Earnings Call Transcript - PAG Q1 2026

Operator, Operator

Good afternoon. Welcome to the Penske Automotive Group First Quarter 2026 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through May 6, 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.

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

Thank you, Krista. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's first 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. As always, I'm available by e-mail or phone for any follow-up questions you may have. Joining me for today's call is Roger Penske, our Chair and CEO; Shelley Hulgrave, our EVP and Chief Financial Officer; Rich Shearing from North American operations; Randall Seymore, of International Operations, and Tony Facione, our Vice President and Corporate Controller. We may make forward-looking statements on today's call about our earnings potential, outlook and other future events, and we also may discuss certain non-GAAP financial measures such as EBITDA and adjusted EBITDA. We've 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, again, both of which are available 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 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. At this time, I'll 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. We're pleased to report a solid and productive first quarter. During the first quarter, PAG delivered over 123,000 new and used vehicles and nearly 3,600 new and used commercial trucks and that generated approximately $7.9 billion in revenue. We earned $324 million in earnings before taxes and $235 million in net income and generated earnings per share of $3.56. The first quarter results include a $60 million gain on the sale of a dealership partially offset by $13 million in certain disposals and other charges as we continue to optimize our dealership portfolio. Excluding these items, adjusted earnings before taxes was $276 million. Net income was $201 million and earnings per share was $3.05. This was a difficult comparison for the prior year period and challenging market conditions impacted year-over-year performance. We also continue to grow our footprint. In February, we acquired two high-performing and strategic Lexus dealerships in the Orlando metropolitan area of Central Florida, one of the fastest-growing regions in the U.S. These acquisitions complement the two Lexus and two Toyota dealerships we acquired in November 2025. Combined, these six dealerships are expected to generate $2 billion in estimated annualized revenue. We also repurchased 170,000 shares of common stock for $26 million. We increased the dividend to $1.40, which yields approximately 3.4%, the highest yield in our peer group. Looking at the details for the quarter: same-store retail automotive new units declined 5% and used increased 1%. Units retail were impacted by weather-related challenges and a difficult comparison to March 2025 when tariffs caused pull-ahead sales and lower BEV sales in the U.S. associated with the elimination of the BEV tax credit. Gross profit per unit, new unit retail was $4,783, up $94 sequentially. Gross profit per used unit was $2,076, up $306 sequentially. Our service and parts revenue and gross profit was a Q1 record. Same-store revenue increased 4.6% and related gross profit increased 5.7%. Service and parts gross margin was up 60 basis points. In the Retail Commercial Truck segment, Q1 unit sales declined 953 units driven by reduced order intake during Q3 and Q4 2025, following the implementation of tariffs and weakness in the freight market. However, we are encouraged today with the trends we are seeing across the commercial truck market. In recent months, we've seen an increase in new truck orders and expect the timing of these deliveries to take place in the second half of 2026. PTS equity income increased 24%. Growth in full-service leasing revenue, improved fleet utilization, lower operating and interest expenses resulting from continued fleet reductions, including maintenance and our depreciation, were partially offset by continued challenges in the rental business and lower gain on sale of trucks. At this time, I'll turn the call over to Rich Shearing.

Richard Shearing, President, North American Operations

Thank you, Roger, and good afternoon, everyone. In U.S. Retail automotive, same-store new and used unit sales were affected by two major winter storms, the tariff announcement and pull-forward of retail sales in March of last year and lower BEV sales from easing emissions regulations and the elimination of the BEV tax credit at the end of September 2025. During the quarter, 25% of new units sold were at MSRP compared to 29% in Q1 last year. Same-store service and parts revenue increased 3.2% and gross profit increased 3.4%. Customer pay was up 4%, warranty was up 5% and collision repair declined 4%. Our U.S. automotive technician count is up 3% when compared to the end of March of last year, and our bay utilization is 84%. Turning to Premier Truck Group: During Q1, Premier Truck retailed 3,583 new and used trucks, generated $695 million in revenue and $128 million in gross profit. On a sequential basis compared to Q4 2025, new unit gross increased $111 and used unit gross increased $4,624. New unit sales were down 26% and were in line with the overall North American Class 8 market. The recessionary freight environment and market uncertainty associated with tariffs and the status of emissions regulations impacted new truck orders during the last half of 2025. However, as Roger mentioned, in recent months, we have seen an increase in new truck orders. In fact, Class 8 orders increased 91% and the industry backlog grew 33% to 175,000 units in the first quarter when compared to March of last year. We expect this increase in order activity to result in higher new unit sales in the second half of this year. Service and parts revenue increased 5% as average daily activity continues to grow and service backlog is beginning to increase. Service and parts gross profit represented 73% of segment gross profit during Q1. Turning to Penske Transportation Solutions: We are also encouraged by the stronger financial performance of Penske Transportation Solutions. During Q1, operating revenue declined 4% to $2.5 billion. Lease revenue increased 2%, rental revenue declined 17% and logistics revenue declined 3%. PTS sold 9,319 units in Q1, ending the quarter with a fleet size of 387,500 units compared to 435,000 at the end of December 2024. Gain on sale declined by $26 million in Q1 2026 compared to Q1 2025. As PTS continues to rightsize its fleet, higher fleet utilization and lower operating costs for maintenance, depreciation and interest expense contributed to an increase in earnings. Overall, our equity income from PTS increased 24% to $41 million. I would now like to turn the call over to Randall Seymore to discuss our international operations.

Randall Seymore, President, International Operations

Thanks, Rich. Good afternoon, everyone. During Q1, international revenue was $3.3 billion, which is up 6%. International new units were up 2% and used increased 3%. Same-store service and parts revenue increased 7% as our strategies to increase customer pay drove a 10% increase, which more than offset a 3% decline in warranty. In the U.K. market, Q1 automotive registrations increased 6% to 615,000 driven by private and retail demand and an increase in Chinese OEM sales. While we were encouraged by Q1, the U.K. automotive environment remains challenging as inflation, higher taxes, consumer affordability and the government mandate towards electrification impacts the overall market. During Q1, our U.K. same-store new units delivered were flat from lower sales of several German luxury brands and the elimination of the incentive programs for these luxury brands. Same-store used units increased 3% and gross profit per unit increased $500 sequentially when compared to Q4 2025. Turning to Australia: Our EBT increased 15% compared to Q1 last year. In automotive, our three Porsche dealerships in Melbourne continue to gain market traction through implementing our Porsche 1 ecosystem process. This process has driven higher customer satisfaction with all three dealerships in the top five, including the top position nationally. Although we had a decline in new unit sales associated with the transition of the McCann to an all-electric vehicle, we had a strong mix of higher-end vehicles and our focus on pre-owned and after sales continues to drive the business. In the Australian Commercial Vehicle and Power Systems business, we are diversified with revenue and gross profit split approximately two-thirds off-highway and one-third on-highway. The off-highway business continues to grow. The current order book has exceeded our full year business plan with strength in Energy Solutions, mining and defense sectors. We have over AUD 600 million in secured orders so far for 2026. The engines and support we provide will be critical as this segment evolves. We continue to see the potential for our Energy Solutions business to generate at least AUD 1 billion in revenue by 2030. Over the last several years, our focus has been to increase units in operation to grow the recurring service, parts and remanufacturing aspects of our business, and this focus is starting to pay off. One of the major mining customers operates a 125-megawatt power station with 20 Bergen engines that we installed four years ago. As part of the major maintenance interval, we have begun to remanufacture 300 cylinder heads which will generate approximately 15,000 hours of work for our business. I would now like to turn the call over to Shelley Hulgrave to review our cash flow, balance sheet and capital allocation.

Shelley Hulgrave, EVP and Chief Financial Officer

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. SG&A expenses increased by 1.5%, which is lower than the rate of inflation, while gross profit declined 1.7%. SG&A as a percentage of gross profit for Q1 2026 was 74.3%. Adjusted SG&A to gross profit was 73.3%. Q1 SG&A to gross profit was impacted by employee benefit costs up $4 million, payroll taxes and other U.K. social programs of $3.5 million, rent and real estate taxes up $7 million and lower automotive units and the impact from lower sales of new and used commercial vehicles at Premier Truck Group. During Q1, we generated $215 million in cash flow from operations and EBITDA of $397 million. During Q1 2026, we invested $63 million in capital expenditures. This is down from $85 million in Q1 2025. We completed acquisitions of two Lexus dealerships representing $450 million in estimated annualized revenue. We increased the cash 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 39% over the last 12 months and we repurchased 170,000 shares of common stock for $26 million. As of March 31, 2026, $221 million remained available for repurchases under our securities repurchase program. Since the beginning of 2023, we have returned approximately $1.6 billion to shareholders through dividends and share repurchases. At the end of March, non-vehicle long-term debt was $2.6 billion and leverage was only 1.8x, despite completing several large acquisitions over the last six months. Floor plan was $4.1 billion, and we have $425 million in vehicle equity. For the quarter, total interest expense increased $2 million. Floor plan interest decreased $4 million due to our cash management and lower interest rates, while other interest expense increased $6 million, primarily from higher borrowings for acquisitions. We estimate a 25 basis point change in interest rates would impact interest expense by approximately $15 million. Our effective tax rate was 27.4% in Q1 2026. The prior year results have been recast 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. Q1 2025 does not reflect federal or state income taxes had 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. Total inventory was $4.9 billion, up $77 million from December 2025. New vehicle inventory is at a 44-day supply, including 46 days for premium and 29 days for volume foreign. Used vehicle inventories at a 39-day supply with the U.S. at 33 days and the U.K. at 42 days. At the end of March, we had $84 million in cash and liquidity of $1.2 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 mentioned, we added two Lexus dealerships to PAG during the first quarter. And today, I'd like to welcome our new teams at Lexus Orlando and Lexus Winter Park to our organization. As I said earlier, we had a solid first quarter, and I continue to remain optimistic about our business. New and used retail and our service and parts processes remained strong and service and parts continue to grow. Our diversification remains the key strength of our business model; the recovery in the commercial truck market is underway. We expect to increase new truck orders to benefit the second half of the year and our retail truck dealerships and PTS investment should benefit. Again, today, thanks for joining our call. We'll take questions.

Operator, Operator

Your first question comes from Michael Ward with Citigroup.

Michael Ward, Analyst, Citigroup

I hope you all are doing well. Weather had a significant impact on the industry in January and February in the U.S. Can you quantify at all how much you were affected? And were you able to get any of that back?

Richard Shearing, President, North American Operations

Mike, this is Rich here. Good question. As I mentioned in my prepared remarks, two significant storms, one in January and one in February, impacted our businesses. The first storm in January had a very long path and affected our operations from Texas all the way to the Northeast. We had delayed openings and multiple day closures as we had to deal with cleanup. February wasn't as bad, but did impact the Northeast significantly. The good news is our competitors in those markets also suffered the same challenges. So we don't think consumers were running to alternative dealerships while we were recovering. But certainly, from a fixed gross standpoint, there was lost business because that's time you just can't get back. We had the added expense of snow removal and then we attribute the fixed gross loss to about $4 million to $5 million. In total, overall, about a $6 million impact to our earnings in Q1 related to the weather.

Michael Ward, Analyst, Citigroup

Okay. So you called out—I don't know if you were calling out or just the cost on the SG&A side of about $15 million. It sounds like some of those will be recurring, I guess, the rent and the health in the U.K. Are those one-time in nature? Are they not recurring? What were you kind of alluding to with that?

Shelley Hulgrave, EVP and Chief Financial Officer

Mike. Yes, a little bit of both. Certainly, rent increases we see year-over-year and health benefit plans—we hope those costs go down, but that doesn't seem to be the trend. I wanted to highlight the fact that the U.K. social programs, this is the last quarter before we anniversary those. So it's a bit uncomparable compared to Q1 of 2025. But like I said, we'll see that anniversary here in Q2.

Michael Ward, Analyst, Citigroup

Okay. And that's about 30 to 40 basis points, sorry?

Shelley Hulgrave, EVP and Chief Financial Officer

Yes. We estimate without those that our SG&A to gross profit would be in that 71% to 72% range that we had talked about. So still comfortable in that low 70s range.

Michael Ward, Analyst, Citigroup

Okay. And just lastly, it looks like you've been doing some portfolio rebalancing. Usually, you don't see much movement in the retail automotive revenue mix, but you see a couple of good changes year-over-year. And I'm just wondering if that's a trend we can look to more. Are those going to your focused brands? Continue to focus on the luxury, the volume—form, that's the strategy, correct?

Roger Penske, Chair and CEO

Well, let me say this: we actually sat with our Board probably 18 months ago to determine what was going to be our strategy on brands and locations not only domestically but internationally. We felt that we would look at our low performers, and then we looked at what the expectations of the manufacturers were from a CapEx perspective and where we could grow the business. We determined there were a number of locations that we would need to sell in order to get the return that we want, because of our commitment to go forward with Penske Motor Group. We had to commit to sell two Lexus stores, one in Norwich and one in Madison, Wisconsin, which we completed. That gave us the opportunity to buy the Orlando stores and the PMG stores. Along with that, we sold a number of other smaller locations, some larger, some in the U.K., and that generated about $25 million to $35 million of free cash flow back from these stores, which we used in part to buy these other key stores. So we'll continue to prune the portfolio. We're still in the acquisition business. I think we made the decision in the U.K. to reduce our number of Sytner Select stores from 14 to 6, which is paying off. We are taking those locations and adding the Chinese brands in the same showroom. Overall, I think the strategy has worked and we've kept our leverage, as Shelley said, from around 1.5 to 1.8. So I think it's been a good movement and we will continue. I see our peers doing the same thing because today the cost of doing business is so high and some of the smaller locations, with all the controls you need and the high cost of the best people, just can't deliver the returns we want. So all of us are looking for locations where we can add on in key markets.

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

So Mike, just Page 9 of our earnings presentation is a key chart in the deck that lays out what total revenue is. You can see there premium is 72%, volume non-U.S. is 22%. And then when you look at the Toyota/Lexus number, it has jumped up to 18% of our overall automotive business. So that's very, very key with the acquisitions and the OEM presence that we have.

Michael Ward, Analyst, Citigroup

Proactive plan looks like you're just pulling it off.

Operator, Operator

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

Rajat Gupta, Analyst, JPMorgan

I just wanted to follow up on PTS. Pretty nice earnings growth in the quarter, obviously despite the lower gain on sale. Obviously, a lot of those improvements are coming from just lower maintenance, debt, fleet costs, et cetera. I'm curious how we should think about the trajectory of PTS earnings for the remainder of the year? Any kind of guardrails you can give us for the full year?

Roger Penske, Chair and CEO

I think number one, we've come from roughly 430,000 units defleeted to 387,000 at the end of the quarter. That's reduced a significant interest cost and depreciation has been impacted positively. Our fleet utilization on the rental side, which before was down to 71%, has moved up to 76%. We've seen the operating side of our business perform well during the quarter and really in Q4 also, even though our gain on sale was down $26 million in the quarter. We were able to pick that back up through utilization, through lease revenue and some of our logistics businesses, which provided an overall pickup in PTS profit from $120 million to $142 million. We've got lower operating expenses—maintenance and depreciation have improved. So think about interest, depreciation and gain on sale: gain on sale is down but overall we're seeing rental utilization up about 500 basis points and the operational improvements are significant.

Rajat Gupta, Analyst, JPMorgan

Got it. So I mean, just like a lot of these trends are sustainable—at least from a cost and earnings perspective through the remainder of the year on a year-over-year basis?

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

Rajat, could you repeat that, please?

Rajat Gupta, Analyst, JPMorgan

I was trying to say that a lot of these trends seem sustainable for the remainder of the year directly from the cost side when you look at the year-over-year trend?

Roger Penske, Chair and CEO

You're talking about PTS? Certainly, we are continuing. We probably have another 3,000 to 4,000 units that we'll take out during this year from a fleet perspective; we will continue to rightsize. We're also seeing revenue coming back on rental, and we can take some of our off-lease equipment and replace it when appropriate. The older trucks are out now, which were providing much higher maintenance; we're seeing maintenance costs improve. Customer acceptance is key: we're starting to see people signing up for long-term leases. There was a pause over the last 90 to 120 days with emissions and costs, et cetera, and we weren't getting traction, but in Q1 we saw lease signings go up, which bodes well because these leases are three, four, five years with contractual escalators. So many of these trends—higher utilization, improved maintenance and stronger lease signings—should be sustainable to support earnings for the remainder of the year.

Rajat Gupta, Analyst, JPMorgan

Got it. And just a follow-up on the parts and service business, more on the international side, pretty strong numbers overall. But it looks like if you look at it excluding the FX benefit, growth was probably flat to slightly up. I'm curious if that's correct? And what kind of initiatives are in place to maybe accelerate that growth going forward?

Randall Seymore, President, International Operations

Rajat, it's Randall. If you take FX out, that's correct—growth would be modest. In the U.K., we were slightly up. But in other markets, for example, Italy was up 11%; Germany was up 20%, and that's really on the back of customer pay focus because warranty is actually down. Internationally, we don't get the same parts markup as in the U.S., so margin on parts warranty is lower, whereas customer pay has the higher margins. So the mix and the focus on customer pay are driving the improvement, and that's higher-margin business.

Rajat Gupta, Analyst, JPMorgan

Got it. What portion of international is the U.K. versus non-U.K. in your numbers there?

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

Rajat, I'll get that back to you offline after the call.

Operator, Operator

Your next question comes from the line of Jeff Lick with Stephens.

Jeffrey Lick, Analyst, Stephens

Question for Rich. We get into this part of the year—April through the rest of the year—lapping against last year. Last year at this time, luxury started to lag the broader auto sector with the exception of August and September with the EVs. Just kind of curious how you're seeing things now as the year plays out because you guys are a bit unique and you have easier compares. How are you thinking about the rest of the year on new luxury and then maybe also talk about as we lap the EV compare anything to think about there?

Richard Shearing, President, North American Operations

Yes. On the EVs: if you look at Q1 this year versus Q1 of 2025, our BEV sales were down 61% this year compared to last year. In our West Coast markets such as California, there's still demand for BEVs, but consumers have concerns about range and charging infrastructure. We haven't seen a material change in that balance for the rest of this year; it has stabilized post the tax credit going away. BEVs now represent a smaller portion—perhaps 4% to 5%—of the overall retail sales market. On the premium/luxury front, we have some tough comparisons, especially looking at March. Some OEMs' sales are down: Audi in Q1 was down about 30% overall as they are launching new models; BMW about 15%; Porsche, with the Macan transition, is down about 18%; Mercedes roughly down about 15% overall. The good news is OEMs have adjusted to the tariff impact and are back in the market with incentives that are reasonable, and the products they are producing are still desirable. We see many new product launches this year that should be highly desirable. From a model mix and brand mix standpoint, with about 72% premium luxury exposure, we remain well positioned.

Jeffrey Lick, Analyst, Stephens

Anything to call out with service and parts with respect to warranty that you're lapping stop sales, especially on the luxury side?

Randall Seymore, President, International Operations

Our fixed gross overall was up about 3.5%. We talked about the impact from the storms. An encouraging nugget is our customer pay ROs—we've been really focused on that segment. Recalls continue to occur: Toyota extended the Tundra engine recall to certain 2023 and 2024 model year units, BMW has a starter recall that was recently announced, and Audi has piston replacement campaigns on certain 3-liter engines which is a roughly 30-hour job, plus proactive software campaigns on the Q5. These OEM quality issues continue to drive work into our shops.

Operator, Operator

Your next question comes from the line of John Babcock with Barclays.

John Babcock, Analyst, Barclays

Just a quick one on the truck market. I know you're expecting an increase in truck orders, particularly in the second half. Just curious on the sustainability. I'm sure there's probably a portion of the truck demand that is driven by expectations for higher prices with some regulatory changes. So is this long-term sustainable truck demand or temporarily driven by short-term factors like regulations?

Randall Seymore, President, International Operations

I certainly think there's some short-term influence on truck orders similar to what we saw with lack of orders in Q3 and Q4 last year. Once there was finality on EPA 2027 guidelines and customers could understand the rule set, that drove order intake in the first part of this year—Class 8 orders were up 91% as Roger quoted. There was also a near-term bump from tariff announcements in February where a grace period allowed customers to place orders to avoid certain tariff increases. Structurally, enforcement by DOT and FMCSA cracking down on illegal carriers and non-domiciled CDL holders has tightened capacity and pushed spot rates up 30% to 40% year-over-year, driving higher utilization of legal operators and increasing parts and service revenue. We've seen the first growth in fixed gross profit in six quarters in that business, and freight rate increases are driving near-term used truck demand as well. Volume sales are trending upward and gross profit per unit was up meaningfully in the quarter. Public carriers have commented that many of these changes are structural and not temporary.

John Babcock, Analyst, Barclays

Thanks for all that color. On the M&A side, you've increased exposure to Toyota and Lexus recently. On a go-forward basis, should we think about expanding brands? Are there certain geographies you want to add? Also, how are you balancing that with leverage and what's your comfort level with leverage right now?

Roger Penske, Chair and CEO

I think our leverage gives us flexibility. We're currently roughly 70-plus percent premium luxury and about 21% or 22% volume foreign. We're focusing on the mix of our business in those areas and looking for opportunities carefully. Our goal is to maintain dividend, buybacks and CapEx discipline. By eliminating some underperforming stores we've reduced CapEx needs, which gives us the opportunity to focus. Internationally, we've pruned businesses and are focusing investments in Australia—defense and power systems—where returns are attractive. Premier Truck Group's Freightliner business has produced very good returns and we will look for other locations in the U.S. and Canada that make sense. Key considerations are the right brand, right location and profitability. We have the luxury of not being in a hurry; the Orlando stores, for example, added $2 billion of revenue and integrating them is a priority. We'll continue to act when the right opportunities arise and maintain our leverage profile prudently.

John Babcock, Analyst, Barclays

Thanks. Appreciate it.

Operator, Operator

Your next question comes from the line of Mike Albanese with StoneX.

Mike Albanese, Analyst, StoneX

Could you comment on what you saw in Q1 regarding Chinese models taking share in international markets? And then a house view on the implications to premium luxury. Do you think about leaning into building exposure with these models or continue to take it slow and monitor?

Roger Penske, Chair and CEO

Let's let Randall address that—he's been to the auto show in China and has the most current perspective.

Randall Seymore, President, International Operations

Yes, Mike. Chinese brands are gaining share in Europe. In the U.K., Italy and Germany they've more than doubled in some cases. In Australia, last year Chinese brands were about 15% of the market and year-to-date through Q1 they're up to 23%. We've put our toe in the water in the U.K. and Germany—this is our first full quarter after starting late last year. We have 11 locations between the U.K. and Germany with four different brands. Our strategy is to introduce these brands into existing facilities—like Sytner Select big-box used car retail—so we can do that with minimal capital investment and without adding fixed operating expense. First impressions have been positive. We're taking a measured, 'walk before you run' approach because each Chinese OEM and each brand is different; you can't treat them as one homogeneous group. We'll expand where it makes sense, but we'll be cautious and disciplined.

Mike Albanese, Analyst, StoneX

Great. And then follow-up: unit profitability on these vehicles—what are you seeing?

Randall Seymore, President, International Operations

It differs by brand and by market. In the U.K., Geely and Cherry have both been good to deal with. One risk is over-inventory from an OEM, which could lead to aggressive discounting. When you open a new stand-alone store for a new brand, fixed absorption is low at the start and that depresses returns initially; over time that improves. In Germany we have begun with BYD and MG; it's too early to draw firm conclusions. In our big-box used operations, we are seeing a few thousand pounds more margin on the Chinese models when compared to similar used vehicles we're selling in the same channels, so early returns are positive but we remain cautious.

Roger Penske, Chair and CEO

I'd add that margins in our big-box channels have been reasonably attractive so far. We are not seeing consumer pushback and the initial mix has been about 50% retail and 50% fleet as manufacturers seed the market. We will monitor closely as they scale.

Richard Shearing, President, North American Operations

From a product standpoint, customers are reacting well. The mix of retail and fleet has been sensible so far. We would caution against OEMs oversaturating the market and driving a race to the bottom on pricing.

Mike Albanese, Analyst, StoneX

And then my last question: implications on after sales with these brands—are ROs similar and can you service them effectively?

Randall Seymore, President, International Operations

Good question. The main concern is ensuring the OEMs provide appropriate parts support so we can service those vehicles effectively. I emphasized that to the OEMs at the auto show; they understand. We haven't seen any major challenges to date, but volumes are still relatively small. Many of these cars come with longer warranties—some up to seven years in certain markets—which could drive stickier after-sales behavior and recurring service revenue. Our approach has been to put these brands into locations where we already have parts and service capabilities so we can handle them without significant additional fixed investment.

Roger Penske, Chair and CEO

We don't yet know how the used car bias will evolve. Captive finance availability is also important—brands with stronger captive finance tend to help retail uptake. Our measured approach of placing these brands where we already have capacity is designed to minimize execution risk while we evaluate performance.

Richard Shearing, President, North American Operations

We're seeing product acceptance in markets where Chinese brands have launched. In Australia specifically, the market share move from 15% to 23% over a short period is a clear sign of disruption, and customers there are now getting experience with those brands.

Operator, Operator

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

Daniela Haigian, Analyst, Morgan Stanley

The trend of energy and auto converging is getting a lot of investor interest. Could you speak a little about your Australian and New Zealand segment and any opportunity there?

Randall Seymore, President, International Operations

Thanks, Daniela. The energy business is vital globally, and particularly important in Australia where data center investment is strong. We have about 75% market share in data center backup power for the power range of 1,250 kilowatts and higher, which is where most projects sit. Our pipeline there is extremely strong and we're tight with numerous customers. One characteristic of standby and backup power is you sell the engine and it sits there; you might do monthly maintenance but it doesn't run continuously, so after-sales annuity is lower unless you have units in operation. Our strategy is to grow prime power units in operation where engines run many hours annually: for example, four years ago we built a prime power station with Bergen engines in northwest Australia for a large mining customer. That installation has multiple very large engines that run 7,000 to 8,000 hours a year. We're now in a major maintenance cycle where remanufacturing cylinder heads is required; remanufacturing 300 cylinder heads will generate about 15,000 hours of work. Our focus is to increase units in operation so we can grow recurring service, parts and remanufacturing revenue. This is a key strategy for our Australia business.

Operator, Operator

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

Alexander Perry, Analyst, Bank of America

Congrats on the strong quarter. I wanted to ask about the outlook in the U.K. ex the Chinese brands—what's the core outlook? And on the Chinese brands, you're taking a measured approach—will you continue to add doors there?

Roger Penske, Chair and CEO

Measured is the right word. Meeting with OEMs helps us understand their strengths and how their strategies align with ours. We'll continue to evaluate which brands make the most sense to partner with and put them where we already have facility infrastructure, so the capital outlay is minimized. Given current supply constraints, we prefer to place these brands into existing operations to leverage parts and service capacity. We'll continue to be good partners with OEMs and grow where it makes sense, but OEMs will also limit distribution in many cases. Our approach will remain cautious and disciplined.

Randall Seymore, President, International Operations

Yes.

Alexander Perry, Analyst, Bank of America

That makes sense. On inventory levels across the network more broadly: how do you feel about inventory? It sounds like brands such as Lexus are light. Anywhere you think you're over-inventoried? How is that restricting sales velocity and do you see improvement ahead?

Richard Shearing, President, North American Operations

Alex, from an overall perspective in the U.S., new vehicle inventory ended the quarter at 43 days and used at 33 days; new is down from 52 days a year ago so we're nine days lower in supply. You must look at days supply and model mix by brand. Toyota/Lexus are healthy on days-supply, but we'd prefer more certain models and fewer other models—so there is nuance by model. Last year Honda overproduced a bit and days supply crept up; a plant closure earlier this year brought things back in line. BEV mix changed: after the tax credit went away at the end of September, we saw sell-through and new BEV day supply rose—from a low to 78 days supply now—higher than our overall new average and higher than we'd prefer. On used cars, there's demand, but we've been disciplined in sourcing used inventory. We could buy more used cars but that would lower gross per unit, so we've stayed in our preferred 0- to 4-year-old sourcing window rather than going deeper into 8-plus year vehicles.

Randall Seymore, President, International Operations

In the U.K. it's similar: new car supply is about 40 days with a band for brands from roughly 35 to 45 days. Used car supply is about 42 days. Our U.K. team has done a strong job acquiring used cars and appraising them properly. Overall, we feel we're in good shape.

Operator, Operator

Your next question comes from the line of David Whiston with Morningstar.

David Whiston, Analyst, Morningstar

On service bay utilization, you talked about it being 84%. What prevents that from being much higher—100%? Is it purely labor shortages or other variables?

Richard Shearing, President, North American Operations

It's a combination of factors. Bay utilization measures tech ratio to base. Our tech count is up 3% year-over-year. You don't want to run at 100% utilization because to do so you'd need perfect parts availability and no downtime; in reality you have delayed parts, you have cars torn down awaiting parts, and with BEVs you may need adjacent bays to do certain battery work. We're comfortable at 84% and can probably tick that up a few percentage points, but growing much above low 90s would be challenging given the flexibility required for the types of jobs we perform.

Roger Penske, Chair and CEO

Also, some larger jobs require additional space and time. We are making investments: for example, adding 100 bays at Longo Toyota in California, building a full dealership with 100 bays in Hutto, Texas near Austin, and adding another 30 bays in Central Florida. Our focus on parts and service capacity is a strategic investment given the units in operation for certain brands—after-sales is a key part of our long-term growth.

Operator, Operator

That does conclude our question-and-answer session. And I would now like to turn the conference back over to Mr. Penske for closing comments.

Roger Penske, Chair and CEO

Thanks for joining us. We'll see you next quarter. Thank you.

Operator, Operator

Ladies and gentlemen, that does conclude today's call. Thank you all for joining, and you may now disconnect.