Penske Automotive Group Inc (PAG) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the Penske Automotive Group second-quarter 2014 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through August 6, 2014.

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. Please go ahead.

Thank you, John, and good afternoon, everyone. A press release detailing Penske Automotive Group's second-quarter 2014 financial results was issued this morning and is posted on our website along with a presentation designed to assist you in understanding our performance.

Joining me for today's call our Roger Penske, our Chairman; David Jones, our Chief Financial Officer; and JD Carlson, our Controller.

On this call we will be discussing certain non-GAAP financial measures such as earnings before taxes, interest depreciation and amortization. We have reconciled EBITDA to the most directly comparable GAAP measures in this morning's press release which is available on our website.

Additionally we may make forward-looking statements on this call. 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. Additionally, the discussion and other factors that could cause results to differ materially are contained in our public SEC filings including our Form 10-K.

At this particular time I'll turn the call over to Roger.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today.

We reported the most profitable quarter and the six months in the history of our Company today. A record second-quarter performance is highlighted by a 21% increase in revenue to $4.4 billion and a 28% increase in income from continuing operations to $80 million.

Related earnings per share increased 27% to $0.89 from $0.70 in the second quarter of last year. Our second-quarter performance continues to highlight the benefit of our brand mix and the diversification of our revenue base. Based on the strength of the Company's performance earlier this month our Board of Directors authorized a 5% increase in the quarterly dividend to $0.20 per share yielding a 1.6%, the highest yield in the automotive retail sector.

Additionally, for the first half of the year we repurchased 335,000 shares for approximately $15.5 million or an average price per share of $46.20. We have a remaining share repurchase authorization of $77 million as of June 30, 2014.

Let me turn to the specifics of our record second quarter. Second-quarter results were driven by a 10% increase in total retail unit sales to 101,400 and a 21% increase in total revenues to $4.4 billion.

On a same-store basis automotive retail revenue increased 12.7% including 6% in the US and 25% internationally. Foreign-exchange rates increased revenue by $137 million. Excluding the effect of foreign-exchange, same-store retail revenue increased 9% including 15% in our international markets.

Our revenue mix in the quarter was 61% in the US and 39% internationally. 97% of our revenue was generated through our automotive dealerships while the remaining 3% came from our commercial vehicle car rental and other businesses.

In our automotive dealership business our brand mix was premium luxury 71%, volume 4% and 25% and Big 3 4%. Looking at new vehicle performance, new units retail increased nearly 11% to 55,500 units representing growth of 8% in the US and 16% internationally. Our premium luxury business grew 14%, our volume foreign grew 6% and the Big 3 grew 3% for a total of 11%.

On a same-store basis new units retail increased 5%, the US was 3% and international was 9%. New vehicle revenue increased 18% to $2.2 billion. New vehicle average selling prices improved 7% and gross profit for new vehicle retail improved 11% to $3,115.

Gross margin improved 20 basis points to 7.7% on new vehicles. Our supply of new vehicles was 61 days at the end of June compared to 63 days in 2013.

Turning to used vehicles, we retailed 45,900 units in the quarter representing an increase of 10%. Our premium luxury was up 13%, our volume foreign up 6%, Big 3 up 8% for a total of 10%.

Our used-to-new ratio was 0.83 to 1 and this was consistent with last year. Approximately 35% of our unit sales in the US were certified pre-owned which was up from 34% last year. Same-store used retail units increased 6%, US was up 4%, international was up 10%.

Used vehicle revenue increased 20% to $1.3 billion. Used vehicle average transaction prices increased 9% and gross profit per used vehicle retail improved 3% to $1,966. Our gross margin declined 40 basis points to 7.1%.

Our supply of used vehicles was 43 days at the end of June compared to 41 days in 2013.

Turning to finance and insurance we continue to make good progress on our initiatives to drive improved performance. In the second quarter revenue increased 19%. I am pleased to report that F&I improved $76 per unit to $1,107.

F&I per unit was $1,065 in the US and $1,197 per unit in our international markets. Service and parts business had another solid quarter with customer pay, warranty, collision repair generating double-digit growth and revenue. Service and parts revenue improved 13% in the quarter including 8% on a same-store basis.

Customer pay was up 14%, warranty was up 11%, body shop is up 16% and PDI was up 12%. And on a same-store basis customer pay was up 8%, warranty was up 5%, body shop was up 11% and PDI up 8%.

Our service and parts gross margin was 59.7% and on a same-store basis service and parts gross margin improved 10 basis points to 60.2%. In total, overall gross profit improved $107 million, or 19% while overall gross margin was at 15.1%. Gross profit flowthrough was 25% in the second quarter improved to a 41% on a sequential basis.

Operating income increased 22% to $136 million and operating margin was 3.1%. Our investments in joint ventures continue to perform well. In Q2 our income from these investments increased 22% to $10.9 million from $8.9 million last year.

Effective tax rate for the quarter was 33.6%. We expect our effective tax rate to be between 34% and 35% for the remainder of the year.

Turning to our international automobile business, our operations in the UK, Italy and Germany all performed well during the second quarter highlighted by a 15% increase in total units retail. New units were up 16% and used units were up 15%.

In the United Kingdom, June represented the 28th consecutive month year-over-year registration increases. And the market is on track for 2.4 million new vehicle registrations in 2014. And this would represent more than a 6% increase over 2013.

The market remains strong; our new unit volume increased 10% which compares favorably to the overall UK market which improved 7% during the quarter. Used unit sales increased 11% in the quarter and our used-to-new ratio in the UK now is running at 1 to 1.

Turning to Penske commercial vehicles and car rental, we are approaching the one-year anniversary of entering the Australian market. Over the first 10 months we have spent a lot of time focusing on customer interactions with dealers and forging new relationships with our OEMs. We are introducing initiatives to drive new market penetration and are driving improvements in used vehicle remarketing.

We also started a training academy for dealers and our employees. During the second quarter the commercial vehicle business generated approximately $111 million in revenue and remains on track to meet expectations. The parts distribution business is very strong and has improved over 20% for the first half of the year and the car rental side of our business continues to grow.

For the quarter our revenues increased 11% to $16.7 million. We now have over 6,800 cars in our fleet with a utilization rate of approximately 73%. Commercial vehicles and car rental generated a 21.5% gross margin in the second quarter.

Moving on to the balance sheet, at the end of June total liquidity was approximately $517 million. Total non-vehicle debt was approximately $1.1 billion essentially flat with the end of last year. Our total-debt-to-capitalization ratio improved from 42% at the end of December to 40% at the end of June and our debt leverage improved to 2.1 times trailing 12-month EBITDA.

Excluding the $121 million in Penske car rental line of credit, our total non-vehicle debt would have been approximately $968 million and the debt-to-total-capitalization ratio would have been 37%. Our new and used vehicle inventory was $2.4 billion increasing $387 million when compared to June of last year. New was up $239 million, used was up $148 million.

On a same-store basis new and used vehicle inventory increased $272 million when compared to the end of June last year. New was up $154 million. Used was up $118 million.

Capital expenditures for corporate ID and facilities were $38.4 million in Q2 and are $72.9 million for the first half of the year. Our EBITDA improved 22% to $153 million.

Turning to acquisitions, during the quarter we opened a new Toyota dealership in Surprise, Arizona representing our 16th Toyota dealership in the US and our 22nd dealership in the greater Phoenix area. We also expanded into Spain by establishing a 50-50 joint venture that will exclusively operate BMW and Mini dealerships in Barcelona. Spain is one of the top five car markets in Western Europe and Barcelona is a premier location along the Mediterranean Sea.

Our total capital investment including working capital for the entire market of Barcelona for our 50% is only EUR12 million. We believe this is a natural extension of our international business strategy and are excited about the opportunity to develop this market for one of our key business partners.

Finally, we began developing our new Porsche dealership in Broward County, Florida. This new dealership will represent the 7th Porsche dealership in the US and our 15th on a worldwide basis and is expected to open in 2015.

In closing, I'm very pleased with our record performance so far this year and believe the results continue to demonstrate the benefit and strength of our brand mix and geographic diversification. With a strong balance sheet and a positive outlook across our automotive dealership, car rental, commercial vehicle businesses we are poised for continued growth.

As we move forward we will continue to evaluate our market position and remain committed to pursuing strategic and opportunistic acquisition to help our Company achieve long-term success and prosperity. Thanks again for joining us today. At this time I would like to open the call up for your questions.

(Operator Instructions).Rick Nelson, Stephens.

Thanks. Good afternoon, Roger. Nice quarter.

Like to ask you about the same-store new unit sales growth. You indicated 3% in the US which looks a little light of where the industry was. And then 9% growth in the UK looks a lot stronger than the overall market.

When you look at same-store we are up 3%. On an overall basis we were up 8%, which was equal to the market.

I think a couple of things that we have to take into consideration, Puerto Rico was down about 25%. And also from a Mini perspective, they had a very slow rollout of their new car and I think that we were down 23% in the quarter on Mini units, which obviously impacted us.

But overall what I think was most important is that we managed our business for margin. And we had a 20 basis point increase on our new vehicle margin. And I think you don't think it's key that we maintain our margin, so we think we are on track.

Obviously CLAs, a lot of the key premium luxury cars from an inventory perspective were in short supply, Q5s, Q7s, we were really in short supply. The Macan is hot with Porsche, so I don't see anything there that we should be worried about. I think we are really on track, looking at July we are on track for a mid-single-digit increase, at least so far for the month.

Okay. Thank you for that. The used car business in the US would seen some challenges from some of your peers and you seem to have navigated it well. If you could comment there, what you see in that segment as we move forward?

I think there's been some areas of the country evidently that have been in short supply of used. Obviously we having 71% of our business in premium luxury, we have a significant number of lease returns which helps drive our pipeline.

And as we have mentioned before on the calls, we've got a process retail first where we are reaching down, cars that we would wholesale in the past we're now retailing. I think when you look at our business about 66% of the business this year, or at least in the quarter was trades.

The other 33% roughly was purchases and I think that with the CPO that we have we are at 35%. We were up 4,300 units and from a gross perspective we held $50 per unit, so overall inventory was fine.

I think the execution is good. Gross profit per unit is in line. When we look at it there is no question that when you look at the marketplace we are up nicely on gross profit.

And to me sometimes the cost of a CPO drives some of the cost of sale up. So it has some impact on downward pressure on margins.

But we really have looked at our penskecars.com and we have over 16,000 used cars online there, which seems to be generating quite a bit of traffic. So I think that is working out from an e-commerce perspective.

Thanks a lot, Roger, and good luck.

John Murphy, Bank of America Merrill Lynch

Good afternoon, Roger. A first question on the acquisitions and the JV that you have put in place over in Barcelona in Spain. There's a lot of talk and there's actually a lot of action around some large acquisitions here in North America, which you seem to be not participating in as aggressively but are allocating capital to the international markets.

I'm just curious how you go through the assessment process of those investments versus what you might do here in the US? And if they are just much more attractive than what you are seeing here in the US right now?

Well, I think first you've got to look at our revenue mix. It's 64%/65% domestic and the balance is international. So obviously a global look is important for us.

And to me if people talk about a big transaction, all of us -- our peers that are in the public retail space have certain framework agreements which would limit us to having certain a number of brands of the same brand in certain markets.

So I don't see that as an option for us right now with our size and especially in the key markets where we operate. Obviously, from our perspective what we are trying to do is we moved into the UK back in 2002, I think it was, we've grown that management team and built that business from $900 million to $4 billion.

We see the same thing happening in Italy with Mantellini as our partner there, a 30% partner and moving into Spain specifically. Catano is the largest BMW, I think they have 34% of the market in Portugal, and they are our partner in Spain.

And what we have done is gone in and set up a joint venture with about $24 million to $25 million of total capital. We putting in half. And we of the entire market in Barcelona.

Obviously the dealers there have suffered during the downturn. We've got five locations. Some premium facilities and it is a matter of building our management team there and executing.

The Spain market, obvious, is one of the largest in Europe and probably 1-million-unit market this year. And it's going to be up about 15% to 20%. So I think we are getting in at the right time.

So it's lower cost, which obviously is good. On the other side as we look at the commercial vehicle, we've gone into Australia with Western Star and MAN. We see that also as potentially as a partner that we can do from the standpoint in another vertical in commercial vehicles.

And that would give us an opportunity to look in the US for retail truck dealerships similar to what Rush Trucks has. It's a public company that is I think on the New York Stock Exchange.

So we are looking at retail auto. We are looking at regions. We are looking globally and obviously on the commercial side.

And we also have the benefit to grow our rent-a-car business, which has given us about 50% of the cars that they have sold in the first six months went to our dealerships. So that equation is working out nicely for us also.

So I see us actively in the business. So far in 2014 between new open points and acquisitions we've got an annualized revenue of about $250 million. And I think we are on track.

We said to the Street that we would look at growth of about 13% or 14% for the year. And a good portion of that, half of that would come from acquisitions. And I think we are on track for that.

That's very helpful. And second question, as we look at the gross profit per unit on the new vehicle side there was a big uptick and it looks like mix was pretty positive for you in the quarter. Is that something you think you can continue going forward and is the market set up for that?

Well, I think when you look at our particular mix and again I will go back to 71% premium luxury and when you look at our margins on premium luxury, it really is strong. We were up overall $300 per unit overall in new and up $50 in used.

But when you break it out even closer, on the premium luxury side we were up 10%, almost $400 per unit from $3,700 to $4,100. And the good news is with all the pressure on volume foreign, we were 9% on gross when you break that out from about $1,700 to $1,800.

So we had growth both in premium and volume foreign. I think the customer it's a slower sale. I think they care about parts and service.

I think our locations, the money we spend on CapEx, we don't have the interbrand competition in many cases that you have in some of the other brands. So I think that is boding well and there is no question from a sequential standpoint when you look at we had a strong fourth quarter, that was almost $4,300 but you have a lot of the incentives and a lot of the yearend money that dumps in there for you which gives you some benefit.

So I think we have been pretty consistent. If you average the last three quarters we would be over $4,000, which is significant when you look at it, it's almost double what volume foreign is and what domestic. So I think we are in the right place.

Okay. And then just lastly on parts and service, obviously it was very strong in the quarter. I'm just curious where you think we are in the curve of that parts and service business benefiting from the growth in UIOs that we are seeing here in the US but also in the UK and the international markets. What's going on in those markets as well?

We are not affected by these recalls because primarily most of that is in the domestic side as we've seen here lately. We had some recall activity with Mercedes, Lexus and BMW last year.

But if we take that out, overall we are looking at probably about an 8% overall increase on a same-store basis and really it is driven by 8% in customer pay. Warranty is up about 5% and our Get Ready, which is key and this includes our PDI and our used car reconditioning, is up almost 8% and then our body shops are up.

So it's across the board. And I think with units in operation continuing to grow the zero to five years, which you folks focus on, that's going to drive more business. Plus with the full circle program at Toyota, people come back for their consumables.

You've got the BMW full circle program on maintenance when they sell a vehicle. That to me bodes well for us and I see us continuing to grow at mid single digits in parts and service.

In the UK we have now focused a lot more in the parts and service area. And I think that with that business growing like it is we are starting to see a little more growth over there because we've had this big growth from the market share.

You look at premium luxury, if you go back to 2008 it had about 18% of the market. Today it is 25% and that growth, that has been the tailwind we have had.

Now with the market up from $2 million to $2.4 million we are going to get the benefit. So they're driving more units in operation and obviously premium luxury is gaining the big piece of that. So that will continue to drive our parts and service including warranty.

When you look at the UK it's a little different story because so many new vehicles. Our warranty there is up 22% and our customer pay is up only 13%. So a little bit different when you look at the international business.

Great. Thank you very much.

Patrick Archambault, Goldman Sachs.

I guess maybe just as a start, just following up on the gross margin. I know it was touched on sort of in the last question but it does look like gross margins have more than stabilized. They have started to improve.

Underpinning that as always is a pretty big ASP increase whether you strip out FX or not, it is up a lot. So how do we think about the competitive environment just in the context of that?

And then on the back of that I did notice used seems to be a little bit weaker if you are looking at margins year on year despite also a pretty good tailwind in ASPs. So maybe contrasting those would be helpful.

Well the competitive environment, I think, on new we certainly think our mix at 70% is driving a higher margin for us in premium luxury. As I said we were up 10% to over $4,000 per unit. So to me that is strong and when you look at it a comparison a year ago we are up 20 basis points.

Our volume foreign margin was up and our domestic was down. And on the used car side we were up $50 and when you look at it across probably sequentially, there is no question that we have been able to sustain our margins now for the last three or four quarters, which I think is key.

And we don't have the interbrand competition on the new and I think on the used with the execution of the Internet, that person wants to buy that particular car. And if the process is efficient and we can get that customer in we don't have a competitor on that car.

Remember -- I will give you an example, in Atlanta we have two BMW stores and they sell anywhere from 100 to 120 new vehicles per month. And they are selling 250 new per month -- or used per month, excuse me. And that is done with the strength of the Internet because all of those people aren't driving by.

So I think Internet execution is key and that is helping us differentiate ourselves from the standpoint of the competitive environment from a margin pressure. And we are going to continue to focus on that.

And quite honestly we have a tool that we use every day to manage gross in every store. And I have a particular template that I use every 10 days. So we are managing it not just at the end of the month and saying, wow, we didn't get there.

We are looking at on a 10-day period. So I think the team is really focused on the gross. And I have two major categories I worry about, that's CSI and gross profit.

And I just knock on wood that we are continuing to execute, so I think the team has done well. One thing in the UK you should know that on used cars, we have the VAT. And that probably impacts -- it's about 18% charge on our gross profit.

So that has $300 or $400 impact when a retail buyer buys it . If you are a buyer, a commercial buyer buys a car you can then go back to the government and get that money back. So that has a little bit downward pressure on our used margin but otherwise it's pretty consistent.

Okay. Yes, that's interesting. So the volume foreign is actually seeing margins up and domestic down.

And so it seems like it has changed a little bit. Wasn't it the volume foreign that was sort of using more aggressive stairstep incentives until fairly recently?

Well, we go back into four or five quarters and we have held pretty study. Our volume foreign has been really been flat and it's up and this particular quarter. So I think our focus is on gross and that is on the new side.

And I don't think you can really look at us as a model on the -- with only 4% domestic, I don't think it's fair to compare us to the other peers. Because they've got a lot more scale than we have. So overall I think it's just again focus on the gross profit.

And when you think about being up $400 a vehicle on premium luxury and having the increase on the volume foreign also in the quarter, it shows that there is the right focus.

Okay. That's fair. Thanks.

One last one, is just how would you -- there's been some mixed comments about the health of the M&A environment for lack of a better word just among some of your peers. How would you characterize the availability and attractiveness about the assets and sort of the valuation environment that is out there?

I would say the health of the pipeline is very good. I think each of us may be have different markets we are strong in. So we would be focusing on stores that we could add value or add volume into places where we had the infrastructure in place.

Obviously there's -- I think I have seen it written and I know it, there's some of these families that don't have siblings that are going to take over the business are now having to look at major CapEx issues so they are coming into the market to offer their stores for sale. Obviously there's a number of what we would call brokers who are out there today who have found that there is a business out there, so they are generating more leads to us but I would say this.

I can't remember here in the last year, and I will just take the last 12 months, where I've been in competition with one of the other public companies to try to buy a business. I think each one of us have our own individual pipeline.

We've got contacts. We have people that refer us because we've done business with them before. So I would say the health of the pipeline is good.

I think the growth opportunities for the sector, the whole retail sector, is excellent. And when you look at the liquidity that we all have, we are going to be the right guys to approach to sell their businesses.

We are going to look at it not only on a domestic basis but we will look at it on -- we have a bigger sandbox, you could say. We are going to look at it globally. And we are also going to look at different product line from commercial vehicles to retail automotive.

Okay. Got it. Great, thanks a lot for the color.

Ravi Shanker, Morgan Stanley.

This is (inaudible) in for Ravi. Couple of questions. First, you recently started testing the no-haggle pricing at one of your new stores.

And initial media article suggests that traffic conversion and transaction time both improved. Can you provide an update there and also any sense of by when you could decide whether this is something you would expand to other stores?

Well, Ravi, this is really 1 out of 170 franchises in the US. We have been in that store for two months. I would say the activity is excellent.

I looked at the gross margin based on one price offense. And it's equal or better than our other Toyota stores.

The store happens to be out in Arizona. I think the key thing here is we have gone back to each one of the individual purchasers and called them to find out what was their understanding and how did the process go, the feeling of the entire engagement with our people. And that's, I would say, 95% of the people said they liked the process and only a few said they'd like to negotiate.

So I think that bodes well and we will obviously look at that. One of the things that we haven't been able to -- because it's a short period because we are adding people -- to understand what costs that we have been able to take out of the business. Because you have one person handling the sale from start to finish, and I think we need a larger sample before we can make any decisions.

But I would say it's good news to date. Can you convert our whole business over to that? I couldn't say that today and to me we will have to give you more color on the next calls but so far so good.

Understood. That's very helpful.

Secondly, your customer pay on the same-store basis did really well compared to warranty. But please correct me if I'm wrong here but for you guys warranty is the higher-margin business, right? Has it always been that way and what's the margin difference compared to customer pay?

Well, remember on warranty we negotiate the warranty rate with the manufacturer. So that labor rate doesn't change. And then there is individual time allotments for each operation, so it's pretty much a multiplier of hours time your rate.

When you get into customer pay and as we try to continue to keep these people as customers, as the vehicles get older we have different menu pricing which obviously in some cases discounts the overall impact of the selling price, so that would reduce it. Also the markups on parts might be different as we might have a situation in customer pay where we sell a package, a tune-up, etc.

So these are the things that would adjust the customer pay. Because remember, we want to maintain that customer after the warranty is over. So older vehicles are going to have a labor rate that is lower and I think that is key for us to sustain this customer and that repeat referral business.

Got it. Thanks.

Brett Hoselton, KeyBanc.

Good afternoon, gentlemen. I wanted to start off just talking a little bit about gross profit throughput. If I calculated it on slide 15 correctly I am thinking it's around 25% in the quarter, that is up from where you were last quarter but it is still shy of your target of 35%.

And I was wondering what are your thoughts on the outlook there? Are you still targeting 35%?

Was there anything unusual in the quarter? What are your thoughts there?

There's always pluses and minuses in a quarter that we could dictate out in a conference like this but I would say it is steady. We certainly had a better quarter than we had the first quarter because we had the weather-related stuff in the East.

But I think that at this particular time you've got to look at our advertising spend was up about $4 million, which was consistent. And one of the things that we looked at is [WIR]. WIR is a big SG&A expense.

And we got into our loaner cars, today we have almost 7,000 loaner cars in our fleet between the US and internationally and another 3,000 demonstrators. And these vehicles all obviously have depreciation and we have to pay the maintenance on them, which is entirely different than if you had a domestic fleet or even a volume foreign fleet.

We don't provide loaners. And that's an area that we are looking at to see if there's a way to take some of that cost out. But those would be two areas that would be significant.

Our goal is to get to 35%. One thing you have to look at, when you look at our income statement you've got to also take into consideration that we are involved in -- there's about $11 million of income from our investments.

And if you add -- just the delta on that over the years, year-over-year that would add about 5%. So I think that we'd like to be at the top of the list. Whether we can get there I don't know but I think the upward movement is good.

And we've got some areas of the country that are flowing through 44%, so it's an average we are giving you so we know that this is a focus. As gross has been a focus we are now focusing on the flowthrough but to me 30% to 35% is certainly our target.

And then as we think about parts and service, I think there's a thesis in the industry, in the investment community that parts and service sales are going to accelerate. I think we are already starting to see some of that.

People generally differ on the CAGR of that increase, so this quarter you were up 8% on a year-over-year basis same-store. There are some people in the investment community that are thinking well that might accelerate to 10% increase on a year-over-year basis, or even 15% on a year-over-year basis because the number of vehicles in operation are going to go up and so on and so forth.

I guess I am wondering a couple of different thoughts here. One, what do you think is a reasonable outlook for your parts and service same-store sales growth over the next few years?

And then secondly, if you were to identify what might be the primary bottleneck to achieving that growth, what would you suggest that might be? Is it the number of customers, the bay capacity, the number of technicians you have, how do you think about the bottlenecks?

Well, before we talk about the bottleneck, I think if I was putting a model together I would say it would be mid-single-digit, we would see same-store growth in parts and service. I think all of us have been investing. So we certainly have in capacity from the standpoint of our facilities.

And where we are getting tight meaning we don't have the bays available, we are going to four 10-hour shifts, we are going to second shifts to do our PDI and our new car delivery, so I don't think facilities are really the issue. The key thing is as we get into more vehicles and we go back to 10 million, now we are at 16 million or 17 million, as those vehicle start to fall off and we also have to be sure that we are pricing the product comparable to the year of the vehicle.

Because people have older vehicles, might have bought them used, are not going to pay high labor rates. So that's probably a little bit of a pressure down from the standpoint of just the overall revenue growth.

I think overall we see from a car part perspective, we see that we are running in the 0 to 5, you've probably got 75% of your business as warranty, from 0 to 5. And to me when that warranty comes off then you have got to be able to manage your customer.

I think the other key thing is this quality. We are going to be in a position that as an OEM-certified dealer that we are going to be able to provide a better quality as the cars have gotten more complex.

Also we have got to understand that recalls drive this number up and drive it down. We are not domestic today to see some of that. But we've seen it in Mercedes, we've seen it at Lexus and BMW that we do get the benefit of that.

So there can be some ups and downs, that will be hard to maybe the next year to see growth. But I think mid single digit is realistic from a same-store standpoint. And we are going to count on our margin being anywhere between 58% and 60% would be our margin target.

As the dealers generally are seeing some growth in the parts and service business, it would obviously demand more technicians. And I guess what I'm wondering from your perspective, how are you feeling about your current base of technicians?

Obviously I am sure they are highly qualified and so forth. But how are you thinking about growth in technicians, or the ability to add technicians?

Are there just a lot of BMW technicians that are sitting on their couch watching Barney on Saturdays and trying to figure out what to do with the rest of their life? Or is there a lot of highly trained folks that are amply available, or is -- are they in tight supply?

I would say technicians, the right technicians are in tight supply. We have added 200 technicians in our network over the first six months.

One thing we have done for a number of years, we've had a very strong relationship with UTI, which is Universal Technical Institute. They generate about 18,000 technicians a year that they graduate.

They've got locations outside of Boston, they are in Philadelphia, they are in Chicago, they are in Phoenix, they are in Dallas, they are in Houston, Los Angeles and up in Sacramento. So they've got a broad-based campus.

And I think that what we do go in and we interview for the best technicians. And in many cases some of the OEMs have special programs where they particularly train -- it is a step course where they go up one level up and they train specifically on an OEM.

So what we have done, not only in the truck leasing business where we have diesel when we need it, we have used them as a resource. And they have been -- we've got some very good candidates.

And I would say that would be our biggest area that we are gaining candidates. And to me people coming out of UTI seem to be really good guys to start and technicians are hard to get.

A lot of our guys retire that have all the expertise. So it's important to grow this space but at the moment I would say we probably need a couple hundred technicians. And we will go through that on a very selective basis for the balance of the year.

Thank you. And then just a final question.

On the acquisition front, we have recently seen Lithium make what I would call a transformational acquisition, quite large, similar to maybe your Sytner acquisition from a number of years ago. What are your thoughts kind of going forward over the next two to three years, you clearly have the capacity to do something quite transformational if you wanted to.

Are you more in the mode where we are going to do some bolt-ons as we kind of move along? Or is there a possibility that there is a large dealership or group or two out there whether it be here in the US or internationally that you might have an interest in?

Well, we bought the Agnew Group in Northern Ireland a couple of years ago. So we are obviously open to a group that has the right brand mix and geographically it would fit.

I think I said earlier in one of my comments that because of the framework agreements here, if we were to look at someone who had concentration in the East Coast in New York or Connecticut or even in Los Angeles or Phoenix, we are prohibited under our agreement to have multiple same brand locations, or the same brand. Different than that is, by the way, when you talk about Barcelona you talk about the Midlands in the UK, in the US that's the way the franchise agreements are working and the areas that the manufacturers want to look at interbrand competition.

So we are open for investment. I think that we are looking for diversification, so that would mean that we could look at some more commercial vehicle. The commercial vehicle business seems to run at a higher return on sales.

There is a lot less CapEx required from the standpoint of what I call corporate identity on showrooms, etc. So we're going to look at a balance between retail automotive. I think you will see that 3% growth over a period of time.

And I think that there's no question that we are looking at -- we have generated probably about $1 billion over the last nine months when you look at our acquisition based on what we have done already. And again we have our liquidity is about $500 million, so there's no question that with the US, with the UK, with Spain and also, I just say Western Europe, we feel good about where we can go.

Thank you very much, Roger, and good luck this weekend.

David Lim, Wells Fargo.

Hi, good afternoon. Just a couple of questions. With the technological advancement in the modern car, would that really preclude the third-party mechanics, whoever is out there the mom-and-pop shops, really do any kind of a competent repair on these new vehicles?

Can you comment on that? Because I know that a lot of people have been talking about a 0 to 5 year vehicle. But the way that the vehicles are manufactured today just jam packed with electronics, it seems like when you get to the 6 and 7 year it would probably end up at the dealer lot rather than the local mechanic.

Well I think your perception is probably right on. Because you open the hood of these calls and with the encapsulation of the engine, you can't even see it. And obviously we have a tremendous amount of reprogramming that we are doing.

If you go to our BMW stores we've got 16 bays in Crevier that we do nothing but reprogramming the different computers on the car. And I think that's going to be very difficult for a mom-and-pop type workshop.

I think we are going to go through a sea change here. The technology has grown leaps and bounds over the last four or five years and as these cars get into the market and are resold I think there will be a real opportunity and that will increase our customer pays as we go forward.

So to me and also then the availability to have the codes and to have the expertise. And we send our technicians to these OEM schools regularly in order to keep them with pace of the technology. So I think that it bodes well for the retail auto business on the OEM franchise dealers as we go forward.

But do you think on the customer pay front the real, the sweet spot of where you guys could gain some acceleration there are vehicles more in the four to maybe seven years of age?

I think we are getting some of that right now as we go into retail first on our used we are starting to do reconditioning on vehicles that we normally would have wholesaled. So that is driving us back from the standpoint of our business and driving us down in model years and of course with the CPO, that is driving more shop business.

It might not be customer pay in some cases but it is internal, which drives the cost of sale, which ultimately we get paid for by the sale of the vehicle, so I think there's opportunity there. What we have done is said look, why do we sublet anything? Whether it's window glass, whether it's window tinting, all of these things now we have scale and have these campuses, we have a capability to do that.

And that to me has become a very important part of our business and there's no question. When you look at the UK the luxury growing like it has been, at the rate it has, I think that's going to bodes well for us with a higher growth in CP in the UK as we go forward. That has grown between 18% in 25%, 700 basis points the market share of premium has grown in the UK over the last eight years.

And finally, share buyback, are we going to see this becoming more consistent as we go forward? Or are you still sort of siding on opportunistic buyback? Thank you.

Well, our share buyback we are at 90.3 million shares, 90.4 million shares consistent. We have certain performance shares that our employees get and then they put those in the market. We typically go out and buy those shares back in to keep us at a level playing field at about 90.3 million or 90.4 million.

So we've got $70 million-plus available. So if there was a reason we wanted to buy in the market we certainly have the money to do that. But as you know we have been paying dividends, we are paying 1.6% I think today.

Our payout's somewhere between 25% and 30%. So that to me, we've got dividends, we've got good growth in the stock. So I think we are sitting at a very good place.

Thank you.

Brian Sponheimer, Gabelli & Company.

Hi, good afternoon Roger. Looking back, most of my questions have been answered, but just looking at your timeline here. You are now three years past buying Crevier and Mercedes Benz at Greenwich which were two gem facilities, when you got them, or two great locations, rather.

Can you talk a little bit about maybe some of the improvements that you have made? And if I am thinking about the next 12 months you will be anniversarying three, four years on Agnew and Mantellini and Savage. Should we potentially see some other benefits coming through the system on some of the other acquisitions you have made?

Well, let me go back and we made a consistent effort to grow these campuses. And when we look at, to jump back just a minute here, when we look at Warwick, Rhode Island where we have a number of locations, or dealerships, that's really -- they've had good growth this year.

In fact they are up almost 10% on a same-store basis. The same thing when you look at Turnersville. They are up about 11%.

So I see the traction in those markets, we are getting the benefit of the PDI consolidation. We are getting the benefit of some of the things we've talked about, glass, tinting, body shop.

So those are the things that have taken place in some of the markets. Obviously Phoenix has been a home run. San Diego in places like that.

I think Crevier, when you talk about Crevier and we continue to grow that business, Crevier is the largest single BMW point in the country. And we have just gone through a major expansion there and we see that as a real leader in the BMW market.

We also have grown in that market. We have Audi now, we have Volkswagen and we have Mini. So overall that has been a campus that has really gone from where it was in Santa Ana to a very bright spot in our Company.

And the Greenwich acquisition, if you are familiar with it, basically was $4 million out of trust when we walked in. And today the return on sales are one of the highest in our Mercedes network.

And then adding the BMW business, which is almost contiguous in Greenwich, we now get scale to be able -- one of the things that is a byproduct of this is we get to move our management team. People that are coming up through the organization we can move them across the street and not have to relocate them halfway across the country.

So I think that is some of the traction we are getting in Warwick and certainly in what we have seen consistency. And Turnersville there is no question that it's playing a role for us at Crevier in that market and also we will see that in Greenwich. So we will continue in those markets to try to purchase brands that fit our mix as we go forward.

But we will add a body shop, which we don't have at Crevier. We will add a body shop, which we really don't have in Greenwich. We can use our Fairfield shop today.

So those are areas that we will expand from a fixed operations standpoint where we have our high margins. Today if you look at our body shop business, we run about 7%, 8% on sales and I think that that's key.

And our used car focus, which is really something that was not a focus in Greenwich, is growing nicely and we are adding capacity there. So those are all things that we will do over time. It takes time to get the people and also get through these cities, they are a very contentious route to get through some of these cities when you are in the auto business.

But we tend to get there after a period of time. So I think it's all a plus.

All right. Thank you very much. Another great quarter.

David Whiston, Morningstar.

Hi, Roger. Hi, Tony. Thanks for taking my call.

I guess going back real quick to capital allocation. I was a little bit surprised to see three dividend increases this year.

Are you -- do you have a target payout ratio? Are you looking to keep the yield matching the S&P's dividend yield? Can you just talk about where that will be going with the dividend policy over the coming 18 months or so?

Well, if you ask me where I want to get to I would like to get to 30% to 35% as a payout. Now we've got to look at our cash flow. And that is going to be dictated by acquisitions, going to be dictated by CapEx.

But it's certainly key for us to provide that dividend. And we are at 1.6. I don't think that I've talked about the market more than other than looking at our cash.

So our Board looks at cash flow, expected cash flow for the next quarters and that's really how we determine where we are going. But the goal would be I think to get 30% to 35% might be the top end.

Okay, thanks. That's helpful.

And then just one other question on the UK. Obviously a lot of tremendous momentum there. Some of it is of course very much in the luxury area.

But I'd just like to get some more detail from you on your opinion on, are there other perhaps macro things going on there, or is it all pent-up demand? Is there a housing bubble brewing in the UK, or anything like that, low interest rates that might be juicing demand a little too much?

Well, I think number one, the unemployment rate has really gone down. I think it's in the low 6%s and the workforce that is working today is I think it's over 73%, which is an all-time high.

And when you look at the GDP, the growth is somewhere around 2.5%. And inflation is below the Bank of England, I think the Bank of England has about a 2% rate and it is running at about 1.8%, 1.9%.

So I think when you take all of these into consideration, the UK is going to be very positive for us. And there will be some wage growth, which probably could exceed some of the inflation.

But I think overall the economy is strong. And there is no question in the premium sector we have just seen this growth, which has been terrific, really double-digit growth.

When you look at our brands it has increased by 9% versus the market was at 7.3%. And I think that Audi is up when you look at their business, Agnew's up 14%, Bentley is up 23%, BMW is up almost 9%, Land Rover up 20%.

So you really got some strong strong growth over there. And that's right in our sweet spot because we are really number one with all of those players from the standpoint of location.

Okay, thanks. That's all I had.

And Mr. Penske, no further questions in queue.

All right, John. Thanks.

We'll see everybody next quarter. Thanks a million. Bye-bye.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.