Penske Automotive Group Inc (PAG) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Penske Automotive Group third quarter 2015 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through November 5, 2015. It's on the Company's website under the Investor Relations tab at www.penskeautomotive.com.

I'll now introduce Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, John. Is everything okay? We had a cutout there for a second. Is everything all right?

Please go ahead.

Okay, thank you. Thank you, everybody, and thank you for joining us. A press release detailing Penske Automotive Group's third 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 us for today's call are Roger Penske, our Chairman, 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 some 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 on factors that could cause results to differ materially are contained in our public SEC filings, including our Form 10-K.

At this time, I'll now turn the call over to Roger Penske.

Thank you, Tony. Good morning, everyone, and thank you for joining us today. We've reported third quarter results, which included the best nine months in our history and certainly a record third quarter. For the third quarter, revenue increased 12.8% to $5 billion, while income from continuing operations increased 13% to $86.7 million, and related earnings per share increased 12.9% to $0.96. The revenue increase was driven by a 7.3% increase in retail units sold and by acquisitions, most notably from our US commercial truck dealership business.

Since 40% of our revenue is generated overseas, principally in the UK, the significant year-over-year decline in the UK pound against the dollar impacts our comparable results. Excluding foreign exchange, revenue would have increased 16.9% to $5.1 billion. Foreign exchange negatively impacted earnings per share by $0.04 in the third quarter.

During the quarter, 83% of our income was derived from our automotive retail business, 8% from our US commercial truck dealerships, and 9% from other, which includes Australia and our joint venture investments. Based on our continued strong financial results, the Board of Directors recently approved a cash dividend of $0.25 per share for the third quarter.

Let me now turn to the specifics of our performance. Our revenue mix during Q3 was 61% US and 39% international. Approximately 92% of our total revenue was generated through our retail automotive dealerships. Overall gross profit improved $82 million, or 12.6%, and overall gross margin was 14.7%. SG&A-to-gross profit improved 30 basis points to 77.3%, and overall gross profit flow through was 25.1%, including 34% for our automotive retail dealerships.

Operating income increased 14% to $146 million, and operating margin was 2.9%. Our operating income includes nearly $51 million of rent expense for operating leases, which impacts operating margin by approximately 110 basis points. Additionally, operating margin excludes $11 million in equity income we earned related to our joint venture investments, such as our investment in Penske Truck Leasing.

Earnings before taxes increased 10.5% to $129 million. Our effective tax rate was 32.3%, compared to 33.9% last year, principally related to the mix of our pre-tax income across various markets. EBITDA improved 12.7% to $165.4 million.

Turning to our retail automotive business, our brand mix was 71% premium luxury, volume foreign at 25%, and the big three 4%. Total retail automotive revenue increased 6.8% to $4.6 billion. On a same-store basis, automotive retail revenue increased 5.2%, including 3.3% in the US and 8.4% internationally.

Exchange rates impacted same-store retail revenue by $135 million. Excluding foreign exchange, same-store automotive retail revenue would have increased 8.5%, including 17.2% in our international markets. New units retail increased 7% to 61,000. On a same-store basis, new units increased 4.7%. New vehicle revenue increased 6.9% to $2.4 billion, commensurate with the increase in new units.

Our gross profit per unit retail was $2916, down $89, and our gross margin was 7.5%. Excluding foreign exchange, our gross profit per new unit would have increased $15 to $3020. Our supply of new vehicles was 53 days at the end of September.

Looking at our used automotive business, we retailed 51,000 units in the quarter, representing an increase of nearly 8%. CPO sales represented approximately 36% of our used unit sales in the US during the quarter. Our used-to-new ratio was 0.84 to 1 for the quarter. Same-store used units retailed increased 4.5%.

Used vehicle revenue increased 7% to $1.4 billion. Gross profit per used vehicle retailed was $1652, down $155 per unit. Gross margin was 6%, down 60 basis points. Excluding foreign exchange, gross profit would have been $1716. Our supply of used vehicles was at 39 days at the end of September.

Turning to finance and insurance within our retail automotive business, retail -- or revenue per unit was $1098. Excluding foreign exchange, F&I revenue per unit was $1127, an increase of $31 per unit.

The retail revenue service and parts business had another strong quarter with revenue improving 7%, including a 4.5% increase on a same-store basis. Excluding foreign exchange, same-store service and parts revenue increased 7%. Our customer pay was up 3.6%, our warranty was 19.1%, our body shop was up 3.4%, and our pre-delivery inspection was up 10%, for an overall increase of 7.2%.

Turning to our Australia businesses, the business really is comprised in two parts -- the distribution of commercial vehicles and related parts and, the second, power systems, which distributes diesel and gas engines, power generation systems and relative service and parts for the on and off-highway markets. Australia generated approximately $102 million in revenue and a gross margin of 25.9% and were profitable in the quarter.

The power systems business is performing well and has received several significant equipment orders for engines and repowers. These repowers will continue to drive the parts business for a number years in the future.

In the commercial vehicle distribution business, the economic conditions, the low commodity prices on iron ore, et cetera, and the decline in exchange rates continue to pressure that market. The heavy-duty truck market has declined more than 7% this year. Our commercial vehicle distribution business experienced a $0.03-per-share decline in earnings year-over-year.

Our inventory positioned in Australia continues to improve, and we are taking additional steps to reduce our SG&A costs. We continue to view Australia very favorably over the longer term, as the average fleet age of trucks should foster replacement demand as the economy recovers.

Let me turn to our US commercial truck business now. Our US-based business continues to perform well. We represent Freightliner and Western Star brands under Daimler, which account for nearly 40% of the US Class 8 market. These brands have gained over two market share points in 2015. The Freightliner brand continues to demonstrate best-in-class operational efficiency and strong residual values with much sought-after Detroit diesel engines in the proprietary transmission and axles.

In the third quarter, we generated 2000 truck sales, $268 million in revenue and a return of approximately 3.8% on sales. Service and parts represented approximately 71% of the total gross profit in this business, and when you compare that to the retail auto business at 40%, it's very strong. The strength of our service and parts is a key element to our commercial truck strategy in the future.

The market dynamics for medium and heavy trucks remain strong across North America for the Freightliner brand. The backlog is over 137,000 units at the end of September, and we expect the remarket to remain strong.

Looking at our balance sheet, our strong cash flow has allowed us to reduce our total non-vehicle debt by $168 million this year to $1.2 billion, with $50 million cash of on our balance sheet at the end of September. Our leverage ratio is 2 times using trailing 12 months EBITDA, giving us plenty of room under our covenants to make acquisitions. Between our US and international credit lines, we had more than $800 million in liquidity at the end of September.

New and used automotive vehicle inventory was $2.7 billion, up $456 million when compared to September of last year. New was up 373. Used was up 83. On a same-store basis, new and used automotive vehicle inventory was up $329 million compared to the end of September last year. New was up $277 million. Used was up $52 million.

If you look at our numbers on unused car inventory compared to the end of the year at 2014, we're actually down $13 million. Also, our wholesale loss during the quarter was down $500,000, or $70 per unit, as we try to balance our used car inventory going into the fourth quarter. Capital expenditures were $151 million year-to-date, which includes $121 million for facilities and corporate ID programs and $30 million of land for future development.

Let me talk a little bit about e-commerce. Earlier this year, we launched on our online buying tool called Preferred Purchase, providing online functionality in the car buying process and caters to a customer's individual needs. The tools provide functionality on all aspects of the vehicle transaction in one place, easily allowing customers to access trade valuation, pricing, leasing and financing options, manufacturing incentives and applying for credit.

This functionality is available and integrated on a single platform that resides on the individual dealer websites. Most importantly, we've seen this transaction time streamlined and significant higher closing ratios when compared to normal Internet leads.

In closing, I'm pleased with the performance of our business. We posted a record third quarter with double-digit increases in revenue, income from continuing operations and earnings per share. We continue to focus on gross profit retention and exceeding the expectations of our customers.

The diversification offered by our business highlights the opportunity we have for continued growth. Further, the outlook for the medium- and heavy-duty truck market remained robust across North America. We are confident in the long-term strategy we've deployed.

I want to thank you for joining us today and your confidence, and we'll open the call up at this time for questions.

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

Just first question -- one of the reasons that the results were a little bit lighter than we were looking for is really just foreign currency, and obviously that's a fleeting factor. I'm just curious, as you look at that and look into 2016, when you think the pressure from ForEx may ease, and if you could just remind us that this is all translational and there's no real transaction risk here at all.

That's correct, but I think when you look at FX as we get into the fourth quarter, we're going to see that there is a lot of -- we're getting much closer, I think, $1.53 versus $1.56 if you look at December of 2014, so we'll start to -- that'll start to close up. We have no transaction risk on any of this at all.

Okay. And then a second question -- I mean, you've got yourself in North America and the US market, Europe and Australia in a number of different businesses, so there are opportunities to allocate capital in a number of places. As you look forward to 2016, where do you think the best allocation of capital is going to be? It sounds like the truck business is a real burgeoning part -- I mean, it's obviously been a part of the business for a long time, but a real burgeoning opportunity for you. Is that where you think you'll be making more acquisitions, or do you see stuff on the light vehicle side as well?

I think first we've got to meet the OEM's requirements for our CapEx in corporate ID. I think that's point number one. We've continued to increase our dividends each quarter, and we would expect to do that as we go forward. And our EBITDA was $650 million, we expect, for the year.

But when I look at the markets themselves from a new vehicle manufacturer franchise, I think that today some of the pricing is getting probably a little stiffer than we've seen it in the past. There are still, I think, some good deals out there. Each of us peers have opportunities in our own markets where we have strength and contiguous opportunities I think we'll continue to grow.

The truck side of the business in the US, there's a consolidation going on by Freightliner. You've seen it. They've even represented in some of their press releases that they're looking for consolidation. We see that as a continued opportunity as we go into the truck side.

But when you look at Western Europe, we've been able to grow there nicely as we've gone into Spain, we've gone to Germany and Italy, and we see opportunities there now. People are knocking on our door with acquisitions, so we'll balance our capital spend on acquisitions.

I think between all the markets, if I said a market where we might have our foot on the brake, it might be Australia because of the current economic situation there, because China, as you know, has really given Australia somewhat of a cold here over the last several months with the commodity prices going down, and I think that at this point, our power system business is very strong.

And when you back up on this, I'm looking at businesses where we don't have the cycles really impact us over the long-term, and when you look at our business here in the US on the car side, 40% of our gross profit comes out of parts and service. On the truck side, it's 70% both in the U.S. and also the distribution business in Australia, but our power system business is 90%.

So I think that we'll obviously look at those from the standpoint of continued growth, but our focus today is probably 60-40 international-US, and there's no question that from an opportunistic standpoint, we're going to look at all of these markets. Italy has been very good for us, and we have some opportunities there also.

So I would say it's pretty much a range in all markets where we have scale and we can actually glue on opportunities where we can utilize some of our back office capabilities and our good people, so, again, acquisitions, CapEx and dividends would be the focus.

Okay. And then just, lastly, when you look at the gross profit per unit you put up ex-ForEx, it was up $15, which is pretty impressive relative to what we're hearing from other folks out there. I mean, could you explain how you're getting that $15 increase? Is some of it the international exposure and the UK is doing better than what you're seeing in the US? And if you are sort of seeing some underlying pressure on grosses, where do you think that's coming from?

Well, I think when we look at our business, we've been trying to drive our guys on GP and not just run for volume, and I think that as we looked at the markets during the quarter, we had some softness in the Northeast in our premium brands -- both in Audi, Mercedes and BMW and also somewhat in San Diego. But, again, we held our gross margins in the premium side.

There's been some pressure from Audi as they have gone to more of a push strategy rather than a pull that they had in the past, and I think that's having some impact, but the focus today is on gross profit. We've always held it. I think our mix is making a difference, because we have more premium luxury than maybe volume foreign or domestic, which would make a difference.

So overall, I think we're in pretty good shape when we look at almost 8% on our new in the quarter, and I think that's going to be an area that we're going to focus on as we go into the fourth quarter.

It's been a good strategy. Thank you very much.

Bill Armstrong, C.L. King & Associates.

Just kind of as a follow up to that, we keep hearing about that there's an oversupply of BMW vehicles both in North America and Europe and the slowdown in Chinese demand is kind of causing the OEM to divert vehicles over to these markets. Are you guys seeing that, and are you seeing any margin pressure in BMW in particular?

Well, if I looked at my BMW inventory comparison to December, we would be up from about $200 million to $245 million in the US and certainly overall, but we always tend to grow that inventory as we look into the fourth quarter because they have a tremendous amount of incentives and different programs that would drive that into Q4.

And when I look at internationally, I'm always looking at the end of the year on this number because, Bill, we've got to look at where we end up. We're actually down $48 million on BMW if we look at December in 2014, so in balance on our BMW business, we're about flat if we look at the overall business both internationally and domestically.

Okay. That's good to hear. And then on parts and service on the retail auto side, gross margins were basically flat year over year. You had previously been reporting some nice increases. Any concerns there or anything to call out as to why they didn't expand?

Well, when I -- look, we're at 59%-plus, which is I think pretty much at the top of the mark when you look at the business, and at the end of the day, with less used car retailed, we had less reconditioning, which we have a higher margin and could have driven that. But I think overall, when you're looking at 59%-plus, I wouldn't expect much more than that. I think we've kind of grown into that area, and to me that's a good metric.

Agreed. Okay, thank you. That's all I have.

James Albertine, Stifel.

I'm sorry if I missed it but wanted to ask a point of clarification. Can you tell us what your front-end margin was during the quarter and how it compared last year -- to last year?

Well, you're talking on new or used?

Well, the combination really, so new and used and F&I over your new and used retail units.

Well, if we looked at new compared -- taking all premium volume, foreign and domestic, we were at 7.5% for the quarter, versus a year ago same quarter, we were at 7.7%, and we were down 60 basis points on used from 6.6% to 6%. And I think that without foreign exchange, when you look at our business from an F&I perspective, we were up $31 per unit, so the foreign exchange had some impact overall. Without foreign exchange, we were up $2 on F&I.

Okay, great. I think on a PVR basis, as well, I think it was roughly flat, if I did my math correctly, but, [Tony], we can follow up on that after the call.

Okay.

And also, Roger, if it's okay, I wanted to maybe dig in. You had some interesting comments on the used inventory side. I wanted to understand the thought process looking into the fourth quarter, and then if you can maybe separate for us in the US business some of the margin trends that you saw in the third quarter and so how you performed on a year-over-year basis, that would be really helpful. Thanks.

Well, I think if we look at used, it kind of followed the lower new car premium volume in the Northeast, and I would say that's the whole Northeast, so we were actually down on units, probably around 500 units in used in the Northeast, but gross profit, when you look at it, was up overall about -- almost $200 per unit. In the Central, we had an increase where we didn't have impact on used. From a sales perspective, we were up 700 units, and we were down a little bit on their used gross profit, probably around $90.

And in the West, we were flat on gross profit and really flat on units. So, again, I think the San Diego market had some impact on the used car side too, because (inaudible) the new car sales, we don't generate some of those trades that we would sell, so there's some -- I think some tie in there.

But overall, I think what we have to do is start early and look at our strategy for inventories on used cars, and I think of I looked -- I said earlier in the call we were down, I think, about $13 million if you look at our business from December, and the good news is our wholesale loss is down about $70 per unit in the quarter, so the trend is down on wholesale loss. I think managing our inventory down is going to be key, because there will be a lot of cars coming off lease. I think residuals will take somewhat of a beating as we get into Q4, getting into the first quarter of Q1, so we want to have our inventory balanced properly.

That's extremely helpful. I appreciate that, and best of luck in the fourth quarter.

Thank you.

Rick Nelson, Stephens.

Roger, one of the public peers in the commercial truck dealership segment is calling for a pretty big decline in sales next year. I'm curious what you think about that forecast and how that affects your business and your appetite for acquisitions.

Well, I think [Rush] is the really comparable that you'd look at our in the market. He's a very good operator. His brands are international and Peterbilt, which primarily international has a small piece of the overall on-highway market and Peterbilt is, I think, probably being impacted somewhat in the oil and gas side, where Freightliner is really the biggest player in the market. With the Western Star and with Freightliner together, they're almost 40% of the market, and they've picked up a couple of share points during the quarter.

And I think that the market from our perspective, from our brand, we think remains strong, and remember Freightliner is really for the over-the-road trucker, primarily a lot of the big fleets, and they haven't bought -- in fact, if you just look at Penske Truck Leasing, we're going to buy 13,000 Freightliner trucks this year, tractors, so our buy is up. But we think that with them taking share and with their sales up, there's no question that we'll see that strong move in 2016.

Our Premier Truck business, as you look at it, is a strong -- is in strong markets in Dallas, it's in Ft. Worth, it's in Oklahoma, and also in the East in Georgia and Tennessee, and we have good vertical integration with that brand.

One thing you don't get with Peterbilt and-or Navistar, you don't get the engine, transmission and axle integration, which we have with Freightliner where we have an engine, transmission and axle drive line, which is all proprietary, and with that, that generates a strong parts and service business.

So we see that as a plus, the strength of our locations, and quite honestly, when I look at the return on sales, we've had some of our locations as high as 5% overall. I think for the quarter, we were about 3.8%. So, again, when we look at parts and service gross 70% of the overall gross, I think it's a great space to be in.

And in these fluctuations of markets, that parts and service gross is going to drive us through. You've seen that even in the auto side when we had the downturn, how important that was. So I think that 2016, there might be somewhat if a slowdown overall in the overall sales, but I think Freightliner, with the strength they have and the quality of the product and technology -- I think they're going to be a leader as we go forward.

So to me, we have the ability to conquest a number of new accounts. We've picked up US Express, we've picked up Covenant people in the Northeast that we didn't have, and those are going to drive volume for us, so I would say the lights are green for us in 2016 from an overall standpoint.

Thanks a lot for that color. And then shifting to the car business, if sales do flatten out here -- I know you've got those 10% growth targets. Do you think you could achieve that through some segments of the business like service and used?

Well, I think we've been running -- I think we have to be careful. I think our -- when you look at parts and service -- and we've got to compartmentalize this, so we've got US, we've got international, we've got the truck side. I think that we're going to see our parts and service continue to grow, because the zero- to five-year population of cars in the marketplace -- I think that's good from the standpoint of new and used cars.

We have an overall revenue target growth at 10% now at least, and then we'd want to grow the bottom line in our EPS. I mean, I can say that that's a general number, but we would certainly have that as a number to manage towards. So to me, ex-ex exchange, we're up 8.5% on a same-store basis this year, and I would expect that we would operate on the same basis. Some of our benefit might come out because the truck business grew more.

Certainly when I look at Western Europe, when you look at the markets in Western Europe from the standpoint of Spain and Italy and Germany, those markets are up, and we've seen a tremendous continuing growth in the UK. You've seen that, I'm sure, from Group 1's acquisitions over there too. When you look at it overall, the international market is really up 17% and at a comparable comp in the quarter, and the last quarter would have been 18%, so I think that continues to grow. So when we take all the pieces and put them together, I don't think that our numbers should be unrealistic.

Great. Thanks a lot, and good luck.

Thanks, Rick.

Paresh Jain, Morgan Stanley.

I wanted to stick with acquisitions and the inorganic growth opportunity. So the first question there, you've obviously been monitoring Spain and Italy for some time, and you already have some presence through JVs there. What do you need to see to have more confidence and perhaps a bigger presence in those markets?

Well, I think its people. I guess the human capital side of it is really the most important, because we have to have good people to run those businesses. And we're developing a great team both in Italy, Spain and Germany, and as we do that, we are continuing to grow.

There are many opportunities in Spain and Italy. The OEMs are knocking on our door every single day to take a look at opportunities, and I think that we'll continue to grow. We have a couple of the opportunities that are maybe closer in right now that we're going to look at over the fourth quarter and hopefully maybe have some news as we get into Q1.

But to me, we think it's a strategy. We've got a good team in Europe, and there's no question that -- they're fragmented markets. We don't have any franchise laws from the standpoint of ceilings, hitting too many -- having too many franchises. And quite honestly, what we see is that many of these families have lived out of these businesses in these foreign countries, own the real estate and really have found out they haven't been able to run the business profitably, but they're willing to hold on to the real estate, lease it at very realistic numbers compared to the US. We then put working capital in and buy these businesses at low multiples, so to me there's a tremendous amount of opportunity to consolidate.

Understood. And then staying on acquisitions here, obviously there have been some warnings signs on the Class 8 productions here, but you seem to be more confident about Freightliner's exposure. But does that in any way pause the inorganic growth opportunity with CV's, or because you're still in the early stages of consolidation, it perhaps makes a lot of deals come to you?

Absolutely. I mean, we have I think three right now that we're talking to that have interest for us to potentially purchase, and I think that will continue. Remember, the Freightliner brand has grown to be the leader in this market, and they continue to grow. Their technology is the best. The integrated power train from the engine, transmission and axle is a real plus, because that drives that customer back into the shop. And I think with our experience having owned Detroit Diesel, we have a very good understanding and we have access to some very good people who have joined our organization to drive that.

So I think it's opportunistic, yet I think the consolidation is being supported by Freightliner in certain contiguous markets. And to me, when you think about today, 85% of all the freight that moves in the United States is by truck, and that's been pretty much the same for as long as I can recall, so I think that continues to be a real opportunity for us.

And the market going up or down I don't think is going to affect Freightliner. At least, it won't affect our US retail business, because we're really just getting started from the standpoint of our team and connecting with customers in our markets that we weren't doing business with, and I think we have a reputation as the Premier Truck Group now that we can gain some share.

There's a huge parts business, too, that follows us, which is something. With all these units in operation, it's a little bit like the zero- to five-year car park on the car side. We've got all these trucks now that Freightliner's put in the market. Someone has to take care of these, and we're in a perfect spot. And many of the big fleets who even do their own service still have to buy the parts from us, whether it's warranty or customer labor, so we're in the right spot.

Understood. No, that's very good color. One last housekeeping one for Tony. We typically see an uptick in other equity income in 3Q versus 2Q. What was different this time?

Paresh, that was the consolidation of the Premier Truck Group franchises into -- out of equity income and into the consolidated results, which took place starting in November of last year.

Got it. Thanks so much.

Brett Hoselton, KeyBanc.

Good morning. This is actually Irina Hodakovsky on for Brett. How are you this morning?

Irina, how are you?

Good, thank you. Roger, I wanted to ask a couple more questions on the new and used vehicle gross profit per unit ex-FX headwinds. Someone mentioned earlier on the call the BMW anecdotal commentary about -- surrounding the inventory and competitive pressures there. Just sequentially when I look at the 2Q versus 3Q, when FX was more or less flat, even a little bit positive, I'm still seeing a pullback in new vehicle gross profit per unit and used vehicle gross profit per unit. I'm wondering if you can kind of reconcile that for us so we can understand excluding FX. What are we seeing in the market?

Well, I think our peers have said before there's a push for volume. There's no question about it, and we have to hit certain targets to get into the bonus levels, and that's driving some of that behavior. But, again, I think when we look at ours, our strategy still is to maintain good growth, and I think when you look at today at almost 8% on new and we're 6% on used, I think we're in good shape.

All right. Thank you very much.

Michael Montani, Evercore ISI.

So I wanted to ask, first off, if I could do it -- on the service side, could you just provide some incremental detail there to get into a little bit how customer pay was versus collision and also some of the recon work. Obviously, strong growth there -- just want to understand kind of the drivers of that growth.

Well, when you look at our customer pay, we were up 3.7%. Our warranty was up 17.3%. Our get-ready was up 13.1%. Our body shop was up about 1%. And I think that when you look at our business, 52% of our customer ROs were zero- to five-year vehicles, and 67% of our warranty ROs were zero to five years, so it's strong.

I think one thing you look at -- you ask the question why is your warranty business up 17% and you're up just under 4%. One thing you have to realize in the premium luxury, we have a number of full-service OEMs. All our BMW business has come back in, and we do free service and that -- the chargeback to the manufacturer goes through warranty. We have that now in Land Rover and Jag and some of the other manufacturers.

So that probably drives a little bit higher warranty, because actually the quality of the business -- of the vehicles today is better now. We have the recalls, and they continue to drive some business into our shops, but I would say that some of the full-service, the ToyotaCare, which you would have for the first two years, is also driving that warranty number up.

Okay. Great. That's helpful context. And then one question that's a bit of housekeeping, but I feel like it needs to be asked because this is where the miss came this quarter versus my number, which was just the SG&A. And if I look, I guess, a year ago, SG&A dollars were relatively similar in the third quarter versus the second, but they stepped up a little bit sequentially this time, which is a bit more consistent with your history, to be fair.

So I guess the question -- moving forward into the fourth quarter, should we expect kind of a seasonal kind of shift there, or is there anything to keep in mind either because of acquisitions you might have done or different refreshes or initiatives you have at the dealership level just to know about in terms of SG&A dollars?

Well, I think one thing you've got to look at -- I'm just going to talk about third quarter to fourth quarter. Obviously, third quarter is stronger from an overall growth perspective, and there are certain fixed costs which don't go away with lower volume. When I look at SG&A, we were up about 1% on our comp to gross as a comparison, and we had approximately $1.5 million to $2 million more in rent. We had our escalators that kicked in during the third quarter of this year, and our medical was up about $3 million. So when you take those together, they had an impact on us from the standpoint of SG&A-to-gross.

But I think as you look at the fourth quarter, I would assume that the SG&A-to-gross number that we had -- I think it was in the 78, if I recall. We'd expect that we would get some traction. We got 30 basis points in the quarter, this quarter. I'd expect us to get some traction on that in the fourth quarter also, unless grosses just go down due to the competitive pressure from the OEMs.

Okay. Great. And if I could just ask a compare-and-contrast question, if you look at the US and the UK markets just given your presence there, it's been so competitive in the US, which is no secret, but can you just sort of help us understand, Roger, what you're seeing competitively and also in terms of OEM supply in the UK market versus the US, both on retail new as well as retail used units at the moment?

Well, let's think about -- when we think about the UK, we've had, I think, over 40 consecutive months of sales increases for premium sales, and they represent 26% of the market. If you go back probably four or five years, we've had almost 600 basis points of increase in market share, so that continues as we see the OEMs -- at least the international OEMs are coming down. They got from 7 series to 1 series. You've seen from S-class down to A- and B-class. Those are all things that are helping us drive it.

I would say this -- that you've got two markets. You've got the retail market in the UK, you got the business fleet, and the retail market is up about 3% and the business fleet market is up probably around 11%. Now, to my understanding -- and I'm watching this closely -- is that some of the fleets have backed off on Volkswagen right now in the UK. We haven't seen that in Germany, to be honest with you. It's ironic. But in the UK, we've seen some slowdown.

Our order intake -- if we looked at the last four weeks, we were maybe running at an order intake at about 45. We had the announcement we went down to about 15, then back up to 35, and I think were down under 20 this last week. I've been watching it. So there's been impact on Volkswagen, but Volkswagen is such a small piece. It really -- I'm really not concerned about it. Audi, on the other hand -- we've had very little at all from the standpoint of this emission problem.

But overall, remember, we don't have -- in the US, we don't really have demonstrators, but in the UK, we have to carry a number of demonstrators to meet our targets for our margins, and those demonstrators of course lose value quickly, and I would say we've got more pressure on running too many demos and not being able to get out of those, which has some impact on our gross margin. But I think consumer confidence has really climbed to the highest level in the last four years, and to me, wage growth and low inflation is giving consumers confidence, so to me, I think the market is good.

Housing prices -- if you go to London and you want to buy a house, I guess you've got to have two wallets, and the GDP is forecasted to grow probably, I think, somewhere around 2.5%, so I would say the market is strong.

One impact we had, which hurt our growth in the quarter, which I really didn't mention -- I should have -- was about 500 Land Rover vehicles that we could not deliver in the quarter because of quality issues, so hopefully we'll get those in Q4. So those are things that are impacting that market, but very competitive on the used, pressure because of the demonstrators and turning those to meet our metrics.

But I wouldn't think there's anything different other than we have a growing market there on the premium side, and it was up 7.3% when you look at the registrations. And we're looking at, what, a $17 million plus SAAR over here, so I think both engines are firing on all cylinders.

That's great context. Thanks a lot.

Brian Sponheimer, Gabelli.

Just a few questions from me. Roger, you mentioned Volkswagen earlier in the call, and your exposure is more on the Audi side and I guess the A3. Can you just talk about any feedback from your dealers or perhaps their customers on kind of how they're thinking about the diesel option?

Well, let me put it in perspective. We have two VW stores in the US, we have four in the UK, plus we have two in Northern Ireland, and then we have about 10 VW-SEAT-Skoda stores in Germany, and right now I think the biggest impact has been from the fleet buyer who -- this is the fleet business buyer who says -- hey, we're green. We want to be -- we want to look at this a little differently. So we're seeing some of those people backed off.

The retail customer today is really -- I don't think he's concerned, because we communicated with the customer. The factories have sent letters out to them. Each of the manufacturers, in fact, both here in the US and -- both Volkswagen and Audi have given some capital that we can use for loaner cars, for taking trades back in. This is similar to what Toyota did when they had the acceleration problem. I think it's a good thing, a good customer -- really goodwill piece that's available to us, and that's been done in the US.

And as I said, overseas impact in the UK. we really haven't seen that much in Germany, and it's amazing when you look at it. Here in the US, we have 67 vehicles, which were placed on stop sale, and of that, 51 were Volkswagens and 16 were Audis. And when they're on stop sale, until we get the fix, we wouldn't sell those to customers.

In the UK and in Germany, if you sell one of those vehicles to a customer, you give him a piece of paper and say this vehicle has this issue on it, the diesel, but yet we will call you in and make the fix when -- it's not a safety issue. They make that quite clear. This is not a safety issue. It's more of an emission situation, which will be dealt with, and I think they're trying to get their arms around it. It's a big job for them. But we as a company right now have not been impacted to any great extent.

All right. I appreciate it. Thank you very much. And just talking about the used market, any softness from a gross perspective that goes beyond just typical supply demand?

I guess we were -- the cars coming off lease are maybe a little higher residual values, the expectations of some of the manufacturers, which when you buy these vehicles, in order to meet some of the metrics, we're probably paying a little bit over market, which has some pressure on overall gross. I would say that would be my only comment. The rest of it is trying to buy vehicles right, and the best way to buy them is trade them.

Right. Certainly. Last one from me, just on -- you mentioned Freightliner or Daimler looking to consolidate the Freightliner dealer base. What's the kind of pressure, I guess the carrot or the stick, that they're getting the sellers to open up to actually selling the franchise?

I think it's been a business that's been really -- and I don't say this negatively, but it's really been an owner-operator type business over time, and some of the -- there are not legacy family members that would want to pick up these businesses, and the costs to build these sites and the expectations for dynamometers in your shops that as you now go to -- have to have a rebuilding of engines and transmission, obviously it's key from the standpoint of investment, and I think some of the guys are saying -- look, it's time for me to move on. We've seen that on -- certainly we've seen that on the car side.

But [Rush] has been out in front of that. When you think of the number of Navistar and the number of Peterbilt dealers that he's been able to pull together over the last several years, it's been amazing.

But I see Freightliner right now trying to have a strong network across the country where we will invest, and Freightliner had some of their own owned locations, which they've sold, some used truck locations. They've sold out over the past few years, but I think they're being selective. Their goal when they do this is try to sell to contiguous owners, and that's something they've made quite clear to us.

So we've got a base now in the Texas and Oklahoma market, we have a base now in the East and the Georgia and Tennessee markets, so we would look to see if we can't expand in those. And I think the good news is they really only have one dealer in each market. They really are being very careful not to over dealer, which I think is key when you look at the overall opportunity.

Thank you very much for the color. Best wishes.

Thanks.

And with no further questions, Mr. Penske, I'll turn it back to you.

All right, John, thanks, and everybody, thanks. We'll talk to you next quarter. Thanks.

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