Penske Automotive Group Inc (PAG) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group's second-quarter 2013 earnings conference call. Today's call is being recorded, and will be available for replay approximately one hour after completion through August 7, 2013 on the Company's website under the Investor Relations 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, Craig, and good afternoon, everybody. A press release detailing Penske Automotive Group's second-quarter 2013 results was issued this morning, and is posted on our website, along with the financial presentations designed to assist you in understanding our financial results. Joining me for today's call are Roger Penske, our Chairman; and David Jones, our Chief Financial Officer.

On this call, we will be discussing certain non-GAAP financial measures, such as EBITDA. We have reconciled these items to the most directly comparable GAAP measures in this morning's press release that is available on our website. Also, we may make forward-looking statements on this call. Our actual results may vary because of risks and uncertainties, which may cause the actual results to differ materially from expectations. Additional discussion and factors that could cause results to differ materially are contained in our public SEC filings, including our Form 10-K.

At this time, I will now turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone. Thank you for joining us today. I'm pleased to report that our business produced an outstanding second quarter. We delivered solid growth across each area of our business, and we earned the highest income and earnings per share for any quarterly period in the Company history.

The record results were driven by a 14.1% increase in total retail unit sales, and 11.6% increase in total revenue to $3.7 billion. We also leveraged our selling and administrative expenses as a percent of gross profit by 190 basis points, and improved our operating income by 24.9%. As a result, income from operations increased 27.4% to $64 million, and related earnings per share increased 26.8% to $0.71.

Let me now turn to the specifics of our record second quarter. Total retail unit sales increased 14.1% to 93,600 units, and total revenues increased 11.6% to $3.7 billion. On a same-store basis, revenues increased 11.5%, including 13.2% increased -- increases in our US market, and 8.5% internationally. Foreign exchange rates negatively affected our same-store revenue growth in Q2 by 110 basis points or approximately $37 million. Excluding the effect of foreign exchange, same-store retail revenue increased 12.6%, including 11.7% for international markets.

Our total revenue mix in the quarter was 66% in the United States and 34% internationally. Our brand mix was consistent with last year Premium Luxury at 68%, Volume Foreign at 28%, and Big Three at 4%. Looking at new vehicles, we retailed 51,300 units, representing 11.6% increase, including 11.3% improvement in the US and a 12.3% increase internationally. We outperformed both the US and the UK markets during the quarter. Breaking that down, Premium Luxury was up 14.7%, Volume Foreign up 9.4%, and the Big Three was up 4.9%. Total same-store new units retailed increased 10.2%. The US was up 8.9% and international was up 13.6%.

Total new vehicle revenue increased 12.7% to $1.9 billion. New vehicle average selling prices improved 1.1%, while new vehicle gross profit per unit was $2807, and our gross margin was 7.5% compared to 8% in 2012. Our days supply of new vehicles was 63 days at the end of June compared to 56 days last year. Looking at used vehicles at retail 42,300 units in the quarter, a 17.4% increase. Our Premium Luxury used increased 15.7%, our Volume Foreign 20.4%, and our Big Three 6.5% for a total again of 17.4%.

Our used and new ratio was 0.83 to 1, which increased from 0.78 to 1 in the second quarter of last year. Total same-store used units retail increased 14.9%. In the US, it was up 15.2%, and internationally, it was up 14.4%. Used vehicle revenue increased 15.5% to 1.1 billion. Our used vehicle average transaction prices declined 1.6%, while the used vehicle gross profit per unit was $1928, and our margin was 7.5% this year versus 7.7% last year. Our days supply of used was 42 days at the end of June compared to 43 days last year.

I'm pleased to report we're making great progress on our initiative to improve our finance and insurance revenue. During the second quarter, revenue increased 17.9%, including 16.4% on a same-store basis. F&I improved 3.3% per unit to $1024 or approximately $33 per unit. F&I per unit was $1001 in the US and $1077 internationally. In the second quarter, 69% of our F&I revenue was generated in the US, and 31% was generated in our international markets.

Turning to service and parts, our business had another solid quarter, with revenue improving 8.1%, including 6.6% on a same-store basis. Customer pay was up 3.8% on a same-store basis, warranty of 15.6%; our body shop increased 9.4%, and our predelivery inspection was up 9%. Our gross margin for service and parts increased 160 basis points to 60.1%. In total, overall gross profit increased 12.7% to 569 million, and gross margin improved 20 basis points to 15.4%, up from 15.2% last year. For the quarter we generated 190 basis point improvement at SG&A to gross profit to 77.4%. Our SG&A flow-through was 38%. And if you exclude our rent, our SG&A as a percentage of gross profit was 69.5%. Our operating margin improved 40 basis points to 3.1%.

Our effective tax rate was 35.3%, up from last year compared to last year at 34.8%. EBITDA for the quarter improved 23.4% to $126.7 million. When you look at the balance sheet at the end of June, non-vehicle debt was $920 million, down $17 million from the end of last year. Our total debt to capitalization ratio improved to 40% and our debt leverage was 2 times EBITDA. To exclude approximately $105 million in vehicle rentals, our credit -- our total non-vehicle debt would have been approximately $850 million, and debt to capitalization ratio would have been approximately 38%. At June 30, we had total liquidity of $545 million. Our vehicle inventory was 2 billion. On a same-store basis, inventory increased approximately 294 million. New was up [294 million] and used was flat.

Capital expenditures for corporate ID facilities were $60 million for the first six months, and we estimate total CapEx for these initiatives to be somewhere between $115 million and $125 million for 2013. Additionally, we spent $11 million for real estate and land purchases during the first half of the year. Also, $73 million on the procurement of rental cars for Hertz franchises in Tennessee and Indiana.

Turning to our UK business, our business produced another very strong quarter, highlighted by a 15.7% increase in total units retailed. The overall UK market was strong also, with registrations in Q2 up 13%. The June registration period marked the 16th consecutive month of growth in new car registrations. The overall UK new vehicle market is up 10% for the first half of the year, with registrations increasing across private, fleet and business market segments.

Employment growth, attractive financing options to low interest rates, and manufacture support, continue to bolster the UK market.

Before opening up the call for questions, I wanted to discuss the announcement we made earlier this week about expanding our business into the commercial vehicles in the Australian and New Zealand markets. We believe this is a great opportunity for our Company to grow our revenue and profitability, while further diversifying our overall business. By the end of the third quarter, we expect to acquire a distributor of commercial vehicles, spare parts, and aftermarket support across Australia and New Zealand. This commercial vehicle business is the exclusive distributor of Western Star Trucks, MAN Truck and Bus, and Dennis Eagle Refuse and Collection vehicle brands through a broad and well-established dealer network located throughout Australia and New Zealand.

Many of you might be asking why commercial vehicles and why Australia? As you know, we're a global transportation company with operations in four countries, and we look for opportunities to build market scale, with strong brands, while further developing our partnerships. We believe our executive management team understands and has the significant experience with heavy and medium trucks. We own 9% of Penske Truck Leasing and Logistics, and that business operates and maintains over 200,000 trucks on a worldwide basis.

Additionally, many of our key team were involved with managing Detroit Diesel's worldwide manufacturing and distribution of diesel engines, which included distribution in Australia. We also believe this business enhances our already strong business partnerships with several OEMs, including Freightliner, Daimler Trucks, and Volkswagen, and provides us with multiple growth options across a number of industries, including on-highway, logistics, construction, mining, manufacturing, agriculture, and refuse waste collection. From a future growth and expansion standpoint, we believe this opportunity provides a potential stepping stone to Southeast Asia markets for other parts of our business, including potential automotive retail opportunities.

Lastly, the business will provide us with approximately $420 million to $460 million in expected annualized revenues, and we expect $0.10 to $0.14 per share in accretion, excluding any acquisition-related costs we expect to incur related to this transaction.

We are excited about the opportunity, and expect to close the transaction during the third quarter. The transaction is subject to specify closing conditions, including OEM approval. We expect total consideration for this acquisition to be approximately $200 million, which includes inventory, parts asset, and goodwill, and will be financed with existing cash flow from operations, and availability under our credit line and floor plan facilities.

In closing, I am very pleased with our performance in the first half of 2013, and believe our results continue to demonstrate the strength, the diversity and resilience of the Penske Automotive business model. We continue to expect the US and UK markets to perform well, and remain confident in our ability to continue to grow our business. Our cash flow is solid. We have increased our dividend twice so far this year. Additionally, our balance sheet remains healthy, and we remain poised to grow the business on an opportunistic basis.

Thanks again for joining us today. And let's open it up for questions. Thank you.

(Operator Instructions). John Murphy, Bank of America Merrill Lynch.

Good afternoon, Roger. Just a first question on the acquisition. I'm just curious as you look at this and the price you paid there, is this an indication or an implication that acquisitions of dealerships in the US and the UK are too expensive right now, or not available? Or was this just such a good deal, as far as price, that you had to go after it?

Well, I think we had to look at it strategically first, that this gave us access to another market. We had experience in these product lines, through our Penske Truck Leasing and our Detroit Diesel experience in the past. When we're looking at multiples on the premium side, and in the storage that we would look at both domestically and internationally, the multiples are getting higher. This, obviously, was [one] below that, and we think it was attractive from the standpoint of price.

Also, it gave us the opportunity -- a low tax rate area, 30% in Australia, and the repatriation of profits back into the UK, where we will finance this, there's no double tax. So, from a financing standpoint, obviously, it's very good. Now we do have a pipeline of opportunities here in the US and the UK, which we are obviously going to follow, but it's going to be on an opportunistic approach.

But, overall, we've got people that have experience. We're setting up Penske Transportation International Group. We will populate that with some of our key guys here from the US. The management team in Australia is a great group. Probably average seniority of the senior people is over 10 years. And there is no question that they know the brands. And I feel good about that.

The dealership activities, we have approximately 80-plus dealers in that business. About two-thirds of them are full-service sales and will give us the chance to grow. So we can introduce rental; we can introduce leasing into that market, which they don't have today. And it's interesting -- already, I've had calls on retail automotive opportunities since we annnounced this in the last 48 hours. And, again, it has about $70 million of working capital in that purchase price. So, again, when you work out the math, it was quite attractive.

And, again, I think the manufacturers looked at us -- we had to get OEM approval, which I will say today, we have gotten from all three of the manufacturers. And I think the fact of our experience level having been in that market played a key part for that approval. And these contracts are multiple years.

Okay, that's very helpful. And then a second question getting to the new vehicle business. We saw average selling prices for your cars up 1.1%, but the gross profit per unit down about $181. And we have seen that kind of dynamic at a bunch of other dealers. Is there something changing in the relationship with the automakers that they're pressuring gross profits or -- per units? Or relative to the selling price? Or is there something going on in the market that it's just getting much more competitive? Because it's just a little bit interesting that you are seeing the average selling price go up, but the absolute dollar gross profit unit per unit go down.

Well, I think there has been -- they kind of raised the upside -- the MSRP, and then there is some increase, in many cases, on incentives for the consumer. When you look at our business, right now at 100 basis points decline in volume foreign. I think you've got to go back and take a look at where we were probably [eight, nine] -- where Honda and Toyota were. And I think we're probably back to normal position there from a margin standpoint.

We saw the UK -- probably a little more pressure on margin than we'd expected. But when I look at the second half and talking to Jarrod Newinghouse in the UK in the last couple of days, he feels the mix of the vehicles which we're going to have -- I think that will bode well here in the US -- that the mix of the vehicles available, when you think about BMW, X3, X5, you know, you look at the A3 Sportback at Audi in the UK, and some of the Audi product Q5 over here and Mercedes, we're going to have vehicles that we didn't have in the first half because the slowdown in Europe is going to drive probably a better mix for us. We can see that.

So, look we've got to manage gross. We are down slightly. If they're used, we're down 20 basis points, but we're moving down. We went from probably close to $30,000 -- probably a number of years ago -- on our used average cost of sales down in the $26,000 -- $27,000. And we are selling down -- cars below $10,000, and that's going to drive a lower margin, there's no question. And I think overall, our total vehicle gross was up despite margin compression. So, I think that's the bottom line.

Yes, that's very helpful. And then, just lastly, on the parts and service, I mean, the margins, gross margins bumping up above 60% is really sort of pretty miraculous and something we never really expected to happen. It looks like on slide 12, a lot of that has to do with mix. And we are seeing a lot of the 0 to 5-year-old car population being rebuilt. I mean, is this the start of the curve of a real glory day for the parts and service? Or is it really just too early to call?

I'm just trying to understand what's going on there, because it seems like it's a more natural bumping up of just operating leverage that's driving this gross profit. But just really trying to understand what's going on there.

I think there's three points. One has to do with our increased used car activity. The internal margin is much higher than the traditional. Number two, warranty is up -- was up about 15%. And based on warranty, we don't discount that, so we negotiate a warranty labor rate and parts markup with the manufacturer, and that's consistent. And with the new prepaid maintenance programs now at Toyota, it's been at BMW, we start to see the benefits of that overall.

So I think those are two of the key things which are key, and there is no question that the retail activity is driving certainly more opportunity. When you go back and you start to look at the down period from the standpoint of vehicle 0 to 5, I think you go back to somewhere in 2011 and '12, and the market was about 62 million. And if you fast-forward and use 15 million -- say 15.5 million in '12 and '13, and say '14 and '15, you use 16 million, you are probably going to have a carpark of 0 to 5 of almost 80 million vehicles.

So, for me, that bodes well for us and for the other -- our other peers, that we're going to see a nice lift in the Service Departments. And quite honestly, with initiatives of more share of wallet today with debt repairs, with tires, you know, all the things -- the quick oil changes, which we are now doing, rather than letting that move out to some of these smaller players, I think that's going to grow it. Because these are high-margin areas.

We've gone into this quick dent repair, rapid repair, we call it, window tinting, wheel alignments. and many of these things are now sold on the service drive. And I think every day, we are looking to try to gain, as I said earlier, more share of wallet. So, that's all positive.

I think that we have to take a hard look at Q2 and compare that when we look at Q3, because there was some considerable BMW and Honda warranty going through during the quarter. And whether that had a major impact and maybe drove 100 basis points, I really can't tell you.

Okay, that's encouraging. Thank you very much.

James Albertine, Stifel Nicolaus.

So I wanted to focus real quickly -- just given what you are seeing -- it might be maybe a little early to predict -- but what you are seeing in the UK, any thoughts on September, which obviously is a big registration month coming up in the third quarter?

Well, what I can see is all the manufacturers have got big targets for all of us. I think that the goal here is how much they're going to put money into the market. They always wait till the last -- probably 10 days of September to drive the final. They are pushing volume. But we see from our business plan that we forecasted, we should be in line with our expectations.

Again, I talked earlier about mix availability. We think that's going to be good for us from the standpoint helping to drive some better margins. So I guess we will wait and see. But we don't see anything that isn't normal in Q3, because you have March and September as registration months.

Okay, that's helpful. And then just a quick update, if you could, on your partnership with Hertz. And then as well, maybe some color on the improvements or the movement you are seeing on the Penske cars front, from that perspective. Thanks.

Well, let's talk about Hertz. Obviously, the second quarter was the first quarter that we had both Tennessee and Indiana markets combined. We did $15 million in revenue, and the pretax was $1 million. So that would trade at about 6%. I think we're looking at a business that will, in the future, run somewhere between 5% and 6%. We've got about 6000 vehicles today, which has a utilization roughly around 70%, which is probably driven, obviously, with our off-airport and also on-airport.

I saw Hertz's release here in the last couple of days, their business was up. We feel good about that brand. Our net promoter scores are through the roof and in our markets, both on- and off-airports, which is key. And as we go forward, one of the byproducts of this is the fact that we're going to have that 5000 to 6000 units will come off the rental line, and those will be great used cars under $20,000 in most cases. Those will be available for our used car lots across the country.

We are setting up a separate site, Penske Direct, we're calling it, which will be an internal auction site that we can place these rental cars with pictures, just like they would on Auto Trader or someplace else. We can put these cars up online for our used car managers and GM's to bid on. So we will get maximum pricing on those. And I think that this will be key.

And, also, if this works out, we think this is a precursor for us to have the other dealerships online to put vehicles that they might want to move, so give us kind of a central intersection for cars that we want to sell through the operation that come off rental. And then the dealerships, rather than kind of trading them side-by-side, we can give visibility on these cars across the country. So, it's an inside, I would say, offense play that we have that's a byproduct of our Hertz operation.

That's very helpful. Thanks and good luck in the third quarter.

Thank you.

Rick Nelson, Stephens Inc.

Roger, the growth rate in the used car segment, the comps really accelerated this quarter double-digit. Can you talk about the drivers to that and whether you think that sort of growth is sustainable as we look forward?

Well, you know, I really got to give the credit for that with Raminat, who runs the central for us, has just been all over this now for probably 12 to 18 months retail first. So, we don't want to wholesale car. In fact, we look at a metric, how many cars do you wholesale versus retail? And we like that to be 20% or less. So that means we're going to sell cars under $10,000. And we know how to utilize the Internet to do that, and present the cars. And that's made a big difference.

On the other hand, when you look at -- just take the Atlanta market by itself, our BMW stores, on a combined basis, probably do somewhere between 200 and 250 new a month, and they will do 500 used. So that's 2-to-1 used to new. And that's because they're inventorying 300, 400 used cars. And that's what we're finding out today, that we want to bypass this wholesaler, and be able to utilize the bricks and mortar that we have invested in to sell used cars. And I think that's key.

And there's no question, when you look at penskecars.com, which has been a good offense for us also, got over 10,000 use cars on -- with our branding on Penske cars. So to me, that's key. Those are the things that are driving it.

Also, our finance sources. There's no question the benefit of a public -- our public peers that we have a tremendous inventory of finance sources, which give us the ability to offer low rate financing at leasing, et cetera, which is key. 35% of all the used cars that we sold in the quarter in the US were [CPO'ed]. And that's up 15% from last year. So, I think we've got a lot of drivers which are giving us that increase. And I don't think we're at the end of it either. Because there is plenty of use cars out there. And if you look at the Carmax model, they are buying cars, trading cars, and they have grown a great business. So what we need to do is use that model, but also have that adjacent to our new car model.

Okay, got you. Do you think the improvement in off-lease volume is helping fuel that business and units in operation generally? I know you mentioned it helping the service business, but do you think that's helping the used car (multiple speakers) --?

Yes, leasing -- our premium luxury customer was hit right in the gut back in the financial crisis, so there were less cars leased in the market. And now that's picking back up, so we're starting to see more cars coming off lease. And we get the first shot at those. And in all cases, I think we take 90% of those; we don't turn many of them down. So that's a great resource for us for future used cars.

Got you. And finally, if I could ask for an update on the big acquisitions, how they are performing relative to your expectations -- Northern Ireland, Italy, Madison, I guess. And you acquired 750 million [at revs] last year. You made the big Australian announcement this week. I'm curious how you think this year stacks up relative to last?

Let me say Belfast, just as you said that first, has been a home run. The management there under Yul McGee has just been seamless. We have supported them. They are at the league -- the top of the league tables for Europe from the standpoint of their managers. Our BMW store there was the number one store in Europe last year. I couldn't say anything other than it's a home run.

When you look at Italy, we had a business plan in Italy for EUR1.5 million for Monza and Bologna combined. And we did EUR1.3 million in the first six months. So even in the marketplace that has been tough, that they have just really executed there. We've got a tremendous operator there in Andrea Mantellini, and he knows the market. We have obviously Owen Alberti, who was one of our top financial people who -- from that region.

So to me, we're going to continue to grow there. We've got a couple of acquisitions we are working on in the Italian market. You know, the prices are minimal from a good will perspective. And there is no question when you look at Lexis and Toyota Madison, it's another market I look at like Austin, Texas, state capital, University of Wisconsin. And their user now over [1-to-1] already and I would have to say it's exceeding our expectations.

So overall, I just -- that's why we're looking to continue to grow. I think the plan we told The Street that we would grow double digits, a combination of acquisitions and organic with our growth on a same-store basis over 11% in a quarter. I think we will meet those targets easily for the total year. So overall, acquisitions are in good shape. And we've got a pipeline going forward. We've got opportunities in Texas with Hyundai. We've got Bentley in New Jersey, and we have Toyota in Arizona. These are all open points, which we're activating here over the next six months.

Sounds good. Thanks a lot and good luck.

Thank you.

Matt Nemer, Wells Fargo Securities.

A couple questions. First, on the service business, just following up on the margin question that John asked earlier, is there mix within the businesses that's benefiting the margin, i.e., a mix towards labor away from parts? And then as PDI growth has been so strong, is that also significantly benefiting the margin?

Well, when you look at the breakdown, and this is been pretty consistent, I think it's just volume, 70% of our margin in service and parts is customer pay. You've got probably about 20% is warranty. And the balance of 8% or 9% is in your PDI and body shops. I think that's pretty consistent. We just see the warranty margin is up, because again, some of these prepaid maintenance programs drive a higher margin.

We have had the recalls too, which both I mentioned earlier in Honda and BMW have had some impact on that. I just don't know when it's normalized what it's going to be. But I still see strong high 50s as the norm as we go forward.

Okay, great. And then turning to the proposed acquisition in Australia, can you just talk to what the accretion could potentially look like in 2014? Is there anything you can tell us about the business strategy in terms of growth or cost cuts that take that accretion level higher next year?

Well, I think that what we are looking at, in our release, we said $0.10 to $0.14 on an annualized basis, and revenues in the $400 million, I guess, $420 million to $460 million, the press release said. One of the things we're going to do, we're going to invest in putting in some rental vehicles. We're going to put in demonstrators, which they didn't use in the past. So that will take some cost, make some cost impact.

But I see this growth opportunity here -- you know, this has been part of a waste management company, which really, this has kind of been a tack-on. And this gives us a chance now to pull it away and operate as standalone. And the number one truck manufacture from a sales perspective in Australia is Kenworth. And they had traditionally built most of their trucks there. I guess they're going to now only build a few and import the rest. And from our standpoint, they're the highest priced trucks. So we're not in the market -- we're competing to get share from a guy that's so low have to cut prices to get it.

So I think it's a rational market. I think the odd highway transportation mode is where most of the freight moves in Australia. And our ability then to add on other products, i.e., rental and leasing, will let us grow. But for me to give you an indication today what we're going to try to do -- we've had some questions about segment reporting. We have talked to Dave Jones about that, and we're going to come back. So we will try to have complete clarification and transparency on that as we go forward.

So, to me, we are focusing on -- I think it's going to be a great addition. And what you can't forget is that we are in the retail auto business, and we certainly wouldn't sit in that market without the opportunity to look at anything that comes across our plate. We are known by the OEMs. We don't need to get introduced. And many people had worked somewhere in the world are out there now that we already know. So I think that's going be a fertile ground for us and over the next several months. By putting a couple of key guys from the automotive side here that also know the truck side out in that market, to work in conjunction with the management team there, I think it works fine.

We don't need to replace management. We are not talking about taking people out. I think their systems -- we've used to the same back office MIS system here in the US for our distribution of smart, so we know the IDS. We use that also when we were out there with Detroit Diesel. So, from a back office, it's pretty consistent. So I think the timing is right. The market is right. The growth there looks good. Right now, obviously, China is a little bit weak; probably affects some of the industry there in Australia. But overall, transportation is key and we're going to walk right into that.

And then, I just had a quick question about your web and mobile traffic growth, both for the branded store websites and penskecars.com. Can you give us any indication on how fast the Web traffic has been growing)? And as people do more homework ahead of time, are there any changes sort of longer-term needed, in terms of your marketing strategy or the way you look at stores, and staff stores and operate stores?

Well, I think when you look at our Web traffic, we're estimating it's up between 20% and 25%. We have switched a lot of our traditional advertising that had been media-related electronic and radio to the Web -- you know, more precise. We can manage it; the Internet departments continue to grow in the stores. And there's no question as we go out, we're going to have some really email templates that we're going to roll out. We're using some tablets in our store, our Toyota store in the round rock on the sales side. You walk in, you've got a tablet sitting with the consumer.

So we are -- I see that some of the other peers are using those. I think that we are in a transition period. There's a lot of things -- our ability to have mobile payment, which is going to be key. We can send the service bill to the customer by email. He can communicate back with us and then he can make payment over his device. And that's something that we're going to roll out or are in the process of rolling out now. So that will change the mix.

You go to an airport today, you think about the counters where there is nobody at these counters, because people are ordering their tickets, they're getting their seat number, and they are walking to the plane. Well, we want that to happen, certainly as we look at the service to be able to have a quicker process. So, on the sales side, we are focused; on the service side, obviously, there's a lot going on there. Electronic catalogs, the ability to order our parts through the Internet and some of the key stores in the sales and wholesale side has been key also.

And then just lastly, Tesla is on fire out here in Northern California, and it would seem like, given your expertise in -- with the luxury brands and running luxury stores, that there would be a natural fit there. Is there any opportunity for you to get involved with the Tesla on the retail side?

You know, I'm -- I guess the first thing I would say, I'm not a proponent of manufacturers selling direct to the consumer. That would be point number one.

I think that from Tesla's -- it's a great car; well-engineered. The question is, what's the next model? What's the distribution going to be for the consumer? And when you look at the captive finance coming, what has been the Achilles heel of Chrysler and General Motors since the bankruptcy is trying to get captive financers. And at this point, I think the Company is taking residual risk on those. And from my perspective, these are things you have to take a look at.

We were a Fisker dealer. We turned in that franchise; obviously, we've seen what's happened. Tesla has done a much better job in execution; a very vertically-integrated factory, which obviously gives them the quality benefit. So I'm betting on, from my perspective, on BMW with the new i3 and the i8, which were announced in the last couple of days. And I think it's going to be a dogfight. But good value on Tesla, good car; I'm just not a fan of the distribution.

Understood. Thanks and congrats on a great quarter.

All right, thanks, Matt.

Brett Hoselton, KeyBanc.

Your commercial vehicle distributor in Australia, can you talk a little bit about how that deal came to your attention?

Well, I think a couple of ways. I guess we've got investment bankers. They invested in -- really had set up an investment banker that had talked to us. But more important, we got a call from the OEM that said that this deal might be available. So, we jumped on it right away. So it was really through our relationship with Daimler Trucks that this was available. We have a great relationship with them, a long-term relationship. So that's really how it took place.

We knew the market -- we know a lot of the customers because of Detroit Diesel. I think when they looked at us with our experience level, we'd be a perfect fit.

And then switching gears, gross profit throughput, 38% in the quarter. How do you see that trending going forward? Many of your peers think kind of 40%, 50% range. What are your general thoughts as you move forward through the remainder of this year and maybe into next year?

Well, I have seen some big numbers now in flow-through. And as we look at our business, I'd like to see a [4] on it. But that 's driven, obviously, by certainly in our SG&A managing that, and that of course continued to maintain gross. If we see deterioration on gross continuing, that number is going to be harder and harder to see that flow-through. But I think that if we can operate between 30% and 40% that we're in good -- really in good shape.

One of the things that we have to look at in our case is our higher rental expense. And in the premium luxury side, our loaner car expense is considerably higher. We run anywhere between 3% to 7% of gross in our premium luxury story -- take Krebia BMW in the West Coast got 350 loaner cars. Well, you know that's an expense that you don't have in some of the other non-premium businesses. So there's a lot of moving parts. I feel good about SG&A to gross, excluding rent at [69.5]. I think that's key. And if you look at same-store for the quarter, we'd be at 42%. So that's a world-class number for us.

And as I think about your parts and service margins, I understand that this quarter may have been a little stronger because you had some recall business and so forth. But we've generally seen a trend upwards for many of your peers and you as well. It seems like your used car operations are doing quite well, and your used car reconditioning should be a nice tailwind for you for the foreseeable future. Warranty generally speaking, a tailwind, again, maybe a little bit of a step back with some of the recalls in the near-term.

But I guess I have a hard time seeing why parts and service margins couldn't just continue to trend upwards at a slow steady pace -- at least for the next year, maybe two years, as warranty rebounds and used car reconditioning continues to go up. Are there some headwinds that you see that might cause it to plateau?

Well, I think the overall parts and service gross will grow. Because when we talk about the 0 to 5-year cars, as I mentioned earlier on a question, we see that growing from about 62 million, which would have probably been the bottom in 2011/'12, to almost 80 million. So that's going to drive the overall number. I think the warranty in the prepaid maintenance -- more and more the manufactured, just to give you an idea. Think about it today -- you can get an oil change -- many of us advertise $29.95 or $39.95. Under the Toyota care program, you get 7/10 of an hour, say you're at $100, at $70 for labor and you get your full markup on the oil.

So when you start to look at that, that's a real opportunity. And we're doing every single customer for two years has that benefit. So I don't see the manufacturers taking that away. I think that's something of a norm as we go forward. And the other thing you can't predict is recall activity. With the BMW and Honda recalls, obviously, we see -- seem to see them every day, but we benefit from that. And that's again, as we establish warranty labor rates based on the competitive market, those rates are not negotiated down under a warranty situation. They are firm. And the parts markups are firm.

So the only area where we get less markup on warranty parts is in Europe, where we just get a 10% lift on parts. So we don't get the benefit we get here probably at 33%. So I think 60% margin is excellent. I'm not trying to manage to a number. If I wouldn't tell you when we started the quarter we'd get to 60%, but when it came together, I think we got a number of different factions -- whether it's more warranty; obviously, customer labor is 70% of the mix. But we get big margin on our reconditioning, because many of those people are on hourly, so that pays the bill.

And we are doing more of it inside. We used to sublet a lot of work. And today in sublets, you might mark up 10%. But when we bring that in-house -- the rapid repair, the tire work, a lot of the things that we had done outside, our window tinting, our windshields -- in these markets where we have campuses, we have specific businesses that that's all they do. And I think that drives part of this margin. Wheel alignments gives us more share of wallet, where we really hadn't focused on that. So these are the things that we are trying to continue to focus on.

Thank you, Roger. Solid quarter.

Thank you.

Ravi Shanker, Morgan Stanley.

So can you just give us an update on the state of the US luxury market? Do you have all the inventory you need for the models that really are selling? Any particular models that are sitting in the pipeline, and what's the state of '13 versus '14?

Well, you know, now, with the market as strong as it is, inventory control is important. One thing you did see, they're up almost 300 million on a same-store basis on new vehicles. So, to me, we've got to be sure that we're not over-inventoried. But as I look at some of the BMW products which are phasing out X5, we're in great shape. We look across the line. I think that you never have enough of the right models. I mean, there is no question as we go through the quarter. But overall, I am not hearing that there is a lot of issue at this particular time from the standpoint of inventory.

Got it. Are you seeing any pricing actions at all from Lexus, Infiniti and Acura?

Boy, I would have to ask our guys, Ravi, to tell you. I mean, I look at the overall gross. We had some impact on margin during the quarter. But inventory is strong. I'm, in fact, doing this call from Lexus of Edison today. Their inventories in good shape. They'll do over 1-to-1 used to new this quarter or this month. So, overall, I think business continues to be very bright.

Understood. And just finally, you have a very strong and diverse international operation -- UK, Germany, Italy, Australia. Have you given any thought to going into the emerging markets at all and capitalizing on the volume growth that we expect there?

Well, emerging markets are interesting, and you see big multinational companies going into those. I think the retail business is a little bit different. We've got to have local partners, as we do when we look at the in-country capability in Australia; same thing in Germany, and certainly in Italy and the UK. So we'd have to get certainly expertise. Because you know, certainly the cultural and business ethics are different in some of those areas, so we've got to be real careful. But I would say all markets are interesting to us. I think we've got plenty in our plate right now.

Great, thank you.

Aditya Oberoi, Goldman Sachs.

It's actually Pat Archambault here. You know, just on the -- more on the acquisition. Can you tell us like -- this is a bit of different business, right, being distribution. I mean, I think there's a couple of dealerships within it, but it's mostly distribution. Maybe a little bit more about the rationale of it sitting within Penske Automotive Group rather than Penske Corp. I think you had mentioned that there was an ability to take advantage of some tax benefits in the UK. I think you had also mentioned a desire to be maybe in Australia on the light vehicle side, but maybe more on that rationale.

Well, I think, number one, that we're a global player and want to build the growth. And this was an entry into that market, from the standpoint with an existing business with a little less than $0.5 billion in sales, which gets us really in that particular market. It's a market we know, as we were the distributor for Detroit Diesel there in the past. This is more of a dealership business. And we own the assets. When you look at truck leasing, we have got 6 billion of trucks. So when I look in this market, our distributor, 72% to 75% of the trucks that we handle in Australia will have pre-ordered by our dealers. We hedge the currency between the euro and the Aussie dollar and certainly the pound, and then the US dollar.

But when I look at the business overall, I think this gives us the ability to provide geographic benefits, certainly from a revenue standpoint, profit diversification. And it's not a change in our strategy, I don't think, at all. From the other standpoint, we have a private company, and this is a public company. And I think of the value that we can bring to the shareholder with this acquisition under PAG, the fact that the financing for this transaction is from the captives, when you look at it, is key, along with our ability to finance some of the transaction through our cash flows in the UK, and pick up this benefit of taxes and repatriation.

So when you put it all together, I probably wasn't too smooth on giving you all the answers, but I think it fits there. And the fact that we can take and have some hand-raisers internally in PAG that want to go into that market, will take some expertise from truck leasing. But remember, truck leasing is a joint venture that we have with GE. And it is strictly logistics at truck leasing. So I think that this fits probably best in where we have it in PAG.

Oh, okay, great. Yes, that makes sense. The follow-up I had is just maybe with respect to your slide 16, I guess, can you tell us a little bit about what your leverage targets are for Penske? And how do we think about the kind of dry powder you're going to have left, post this acquisition, to pursue some of the other ideas that you are thinking about?

Well, if you look at the peer group and you look at the depth of capital, I mean, some are as high as 50%. I think if you take the rental cars out and really look at those as an inventory that turns, we're at 38%. And I said I'm comfortable operating somewhere in the 30% to 45% range.

And if you go back to 2009, we were at 50%. And today, we have been able to really look at 38%, is where we are today. And we will get back 70 million through our floorplan on this particular transaction once it's done. So it's really just you've got to do the transaction, but the good news is that the trucks that we have in inventory that are in process will be financed as floor plan for us. And then the same floor plan provider, and I would say 95% of the cases, will provide floor planning and retail financing for the dealerships that we sell to.

Okay, all right. So I haven't done the math, but you see yourself, even post the transaction, with the working capital benefit having some bandwidth left for more M&A?

Oh, yes, absolutely. We've got 545 million today. And I think at the end of the quarter, if I'm correct, we had about 7 million outstanding on our credit line in the UK, and we have probably GBP120 million, GBP125 million line there. So there is plenty of room and the cash flow has been excellent there.

Okay, great. Congratulations on a good quarter.

Thank you very much.

Scott Stember, Sidoti & Company.

You talk about parts and service, was there any meaningful difference in the growth rates between the US and your international operations?

Well, when you look at parts and service, pretty flat in the UK, and I think that's an opportunity on international for us. We were up -- in domestically, we were up about 9%. So, overall, we get less margin there because of warranty parts, I think I mentioned that earlier. We had exchange impact there -- we showed 1%, but it would have been 4% if we didn't have the exchange rate. So there is some impact there from a mix standpoint.

But we need -- the problem -- it's not a problem, but we don't have the facility size and footprint on a lot of the storage in the UK so we can go into some of these auxiliary businesses on the service side. We certainly don't have the body shop footprint internationally that we have here in the US, and that helps drive some of this business. So, to me, we'll wait and see. We don't have the -- over there, we don't have this prepaid maintenance that we have here in the US, and this is a more competitive market. So, those are things that you'd have to say are different than the core business here.

Okay, and just moving to the SG&A leverage. Other than the traditional personnel and advertising leverage that you have been giving, is there anything else that's in there that you've been able to get? And looking out, are there any other levers that you can point to?

Well, I think, you know we look at our peer groups, and we look at comp to gross, and we've really got ourself, I think, in line now. We have looked at some studies across the different skill groups -- you know, the marketing spend on a per-car basis. And remember, you've got gross -- the expansion of gross helps drive that number. So, we need to remember it's not just an expense.

I am not driving the business counting every pencil in every dealership. And I don't give a star if someone is -- if somebody with higher rents; other people have real estate that they own. I think what you've got to look at is, from an SG&A gross standpoint, where we are less rent? And at that point, I think you see we're running the business pretty efficiently. And I'm obviously well-focused on the number.

It's one of the great things having the peer group, because you can see that it helps you in the management to say -- we can say look, if one or the other peers is able to grow at a certain rate, if you look at margins, then that helps drive us to be better quality and better numbers.

Great. That's all I have. Thank you.

Okay. Thanks, Scott.

Dave Whiston, Morningstar.

On Australia, can I just get a little more clarification on -- once you decided an Asia-Pac expansion made sense, why commercial vehicle over light? And would you want to have a light vehicle network in Australia?

Well, when you talk about light, are you talking about retail auto?

Yes.

Well, listen. No, I think this is -- we pressed this doorbell first, because we could get the scale right out of the box, get this on the ground, we'll understand the market. And I think I said earlier that I have had -- I think -- I know two for sure, almost three calls already, this market is about half the size in the UK. And Toyota has probably about 20% of the market. So we know the brands, and we would expect that to make acquisitions on retail auto, if they were the right brands and fit our strategy.

And then the fact of the distributorship, we're going to be in every single market in Australia with a franchised dealer. So, we will have some access to knowledge of that local market. So to me, it's good. And the good news is here that we have a strong captive finance operation in Australia, DTA&A, the -- which is key from the standpoint of the business, both on the MAN side and on the Daimler side.

So, retail financing and leasing for the consumer, floor planning for the dealer, and floor planning for us. So -- and again, it's asset-light. The total fixed assets in this business, other than vehicles and parts, is about $6 million. So, to me, we don't have all the fixed assets you'd have in a normal dealership. That might have -- would have been a good answer to the question I got earlier -- it's asset-light.

Okay, that's helpful. Thanks. On Europe, some of the OEMs are saying they are seeing signs of stabilization. That's certainly not showing up, though, in the EU 27 registration data. I know Europe may focus on the UK and that market is doing really well, but do you have any insights on what the state of the consumer auto spending is on the continent?

Well, I'd have to say that we have seen some lift in our super premium luxury business in Hamburg and Bremen, which is the Ferrari, Maserati, Bentley, Rolls-Royce, Aston Martin, Lamborghini. We've seen some lift there. Our Porsche business in Germany is slightly ahead of last year. So there is the downward pressure, there's no question.

But in Italy, on the other hand, we've had nice growth there year-over-year. And I think it's the management team, and the fact that we took over a business that was undercapitalized. And there's no question that we are getting the benefit of that -- good people, giving them the capital they need to operate it.

You know we've got the used car business. And quite honestly, we are 100% ahead of our target for the market during the first six months. So, that's us as PAG. And we would look to grow selectively in other markets. And the good news is all the OEMs are, since they know we're there, are giving us insight on potential people who want to divest, which gives us a pretty good windshield of opportunity.

Okay, thanks for taking my questions.

Brian Sponheimer, Gabelli & Co.

Just -- most of my questions have been answered. Next time I will remember to press star one. With the $200 million acquisition, how flexible would you consider yourself, should you come across another large potential acquisition, say, an Agnew or a Crevier?

Well, I don't know -- if we came across Agnew, I mean, we would do it. I don't think there's anything holding us back, but it's got to be in the right area; it's certainly got to be the right brands. And we would be opportunistic. But we also want to look at our debt to capital, and know that we have a -- we're safe and secure from an overall standpoint.

And remember, we went back here, I guess it was, say, 12 months ago or maybe less, we did some 10-year money, $550 million at 5.75, 10 years. So we've got some pretty patient sub-debt which sits out there until 2022. And then with the credit availability through our credit lines in the US and also in the UK, we've got over $0.5 billion of available cash or credit lines plus the cash flow that will generate during the year.

Now, you know we are paying out about 28% of our net income for dividends, and we have got almost a 2% return to our shareholders. So I think that that's obviously attractive to them, and we have to look at that in our capital allocation, obviously, is going to meet the CI requirements for our investors, the dividends, and then we've got acquisitions.

So it's a continued with our Board, we have about 100 million available, I think 85 million to be exact on -- for debt repayment or share buyback. And we will continue to buy in the shares that we give to our employees, so we can keep our shareholder account from a share standpoint at about 90 million. And that's obviously something we're going to focus on. But -- and overall, acquisitions, I look at are pretty much got to be opportunistic, but -- and we're not going to just go buy one thing in a market, unless it's a glue-on that we can -- we already have scale.

Okay, that's great to hear. I guess just one last one. Going to Western Star, any sense that the dip in the Australian dollar helped this deal come together a little bit quicker than you'd imagined? Or was this something where you were [200 bid] for the business, and finally the seller came to you and basically relented? Or -- and I guess the other side of that, is there any concern about the Aussie market should their Federal Reserve Bank continue to weaken their own dollar?

Well, you know we are doing business based on historic numbers and forecasts, and we feel pretty good. We obviously look at the sensitivity of the dollar and the US dollar and the Aussie dollar, even the euro, but we have very little currency risk once we place an order. And the dealers are placing orders based on Australian dollars. So, we hedge all the purchases at the time we order, so there's no -- we have no risk there. And as far as this transaction, I guess we just hit it at the right spot where the pound and the US dollar, it strengthened over the last probably, say four or five months. We hit it right at the right time.

And that wasn't the motivator for us. That just -- sometimes you get a benefit. It could have gone the other way. We have hedged the purchase price from when we signed the document to closing. So I think we have done all the prudent things we would do in a transaction like this.

Okay, great. From an operational perspective, hard to poke any holes in this quarter. Great job, guys.

Thanks a million, Brian.

(Operator Instructions). Simeon Gutman, Credit Suisse.

Thanks for keeping it going. Just one quick housekeeping and then one higher level. You mentioned earlier the parts and service US comp was up, I think, 9 and you said UK was flattish. Is the mix of business similar to the way it mixes out compared to total revenue?

Well, we would have more customer labor because the warranty, when you look at parts and service in the UK, we don't have the markup on our parts. But -- and we don't have the body shop. Again, we are selling more newer used cars. One thing we don't have is this retail-first mentality. I think we are -- it's starting to penetrate. So our cost of sale in the UK, because our demonstrators we have to have under the franchise agreements, we have to have a certain number of demonstrators. And in the US, we'd sell those as new cars. In the UK, those are sold as used, so we don't have the opportunity for the reconditioning at some of that margin.

So that would be some of the differences between the difference. And I think, overall, 80% of the service and parts would be customer pay, and probably 20% warranty. So, obviously it's a little higher.

Okay, and then the second one from a little higher level, is sales and gross profit per unit. This quarter, I think the group in general saw a little dip. I think for you, in particular, you mentioned some UK, and then we heard a lot about stairsteps. So I'm curious if what we are going through is a blip? If you think the proposition for dealers in general, the trade-off between sales and gross profit has changed? Or do we snap back, where this is just a weird period, and comparing to a tough one a year ago in terms of a lot of deals and incentives out there in the market?

Well, you know, when I look at the peers, and kind of look at where we are on overall new margins, it really -- when you look at it from an overall standpoint, our peers are in the 6's and 5's, we're at 7.5; and then if you look at used, and we're at 7 and we've got -- I think lifting as high as 15% -- I'm not sure how all the accounting is done, to be honest with you, from the standpoint of these margins. All I know is that we are getting, I think, a good margin on our new. We have been there. We have been as high obviously, over 8 in the past. Just -- it just depends where we are.

We are going to continue to focus on gross. Remember, our sales people and our managers are all paid on margin. So we're all focused in the right direction. And I think the comp to gross that we look at is pretty consistent. We see gross going down, comps coming down with it. So it's like an elevator and I think that our guys have done a good job managing.

When you look at the business on the new side, we're down $181 year-over-year Q2. We are only down $84 on used. And we are growing the business. So overall, our gross profit is up. And I guess if we're going to be in the volume business, you're going to probably have a little less margin. But -- and on the premium luxury side, we have a little more time to spend with a customer, because we don't have -- we're not big volume stores; we're on the volume foreign. You know, it's -- these are bigger stores. And, again, we have more turnover in the sales forces on these volume foreign stores, we have 25 or 30 -- 35 salespeople. And sometimes the capability of that lower tier sales guy tends to give the product away, and we just need to do a better job at training.

So, it starts with training of our employees. And I think that there is no question when you look at premium luxury, and I think this will drive the fourth quarter always is the biggest quarter for us, from a gross margin standpoint, on new. So we'll just have to wait and see. But we're looking at it just like you, right -- we are in the same boat everybody else is. We see pressure on margin.

The consumer today with two car and some of these other tools that are available, many times the consumer comes in knowing more than we do about the particular car. We've just got to better educate our sales teams.

And does the model changeover year help in the next -- I guess in the next quarter or so, does that help maybe bring the margin rate up a little?

Well, all new models, obviously, when you get the new models. And unfortunately, we've seen in the UK that there's some Internet -- guys get on the Internet because they're trying to meet these volume targets, that they start discounting cars that are new. And that's what hurts us. When you see the same car that you're trying to sell at the retail level on the Internet by one of the -- its interbrand competition. But that's driven by the manufacturers trying to push instead of having a pull system. But, obviously, we don't have any control over that.

Okay, thanks.

And at this time, there are no further questions. I would like to turn the call back for any closing comments.

Craig, thanks. And thanks, everybody, for joining us. See you next quarter.

Thank you very much. Ladies and gentlemen, that will conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.