Penske Automotive Group Inc (PAG) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group fourth-quarter 2014 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through February 18, 2015, 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 fourth-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 are Roger Penske, our Chairman; David Jones, our Chief Financial Officer; and J.D. Carlson, our Controller.

On this call we will be discussing certain non-GAAP financial measures such as adjusted income from continuing operations, adjusted earnings per share from continuing operations, and adjusted earnings before interest, depreciation, taxes, 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.

The adjusted figures discussed on today's call exclude a non-cash gain of $16 million, or $0.10 per share, relating to the remeasurement at fair value of our previously held non-controlling interest in our US commercial dealership operations. In the fourth quarter of 2014, we acquired a controlling interest in that business.

We may also 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. Additional discussion and factors that could cause results to differ materially are contained in our public SEC filings, including our Form 10-K.

I will now turn the call over to Roger.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us. Today we reported record fourth-quarter unit sales, revenue, and adjusted income from continuing operations and adjusted earnings per share.

For our fourth quarter revenue increased 16% to $4.4 billion and adjusted income from continuing operations increased 14% to $71 million. Related earnings per share increased 15% to $0.79.

Our fourth-quarter results were highlighted by a very strong performance from the retail automotive dealership and our US-based commercial vehicle dealership businesses. This was partially offset by our Australian operations, which were impacted by challenging economic conditions and post-acquisitions restructuring costs within our power systems business. The impact -- results were impacted by approximately $0.05 in the fourth quarter.

Before discussing the details of the fourth-quarter results, I would like to review some of the highlights from the past year. In fact, in 2014 it was our best year in the history of our company. PAG achieved new performance records for retail unit sales, revenue, and income from continuing operations and earnings per share.

During the year, 12 of our US dealerships were named to the automotive news best 100 dealerships to work for, while our UK business was again named one of the best big companies to work for by The Sunday Times. I would like to thank each person on our team at these locations for their commitment to ensuring the long-term success of our organization.

Total retail automotive unit sales increased 11% to 398,400 units. Total revenue improved 19% to $17.2 billion and same-store retail automotive revenue increased 11.7%, with each area of our automotive business achieving solid growth.

Our adjusted income from continuing operations improved 19% to $296 million, while related earnings per share increased 19% to $3.27 when compared to last year. Our adjusted EBITDA increased 19% to $569 million.

We completed acquisitions representing more than $1 billion in estimated annualized revenue, which will benefit our businesses for the years to come. We also added to our automotive dealership scale with acquisitions both in the US, the UK, established a joint venture to operate BMW businesses dealerships in Barcelona. We further diversified our revenue base by acquiring a majority interest in a commercial vehicle truck dealership group operating in Texas, Oklahoma, and New Mexico.

Based on the strong performance of the year, the Board of Directors raised the cash dividend each quarter, most recently to $0.22 per share. The dividend payout ratio is now 26%, while the dividend yield is 1.7[%], the highest yield in the automotive retail sector.

Let's now turn to the specifics of our fourth quarter. We reported fourth-quarter retail automotive unit sales revenue record adjusted income from continuing operations and adjusting earnings per share. Our results were driven by a 10.5% increase in total retail automotive unit volume to 98,300 units and a 16.3% increase in total revenues to $4.4 billion.

Foreign exchange rates reduced our revenue by $49 million. Our total revenue mix during the quarter, the fourth quarter, was 64% US and 36% internationally. If you look at 12 months, 61% of our revenue came from the US and 39% came from our international businesses.

94% of our revenue was generated through our retail automotive dealerships, while the remaining 6% came from our commercial vehicle businesses, which include both the US, Australia, and New Zealand operations. Overall gross profit improved $88 million, or 15%, while our gross margin was 14.9%.

SG&A to gross profit was 78.9% compared to 78.4% in the fourth quarter last year. However, our retail automotive business' SG&A to gross profit improved 70 basis points during the quarter.

Our gross profit flow-through at the retail automotive level was nearly 30%, partially offset by the negative flow-through from our operations in Australia. Overall gross profit flow-through was 18%.

Operating income increased 12% to $119 million and our operating margin was 2.7%. Our effective tax rate for the quarter was 31.4% compared to 31.9% last year. Adjusted EBITDA improved 16% to $138.8 million.

Turning to our retail automotive business, our brand mix with premium luxury was 73% of our total revenue volume. Foreign was 23% and the big three represented 4%. On a same-store basis, retail automotive revenue increased 8.3%, including 5% in the US and 14.8% internationally. Excluding the effect of foreign exchange, same-store automotive dealership revenue increased 9.3%.

New units retail increased 12% to 54,200, representing a growth of 7% in the US and 26% internationally. Our premium luxury grew 18%, our volume foreign grew 6%, and our big three was down 6%. On a same-store basis, automotive new units retail increased 8%.

The UK market remains strong demonstrating many of the same characteristics as we've seen lately in our US market. In fact, in the UK in December it represented the 34th consecutive month of year-over-year registration increases. New vehicle revenue increased 13% to $2.2 billion as average selling prices improved 1% to $40,600.

Our gross profit per unit retail declined $58 to $3,185. Gross margin was 7.8% compared to 8.0% in the fourth quarter of last year. Our days supply of new vehicles was 57 days at the end of December, compared to 62 in 2013.

Looking at our used automotive business, we retailed 44,100 units in the quarter, representing a 9% increase. Our premium luxury used was up 8%, our volume foreign was up 10%, and the Big Three was up 25% for an overall increase of 11%.

CPO sales also were up 11% in the fourth quarter and approximately 36% of our used unit sales in the US were certified preowned, up from 35% in the fourth quarter last year. Our new-to-used ratio was 0.81 to 1 overall for our business.

Same-store used units retail increased 6%. Our used vehicle revenue increased 11% to $1.2 billion as average transaction prices increased 1.5% to 27,000. Gross profit per used vehicle retail declined $92 to $1,659 and the margin was at 6.1% compared to 6.6% in 2013. Our supply used vehicles is 45 days at the end of December compared to 46% -- 46 days last year.

Turning to retail automotive finance and insurance, revenue increased 14% and F&I improved $29 per unit to $1,070. F&I per unit was $1,056 in the US and $1,100 in our international markets. The retail automotive service and parts business had another very solid quarter with revenue improving 9%, including a 6.2% increase on a same-store basis.

Our customer pay was up 7%, warranty up 14%, our body shops up 15%, and our PDI up 16%. Service and parts gross margin improved also 90 basis points to 59.7%.

Let me now turn to our Australian commercial vehicle business. This business includes our distribution of Western Star, manufactured by Daimler, MAN trucks and buses, and Dennis Eagle vehicles and their related parts, as well as power system businesses which we acquired in the fourth quarter, which presently distributes gas and diesel engines, power systems, and related spare parts for the on- and off-highway markets.

After we acquired the power systems business in the fourth quarter, we took steps during -- to restructure its operations, separating the business into on- and off-highway groups and to begin consolidation of our parts distribution center with our vehicle distribution operations in those markets. We also changed the name from MTU-DDA to Penske Power Systems and have won several contracts since.

During the fourth quarter these businesses generated approximately $136 million in revenue. Sales and profitability, as I mentioned earlier, were impacted by economic conditions in Australia. In particular, affecting mining and construction as the commodity prices, such as iron ore, remain weak. The parts and service business, on the other hand, is very strong, increasing over 7% in the fourth quarter and we expect the strength of this to continue.

We are very optimistic about the opportunity in Australia. According to Australian business statistics there are 329,000 heavy-duty trucks registered in Australia with an average fleet age of 14 years. This is significantly higher than the six-year average of trucks in North America and certainly will foster replacement demand as the economy recovers.

Let me now turn to our US retail commercial vehicle business. Our US business, commercial business performed very well since the acquisition of a controlling interest at the beginning of November and we retailed approximately 1,000 new and used trucks, generating $126 million in revenue.

The market dynamics for medium and heavy-duty trucks remain very strong across North America. In fact, in 2014 sales of medium and heavy-duty trucks were approximately 498,000, an increase of 12.4% and the heavy-duty piece of this was up almost 19% to Class 8. The backlog for orders for heavy-duty trucks during 2014 increased at the end of the year to 83% to approximately 172,000 units.

Based on a growing economy, the strength of the order backlog, strong freight metrics, certainly the drop in oil prices will help carrier and trucker profitability and boost discretionary spending. There are expectations for continued strength in the medium and heavy-duty truck market throughout 2015 and 2016, so I think we are here at the right time.

Looking at our balance sheet at the end of December, our total liquidity was $550 million. Total non-vehicle debt was approximately $1.3 billion. We had $36 million of cash on our balance sheet at the end of the quarter.

During Q4, we refinanced $300 million of variable debt with a fixed-rate senior subordinated debt of 5.375%. This new sub debt increased interest costs by about $1 million in Q4; however, it locks in low-cost financing for the next 10 years.

Our new and used vehicle inventory was $2.4 billion and increased $153 million when compared to December of last year; new up $96 million, used up $57 million. On a same-store basis, new and used inventory increased $108 million compared to the end of December last year; new up $60 million, used up $48 million.

Capital expenditures for corporate ID and facilities was $148 million, an additional $27 million was utilized for land purchases for future development.

In closing, 2014 was a great year for our company as we added over $1 billion in annualized revenues. We solidified our balance sheet and generated another year of strong cash flow.

The outlook for medium- and heavy-duty truck markets remained certainly robust across North America. The retail automotive markets in both the US and internationally remained strong and we believe our Australian operations will be positively impacted by the changes we implemented and we see significant opportunities within our commercial vehicle, distribution, power system businesses.

We also remain optimistic about our acquisition opportunities across both the retail automotive and commercial vehicle businesses in 2015. 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.

I want to thank everyone for joining us today and your confidence. And we will open it up for calls at this time. Thank you.

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

Good afternoon, Roger. Just a first question on capital allocation on acquisitions as you go forward. I'm just curious if you could just run us through the thought process on the profitability and returns of the commercial vehicle business versus the light vehicle business and how you are making that decision going forward.

Well, let me first say that if we look at 2015, I think that you'll have -- 50% of our acquisitions will be in commercial vehicle and the other 50% will be divided 25% US, 25% internationally from an acquisition perspective.

But to the point of commercial vehicle, what we see as lower valuations from the standpoint of commercial vehicle, from the standpoint of acquisitions, there's no question it's probably 25% to 35% less from a goodwill perspective versus premium luxury automotive. Also, from the standpoint of future CapEx, there is significantly less requirements from a commercial vehicle aspect that there are in some of the showrooms and things we have to deliver to the OEMs. Quite honestly, the rent factors are significantly lower in these cases, where we have purchased these businesses and then releasing back from the operators.

Again, when you look at the business I think another key metric there is when you look at the gross profit, on the auto side, if you looked at our results, we are probably around 9% to 10% sales revenue in parts and service with a 40% GP. And you look at the commercial vehicle business, that gross profit is approaching 70%. Again, on 27% of the sales.

We see that from a strategy standpoint and a cyclical strategy that the fixed coverage is anywhere between 110%, as high as 140% in a couple of our locations. So we see that very strong as we go forward.

I think it drives an overall strategy. In our press release on page 13, I think we showed what we have done just in the first part of the two months of ownership. Our average gross profit for the auto side was 14.9% and I think we were 16.3% in the truck side.

Early returns are quite positive and one has to realize that our background really is driven from probably 1988 when we bought Detroit Diesel from General Motors back and ran that business for 13 years. Most of the customers in the US, and even internationally, used our engines, so we have a great knowledge of that customer base and relationships.

When Freightliner decided that they wanted to consolidate their dealership group and they had 40% of the market, we jumped on board there and made a couple of strategic acquisitions. And we see that as a great vertical for us as we go forward to balance our domestic and our international. Then with our commercial vehicle and certainly our knowledge of the truck business, because of our big fleet, makes it a positive for us as we go forward.

Okay. Maybe if we could stay on that theme of commercial vehicles; the equity income was incredibly strong and I'm assuming the bulk of that was PTL. Just curious if you can talk about how that business is going and what you might be expecting for 2015 and forward there.

Well, there's no question; from a PTLs perspective, we are having a great year. We have public bonds there so that information is available publicly on the results of that business.

We had nice growth, top-line growth. There's no question that we see ton miles up, which is driving our rental business and also our long-term lease business. And certainly as we see the trucks being more complicated and more costly, we are seeing ownership going over to leasing, which has been a real plus for us as we go forward.

So we see good growth and are comfortable that Ryder is seeing the same thing as we see this market. Overall, the heavy-duty market and the leasing and rental market remains very strong and we see it be strong for the next couple years.

Lastly, Roger, as we think about the acquisition environment being pretty hot right now and valuations being fairly high, is there anything in the light vehicle portfolio as far as the dealerships that you think might be worth selling and reallocating capital to other dealerships or maybe even the commercial vehicle business, just given that pricing is so strong right now?

John, I think we are looking at all of our businesses. Obviously things that maybe looked quite beneficial to us several years ago, we might have changed our minds in certain markets, so we will be adding and subtracting those businesses as we go forward. But I think that we are going to stay focused on four nameplates: volume foreign and primarily in the premium luxury in the US, as we are probably 66%. Overall 73% and over 95% internationally.

So I would say that would be our focus would be premium luxury, volume foreign. Obviously there might be some opportunities on the domestic side, but we need to get opportunities there that have scale and I think that is something that we would look for. But we are looking at it opportunistic and there's no question we need to have a dealership to compliment our footprints where we have back offices and we can get the benefit of scale.

And that is something we have been able to do with the acquisitions of the Land Rover business and in Darien. We also picked up some Volkswagen business in the UK, which were just glue-ons for us.

Great, thank you very much.

James Albertine, Stifel.

Thanks. Good afternoon, everyone. I'm doing great thank you for asking, and thanks as well for the disclosure and the detail on the heavy-duty business this quarter. It was very helpful.

If I could just maybe shift to the Australian side of the business strategy, can you help us understand what the next steps are? How do you see the Australian strategy progressing?

And the $0.05 I think I heard you say on the call as a headwind in the quarter, yet parts and service is strong, there's a 14-year average age of the fleet over there. Has that headwind already turned to more of a tailwind, or should we think about it as more of a tailwind in the first half of 2015 or still tough?

Well, I think we are going to have a tough probably first quarter and six months, because right now you've got iron ore and coal prices are down, which are driving less of the economy. And, therefore, people aren't stepping up and buying new trucks.

That is one of the things that we saw. We had a good first and second quarter; slowed a little bit in the third, but in the fourth we just saw the retail business at the dealership level really come down substantially. And that is when we supported those dealers with incentives, which obviously ate into our profitability.

We see a pretty steady process as we go through the balance of this year. There's no question that if the mining picks up and we have had some opportunities on the other side, on the off-highway side. We have been successful in getting some repowers in some of the mines where they are coming back and doing some maintenance.

So I would say pretty much business as usual for the next three to six months in Australia from the truck side. Obviously, with the consolidation of some of things we are doing, we are going to take additional costs out, but we see these businesses -- our plans are to be profitable during 2015.

As it relates to the distribution versus the potential strategy of a heavy-duty retail portfolio or even an auto retail portfolio in Australia, so how are you thinking about, from a very high level, the growth prospects in that market? Thanks.

Well, there's been opportunities for us to make acquisitions in the auto retail, but I think strategically what we have said that we are going to stay in distribution at this point. We think that we have committed in the market that way from the standpoint of our 60-plus dealers and Western Star and MAN and Dennis Eagle. And then we have even more dealers under the distribution for both the Detroit Diesel product and the MTU products.

So distribution would be our focus. I don't think right now that we are ready to jump into the retail auto business. I think we need to focus on getting it right based on what our commitments are at this point, but we feel good about that market.

One other point I didn't make earlier; we operated in that market when we owned Detroit Diesel. We actually consolidated that market from private ownership into Detroit Diesel. So when we bought this business from Daimler, it was the same business that we had a number of years ago.

We know the people and we know the customers and then the Rolls-Royce Power Systems is really the piece that MTU bought -- they bought from MTU, which was also Daimler. Again, these were large companies exiting the business in that market, which gives us a distribution opportunity with many sub dealers and dealers, so to me it's a great parts and service play.

Thanks. And if I could just sneak a quick follow-up in. Last year first quarter you talked about a significant number of days closed related to weather. You've had some harsh weather already this year in the Northeast. Should we think about it as more of a wash or is it a net tailwind, headwind for the first quarter? Thanks.

I think we looked at the number of days that we have been shut down, if we take the dealerships, it's probably over 100 over the last several weeks. And I looked at the numbers just for the first part of February, our Rhode Island business is off about 27% because of the snow. You personally know that if you guys are around New York. And Connecticut off about 10%, so we still see some impact, but we should get that business back as we go forward

Thanks again and good luck.

Rick Nelson, Stevens.

Good afternoon. A public peer out there in the heavy-truck dealership is Rush Enterprises. They stated $4.7 billion in revenue here; roughly $900 million today. Is there anything structural that would create impediments to growing to that type of size or perhaps even bigger? Freightliner has a bigger share I think than the brands that they represent.

We have a framework agreement with Freightliner, but it gives us lots of runway. Basically, I think with the parts and service business, Rush has been at it for a number of years and done a good job.

Now they have consolidated both PACCAR's Peterbilt and Navistar International, those are the two brands. But, again, when you take those two brands together, they don't have the market share that Freightliner has. Freightliner is about 40%, so I see the growth as we go forward.

If we take the acquisition that we made in Tennessee just here recently, just in the US we probably have probably $1.1 billion to $1.2 billion in revenue when you add it all together on an annualized basis. So to me there's opportunity for us to grow.

I haven't really calculated whether we will go to $4.7 billion or $5 billion, but I think there is certainly an opportunity to go. And I think their results, which I've seen, look quite positive and they see the same opportunity from the standpoint of the parts and service business being very strong for them also.

Thanks for that. Your heavy-truck dealership business has pretty big concentration in Texas and Oklahoma. Recognizing your recent acquisitions are out of those markets, but how do you see the oil and gas effect there? And are you in fact seeing any slowdown in those operations?

I think, Rick, you have got to think about the business we are in. We are in the highway truck business and with the economy better, the ton miles for trucks have gone up each quarter now I think sequentially for the last four or five quarter. So we've certainly got that tailwind.

As far as the off-highway business we might do on truck engine support, we see a lot of those pieces of equipment coming back into the shops that really haven't had good overhaul. So we see that to be good going forward. At this point, we don't see that having any material effect.

In fact, with lower oil prices, you start to see truckers or operators buying new trucks because they've got more cash flow. And there's no question that the fleets, because of the current economy just in the US generally, we are seeing them going from a replacement mode to an additive mode. They have been able to get pricing and those fleets are growing, so there's no question that overall I think that it's going to be strong.

Sounds good. Thanks a lot and good luck.

David Lim, Wells Fargo Securities.

Good afternoon, gentlemen. Quickly, with improving vehicle registrations in Europe, do you feel a need to do more acquisitions quickly? And how are valuation multiples trending in Europe?

Well, I would say the goodwill component in Europe probably today is 10% of what it is here in the US, and in many cases the OEMs are directing us to troubled situations where we are really buying assets at book value and taking over real estate through long-term leases. So the economics are very attractive and I think at this particular time all of the strong OEMs that we do business with, primarily in the premium luxury side, are in contact with us to look at future opportunities.

I think we are growing a very nice base in Italy. We have a joint venture partner there, Mantellini, who owns 30%. He's on the ground. We've got an experienced team there and we continue to grow that business.

We have a strong Porsche business in Germany and also we have gone with a partner, [Catano], who is the largest operator in Portugal for BMW. He is our 50% partner in Barcelona.

We have been able to consolidate that -- those operations. We started out this year -- we've been in that business six months. We have been able to make tremendous progress, so those markets both are growing, especially in the premium side.

For us to say we are going to make a big launch there, I say we are going to be selective. We will be opportunistic; areas where we can join. I know in Milan we are going to add a service center there, which BMW has directed us to to give us a little more share of wallet for that clientele. And we will share the northern part of Milan and the factory will share the southern part.

So there is a direction, a specific direction by each of the OEMs and we think there is more to come. We will look at those, but the capital allocation for there and the amount of capital is significantly less than what we would have to see either in the US or in the UK for premium luxury opportunities.

Interesting. Understanding that most luxury vehicles are leased, can you give us some additional color on what percentage of your F&I is from vehicle financing? And in the scenario that the CFPB goes to some level of flat fees, how would that hurt your business?

When you look at our overall business, I think the number is -- probably you could use 40% would be finance reserve and 60% would be product income if you looked at the US by itself. I don't have the number specifically on the international basis here. Tony can follow up with those.

Quite honestly, when you look at -- certainly CFPB -- in our case 65% of our business is US and 35% internationally, so 35% wouldn't be affected. Then you look at 60% of that is product income, I think we are in a pretty good shape.

One of the things that we are doing, we are looking at a model and really a pilot from NADA. We are trying to see what impact that might have on us at four stores, so we will keep you posted on that. But at the present time there has been very little action on that from the standpoint of connection with us.

I think the pilot that we are running with NADA we have initial standard rate markups for all the customers. If there's a deviation, obviously we have to make that -- put that in writing and document that, so it's a pretty straightforward transaction. We are testing the water on that potential option for the future, if that would become something that the government would seem to be necessary to explore with the retail auto network.

Finally, if I may, how should we think about working capital needs on the commercial side versus the light vehicle side? Thank you.

I think overall, when you look at the commercial vehicle side you've really got two components: your new and used truck inventory. The good news is our partner is Freightliner and certainly the commercial vehicle side of Freightliner's finance -- captive finance is very strong, probably the strongest in the industry. And that bodes well for us.

We do all of our financing, our acquisition line obviously, and also our floor planning with those folks. So basically we are leasing the majority of the facilities today and we -- at very attractive rates. On top of that we have the ability for capital from Daimler and also they handle our floor planning.

We don't need to go to banks or third parties for support. There is a tremendous, I think, value that has been created by the Freightliner brand in Western Star across the US and Daimler is standing behind that from the standpoint of their vehicles. And with a 40% market share, that's only going to drive more parts and service.

So we will have -- we carry a higher parts inventories where we'd carry $300,000 to $400,000. In a large, premium luxury store we probably would be -- we would probably carry $2 million in parts inventory in a retail Freightliner business.

Thank you.

Brett Hoselton, KeyBanc.

Good afternoon, gentlemen. Wanted to start off just on the M&A front. You did about $1 billion in revenue or so in 2014. Kind of about 5% revenue growth. Is that the pace of acquisitions that you think might be reasonable to expect in 2015 and 2016?

As we try to model ourselves, we are looking at about 50% of our growth from a standpoint of probably looking at 10% overall. Half of that would be through organic and the balance would be through acquisitions.

When you looked at this past year, we did about $225 million on the retail automotive side and we had about $800 million on a going-forward basis in commercial vehicle. Then the power systems business was about [200] if you looked at 2014, if you look at it on an annualized basis. But I think that 5% as we go forward on the acquisition side is realistic.

Now, as we get into more of the commercial vehicle, and if there's a platform in the US or internationally that we can look at that would be multiple locations, obviously that would grow that. And we will remain an opportunistic buyer where we have scale.

Then as I think about the breakdown there, it sounded like you're thinking maybe about half of that is commercial vehicle, half of that is automotive. Then as you talked you also suggested maybe half mix of US, half international.

Assuming those numbers are correct, the US and international is my impression correct that you are thinking, when you talk about international, it's automotive but there's also an opportunity in commercial vehicle? Because it didn't sound like you are interested in getting into the dealership side of the business in Australia, but it sounds like maybe you are considering some commercial vehicle in Europe.

Let me straighten that out for sure. We are not at this point, and we would let you know that, we are not going into the retail auto business in Australia at this point. We are going to play the hand that we have dealt ourselves on the commercial vehicle and also parts distribution business.

And as we look at Europe, we are not going into the commercial vehicle business -- retail business there. We're going to stay automotive, but when you come back to the US we are going to be in the retail heavy-duty truck business.

So it sounds like the incremental dollar is going to be spent on commercial vehicle dealerships in the US and then you are going to -- any international is going to, for the most part, be automotive related and possibly more focused on Europe. Is that a fair assessment?

That's correct, yes.

Perfect. Then how do I think -- switching gears on gross profit throughput as I look back over the past few years, 2012 and 2013, you kind of were in that range of 30%, 35%. And I think in the past you've talked about that as being the gross profit throughput range that you are targeting. This year you declined down into that 20% range, give or take.

My impression is that there are some headwinds here on the commercial vehicle side that kind of pulled you down a little bit this year. How do we think about gross profit throughput into 2015 and into 2016? I guess what I'm really asking is if we are ramping up on the commercial vehicle and if that was the headwind in 2014, does that mean in 2015 we should be thinking more along the lines of 20%, 25% gross profit throughput as you continue to grow that commercial vehicle business? Or do you expect that you can improve the overall gross profit throughput of the Company?

I think we just look at Q4 for a moment. Our retail auto business was at 30%, and remember our fourth quarter is not the strongest from the standpoint of the UK because they have registration quarters both in Q1 and Q3. I think from the standpoint of this year, we had the first quarter we were impacted significantly because of weather, and then we had the flowthrough impact because of the start-up in Australia and the slowdown of the economy.

But I would say that if we looked at Australia -- and I said this earlier I think -- that we are going to see kind of a slow start here of the economy. I don't see something that is going to overnight ignite it unless we see some iron ore and some of those prices change at the moment. We also have some impact, from the standpoint of currency, on things that we are buying outside; we are buying from the US and/or from Germany. So that makes -- will have some impact just on a foreign exchange basis.

But, overall, I think that the commercial vehicle business will certainly be better from the standpoint of SG&A to grow, so we are going to see some benefit there, which hopefully will drive -- I don't want to say hopefully -- will drive some better flow through.

Is there -- as you think about the automotive dealership business versus the commercial vehicle dealership business -- and I think you just commented on this -- but how do we think about the throughput rate for the automotive business versus the commercial vehicle business? It sounds like the SG&A might be a little bit better as a percentage of gross on the commercial vehicle side. Is this throughput also better on the commercial vehicle side?

I think if we look at the businesses, remember now we have owned this business today for two months, really November/December, the business we originally bought in Texas. I go back; remember 18 months ago we made a 25% investment strategic just to get our toe in the water. And then, of course, we made the bigger investment here in October and November.

The one thing that I see, Brett, is that we are at 14.9% overall as a company from a gross profit perspective and for the first two months -- two innings don't make a ballgame, but you look at that at 16.3 and we know that our real estate costs are less. So I think overall we are going to see more pull-through from the commercial vehicle side.

And we will start to give you some of the metrics there as we go through it; you will see that. Don't know if you had a chance to look at our release, but I think it's on page 13; it gives you a little more input, more insight on that.

Thank you very much, gentlemen.

Scott Stember, Sidoti & Company.

Good afternoon, Roger. Can you just maybe talk about what you are thinking for the US sales environment on the new car side for 2015?

Well, I have seen everybody else's statements and I guess I fall in line in cadence with them that we see probably a 17 million SAAR for the year. I think that we will see a mix change. You will see more SUV and truck purchases versus cars due to the fact that the fuel prices are down. And I think that is going to put pressure on hybrids and electric vehicles, at least in the short term.

You've got a real strong credit situation from the standpoint of availability. I think consumer confidence is higher. I mentioned on the truck side, on the heavy-truck side with lower fuel prices you are going to see owner-operators and fleets increase their fleet. So I think that with unemployment down and the age of the vehicles creeping up, we're going to still see a pretty robust market.

Okay. And maybe here in the US could you talk about potential areas or areas of weakness during the quarter that you saw or areas of particular strength from a geographic standpoint?

Well, when I look at the market itself, I think that we had some good luck in Orange County, that was strong for us. We were up double-digit there. Puerto Rico obviously was one of the drags that we had on our business. People talk about flow-through. We were down double digit in Puerto Rico. We saw a little bit of light here in January.

Atlanta has been a very strong market for us and Central Jersey. Those would be all double-digit increases, at least for the fourth quarter.

Okay. And just that last question as it relates to Australia once again. It seems like we probably have another couple of quarters before you start to see the light at the end of the tunnel there, but have you made any plans or contingency plans to right-size the business in the event that things don't come back as soon as you would hope?

I think we have been right-sizing the business here for the last 12 months. We have just been in that business for 12 months.

The consolidation opportunities which are taking place when we take two big organizations that have master parts warehouses and we can bring those together, that takes some IT corrections and engineering, which are taking place today. You know, we get out of certain excess warehouse capacity; some of our marketing expenses where we can combine our marketing and back office.

There's a number of things that are taking place and, of course, we have had a reduction already some of the costs associated in the fourth quarter where we had people redundancies already in the power systems business. So there will be a little bit of that, but I don't think it's something that we will have to call out.

I think that the business will continue to grow; it's a very solid business. When you look at freight in Australia, it's by truck. There's no question it's a huge landscape and the fact that in the power system business -- just to think about it, we are powering most of the mine haul trucks and there's a lot of repower business. These are the big 350-ton trucks.

We've got mine haul. We've got fast ferry. We've got marine. We've got military. We've got contract with the Australian Navy in place that we are working every day.

And then you look on the on-highway side, every time a Freightliner truck is sold in Australia, and also the majority of the Western Stars that are sold, have Detroit Diesel engines in them, so they are just seeding the network for units and operation for us to handle the warranties, the service, and the parts. Then we have our dealership group that we distribute to, so there's a tremendous amount of opportunity.

And I think our capability; it would take millions to replicate the capability we have for both the on- and off-highway. To me, our strategy -- and then moving into New Zealand. The New Zealand market is better than Australia right now because their timber and dairy products and China still relies on them for a lot of their support. We see that business there has been much better than Australia.

Then we have some opportunity because of the off-highway business. We have been quoting and being successful in some big repowers Indonesia and other parts of that part of the world. These are bigger contracts.

Big gen sets for buildings like the American Express or Citicorp in New York, those are things that we compete on with Caterpillar and Cummins, but the MTU product has been very successful in those markets. We also see once you are successful you have the ongoing maintenance contracts. So this is really right down the alley that we were involved in for 13 years when we owned Detroit Diesel. It's just a different size engine when you get off-highway.

Got you. That's all I have and thanks so much for taking my questions.

Patrick Archambault, Goldman Sachs.

Terrific. Thanks for taking my question. Good afternoon, Roger.

Just sorry if I missed it, but -- so you had a 5% target for inorganic growth. Do you have -- did you mention or do you have something you could share just broadly on the organic side that you expect, just consistent with your --?

I think I said that we would have a 10% combined, (multiple speakers) organic 5% and it could balance either way. If I look this year our growth, if you look at it for the full year, was over 11% on a same-store basis. So underpromise and overperform I guess.

But to me I think that's realistic when you look at the size; you're talking $17 billion, 5% is key. One thing that we have look at is as we go into the first and second quarter of 2015, there will be some pressure on foreign exchange, because when you look at the pound was $1.70 last year. [It would probably be] $1.50 and also the euro at roughly $1.23 or $1.24 down to $1.10. So there will be some impact there.

And you had the Aussie dollar. When we bought the business a year and a half ago it was at $0.92 or $0.93 and it's in the mid-$0.70s right now. Those are things that we have to manage around, but the basic core business is international.

Our business -- if you can believe it, 2002 we bought Sytner in the UK, $125 million investment, doing $900 million in revenue. And in 2014 it did $6 billion. And we are 98% premium luxury, number one, in every one of those brands there except Land Rover and Jag we are number two.

So to me this international piece, as we look at our business, is a little bit different than just domestic and we are going to continue to try to differentiate ourselves now also with the commercial vehicle.

No question UK has been a big bright spot. You know, I guess just actually that dovetails nicely on the other question I had. In terms of the FX, I mean obviously this is mostly translation, but just to make sure, check that box as we are repatriating it and trying to think through the impact on profitability, just the gross profit margin is probably the best guide?

When you think about the UK, that's one of the reasons -- I wouldn't say the only reason, but one we invested into Australia. We can put the investments into Australia and bring the money back without being taxed, which has been a good use of our excess cash we generated in Australia.

The other good thing about that is the tax rate today I think in the UK is now down to 21%, so we are getting better with a lower tax rate and we are not bringing money back to the US. We are actually deploying that money in these other markets.

Sorry. No, what I meant is that if like the revenue per vehicle impact that you are referring to -- from a year-on-year perspective in the first half, just kind of if I think about the profit impact, the gross margin is as good a guide as any as how that revenue impact will translate, correct?

Well, yes. I think you will have a lower -- the sale price will obviously come down reflecting the pound versus the dollar. We're reporting in US dollars. So you've got a$0.20 reduction already and that will manifest itself on the gross profit per unit. There's no question, so we will have that.

But, again, when I looked at 2014, I think I asked our guys if -- they said we had about $0.05 benefit in 2014 on currency.

I'm sorry, could you repeat that last piece?

The exchange, when you look at the FX, it was a 5% benefit to the overall for the year, I think.

Understood. Okay, got it. Last question for me just on margins.

If I look at just the new side, for the last couple of quarters you had been seeing that increase year-on-year and I think a lot of that was mix-driven, right? This quarter there was -- it was below I think by about 20 bps if I'm not mistaken. So how do we think -- what -- one quarter, obviously, is not like a full-year trend. But how do we think about the competitive dynamics of the new vehicle space where we sit now? What are your expectations for the direction of gross profit going forward?

When you break it up on new vehicles, we were 8.5% or 8.4% on luxury and our domestic was down from 6.9 to 6.1, so we probably had that impact. And also Puerto Rico had a big impact on us because that business was poor and we were hanging on trying to get whatever business we could. So I feel where our strength is in premium luxury we certainly performed pretty well.

When you look at the total new market, we were down $58 on a dollar per unit for the fourth quarter, which was 20 basis points. But again, as I said, on the premium luxury side we went from 8.5% to 8.4% so a very small move there. I think that when you look at the quarter you really got to remember that we don't have the impact of the registration in the UK, so it is more of a natural business during that quarter. We don't get that sales impact that we will see in the first and third this year.

Got it, okay. So it looks like the sort of flattish to upward trend is still (multiple speakers)?

And I would say if you looked at the used car, the used -- I looked at the used just like you and we looked at the used car side. We had a decrease in used vehicle margins in the UK, which drove our overall margin down.

But I would also say that when we looked at our inventory we really bought inventory in the fourth quarter in the UK, which is going to drive a much better used quarter for us in Q1. So we will see if the margins should be better as we go into the second -- into the first quarter.

How about just on the topic of used margins, how -- are you seeing the promised influx of off-lease vehicles? And what is the --? I know you get this question a lot, but just to bring us up-to-date, what is the opportunity there to bring down inventory acquisition costs and have that be a tailwind?

Well, we are looking forward to the off-lease. Today when you look at premium luxury, 50% to 55% of our business is leased with, say, Audi, Lexus, BMW, and Mercedes. They are going to have 150,000 cars coming back, each one of them, so there's going to be a tremendous opportunity to take those used cars in.

And then you get the chance to certify those and with that you get some of the new car rates that are available. So I see that as an opportunity, because we have been struggling to get enough good used cars on the premium luxury side over the last, I'd say, 12 to 24 months. Our CPO was up 11% in the quarter and I think that that also will give us an opportunity going forward to get more new customers into the brands.

Got you. Okay, great. Thanks for all the color. I appreciate it.

David Whiston, Morningstar.

Three questions, first on the dividend. You've had a lot of frequent dividend increases and I was just curious if that has always been your plan, or do things just keep going better than you had expected?

Well, that's really at the discretion of the Board and the consistency of the dividend I think has been important to the shareholders. Our goal is obviously to increase the payout as we go forward. I think if I had an upper level of payout it might be 35%, but right now as we continue to grow our business we haven't quite got to that payout level. But I think the return at 1.7[%], in today's currency market and where we are, I think are key.

Our share buybacks, we only did about $300,000 of share buybacks. You can see that we are spending our money on acquisitions. We are not buying our stock back and we are paying dividends.

I think you've got two investors out there: some like dividends, some like share buybacks. And in our particular case, we think that deploying our money on acquisitions to grow our business will grow our bottom line and grow our revenue faster. We are consistent at about 90.3 million shares outstanding, and that has been for the last couple years.

We do offer our employees some restricted shares and we typically buy those shares that are in the money back each year. So that would be consistent year-to-year.

Thanks, that's helpful. Then going back to an earlier question on brands, is the reason that you seemed to continue to have a strong preference to imports in the US over GM and Ford, Chrysler, is that purely due to the lack of scale on the domestic side that you mentioned earlier?

I would say since our mix for the last 15 years has been driven towards premium luxury and volume foreign, we missed the boat, you might say, on some of the larger, better acquisitions on the domestic side. We have some good GM business, some Ford business, and some Chrysler business, but it's much, much smaller than the other peers on the public side.

But we are talking to Chrysler, GM, and Ford about opportunities. But we've got to get ones that have the right scale and, for sure, have to be in markets where we have -- already have a footprint.

Are you at all interested in more Cadillac?

Cadillac, you know, has been a brand that we were involved -- in fact, it was my best brands I had early on in my career. And I think that if we could get Cadillac in the right market, we would certainly be interested because it's a premium luxury brand.

We even had conversation with Farley and Mark Fields; is there a place we could take on Lincoln? We think that their strategy now and maybe in a smaller place where we had the right CapEx and the right facility it might be a very interesting opportunity. We are not betting the farm on it, but we certainly feel that we need to be sure that we are engaged with the domestic OEMs.

Thanks, that's helpful. Then last question; on an annualized basis today, roughly what percent of your commercial vehicles revenue is in Asia-Pacific?

I would say if you annualized that number today it's probably 3% to 4%.

Of overall revenue or of commercial vehicle revenue?

Overall.

Okay, thank you very much.

Paresh Jain, Morgan Stanley.

Good afternoon, Roger, Tony. On luxury, it seems like Mini had a pretty bad 2014 due to a lack of new products and, if I have the numbers right, 1Q of last year they were down almost 40% year-on-year. Can you remind us again how much of your new business is Mini and if you now have a good product mix there to take advantage of easier comps through the year?

Well, I know that our Mini business is just under 10% of Minis on a national basis, so you can calculate that. I don't know what the national Mini number was for the year, but we are just approaching 10% because we have a framework agreement that we start to bump up to when we get to 10%.

To me, Mini is a great brand and they just had problems in executing the new models coming out. But we saw some good traction in the fourth quarter with Mini coming back with a new product.

Got it. And staying on luxury, a dealer peer of yours mentioned that luxury stores can go for almost 50% premium to domestic. Can you talk a little about what is making luxury stores so attractive to buyers, and if there is any secular share gain story here for luxury?

Well, look, number one, I think we've got to look at the 18,000 franchises that are in the marketplace. You look at Mercedes-Benz, you look at Audi, certainly Lexus, and you look at BMW those brands -- in fact, when you look at Lexus, BMW, and Mercedes have about 300-plus dealerships. Audi today I think has 175,000 standalones.

You just don't have the interbrand competition. You have a higher gross margin. We're running over $4,000 per unit on our premium luxury versus $1,600 -- this is the front-end without F&I -- in our business.

And I think that today with the downstream working down -- remember these were Q7s and S Classes and what have you. That was what they were known for. Now they are working down the food chain with A3s and X1s and CLAs and things like that. These are becoming aspirational brands and they have a strong leasing portfolio, which gives us that full circle to get those cars back.

I would say this that just generally, when we look at return on sales, it's not a secret to anybody that premium luxury have a better return on sales, so I am sure that that is driving a lot of the interest. To me, there is no question when you look at -- the US's luxury market is 12%, and if you go to the UK, today it's 25%. And you go back five or six years, UK market has gone from about 17% or 18% to 25%.

The good news is there's a tailwind there and when we start to see -- I think the event in the SUVs, the M Class way back early and the RX from Lexus, these people really drove those luxury brands, to me, early on and have taken advantage of that. Because you got the GLA, you got all these vehicles that are derivatives of the SUVs and some of the sedans and that has been quite powerful.

Because if you look at those markets today, every one of them across the country, I think we are all starving for some of that core product so that drives that interest. Then, to me, it's the competitive interbrand competition, which is less higher margin.

The other thing, you think about it, other than Ford -- look at the captive finance companies, today the strongest captive finance companies in this business are the premium luxury guys and that's a huge difference from the standpoint of buying your used cars, providing you working capital, providing you mortgages on your facilities. You can look at our peers, a lot of them have gone to owning their facilities. And I think if you look into a lot of those transactions, they are being supported by the premium luxury captive finance company.

I think you put that all together I think it sounds like it's a pretty good direction. But on the other hand, I think there are some definite opportunities for us on the domestic side.

That's great color, thanks.

Carl Dorf, Dorf Asset Management.

Afternoon, Roger. I want to address the elephant in the room.

How did you get all the way to the last guy here?

Well, I guess I put myself in a little bit later. Your stock is down about 7% today. I looked at the release. The only thing that I saw that bothered me a little was your debt went up.

Hearing the call today I hear about the foreign exchange being a headwind, but that was in there before the release, should have been anyway. I'm wondering, one, can you qualify the foreign exchange impact negative headwind that you're looking at this year based on where rates are today. And is there something else that I am missing that has caused the magnitude of the decline in the price of the stock?

Carl, I wish I could project the stock each day. Obviously I can't. I think that there was questions that we've had, you heard it on the call, from the standpoint of the impact of Australia, which we said was approximately $0.05, which obviously hurt our overall numbers. But from a (multiple speakers).

Roger, but what I see in that is you met with your guidance; despite the fact of the Australia problems, the rest of the business was stronger than most analysts were probably looking for.

Well, I think we met the Street estimate, there's no question. And I think that you know me well enough, we run the business to generate profits that are sustainable, not just quarter by quarter. I think that when you look at the total benefit of foreign exchange in 2014, I think it was approximately $300 million in revenue, something like that.

So when you look at 2015 and we've got the UK pound to the dollar going from $1.70 to $1.50 and the euro from $1.25 to, say, $1.10 or $1.11 there is going to -- you can figure that out. I can get Tony to come back to you and give you the exact details on that, but there will be some impact. But we expect to perform accordingly.

Okay. So other than that there's really nothing else that you see that would've caused this?

I don't know what the expectations were. We felt very good about our business. When you look at revenue up 16%, your net income and earnings per share up almost 14%, and on a year basis revenue up 19%, and your income and your EPS up 19%, I'm not sure that there's much more we can do.

Obviously, we continue to drive the bottom line and I think that some of our peers beat the Street, which they've done a great job. But on the other hand, that's not our goal every month to beat the Street. Our goal each quarter is to run the business, and I think Australia might have some --.

But to me, when they understand our strategy, and I will just articulate it to you quickly, in 1999 we got in this business. We said we were going to be foreign nameplate and premium luxury. We grew that; today it's 73% overall and then we went on to the UK. It's 99% there.

And the business we are doing in Western Europe is premium luxury. Then we swing back here into the US and our commercial vehicle strategy now is going into a business where we know the customers. We've been in that business because of our Detroit Diesel ownership.

So I think that you will start to look at us a little bit differently than you will because we have the international piece, which obviously is Europe and the UK and Australia. Then you have the commercial vehicle piece. And I think when that all melted together you will see that through the cycles that we are going to have a strong parts and service compliment in our business, which will certainly pay dividends.

I'm with you. Thank you very much for the explanation.

Mr. Penske, I will turn it back to you for any closing comments.

Thanks, everyone, for being on. We will see you next quarter. Thank you.

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