Penske Automotive Group Inc (PAG) 2016 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group fourth-quarter 2016 earnings conference call. Today's call is being recorded, and it will be available for replay approximately one hour after completion, through February 14, 2017. It's located 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.

Thank you, John, and good afternoon, everyone.

Thank you for joining us today. A press release detailing Penske Automotive Group's fourth-quarter 2016 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; JD Carlson, our Chief Financial Officer; and Shelley Hulgrave, our Controller.

On this call, we will be discussing certain non-GAAP financial measures such as adjusted income from continuing operations, adjusted earnings per share, and earnings before interest, taxes, depreciation, and amortization, or EBITDA. We have prominently presented the comparable GAAP figures, and have reconciled the non-GAAP measures in this morning's press release and investor presentation, which is available on our website, for the most directly comparable GAAP measures.

Also, we may make forward-looking statements about our operations. 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. I direct you to our SEC filings, including our Form 10-K for additional discussion and factors that could cause the results to differ materially.

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

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

I'm pleased to report record fourth-quarter results for PAG, really demonstrating the overall strength and diversification of our transportation service model. In the fourth quarter, income from continuing operations increased 13.5% to $82.5 million, and related earnings per share increased 19.8% to $0.97 per share. Our GAAP results include a $5.1 million income tax benefit from the revaluation of a deferred tax liability on our Premier Truck investment. Our results also include a $2 million after-tax benefit related to the Volkswagen settlement. Excluding the income tax benefit of $5.1 million, adjusted income from continuing operations increased 6.5% to $77.4 million, and related earnings per share increased 12.3% to $0.91. Our fourth quarter results were achieved despite the year-over-year currency headwinds, mainly driven by the UK pound. Excluding foreign exchange, adjusted income from continuing operations increased 12% to $81.4 million, and related earnings per share increased 18.5% to $0.96.

Before we discuss the specifics regarding PAG's fourth-quarter performance, I would like to review some of the key highlights from the past year. We retailed more than 457,000 new and used vehicles. Our used-to-new ratio was 0.83 to1. Our revenues increased 4% to $20.1 billion. Excluding foreign exchange, our revenues increased 8.6% to $20.9 billion. Income from continuing operations before taxes surpassed for the first time $500 million. Adjusted earnings per share increased 7.1% to $3.93. Excluding foreign exchange, adjusted earnings per share increased 12% to $4.11.

Our Board of Directors increased our dividend 4 times, and the current yield is approximately 2.2%. We repurchased approximately 4.5 million shares for a total of $167.9 million during the year.

We also took several steps to grow our business while continuing to diversify. We announced our completed acquisition is expected to contribute approximately $1.4 billion in annualized revenues, which would include the expansion of our retail commercial truck dealership business in Toronto, Canada, acquiring six locations representing Freightliner and Western Star Brands. A dealer group in the UK representing the Audi, BMW, MINI, SEAT, Skoda, and VW franchises, which are expected to generate $200 million, was purchased in the UK during the year. Seven franchises in Italy were purchased, effectively doubling our business. Our business in Italy is expected to generate approximately $400 million in revenue annually.

As previously discussed, we acquired an additional 14.4% interest in Penske Truck Leasing to bring our ownership to 23.4%. We also invested into an automotive dealership joint venture in Japan, and increased our ownership interest in one of our Germany JVs from 60% to 68%. Most recently, we announced the acquisition of two standalone used car vehicle retailers, one in the US, and the other in the UK. These are expected to generate approximately $700 million in annualized revenues. These businesses provide added diversification, and a greater opportunity to drive used vehicle sales in this growing segment of the market.

Now let's turn to the details of our fourth quarter. Revenue decreased 0.7% to $4.9 billion, however, excluding foreign exchange, our revenue increased 5.7% to $5.2 billion. Same-store retail revenue declined 3.8%; however, excluding foreign exchange, it increased 2.8%. Approximately 93% of our total revenue was generated through our automotive retail dealerships. Our revenue mix for the quarter was 63% North America, 37% internationally, and for the 12 months, we were 60% North America and 40% internationally. During the quarter, 72% of our income was derived from automotive retail, 4% from North American commercial truck dealerships, and 24% from other, which includes Penske Truck Leasing, Australia, and our other non-automotive joint venture investments.

Now turning to Q4 retail automobile business, total units retail increased 1.8% to 112,129 units. Retail automotive revenue was essentially flat at $4.6 billion, and declined 3.8% on a same-store basis. Exchange rates negatively impacted the same-store retail automotive revenue by $281 million. Excluding foreign exchange, same-store retail automotive revenue increased 2.8%. Same-store variable gross profit per unit -- that's gross profit from new vehicles, used vehicles, and F&I, declined $9 per unit to $3,418. Excluding foreign exchange, our variable gross profit increased $227 per unit to $3,655.

Turning to new vehicles, new vehicles retail increased 4% while same-store units were flat. Gross profit per unit retail was $2,988, down 2%. However, when you exclude foreign exchange, gross profit per new unit retail increased 4.6% to $3,189 or $139 per unit. Our gross margin was flat at 7.9%. Just as an added point: our premium luxury gross profit was 8.3%. Our supply of new vehicles was 64 days at the end of December, versus 68 days at the end of 2015.

Looking at used vehicles, used units retail declined 1%, while same-store used unit retail declined 4%. CPO sales, however, represented approximately 40% of our used unit sales in the US during the fourth quarter. Gross profit per used unit retail increased 3.5% to $1,472 or $50 per unit. Excluding foreign exchange, gross profit per used unit retail increased 11.1% to $1,580 or $158 per unit, and our gross margin increased 30 basis points to 5.5%. Our supply of used vehicles is 49 days at the end of December, versus 44 days at the end of December in 2015.

Finance and insurance revenue per unit was $1,087. Excluding foreign exchange, F&I per unit was $1,164, an increase of $54. Our service and parts revenue increased 2%, and was flat on a same-store basis. Excluding foreign exchange, same-store service and parts revenue increased 4.8%. Our customer pay was up 1%, warranty up 14%, our body shops and PDI up 12.8%, for a total of 4.8[%].

Turning to the retail commercial truck business, in the fourth quarter our Premier Truck Group dealerships generated $218 million in revenue and $33 million in gross profit. In Q4, our truck dealerships generated nearly 83% of its gross profit from service and parts, and fixed cost absorption ratio was 114%. New and used truck sales continue to be impacted by a decline in North American Class 8 heavy duty truck market, caused by softer freight demand and excess capacity. This continues to put pressure on used truck values. Recently, we have seen improved conditions for truck sales, which seem to indicate that the supply/demand balance is improving. We expect similar conditions to continue in 2017, and improving economic conditions could lead to increased freight demands later in the year.

Turning to the Australia truck distribution and power systems business, in the fourth quarter revenue increased 7% to $116 million, and gross profit increased 14% to $31 million. We have seen good progress across our commercial vehicle and power system business during 2016. We recently were awarded a $10 million contract to supply engines for large ferry boats in Australia. In 2016, we delivered 113 military vehicles to the government of Australia under a long-term supply contract. We expect to deliver 2,500 heavy duty military trucks under this program through 2019.

Looking at our balance sheet, we had $24 million of cash on our balance sheet at the end of December, and our non-vehicle debt was $1.9 billion. Our debt to capitalization was 51.2 at December 31, and our leverage ratio was 2.7 times. We had over $600 million in liquidity at the end of December.

New and used automotive vehicle inventory was $2.9 billion, essentially flat when compared to December last year. On a same-store basis, new and used inventory was down $131 million. New inventory was down 7%, used inventory was up $15 million or 2%. Approximately $34 million of our used inventory is currently on OEM stop-sale, representing approximately 1,100 vehicles. At the end of the quarter, the first quarter, we had approximately $80 million on stop-sales, so we made considerable progress since then. Capital expenditures for the year were approximately $203 million, and include $33 million for land purchases, and a lease buyout we replaced with a mortgage.

In closing, we're very pleased with the performance of our business, and continue to believe in our diversification strategy, the strength of our business model, and its ability to adapt to market conditions. I would like to take this opportunity to thank the 24,000 team members who worked tirelessly to drive our business every day during 2016. Thank you again for joining us on the call, and your continued confidence in our business.

At this time, I'd like to open it up for questions, thank you.

(Operator Instructions)

And first, we'll go to the line of James Albertine with Consumer Edge Research.

Hi, Jamie.

Hey, Roger. Good afternoon. How are you?

Fine.

Thanks for taking the question. I wanted to ask on the used vehicle gross profit side. Looking ahead to 2017, can you help us understand kind of what the biggest impacts as you see them potentially, in terms of gross profit per unit could be, whether it's supply, some combination of new vehicle incentives bleeding into used pricing, or just the influx of competition perhaps even into the market? Thanks.

Well, I'd say, the first thing as far as I'm concerned, it's going to be driven by the new vehicle sales that have taken place over the last 12, 24 or 36 months. And we have a significant number of off-lease vehicles coming in on the premium side, because we're dealing primarily as you know, 72% of our mix is premium. And we're looking at about 3.5 million lease returns in 2017, and that's going to grow to over 5 million, when we get to 2018 and 2019. So we expect this to have a certain impact.

I think the key thing here is though, that as we grow our used car business, we found that the sale of our demonstrators under the new programs, we can take them out, in between 3,000, 4,000 and 5,000 miles. And they become high profit cars for us, because we bring them into the marketplace as almost new cars. We get the current financing and our lease programs with those, and that's helped us maintain our gross profit. So we use that as an offensive tool, as we go forward the rest of the year.

I think from the standpoint of availability, there's no question with 40 million used cars being sold, there's no question that there's the opportunity for us to understand the used car business. And I think that's one of the reasons that we made our acquisition into CarSense here in the US, and also CarShop will close in the UK some time in the next 30 to 60 days. And this gives us another option. When you think about our used car prices, they're typically between [$]26,000 and [$]28,000, and under the CarSense model, it's probably between [$]19,000 and [$]21,000.

So we're really going to access a different customer, with a different model, fixed price, salaried employees, unit bonuses. And I think that based on our current understanding of that business, it's really a no haggle, no fear buying experience, which we've heard about, and now we're going to experience. And I think the question is, is this going to be an opportunity that we can then take into other markets? We think we can. There's a lot of white space. There's no corporate identity and franchise agreements. So I think the used car business is a real opportunity for us, as we see the OEMs putting pressure on new car margins.

That's extremely helpful. Thank you for that. And maybe as a follow up, what are the -- or how should we think about the growth in investments into that business for you? What are the gating factors to keep in mind, with respect to the brick-and-mortar growth? Is it finding real estate, is there something that we should consider that might slow that down? Or can this standalone used opportunity grow quite rapidly, quite quickly, as we're looking ahead? Thanks.

Well, I think that our peers have all been getting into this business. And I think that they see the capital expenditures, the investment in bricks-and-mortar being considerably less than going into the traditional dealership model, and I think that this bodes well for us. And we look at probably, adding at least two locations in 2017 here in the US, and also at least one in the UK, as we go forward. So the investment is less.

The cars are the same, except we can access those, probably have more tools to access those than a typical used car dealer would have, and we can use our back office for all of the other items we need to run a business. So I think the model is good. It's less cost, and the nice thing is there's no goodwill, when you going to go into these businesses. So all your money is on working capital and your fixed assets.

Well, great. Thank you so much, and best of luck in the first quarter.

Thank you.

Next we go to Rick Nelson with Stephens.

Thanks. Roger, just to follow-up on the freestanding used car stores. Your approach to acquire versus a build from scratch, as some of your peers are executing that strategy, and I'm sure you considered that as well. What do you see the advantages of the acquisition, as opposed to build from scratch?

Well, look, I think that you can take either course. I'm not sure that I'm any smarter than they are, but I would say that in our case particular, I see a business from CarSense which has been perfected over 20 years. In that Philadelphia, Pennsylvania and New Jersey market there's very attractive demographics there, there's a high repeat business. So we're getting a repeat referral already coming out of that business, and we talked about the culture, and the hiring process there is key. And I think that it's interesting, when we look at this new model, we now have really something that we can use to base as our future growth, because we have a successful model.

And I would say, to the investment community that the ability to have accretion of $0.06, $0.07, $0.08 for this business in 2017 is another positive. So again, there's plenty of space out there. And I think with 40 million used cars, 3 times almost the number of new sold, when you think there's about 14 million real retail cars sold a year, not [17], that's including fleet, there's a real opportunity for all of us. And I think you'll see with the tools we have, and the internet obviously to be able to do the branding, will be very, very powerful for us as we go forward.

Thanks for that color. You've talked about the acquisitions, the Open Points added -- [$1.4 billion] in revenue. I guess, about half of that is going to close here in the first quarter. As you look forward, do you think 2017, how do you think that's going to stack up from an acquisition standpoint?

Well, I think that we're continue to look at greenfield, on the used car side which we just talked about. I think if there is premium luxury opportunities that we can glue on in markets where we have a presence, we'll continue to be an opportunistic buyer -- excuse me. And certainly, we'll take a look at the balance of the Penske Truck Leasing that GE owns, could be an opportunity for us as we get towards the end of the year. So if I gave you the full 360, that's where we are looking at capital allocation after dividends, and certainly any CapEx that we have take care of, based on our commitments to the OEMs.

To follow up on that, most of the acquisition looked like it came overseas, although PTL is a little different there, not much in the US. Is that kind of the same outlook, more opportunities overseas?

No, I think, that we want diversification. Overseas, we were able to add on in Bologna, where we had a strong management team which is key, and also Sytner had a tremendous year this year. So they had a nice tuck-in that they had from a brand perspective. But I see us adding in the US. The multiples remain higher here. So we have to balance that off. But on the other hand, real estate, as we look in the UK, and certainly in Western Europe, we don't quite have the commitment we have to make to the OEMs over there. So it's a balance, but I would say, we're not shutting the door on the US for sure.

Okay. Thanks a lot, and good luck.

Thanks, Rick.

Next we'll go to Paresh Jain with Morgan Stanley.

Good afternoon, Roger, Tony.

Hi, Paresh.

Hi, Paresh.

Hi. Just have one question on used demand. There is this belief that with the increase in used supply, and a potential fall in used prices, demand for late model used vehicle will increase significantly, and perhaps cannibalize new demand. Let's consider the [worst] situation for a second. What we have started seeing is, that new cars are coming in with a lot of active safety content that makes them safer than the average late model car power of magnitude. [Acura], for example, has active safety content that is pretty much standard on its entire line up. Do you see something like this perhaps supporting SAR in the near-term, and creating further pressure on used instead?

Look, I'd have to use the heavy duty truck market, Paresh, as maybe an example. We have anti-skid breaks, we had lane avoidance, all of those things came on, and were opportunities, but it takes awhile until people go through their fleet cycles before they add those on based on cost. And then certainly, we're finding out in some cases, we don't get the benefit of the residual value.

I don't think it's going to change the SAR, because someone doesn't have a car with that capability. I think more important is going to be, what's going to be assisted driving, what's going to be autonomous. Those things might decide the number of vehicles that we'll need on the road to get the utilization we want. Of course, that's going to raise maintenance costs for us at our shops potentially.

So I don't think that you're going to see those types of -- call them safety items, or items with technical capabilities that are going to drive higher SAR. I don't think that. I think that it's new models. You certainly would see it, if electrification, and there's legislation coming which drive, and that's what's going to drive the electric vehicle. The cost of ownership model today on EV, I don't think it gets you there. But it will once the manufacturers that have to meet the 2025 emission requirements, then you're going to drive some different dynamics as far as mix.

Got it. Thanks for the color.

Next we go to Brian Sponheimer with Gabelli & Company.

Hi Roger, hi, Tony.

Hi, Brian.

Hi, Brian.

Roger, just some perspective on your own used inventory as you see it as at December 31 of 2016, versus 2015 just from a mix perspective?

Well, our inventory actually was up, if you looked at it between 2015 in December and 2016. And I think, one of the real reasons, it went up, I think by several thousand vehicles in Europe, in both Western Europe and the UK, which drove up our used car inventory at the end of the year.

But the mix, obviously today, people want trucks and SUVs. And when you look at our overall inventory, it was only up [$15 million] at the end of the year. So we are seeing pricing on trucks and SUVs much stronger than we do on sedans, which you've seen that because of the gas prices being low, and the incentives really push the customer towards the truck. So we still need more SUVs.

As we think about particularly for you, the CPO vehicle or the vehicle that could be CPO coming back, the mix three years ago from a lease perspective is a little bit different than it is now. Is that going to potentially create some problems, as far as what you do with those excess sedans, as they come back relative to the SUVs and crossovers that you want to keep?

Well, I think that's something that's the liability of the OEMs. For me, that's good for CarSense, because we're going to be buying in the open market those vehicles, we'll be buying at market price. And we'll see some, I see some sedans today, that are very well-priced because of that. So remember, we're not on guarantee buybacks on used cars. We're not guaranteeing that.

So to me, we have the market ability to buy at market value. Now if you don't turn those vehicles in 30 or 60 days, then you have some deterioration of your margin, and then there will be no question, as we see more incentives on new cars, that's going to drive lower pricing on existing portfolios of used. So there will be dynamics there, which I think will be more impactful on the OEM, than it would be on the retailer.

Okay. And I guess, last one, just big picture. It's obviously very early in the new administration, but thoughts on potential changes in corporate tax, vis-a-vis border adjustment taxes, and everything that's getting thrown out there right now?

Well, I don't think I'm the one to be able to give you anything that's going to be meaningful. Other than to say, that a reduction in regulations, I think will be beneficial to the business community, no matter what business you're in. I think that's a positive. The reduction in the corporate tax rate -- today we're at 33% to 35%, going to 15% or 20% would be a big help to us, as you would expect.

The elimination of interest deduction. I'm not sure how that impacts us. Certainly, I read recently that there's a deductibility of capital spending, instead of amortizing over three or four years, you can deduct that in year one. The bonus depreciation obviously might go away. So to me, the repatriation of earnings would be a big benefit to PAG, because of the growth of our business internationally. So all of the things that I see on the plate here I think are excellent. And if we can take regulation out, and then simplify the business, and certainly with taxes, I think it will be massive benefit to us.

From a border tax, how it impacts the OEMs, whether they're foreign or domestic OEMs I don't know, because you've got parts coming out of the US, going into these foreign countries, then coming back in. Is it a net import/export number you're taxed on? I really don't know that. I think that we're still in the first inning, as far as Trump is concerned on that.

All right. Well, thank you very much.

Thank you.

Our next question is from John Murphy with Bank of America Merrill Lynch.

Good afternoon, Roger.

Hey, John.

We've seen some of the luxury brands work their way into, and out of some lease bubbles in the past. And obviously, you've been there with them, to help on both ends. I'm just curious if you can kind of highlight or think back to any of the tactics that they used to work through some of these surges in leasing. And also, as they do that, do they get the sort of the owner to buy the vehicle, or the lessee or the lessor to buy the vehicle at the end of lease? Or does, it mostly end up in the open market, and you guys work with it from there?

Remember, you've got three options. You've got one to extend the lease. And you can be sure that the OEMs because of the amount of premium coming back, they will do everything they can to offer an extension at a lower rate. So that certainly would be one. Two, would be able to buy the vehicle. And I'm sure there's no question that they'll be offering certainly great rates from the standpoint of buying out the vehicle.

Also, what we'll see is, in order to mitigate some of the pricing, and able for us to move and they will have longer warranties on used, there's no question. And you'll see some probably zero rate financing on used cars that we haven't seen before. So to me, the offer of leasing now on used cars is very interesting, because that's somewhat of a camouflage on residual value that they're betting on, is that that car goes back out again, maybe for a two, three or four year cycle.

Yes, that's interesting, and very helpful. And as we look at the CarShop acquisition, you guys made mention in the press release that you have 15-acres for the prep site for the vehicles. I'm just curious, what exactly is going on there in that prep site? And two, if there are other opportunities to leverage the real estate and the processes that are going on there?

Well, to put that into perspective, we've got approximately 15-acres. We can actually service 45,000 vehicles through that site, where we're 24 hours, seven days a week. Now right now, some of the work that's being done there is some decommissioning of used cars and lease returns for a third-party. So we do that to fill in, where we don't have the vehicle parked for our own utilization. So the good news is we can grow that.

And that's one centralized location at Leighton Buzzard in the UK, So all vehicles go there, and then they go back out to the retail outlets, which gives us the reconditioning being complete, and the standards are the same across the entire market gives us real consistency. So we see it as one point of contact for used reconditioning.

We see it as an opportunity to also -- in some cases, I know they are doing business with MG, which is a brand that you probably don't even see here, but they're doing the reconditioning for them, and some of the PDI work. So those things we can pick up, and add a little bit of extra growth, but that's not the core business.

Okay. And then just lastly, you mentioned that the state that GE still owns in PTL might be something you'd consider buying out. I'm just curious, how much is left there at GE, and sort of how motivated they are, to really kind of clean up the books there?

Well, GE has really downsized GE Capital. We've been part of GE Capital for -- since our early joint venture. There's 15% less that we would certainly take a look at, and [Mitsui] is a partner of ours also in that business. So I think together, we would look at that towards the end of the year, and see if we have the capital available, the markets in the right condition, we would go to GE, and try to negotiate a purchase of that last piece.

Okay, that's great. Thank you very much.

Thanks, John.

We'll go to Bill Armstrong with CL King & Associates.

Hi, Bill.

Good afternoon, Roger and Tony. Roger, I think I heard you mention that heavy duty truck sales trends are improving recently. I was wondering if you could clarify that, and what do you think might be driving that?

Well, I guess, I see this on the truck leasing side, Bill. And we saw at the end of 2015, we saw our rental business start to fall off. And I think when you see that falling off, you know that there's either freight has slowed down, or there's excess capacity. So we took out about 2,000 tractors at the end of 2015, early 2016.

And now, we've seen that rental business start to kick up, and our RPU rental per unit and RPT rental per transaction continues to grow. So we think that's showing that this oversupply of equipment is starting to flatten out. In fact, we see the business at Premier truck in Dallas, just an example. We're out buying used trucks now, where in past six months we've been trying to get out of the trucks that we have -- that we've had too many of the same make maybe and model. So we just see --[mine] used trucks, we see the market open for that, and we see the fleets probably leveling out.

What's happened, most of the big fleets have had to add another year of depreciation, where they might turn in 2.5 years or 3 years, are going to 4, so they can equalize book values to market values. And I think that's coming in by probably, the second or third quarter, and we'll see that pretty well equalized.

Got it, very interesting. And on Penske Truck Leasing, obviously, you have a larger stake now than you did a year ago. What was the underlying income of PTL in the fourth quarter versus a year ago, if you can disclose that?

We don't disclose that. Only thing we did was give you that we had $26 million in the quarter of benefit from Penske Truck Leasing.

Okay. Fair enough. And the finally on, just back to automotive. In Texas, we've had industry weakness because of the energy situation, any update there, and what you guys saw in Texas relative to the rest of the country?

Well, the good news is we're in Austin, the state capital. And there's no question that we have a BMW business there that's been strong. And we're in Round Rock with Toyota, Honda, and Hyundai, and that market has been very good for us.

I'd say, when you move over to Houston, where we have two Honda stores, it's been a little bit weaker. But overall, I think that we've had, in the fourth quarter, our units were up probably somewhere between 5% and 7% in the Texas market.

Okay. That's pretty good. All right. Thank you very much.

One other thing, just I would say, if you talk about West Texas, where we have our Premier Truck business, we certainly saw that fall down, and go down considerably over the last say 12 to 18 months, maybe 12 months. But that started to come back too. With oil prices going up, we're starting to see some -- I think the West Texas Intermediate is up about 44%, so we're starting to see some truck activity there. And I think that's what's boding well, when we look at the overall heavy duty truck business, you're going to start to see some money spent in that particular market.

Got it. Thank you.

Our next question is from David Lim with Wells Fargo.

Hi, good afternoon. Roger, can you dimensionallize what were the factors that contributed to the gross profit per unit growth on ex currency basis, on new and used in the quarter?

Well, I think number one, you've got to look at our business, as 72% of our businesses is premium luxury. So volume foreign being 21[%], and the big three is only 4%. So we're getting the benefit when you think about Porsche and Mercedes and BMW, Lexus and these models, and Land Rover, we're a high profit business. And when you look at in the UK particularly, we're the number one dealer in all of those markets, except I think Land Rover and Jag. So we're getting a nice GP from there.

And when you look at our luxury GP, I mentioned I think on the -- earlier in my notes that we were 8.2%, and that's because of mix. When I go back to the end of 2015 for Q4, we didn't have the mix of trucks. In fact, in BMW, we started out the year with 35% trucks and 65% sedans, and that mix really flipped for us. So we really started to get the model mix we want.

You look at the Northeast. The Northeast had been soft, so a lot of the good equipment had gone to say, South Florida, or maybe out to the West Coast, so Warwick, Fairfield, Greenwich, even DC, we were short of trucks. And we had a big influx of that product, as we looked at the fourth quarter. And I think that probably had a big impact on us, from a GP perspective.

Interesting. And when you talk about two more locations in 2017, talking about used vehicles in the US, I presume, and one in the UK, is this going to be under the CarSense brand, et cetera? And are these greenfield dealerships?

Yes, I would say that as we go forward, I don't think we have anything on our books today that we would want to convert, or it has the size that we want to convert to either CarShop in the UK, or CarSense here. So we have located, I think, a couple locations for CarSense that we're looking at. And I know for a fact, in the UK that we've picked out a location already. So those will be greenfield sites.

But remember, instead of building $15 million or $20 million dealership site, we can buy the land. The land will be the same price, no matter what you put on it. But the infrastructure we put on, will be probably be, I would say 40% of what we pay, if it was a full blown dealership. So the economics will be I think much better. And one thing that we want to be sure that we do, is that we provide the customer experience for service, which really I think we can bring up to another level.

We have it at CarSense, and they have it, certainly, to a certain extent in the UK. But I think that's one area that we can bring some expertise to, the technician training, and have a proper lounge area for your customers. And they really have gone into used car business, and thought about service after that. I think CarMax has done a good job, in executing both the sale and the service piece. So we'll take our capability, and our expertise in that area, and try to meld it in with a CarSense or CarShop.

But keeping the brands separate, we're not changing the brand names. We think that there's a lot of capability and certainly there's value in those brands already. So what we want to do is have them be standalone, and be able to then go into markets, and operate as a separate brand opportunity.

Got you. And then, just two more. When we think about the incremental investments, did you guys -- I know you just said 40% less -- but in order to build a ground up CarSense, CarShop, how much CapEx should we think about?

And then on -- to follow-up on Paresh's question. So from your experience, just to be clear, active safety content, you don't think that there's going to be a massive switch from a prospective used car buyer to a new car buyer because of active safety?

Look, I'm -- I understand the technology, but for me to make that kind of statement, I think would be wrong. Certain -- look, if it takes your insurance down by 50% or 60%, I think there's got to be third-party factors that drive that, not just the fact that you can get these things. Because some of this is available now, and I'm not sure that's the reason people are buying cars. I think they buy on styling, they buy on comfort.

Obviously, with a safety requirements, all cars are much safer than they've been in the past. So I think that it's the autonomous, I think it's the assisted driving, and some of those things that ultimately will change the mix. But I think that's going to be 2020, 2025 before you see a real impact. And a lot of that's going to be because of regulation, in most cases done by the government, and we'll see what Trump does on some of that. I think that's still open.

Going back to your point on CapEx, I would say that you're probably going to pay $400,000 to $500,000 an acre for your land. So if you're putting 10-acres, it's probably $5 million. And I think the facility that you'd put on that land would be somewhere between $5 million or $6 million. So I think we're probably all-in. You said [$10 million] on the low side, and [$12 million] or [$13 million] on the high side, would be probably realistic.

That's my numbers. Now someone could -- if it was a contractor could challenge that, but it depends on where you want to go, and what market you want to be in. Now if it's New York City, it's a different number. But I think that size of around 10-acres, you can put 150 cars an acre if you pack them in. So you could easily put 200 or 300 cars on 10-acres, and that's what we like to have in most of these is 300 to 400 vehicles on the used car side, to make a proper value proposition.

Great. Thank you so much for all of the color. Appreciate it.

Yes, no problem.

Next we'll go to Brett Hoselton with KeyBanc.

Good afternoon.

Hey, Brett.

Just briefly on the used vehicles, I think you said you had a 67 day supply, and it's kind of high relative to your peers. What are your thoughts there?

Well, I think I said it earlier, when you look at our day supply, we're up from last year, but that is -- we're looking at the end of a big impact in Europe, specifically due to the fact that we bought I think somewhere between 1,500 and 2,000 used vehicles at the end of the year. And in the US, our day supply is 40 days which is well in line.

And then if we look at 2017, and we think about M&A, kind of how are you thinking about deal flow and multiples? I know you've already mentioned some of this, but light vehicle versus commercial vehicle, and regional, and that sort of thing?

Well, we would like to always -- if we can buy where we could glue on, where we have scale, where we have a centralized office, and it would be a premium brand, we'd be looking at as for [volume foreign] where we have the expertise with our people. So I would see markets, where we have scale.

Number two, from a truck perspective, there's no question that Freightliner is interested to see fewer owners and larger dealership groups. So we'll have a little broader look there, they might not all be contiguous. But I see that still as a continued opportunity. And the multiples there, are less than they would be, if you were trying to buy a new Mercedes business or a BMW business in a prime market.

On the other hand, when you go overseas, there's lots of families over there that have owned businesses for many years, that just basically want to keep the real estate, and you'll get a very attractive rate on the rents on the real estate in most of those cases. And they will make any CapEx additions, if that's needed, and then you actually put working capital in them. And the multiples there are significantly less.

Thank you very much, Roger.

Thank you.

We'll go to Michael Montani with ISI.

Hey, good afternoon, Roger, Tony.

Hi, Mike.

I just wanted to unpack a little bit if I could, the 11% increase in GPU on the used side? Can you give some additional color there, about how the US looked versus the UK? And then also, what kind of impact did the loaner vehicles have on that, if you were to strip that out?

Well, I would say that in the premium luxury side, when we look at our BMW franchise specifically, I look at Crevier in Orange County, we look at San Diego, we look at Peter Pan, we look at the stores in Atlanta, just to mention a few. There's just no question that the loaner car change out has been a real plus for us.

That's driven our used car volume and margin nicely, because most of those vehicles have 3,000 to 5,000 miles on them, and we have to turn them anyhow. And we're not putting vehicles into loaner car today that we can't sell. We're putting ones in that we know will hold their residual value. So there's no question that that's helped us significantly.

And when you look at the used vehicle grosses, overall we were up $50 for -- when you take the luxury, the volume foreign and domestic. So to me overall, we're up $30 in the US. So I think it's a mix. And we're going to continue --the other thing that I didn't mention, I'll tell you that our gross profit would be, that our wholesale loss was down significantly.

I think we were down about $500,000 in the US, and we have a auction, online action in the UK, which was I think generated several million dollars worth of profit during 2016 in the UK. So when you take that in, and you look at your total gross profit on used, with your losses and your profits, I think that also had a benefit for us.

Okay. And then if I could, just thinking ahead, you mentioned the off-lease vehicles, how should we think about the potential to get accelerated used units from that, versus the potential for incremental margin pressure, how do you all think through that?

Well, I think the units are going to come out. I mentioned earlier, that a customer can extend his lease, he can buy out his lease. And then the third, would be negotiating -- the OEM takes it back. And then, we have a negotiation with the OEM for that vehicle, and then we retail it.

And I think the impact to move those obviously, is better today. With low interest rates, you certainly have zero rate financing. You've got longer warranties you can put on that if they are certified, and we have the benefit to move some of these vehicles that are available, we can go in, and try to buy blocks of vehicles. And CarSense is a perfect, would be a perfect place to put those, because if they'll be -- remember, if they're two, three or four year leases, we're going to be in that sweet spot around $20,000 retail, which is exactly what we are looking for, versus loaner cars that are coming out that might be as high as $30,000.

Okay, great. And just the last one I had, was housekeeping, but can you just give any incremental color, in terms of what the split was on the unit comp side, UK versus US? UK actually looked quite strong in the quarter.

As far as the gross profit?

Well, I was thinking more in terms of the units, just the unit comp?

Yes, US was down 1%, Mike, and UK was up about 7% on a same-store basis.

Thank you.

You're welcome.

Our next question is from David Whiston with Morningstar.

Hi, David.

Hey, Roger, hey, Tony. Just a couple things on car -- or on the used business first. And can CarShop be expanded ultimately long term throughout Continental Europe, or do you think that will only make sense in the UK? And somewhat related for either the UK or US used strategy, are you willing to have a captive finance arm for it at some point?

Well, let me say this. As CarShop particularly, we see a real opportunity in the UK, and I would say a place we might go is South, and we might even go to Northern Ireland, where we have some people, and we have capability there. But I see it, quite honestly, CarMax was so far ahead of the game over here, you really didn't see that. And then there's been a couple of businesses similar to CarShop that have popped up in the UK. So I see that as something that we can do. And there's no question that that has an opportunity in Western Europe.

Now do I think we're going to probably want to populate the UK and Northern Ireland, before we go marching into Italy or Germany at the moment, because of the language in some cases is tougher for us to maybe manage that and move that expertise. From a finance perspective or a finance arm, I think that's something that we have to look at. There's some buy here, pay here options that people have out there, but at the moment, that's not at the head of the list for us.

Okay. And as you probably saw, Automotive News had a lot of discussion on sales associate turnover recently, 67% I think on average for the industry. Can you disclose what it is for PAG?

Our turnover last year was right at 20%, and we've been hovering in 18%, 19% or 20%. I would say our sales turnover is somewhere between 40% and 45%, which is too high. And I think that that's what we're going to look at, is there are other ways to compensate? It seems that in the used car model that we have, there's lower turnover. But that's obviously, because there's salary, they're salaried people, they get unit bonuses, and I think that makes a big difference as far as turnover is concerned.

And that might be the model, if you're going to go to one price. The cars are priced, so the negotiation is very minimal, and we can probably attract a different type person there which would probably be more successful. So I think that the -- we have to train, train, train. And we're using product specialists now, which to me have made a big difference.

These are people that really handle the product. And then, you have your managers that can handle the ultimate sale. And that's been something that's been -- I wouldn't say it's been prescribed, but it's certainly from when you look at Mercedes, and look at BMW product genius, product support people are making a big difference, because we're able to take a sales person, and take a young person that wants to be a product specialist, and you team them up. And by the time, they get to the floor to be a sales person, they know all of the nuances, and have the training, and it makes a huge difference.

And to me, one of the things we're doing differently is, that we have an NADA class for our managers. And we're sending -- and this is a separate class that we have tailored specifically for PAG, and we send anywhere from 25 to 30 people there, from a management perspective. And we're seeing today 85% of those people are still with us, and they've moved up into jobs with more responsibility. So we think that it's up to us, to provide an environment where they can make money.

I know there's got to be flexible hours for -- we've got diversity, with women and they have kids, that want to work certain hours. So we're adjusting, we're adjusting the workplace hours, in order to meet the employee's requirement. And overall, we've tried to make it hard to get in here, and hard to get out. So overall, I think a 20% in a retail business -- and that's kind of moved up. As the employment rate has come from say, 7% or 8%, down into the 4%s, we've seen ours creep up a little bit, because people have other options.

That's all very helpful. Thank you.

Good.

We have a question from Carl Dorf, with Dorf Asset Management.

Good afternoon, Roger, Thanks for squeezing me in.

Carl, how are you?

I'm good. Roger, I like everything that you're doing on the diversification side, but what's concerning me a little bit is the level of debt. And the fact, that if you continue to do deals, as well as continue the buyback, can you give me a feel as to where you see the debt level going, and what your (inaudible) on this?

Well, our debt to capital, when you look at it, we're at 51%. And I look at our peers who are -- some are higher than that. And obviously, if we had to go into the market at someplace, for more equity, if we felt that was the right thing to do, I'd be the first guy at the door investing.

Well, can you tie in that, with the continuation of the buyback and the deals, and are you comfortable leaving it at 51%? Do you see it going any higher, or you see it going down?

No, I think that we've got to keep our leverage at around 2.7 to 2.5 times. I think that 51% is a high watermark for us.

We've been in the low 40%s. So as we've made these latest acquisitions, it's moved up. But from a buyback perspective, I think right now, I mean, we would support the stock -- and as you saw me support it, or we supported it back here several months ago, I think that when you look at our EBITDA, it was almost $700 million. I think it was $670 million last year, I feel comfortable where we are, but I don't think you're going to see much higher than 51% or 52%.

Okay. And my perspective is, I'd like to see you ease off on the buyback, and with the stock where it is, and see the debt coming down a bit.

That's good. That's good. That's good input. I appreciate it.

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

No, that's all. Thank you, John. And we'll see you next quarter. Thanks, everybody.

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