Penske Automotive Group, Inc. Q2 FY2025 Earnings Call

Good afternoon. Welcome to the Penske Automotive Group Second Quarter 2025 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through August 6, 2025, on the company's website under the Investors tab at www.penskeautomotive.com. I will now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Julianne. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's second quarter 2025 financial results was issued this morning and is posted on our website, along with a presentation designed to assist you in understanding the company's results. As always, I'm available by email or phone for any follow-up questions you may have. Joining me for today's call are Roger Penske, Chair and CEO; Shelley Hulgrave, EVP and Chief Financial Officer; Rich Shearing, North American Operations; Randall Seymore, International Operations; and Tony Facione, Vice President and Corporate Controller. Our discussion today may include forward-looking statements about our operations, earnings potential, outlook, acquisitions, future events, growth plans, liquidity and assessment of business conditions. We may also discuss certain non-GAAP financial measures as defined under SEC rules, such as earnings before interest, taxes, depreciation and amortization or EBITDA, adjusted net income, adjusted earnings per share, adjusted selling, general and administrative expenses and our leverage ratio. We have prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures to the most directly comparable GAAP measures in this morning's press release and investor presentation, both of which are available again on our website. Our future results may vary from our expectations because of risks and uncertainties outlined in today's press release under forward-looking statements. I also direct you to our SEC filings, including our Form 10-K and previously filed Form 10-Qs for additional discussion and factors that could cause future results to differ materially from expectations. I will now turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone. I'm really pleased with the performance of our diversified international transportation service business in the second quarter. Our revenue was $7.7 billion, which was consistent with Q2 last year. Our Q2 revenue was impacted by strategic divestitures of dealership closures made since quarter 2 in 2024, representing approximately $200 million in revenue. EBT increased 4%, our net income increased 4% and earnings per share increased 5% when compared to the second quarter of 2024. Q2 represented our third consecutive quarter of year-over-year earnings growth, and we generated $337 million of income before taxes, $250 million in net income and $3.78 per share. Our EBT margin increased 20 basis points to 4.4% when compared to Q2 last year. The second quarter performance was highlighted by a 9% increase in same-store retail automotive service and parts gross profit and a 50 basis point increase in service and parts gross margin, also an increase in fixed cost absorption of 330 basis points in the U.S. and 30 basis points in the U.K. Our gross profit increased to $1.3 billion, which compares to $868 million in Q2 in 2019. The company gross profit margin increased 50 basis points to 16.9%, representing the eighth consecutive quarter of strong and stable gross margin. New and used vehicle grosses increased by $141 in the quarter for new and $384 sequentially. Used grosses increased $504 per unit for the quarter and $177 sequentially. New and used vehicle gross and F&I combined, or what we call variable gross profit, increased $583 per unit, or 11%, to $5,691. Our focus on controlling costs, such as advertising compensation as a percentage of gross profit, helped drive selling, general and administrative expenses as a percentage of gross profit or SG&A to 69.9%, a 30 basis point improvement. As we look at the current environment, we are encouraged by the recent trade agreements. In fact, the recent agreement with the EU is expected to provide benefits to two of our largest partners that should benefit from the agreement by exporting U.S. production. We've seen some OEMs increase prices modestly while others have extended during the current pricing. The situation remains fluid, and we remain in close contact with our OEM partners. I think our diversification is a key differentiator as approximately 61% of our revenue is generated in North America, 29% in the U.K., and 10% from other international markets. PAG's premium brand mix, our presence in the U.S. and international automotive markets, our North American retail commercial truck dealerships and earnings from Penske Transportation Solutions, coupled with our highly variable cost structure, provide us with opportunities to flex our business to meet the changing automotive and commercial truck landscape. Let me now turn it over to Rich Shearing, who handles our North American operations. Rich?

Thank you, Roger, and good afternoon, everyone. In our automotive retail business, during the second quarter, we experienced elevated traffic during April and May. We believe the pent-up demand is driving customer resilience and we have seen stronger traffic and closing ratios so far in July with sales up approximately 10% month-to-date versus the prior year. In the second quarter, our new units in the U.S. were up 1%. Some OEMs held off shipping product as tariff negotiations took place, limiting inventory of some brands. During the quarter, 34% of new units sold were at MSRP compared to 35% in the second quarter last year. Second quarter used vehicle sales declined 3% and were constrained by fewer lease returns and rising prices. We expect the lower level of lease maturities to bottom this year and begin improving in 2026. We expect franchise dealers will benefit from increasing lease returns for used vehicle sourcing in that time period. Our U.S. service and parts operations generated record levels of revenue and gross profit. Same-store service and parts revenue increased 7% and related gross profit increased 9%. Same-store gross margin increased 90 basis points. Customer pay gross was up 6% and warranty was up 24%. We have approximately 6,000 service bays and 5,800 technicians, and our technician count is up 2% from June of last year. While our service and parts revenue and gross profit is at a record level, we continue to focus on driving higher utilization of our bays and increasing fixed cost absorption. Turning to Premier Truck Group. We operate 45 locations and remain one of the largest commercial truck retailers for Daimler Trucks North America. Daimler Trucks North America continues to have the largest share in the Class 8 market at 42.5% year-to-date. Premier Truck Group is one of the core pillars of our diversified model and represents 12% of revenue and 11% of gross profit. As we look ahead, the U.S. Congress revoked the EPA waiver that allowed California to adopt more stringent emission rules, which means manufacturers and dealers will no longer have to navigate different rules across different states. Coupled with the waivers being rescinded for Advanced Clean Truck and Advanced Clean Fleet rules, the ZEV mandates have also been effectively removed. As a result, we believe the potential cost increases for the 2027 model year Class 8 trucks will be more muted than originally expected. During Q2, Premier Truck Group sold 5,339 new and used units. New was up 4% and used units were down 8%. Although used units declined, used truck grosses increased over 50% to $7,037 from $4,502 as late model low-mileage trucks continue to be in short supply. At the end of June, the current industry backlog was 90,400 units or approximately 4 to 5 months' worth of sales. We did note some pull-ahead ordering during the quarter as a result of tariffs as some customers look to lock in lower prices. Same-store service and parts revenue increased 1% as well. Looking out over the next 6 months, for the first time in approximately 5 years, Daimler Trucks are no longer being allocated on a distribution level to their dealers. This provides us with an opportunity to conquest new customers.

Thanks, Rich, and good afternoon, everyone. PAG's international operations represent approximately 40% of total consolidated revenue. During Q2, international revenue was $2.9 billion. In the U.K., the macro operating environment remains challenging as inflation, interest rates, higher taxes, and consumer affordability impact the overall market. The U.K. market continues to transition new vehicle sales to BEVs and hybrids. In 2025, the government target for BEV penetration is 28%, many of which are being sold through corporate fleet channels. During Q2, the number of new units we delivered declined by 16% and were impacted by several factors resulting from OEM product changes and reduced incentive offerings, as well as impacts to the new car market from the U.K. ZEV mandates and the previously discussed disposed or closed dealerships. Turning to used cars, same-store used units declined 23%, which is attributable to the realignment of the company's U.K. CarShop used-only dealerships to Sytner Select in 2024. Through this realignment, we have taken out approximately 500 people through attrition, which helped drive a lower cost structure. The realignment began in Q3 2024, so the year-over-year decline is expected to abate in the second half of this year. We view this as a positive change for our business. As a result of this strategy and improved management of overall used inventory, gross profit per unit has increased by over $800 or 56% quarter-over-quarter and $221 sequentially when compared to the first quarter of 2025. Service and parts remained strong as same-store revenue increased 6% and gross profit increased 8%. Pleasingly, customer-paid gross profit increased 10% and warranty declined 5%, largely due to the 20% growth we achieved in Q2 of last year. Turning to Australia, we operate 3 Porsche dealerships in Melbourne, which we acquired in 2024. During the first half of this year, these dealerships retailed 1,136 new and used units and generated $128 million in revenue. The used-to-new ratio is nearly 1:1 and has doubled when compared to the ratio prior to the acquisition. We use our existing scale of the Commercial Vehicle and Power Systems business in Australia to leverage costs while executing our One Ecosystem strategy at the Porsche dealerships, which provides for a superior customer experience. We anticipate generating approximately AUD 450 million in annualized revenue through these automotive dealerships. Turning to the Australia Commercial Vehicle and Power Systems business, we are diversified with revenue and gross profit, which is split approximately 50-50 between our on- and off-highway markets. In the on-highway markets, the brands we represented picked up 30 basis points in market share as the products we continue to sell gain customer preference. In the off-highway sector, revenue and margin were driven by strong energy solutions demand. We have a $350 million backlog for 2025 delivery and a total order bank of over $500 million, predominantly related to the large growth in data center and battery energy storage solution businesses. We see a potential for the total Energy Solutions business to generate over $1 billion in revenue by 2030. Our defense business continues its strong momentum too, with projects for infantry fighting vehicles and several Navy applications for frigates and submarines.

Thank you, Randall. Good afternoon, everyone. Our strategy has been to focus on the strength of our balance sheet, cash flow, disciplined approach to capital allocation, and our diversification. Our balance sheet remains in great shape, and our continued strong cash flow provides us with opportunities to maximize effective and opportunistic capital allocation. For the 6 months ended June 30, 2025, we generated $472 million in cash flow from operations and EBITDA was $800 million. On a trailing 12-month basis, EBITDA was over $1.5 billion. Our free cash flow, which is cash flow from operations after deducting capital expenditures, was $325 million. Through June 30, we paid $165 million in dividends and invested $147 million in capital expenditures. We increased our dividend by 4.8% to $1.32 per share last week, representing the 19th consecutive quarterly increase. Since the end of 2023, we have increased the dividend by 67%. On a forward basis, our current dividend yield is approximately 3.1% with a payout ratio of 34.7% over the last 12 months. During the quarter, we repurchased 630,000 shares of stock for $93 million. Year-to-date through June 30, we have repurchased 885,000 shares for $133 million, representing approximately 1.3% of our outstanding shares. Over the last 4-plus years, we have returned over $2.5 billion to shareholders through dividends and share repurchases. In May, our Board authorized an increase in the repurchase authority of $250 million. As of June 30, we have $295.7 million remaining under the existing securities repurchase authorization. As part of our strategic capital allocation, in July, we acquired a Ferrari dealership in Modena, Italy. As many of you know, Modena is the home of the Ferrari brand. While we continue to evaluate the impact of the One Big Beautiful Bill on our financial statements, we do expect to recognize positive cash flow impacts related to our 28.9% ownership in the PTS partnership. Bonus depreciation, in particular, will provide an estimated benefit of approximately $150 million on the $3 billion worth of capital expenditures in trucks that PTS expects to purchase in each of the next 3 years and beyond. At the end of June, our non-vehicle long-term debt was $1.78 billion, down $69 million from the end of December last year. Debt to total capitalization improved to 24% from 26.1% at the end of December last year and leverage remained at 1.2x. 77% of the non-vehicle long-term debt is at fixed rates. When including floor plan, we have $4.6 billion of variable debt. 54% of our variable rate debt is in the United States. We estimate a 25 basis point change in interest rates would impact interest expense by approximately $12 million. At the end of June, we had $155 million of cash and liquidity of $2.3 billion. In September, our $550 million of 3.5% senior subordinated notes will mature. We currently expect to repay those notes from cash flow from operations or borrowings under our U.S. credit agreement. Total inventory was $4.8 billion, up $209 million from the end of December 2024. Retail automotive inventory was up $44 million. New vehicles declined $20 million, used vehicles increased $49 million, and parts increased $15 million. Commercial vehicle inventory was up $166 million. Floor plan debt was $4.2 billion. New and used inventory remains in good shape. New vehicle inventory is at a 57-day supply, including 59 days for premium and 38 days for volume foreign. Used vehicle inventory is at a 44-day supply. At this time, I will turn the call back to Roger for some final remarks.

Thank you, Shelley. As I mentioned earlier, I continue to be pleased with our performance and the resilience of our business. I would like to thank each of our 28,000 team members that work in our business each day for their efforts to exceed expectations. Our results continue to demonstrate the benefit from our diversification across the retail automotive and commercial truck industries, our cost control and a disciplined capital allocation strategy, and certainly a strong balance sheet and cash flow. I remain confident in our diversified model and its ability to flex with market conditions and remain very pleased with the performance of our business. I want to thank all of you for joining the call today, and we'll open it up for questions with the operator. Thank you.

Our first question comes from Mike Ward from Citi Research.

I wonder if you can quantify a few of the moving pieces that affected your unit sales in the U.S. and the U.K.?

Sure, Mike. It's Shelley. I'm happy to take that. As we mentioned, we had approximately $200 million of revenue in the quarter in 2024 that we did not have in 2025. We sold and divested of a few stores. We also closed some stores, some of which related to the Sytner Select business in the U.K., as mentioned. So when you look at new and used vehicle units that had an impact as well, new units related to those divested stores were approximately 2,000 units. We also had the MINI brand transfer over to agency. So that impacted the new units by approximately 1,300. When you take that against the units that we reported, we actually were only down about 17 new units quarter-over-quarter. From a used perspective, those divested or closed stores attributed to about 4,400 used units.

Okay. And what about the U.K., right? They divested in the MINI?

It's everything. We had some stores that we sold in the U.S. as well, but it's just the U.K.

We also had, Mike, mobility in the U.K. is a product that people that qualify for mobility credits that was really slowed way down by Audi, BMW, and Mercedes during the quarter really were not in that business, which obviously was an impact to us from the premium sector. We see that coming back this quarter. I think this was all part of a strategy. They were waiting to see what the tariff structure was going to be and didn't want to pour a lot of their incentive money into mobility. Now that's changed now, and we'll have to see how that rolls out here based on the current information we have regarding the 15% tariff for the European Union.

And Mike, I think on a smaller scale, to add to Roger's point, in the U.S., we had Audi, Porsche, and Land Rover kind of suspend wholesales for a period of 45 days in the second quarter as they were further looking to understand what the tariff outcome was going to be. That probably impacted our Porsche business the most. If you look at that brand, our EBT was down 9% in the second quarter, whereas year-to-date, we're up 1%, and that certainly hurt our mix. But that wholesale from those brands now is flowing again. So it was a short-term impact.

Okay. Is some of the 10% increase in July due to that coming back?

Well, I think it's resiliency of the consumer. We're seeing traffic counts kind of remain flat year-over-year, but conversion has ticked up. So there are more serious buyers. I would say in June, our conversion of the traffic was down a little bit because I think there was still uncertainty in what the ultimate tariffs are going to look like. Now that we've got conclusive positions with Japan, which obviously impacts our Toyota and Honda business, the U.K. with Land Rover, MINI and then the EU with Audi, Mercedes-Benz, BMW, Porsche, the majority of the brand mix we have in the U.S. has some certainty on what the tariffs are going to look like going forward.

And Shelley, the $150 million from the Big Beautiful Bill, that's in addition to any dividend income you get from your equity stake, correct?

That's right, Mike. So we still have the 50% dividend policy that we receive each year. The One Big Beautiful Bill, bonus depreciation, in particular, was an item in the Tax Cuts Jobs Act that was starting to sunset. So we were starting to have to pay more in income taxes from a cash perspective in '24 and projected for '25 when that bonus depreciation was supposed to go away. The One Big Beautiful Bill made it permanent and retroactive back to purchases to mid-January. So it's an estimate of the deferred cash taxes that we expect to enjoy this year and into the future.

That will benefit this year?

Yes.

We look at about $3 billion to $3.5 billion of asset purchases at PTS each year going forward. So obviously, with roughly 30% of the ownership, it's a partnership, we get the benefit on our tax line. So overall, it was a terrific benefit to us. If you look at this year and say it's the same in '26 and '27, it could be as much as $450 million that we would not have to pay due to this in corporate taxes.

And I want to highlight, it doesn't impact our rate. It's really just the cash taxes that we have to pay. But given that it's a cash benefit, we certainly will look to deploy that cash through our capital allocation strategy. So we certainly see that as a benefit going forward.

And on PTS, we have a program there that typically 50% of our earnings before taxes is paid out to the shareholders based on their ownership piece. So based on our current projection, this could be roughly another $100 million. You'd look at almost $250 million of benefit during 2025 in cash.

Our next question comes from Ron Jewsikow from Guggenheim Securities.

Roger. Yes, just before my questions, I wanted to say congratulations, Roger, on the Centennial Award recognition last month.

Thank you. That is a byproduct of the 74,000 people that work for us every day, but I appreciate you mentioning it. Thank you.

And I appreciate the quarter-to-date commentary on volumes, but maybe if you could just touch on the GPU trajectory and the cadence throughout the quarter and then into July, if you can talk about that as well.

Yes, Ron, Rich here. When considering the initial tariff announcement back in March, it certainly led to increased activity. We noticed a spike in activities into April, and to a lesser degree in May and June. We recognized that our inventory not affected by tariffs became more valuable at that time, so there was no reason to reduce prices on those vehicles while we awaited clarity on the ultimate tariff impact and resolution between the countries. Throughout the quarter in the U.S., our gross profits remained steady. They were highest in April at $7,250, but the difference between May and June was only around $125. Our team effectively balanced volume with gross profits during this period. Looking ahead to May, sales activity has increased, which may lead to slight gross profit compression, varying by brand. Additionally, with the IRA tax credit for BEVs ending in September, our team is focused on finalizing deals with consumers interested in BEVs to minimize inventory during that period. The OEMs are also motivated in a similar way, as we've observed increased incentives on various models following the tax credit announcement to reduce their inventory. While our margins on new vehicles have remained stable, the average selling price continues to rise. Previously, before the pandemic in 2019, our average selling price was $41,000, and now it stands close to $61,000.

Roger, congrats as well. Just wanted to follow up on PTL. It looks like if we exclude the gain on sale, PTL income was up year-over-year overall. Should we expect that kind of cadence to continue here in the second half? And just maybe if you could give us some broader outlook around where we are in the freight cycle and when you could expect that to reflect? I have a quick follow-up.

From the operating perspective, during the quarter, our gain on sale was $44 million last year, compared to $16 million this quarter, resulting in a decline of $28 million. Our team performed well operationally. Looking ahead to Q3 and Q4, the gain on sale will largely depend on market pricing. We are considering some asset disposals, having removed 14,000 units from our fleet this year. It's crucial to evaluate the gain or loss on sale, especially since freight remains stable, which will contribute to increased rental from both existing lease customers and casual renters. In terms of quarterly performance, our lease revenue grew by 5% to 6%, logistics increased by 1%, while rental declined by 9%. Overall cost management and the gain on sale resulted in over $50 million in returns. If we project that for the remainder of the year, it would amount to around $200 million, but this could change due to fluctuations in gain on sale.

Understood, understood. That's clear. And just a broader question on capital allocation. If you take into account the extra $150 million you're going to be getting from the taxable changes, I mean that's a pretty step change in your cash flow profile. I'm curious, does that in any way change how you're thinking about capital allocation, maybe being more aggressive on share buyback versus just like other forms of use of cash? And if you could just tell us if you're looking to reprioritize that.

Rajat, it's Shelley. It certainly provides us with more opportunity. As we said before, we're going to continue to weigh current market conditions. The first half of 2025 certainly had a bit of tariff uncertainty. You saw us as well as some of our peers really look to take advantage of a down market and focus on buybacks. We are always going to remain focused on our dividend. Year-to-date, about $300 million of return to shareholders. We've started to see folks come out and make some purchases and acquisitions, and we're still focused on growing that side of the business as well. I think it will be a tale of two halves, and we will certainly look at different market conditions, but the additional $150 million of benefit that we're estimating certainly helps to provide us with more opportunity.

I would say from an M&A perspective, obviously, our doors are open, and we're looking at a decent pipeline right now. How those will mature, I can't say, but certainly, we'll look to do M&A more aggressively in the last 6 months than we did in the first 6. That would be probably fair.

I wanted to stick on the M&A topic actually because if I remember correctly, you've talked in the past about wanting to acquire $1.5 billion in annual revenue, and you've just done the prior deal so far. So even if you do end up closing some of these deals in your pipeline, do you think the $1.5 billion acquired number for '25 is still on the table? Or is it going to be lower?

I think it's unrealistic to expect we're going to achieve that right now on an annualized basis, but if everything goes perfectly, I would aim for 5% organic growth and another 5% through acquisitions. We aren't currently hitting those targets, but given our strong capital position, especially regarding acquisitions, we should be in a good position. Our capital allocation shows we generated a solid cash flow of $472 million from operations. The uncertainty following the tariffs caused us to pause, which definitely had an impact. We've already repurchased about 1.3% of our outstanding shares for around $900,000, and we've distributed $165 million in dividends. Shareholders are benefiting from these dividends, and a 3.1% yield is quite strong. We’re paying out approximately 35% of our earnings. We are carefully considering acquisitions. I want to emphasize that our deal with Ferrari was unique due to our status as the largest dealer in the world and our ability to locate a key dealership next door. As we evaluate potential acquisitions, we want to ensure they align with our scale and market presence, and we will continue to be cautious like our peers. The size of the U.S. auto market presents significant opportunities for international growth through acquisitions for many years ahead.

And just one other question on Porsche Australia. You mentioned the used-to-new ratio has already doubled in about a year's time. I'm just curious, was that mostly due to a lot more advertising or just changing internal operations at those stores?

Sure. No problem. Good question. This was mostly internal. In fact, it was virtually all internal processes relative to just taking advantage, focusing on getting more trades, whether it be on selling a new or a used, the efficiency of reconditioning the marketing them properly. The big opportunity, a lot of the independent used car providers were getting a lot of these cars. We're just organically keeping them. We're also opportunistically out there buying them as well. So it was a big focus, and the team did a great job.

That business really has turned out to be amazing when you think about it. We have the 3 stores in the big city of Melbourne. Randall and the team are really looking at it as one dealership with 3 locations in the city. We can combine customer service, one inventory for all 3 dealerships and the marketing. I think it's really key. Then we have the benefit of our commercial business that's taking place in Australia. Our financing, our legal, our insurance, our HR, all of those functions are we can take advantage of those in our auto business and will give us a runway, hopefully, to continue to grow the auto business in Australia as we go forward. I think we need to get the Porsche dealerships solid and have a year or so under our belt, but we certainly would look if that would be a place that we could grow some of our business with our expertise. All right, everyone. Thanks for joining us today. I think it was a great quarter. As we said earlier, lots of moving parts, but I think the management team we have across all aspects of the business has really been great. I think our turnover is the lowest in the industry, and I think that provides us the best management. So look forward to talking to you next quarter. Thank you.

This concludes today's conference call. You may now disconnect.