Penske Automotive Group Inc (PAG) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group first-quarter 2016 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through May 3, 2016 on the Company's website under the Investor Relations tab, at www.Penskeautomotive.com.

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

Thank you, Lori. And good afternoon, everyone. A press release detailing Penske Automotive Group's first quarter of 2016 financial results was issued this morning and is posted on our website along with the presentation designed to assist you in understanding our performance.

Joining me for today's call is 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. We have reconciled this measure 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 on factors that could cause results to differ materially are contained in our public SEC filings, including our Form 10-K.

I will now turn the call over to Roger.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. We reported another outstanding financial performance including record first-quarter results. This follows record financial performance posted by our Company in 2015.

For the first quarter, income from continuing operations increased 4.2% to $79.3 million and related earnings per share increased 7.1% to $0.90 per share. Foreign-exchange rates negatively impacted earnings per share by $0.03 during the first quarter. The resiliency of the US and UK markets drove solid performance from our truck dealership operations and drove our business to another quarter of record results.

During the quarter we increased our dividend to $0.26, reflecting the continued strength of our business.

PAG offers shareholders a current yield of 2.9%, the highest in the automotive retail space. During the quarter we acquired 49% ownership interest in the Nicole Group, located in Japan, that operates nine dealerships including four BMW, three MINI, a Rolls Royce, and a Ferrari along with two standalone service centers and two preowned showrooms. We increased our ownership in our Germany-based Jacob's Group from 60% to 68% and we divested of three non-core dealerships.

We repurchased 4.5 million shares of common stock for approximately $168 million. In addition, in April our Premier Truck subsidiary acquired Harper Truck Centers, located in Ontario, Canada, with five dealership locations in greater Toronto. The acquisition is expected to generate approximately $130 million in annualized revenue.

Let's turn to the details of our first-quarter performance. Revenue increased 7.6% to $4.8 billion, and same-store retail revenue increased 2.5%. The revenue increase was driven by acquisitions, along with a 9.9% increase in retail units sold. Excluding foreign-exchange, revenue increased 10% to $4.9 billion. Approximately 94% of our total revenue was generated through our retail automotive dealerships. The US accounted for 57% and international was 43%.

Overall gross profit improved $34 million or 4.9%, and gross margin was 15%, down 40 basis points. SG&A to gross profit was 77.2%, down 50 basis points when you compare to the same period last year. Gross profit flow-through was 32%, including 35% in our retail automobile business.

Operating income increased 6.3% to $144 million and operating margin was 3%. During the quarter, 92% of our income was derived from automotive retail, 5% from our US commercial truck dealerships and 3% from other, which includes Australia and our nonautomotive joint venture investments.

Turning to our Q1 retail automotive business, total retail automotive revenues increased 7.8% to $4.5 billion, including 2.7% on a same-store basis. Exchange rates negatively impacted same-store retail revenue by $90 million. Excluding foreign exchange, same-store automotive retail revenue would have increased 4.7%. Our brand mix was Premium Luxury, 72%; [Body and Foreign], 24%; and the Big Three, 4%.

Variable gross profit per unit -- that's gross profit from new vehicles, used vehicles and F&I -- on a same-store basis excluding the impact of foreign exchange was $3,533, down $48 per unit or 1.3% when compared to 2015.

Turning to new vehicles, new units retailed increased 10% to $58,750, representing a 14% increase in the UK and flat performance in the US. The balance of growth is primarily driven by the consolidation of our German-based joint venture, which began in the fourth quarter of last year.

Same-store new units increased 4.2%. Gross profit per unit retail was $2,988 and a gross margin decline of 10 basis points to 7.7%. Excluding foreign exchange, gross profit per new unit retail was $3,051, a decline of $99 per unit. Our supply of new vehicles was 55 days at the end of March.

Turning to our used vehicle business, we retailed 52,741 units in Q1, representing an increase of nearly 10%. Same-store used units retailed increased 1.3%. CPO sales represented 37% of our used unit sales in the US during the first quarter. Our used to new ratio was 0.9 to 1, a new record for the company. Used vehicle revenue increased 10% to $1.4 billion. Gross profit per used vehicle retailed was $1,598 and gross margin was 6%, down 60 basis points. Gross margin increased to 80 basis points, however, sequentially. Excluding foreign-exchange, gross profit per unit was $1,633, down $130 per unit. Our supply of used vehicles was 39 days at the end of March.

Finance and insurance revenue per unit was $1,062 excluding foreign exchange. F&I revenue was $1,085, down $11 per unit. Our per unit was impacted when we increased our investment and began consolidating the operations of Jacobs in our German-based joint venture. On a same store excluding foreign exchange, F&I increased $57 to $1,152. Service and parts revenue increased 9% including a 3.7% on a same-store basis. Excluding foreign exchange, same-store service and parts revenue increased 5.3%. Customer pay was up 5.4%, [audio] 4.4%, body shops up 6.9% and predelivery inspection was up 7.6% or 5.3% on a same-store basis.

Turning to the Retail Commercial Truck business in the first quarter, we generated 1,431 truck sales or $207 million in revenue and $33 million of gross profit. Total new and used retail sales increased 7%. During the quarter we experienced some softness in the used truck value due to the industry deflating, which affected our use truck grosses. We offset some of the used truck pricing pressure with better F&I performance.

In fact, F&I per unit increased $303 to $1,311. New increased $116 to $821 and used trucks increased in F&I $1,333 to $3,404 per unit.

We are very pleased with the improved penetration rates we're seeing in F&I and we are targeting additional penetration increases for 2016 and beyond.

The strength of our service and parts, as a key element of our commercial truck strategy and a most important profit driver, represented 79% of the total gross profit in the first quarter, which compares to approximately 40% in the retail automobile business. Our fixed cost absorption was 117% in the first quarter.

Moving on to Australia during Q1, these businesses generated approximately $100 million in revenue, gross profit of $24.8 million, and gross margin was 24.6%. Economic conditions, low commodity prices and the decline in exchange rates continue to pressure the truck market in Australia, which declined another 6.7% in the first quarter. The most important aspect of our Australian-based business is the service and parts gross profit, which accounts for more than 75% of all gross profit.

During the quarter, our Australian Commercial Vehicle business recently has been awarded a significant military contract to provide integration, services and parts supplies for a new fleet of over 2,500 heavy-duty logistic vehicles. We will be in servicing and coordinating the supply of all spare parts for the vehicles, the first of which are expected to be delivered later this year and will continue through 2020.

Turning to our balance sheet, we had $46 million of cash on our balance sheet at the end of March, and our non-vehicle debt increased $110 million to $1.4 billion, largely due to our share repurchases of $167 million in the first quarter. Despite the increase in non-vehicle debt, the leverage ratio remains low at 2.1. We had more than $600 million in liquidity at the end of March.

New and used automotive vehicle inventory was $3 billion at the end of March, which was up $36 million from the end of December. On a same-store basis inventory was up $22 million from the end of December, new inventory up $16 million, used inventory up $38 million. Approximately $60 million of our US inventory is currently on OEM stop sale, representing approximately 1,700 vehicles.

Only minimal amounts of inventory are on stop sale in our international markets.

Capital expenditures were approximately $47 million for land purchases, facilities and corporate ID programs in the quarter. We expect $150 million in net CapEx in 2016.

In closing, we are very pleased with the performance of our business and our record results. We continue to believe in the strength of our business model and its ability to adapt to market conditions.

Furthermore, the diversification of our business across automotive retail and commercial truck highlights the opportunity we have for continued growth and profitability.

I want to thank you for joining us today on the call and for your continued confidence in our business. At this time I'd like to open the call up for questions. Thank you.

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

Just a first question on capital deployment because what you did this quarter was relatively diverse. The buyback was almost 5% of the shares outstanding. You upped the dividend yield and you bought Harper; that was right after the end of the quarter.

I'm just curious. As you look at the opportunity to deploy capital, how do you think about that now, relative to buybacks, the truck business, the franchised new vehicle business? What is the opportunity you see out there and where you think you're going next? And can you continue to be this aggressive?

Well, look. Number one, we have certain commitments to the OEMs for capital expenditures on CI. So that obviously becomes key. We also want to maintain the increase in our dividends, which, as I said earlier in the call, we are at almost 2.9% dividend yield.

But I think we're going to continue being an opportunistic buyer. I would say that as we look at the business today, in the US the multiples are pretty high. And unless they are strategic and would be contiguous to where we are, we would probably have our pencils down at the moment. H

However, when I look at the truck business, Daimler continues to ask us to look for other opportunities. And we see those options in the heavy truck business, the multiples being probably anywhere from 50% to a third of what we pay on the auto side. And with less CapEx, it's very attractive to us.

Also in Europe, with the success we've had in Western Europe we see many opportunities there that we're looking at with the Premium Luxury brands which we have the relationships with. I would say in the UK it's a little tighter because of size of our Company there.

But I think overall we will continue to look opportunistically for acquisitions that fit. With the stock price, I think that we were -- looked at lower stock price. It looked to me that that was a very good buy for us during the quarter. We have a Board meeting coming up in the next couple of days and we will probably reload our stock buyback plan.

But to me at the present time, I think we will watch the cost of dealerships, look at our stock price and again look for opportunistic purchase. But we are definitely in business.

Yes, I know. It's very impressive. Then a second question -- as we look at SG&A, this was one of the best quarters you got on leverage. It seems like it was a real focus on cost.

What changed as you were going through the end of last year that gave you this kind of benefit in the first quarter? And is this the kind of thing we should think of going forward as getting this 30% to 35% SG&A or operating leverage, let's say, on the total business or flowthrough?

Well, I think we looked at our business plan at the end of the year as we looked into 2016 and we got together with the key guys and we said, okay, what are some of the cost takeouts that we can do to really ensure the plan and maybe even do better?

And I think our guys have jumped on that.

Basically, our advertising and marketing costs are flat. We have now really tailored our comp plan. So as gross goes up or goes down, our comp plans or comp to gross is staying pretty much the same. And from a personnel standpoint, I think when you look at the US we really haven't added any personnel at all during the year; in fact, we are down. That will give us some benefit from a personnel perspective.

But when you look at this I think the key thing is that we're focusing on our growth, which obviously we are maintaining our new car [gross] was down 10 basis points, which gives us some benefit on flow-through if our comp is right. So I think it's the basics. Our insurance was in line.

I think overall our capital expenditures are in line with what we are expected to spend. So our interest line is in line.

So overall, probably most important area would be loan cars. And we looked at that very carefully.

In fact, Bob Joseph, one of our key guys, has really done a study. And we are seeing that our loan car costs were almost 10% of our service and parts gross in 2015 at some stores. We are trying to get that cut in half. Obviously, with the Takata airbag and some of these things, it has a little different ring to it, but there we are getting reimbursed more from the manufacturer.

So I think we can look at still good flow-through as we see Q2 and Q3.

Okay. And just lastly, on the Premier Truck Group, on the truck business, it looks like that the Parts and Service business stepped up from 71.3% of gross to 79.5%.

So it looked like there was almost a 13% improvement in aggregate parts and service on the commercial truck dealership business. What's going on there? And is that something that is countercyclical, or was there something as far as your efforts or something that changed in the market that you could get that big a step up in parts and service work there?

Well, of course we had an acquisition last year in the first quarter, when we bought the businesses in Tennessee and Georgia. But more important is, as we've added that geographical area, we picked up some key fleets. So, as you start to look at the gross that we get on the fleet business versus the pure retail, it has some impact on gross mix.

But to me, overall, we are focusing on our Parts and Service real-time and trying to understand how we can get better throughput. We've taken some of the same things we've learned on the car side and putting some of those processes in place. We hired a person to be specifically in line to take a look at what the benefits are in getting our process better at the locations. But Parts and Service is driven by the truck market.

And if you look at freight, in the month of March it was up 2%. Now we've got some impact on energy-related markets but construction is still up. And I think that we're going to see trucks continue to be using parts.

If the new truck business slows, we will see more maintenance on the used, which is certainly a benefit. And when we look at our business overall, I think the business, the model, the Parts and Service is why the reason we invested.

And Roger, just really just one last follow-up on that. As you think about the opportunity in the market, how much opportunity is there to win some of this fleet business? And also how much capacity do you have in the service base or the service area for the Commercial Truck business where you could potentially absorb that business?

Well, we are operating not on three shifts and tipping some locations have -- were operating at three shifts. I think we are in our South Dallas operation. But we see that as an opportunity and we're making some acquisitions to build a big body shop to take bodyshops out of our existing surface facilities so we could open up those bays, and we will be consolidating those in Oklahoma and also in Texas.

So I see that as a way to get more expansion from a Parts and Service standpoint.

Great, thank you very much.

Rick Nelson, Stephens.

Margins on the new car side held up a lot better than some of your peers' volume foreign I'd say was higher year-over-year, domestic kind of flat, some pressure in the Premium Luxury.

What has changed there that is helping your flow-throughs as well?

I guess my guys would say good management on grosses. But I think that our plan and when we really invested in the Company was to be involved in Premium Luxury and volume foreign. And when you start to look at the business from a gross perspective, I think we have to look at the number of dealers. And when you look on the domestic side, you look at Chevy and Ford have approximately 3,000 dealers. I think FCA has somewhere around 2,300.

So when you start looking at the interbrand competition in these markets, with the Big Three having about 45% of the market, and we think about Toyota and Honda with 1,000 or 1,200 dealers, and then you look at the premium luxury -- I think Lexus has around 250; and BMW, Audi and Mercedes Benz are in the 300s -- and you start to look at the margins, and I think that we have less interbrand competition in volume foreign. We do, and certainly in the domestic we are a small player.

But I think what happens to us in the luxury side -- our margin was down but I think that was primarily due to where we were in the Northeast because we have been down the last three quarters. So I think we have been really affected by the stock market [and buy] products for the stock market but also mix.

And we have not had the SUVs. When you think about what has been the real success of the Big Three, it has been trucks and SUVs. Well, as we are starting to see the plants change over and give us more SUVs, I think we will see some better penetration and really get our grosses back up because it's all driven by product. We can see it. At Land Rover we can see it, at Porsche and McCann. And I think when you look at our business overall in the markets we've done a pretty good job.

And when I look at Texas alone, there has been a lot of discussion about Texas. We are up really in Texas over 2% on our used cars. And I think from a new car business, we were up almost 6%. But again, profit was up, gross profit was up in those markets.

So I think we are in Austin, which gives us a little better base because of the state capital. But, overall, I think the mission is right. We don't have the interbrand competition. And I think our guys are really focused on margins. We have some daily tools that we use, not only in the US but internationally to monitor gross profit every single day on our deals, and I think it's paying off.

Okay, thanks for the color. Finally, I'd like to ask you about any updates on the progress that you are making from an e-commerce standpoint in this preferred purchase program, how that is progressing.

Well, a couple of points to make on e-commerce -- we've really worked hard to refresh our websites, and this is an ongoing process to make them more responsive. And of course, mobile is certainly something we have to enhance those designs and have better navigation.

I think our people -- Terry Mulcahy and our people have done a great job there. We are also right now piloting some cloud technology to update our inventory photos; so all sources can pull them right of the cloud rather than us having to send them individually, which is much more efficient.

And our website traffic was up about 10% so far in the quarter, and I think when you look at that -- and our digital lead volume was up 35%. And mobile growth, which is something we are all looking at, was up 26%, and that represents today almost 42% of all of our traffic.

But even more important, I think, is what are we doing in social media, what are we doing in reputational management? We're looking at our stores for Google reviews every single day and every month. And we've gone from 65 to 75 Google reviews per dealership during the first quarter, and our star rating has gone from 4.12 to 4.2.

So I think that with those actions along with keeping our advertising expense per vehicle flat year over year has been key. And a couple of things we've done -- we've got a Mystery Shop program to be sure that our people are trained properly. And we've got some email campaigns which are really call to action. And there's no question that we've had growth from our digital advertising, 10% of our leads come from third-party sites.

That would probably be cars.com and Auto Trader.

So there's a lot going on in the marketing area. And I think the good news is we are keeping our costs flat. And preferred purchase has been great year to date. The rollouts will be completed in May. I think our conversion rate is three times higher and the closing rate is almost 19%.

So, transactions are streamlined. Many of them are under an hour, which -- the people like that. And we are looking at it from a CSI perspective, and we are seeing strong CSI and preferred purchase. We're going to roll out an F&I product associated with that early in the next quarter. So I think overall our guys are doing a great job on the e-market, e-marketing and our e-commerce.

Thanks a lot for that update. Congrats and good luck.

Brian Sponheimer, Gabelli.

Another great quarter from an execution standpoint. The one thing that jumps out is what's not there, and that's an increase in inventory. Roger, talk about how you and your dealerships are managing the release valve and making sure that you are not seeing the inventory build that maybe the rest of the industry is.

Well, look, we had a build if you go back a year. But I don't think that's fair. I think we've got to look at December. We had $2.2 billion in inventory in new cars at the end of the quarter and about $800 million in used cars. And I think that at the end of the day we had about $400 million of trucks when you look at both Australia and our Premier Truck Group.

So at the end of the day from a retail truck -- or car standpoint I think we are in really good shape. What happened is our inventory went up $31 million in the US, new; and it went down $37 million, internationally. Now, Premium, where we had -- remember we were very high in BMW and Mercedes. And we've been able to manage that down on Premium Luxury. We are down about $44 million.

But our volume foreign, where we were light on Toyota and Honda -- that has picked back up again. So I would say we are up about [$46 million] there, so pretty much level. Then we go on to increases in Land Rover, Porsche, Toyota and Honda.

We've just rebalanced inventory. And I think you are going to see that for the rest of the year. We are going to see $17 million plus in SAR. And we are going to see market share moving around. And I think with low fuel prices, you are going to see trucks and SUVs being what people want. I think all these manufacturers are rushing to change over their plants to build these cross-overs.

So, to me, overall, I think it's just a matter of us rightsizing our premium side.

And we think the mix is going to get better. Remember, we're going into the best selling season. I know everybody is concerned about inventory.

But at this particular time, with the size of our business, when I look at it on a domestic and international basis we are in pretty good shape. Overall I think I said on the call we had 55-day new, and that compared to 68 at the end of the year, so that was down. But you look at the US alone we are about 70 days. So we are in line with some of our peers, but again our used car is at 39 days.

So it's a focus. But again, I think more important is what do we do to these hours we're sitting with that are on stop sale? That's my biggest concern.

That's very helpful. And just a broad industry comment, Roger -- as far as your thought on health of the retail environment, broadly speaking, and your thoughts on lease penetration and maybe some of the levels that that's elevated to.

Well, let me just talk about lease. On the Premium Luxury, we have been -- in our business over 50% has been leased. And we like that business. It is stickier from the customer standpoint because we deal with them when they bring the cars back. We can deal with them when they are getting service.

So I think leasing has been key. And when you look at us overall, at 41% of our new units were leased and 30% of our total. So it's a pretty strong part of our business. And when I look at the business overall I think that leasing is quite positive from the standpoint of where we are going. And from an off-lease perspective, just to put it in realistic terms, just in BMW alone, we've got 10,000 vehicles coming back this year from BMW. And we like those vehicles coming back because we buy those and they are good cars for us to recondition, to certify them and resell them. And we keep that customer. So I think that's important.

What was the first part of your question? I jumped on the leasing.

It was broader health of the retail environment and whether you think that the manufacturers are doing the right things to move new vehicles, maybe not on the premium side but also within your volume foreign them as well.

Well, let's just say premium they've got to ship more to trucks and SUVs, let's say. That's point number one.

I think from a credit perspective I've never seen the OEM captives stronger from the standpoint of on the retail side. You see that Toyota and Lexus have announced leasing on used. We've been doing that already with some of the other Premium Luxuries in the last 18 months. But credit is strong.

From an overall standpoint there's some discussion about subprime. In our business it is probably less than 6%, so I can't really comment on that.

But there's people popping up every day that want to finance us. And we have about 60% of all about financing is done with the captives on the retail side, 100% on leasing. So the balance would be with our preferred lenders.

So, I look at a strong $17 million SAR. I see competitive situations with the OEMs, and there's no question that from a lease perspective I like them better because what it does, they are typically 24 to, say, 36 or 39 months and gets that customer back to us. Now, we don't have the benefit of selling as much aftermarket product on those. But I guess I'd rather have the customer back in my shop on a going forward basis.

So, overall, I don't see anything but a good market here for the balance of the year. And to me, on the truck side freight still as positive in March. I think there's some adjustment in inventories across retail, meaning just overall consumer retail. But construction is still strong and I think that we will still see that market stay there and our Parts and Service will, of course, drive that continue revenue stream.

Well, great job by you and your team. Thank you for having me on.

Brett Hoselton, KeyBanc.

I wanted to circle back around, talking a little bit about the airbag recall. Some of the other auto retailers are talking about a large percentage of their used vehicles in a stop sale position and how maybe on the new vehicle to a lesser extent but on the used vehicle to a greater extent, being a little bit of a hamper to sales.

I'm wondering, are you seeing a negative impact on your new sales? And are you seeing negative impact on your used sales, or have you found workarounds?

I can't say that I've got a negative -- we lost maybe some Volkswagen TDI business for obvious reasons because people did like that vehicle from a diesel perspective.

But quite honestly, it's probably the inconvenience of having these vehicles -- you have to store them and in some cases we have -- we're on flat tires that we have to deal with. We have batteries on these Premium Luxury cars that have to be charged. So there's no question that is becoming more challenging.

But it's difficult to really predict the cadence on when we are going to get the spare parts. Today we have approximately, I think I said earlier, about $60 million of stop sale vehicles. If you look at those, $20 million would be in used and $40 million would be on new vehicles.

So, to me, it's a matter of storing these.

The good news is that the manufacturers that are supplying us floorplan credits or floorplan assistance -- I'm sure in some cases we are not getting all of our costs -- [or] giving us money to give rental cars to consumers. My issue is that it's CSI turning it from a customer satisfaction perspective when you can tell the customer we don't know when we're going to get the parts.

So that becomes a little bit more problematic. And I know that some of the publics are wholesaling some of these cars. Where we can do that and we don't have a safety-related stop sale, we probably would take the same action.

And then in terms of BMW specifically, some of the dealers are telling us that there has been a dearth in the first quarter of off-lease vehicles due to a program, about three years ago, a lease program about three years ago, and it's pushing back or pushing out some of the off-lease vehicles into that May, June, July timeframe that we normally would have seen in the first quarter.

So my question is, how do you feel about the cadence of BMW's sales? And as you look at your BMW sales, are you seeing the same impact on your sales that these other dealers are talking about? I presume you are, but maybe they are making too big a deal out of it.

Well, each one of us -- BMW is a very important partner of ours, our number-one partner. So we are with them every day.

I would say this, that we definitely saw a slower lease return because of the 39-month lease that they had. but also they've got a Takata airbag issue with a number of their cars. So even if we got those cars back, many of them we could not even sell because of the stop sale.

Now, what we've done, we've taken a little bit different action. We've gone to turning our loaner cars -- we have a number of loaner cars. Just taking care of the West Coast, that's 350. We've gone to turning those at a higher rate, which is giving us a young used car. And we can take the financing/leasing opportunities there.

So we kind of filled the hole with those until we can get some of these stop sale cars or maybe a better flow of off-lease returns. But we live off those and I think it's going to be important. I said earlier we have 10,000 coming back in 2016.

Excellent. Thank you very much, Roger.

David Lim, Wells Fargo.

Roger, I wanted to ask you when you compare 2015 to what you are seeing so far in 2016, are you seeing some noticeable bad practices reemerge such as overinflated residual values when it comes to leases, aggressive incentives, channel stuffing or even pre-registering of vehicles?

Well, I think that you see the same information I see. I looked it up before the call. And right now the industry average on incentives is about $3,100. It's up about $400 from a year ago.

It's interesting; when you look at it, the European brands, which we have a lot of conversation about, it's only up $100. And the domestics are up $800. So there's probably more incentives going on, on the domestics now.

From a stairstep perspective, we talk a lot about that. I don't see that much in the Premium Luxury side at all. I think that I look at Porsche, probably Mercedes, I think maybe Cadillac. I don't see any stairstep at all.

And Audi has a BPO goal which has been consistent. We always say they are too high, but we figure how to get there anyhow. At the end of the day, I don't see anything more than we are all pushing for the different commitments that we've made because there's simply a pot of money at the end of that.

And I don't know that, I go back a year ago, that we were in the same situation. I think today the big issue that we are facing is what are we going to do with these stop sale cars. And it's becoming a bigger and bigger problem because there's no question that we have to handle those for the OEM; that's the downstream partner's responsibility. And we have to do that.

But that would be a bigger concern for me. That's what I would look at today is these campaigns that are safety-related. And the OEMs are looking for share, and because China has been obviously soft they are pushing those vehicles here. But I know for a fact that Audi has slowed down their -- I think they've taken 10,000 to 15,000 out of their production here over the Q2 period, so we're starting to see that inventory certainly tighten up. And it will help us on our gross profit.

So you mentioned that Audi has taken down production. Are you seeing any kind of other production cuts from other OEMs? And then a follow-up resting to that is on industry sales, 17.3 million, 17.4 million is what we did last year. And is that something that can be achieved in 2016 or do you have an opinion either way.

I have never been anyone to forecast it, but I certainly feel that 17 million SAARs -- we are now into April and April seems to be a good month so far. I don't see anything other than that.

I don't know that any other OEMs specifically have cut back. I know that there are some plants that have shut down here just lately, this week, some of the domestics. Some of that has been maybe through parts shortages. I don't know that for sure.

But I think everybody understands at the end of the day in the OEMs -- we have conversations with them every day. You push cars to us it's going to cost you money to sell them through incentives. And I think they all realize that. But again, I guess we will have to wait and see.

My last question, if you don't mind, is, is Penske Automotive Group pushing back on any orders from the OEMs?

We say no a lot of times.

Got you.

We have to say no. And I think that we can only take so many vehicles. And the problem is it's not that we don't want to take them, it's the mix. And you just cannot continue to take vehicles where you've got an overload. And that's probably -- if you look at everybody's inventory that's talking about over-inventory, it's probably mix. And if we had the right mix we'd be in good shape.

But to me, we haven't been able to convert the plants fast enough to go to these SUVs crossovers. And I think it's different by brand and certainly it's different by market and certainly by segment. But again, I think this market after a while will shift to where we have the right supply of the right product. But trust me, we have to be able to say no.

Thank you, gentlemen.

Bill Armstrong, CL King & Associates.

A couple questions on the Commercial truck area -- so your gross profit per unit is down year over year and for used it was negative. Conversely, you had a huge increase in F&I per unit. So I was wondering if you could maybe just discuss the different directions in those metrics.

On the new side we added the Group in Tennessee and Georgia. We picked up some larger fleet business, which obviously had an impact on grosses. We didn't get quite the retail gross on a fleet business. So that had some impact there.

Then as we looked at the end of the year, we looked at our used truck inventory because as the fleets have topped off and now with, say, freight leveling out, there are some overfleeted. So we saw some fleets trying to wholesale trucks, so we saw the used truck market drop. So we took action and really have compensated our sales guys to move these trucks at what the market is, and sometimes that's obviously below our cost.

So what we did, we put some good incentives on the Finance and Insurance side. And you can see that we were $3,400 per used truck. But again negative. We sold 271 used trucks in the first quarter. Our inventory is about a 60-day. We are sitting just under 500, so we are sitting in pretty good shape now.

But I think that action was really, as we do in the car side, to downsize it so we are in a position to be able to take more trades in the future.

So should we see maybe more normalized F&I and gross profit per unit going forward, then, now that you have cleared that out?

I think we still probably have 25% of our trucks that we need to move. There are those ones at the backend that we've had. And instead of wholesaling them and taking a big loss, we're better off to retail them and get the benefit of our financial reserve. And I think that it will take us probably through Q2 and then we are going to be aggressive and continue to take trades where it makes sense because we will get the front end deal too.

But again, we want to be sure that it's in line with the marketing. And there's no question that, as we look at our used truck F&I growth at $3,400 it's strong. And we look at it overall, it certainly makes sense to take on the section. And we get a little bit higher sales costs also, too, because our sales guys don't have much on gross. We are paying them on a flat.

That has had some impact on our compensation from a variable standpoint.

We are hearing that obviously used truck prices have been suppressed, especially for Class VIII, and that lowers the trade-in value when these fleets are looking to replace their vehicles. Are you guys seeing that in your dealerships where the buyers just maybe aren't able to replace these trucks as soon as they would like to because their trade-in values have been diminished?

Well, that's the one thing about a heavy-duty truck. You can run longer in order to depreciated to what we would suppose the market price is. The only thing there, you have some higher maintenance costs. Well, of course, that drives more parts and service to us.

But I think there was a guy -- pretty smart in the business -- said it takes about a year for people to realize, because what's happened -- it has really been a sellers market in the used truck side for the last, what, five years. And now with production of fleets being full, it's now going to be a buyers market from the standpoint of the truck dealer.

And I think that there will have to be some will come to the 50 yard line here probably over the next six to 12 months. And people understand their values, and if they have to affect the depreciation life they will have to do that. But I think that typically on a heavy-duty tractor, if you got five or six years of depreciation, you probably are not affected by any big swings in the markets.

Got it, thank you.

Paresh Jain, Morgan Stanley.

Just a follow-up, actually, on the inventory and production topic. In the past year, highlighted how both UK and US were seeing some of the production that was originally meant for China. How has that trended more recently?

Well, let me say this. I think Land Rover particularly has been very positive for us, the UK and in the US. So those inventories are picked up. I would say Porsche also, and we are getting some benefit, I think, in ML and GLS, GL in the Mercedes side. But that certainly will help us.

When I look at the numbers, Tony gave me the numbers specifically. We're seeing our inventory up about $13 million in Porsche in the US and another $7 million in the UK. You look at Lexus is up $16 million. Honda and Toyota are up about $30 million each and Land Rover is up about $47 million.

So again, then you balance that off with a reduction in Mercedes and BMW, and I think we are in pretty good shape. But this is a balance. And with interest rates where they are, it's not a big impact. But I tell you one thing, we're definitely keeping an eye on it. And if this mix doesn't change we're going to have to take some action and move -- and probably take some less growth to move it.

Got it. And then just one follow-up -- on the US F&I, in the quarter most of your peers are seeing meaningful uptick, F&I in US, F&I per vehicle in US was flattish. What drove that flattish performance?

I think you've got to look at it -- I think we were up about $47, if I remember. But leasing was up. When you have leasing in the quarter we don't have the benefit of the backend on F&I that you have on a pure conditional sale contract.

Understood. Thank you.

Michael Montani, Evercore ISI.

Just wanted to ask if I could, Roger, on the 7% decline with used GPUs, there has been a bit of a trend there of declines really since the back half of 2014. And now we have seen Manheim Index come in a little bit. So is there any way you can share some additional color maybe by US versus UK, and also how do you see that evolving, given the rising off-lease vehicles?

I guess I could get Tony to give you the input later on UK versus US. But what we are all trying to do -- we have gone from 0.5 to 1 used to new, to 0.9. So there's no question that we are retailing first. So there's a lot more focus on used cars.

And I think, with that, that's driving some of our lower margin. And when I look at Germany specifically, in the Jacobs Group that we had this past quarter, we had 1.2 used to new. And Jacobs' margin on used is probably around EUR800, which drives that number for us when you consolidate it with our US.

But I think it probably -- Tony says that Jacobs probably cost us about $50.

If I could, on a slightly different topic but related, on retention rates that you may have actually for off-lease vehicles -- and what I'm thinking about here is used day supply is 39 days. How would you all think about trying to retain a certain percentage of the off-lease vehicles that you all have and then convert in CPO versus balancing the day's inventory to make sure that you are disciplined on GPU?

Can you just talk about strategically the trade-off there and how you think about what percentage of the off lease you actually want to keep versus maybe send back to auction?

Well, I'd give up a little bit on margin to either keep a customer in the used or to get new customer. Then we get the benefit of the Parts and Service gross profit in the reconditioning, which is key now today.

And we are doing tires on our own now. We are doing our glasswork. We are doing our debtless repair, our rapid repair. All of that now is done internally to try to keep the sublet down.

But we see the off-lease vehicle as a very important part of our business. And I think that we watch our inventory. But remember, we have -- we really have three ways to get used vehicles. We can buy them on the [curb], we can trade them. And then what we had we called young used is the ones that we take out of demonstrator service or loaner car. And we can turn those typically in a minimum of three months if we wanted to.

So as we need to fill the bucket of what good preowned, we have those three levers to pull.

Great. And last one, if I could sneak it in, is just any update you can share around the Northeast market, in particular, what you are seeing there trendwise, either from a new unit comp or GPU standpoint.

Well, I'd say that we see the Northeast down. For us it's probably the Connecticut and New York -- out of New York we see probably 5% reduction year over year. And in Jersey it was down 4%. We think that's a byproduct of the financial markets in New York.

But again, we've got good businesses there. All those businesses are making money. We're just not getting the uptick that we see in some of the other markets.

Patrick Archambault, Goldman Sachs.

Just building on the used question, tying back a couple of thoughts, it sounds like from the -- you have 39 days of inventory, which is not excessive. But you are seeing at least in the US some degradation in the Manheim -- not a lot, but a little.

Is that something that is offsettable? Or should just the depreciation of that inventory in terms of price for 40 days be something we think about as being adverse to used vehicle margins as we go forward?

If I'm going to dump them in the market is and wholesale them, I'm probably going to have a different outcome that I will if I retail them. And remember, if I have to take, as I said a little bit earlier, if I have to take a smaller gross in order to have a customer and get some F&I like we're doing on the truck side, I think it makes sense because we get reconditioning.

Now, to me, if you are in the 40 to 50 days, and you are turning your used inventory, I think you are in pretty good shape. You're not going to run into a buzz saw with a big drop. You will be able to manage that.

The big problem is the cars that get over -- you have some cars that probably trail in to 60 days. And we try to have some pretty good discipline to move those out when we have to. I think the fact that we are 0.9 to 1 used to new from a Company perspective shows us that we can sell used cars. And I'll tell you, we didn't focus on that as we first got into this business. And I think that at the end of the day we are certainly in a much better position.

And as I said, when we look at our variable growth, if we look across our new, our used, our F&I, we are getting almost $3,500 per unit. And to me is what makes sense. What's the total all in? And you look at the front end transaction being maybe a new car, a used car. Then you also look at the impact on our Parts and Service.

And our Parts and Service margin is running anywhere between 58% and 59%. And that has been pretty consistent. I don't know if I can get it any higher. And that's because we have gone into glass, we've gone into windows, we've gone into window tinting -- all those things that we were sending stuff out where we were leaving money on the table.

So our process is more vertical integration. And I think that's what we are doing on used. And I think all the other public guys are -- I hear Asbury and I know what Auto Nation is doing and certainly Sonic with the special used car programs. Remember there's a lot more used cars sold than new, so it is a market that we need to understand and how we can penetrate it.

Got it. That's helpful to contextualize it and put it altogether. In terms of just getting back to -- and I'm sorry if this is in the deck somewhere. But on commercial vehicle, if you exclude the acquisition of the Tennessee dealer point, how much was it up on the same store, same sales basis? And again, if this is a number that's out there I apologize. I just didn't see it.

I don't have that with me. I'll get Tony to come back to you on that. Obviously, we had a benefit of -- I haven't really looked at it on the same-store basis because it was really -- we got it in January of last year, so we did have part of it in February and March. But I almost could say it was same-store. We had maybe one month, that would been January.

Okay. Well, that leads well into this final question. It's just your revenue was up and obviously you have had -- the dynamics of orders and retail sales for Class VIII are difficult. How much of that is some of the market share gains that you spoke to with DTNA? You did speak to a pretty brisk used business because you had cleared out some units. So maybe just trying to put the pieces together there.

Let's say this. We represent only one brand, and that's DTNA or Daimler, which has Western Star, Freightliner and Thomas Built buses. And of course they had good share last year. As we look at our business you've got to retail piece of this, which basically we were in when you look at -- we didn't have some of the big fleets that are located in the Southeast, the US Xpress and Covenant and people like that, which now that we have -- and those fleets today, I think, are in a position where they are going to have -- I don't think they're going to grow their fleets. They are going to be replacements. So we're going to have to play ball with them on trades. We are going to have to play ball with them on pricing, which is going to drive -- will drive some margin down.

But on the other hand it gives us a margin we didn't have and gives us a chance to do the predelivery inspection and provide parts and bodyshop work. So I think that the model is working fine, and we will see probably less in what you would call a SAAR for trucks. I think it will be down probably from 310 or 320 probably down in the mid-200s.

But on the other hand, I think with Daimler's share we're going to get a bigger piece of that. And the good news is that we have the units in operation, which will drive this 79% gross profit which is so key.

And remember, when you look at the business in the first quarter, we would do anything to get 117% fixed coverage. And that's what we had in the truck side. So when you look at the model I think we are in the right spot. It's good diversification for the Company.

Got it. Appreciate all the color. Thanks again.

Thanks, everybody.

Ladies and gentlemen, this will conclude our teleconference for today. Thank you for your participation and for using AT&T's Executive Teleconference Service. You may now disconnect. And presenters, you can remain on the line.