Earnings Call Transcript - PAG Q4 2025

Operator, Operator

Good afternoon, and welcome to the Penske Automotive Group Fourth Quarter 2025 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after the completion through February 18, 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. Please go ahead, sir.

Anthony Pordon, Executive Vice President of Investor Relations and Corporate Development

Thank you, Regina. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's fourth quarter 2025 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. 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, 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. During the fourth quarter, we acquired Penske Motor Group from a commonly controlled affiliate. As a result, the information contained in today's press release has been retrospectively recast to include the full quarterly and annual results of Penske Motor Group in both periods, which is required by GAAP under common control accounting. We have provided schedules in today's press release to help you better understand the impact of the recast. Additionally, 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 and adjusted EBITDA. Our future results may vary from our expectations because of risks and uncertainties outlined in the press release today. We have also prominently presented and reconciled any non-GAAP measures to the most directly comparable GAAP measures in this morning's press release and investor presentation, both of which are available on our website. I 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.

Roger Penske, Chair and CEO

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. Today, I'd like to begin by thanking each of our team members for their hard work and commitment to exceeding expectations in 2025. Despite several challenges, our business generated another year of strong profitability. I look forward to the future, and I am even more optimistic about PAG. The recent strategic acquisitions of Toyota and Lexus dealerships combined with our existing diversification provide a solid foundation for future growth and improved profitability. During 2025, PAG delivered 485,000 new and used vehicles and nearly 19,000 new and used commercial trucks. We generated $31 billion in revenue. We earned almost $1.3 billion in earnings before taxes and $935 million in net income, and generated earnings per share of $14.13. We continue to grow in the U.S. and Italy with the acquisition of 2 Toyota and 2 Lexus dealerships and 1 Ferrari dealership. We followed that up with the announcement of the 2 Lexus dealerships we plan to acquire in the first quarter. These are located in Orlando, Florida. In total, these acquisitions represent $2 billion in estimated annualized revenue. We also completed strategic divestitures representing approximately $700 million in revenue. These divestitures generated $200 million in proceeds that were redeployed into higher returning assets. We expect to generate another $140 million in proceeds from additional divestitures planned for 2026. In our press release this morning, we announced the 21st consecutive increase in our quarterly dividend. The increase was $0.02 per share to $1.40. Our dividend payout ratio increased to 37.4%, and the forward yield is 3.4%. We repurchased 1.2 million shares of stock, representing 1.8% of our outstanding shares for $182 million. Let me now turn your attention to the fourth quarter. In automotive, our business was impacted by weaker premium sales in both the U.S. and U.K. due to tariff and BEV-related pull forward, unusually high unit sales in the prior year related to stop sale, the Land Rover cyber incidents, which resulted in 800 units of fewer sales in Q4, and the macroeconomic conditions in the U.K. For example, our new sales of the German luxury brands were down 20% in the U.S. and 22% in the U.K., including a decline of over 2,800 BEV units when compared to Q4 of the prior year. As a result, automotive same-store units delivered declined 8% and used declined 4%. Gross profit per unit retail in Q4 was $4,689, and it was up $47 per unit sequentially. Gross profit per used unit was $1,770, which was consistent with Q4 in the prior year and in line with seasonal expectations. In the Commercial Truck segment, PTG outperformed the market. However, the continuing freight recession drove lower new and used unit sales and also impacted our equity income from PTS. In total, PAG Q4 revenue was $7.8 billion, down 4%. The decline in revenue is from the lower unit sales, coupled with strategic divestitures and dealerships, which impacted the quarter revenue by $200 million. EBT was $256 million, net income $186 million, and earnings per share was $2.83. On an adjusted basis, EBT was $263 million, net income $192 million, and earnings per share was $2.91. We estimate fourth quarter EBT was impacted by $29 million or $0.32 a share. The first item was the U.K. social programs with approximately $3 million, the cyber event with Jag/Land Rover at $8 million, continued freight weakness impacted by Premier Truck at $11 million and PTS by $5 million, and costs of strategic divestitures of approximately $2 million. Additionally, when you compare Q4 of the prior year, a higher tax rate reduced net income by approximately $8 million or $0.12 per share. At this time, I'd like to turn it over to Rich Shearing to discuss our North American Operations. Rich?

Richard Shearing, North American Operations

Thank you, Roger, and good afternoon, everyone. In U.S. retail automotive, same-store new and used unit sales decreased 4%, with new decreasing 6% and used decreasing 1%. In Q4, new unit sales at our German luxury brands declined 20% and were impacted by pull-forward activity from tariffs and the expiration of BEV credit. Also, Land Rover new unit sales decreased 37% as production was halted for 6 weeks, limiting our available inventory for sale. BEV sales declined 63% or 1,700 units in Q4 2025 versus Q4 2024. During the quarter, 25% of new units sold were at MSRP compared to 29% in the same quarter last year. Used vehicle sales continue to be constrained by fewer lease returns and affordability. Lease returns bottomed in 2025 and are expected to begin improving in 2026. Our U.S. same-store service and parts revenue increased 6%, and related gross profit increased 5.5%. Customer pay gross was up 7%, and warranty was up 9%. On average, in the U.S., we estimate each of our automotive technicians generates approximately $30,000 of gross profit per month. Our automotive technician count is up 2% compared to the end of December last year. Our automotive service and parts revenue and gross profit are at a record level, and we continue to focus on driving higher utilization in our base. Turning to Premier Truck Group. During Q4, Premier Truck outperformed the industry retail sales of new trucks, which decreased 14% compared to an industry decline of 28% for Class 8 sales. We retailed 3,789 new and used trucks, generated $725 million in revenue and $121 million in gross profit. Tariffs pulled some orders previously scheduled for delivery in Q4 to earlier in the year, while other customers remain on the sidelines due to Section 232 tariffs and the resolution of the EPA 2027 emissions rules. Service and parts revenue declined 1% and represented 74% of the total gross profit during Q4. EBT declined $11 million from $45 million to $34 million compared to Q4 last year as the prolonged recessionary freight environment impacted Class 8 orders, new and used unit sales, and fixed operations activity. Turning to Penske Transportation Solutions. The freight environment also impacts the full-service lease, rental and logistics operations of PTS. During Q4, operating revenue declined 5% to $2.6 billion. Rental revenue declined 17%, and logistics revenue declined 3%. Throughout this past year, PTS has reduced its fleet size in rental, leading to reduced operating costs for maintenance while also reducing depreciation and interest expense. PTS sold 9,750 units in Q4 and 41,500 units for the full year of 2025, ending the quarter with a fleet size of just under 397,000 units, down from 435,000 units at the end of December 2024. The weak freight market continues to impact gain on sale. Overall, the gain on sale declined by $18 million in Q4 and $87 million for 12 months of 2025. Despite market headwinds, equity earnings from PTS were down less than 10% to $48 million. The PTS team continues to focus on cost reductions, including rightsizing the fleet and operating cost reductions. The actions will see future benefits when the freight environment recovers. In fact, in January, PTS experienced a net increase in full-service lease fleet, tractor rental utilization of 82% and improved operating profit in rental versus the prior year as a result of these actions. I would now like to turn the call over to Randall Seymore to discuss our international operations.

Randall Seymore, International Operations

Thanks, Rich, and good afternoon, everyone. During Q4, our international revenue was $2.8 billion, down 2%. The U.K. remains challenging as inflation, higher taxes, consumer affordability and the government push towards electrification impact the overall market. We are encouraged to see the Bank of England cut interest rates to their lowest level since early 2023, with additional cuts predicted in 2026. We have taken steps to realign our U.K. operations with current market conditions. These steps are reducing the footprint of our Sytner Select locations, closing unprofitable franchise dealerships, and reducing our headcount in the past year by 1,000 people. At the beginning of January, we also changed our management approach from a brand-driven to a market-driven offense. We believe this strengthens our management team and enhances our focus on a market-by-market basis across the U.K. This approach is similar to the structure that we have in the U.S. During Q4, same-store new units delivered were impacted by weaker national sales of the German luxury brands, which declined by 20%. However, our new car gross improved by $34 per unit. Same-store used units decreased by 10% as lower new car volume impacted vehicle availability, combined with lower unit sales at the Sytner Select locations. The Sytner Select locations retailed 1,000 fewer cars from a reduction in the number of dealerships and the macro environment in the U.K. However, pleasingly, our used car gross increased by $150 per unit. Service and parts same-store revenue increased 2% as our strategies to increase customer pay resulted in a 9% increase, which was offset with the 18% decrease in warranty. We see an encouraging environment across our Germany and Italy businesses, leading to an improvement in those markets of profitability during our Q4. Turning to Australia, we had a very strong fourth quarter. EBT nearly doubled compared to the same period in the previous year. In automotive, we have spent the last 12 months implementing the one ecosystem strategy for our 3 Porsche stores in the Melbourne market. Through this process, we have improved the customer experience, increased the performance of our used vehicles, and grown our service and parts business while increasing profitability. On the Australian Commercial Vehicle and Power Systems business, we are diversified with revenue and gross profit split of approximately 2/3 off-highway and 1/3 on-highway. In particular, we see strength in the off-highway market segments of Energy Solutions, mining, and defense. We completed projects worth nearly $700 million in revenue last year and already have $500 million in secured orders for 2026. In Energy Solutions, this growing segment provides power solutions for data centers to support the growth of artificial intelligence, and these data centers require robust infrastructure with reliable power at the core of their operations. The engines and support we provide will be critical as this segment evolves. We see the potential for our Energy Solutions business to generate at least $1 billion in revenue by 2030. I would now like to turn the call over to Shelley Hulgrave to review our cash flow, balance sheet and capital allocation.

Shelley Hulgrave, Executive Vice President and Chief Financial Officer

Thank you, Randall. Good afternoon, everyone. We remain committed to our diversification strategy, a strong balance sheet, and a flexible and disciplined approach to capital allocation while implementing efficiencies to lower costs. During 2025, total SG&A expenses grew by 2.1% and were in line with inflation. SG&A as a percentage of gross profit for the 12 months ended December 31, 2025, was 72.1%. Excluding certain one-time items in 2025, adjusted SG&A growth was 71.5% and is in line with our previous guidance. As Roger mentioned earlier, Q4 SG&A growth was impacted by lower new and used units previously discussed, lower business volume at Premier Truck Group, and higher social program costs in the U.K. For the 12 months ended December 31, 2025, we generated $1 billion in cash flow from operations and EBITDA of $1.5 billion. Our free cash flow, which is cash flow from operations after deducting capital expenditures, was $651 million. We used our cash flow and strong balance sheet to allocate capital as follows: we repaid $550 million of senior subordinated notes at their scheduled maturity. We invested $325 million in capital expenditures. We completed acquisitions representing $1.6 billion in estimated annualized revenue, which included Longo Toyota, the #1 Toyota and Longo Lexus, the #4 Lexus dealerships in the U.S. At the same time, we generated cash proceeds of $200 million by divesting nonstrategic dealerships, representing $700 million in revenue and $4.5 million in EBT. Through December 31, we paid $344 million in dividends. Today, we announced an increase in our dividend to $1.40 per share, representing the 21st consecutive quarterly increase. On a forward basis, our current dividend yield is approximately 3.4% with a payout ratio of 37.4% over the last 12 months. During 2025, we repurchased 1.2 million shares of common stock or approximately 1.8% of outstanding shares for $182 million. As of December 31, 2025, $247.5 million remained available for repurchases under our securities repurchase program. Over the last 4-plus years, we have returned approximately $2.5 billion to shareholders through dividends and share repurchases. At the end of December, our non-vehicle long-term debt was $2.17 billion, which is only up $314 million since the end of December 2024. Floor plan is $4.1 billion. 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. We estimate the bonus depreciation feature will provide an estimated $120 million to $150 million of additional cash flow each year. For the year, total interest expense declined $18.8 million or 7% due to our cash management and lower interest rates. We estimate a 25 basis point change in interest rates would impact interest expense by approximately $12 million. Total inventory was $4.8 billion, up $104 million from December 2024. At December 31, new vehicle inventory is at a 49-day supply, including 52 days for premium and 34 days for volume foreign. Used vehicle inventory is also at a 49-day supply with the U.S. at 34 days and the U.K. at 66 days. At the end of December, we had $65 million of cash and liquidity of $1.6 billion. At this time, I will turn the call back to Roger for some final remarks.

Roger Penske, Chair and CEO

Thank you, Shelley. As I look towards 2026 and beyond, I'm quite optimistic. We anticipate the long-awaited recovery in the commercial truck market, and we expect a stronger macro environment in the U.S. The Big Beautiful Bill, tax refunds, lower interest rates, and GDP growth will have a positive impact on all of our operations. One thing we can't control is the weather. A few weeks ago, our businesses in the Southern, Midwest, and Northeast U.S. were impacted by snow and ice storms, which lasted several days. Over half of our locations felt some level of impact. I'd like to thank all of our team members for their efforts in recovery, taking care of this storm, which we had not expected. I want to thank all of you for joining us today, and we'll open it up for questions. Thank you.

Operator, Operator

Our first question will come from Michael Ward with Citigroup.

Michael Ward, Analyst

I don't know if I'm looking at this the right way, but I tried to check back a couple of years ago and look where your brand mix has trended. And it seems like it's Toyota, Lexus, BMW, Porsche have been the growers. And is that in the U.S. and the U.K.? Is it mostly in the U.S. that growth? Is that strategic? And then it also looks like you're getting focused on, if you look regionally, you have Northeast Florida, California, Texas. Am I looking at that the right way? Is that a strategic direction for Penske?

Roger Penske, Chair and CEO

Well, first, let me say strategically, obviously, when you think about Florida, you think about Texas and California, where we have a big footprint. These would be where we'd like to add on brands. There's no question when you think about Toyota, Lexus, Porsche, and certainly BMW, we've grown with these brands over the last 4 or 5 years significantly, not just in the U.S., but I would say internationally. We look at these brands as premium luxury. Obviously, the volume foreign, which would be the Toyota business, has been very strong across the country with everyone that handles that particular brand. As I look at the future and you take your BMW business, you take our Toyota Lexus business, including Orlando, and add Porsche to it, it's probably over 50% of our business from a sales volume. So to me, we know how strong those brands are. And one of the things that drives us here is the captive finance companies. Toyota Financial, Lexus Financial, Porsche, and also BMW. These are the strongest players that we have within the market. And I think at the end of the day, we continue to keep our mix primarily. I think it's 71%, if I'm correct, Tony, 71% premium luxury, which will go up when we look at adding the 2 Lexus stores. So I would say California, Texas, and Florida are strong markets, and the brands are right where we want to be. Additionally, we've divested, Mike, which we've talked about before, stores where we weren't getting the returns that we needed. The markets were not the ones that had the growth, and we had certain CI requirements. So again, adding those markets with Arizona, where we have, I think, Shelley, almost $2 billion worth of business, really puts us in the sweet spot.

Michael Ward, Analyst

And secondly, could you talk a little bit about the cadence of earnings in 2026 because Q1 is a tough comp. And now you have the weather sitting on top of it. Can you talk about the cadence, how we should look at it going through the year?

Anthony Pordon, Executive Vice President of Investor Relations and Corporate Development

Yes, Mike, this is Tony. Thanks for that question. So Q1 will be impacted by the tariff-related effect that we saw the pull forward into March of last year. So with that, we expect some headwinds there. On top of that, we saw a SAAR of $17.8 million in that month, I believe, and it carried forward into April. In the U.K. last year in the month of March and into April, they had a new tax that came on in April last year, which actually caused some pull forward of demand into the first quarter. Our earnings are always judged and predicated upon how the registration periods for the U.K. do in Q1 and Q3. Typically, Q2 is a really, really strong period for the U.S. marketplace. If you go back and look at our historical trends, as you know, the summer selling season kicks off and you've got all the tax refunds that have come in. I think you'll have those types of challenges in front of us in the first quarter with those year-over-year comparisons.

Roger Penske, Chair and CEO

I think in Q2, it will be great for our one-way business. We see a spike in Q2 with people coming out of school and going out for the summer, which is a big help.

Michael Ward, Analyst

All right. So you have a soft Q1, big Q2 and then you move from there.

Anthony Pordon, Executive Vice President of Investor Relations and Corporate Development

Right.

Roger Penske, Chair and CEO

I never want to use the word soft. That's your word.

Michael Ward, Analyst

Yes.

Roger Penske, Chair and CEO

All right, thanks, Mike.

Operator, Operator

Our next question will come from the line of Alex Perry with Bank of America.

Alexander Perry, Analyst

I guess, first, I just wanted to talk through your outlook on the parts and service business as we move through the year here. Obviously, it's sort of been a big outperformer. Should we continue to expect really strong growth on a same-store basis? And maybe just walk us through what key company initiatives are driving strong growth for you guys?

Richard Shearing, North American Operations

Yes, Alex, it's Rich here. I can speak to the U.S. and kick it over to Randall for the international. I think, obviously, as you pointed out, it continues to be the bedrock and foundation of the profitability of the business. Whether it was truck or automotive dealerships, we continue to grow our effective labor rate, up 5% on the auto side, and up 2% on the truck side. We saw our fixed absorption rate go up by 200 basis points in the U.S. automotive business to 89.6%. As we look to this year, we would certainly target to have that same mid-single-digit growth in our fixed operations business. We always have to take a look at the balance of what is customer pay versus warranty. We've been very fortunate the last couple of years on the warranty side that the OEMs have had a lot of recalls. That is never guaranteed from one year to the next. We need to continue to work on our customer pay opportunities. We've talked in the past about what we're doing with artificial intelligence, tech videos, and targeting segment 2 and 3 customers, right? If you look at the age of the car park, it's at an all-time high. The average mileage for cars in the car park is at almost 70,000 miles. We need to ensure those customers operating older vehicles and who may not be in the market right now to buy a new car, are coming back into our dealerships. We haven't cracked that code yet. It's something we're still working on, but those are some of the opportunities. Additionally, if you look at where we're investing, we thought maybe that the radar and ADAS systems would eliminate collisions, and that's just not the case. In fact, we're seeing when the repairs need to be made on these vehicles, the severity of those repairs is higher from a labor dollar standpoint. There is a cost of that technology, and depending on the damage, it may result in the cars being written off by the insurance companies. That's an area we're investing in, and we just opened an 85,000 square foot facility on the truck side in our Dallas market. So I think those are going to be the areas that we continue to focus on.

Roger Penske, Chair and CEO

I think when you look at the acquisition of Longo, Rich talked about our expansion to grow on both the car and truck sides. Longo Toyota's body shop generates $1 million worth of gross profit just in the body shop, per month, and they have a tremendous opportunity for us to learn how they do that across the country. Internal service will continue to be a key asset for driving revenue from used cars and also from the PDI on new cars and adding accessories. We have two businesses out in Oklahoma, where we provide all the accessories for both Ford and GM products, which are not put on the cars on the assembly line. That business continues to grow with a great return.

Alexander Perry, Analyst

That's incredibly helpful. And then I wanted to ask my second question on what is your outlook on the freight market for the year? Are you seeing some relief in terms of the supply-side overcapacity headwinds that had been facing the industry? Or are you a little more optimistic on the freight side?

Richard Shearing, North American Operations

Yes, thanks, Alex. I'd say, generally, I'm a little bit more optimistic. There have been some green shoots as of late. Some things that I think are driving that. We've talked in the past about the administration's efforts to crack down on non-domicile CDL and illegal CDL holders. We are seeing that have an effect. When we talk to some of our shippers, they mention that there is capacity tightening in certain areas of the country, specifically Chicago, Northeast, parts of Texas, and some parts of California as well. For the first time in years, they've been able to turn down loads that may be less desirable from an economic standpoint, so I think that's a positive. Of course, I think Q3 and Q4 last year, there was uncertainty around tariffs and what the EPA27 regulations were going to look like. I believe that caused a number of carriers to remain inactive regarding order placement. As those things gain clarity, we expect people currently on the sidelines to enter the market. Indeed, we saw some of that in January where industry orders were up 20%. I think we'll continue to see this tightening. Interest rates will help, and the investment the administration has been discussing regarding onshoring of manufacturing will drive freight as well. Once those dollars start to be deployed and construction begins relative to those investments, it should be beneficial for the trucking market.

Anthony Pordon, Executive Vice President of Investor Relations and Corporate Development

You have smaller fleet carriers exit the market too, right, which helps overall.

Richard Shearing, North American Operations

Yes.

Alexander Perry, Analyst

That's all incredibly helpful. Best of luck going forward.

Operator, Operator

Our next question will come from the line of John Babcock with Barclays.

John Babcock, Analyst

Just one quick question while we're on the trucking side of things on PTS. I was wondering if you could talk about what sort of utilization rate it's going to take to see earnings start to meaningfully inflect there? And then I have a follow-up.

Roger Penske, Chair and CEO

I don't think utilization is the only metric to consider as we balance our fleet. The significant factor is the total loss or gain on sale compared to 2024, which was $87 million. We need to return that to normalized levels. De-fleeting in a soft market means we lose the profit we typically expect. We've noticed a decrease in interest costs because our total fleet is smaller. By de-fleeting, we generate capital, leading to about $1.4 billion in debt reduction for our leasing company, which will be advantageous. From the customer perspective, full-service leasing includes the truck, licensing, maintenance, etc. We are also ready for demand spikes by providing additional vehicles. Over the past two years, rental revenue from our existing lease customers has dropped by around 50%. The mileage driven by our lease customers is down, as we have a fixed weekly rate and a mileage charge, and without miles, we don't generate revenue. I anticipate that will improve, which will be very positive as the market, as Rich mentioned, starts to expand and gain momentum. If we can stabilize the gain on sale, remember we were down about $16 million or $17 million in EBT last year and had $87 million less in gain on sale. Yet, operationally, we've performed exceptionally well. Our operational structure is robust, and no one has a fleet like ours. Our logistics business is expanding with key customers, and we're being selective, ensuring we don't grow logistics indiscriminately. We want to maintain profitability in these partnerships. In a few years, once we fully realize the opportunities from the fleet downsizing, we believe we will have a strong business ahead.

John Babcock, Analyst

All right. That's very helpful. And then just my last question or really follow-up here, I guess. On the M&A market, how does that feel right now? And also, what are your goals on the M&A front in '26? For example, are there certain geographies or brands that you're looking to fill out?

Roger Penske, Chair and CEO

I would say that with the acquisition we made with Penske Motor Group and what we have in the bucket here for Orlando, the 2 Lexus stores will generate about $2 billion. I think we discussed that over the years, with a target of around 5% increase through acquisitions and 5% organically. So we're right in that target. We will continue to look for strategic areas in markets where we have scale. I don't see any markets we will be entering today unless we buy a larger group. From a ratio standpoint regarding our leverage, we want to maintain it well under 2%. With that being said, we will be very selective as we go forward. Capital allocation, Shelley could discuss, and we'll be looking at share buybacks and CapEx requirements.

Operator, Operator

Our next question comes from the line of Rajat Gupta with JPMorgan.

Rajat Gupta, Analyst

I just wanted to double-click a little bit on used car GPUs. Typically, I mean fourth quarter is always down slightly versus the third quarter. But this is the largest decline we've seen sequentially. I understand year-over-year was up slightly, but the prior quarters year-over-year were up significantly because of the Sytner consolidation. So I'm curious if you could comment or unpack the fourth-quarter dynamics a bit. We've seen some of this weakness across your peers as well. I'm wondering if there's anything changed in the market landscape recently, anything to do with mix? Anything you would call out to help us understand that better and how we should think about 2026? And I have a quick follow-up.

Tony Facione, Vice President and Corporate Controller

So Rajat, this is Tony. Thanks for the question. So basically, when you take a look at our overall gross per unit in Q4, it was $1,770. That compares to $1,773 in Q4 last year, so it was flat. Average selling price stayed relatively flat. However, one of the things we did see is that there was a mix shift between our business in the international markets, primarily the U.K., with fewer units in that market where we saw a larger decline in same-store unit sales. We saw stronger performance in the U.S. on the used unit side, but we make less in the U.S. overall gross on used vehicles. So the combination of these factors caused the largest decline between Q3 and Q4. Additionally, seasonality was in play in Q4 where de-fleeting occurred. As experienced in Q4 2024, the same phenomenon transpired in Q4 of each year. We would expect improvement as we move sequentially into Q1 and Q2 of this year in gross per unit.

Roger Penske, Chair and CEO

One thing to mention is that we were, and I'll use the word struggling to try and get the right focus on Sytner Select. The significant issue in that business was obtaining enough used cars every month to sell 5,000 or 6,000 units. We were not able to achieve these numbers with any profitability when we bought cars at auctions. We decided to shift our strategy and look to acquire significant blocks of used cars, which we hadn't done before. We purchased, don’t hold me to this, between 1,000 and 1,500 cars, and we are paying for some of those in growth, which means we're not securing the profitability we hoped for. The positive news is that 46% or 47% of the cars we generated for used vehicles came from internal trades, and that percentage has increased to over 60% now. As a result, we anticipate better margins moving forward from our existing stores, coupled with this improved trend. We're likely a quarter away from working through the 1,500 cars, so it's nothing to worry about; it's just another bump we encountered as we continue to find the right solution. Used car prices being up makes it difficult to acquire them, and we aim to ensure a margin when doing so. The finance company’s allowance for financing is also vital; if we over-recondition a used car, it can limit profitability. Pulling all these aspects together, I think we're on the right track. Randall, how do you feel about our progress for 2026?

Randall Seymore, International Operations

Yes, we confidently finished December, comparing it to October and November, and observed a continuation of gross profit per unit growth, with January also showing good progress month-over-month. The car inventory's health is in terrific shape. While it is challenging to acquire vehicles, we are effectively increasing the percentage of cars acquired through trade or direct purchases, which has risen approximately 20 points compared to last year.

Roger Penske, Chair and CEO

We're not involved in the older car market. Some believe it's a viable opportunity, but the number of vehicles returned for policy or buyback was unmanageable. This was another reason we decided to refocus and go down a gear since the older the car gets, the less full reconditioning is viable. Remember, when you purchase a car, it's expected to be operable and not to return to the dealership shortly after purchase. We're targeting the 1- to 5-year range for our business going forward. What are your thoughts, Rich?

Tony Facione, Vice President and Corporate Controller

Yes, I agree, Roger. Noting that we feel we've reached the bottom last year on lease returns. Lease returns comprised only 7% of our used car sales last year, down from 11% in '24. This situation provides us with valuable inventory that does not usually face competition from other dealers.

Roger Penske, Chair and CEO

Also, we haven't been able to secure the right vehicles on the premium luxury side due to tariffs, etc. This has hampered our ability to cycle our loaner cars. In our BMW store, we've been unable to cycle loaner cars at 303x, resulting in 1,000 young used cars we haven't been able to capitalize on over the last couple of years, which will positively influence our future results.

Rajat Gupta, Analyst

Got it. That's all very helpful. I had a follow-up on PTL, just following up on Alex's question. Based on how January might have started and capacity coming out, in the past, you've mentioned there might be an opportunity to reduce bad debt expenses as well. Considering all these factors, would you expect PTL's income to grow in 2026? What would be a sensible expectation for modeling that segment?

Roger Penske, Chair and CEO

From an overall business perspective, we anticipate an increase since our rental business is improving, likely accelerating towards the second half of the year. Although weather may impact us in the short term, we foresee positive development. There will also be substantial government funds released into the economy, including new tax rates. This is expected to stimulate one-way business growth that has been lagging as individuals had previously been financially constrained. I also view logistics as a segment that will continue to maintain growth, particularly in light of our new business acquisitions. However, many of our logistics customers have faced declining revenues from their clients, and we've witnessed a similar trend ourselves, given that we work directly with some OEM manufacturers supplying parts. Positive revenue growth is anticipated moving forward, and as far as bad debts are concerned, rental-side fraud has been a significant issue. Individuals booking trucks online with false credentials led to a high occurrence of unrecoverable rentals. We’ve instituted detailed measures, which led to a drop in this problem, with a potential to slash bad debt by $10-15 million next year. This represents a vital opportunity to enhance our performance.

Rajat Gupta, Analyst

Understood. Great. Good luck.

Operator, Operator

Our next question comes from the line of Daniela Haigian with Morgan Stanley.

Daniela Haigian, Analyst

So Roger, you've spoken about affordability pressures going into 2026. How have you noticed any change in consumer behavior either in the finance business or in after-sales for maybe retention on those older model year vehicles?

Roger Penske, Chair and CEO

Let me let Rich discuss after-sales experiences.

Richard Shearing, North American Operations

Yes. Affordability pressures are often discussed in terms of new and used vehicle sale prices. Towards the end of last year, during our monthly operations meeting, our team noted that third-party financing for our after-sales repair orders was on the rise. Most repairs, unless routine oil changes, are unplanned expenditures that could surpass $1,000. Given the strain on consumer budgets today, financing sometimes emerges as the sole viable option for exceeding out-of-pocket expenses.

Roger Penske, Chair and CEO

For those customers out of warranty, we're focusing on maintenance at Level 2 and Level 3.

Richard Shearing, North American Operations

We're actively assessing strategies related to labor rates, parts pricing, and offering alternatives in repairs so that customers have spending flexibility.

Roger Penske, Chair and CEO

Looking at the current situation, affordability indeed poses challenges, particularly due to the uncertain political landscape regarding tariffs. This affects vehicle costs, particularly 25% tariffs on German OEMs. Presently, the U.K. has a 10% tariff for the first 100,000 units, adding additional cost pressures on our trucks, cars, and light vehicles. We may need to explore offering vehicles with fewer features to maintain competitive margins. Regarding BEV vehicles, as they ramp up in production, we are beginning to witness inventories increasing as OEMs aim to utilize production lines effectively. I believe ICE vehicles will need to match BEV prices to sustain market dynamics. While I don't anticipate broad escalations, tariff explanations will be prevalent.

Richard Shearing, North American Operations

Yes. I believe they'll have to re-engage heavily in leasing, as they can influence residual values and dictate payment structures. The U.S. market has traditionally been leasing-oriented, remaining flat year-over-year at about 32%. Yet, there remain opportunities for premium luxury leasing, which historically has been between 50% and 55%. Currently, we're in the low to mid-40s for premium luxury.

Daniela Haigian, Analyst

And my follow-up is switching gears a bit to Chinese OEMs in EU and rest of world markets. How has your strategy evolved in relation to the influx and shifting market shares that you're observing in these international markets?

Randall Seymore, International Operations

Yes, there's no doubt that in some of these foreign markets, particularly in Europe, the Chinese are making inroads with market share. For instance, their share in the U.K. has nearly doubled to almost 10%. Our strategy has been deployed through our Sytner Select stores. We've introduced Chinese brands, like Chery in 3 of our locations, Geely in 5, and we're opening a BYD store. We are maximizing our current asset use. Of course, we need to invest in corporate branding identity, yet we retailed 176 Chinese vehicles out of Chery and Geely since starting our earnest operations back in November. Q1 will be our first full quarter.

Operator, Operator

And our final question comes from the line of David Whiston with Morningstar.

David Whiston, Analyst

On the Orlando deal, once that closes, are you going to need to sell any Lexus stores that remain under the cap?

Roger Penske, Chair and CEO

Once that deal is completed, we will be in compliance with both Toyota and Lexus requirements, including Penske Motor Group.

David Whiston, Analyst

Okay. And then on the credit line draws to partially fund these deals, do you prefer to let leverage increase a bit after the deal, or do you want to repay those credit line draws quickly?

Roger Penske, Chair and CEO

Well, let's take a look. Our leverage is 1.5, and I say we want to be well under 2.0, but the cash flow if we have a similar year to this year, and we project that our CapEx will likely decrease by $100 million, we'll encounter free cash flow, after CapEx, that might surpass $750 million. We perceive this as a temporary short-term elevation in our leverage, but we don't plan to enter the market right now.

Anthony Pordon, Executive Vice President of Investor Relations and Corporate Development

All right, thanks, guys.

Roger Penske, Chair and CEO

Thanks, everybody. We'll see you at the end of the next quarter.

Operator, Operator

This concludes today's call. Thank you all for joining. You may now disconnect.