Penske Automotive Group Inc (PAG) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group fourth-quarter 2015 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through February 18, 2016, 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. Please go ahead, sir.

Thank you, John, and good afternoon, everyone. A press release detailing Penske Automotive Group's fourth-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 adjusted 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.

I will now turn the call over to Roger Penske.

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

We reported fourth-quarter results, and when compared to adjusted fourth-quarter results last year, they were the best in the history of our Company. For the fourth quarter, income from continuing operations increased 4.5% to $72.7 million and related earnings per share increased 3.8% to $0.81, when compared to adjusted figures in Q4 of last year.

Our fourth-quarter performance highlights the strength and benefits of our diversification across different segments and markets, as the international operations and US commercial truck businesses continue to perform very well.

Before covering our fourth-quarter results in detail, I wanted to highlight a few items from the recently completed year. 2015 was a record year for our Company. We increased our retail units sold by 8% to over 430,000 units. We grew our revenue by 12% to $19.3 billion. Excluding foreign exchange, our revenue would have increased 16% to $20 billion.

We grew our income from continuing operations by 13% to $329.6 million and related earnings per share by 13.6% to $3.67 when compared to the adjusted figures last year. Foreign exchange negatively impacted our EPS for the year by $0.14.

We increased our dividend each quarter by returning $85 million to our shareholders. The Board of Directors recently approved a cash dividend of $0.26 per share for the fourth quarter, raising our dividend payout ratio to 32% for the quarter, and the current dividend yield is approximately 3.5%.

We successfully completed our 2015 acquisition target by acquiring retail automotive and commercial truck dealerships, representing approximately $500 million in annualized revenue, further enhancing our diversification. We also acquired an additional 10% ownership interest in one of our German-based automotive joint ventures and we've assumed operating control. We now own 60% of this business. As a result, we began consolidating an additional 27 dealerships into our financial results, representing approximately $690 million, estimated, in annualized revenue. Now with the operating control, we intend to evaluate and divest of non-core franchises.

All in all, 2015 was a great performance for our 22,000 individuals that make up the Penske Automotive Group team.

Now let me turn to our fourth-quarter performance. Revenue increased 11.2% to $4.9 billion and same-store retail revenue increased 3.6%. The revenue increase was driven by acquisitions, along with an 11.9% increase in retail units sold. Foreign exchange revenue increased 14% to $5 billion. Foreign exchange negatively impacted earnings per share by $0.01 in the fourth quarter. Approximately 93% of our total revenue was generated through our retail automotive dealerships.

Our revenue mix during the quarter was 62% in the US and 38% internationally. Overall gross profit improved $57 million, or 8.6%, and gross margin was 14.6%.

SG&A to gross profit was 79.6%, up 40 basis points when compared to the same period last year; however, on a same-store basis, it was up only 10 basis points.

Operating income increased 7% to $126 million and operating margin was 2.6%. Our operating income includes $52 million of rent expense for leases, which impacts operating margin by approximately 100 basis points. Additionally, operating margin excludes $9.6 million in equity income we earned related to our joint venture investment, principally our 9% of Penske Truck Leasing.

During the quarter, 85% of our income was derived from automotive retail, 7% from US commercial truck dealerships, and 8% from other, which includes Australia and our joint venture investments.

Let's turn now to our Q4 automotive retail business. Total retail automotive revenue increased 9.8% to $4.6 billion. On a same-store basis, automotive retail revenue increased 3.6%, 1.8% in the US and 6.8% internationally. Exchange rates negatively impacted same-store retail revenue by $73 million. Excluding foreign exchange, same-store automotive retail revenue would have increased 5.4%, including 12.1% in our international markets.

Our premium luxury was 72% of our mix, volume foreign 24%, and the big three was 4%.

I'm pleased to report that the variable gross profit per unit -- and that's gross profit from new vehicles, used vehicles, and F&I -- on a same-store basis was $3,577 in Q4, up $4.00 per unit when compared to the same measures in 2015 Q4.

Turning to new vehicles, new unit retails increased 11% to 60,400 units, representing a growth of 2% in the US and a 5% increase in the UK. The balance of the growth primarily was driven by the 10% increase in the ownership of the German-based joint venture, Jacobs, to 60%.

On a same-store basis, new units increased 2.5%, including 1% in the US and 6% internationally. Same-store gross profit per unit retail was $3,047, down $146, and gross margin declined 70 -- 30 basis points to 7.5%. Excluding foreign exchange, same-store gross profit per new unit retail was $3,107 and a decline of $86 per unit. Our supply of new vehicles at the end of the quarter was 68 days, largely due to the elevated inventory in our premium luxury brands.

Turning to used vehicle business, we retailed 49,700 units in Q4, representing an increase of nearly 13%. Same-store used units retail increased 2.3%. The balance of the growth is primarily driven, again, by the 10% increase in ownership to the German-based company.

CPO sales represented 36% of our used unit sales during the fourth quarter. Our new to used ratio was 0.82 to 1. Used vehicle revenue, of course, increased 14% to $1.4 billion.

Same-store gross profit used vehicle retail was $1,521, down $115, and gross margin was 5.5%, down 60 basis points. Excluding foreign exchange, same-store gross profit per unit was $1,573, down $83 per unit. Our supply of used vehicles was 44 days at the end of December.

Same-store finance and insurance per unit was $1,205, up $136 per unit.

The retail automotive service and parts business had another solid quarter, with revenue improving almost 10%, including 3.2% on a same-store basis. Excluding foreign exchange, same-store service and parts revenue increased 4.8%; customer pay, 4.3%; warranty, 7.4%; and body shop, 3%; and our PDI was down approximately 2%.

Turning to the US-based retail commercial truck business, in the fourth quarter we generated 1,855 heavy-duty truck sales, $241 million in revenue, and $36 million in gross profit.

2015 was a record year for the Class A heavy-duty market, with industry sales up 8% to 310,000. Freightliner and Western Star brands accounted for nearly 42% of the Class VIII market in Q4 and over 39% of the Class VIII market in 2015. They gained 350 basis points of market share during 2015.

The Freightliner brand continues to demonstrate best-in-class on-highway operational efficiency and strong residual values.

Service and parts represented 72% of the total gross profit in this business in 2015, which compares to approximately 40% in the retail automobile business. The strength of the service and parts is a key element of our commercial truck strategy.

We're focused on growth in our service and parts business through the improving labor rate efficiency, coupled with gross profit benefits from Freightliner's vertical integration of captive engines, transmissions, and axles. As we look at 2016, we expect Freightliner to gain additional market share, which will benefit our heavy-duty truck business.

Let me move on to Australia. During Q4, these businesses generated approximately $109 million in revenue and a gross margin of 24.6%, compared to 20.8% in Q4 of last year. We made great strides in improving all of our overall businesses, improving our inventory position, and taking steps to reduce SG&A cost going forward.

The most important aspect of our Australian-based businesses is the service and parts gross profit, which accounts for over 75% of overall gross. The power systems business is performing well and has received several significant equipment orders for engines and re-powers. These re-powers will drive the parts business for years to come.

In the commercial vehicle distribution business, economic conditions, low commodity prices, and the decline of exchange rates continue to pressure that market. As a result, the heavy-duty truck market in Australia declined approximately 7.5% in 2015.

We continue to view Australia favorably over the long term, as the average fleet age of trucks should foster demand as the economy recovers.

Turning to our balance sheet, our strong cash flow has allowed us to reduce our non-vehicle debt by approximately $69 million this year to $1.3 billion. We had $62 million in cash on our balance sheet at the end of December. Our leverage ratio was two times. We had more than $700 million in liquidity at the end of December.

New and used automotive inventory was $2.9 billion, up $489 million when compared to December last year, with new up $415 million, used up $74 million. On a same-store basis, new and used automotive vehicle inventory was up $338 million compared to the end of December last year. New was up $300 million; used was up $37 million. The inventory increase is primarily driven by the premium luxury brands.

Our capital expenditures were approximately $168 million for facilities and corporate ID programs and $33 million of land purchases for future development. We expect CapEx to be approximately $150 million net CapEx in 2016.

In closing, I am very pleased with the performance of our business and our record results in 2016 -- 2015. 2016 is expected to be another good year in the auto retail business, one of the best on record. We continue to believe the strength of our business model and its ability to adapt to market conditions. Furthermore, the diversification of our business across the automotive retail, commercial trucks highlights the opportunity we have for continued growth and profitability. The service and parts business accounts for more than 40% of our automotive retail gross profit and more than 70% of our commercial truck gross profit. As a result, our model has stood the test of time.

Thanks for joining us on the call today and for your continued confidence in our business. At this time, I'd like to open it up for questions.

(Operator Instructions). John Murphy, BofA Merrill Lynch.

Good afternoon, Roger.

Hey, John.

A first question on the truck business. I mean, there is some concern out there amongst investors that you might be getting involved in too many sort of verticals out there in the world. I'm just curious. As you think about the truck business and allocating capital towards it, where do you see it going over time? Could this be the kind of opportunity that you saw in Sytner way back when when you bought that and grew the UK business? Just trying to understand how you are thinking about that.

First, I think you've got to look at our diversification. Today, 61% of our business is in the US and 39% is international. We're doing business in the US, in the UK, Germany, Italy, and Spain.

And when you look at our brand mix -- we've talked about it before, it's 72% premium luxury in auto and 24% volume foreign and certainly the big four, and I think this gives us the opportunity to connect with our automotive OEMs on a worldwide basis and gives us good opportunity for getting new businesses and opportunities on a worldwide basis.

And that really leads into the truck side. We think being in the US retail truck business is something that really gives us the chance to utilize our expertise that we have in that heavy-duty market. Number one, we ran Detroit Diesel for a number of years. Number two, we have the largest commercial truck fleet in the US, 230,000 at Penske Leasing. And with what I said earlier in my comments, Freightliner represents the number one brand with the share they have, and I think that, with their vertical integration, it gives us a lot more opportunity for us to get parts and service business. And to me in these markets where we have knowledge and have people, it gives us a chance to continue to grow.

I think the key thing here is Freightliner is interested in reducing the number of partners today. They have probably 130 plus and they want to go down to double digits. That gives us a chance for acquisitions, and I think because of our understanding of the business and certainly with the service and parts opportunity, when you think about it, there will be a real opportunity for us to continue to grow. And when you look at the truck business by itself, we did $1 billion in sales this year -- really our first full year.

So I think our strategy going on into New Zealand and Australia where we operate in similar businesses, engine and truck distribution, along with the power systems, it gives us a chance to have a global footprint, and yet some of the cycles that go up and down in the retail auto business here can be smoothed out with our truck business on a worldwide basis.

And I think the key thing is a strong dealership model gives us the 72% of total gross profit and the vertical integration obviously on the US side with Daimler, with the engines, axles, and transmissions, I think it's a perfect place to be in.

And by the way, it's retail. It's financing. It's leasing. It's parts and it's service, and it's just bigger pieces of equipment that we are dealing with versus the retail auto.

That's incredibly helpful. And then, second question, is as we think about sort of those calls on capital as far as investment going forward, as well as where this stock is trading right now -- I mean, the stock is incredibly inexpensive given the pullback, I'm just curious. How do you think about capital allocation with those opportunities, as well as the opportunity set on your own stock, and then what sounds to me like more expensive private-market transactions or acquisitions on the retail side here in the US?

As I look at the business and from the standpoint of growth, we don't give guidance. We said last year that we would grow at about 10% and I think we're at 11.9%, half of it organic and half of it acquisition.

And this year, I think we'd be 7% to 10%, probably a little more weighted toward acquisition, but based on the current stock price, I think we've got to look at buyback versus acquisition, what gives the shareholder the best return. And today, our Board has authorized up to $200 million of share buyback.

So I think capital allocation, that would be a part of it. And then, of course, we have the CI -- mandated CI from the manufacturers. We don't have our continued dividend payout today, which is the returning of about 3.5% and the payout was 26% for the year. So I think that also attracts a certain investor as we go forward.

So, to me, I think we look at the market on acquisitions versus stock buyback. Obviously, we also look at our debt structure. As you can see, we were able to take down our debt, even though we had a high cash position at the end of the year, and acquisitions will be part of our strategy, based on realistic numbers.

Okay. And then, just lastly, the gross profit per unit performance that you put up was much better than we saw at a lot of your peer dealer groups. I'm just curious how you achieve that. And also, did you trade off volume to get that better gross profit? Could you have potentially gotten better volume or was this just a function of focus?

I think gross profit is discipline and we have metrics we've set up very carefully with each of our managers from a comp to gross perspective, so as the gross goes up, the comp goes up, and vice versa, and that covers not only -- all the way across almost into my compensation.

So we think that in the premium luxury side, we don't quite have -- don't have the inner brand competition that we don't also on the international markets that we would might have here. And I think that our guys did a pretty good job holding on to gross.

Now when you look at our business in the quarter in the US, we were flat, new and used. And if you looked at it specifically -- this is new and used, we were up 5% in the Central, down 5% in the East. I'll talk about that -- and flat in the West, and in the premium luxury, basically in the East Coast I think was impacted something with the stock market probably had some hangover there for premium luxury side. We were short some vehicles both at BMW and Mercedes.

But I think the not running for volume, but also trying to maintain the gross, certainly paid off. And this isn't something that we've just done. Our margin dropped 30 basis points on new and I think 60 on used, but that's basically because we have a higher cost of sale. But in the real gross profit numbers, it was about $80 a unit across both new and used.

So generally I think the guys did a pretty good job, but that's a constant conversation, and we have ability both in the international markets and here in the US where we look at every deal every day. We can look at that and we have certain techniques that highlight low grosses. So, to me, it's very key for us as we look at that and I think that drives the discipline that we have.

Great. That's very helpful. Thank you very much.

Rick Nelson, Stephens.

Thanks. Good afternoon. The UK was a standout in the quarter and the year. As we look forward to 2016 and a big registration on coming here in March, how do you size that up? And the opportunity in the new year?

I think, number one, when we look at the quarter, Rick, we were up 5.4% and the market was up 3.5%, so we continue to outperform the market in basically every one of our areas. I think other than BMW we were stronger than the market.

When I look at overall 27% of all sales in the UK was premium luxury, that's gone from about 17% over the last several years, and I think that's, when you look at it, is the tailwind we've had. In the US, it's about 11%.

So to me, we continue to grow. I think that we're today 99% in premium luxury. We had some Toyota, we had some -- or had some Honda. We've really divested of those, and today we have, I think, just a half-dozen VW. The rest of it is all premium luxury.

And I think that the UK market when you look at January, it started out it was up 2.9%. I think the confidence is still strong in the UK. When you look at unemployment, it's the lowest it's been since, I think, 2006 and the GDP is forecasted to go up about 2.2%. So I think that it's pointing to, I think, a strong quarter, and of course, the registration month which we have in March, from the discussions I've had with our key management in the UK, they feel that that month is filling in pretty well, and I think January is pretty much similar to what we had last year.

Thanks for that color. Did Australia turn a profit in the fourth quarter?

I guess you look at Australia overall -- we actually went backwards in the year on our truck business probably about $7 million US. We made money there in the business. On the other hand, we turned around a negative business in 2014 to a positive. So overall, we were profitable for the year.

The fourth quarter from the standpoint -- we had slightly a small loss because we took some restructuring charges on the truck side, which made that a little bit negative, but I think it was less than AUD1 million Australian.

Thanks. Just curious overall, if industry auto sales flatten out, if you think that you can hit this double-digit bottom-line performance and what you think are going to be the big drivers. It sounds like commercial trucks, UK.

I think, as I've said before, I think from John's call, the diversification that we have across the seven countries and four continents and then the commercial truck and the distribution business will help smooth that out for us.

Today, we're looking at the SAAR from my perspective from the marketplace, I think we're going to have a $17 million plus SAAR. I can't tell you exactly what it is. I think there's going to be quite a mix shift. Because of low fuel prices, you are going to see more trucks. We are going to have to see more trucks from the standpoint of the German luxury guys. We've been short GLs and Q7s, etc., and I think that with BMW moving from 30% to 40%, that will help us. Plus they've changed their margin structure, which should give us a little more margin as we go into 2016.

So I think the 7% to 10% increase from the standpoint of our business is pretty realistic. Now, I can't read what's going on. I didn't read $27 oil prices either, but we certainly -- as we rolled out of January, we had a little bit of a headwind with the storms up on the Northeast coast. But overall, I think that we are poised to have another good year.

Great. Thanks a lot and good luck.

Michael Montani, Evercore ISI.

So I wanted to just follow up for a minute, if I could, on the ability to do 7% to 10% kind of bottom-line growth. Roger, can you just talk about maybe some of the puts and takes there? We've heard healthcare costs mentioned by competitors. Maybe some of the risks that you need to navigate, and then also where you might see some opportunity set? There was some nice gain in F&I, for example, and also the service side. So what do you kind of need to have on an organic basis fall into place to do that kind of growth?

First thing, the 7% to 10% would be our topline growth just from a sales perspective, and I think that's what we -- last year, we were double digit last year.

I think an execution for us with the parts and service business on the truck side, we'll continue to grow our gross profit there because we're running at 70%. I think the ability that we have in Australia right now on the power systems side with the orders, we've got some good bus orders coming in in New Zealand right now on the truck distribution side with [amien] buses which will flow through the year, will be a plus for us.

There's no question that the UK with the units in operation and with our penetration, we should see a little bit of growth on the service and parts side, same store. And then go to Germany, and with the activity we're going to have at Jacobs, which we took on this business that has 27 stores and about $690 million, we are going to do some research and reengineering on that to bring it down probably to somewhere around $500 million when we're done, but we have a real opportunity to grow that because they have basically been a family business, old school. And I think we can put metrics there, so we're going to see some growth certainly as we look at the Germany market.

And then in Italy, we've had a nice growth there with our BMW brands. We have some acquisitions potentially in the pipeline there at very reasonable multiples that could give us some additional growth. So I think that the truck business in the US, the heavy-duty truck, as I talked earlier about the consolidation, having fewer owners, as we look in those markets I'm sure we will do some acquisitions on the truck side also.

Okay, great. And I have to ask the question on gross per unit. Just thinking about moving forward from here and given some of the elevated inventory levels that have occurred, how do you see it working through? How long do you think it would take to get some stabilization out of gross per unit, particularly on the new side, but also used?

I don't know what stabilization is. This thing seems to be driven in some cases by new product announcements, when you look at that year over year, and we have a lot of new products coming out.

And I think on the premium luxury side, we are going to see with more trucks at Mercedes and BMW and with their new margin program, that help us. And I know for a fact that I talked to Scott Keogh at Audi about inventory and he said you are going to be asking me for vehicles when we get to April. So I think there will be some -- some of the OEMs will slow down a little bit on pushing the vehicles to us on a monthly basis, so it'll certainly help.

But I don't want to be thrown in the bucket on the whole country, I think, because east, west, and central operate differently. I think what we've tried to do is set all of our metrics on comp to gross and I think that's driven some -- I think the proper behavior, I would have to say, to maintain decent gross profits, and when I look at it, $83 overall on new and $82, I think, on used, or vice versa, we're in pretty good shape if you exclude FX. In some brands, we continue to grow, so I think that's important.

And when you look at premium luxury, premium luxury when you take Mercedes, BMW, Audi, and Lexus, we're 2 to 2.5 times what you would get on a volume foreign, so that helps our mix of gross also because we don't have the pressure, quite the volume pressure, on those brands.

Okay. Great. Thank you and good luck.

Bill Armstrong, C.L. King & Associates.

Just kind of a follow-up on that, so if we look at -- we hear about all the margin pressure on the luxury brands, and really you guys -- the decline in your GPUs has been much less pronounced than the other publics that have reported so far. What's different about where you are kind of maybe approaching the market or is it a mix issue? What do you see different that you guys are doing compared to some of the other publics whose numbers we've seen where their gross profit per unit is declining much more sharply than yours?

I think, number one, it's mix. When you look at the volume foreign and look at -- we are probably in our margin in premium versus volume foreign not quite three times more, and from a domestic, we're twice. So we get that mix, and when you blend it, we look much better from the standpoint of I think we were down about -- I said I earlier about $86 after FX. So, I think it's mix.

But look, when you have -- we have Land Rover, we have 12 Land Rover stores over in the US or in the UK, we have Land Rover here, these are very strong -- these are double-digit margins. We have Porsche, we have six -- seven Porsche stores here in the US. We have seven in the UK and one in Germany.

So when you blend these altogether, I think we get the benefit of our mix and that would be key, and there's no question that overall that's probably driving it. And I think more important -- I'm kind of like in a race, right? At the moment, I'm half a lap ahead of these guys because of my gross profit, but I think we've got to watch our behind because, to me, this can change very quickly, either by volume or by not having the discipline.

Got it. And then, just shifting gears to SG&A, the ratio was up. We've heard other companies talking about increased healthcare expenses. Was this just kind of deleveraging? Did you have some healthcare costs or anything else that you could call out on the SG&A front?

We had an increase in healthcare and workmens' comp costs. We manage that very carefully, but we had a little bit of a spike here in the fourth quarter, which had some impact on us.

We also had roughly $1 million worth of restructuring in Australia we talked about earlier. And then, the consolidation of Jacobs from Aachen, in Germany, probably had 30 basis points of headwind on SG&A, then our comp to gross was a little bit higher because of our gross profit.

And one other area that we continue to struggle with, and that's our loaner car expense. Today, we have almost 7,000 loaner cars across our fleet and with those in the US, and our maintenance cost was up about 2.5%.

So, all of these areas are areas that we can manage and I think we've identified them. On the other hand, when we looked at our advertising and marketing, we were in very good shape there from the standpoint of year over year.

Okay. Thanks for that detail. I appreciate it.

Brian Sponheimer, Gabelli.

Hi, good afternoon.

Hey, Brian.

Can you -- Roger, can you just talk about the circumstances by which you were able to bring in this joint venture now to 60% and maybe talk about other opportunities where that may be able to be the case as well?

Let me just give a little bit of background on Jacobs. We've had a partnership with them, I think, for about 10 years. It was the Jacobs family, the father and two sons, and we made a $10 million investment there, as I say, 10 years ago.

And at the end of last year, senior Jacobs decided that he wanted to retire, wanted the boys moving to a different part of their business. So we said we wanted to take advantage and move up to 60%. We have a -- by contract, each year can buy 4% more and we'll be able to get to 80%, and then they can put the last 20%, so we see that as a very good business going forward.

Now they have -- Audi and Volkswagen are the key brands. They have some Skoda and Fiat, but the Toyota, Kia, and Citroen, we'll probably -- and Maserati, we would probably divest of those over time. And there's some interest by the father and the other son to maybe take those from us. If they do, we will be able to downsize, and then we will put in our metrics and our management team to help support that.

So we see this as a real opportunity. This is in northern Germany. We've already been contacted by the OEM about increasing our footprint in that marketplace. So once we're able to digest this, I think that's going to be another area for us to grow, like we have in the UK with Sytner.

All right. I appreciate that, and I guess on the commercial truck business, we're very clearly going to be in a prolonged softer period for Class VIII, at least on the new side, and I know that parts and service is really what drives those businesses. But are you getting the sense at all that there are any more willing sellers among the Freightliner community that are contiguous to the 10 dealerships you have that that could be an avenue for growth in 2016 as well?

Let me say this, rather than me saying where we have opportunities. We definitely have opportunities for acquisitions.

And I've said before that these, in most cases, are 50% of what we'd have to pay for a similar size business in auto retail. And to me, the Class VIII market, it's been one of the highest markets in 2015. It will probably be [off] 10% to 15%, but with Freightliners, with their on-highway capability, I think that they are going to continue to gain share and that's going to help us.

We're in some great markets. We are in the northeast. When you think about Tennessee and Georgia. We have businesses in Oklahoma. The Dallas-Fort Worth area has been very strong, continues to be. We're a little weak in west Texas, which would be Midland and Odessa, but it's a very small part of the overall business.

So overall, I said we did -- from that business, we were at almost $1 billion, $988 million last year, and I think we'll continue to grow that nicely.

And again, Freightliner is a very strong on-highway truck. That business continues to grow, and again if they don't -- if we don't sell trucks, what happens is used trucks then have some value benefits, and then, of course, the parts and service that go along with the continued maintenance. And to me, the vertical integration that we have with Freightliner on the engine transmission and axle is something we didn't have before because you had a CAT engine or something else, or you have Cummins or you had a different transmission. We now have all vertical integrated products by Daimler, which is a huge benefit for us.

Thank you very much for having me on.

Brett Hoselton, KeyBanc.

Good morning, gentlemen. It's actually Irina on for Brett. How are you doing today?

Irina, how are you?

I'm doing well. Thank you. I wanted to ask you about the FX trends that you are seeing. In 2015, FX was a headwind of about $0.14 to the bottom line. It looks like the British pound once again has turned in the negative direction for the translation for you. What are your expectations for 2016?

When you look at the pound, we had a chart that we have here and we looked out, I guess we are at $1.46 today. Last March, it was $1.50, so obviously there's a 2% or 3% already impact to us.

But I think -- hopefully, the Australian dollar has kind of bottomed out. It went down as low as 69; it's now almost at 72, and again it will have some impact because last year at this same time we were at about 77. So across the board, we've got the euro, we've got the Australian dollar, and we've got the New Zealand dollar. And I think from an overall standpoint, when we look at the euro, we are pretty much flat. We're at, I think, $1.08; last year, we are $1.11, so that will have some benefit of equalizing the impact of the pound.

Thank you for that detail. And the last question is on BMW. Volume was a little bit weak for BMW in the fourth quarter. There is some conversation out there about the cadence of some of the promotions from three years ago. Can you discuss that a little bit and what your expectations are for BMW's volume at the end of the first quarter and the beginning of the second?

BMW is our number one brand when you look at it on a worldwide basis, not only in the UK, but over in Europe and certainly here.

I think that there's been conversation that the 39-month lease, which they had three years ago -- plus three, I guess -- will come to pass here in this quarter. So that will benefit us obviously with lease -- cars coming off lease. In fact, we're looking forward to that from the standpoint of supporting our used car.

But we see MINI probably struggling more than the BMW brand, and I think, most important, if they change the mix from 30% to 40% on trucks, that will make a big impact on our penetration going forward in the first and second quarter, and that's what's been signaled to us.

And we certainly have enough inventory to do more business that we didn't have last year. And when we look at our inventory -- when I look at my new inventory here in the US just alone, overall, I'm up about $130 million from last year in February. And when you think about some of the brands where we were so weak, it probably isn't too bad, and it's pretty much consistent as I look at it from December.

And our used car business -- excuse me, our used car inventory is only up $3 million here in the US, so we're trying to drive that down because each quarter of a point in interest rate hike is about $0.04 to $0.05 impact the size inventory we have. So, we're very cognizant of inventory creep on us. Again, that's another one of the metrics our guys are working on. And of course as these cars come off lease from BMW, there's a great CPO opportunity.

Excellent. Thank you very much, Roger. Pleasure as always.

David Lim, Wells Fargo.

Hi, good afternoon, Roger and Tony. So the question that I have is obviously 7% to 10% revenue, I guess it's sort of like a soft guidance. Half of that is -- more than half of that is coming from acquisitions. From an acquisition front, does your SG&A to gross profit from the acquired dealerships, are they normally better or worse than your same-store performance?

Let me say this. The Jacobs was 110 basis points worse on SG&A to gross and that's one of the things we are going to work on.

Typically, it's one of the first areas that we work into and reengineer to try to bring that down and I think that's something we typically can do within six to 12 months. I can't guarantee it overnight, but that's one of the areas that we look at. And some of the fixed costs, even interest rates and things like this on floor plan, we tend -- that many cases have a better rate, so we can create a better bottom line and flowthrough.

So I guess what I'm trying to point out here, Roger, and please clarify me if I'm wrong in the way I'm thinking, is if you are looking at 7% to 10% topline soft target, would that imply -- given that most of that is coming from acquisition, would that imply that your EPS before any kind of buyback would grow at a slower rate?

We don't give any guidance --

Yes, that's true.

-- and I want to be sure that I don't mislead anybody.

In today's world, we just don't see any stabilization (multiple speakers) today in the market. So for me to walk in here and make some big statement, I think 7% to 10% is someone who thinks we have a good solid business, where we've got diversification, our capital base is good, our leverage is two times. We've got access to really the world markets as far as acquisitions (multiple speakers) truck sites open to us. So, we're open for business.

On the other hand, with $200 million worth of stock buyback, we are going to look at that carefully, too. So that could change some of these metrics very, very quickly.

Very true. Very true. The other question I have is related to the premium luxury, and if you would, can you dimensionalize if this is -- is this something of a situation where there's just too much product, as in it's been way oversupplied? Or are you seeing maybe some weakness or cracks with the premium luxury buyer that you see maybe in Q4 and going forward?

The only thing I can say with the premium luxury buyer, if I look at the Northeast, I see my Mercedes, BMW, and Audi businesses were off year over year.

On the other hand, when you go to Austin, when you go to Phoenix, you move out to the West Coast -- in fact, when you look at Mercedes numbers and BMW numbers, they are off the charts on the West Coast. Now, I think a lot of product that we'd expect to get on the East Coast because of the mix, and primarily you are talking Q7, X5, GL, GLX, and some of those cars, we saw we didn't get those on the East Coast.

So to me when I look at that, I see an impact. Probably when I look at Greenwich alone, we probably were off in the quarter -- we were off probably 10% to 12% and that would be Audi, BMW, Mercedes, and BMW.

So I think some of it is regionalized as far as the premium luxury, and again when you look at the business, in the US, 30% in BMW is trucks and 70% is sedans, and they've got to turn that mix the other way and that's going to help us.

So I think each market is different. You look at the Southeast, I think the guys in Florida have had a good year, and certainly -- Atlanta, our businesses in Atlanta from our BMW stores, both of them from a new perspective and a used perspective were off the charts. So if you just looked at Atlanta, you would say we are in great shape. Then you go to the Northeast, you get a little bit different feel. And I guess if you're in New York, you probably have a little feel of what's going on there from the standpoint of the market.

So, we've got to be very flexible and be prepared to move in either direction. But we're going to be very prudent on the use of our capital.

Great. Thank you for the color. Appreciate it.

Paresh Jain, Morgan Stanley.

Good afternoon, Roger, Tony. A follow-up question on GPU, actually, and I wanted to go beyond the near-term inventory mix issues. There is a growing feeling that gross profit per unit can stabilize after a couple of quarters as dealers work through the inventory mix and OEMs continues the shift to more truck production. But given how fragmented this market is and the fact that the overall GPU, including F&I, is still close to record levels, why would it be unreasonable to think new and used margins could continue declining maybe for a few more years?

One thing that we really -- we haven't talked about is the Internet, and I think that certain brands and the way people are advertising vehicles on the Internet has had some downward effect on the Internet. I think that that has to flow through all of our different brands.

But from my perspective, we've held onto our brand margins pretty well, but it also comes down to new product from the standpoint of how many new models are coming out, because you get the new Q7, you are getting almost MSRP. You get the S-class now that's been out for maybe 12 or 13 months, the new one, you are probably down; you are not getting the margin you did before; and I think it goes back and forth. Porsche is hot, Land Rover is hot, and yet five years ago in the UK, they were putting green stickers on Land Rovers that say don't buy them.

So there's lots of dynamics, and I think what we have to do as a company and the industry has to here in the US, we've got to be prudent on how we pay our people. We've got to have metrics and we have to have tools that we can monitor gross profit because I don't know that $100 or $200 per unit can't be managed right at the desk when you're sitting down with a customer. And I believe that and it's the way the phone call is taken, the way you bring the customer into your business. We have preferred purchase, which we are seeing is a higher-margin customer of ours. There's many different things that are going on now with the Internet and some of the tools we have.

So for me, we are looking at -- to drive margin, you think about reputation management. Whoever thought about that worrying about how many stars you have might be a reason people might come in to do business with you? And I think we look at that every day. From a Google perspective, we've gone from 4.1 to 4.22 per location, star rating, and I think that helps us get people to come in and do business, rather than maybe shop us. That's certainly a key.

And then, the digital lead volume has gone up -- for us is up almost 33%. So, there's so many different actions that are taking place, and I guess every day we're trying to figure out how to collect those and drive the bottom line. But that's probably a poor answer, but those are -- there's just so many different things that we can do. The one thing is we have to be consistent and we have to pay our people based on gross profit and flowthrough. Those are a couple of metrics that are key with our Company.

That's clear. Thank you. Just one more follow-up, a quick follow-up on Japan, the Japan dealers. It's a minority stake right now, but that's how you started with the US commercial vehicle business as well. Is this a more opportunistic one-off deal? Or is this the start of having a broader presence in that market?

I think it's important, and the Nicole group that we invested 49% in in Japan is really one of the leading private operators with BMW, MINI -- they have Ferrari and also Rolls Royce. They are the distributors for Alpina, which is the AMG version of BMW.

I think that we've been very impressed with Nicole and what they can do, and we have the ability over the next three years to buy that business. So I'd have to say we got our nose in the tent. We'll look to grow our management team. The owner would like to exit after three years, very good guy. And I think that we're going to learn a lot about that market. It's in Yokohama. And it gives us a chance.

We have a partner that's -- I guess people forget that Mitsui is a major partner of ours in our auto business, so many of their people we can use to utilize to help us support that business as we go forward. And that means that we've got boots on the ground with our local partner.

Understood. Thank you.

Patrick Archambault, Goldman Sachs.

Hey, Roger. Good afternoon. Just a couple follow-ups here, just on the SG&A leverage point. I think it was previously brought up that there were some frictional items in terms of healthcare and workmens' comp and that sort of stuff. But with 7% to 10% growth, like something closely approximating that range flowing through this year, assuming that's right, where would you expect that leverage ratio could go?

We had a 15% flowthrough in Q4, which is not acceptable from my perspective, but there was probably 300 basis points impact there from the Jacobs group. But as I said earlier, we had the healthcare, we had the restructuring in Australia, and we had the consolidation of Jacobs, along with some loaner expense which hit us. So to me when we look at overall from the standpoint of our SG&A, I think we were up about 40 basis points.

Got it, okay. So it sounds like -- I mean, the Jacobs consolidation is something that -- that's clearly going to go through -- have a full-year impact. But, I mean, is it fair to say that some of those other costs might be a little lumpier and not as prominent in subsequent quarters?

Look, we are not going to let our SG&A go up any higher. If we have certain aspects of an acquisition to hit us, we'll clarify those and bring those to the surface. I think a target for flowthrough still is 30% to 35%, and we were at 25% if you go back and calculate it for 2015 overall.

Got it. Okay. Helpful. On the topic -- it was brought up a little bit before, but how should we think about the impacts of lower or increased used vehicle inventory? I think you said it was BMW, but it seems like it's happening across the board, right? There's a pretty big -- I think NADA said that the amount of off-lease vehicles are going to be up 30% to 40% this year, if I'm remembering that right. So it sounds like on the one hand there's kind of a CPO opportunity there, but on the other hand there is kind of a residual value or maybe more of a pricing impact there. So how do you see the net of those things working for you?

I ran an inventory this morning before the call because I knew that would be interesting on used. We're actually down probably 1,000 units from where we were same time last year.

So, I think that again with the strength of the used-car discipline on 30- and 60-day vehicles and hopefully not many 90-day vehicles, we maintain the commitment to move these. Now we're selling a lot of our cars, the older cars, and that's why we are at 0.82 to 1, and we look forward to cars coming off lease because if you look at -- I'll give you a quick example.

In Atlanta, where we have the two BMW stores that do over 300 used cars a month, they are doing probably 10% would be coming out of their loaner car fleet every month, another 10% would be non-BMW trade, and the rest are BMW, and I think that the ability for us to be able to recondition those, we get the benefit of that in our shops, the parts and service. And then, the ability to utilize some of the OEM's programs -- that's one of the things that I think people don't realize is both Mercedes and certainly BMW and I know Toyota does, they have some very attractive programs on used cars that come out of loaner service or come off lease, and especially if you CPO them.

So we are going to take advantage of those. I think at the end of the day, we end up buying those vehicles either at book value or MMR, which is the market value. So if you have a robust used-car operation, it's a great thing to sell cars that you represent on the new side. So, I see it as an opportunity.

And I think the -- remember, the off-lease cars coming off are going to drive that opportunity for us to sell a new car because we'd like to see 50% or 60% loyalty on those coming off. Either we sell the car to the customer, we re-lease it to the customer, or we lease them a new vehicle. So, those are things that provide the opportunity for us and I think that what we're trying to do now is -- we talk about CRM, we're looking at -- a term the other day I picked up is VRM and that -- we want to keep that vehicle. We want to take the vehicle from the customer off lease. We want to sell it or lease it to a second person, then get it back and retail it at the end. So there's some real opportunity for gross and profit on each vehicle, so we don't want to lose those vehicles as they come through the cycle.

Got it. And one last one, just I have to ask. I mean, I know subprime isn't very big for you guys, just given the brands you represent. But any kind of indication on it being more difficult to get somebody with weaker credit bought or any observations from the credit markets? Clearly, there's been some, I guess, items that have scared people a little bit, like SCUSA results and Cap One, but I just wanted to get your views there.

For us, the financing environment remains real strong. I would say that today 62% of all of our financing goes to the captives and 100% of the leases. And in premium luxury, I think 55% of the vehicles are leased, so that keeps us tied to the OEM.

And because we are so much on the premium side, only 6% of our overall business is subprime. So there's new people coming up every day in that subprime area that want to have that bigger spread, but it hasn't affected our business. And Cap One and people like that, we don't do a lot of business with them, but on the other hand, we try to stay vertical as much as we can with the captives. Then we have a few major banks -- preferred lenders, we call them -- that we would use, but they would be very consistent. They would be the bigger players such as JPMorgan, obviously Bank of America, Wells, and some of the other people.

Got it, okay. So it doesn't seem like the landscape is showing any signs of cracks or anything like that?

It certainly hasn't from -- look. It certainly hasn't from our perspective, at least the communication that I have with our team. I think we're looking for more opportunity, to be honest with you.

Understood. Okay, great. Thanks a lot, guys.

Due to time constraints, our final question will be from David Whiston with Morningstar. Please go ahead.

Hi, Roger; hi, Tony. A couple questions, I'll try and be quick here. I know we are out of time.

Take your time.

Going back to this gross profit decline, just trying to get a little bit more color on how you mitigated that falloff, especially in premium of $215 a unit. You mentioned mix, but is there any way you can disclose what your percentage change in retail premium unit volume was for the quarter?

I don't have that right here. I'll get Tony to follow back up with you on exactly what that mix was. But it's a significant part of our overall business. When you look at just from a unit perspective, it's 72%. So to me, at the end of the day, mix makes a big difference.

Okay. And on -- just for modeling purposes with Jacobs being consolidated, is there any -- how should we think about the minority interest increase going forward? Roughly on an annual basis, how much more will that be?

Remember, before we had it in investment one line and we moved it into consolidation. We have 60%, but we have to consolidate the entire balance sheet with us as we go forward.

Now each year, we're going to grow by 4% and we can do that or more if Jacobs decides -- we've said a minimum of 4%. It's by contract and we know the numbers. So, it's a very good deal for us. And then, we would wait when we got to 80%. Do they put us the last 20% or do we buy it? So I think we're in good shape there.

What we have to do, though, is drive our metrics as we do the rest of Europe and the UK at Jacobs. It's a terrific business; it's just a matter of deciding what are going to be the core brands going forward, and the ability, then, to grow with those brands in that region.

Okay. And over to the M&A environments, are you seeing any indication where perhaps buyers are starting to reduce what they are willing to pay, but sellers are still anchoring the more rosy outlook from a year ago?

We made a very prudent purchase in New Jersey, in Monmouth County here -- Land Rover, Audi, and Porsche at the end of last year, and we see some opportunities. We've got three or four of them we are looking at today. Some of the expectations are higher than we will ever get to the table. That's why we want to look at the options of stock buyback, commercial truck, or retail acquisition.

And there's no question that we have some very good opportunities in Italy and Germany, which will give us the opportunity to make some acquisitions at a much smaller multiple than what we see in some of the premium ones over here. I've seen some big numbers.

Apparently now, it's an industry. As you know, we have a lot of brokers out there, which are driving some of the prices. Some of them are unrealistic. We just have to get with the sellers and let them understand what's real.

On top of that, there's a lot of sales efficiency numbers by manufacturers that if you are not sales efficient, it might limit you from buying. So not everybody has got a -- might have the wallet, but don't have the opportunity to make the sale -- or the purchase.

And my last question, I think if I heard right you said 68 days new vehicle supply. I was just curious what that was at the end of Q4 2014.

58.

58? Okay. Thank you very much.

All right, guys. Thank you.

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

Okay. Thanks for joining us for the call and we will see you in April for the first quarter. Thanks.

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