Penske Automotive Group, Inc. (PAG) Earnings Call Transcript & Summary

Good afternoon. Welcome to the Penske Automotive Group Second Quarter 2026 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through August 5, 2026 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, Lea. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's second quarter 2026 financial results was issued this morning and is posted on our website along with the presentation designed to assist you in understanding the company's results. Joining me for today's call are Roger Penske, Chairman's CEO; and Shelley Hulgrave, EVP and Chief Financial Officer; Rich Shearing, North American Operations; Randall Seymore, International Operations; and Tony Facione, Vice President and Corporate Controller. I'm also available by mail, e-mail or phone for any follow-up questions you may have. We may include forward-looking statements on today's call about our earnings potential, outlook and other future events, and we may also discuss certain non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted earnings before taxes, adjusted net income and our leverage ratio. We've also prominently presented and reconciled any GAAP -- non-GAAP measures to their mostly directly comparable GAAP measures in this morning's press release and our investor presentation, both of which are available on our website. Non-GAAP measures should be considered in addition to, not as a substitute for, the comparable GAAP measures. Our future results may vary from expectations because of risks and uncertainties outlined in today's press release under forward-looking statements. As most of you are likely aware, the company received an unsolicited, preliminary and nonbinding proposal from Penske Corporation and Mitsui & Co. to acquire the remaining shares of the company's common stock they do not currently own for cash consideration of $210 per share. The Board of Directors has established a special committee of disinterested and independent directors authorized to retain its own legal and financial advisers to evaluate the proposal. We have no further comments and will not be taking any questions on this matter at this time. However, I do direct you to our SEC filings, including our Form 10-K, our previously filed Form 10-Q for additional discussion and factors that could cause future events to differ materially from expectations. And now I will turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. We're pleased to report a strong second quarter and financial results. During the quarter, PAG delivered 125,000 new and used vehicles and more than 5,400 new and used commercial trucks. We increased our revenue by 6% to $8.5 billion. We generated a sequential increase in earnings before taxes, net income, earnings per share when compared to the first quarter 2026. Earnings before taxes were $354 million, net income was $260 million, and earnings per share were $3.96. Second quarter results include approximately $30 million from the gain on sale of dealerships as we continue to optimize our portfolio. Excluding the gain on sale, adjusted income before taxes was $323 million, net income was $238 million and earnings per share was $3.62. Cash flow was strong, allowing us to reduce our long-term debt by $141 million and increase our quarterly dividend to $1.44, representing our 23rd consecutive quarterly increase. Let's take a look at the details of the quarter. Same-store retail new and used units increased 5%. Gross profit per new unit retail was $4,782, down $1 per unit sequentially. Gross profit per unit retail used was $2,095, up $19 sequentially. Our service and parts same-store revenue increased 2% and related gross profit increased 3%. Service and parts gross margin increased 60 basis points and sequentially 80 basis points quarter-over-quarter. Turning to the Retail Commercial Truck segment. New and used truck units retail increased 2%. In fact, according to industry reports, North American Class 8 orders increased 170% in the second quarter compared to the same period last year. We expect to see the benefit from the strong order book in the second half of 2026. I was also pleased with the increase in profitability of PTS. During the second quarter, equity income increased 7% to $57 million and their earnings were $207 million for the quarter, growing into full-service leasing revenue, improved fleet utilization, lower operating and interest expenses resulted from continued fleet reductions and were partially offset by continued challenges in rental and by lower gain on sale of used trucks. At this point, I'll turn it over to Rich Shearing to discuss our North American operations.

Thank you, Roger, and good afternoon, everyone. In the U.S., our retail automotive same-store new and used unit sales increased by 3%. During the quarter, 24% of the new units sold were at MSRP, which is consistent with the first quarter of this year. Same-store service and parts revenue and gross profit increased 2.5%. Customer pay was up nearly 4%, warranty was flat, and collision repair declined 2%. Our U.S. automotive technician count is up 2% when compared to the end of June of last year, and our bay utilization is approximately 84%. Turning to Premier Truck Group. During Q2, Premier Truck retailed 5,431 new and used trucks. Same-store new units declined 8% and used increased 65%. New units retailed improved sequentially by 53% to 4,276 compared to 2,786 in the first quarter of 2026. The increase in used units is primarily driven by an improved freight environment from a tightening in overall market capacity and improved spot rates. Used vehicle gross per unit was strong, increasing more than 2,000 on a sequential basis when compared to Q1 and nearly 1,900 when compared to prior year. Premier Truck Group generated $928 million in revenue and $143 million in gross profit and gross margin increased 20 basis points. As Roger mentioned, throughout the first half of '26, we have seen a stronger order book developed for the Class 8 market. In fact, Class 8 market orders increased 170% and the industry backlog grew 105% to 186,000 units in the second quarter. We expect to see the benefit from the strong order book in the second half of 2026 in the form of retail sales. Service and parts revenue increased 5% as average daily activity continues to grow and service backlog continues to increase. Turning to Penske Transportation Solutions, we're also encouraged by the stronger financial performance. During Q2, operating revenue was flat with the prior year quarter. Lease revenue increased 1%, rental revenue declined 12% and logistics revenue declined 2%. PTS sold 9,170 units in Q2, ending the quarter with a fleet size of just under 380,000 compared to 414,000 at the end of June '25. As PTS continues to rightsize its fleet and dispose of older, higher-mileage trucks, the gain on sale declined $13 million in Q2. However, higher fleet utilization, lower operating costs and lower interest expense contributed to a 7% increase in equity earnings. As a result, the equity income increased to $57 million from $54 million. I would now like to turn the call over to Randall Seymore to discuss our international operations.

Thanks, Rich. During Q2, international revenue was $3.2 billion, which is up 10%. Same-store new units increased 8% and used units increased 7%. Same-store revenue increased 10%, while same-store gross profit increased 6%. Same-store service and parts gross profit increased 5% as customer pay was up 3%, but warranty declined 7%. Looking at the U.K. in Q2, our new vehicles delivered increased 14%, which was in line with the overall U.K. market increase of 13%. Gross profit per unit increased sequentially by $303 when compared to Q1 2026. Same-store used units increased 9% and gross profit per unit was $2,228, which was down only $29 per unit on a sequential basis. While we were encouraged with the performance in Q2, the U.K. automotive environment remains challenging as higher taxes, consumer affordability considerations, the reduction in [ motability ] programs and the government mandate towards electrification impact the overall market. Turning to Australia. In automotive retail, our 3 Porsche dealerships in Melbourne continue to gain market traction through implementing our One Ecosystem process. This process has driven a seamless experience for our customers resulting in top customer satisfaction scores for all 3 of our Porsche dealerships in Melbourne. During Q2, new unit sales were impacted by the switch of the Macan model to a BEV only powertrain. However, a strong model mix of new vehicles sold coupled with a 10% increase in used units showcased the ability of our business to flex with market conditions. Also pleasingly, fixed operations gross profit increased by 11%. Turning to the Australian Commercial Vehicle and Power Systems business, we are diversified with a revenue split approximately 2/3 off-highway and 1/3 on highway. The off-highway business continues to grow. The current order book has exceeded our full year business plan with strengthening in energy solutions, mining and defense sectors. We remain a market leader in the over 1,250 kilowatt horsepower high horsepower market. During Q2, our off-highway revenue increased 63% and the future order pipeline remains strong as we secured over $300 million of orders in Q2, bringing the order book to nearly $660 million in secured orders for 2026. I'd now like to turn the call over to Shelley Hulgrave to review our cash flow, balance sheet and capital allocation.

Thank you, Randall. Good afternoon, everyone. We remain committed to a strong balance sheet and a flexible and disciplined approach to capital allocation while driving our diversification strategy, implementing efficiencies and striving to lower costs. For the 6 months ended June 30, 2026, we generated $418 million in cash flow from operations and EBITDA of $829 million. During the first half of 2026, we invested $134 million in capital expenditures. This is down from $147 million for the first half of last year. We completed acquisitions of 2 Lexus dealerships representing $450 million in estimated annualized revenue. We increased our cash dividend from $1.40 to $1.44 per share, representing the 22nd and 23rd consecutive quarterly increases. On a forward basis, our current annualized dividend is $5.76 with a yield of 2.9% and a payout ratio of 40% over the last 12 months. And we repurchased 265,000 shares of common stock for $43 million. Since the beginning of 2023, we have returned approximately $1.6 billion to shareholders through dividends and share repurchases. At the end of June, non-vehicle long-term debt was $2.5 billion and leverage was only 1.7x despite completing several large acquisitions over the last 8 months. We also reduced long-term debt by $141 million during the second quarter. Floor plan was $4.4 billion, and we had $412 million in vehicle equity. For the quarter, total interest expense increased $6 million. Floor plan interest decreased $5 million due to our cash management and lower interest rates while other interest expense increased $11 million, primarily from higher borrowing costs as a result of acquisitions. We estimate a 25 basis point change in interest rates would impact interest expense by approximately $15 million. Our effective tax rate was 26.2% in Q2 2026. The prior year results Q2 2025 have been recapped for the acquisition of Penske Motor Group using common control as disclosed last quarter. As a reminder, PMG was a partnership prior to our acquisition and was not subject to income tax. Q2 2025 does not reflect federal or state income taxes as PMG been included in our taxable group. Therefore, period-over-period comparisons of net income and earnings per share may not be directly comparable due to the change in tax status of PMG. The impact to the effective tax rate would have been approximately 100 basis points and the impact to earnings per share would have been $0.05. Turning to SG&A. Expenses increased by 3% during the quarter. SG&A as a percentage of gross profit for Q2 2026 was 71.8% compared to 69.8% in Q2 last year, but was 250 basis points lower sequentially when compared to the first quarter of 2026. Q2 2026 SG&A expenses were impacted by higher costs for personnel expenses including employee benefits, information technology expenses, rent and rent-related costs and vehicle maintenance costs. Total inventory was $5.1 billion, up $295 million from December 2025. New vehicle inventory is at a 51 day supply, including 58 days for premium and 28 days for volume foreign. Used vehicle inventory is at a 44 day supply. At the end of June, liquidity was approximately $1.4 billion, including $70 million in cash and $1.3 billion of availability under the U.S. and international credit agreements and revolving mortgage facilities. At this time, I will turn the call back to Roger for some final remarks.

Thank you, Shelley. We had a solid quarter, and I remain optimistic about our business. Our diversification remains a key strength of our business model. Our recent acquisitions of Toyota and Lexus dealership in California, Florida and Texas demonstrate our ability to identify and incorporate significant acquisitions into our portfolio. New and used retail automotive grosses remains strong and service and parts continue to grow. The recovery in the commercial truck market is underway. We expect the improving freight conditions to benefit both our commercial truck dealerships and also PTS. Again, thanks for joining us for the call today and your confidence in PAG. Let's turn it over to the operator.

[Operator Instructions] Your first question comes from the line of John Babcock with Barclays.

I guess just the first question. This is really more on the trucking business. You talked about the sheer magnitude of the growth in the Class 8 order books. And I was just wondering if you could maybe give some color in terms of how we should think about how that ultimately converts into sales. So in other words, like kind of the cadence, how it typically flows through? Is that the kind of thing that flows through over a year over 18 months or is that something that we should expect to hit more near term than that?

Yes, John. Rich here. So if you look at the backlog, it's 186,000 is what it's grown to with the ramp-up in the orders year-to-date. So that represents about an 8.5 months' worth of production. We're, as you know, we're exclusively tied to Daimler Truck North America, and they have manufacturing plants, both in Mexico and the United States, depending on the type of vehicle that they produce. Generally from order intake to delivery, depending on where their first production slots availability is, it's a 45- to 60-day kind of time line from when the truck order would be placed to when we receive that truck at our dealerships. So obviously each month, they're producing units that are intended to come to our dealerships. And so if you look at this order ramp up for the first half of the year, we anticipate the majority of those orders that we've taken to convert into retail sales in the second half of this year. So if you look at Premier Truck Group's backlog, it's about 10,400 units. Some of those will probably spill into the first part of next year, but the majority of those will deliver in the second half of this year.

Got you. And has the strength of the growth in those order books been pretty recent? Or like has that been building? Or how should we think about the trend there?

It started to build in December, which is about 3 to 4 months late and the normal order cycle would generally take place. So you look at Q2, they were up 170%. June, the orders were up 231%. And year-to-date through 6 months, they're up 117%. So essentially, the majority of the manufacturers at their production capacity for this year and sold out. And so we'll see those -- that order intake probably curtail a little bit the second half of this year as the manufacturers start to publish the calendar year 2027 pricing. So as a result of that, though, it's going to keep our used truck demand elevated because the availability of new trucks from an order book and their ability to produce this year, additional new trucks will be muted.

Rich, we also -- I think we had, what, 6,000 deliveries in the first half?

Correct.

And we're expecting 10,000 in the second half. So quite an increase. And I think we feel good about margins staying pretty much consistent based on the mix of our business.

Yes. And you saw that in the press release that our used gross per unit up almost 2,000 both sequentially and year-over-year.

And then on Penske Transportation Solutions, given where supply and demand are today, where do you think that fleet size ultimately normalizes?

Well, I think basically, where you see the defleeting really, we had over [ 88,000 ] rental trucks, and we brought that down. And I think we're at a point now, we actually are in pretty good shape because what's happening is the utilization today is almost 80-plus percent where it was down in the low 70s. So that drove our decisions to defleet. And of course, it has reduced our total debt, almost $2 billion when you look at year-end forecast. Obviously, maintenance is down, interest is down, and we've taken out some mechanics because with a reduced fleet. And I think we're going to grow it back based on our lease business and our logistics business. So I think when you look at the number of trucks we've sold in the first 6 months, it was 18,500, which is lower than it was in the past.

Your next question comes from the line of Michael Ward with Citigroup.

Randall, your comments on the U.K., it sounds like you had a pretty good quarter in the second quarter but you remain kind of cautious on the market outlook. Is that fair?

Look, it's just a turbulent market right now, Mike. I mean, with the ZEV mandate and with the government change there, it's a little bit of a question mark, what they're going to do. The mandate is 33% on the ZEV and we're only at 25%, next year it goes to 38%. So that puts pressure on the OEMs and then that also dictates what channel they sell the cars through. And then so the second point is the Chinese brands have doubled their market share from 7.5% to over 15%. In fact, in June, they were over 16%. So look, we feel good the way we structured our team there. We've gone from [ random ] to market area and look at our brands, our [indiscernible] premium was good in Q2. So we think we've got more opportunity on the after sales side. So it's just the macro environment is not easy.

So it's just going to change -- it's going to continue to be changing every quarter. So there's no way -- it's not like we've had a base and we're starting to turn positive rate at this point?

No, I think we've hit our pace, Mike. I think it's just the uncontrollable macro items have been difficult to probably remain that way. So it's -- you could say it's a new normal. And in Q2, we showed our resilience being able to operate and perform in that environment.

I would say, though, when I look at the Chinese on building their market share, correct, year-over-year. But that's primarily in the lower-cost vehicles, and we're 90-some percent premium luxury. So at the moment, I don't think that's going to be an issue for us. What do you think, Randall?

Correct, correct.

Yes. Mike, the Chinese brands sold 171,000 units for the first half of the year. That's up from 79,000 last year, 100,000. So it's meaningful. And Randall talked about what our strategy is in, what we're adding those to our franchise deck. .

Yes. So we're sweating assets. Current facilities, we have all of our Sytner Select locations have Chinese brands in them. And then where we have separate facilities that are existing maybe as an example, we had a Jaguar Land Rover dealership where we no longer have Jaguar, and there is a stand-alone Jaguar dealership next to it, and we're going to put a Chinese brand in there. So you just can't afford without after sales, without used cars and no fixed absorption essentially, you're living on new cars. But of course, over time, that will improve. And look, they've been aggressive on pricing, on payments. They've subvented the rates. Inventory has been a mix depending on the brand. But look, our toes in the water and margins are acceptable. So yes, total of 10 locations. And I would say we're strategically and pragmatically growing that.

Yes, I think as I look at it, Mike, we don't know how many dealers are going to put in. What's going to be the volume aspirations. They don't have a captive finance company, but they're relying on [indiscernible] banks and other things. And that's always a question when you're dealing against MB financial, Audi financial, et cetera, where we have lease programs, we've got programs on certified vehicles. So there's a big stretch here, then the kind of people they have in the field and we're going to have to build a fixed business. And right now, it's really get ready, and that's it.

Okay. Shelley, when you look at capital allocation, do the comments that are with the U.K. and also when Rich was talking about the PTG business, it seems like most of the focus on the acquisition side of the allocation has been U.S. Toyota Lexus. Is there anything that's helping the scale? Or are you going to just continue to be the same wherever it makes the most sense? It seems to me like the truck market is going nuts, right?

Truck market is certainly attractive, and that's why we remain committed to being flexible. We talk about that a lot, and it's just about allocating our capital wherever it makes the most sense. The opportunities that we have with PMG and again, with Orlando, with great brands and great markets that was really attractive to us. The acquisition market is very healthy. You saw we continued to increase our dividend this last quarter. We're making investments internally with our CapEx. So continuing to fire on all cylinders and remain flexible so that we've got the most best use of our capital. We also paid down $141 million worth of debt. So we improved our leverage state, and we'll continue to look at what makes the most sense for our cash.

And we've made a couple of key commitments in Europe and Germany, which we feel fit with the structured store group we have up in Aachen, which is in Northern Germany, which has been quite profitable for us, and we're continuing to, so we added the Ferrari location in Modena this past year, which has been very positive for us. Also in the 3 stores in Melbourne from a Porsche standpoint. So we're certainly open for business.

Is PTG exclusive to Daimler? Or are you allowed to go off brand?

So yes. Yes, Mike, we're exclusive. We have a framework with them and that prohibits us at the moment from acquiring brands that compete with the product lineup they have. So light-duty stuff, [ 4, 5, ] where they don't produce trucks to participate in that. We have an Isuzu franchise in Canada. But look, they're 40% of the market. They continue to be successful. They produce a truck that's got the lowest total cost of ownership. It's reliable. We've got a presence both in Canada and the U.S. We're 1 of only 3 dealer groups that have that ability. And we've got some headroom to grow. And here in Michigan, in our backyard here, you may have heard this week, too, they just opened the Gordie Howe Detroit river bridge crossing, it's going to help goods significantly from a congestion standpoint where you have the Ambassador Bridge and the Blue Water Bridge is going to really help trade go back and forth.

We'll see what happens with Canada, right?

Yes.

All right. So you still have plenty of room within the Daimler network throughout the U.S. and Canada to grow?

Yes. Correct.

And it's been a good relationship. And I think they notify us when there's opportunities and we get back to them. They've been very helpful. And of course, one of the key things is that our finance partner is Daimler and Toyota, and they stepped up at every ounce that when we do an acquisition, they're side by side with us. So I'd say they've served us well back to -- when we had Chrysler, Daimler Chrysler, right, Shelley, doing our financing. I don't know how many years ago.

Your next question comes from the line of Alex Perry with Bank of America.

Sorry about that. I wanted to ask on actually the Australia, New Zealand energy solutions business for you guys, it seems like a pretty unique business. Maybe just remind us how significant that business is, how big could that business scale to over time? And what would be the key drivers there?

Thanks, Alex. Randall here. So our business in Australia is 1/3 on highway, which is our over-the-road truck distribution and retail business and then 2/3 off-highway. Mining is a big chunk of that, defense, rail, marine and then as you said, energy solutions. And we're -- we've got about 1,300 people, of which 500 are technicians. So we have a very good footprint and infrastructure there. We're in all the capital cities and then spot in other places where we've got business particularly in mining. So the energy solutions business in the backup power for data centers, 1,250 kV and higher, we've got 75% plus market share. And that, Australia is the #2 market in the world from an AI token export standpoint. So the investment continues. So our pipeline continues to grow. And as we deliver, we're replacing the pipeline. So it's an accretive growth. And we stated, I think on the last couple of calls that we feel we can hit AUD 1 billion in data center revenue by 2030. And with the current demand and with our market share and the relationship we have with both the customers and frankly, supply of the engine is probably the biggest challenge. But we're working hard with our partners there, we definitely see a path to achieve that target.

That's really helpful. And then maybe just shifting, I think the new commercial trucking side was asked about earlier. But just as we think about the used commercial truck demand, that sort of already turned this quarter. Maybe talk through the strength that you're seeing there. Are you seeing operators sort of take advantage of the higher freight rates? Could this lead to an increase in GPUs on the used truck side? How do you sort of expect the used truck business to play out through the balance of the year?

Yes. Thanks, Alex. It's Richard again. I think you picked up on it. The used truck demand increase is driven by what we're seeing in the spot rate market. If you look at dry van, reefer, flatbed, those rates are anywhere between 40% and 50% up over where they were a year ago and their highest level since 2021. So whenever you get that kind of escalation in rates, there's people that jump into the market to take advantage of that. And so generally, those buyers with the 1 to 2 trucks or the owner operators or used truck buyers, and that's what's driving that demand. And as I mentioned in my prepared remarks, we're up 2,000 sequentially and year-over-year. So we -- I anticipate that demand continuing as we go into the second half of the year. And there's going to be customers that try to avoid the new truck price as well. Because just like on the auto side, we've seen price escalation, new and used trucks and the used truck, especially late model, low mileage is a highly desirable unit. Our challenge as a dealer is going to be sourcing those trucks to keep with the demand.

I'd also say that as we look at PTS, we've seen a $2,000 to $3,000 to $4,000 increase what we're getting on our used trucks, which is a huge help to us as we continue to defleet. And that's been one of the areas on [ day cabs, ] which has been really losers for us, and that's turned around. So the used truck market is much better. And I think it's given us the opportunity to be able to bring our fleet in line from the standpoint when you look at mix and age.