Penske Automotive Group Inc (PAG) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Second Quarter 2017 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through August 3, 2017, on the company's website, under the Investor Relations tab at www.penskeautomotive.com.

I will now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Please go ahead, sir.

Thank you, John, and good afternoon, everyone. Thank you for joining us today. A press release detailing Penske Automotive Group's second quarter 2017 financial results was issued this morning and is posted on our website, along with our business update and results presentation designed to assist you in understanding our performance.

As always, I'm available by e-mail or phone for any follow-up questions you may have. Joining me for today's call are Roger Penske, our Chairman; J.D. Carlson, 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 prominently presented the comparable GAAP number and have reconciled the non-GAAP measures in this morning's press release and investor presentation, which is available on our website, to the most directly comparable GAAP measures.

Also, we may make forward-looking statements 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 the additional discussion in factors that could cause results to differ materially.

I will now turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report another record quarter of performance for PAG. The second quarter represented the highest quarterly income from continuing operations and earnings per share in the history of our company and continues to demonstrate the strength and diversification of our transportation service model.

During the second quarter, we retailed more than 130,000 new and used vehicles and our revenue increased overall 2.5% to $5.4 billion. Income from continuing operations increased 11.9% to $106 million and related earnings per share increased 10.8% to $1.23.

Our second quarter results were achieved despite the year-over-year currency headwinds, mainly driven by the British pound. The good news is that we reached the 1-year anniversary of the Brexit vote and the devaluation of sterling. As a result, we expect the year-over-year foreign exchange pressure on our performance to mitigate as we go forward.

Foreign exchange reduced revenue by $216 million, income from continuing operations by $3.6 million and earnings per share by $0.04 during the second quarter. If you exclude the above, foreign exchange revenue would have increased 6.6% to $5.6 billion, a new record, income from continuing operations would increase 15.7% to $109.6 million and related earnings per share would have increased 14.4% to $1.27.

Our revenue was generated 94% to our retail automotive dealerships, 4% to our commercial truck operations and 2% from our operations in Australia and New Zealand. The total revenue mix was 60% North America and 40% internationally.

During the quarter, 77% of our income was derived from automotive retail: 6% from North America and commercial truck dealerships and 17% from other, which includes Penske Truck Leasing and our Australia operations.

Now let's turn to the details of our Q2 retail automotive business. Total units retailed increased 13% to over 130,000 units and revenue increased 4.2% to $5.04 billion. On a same-store basis, retail units declined 1.9% and revenue declined 5.6%. Excluding foreign exchange, same-store retail automotive revenue declined 1.7%. Same-store units retailed were impacted by a 12% decline in unit sales in our Germany joint venture, primarily from the negative publicity surrounding diesel powered vehicles.

Same-store variable gross profit, which includes new vehicle, used vehicle and finance and insurance gross profit, was $3,412, a unit representing a decline of $139. However, excluding foreign exchange, the variable gross profit increased $6 to $3,557. Variable gross profit for unit retail excluding foreign exchange increased to $49 when you exclude our German joint venture.

Turning to new vehicles. New units retailed increased 2.8%, but declined 3.4% on a same-store basis. Same-store units declined 4.1% in the U.S. and 2.2% internationally. Same-store gross margin, however, increased 10 basis points to 7.9%. Same-store gross profit per unit retail increased $67 in the U.S. but declined $150 on a consolidated basis. However, when you exclude foreign exchange, the decline was only $27 per unit.

Decline on the same-store gross unit retail was also impacted by Germany. So if you were to exclude Germany, the gross profit per unit retail would have increased $82 per unit when excluding foreign exchange.

Our supply and new vehicles was 70 days at the end of June compared to 66 days last year.

Turning to used vehicle -- the used vehicle part of our business. Used vehicles retailed increased 25% and the used-to-new ratio improved to 1.04:1, mainly due to the acquisitions of CarSense and CarShop, which I'll discuss momentarily.

Same-store used units retailed were flat. CPO, certified preowned, represented approximately 40% of our used unit sales in the U.S. during the second quarter compared to 39% from the second quarter last year. Same-store gross profit per used retail declined $222 a unit or $154 if you exclude foreign exchange. Same-store gross margin declined 60 basis points to 5.5%. Our used vehicle supply was 44 days at the end of June compared to 43 at the end of last year.

Same-store finance and insurance revenue increased $58 per unit. Excluding foreign exchange, same-store finance and insurance increased $106 to $1,198. Service and parts revenue increased 4.9% and gross margin increased 130 basis points. Excluding foreign exchange, same-store service and parts increased 3.2%.

As most of you know, we acquired stand-alone used vehicle supercenters in the U.S. and the U.K. during the first quarter. We believe these used vehicle supercenters further diversify PAG's business and provide an opportunity to capitalize on a highly fragmented used vehicle market. We also believe these businesses provide an unlimited white space for scalable expansion. We have plans to expand CarSense and CarShop operations into several new markets and continue to expect to double the number of locations within 24 months.

In the second quarter, our stand-alone supercenters retailed 11,125 vehicles, generating $193 million in revenue and $33 million in gross profit. The average transaction price was $14,344 and the variable gross profit was $2,379 per unit.

Turning to the retail commercial truck dealership business. For the 3 months ended June 30, 2017, our Premier Truck Group retailed 1,559 units, generating $229 million of revenue and $40 million of gross profit. In Q2, service and parts represented 75.8% of total gross profit and our fixed cost absorption ratio was 120%.

We continue to experience improved conditions in the used truck marketplace, including improved heavy-duty truck utilization rates and the stabilization of used truck values and quicker inventory turns. In fact, the overall Class 8 market is now forecasted to be much stronger this year than initially planned. According to the July 2017 ACT North American Commercial Vehicle Outlook, Class 8 production forecasts have been raised to 250,000, which compares to a forecast of 202,000 at the beginning of the year. We believe these improved conditions could lead to an improvement in Class 8 truck sales and orders later this year.

Turning to Australia and our truck distribution and power system business. The second quarter revenue increased 9.8% to $113 million. We are generally experiencing improved conditions in the Australian truck market, with heavy-duty truck market sales up 18.8% over June of 2016 and volume for the year-to-date is up 13.8%. In fact, June was a record month for commercial vehicle sales in Australia.

Our market share of the products we distribute in Australia has increased 300 basis points compared to the same period last year.

Looking at our balance sheet for a moment. We had $20.7 million of cash at the end of June, our floor plan debt was $3.5 billion and our nonvehicle debt was $2 billion. 28.6% of our floor plan in nonvehicle debt is at fixed rates while the remaining 71.4% is variable. With over $500 million in liquidity at the end of June, our debt-to-capitalization ratio was 50% and our leverage ratio was 2.8x on a trailing 12-month basis.

New and used automotive vehicle inventory was $3.2 billion compared to $2.9 billion at the end of December. Approximately $35 million of our U.S. inventory is currently on OEM stop sale, representing 1,100 vehicles. New vehicles, $19 million or 300 units; used vehicles, $16 million or 800 units.

Capital expenditures in the first 6 months of this year were approximately $113 million, which includes $8 million of land purchases for future development.

In closing, I want to thank the team for their efforts this past quarter as the PAG produced another record quarter of results. Our performance continues to demonstrate and reinforce the adaptability of our business to market conditions. In fact, as I continue to hear concerns about the flattening of the SAAR and the slowdown in the new car market and about off-lease supply and used vehicle values, I want to remind everyone on this call about our strategic vision for our business.

Although the SAAR is important, our business is much more than just new vehicles. We continue to build a different model that is about diversification, and our model includes the $7 billion revenue international automotive business in the U.K. and Western Europe, a $1 billion North American heavy-duty retail truck dealership group operating in North America, used car superstores in both the U.S. and U.K., our 23.4% ownership in interest in Penske Truck Leasing which provide substantial earnings and cash flow; the reoccurring revenue stream from service and parts as leased through our businesses and produces nearly 45% of the total gross profit for our company; and for the 25th consecutive quarter, our Board of Directors has increased the dividend we pay to our shareholders, representing a sector-leading yield of 2.8%.

Coupled the diversification of our business with a strong balance sheet that provides flexibility to be opportunistic within the marketplace to make acquisitions and share repurchases as we have demonstrated over the last 18 months. I believe PAG is a compelling investment opportunity.

Finally, I'd like to mention that 20 of our PAG dealerships in the United States were named this week the Automotive News 100 Best Dealerships to Work For in North America. PAG dealerships comprised 20% of the list, and I'd like to offer my congratulations to every member of our team that made this achievement possible.

Again, thanks for joining the call today. And we'll turn it over to the operator. Thank you.

(Operator Instructions) First, with the line of James Albertine with Consumer Edge.

I wanted to ask on the used stand-alone initiative, if I may. Thank you, Tony, for providing -- there's some good data here in the slides. So was the variable gross per unit of almost $2,400. Wanted to ask you a little bit about where you're sourcing most vehicles from and how we should think about the trajectory of this business overall, whether it's going to be new locations or sort of growing around existing markets, just kind of how will you frame this maybe over the short to medium term?

Well, I guess, the first area would be approximately about 80% of these vehicles come from auctions here in the U.S. And then, of course, we have trades and then we buy cars as CarMax does at the curb. In the U.K., we have contracts with certain leasing companies to perform sales on their off-lease vehicles, which gives us a steady stream of vehicles on a consistent basis. So we think that, that will continue. And with this big wave of used cars coming as we look at 2018, '19 and '20, we think that there'll be many off-lease vehicles that we can enter into maybe some other arrangements here in the U.S. also will provide us an additional supply. Our day supply today is about 45 days in the U.S. and it's under 40 days at CarShop in the U.K.

Roger, if I may, just a follow-up then. Is it fair to say that when you source a vehicle from auction, relative to buying it through either Appraisal Lane or sourcing it internally, otherwise, is it fair to say that auction vehicle will have a lower variable gross per unit? And I guess my question is, given the 80% mix, do you see this gross profit potentially moving higher over time as that mix shifts more toward internally generated vehicles?

Well, I think you have to say that auction prices, on a daily basis, demonstrate the real value of the vehicles. So we have a number of buyers and they're out there looking at the marketplace. They have metrics that they're looking at certain models, certain colors in markets that have been selling. So they have a past history. So they're prepared to pay a particular price for these vehicles. And I think that we only buy the cars that we want that fill in certain types of cars. In fact, I looked at some metrics here during the week and it showed certain models that they were long on and certain models they were short. So they actually just don't buy cars, they buy specific models. And obviously, we have a mix of SUVs and trucks along with cars. But our customer is looking for a vehicle that's probably 1 to 4 years old. The average selling price in the U.S. is $20,000. So we have a pretty good mix of vehicles. And to me, we're in a position to purchase many of these off-lease vehicles that come in. And the auction today are ones that they offer this opportunity. There's some closed auctions for dealerships. And then, obviously, after that, we have the open auction opportunity to buy those vehicles. And then this helps us; as we go forward, we manage our variable costs associated with these purchases.

Very good, I appreciate the color. And then last one, if I can sneak one in. Preferred Purchase, your digital strategies in general, just hoping for a quick update or some highlights that you can provide on those initiatives.

Well, everybody's talking about being able to purchase cars online. And we have a technology tool, which our team has put together here over the last 12 months called Preferred Purchase. We've rolled it out to all of our dealerships at this point. And we think that this is an opportunity to reduce the cycle time for customers to buy a vehicle. And I think that the closing rate, as we look at this, probably is 3x higher than a normal purchase. And you as a customer, can pick the vehicle. You can also supply your trade information. We'll give you a purchase price on your trade. You can look at a lease. You can look at a finance transaction and then you can call us, obviously, to complete it. But at this particular time, we see cycle time down and there's no question that from a CSI perspective, that the people are very happy with this type of transaction. And to think about our closing rate in June, in fact, was 24%. So when you look at it overall, this is the same thing that people are talking about. And we have it in place at every one of our dealership. And I think that this will give us the ability to do this across all of our businesses, and there's no question that we continue to enhance this to make it quicker and more transparent to the customer.

And next, we'll go to Rick Nelson with Stephens.

I'd like to follow up on the freestanding used car stores. When you initially acquired CarSense and CarShop, you provided guidance of $0.07 to $0.09 accretion from each of those. I'm curious how that is tracking relative to that expectation.

I think we're right in line, quite honestly, and I think there's some upside, to be honest with you. I've looked at this business now. For the first 3 months, I was cautiously optimistic and I would say I'm optimistic now as I look at it after 6 months, both in the U.S. and the U.K. In fact, the U.K. team is over here right now just trying to look at some of the best practices that we have here in the U.S. Our days supply is low. The ability to get vehicles. And the one thing that you have to realize, which we didn't know on this business, was the compensation levels versus a normal dealership. And our comp to gross is probably 10% less in a stand-alone used car operation. We have no variable compensation. It's unit-based and salary. And I think that's made a big difference from the standpoints of lower turnover and also from the standpoint of units per salesperson. The average salesperson today at CarSense here in the U.S. is selling about 23 cars. And if you look at the traditional automotive business, it's approximately 10. So we also have 50% repeat referral, we think, on this business here in the U.S. I don't have these metrics for the U.K. But we think it's scalable, and we would expect to hope to double this business over the next 24 months.

Is there any thought given to integrating a captive finance business into these stores? Some of the dealers are suggesting that that's what the model -- and reviews car models (inaudible).

Well, I think if you look at CarMax's bottom line, they have a big impact with their financing. They've done a terrific job. Right now, we're using third-party financing and third-party for the products that we sell. I don't know that at the moment, that we have the capital available to start a finance company. It's something we can look at once we have a history and maybe we get a partner to do something like that. But the good news is it's an opportunity because we've seen the success that Carmax has. We just have to assess the risk on that if we go into that area. But I wouldn't say that's top of the list right now.

Okay. And finally, if I can ask you about the U.K., the new car market, how you see that shaping up. We had a big first quarter, more difficult second quarter with some of the tax changes. How you see the back end of the year pushing forward?

Well, I think what you have to do is look at the quarter. We, on a same-store basis, announced we were down 2.4% on new. We were up 4.7% on used. So the total, we're up 1.1%. And as you look at the market, it was down 10%. But if you look at it sequentially, April was down 19% following the pull ahead. May was down 9%. And June was down 5%. So March was up 8%. So there was definitely a pull ahead. I think that had some impact for us. But when you look at, on a same-store revenue base, we were up 2%. And from a gross perspective, and I'm taking gross for new cars, used cars and parts and service, we were up 4.5%. So looking at July, the first few days of July, if I look at the reports coming in, we're up both in new and used. So I think that we're back on track. And remember, the premium/luxury, if you look at that business, it was 30% of the market now. When you go back 6 or 7 years, it was 16% or 17%. And they were not -- we don't have a proliferation of dealerships when you look at premium/luxury. So I think the bigger change in the market, obviously, would be on the volume foreign and some of the local brands.

And we'll go to John Murphy with Bank of America Merrill Lynch.

Just a first question here. I mean, it looks like you were able to hold grosses when we adjust for currency on new vehicle sales much better than anybody else. And obviously, there's a lot of concern in the market. I'm just curious what you're seeing as far as incentive activity and your ability to work with the automakers to hold grosses and still put up decent volumes because it seems to be a bit different from what we're hearing from other dealers.

Well, I think that you have to look at our mix. And we have 72% of our business is premium luxury. So we don't have the competitive situations you have for the Big Three in many cases in the volume foreign. And quite honestly, with leasing, on the front end being 55% of our business, the -- we are able to get a fairly strong gross margin, and then we hit our targets and you look at brands like Land Rover that you're getting almost 10,000, you're looking at Porsche up in that area, we've got some brands where we have a number of dealerships really help us from a (inaudible) level. And that, to me, is something we have to continue to manage. On the flipside of that is the used side and the pressure that we've had on used, I would say has been driven because we're premium/luxury, and we have about 6,000 of what we call loaner cars or demonstrators for our customers here in the U.S. And those cars have to come out between 4,000 and 5,000 miles because we have -- we want to be able to utilize the financing and lease products that are available for new cars to bring them out within 4,000 or 5,000 miles. And so that has created a lower gross margin on the selling price because we don't -- have not depreciated that much in that period of time. And to give an example, and probably this is one thing that hurt us from the standpoint of margin on used. Just in BMW alone in the quarter, we were 1.5:1 used to new. So that meant we sold 150 used BMWs versus 100. So -- and that was because we would continue to turn this nearly new fleets. So it's a little bit of a phenomenon, but it has had some impact on gross. But I think that, overall, we're going to have to be better on buying our used cars, which I think we're going to learn through the CarShop, CarMax process. And that's going to be a -- it's certainly a focus. We've also done a better job when you look at our total gross because our F&I is up both here in the U.S. and overseas, which is a concentration on selling less products but at a better value.

Okay. And then just maybe to follow up on that, Roger. I mean, it looks like buyer estimates, you have more than 30 new crossovers being launched in the next 3 years. A big chunk of those -- or actually, the majority of those are coming on the premium/luxury side. I'm just curious how much relief and help that will create in the market and how short you think some of these brands may still be on CUV nameplates as well as actual just pure volume relative to the market demands and what that might mean for your business in the next few years?

Well, I can tell you, in the North East, we've been whacked at Mercedes because the Lexus dealers are sitting with NXs and RXs. And we are just in short supply of trucks or SUVs. And I think that that's going to give us some opportunity to get back some market share. Obviously, is there going to be pressure on gross once all these manufacturers have these 30 new crossovers? That's going to change the dynamics of the market. I can't really tell you. But again, with only 300 dealers typically with Mercedes, Lexus, Audi and BMW, the inter-brand competition is certainly a lot less than you have if you look at the thousands of dealers that the other makes have. So -- and I think there's some discipline, at least within those ranks. Now we'll see, as we go forward. Because when I look at gross profits, I'm looking at the complete gross profit between -- that's the front end and that's the finance and any other special bonus you get. The -- when you look at the volume foreign versus a premium/luxury, premium/luxury is almost 2x higher per unit. So that gives us a real opportunity to sustain our almost 8% margin on new vehicles.

Okay, that's helpful. And then just lastly, I mean, it sounds like the used car business might be one great area for capital and diversification of the business. But PTL is also doing fairly well. And I'm just curious if you can update us where you are in maybe discussions on potentially buying the GE stake and how much of that is relative to what you own right know in PTL with inside PAG.

We have 20 -- I think 23.4% right now. And we want to grow that. We're going to assess the market here over the next few months and see how we are from a business perspective. But our goal would be to take more ownership of that. We haven't decided how much at this point in the balance here. We're in discussions with GE now. That is a reoccurring revenue stream. We've got tax benefits that come with that. And the cash-on-cash return on that probably is almost 20%. So it's very strong as we look at this. So we see this as another piece of diversification of our model.

Next, we'll go to Brian Sponheimer with Gabelli.

I wanted to kind of dig into the commercial vehicle business. The profit was better. The -- there's about a $10,000 change in used truck values from a revenue perspective and $8,000 on the gross side. But units were down pretty considerably year-over-year. That's a little different than what we saw at Rush today. Can you speak to that, Roger?

Well, look, on the unit side, we showed units down. But remember, you're talking about Rush. She's with Peterbilt, a little different marketplace. We have the big fleet. And if you go back, I don't know if I mentioned it earlier or not, but the truck estimates were 200,000 in the heavies at the beginning of the year; it's now just moved to 250,000. So we're seeing a lot of the fleets that maybe were sitting on the sideline earlier in the year and now have given us orders. So we see us meeting or beating our new truck volume of last year during 2017. And I think that they've just held back purchases, and that will be certainly, a benefit to us. We're holding margin, which is good on these trucks. And the used truck has just turned 180 degrees because there was an oversupply of tractors, probably 150,000. We know that's gone down because we've seen our rental business at Penske Truck Leasing go up because as guys need more equipment, they go to rental. So we see that as a good news from a used truck perspective. And on top of that, we've been able to go out and buy trucks now, which we're getting ourself out of trucks that maybe were overvalued for the last 12 months, which was impacting our gross profit. So we've turned the corner completely. And when we look at our parts and service gross profit in that business, it was -- the gross profit was almost 76%. So overall, I have a very good feeling on the commercial business. And the good news there is there's a great opportunity for us to continue to purchase and expand in those businesses through acquisition. Now we did the business up in Toronto, which is starting now to take hold. And Daimler themselves are pushing to have less owners and give larger-scale opportunities to existing partners. So we would continue to make acquisitions in those markets. And typically, those are half the goodwill number as you'd see on the automotive side.

Sure. That was helpful. Just going back to the auto business. The real margin improvement in parts and service this quarter. It's the second -- really third consecutive quarter where we've seen that. Is there anything structurally that make this business more profitable than it's ever been in the past?

I think it's -- I hand it out to our guys, the West Coast team. Probably 6, 8 months ago, we started looking at effective labor rate we called ELR. You have a posted rate of $120 and your actual effective rate might be $95. So we're looking at reducing discounts, and we've effectively done that during the first 6 months this year, which has driven higher gross margin on our retail business. And of course, we get good margins on our warranty business. And to me, that's obviously good. We have, of course, used car reconditioning, the internal that gives us margin. So the model works with the new car dealer having the benefit of the parts and service, the warranty and certainly, the reconditioning. And I think that our warranty was up overall about 11%. So this is recalls which are helping us and we get -- we're getting at a maximum margin on our parts business also during these recalls on warranty. So that's a positive for us.

Next question is from Michael Ward with Seaport Global.

Roger, I'm wondering if you can share your thoughts on a couple of topics. The first one relates to electrified vehicles. And not just all electric vehicles, but hybrids as well. What do you think the implications are for the service side of the business for dealers if those vehicles do ultimately expand share of the market?

Well, let's assume they do expand share. The model obviously, the downstream partner, which is the dealer, will be the one that has to handle the warranty. So that will continue to drive the customers back into the market -- or back into the dealerships. And today, the electric market is about 2.9%. So it's going to be a long time before we see it 100%. So to me, Porsche is asking us now to change the outline of our bays and our shoppers are coming with a fully electric vehicle. Look, they're going to come to us. We'll have the expertise and the mechanics. And on top of that, we'll have the parts availability, which obviously a third party, someone maybe, Richard, we talk about that might be out there wanting to get into our business because of the franchise agreement, we'd have the captive parts and the trained technicians. So I see, obviously, there's some ability to flash or change software through the year. But I think at some point, we'll have to sit down with the OEMs and see if there's not a change in the franchise agreement, if they're starting to do that, not with us, but through direct by the OEM. So those will be things that we'll have to manage over the next several years.

Is the content for a service bill higher for a hybrid than it would be, say, for internal combustion?

I guess, initially, the complexity will be very interesting because we've seen battery technology on hybrids. We rent a lot of taxis in New York out of Hudson, Toyota, the Prius and those vehicles come in. For batteries, there's a big parts and service business there when you're replacing those batteries and we see that as an opportunity. And there's no question of complexity. But we'll have -- an internal combustion engine might have more parts, obviously, than electric motor. So there'll be some less content there when you look at it. But overall, when you're working on electric vehicle with battery, with a capability, you have to have a safe conditions and that will have to be -- you'll reassess your service departments to do that. So to make that investment, you'd expect to have that service be directed by the OEM.

Maybe tied in to that. One of the pushbacks you hear on the auto retailers is that Amazon, like they're going to take over everything. But one of the things people claim is that they're going to take over -- especially the service of auto retailing. I'm just wondering what your thoughts are in something like that.

Well, look, I see Amazon as an operator that can buy things and very successfully, through super logistics, get items to the customers. Now when you start to have to assess service requirements, you have to have service shops. You have to have trained technicians and you have to have franchise agreements to do warranty. I think it's a long day before they're going to get into the service business on vehicles. Now you've got people like [icon] that have all the Pep Boys and other things like that, that have service. But again, they can't access some of the software and some of the things that we do -- we get as franchised dealers. And I think there's a long time before they'll see those people penetrating our business. Look, I take my hat off to Amazon. Probably, the do-it-yourself suppliers are probably more at threat because of that Amazon can buy off-brand parts that are not genuine and supply those in some of these older vehicles. But to do it for me, I would have to say will be done by a franchised operator.

It sounds like both those trends will push more business on the service side to the traditional dealers.

I certainly think so.

And next, we'll go to David Lim with Wells Fargo.

Just quickly, I want to talk about the SAAR and there's different camps of whether it's going to be flattish, whether it's going to go down. Roger, what's your take on it? I mean, you've been in the industry quite a while. You've seen the ebbs and flows and how creditor impacts the SAAR. But maybe next year and the year after, I mean, what's your thoughts on the SAAR going forward?

Well, I guess, I have to break the SAAR out into types of vehicles, meaning manufacturers: luxury, volume foreign and the Big Three. And I think that if you look at the market today and you look at inventories, it probably shows you that the Big Three have higher inventories than maybe the volume foreign and the luxury. From a SAAR perspective, there's no question that the markets, if you look at cycles, there will be cycles in any business. And I looked at our business and said, what's the impact if the SAAR went down 7% or 8%, what kind of impact would it have on us? And when you look at 150,000 new vehicles and if you took -- if you said 8% of those, you would -- you'd lose because the SAAR went down, that's probably, at this point, 12,000. You take that times 4,000 per vehicle, it's about 48 million, and then you take your variable comp, which would be 1/3. So you're now down to 32 or 33. And you look at that from an EPS perspective could hit us probably about $0.20 a share. So it's not -- it's certainly meaningful, but it doesn't put us out of business. We can lower our people cost, probably take some managers out if it goes down. Remember, we're on variable compensation. So we have the leverage. And I think the whole industry, if you go even back to '08, '09, there's only 1 quarter we lost money because we were able to shift gears pretty quickly. So I think the industry, not just Penske, but the industry is very flexible and then we operate with a variable compensation, which will make a difference and we have the parts and service, which obviously give us the opportunity to cover our fixed costs. And there's no question that with the incentives that are out there, the manufacturers still have room to grow some incentives in order to mitigate maybe some consumer concerns on the cost. And there's a delta there today because there is some softness in used pricing. But today, you're looking at SUVs at 63%, and which has made a big difference. And I think there's still some more room for that to grow. So I think when you look at the business, year-to-date, we're about 8.5 million units. So we're still looking at close to 17. So I'm thinking we'll see something probably in the high 16s next year. But I've never been one to be able to forecast properly. But I know what I have to do if it starts to deteriorate. And I think that we've proven that we're able to do that successfully.

Given the difficulties in leasing because of residual values and your luxury mix, are you seeing any kind of shift in incentive strategy from the luxury OEMs? And then a follow-up question is, and you may have already touched on this, your same-store sales in the U.K. on used retail are really, really good. Can you provide us with some additional color behind what drove that?

Well, let me take that question first. That again is, remember, we have pre-registrations, which turn into used cars. And those are nearly new, similar to our demonstrators and loaners over here. And there was -- it was an off-registration quarter. So we saw a lot of those vehicles being sold as we reduced our inventory there. So that's really -- these are nearly new vehicles that were put into use to sell the same thing as we've done over here. But the classification in the U.S., they have to be sold as used cars. So I think that there's no question, when you look at premium/luxury in the U.K., that they gained 280 basis points. So we have more used cars coming out there for -- in the industry. The first question was you asked about incentives by manufacturers on leasing. The big question here is most of the manufacturers have been whacked because of the residuals they put on (inaudible) hands. So you've seen probably some pullback from the standpoint of where they set their residuals on the next vehicles, say at, 2017 or '18. And that is providing a little bit of sticker shock for someone that might have had -- let's just say, had a vehicle that they had for, say, $300 a month and now the same vehicle is $380 or $390. So -- but they can move these incentives around or they put it on to a buy 0, 0 financing or they can support leasing. So I think they've got a pretty good ability with a lever there to move them around. And I think at the moment, on the premium side, the Northeast, for some reason, we feel has been a little softer for us in the premium side. I don't know if that's the finance market or what it is, but I think we'll have to wait and see.

Our next question is from Brett Hoselton with KeyBanc.

I wanted to just touch upon M&A and where you're seeing the best opportunities right now, whether it be light vehicle, commercial vehicle, U.S., international? And are you pretty aggressively continuing to pursue M&A at this time? Or evaluations are maybe a little on the high side and you're kind of holding back a bit. What are your thoughts there?

Well I think we'll look at it all of the areas you've talked about. We're quite excited about this used car business. So we're going to be looking to see are there other smaller used car superstores that we can consolidate into under our brand in the future, any part that we -- where we do business. Certainly, the heavy truck areas is one that we're looking at. We've probably got 2 or 3 people that have contacted us that are interested. And we continue on the automotive side. We have a number of these advisers out there, investment bankers that are covering the auto side that are calling us every day. I would say that it doesn't go by a week we do have 4 or 5 opportunities. Now, obviously, some don't meet our requirements. So I'd say heavy truck. I'd say the -- certainly, there's no question, when you look at the used cars and probably at the top of the list right now would be looking at their Penske Truck Leasing to take a little more share of that because of the great returns that we get from that. We know the people, we know the business, and that could be a great opportunity because it gives us some real fine tax benefits from the standpoint of the accelerated depreciation.

And then switching gears. Thinking about the stand-alone used car operations. You're talking about expanding those. How do we think about the expansion? Are you basically going to kind of replicate the store's existing size and so forth in regions close by where they're currently located? Or is this something where you might jump into another state or even across United States?

Well, let's just look at one thing. Right now, the used vehicle sales is 2.5x new cars. So let's say that's an opportunity. The cost of entry is significantly less than it is in a new car franchise, where you have to build a building with a certain CI. If you look at our stores here in the U.S., only one store has a showroom. So you don't have any of those additional costs. And we do have what the benefits are here that if you set it up properly, you get the parts and service business, which is something that we -- probably people don't remember. But I think that we're doing in the U.S. about $1 million a month in parts and service gross profit already just in the stores that we have here. So I would say we would look to put in more stores in a market where we already had some scale, where they wouldn't cannibalize each other, but they'd be able to get the benefit of the promotion and the advertising. So to me, there's a huge opportunity; 40 million units in the U.S., as we go forward. So we would add new stores. We have some land available in markets. And it will be a test for us. Can we take the people, the metrics, the process and move it into a greenfield? And that's something that we're going to attempt to do here in over the next 12 months. And then we'll also be looking, I think, internationally, are there any other smaller businesses that we could consolidate into ours because the CarShop brand is very strong. They did 7,000 of our 11,000 units in the quarter. So they're going to do almost 30,000. So they have a real good process. And that we think that, that brand is very strong also in the U.K. So I think we have to wait and see. But there's no question that the cash flow and the profitability out of these businesses is double -- almost double what we get out of the U.S. retail from a return on sales.

And we'll go to David Whiston with Morningstar.

Two questions. First is on electric and on the recent announcement by the U.K. so that they want to restrict by 2040. Just curious on your thoughts there in terms of, I know -- I'm not asking about 2040. I'm asking more about in the next few years. Do you see the U.K. consumer being willing to embrace hybrid and pure electric more than they are today even if gas stays -- if oil prices stay low? And I guess, I'm asking in both the premium, for the premium customer and for the volume customer.

Firstly, your question on 2040, I'll leave that probably to my successor, but -- I'm just kidding. On a real basis, look, the technology is certainly there. It's a vehicle. The 0 emissions is very important. The costs today are certainly higher and you're getting the subsidy today from the standpoint of the government. You look at Tesla when they get to 200,000, obviously, it's a sea change for them from a gross profit perspective. I see the market continuing to grow because it's being mandated by the governments. And when you think about London and now you're talking about diesels not being able to go into Frankfurt or Hamburg or some -- and [Munich] and places like that, some of this is emotion and some will ultimately come into effect from the standpoint of local regulation. So there's no question that the manufacturers, all of them are spending money to be able to be in this business. And you look at the Chevy Bolt, it's a terrific vehicle. And as we go forward, I know Porsche is coming out with a very strong vehicle. e-tron coming out here in the next several months. And these vehicles will obviously -- in the premium end, I think will be quite acceptable, as you see Tesla with their Model S. Now my question is residual value. We've now taken a couple of Teslas in. Someone asked me the question. So I did a little homework on it. We've taken Teslas in on trade. And we're looking at a significant impact on residual here, $120,000 Tesla that's less than 3 years old. And we have a -- we're selling it for $50,000. So you're start to look at the depreciation on that. Somebody has to bear that, and that's the consumer. So the total cost of ownership of these things is going to drive ultimately, I think, the volume and the penetration of these other than where you're mandated by the government.

And just a question on the quarter on new vehicle revenue per unit. It was down 5% despite the mix shift in the U.S. to light trucks. So I was just curious is that delta? I imagine maybe some of that is driven by exchange. But if not, can you just talk about what's going on there with new vehicle pricing?

Well, I think we were up 2% on revenue when you look at the U.S. So whether it's exchange, it's hard to get all the numbers right. I wondered about that, too. But the mix, really, as we look at SUVs, probably long term, will give us more revenue per unit due to the content in those as we go forward.

Okay. But you said the U.S. was up 2%; company was down 5%?

Correct.

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

I was wondering if you could maybe talk a little bit about how trends are going in Texas. We're hearing some other dealers are still having some very weak results there. What are you seeing there?

Well, look, I think if I look at Houston, Houston has been a tougher market for us. All we have in Houston are 2 Honda stores. And on those stores, at least one of them has had -- has been negative from a year-over-year. Our businesses in Austin are very good. Obviously, the state capital and to me, that's always been a very good march along and also, in Round Rock. Then we go out to West Texas, Amarillo, Midland-Odessa for our truck business and, quite honestly, it's up significantly because a lot of the oil guys are bringing stuff back off the fence and looking for new equipment. So I think Rush trucks said the same thing from what I understand today that that's been good for them. So it's a mixed bag. I can only say the Houston area, from an automotive standpoint, has been challenging.

Right, okay. That makes sense. And on the truck side, your new truck sales are down. I think you -- and I think -- I heard you say, I just wanted to clarify, that even with the first half being down for your business, you still expect, by the end of the year, that full year Class 8 truck sales should be higher than the year before in 2016?

Yes. Yes, you heard it correctly. The fleets have been sitting on their hands. And all of a sudden, the truck demand, the loads have picked up and utilization is up. Even our rental business is almost touching 90%. That means that there's a requirement for equipment. So from our team, they feel good. There's just timing on some of those orders and they think that they'll -- that what they build now will be -- will deliver those in the back half of the year and should be able to meet or beat what we had last year. Of course, the used truck business has turned around dramatically.

Right. With the used trucks, your gross profit per unit was like $6,500. Do you think that's sustainable? What should we be kind of looking at as a normalized GPU for used truck?

I don't think it -- I think what we really -- we had a couple of good buys. Just ironically, we're in the market to buy trucks. And we've been able to buy trucks at some fairly, fairly good prices and we're unable to sell them because we were -- really, for the last 12 months, we were digging out of some commitments we had made on trades from some of the fleets. And as the used truck prices went down, I know we had to sell those in a loss, which drove our margin down. But I think that the used truck pricing should be somewhere between $3,500 and $4,500 on a going-forward basis would be a realistic number. Now I'm not looking at statistics to give you that, but that's pretty much my gut feel.

And, Mr. Penske, no further questions in queue.

All right. Thank you, John. Talk to you next quarter. Thank you. Bye-bye.

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