Penske Automotive Group Inc (PAG) 2015 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group second-quarter 2015 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion, through August 5, 2015. It's 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.

John, thank you, and good afternoon, everyone. A press release detailing Penske Automotive Group's second-quarter 2015 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; J.D. Carlson, our Chief Financial Officer; and Shelley Hulgrave, our Controller.

On this call we will be discussing certain non-GAAP financial measures such as earnings before interest, taxes, depreciation, and amortization, or EBITDA; and EBITDAR, which adds back rent expense to EBITDA. 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.

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

Thank you, Tony, and good afternoon, everyone, and thank you for joining us today. We're pleased to report another quarter of record profitability, including the best quarter and six months in the history of our Company. For the second quarter, revenue increased 12% to $4.9 billion. Income from continuing operations increased 17% to $94.4 million. And related earnings per share increased 18% to $1.05. Excluding foreign exchange, revenue would have increased 17% to $5.1 billion. Foreign exchange impacted earnings per share by $0.05 in the second quarter.

Retail automotive and our US commercial truck dealerships continue to produce outstanding results, driven by an increased unit volume, our fixed operations, and focus on gross profit flow-through. The performance continues to demonstrate the flexibility and the resiliency of the Company's brand mix and our business model, as the record second-quarter results were driven by a 7.5% increase in retail automotive sales; a 50 basis point increase in automotive retail service and parts gross margin; and a reduction of 110 basis points in selling, general, and administrative expenses as a percentage of our gross profit.

Based on our strong financial results, the Board of Directors approved a cash dividend of $0.24 per share for the second quarter.

Let me now turn to our specifics of our performance. Looking at our revenue mix, 62% was generated in the United States; and internationally, 38%. Approximately 93% of our revenue was generated through our retail automotive dealerships, while the remaining 7% was generated through our commercial vehicle businesses.

Overall gross profit improved $75 million or 11%, and overall gross margin was 14.9%. SG&A to gross profit improved 110 basis points to 75.6%, and our overall gross profit flow-through improved to 34%. However, within our retail automotive businesses, SG&A to gross profit improved by 150 basis points, and our gross profit flow-through was 61.3%.

Operating income increased 17% to $159 million, and operating margin was 3.2%. A couple of points about our operating margin. First, operating margin includes $49 million of rent expense for operating leases, which impacts our operating margin by approximately 100 basis points. Additionally, operating margin excludes the equity income we receive related to our joint venture investments, such as our investment in Penske Truck Leasing. For the second quarter, equity income represented $12 million.

Earnings before taxes increased 17% to $143.7 million. Approximately 84% of our pre-tax income is attributable to the retail automotive dealerships, 7% to the US commercial truck operations, and the other 9% which includes our investment in PTL. Our effective tax rate was 33.1% compared to 33.6% in 2014.

EBITDA improved 18% to $179 million. If you add back rent expense of $49 million to EBITDA, on a rent-adjusted basis EBITDAR was approximately $228 million, and EBITDAR margin was 4.7%.

Looking at our brand mix, premium luxury was 72%, volume foreign was 24%, and the big three was 4%. Total retail automotive revenue increased 6.6% to $4.5 billion. And on a same-store basis, automotive retail revenue increased 5.6%; 4.2% in the US, and 7.8% internationally.

Exchange rates impacted same-store retail revenue by $171 million. Excluding foreign exchange, same-store automotive retail revenue would have increased 9.8%, including 19.2% in our international markets.

Units retail, new, increased 6.3% to 58,800, representing a growth of 2% in the United States and 16.9% internationally. On a same-store basis, new units increased 5.7%, including 1.3% in the US and 16.2% internationally.

New vehicle revenue increased 4.9% to $2.3 billion, commensurate with the increase in new unit sales. Our gross profit per unit retail was $2,999 and the gross margin was 7.5%. If you exclude foreign exchange, gross profit per unit increased $6 to $3,128 and gross margin was 7.6%. Our supply of new vehicles was 64 days at the end of June.

Looking at our used automotive business, we retailed 49,500 units in the quarter, representing an increase of nearly 9%. CPO sales represented 38% of our used unit sales in the US, and our used and new ratio was 0.84 to 1.

Same-store used unit retail increased 8.2%. Used vehicle revenue increased 8.7% to $1.4 billion. Gross profit per used vehicle retailed was $1,777 and margin was 6.4%. Excluding foreign exchange, gross profit per unit was $1,861. Our supply of used vehicles was 40 days at the end of June.

Turning to finance and insurance, within our retail automotive business revenue per unit improved $15 to $1,125. Excluding foreign exchange, F&I revenue per unit would have increased $52. The retail automotive service and parts business had another solid quarter, with revenue improving 4.8%, including 4.3% on a same-store basis. Excluding foreign exchange, same-store service and parts revenue increased 7.5%.

Customer pay was up 4%; warranty up 19.5%; body shops up 5.1%; and our pre-delivery inspection was up 13.2% for a total of 7.5%, excluding foreign exchange. Service and parts gross margin improved 50 basis points to 60.2%.

I'd like now to turn to our Australian Commercial Vehicle business. As I mentioned before, this business includes our distribution of Western Star, MAN, and Dennis Eagle vehicles, and related parts, as well as our power systems business, which principally distributes diesel and gas engines, power generation systems, and related service and parts for the on- and off-highway markets.

During the second quarter, these businesses generated approximately $120 million in revenue and generated a gross margin of 24.8%, and were profitable. We were pleased with the performance of the power systems business, which posted several significant contract wins for repowers in both on- and off-highway businesses. These repowers will continue to drive the parts business for the future periods.

The commercial vehicle distribution portion of the business continues to be impacted by the economic conditions in Australia. The Australian truck market is down approximately 10% year to date. However, our parts and service business continues to perform very well, and our inventory position is improving each month. Over the long-term, we continue to view Australia favorably, as the average fleet age of trucks should foster replacement demand as the economy recovers.

Turning to our commercial US truck business, as you know, we're based in Texas, Oklahoma, New Mexico, Tennessee, and Georgia. This business performed very well in the second quarter, retailing almost 1,800 new and used trucks, and generating $242 million in revenue. Our gross margin was 15.8%.

Service and parts is a key part of the commercial truck business. In the second quarter, service and parts represented 72% of the total gross profit of this business. And that compares to our retail auto business, which is only 41%. The dynamics of the medium- and heavy-duty truck markets remain very strong across North America. In the second quarter, North American sales of Class 5 through 8 medium- and heavy-duty trucks were approximately 139,000 units, up 10%.

The Class 8 heavy-duty market increased 15% to 83,200 units. And the backlog of orders for Class 8 heavy-duty trucks increased 32% to 157,900 when compared to the same time last year.

We represent Freightliner, the brand which accounts for more than 35% of the current North American Class 8 market. Being aligned with a market leader gives us the opportunity to drive the service and parts business, which covers more than 100% of the fixed costs.

Based on a growing economy, the strength of the order backlog, strong freight metrics, and low oil prices, we expect the medium- and heavy-duty truck market to remain strong for the foreseeable future.

Looking at our balance sheet at the end of the quarter, our liquidity was over $900 million. Our strong cash flows allowed us to reduce total non-vehicle debt by $191 million this year to approximately $1.2 billion. We had $37 million of cash on our balance sheet at the end of the quarter.

Our leverage ratio was 2 times using trailing 12-month EBITDA, giving us plenty of room under our covenants to make acquisitions.

New and used automotive vehicle inventory was $2.6 billion, up $250 million when compared to June of last year. New was up $200 million; used up approximately $40 million. Capital expenditures for corporate, ID, and facilities were $83 million year to date, and we anticipate CapEx of approximately $150 million in 2015.

Year to date, we have repurchased or acquired 439,000 shares of our common stock for $22 million. We have remaining authorization of $136 million to repurchase shares under the program.

In closing, I'm very pleased with the performance of our business so far this year. We continue to focus on gross profit retention and exceeding expectations of our customers.

I'm also extremely pleased to report that Penske Automotive Group placed 15 of its dealerships on the automotive list of Best 100 Dealerships to Work For. On behalf of our entire management team, I congratulate these dealerships and thank them for their outstanding dedication.

We believe the retail automotive markets in both the United States and the UK will remain strong, while the future outlook remains very stable. Additionally, we continue to see the overall market improvement in our Western European markets, specifically in Italy, Spain, and Germany, as well. Further, the outlook for the medium- and heavy-duty truck markets remain robust across North America, and we are confident in the long-term strategy we have deployed.

I want to thank you all for joining us today, and we'll open the call for questions. Thank you.

(Operator Instructions). Rick Nelson, Stephens.

So, when you acquired the heavy truck business back in November, I believe you said you thought it would be $0.12 to $0.14 accretive. You've layered on now a couple hundred million in revenue; you've got six months under your belt. What are your thoughts now in terms of the contribution there?

Well, I guess we'd look at a few future acquisitions. We have a pipeline of opportunities which we're looking at here domestically. And I think, as you've seen the business we already have, we'll generate probably $1 billion in revenue. And I think when we look at it overall, we could expect the $0.10 to $0.12 probably being realistic as we look forward in 2015. And we would hope that as we move into this area of the business that we will see some additional profitability.

Just to put it in perspective, we see about 130 basis points higher return on sales in the US. We compare our US heavy truck business compared to a retail auto business. So again, with the acquisitions, we will see some ability to increase our profitability.

And also one of the good things is we don't see the CapEx requirement that we have on the retail car side. So I feel pretty good that overall, if we did the acquisition that we had this year for $200 million -- we'll see probably $0.02 to $0.03 benefit to that.

Thanks for that color. You've got some concentration there in the heavy truck business in Texas and Oklahoma. Is there any slowdown evident in those markets?

Well, we've seen some slowdown on the new truck sales side, but that is more of a service area for us. And a lot of the rigs and things that have come back in are in now for service. So we're seeing that probably in pretty good shape. But remember, the Freightliner brand is primarily a large fleet brand, so the big carriers or the big customers of Freightliner -- so their business is strong. Their operating ratios are the best they have been, so they are out buying trucks when you see the backlog. We don't see any real impact on that right now.

All right, thanks. And finally, if I could ask you about the flow-through at 35%, and auto at 61%, relatively stable gross profit per unit. But could flow-throughs -- do you think those types of levels are sustainable?

Well, I hate to post a big number like that, because you won't forget it. But I think on the automotive side, we had strong gross profits in the quarter with our international businesses and also in the US. And when you look at our gross profit from the standpoint of per unit, we run about 2 times the volume foreign. If you look at Audi, Mercedes, Lexus, and BMW, the total all-in margin on a premium luxury is twice what we would see on a volume foreign with our 72% mix. I think that really played well for us in the second quarter.

And along with that, we had a 50 basis points increase in our parts and service, which really was strong. And the UK had an outstanding quarter. When you think about UK from the standpoint of overall business, this is the 40th month in a row they have had an increase. We were up over 16% in that market, and the market was up 7%. So I think there's a number of things that we probably hit just on the head properly that gave us the flow-through on the automotive.

Great. Thanks a lot, and good luck.

John Murphy, Bank of America Merrill Lynch.

Just a first question: as we think about China slowing a little bit, and the German lux guys may be shifting their focus to the European and US market, I was just wondering if you're seeing improvements in availability for vehicles for you to sell, coming from them?

Well, there's no question. I think that with China slowing down, this was a sweet market for the OEMs to send the key premium luxury vehicles. And that's slowed down. So we're seeing more availability in Land Rover, some of the SUV product that we -- the trucks; the GL, MLs, et cetera; the Q5, Q3s at BMW. And really I've seen a great impact with Porsche on Cayenne and the Macan. So that's favorable to us, not only here domestically but internationally. I think you'll see that for a while.

The only question we have is if they don't have the production there, are the people wanting to buy vehicles -- the demand I would say. I hope they don't push too many vehicles in our way, because it could have some impact on margins, and pressure on the individual dealerships. But I think right now we're glad to see that shift. And we're seeing it not only here in the US; we're seeing it globally.

Okay. And then just a second question: if we think about the margins in parts and service, obviously they are pretty incredible. I'm just curious, as we think about where those margins can go, if you could dimension where capacity utilization is in your service bays, and if there is more room to really run those fixed assets a little bit hotter and maybe even get better margins over time.

Well, we've been investing probably $2.5 billion in CapEx over the years, as we've talked about it before. Some people thought we were maybe expanding too much. But I think today with the increased parts and service, it has made a big difference. And what we've done is taken capacity where we've had single shift operations and we're going to a second shift, where we are primarily doing our PDI, pre-delivery inspection in our pre-owned vehicles, and we're getting more utilization. And I think that that's proved to help us immensely. And when you look at the increase in our 0.84 to 1 in our used vehicles, we're getting more used vehicles, and that's driving our parts and service.

And I think that's one thing that as people concern themselves on lower margin on used cars, they really got to look at the full formula. Because every car that goes through our shop, prior to delivery, has some work done on it; that's at high margin, and drives our parts and service. So to me, we've got good efficiency, we've got utilization, we've added probably 200 technicians already this year, and actually 77 in the body shop. So we're having the -- they see the strength of the parts and service. Certainly with warranty being key now, and all of the recalls, we as a downstream partner of the OEM are getting the benefit of this.

So, overall, we think that it's good. And warranty is a higher margin. Because we set that rate on an annual basis or maybe twice every couple of years, and we get that rate 100% where, in many cases, you have to negotiate on -- depending on the age of the vehicle, it might give you a lower margin. So, to me, I think we're really in a good spot here because the OEM cannot survive without the downstream partner. And I think that's a message that we have to give the investment community as we go forward.

We're in good shape. We've all invested in shops. We got the best equipment, and we're getting more share of wallet. Oil changes, front end alignments, tires, all of those things are playing part of it.

That's helpful. And then just lastly, as we think about the stepped-up requirements that we're hearing from a lot of auto makers for image programs and facility enhancements, just curious if you could comment on that; where do you think you stand on a relative basis, and does that give you an advantage as a large, well-run company over some of the smaller players out there? And might we see more acquisitions as a result of that?

Well, look, number one, it's ironic as the industry is better and we do better, we get them knocking on our door for more corporate identity. And we had just about amortized what we've done four or five years ago, and they want new tile or something else. That's going to be a constant challenge for us across all the brands. I think much of the CI is terrific. I think the customer experience, these product specialists, product geniuses -- they want to be part of the CI upgrade. I think that's key.

But what's happening is when you go to a smaller independent retailer, he has a bill for $2 million or $3 million to do over his showroom; and then the expansion requirements, as they look at the market growing, it puts pressure on it. But, to me, I think the acquisition pipeline is good right now, and I don't think there's anything now that would keep us back.

For us, worldwide opportunities continue from the standpoint of us because of our global footprint. And, to me, we've got the most geographic diversity, so that should give us a great chance to grow on the auto side. And then we tie in with our Australian business on the power systems in the commercial truck side. I think we're in good shape.

And truly just last question. When you think about the multiples on the commercial truck acquisitions versus the light vehicle or new vehicle dealership acquisitions, how disparate on them? It sounds like the profit and capital intensity, once you get the commercial truck dealerships, is a lot lower. I'm just curious what the entry cost is, you think.

I think out of goodwill it's 30% to 40% less. And the CapEx is -- there's standardization in signs, and of course certain types of equipment. But you probably have more real estate from the standpoint of -- because you've got trucks and trailers being parked. But it's significantly less from a CapEx perspective.

So I like the model. I like being associated with Freightliner, the leader in the marketplace. And we're going to remain an opportunistic buyer. We want to buy where we can that's contiguous. On the other hand, we're now out in Texas; we're up in Oklahoma; we're on the East Coast. So I think that we'll build a real network. And we call our group -- and it's called the Premier Truck Group is the name of our Freightliner group today.

Right. Thank you very much, and great quarter.

James Albertine, Stifel.

Congratulations on a good quarter. And I know it doesn't get said enough, but thank you to Tony for the great slides and disclosures and details you provide every quarter. It's super-helpful to understand your position in the market, so thank you for that.

Roger, if I may, I think most of us know that used vehicle supply, if you look at the lagging effect of new vehicle SAAR over the last few years, it stands to reason that used vehicle supply should continue to improve over the next few years.

Can you help us understand what you are seeing on the demand side? Is there enough demand to support that?

And then as an aside, you mentioned something very important, I think, to your parts and service business with respect to the internal work and the profit flow-through there.

So, it's not just about the used sales, you said; but help us understand how it touches the other parts of your business in a positive way, as we think about where consolidated op margins can go over time. So, sorry for the long question, but I think it's an important one to touch on.

Well, I think that when you think of the market -- let's just step back a minute. The used market today is 3 times the new market. And certainly with e-commerce what has happened, to give you an example just in Atlanta, we have two BMW stores there that do anywhere from 100 to 125 new a month, and they do 300 used. And you can imagine that everybody is not driving by the front door. So the impact of e-commerce there is amazing. It's being able to have the supply.

And one of the benefits that I see coming as we go into 2016 and 2017 on the premium luxury side -- in the US, I'm specifically talking about -- there's been a huge amount of leasing. And probably 50% to 55%, at least in our book of business, is leased.

So we get the opportunity to access those cars when they come back. And I think with the certified -- many of those become certified -- and with that, we get the benefits of running those cars through the shop. And we would spend anywhere from $1,000 to $2,000, in some cases, if you replace the tires for certification. So that adds internal gross profit.

The Internet has opened the market up to us as individual dealers across the country, not just Penske, but AutoNation and the rest of our peers I think have the same opportunity. But, to me, we have this flow of premium luxury used cars coming back.

Remember, we also have large fleets of loaner cars, which we have to employ to take care of our premium customers. And we're turning those now, and [it weighs] two to three times per year. And those vehicles now become very positive from the standpoint of what I would call cars that are priced right. They've got some depreciation; they've got some support from the manufacturers. So those are very effective in our sales side.

So, to me, I think that the used growth is really unlimited from the standpoint of us. We're at 0.84. In the UK, we're 1 to 1. We've got some stores here in the -- take the two stores I talked about in Atlanta. We have other ones that are over 2 to 1.

So I think it's up to the operator at [successing] the cars. It's also flow-through. You've got to get these cars in and out, because the profits will diminish if you carry the cars too long. And what we've done is really done a good job on our pictures, and trying to outline the details of the car make a big difference.

So the Internet is so powerful, and I think we've got good consistency. Penskecars.com probably has, at any point, 25,000 to 30,000 vehicles on it. And I think that it gives you online capability to see these vehicles.

Well, I thank you for that very detailed answer, and I'll leave it to my colleagues or my peers here. But thank you and good luck in the next quarter.

Brett Hoselton, KeyBanc.

This is actually Irina Hodakovsky on for Brett Hoselton. I had a couple of questions for you on the new vehicle demand outlook. There's been concerns raised by a few of the peers who reported earlier about the new vehicle gross profit per unit declining, and potentially signaling a waning demand in new vehicle going forward, potentially suggesting that we're peaking in SAAR. What are you seeing? And what is your opinion on the new vehicle demand?

Well, if we have a SAAR that's increasing, that's going to drive demand across all of the different brands. I think that in the premium luxury side, where we are, we can't get enough Land Rover product; we can't get enough Porsche product. When you look at the X product in BMW and some of the Q product in Audi, and certainly the S class veteran Mercedes, these are hot cars. And when the mix of those you have is higher, it's going to drive a bigger gross profit.

And we've seen with gas prices that people really disregard driving sedans, and they're going to trucks and SUVs. And because of the shortness of supply capability in some of these, we see some shortage, which will help drive margin.

But new product, new vehicles coming out is going to keep driving this margin up. And we always have a tendency to see it coming down as the supply comes up. But at this point, we're managing it every day. And for me to be -- I wish I knew exactly where I'd be 6 to 18 months from now. But I think we sustained, as we'd see here without FX, we've sustained on our overall Company standpoint, we've seen a -- we've been able to sustain our new car margin. And we have not done that in used cars.

I think that's because we're reaching further into this Internet to use it as a tool to be able to drive more used car business, which drives service and parts growth.

So I think you've got to look at the whole business from the standpoint key. And also when you look at lease returns, they are also going to drive demand.

Thank you. One other question in terms of the UK market: one of your competitors mentioned that they are already seeing that inflection of supply in UK that comes -- cars are being brought in that normally would have gone to China. And that is also pressuring their gross profit per unit in new.

It seems that longer term, when you look at the trends, your total gross profit tends to stay pretty stable. So wondering how likely is it that, in case that pressure occurs, you would be able to compensate in your other segments, such as used vehicles or in the F&I department?

Well, I think you've got to look at brand mix. One of the nice things in the UK for us -- we have market areas. So typically we have three or four or five dealerships in a market, so we don't have the inter-brand competition. And when I look at the year-to-date gross profits in the UK, we're up probably GBP100 per vehicle, all-in, in the UK. So, to me, that's a pretty strong indication that that market is good. And in the US, on a year-to-date basis, we're flat, so we've held the margin.

I think it's getting the right inventory. And I think it's also from the standpoint of how you get your mix. And, to me, that's what we've tried to do. So I think there's a lot of things we have available to us to make a difference.

But UK specifically, it has always been competitive. There's a lot of pricing on the Internet. But again, I think the way we're set up there is much better because today the premium is 26% of the market and (technical difficulty) probably 10% of that market ourselves.

And then lastly, we're hearing that there's an increasing number of sellers in the US market, or perhaps expectations are a little high. Have you seen any changes over the past maybe three, four months, in terms of the M&A market and expectations?

Well, I think there's -- it's an active market. And it's ironic; we very seldom run into each other. I think the publics are interested in growing. They've got capital, low-priced capital, and we see a good pipeline. I would say this: that for the right store and the right location, we're probably paying 20% to 25% more money than we did two or three years ago. But the market is strong, and we're going to take advantage of it.

Thank you very much. Congratulations on a good quarter.

Paresh Jain, Morgan Stanley.

I'd like to get to the quarter, but first things first: Roger, congratulations on being inducted into the Automotive Hall of Fame.

Well, thank you. I told somebody, they finally got down to the Ps, right?

(laughter) Very well, then. Excellent. So with that, let me start with a question on acquisitions here. Since you bought ATC last year, has there been any shift in your CV acquisition strategy? I believe you mentioned on previous calls that 50% of your acquisition revenues in future may come from the CV business over the next few years. Do you feel more or less bullish about acquiring CV dealers now, versus when you bought ATC last year?

Look, we're going to be opportunistic, based on location and where we have contiguous potential markets. And I think we're going to continue to grow. There's not the field of opportunities in the US as we have 18,000 franchises on the car side. But I think that when you think about our business, we acquired $200 million in the first quarter and -- in Chattanooga and Knoxville -- and I think there are these glue-on ones that will see throughout the US that we'll take advantage of, especially because we are committed to the Freightliner brand. So I haven't changed our attitude at all. And we're definitely going to grow both sides of the business on the retail auto side and the commercial vehicle side.

I think that's what I said last quarter. But, to me, originally ATC was $700 million, and I think now will be pushing $1 billion when we look at annualized revenue for the year.

Understood. No, that's helpful. And then following up on John's question on acquisition: you have technological and regulatory headwinds to deal with that could pressure, I believe, smaller private dealers a lot more than the well-resourced public ones. And to that you add a slowing SAAR. Shouldn't that bring valuations of private dealers down right now?

Quite honestly, I think that the people who are selling -- in many cases, it's a generation gap where you don't have succession. They are looking at what is the CapEx requirements and knowing that there are public retailers -- or other even private groups, like Buffett and that team -- are interested in growing.

So I don't see this as a period where if the SAAR slows that we're going to see the prized locations go for less. I think that many of these people are signed for tax reasons, and I think that's always going to be out there. But I have not seen any indication, at least where we're looking, that the pricing is coming down. I think it's been pretty steady and on the upward side here over the last, I'd say, 12 months.

Got it. Thanks for the color.

Brian Sponheimer, Gabelli & Company.

Congratulations on the induction, and also great quarter.

Thanks.

A couple questions here. Just one on product cadence: what are you seeing as far as acceptance of some of the lower-priced products that are being rolled out by some of your premium OEMs in the US? And relative to where your UK dealers are with those products, since they were launched a little bit earlier, just give some ideas -- your thoughts on how these products are going to help you over the next couple of years.

Well, I think that -- if I just think off the top of my head, there's no question that we've got the Audi A3; the GLA has come in nicely here; the CLA. X1 is a strong product for us in the UK. And a lot of these products are now coming with the xDrive, which I think is key in the US, based on the weather patterns.

The new Pilot, the RAV4 -- a lot of the Toyota product, I'm interested to see the strength of the Toyota product in some of the markets in Europe, in Germany specifically. And we can't get enough of some of these vehicles. But overall I'd say is the quality of the premium luxury guys, they look in their toolboxes, their ability to go downstream I think is pretty amazing. And it's definitely growing their share. We've seen that in the UK.

And then probably a perfect example is what -- with the Cayenne. Porsche started out as a sports car company, and then they had that -- the Cayenne, then the Panamera, and now the Macan. We can sell every one of those we can get. A little slowdown in China has helped with that.

So I think those vehicles are very strong for us. And the pipeline of new vehicles coming in -- I think there's probably, what, 150 new models coming in over the next 24 months.

Great, that's helpful. Just one more question just on -- as vehicles become more connected from a 4G-LTE standpoint, is that any threat to your parts and service business, where you may not get the look on a software recall that would have driven some incremental parts and service business?

Well, there's no question that being able to have remote diagnostics is going to be a great tune for the customer. In fact, today, we get notified at the dealership at BMW if we've got a light going on in one of our customer's cars. So I think it's a service capability.

Now, if it's a diagnostic piece that they can handle over the wire, that probably is good for quality with the customer. But we're still going to be needed for the routine consumables that take place. And, quite honestly, it could drive some additional business to us as we get more complicated with technology.

Understood, thank you. Well, tremendous quarter. Thank you for taking my questions.

David Whiston, Morningstar.

First on the dividends, up 16 straight quarters now: how much longer can that streak continue?

Well, I'm a dividend guy, I would tell you that. As we continue -- look, the Board of Directors looks at our cash flow each quarter and trailing 12 months, and with the earnings that we have I think our payout is in the mid-25s. So I think that we could get into the mid-30s would be probably if you say where's the roof, it could be at 30% to 35% ultimately. But at the moment, we continue to look at each quarter and hopefully we can continue to grow the dividend.

Okay. And as you know, there's been a lot of publicity about AutoNation and TrueCar recently. I was just curious, what's your relationship with TrueCar and other vendors like that?

Well, we've had an association with TrueCar maybe a little bit different. Today I think we have probably nine locations that we have with TrueCar. And primarily those are in Texas, and they support USAA. But we have a little different model. We have a subscription where we actually pay a subscription to get leads from that market. We don't pay by individual lead, and we don't provide our data. So it's a little bit different, but we're looking at it.

I think that AutoNation had a little different model with them from a data perspective, and I understand Mike Jackson's concern. And to me, we will continue to monitor our situation at this point. But it's certainly not significant, one way or the other, to us.

Okay. And finally, I'd be very interested to hear your thoughts on -- is car sharing ultimately going to be a big threat to the US SAAR, because people won't want to have private vehicle ownership anymore?

Well, I think that people like to travel. When you think of the size of the US, are we going to car share across the country? I don't know that. You look at Uber's success, you look at some of the different products that are available; it's very interesting, but someone has to sell those vehicles. There's some question, do the manufacturers own the vehicles, or will the dealerships be able to sell those? And then they will be shared amongst the communities.

The one thing that really we haven't seen the impact of insurance. I think that in major cities you'll probably see some impact, but guess what? I think this is going to create more miles on vehicles. Because if we get utilization of vehicles, guess what it's going to do? It's going to drive our parts and service business where we have our high margin.

Okay. Thanks so much.

Pat Archambault, Goldman Sachs.

Just a couple here. Just first on the CFPB, we've had a couple of companies weigh in on this arrangement that was struck with Honda, where they agreed to effectively cap either the markups that they would allow their lenders -- and I think there is, though, however, some flexibility for them to pay a slightly higher buy rate.

So I wanted to get your thoughts about, A, the impact of that, whether you think that's a good idea. And also if you think this represents a blueprint for other things to come with other lenders.

Well, it's hard to say the CFPB if this is a blueprint. I wouldn't say this, because I think there are still probably negotiations going on. I think that the Honda situation probably provides a workable framework by eliminating discretion of the individual transaction by placing caps on the markup. And I'd say we've had caps on our markup for a number of years. And we provide -- I think one thing that we forget is we provide an added value to consumers.

And the solution between Honda and the CFPB allows dealers will be fairly compensated, but for me to say this is going to be a blueprint, I don't know that. I looked up just as a data point what has been our average markup with our OEM financial institutions, our captives, you'd call them.

And we think with the best information we could get -- because I knew there would probably be a question -- it's probably between anywhere from 0.6% to 1%. And with our traditional preferred lenders, which would be our banks, we'd probably be around 1%. So I don't see this as being a big impact one way or the other.

But I think, overall, NADA is discussing this with the government. We've got some of the banks and other people. I'm really staying out of it. I think, at the present time, I think we need to have a fair and equitable solution for both the buyer and also certainly we as retailers.

Yes, NADA doesn't seem to like it. So I guess from your perspective it sounds like, either way, you don't expect it to have a very big impact on your profit outlook for F&I.

Well, you look at Penske specifically, you remember, 67% of our business is in the US and the other is internationally, so we're not really impacted by it. So, at the end of the day, our finance revenue is only 40% of that 60. So we won't be impacted severely. And on top of that, remember a big portion of our business is leased. And there's flats and smaller margin available on those types of transactions.

Right, right. Got it, okay. Getting back to -- the question was brought up about gross margin in used, which was down year-on-year, a little bit under some pressure. I feel like we've seen that across a couple of guys this quarter. I wanted to get a sense of what you thought the outlook was there.

Just to tie in a few things together, I think it was also mentioned on this call that you've got more inventory availability from off-lease vehicles. So is there a potential for used to stabilize and improve? Or is the rotation to digital more of a long-term headwind there?

I think that you are going to see more used car volume because we're really wiping out what I would say some of the smaller used-car lots on the corner, because of the complexity of the cars to get them ready for resale, the requirements by the government.

But from a used car margin standpoint, what we've done is -- there's no question the supply is higher, but were also -- we're selling more vehicles. And, to me, we need to make the new car -- there might be some trade-off between the new car margin and the used-car margin, too. I guess you got to look at both ends of the transaction, and particularly in our case. We're trying to get to 1 to 1. And you've seen some of our peers are operating their own independent used-car operations. So there's definitely an interest in used cars. They've seen the success of CarMax.

And you look at their margins and where they are, I think that we need to look at each one of the brands, whether it's premium luxury. You'll certainly see a higher margin than you will in maybe a volume foreign, and that's what's going to drive the margins down. But I'm probably less annoyed about a smaller margin drop than I would be if I didn't get the volume.

With our volume up 5% to 8%, to me that's key because I'm getting not only more gross profit; it gives my salespeople a chance to make more money; we get utilization of our service bays at night. So when you add it all together, it's a bottom-line benefit, and you can see it on our flow-through this last quarter.

Yes. And if I can just squeeze one final one here, just on that last point. The flow-through was exceptionally good. How sustainable is that? At just a high level, it seems like -- whereas the incremental dollars of SG&A was probably more in the 70s in past quarters. It was low 60s this quarter.

Is that something that can be carried forward into future quarters? Or is it likely to more edge up towards the 70s where it has historically been?

Not sure I understand the question. But let me say this: that I think when we look at our flow-through for an overall company, we're going to be -- our goal is in the mid-35s. And we can move it up, and then you'll have different pieces of the business that will have more.

I was just using the residuals, so sorry if I'm being confusing. But it seems like you were mathematically close to almost 40, like high 30s this quarter, if I'm doing the math right. So it seems just high --.

We were at 34%, Pat.

Okay. Maybe I'll go off-line with this, Tony, with you (multiple speakers) seems very good. Okay, cool. Thank you, guys.

David Lim, Wells Fargo Securities.

I just wanted to touch on what Mark Fields has said when he was saying a plateauing SAAR environment. In that situation in the US, Roger, what can you guys do in order to garner additional growth that goes above and beyond maybe what the industry sales rate is? Would that be targeted acquisitions? Or is there another lever that you could pull?

Well, I guess you have to look at our overall -- as we talk to the investors, we're looking at a 10% -- this is our goal, is a 10% increase, and half of that same-store. And you look historically here; we've been able to beat that. And I think we would continue -- from a company perspective, we would look at acquisitions, which are key. We'd grow our used car business. We've got lease returns, which will drive a new car business for us.

And I think we've got to get more -- we've got to get penetration. And I think what happens is if we're getting 100 lease cars back a month, what percent are we keeping? If we lose half of them, then we're probably not going to gain market share.

So I think we have got to look specifically where we have a customer that we don't give it away to someone else, and that will keep maintaining our market share. Because people will still be buying cars. And there's no question, at the end of the day, as we look at the profitability of the Company, it's going to be driven by our parts and service gross, which continues to be strong because of our used car reconditioning, our CPO, and then of course in our commercial truck side. So I think all of those will help us sustain some bottom-line growth.

But on the other hand, if the SAAR dips 10% or 15%, I think we will all have -- there will be some impact. I don't want to say I wouldn't think anything different. But with the international piece, going on the upside, you look at Western Europe; they're certainly not looking at a down SAAR. They're looking at 10% to 15% increase, and we're going to get the benefit then.

You see the commercial truck side, which is growing significantly. With low fuel prices, and people spending money with the economy, guess what? 85% of all the goods and services across this country are driven by trucks, and we're going to get the benefit of that.

So at some point people have got to understand our Company is not just an automotive retailer. We're a global player; we are in commercial vehicles; we're in distribution of trucks out in Australia. So we have, I think, a little different playbook.

So, I wanted to touch on the whole European aspect of your business. Obviously things are turning around; registrations are getting better; and you have some JVs in Western Europe. Are you looking into a more aggressive acquisition strategy in Western Europe, where it's no longer a JV structure but it's wholly owned by Penske?

Correct. Yes, we definitely -- right now, we have a 70/30 partnership in Italy, which I think is very strong with Mantellini family, and very strong operators. And we will be adding to that group of stores over the next 12 to 24 months. There's a tremendous amount of opportunity.

And I think with people on the ground, we have people who work for us here in the US with a tremendous amount of experience. They speak the language, they know the culture, and that's going to help us drive those businesses not only in Italy, but Germany. And also we've had some very good luck in Spain with our partnership with Caetano. And, as you know, we've taken over the Barcelona market for BMW.

So we see that as a real opportunity. I will say, I hope that we always have a small partner in these markets who understands the social side of the business, and also from a language perspective. We're trying to build a new team of people in the Company. The best global companies -- and when I was on GE's Board, when you looked at GE, their global, 55% of their employees didn't come from the US. So we've got to think a little bit that way as we grow internationally to give these folks a chance. And it's amazing the interest we have as we've been able to have capital and move into some of these markets.

So just to be sure, you would still do a JV kind of structure versus the wholly-owned Penske ownership of any dealerships in Europe?

I would say today, the way we are set up in the markets that we would own -- we've like to own probably between 70% and 80%.

Okay.

That would be the ultimate goal. And maybe in Spain today with Caetano, 50-50, we might grow on that basis. But it gives us an opportunity to take a look at that. But I wouldn't want to mislead you, and think that overnight we're going to be 100%. Because I'm not sure that we could execute as well without partners that have the market experience.

Sure. In my final question, I just wanted to clarify a question that Rick Nelson asked a little earlier. And I just want to be sure -- you said, I think, heavy trucks were going to contribute $0.12 to $0.14. And then did I hear you correctly, where you are now estimating $0.10 to $0.12?

I guess I misunderstood him. We thought we'd get another $0.02 out of the $200 million that we got -- we've added to the business going forward.

Okay, got you. Great. Thank you so much.

And with no further questions, Mr. Penske, I will turn it back to you for any closing comments.

That's fine, thanks. We'll see you next quarter.

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