Penske Automotive Group Inc (PAG) 2019 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Third Quarter 2019 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through Tuesday, November 5, on the company's website under the Investors tab at www.penskeautomotive.com.

I will now introduce Anthony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Lori. Good afternoon, everyone, and thank you for joining us today.

As Lori indicated, a press release detailing Penske Automotive Group's third quarter 2019 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 phone or e-mail 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 we noted in our press release, income and earnings per share from continuing operations in the third quarter last year included a tax benefit of $11.6 million or $0.14 per share related to the final reconciliation of the income tax benefit of the 2017 U.S. Tax Cuts and Jobs Act. Excluding the $11.6 million from third quarter 2018 results, adjusted income from continuing operations was $118.5 million, and related earnings per share was $1.40.

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

I will now turn the call over to Roger Penske.

Thank you, Tony, and good afternoon, everyone.

Today, PAG reported record third quarter revenues of $6 billion, a 1% increase in earnings before taxes to $158 million. Income from continuing operations was $116 million, and related earnings per share was $1.42. On an adjusted basis, income from continuing operation increased 1.4%.

The effective tax rate was 26.8% in the third quarter of this year compared to 17.3% in the same period last year. If you exclude the $11.6 million tax benefit from the third quarter last year, the effective tax rate would have been 24.6%. Additionally, foreign exchange rates negatively impacted earnings per share by $0.01.

We're very pleased with our performance considering earnings per share were negatively impacted by approximately $0.26 per share when compared to last year by the overall weak market conditions in the U.K., largely as a result of Brexit, and the oversupply of vehicles, which impacted new and used vehicle gross profit and margins in the third quarter.

Despite this impact, we grew revenue and earnings before taxes in the third quarter from the strong performance of our U.S. retail auto and commercial truck operations. In fact, same-store SG&A to gross declined by 150 basis points in our North American operations.

The acquisition of Werner Truck Centers was certainly positive in the quarter. The reoccurring revenue stream provided by service and parts, which typically generate 45% to 50% of our overall gross profit, was positive, and our investment in Penske Truck Leasing continues to support strong earnings for us.

During the first 9 months of the year, we generated $661 million in cash flow from operations, allowing us to increase our dividend 3x, which currently yields 3.4%.

In the quarter, we repurchased -- or for the year, we repurchased 4 million shares of stock for $174 million. We invested $182 million into our business in net CapEx, and we acquired $1.1 billion in annualized revenue.

Looking back to 2010, we've grown our revenue from $9.7 billion to $22.8 billion, 11% compounded annually, while increasing our income from continuing operations nearly 4x from $119 million to $471 million.

Looking at the details of the third quarter. The franchised automotive dealership businesses represented 81% of revenue and total gross profit. In the third quarter, we retailed 111,500 new and used units. Same-store retail units increased 2.2%. New was down 2.2%, and used was up 2.8%.

Our used to new ratio is nearly 1:1 in the franchised auto dealerships and increases to 1.3:1 when including the used supercenters versus 1.2:2 in 2018. 42% of our used unit sales in the U.S. at our franchise dealerships were certified pre-owned.

Same-store retail automotive revenue increased 0.5%. When you exclude the impact of foreign exchange, same-store revenue increased 2.9%. New was up 1.8%. Used was up 3.0%. F&I was up 7.6%. Excluding FX, same-store service and parts revenue increased 6.2%. Our customer pay was up 4.6%, warranty up 10.6% and total up 6.2.

Our finance and insurance increased $54 per unit to $1,264, including a $110 per unit increase in the U.S. Our variable gross profit per unit was $3,199, a decline of $189. However, the U.S. increased $147 to $3,581, and international declined $562 to $2,773 or $407 excluding foreign exchange. Now let's move on to our used vehicle supercenters.

As you know, we operate 15 dealerships, 6 here in the U.S., 9 in the U.K., plus 1 reconditioning center in the U.K. During the quarter, we opened a new supercenter in Glen Mills and, in the third quarter, we're pleased to report it was profitable in the second full month of operation.

New supercenters represented 5.5% of our overall revenue and 4.9% of our gross profit.

In the third quarter, the used vehicle superstores retailed nearly 19,700 vehicles and generated nearly $328 million in revenue. Our unit volume was up 6.2%, including 5% on a same-store basis. However, in the U.K., the oversupply of used vehicles, the significant decline in market values impacted vehicle gross profit.

Our supercenter variable gross profit per unit was down $286, but in the U.S., we were up $120 to almost $3,000 per unit. In the U.K., we were down $388 per unit to $1,450. We expect to open our U.K. Bristol dealership in December, and we look forward to when we have another 4 to 5 sites in planning process at this time.

Turning to our retail commercial truck dealerships. We operate 25 dealerships, and we are the largest freightliner and Western Star dealership group now in North America. In the third quarter, our commercial truck retail unit sales increased 57%, and revenue increased 80% to $692 million. The increase in unit sales and revenue is related to the acquisition of Werner Truck Centers in Salt Lake in the third quarter, which will contribute an estimated annualized revenue of approximately $1.1 billion.

During the quarter, the same-store revenue increased 4% and a 6.4% increase in Service & Parts revenue and a 7.7% increase in related gross profit. Service & Parts represented 64% of our total gross profit and covered 127% of our fixed cost in the quarter.

In Q3, class 8 retail North American truck sales increased 7% to 90,400 units. The class 8 market is expected to retail over 330,000 units in 2019.

At the end of September, the backlog was 133,000 units.

While ACT Research is forecasting a return to more normal demand environment next year, which I think will result in a potential decline of class 8 truck sales of approximately 20% to 25%. Our forward customer order book remains in good shape. Coupled with the recent acquisition of Werner in July, we'd expect our business still to perform well in 2020. Additionally, high deliveries of new trucks over the past few years have caused an oversupply of used trucks in the market, pressuring used truck values down, and it may impact future truck sales.

Turning to our commercial truck distribution and power system business in Australia, which serves the on-highway, marine, defense, power generation and industrial markets. We generated $120 million in revenue and EBT of $5.8 million, an increase of 2.7% during the quarter.

In this business, the parts and service gross profit represent 80% of our total gross profit.

Moving on to our Penske truck leasing investment. Penske Transportation Solution, or PTS, has now become the new universal brand for PTL's various business lines: Penske Truck Leasing, Logistics, Vehicle Services and Epes Transport System. The name change was made to better articulate the breadth of the company's capabilities. Our 28.9% ownership provides PAG with equity earnings, quarterly cash distributions and tax benefits.

In the third quarter, PTL increased its earnings 3.6% to $146 million. Accordingly, we recognized $42.2 million of equity earnings, an increase of $1.5 million or 3.7% over the third quarter of last year.

Looking at the last 12 months, our investment in PTL has provided cash benefits of $85 million through distribution and cash tax savings. PTL is now managing a fleet of over 327,000 vehicles.

Moving on, I'll make a couple of comments on digital initiatives. We continue to improve and enhance our capabilities across our enterprise. We have approximately 58,000 vehicles online, ready for purchase. In the third quarter, 37% of our new and used unit sales in the U.S. were originated from digital sources.

We remain on track to complete the rollout of docuPAD technology to all our U.S. locations by the end of this year. This is an interactive tool that allows us to engage customers digitally by creating processing and securing funding of a transaction electronically. For our customers, this investment results in a greater transparency, quicker transaction time and an improved overall customer experience while creating operational efficiencies for our business. This is approximately a $5 million investment for our company, which almost 50% has been expensed during the first 9 months of 2019.

The enhanced self-service tools we introduced for service to the service department customers for online service appointment scheduling and online payments continue to perform well. As a result, online payments increased 30 -- excuse me, 73%, and online appointments increased 19% in the third quarter.

Our digital retailing tools have continued to improve the customer experience. Their success has encouraged us to pilot new technologies through tools throughout the dealer network.

Online estimating capabilities for our collision centers, videos, digital pictures for service updates and additional sales are part of that action.

We continue to make enhancements to our existing digital Preferred Purchase tool through our dealer websites and PenskeCars.com. We continue to enhance our proprietary online closed bid used auction site in the U.K. Today, we have over 3,700 active online bidders, and we sold nearly 17,000 vehicles year-to-date through this process.

Further, our U.K. franchise dealerships are filing a new digital dealership platform. This launch will occur in phases, ultimately resulting in the capability to complete a total vehicle purchase 100% online.

Looking at our balance sheet at the end of September, we had $78 million in cash. Total inventory remained flat at $4 billion compared to December of last year. The supply of new vehicles was 64 days. Used was 43 days at the end of September. Floor plan was $3.9 billion, and non-vehicle debt was $2.4 billion, of which 35% is at fixed rates.

This September of last year, we've mortgaged properties of approximately $100 million to take advantage of the low long-term interest rates. Our debt to capitalization was 47.2%, and our leverage ratio was 2.9 compared to 2.7 at the end of December. At the end of September, we had approximately $700 million in liquidity for acquisitions, dividends, share repurchases and other corporate opportunities under our existing credit agreements.

Before I close, I'd like to congratulate the 33 Penske U.S. dealerships that were recently named by Automotive News to the 100 Best Dealerships To Work For listing. We had more dealerships on this list than any other automotive retailer for the second year in a row, including the top 6 dealerships in the 2019 ranking.

Audi at Turnersville was ranked #1 in the country.

We're honored by this accomplishment. This is a team effort and shows the depth and commitment of our human capital. So I'd like to thank all our employees for their contribution, making our company one of the best to work for.

In closing, thanks for joining us today on our call. I'd like to turn it over to the operator.

(Operator Instructions) Our first question from the line of John Murphy with Bank of America Merrill Lynch.

Roger, just a first question coming from across the pond in the U.K. or looking across the pond in the U.K. When we think about the pressure on used GPUs, it seemed kind of high, and it seemed like there may be an inventory turn issue over there. So just curious if you can comment on that. And then also some actions that you may be taking to reduce costs and streamline the business, just given the uncertainty and volatility and continued pressure in the U.K. market.

Well, let me first talk about costs in the U.K. We have an action plan. Darren Edwards, our Managing Director, we've got a plan to take GBP 20 million out of the cost base by the beginning of 2020. That's underway now. We established that probably over the last 60 to 90 days. So that's an action plan. Because when you look overall at our business, the SG&A to gross in the U.K. was up 700 basis points. And part of that was comp to gross up 400. And in our margins, of course, were down GBP 500 on new and GBP 300 on used. So looking at that, I think that with the action plans we have, and from the standpoint of all actions, I think we'll see the cost base come down.

And we certainly know that the margins will go up, but looking at the used car business separately, we had a double digit increase in our SG&A to gross during the quarter. And when you take 16,000 units times a negative GBP 225 per unit, it's about USD 4.5 million. So significant impact. So that impacted, obviously, the SG&A to gross.

But when you look at actions, what's taken place, if you go back to week 30, we had 8,000 vehicles in our superstores' inventory, and 37% of those were over 60 days. Now what happened since week 30 to where we are today, we've got approximately 7,100 units. That's down about 11%. And 16% of our vehicles are over 60 days. So what that's allowed us to do, reduce inventory with a lot higher turns. We're not dealing with the market today. We think the used car pricing, at least at the moment, has stabilized. And what happened really, as you go back to end of March, everyone was expecting Brexit to go through, but it really destabilized the market when it didn't. So we saw a precipitous drop in our used car pricing anywhere from 1% to 2% a month as we went through March, April, May and June. And I think this put us in a position where we were overstocked with vehicles that we were -- we had too high market value.

So during the third quarter, we took the action to -- really to take these vehicles down. And of course, we reduced them by selling them, in some cases, at a loss, which reduced our margins. So our inventory's in better shape. Our terms are better, and we feel very good about the fact that on the superstores side that we will turn this. Now what we're doing now is slowly building that margin back that we had in previous months. We also have some impact. During the quarter, we're opening a new store in Bristol in December. So we're carrying some of that overhead at this point.

Okay, that's very helpful. I mean -- and then on the truck side, I mean, a skeptic would look at these acts -- forecast was down 20%, 25% on new volume next year and get pretty concerned about it. But I was just curious if you can remind us what the fixed ops coverage is in the truck dealerships in general. And then, also, just think about the acquisition environment there. I mean, it seems like that some of the owners might be running a little bit scared, so you might be able to do better deals on that side. Is that the case? And is it more available to you at better prices because of this?

Well, let's talk on the acquisition side. As you know, I think we've mentioned it before, we have a framework agreement that allows us to continue to grow under the Freightliner framework agreement. So we've had a lot of activity, people contacting us. They see us as a buyer. We had the fortunate opportunity to buy Werner in Salt Lake, which gives us a great footprint across the country. So our goal would be that over the next 12 to 24 months to increase that footprint.

And I think when you look at it, the multiples probably are 40% to 50% less on a truck dealership than it would be on a premium/luxury dealership. And I think that the good news is that 64% of all the gross profit comes out of parts and service. So I see this as -- certainly as an opportunity. So when you look at the coverage that we've had in the quarter, it was 127%. And with that showing 20% to 25% down on tractors, I think the mid-range market, John, is going to be better because with all the same one-day delivery and same-time delivery coming because of the Internet, I think we're seeing that market stabilize and also, the smaller vans, which obviously, we have thousands of those. And I think our rental utilization certainly is up. So to me, that's certainly possible or positive.

And I think the marketplace, the only thing I would worry about on the truck side would be with all of these new trucks we've delivered now to customers, with a flood of used trucks coming into market, you're going to see some depressed prices. So that could have a little bit of impact to us on gross profit on used. But the combination of premier, and now Werner into the premier network, we see that combination of existing customers and the growth that we've had as a company. And we have the ability from an SG&A standpoint to take out the -- more of the SG&A.

In fact, a calculation we did overall, it is not same-store. Our SG&A would have been down almost 300 basis points. So how that's going to shake out by the time we get through Q4, I don't know, but that's just -- was an early number. So we see SG&A positively. We see new truck margins pretty much stable. We see mid-range trucks not having the drop that we would have on the heavy-duty side. And of course, you talked about the fixed coverage.

I think the -- any slowdown there from the standpoint of impact on PTL, we don't see that because most of our PTL customers we have 3 to 4 to 5-year contracts with economic escalators. So we think that will be good. And we grew that business on lease 8% in the quarter. And I think, overall, the only impact we have there is our rental business came down 2% in the quarter versus 10% year-to-date. So you can see that the rental business is slowing, and we'll be able to -- what we'll do is we'll de-fleet on the rental side, which -- again, through sale or repositioning those trucks. So I think we're in good shape. We had a great quarter there.

And then just lastly, real quick on floor plan interest expense. How much of an opportunity is there when -- as rates are declining, both from a rate side? And then it sounds like you're also getting leaner on inventory in used, specifically in the U.K. I mean, is there a real opportunity in the on floor plan interest expense that we should think about going forward?

Well, I think when you look at 25 basis points here, we think it's probably almost $10 million based on our current inventory level on an annualized basis. So to me, that's good.

Look, we're looking at inventory. You look at our total inventory, we did a review last week. Our inventory, as you saw, was flat at the end of September. I think it's even crept down now since last year. And that includes about $255 million of acquisition inventory that we didn't have last year. So I think our guys are doing a great job on inventory. We're looking at aging, which is we have to be -- I think our used car aging is in great shape. And to me, the focus, obviously, is the -- we'll now be selling the 2019s and getting rid of those as we see the '20s coming on board.

Our next question from Rajat Gupta with JPMorgan.

I just want to congratulate you again on the Medal of Freedom awarded earlier this week. Yes, I just wanted to follow up on the supercenters, especially in the U.S. Could you dissect the growth there that you saw in the U.S. specifically versus U.K.? And in the past, you talked about increasing your mix from retail there, sourcing mix from retail versus auction. Could you give us an update on how that initiative has progressed? And how is that helping GPUs as well? And I have a follow-up.

Well, when you look at CarSense here in the U.K., in the quarter, we were up 5%. And I think from the standpoint of margin, I think I said it in my remarks, we were at 3,000. So quite positive. And again, we opened up Glen Mills in Pennsylvania. And I think we're opening these -- remember, these are locations that can also do significant parts and service. So we think, longer term, that that's an opportunity for us in parts and service, which really hasn't been tapped probably even in the U.K. We see that probably stronger in CarSense than we do -- we're doing our reconditioning in those locations. So we can't open them as fast as maybe others can, but we think that the cadence that we're on now is good.

When you look at, certainly in the U.K., we see our units were up 6.4%. Again, the revenue per unit was down because of a lower MSRP. And I think vehicle gross, that was a tough one for us because our margin dropped to 220 basis points. But again, we talked about inventory of 8,000 going to 7,100, down 11%. We talked about the inventory turns and the capability not to have as many units over 60 days. Those are all action items that the team has taken -- has taken place. And I look at those numbers, quite honestly, every day because I think it's lost opportunity where we don't get the margin back. But we have a new store opening, as I said earlier, in Bristol, and I think the team is certainly focused. And there's no question from -- overall that the variable gross, when you look at it, it's up $120 in the U.S., up to almost $3,000.

Got it. And I just wanted to follow up on a previous question. On SG&A, given the benefits you might see from the restructuring actions in the U.K. and then coupled with what's going on in the truck market as well as Werner coming in, what kind of potential -- what kind of opportunity are we looking from an SG&A growth perspective going into next year? I mean, what's kind of like the right range to think about, which is a more normalized level, assuming U.K. does not get incrementally worse from here?

Well, I don't have the number in front of me what it was last year in SG&A in the fourth quarter. But at 30 basis points here, I would hope we could get 30 in the fourth quarter. And then, to me, as we consolidate and start to homogenize the truck business, let's hope, with increased gross profit, we get the U.K.'s GBP 20 million impact of lower costs that we could see 50 to 75 basis -- like maybe 100 basis points next year. I don't want to forecast that, but that certainly would be our goal.

And we have a question from John Healy with Northcoast Research.

Wanted to ask about your comments you made about I believe it was the U.K. market where you said you'd be able to offer a completely digital transaction offering. Was that on the retail side or wholesale side?

No, John, we already have the Sytner Electronic Auction. And that goes on day after day. So we've done about 17,000 units there. So we're building a proprietary capability that we will be able to have a complete online capability with all signatures, et cetera. We're starting on used, and then we would migrate that to new.

And do you think about ever bringing that type of operation over to the U.S. market? Or is that just too difficult to do, given the size of the footprint?

Well, I think the good news is that we don't have the opportunity with some of the vendors that you have here for some of these tools. So we've got a very proactive IT team in the U.K., which are building these products. They built electronic auction. We're now integrating them very closely into CarShop. And I think that what we'll do is look at that bucket of capability, and our guys are interfacing all the time, we'll bring wherever we can that's transportable here. Because, look, ultimately, the goal to me is for everybody that's in our business, all our other peers, is to have a transaction we do online.

Now we're limited here in some cases because of we need certain wet documents signed, and certain states need requirements. But from my perspective, that's the end zone for us. And I think what we can do, we're able to take many of the things that they do in the U.K. and we can test them in certain sites. So we would be foolish not to take advantage of that. And to me, there's a very close relationship. And we had to even make that better. Now some of the things that we're getting when we buy this truck business from Werner, we're able to consolidate right away to our platform with our dealerships. So we see the same thing happening certainly in the U.K. And I think that no one could purchase a vehicle -- new vehicle online today, I think, without having an interface with the customer.

And then just one question on the opportunity set ahead of you guys to maybe get a little bit more out of your CPO program in the U.S. Is there any sort of opportunity that you've kind of toyed with, with the CarSense stores of maybe selling certified preowned through the CarSense outlets? Have you approached any deal -- manufacturers about their willingness to allow you guys to work down that path?

Let me tell you, you hit a hot button of mine. Really, when you think about CPO, when you think about premium/luxury, the used cars we're selling, remember, 65% roughly are super premium. And most of our used cars, the primary group of those would be young used cars, maybe 12 to 18 months. And quite honestly, if you start to CPO those, you add on maybe $1,200 or $1,300 to cost. And basically, these are almost new cars. So to me, I think it's a balance. We need to meet certain metrics with the OEMs on CPO. But when you think about advance rates on cars today, if you put another $1,200 or $1,300 on for CPO on a car that's maybe 8,000 to 10,000 miles, you're really limiting yourself from the standpoint of the opportunity to make gross margin. So I think it's a balance. I don't want our guys rebuilding cars. I think that's a mistake.

And when you look at ours, I think at the end of the day, we've got a good balance. And we said 42%, I think, were CPO.

From a CarSense perspective, we have not talked to the OEMs. We have our own warranty programs on those. And I think that they're working well when you think about $3,000 all-in for margin in our supercenters. So I like certified. It's not a priority. I think it's good for certain models, but I think you're going to see us probably at the lower mark on that. Maybe the manufacturers might not like that, but I see that maybe as a way to be able to increase our gross.

And last question for me, Roger. Any kind of initial thoughts on the luxury nameplate in some of the electric vehicles they're bringing to the market? Any initial view in terms of demand for those vehicles? And ultimately, what sort of gross margin do you think those types of vehicles bring to the overall mix?

Well, I think it's -- when you think about the business, we've seen I-PACE come in. I think that they've not had the lift that they expected. Because there's no question that e-tron with Audi, there's been significant cancellations on those. I think there's some sticker shock and the customers that thought these would be more affordable on Q5. But when you're looking at an $80,000 vehicle and a $1,500 payment, it gets -- it's really aggressive from the OEM standpoint.

I think they're addressing this. They're going to relaunch these. Taycan comes in from Porsche. We've got a tremendous amount of orders out in Northern California. We hope that there won't be the cancellations we've seen on e-tron, but they have their kickoff for that in Barcelona as we sit here today. So I think they're fine.

There's no question today, they're expensive. And everyone has range anxiety. And to me, what's going to be the residual value at the end? So there's lots of questions. But when you think about it, it's a premium/luxury vehicle. Most people who have one have another car in the garage. So the growth is going to be slow. I think it would be interesting. Tesla, obviously, has done a good job. They've been in the market for a number of years, but they still haven't gotten a return. I think the cost of batteries are still high, and I think the products are good. And quite honestly, we're going to support them.

From a margin standpoint, I know one of our stores in Northern California probably will sell 6 or 7 units this month, and it's got 30 in stock. So that certainly has pressure on margin.

Our next question from the line of Armintas Sinkevicius with Morgan Stanley.

Just a question on the digital initiatives and the wet signatures. How much of a hurdle are the wet signatures? Because if I think of someone delivering a vehicle, you can sign for the vehicle with the delivery person. So I just wanted to make sure I understood the nuance there.

Well, that's certainly an opportunity. I think there's more complexity than just have the driver of the truck maybe bring it to you, and I think we've got to figure that out. At this point, it's different by OEM captive and by the states. In some places, they want the delivery to be made at the dealership or you got to have a registered salesperson from the dealership make that delivery, not just a truck driver. So those are things that we're trying to navigate.

Okay. And as you think about the path for the next 12 to 18 months, what do you have on your agenda to attack from the digital side?

Well, we want to continue from the standpoint of growing the parts and service. Today, we take about 400,000 inquiries through our BDCs and through the Internet, and we'll continue to do that. And we talked about online payment scheduling, the things that we're doing as you look at -- now we're doing estimating for our body work. So we're going to continue in the parts and service area, obviously, and then we'll grow from initial standpoint. We talked about what we do at Sytner across the pond. We'll try to bring those over, and those will be portable to the U.S. So to me, there's a lot of different opportunities that we have, and I think we're focusing mostly on transactions online, not just leads.

Okay. And then -- and since you bring up leads, just what are your thoughts on the lead generators here as far as the return on investment and et cetera?

Well, I think the best leads that we get are on our own websites and the ones that are given us by the OEMs.

And we'll go to Michael Ward with Seaport Global.

When I look at your Service & Parts business and if we're looking at U.S., your same-store growth is below the industry average, but your margin's well above. Is there something with the structure of your business or with your dealerships that makes for that structure to come out that way?

Well, when you look at the -- for the month -- or for the quarter, excuse me, we were up 4.5%. International was up 9.6% versus 6.2%. When you look at our business, we've got to realize, because of the premium/luxury side, a majority of our vehicles in the premium side are leased. And there's not a lot of parts and service that we can sell at the business office. And of course, these vehicles take mostly what I would call routine maintenance. But when you look overall in the U.S., our margin was 60.3%, which I think is -- within the peer group, is high. And there's some -- the way people allocate costs to use on reconditioning that could change some of our numbers, and I can't really relate that across the peer group.

Right, okay. And so there's -- as you look going forward, your business from a revenue standpoint should benefit and be fairly steady the way it sits because I don't see that lease/own equation changing much in the premium/luxury.

Well, the good news -- I think the good news is most of these people that have these leases are not going to be underwater, and they're going to come back and turn them in. And we have an opportunity to sell them across the brands. They might have a BMW today, they might go to an Audi or go to a Mercedes, but to me, that's the luxury of having a lease because that customer's coming back and we can manage that. We're starting to mine those customers 6 to 8 months out, and we stay in touch with them during that lease contract 24 or 36 months. And I think that we try to build that loyalty to the dealership.

And I think when you look at, really, the metrics that we measure differently by each OEM, we're probably getting anywhere from 50% to 55% loyal customers coming back and doing business with us. And I think the good news, when you look at the mix of our -- and you talked about service, we're running at about 44% gross -- total gross profit with parts and service even with a premium/luxury mix and a high margin. But I think the new -- one thing that hasn't been mentioned, there's a new act in California, which will allow us to be able to increase our margins on warranty on parts to the same level as labor. And that's going to be a big impact for people who have a footprint in California. I don't know whether that will come across the country or not.

But when you think about premium/luxury, also think about, on the service side, the loaner cars that we have because they help give us cars for use and they also help us in our CSI.

Okay. And those loaner cars, that cost of those goes into the service and parts?

Absolutely. Today, when you look at it, we look at it as a percentage of parts and service gross profit. So if we're looking at parts and service gross profit in the 59% to 60%, I would say, in some cases, we're running anywhere from 7% to 8%, even 9% costs for our, what we call, company vehicle expense. And those would be loaners. So we continue to look at that. We depreciate them anywhere from 1.6% to 1.8%. And these are great used cars for us, which we don't have to certify. And it's really the backbone of our premium/luxury business these days. So overall, the loaner cars are key to us for our loyalty with our customers.

Absolutely. Now I missed one number. I thought you mentioned what percentage of your used car sales at your dealers were certified pre-owned. Was that...

42%.

42%? Is that just U.S.? Or is that consolidated?

That's just the U.S.

Just U.S. Wow.

And we'll go to Rick Nelson with Stephens.

Roger, I'd like to follow up on -- PTL had another good quarter there. One of your public peers had more challenge. And I'm curious, what is different about PTL's business, and if you could talk about the outlook there as we push forward into 2020?

Well, Rick, I'd go back 50 years to that company when we had 300 units. So I think when you look at the human capital and the length of service, we've got a great team. And we continue to grow. I think there's a lot of interest in our brand in that business, the ability for us to conquest a customer. And we're not -- ironically, I think everybody in this business, we're looking for new customers, and there's a lot of people that want to come out of ownership, and I think we've had the ability to do that.

We have a one-way business, which we have -- which has been quite good for us because it gives us some flexibility to use those trucks in high-demand periods, obviously, at the end of the year, when UPS and FedEx need equipment. But overall, I think it's a focus on our lease business. We run a fleet of almost 18,000 tractors in our rental fleet. Now we're pulling that back, obviously, because the new trucks have been delivered to -- for us, for our customers. So we can de-fleet that.

I think it's the way we manage the business. And we have, obviously -- like our competitors do, we have options on contract maintenance. We have logistics with warehousing, dedicated carriage. There's a lot of things that we can do in this. So we have a full -- I would say an envelope full of capabilities which are lease, contract maintenance to our commercial rental, our consumer and our logistics. And I think our technology advantages that we have with our guided repair, we've got voice-activated PMs going on. And we have a cloud computing, what I'm calling predictive maintenance today. These are things that we are really sharpening on today as we go forward.

So it's giving a better value for our customers and being ahead of them from a truck perspective on maintenance. And to me, that's the business that we've been trying. We were first with anti-skid brakes. We were first with electronic engines, lane guidance and things like this are standard equipment, LED headlights. These are things that we've been able to do over the years in order to be able to create that stickiness with our customer.

That's very helpful. Also, I saw on one of your slides on cash from operations, $660 million through the 9 months, if you could talk about how you see future cash flows, where you see them directed, acquisitions. I noticed you stepped up your buyback authorization, debt retirement, how you're thinking about those alternatives.

Well, let's look at the first 9 months, and I think it was Slide #5 in our deck with -- or Slide #8, which showed the $661 million for 9 months. I think that from a cash flow standpoint from ops, we obviously have a commitment to the OEMs, as we know, for CapEx. We're pushing back on that today in many ways because we think that right now, certainly, in the U.K. with Brexit and the overhang of this whole Brexit situation, we're not going to make these expensive CapEx allocations today. So we're going to continue to push back. So -- but that's going to be a requirement for us.

I think we want to continue with our dividend. I'm a shareholder, too. I like dividends, and I think we'll continue with our dividend policy. We've had, I think, 34 consecutive quarters where we've raised the dividend. And the return today is 3.4%. So those are pretty well given.

From an acquisition standpoint, we're going to be selective. I think I said before, we're really looking at all of our dealership locations, all of our businesses, ones that basically meet our hurdle from a standpoint of return, ones that don't. We're going to have an action plan together. If that doesn't work, then we'll look to put it on a divestiture. So that will be, obviously, on the side, that will generate some capital. On the other hand, as we did last year, we sold 2 Lexus stores in New Jersey and bought 2 in Austin. So opportunistically, where we have capability already, we'll continue to do that.

And then, of course, the buyback, where the authorization increased, which was certainly important to us on a going-forward basis. So to me, looking at -- I think it's August of 2020, we've got a $300 million bond due. And what we're going to try to do is generate enough capital to take a big portion of that. Then we can look at our working capital line, which will have plenty of capability. Do we retire that bond without going back into the market? That's really my personal goal is to be able to do that. We've got the ability to bring cash back from the U.K. based on our bank covenants with no tax based on what we did during the tax change. So it's an open door to bring that back based on it.

I think we can bring back 50% of our pretax income. So that will give us some opportunity, plus the -- as you can see from operations, what we had this year. So I would say focus on the bond in 2020. We will look at -- continue to look at stock buyback. And we'll meet, obviously, hopefully, the -- our shareholders' anticipations on a dividend, and we're going to definitely push back on big CapEx at the moment.

Our next question from the line of Derek Glynn with Consumer Edge Research.

Roger, I'll throw in my congratulations as well on receiving the Medal of Freedom Award.

Thank you. It was a very humbling experience for me and my family. But as I said many times, it's about the whole team around the world that continues to support us. So without that, I wouldn't be here in that particular role, I guess.

Yet quite an accomplishment. So I saw on the deck, just on the variable growth in the U.S., up 3% on a same-store basis. How are you thinking about the puts and takes there as it relates to new, used in F&I? And then do you think that low single-digit growth in the front end is sustainable?

Well, I guess, what I'm looking at on the new side, I think we were up about $65 per unit and we were down about $31. This is on the auto side, not the supercenter side. And our -- remember, F&I continues to grow. Now we're not up in the $1,800, $1,900 or $2,000 because a lot of our premium customers are leases, and we get flats on those, and we don't have the ability to sell extended warranty on a 3-year lease. So I think that we're climbing. I think docuPAD has made a big difference from a technology perspective. It keeps our people online from the standpoint of going to be able to sell certain products. That's worked well, and that's going to continue to grow.

And certainly from the standpoint today on the used side, we're just getting better at used. We're trying to take some of the things we learned in CarSense and CarShop from the standpoint of acquisition. I think that's one of the secret sauces that CarMax has and the rest of these people is acquisition of vehicles. And we're now, as everybody is, is focusing on let me buy your car. So that's something that we'll continue to do that certainly we can enhance our used vehicle. But I think we're at the top of the list when you look at total variable gross. And certainly, with the impact -- negative impact in the U.K. during the quarter, we're going to claw a lot of that back, hopefully.

Okay, got it. And then just a follow-up on the Glen Mills supercenter. I think you mentioned it was profitable in just its second month of operation. Can you expand on that on how you're able to convert that store into profitability so quickly? And can you also just remind us if that was a greenfield site you built out? Or just provide some context there.

Well, number one, it was a greenfield site. It was in a contiguous market. It's halfway between Philadelphia and Wilmington. And we're in that Pennsylvania market over near the turnpike. But at the end of the day, it took us about 10 or 11 months to grow that business or to build a facility. We've got about 20 bays there for service. We've got a reconditioning unit there, which will help us from the standpoint of getting our cars ready. And we really -- the first half, I guess you'd say half a month that we're open, we really -- we lost about $100,000. But when you look at the first full month, we made $100,000. We're really focusing this month to deliver probably anywhere between 140 and 150 units. So we continue to see that.

So really, the first full month, we were in a profit. I read some other data where people take -- maybe it takes $1 million or so to open up. I think we'd probably say, for us, right now, it's somewhere between $300,000 and $500,000. With the drag that we have bringing the people onboard ahead of time and the things we have to do and to carry maybe even some rent that we have to have during that time.

But I was very surprised that we've come that quickly. And we're hoping that the markets that we're in that will understand our brand. And there's no question that there's a better opportunity here for us to be able to build these across the country. And the interesting thing was here we are at Glen Mills, almost meeting the gross projections of our more mature business.

And we'll go to Chris Armes with Buckingham Research.

A quick one here. So I think as of the second quarter, you guys had sold, I think, roughly 12 auto franchises year-to-date. Can you just give us an update on that number? And then also, can you provide some color on how you're viewing the environment for acquisitions on the auto side?

Let me start with acquisitions. I think there's a lot of people contacting us. But right now, I think some of the asks are high. I think all of us are trying to look for opportunistic stores, which are in the market where we have scale. We're looking carefully -- as I said, we did the Lexus. I think right now, my biggest focus is on evaluating the existing platforms, and -- but we would look opportunistically.

The truck side seems to me, today, probably more action out there from the standpoint of realistic values, and we would continue to look at that. From a sales perspective, we sold stores in Arkansas. I think we have a Birmingham store in the U.K., a BMW store that we closed during the quarter. I'll get Tony to get that number for you exactly. I just don't have that with us today.

And our next question from Stephanie Benjamin with SunTrust.

I just really had -- I wanted to get just a final question in on just kind of get your opinion on the state of the overall new vehicle market here in the U.S. I know you've provided a lot of color on what's going on overseas, but just given the improvement we've seen, not only with your own performance on the new unit side throughout the year as well as just kind of the industry rates have improved as well, kind of what you're thinking as you sum up the full year and then as you look to 2020 and any pockets of outperformance you might be seeing, too.

Well, let me say this. I mean, I've never been a guy to protect the SAAR. But when you think about probably a $17 million market we've seen now probably since -- if you add it all together and divide it -- since 2014, I certainly see it from our business. And I was looking at the numbers today, for this month, the first month of the quarter, they look quite positive here in the U.S. So I'm certainly not seeing a downturn. I'm seeing used car business certainly is very active.

So as I look into next year, the economy still is strong. We look at the unemployment rate at 3.7%. And really, from our perspective, and I think our peers', the credit availability from our captives, who provide many us the floor plan, is there. And there's a number of people jumping in and out of the subprime. We're not a big player in subprime, but that's always an interesting side of the business. But overall, I think that you're going to see most of us continue to get to 1:1 or even 1.2, in some cases, used to new here in the U.S. That's been not a phenomenon in the U.K., that's been a normal day of business.

And then, of course, everyone seems to have an interest in these special used car sites. And to me, it's going to be a focus that we have going forward. So I would say the market will be maybe $16.5 million to $17 million next year, unless there's some tariff or some other act that takes place. And I think right now, from a tariff perspective, that's been pushed off now, I think, until sometime in -- for 6 months, I think the president had pushed that off. So to me, I don't know if that's going to happen or not.

When you look at the marketplace itself, let's talk about mix. Today, we're almost 72% SUV and trucks. I don't see that thing slowing down. Now people like Toyota and Honda and some of these people, some of the SUVs that we'll have, it will be all electric. We'll still have sedan. So that mix has changed. Everybody's got their factories converted to build these. So I think there'll be some pressure in the marketplace as to who's going to grab this SUV market. But they're all in there, all the premium guys are, certainly the big 3. So that's going to probably have some pressure to get market share by the OEMs might have pressure on us.

Then we got to think about, what are going to be the residual values of these sedans coming back? And certainly, when we look at the U.K. diesels and things like that, today, that market is way, way down. So again, $16 million to $17 million, I think, is realistic, a more one-to-one focus on the retailers from a used to new and a big focus on maintaining the loyalty from -- on the parts and service side. And I think that -- I don't like the 84-month term that we have. Today, we're seeing, I think, that we're below 5% on that. So that, to me, is why I like the leasing better.

So overall, market is good. Unemployment is down. People are making money, and I think they still want to buy a car. Now, there is some knowledge right now that the delinquencies are moving up. Will that have any impact on our credit availability from the banks or the OEMs as we cross into the New Year? That could be maybe a red herring we got to look at.

I'll turn it back to our speakers for any closing remarks.

No, thank you very much today for having our call. I thank everybody online, and we'll look forward to talking to you after Q4. Thanks, everybody.

Thank you. Ladies and gentlemen, this will conclude our teleconference for today. Thank you for using AT&T Conferencing, and you may now disconnect.