Penske Automotive Group Inc (PAG) 2018 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group Third Quarter 2018 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through November 2, 2018, on the company's website under the Investors tab at www.penskeautomotive.com. I would now like to introduce Anthony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Sean, and good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's third quarter 2018 financial results was issued this morning and is posted on our website along with a presentation designed to assist you in understanding our performance and strategy.

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 Corporate 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 you saw in the press release this morning, Penske Automotive Group reported record results for the 3 months ended September 30, 2018. Our record income from continuing operations increased 38% to $130.1 million and related record earnings per share increased 39.1% to $1.53. Third quarter 2018 income from continuing operations and related earnings per share include a tax benefit of $11.6 million or $0.14 per share related to the final reconciliation of the income tax benefit related to the enactment of the 2017 U.S. Tax Cuts and Jobs Act.

Excluding this benefit, record third quarter 2018 adjusted income from continuing operations increased 25.7% to $118.5 million and related record adjusted earnings per share increased 27.3% to $1.40. We prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures in this morning's press release and in our investor presentation, which is available on our website to the most directly comparable GAAP measures.

Additionally, we may make forward-looking statements about our operations, earnings potential and outlook on the call today. 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.

As always, I direct you to our SEC filings, including our Form 10-K, for additional discussion ON factors that could cause results to differ materially.

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

Thank you, Tony. Good afternoon, everyone, and thank you for joining us. I'm pleased to report record results for the third quarter of 2018 for PAG. In the third quarter, we retailed 130,900 new and used automotive units that generated $5.7 billion in revenue and increased our earnings before taxes 13.1% to $157.1 million. And as Tony said, adjusted income from continuing operations grew 25.7% to $118.5 million and related adjusted earnings per share grew 27.3% to $1.40.

Exchange rates negatively impacted earnings per share by $0.01 during the quarter. The record results in the third quarter were driven by diversification, including our heavy-duty truck dealerships, the Penske Truck Leasing investments and the standalone used vehicle supercenters. Additionally, the business generated increases in new vehicle, used vehicle and finance and insurance gross profit for retail automotive units sold; also, a 70 basis point increase in service and parts gross margin; a 33.8% increase in medium and heavy-duty truck sales; and an 80 basis point improvement in SG&A leverage.

Looking at our retail automotive business for the third quarter. Total units increased 0.5%, but declined 2.2% on a same-store basis. Same-store new units declined 6.6% and were impacted by the temporary shortage of availability of units in the U.S. and U.K. and Germany from the new light vehicle testing procedures called WLTP. On a same-store basis, our used units increased 2.1%.

Total retail revenue increased 0.7% or 0.2% on a same-store basis. Just looking further into the revenue and unit shortage, worldwide harmonized light vehicle testing procedures impacted September's performance. U.K. declined 20.5% in September and declined 10.5% in the third quarter, led by many of the German brands that had also obviously impacted us in Europe.

Bentley was down in September 74%; Porsche down 68%; Audi down 53%; BMW down 11%; and Mercedes-Benz down 4%. So significant impact on our unit sales in the third quarter. From a unit perspective, product availability due to WLTP and certain stop sales that we have today on our other units, approximately 3,400 units were impacted in the U.K. And again, Audi at almost over 2,000; Mercedes, 600; Porsche, 240; and Volkswagen, almost 300. We had 700 units in the U.S. that were impacted by WLTP.

On the other side, from a profit per unit perspective, our new vehicle profit was at $3,030, up 4.5% or $130. Our used vehicle was at $1,504, up $62 or 4.3%. Finance and insurance margin increased to $1,244, a $68 per unit increase or 5.8%. Our service and parts revenue increased 1.7% on a same-store basis.

Moving on to the U.K. Despite challenges due to vehicle availability of certain brands in the U.K. during the third quarter and a market decline of approximately 10%, our U.K. business produced another record quarter of EBT due to our brand mix, our diversification into used vehicles and our highly experienced U.K. management team. This outstanding performance is the result of our foundation as the largest car retailer in the U.K. by revenue and one of the leading standalone used vehicle operators in the market.

PAG's U.K. franchise dealership brand mix is over 90% premium/luxury, and that includes a market-leading position in the super luxury and sports car markets. These brands are core to the U.K. strategy and typically provide a higher return on sales and capital.

Premium/luxury brands continue to outperform the market and take market share. That premium segment in fact, increased 60 basis points in the third quarter and representing, on a year-to-date basis, 31.6% of the market. As our U.K. business continues to evolve, the used-to-new ratio has grown to 1.83 to 1 and has a great platform to continue to grow its used vehicle presence, particularly through the standalone new supercenter formats. Used cars are not subject to OEM pressures and performed well in economic downturns as many consumers turn from new to used.

The standalone supercenters in the U.K. expect to retail over 55,000 used units in 2018. As a result, despite the new vehicle registration declining 7.5% year-to-date, our U.K. business has delivered a record EBT in Q3 and year-to-date.

One additional point I'd like to highlight is the well-established e-commerce auction website we operate in the U.K., which sells approximately 30,000 wholesale units per year, providing even further differentiation in the used car space. Over half of these units have the potential to be retailed and with an invaluable no-cost source of stock as we plan to further expand our used car supermarket footprint in the U.K. Many of these units can be retailed through our supermarket footprint, providing an opportunity to grow our used car business in the supermarket chain volume by 25% over the next 2 to 3 years. This is a great example of the exciting synergies between our franchise dealership business and our used car supermarkets both in the U.K. and the U.S.

As a result, we believe our U.K. auto retail business is unique, making it much less vulnerable to perceived vehicle -- new vehicle market pressures. Let's move on in a little more highlight on the used standalone supercenters. We operate 14 supercenters, including 5 in the U.S. and 9 in the U.K., plus 1 reconditioning center in the U.K. These operations use a 1 price no-haggle approach. For 2018, we expect to retail nearly 70,000 vehicles through these supercenters and will generate approximately $1.2 billion in revenue.

Year-to-date, the standalone used dealerships retailed for 56,000 units, generated $1 billion in revenue and a return on sales of approximately 3.9%.

The average transaction price is $15,000 and the variable gross profit per unit is almost $2,200 for a variable gross margin of 14.5%. We expect to grow the standalone used business through a combination of e-commerce initiatives and new market introductions. We're in the process of evaluating 4 new standalone sites, which we expect to open in the latter half of 2019.

Turning to our retail commercial truck dealership business. This market continued to experience strong market conditions, including improved and including freight metrics and truck utilization rates. Build rates remained strong and the industry backlog is increasing.

If you look at the 2018 ACT data, it forecasts North American Class 8 heavy-duty truck sales of $315,000, which would represent on a year basis -- year-over-year basis, an increase of 25%. For the quarter, our Premier Truck Group increased retail unit sales 35.5% to over 3,000 units, generated almost $400 million in revenue and had a return on sales of 5%. Same-store revenue increased 25.4%. Gross margin on new, used and service and parts all increased during the quarter. Service and parts represented 63% of our total gross profit and covered 121.7% of all of our fixed costs and nearly 100% of our total operating costs.

We believe these strong market conditions will continue and help drive our business's improved sales and growing profitably. Let me turn to our Penske Truck Leasing investments.

We own 28.9% of PTL, PAG does, with equity earnings, quarterly cash distribution and tax benefits generally associated with accelerated depreciation. We made our initial investment in PTL in July of 2008 for approximately $220 million, with an additional $700 million investment back in 2016 and '17. So today, our investment is approximately $950 million. To date, we received almost $600 million in cash benefits and another $420 million in equity income.

When you think about Penske Truck Leasing, it operates across 3 main business units: full-service lease of 15% of revenue; logistics at 24%; and rental at 26%. Full-service lease and logistics typically have 3- to 5-year firm contracts with economic escalators providing long-term stability.

For the 3 months ended September 30, 2018, PTL generated $1.7 billion in operating revenue and income of $141 million and return on sales of 8.3%. Accordingly, we recognized a PAG equity earnings in the third quarter of $40.7 million.

Looking at the balance sheet at the end of September, we had approximately $38 million in cash. Our inventory was $3.8 million, flat with September last year. By the way, we had 606 vehicles, representing $28 million on stop sale. Our new supply vehicles was 61 days versus 57 last year, and the used supply vehicles days was 48 days this year and 45 days last year. Our floor plan was $3.5 billion and our non-vehicle debt was $2.1 billion, which is 34% at fixed rates.

Debt-to-capitalization, our ratio was 44.4% and our leverage was 2.5x compared to 2.9x at the end of 2017. So far this year, we've reduced our non-vehicle long-term debt by $77 million, we reduced floor plan debt by $233 million, and we continue to increase the cash dividend, returning $90 million to shareholders.

We repurchased 1.2 million shares for the first 9 months for $56 million. We've also invested $188 million in capital expenditures, including $30 million in land acquisitions for future developments, and we completed $47 million in mortgages.

At the end of September, we had $700 million in liquidity, providing plenty of dry powder to continue growing and expanding our business. Additionally, with the tax law change at the end of the year, we have the ability to repatriate over $900 million in cash for international operations on a tax-free basis. Excluding floor plans, our debt at the end of the quarter was probably around USD 70 million.

In closing, our record results for the third quarter and the first 9 months of 2018 demonstrate the benefit provided by PAG's diversified transportation service model. We continue to demonstrate that the PAG business is much more than just a monthly new vehicle sales business. We are continuing in a strong U.S. economy, the strength of our premium and luxury automotive brand mix, the continued strength of the Class 8 heavy-duty truck market in North America and growing standalone used vehicle operation and the benefits we continue to receive from Penske Truck Leasing's investment. We remain confident and optimistic about the future of our business.

Before I close, I'd like to congratulate the 24 U.S. -- Penske U.S. dealerships that were recently named by Automotive News to the Best 100 Dealerships to Work For listing. This is more than any other group for the second year in a row.

Additionally, our Acura Turnersville Dealership was named the #1 in the country as the Best to Work For at a Penske Automotive dealership. Also, Penske had 5 of the top 10 on that list. We're honored by this accomplishment. This is a team effort. I'd like to thank all of our employees for their best contributions, making our company as one of the best places to work for.

Thanks for joining us on the call today. And at this time, I'll turn it back over to the operator, Sean, and open up for questions.

(Operator Instructions) Our first question will come from the line of James Albertine from Consumer Edge.

I wanted to ask on the used vehicle side. Looks like we're seeing some acceleration in the top line but also some pretty solid expansion, 4.3%, I think it was, year-over-year in same-store gross profit for vehicle retail. Can you just sort of walk us through what you're seeing in terms of demand for used vehicles, and then maybe help articulate a little bit what's helping you to drive that margin higher?

Well, I think part of our strategy, when you look at our business certainly in the U.K., we're looking at 1.8 to 1 on used, so there's a focus, we're getting some tailwind from the supercenters. But in the U.S., because on the premium/luxury side, we've decided to take our loaner vehicles out anywhere from 4,000 to 5,000 miles, which is probably 4 to 5 months of operations, so you get about 10% reduction in your cost base, plus anything the OEM gives you from a standpoint when you put that vehicle into service. So these are young, new vehicles. When you just look at BMW by itself, we're at 1.6 to 1 used to new in that -- with that particular brand. I think that pretty much carries through most of our premium/luxury. So that focus is good. We get a new customer, we give them a premium vehicle and obviously, from a finance perspective, we get all the programs that are available either for lease or on the finance side. So I think that's key. Also, we've gone, Jamie, to consolidated reconditioning locations, which I think are key, which gives us a lower cost base on reconditioning and allows us to gain more gross profit. So to me, our -- that's also key.

And also, when you look at the business and certainly, with the Internet being a big part of e-commerce for used automotive, we really are looking at double discounting. Double discounting means that you have an Internet price. Someone comes in on the internet price and the first thing your salesperson does is give him a discount. So I think it's managing your team did with double discounting has really helped us to maintain our used -- both new and used gross profit as you've seen that increase during the quarter. So that was -- those will be some of the key points. To me, when you look at e-commerce, we're up to 35% now coming through e-commerce.

And can you just maybe remind us in terms of sourcing vehicles, some kind of a breakdown you could provide as it relates to sourcing via trade-in versus auction. Just like, help us sort of delineate where you're grabbing a lot of used supply from.

I don't want -- I can't give it to you by a percentage here, but maybe Tony can get you that later. But I would say that the trade-ins would be, obviously, would be the first level of acquisition of used, then auctions are key. Buying cars on the curb from customers we do communicate on the Internet. We buy vehicles which I think is key. And then there's a tremendous amount of lease returns coming back. We've talked about that wave of lease returns coming back not only in '17, '18 but beyond into '19. And we have the opportunity to make big purchases on those. In fact, in the U.K., I know they buy any -- sometimes between 1,000 and 1,500 vehicles in a time, which gives them very good pricing and a broad mix of vehicles. So those would be the key areas of acquisition.

And I think that with the technology that we have in the used car supercenters, both in the U.S. and in the U.K., the fundamentals of what we buy at what price for what location are key. And I think with the technology they've developed, and this is in-house, has given us the ability to buy the right vehicle to give us the turn on our inventory.

That's very helpful. And if can ask just a quick strategic question, if possible. As we think about acquisitions across your main lines of business, is there any update you can provide in terms of seller expectations? I guess, starting with the franchise dealers first, but also wanted to touch on, if possible, the heavy-duty truck dealerships and the used standalone. Where do you see the majority of the brick-and-mortar growth coming from, call it, over the next year or so?

Well, I think there's -- with the complexity of -- or maybe not the complexity, but the implementing of CI by the OEMs and mandating that across many of the other brands, we're seeing that some of the older operators who have been in the business have decided to monetize the value they can out of their businesses. So we're seeing now there's a number of people that are coming to us and I'm sure to the other public retailers because we seem to have the capital. But where we have the ability to buy strategically, where we have scale, I would say we're in the market primarily in the premium brands side and maybe the buying foreign. From a standpoint of heavy-duty trucks, there's no question that we have grown that business nicely since our first acquisition. Obviously, we went out to West Texas, we went to Georgia and Tennessee, we're up in Canada growing. So we see that as a continued landscape that we will be operating in. And to me, we'll grow that business nicely because our OEM who we're committed to is Freightliner. We have a framework agreement with them and it allows us to grow significantly before we hit any particular cap. So also, you asked about used cars and I think from a used cars perspective, we continue to announce locations which we'll grow on. And I think we'll have 2 in the U.K., 1 in Nottingham, 1 in Bristol, which will open up next year. We'll have 1 in New Jersey and 1 in Pennsylvania we hope to add during 2019. So we see that as real opportunities going forward.

We have a question from the line of Stephanie Benjamin from SunTrust.

I was just hoping if you could maybe talk to the SG&A performance during the quarter. Definitely saw some good improvement year-over-year and just kind of, I know that comes despite some of the decisions to increase 401(k). So just kind of if you could speak to what's driving the improvement there.

Well, I think one thing we've looked at, our marketing and advertising particularly, really looking at a mix shift probably more digital, which has taken some of the main core higher price advertising costs out during the quarter. I think when you looked at our flow-through on the truck side, it was 56%, which certainly helped our growth from the standpoint of gross profit flow-through. Also, I think it's the blocking and tackling. As we've added the used car supercenters and also the truck businesses, our main core overheads now can be supporting both those businesses and not have duplications, which certainly helped a lot. The big impact we had from a headwind perspective though, is as we added 100 basis points to our 401(k), that probably increased our cost in the quarter $2 million to $3 million, so we had that headwind. But I think it's better blocking and tackling, I think it's discipline on gross profits. When you look at our new car gross profit up $177 and used up $68 and certainly, the F&I has generated more growth. And then on the truck side from a gross profit perspective, you can see that we had 122%, I think I mentioned that coverage on the truck side. So part of this SG&A to gross is growing the top end, which I think we did nicely, and we're able to sustain our cost pretty much flat when we looked at the overall based on our business.

We have a question from the line of Rick Nelson from Stephens.

I'd like to follow up on the U.K. markets. Some of those inventory challenges you had within the new emissions certification requirements, how -- what's the timing, I guess, of getting some of those inventory back? And do you think -- how much of it do you think you can make up here in the fourth quarter?

Let me just explain. What's happened is that because of all the diesel scandals, they've implemented a much tighter emission control requirement and testing procedures. That's why they call it Worldwide Light Vehicle Testing Procedures. And what happened in the past, they might test one vehicle in a model line, say the lower and upper-grade vehicle, let's say S-Class. Well now, what they're doing is taking all models and putting them through a very stringent test. The opportunity obviously in the future is, those will come through to us and those are high price and valuable vehicles for us. The problem is that in the capability, the number of test batches that are available in the U.K. and in Europe were constrained. In fact, Porsche, I know has brought certain vehicles to the U.S. to be able to certify. So I see that a temporary situation, but I wouldn't expect this whole ball to come through the tube here before probably the end of the first quarter, I think it's going to take probably through the first quarter. And remember, it started on September 1. We were -- everything was good to go up 'til September 1. And September 1, you saw the impact. I think I mentioned earlier, 30%, 40%, 50% by some of the German nameplates that we deal with both here in the U.S. and also internationally were highly impacted just in the month of September, which had effect on our revenue and also effect on our unit sales.

Commercial trucks, that's been an area of strength, big growth. Any clouds on the horizon for that business? And do you think it's going to carry into 2019?

Look, I think 2019, 2020, really, when you think about it, over the last 12 months, there's been over 500,000 net orders that have been booked, which is a new record. And the backlog, as we sit here today at the end of September, early October, was almost 300,000 units, at 286,000 and that was a new record. And the 9-month build rate was only 241,000. I think they're estimating about 310,000 to 320,000. So again, with retail sales up 28%, and I think the forecast for '18 will be 315,000, there's no question that the sales could hit 320,000 to 330,000 units next year, so -- and what's happening is ELD or 3-letter people that probably don't know about on the phone is Electronic Logging Devices. That means every driver has to electronic report his drive time to the federal government, where they used to have logbooks they filled out and typically had 2 of them. Well, that's all gone by, so there's been a shortage of equipment depending on the owner/operator, so that puts pressure on these fleets in order to buy trucks. We've even seen our rental business at PTL running in the mid-'90s from a utilization perspective, so that certainly put pressure on it. Then you look at just commerce, e-commerce. Today, 85% of all goods are delivered by trucks, either light, medium or heavy-duty. There's pressure on those, obviously, for this 1-day, 2-day delivery, which certainly is key. The good news for us is that the byproduct will be on a longer-term basis is the parts and service business that comes out of this. Units in operation with Freightliner, with the highest percentage of 40% of the market, this will give us a strong parts and service follow-up and flow-through for us over the next 3 to 5 years. Because typically, these trucks run anywhere from 100,000 to 150,000 miles. That puts us really in the sweet spot when you think about it. So to me, I think we're in good shape. There's no question in my mind that 2019, and I'm also looking at 2020 because I can look at that pretty much from the standpoint of Penske Truck Leasing, that spends about $2.5 billion a year on equipment. And we're seeing more and more people having to go to new equipment and are driven for a couple of reasons. Number one, emissions, the new emissions capability is less complicated and also, better fuel economy. And to me, that's amazing, and we were up to 90% utilization of our fleet at this point.

We have a question from the line of Armintas Sinkevicius from Morgan Stanley.

When I think about the market looking for disruption and innovation per the dealer model, that there's a stock in mind that's had some traction this year, and you've made some investments and then sort of, in front of that, that curve as far as pushing innovation. Just if you could talk about some of the areas of innovation that you're most excited about, that would be interesting.

Well, I think when you really look at e-commerce, online e-commerce, the question that we're looking at and we're taking some time and investing some money is, what is the real business case today that makes a profitable business? Because some of the people that are in this space today are maybe successful selling cars. At the end of the day, our shareholders expect us to pay a dividend. And where do we play and more important is, how do we win? And when you think about that, there's got to be a value proposition, not only from our perspective, but also the customer. The customer experience we're looking as we look at information online from customers, what's the customer experience? It might be easy in order to buy the car, go through the transaction, what's the logistics associated with that, and then what happens when you get the car's delivered? I think that's key. Also, we're looking at what's the marketing and the costs that take place as we go forward from the marketing perspective and how does that tie into logistics? It's not -- you can't deliver a car across the country without having some costs associated with that. Is that consumer going to pay for that or not? And I think overall, our inventory management, we know how to do that, we're doing it every day, and we think we're going to sell probably 250,000 used cars this year. And then there's pricing. I think the dynamic pricing that takes place at this point, it's important that we understand the dynamic pricing, which I think we do. We talked about double discounting earlier today. And then we have certainly, the financing capability. When you look at financing, I think that there's some operators online that say they can do the financing online, I think that's key. But when you look at that, what sort of risk are they taking from the standpoint of credit quality and credit scoring? Because at this point, there's -- we go through the captives, they have a very robust process to handle that. And I think that at the end of the day, we will continue to look at that as an opportunity, certainly from an online perspective. But again, this technology, the infrastructure that we're looking at, how we win in this market, and that's going to be tied into the experience and obviously, the infrastructure knowledge we have already in our superstores. So our approach will be dealer sites, our PenskeCars.com, our Preferred Purchase, which we've had where people can buy cars online. We think that if we use these on a longer-term basis, we certainly will be in good shape. Remember, social media is playing a big part of this also and through YouTube, certainly Twitter, Instagram and Facebook. Our people are monitoring those sites every single day. And on a final note, and this primarily is for the bricks-and-mortars used cars sites that we have and new car sites, we're investing $5 million over the next 18 months, maybe 14 to 18 months in docuPAD, which will give us paperless transaction, other than maybe some inked pieces of paper we have to have for the state. Will give us a paperless transaction, save the cycle time, maybe taking out 30%, 40% or 50% of that. So it will help us from a documentation standpoint. Longer-term, our finance sources in some cases, can pay us for the vehicle before the customer leaves the store. So we see that commitment. To me, very, very strong. And we made that decision and we looked at lots of different opportunities at rentals and rental had docuPAD. We're fully installing that across the country. And I think that we can do that with online retailers also as we go forward. So we're all over this but at the end of the day, what do we have to do to win and make money for our shareholders? And certainly, I'm a big shareholder in this company and I'm interested that we are making a return.

And last quarter, you talked about some of your e-commerce initiatives. Can you provide us with an update on where you are and what your plans are in sort of the next call it 6 months to a year?

Well, I think when you look today, we're continuing to have all of our sites are e-mobile. I think that's -- and over half of our traffic comes from smartphones today. Our leads are -- most of our leads are organic, I think I've said that before, and less than 10% of those comes from a third party. And over time, I think is -- we have to look at every one of our cars now as online, so the consumer has the ability to access that. And we'll continue from a service perspective, which is a point that we don't want to miss, we are now seeing over 20% of our service appointments are online by the customer made that in -- made the appointment online. And when you look at that and take in our BDCs now, 70% would be through online in our BDC. So overall, 35% of our deals are coming from digital, so that's increasing every single quarter.

We have a question from the line of John Healy from Northcoast Research.

Roger, I wanted to ask a little bit about the PTL business. Just given the success in the business to date, maybe you could just dive in a little bit more on what's really kind of driving that as well as kind of the durability of that business as we move into '19 or '20 and maybe addressing some of the economic sensitivity and how those revenues may or may not play back as things get a little bit more shaky.

Well, I think, as I mentioned earlier, 75%, that's 25% in logistics and 50% in our truck leasing business, excluding rental now, typically have 4- to 5-year contracts with economic escalators. So people commit to us, take our vehicles, and we have contracts that are solid for those.

Now supporting that would be a rental fleet, which today is about 25% of our revenue. And half of the rental revenue comes from our existing lease customers. An example, maybe the Coca-Cola people want extra trucks in the summertime, the battery people want extra trucks in the wintertime. So to me, that gives us a pretty good balance from the standpoint of the business. The complexity of the new trucks, the cost of trucks, is now forcing people to look for other resources. And part of our success has been conquesting, not our competitors' leasing business but people that are in ownership because they have a hard time getting mechanics. When we're buying 25,000 or 30,000 trucks a year, I would hope that we have a better buy capability, which gives us the ability from a profitability standpoint, to sustain ourselves. But covering that would be the 900 service locations that we have across the U.S. We also have a very sophisticated all-digital, 24-hour, 7-day a week online SOS service in Reading, with probably over 100 people. This is not a coin-operated emergency service, this is one which is owned and operated by our own people. And I think that the fact that we have a business that's over 50% or 75% with contracts, the supporting rental revenue that goes with that, and then the ability for us to service these customers on over-the-road capability at 900 locations gives us a real advantage in the market. And today, I'm not sure I mentioned earlier, we have 295,000 trucks on the road today. And when you think about the rental business and particularly talk about seasonality, when we look at, say, the last 2 months of this quarter, November, December, we'll have thousands of units out to Fed Express and UPS. So they count on us, we have Penske Rental 1, which allows you to get trucks across the country with one phone call. So when you look at our margins in this business, we talked about 8.3% return on sales in the quarter. The ability for us to gain the accelerated depreciation from a tax perspective has really given us a long-term view of the business. And we feel, with the people we have, succession planning within that, we have a very robust business. And to me, I think that it's going to drive profitability through any economic cycles because we have the ability -- that rental fleet, which is our flex fleet, we have the ability to sell those units off or reduce those. And again, that gives us the chance to lower our fleet. And when we reduce our fleet, it generates a lot of cash. So when you think about that, it comes -- really, it's a positive for us. For 9 months, our income really was up 10.8%. So we've had a good solid year, and we project going the same way going out into '19 and '20.

Great. And just one final question for me. As you look at the standalone used concept here in the space and you look at the lease returns that come to your franchise locations, is there an opportunity to potentially take those lease returns and throw them into a CPO program, but then begin to retail them through these standalone concepts? Is that logistically or from a framework standpoint, allowed by the manufacturers just because I was just curious about how you might be able to create a product that's maybe differentiated on the standalone space.

So #1, when we certify, and remember, we're talking about a car that's anywhere from 2.5 to, say, 4 years old and that average 15,000. So when you start certifying a vehicle that has that many miles on it, you get to rebuild the car and you get the cost of sale up too high. I don't think today that OEMs would allow us to take certified vehicles and then move them into our supercenters and get the benefit of the warranty that follows a certified vehicle. I don't think that -- I don't -- I can't tell you for sure but my nose said that, that's not something that we would do.

And then our final question will come from the line of Michael Ward from Williams Research.

I wonder if I -- just on the standalone used, if you can talk a little bit about your strategy. So you have 4 new stores coming next year. Presumably, they're new locations, greenfield sites that you will build up. Will you model them after the existing stores?

Well, I think there's 2 ways to go. One is to take a complete greenfield site, which we've done in the U.K. The Car People has done one in Warrington just in the last year or actually, 18 months. And then there's the opportunity, as look at real estate similar to on IKEA site, like we have some sites in the U.K. that have 800 or 900 cars in stock and sell 700 a month. So we would look at locations that have major real estate space that we could use. We'd probably put our CI on those, which will be less expense, might even lease them rather than building from a greenfield. So I think we have both of those strategies in the U.K. Presently in the U.S., we have 2 sites I mentioned earlier. One in -- one outside of Philadelphia in Wilmington and another site in New Jersey, which we will be bringing online. And again, we have also real estate that we purchased that we know that we can activate as we go into '19 and '20.

And I think, overall, there's no question that the standalone businesses returning on sales 4% and the return on invested capital that we've seen to date is 15%. And I think when you look at our truck business, we're looking at a return on capital of 25%. So these businesses that we've gone into along with the investment in Penske Truck Leasing, really, you have to look at us, as I said earlier, strategically we're in the transportation business and there's no question that the standalone used car is key. And we're looking at the differentiation between pure e-retailing and focusing on also retailing from bricks-and-mortar. And I think there's going to be a balance that we'll be able to hit here in the near future. As we do our homework, I talked about earlier, how do we win in this space? And I think there's a number of initiatives that our people are looking at as we're going through that.

It seems to me that the used vehicle side, you probably have equal to or greater growth opportunities in both the U.S. and the U.K. And you also have the opportunity to leverage off some of your expertise that you're using, like docuPAD on the new vehicle side. Is that the correct assumption? Is that something all the financing and your bank relationships and everything else go with it?

When you think about the billions that we have outstanding in leasing and retail finance, both domestically and internationally, that gives us a tremendous asset to talk about being a finance source for any used car superstores. But remember, when the new car market goes down, we've seen that in the past, the used car market goes up. So with our embedded capability already here with bricks-and-mortar both in the U.S. and the U.K., I think we're positioned perfectly. But again, this is a one price, no haggle. And again, we're looking at a margin. When you look at people's margins on used cars, we're almost double. When you look at that, it's over 15%. And I think from a used to new ratio, when you look at that overall, we went from 0.5% in 2008 to 1.22%. And you think about, in the U.K, including the superstores, they're over 1.8%. So there's no question that, that mix of used car business that's driving it. And I think we're even going to see that it might even be 2 to 1 when we get to 2020.

And you'll keep carrying the same brand names, the CarSense, CarShop?

Well, CarSense is here in the U.S. CarShop and Car People in the U.K.

Right, Car People in the U.K.

Yes, in the U.K. I think that there's been a great combination. It's taken our SG&A down by combining the back office and many of the marketing initiatives in the U.K. have driven that SG&A leverage we had in the quarter. And I think we're going to look at having one brand name. We haven't announced it yet, but we'd have one brand name representing us in the U.K. and international markets. And remember, we can scale this anywhere because of the technology we have and the infrastructure. So to me, the costs are a lot less and when you think about profitability, you buy a greenfield site today from an OEM, that could take 2 years to get into a profitability from day 1. This business, we think that we can generate at least Warrington in the U.K. was 6 to 7 months before they got into a profitability. And I think Hatfield or one of the ones in Pittsburgh took about 8 months. So we think that within a 12-month timeframe, these businesses were creating positive EBT.

Can you double the revenue of these standalone used vehicle in the next 2 years, 3 years?

Well, we're at 70,000. And that's up what, Tony, that's up what year-over-year probably, what, 45%?

Yes, at least for the Car People.

Yes, Car People.

We're at $1 billion in revenue right now for 9 months.

And the organic growth. So I'm -- listen, to tell you we're going to double it, that would be our goal. But I think when you look at the let's say, where we're going and the ability and there's obviously potentially on an international basis, the ability to make other acquisitions, and it's (inaudible). It's not at the top of our list right now, but it's certainly something we can do. So acquisition, plus organic growth, plus the new sites will give us a chance to double that revenue.

That's what it sounds like. It sounds like the way the new vehicle dealer locations were back in the '90s. Lots of opportunity.

Yes, and I think -- look, we've got to be multifaceted. We're going to have bricks-and-mortar, there's no question that there's still people who are buying new cars would love to have that experience. If we can use docuPAD and some of the technology available to us to make that experience better, there's no question...

And the bank relationships.

Exactly. I think the funding, when you look at the funding and ability for us to fund on an electronic transaction today before the customer leaves, think about contracts in transit, the amount of money that we have tied up. And I just looked at a number here, when you look at revenue, third quarter '17 over -- compared to '18 is up 65%. And on a year-to-date basis, we're up 88%, so from $500 million to $1 billion. So I think your number could be realistic.

We do have one final question from the line of John Murphy from Bank of America.

Roger, just 2 kind of follow-ups here. I mean, you and Mike just kind of went through this in a pretty detailed way on diversification benefits there. But I mean, as you look at this, I mean, is there the opportunity -- I mean, it looks like capital allocation is going to go in a number of different ways, which might have better returns than it has had historically and be a little bit more flexible. But is there anything that you think you might need to do in your existing portfolio and kind of release some capital that's lower return and push it to higher return lease? I mean, just kind of think about how you make these decisions on your portfolio and capital allocation going forward.

Well, there is -- look, there is no question that we are looking at not only from an international perspective but domestic on businesses that are not giving us the returns. And I think we've talked about that, I hear our peers talking about that now, too. I mean, we have investments and there's no question that we have underperforming locations. And what we need to do there is determine, are we in a market that we can't compete because of our facility? Is it a deteriorating retail environment in that particular area? And what's the cost then to bring the CI up based on the expectations of the OEMs? And that's driving a lot of our discussions today because they have to spend $5 million or $10 million, you start to look at the return on that. We're much better off to maybe invest that in a truck dealership or something else. So when I look at the business, we really have multiple levers to pull, don't you think? It's just not all about new cars. We talked about the used cars just a little bit ago with Mike, countercyclical. We've talked about the used to new ratio in the U.K., over 1.8%. And when you look at the commercial truck business today on a going forward basis, I would assume that the sales on those would be 4% to 5% return on sales. And well, the fixed absorption at 122%, we're running probably in the mid-70s in the car business. But to think about in some good months and certainly, the third quarter for Premier, they were at almost 100% of their total cost, which I think is key. Then would we invest more in the superstores? It's a much lower investment, we don't have CI to really -- it's our own CI that we have to manage and there's a lot of white space. We can put these -- and you've seen CarMax. They've done a great job in building stores across the country and I think that we're going to continue to invest in that. And then the PTL investment, I think, will continue to give us cash. It certainly is a stable business. We talked about our ability to supply extra vehicles to people like FedEx and UPS, not at 1 or 2 at a time, I'm talking thousands of vehicles in their peak period. Who else can do that? And with more and more freight being generated on the truck because of next day delivery, a lot of the commitments by retailers now just forcing more trucks on the road. And I think our ability from a network standpoint with 800 or 900 locations for service will give us a competitive advantage. And then as I look, which we haven't really talked too much today at all, is our distribution business in Asia and certainly, the Pacific with Australia and New Zealand. Our distribution of MAN and Western Star trucks, this continues to grow. And then the defense business because of our relationship with MTU and Detroit Diesel, we see a $200 billion expense taking place over the next 5 to 10 years in Australia. And we are in a prime position, having done business both on land and on sea with the government, we will be a prime contractor to supply our engines in many of the applications. And then you become typically the source for continued maintenance on a lifecycle basis. So looking at the used cars, commercial vehicles or standalone. Certainly, we talked about our PTL. I think we're in a great position and I think we have that lever. And always, we get stock buybacks but we also want to continue with 30 quarters in a row we've raised our dividend. And I think we're returning -- we returned $90 million, I think, year-to-date and we'll continue to do that on a going forward basis.

Roger, just one follow-up one this. I mean, when you think about what's going on here, is you are a business partner that's coveted by many automakers to distribute their product and service their customers on the automakers side. And now they're hearing someone like you say, hey, listen, I can make a lot more money someplace else. Have we reached a fulcrum point where the automakers might say, hey, listen, Roger, we're going work on economics with you, we're going to give you a better -- I mean, better funding in some of the dealers that you buy. I mean, is there any kind of discussion like that beginning to happen with some automakers? Because the last thing they would want to lose is a partner like you.

Well, look, there's many good partners out there. Look, I appreciate the accolades. But let me tell you this, there's no question that not only myself, but many of my peers that are on the line that are having discussions with the OEMs about return on capital. And with the requirements at CI that they're requesting, the marketplace and then there's this vibration about subscriptions and some of the things that the OEMs are doing themselves. I'm not saying they're trying to run around the franchise agreement, but there's no question that, that gives me some concern. Because when you think about it overall, we need all the business we can have from this standpoint because when there's warranty required, when there's customer satisfaction and touching the consumer, who are the ones that have to do that? So look, there's no question that I'm looking at it very carefully. And look, business is changing, and can we afford to spend $25 million a quarter in advertising to generate an online business? The answer is no because at the end of the day, we have to have a profitable company. I said it earlier, I own a big piece of this business and I care about the customer or the shareholder return. So I think there will be lots of discussions but you've seen the Lincoln brand has done a great job. We became a Lincoln dealer out in California and there was a good partnership going on in that to put that whole business together. And I think at the end of the day, you're going to see more of this because people have the right CSI, have the capital and have the knowledge in the market. I'm sure the OEMs, there's opportunities for support. What that might be? I don't know. But I'm sure it's not consistent all across the country by all OEMs. But for sure, there's -- as they've gotten out of the business themselves, as you know that in Europe, the Niederlassungs in Germany, they're getting out. I'm sure they're working opportunities for people to get into those stores and make them better and more profitable. So at the end of the business today, business is changing and I guess, that's why we're looking at diversification.

And at this time, I have no further questions. Please go ahead.

All right, Thanks, Sean. Thanks, everybody, for joining us today. We'll see you at the end of next quarter. All the best.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.