Anthony R. Pordon - Executive Vice President of Investor Relations and Corporate Development Roger S. Penske - Chairman, Chief Executive Officer, Chairman of Executive Committee.

N. Richard Nelson - Stephens Inc., Research Division John Murphy - BofA Merrill Lynch, Research Division Patrick Archambault - Goldman Sachs Group Inc., Research Division Paresh Jain - Morgan Stanley, Research Division Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division David H.

Lim - Wells Fargo Securities, LLC, Research Division Brian Sponheimer - G. Research, Inc. David Whiston - Morningstar Inc., Research Division.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Second Quarter 2014 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through August 6, 2014, on the company's website under the Investor Relations tab at www.penskeautomotive.com.

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

Roger Penske, our Chairman; David Jones, our Chief Financial Officer; and J.D. Carlson, our Controller. On this call, we will be discussing certain non-GAAP financial measures such as earnings before taxes, interest, depreciation and amortization.

We have reconciled EBITDA to the most directly comparable GAAP measures in this morning's press release which is available on our website. Additionally, we may make forward-looking statements on this call.

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. Additionally, discussion and other factors that could cause results to differ materially are contained in our public SEC filings, including our Form 10-K.

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

Thank you, Tony. Good afternoon, everyone and thank you for joining us today. We reported the most profitable quarter and the best 6 months in the history of our company today. A record second quarter performance is highlighted by a 21% increase in revenue to $4.4 billion and a 28% increase in income from continuing operations to $80 million.

Related earnings per share increased 27% to $0.89 from $0.70 in the second quarter of last year. Our second quarter performance continues to highlight the benefit of our brand mix and the diversification of our revenue base.

Based on the strength of the company's performance, earlier this month, our Board of Directors authorized a 5% increase in the quarterly dividend to $0.20 per share, yielding a 1.6%, the highest yield in the automotive retail sector.

Additionally, for the first half of the year, we repurchased 335,000 shares for approximately $15.5 million or an average price per share of $46.20. We have a remaining share repurchase authorization of $77 million as of June 30, 2014. Now let me turn to the specifics of our record second quarter.

Second quarter results were driven by a 10% increase in total retail unit sales to 101,400 and a 21% increase in total revenues to $4.4 billion. On a same-store basis, automotive retailer revenue increased 12.7%, including 6% in the U.S. and 25% internationally. Foreign exchange rates increased revenue by $137 million.

Excluding the effect of foreign exchange, same-store retail revenue increased 9%, including 15% in our international markets. Our revenue mix in the quarter was 61% in the U.S. and 39% internationally.

97% of our revenue was generated through our automotive dealerships while the remaining 3% came from our commercial vehicle, car rental and other businesses. In our automotive dealership business, our brand mix was Premium/Luxury 71%, Volume Foreign 25% and Big Three 4%.

Looking at new vehicle performance, new units retail increased nearly 11% to 55,500 units, representing growth of 8% in the U.S. and 16% internationally. Our Premium/Luxury business grew 14%, our Volume Foreign grew 6% and the Big Three grew 3%, for a total of 11%. On a same-store basis, new units retail increased 5%, the U.S.

was 3% and international was 9%. New vehicle revenue increased 18% to $2.2 billion. New vehicle average selling prices improved 7%, and gross profit for new vehicle retail improved 11% to $3,115. Gross margin improved 20 basis points to 7.7% on new vehicles. Our supply of new vehicles was 61 days at the end of June compared to 63 days in 2013.

Turning to used vehicles, we retailed 45,900 units in the quarter representing an increase of 10%. Our Premium/Luxury was up 13%, our Volume Foreign up 6%, Big Three up 8% for a total of 10%. Our used-to-new ratio was 0.83 to 1 and this was consistent with last year. Approximately 35% of our unit sales in the U.S.

were certified pre-owned which was up from 34% last year. Same-store used retail units increased 6%, U.S. was up 4%, international was up 10%. Used vehicle revenue increased 20% to $1.3 billion. Used vehicle average transaction prices increased 9%, and gross profit per used vehicle retail improved 3% to $1,966.

Our gross margin declined 40 basis points to 7.1%. Our supply of used vehicles was 43 days at the end of June compared to 41 days in 2013. Turning to finance and insurance, we continue to make good progress with our initiatives to drive improved performance. In the second quarter, revenue increased 19%.

I'm pleased to report that F&I improved $76 per unit to $1,107. F&I per unit was $1,065 in the U.S. and $1,197 per unit in our international markets. Service and parts business had another solid quarter with customer pay, warranty, collision repair generating double-digit growth in revenue.

Service and parts revenue improved 13% in the quarter, including 8% on a same-store basis. Customer pay was up 14%, warranty was up 11%, bodyshops up 16% and PDI was up 12%. And on a same-store basis, customer pay was up 8%, warranty was up 5%, bodyshops up 11% and PDI up 8%. Our service and gross -- parts gross margin was 59.7%.

And on a same-store basis, service and parts gross margin improved 10 basis points to 60.2%. In total, overall gross profit improved $107 million or 19%, while overall gross margin was at 15.1%. Gross profit flow-through was 25% in the second quarter, improved to a 41% on a sequential basis.

Operating income increased 22% to $136 million and operating margin was 3.1%. Our investments in joint ventures continue to perform well. In Q2, our income from these investments increased 22% to $10.9 million from $8.9 million last year. Effective tax rate for the quarter was 33.6%.

We expect our effective tax rate to be between 34% and 35% for the remainder of the year. Turning to our international automobile business. Our operations in the U.K., Italy and Germany all performed well during the second quarter, highlighted by a 15% increase in total units retailed. New units were up 16% and used units were up 15%.

In the United Kingdom, June represented the 28th consecutive month year-over-year registration increases and the market is on track for 2.4 million new vehicle registrations in 2014, this would represent more than a 6% increase over 2013. The market remains strong. Our new unit volume increased 10%, which compares favorably to the overall U.K.

market which improved 7% during the quarter. Used unit sales increased 11% in the quarter and our used to new ratio in the U.K. now is running at 1:1. Turning to Penske commercial vehicles and car rental, we're approaching the one-year anniversary of entering the Australian market.

Over the first 10 months, we've spent a lot of time focusing on customer interactions with dealers and forging new relationships with our OEMs. We're introducing initiatives to drive new market penetration and are driving improvements in used vehicle remarketing. We also started trading academy for dealers and our employees.

During the second quarter the Commercial Vehicle business generated approximately $111 million in revenue and remains on track to meet expectations. The parts distribution business is very strong as it improved over 20% for the first half of the year. In the car rental side, our business continues to grow.

For the quarter, our revenues increased 11% to $16.7 million. We now have over 6,800 cars in our fleet with a utilization rate of approximately 73%. Commercial Vehicles and car rental generated a 21.5% gross margin in the second quarter. Moving on to the balance sheet. At the end of June, total liquidity was approximately $517 million.

Total non-vehicle debt was approximately $1.1 billion essentially flat to the end of last year. Our total debt-to-capitalization ratio improved from 42% at the end of December to 40% at the end of June. And our debt leverage improved to 2.1x trailing 12 months' EBITDA.

Excluding the $121 million in Penske car rental line of credit, our total non-vehicle debt would have been approximately $968 million, and the debt-to-total-capitalization ratio would have been 37%. Our new and used vehicle inventory was 2.4 billion increasing 387 million when compared to June of last year.

New was up 239 million, used was up 148 million. On a same-store basis, new and used vehicle inventory increased 272 million when compared to the end of June last year. New was up 154 million, used was up 118 million. Capital expenditures for corporate ID and facilities were $38.4 million in Q2 and are $72.9 million for the first half of the year.

Our EBITDA improved 22% to $153 million. Turning to acquisitions. During the quarter, we opened a new Toyota dealership in Surprise, Arizona representing our 16th Toyota dealership in the U.S. and our 22nd dealership in the Greater Phoenix area.

We also expanded into Spain by establishing a 50-50 joint venture that will exclusively operate BMW and MINI dealerships in Barcelona. Spain is one of the top 5 car markets in Western Europe, and Barcelona is a premier location along the Mediterranean Sea.

Our total capital investment, including working capital for the entire market of Barcelona for our 50% is only EUR 12 million. We believe this is a natural extension of our international business strategy. We're excited about the opportunity to develop this market for one of our key business partners.

Finally, we begin developing our new Porsche dealership in Broward County, Florida. This new dealership will represent the 7th Porsche dealership in the U.S. and our 15th on a worldwide basis as expected to open in 2015.

In closing, I'm very pleased with our record performance so far this year and believe the results continue to demonstrate the benefit and strength of our brand mix and geographic diversification.

With a strong balance sheet and a positive outlook across our automotive dealership, car rental, commercial vehicle businesses, we are poised for continued growth.

As we move forward, we will continue to evaluate our market position and we remain committed to pursuing strategic and opportunistic acquisitions to help our company achieve long-term success and prosperity. Thanks again for joining us today. At this time, I'd like to open the call up for your questions..

[Operator Instructions] And first go to Rick Nelson with Stephens..

I'd like to ask you about the same-store new unit sales growth. You indicated 3% in the U.S, which looks a little light of where the industry was, and then that 9% type growth in the U.K. looks a lot stronger than the overall market..

Fully, when you look at same-store, we're up 3%, on an overall basis we were up 8% which was equal to the market.

I think a couple of things that we have to take into consideration, that Puerto Rico was down about 25%, and also from a MINI perspective, they had a very slow rollout of their new car, and I think that we were down 23% in the quarter on MINI units, which obviously impacted us.

But overall, what I think was most important is that we managed our business for margin and we had a 20 basis point increase on our new vehicle margin. And I think that -- I think it's key that we maintain our margin. So we think we're on track.

Obviously, CLAs, a lot of the key Premium/Luxury cars from an inventory perspective were in short supply in Q5s, Q7s. We were really, really in short supply, the [indiscernible] is hot with Porsche. So I don't see anything there that we should be worried about. We think we're really on track.

Looking at July, we're on track for a mid-single-digit increase, at least, so far for the month..

Okay. The used car business in the U.S., we've seen some challenges from some of your peers and you seem to have navigated that well. If you could comment there what you're seeing in that segment and as we move forward..

I think there's been sellers. The country evidently has been in short supply of Used. Obviously, we having 71% of our business in Premium/Luxury. We have a significant number of lease returns, which help drive our pipeline. And as we had mentioned before on the calls, we've got to process retail first.

We're reaching down cars that we would wholesale in the past we're now retailing. And I think when you look at our business, about 66% of the business this year, at least in the quarter, was trades, the other 33% roughly, was purchases. And I think that with the CPO that we have, we're 35%, we were up 4,300 units.

And from a gross perspective, we held $50 per unit. So overall, inventory was fine. I think the execution is good. Gross profit per unit is in line when we look at it. There's no question that when you look at the marketplace, we're up nicely on gross profit.

And to me, sometimes the cost of CPO drives some of the cost of sale up, so it has some impact on downward pressure on margins. But we really have looked at our PenskeCars.com and we have over 16,000 used cars online there, which seems to be generating quite a bit of traffic. So I think that's working out from an e-commerce perspective..

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

A first -- just a first question on the acquisitions and the JV that you've put in place over in Barcelona in Spain. There's a lot of talk injects a lot of action around some large acquisitions here in North America, which you seemed to be not participating in as aggressively but are allocating capital to these international markets.

I'm just curious how you go through the assessment process of those investments versus what you might do here in the U.S. and if they're just much more attractive than what you're seeing here in the U.S. right now..

I think first you got to look at our revenue mix, with 64%, 65% domestic and the balances international. So obviously a global look is important for us.

And to me, if people talk about a big transaction, all of us, there are peers that are in -- the public retail space has certain framework agreements, which would limit us to having certain, a number of brands, of the same brand in certain markets.

So I don't see that as an option for us right now with our size, especially, in the key markets where we operate. Obviously, from our perspective, what we're trying to do is we moved into the U.K. back in 2002, I think it was, we've grown that management team and built that business from 900 million to 4 billion.

And we see the same thing happening in Italy with Mantellini as our partner, they're 30% partner and moving into Spain, specifically, Catano, is the largest BMW. I think they have 34% of the market in Portugal, and then they are our partner in Spain.

And what we've done is gone in and enter and set up a joint venture with about $24 million to $25 million of total capital. We, putting in half and we have the entire market in Barcelona. Obviously, the dealers there have suffered during the downturn.

We've got 5 locations, some premium facilities and it's a matter of building our management team there and executing. The Spain market, obviously, is 1 of the largest, in Europe and probably 1 million unit market this year and it's going to be up about 15% to 20%. So I think we're getting in it at the right time.

It's lower cost, which obviously is good. On the other side, as we look at Commercial Vehicle, so we've gone in to Australia with Western Star and MAN. We see that also as potentially as a partner that we can do from a standpoint in another vertical in Commercial Vehicles, and that would give us an opportunity to look in the U.S.

for retail truck dealerships. Similar to what Rush Trucks has, you see it as a public company in the New York Stock Exchange. So we're looking at retail auto, we're looking at regions, we are looking globally and obviously on the commercial side.

And we also have the benefit to grow our rent-a-car business, which has given us about 50% of the cars that they sold in the first 6 months went to our dealership. So that equation is working nicely for us also. So I see us actively in the business.

We've so far in 2014 between open points and acquisitions, we've got an annualized revenue of about $250 million and I think we're on track. We said to the street that we would look at growth of about 14% -- 13% or 14% for the year and a good portion of that, half of that would come from acquisitions, and I think we're on track for to that..

That's very helpful. And second question is as we look at the gross profit per unit on new vehicle side, there was a big uptick and it looks like mix was pretty positive for you in the quarter.

Is that something you think you can continue going forward and is the market set up for that?.

Well I think when you look at our particular mix and again, I'll go back to 71% Premium/Luxury, and when you look at our margins on Premium/Luxury, it's really -- it really is strong. We were up, overall, we were up $300 per unit overall in new and up $50 in used.

But when you break it out even closer on a luxury, Premium/Luxury side we were up 10%, almost $400 per unit from $3,700 to $4,100. And the good news is with all the pressure on Volume Foreign, we were up 9% on gross. We have break that out for about 1,700 to 1,800. So we had growth both on Premium and Volume Foreign.

I think the customer is a slower sale. I think they care about Parts and Service. I think our locations, the money we've spent on CapEx, we don't have the interbrand competition in many cases that you have in some of the other brands. So I think that's boding well and there's no question.

From a sequential standpoint, when you look at -- we had a strong fourth quarter, that was almost $4,300 which have a lot of the incentives and a lot of the year-end money that dumps in there for you, which gives you some benefits. So I think we've been pretty consistent. If you average the last 3 quarters, we'd be over $4,000, which is significant.

When you look at it is almost double what volume foreign is and what domestic. So I think we're in the right place..

Okay. And then just lastly, on Parts and Service obviously it was very strong in the quarter. I'm just curious where you think we are in the curve of that Parts and Service business benefiting from the growth in UIOs that we're seeing here in the U.S. but also in the U.K.

and the international markets really kind of what's going on in those markets as well..

Well, we're not affected by the -- these recalls because primarily most of that's in the domestic side. As we've seen here lately, we had some recall activity with Mercedes, Lexus and BMW last year. But if we take that out, overall, we're looking at probably about an 8% overall increase on a same-store basis.

And really, it's driven by 8% in customer pay; warranty's up about 5%; and our get-ready, which is key and this includes our PDI and are used car reconditioning is up almost 8%; and then our bodyshops are up, so it's across the board.

And I think with units and operation continuing to grow to 0 to 5 years which you folks focus on that's going to drive more business, plus, with the full circle program entitle people come back for their consumable. You got the BMW Full Circle program on maintenance when they sell a vehicle.

That to me bodes well for us, and I see us continue to grow at mid-single digits in Parts and Service. In the U.K., we've now focused a lot more in the Parts and Service area, and I think that with that business growing like it is, we're starting to see a little more growth over there, because we've had this big growth from the market share.

If you look at Premium/Luxury, if you go back to 2008, it had about 18% of the market. Today it's 25% and with that growth that's been the tailwind we've had. Now with the market up, from 2 million to 2.4 million we're going to get that benefit, so they're driving more units and operation. And obviously, Premium/Luxury is gaining the big piece of that.

So that will continue to drive our Parts and Service, including warranty. When you look at the U.K., it's a little different story because so many new vehicles, our warranties there is up 22% and our customer pay's up only 13%. So a little bit different when you look at the international business..

And next, we'll go to Patrick Archambault with Goldman Sachs..

I guess maybe just as a start, just following up on the gross margin. I know it was touched on sort of in the last question. But it does look like gross margins have more than stabilized, they've started to improve. Underpinning that is a pretty big ASP increase, whether you strip out FX or not, right, it's up a lot.

So I mean how do we think about the competitive environment just in the context of that? And then on the back of that, I did notice Used seems to be a little bit weaker if you're looking at margins year-on-year despite also pretty good tailwind in ASP so maybe contrasting those would be helpful..

Well, the competitive environment I think on New, we certainly think our mix at 70% is driving higher margin for us in Premium/Luxury. As I said, we were up 10% over $4,000 per unit so to me that's strong. And when you look at it a comparison a year ago we were up 20 basis points. Our volume foreign margin was up and our domestic was down.

And on the used car side, we were up $50. And when you look at it across probably sequentially, there's no question that we have -- that we've been able to sustain our margins now for the last 3 or 4 quarters, which I think is key. And we don't have the interbrand competition on the new.

And I think on the used with the execution of the Internet, that person wants to buy that particular car. And if the process is efficient and we can get that customer in, we don't have a competitor on that car. Remember, and I'll give you an example in Atlanta we have 2 BMW stores, and they sell anywhere from 100 to 120 new vehicles per month.

And they're selling 250 new per month -- or used per month, excuse me, and that's done with the strength of the Internet because all those people aren't driving by.

So I think Internet execution is key and that's helping us differentiate ourselves from the standpoint of the competitive environment from a margin pressure, and we're going to continue to focus on that. And quite honestly, we have a tool that we use everyday to manage gross in every store, and I have a particular template that I use every 10 days.

So we're managing it, not just at the end of the month, and saying wow we didn't get there, we're looking at it on a 10-day period. So I think the team is really focused on the gross. And I have 2 major categories, I worry about the CSI and gross profit, and I just knock on wood that we're continuing to execute. So I think the team has done well.

One thing in the U.K. you should know that on used cars, we have the VAP, and that probably impacts our -- it's about 18% charge on our gross profit, so that has $300 to $400 impact when a retail buyer buys it.

If you're a buyer, a commercial buyer and buys a car, you can then go back to the government and get that money back, so that is a little bit downward pressure on our used margin. But otherwise it's pretty consistent..

Okay. Yes, I mean that's interesting. So the Volume Foreign is actually seeing margins up and domestic down. And so it seems like it's changed a little bit, right, because I mean wasn't it the volume foreign that was sort of using more aggressive stairstep incentives until fairly recently..

Well, we go back into 4 or 5 quarters and we've held pretty steady. I mean our volume foreign has been really been flat, and it's up in this particular quarter. So I think that we're - our focus is on gross and that's on the new side.

And I don't think you can really look at us as a model with only 4% domestic, I don't think it's fair to compare us to the other peers, because they've got a lot more scale than we have. So overall I think it's just again, focus on the gross profit.

And when you think about being up $400 a vehicle on Premium/Luxury and having the increase on the volume foreign also in the quarter, it shows that there's the right focus..

Okay, that's fair. One last one is just how would you -- there's been some mixed comments about the health of the M&A environment, for lack of a better word, just amongst some of your peers. How would you characterize the availability and attractiveness of that assets and sort of the valuation environment that's out there..

I would say the health of the pipeline is very good. I think each of us maybe have different markets we're strong in, so we would be focusing on stores that we could add value or add volume into places where we had the infrastructure in place.

Obviously, there's I think I've seen it in Britain and I know it, there's some of these families that don't have siblings that are going to take over the business are now having to look at major CapEx issues. So they're coming into the market to offer their stores for sale.

Obviously there's a number of what we would call brokers who are out there today who have found that there's a business out there, so they're generating more leads to us.

But I would say this, I can't remember here in the last year, and I'll just take the last 12 months, where I've been in competition with one or the other public companies that tried to buy a business. I think each one of us have their own individual pipeline, we've got context, we have people refer us because we've done business with them before.

So I'd say the health of the pipeline is good. I think the growth opportunities for the sector, the whole retail sector, is excellent. And when you look at the liquidity that we all have, we're going to be the right guys to approach to sell their businesses.

We're going to look at not only on a domestic basis, but we look at it -- we have a bigger sandbox, you could say, we're going to look at it globally and we're also going to look at different product lines from Commercial Vehicles to retail automotive..

Our next question is from Ravi Shanker with Morgan Stanley..

This is Paresh Jain for Ravi. A couple of questions, first do you recently started testing the no haggle pricing at one of your new stores, and initial media article suggest that traffic conversion and transaction time both improved.

Can you provide an update and also any sense by when you could decide whether this is something that you would expand to other stores?.

Well, Ravi, this is really 1 out of 170 franchises in the U.S. We've been in that store for 2 months. I would say the activity is excellent. I looked at the gross margin based on one-price offense. And it's equal or better than our other Toyota stores that, this store happens to be out in Arizona.

I think the key thing here is we've gone back to each one of the individual purchasers and called them to find out what was their understanding and how did the process go, with the feeling of the entire engagement with our people. And that I would say 95% of the people said they liked the process and only a few said they like to negotiate.

So I think that bodes well and we'll obviously look at that. One of the things that we haven't been able to, because it's a short period because we're adding people, understand what costs that we have been able to take out of the business because you have one person handling the sale from start to finish.

And I think we need a larger sample before we can make any decisions. But I would say it's good news to date, can you convert our whole business over that? I couldn't say that today. And to me, we'll have to give you more color on the next calls, but so far, so good..

Understood and that's very helpful. Secondly your customer pay on a same-store basis did very well compared to warranty.

But please correct me if I'm wrong, but for you guys warranty is the higher margin business, right? Has it always been that way? And what's the margin difference compared to customer pay?.

Remember, on warranty, we negotiate the warranty rate with the manufacturers, so that labor rate doesn't change. And then there's individual time allotments for each operation, so it's pretty much multiplier of hours time your rate.

When you get in to customer pay, and as we try to continue to keep these people, as customers as the vehicles get older we have different menu pricing, which obviously in some cases, discounts the overall impact of the selling price so that would reduce it.

Also the markups on parts might be different as we might have a situation on the customer pay where we sell a package, a tune up, et cetera. So these are the things that would adjust the customer pay. Because remember, we want to maintain that customer after the warranty's over. So older vehicles are going to have a labor rate that's lower.

And I think that's key for us to sustain this customer and that repeat referral business..

And your next question is from Brett Hoselton with KeyBanc..

I want to start off just talking a little bit about gross profit throughput.

If I calculated it on Slide 15 correctly, I'm thinking it's around 25% in the quarter, that's up from where you were last quarter, but it's still shy of your target of 35% and I was kind of wondering what are your thoughts on the outlook there? Are you still targeting 35%? Was there anything unusual in the quarter? What are your thoughts of there?.

Well, there's always pluses and minuses in a quarter that we could dictate out in a conference like this, but I would say it's steady. We certainly had a better quarter than we have in the first quarter because we had the weather-related stuff in the East.

But I think that at this particular time you've got to look at our advertising spend was up about $4 million, which was consistent. And one of the things that we looked at is where is the big SG&A expense. And we got into our loaner cars, today, we have almost 7,000 loaner cars in our fleet between the U.S.

internationally and another 3,000 demonstrators. And these vehicles all obviously have depreciation and we have to pay the maintenance on them, which is entirely different if you had a domestic fleet or even a volume foreign fleet, we don't provide loaners. And that's an area that we're looking at to see if there's a way to take some of that cost out.

But those would be 2 areas that would be significant. And our goal is to get to 35%. One thing you have to look at, if you look at our income statement, you got to also take into consideration that we're involved in -- there's a lot of $11 million of income from our investments.

And if you add that, just the delta on that over the years over the year-over-year, that would add about 5%. So I think that we'd like to be at the top of the list, whether we can get there, I don't know. But I think the upward movement is good. And we've got some areas in the country that are flowing through 44% so it's an average we're giving you.

So we know that this is a focus as gross has been a focus. We're now focusing on the flow through. But to me, 30% to 35% certainly are target..

And then as we think about Parts and Service, I think there's a thesis in the industry, in the investment community, the Parts and Service sales are going to accelerate, I think we're already starting to see some of that. People generally differ on let's say the CAGR of that increase.

So this quarter, you were up 8% on a year-over-year basis same store. There's some people in the investment community that are thinking, well that might accelerate to 10% increase on a year-over-year basis or even 15% on a year-over-year basis, because the number of vehicles and operation are going to go up and so on and so forth.

I guess I'm wondering -- a couple of different thoughts here.

One, what do you think is a reasonable outlook for your Parts and Service same-store sales growth over the next few years? And then secondly, if you were to identify what might be the primary bottleneck to achieving that growth, what would you suggest that might be? I mean would that be the number of customers, the bay capacity, the number of technicians you have, I mean how do you think about the bottlenecks..

Well, before we talk about the bottleneck, I think if I was putting a model together, I would say the mid single digit, we'd see same-store growth in Parts and Service.

I think all of us have been investing, so we certainly have incapacity from a standpoint of our facilities, and where we are getting tight, meaning, we don't have the bays available, we're going to 4 10-hour shifts, we're going to second shifts to do our PDI and our new car delivery. So I don't think facilities are really the issue.

The key thing is as we get into more vehicles let me go back to 10 million, now were at 16 million or 17 million. Those vehicles start to fall off and we also have to be sure that we're pricing the product in comparable to the year of the vehicle.

Because people have older vehicles might have bought them used are not going to pay high labor rates, so that's probably a little bit of pressure down from the standpoint of just the overall revenue growth.

I think overall, we see from a car part perspective, we see that we're running in the 0 to 5, you probably got 75% of your businesses warranty from 0 to 5. And to me, that when that warranty comes off, then you've got to be able to manage your customer. I think the other key thing is this quality.

We're going to be in a position that, as an OEM-certified dealer, that we're going to be able to provide a better quality as the cars have gotten more complex. Also, we got to understand that recalls drive this number up and drive it down.

I mean we're not domestic today to see some of that, but we've seen it in Mercedes, we've seen it in Lexus and BMW, and we do get the benefit of that. So there can be some ups and downs, it would be hard to maybe the next year to see growth.

But I think mid-single digit is realistic from a same store standpoint and we're going to count on our margin being anywhere between 58% and 60% would be our margin target..

As the dealers generally seen some growth in the Parts and Service business, they would obviously demand more technicians. And I guess what I'm wondering from your perspective, how are you feeling about your current base of technicians. Obviously, I'm sure they're highly qualified and so forth.

But how are you thinking about growth in technicians or the ability to add technicians.

I mean are there just a lot of BMW technicians that are sitting on their couch watching Barney on Saturdays and trying to figure out what to do with the rest of their life? Or is there a lot of highly trained folks are amply available or are they in tight supply?.

I would say technicians, the right technicians are in tight supply. We've added 200 technicians in our network over the first 6 months. One thing we've done for a number of years, we've had a very strong relationship with UTI, which is Universal Technical Institute.

They generate about 18,000 technicians a year that they graduate, they've got locations outside of Boston, they're in Philadelphia, they're in Chicago, they're in Phoenix, they're in Dallas, they're in Houston, Los Angeles and up in Sacramento, so they've got a broad-based campus.

And I think that what we do go in and we interview for the best technicians and in many cases, some of the OEMs have special programs where they practically train. It's a step course where they go 1 level up and they train specifically on an OEM.

So what we've done not only in the truck leasing business where we have diesel when we need it, we've used them as a resource and they've been -- we've got some very good candidates. And I say that would be our biggest area that we're gaining candidates.

And to me, people coming out of UTI seem to be really good guys to start and technicians are hard to get. A lot of our guys retire that have all the expertise. It's important to grow this base. But at the moment, I'd say we probably need a couple of hundred technicians and we'll go through that on a very selective basis for the balance of the year..

And then just final question. On the acquisition front, we recently seen Lithium make, what I would call, transformational acquisition quite large similar to maybe your Center acquisition for a number of years ago. What are your thoughts kind of going forward over the next 2 to 3 years.

Do you -- are you clear of the capacity to do something quite transformational if you wanted to. Are you more in the mode where you're introducing some bolt-on just to kind of move along or is there a possibility that there's a large dealership or group or 2 out there, whether it be here in the U.S.

or internationally that you might have an interest in..

Well, we bought the Agnew group in Northern Ireland a couple of years ago, so we're obviously open to a group that has the right brand mix and geographically it would fit.

I think I said earlier in one of my comments that because of the framework agreements here, if we were to look at some of the head concentration and say that the East Coast and New York or Connecticut or even in Los Angeles or Phoenix were prohibited under our agreement that have multiple same brand locations in the same brand different than that is And that is by the way Barcelona you talk about the Midlands in the U.K.

and the U.S. that's where franchise agreements are working and the areas of the manufacturers want to look at interbrand competition. So, look, we're open for investment.

I think that we're looking for diversification so that would mean that we could look at some more Commercial Vehicle, the Commercial Vehicle business teams are running higher return on sales. There's a lot less CapEx required from a standpoint of, what I call, corporate identity on showrooms et cetera.

So we're going to look at a balance between retail automotive, I think you'll see that 3% grow over a period of time. And I think that there's no question that we're looking at -- we have generated probably about $1 billion over the last 9 months when you look at our acquisition, based on what we've done already.

And again, we have -- our liquidity is about $500 million, so there's no question that with the U.S., with U.K., with Spain and also, I can just say Western Europe, we feel good about where we can go..

Our next question is from David Lim with Wells Fargo..

Just a couple of questions. With the technological advancement in the modern car, would that really preclude the third-party mechanics of whoever's out there, the mom-and-pop shops, to really do any kind of competent repair on these new vehicles.

Can you comment on that, because I know that a lot of people have been talking about the 0 to 5-year vehicle, but the way that vehicles are manufactured today just jampacked with electronics. It seems like when you get to the 6 and 7 year, it would probably end up at the dealer a lot rather than at the local mechanic..

Well I think your perception is probably right on because you open the hood of these cars with the encapsulation of the engine you can't even see it. And obviously we have a tremendous amount of reprogramming that we're doing.

If you go to our BMW stores we've got 16 bays in Crevier that we do nothing but reprogramming the different computers on the car and I think that is going to be very difficult for a mom-and-pop type workshop. I think we're going to go through a sea change here.

The technology is growing leaps and bounds over the last 4 or 5 years and if these cars get in to the market are resold, I think there'll be a real opportunity and that will increase really our customer pays as we go forward. So to me -- and also the availability to have the codes and to have the expertise.

We send our technicians to these OEM schools regularly in order to keep them with pace of the technology. So I think that it bodes well for the retail auto business and on the OEM franchise dealers as we go forward..

Do you think on the customer pay front, the real sweet spot of where you guys could gain some acceleration there are vehicles more in the 4 to maybe 7 years of age?.

Well I think we’re getting some of that right now as we go in to retail. First on our used, we are starting to do reconditioning on vehicles that we normally would've wholesaled, so that's driving it back from a standpoint of our business and driving us down in model years and of course with the CPO that's driving more shop business.

It might not be customer pay in some cases, but it's internal, which drives the cost of the sale which ultimately we get paid for by the sale of the vehicle. So I think there's opportunity there. What we've done is say look, why do we sublet anything whether it's window glass, whether it's window tinting.

All of these things now where we have scale and have these campuses, we have the capability to do that and that to me has become a very important part of our business and there's no question. When you look at the U.K.

with the luxury growing like it has been at the rate it had I think that's going to bode well for us with a higher growth in CP in the U.K. as we go forward. That's going up between 18% and 25%, 700 basis points the market share of premium is grown in the U.K. over the last 8 years..

And finally share buyback. Are we going to see this becoming more consistent as we go forward or are you still sort of siding on opportunistic buy back..

Well our share buyback, we're at 90.3 million, 90.4 million shares consistent. We have certain performance shares that our employees getting and when they put those in the market, we typically go out and buy those shares back in to keep us at a level playing field at about 90.3 or 90.4.

So we've got 70-plus million available, so if there is a reason we want to buy in the market, we certainly have the money to do that. But as you know we've been paying dividends, we're paying 1.6%, I think today our payouts are somewhere between 25% and 30%.

So that to me we've got dividend, we've good growth in the stocks, so I think were sitting in a very good place..

Our next question is from Brian Sponheimer with Gabelli and Company..

Looking back, most of my questions have been answered, but just looking at your timeline here. You're now 3 years past buying Crevier and Mercedes-Benz in Greenwich, which 2 gem facilities when you got them, or 2 great locations, rather.

Can you talk a little bit about maybe some of the improvements that you've made? And if I'm thinking about the next 12 months you'll be anniversary-ing 3 or 4 years on Agnew and Mantellini and Savage, and should we potentially see some other benefits kind of coming through the system on some of these acquisitions you've made..

Well, let me go back, and we've made consistent effort to grow these campuses. And when we look at jump back just a minute here, when we look at Warwick, Rhode Island where we have a number of a location of dealership that's really they've had good growth this year in fact they're up almost 10% on a same-store basis.

The same thing when you look at Turnersville, they're up above 11%. So I see the traction in those markets. We're getting the benefit of the PDI consolidation. We're getting the benefit of some of the things we talked about glass tinting, body shops. So those are the things that have gone taken place in some of the markets.

Obviously Phoenix has been a home run, San Diego and places like that, I think Crevier, when you talk about Crevier, we continue to grow that business. Crevier is the largest single BMW point in the country and we've just gone through a major expansion there and we see that as a real leader in the BMW market. We also have grown in that market.

We have Audi now, we have Volkswagen, and we have MINI. So overall, that's been a campus that's really gone from where it was in Santa Ana to I think a very bright spot in our company. And the Greenwich acquisition if you're familiar with it, basically $4 million out of trust when we walked in.

And today, the return on sales are one of the highest in our Mercedes network. And then the adding the BMW business, which is almost continuous in Greenwich, we now get Fairfield. One of the things that is a byproduct, we get to move our management team.

People that are coming up to the organization, we can move them across the street and not have to relocate them half way across the country. I think that is some of the traction we are getting in Warwick and certainly in what we see in consistency in Turnersville.

There's no question that it is playing a role for us at Crevier at that market and also will see that in Greenwich. So we'll continue in those markets to try to purchase brands that fit our mix as we go forward.

But we'll add a bodyshop, which we don't have at Crevier, we'll add a bodyshop, which we really don't have in Greenwich, we can use our Fairfield shop today. So those will expand from a fixed operation standpoint where we have our high margin.

Today if you look at our bodyshop business, we run about 7% 8% on sales and I think that that's key in our used car focus, which is really something that was not a focus in Greenwich is growing nicely. We're adding capacity there so those are all things that we will do over time. It takes time to get the people.

And also get to these cities very contentious route to get through some of the cities when you are in the auto business but we tend to get there after a period of time. So I think it is all plus..

And we'll go to David Whiston with MorningStar..

I guess going back real quick to capital allocation. At it a bit surprised to see 3 dividend increases this year, are you- do you have a getting a target payout ratio are you looking at keeping the yield matching the S&P dividend [ph] yield. Talk about where bill going with the dividend policy over the coming 18 months or so..

Well if you ask me where we want to get to I'd like to get to the 30% to 35% as a payout. Now we've got to look at our cash flow and that's going to be dictated by acquisition it's going to be dictated by CapEx. But it's certain key for us to provide that dividend.

And you know we are at 1.6 I don't think that I've talked about the market more than looking at our cash flow. Our board looks at cash flow, expected cash flow for the next quarters and that's really how we determine where we're going but the goal would be, I think to get 30% to 35% might be the top end..

That's helpful. And just one other question on the U.K. obviously a lot of tremendous momentum there. Some of that is of course very much in the luxury area. But I just thought get some more detail on your opinion on are there perhaps other macro things going on there was it all pent up demand, was a housing bubble brewing in the U.K.

or anything like that, low interest rates that might be juicing demand a little too much..

Well, I think number one, unemployment rate is really gone down. I think it's in the low 6s and the workforce that's working today I think it's over 73%, which is an all-time high.

And when you look at the GDP, the growth is somewhere around 2.5% and inflation is below the Bank of England, I think the Bank of England has about a 2% rate and is running about 1.8%, 1.9%. So I think when you take all of these into consideration, the U.K. is going to be very positive for us.

And there'll be some wage growth, which probably could exceed some of the inflation but I think overall the economy is strong and there's no question. And then the premium sector, we've just seen this growth, which has been terrific. Really double-digit growth when you look at our brands have increased by 9% versus the market, which is 7.3%.

And I think -- Audi's up when you look at their business, Anew [ph] Up 14%. Bentley's up 23% BMW's up almost 9% Land Rover up 20%, so you really got some strong growth over there. And that's right in our sweet spot because we're really #1 with all those players from a standpoint of locations..

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

All right, John, thanks. We'll see everybody next quarter. Thanks a million. Bye-bye..

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