Penske Automotive Group Inc (PAG) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Penske Automotive Group third-quarter 2014 earnings conference call. Today's call is being recorded and will be available for replay approximately one after completion through November 5, 2014. It's on the Company's website under the Investor Relations tab at www.penskeautomotive.com. I'll now introduce Mr. Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you, John and good afternoon, everyone. Our press release detailing Penske Automotive Group's third-quarter 2014 financial results was issued this morning and is posted on our website along with the presentation designed to assist you in understanding our performance. 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, we will be discussing certain non-GAAP financial measures such as earnings before interest, taxes, depreciation and amortization. We have reconciled these measures in this morning's press release and investor presentation, which is available on our website to the most directly comparable GAAP measures. Also, we may make forward-looking statements. 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'd now like to turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone and thank you for joining us today. We reported another strong quarter of performance and record third-quarter results, including a 15.6% increase in income from continuing operations to $76 million and a 16.4% increase in earnings per share to $0.85. Based on the strength of the Company's performance, earlier this month, the Board of Directors authorized a 5% increase in the quarterly dividend to $0.21 per share yielding approximately 2%, the highest in the automotive retail sector.

Let's now turn to the specifics of our third quarter. Our results were driven by a 10.2% increase in total retailed unit sales to 105,000 units and a 17.5% increase in total revenues to $4.4 billion. On a same-store basis, automotive retailed revenue increased 11.2%, including 7.5% in the US and 18.1% internationally. Our operations in the UK continue to perform extremely well. Foreign exchange rates increased revenue by $97 million. Excluding the effect of foreign exchange, same-store retailed revenue increased 8.7%, including 10.8% in our international markets.

Our total revenue mix during Q3, the US was 61% of our revenue and international was 39%. 97% of our revenue is generated through our automotive dealerships while the remaining 3% came from our commercial vehicle business. In our automotive dealership business, our brand mix back was 71% premium luxury, 25% volume foreign and 4% Big 3.

Looking at our new vehicle performance, new units retail increased 9% to 57,300 units representing an 8% growth in the US and 13% internationally. Same-store new units retail increased 4%, US was up 2%, international was up 8%. New vehicle revenue increased 14% to $2.2 billion and average selling price improved 4% to almost $39,000. Gross profit per unit retail increased 6% to almost $3,000 while gross margin improved 20 basis points to 7.7%. Our supply of new vehicles was 49 days at the end of September compared to 50 days at the end of the same quarter last year.

Turning to used vehicles, we retailed 47,700 units in the quarter representing an increase of 12%. Premium luxury was up 15%, volume foreign up 7%, the Big 3 up 5% for a total of 12%. Our new to used ratio was 0.83 to 1, up slightly from last year. Approximately 36% of our used unit sales in the US were certified pre-owned during the third quarter, up from 34% last year. Same-store used unit sales retailed increased 7%, the US was up 6% and international was up 9%. Our used vehicle revenue increased 21% to $1.3 billion. Used vehicle average transaction prices increased 8% to $27,300 while gross profit per used vehicle retail -- or declined $69 to $1800. Gross margin declined 80 basis points to 6.6%. Our supply of used vehicles was 39 days at the end of September as compared to 42 days last year.

Turning to finance and insurance, in the third quarter, revenue increased 17% and F&I improved $60 per unit to $1092. F&I per unit was $1042 in the US and $1200 per unit in our international markets. Service and parts business had another solid quarter, improving 16% with customer pay, warranty collision repair generating double-digit growth in revenue. Service and Parts on a same-store basis increased 11%. Customer pay was up 10%, warranty was up 14%. Our body shop is up 17% and our PDI up 7%. Service and parts gross margin was 59.4%, largely due to a shift in mix in our international operations. In total, overall gross profit improved $88 million, or 15% on our overall gross margin was 14.9%.

SG&A to gross profit improved 30 basis points to 77.9% and our gross profit flow-through was 24.1% in the third quarter and the flow-through on a same-store basis for the quarter was 26.4%. Operating income increased 17% to $128 million and the operating margin was 2.9%.

The investments we made into joint ventures continue to perform well by providing another layer of diversification. In Q3, our income from these investments were $13 million representing an increase of $1.5 million or 13% from the third quarter of last year. Our effective tax rate was 34% compared to 32% last year and affected EPS by $0.02 per share. We continue to expect our full-year tax rate to be approximately 34%. EBITDA improved 18% in the quarter to $147 million.

Let me now turn to our international automotive business. Our operations in the United Kingdom, Italy and Germany all performed well during the third quarter, highlighted by a 13% increase in total units retailed. Our new units were up 13%; our used units were up 12%. In the United Kingdom, September represented the 31st consecutive month of year-over-year registration increases. In the month of September, the market registered almost 426,000 vehicles, which represents an increase of 5.6% when compared to the same period last year. The overall UK market remained strong and is on track for more than 2.4 million units during 2014, which would represent an increase of approximately 6%.

Despite the strength of the market over the last 2.5 years, the market still remains about 7% below the previous peak of nearly 2.6 million units. Our new unit volume increased 9%, which compares favorably to the overall UK market, which improved 6% during the third quarter. Used unit sales increased 9% in the quarter and our used to new ratio in the UK is running at 0.93 to 1 for the first nine months of the year.

Let me turn to our commercial vehicle business. We now have been in the Australia and New Zealand market for a little over one year. During this period, we spent a lot of time focusing on customer interactions with the dealers and forging new relationships with our OEMs. We continue introducing initiatives to drive new market penetration and are driving improvements in the used vehicle remarketing. We recently launched a new e-commerce site for this business allowing us to combine inventory while providing us an opportunity to gain leadership position in used truck remarketing. We also started a training academy for dealers and our employees.

During the third quarter, the commercial vehicle business generated approximately $100 million in revenue and remains on track to meet expectations. Earnings before taxes generated approximately 4.2% of sales on a year-to-date basis. The parts distribution business is very strong and has improved over 17% for the nine months of this year.

Further, at the beginning of the fourth quarter, we completed the strategic acquisition of MTU-DDA, the distributor of gas and diesel engines, Allison Transmissions and power systems across both on and off-highway markets in Australia and New Zealand in the Pacific along with providing service and parts support in those markets. MTU-DDA is the exclusive network for over 80 accredited dealers and will help bring added scale to our existing operations in these markets. This acquisition will provide us with the opportunity to provide a full range of product and services to customers across these regions and will provide an estimated annual revenue of approximately $225 million to $250 million.

Looking at our balance sheet at the end of September, our liquidity was approximately $340 million. Total nonvehicle debt was $1.2 billion and we had $150 million cash on our balance sheet. Our new and used inventory was $2.3 billion. It increased $219 million when compared to September last year. New was up $161 million, used was up $58 million. On a same-store basis, our new and used inventory increased $139 million compared to the end of September last year, new up $97 million and used up $42 million. Our capital expenditures for ID facilities were approximately $100 million year-to-date. Additionally, we also purchased approximately $20 million in land for future development.

Turning to the acquisition we announced this morning in our press release, we have signed agreements to acquire the majority ownership in the Around The Clock Freightliner business, a heavy and medium duty retail truck dealership group with operations in Texas, Oklahoma and New Mexico. This business retails new trucks from Freightliner, Western Star and Sprinter and has sophisticated used vehicle remarketing programs that like automotive dealership provides a full range of maintenance and repair services.

We previously had held a 27% minority ownership in ATC and on closing in the fourth quarter we will consolidate the operations and the estimated incremental revenue will be approximately $600 million to $700 million and earnings per share of $0.12 to $0.14 on an annualized basis. I certainly believe this is a strategic opportunity for our Company in the future. We have considerable expertise in this business with over 220,000 trucks on the road at Penske Truck Leasing and this business provides an additional layer of diversification. Like the automotive business, the truck dealership market is highly fragmented and provides an excellent opportunity for further consolidation.

On the automotive side, we have started construction of our new Porsche dealership in Broward County Florida. The new dealership will represent our seventh Porsche dealership in the US and our 15th on a worldwide basis and is expected to open in 2015.

In closing, I am 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. We're excited about our acquisition opportunities available across both car and truck dealership businesses. As we move forward, we will continue to evaluate our market position and we remain committed to pursuing strategic and opportunistic acquisitions to help our Company achieve long-term success and prosperity. With a strong balance sheet and a positive outlook, we are poised for continued growth. Thanks for joining us today and we will open up for questions.

(Operator Instructions). Rick Nelson, Stephens.

Thanks, good afternoon, Roger. I'd like to start with a question about ATC. If you could talk about the multiple that you pay there and the margin profile of the business would appear to be bigger operating margins from PAG and whether the near-term acquisition focus is now going to turn to consolidating the truck business.

Well, when I look at the multiple, in this case, it's probably 30% to 35% less than you'd pay for a premium luxury brand in the US. I think that's the guidance I would give you from the standpoint. From a margin perspective, on return on sales, we look at this business somewhere in the 4% to 4.5% and today, we're at about 2.9% operating income in our business.

From a focus perspective, I see this as a real opportunity. We run approximately 220,000 trucks in our truck fleet. We've focused on truck service for many years and this is another way for us to move into that market. When you think about the parts and service business on the car side, in our business, it is 10% of our revenue and it's 40% of our gross profit. When you look at a truck dealership, the parts and service gross profit is approximately 70% of the total gross profit. So to me, it makes a big difference and when you look at downturns, we're going to see this parts and service fixed coverage well over 100%, which to me is key. And to me, when you look at this business, it's really fragmented. There's probably 2200 dealerships. We have a framework agreement with Freightliner and then we would expect to grow in their markets. But, to me, it's going to be a strong vertical within our overall business.

Thanks for that color. Service and parts comp plus 11% and customer pay also up double-digit, do you think we're now hitting stride with these units in operation that are going to continue to produce big growth in that segment?

Well, I think we saw growth really on a same-store basis double-digit really across customer pay, our body shop and warranty. There's no question that we're looking in the 0 to 5-year population. There is a number of initiatives by the manufacturers, Toyota Care, the full service that BMW offers and with our premium luxury mix, we see those customers coming back in and through our Internet process, we are offering these customers different opportunities once they are out of warranty to come in with a different menu pricing in order to attract them rather than going through the independents. So I think that's paying off.

We had some shift in the UK this past quarter to more warranty, which carries a little bit less margin. We don't get the markup on parts in the UK. Here we get a full markup on warranty parts in the US. We only get 10% in the UK. So they picked up quite a bit more warranty there, so our margin was a little bit less due to the parts markup. But, overall, we see the service business really coming on strong and we'd expect that to continue to grow because of the SAAR being at these higher rates over the last 36 months.

Okay, great. Thanks a lot and good luck.

John Murphy, Bank of America Merrill Lynch.

Good afternoon, Roger. Just a follow-up on ATC. Thanks for the information there, but as we think about this, you've mentioned consolidation, but if we think about this in the longer term, is this kind of a mirror image of kind of what you did with Sytner over in the UK, and we're looking at something that might be multiples of what it is right now within PAG in the next 5 to 10 years?

Well, I certainly -- we bought Sytner back with $800 million in revenues and now it's -- or $900 million -- it's now $5 billion since roughly 2002. I would expect to see this continued growth. There is I think an aging population and some of the older guys that own these dealerships, there's some interest obviously for consolidation by the manufacturer and there's no question that Freightliner is the market leader. We're really poised with the right manufacturer to go forward.

I think if you look at Rush, Rush is a public company. I think it trades at about 16 times our multiple and they have been able to consolidate over the last few years both Peterbilt and International. So this is I think a first step for us. And one thing you might -- we run more Freightliner trucks in our fleet from a Penske leasing perspective. So this also gives us an opportunity for parts and service we might not have had before.

And Roger, when you think about capital allocation, there's certainly some return going on to shareholders and there's certainly some massive reinvestment in the business for these growth drivers. When you look at it, how do you allocate capital to growth versus return to shareholders when you see these kinds of opportunities and are there just a lot more opportunities for acquisitions and business growth that are a lot more attractive than maybe reinvesting in the stock at this point?

Well, I think when you look at the two major shareholders in PAG, ourselves and Mitsui, we have a significant share and we want to have a float out there that's realistic and then there's no question from a capital allocation perspective we've got to meet certain brand ID, [you can] CI requirements. We do pay a dividend, which I mentioned is $0.21 per share per quarter now. With the yield at 2%, our payout ratio is 26%. So I guess people have to think about do we want a stock buyback or do we want a continued income stream through dividends. Certainly, we have authorization of about $78 million left for buyback today either on our debt or on stock buyback and we continue to look at that. But I think our Board and I think I do particularly look at the opportunity to make investments because the base of this business is through the parts and service and sales of vehicles and to me, we need to continue to invest in that and we've built a good brand not only here in the US, we led in getting into Audi and some of these other brands early on.

We moved into the international market today and we have a $5 billion business in the UK today, which is a leader in almost every single premium brand. And then also going into Australia where we have distribution, not just retail sites, but I think it's important to know that we're the distributor there. So we engage with anywhere from 80 to in the case of Western Star and MAN and Detroit Diesel up to almost 160 different dealers where they sell our parts. So it gives us a tremendous reach into this service business, which is a high-margin business that will give us I think a nice consistent growth that we can manage through some of the ups and downs of the economies in the particular markets.

That's great. And then just lastly, the used vehicle business was fairly strong. Pricing seems like it was fairly strong as well, up 8.2% and grosses were okay. There's a lot of concern that used vehicle pricing might come under pressure and create some real hiccups in that part of the business. I was just curious if you can comment on what you are seeing in used vehicle pricing, why your pricing was up so much in the quarter and what you think the prospects for that business are going forward regardless of where price goes?

Well, I think when you look at used vehicles, you've really got to go back -- there was kind of a sea change in August. We had a 17.5 million SAAR for August for new car, which generated a tremendous amount of used opportunity and I think we saw some of that in the month of September and if we go into the fourth quarter, for us, we took action to be sure that our days supply went from 42 down to 39 was key. Because we're in the premium luxury side and we have a number of the off-lease vehicles coming back, our sale price, our cost of sale probably is higher than the peer group. And what we did, we wanted to move these vehicles from the standpoint of inventory because traditionally we know in the fourth quarter prices do deteriorate because a lot of the wholesalers are dumping their inventories and we move into Q4.

So I think, in our case, we think it's an opportunity for us. With more used cars on the market price, we'll buy at market and we're going to try to sell at a point where we get a fair margin. Then we've got the F&I opportunity, we've got the internal opportunity from a reman perspective. And again, for us, it gives us an opportunity to make more money and the better availability from the standpoint of used cars with lower prices helps our acquisition cost.

Great, thank you very much.

Brian Sponheimer, Gabelli & Co.

Hi, Roger. Hi, Tony. I just want to talk about your new pricing and gross per new unit. And one area where I thought it was particularly strong was on the volume import and it really kind of bucked the trend from what we've seen from some of the other dealers, particularly in midsized. So can you just talk about what you're seeing there and how your pricing enabled you to get that margin expansion?

Well, we're focusing -- the good news is, in the premium luxury, it's not high-volume. So the sales consultant can take more time. I think that, in many cases, we're getting a repeat referral customer there. So it allows us to take advantage of maybe good customer interaction and service we've given them in the past. So I see the premium luxury continuing to drive our business because, as you look at our number at $4,000, almost $4,100, I think that shows you the strength of that. Now that's not only -- remember, that's a combined number, not only the US, but also internationally. So I think that's key as we go forward.

When you look at the volume foreign, on the other hand, there's been pressure in that area, but I think we've got, as we look at the 17 Honda stores we have and a similar amount of Toyota stores, these stores have been in place, we've owned them for almost half the time we've been in this business and we've got a great following there and obviously we're focusing on gross profit and that, to me, is the most important -- it's a management tool and we're just not going to get into giving it away. If we've got to meet some target, we're going to look at what does it do to our bottom line because I think that's more important long term.

I think that, at the end of the day, it's about focus and when you look at the CPO, 36% of our units were CPO in the US and I think that's key. And the good news is, from the standpoint of our ability to make money, when you look at the finance companies that are associated with the premium luxury, obviously, BMW, Lexus, Mercedes, Audi, etc. and also on the volume foreign. When you take that combination together, we really end up with a strong offense. We're looking at over 60% of all of the contracts that we do is with the captives and that gives us some offense because we're not going to a third party. This business primarily is premium business. It's not subprime and that gives us a chance I think to have a better outcome from the standpoint of margin.

I appreciate that. Just one more, you identified a total liquidity of about $340 million and back of the envelope, that buys about another $1.5 billion in revenue if you were to come across it. What is the acquisition pipeline for you right now in the traditional light vehicle business? Should we expect to see or -- rather -- if something large were to come along like what you did in Northern Ireland, is the capacity there to still do that?

Well, I would say yes. I wish there were more Northern Ireland opportunities for us. I mean that was a relationship that was generated by [George Newinghouse] over the years with the [Agnews]. It's turned out to be an outstanding purchase. We'll look -- internationally we've done some joint ventures with minimal capital both in Germany and in Italy and Spain. Those are turning out to be quite good, so we have a pipeline here in the US of potential acquisitions on the car side. And obviously, as we look at the commercial vehicle side, we have some of those in our sights also. So to me, when you look at our EBITDA at $450 million for the first nine months, our cash flow is strong.

We've seen what a great business Rush is too. Congratulations on ATC and good luck.

Thanks, Brian. I appreciate it.

James Albertine, Stifel.

Good afternoon, Roger and Tony. Very quickly if I may on ATC and let me add my congratulations as well. The $0.12 to $0.14 of EPS accretion that you called out on an annualized basis, is implicit in that figure some expense related to infrastructure investment that could support future acquisitions? And so said another way, if you were to go out and to buy the same sort of revenue base in another heavy duty dealership base, could it theoretically be more accretive to EPS in the future from here?

Well, I think it would be more accretive and each one is different. In this particular case, part of it we bought the real estate, which was in the Dallas, Oklahoma market. The west Texas stores are leased, so there's a mix and obviously, with the ability from a Daimler perspective, I talked about the strength of the captives with Daimler, it's very happy to provide us mortgage financing on these facilities because it's a key part of the business.

So we would look at sale-leasebacks and seller financing or seller providing us the facilities on a long-term lease, which would reduce the amount of capital. So I think the one thing you have to realize from a floor plan perspective, there's significantly less floor plan required in this business. We probably carry more parts and service and you don't have the turns you might have in automotive, but I see this model as one that is really going to be good for us because we've got the benefit of the knowledge of the truck business. It's a smaller group of dealers competing in this marketplace and with Freightliner being the leader in the industry both in medium and in heavy duty, it gives us a chance for more opportunities. And I would say that any other investment that we would make in this we wouldn't make unless it was accretive.

I appreciate that additional color. If I may just ask a kind of higher-level strategic question. Over time, you've developed a very clear, it seems, focus around premium luxury in the US. From an auto retail perspective, you've taken that on the road to the UK and then subsequently to the EU. You've made a lot of investments in technology and Penskecars.com and now you're starting to leverage those investments and now you're in the heavy-duty truck business. So I guess very broadly can you talk a little bit about the vision you have for PAG going forward? And then maybe more directly as it relates to sort of SG&A and some -- where are you leveraging those investments now and in the form of continued SG&A to gross benefits quarter in, quarter out?

Well, let me first say when I think of the vision, today, we're 69% our business in the US and 31% international. I think you'll see us -- as we go forward, we'll tend to go probably 60/40. I would say if you looked over the next 12 to 24 months, you could see that. I think from a commercial vehicle business, I'd like to see that business grow from 5% to 10% over the next 24 to 36 months.

From a leverage perspective, I think one of the things that you have to step back when you think of 220,000 trucks, we spend $100 million a month in maintenance on these trucks so you can imagine the trucks on the highways being spent. So we get the benefit maybe of leveraging those buys along with the PAG buys and then also the buys that we have on the truck side from the standpoint of parts. So that's going to give us something that we'll look at our marketing, consolidation of our back offices and our legal, certainly our e-commerce. All of those things I think are key and all of them are focused on customer service and repeat referrals.

So the vision obviously is to grow more internationally. I think that gives us balance. When we look at Spain and we look at Italy today, right out-of-the-box they've been performing well and we think there's more opportunity there. Every manufacturer has knocked on our door in Europe now to say, hey, we have an opportunity and to me, those are ones that are not in any of the multiples that we look at here.

So we are going to continue to look at those. We want to stay on the premium side I would say this. Strategically there might be. If we look at certain domestics here in the US, there are some domestic opportunities that have popped up for us that we'll look at. But, to me, we're going to pretty much stay in line as a premium luxury foreign volume player and there's no question that service and parts, when you think about commercial vehicles, will play a key part going into the future because when I look at commercial vehicles, 70% of the total gross profit in those businesses is parts and service. So there may be less capital involved in those from an acquisition standpoint, less from a working capital perspective and again, I think it's a more stable business because it will help drive us through any ups and downs and we don't have the facility requirements, the tile floors and the fancy showrooms that you have on the automotive side.

I think if you looked at our CapEx, we are spending $150 million a year. That's driven -- a lot of that's driven because of the corporate ID and CI. We don't have that to any real extent. Obviously, you've got to have nice facilities on the truck side, but I would say you don't need some of the things that are necessary to meet these CIs in the future. We don't have that. That's a long answer to your question. I'm sorry. It was a long question too.

Admittedly it was. Thanks again for taking it and best of luck in the fourth quarter.

Brett Hoselton, KeyBanc.

Hey, Roger, Tony. Starting off on the parts and service side, I think in the last conference call you were thinking longer term parts and service would grow in that mid-single digits and certainly you've been outperforming that this year and significantly so this quarter. So kind of two questions. One, as you looked at this quarter, was there anything unusual in this quarter or maybe last year's quarter that might have drove some pretty good outperformance, maybe some recall activity or something like that? And then the second question is do you still feel mid-single digits growth is the reasonable target for the parts and service growth?

Well, if you looked at the US by itself, it was around 8% and internationally, we were up almost 20% and that was driven by a strong warranty component. It was up about 23%. And I think that really -- when you looked at the total then together, we're up 11%. So I think traditionally we would be looking at somewhere in that 7% to 8% in the UK.

The one thing, when we look at the international business, the parts margin on warranty is a maximum of 10%. Certain big items you get no margin on. So we've got to be careful. We don't think that that margin is just going to drive as we get more top line, we're going to drive that margin. There will be some of that we won't get. Now we'll get the full labor component on that, which will be good. But, at this particular time, I think if you look at mid-single digits is a fair estimate as we go forward.

And then as we think about just the size of the commercial vehicle business, potentially, just to follow on to your earlier question, is that a business that you think can get to 25% of your mix or 30% or 40% of your mix over a five-year period of time? Is there that much emphasis there or is it more opportunistic?

Well, we certainly are not getting into it to say we have just an operation in the Texas/Oklahoma market. We're in it to grow. We made that quite clear to our OEM partner and I think that we've demonstrated to all the OEMs how we run our business from a truck perspective. To me, there's no reason this business over the next couple years can't be 10% of our overall business. How it grows from there will be up to us and the opportunistic buys that we would make in that particular line.

We have a framework agreement that allows us to grow nicely over the next several years, so there's no muffler on us to stop us. So it will be opportunities, ones that we can glue on in the markets that are contiguous. Then also as we look in different parts of the country where we think it's strategic for us to go, I think there's -- if we grow the business 4 or 5 times, we could have a $3 billion business here, which would be I think very good for us from the standpoint -- because the returns -- typically, on this business, we're looking at the mid-4s%. I talked about Australia, today 4.5%; we're running at 2.9%.

One other piece of leverage, which you have in this business, is the SG&A to gross is probably in the low 70s, which is 6 or 7 points below where we are on the auto side, which will certainly help us drive that number down.

And then changing gears, gross profit throughput, kind of been running I think in the mid-20%s here for a few quarters now. I think, in the past, you've talked about ideally you'd like to get up around that 35% range. And I'm wondering is that still an objective of yours? And then, secondly, what do you need to see change potentially to get those -- gross profit throughput up in the mid-20%s into that mid-30%s range?

Well, number one, I think that we've said 30% to 35%. I'm not sure what's -- I guess you'd like to be at 50%, but we also want to grow the business and it depends on how you deploy your capital. I think, at this particular time, we're a 24% year-to-date. We were at 26% on a same-store basis in the quarter. So we're going in the right direction and we will continue to focus on that.

But, again, we've spent more money in marketing this quarter than we did in the previous one. One of the areas that we have been looking at that probably is a focus is on vehicle maintenance. With the premium luxury side, we have a considerable number of loaner cars that you have to have within the franchise, which you don't have in the domestics and the volume foreign. As we look at our gross profit, a piece of that is being eaten up from the cost of these loaner cars. We own almost 6,000 loaner cars in our fleet today, which, if you look at the cost of those, just the depreciation, that's hurting some of our flow-through.

Thank you very much, gentlemen.

Ravi Shanker, Morgan Stanley.

Good afternoon, everyone. This is (inaudible) in for Ravi. I had a couple of questions. First, you've been testing the no haggle pricing in one of your stores in Arizona, if I'm correct, where one sales associate handles the entire transaction. It's kind of similar to a peer of yours that's already planning to roll it out nationwide and your own initial results from the store were quite favorable in terms of traffic conversion and transaction time. Has that sustained through the recent months and any updates if the test has been expanded to other stores?

At this particular time, we're focusing on that one location and we think we need to get six or eight months under our belt. I will say the business has grown nicely from a greenfield site. One thing, we are seeing our margin based on one price is competitive in the marketplace, maybe a couple hundred dollars per unit higher, but the one benefit we get is that the customer deals with one individual from the time they walk in the store until they walk out. So there's obviously some savings from the standpoint of the mid-line management that you might have to have in a normal sales transaction.

We're a long, long way from saying it's going to be a standard way we do business from a retail standpoint. But I think we have to be constantly looking at these as our peers are and the other publics and I think that we'll take our experience coupled with what we see and read from the other folks in different parts of the country. And I think that today we're looking at this one pilot as one that will give us some insight and we would give you some daylight on what we've planned to do if we want to roll it out to other brands going into 2015.

That's great color actually. A question on the CV space. When you look at the potential acquisition targets in this space, are they typically of the size of ATC or perhaps even bigger?

I think today you're probably going to see the average size somewhere in the $200 million to $250 million. I think that's where most of these are. They typically have two or three locations and $50 million to $60 million at each one of them would probably be realistic. Now, there are obviously some that are larger, but that's what I would see at the moment.

Got it. That's all I had. Thanks.

David Lim, Wells Fargo Securities.

Good afternoon, gentlemen. Most of my questions have been answered, but I just wanted to revisit the ATC acquisition. So is it true that it is probably easier to acquire a commercial vehicle dealership relative to a premium luxury brand and the valuations are more compelling?

Well, number one, they are not consolidated and today, I think our peer group is quite active in the premium luxury side, whether it be Mercedes, Lexus, BMW, Audi, Porsche, etc. and on the commercial vehicle side, I think Rush has been the leader there and they've chosen the brand of Peterbilt and International and they've been able to grow it nicely, if you look back at their track record, over the last three to four years. So I hate to say it's easy. I would say I think there's an opportunity there and we will certainly, as we get a reputation in this area and especially the fact that we are truck guys should give us a chance to continue at a reasonable pace.

Got you. And then on the fixed operations side CV, Roger, as the trucks age, do you see the owners of these trucks still coming back to the original dealerships or is there more of an aftermarket component where they might go to a so-called mom-and-pop and please excuse me, I'm not well-versed in the CV fixed operations side.

Okay. Let me say this. The good news here is, I'll go back, 70% of the gross profit in a heavy-duty dealership today is from parts and service and the bigger piece of that gross is coming from parts. So whether you have the customer come back to you, while it might be during the warranty period and when you think about warranty, the warranty on trucks today is much longer than it is typically on a car. The average warranty probably is somewhere around 250,000 to 300,000 miles and then on the 5Cs, which is your crankshaft, your cylinder block, your cylinder head, your camshaft and your connecting rod, in some cases, it's 1 million miles. So that gives you a real handle on getting these customers back into the shops. And the good news is if they decide to go down the street, they've got to get the parts from somewhere and the good news is we're a franchise dealer. So when you talk about original equipment OEM parts, we would be able to supply them through our dealerships in our market.

Also, the great thing about Freightliner, they have a line of parts called Alliant and that gives us a chance to be able to have other aftermarket parts, which we can supply for other makes if we take in trades. So to me, I think that that's key. And the customer service is important because a lot of these people, they don't have another truck. So being able to come in, we run 24X7 -- in fact, Around the Clock Freightliner, the name came from 24 hours by 7 where they can provide service for the trucker and it'd be very interesting to have many of the people on the line here today to see one of these operations to see how detailed it is in order to supply the customer reception and interface.

So I see, whether they go into the existing dealership or the truck is sold, in many cases, the fleets have their own captive shops. So when they have captive shops, they bring warranty work to us or in many cases, we might even put mechanics at these larger fleets and then we supply the parts. So to me, that's something different. There's a lot less cannibalization in the heavy-duty truck area for the premium parts when you look at the Detroit Diesel DD15 or DD13 or a Cummins engine. They've got a captive transmission now in a DT12. They've got rear axles, so all of this stuff is captive and that's going to be supplied by the manufacturer through the dealer network. So they don't have a secondary distribution.

One follow-up question on the light vehicle SAAR for 2015 in the US, what is your initial read there?

Well, I think we're seeing the SAAR creeping towards 17. I don't have a crystal ball here quite honestly. I think one thing you will see is that you'll see the marketshare, the foreign nameplates continually growing and obviously that's where we have our primary focus and position. And today, when you look at the vehicle park, it's about 11.4 years old and on the heavy truck side, it's 6.1. With financing as strong as it is and as we talked about earlier, these captive finance companies are really the strength of many of these brands and along with leasing, leasing has now moved to 25% to 26% of the market and on the premium luxury side, I think it's over 50%. When you look at most of the key brands, that's got to drive more business for us in 2013.

Great. Thank you so much.

Scott Stember, Sidoti & Company.

Good afternoon. Can you talk about, on the parts and service, what was the US parts and service same-store sales and maybe break that out by customer pay and warranty?

Well, customer pay was up about 6%, warranty was up 11%. Our get-ready, which is our PDI, was up about 7% and body shop was up about 11% giving us just under 8% from the standpoint of the US performance. Then I think I said earlier that the international was up about 19.6% driven by a 23% increase in the warranty over there.

Got you. And just moving over to ATC, you talked about how gross -- the parts and service represents about 70% of gross profits. How much of the sales does that represent?

On the new side or new and used?

No, on the parts and service side of ATC.

Well, you break down -- your finance is about 1% and I think when you look at the new -- on the new side, it would be broken up -- probably you've got about 29% left. It would be -- probably half of that would be under the new or 27% would be on the new side from the standpoint of margin.

Okay. Can you talk about what the parts and service growth has been in recent periods for ATC just so we can get a sense of how fast that's growing?

Well, if I go back and look at the business, we're growing probably similar to what we talked about, around 10% would be probably the right number in parts and service. When you think about west Texas, with all the oil and fracking and everything else going on out there and in Oklahoma, we would even see those markets maybe growing a little bit more. But Dallas is right in the middle of a big industrial commercial transport hub, so it's right in the sweet spot.

And just last question. Back on ATC again and the parts and service, could you maybe just give us a breakdown of how much is customer pay versus warranty versus any other revenue drivers in that segment?

I'll get Tony to get that for you. I don't think we have that here today. I will get him to follow up with you on that. I'm not sure what that is.

Okay, great. Thanks for taking my questions.

David Whiston, Morningstar.

Good afternoon. First, on ATC, are you planning on taking on any debt for that deal?

Well, we'll use our credit line that we have available through our financing sources. We have plenty of liquidity there from the standpoint of availability.

Okay. And a longer question on Penskecars.com, particularly on the used vehicle side, I'm just trying to get a better understanding of how your site compares to sites such as BeepBeep or some other sites that specialize in used luxury brands. Specifically can Penske car customers buy a used car online and have Penske deliver it or do they have to come to a showroom? What kind of return policy is there? And do you guys also have an advantage over these independent websites in that you can do CPO sales, but they cannot?

Well, let me say this. All our customers in order to buy the car have to come to the showroom and I think, in most cases, I think in all cases from a new perspective, the OEM expects you to deliver to the customer. When we look at our mobile traffic and digital websites, I think 32% of our business is coming from mobile phones and we're up almost 50% through the nine months compared to the same period last year, so mobile is key. We're using it obviously for paying our service customers, paying their repair orders. There's a number of areas and the website traffic continues to grow. We're up probably 10% versus last year for nine months and I think, at the end of the day, we're getting about 100,000 leads in the third quarter from our dealer sites.

So coupled with our OEM sites, it's driving some real good traffic and we've made it a priority from a used car perspective from the standpoint of how we show the cars on our sites and I think that's paid off because when we look -- two success stories would be in Atlanta where we have two BMW stores and they are doing over 300 used a month, each one of them and probably a third of that from a new perspective. So there's no question. We can take an order through a phone or over the Internet, but then we will deliver it directly to the customer and I think that, at the end of the day, if people want to come into the showroom, we can show 50 or 60 pictures, but still -- I think what the Web does it gives us reach because the people are not driving by, but once you display them, then I think it's the phone capability because they typically phone after that and want more information and you've got to be able to have your people trained accordingly in order to be sure that you make a contact and be able to come in to close a particular transaction.

But the Internet has changed the game and certainly I think it's been a positive for all retailers on the used side and we do very little wholesaling now. When you look at wholesaling as a percent, our wholesale has gone way down, wholesale cars. If you look on Penskecars.com today, we probably have over 10,000 vehicles under $15,000, which we wouldn't have ever heard of that if we didn't have the Internet. Especially as a premium luxury player, we would have wholesaled those cars in the past.

Okay. So just so I understand part of your answer, for the used customer on Penskecars.com, they still have to go to a dealer to take delivery?

Yes, correct.

Okay, thanks very much.

David Tamberrino, Goldman Sachs.

Hey, thanks for taking my questions. Just going back to the loaner cars you mentioned as being a reason for somewhat of the reduced flowput -- excuse me -- flowthrough at this point. Is that elevated? How much has that grown over the year and is that population expected to continue to grow or what's kind of driving that?

Well, I think it's the fact that our parts and service business continues to grow. We talked about it growing mid-single digit. We're up about 1,200 units year-over-year, which I think is key and then the vehicle maintenance around that is important because we sell those cars into the market after they've been used. And that's really a benefit. Another source that we get for used cars is running these cars for three, six, nine, 12 or 18 months and then they become great used cars. In many cases, the OEMs will let us sell those cars using the current finance rates or programs that are out there. So where it's a deficit on one side, it's also an opportunity on the other.

Okay. So I mean just by that math, it's up about 25% year-over-year. Does that growth kind of slow down going forward relative to parts and service being up 11%?

Well, I think -- I would hope it does because we've got a real focus on it now because we've seen it spike and we need to look at -- we're looking at mileage on cars and we've got people taking cars and running them 30 miles and then coming back. We probably could have taken them in some sort of a shuttle rather than putting a car out there. So are we getting the cars back, are people using the cars over the weekend? There's a lot of things that we need to look at and I think we need to compensate our service riders probably on the number of days that we have cars out with customers. Then also we've got to look at productivity in our shops to be sure that some of this isn't because we don't have the right part or we don't have the right productivity. So that's going to drive more technicians to two shifts. So those are things that all drive the cost up if you have to have more loaner vehicles.

Understood. For used average selling prices, I mean it's up pretty nicely year-over-year. What's the driver of that? Was that all mix from CPO [growth] or is that -- and then in that vein, what drove the lower used gross margin year-over-year because (multiple speakers)?

I think the revenue per unit was really up a basis shift to more luxury and I think some of that has to do with international. International was up I think over 12% on units.

And then on just the lower gross margin year-over-year for used?

Exactly. I think that we're trading -- and some of these vehicles, by the way, that come off these full-circle programs from BMW and other, we take those at their market price. We don't have too much of an opportunity to negotiate those, so sometimes that limits our ability to sell a vehicle at a higher price because you're bumping right into -- someone could potentially for a lease or a payment price could get into a new car. So that has some downward pressure and I think that, at the end of the day, we trimmed our inventory at the end of September going into the fourth quarter in 2014, which obviously you do that either by wholesaling or you do it by selling them and we get the benefit of F&I if we do sell them in many cases. So we had a wholesale loss during the quarter, which we take when we're trying to move out some of these vehicles, but the good news is that our days supply is 39 days rather than 42. So to me, that puts us in great shape for Q4.

Understood. And just last one from me on ATC, just broadly, how much of the revenue there is from the over-the-road class 8 tractors versus your medium duty vehicles or 4 through 7?

I would say 90%.

Okay.

90% both on the sales side, new and used and also the parts and service. Sprinter, Sprinter is a vehicle that's sold by even the Mercedes dealer, so we get more service business there probably than sales and then the midrange -- if you look at the market, it's about 350,000 units. So 260,000, 270,000 would be heavy duty and the balance would be mid-range trucks, probably 5 and 6 class vehicles.

That makes sense. And that's a very highly fragmented market. I think 98% of fleets out there are five trucks or less. What is the largest customer in terms of just that business? How big are the fleets that you're dealing with, I know you mentioned that earlier, on the service side?

I think there is plenty of fleets that are three to five trucks. There are people in those markets -- they are running 4,000 to 5,000. And they are turning those trucks maybe every 3.5 to 4 years. So we've got some fleets that, if we're successful going forward, you could have 500 to 600 to 1000 units available to you from a new vehicle perspective. And then at this particular time and many times when you quote on those new units, you get an opportunity to quote on the used units. Today, the market on used is so strong, a lot of the carriers are selling their own. But on the other hand, some of them don't want to get into the used business and that gives us an opportunity to take those vehicles, recondition them and sell them on our lots and I think they've been quite successful.

And that makes sense, but just trying to understand the makeup of the customers you have. What percentage is your larger fleets, your Werners, your Knights, your Celadons, your Heartlands, etc., Swift, which would be some of the larger public guys in that space versus again kind of smaller 200 truck fleets?

Well, we wouldn't sell a big fleet if it wasn't in our territory. So the good news is that you have -- there's I think some integrity in the systems, but set up in the primary market areas by the manufacturers. So that would have to be depending on what markets you were in. I would say this. From a service standpoint, most of the trucks you see in the shop would be small fleets and fleets that have warranty work to be done. So to me, most of our sales, if you looked at -- they will do about 4,000 this year -- I would say half of them would be big fleets.

All right, thank you very much for your time.

Mr. Penske, no further questions in queue.

All right. Thanks, everybody and we'll see you next quarter. Thank you, John. Bye-bye.

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