Penske Automotive Group Inc (PAG) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Third Quarter 2017 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through November 1, 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. Sir, please go ahead.

Thank you, John, and good afternoon, everyone. Thank you for joining us today. A press release detailing Penske Automotive Group's third 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, our Chief Financial Officer; and Shelley Hulgrave, our Controller. On this call, we may be discussing certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization, or commonly referred to as EBITDA.

We have prominently presented the comparable GAAP measures 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 and earnings potential. 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 in factors that could cause results to differ materially.

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

Thank you, Tony. Good afternoon, everyone, and thank you for joining us this afternoon. I'm pleased to report another quarter of record results for PAG. During the third quarter, new and used units retail increased 9.9% to over 130,000 and our revenues increased 7.2% to $5.5 billion. Income from continuing operations increased 7.9% to $94.3 million, and related earnings per share increased 6.8% to $1.10.

We increased our investment in Penske Truck Leasing by 5.5% and now own 28.9%. These record results were achieved despite the disruption from hurricanes Harvey, Irma and Maria. In these areas, our operations included 19 dealerships and 3 collision centers. Hurricane Maria severely impacted the island of Puerto Rico, disrupting the power grid and communication system. Obviously, our top priorities has been the welfare of our employee.

We continue paying our employees despite being nonoperational and instituted a Gofundme Page so our team members could help their colleagues. Operations remain challenging on the island, are expected to remain so for the foreseeable future. As a result, third quarter income from continuing operations was adversely impacted by approximately $3 million or approximately $0.04 per share.

During the third quarter, foreign exchange increased revenue by $19 million, but had no impact on earnings per share. Our results continue to highlight the benefits of our strategy of focusing on diversification as a transportation service company. As such, our revenue in the quarter was generated 92% through retail automotive dealerships, 5% through our commercial truck dealership operations and 3% from our operations in Australia and New Zealand.

Our earnings before taxes were derived 68% through our retail automotive and 8% through our commercial truck business, 24% through our operations in Australia and New Zealand and nonautomotive joint ventures, such as Penske Truck Leasing. Let me now turn to the details of our Q3 retail automotive business.

Total units retail increased 9.9% to 130,257 units and automotive revenue increased 6.6% to $5.1 billion. On a same-store basis, retail units declined 2.9% and revenue declined 1%. We estimate the loss of approximately 900 to 1,000 in unit sales as a result of the hurricanes.

Same-store total gross profit, which includes new vehicle, used vehicle and finance and insurance gross profit, was $3,391 for the quarter, representing an increase of $98. Turning to new vehicles. New units retailed declined 6.2% on a same-store basis, which includes declines of 3.3% in the U.S. and 10.5% internationally. New units sales were impacted by the hurricanes and the diesel engine challenge in Germany.

Despite the unit decline, we increased gross profit per unit retail by $186, including $150 on a same-store basis. New vehicle gross margin increased 20 basis points to 7.5%. For supply new vehicles was 57 days at the end of September compared to 53 at the same time last year. And turning to used vehicle business. Total units retailed increased 25% and the new -- used/new ratio improved to 1.02 from 0.8, mainly due to the acquisitions of CarSense and CarShop, which I'll discuss shortly.

Same-store used units retailed decreased 1.2%. Same-store gross profit for used unit retail declined $110 per unit. CPO sales represented approximately 41% of our used unit sales in the U.S. during the third quarter compared to 40% in the third quarter last year. Used vehicle margins declined 10 basis points to 5.7%.

Our supply used vehicles was 45 days at the end of September compared to 41 at the end of September of last year. Our finance and insurance revenue grew 17.8%, including 5% on a same-store basis. F&I revenue per unit was up $79 to $1,167. Our service and parts revenue increased 5.8%, including 1.5% on a same-store basis, and our gross margin increased 200 basis points.

As most of you know, we acquired stand-alone used vehicle dealerships in the U.S. and the U.K. during the first quarter. We believe these used vehicle dealerships further diversify our business and provide an opportunity to capitalize on the highly fragmented used vehicle marketplace. We also believe these businesses will provide an unlimited white space for scalable expansion.

We've identified several new markets for expansion of the CarSense and CarShop brands and are on track to double those number of locations within 24 months of the initial purchase. In the third quarter, our stand-alone used vehicle businesses retailed 11,600 units, generating $200 million in revenue and $34 million in gross profit. The average transaction price when you combine the U.S. and the U.K. the variable gross profit was $2,340 and the transaction price was $14,200. Turning to our retail commercial business.

We operate 20 dealerships in North America. We continue to experience improved conditions in the used truck marketplace, including improved heavy-duty truck utilization rates, the stabilization of used truck values and quicker inventory turns.

For the quarter, our Premier Truck Group retailed 2,096 units, generating $300 million of revenue and $44 million of gross profit. Same-store revenue increased 11.8%. Our service and parts business represented 71.6% of total gross profit and our gross margin improved 130 basis points. Fixed cost absorption ratio was 120% in the third quarter.

Our largest market, North American Class 8 trucks, is now forecasting to be much stronger this year than initially planned. According to ACT, third quarter net orders for the Class 8 market increased 62.7% while retail sales improved 11.9%. Looking at 2008 (sic) [2018] ACT production forecast is at $289,200. Class 8 retail sales in 2018 are forecasted at $286,000, representing a 17% increase over 2017.

We believe these improved conditions could lead to an improvement in Class 8 truck orders for our business and improved sales later in the year and in 2018. Turning now to the Australia truck distribution and power system business in the third quarter.

Revenue increased 27% to $138 million. We are generally experiencing improved conditions in the Australian truck market, the heavy-duty truck market sales up 19% year-to-date. Our market share of the products we distribute has increased 300 basis points compared to the same period last year.

If we look at our balance sheet, we had $37 million of cash at the end of September. Our floor planned debt was $3.6 billion and our nonvehicle debt was $2.2 billion. During the quarter, we fixed $300 million of variable rate debt through a senior subordinated note offering at 3.75%.

As of September 30, 32% of our floor plan and nonvehicle debt is at fixed rates while the remaining 68% is at variable. We had over $600 million in liquidity at the end of September. Our debt to total capitalization was 51.5% and our leverage ratio was 3.1x on a trailing 12 months basis. New and used automotive vehicle revenue was $3.2 billion compared to $2.9 billion at the end of December. On a same store basis, it was $3 billion, up $55 million. New vehicle inventory up $6 million; used vehicle inventory up $49 million. Our team did a great job managing new vehicle inventory given the product pressure from the OEMs.

Approximately $22 million of our used U.S. inventory is currently on stop sale, representing 489 vehicles, 17 million of new vehicles and 5 million of used. Capital expenditures year-to-date were approximately $180 million, which includes $8 million of land purchases for future development.

In closing, I think our business produced another record quarter of results despite the challenges of 3 hurricanes, which disrupted operations across several significant markets. Our personal thanks to our team members, many who suffered personal hardships, for their outstanding efforts. For the 26th consecutive quarter, our Board of Directors increased the dividend we paid to our shareholders representing a sector-leading 2.9%. The Board of Directors also increased our buyback authorization to $200 million, providing us with flexibility to -- and opportunistically to repurchase shares. We continue to build a different auto that is about diversification. Our performance continues to demonstrate and reinforce the adaptability of our business to changing market conditions.

Finally, I'd like to again congratulate the 20 Penske automotive dealerships, which were named to the Automotive News 100 Best Dealerships to Work For list in 2017, including 5 that were ranked in the top 10.

Thanks for joining us on the call today. At this time, I'd like to open for the operator. Thank you.

(Operator Instructions) First, we go to line of Rick Nelson with Stephens.

You are really holding your GPUs and the front end yield. It should be -- used has been a challenge for the industry. Is that mix? Or exactly what do you think are the drivers there?

Well, I think that we're obviously highly involved with the premium/luxury side. And I think that some of the OEMs who gave us additional support on vehicles that we had taken out of loaner car use and put them into used car inventory, when we retailed those, we got some additional margins. So that's certainly probably helped us here in September and obviously, across the quarter.

And also, the service and parts gross margin, we saw a nice expansion there. What is the driver to that?

Well, I think the key thing, we were up about 8.4% on warranty. With all these recalls and what's going on, we actually have our higher-margin. And our warranty is probably 52%, where our normal customer pay is 47%. So there's 500 basis points there. And I would say that had some benefit. And also, when you look at our get rate or our PDI, we've now gone to selective larger locations where we do PDI for multiple dealerships, and that's taken our costs down, and our margin there is now up to almost 82%. So that's also given us the ability to decrease that margin in parts and service.

And finally, if I could ask again. On the acquisition front, this year, you acquired $1.2 billion of revenue. It got to stepped up stake in PTL. How does the pipeline look to you as we push forward? And what will the balance sheet support in terms of future acquisitions?

Well, Rick, we've got $600 million of liquidity. I'd like to see a debt-to-cap below 50%. As we go forward, we're going to look at -- obviously, is there opportunity for us to generate some cash and maybe take some of the variable debt down. But I would think, I'd look in 3 areas. I think, number one, we're going to continue to invest in our stand-alone used car centers, I think, both in the U.K. and in the U.S. And we'd expect to add 4 to 6, at least, in -- some time along in the first 6 months in 2017 (sic) [2018]. I think, obviously, from a retail auto standpoint, there are still some very attractive opportunities for us where we have scale in certain markets, we would continue to invest. And then on the third side is, there's a tremendous amount of interest for us to continue to grow on the heavy-duty trucks side. And we think that, as we've seen the execution there, you look at the numbers on Premier, they had an outstanding quarter. And I think that it's a business that's approaching almost 4% return on sales and we want to continue to grow that. We've opened up in Toronto, as you know, this year, and that's turning out to be a very good acquisition for us. And I think that also, we're looking to add -- we have some opportunities in Italy in order to add there with our current business. So we're going to look at all those areas. But again, we're going to be mindful of what leverage we put on the company.

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

Just, a first question, kind of following up on sort of your comments there. I mean, we didn't hear you talk about making more acquisitions on the new vehicle side. So I was just curious if you think about your capital priorities, we really should be thinking about CarSense and CarShop, the truck business as sort of priorities. And how should we think about potential acquisitions on the car side or a reinvestment in open points there?

Well, I guess, what I did, I'd probably missed that. We are looking -- I think I said we have some -- in the pipeline, we have automotive, both in the U.S. and internationally. We're not going to forget that business. But they have to be ones that are contiguous and we can get scale. Our scale would help us from the standpoint of profitability. But I think -- look, certainly, new car franchise is both besting internationally. I think the Premier Truck, there's no question that we have from the standpoint of the ability on the used vehicle side with the standalone car centers is key. And of course, we have our capital expenditures that we're going to have to look at and then continuing our dividend.

Okay, that's helpful. And then as we think about CarSense and CarShop, I mean, it sounds like you're going to be reasonably aggressive in opening new stores there. But how large do you think that can ultimately get and the management bandwidth at these 2 platforms, both in the U.S. and Europe, I mean, how much room do you have -- think they have to really grow into maybe potentially national footprints or European footprints? I mean, how confident are you in that unit capital in those acquisitions?

I think, first, you have to look at the concentration in the U.S., We're primarily in the East, where we are around the Pennsylvania, the Philadelphia area; we have one store over New Jersey, so we're getting the benefit of our advertising. So I would see us growing off that base with stores that are not competing with each other, but getting the benefit of the umbrella-type either digital or overall TV/radio advertising. And the same thing in the -- and we have a very good management team there. The management team has stayed in place. We've learned a lot from them. I think we're bringing certain capabilities to them that they didn't have in the past. Some capital for -- for capital expenditures, which I think has been taking place. I think we'll have all locations up to the level we want by the end of the year. Then at CarShop, the team we have there with Jonathan Dunkley is not a (inaudible) there's no question that they have the bandwidth to grow. And we're also -- there's some acquisitions potentially in the European markets, which we can tuck in very easily. So these are ones we're looking. And then we're going to kind of branch out maybe in the markets where we have scale and people across the United States, where we would then look at maybe property we have or areas that we think would be good for this type of a business, and we'd open up -- I mean, we need to open up at least 2 or 3 stores in a market to get the scale from a marketing standpoint. So I'm very confident in the management team with Ramonat, who is -- runs our central, has the overall responsibility for that. And he's keenly interested to see it grow. The interesting thing is when you look at those 2 businesses, take all the inventory out, probably the total net book value of the fixed assets is probably around $5 million or $6 million. So we don't have tens of millions of dollars of fixed assets, but we basically have -- we have cash and we have cars and we have profits. So to me, that's significant. And at the present time, we are leasing the facility. I think we own one over in the U.K. We have less CI and then we'll look at what we do in the future. Do we mortgage these properties? Do we go to our OEM partners, who are very interested in providing us lending for mortgages? And then we have certainly, our preferred vendors, which are involved in handling many of the leases and finance there. So I think we're good to go. And there's certainly a better expense structure. And just to put it into particular, when you look at the retail auto business in the U.S, the typical variable cost of sales is about -- it's anywhere from 28% to 30%. I think anybody could be up or down. Interesting enough, when you look at CarSense, it's about 17%. So almost 1,200 basis points less. So you start baking that into the profitability on a going forward basis. And when we look at the gross profit per new -- or used at CarSense in this last quarter, it was about $2,850, probably about $400 more than our traditional business here in the U.S. So again, I think it shows the opportunity.

Okay, great. And then just lastly, on the truck dealerships. It looked like there was great performance on the used GPUs. It looks like I think from negative 1,500 to positive 5,500. So I was wondering how much of that is market factors, how much of it is focused on that business? And in particular, as you think about the growth in the truck dealerships over time, how does the acquisition pipeline look like there? I mean, we think we're all more familiar with the regular -- new vehicle dealership and acquisition pipeline but what does that, the pipeline, look like on the truck side?

Let me step back. And we signed a framework agreement back when we got into this thing, that we would be exclusive on the Freightliner, Western Star, Thomas Bus business until we got to 10% of the overall sales of, say, Daimler. Obviously, we're a long way from being there and it gives us some real runway. So the acquisitions that we would do would be in the same brand. And there's no question, we are getting contacted, not daily, but frequently of people who have some interest in talking to us about a strategic sale to us. And we're looking at those. And I would hope that we would get something on the platform in 2018 and then continue to grow. And by reason of the OEM saying to us, we want to see less individual operators and reduce that down where we have people that have larger scale, so I think we're really walking in unison with the OEM.

Next question is from James Albertine with Consumer Edge.

Just a clarification point. Apologies if I missed it in your prepared comments. Can you just help us rank the transaction multiples that you're seeing sort of an average when we think about used stand-alone stores relative to the truck stores, relative to the new vehicle franchises? Just trying to sort of dimension the order of magnitude there.

If we're talking about premium/luxury, we're probably in the 6 to 7 for the right stuff. I think that -- and you'd see the Toyota, Honda probably 4 to 5. When you look at the used car stores, I would say you're probably around 5 if you looked at what we've done so far. And on the truck side, we're probably at 4x. And this would be a good real-time to trailing 12 EBT.

Great, very helpful. And then, if I may. I believe Ryder reported, earlier this week, they had some pressure's on a year-over-year basis in their business. I noticed your earnings and equities from affiliates was up sequentially and looked to be, I think up as well year-over-year. But there's been some ownership change there. So I was just wanted to get your view on what PTL, how that's been going in the quarter and then kind of your views long term on that business.

Well, I'm not sure if everybody on the phone realizes, but we have over 260,000 vehicles at PAG or PTL. And I think the revenue was up 10%. And when you compare it with our competitor, they were up 4%. And you look at our EBIT margin, we were 13.5%, and they were 8.3%. We have a little more depth than they have. But we were up 10% on leased truck. Our contract maintenance was up 16%. Our commercial rental was up 11%. Our consumer rental was up 2% and logistics up 11%. So we had an excellent quarter. And I think the only thing that had some impact was we had less vehicles to sell, so our gain on sale was down $6 million or $7 million. So from a performance standpoint, I think that we really outperformed the market and took market share. This investment is certainly strategic for us in a number of ways. We know that business. We've got a great number of people there, some 24,000 in that company today. We built it from 300 vehicles, if you can believe it, back several years ago. So to me, we continue to grow this, where we're focusing not just on logistics, but focusing on a full service Truck Leasing and also rentals. So we've got a great management team. And I think that this investment also gives us some tax benefits that we would not have otherwise in PAG. So we get 33% -- or roughly 30% of the tax benefits that would accrue because of the accelerated depreciation that helps us from a cash flow basis here at PAG.

Understood, all very helpful color. And then the last one I have for you, if I may. With respect to your stores in and around the Houston and sort of Hurricane Harvey impact region, just wanted to get a sense for, just sort of, how replacement demand has played out there. Immediately following the storm, it sounded like there was a big uptick. Has that bled into the fourth quarter as well? Or has it sort of, if you will, sort of flamed out or fizzled out since that uptick?

Well, when I look at the Texas area, let's just look at the area and look at it through the 25th. We're up 2.3%. So at the end of the day, one Honda store is up 50% through the 25th and the other one was up 15%. And those are the only 2 stores we have there. Obviously, we were out of business there for a while. But we've seen some help on that in September but don't see it being a long-term benefit at the moment.

Next question from Michael Ward with Seaport Global.

Turning to the U.K. a little bit. Excluding the new vehicle business, how are the other segments doing? What's going on in parts and service, the secondhand cars, whatever they call them, and also F&I over there?

Well, from a used car perspective, with CarShop, we're up significantly on the used car basis. And when you look at our margin, we've had some margin pressure on new because of the push of the OEMs. And we have to take those vehicles and turn them into used vehicles if we pre-register them, and that's given us some pressure. But overall, our parts and service business was up. And I think that on a same-store basis on our used, I think we were up 7%, which is -- certainly is good from the standpoint of overall. And I think we're almost probably 1.2% or 1.2% to 1% on used to new over there. So to me, and you look at -- take the used up 7% and our parts and service business was 8%.

Wow. And then on the new, is that a function of -- if my math is right, the pound has weakened about 10% to the euro since Brexit. But it looks like the new vehicle pricing is only like 3% to 5%. Is that what the market -- the manufacturers are trying to do? Or are they just trying to bogey the pricing?

I'm not sure I'm that smart to figure that out. I think that we don't have any impact on foreign exchange in -- from our reporting in the quarter, and we had $19 million of revenue. Nothing on the -- to speak of. But we had a consistent 1% to 1.5% increase in cost of vehicles over the last 3 to 5 years. So I don't think that there's anything going on there that would be -- that we'd have to look at. The only thing we have tried to do is communicate. We cannot be in the situation where we have these targets, which are not reachable on a normal basis, money for metal. And we have to pre-reg these vehicles for them to get the registrations and we get certain bonuses. Then they have to be turned into used cars for us to sell them. And that's not the model that we want to see on a long-term basis. I've been communicating that recently to many of the top people over there. And I think that they're starting to understand that they're adjusting some of these targets as we go into the fourth quarter.

Okay. So that target process that's going on should stabilize over the...

We are doing everything. I think there's a rationale coming up now that we've been living in this growing market. And one thing I would say in the U.K., which, I think, is important. The market was down almost 9%. We were down 3% and the premium/luxury side of the market, it was up 30 base -- up to 30%. So we're riding a 95% mix of our business on this premium side that continues to get market share. That's another way that we mitigate, obviously, the down market. And people talk about Brexit. We've talked about it. But here we are now well into Brexit discussions and our guys are managing around our used car business, our parts and service. We've got units in operation, and I think that's key to us. And when you look at our business year-to-date, we're up 2.3%.

In the U.K. in total?

Yes.

Wow. Now, I think unfortunately, it sounds like the adverse impact on Puerto Rico is going to continue on for at least a couple of quarters.

Yes, look, our people are down there today. We've been down there. There's no question. If you look at the numbers in Puerto Rico, we're down 50% through the 25th of October. And we're still on generator sets at our locations. We've been paying our people. We want to keep them and really having them focus. We don't have enough work for them on a particular day. They go home and work on their own personal situations. But it's a day-to-day situation. And look, I think that fortunately, San Juan, we had less damage there. But when you look at Ponce and Mayagüez, that was a real storm that went through there and we had some significant damage. So we'll be reporting on that, I'm sure, in Q4. But I feel much better that we're up and running even though -- and the doors are open. We're not seeing a lot of service right now because people are really worrying about fixing their homes before they bring their cars in with the money they might have to spend.

Our next question is from Andrew Fung with Berenberg Capital Markets.

I wanted to drill a little bit more into Europe or, I guess, U.K. in particular. One of your competitors cut their earnings outlook earlier this week and you cited weaker than expected demand, margin pressure from certain OEMs on the premium side pushing volume. You guys seem to be a bit more constructive on that outlook, but with discipline around the OEM market...

Well, I think when you look at our mix of businesses, we are -- we certainly have -- we're across all of the brands and we are also, when we include the U.K., we include Northern Ireland, and they've had an exceptional year for the first 9 months. And with the addition of our used car superstore business over there, that's been a real benefit to us. And I think when you look at -- Porsche is up 9%, and we've got almost 30% of the market there. Our Jaguar Land Rover business is up. Our Ferrari Maserati business is up. Lamborghini, and I think -- our BMW business is down 4% and our Mercedes business is down, I think, 0.8%. So when you look at it overall and with the strong parts and service we talked about earlier there, I think that the units in operation are paying off. Because our business is -- I think we've got a $6 billion business in the U.K. from a U.S. dollar perspective. So we've got some real scale there. I think it makes a big difference.

Right. And how should we think about, I guess, in Germany, the diesel, I guess, the issues surrounding diesel there?

That would be my biggest Achilles heel right now and the thing I'm working on the hardest myself is in Northern Germany, in Aachen, where we have significant -- a significant footprint of Volkswagen and Audi, and we've seen that business of 50% on the Volkswagen business. So that concerns us. Residuals are down. Now I met with the Head of Volkswagen, and they assured me that they were monitoring this and would take action to support the dealers as we go forward, fourth quarter and into next year. So we're going to look at what we have as a footprint, what do we need? Is there some divestitures that we should make? All those things are under thought process right now. And I would assume that we can right that ship. We have a good business there, just the fact that this hit us because, as you know, diesel from a Volkswagen standpoint and even an Audi standpoint, that's the engine you had in your car if you were in Europe. But sooner or later when they announced in Germany, you can't take a diesel into Frankfurt or Munich or Stuttgart or some of the other cities, everybody came to a parade rest. Nobody wants to buy a new vehicle with a diesel in it. The problem is they've got one to trade with a diesel. So those residuals are down. So we kind of have a catch-22. But, look, you're always going to have something you're going to have to work on, and that probably hurt us in the quarter, probably a couple of cents if you really -- we got down to the real detail there, that would have been another couple of cents that we had to take the negative in the quarter.

Great. And I guess, lastly as a follow-up on just your capital, use of capital. Fair reported that, I guess, you guys have an investment in that app. Where else do you see opportunity beyond, I guess, the more traditional role of a dealer as we look at technology and some of the other kind of innovations that -- with regard to your...

Well, let's look at capital allocation. I think I mentioned earlier. Look, obviously, we want to maintain our dividend. Today, we're returning about 30%. We're increasing our dividend down to 26 consecutive quarters. We've got our capital expenditures and, obviously, our share repurchase, our debt reduction. Then while we'll do, this investment, by the way, has gotten a lot of noise on Fair. We've invested $1.2 million, less than 1% ownership. We think this is an interesting startup. You're seeing GM and Ford, all these other people investing in some of these different business ventures and ideas. So we're going to learn from this one and see if there's any way this might have some application to us at this particular time. And we're going to look at maybe some other things in ride-sharing and areas like this that we might make -- what I might say $1 million to $5 million investments in over the next 12 months. But I don't have any news that we're going to make some big acquisition and utilize all of our capital. And also, Fair is as a lead generator also.

Our next question is from David Lim, Wells Fargo.

Just wanted to dive into the U.K. I know that you guys have been benefiting from a greater premium/luxury mix. And I was wondering if you could dimension, like, where can this mix go? I mean, obviously, the luxury mix can't be 100%. But I mean, is it 35%, 40%? I mean, can you give us some color to that, Roger?

Our luxury mix in the U.K. in Northern Ireland is 95%.

Oh, I'm sorry, I mean, for the market.

Oh, well, look, the market is gone. It was at 31.8% in Q3, and it's 30.6%. I guess, Tony, if we go back, what, 4, 5 years ago was down 18...

18.5% to 19% range, yes.

Yes. So, look, it will go to 100%. But remember, what's happening is that it was a BMW 7 series, it was S classes. All of a sudden, now we're down into X1s; we're into different models. What they've done is they've actually come down and are moving into some of these, what you would call, traditional market pricing levels in providing vehicles. So I think they'll continue to be leaders. Consumers like the foreign nameplate, like the German cars. Look at Porsche. It started out as a sports car company, Cayenne, then Panamera, now Macan. It's taking big market share from the standpoint. And I think at the end, you're going to see their business cars that people are buying. Part of the member in the U.K, 50% of the cars that are sold in the U.K. are really provided to people who work in their business as part of their compensation. And I think it's the low end, you're going to see Audi and BMW attack that segment.

So the market, so the expansion and segmentation is definitely helping the stronger brands that you're levered to?

Well, there's no question. When you look at it -- I think I said earlier, BMW was down 4%. Mercedes, I think, was down 0.8%. Porsche was up 9%. So these are all bands that we're involved in. So you don't see this dramatic impact. The other thing is that remember, the marketplace today is shifting from cars to SUVs. And those SUVs provide higher MSRP and also a higher margin for us.

The -- one of the questions that I wanted to dive in on was a little bit more on the electric vehicle side. Definitely, there's getting traction -- there's talk and there's positive headlines. Going forward on 2 things. There's an argument on maintenance for electric versus regular gas engines. And we are hearing that the maintenance is not really all that different as in the dollar, the average dollar. The other thing is, what can you guys do from like an overall dealership level of versus a Tesla, for example, when it comes to electric vehicles, when it comes to servicing. If you could sort of frame that for us, that will be helpful.

Well, remember, the dealer is involved, number one, to service the customer. And all of it was either sold -- have an extended warranty or some warranty provision. So we're always going to be there and have to be at the downstream end to take care of the customers' performance from our warranty perspective. And then when you look at our parts and service business, you start to think about maintenance items. And many of these vehicles are sold with a maintenance package. Again, we're going to be at that end. And those margin -- maintenance packages are many times higher than 50%. Now I would tell you that I've got an interesting question to say. What's the government going to do? They have all of these taxes on engines, which are not -- or vehicles that have engines in them that say, that's your aspirated gasoline engines or diesels, what have you. Where is the tax revenue going to go when everything goes electric? So I think that today, nobody is making money on electric vehicles. I think that the technology is terrific. But what's going to happen is I'm not sure that the consumer is going to be ready with all the direct-injected engines today and the mileage we're getting.

Are they going to be ready to spend more money for a vehicle they don't know what the residuals are going to be on them? Because as the battery technology gets better, you certainly -- you want to have your vehicle to have the highest level of performance from an mpg perspective with the increasing technology and batteries. I'm not sure where we're going to get to a level where we won't see that year-over-year climb. We've seen a 100 miles. We've seen 150. Now we're talking 200 to 300. And I guess that's going to continue to change. And that will have some downward pressure on residuals. So when you think about total cost of ownership, I think it's going to be expensive. So I think there's going to be a balance there. And I think there's still going to be a lot of naturally aspirated or turbocharged engines being sold. So to me, all the OEMs that are investing billions -- and I think the good situation is when you look at the leadership, when you talk about this, the brands that we're involved in on the premium side seem to have the technology. They certainly have the scale and I think we'll bring the right product to market. And guess what, we're going to sell it now. Maybe you have to make more money on the front end to offset maybe some loss profit on the parts and service.

Roger, obviously, you're very well connected and know the pulse of what's going on, consumers as well as OEMs. I guess the question that I really want to ask is, 201,8, I mean, what's your best guess right now and how 2018 could shape up from on industry sales standpoint? And then I have one sort of housekeeping follow-up question.

Well, I'm thinking that we're going to have a SAAR, something around -- somewhere in the $16 million range, something there, I think, would be realistic $16 million to $17 million. I don't know, at this point, anything if is going to change it. It looks like interest rates are going to be reasonable. There's plenty of credit available. There might be some pressure depending on pricing of the OEMs if they got to get more margin, they might push people to buy certified preowned, which might make a difference. I think you'll see, obviously, the used car business grow in '18 because of all the leased cars coming off, that we've leased over the years. And production is still high. And I think it was $4,000 per unit, was the incentive. So as long as the incentives are out there, and they've have got that room at the OEM level in their margin, I think they'll continue to drive the business here in the U.S.

Interesting. And then, finally, and maybe this is, Tony -- for both you and Tony, is a -- the SG&A leverage. Can you give us some rough guidance on how we should think about that going into 2018, given, let's say, 2017 as the jumpoff point?

Well, I think that our big impact on SG&A has been in Germany because of this -- as I told you, it probably impacted us at least $0.02 to $0.025. And that's had some impact on that. But look, our goal is to continue. We're not going to give you a forecast, we're going to take 2 or 3 points of SG&A overnight. I think that we need to use a benchmark there to continue to reduce it. And I would hope that we can see, as we go into '18, 50 basis point to 100 basis point reduction in our SG&A cost. I think that's realistic. We're growing. I don't look at that number. I'm looking at what's coming out the bottom line? What's my return on investment? And what kind of foundation am I building for the future, is really what I look at on a quarter and on a month-to-month basis.

Our next question is from Brett Hoselton with KeyBanc.

I think to start with U.K., you kind of commented on your thoughts about the U.S. and kind of the outlook and expectations and so forth. What are your thoughts about the U.K?

Well, I think that the U.K. market is down, as we've talked about 6.9% for -- year-to-date, it's down about 4%. And I would think that you're going to see that probably down 1% or 2% next year. Our goal, of course, is to outperform the market like we've done through the third quarter. We're up actually 2.3%.

And then I think earlier this week, one of your competitors kind of commented on BMW product cycle and so forth. I'm wondering -- obviously, you've got some pretty exposure there as well. Your thoughts there?

Well, there's no question, we've got some great products coming from BMW. When you think about -- we get this X7, which is a 3-seat SUV, which should be a full gross car for us. The new X3 is coming. They've got a really a bank of vehicles coming really over the next 18 months, which has proved to be very good for us. The X -- this 2 series model that's very, very popular, and we'll see that also. So to me, what we need to do is just be sure that the targets that are expected by the OEM don't drive bad behavior from a gross perspective as we sell this vehicles in all the markets, not only in Europe, but also here in the U.S.

And then you've obviously had a little while here with -- to interact with the folks at CarSense and CarShop and so forth. Has anything changed in your thinking in this past few months here or so?

Yes, it's changed. I like it more. No, it's -- I think we are very fortunate to get into this business, the technology, the people, we've had no turnover with senior management, both of these businesses. I think they applaud the fact we've come in with capital, with ideas, with an expansion mode offense. And these are things, I think, that are paying off. And what we want to do is take those things we're learning from there and try to -- can we put those into play in our traditional businesses?

Yes. I think also one of your competitors was kind of chasing CarMax, let's say, and has a pretty aggressive store opening schedule with intention of...

But (inaudible) CarMax has done a terrific job. Look, they're really on a ZIP Code that we're not in. They provide financing. They've had, what, 10 years of managing this business across the country. And what we're trying to do is look at areas that we can go into where we have scale and we have people that we could transfer from the traditional business into this business as we expand. And I think that we have -- I am very confident that we'll see at least 6 either through acquisition or new store openings take place in our 2 businesses next year. And I think that's what we talked about when we started this back 12 months ago. And I don't see anything that's going to stop us. The credit availability is there. Our turnover of our people is in great shape. Our parts and service business is a real opportunity. I would have to say at CarShop, they really haven't taken advantage of this customer base to bring these customers back for parts and service. The guys at CarSense have done a terrific job, and we've just enhanced our drive-thrus, our waiting areas for our service customer, and those margins are very good. And I think that's an opportunity, as you know. In our business, it's 44% of our gross profit and only 11% -- 10% to 11% of our sales. And there's no question that the lower variable cost is key. The one price, we're learning a lot about one price. I'm not sure that we can develop that into the U.S. retail side on new, but there might be an opportunity on use. I know AutoNation, Mike's gone to that and really haven't talked to him to find out how successful. But we had one store that we tried to do that out in Arizona and we weren't very successful. So -- and that was both on new and used. So I think there's some learning that we can take in both in the U.S. and the U.K.

And we'll go to David Whiston with Morningstar.

Just I got 3 for you guys. First on new vehicle GPU and gross margin, actually had a little bit of improvement there. And in a lot of the other public so far, I haven't really seen that. Just can you talk about what's driving that and new?

Well, I hope it's management discipline, because we can't sell cars and not get margins. And I think that we hit our targets in the third quarter, which paid us nice bonuses from the standpoint of the targets we had. And I think when you spread that across the quarter, obviously, it gave us an increase of 20 basis points. I think we've had a better mix. I think there were more SUVs available to us in the third quarter that we didn't have last year. So that was a positive. On the other hand, our used was down 10%. But that really -- or 10 basis points. But that really had to do with a lot of these loaner cars and demonstrators that had to be sold as used, we just didn't get the margin on those.

Okay. And moving over to trucks. I'd love to hear your thoughts on pure electric trucks. I know it's not really a Class 8 type of product, but do you think there's a lot of demand for that amongst customers?

I'm not sure I'm going to be around when we have 80,000 electric tractors running. That would be a long stretch for me. Look, we're involved in nothing that I would announce today. But we're involved in some testing of fully electric. Daimler probably furthest along with that over in Europe. They've run some fairly significant tests. We're being one of their key customers worldwide, probably their largest worldwide, but hope that we would have access to that technology, and we would obviously, bring into our fleet and PTL when it was reasonable. But I don't see it happening overnight. I think you'll see platooning and other things to take place before you probably see fully electric. But I am interested to see the trucks when they do come out and just what is the -- when you look at the total cost of ownership, because when we lease the truck, we have the residual risk, we have the maintenance risk, and we want to make sure that the cost per mile for the customer is not more. So that's something we're going to have to manage, and I don't really have -- I can't give you an honest answer of when we're going to see a big fleet. Maybe you'll see fleets at FedEx where they have a hub and spoke when they can run in and run out, and charge them at night. You might see that but it might be more than daily delivery truck and you'll see it in a Class 8 tractor.

Okay. And this is probably for Tony. It's actually a presentation question on the slide deck. The used gross profit per unit on retail automotive of the 1,434. Does that include the much higher number for the standalone business who use CPU?

Yes, it does.

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

All right, John, thanks. And thanks, everyone, for joining us. We'll see you in Q4. All the best.

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