you think we'll probably be through the worst of this?
Yes, I would say by the end of Q1 would be -- would certainly be a good point to make, yes.
Okay. And then just a second question on the used initiative here. Just curious if you could give us a little bit more detail around the timing of the 2 stores in the U.S. and the two stores in the U.K., when they would be coming online and be productive. And you also slipped in a little bit of a comment on e-commerce efforts here on used. And I was just wondering if there's anything newer to update us on there.
Well, from a used perspective, we have one business close to Wilmington, Delaware that right now that's under construction. We have another shopping center that we're in the process of negotiating to buy, which we hope to have that done here early in the quarter, and then we will do some refurb. And that should be up online before the end of the year. And then when we look at the U.K., we're under construction in Bristol. And we have another Home Depot-type store, which has been closed. It will refurb in Nottingham for a CarShop business. So we feel good about that. And I think at the end of the day, we're really in good shape. We want to have a cadence with these, which are not too many, both in the U.S. and international. And we think that from the history, both in the U.K. and also in the U.S., that these will become -- be profitable after 6 to 7 months because we have initial people that we have to hire and train and get our marketing out. But overall, I think that we're in good shape as far as the growth pattern that we want to have. And we have other land that we purchased that we hope to activate when we get into 2020.
Basically, from an e-commerce perspective, we continue to look at our websites and see how the functionality is, and there's no question that we continue to upgrade those from the standpoint of our business. Today, all of our sites are e-mobile now, and almost half of our traffic is coming from smartphones. And today, we have almost 62,000 vehicles on a worldwide basis online, ready to purchase. And when we look at this for the future, I think our business in Preferred Purchase has been what we've been using, both on new and used, is really our product. We have other names. People have other names, but that certainly has been transparent to our customers. And it provides a personal information to use the tools. We've got all the payment calculations, the taxes and fees, obviously, that are down to the $0.01 for the consumer. And we have real chat time available. But obviously, when you get to the final end of this, there still has to be a connection with the customers because of the state authorities, and we see that both locally. And some of the lenders we do business still want to have wet signatures. I think we're getting closer, but that's going to take working with our partners during 2019.
There was a CoC study out, I'm not sure that people on the line are familiar with that, but they said that 87% of consumers want to take steps to be buying online and 73% are more -- while they are more likely to buy from a dealer, but they want to start the buying process, obviously, with online. But again, 89% prefer to sign paperwork at the dealership. So at the end of the day, I think there's a lot going on. And we are continuing, from an e-commerce perspective, to look at this online. And if you look at the used car business, we look at our business in the U.S. particularly, only 2% of the customers that we sold in our superstores, one at home or office delivery. We look at our 300,000 cars that we sold in the U.S., there was about 2,000 that we made special delivery capability for those customers. So from our business, we don't see that, that's having an impact negatively. But obviously, remember, we have 900 locations associated with Penske Truck Leasing that could be very valuable to us if we want to have the relocations in the future for some online business. So that's an asset that we really have in the bank.
Okay. That's very helpful. And just lastly, real quick. I mean, when we look at the parts and service in the retro truck business, it was a little bit lighter as a percent of the mix in the fourth quarter. I'm just curious if that is just a mix impact and how we should think about that parts and service business over time as maybe the truck cycle slows at some point in the future.
Well, when you look at it, it was 67%. It's been as high as 71% or 72%, but it's a mix because the new and used business was so high in a much lower margins, so it drives the revenue up. So again, that's the only difference there. We had a strong -- we were up 110 basis points on our margin. And when you think about that business, it was 118% for the year fixed coverage. That means that our parts and service goes covered 118% of our fixed expenses. So the business was very strong in the year and also in Q4.
Our next question is from Rick Nelson with Stephens.
I'd like to ask you about the U.K. consumer, the car buyer, how you size them up with the Brexit uncertainty. And do you think the challenge in the fourth quarter was related to Brexit? Or is it entirely of this unit?
Well, I think -- let's look at the current data we have. We look at the numbers during the last couple of days. The U.K. mark was only up 1.6% in January. And we're moving on to the registration quarter, which is in March. And quite honestly, we see our customers and our backlog is beginning to fill up nicely. So obviously, Brexit is going to occur -- is supposed to occur in 2019 in March. There's some uncertainty. But there's really 4 -- I look at 4 possible scenarios. One is extending Article 50, exit without an agreement and no referendum. And then, certainly, cancel Article 50. I don't know what is the most likely case. But obviously, at the moment, we're in the premium/luxury side and we've had not a lot of impact on that, other than WLTP not having vehicles to deliver to our customers. I feel, at the moment, Brexit is really the only question we have going forward. And then our -- in our used car business, obviously, we get some slowdown at the end of the year. And then we all stock up on vehicles into the fourth quarter. And we're seeing that momentum pick back up during January. So we'll see how that rolls for the rest of the year and certainly in Q1.
All right. I'd like to ask you also about the acquisition environment. You've picked up a couple of Lexus stores and open point here in the fourth quarter. If you could comment on the opportunities to do more along those lines.
Well, what we really did with Lexus, we had two stores: 1 in Edison, New Jersey and 1 in Bridgewater. And we sold those two to an Eastern buyer, meaning, a buyer that has dealerships on the East Coast. And we had the opportunity to buy the two Lexus businesses in Austin, Texas, a market where we're already committed with BMW and a number of the buying foreign brands. And we had a supercenter we purchased, obviously, in the U.K. in Q1. And then we had in Italy, where we have a strong business, about $600 million there. We had a Mercedes-Benz business that was contiguous to our BMW business, which we purchased in 2000 in -- I guess, it was the third quarter of 2018. And then we added one location for our truck business in Ontario, Canada. And the open point, certainly, were Lamborghini in Bologna, which we added to our premier section, and then JLR in Englewood. We see the pipeline.
There's lots of people that have their hands up to one seller businesses, but we're going to look strategically, as we said before, where we can tuck these in and have the back-office capability and things like that, we'll continue to do. On the other hand, when you look at this, we're really looking at a priority for the use for our cash. And we want to maintain our dividend, which, obviously, we have. And I think the -- so far, when we look at -- last year, we returned $190 million to our shareholders. And we'd expect to have similar opportunity to pay back to the shareholders during 2019. So before we run out and buy a lot of stores, we're going to look at what are some of the impact, Brexit, tariffs, which we're hearing about, even seeing the market today. These are things that we have to deal with. But from a balance sheet perspective, I mentioned some of the metrics on my remarks, we're in very good shape. I think the other area that we're doing, we're looking at the underperforming assets that we have, both internationally and, certainly, domestically here and the ones that don't really fit our market or where we don't have the scale. We'll be looking at those for possible divestiture. So overall, there's opportunities out there. But again, we're going to be selective.
Okay. How much revenue was tied to these divestitures in the Northeast?
Probably -- overall, probably about -- somewhere between $350 million and $400 million.
Next, we go to Stephanie Benjamin with the SunTrust Robinson Humphrey.
I just wanted to follow up in terms of what you're seeing in the overall incentive environment, I know focused a bit more on premium/luxury. And just -- but I think it's down year-over-year. But just some color around that would be helpful.
Well, I guess, when you look at incentives, it was about 10% last year, I think, overall, to MSRP. And when we look at the car incentives, they were at about 10% and are almost 11%. And SUVs and trucks were 9%. We did see a pullback on the premium/luxury in December, which normally is a big month for us on the premium/luxury. I think the German brands, maybe because of allocation and some of the big cars we didn't get through, either WLTP or other reasons, we didn't have the strong incentives in December, which had some impact on us as our mix is so strong in that area that has some downward pressure on our margins. But it's really a -- it's a variety. You can look at buying foreign, support an advertising, a number of things will drive it. But overall, I think we're looking somewhere around 10% as the bonus -- or excuse me, the incentives on retail.
Next, we'll go to Armintas Sinkevicius with Morgan Stanley.
One is you talked about the strong order backlog for the commercial truck business. How do we square that versus estimates for North America Class 8 retail sales from ACT Research about 300,000, 24,000 up, low single digits for the year?
Well, when you think about that, we've been running 260,000, 270,000 and have 300,000 in the backlog and a 314,000 year -- last year. That's going to be a nice increase. And I think what we like is that we're tied entirely to the Freightliner brand. And Freightliner has got -- has been growing their market share to over 40%. And when you look at our markets, like Dallas and Fort Worth, in these markets where there's lots of construction going on, and in West Texas, certainly, with the oiler area and up into Oklahoma and out into Tennessee and Georgia, we're in really good markets. And as our team has matured, we've added these businesses in Canada. We think just, on a same store basis, we're going to continue. And right now, if we look at our order board, our order board is really larger than what we've been allocated from the manufacturer Freightliner at this point. Hopefully, some of those slots will open up for us later in the year.
All right. And then Penske Truck Leasing seeing some good growth there. Any reason why you wouldn't be able to continue to grow that double digit into 2019?
Well, when you think about, we went from about 270,000 units in 2017 and grew that to -- we're just right at 300,000, so that's a big increase in units. And we think that we continue to grow that business. As you know, from an overall standpoint, if you take a look at that business over the last 3 years, we've grown the revenue from about $6 billion to $8 billion and our profitability from about $380 million to almost $460 million. So we see that growth continuing because, remember, these products that we put on -- or these customers that we put on an annual basis typically are a 3- to 4-year term. So that business will accrue and continue on through the cycle of the lease transaction. And also on the logistics side, we have the ability to have contracts. Then we have economic escalators that would be tied into these contracts. So we see the business stronger. We think the ability to get people to come out of ownership because the complexity of the trucks, the cost of the trucks, the ability to hire technicians that have the understanding, we think we're in a very good position. And with our roughly 900 captive locations that we can service vehicles across the country gives us a leadership position and our ability to continue to grow.
Next, we'll go to Derek Glynn with Consumer Edge Research.
So as it relates to standalone used stores, what contribution can we expect to see over time from parts and service given it's less than 20% in gross profit today? I mean, how much and how fast do you think that could grow over time?
Well, I can tell you one thing is in the U.K, right now, we're reconfiguring all of the existing locations. We have a plant, it won't be done over night, where we have a much more inviting opportunity for the customer to come in for service because they buy these vehicles and they're from the local area. And rather than going to quick fitter in some other places, we need to draw them into our service areas. And when you think about, today, on an overall basis, it's 1% of our revenue when you take the U.S. and the U.K., and it's only 18% of our gross profit. And when you think about what we have in the typical bricks-and-mortar business, it's 44%, even in some cases, 50% of our GP. So we see this as a real opportunity because it's high margin also. And the new locations, we're building all of them, have been focused on having a reception, drive-in, similar to what we have in our retail auto sites. We'll have those available in the new supercenter locations.
Got it. Okay. That's helpful. And then just secondly, so over the years, you've achieved good growth and some scale in the U.K. Just wondering, for the auto retail business, if there's any countries outside the U.S. and the U.K. that you view as attractive regions that would make sense as the next leg of geographic expansion.
Well, I think, right now, the ability to continue to grow where we are in the U.K. and Northern Ireland, obviously, was opportunistic acquisitions. It's certainly a focus on our used car superstore business. Then you take a look at Germany and Italy, where we have -- we need scale. And where we have that, I think you would see us continue to grow. We have a small business, the BMW business in Barcelona. I think, potentially, in Spain, there's something that we can glue on in that market that would give us more scale. But again, it will not have the impact, at this point, that you'd have by growing here domestically or even in the U.K. with our existing businesses.
[Operator Instructions]. Next, we'll go to David Whiston with Morningstar.
I joined the call late, so I apologize if you did address this, but If there's a hard Brexit impact on March 29, are you giving any kind of financial disclosures about EPS, EBIT impact or anything like that?
No, we've not addressed that at all. I mean, I think, in future calls, we've talked about if the market was down, a certain amount here, what would be the impact, we'd have to go back and take a look at that. I think that, at the end of the day, we think it's unlikely. But just in case, we've got discussions with our OEM partners. We think that orders will really either be pulled forward or pushed out. That's what we don't do. And we're certainly stock up on our parts, so we have the ability to handle our parts and service.
Okay. And you mentioned in the U.S., December premium/luxury was down or just not as strong as December normally is. And obviously, inventory shortage of WLTP is an issue. But do you think the rise of the Model 3 is having any impact on that business?
Well, when you look at -- you just got to look at the statistics on the West Coast. And Model 3 there is definitely in the premium/luxury side. It's taken leadership in certain markets, so there's no question. Now they had an order bank of some couple hundred thousand, I think, from the reservation process, and they're working their way through that. Now I see that the -- that they've had to reduce their pricing a couple thousand dollars over the last week to 30 days. And what impact that'll have on them, I don't know. But we see inventory is building up on the Model 3. So [indiscernible] to see, though, what really happens.
And with the EV credit going away, all of these are dynamics in the market. They've done a good job. Obviously, bringing the EV vehicle into the marketplace. But I talk to someone the other night and said if we take the total premium/luxury sales in 2018, which is 2.3 million vehicles and we fast-forward and say in 2025, every one of those has got to be an electric vehicle, and you think about that, that's the entire premium/luxury side. And you take that times 7, it's about 18 million vehicles, so a $280 million marketplace of vehicles and customer -- or cars we have in the U.S. You take $20 million away that would come out, we still are going to have $260 million of ICEs for our service departments. And I don't think it's going to get to that point. Still that -- what would that be, it would be really $2 million, $2.5 million on '17. So it's not into the 20%, 25% that people are talking about. And guess what? And when you think about the impact of what's happening, it's primarily in the luxury side because you got to Taycan, you got EQ coming from Mercedes and I-PACE, which is already here. And I think that, at the end of the day, when you look at the e-tron coming from Audi, the winner is going to be the one that gets the most range.
So that's going to be the real race here going forward. You didn't see GM kind of shift from the lower MSRP vehicle to put their technology against Cadillac. So I see it be a premium/luxury race here for the next several years. And I don't think we're going to see 100% of all the luxury guys being electric. So that gives you a sense of impact on service. On the other hand, these cars are more complex and won't see them going to a local service shop. We'll see them coming into the dealership. But I think that's a positive also.
And next, we'll go to Rajat Gupta with JPMorgan.
Just had a question on the F&I environment. The execution has obviously been pretty solid this year. Do you expect that to continue or having near somewhat of a peak level here, precluding the context of your initiative and it's a new initiative on a flattening new vehicle environment? And I have a follow-up.
Well, I think -- yes, the key thing here is that we've really got to look at the total transaction. And we -- I think we missed this on many of our calls when we talk about F&I upward capability. Remember, in a car transaction, you've got the car margin, you've got a trade-in that could be overvalued or undervalued and then you've got F&I. So what we're doing -- and I'll put this number out today for the first time, when we look at our 518,000 units we sold, we take all of our new car gross, used car gross and finance gross without fleet and without wholesale. We're in about $3,400 all in, and that was up $39 in 2018. In the U.S., it was $3,500, and that was up $55. And then you look at internationally, we're at about $33, and that was up $27. So we can work more in the back end, which is F&I or you can put more money in the trade. There's a number of things you could do.
And from my perspective, in our case, because of our premium/luxury, 50% of our vehicles are leased, so we get flats and less margin on those. And we you look at the overall finance income, it's only 33% of our total, and that's basically -- when you look at the U.S., that's probably the number you should look at. So the reason we're up where we are this quarter from the standpoint of our F&I, I think, as we put docuPAD in, this is a rentals product, which is paperless for the customer, I think it's more transparent from the standpoint of add-on products. And it also cuts the time down probably in half from the standpoint of the transaction process. So all of those things, along with the training that we continue to do and tie-in with our OEM partners, has made a difference. But if you look at our numbers, we've been on a very slow March to build this in a way that's transparent to the customer. Also high rates of F&I, really, sometimes, we get cancellations on product. People pay off some of these things as they go forward. So we're trying to manage that along the process.
Another question was just on your G&A execution. I think it was pretty solid, obviously, during '18 again here. And part of the investments you're making in the business, including docuPAD and then the uncertain environment in U.K., do you think you could still see declines in your G&A to gross profit ratio entering '19? Or is that still too early?
No, I think we've got a target 50 to 100 basis points. We put that out as a target for our people. But as we had the tax benefit last year, we turned around and probably added 100 basis points to our SG&A because of the 401(k), where we provided a benefit to all our employees. We put on recruiters now, which are giving us, really, a good basis of recruiting technicians and sales consultants. So we've added 10 of those in the last 12 months, which have really made a big difference. We've got technology now where we can recruit through dedicated resources. And I think we're leveraging the technical schools and even making calls on campuses. And I think in the technology we're using now, we can communicate with this potential employee that we're trying to hire through technology before we ever talk to them. So we use a quick apply. We can get through the process quicker. And when you look at that -- what it's done for us, our technician openings at this time a year ago was about 270. And as of today, it's 210. So we've grown our business. We know how important parts and service is. So these assets that we have from a recruiting perspective, and this is SG&A obviously, and again, the training we have on F&I, these are things that we have to continue to do. But I would say, there's still opportunity for us to take cost out from an SG&A, and we're going to continue to make that a top priority.
Understood. Just one last one on your capital allocation. Your leverage declined. Moody's upgraded your credit rating. But looking at the leverage on a lease-adjusted basis, I believe, as for Moody's, it's probably more to 4 -- roughly 4x, 4.1, 4.2. It looks like that's a level you're definitely comfortable with. But how much more capacity do you have? Or how much more could you expand that leverage to if you're looking for the right deal?
I think, when you look at our leverage, they add the leases back, do you follow? If you look at our leverage, I think I said it was 2.7x versus 2.9 a year ago. But from a capital allocation standpoint, you can be sure as a shareholder of the company, I'm interested in the return to shareholder, and we had 40% return in 2018, and we would expect that. And when you look at our dividend payout at 3.2%, I think it's been -- I think it's strong. We've been up as high as 3.3, 3.4 when we bought the last piece of PTL from GE, I think, 1.5 year ago. So we're in good shape from a balance sheet perspective. I'm not sure you heard on the call, we've got the ability to repatriate $900 million from the -- our international businesses to the U.S. tax free, and we have that ability over the next several quarters to bring it across if we need it. I think our debt over there was very small at the end of the year. I think it was less than GBP 100 million when you add in the real estate and also the working capital line.
And Mr. Penske, no further questions in queue.
All right, people, thank you for joining us, and we'll see you in the next quarter. Thank you, John.
And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.