Penske Automotive Group Inc (PAG) 2017 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Fourth Quarter and Full Year 2017 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through February 15, 2018 on the company's website under the Investor Relations tab at www.penskeautomotive.com. I'll now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you, John. Good afternoon, everyone, and thank you for joining us today. As John said, a press release detailing Penske Automotive Group's fourth quarter 2017 financial results was issued this morning and is posted on our website, along with the presentation designed to assist you in understanding our performance and company strategy.

As always, I'm available by phone or e-mail for any follow-up questions you may have. Joining me for today's call is Roger Penske, our Chairman; J.D. Carlson, our Chief Financial Officer; and Shelley Hulgrave, our Controller.

On this call, we will be discussing certain non-GAAP financial measures, such as adjusted income from continuing operations, adjusted earnings per share from continuing operations and earnings before interest, taxes, depreciation and amortization, or EBITDA. As we noted in our press release, Penske Automotive Group's fourth quarter 2017 income from continuing operations and related earnings per share include a benefit of $243.4 million or $2.84 per share related to U.S. tax reform.

Fourth quarter and full year 2006 (sic) [2016] income from continuing operations included a tax benefit of $5.1 million or $0.06 per share from the revaluation of the deferred tax liability. Excluding these benefits, fourth quarter 2017 adjusted income from continuing operations increased 11.9% to $86.6 million and related earnings per share increased 11% to $1.01.

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.

Additionally, we may make some forward-looking statements about our operations, earnings potential and outlook on this call today. Our actual results may vary materially because of risks and uncertainties outlined in today's press release. I now direct you also to our SEC filings, including our Form 10-K, for additional discussion and factors that could cause any results to differ materially.

At this time, I'd like to turn the call over to Roger Penske.

Thank you, Tony, and good afternoon, everyone, and thank you for joining us. I'm pleased to report another quarter of record results and the best year in the history of our company.

In 2017, we retailed more than 500,000 new and used automotive units, generating over $21 billion in revenue, and we earned $370 million in adjusted income from continuing operations. As a result, adjusted earnings per share increased 9.7% to $4.31. We increased EBITDA by 10% to $751 million. As a result of our strong cash flow, we increased our cash dividend each quarter.

We repurchased 302,000 shares for $12.7 million. We invested over $200 million in capital expenditures to grow our business. We completed acquisitions representing approximately $1.2 billion in estimated annual revenue.

The strength of our cash flow provided us the opportunity to reduce our leverage to 2.9x at the end of the year from 3.1 at the end of September.

Turning to a few highlights from the fourth quarter. New and used unit retail increased 7% to almost 120,000. Revenues increased 10% to $5.4 billion. Adjusted income from continuing operations increased 11.9% to $86.6 million and related earnings per share, adjusted earnings per share increased 11% to $1.01. Exchange benefit, EPS, approximately $0.02.

Our results continue to highlight the benefits of our diversification as a transportation service company. As such, our earnings before taxes were derived as follows: 59% through our retail automotive dealerships; 9% through our commercial truck dealerships; and 32% through our nonautomotive joint ventures, such as Penske Truck Leasing and operations in Australia and New Zealand. Let's turn to the performance of our retail automotive business in Q4.

Units retailed increased 7%, as I said, up to almost 120,000. On a same-store basis, retail units declined 2.7% while the retail revenue increased because of mix to 2.6%. Variable gross profit per unit, which includes new vehicle, used vehicle and finance and insurance gross profit, was $3,455, an increase of $46. Same-store variable gross profit was $3,510 per unit, representing an increase of $96.

Turning to new vehicles. Units retailed declined 2%, including a 3% decline on a same-store basis. Gross profit per new unit increased $165, including $98 on a same-store basis. New vehicle gross margin declined 10 basis points to 7.8%, but improved 30 basis points sequentially. Our supply of new vehicles was 67 days at the end of December compared to 64 days at the same time last year.

Turning to used vehicles. Used retail increased 19% and our used-to-new ratio improved to 0.95 from 0.80, mainly due to the acquisitions of CarSense and CarShop, which I'll discuss momentarily.

Same-store used units declined 2%. Gross profit per used units declined $114 on a same store basis, largely from the diesel impact in Germany and Italy. Used vehicle margin declined 60 basis points to 4.9% and was driven by a 360 basis point decline from the diesel impact, again, from Germany and Italy. Our supply of used vehicles was 55 days at the end of December compared to 49 at the same time last year. Finance and insurance revenue grew 19% for the quarter, including a 6% on a same-store basis. And our F&I revenue per unit increased $124 to $1,211, including $98 on a same-store basis.

Service and parts revenue grew 7.3%, including 4.3% on a same-store basis. Gross margin increased 180 basis points in total or 100 basis points on a same-store basis. Our customer pay was up 8.1% on a same-store basis. Warranty was up 6.2%, body shops and PDI was up 4%. So again, 7.3%, on a same-store 4.3%.

Moving to our standalone used vehicle supercenter businesses. As most of you know, we acquired standalone used vehicle supercenters in the U.S. and U.K. during the first quarter of 2017. We believe these used vehicle dealerships further diversify PAG's business and provide an opportunity to capitalize on the highly fragmented used vehicle marketplace. In the fourth quarter, these businesses retailed. 9,500 units, generated $176 million in revenue and $29 million in gross profit.

In the U.S., the average transaction price was $20,700 and the variable gross profit was $2,826 per unit, approximately $400 more than our franchise dealerships. In the U.K., the average transaction price was $12,754, with a variable gross profit of $2,040. The U.S., we've identified 3 new greenfield locations to expand the CarSense brand and expect to have all 3 of these locations up and running within the next 12 to 18 months.

In January 2018, we acquired The Car People Company in the U.K., which operates 4 large-scale retail locations in Northern England. This acquisition complements our existing scale, obviously, in the U.K. Car People is expected to retail approximately 18,000 units and generate, on an annualized basis, almost $300 million.

In total, we expect our used vehicle supercenter operations to retail approximately 70,000 vehicles annually and generate over $1 billion in revenue in 2018. If you look at our CarSense and CarShop businesses, we typically see a 3.5% to 4% return on sales and a pretax return on invested capital, averaging between 15% and 20%.

Turning to our retail truck dealership business. This market continues to experience improved conditions, including strong freight metrics and heavy-duty truck utilization rates.

For the quarter, Premier Truck Group increased its new and used unit sales 47% to 2,294 units, generating $308 million of revenue and $45 million of gross profit. Same-store revenue increased 39% due to the strong heavy-duty truck market. Service and parts represented 68% of the total gross profit and covered 117% of our fixed cost and nearly 100% of our operating expenses in 2017.

According to ACT, fourth quarter Class 8 build, that's heavy-duty tractor build rates, increased 40% and net orders increased 94% and retail sales increased 26%. Looking into 2018, ACT production forecast is 322,000 units, Class 8 retail sales for '18 are forecast at 315,000, which represented 25% increase over 2016. We believe these strong market conditions will drive our business with improved sales and growing profitability throughout 2018.

Turning to our Australia truck distribution and power system business. The fourth quarter revenue increased 27% to $147 million. We are generally experiencing heavy-duty truck conditions improving in the Australian market, with heavy-duty truck market sales up approximately 22% year-to-date.

Our market share of products we distribute has increased 240 basis points compared to the same period last year. On the engine distribution side, the business order increased and we're winning more bids. In fact, in January, we were chosen to provide the Australian Defense with engines for its new fleet of offshore patrol vessels and life cycle support for parts and service for the next 20 years.

Looking at our balance sheet. We had $45 million of cash at the end of December. Floor plan was $3.8 billion and non-vehicle debt was $2.2 billion. 32% of our floor plan and non-vehicle debt is at fixed rates, while the remaining 68% is at variable. We had $700 million in liquidity at the end of December. Our debt-to-capitalization ratio was 47.1%, down from 52% in Q3.

Our leverage ratio improved, as I said earlier, from 2.9 -- from 3.1 to 2.9 at the end of September. New and used automotive vehicle inventory was $3.3 billion, up $412 million when compared to last year. On a same-store basis, inventory was $3.1 billion, up $211 million. Approximately $20 million of our U.S. inventory is currently on stop sale, representing approximately 600 vehicles: $12 million on new vehicles and $8 million on used.

Capital expenditures were approximately $225 million, net of $22 million of sale-leasebacks. CapEx includes $20 million in land purchases. Let me talk now about -- take a minute to discuss the tax reform and the positive impact we expect to have for our business.

In the fourth quarter, we recorded, as Tony said earlier, a $243.4 million from essentially 2 items: onetime revaluation of our tax liability from a decrease in the corporate income tax from 35% to 21%, providing approximately $300 million and repatriation taxes on the accumulated earnings of our international operations, which was an expense of $55 million.

In general terms, the new tax reform package required us to incur a tax expense on earnings we had deemed to be permanently reinvested overseas. Although we recorded $55 million in expense, we had a carryover tax losses from our PTL investment. Therefore, we didn't have a cash outlay for this expense. Going forward, we will generally be able to repatriate earnings back to the U.S. in a tax advantage basis.

We expect our 2018 tax rate to be in the range of 25% to 26%, which will provide us the opportunity to pursue our strategic initiatives, invest with our employees and improve shareholder value.

In closing, we continue to build a different model that is about diversification. Our performance continues to demonstrate and reinforce the adaptability of our business in changing market conditions. We remain optimistic about our outlook for 2018. And finally, I'd like to congratulate all of our employees for their efforts in making the Penske Automotive Group one of the World's Most Admired Companies by Fortune. We're honored to be part of that prestigious group of companies.

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

(Operator Instructions) And first, from the line of James Albertine with Consumer Edge.

You shared a little bit more this time around -- on the used vehicle superstores. Just wondering if you could elaborate maybe a little bit more on your strategy around that business. And then as a related question, do you see opportunities to layer in sort of best practices from your franchise operations as it relates to parts and service, over time?

Well, Jamie, obviously, we see this used vehicle strategy further diversifies our PAG business. And there's a highly fragmented marketplace, obviously, a lot of white space, which gives us the opportunity to grow these on a footprint that would be reasonable for us. Really, not only U.S. domestically, but also in the U.K. We're able to leverage off-vehicle sourcing, which is key to us, with the number of used coming off certainly both in the U.K. and the U.S. from a standpoint of leases. There's no question that vehicle sourcing allows us to get access to vehicles that maybe they couldn't get before, so that is key. And I think, overall, when you look at our metrics from a compensation standpoint, if you look at comp to growth, it's about 700 basis points lower than our traditional business. On a variable basis, it's about 10%. So to me, we have strong return on capital. As we said earlier, somewhere between 15% and 20%. We got higher grosses, in fact, to our traditional business. It's up about $400. And certainly, there's lower CapEx, which obviously is key. We don't have the CI standards that we have from the normal OEM. So, overall, I think the model works. We have the ability to grow in markets where we have people. And I think the expertise and the technology that both we have in the U.S. and the U.K. will allow us to grow this part of our business substantially in the future. So you'll see this be a growth opportunity for us. And when you think about going from 40,000 to 70,000 units approximately in 2018 versus '17 will be a real benefit, and it will generate approximately $1 billion in revenue. Obviously, when you think about best practices, there's no question. From a finance and insurance basis, from a training perspective, obviously, our people that handle our CapEx, we can have the standards which we would look at in our existing stores would be at the same level in our stores that would be in the superstore areas. So, overall, I think there's a very good move within the company. On the other hand, we want to be sure we run this business separately from our normal OEM business because of the different models of compensation. Just one example, the average salesperson in a Penske Automotive Group dealership probably around the world sells 10 cars on a monthly basis. In the superstores, they approach almost 20 per person. So there's better utilization and, obviously, the compensation is different, mostly variable here and salary and unit bonuses in the other businesses.

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

Maybe a follow-up on CarSense. I mean, the 3 Greenfield facilities that you're talking about building, I'm just curious if you have a rough dollar number on sort of the capital that's needed to spend on those and sort of what the ramp curve on those. Is it around 18 to 24 months before those stores mature? And what would you expect sort of the revenue to roughly be as they mature?

Well, the first one we'll have will be going into Phoenix, and it was on existing land we had purchased at very realistic rates. So we'll spend probably $3 million to $4 million initially on that facility to build the sales facility. The balance will be vehicles online. We also have -- already have a PDI center there that we could utilize. Then, as we move into the other markets, they'll be contiguous where we have scale and capability. And I would expect, within the first 6 months, we'll see Phoenix and then the other 2 will come in within 12 months. One, down in New Jersey and another one over in the Pennsylvania area. So we have these things circles. We're already starting the detailed drawings and many of these, some will be a refurb of existing locations and others will be a straight build-to-suit.

Okay, that's helpful. I mean, any idea on sort of revenue generation from each point that you would target? Or is it too early?

It's really too early. And to be honest with you, we, in the past, have purchased businesses that had an ongoing business. So we had the benefit of that. But when we look at the, certainly, the CarSense, they've opened up operations here in the U.S. from a greenfield site. And it probably takes, probably between 4 and 6 months probably to break even as you get into these because you're building a customer base and building a team. But it hasn't, even when I looked at -- and the Car People had, in Warrington, England, they have a big operation there that has probably the ability to store about 800 or 900 cars, and it took them 6 months to get into the black. So I think that's much sooner than you would see on a normal OEM point.

Yes, I know that's impressive. And then a second question on tax reform here. I'm just curious if you've seen anything as far as your customers on purchasing with the accelerated depreciation, both on the sort of the light-duty side, where you'd have fleet tail, and then also in the commercial truck side. Second portion of that, do you expect any of that benefit to be competed away amongst dealers? And the third portion of it, does this lower tax rate that you now have make the after tax returns that much better, so going out and making acquisitions and investments more aggressively to grow would be something you'd do, just on a more aggressive basis?

Well, I think it's too early to tell. I think, obviously, the tax benefits are rolling into the market. We have upgraded our 401(k) investment, which is for retirement. In most cases, I think a lot of companies are now giving employees certain dollar, we felt the 401(k) was better because it's a long-term benefit rather than a onetime payment. But I think that the economy that we can see, something is going on because as we look at our Penske Truck Leasing business, our rental is really off the charts. We've never seen January come through like it has been. So there's plenty of freight out there, which means people are doing business. And that's going to drive more money in the pockets of our consumers. Certainly, we hope to see that as we go through the next 2 or 3 quarters. I think on the other hand, when you look at the economy, if business is better, that's going to be better for the individuals. From a dealer perspective, and there's been some -- I've seen some dialogue regarding what will some of the other dealers do with this benefit. Well, when you think about the other maybe 80% or 85% of the dealers out there that aren't -- don't have a public company, they're typically pass-through entities, LLCs, and I don't see them taking that benefit and lowering prices because most of them already, have done everything they can, revaluing inventory and other things, at year-end to reduce their taxes. So I don't see that really being a big benefit. And there's no question, when you look at our business, overall, our benefits come at the holding company and all of our managers are paid on earnings before taxes. So there won't be any benefit from a tax flowing down into individual dealership. And so are all the managers paid on a variable basis. So I really don't see that as a risk at all, especially when you look at the premium luxury, where we have 60% or 66% of our revenue here in the U.S. and there's only 1,200 of those dealers out of 18,000. I don't think the inter-brand competition is going to drive a lot of lower grosses now. Obviously, I might be wrong. From a tax return perspective, we've got double-digit -- from a double-digit commitment to 401, going from 1.5 to 2.5, which is up 67% for our people. Also, as we look at our dividends in the future quarters, do we pass more of that profit back into the shareholders? Today, we're about 2.8% return and we have 30% of our net income that we pass on to shareholders through dividends. So to me, I think that the good thing about this, and one thing we can't forget, any of us that are on the phone, we've never really had a competitive tax rate here in the U.S. at 35%. Thinking right now in the U.K., it's 19%. So we've had the benefit of that for several years. So I think that's only going to be good for business and attracting business to the U.S. in the future.

Sounds great. And then just really quickly, lastly, on diversification. I mean, you kind of went through the stats of retail auto being 59%, the CV and the JV income. I'm just curious, as you think about capital allocation and where you want this business to be, over time, to be balanced out to sort of weather the ups and downs of economic business cycles. I mean, do you have targets that you think about in your head or in your plan where you think you want to take this retail auto down to? Or is it just sort of a constant evaluation of where you're going to get your best returns on the next dollar of capital that's allocated to growth?

Well, I think we're managing the marketplace. I guess, if we went back 4, 5 years on this call, we wouldn't be close to a 60-40 split. But because of our knowledge in markets, certainly, the heavy-duty truck market and the ability for us to invest in that, that has a very long opportunity for us because when you look at the fixed cost being almost covered 100% by your parts and service in a downturn, you're going to have more parts and service business. And you'll look at the leasing company we have invested in, they're really a source of transportation. And from our perspective, with the used car business, all this does is balance maybe some cyclical parts of the business. And we have some cyclical, obviously, in the new truck business. But I think we'll continue to look at it. We're going to look at pricing. It's going to be key. Contiguous opportunities, which where we have scale already, where we can leverage our back offices. So to me, I think it's -- we have a pretty good platform today and we're starting to see, certainly, when we look at the return on capital at Premier Truck, our heavy-duty truck business, we're looking at the return on the, certainly, on the supercenters is very positive. So that will be a focus. Also, the dividend returns to our shareholder will be top priority also.

Our next question is from John Healy with Northcoast Research.

Roger, I was hoping you could talk a little bit just about how you may see the kind of the return on sales picture of the truck dealership stores kind of developing. It was helpful in terms of how you described kind of the profile of the used retail stores. But given kind of where we're at in the cycle, where might we see the earnings power of the truck dealership business kind of potentially go to over the next 2 or 3 years, potentially?

Well, I think, today, we're in the 3.5% to 4%, depending on which market. We're in Canada because its new is probably a little bit less than that. But we see that being very strong. And when you look at that business and you look at it long term and you think about the parts and service gross profit being almost 70% of your overall fixed cost and getting to 100% when you look at your overall cost. So to me, it's quite positive. We see that very positive. And the fluctuations there, if the new truck business is off, there's going to be more parts and service because people will be fixing their trucks and not buying new. And when you look at the used car supercenters, there's no question that in the price range, when you're thinking $14,000 in the U.K. and $20,000 in the U.S., these are cars people are buying to use on a daily basis. And there's no question that the fixed absorption that we would look at once we'd be able to build. And I guess one thing I didn't mention earlier on that question is one area that we haven't really capitalized on in the supercenters is the parts and service. We're just scratching the service. And as we build new, we are going to anticipate by putting in service drives to try to connect that customers, we go forward because I don't think we're getting all that as we look at our business here in the U.S. When we look at our general dealerships, it's really a big difference because on the standalone used, it's 2% of our business, and in the U.S., on our normal basis, in the U.K., it's about 11%.

Great. And just one big picture question. I know you guys have a ton of areas where you can put the capital to good use. But I was curious to know if there's much on the horizon relating to mobility? And any thoughts regarding kind of how you see kind of fleets and changing car ownerships and maybe what's some of the priorities or maybe the pipeline for deals looks like in 2018?

Well, one of our associated companies, Penske Vehicle Services -- we really haven't talked much about it, but we're involved in certain up-fitting of the autonomous cars for one of the operators. And I think that we haven't really talked about that at this point, but we're obviously looking at this. We're looking at opportunities on ride share, on subscription, all of these things are top of mind for us. In fact, we have a strategy group today that's looking at that. And I think that at some point we'll make an investment in one of these. So we understand completely, not just be a portion of the supply chain. We would own the asset, we would operate the asset and we would buy it and sell it and maintain it. So I think we need to do that to find out is this going to be a model that we need to be in from a standpoint of strategy, going forward. There's no question, we made a small investment in fare in 2017 to understand that model. And you'll see us do that over time. So there's no question that this autonomous and the things that are out there are going to be important to us, long term.

Next, we'll go to Irina Hodakovsky with KeyBanc.

A quick question for you on the modeling for SG&A expense. The leverage was below target at 20%, 25% throughout 2017 with a few headwinds. If you can maybe discuss some of the headwinds that happened in 2017, if they're going away in 2018? And how are you -- what is your outlook for 2018? Do you anticipate to get to your target of 20% to 25% range?

Well, I think when I look at -- we were 30 basis points higher this quarter than last year in the same quarter, and I think that there were really 3 items that really affected our SG&A. The first was a 280-basis point increase in the comp to gross profit in the U.K., which is approximately $5 million. And we realized lower gross profit in that market because we missed our OEM aggressive sales target in the quarter and Q4 of 2016, we obviously hit those. So that was a major impact in one case. Also, we had higher fixed cost in compensation. In the U.K., we had a lot of turnover in our service-related writers and we felt that it was -- some of that was due to compensation. So we not only added people, but we also increased comps. So we hope through productivity that we'll get that back on a going forward basis. Then we had $1.2 million additional rent expense and also from leases and also our CapEx on a same-store basis. So overall, those were the things that probably represented 50 to 60 basis points by themselves. And I think we've taken steps to address all of these, including negotiations more -- negotiating more realistic targets with our OEMs, not only in the U.S., but internationally. And we think by streamlining some of our businesses, our employee cost will come down. So obviously -- and we'd like to be in that percent when you talked about earlier that we will be -- hit our target, going forward. So to me, it was the overall flowthrough for the company was 17%. But the U.S., flow through was 42.6%.

And a question, a follow-up question on some of your standalone used vehicle business, those supercenters. How big are these locations? Are we thinking 300, 400 units in inventory?

Well, we have some. I would say, in most cases, it could be 500 to 600 when you look at the ones in the U.K. I know that one location sells 700 units a month. So they'd have probably in excess of 1,000 units. So these will be 10 -- in most cases, 10-, 12-, 15-acre sites minimum.

Our next question is from David Whiston with Morningstar.

I guess, first on the U.K. market. Can you talk a bit about the premium electric customer there in terms of their consumer confidence? Are they much more confident than the broader U.K. market in light of Brexit concerns? And if they are, is that sustainable?

Well, let's put it in perspective. The market was down 6 point -- around 6% last year. And I think in the quarter, it was down 12.6%. And basically, we were flat if you looked at our business. And remember that the premium/luxury market now is 34.5% of the market. If you go back 7 or 8 years, I think it was around 18% or 19%. So we've had the benefit of the tailwind of the premium/luxury market growing, and I think we're going to continue to see this. And there's no question that when you look at 2017, the fourth quarter, we were at 34.5%. On a year-to-date basis, it was 31%. So you can see, it was up, really, from the standpoint about 300 basis points in Q4. So we feel pretty good about that. And again, the way we're set up in the U.K., we have dealership areas, so we might have 3 or 4 dealerships that are contiguous. So we have less brand competition from an inter-brand perspective, which helps us on our margins.

Okay. And on standalone used, do you have interest in doing that in markets beyond the U.S. and Europe, such as Australia?

Well, we would not go to Australia first because we really don't have a retail footprint there. But there's no question that we can be looking potentially in Germany and Spain at some point. But there's so much white space here in the U.S. And I think we have the infrastructure, both in the U.K. and in the U.S., that we would probably -- you'd probably see for the next few years that we're going to pretty much stay where we have people and capability.

Okay. And my last question is on [German 3], and Porsche and Ferrari customers relative to Tesla, who has that new second-generation roadster they just unveiled, some impressive specs. Are you getting your customers, at these brands, asking more often, when are these companies going to come up their own Tesla fighter?

Well, there's no question that there's a lot of people that are interested in the EV of Porsche and, certainly, Audi. Everyone has something coming. And sometimes, when they talk about being 100% electric, that means hybrid in many cases. But I don't see that particular Tesla offense affecting our business. The one thing we have that they don't have, we've got a captive finance company. We have the benefit of great residuals that will be set on these vehicles. And we have the ability, obviously, to have a customer base and service fees for the customer and sell them at the same location that we would service. So at this point, I'm watching the Tesla business. They've done quite a job in promoting the vehicles. But as we all say, you've got to make money some time. And I think the fact that all of these OEMs German guys, particularly, they know what they're doing. They've got the best technology, ultimately. But they know that they don't make any money on those vehicle until they get longer range, and the range anxiety goes away. And I think we're approaching now 250 to 350 miles, which will make a huge difference on a fully electric vehicle. So we think we're in a very good spot with our OEMs at this point.

Our next question is from David Lim with Wells Fargo.

Just several things. On the equity income, equity and earnings affiliates line. I was under the sense that Q3 would be the peak and it sort of tails off in Q4. Can you just give us a little bit more color on the strength that you guys realized in Q4?

That was really as we added more PTL ownership during the quarter. That was the biggest factor.

And that was purely it. But okay, I got you. It had nothing to do with any kind of spike in the industry or anything like that?

Well, the PTL business was strong this year, obviously, throughout the year, and they had a very good fourth quarter. So we had the benefit of -- probably, we have about 30% today and we increased it, during the quarter, 5.5%. So that's part of the uplift there.

Got you, got you. And then, when we think about like some of these new OEMs entrants, like Chinese OEMs, et cetera, I mean, are you guys already in discussions with them for a possible U.S. entrants from overseas, like some of these -- from some of these Chinese OEMs?

I would say, at this point, we have had nothing that I would call serious discussions. People call us all the time. We've had calls in the past, looked at some of this. But I'm not, at this point, ready to jump into distribution of those types of vehicles at the moment. There's no customer base. There's no fixed operation, so you're going to rely on your profitability strictly from vehicle sales, and I'm sure that those margins will be small.

Got you. And then, finally, on 2018, Roger, what's your initial take? I mean, a lot of people are throwing out the number, 16.8 million. And obviously, you've been in the industry far longer than probably all of us have, put together. What's your prognostication for '18?

Well, I can say I've been in the business the longest time, I guess, you're right there, that's for sure. But I think, based on what I see, the market will be somewhere between 16.5 million and 17 million. But I think we got to break out we're going to be the leaders. I think you're going to see, certainly, Toyota and Honda be strong during the -- you can see the Big Three OEMs, they're fighting in the truck business. And the premium/luxury people have a number of new models coming out, which I think will drive their customer base back. And they've got very, very strong leasing programs where people will be turning in these leased cars. Remember, when these leased cars come back, we've been talking about all the lease returns. Those people, normally, they'll walk out with another car and go lease a car someplace else. So I think we've got a continuing string of business because of that. So I feel good about where we are today. Now anything can happen. I think this tax benefit we've talked about earlier, we haven't seen that really flow through the industry yet, but that certainly can't hurt us.

And that will conclude the question-and-answer session. Mr. Penske, I'll turn it back to you for any closing comments.

All right, John, thank you. And thanks, everybody, for joining us today. We'll see you next quarter. Thank you.

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