Penske Automotive Group Inc (PAG) 2013 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon and thank you for standing by. Welcome to the Penske Automotive Group third-quarter 2013 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through November 7, 2013, on the Company's website under the Investor Relations tab at penskeautomotive.com.

I will now introduce Mr. Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Please go ahead, sir.

Thank you, Tom. Good afternoon, everyone. A press release detailing Penske Automotive Groups' third-quarter 2013 results was issued this morning and is posted on our website along with a presentation designed to assist you in understanding our financial results.

Joining me for today's call are Roger Penske, our Chairman; Dave Jones, our Chief Financial Officer; and JD Carlson, our Controller. On this call today we will be discussing certain non-GAAP financial measures such as adjusted income from continuing operations, EBITDA -- earnings before interest, taxes, depreciation, and amortization -- and adjusted EBITDA. We have reconciled these items to the most directly comparable GAAP measures in this morning's press release which is, again, available on our website.

Also, we may make forward-looking statements on the call today. Our actual results may vary because of risks and uncertainties outlined in today's press release, 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.

I will now turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. I am pleased to report that our business produced another outstanding quarter.

Today we announced the highest third quarter and nine months income from continuing operations and earnings per share in the history of our Company. Record third-quarter income from continuing operations was $66 million, and related earnings per share was $0.73.

The record results were driven by a 13.5% increase in total retail unit sales, and a 14.6% increase in total revenue to $3.8 billion. We also leveraged our general and administrative selling expenses as a percent of gross profit by 150 basis points; improved operating margin and income by 25.3%; and improved operating margin by 30 basis points.

As a result, income from continuing operations increased 21%, and related earnings per share increased 22% when compared to the adjusted figures for the same period last year, which excludes the debt redemption costs associated with the refinancing of our 7.75% senior subordinated debt. Based on our strong results our PAG Board of Directors increased the third quarter dividend by 6.3% to $0.17 per share, which now is a yield of 1.8% and a payout of approximately 25%.

Let's now turn to the specifics of our third quarter. Total retail unit sales increased 13.5% to 97,000 units, and total revenues increased 14.6% to $3.8 billion. On same-store basis retail revenue increased 12%, including 11.3% in the US and 13.3% internationally.

Foreign exchange rates negatively affected same-store revenue growth by 70 basis points or approximately $20 million. Excluding the effect of foreign exchange, same-store retail revenue increased 12.7% including 15.1% in our international markets.

Our total revenue mix during Q3 -- the US represented 63% and our international business 37%. Breaking it down, premium/luxury was 68%; volume foreign 28%; and the Big Three 4%.

Looking at new vehicles, we outperformed both the US and the UK markets during the quarter. New units retail increased 13.4% to 53,500 units, representing a growth of 11.6% in the US and an 18.2% increase internationally. Our premium/luxury was up 14.9%; volume foreign up 12.2%; the Big Three up 14.4%, for a total of 13.4%.

Total same-store new units retail increased 12.1%. The US was up 8.9% and international was up 20.3%.

Total new vehicle revenue increased 15% to $2 billion. Average vehicle selling prices on new improved 1.3%, while new vehicle gross profit per unit was $2,791. I looked back and compared this to the third quarter in 2008 where we were $2,802, just $11 less, roughly.

Our margin was 7.5%, compared to 7.7% last year in the same quarter. Supply of new vehicles is at 52 days at the end of September, compared to 50 days last year.

Looking at our used vehicle business we retailed 43,500 units in the quarter, representing an increase of 13.7%. Our premium/luxury use was up 9.8%; our volume foreign was up 18.8%; the Big Three was up 11.9%, for a total again of 13.7%.

Our used and new ratio was 0.81-to-1, which was flat with last year. Total same-store used units retailed increased 11.8%. We were up 13.3% in the US, and we were up 8.8% internationally.

Total used vehicle revenue increased 13.3% to $1.1 billion. Used vehicle average transaction prices declined 0.3% while used vehicle gross profit per unit was $1,870 and our gross margin increased 10 basis points to 7.4%.

Our supply of used vehicles was 42 days at the end of September, compared to 38 days last year.

I am pleased to report that we are making good progress on our initiative to improve finance and insurance revenue. During the quarter, revenue increased 19.3%, including a 17.4% increase on a same-store basis.

F&I improved $49 per unit to $1,028. If you look at it in the US, it was $997 per unit and internationally $1,098. In the third quarter, 67% of our F&I revenue was generated in the US and 33% was generated in our international markets.

Service and parts for the quarter was solid, with revenue increasing 4.4%, including a 3.4% on a same-store basis. Our US parts and service business was up 6%; we were down 2.6% internationally.

Customer pay was up 4% in the US; warranty up 12.8%; bodyshops up 3.9%; and predelivery inspection up 10.3%, for 6%. When you look at the international business our warranty labor was down 2% and warranty parts margin -- or sales were down 14%.

On the other hand our gross margin increased 230 basis points to 60.1%; and our international parts and service gross profit grew from 58% to 62%. In total, overall gross profit increased 15.6% to $580 million and our gross margin improve 20 basis points to 15.2%.

For the quarter, we generated 150 basis point improvement in SG&A. Gross profit was 78.3%. Our SG&A flow-through was 31%.

SG&A includes approximately $1.9 million of costs associated with our acquisition of the Commercial Vehicle Group in Australia. Excluding these costs, SG&A leverage would have improved by 180 basis points, and our flow-through would have been approximately 34 million -- percent.

Operating margin improved 30 basis points to 2.9%. Our effective tax rate for the quarter was 32%, compared to 27% in the same period last year.

The higher tax rate in the third quarter of 2013 is due in large part to a higher mix of US income when you compare that to last year, which is taxed at higher rates, and a $2 million benefit from the reduction of deferred tax liabilities in the UK in the third quarter last year. We expect our tax rate to be approximately 36% in Q4 and 34% for the full-year 2013.

For the quarter, EBITDA improved 25.7% to $126.1 million, when compared to adjusted EBITDA in the same period last year.

Looking at the balance sheet at the end of September, total non-vehicle debt was $1.1 billion, up $123 million from the end of last year, largely due to the Commercial Vehicle Group acquisition we completed in August of this year. Our total debt-to-capitalization ratio was 42% and our debt leverage was 2.2 times EBITDA.

Excluding approximately $97 million in rental vehicle line of credit, total non-vehicle debt would have been approximately $964 million, and the debt-to-total-capitalization ratio would have been approximately 40%. At the end of September we had total liquidity of approximately $450 million.

Our vehicle inventory was $2.2 billion. In comparison to December 2012, it was up $163 million and used was up $102 million. Approximately $98 million of the increase is related to our acquisition of the Commercial Vehicle business in Australia.

And on a same-store basis, vehicle inventory increased $159 million compared to the end of December last year. New was up $63 million; used up $96 million.

Capital expenditures for corporate ID facilities were $101 million for the first nine months. We estimate that total CapEx for these initiatives to be approximately $130 million for 2013.

Additionally, we spent $22 million for real estate, land, and land purchases during the first nine months and $82 million on a procurement of rental vehicles.

Turning to our UK business, our business produced another very strong quarter, highlighted by a 16.6% in total retail units. The overall UK market was strong, too, as registrations in Q3 up 12.1%.

Same-store retail revenue growth improved 14% during the quarter. The September registration period marked the 19th consecutive month of growth in new car registrations. In fact, the month of September was the first time in over five years where the market registered more than 400,000 vehicles.

The overall UK new vehicle market is up 10% year to date, with registrations increasing across the private, fleet, and business market segments.

Let's turn to our Commercial Vehicle business that we completed the acquisition in the end of August. We believe this is a tremendous opportunity for our Company to grow the revenue and profitability while further diversifying our overall business. For the month of September, the Commercial Vehicle business generated approximately $49 million in revenue and had a gross margin of 14.3%.

Before I close I wanted to highlight our continued strategy to consolidate and streamline our marketing efforts across the Company. Most recently, we have completed the consolidation of our CRM system and the execution of new digital campaign templates to improve engagement, our efficiency, and the effectiveness of our marketing campaigns.

We also rolled out a new centralized marketing resource center which provides additional tools to our dealerships and marketing support. We also assessed our marketing spend, resulting in vendor consolidation, the elimination of a number of ad agencies.

As I mentioned, this was in process last quarter. We now have completed the refresh of our individual dealer and mobile websites to provide for enhanced vehicle display, quicker inventory access, and call-to-action attributes. We have seen our traffic improved by more than 30% while providing customers a consistent experience from smartphones, or tablets, or any other device they may use.

We are now in the final stages of new website designs for our collision centers and our large area hub sites. We continue to focus on reputational management through various rating sites, an important part of our continuous improvement to enhance our customer service.

In closing, I am very pleased with our performance in the third quarter, and I believe our results continue to demonstrate the strength, the diversity, and the resilience of our PAG business model. We continue to expect the US and UK automotive markets to perform well and remain confident in our ability to continue to grow our business.

Our cash flow is solid. Our balance sheet remains healthy. And we are poised to grow the business on an opportunistic basis.

Thanks again for joining us today and your continued confidence in our business. At this time I would like to open it up for questions. Thank you.

(Operator Instructions) James Albertine, Stifel Nicolas.

Great, thank you and good afternoon, Roger. Congratulations on a great quarter.

Jamie, thanks.

Wanted to ask you first, if I could, just in terms of your capital allocation strategy. Obviously you consistently delivered relatively significant returns via your dividend. But wanted to maybe get an update on what you are seeing in the acquisition landscape, perhaps first in the US and the UK specifically.

And then separately as a follow-up, the steppingstone acquisition in Australia. How does that play out over time, in your view? Thanks.

Well, number one, when you look at capital allocation, we have a commitment to the OEMs for our CI requirements; and we will spend $130 million, as I mentioned here earlier. And acquisitions then become a key part of our ongoing strategy.

Our dividend, obviously today we increased it, payout at 1.8%. Then we have our stock buybacks; and, obviously, debt.

But when you look at specifically acquisitions which will help us grow the business, we see the market vibrant. The good news we have, we have the opportunity to look both internationally and domestically.

And one of the things that I think everyone has to realize, that when you look at the US that the top dealer groups really own less than 10% of the market. So to me there's many opportunities here, and we certainly see that as a byproduct of some of the acquisitions that we made or things we have in the pipeline.

When you look at our business and you include international, we've got about $600 million of annualized revenue that we have executed on here in the short term. We've got another couple of hundred million dollars under contract; Toyota and Hyundai location in Texas. Then our open points we expect to generate about $200 million when we look at that.

And I would say that probably other than you take out the big piece, which is $400 million, which was the Commercial Vehicle business, it is probably split 50-50 between international and domestic. So we feel good about the pipeline.

Obviously, as we move into Western Europe, we see prices considerably less from a goodwill perspective than we see here in the US, and that is driving some interest. We have now executed in Italy; we will start to report that next quarter. And then we have opportunities in some of those Western countries there which give us some more strength, and we are really partnering with our OEMs during that time.

We also just closed yesterday on a Land Rover business in Annapolis, Maryland, which helps us grow in that DC market, which we think will be quite profitable for the future. That will generate about $40 million in revenue.

So overall, our acquisition pipeline is strong. As we look at our business going forward we think that 5% to 6% of our revenue increase in the future will come from acquisitions.

That was very helpful. Thanks for the color and good luck in the fourth quarter.

Things, Jamie.

John Murphy, Bank of America Merrill Lynch.

Good afternoon, Roger. First of all, on parts and service, from three specific angles. First, what your take is on where we are in the growth of units in operation in the 0- to 5-year-old segment.

Second, that will hopefully feed your parts and service base, where we are in that recovery.

Second, what your capacity utilization is in your service bays.

And third, as potentially this all comes through eventually, are there a lot of SG&A dollars tied to growth in parts and service? Or is there more flow-through than we would see in the other businesses?

Well, let's talk about, first, if you take out 2013 and you look at customer pay, we did some homework on this. About 50% of our [ROs] in that time frame from 7 through 12. If you look on the warranty side it is a little bit higher; it is about 65%.

So when you look at it on a combined basis, I would say we are probably in the 60-plus-% range. So we have got some good traction, some good opportunities as we go forward, as we start to see some of the cars we sold here in 2013 and 2014 going forward coming into our shops.

When you look at capacity, we are sitting today at about 70%. And I think -- and that is without really looking at in some cases second shifts.

Where we have less capacity available what we have gone to is a second shift at night, where we are doing predelivery inspection on new cars and reconditioning on used cars. It has paid off well in giving us more efficiency.

From the standpoint of costs, obviously if you are thinking about adding service capacity itself from a bricks-and-mortar standpoint, it gets expensive. But I think that in our case that we would utilize a multiple-shift capability to get a better process and keep our costs down.

So with a margin today of 60%, you would have to say every dollar invested in parts and service at least additional would provide us more bottom line.

Okay. That is incredibly helpful. Then second question is, as we think about the consumer and consumer confidence, obviously in general it is not that great right now. But you have such a unique focus on the luxury business, I was curious what you think, how your consumer is acting, what you are seeing in showroom traffic and the like.

Because it seems like you might be better positioned than a mass market dealer, given the uncertainty in the general economy and consumer confidence right now. Just trying to understand what you are seeing in your consumer and showroom traffic right now.

Well, let me go back and reset everything. In August, we had a turbocharged August with the extra weekend. September ended up strong, obviously, with the registration month in the UK.

We had a little pause at the beginning of October; but when I looked at the numbers of sales through the last 24 hours, our new car business was up 5% and our used was up 16%. That is here in the US.

So to me we have seen an acceleration back here at the end of the month.

We are in the premium/luxury side. The volume foreign is only 28%, when you look at us internationally and domestically. So overall, that customer is there. I think leasing is driving a lot of loyalty there because of the pull-aheads by the manufacturers.

And there is no question when you look at our portfolio and if you took probably Lexis, Mercedes, Audi, and BMW, almost 50% of their business is leasing. So we have that opportunity to get those vehicles coming off lease and we are seeing more of those coming off now, which is helping us on the renewal side, driving our sales.

So I see credit being strong. We don't have an issue. We really work with our captives primarily; we have a few of our preferred lenders.

CPO growth continues to be strong because they (technical difficulty) that's offered on CPO vehicles. And we have had obviously a very strong used-car business because we're looking at retail first.

So when you combine both new and used and you look at the numbers, just as I looked at the numbers here in the last 24 hours, we see upside on new and we certainly see upside on the used cars.

That's very helpful. Then just lastly on the equity income line, it was much stronger than we had expected. I just wonder if you could give us some color on what is going on with PTL and the other affiliates that are in that line.

Well, we were up almost $2.5 million on the equity line, and half of that came from truck leasing. Our lease revenue is up about 4%. We are seeing rental up very strong double-digit in the leasing side or on the rental side.

And also our gain on sale is strong. Again, some of the same attributes in the truck business; where we've got older trucks, people are now going and buying some of our used trucks that are coming out, which are in great shape. So we see that being strong.

And I think the third quarter for us because of the one-way rentals -- this is rent it here, leave it there -- it's always the strongest in the third quarter. So that has driven some of the profitability.

Also, our joint venture partners in Western Europe are starting to see some traction now, which has given us more profitability. So overall, we feel good about those.

Thank you very much. That's very helpful.

Rick Nelson, Stephens Incorporated.

Thanks a lot. Hi, Roger. Looks like you were able to avoid some of the margin pressures that we have seen from some of the other dealer groups on the new car side; actually used as well. If you could comment on what you think is making you different on that line item?

Well, I think number one, I think focus by our team is key. The fact that our premium/luxury obviously is a key part of our business. And when you look at premium/luxury, we actually get an 8% margin; and when it blends through we are down really at 7.5%.

So I think it is mix. I think it is leasing, which gives us an opportunity to get a little more margin when we do a lease product.

And the good news is these are -- with the pull-aheads, there is some incentive to the customer base. So I feel that is probably driving our new car margin.

And certainly we obviously feel pressure in some of the areas in the internationally, where they give us higher targets. But I would say overall the guys that have managed that manage that quite well.

On the used car side, we have really had good luck. We have been up across the luxury, the volume foreign, and the domestic; and giving us a nice increase of 10 basis points.

So margin and CSR are the two things I guess that are the first words out of my mouth every day when I am talking to the team, and I think they have responded well. But you have got to continually manage it.

I went back -- I think I mentioned in my original remarks that if we go back to the third quarter of 2008, there is really very little difference. $2,802 per unit and it is $2,791. In fact, third quarter of 2009 if you go back, it is actually $2,721. So we have held that margin.

We had a little bit of support and help when Toyota and Honda had short supply. And I think we had a holiday there with all of us getting the benefit of those grosses. Now they have come down more normally.

And on the used side we are within $100 of where we were back in third quarter of 2008. And today we are selling more lower-priced used cars; so obviously holding this margin we think has been a good job by our people.

So overall I think it is focus. Number two, I think the mix of our business is key.

And the other thing that is turning out to be a benefit to us is now, as we are starting to get the rental cars coming off of rent out of our two major locations, Tennessee and Indiana, that is providing us with some good used cars, which have been specced properly for resale. So that gives us a chance. We get the benefit of the captive finance companies rates, current rates and in many cases the extended warranty.

So overall, I think those are the key things that are driving it.

Got you. Do you think that explains the acceleration in used comps the last couple of quarters? You're getting more supply and that is helping drive the top line?

I think it is retail first. Some of our peers are going into individual used-car locations and things like that. What we have tried to do is utilize the infrastructure we already have.

And the goal, there is a metric -- how many wholesale to retail that you have. And we are trying to keep that down to around 20%.

So with the Internet we have got such an opportunity and such a wider base of customers who utilize the Internet, we think that is driving some of our retail first. And penskecars.com has been a real good asset to us.

We have got the -- AutoTrader we have used, the virtual showrooms, and certainly I have talked about some of the marketing initiatives. We are just doing a much, much better job.

If you go online with us I think you will find in some cases up to 60 pictures. So the more we can generate focus on an individual vehicle, I think that that is key.

I think we are driving it through the management process. We had first success in the central area with [Wit Ramanad] and I think certainly the East and the West have jumped on it.

We are also -- we were One2One in the UK or internationally, but I still think there is some opportunity there for more retail. So we see it as a key part of our business.

If you look at the business that CarMax has made out of the used-car business we should -- we would be foolish not to take advantage to it as we combine that with our new car.

Great. Thanks so much and good luck.

Brett Hoselton, KeyBanc.

Good afternoon, gentlemen. I was hoping you could spend a little bit more time talking about your parts and service business, particularly in the UK. How should we think about that on a go-forward basis?

I mean John was alluding earlier to the idea that more new vehicles being sold should result in some improvement in your revenue growth on the parts and service side. Obviously you've had some disruption here in the international operations. I am wondering what happened.

And then how do you think about that business going forward? Is that a mid-single-digit grower or do you think it could be faster or slower than that?

Well, let's put it in perspective. When you look at overall revenue and margin, the UK market overall is 2 million vehicles; we are 15.5 million here, so it is 7 times larger.

90-plus-% of our business is premium/luxury. They have 25% of the market; so it is 500,000 vehicles.

So when you add that up, the movement on total units in operation is not going to move as fast as it will here because of the programs. I think we don't have the Full Circle programs in the UK, where -- in BMW here today, and Toyota Care where the manufacturer pays the consumer to come back in the shops. We don't have that. You have to sell an extended warranty over in the UK to do that.

Overall, our hours are up. I think the key thing we have there with the increase in our used business and the new business has driven our PDI and our internal up about 26% in the quarter. When you look at the overall margin, it went from 58% to 62%, and the overall gross profit in total went up 2.6%.

So to me it is a mix, to a certain extent, and we don't have -- from the standpoint of warranty and this what I would say opportunity to move the customer back into the dealerships because of extended warranties that are given by the manufacturers, we have got to strive further to go out and get that customer that might have dropped off after the warranty is over. And those are some of the initiatives that we are doing.

But when we look at the business, I think that we will continue to grow that on the top line. One other thing we have done, we have looked -- and in our parts and service business you have wholesale. These are trade parts they call it overseas. And some of that business, which was not producing the margins, -- which we're driven for margins, as you know -- we walked away from some of that business, so that has driven some of that.

So I don't think there is anything to be concerned about. Obviously we want to grow it. But when I look at the peers in the US, we are right in line at a 6% growth.

But again overall I think we could do better. There is no question about it.

But our PDI is up; our internal is up; our body shop is up slightly; and our warranty really is driving that decrease in warranty. And some of that has to do with the manufacturers not offering quite the warranty we see here.

Also on parts, when you look at warranty in the UK, we get paid on some parts zero markup; and on our typical warranty we would get 10%; where here in the US we get 33%. So to me we are on it, but that would explain some of the differences.

Then as we think about SG&A leverage, gross profit throughput, and so forth, how do you think about that in terms of your own internal targets as you move into maybe the next year or the following year? In other words, some of your peers will talk about a 30% or 40% or 50% throughput rate and their expectation that they might be able to achieve that on a consistent basis and so forth.

How are you thinking about that in your business? And how does the acquisition in Australia potentially impact that as that comps out over the next few quarters?

Let me say I think flow-through is going to be 35% to 40% in our current mode, and we really need to get a quarter under our belt to see how the flow-through would be and the margin. If you looked in our financials, on the last page I think of the press release, you look at our business. Car rental and Commercial Vehicle are really mixed, but the margin on car rental was 36.7% and the SG&A to gross was 80%. Obviously we have more people due to the counter reps and running our local additions, and also the license fees that we pay to Hertz.

On the Commercial Vehicle side, we were at 14.3% for the month. The car rental was for the quarter. And we had a 60% SG&A to gross, so quite positive.

I think overall, that rounded out to about 72%. The only problem is it is only one month of Commercial Vehicle in the quarter. We probably look at the blended rate for these two businesses, and we have broken them out, to be in the 15% to 16% place from the standpoint of looking at it for a future model.

I think as we look at the Commercial Vehicle business, there is some of the transitional services initially that were being provided by the seller. Those will roll off. And we really need the fourth quarter to establish the SG&A metrics I think as we go forward; and then we should be in pretty good shape.

But we feel good about the flow-through. That is a distribution business. We don't -- it is not heavy asset based from the standpoint of distribution other than the inventory that we are turning with the dealers. We have two dealerships of our own, one in New Zealand and one in Australia.

And the balance is a pure distribution model where we order the truck for the dealer; we hedge the currency both if it is German coming out of Munich for MAN or it would be obviously out of the US from Western Star in Portland. So I think that we have got a good model there.

And certainly from a CapEx perspective or capital perspective as we grow the rental business we got to own those cars, and then we turn those on a basis of probably 12 to 14 months.

Thank you very much, Roger, and nice run with Helio this year.

Thank you, thank you.

Simeon Gutman, Credit Suisse.

Thanks. Good afternoon. Nice quarter, Roger.

Just first, big-picture question because you have multiple businesses in multiple geographies at this point, and I know you don't really give forward guidance. But in terms of the US, international, there's fleet, you have rental, commercial, and you have PTL. How should we think about -- we understand the relative contribution to growth in terms of size, but how do you think about growth from each business?

Which of them should be the faster-growing businesses over the next 12 months? Any color on that?

Well, let's just take the US. We see a SAAR, estimated SAAR of 15.5 million. And from our perspective, we see upside there. The good news is that the brands that we represent, the volume foreign, and certainly when you look at premium/luxury, they continue to add models and I think they are going to have market share.

There is no question when we look at our international business -- and let's talk about the UK and Western Europe. When I look at those, I think it is quite good when you see the increase in the UK. And also what we are seeing in Germany and Italy right now is it's slow growth, so those will only get better.

From a rental standpoint, we are going to continue to grow our rental business. We have the opportunity to take over Cleveland market sometime in the first quarter of next year, or maybe the second quarter.

That will be another opportunity. It has given us a couple -- or another 12 months to understand the business completely; but that will add another 3,000 or 4,000 vehicles to our fleet.

From a PTL perspective, we have seen that business continue to grow. There was some slowdown probably in the last 24 months, people not wanting to lease because the market was softening and they were losing business. But we have seen that turn around and we have seen probably a 3% to 4% to 5% increase top line on leasing.

And contract maintenance rental has been off the charts, really running at 80% to 85% utilization. Because people today would rather rent and pay a higher rate than commit to a 4- or 5-year lease. Now, we are seeing some of those people now saying -- hey, I don't want to pay the extra, let me go to leasing.

The used truck values continue to be strong. We don't have the number of trucks to sell, obviously, as we go into the next 12 to 24 months.

But we see good traction in our logistics business. We have picked up some good logistics business over the last period which we will start to see in our revenues. So from that perspective, I feel very good.

When you look at Australia, overall I think it is a hunting ground for us. We have got a big business there, almost AUD450 million.

We have the opportunity there. We've got two of our best guys we sent out there, Randall Seymore and John DiSalvo, and working with the team out there we have been contracted by a number of people on the retail auto side to grow. We can add some rental and leasing out there.

So it is just a matter of getting our feet on the ground and then starting to execute. So when you look at it and you take a look at our business, we are not just domestic.

I think we have a big platform, certainly when you look at Europe and what is going on there. The UK is really stayed out of the doldrums over many months.

So we certainly are looking as we go into 2014 quite positively. I think the used-car opportunity will continue to be good for us here domestically as we gain. The off-rental cars have come up for sale. So all we have to do is focus and execute here.

That is a long answer to your question. I am sorry.

No, it's helpful. Then following up to part of it, on the rental side, I think the parent company to the namesake brand saw some issues, maybe having too much fleet or saw demand a little weak. How aggressively are you managing that business?

Or first, did you have a similar experience and how aggressively are you managing it? And you are able to unload this -- if you have excess inventory, directly to your stores; and how effective are you at doing that so far?

Well, our model is we are a much, much smaller entity being a licensee and being in a couple of major markets.

We probably have the ability to de-fleet faster because of the roughly 170 franchises we have around the country. And we have a site that we put our units up; this is an internal site, that when they are ready to sell off these cars we put them up and we actually have the entire country looking at these. We have a special transportation logistics capability to move them into the markets where they want them. So it makes it a very good model for us.

But we are trying to do is trying to get the right RPU . And we think that ordering the cars, even with more content, gives us the benefit to get more on the back side.

And all of our cars, I would say, 95% of the vehicles that we have are risk cars meaning we take the residual. And only a few specialized vehicles would we have a factory buyback on, which is maybe a little bit different than maybe some of the rental car companies.

Then last question is, you mentioned CRM. Can you talk about how it is being applied? And then, is it an internal platform or it is an external platform that you are using? And then who is managing that, if it is external?

Well, we have used a number of people over the period of time. I think that at the end of the day, DealerSocket is the CRM system we are trying together.

And then Reynolds and Reynolds, where we have our back plane is with Reynolds and Reynolds. We use as much as we can of their offerings to be consistent, because we use Reynolds across our whole platform.

I think when you use a CRM, we see it benefiting obviously our ability to communicate with our customers on the service side and then obviously on the sales side. I think what it has done, it's regimented the sales process in a much better way.

We have even gone to a new model we are trying where we have product specialists. You have heard about Project Genius obviously at Apple. There is a lot of interest in that in BMW.

We are testing an opportunity where we take all the Internet leads and we bring them into a product specialist. When they come to the store, there is someone there that knows they are coming; they are dealt with.

And we really have people who are probably in many cases we pay by the hour, not on a commission, so they are more interested in understanding the vehicle and providing a CSI experience which is key.

And most of our templates under our CRM are call to action. We have today really an inventory, a toolkit. If you are a particular OEM dealer you can go into that toolkit and you have a number of tools that you can use, whether it is a service tool you need for communication, a sales tool, even an OEM contact capability. We have that available across the network, which simplifies it.

As I said earlier, we have taken some of the ad agencies out and we have really built an internal capability here which is really proving to be quite successful.

Okay, thank you.

Brian Sponheimer, Gabelli & Company.

Hi, Roger. Most of my questions have been answered. But I guess more in the near term, as you are thinking about the fourth quarter this year in the US with your luxury brands, we've had I guess an arms race between BMW and Mercedes the last few years. How are you thinking about potential impacts to your business from incentives on the luxury side as a benefit as we head into these last three months here?

Well, I think you've just got to look at history. These manufacturers all have targets that they are trying to meet. Obviously there is competition between the brands.

But we see typically that as we get into December, primarily we see big spend in advertising and big support from an incentive standpoint, where it is a pull-ahead in our cash on the hood for the consumers. We see that as an opportunity for us.

And we would expect the same posture as we have seen in the past with the OEMs as we go into December.

All right. On the revenue per vehicle, if you show about a 1% improvement you will be just under $40,000 per vehicle in the fourth quarter. At what point do you think that this can potentially top out, where you might be constrained as far as your top line, given that consumer's ability to either finance or purchase a $40,000 car, on average?

Well, I think it all comes down to residual because when you look at -- I think when you look at total transactions between lease and finance, it is probably 75% to 80%. And with that the residual plays the game; and leasing is 24 months to 36 months.

But I don't see the price of the vehicle as important as what the payment is. Now you read in The Wall Street Journal here I think in the last 24 hours where they talk about how on the retail contract side that we are going out to 72 and 84 months. We see probably in our portfolio somewhere on the retail side probably 61 to 62; and on the lease side it is around 36 and some manufacturers even going shorter at 27 months.

So to me that really camouflages the increase in price, because it comes down to the payment, and is it a zero down or first and last? So I don't see that affecting us. We have been pretty much in that line for a number of years.

And with the advent of -- and I think we've got to be careful here. With the advent of a CLA and some of 1 Series, and Qs that are -- you know, Q3, you've got a much lower cost of sale, which is going to drive that down on average. But you are still going to have the S-Class, the 7 Series, really the A8 are all going to be in -- the Panameras and vehicles like that, which are going to be priced a little bit higher.

When you look at the -- I think the average price, when you look at -- in the US is about $35,000 from our perspective; and I think in the UK it is higher at about $42,000. So there is some difference. It seems in the US market the manufacturers are a little more competitive.

All right. Thank you very much. Excellent quarter.

Thanks a million.

Scott Stember, Sidoti & Company.

Good afternoon, Roger. Can we -- maybe just a big picture here of the US and the UK, talking about a 15.5 million SAAR for this year here in the US, without making any predictions for next year. And when factoring in that we are just seen the leading edge of cars coming off of lease right now, what are your general thoughts of where we go from here, the kind of growth that we could see here in the US? Again, maybe just touch base on the UK afterwards.

I think what we really have to do is you have to dissect this 15.5 million. You've got to find out how much of it is fleet. Because if the fleet all of a sudden accelerates, for one reason or another, -- and it has really been less. The manufacturers have really, I think, had a good attitude about providing the hot cars to retail.

But that is going to drive this SAAR in some way, which will be a benefit in some ways because we will get more used cars coming out at some of the fleet operations. But I see this continuing to grow.

I am really looking at our volume foreign and premium/luxury, and what I see there is across-the-board there is going to be approximately 175 new models coming out here over the next probably 12 to 18 months, which is going to continue to drive growth.

And you've got to go back. And the fundamentals are we have 11-year average life of the car park that is in place. Our credit is still good. Residuals are higher.

So I am not sure what else we need. It is a perfect storm.

And leasing overall is 26%, if you just look at the total marketplace. So I think that there is no question that as we look at the market going forward, these will be the drivers for the business. And to me I feel good about the future.

On the UK side, look, Europe has been in a storm over there for several years now. UK has stayed out of the picture.

But with the success we have seen in the UK, as I said earlier, the registration was the 19th consecutive month of growth in new car registrations, and they had over 400,000 just in the month of September. Now, realizing that is a registration month and that is the first time in five years.

So along with Western Europe and what we are seeing in Germany and what we are seeing in Italy. And our first stop there is quite positive for us. Again, it might be the OEMs we're associated with.

On the other hand, the investments from a goodwill perspective are significantly less. You have got language and other things which make it somewhat harder maybe to manage. But I think the team we have on the ground and the partners that we have in Europe are going to make it quite possible for us to continue to grow at a decent rate.

Great, that's good. Then the last question, just on the SG&A side, I'm not sure if you mentioned this. But what are some of the levers that you have been successful in, in the last quarter or so, in tapping? And where do you see additional opportunities on that front going forward?

Well, I think one of the areas is in our marketing. I think the focus on digital has made a big difference.

I think we are starting to manage our loaner car expense much better. I think we were up in some cases up to 10% of our gross profit in service and parts, and we have been able to take a look at that and drive that more effectively.

We are taking our customers home in a van rather than letting them take a car and take it home and have it sit there and put 10 or 15 miles on it. There is a lot of things that we have done.

And I think overall we are really managing our compensation to gross, meaning we have to maintain that. As the elevator goes up on gross, the comp goes up because we're in a variable business. When it comes down, the comp goes down.

And I think in every case, I think our management team is really focused on that. Our people understand it.

And I think that there is no question that when you look at -- we had another $78 million of additional gross in Q3 versus last year. And I think that it is not just SG&A; it is driving the gross profit.

So we are not going to cut our way into more EPS. What is going to happen is we're going to pull it on both sides.

So I think it is focus. I said that earlier, and there is no question that the spend that we have in some of these areas has to be looked at.

But as we grow the business, some of the core infrastructure expense which you would call fixed tends to be then blended over a larger base, whether it is domestic or internationally. And I think we are getting the benefit out of that today.

When you think about going to Australia and buying a $450 million Australian revenue business and we spent $1.9 million -- that includes our people's travel, that includes our legal, and all of the other aspects of it and audit. We used our people internally which was a huge benefit to the process.

The speed, 70 days from the day we got into the process. So those are things I think will pay off on a long-term basis.

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

Mr. Penske, there are no further questions queued up at this time.

All right. Thanks, Tom. We will see you again. Thank you very much, everyone.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T executive teleconference. You may now disconnect.