Tony Pordon - Executive Vice President, Investor Relations and Corporate Development Roger Penske - Chairman and Chief Executive Officer J.D. Carlson - Chief Financial Officer Shelley Hulgrave - Controller.

James Albertine - Consumer Edge John Murphy - Bank of America/Merrill Lynch Rick Nelson - Stephens Brian Sponheimer - Gabelli & Company Paresh Jain - Morgan Stanley Bill Armstrong - CL King & Associates David Lim - Wells Fargo David Whiston - Morningstar Michael Montani - Evercore.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Third Quarter 2016 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately 1 hour after the completion of the call through November 2, 2016 on the company’s website under the Investor Relations tab at www.penskeautomotive.com.

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

Thank you, Justin and good afternoon everyone. A press release detailing Penske Automotive Group’s third quarter 2016 financial results was issued this morning and is posted on our website, along with the presentation designed to assist you in understanding our performance. Joining me for today’s call are Roger Penske, our Chairman; J.D.

Carlson, our Chief Financial Officer; and Shelley Hulgrave, our Controller. On this call, we will be discussing certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization or EBITDA.

We have reconciled these 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.

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. Good afternoon, everyone and thank you for joining us today. I am pleased to report a record third quarter for Penske Automotive Group, clearly demonstrating the overall strength of our transportation services model.

In the third quarter, income from continuing operations increased 1% to $87.4 million and related earnings per share increased 7.3% to $1.03. Our third quarter results were achieved despite a year-over-year decline in currency rates, mainly driven by the U.K. pound.

Excluding foreign exchange, income from continuing operations increased 8% and earnings per share increased 15% to $1.10. During the third quarter, our Board of Directors increased the dividend to $0.29 per share, offering the PAG shareholders a current yield of approximately 2.6%, the highest in the automotive retail space.

We also took several steps to grow our business while continuing to diversify. As previously discussed, we acquired an additional 14.4% interest in Penske Truck Leasing and now own 23.4%.

We expect PTL to provide $0.25 per share of accretion on an annual basis and generate 30% to 35% cash-on-cash return from dividends and tax benefits we expect to receive. In the third quarter, the PTL additional investment provided approximately $0.07 net benefit to EPS.

In July, we acquired 12 dealerships in the UK, which are expected to generate $250 million in annualized revenue. In October, we expanded our Italy business with 6 dealerships, adding approximately $200 million in annualized revenues. We’re now the largest BMW, Audi and Porsche dealer in Italy.

Our business in Italy is expected to generate approximately $600 million in revenue on an annual basis. Let me now turn to the details of our third quarter performance. Revenue increased 3.9% to $5.2 billion, excluding foreign exchange, revenue increased 9.7%. On a same-store retail revenue declined 2%.

However, excluding foreign exchange, our same-store retail revenue increased 4.1%. Approximately 93% of our total revenue was generated through our auto retail automotive dealerships. Our total revenue mix was North America, 60%; international, 40%.

During the quarter, 75% of our net income was derived from automotive retail, 6 from our North America and commercial truck dealerships and 19% from other, which included Penske Truck Leasing, Australia and other non-automotive joint venture investments.

SG&A and flow-through was negatively impacted by changes in foreign exchange rates in the third quarter. When excluding the foreign exchange, gross profit flow-through would have been approximately 11%. Turning to our Q3 automotive retail business, automotive retail revenue increased 4.1% to $4.8 billion.

Exchange rates negatively impacted same-store retail automotive revenue by $265 million. Excluding foreign exchange, same-store retail automotive revenue increased 4.1%. Same-store variable gross profit per unit, that’s gross profit from new vehicles, used vehicles and F&I, declined $123 a unit to $3,364.

However, excluding the impact of foreign exchange, same-store variable gross profit increased $90 to $3,577. Turning to new vehicles, new vehicle unit retails increased 8.1%. Same-store units increased 0.4%. Gross profit per new unit retail was $2,691. Excluding foreign exchange, gross profit for new unit retail was $2,858, a decline of $58 per unit.

Gross profit per unit in the U.S, however, increased $52. Gross margin declined 20 basis points to 7.3%. Our supply in new vehicles was 53 days at the end of September. Used units retail increased 2.9% to 52,500. Same-store used units declined 1.1%. CPO sales represented approximately 40% of our used unit sales in the U.S. during the third quarter.

Used vehicle revenue increased 3.3% to $1.44 billion. Gross profit per unit used retail was $1,592. Excluding foreign exchange, gross profit per used unit retail was $1,692 plus $40 per unit. Gross profit in the used unit in the U.S. increased to $179. Gross margin was 5.8%, down 20 basis points. Our supply of used vehicles was 41 days at September 30.

Finance and insurance revenue per unit was $1,088. Excluding foreign exchange, F&I revenue per unit was $1,156, up $58 per unit. Service and parts revenue increased 6.2%, including 1.8% on a same-store basis. Excluding foreign exchange, same-store service and parts increased 6.2%. Customer pay was up 7.2%. Our warranty was up 4.6%.

Our body shop was up 3.1%. Our pre-delivery inspection up 4.2%, again, for a total of 6.2%. Turning to the retail commercial truck business, in the third quarter, our dealerships generated $266 million in revenue and $38 million in gross profit.

Heavy duty truck sales are being impacted by decline in North American Class 8 heavy duty truck market caused by softer freight demand, excess capacity, which is causing some level of deflating to occur. The good news is that our service and parts business represents approximately 31% of our revenue and 78.5% of our gross profit.

Gross margin from service and parts improved 60 basis points to 36.8%. The fixed cost absorption ratio was 122% in the third quarter and our return on sales was 3.2%. Turning to the balance sheet with $89 million of cash on our balance sheet at the end of September and our non-vehicle debt was approximately $1.9 billion.

Debt-to-total capitalization was 51%. As of September 30, our leverage ratio was 2.8x and we had over $700 million in liquidity. New and used automotive inventory was $2.8 billion at the end of September, down $143 million from the end of December.

On a same-store basis, new and used inventory was down $223 million from the end of December, new inventory down $232 million and our used up slightly at $9 million. Approximately $41 million of our U.S.

inventory is currently on OEM stop sale, representing approximately 1,600 vehicles, 488 new vehicles at $21 million, 1,104 vehicles or $19 million on the used side. Only minimal amounts of inventory are on stop sale in our international markets.

Turning to capital expenditures, they were approximately $171 million year-to-date, which include $32 million of land purchases and a lease buyout we replaced with a mortgage. Before opening up the call for questions, I wanted to provide a quick update regarding Brexit.

Obviously, there continues to be a lot of questions regarding the effect of this vote on our business. While this is an unprecedented event, we remained positive and encouraged about our business in the UK and really throughout Europe. We have a very strong and experienced management team on the ground in the UK.

New and used same-store units’ retail increased 7% in the third quarter and on a same-store retail revenue basis at local currency, increased 12%. And the UK posted record profitability in the third quarter. Our business is 95% premium/luxury in the UK and that segment continues to take market share. Order intake remained strong in October.

UK light vehicle sales are over 50% company cars. These vehicles are typically on a 3-year personal contract purchase, which is very similar to a lease and provide for continuous replacement demand in the market. We buy and sell in British pounds with revenue and expenses dominated in British pounds. We have a natural hedge.

Our exposure is essentially limited to translation of UK results in the U.S. dollars. Based on our full year results in 2015, if we translated the UK results in the U.S. dollar using the current rate of the pound at 1.22, we would anticipate the effect on revenue to be approximately $1.2 billion to $1.3 billion.

They estimate the effect on EPS would be approximately $0.25 to $0.30. In closing, we are very pleased with the performance of our business and continue to believe that our diversification strategy, the strength of our business model and its ability to adapt to market conditions is certainly important.

We are very positive about the acquisition completed over the last 90 days, further diversifying our business.

In particular, the accretion from the PTL investment should more than offset the EPS effect from translation adjustment we expect from Brexit, while the expected cash tax benefits will provide further opportunities and expect 30% to 35% cash on cash return. Continued sales across UK, U.S.

and UK auto markets, coupled with our diversification, should continue to help differentiate our business from others. Thanks for joining us on the call today. Let’s open it up for questions. Thank you..

[Operator Instructions] It looks as if our first question comes from the line of James Albertine of Consumer Edge. Your line is open..

Great. Thank you and good afternoon Roger and Tony..

Hi Jamie..

Hi Jamie..

Just to follow-on to your last comment on the UK, it sounds like, from the ground you are not seeing any major changes since the Brexit vote, but given your relationships with the manufacturers, just wondering what you are hearing from that side of the aisle as to how they are planning for potential ramifications from Brexit? Thanks..

Well, I think we got to go back, Jamie. We took – Tony and I took a look at pricing over the last 4 years to 5 years. And typically, the European EU imports that have come into the marketplace have been increased approximately 1% per year. So there has been some escalation of pricing, which has been into the model.

And when you think the premium/luxury now is at 29% of the market, up 8% or 9% over the last 6 years or 7 years, it has had no impact. And in fact, Jag/Land Rover in the UK has been increasing prices anywhere from 2% to 2.5%.

So I think that there is going to be some sense of a quality when we look at what’s going to happen because you have got approximately 900,000 vehicles that were exported out of the UK into the EU and you had about 800,000 vehicles that were exported from Germany into the UK. So I am assuming that both of them want to maintain that business.

Now interestingly enough last night, Trevor Finn from Pendragon put out a press release. It said, despite significant commentary on the potential net impact of the EU referendum, we have not experienced any noticeable change in our customer’s behavior. Our like-for-like group sales grew 5.7% in Q3.

And from my perspective, with ours up 6.9%, then they went on to say that the – also they had talked to car manufacturers and they don’t feel there will be any material effect as far as price increases to the consumers. So that’s from a third-party, not from us. But generally, the business seems to be in pretty good shape.

And when you look at our business for the first 20 days or 25 days in October, we are up at an average double-digit both new and used. So we don’t see anything at the moment.

It’s hard for me to project out 6 months, 8 months, 10 months or 12 months, but I think this balance of export, import will play a big role, especially in the premium/luxury side.

And I think the loyalty in premium/luxury probably is stronger and be less impact up at the higher level than would be if the volume for and some of the higher volume brands. That would be my position..

That’s very helpful. Thank you for that color. And if I may just ask a follow-up as it relates to the U.S.

businesses, just getting your opinion on where we are in the off lease cycle and maybe some updates as it relates to you are seeing sort of retention rates among your luxury dealerships, relative to your customer retention rates that’s in the volume foreign dealerships, just to kind of help us understand the cushion or the resiliency, if you will, at luxury relative to value upon [ph]? Thanks..

Well, I think one thing that we should look at that – we had in the luxury brands probably about 55% was leased. Overall, I think we were around 40% Tony, if I am correct. We are seeing a lot of cars coming off lease. We had almost 10,000 coming out of BMW. That’s going to grow slightly next year.

We think that’s good because the manufacturers have to mark these to market. There will be some hit that they will take, because as you have seen the shift from cars to SUVs, the cars have taken probably a bigger hit on residual value. So when they wrote these leases 27 months or 36 months previously, they probably had to take some impact.

But they are going to provide us with very good used cars. They give us the ability to certify those. They give us special rates. And to me, that’s given our ability to keep growing our used-to-new ratio. So to me, I think the benefit we have is that we have already started to receive those vehicles during the last, I would say 12 months.

And our teams have committed to grow the used car business. When I look at some of the brands, the used car profitability is really strong. You could see that in the U.S, our used car gross profit was up $179 in the quarter and that’s across all brands.

So we see this as a way to get vehicles that will be really cars that we have sold and leased in the past. They are offered to us first before they go to auction. So typically, we know these cars. We have the service records in-house on those, will give us a chance to be able to take those and certify them and put them into the used market.

So overall, I think that it’s important to know that the leasing is done most of it through the captives, which makes a big difference. So we get them to give us those vehicles back. And now they have some leasing programs even on the cars that they have leased and were re-leased to our used car customer..

Great. Thanks again for taking the questions and best of luck next quarter..

Thanks Jamie..

And our next question comes from the line of John Murphy of Bank of America/Merrill Lynch. Your line is open..

Good afternoon, Roger..

Hi, John..

Just a couple of questions.

First, on the gross profit per unit in the U.S., up $52, I am just curious what you think is driving that? Because we are hearing from a lot of other dealers, they were sort of revisiting this pressure on gross profit per unit on a dollar basis, but you had very good performance there?.

Well, I have to say, I hope it’s – the guys are managing the business. I mean, we have tools in place that manage gross profit on a car-by-car basis. So, we don’t wait till the end of the month and then report to you or the end of the quarter where our GP was. I think that there had been some stair-step programs.

We have been able to meet the requirements from the standpoint of the OEM to meet these stair-steps and some of the BPOs, business plan objectives. But also we are focusing on gross. I think the guys have done a great job. And we track – our compensation is based on gross profit.

So as the salespeople remove the gross and it goes down, they are going to see less comp in their paycheck, which certainly is a driving factor. But overall, the premium side, we see some mixes. We will see it maybe up at Porsche, up at Land Rover. We might see it be down at Audi right now. But as across the board, it’s been pretty steady.

And I really was happy with the increase on the used side. And there is no question that we have got a better mix of SUVs now than we had in the first part of the year, because BMW is really behind on the mix. So, those were getting, obviously, a better gross profit..

And just actually a follow-up on that crossover comment, I mean what is the mix that you are roughly selling at? I mean – and I would imagine these crossovers, these luxury brands could easily get to 50% to 60% if they could supply it.

I am just curious where they are right know and really where you see that opportunity going?.

Let me take a snapshot I looked at yesterday on the West Coast. I looked at Audi, I looked at Lexus, Mercedes and BMW. And if you exclude BMW, the SUVs go anywhere from 41% to 47%, and BMW is down in the 30s. So, there is a big mix there shift that has to take place. And we have told BMW that they have got to get this mix shift.

So, we are almost at 50% today. And then if you look at – on the domestic side and you look at trucks obviously, it’s over – it’s 55%, I think, overall..

Okay, that’s helpful. And then just on the Penske Truck Leasing, or PTL, equity income. It was very strong in the quarter. And this was a, I guess, sort of direct evidence of diversification is definitively helping your bottom line and cash flow.

Are there other opportunities there on either through PTL or other equity income investment that you think that might bolster that, that would help diversify the business further over time or sort of the landscape as we see it right know the footprint you are going to keep going after?.

Well, I would think from another investment we would look first at increasing our ownership in PTL. I mean, today, I think you see it in the slides that Tony prepared. We have, at Penske Corp I think 41%, PAG now at 25%. And I think that [indiscernible] has about 20%. So, GE still has 15%.

And I would think that the focus would be the balance automotive truck retail acquisitions with – taking more of Penske Truck Leasing, because we know the management. We don’t have to build any buildings, no CapEx, no people, and we know the profitability of the company.

And I think that GE, as they want to continue to delever their non-core assets, it gives us a real opportunity to buy the balance. And we have indicated to them we want to do that, but we want to be smart on capital available and just what the market is doing. But to me, that’s certainly a potential opportunity..

Okay, that’s great. And then lastly real quick, I mean there has been some share repurchases by Penske Corp.

I think there is some real questions that we get from investors as to what the motivations are would you ever take PAG private or is this a slow motion privatization? Just sort of want to understand the rationale there? And really what’s going on?.

Well, let me say this that I was – I read some articles where I was buying the stock, it was absolutely – it was Penske Corp, the parent of PAG. Certainly, I am the largest shareholder of Penske Corp. So I have got a definite interest. We had a liquidity event, which generated several hundred million dollars worth of capital for us.

And when we looked to see where we wanted to redeploy that, obviously, PAG was stock we wanted to buy. So, it was certainly an opportunity for us. And we will continue to look at it opportunistically if we can and have the capital available, but I don’t think, right know, I would be making a statement we are taking it private..

Okay, great. Thank you very much..

Thanks, John..

And our next question comes from the line of Rick Nelson from Stephens. Your line is open..

Thanks, Roger, Tony. So, I have a question here, Roger. The market plateaus in the U.S. and the UK. Your business model is quite a bit different than the others.

What do you see is the major growth levers to drive growth in a flat environment?.

Well, I think you have got to look at the total mix of our business. Certainly, used cars, we go back to the financial crisis, what happened? The used car business grew. And I think from our perspective, we have learned to be pretty good used car retailers, not only our sales, but some of the other – our peers are in that business.

We see that as a continued opportunity. We talked about a lot for these vehicles coming back, that’s key. But one of the things that’s really important is that we have the ability to continue to make acquisitions in the international markets on the auto side.

Certainly, the parts and service, which continued to grow and we think that’s going to be probably mid to single-digit growth over the next 2 or 3 years, because the car park has continued to grow not only domestically, but internationally. And then we have with the benefit.

I have said earlier in my prepared comments that the fixed coverage in our truck business was 112%. That meant we covered our fixed expenses by 112% of the parts and service gross profit and we see that continuing to grow. And then we have our business in Australia. Again, I said the truck market was fairly flat.

We are probably a little better than our breakeven there. But on the power systems side, we see some defense business, which is going to grow in our favor and also some power generation. And we just got a big order from Rio Tinto, the big iron and coal people out in Australia for re-powering big mine haul trucks.

We have got an order for 77 and they run anywhere between 607, $100,000 apiece, each one of those three powers. So, that’s all in front of us. And there was a tender for submarines in Australia between the French, the Germans and the Japanese. And the French were able to secure that business.

Now that won’t come in until 2020 or 2021, but the engines in those submarines will be built buy us through our joint venture with Rolls-Royce MTU. So, that will give us the chance to assemble those engines from CKDs, install them in the vessels and then have the parts and service opportunity in the future.

So, these are things that I think really differentiate us on a longer term basis, the international piece, the power systems, obviously and the commercial vehicles. So I would take all those together. We expect to grow the business in 2017..

Thanks for that color, Roger.

Yes, you mentioned earlier PTL and the potential to take down more chunks of that business, what did PTL contribute to EPS this past quarter?.

I think I said earlier it was approximately $0.07 net after interest in cost associated with that purchase..

Okay. So that offset the FX change..

Yes, and that $0.07 – Tony just said that $0.07 was additional to what we normally would get, because we own 9% of that before..

Got it. Okay, thanks very much and good luck..

Yes. Thanks, Rick..

Our next question comes from line of Brian Sponheimer of Gabelli & Company. Your line is open..

Hi, Roger. Hi, Tony..

Hey, Brian..

Hey, Brian..

Just to stay with the acquisition idea, with PTL, you obviously understand asset management.

Would there ever be an idea to potentially get into something little bit different, like equipment rental or something along those lines?.

We looked at equipment rental. I had a real good chance to look at it when I bought the Hertz truck division back in the ‘80s, I guess it was. And I sat at meetings because they had Hertz equipment rental and we looked at that. I don’t see that. That’s kind of an up and down business. Some people have made it probably quite profitable.

But I think we want to have contractual obligations on our equipment. And when you look at PTL, 75% to 80% of all of our income stream comes from contracts either 3 years to 5 years to 6 years either in logistics and/or in truck leasing. And the only variable piece is rental.

And I wouldn’t want to have any greater percentage on that in the rental side. So I would say that we are – our goal would be to get more of what we already have because we know the business so well..

Okay, alright. Thank you very much.

And then just going to the commercial truck dealership side of the house, obviously used truck prices were soft for you in the quarter, that’s going to affect some of your fleet buyer’s decisions, what are the conversations that your dealers are having now with those fleet owners regarding vehicle dispositions?.

Well, let me say this. There is no – let’s just go back. We go back to 300,000 plus new trucks being sold, maybe averaging 300 over the last couple of years. So the fleets were all needed equipment. And they have topped off and maybe there is 150,000 tractors excess right now, we kind of think with the information we have.

So let’s put a downward pressure on new trucks sales. And when that happens, they are also trying to de-fleet to a certain extent. So we are having downward pressure on used trucks. And what I am saying, in fact I talked to Rusty Rush from Rush Truck Centers here over the weekend.

And he said he thinks it’s going to take about 18 months to have the book values meet market values. And in the past, 3 years or 4 years or 5 years, the big fleets have sold their units privately, not trading them, not giving them to the dealers.

Well, of course, we can see the pressure already in our Premier Truck Group, where people want to trade trucks now. And obviously, they want higher values than they are worth. So there is a little bit of an adjustment going to take place. We have lost money on most of the trucks that we had to sell.

We have made some money on our financing, but through commitments that we have had. But we have about 400 trucks in stock. We sold 200 in the quarter used. So we are in pretty good shape. The other thing is if they have to run the trucks longer, that’s going to give us more parts and service opportunity, which obviously is high margin.

But the bottom line is there is downward pressure on margins on used trucks. And I think that people will extend the life. The trucks are so good now that we run our trucks 5 years to 6 years in Penske Truck Leasing and Logistics, where most of the carriers run maybe 3 year to 4 year because they are running more mileage.

So I think that they will push it out probably another 12 months to 18 months, which will help their market value and their book value. But I think we will have to see that, but definite pressure downward because of the over-fleeting..

Okay. Thank you very much..

Thank you..

Our next question comes from the line of Paresh Jain of Morgan Stanley. Your line is open..

Good afternoon Roger and Tony..

Hi Paresh..

I just have one broad question on the strategy front, actually, so you have always called yourself a transportation services company, but in the last 24 months, we are kind of seeing this acceleration and diversification, if you will.

And with the remaining PTL stake and ramping commercial vehicle business, I don’t think it’s unreasonable to think that 5 years down the line light vehicles could be as low as 60% or maybe 50% of your pretax, so trying to better understand the motivation of having so many businesses, is it to ensure a more stable dividend hoping that these different businesses don’t trough at the same time or perhaps you want to hedge any potential disruption to light vehicle business from shared mobility, so would it be – or maybe it’s a combination of a couple of these things, so it would be great to get your thoughts on why we are seeing this diversification activity in the last 2 years?.

Well, diversification is certainly – would be the foundation of our mission plan here. I mean our core business today. I think we mentioned earlier on, biggest part of our revenue today is coming from retail automotive. And I think you got to think about some of that diversification. It has been domestic to international, which today is 60-40.

There is no question that our move into the Premier Truck Freightliner retail business was driven because of some of the multiples and goodwill requirements we had on the auto side and as we grow to the size we are, it’s tougher and tougher to find good acquisitions at reasonable prices.

And we felt because of our truck knowledge that good place to go would be the Freightliner and they wanted to reduce the number of owners and really asked us to come in and take a look at this business and applauded us as we got in and wanted to move forward. So I think that our capital allocation will continue to be to build that business.

And also, the fact that we are probably the largest and I don’t think practically, we are the largest commercial truck fleet in the country that it gives us probably a breadth of knowledge how to run these and how to manage them and sell them, that we then continue to invest in Truck Leasing.

I think its two businesses plus when you think about the fact that it’s a partnership on the PTL side, we get the benefit of the accelerated depreciation and the tax savings, which is – these are normal tax savings that can go forward, I think 10 years and back to, if I am correct, somewhere in that particular area. We get the benefit of the taxes.

So when you put it together you got two – one company that has a very profitable and is a taxpayer and the other company is generating these taxes you put them together plus they are in similar markets, meaning truck and service. I think it gives us a mission that’s pretty clear to me.

Now, the question, how much do we do internationally and how much to me do we do domestically. And then when you think about mobility, we might be talking 5 years from now that we have 500,000 vehicles in our Penske Automotive fleet that we are managing because we have all of these service locations across the country.

We have almost 3,000 in Penske Truck Leasing between our agents and our own captive shops. So that will give us an additional opportunity to take advantage of our scale and also our expertise, because today in our businesses, we are managing the corporate fleet for Chrysler, the corporate fleet for General Motors.

So we have some of this capability already in place. So putting that all together will give us, I think a competitive advantage..

That’s interesting color, especially on the fleet management side.

Just a quick follow-up on the UK business, it is obviously too early to determine any impact from Brexit and volumes and gross profit per unit, but if and when problems do fall, do you expect to continue outpacing the market like you have in the last 2 years or 3 years and how quickly can you adjust your cost base there?.

Well, I think you have got to go back. I think it was 2003 when we bought that business. We were $900 million in revenue, U.S. and today, we will be over $6 billion. So we have been able to grow market share substantially. And when you look at where we are and the nice thing in the UK is you have market areas.

So we don’t have a bunch of contiguous competitors. We have particular markets by brand where they actually applaud us to have them contiguously and which helps us maintain gross profit. But look, if there is – certainly, if there’s pressure, I think that you go back to 2008, it took us about six months to adjust.

And I think we had one quarter that we had a loss, so with the recurring revenue stream and the size of our parts and service growth, the only thing in the UK, which is – I don’t say it’s troubling, but we don’t get the margin on parts and service there, because they don’t mark – let us mark the parts up over there like they do over here, so that’s – it’s a little bit of a negative.

But still, it’s a great recurring revenue stream. And we have the ability – in these cases, if we have got to downsize our people, we would have to do that.

But I think that we want to be on a growth pattern in many times because – think about when you look at Western Europe today, our advantage today is we have capital going into those markets in Germany, Italy and Spain, where people just don’t want to invest in the auto business. We have the capital.

We are able to buy these businesses at very low multiples. I would hope that we are in the same position to go in and maybe buy things that are underperforming and undervalued if we did have a downturn. So, I see that maybe as an opportunity to go fishing really..

Got it. Thank you..

And our next question comes from the line of Bill Armstrong of CL King & Associates. Your line is open..

Good morning, Roger and Tony. Just to follow-up on a comment that you just made, Roger, on the parts and service margins in the UK. So overall, our parts and service margins were down year-over-year.

Is that because of growth in UK or were there other factors involved as well?.

Well, we have less parts and service markup. I think when you looked at Germany, Jacobs has come in now into our numbers and they have a much lower markup on their parts. And certainly, we had an issue – not an issue, we had a large warranty pickup in the third quarter last year with Lexus and BMW.

And those of course have moved down in the warranty thing we have today are much smaller numbers which have made a difference. So, the shift has been more from warranty into a customer labor..

In the U.S..

In the U.S., yes..

Margin was flat in the UK..

Okay, I see. And on used GPU in the U.S., up $179, that was a pretty strong performance, especially compared to the other public dealers that have reported so far.

What do you see going on there that’s driving that kind of performance?.

Well, I think I said earlier, I think it’s focused on gross. And one of the things that we have done in the premium luxury side, we really have – I would say, we have invented.

We have a second channel, which is young used cars and we have decided that because of CSI requirements, we probably have it at one of our premium bands, maybe almost 3,000 loaner cars.

But we have decided to turn those quicker and we get benefits for putting them in either demonstrate or loaner we get the discount, then we depreciate those for 2 or 3 months. And we have got a vehicle that we can lease to a customer $60 or $70 less than a new one. They get all the warranties and everything else with it.

So, we found that to be quite good for us from an offense perspective and we have seen that be very successful in the premium side and our CPO business is up also..

Okay, got it. And my last question on the equity income obviously, it was up a lot. And I recognized the PTL investment.

Were there any other items in there that increased that number so much or was that really just a PTL investment?.

Well, I would say, we also had a benefit in Japan. We made that we have a 49% ownership in BMW business there. That was strong for the month. We also – our Penske vehicle services, which is the company that does the work, I mentioned earlier, does the fleets for Chrysler and GM, that business had a very good quarter.

So to me, Japan started in the first quarter in 2016. So, we think that’s going to be a real benefit to us. We have BMW, MINI, Ferrari and Rolls-Royce in Yokohama..

Got it. Okay, thank you..

And the next question comes from the line of David Lim of Wells Fargo. Your line is open..

Hi, good afternoon everyone..

David, hi..

Can you, Roger, talk about the inventory levels in the industry? I mean is it where you ideally wanted to be? And then if not, I mean, are you hearing anything from the OEMs? Obviously, some OEMs are doing a better job managing that than others, but how was it from a retail standpoint?.

Well, when you look at inventory, I think there is a mix shift going on from cars to SUVs, point number one. And when we look at our business, remember, we were loaded up with premium luxuries. At the end of the year, we had a 68-day supply. And that’s come down now to 53 days at the end of September. And our premium luxury is down almost $250 million.

So, I think we have done a good job. I have told our guys, look, if we see an interest rate go up, we have got to be sure we have got our inventory down. And I think there has been very good discipline there. Volume foreign is up slightly. We had been short of Toyota and Honda. That seems to have picked up.

There is, I think some discipline even talking to Audi. Scott Keogh at Audi, he said, we will start to feel that, that’s going to tighten up. So, I think it’s taken time, because with China slowing down, there was a big push to the U.S. And I think everybody was pushing cars into our market.

And as we got filled up in our inventories and of course, wanting more incentives and the incentive has gone up, I think they find out that they are better off to reduce them. I don’t know where we are going to end up as we end up here in the third quarter. But mix is still an issue.

I think that’s the biggest thing I would say that I talked to some people at Lexus, and they said we just need more SUVs. And there is the same thing I know at BMW, but they expect to have that corrected as we go into Q1..

And then on the acquisition front, are you still looking – is the UK still a target-rich environment where you can make some acquisitions and get really outstanding returns or is it really – as you mentioned earlier, is it truly the focus that leads in the near-term on increasing your PTL investment?.

Well, look, PTL was – I guess would be at the top of list along with anything on the international piece and also on the truck side. It’s really a balance. We would like to do PTL sooner, but it’s a bigger amount.

And if someone asked the question before, what are we going to be look like 3 or 4 years from now? We are still going to be an automotive retail company that has these other businesses.

But from my perspective look, we have to look at it opportunistically and it seems to me the pricing internationally still is a lot better than it is in the upside, because the consolidation and our size from a financing standpoint from certainly the F&I products that we sell, our ability to glue on some of these brands or really – with really no back office increases, make a huge difference.

And I think that overall, the business is still strong from acquisitions here in the U.S. They are just more expensive. And we have a pipeline today, not only in the U.S. and also internationally.

And then we also have to look is there any used car opportunities for us as we start to see the used car business going to be continuing to grow because of all this off-lease cars coming in.

Do we have any opportunities there?.

Got it. Got it. Great. Thank you so much..

Thank you..

And the next question comes from the line of David Whiston of Morningstar. Your line is open, sir..

Good afternoon, Roger and Tony..

Hi, David..

Hi.

Not being a truck expert, could you just go into a little more detail on what’s causing the big swings, unfavorable swings in used truck profitability?.

Well, let’s remember, if you look at a chart that shows heavy-duty Class A truck sales, they have – I think peaked at over 300,000 and they are going to be roughly 220,000 this year, so a significant drop. Typically, these ups and downs are done because emission changes in the architecture of the truck. We don’t have it at this point.

But for the last 3 or 4 years, all the fleets were shorter trucks and inventory now has kind of leveled out. So, the demand has slowed down and as these fleets have been able to buy the trucks they needed, they found that maybe there is now some excess.

We have seen that, because our rental business today, 50% is to our leased customers and 50% is to outside customers. And a lot of those are carriers that need extra trucks. Most of those trucks have come back and we have reduced our fleet.

So, what’s happening is as these carriers now find that maybe they are not getting the operating ratio they want because of excess equipment, they want to put it on the market. Well, they are finding that the market is lower than our book value.

And it’s going to take probably another say 12 to 18 months for them to be able to continue to run the trucks to reduce the book value to meet the market or take a loss depending on what – where they are in the cycle. So to me, there is downward pressure on used trucks.

And then I think I mentioned earlier, Rusty Rush from Rush Truck Centers, thought it would take probably about 18 months to see the book value is equal to market. The good news for us on the PTL side is that we run our trucks from 5 to 6 years. So, we have got much less depreciation in balance when we get to the end of our leases.

Now on the Premier Truck side, we definitely are feeling the used truck price deterioration, because we make commitments on certain trades and the market has dropped on those. So if you look at our numbers, we are taking a loss on some of those trucks.

The good news is, in that business, you got 112% of our fixed costs covered by our parts and service gross. And so we have other levers that would still give us – gave us in the quarter 3% return on sales, which 3.2%, which is better than the auto side. So I think it’s going to be – take some time to level out.

But as you run these trucks longer, there is going to be more parts and service business. So we, as service providers are going to get some benefit out of that..

Thank you for all that detail. I appreciate it.

Can you also talk on your capital allocation, how much buyback spending you did in Q3 and your expectations for any buybacks in fourth quarter?.

We didn’t do any buyback in Q3..

Okay.

And do you want to comment on expectations for the rest of the year or just...?.

Well, we would typically buy – we have some stock compensation, which comes up each year. And we take a look at that and would typically, probably make some purchases, I think we have about $30 million left available on our ability given by the Board to buyback stock..

Okay. And my last question is on the brand-new unveiling of the Mercedes X Class mid-size pickup, I was just curious given your expertise in the premium segment, if you think one would – is there a market for that type of customer in Continental Europe. And then also Daimler said they are not bring it into the U.S.

for now and do you think there are Americans that would want that truck?.

I guess it might be a good truck for Beverly Hills, right. I don’t know. That’s going to be an interesting one. I think they are getting that benefit that’s going to be part of a Nissan joint venture that they have, that they are doing on the Smart car and some of the other cars. I really can’t comment. We will have it in the UK, obviously at some point.

But it’s a further extension. There is a market out there. How many, it’s hard to say..

Okay. Thank you so much..

And our last question comes from the line of Michael Montani of Evercore. Your line is open..

Hi, Michael..

Hi, Roger. Thanks for taking the question. I appreciate it..

Hi Michael..

Hi guys. Just wanted to ask, if I could Roger, you have mentioned in the past 10% as being kind of a top line goal and actually it’s proved pretty prescient this year and it’s kind of 5% acquisitions and 5% organic, so I guess the question I wanted to ask is how you are thinking about that and to next year, given kind of plateau in U.S.

and then obviously potential impact from Brexit?.

Well, I think we said that Brexit will be probably $1.1 billion to $1.2 billion. So – now that would be a 5% impact on $20 billion, roughly. And I think that the acquisition target, certainly will still be there. And you might see more in acquisition than you would growth because of the impact of Brexit..

Okay, understood.

And I guess if I could, is there a certain leverage level that you would say is the ideal level where you would look to buy the remainder of PTL, do you need to be 2.2% or lower or could you kind of do that deal at 2.5%, like how would you think about that?.

Well, that’s something we are looking at. Again I said it earlier, we would like to rush and buy the rest of it. But we have to look at that just – what are the markets. And to me, we want to keep our debt to capital in line. We are sitting now at 51%. And I think our leverage is what, 2.8x right now and we could go higher.

We have to concern our self with our credit rating, so we need to be talking to the agencies, which we would do to be sure that we have plenty of room. And there is no question today that on our covenants, we have room and we have liquidity of about $700 million when you look at our – at our bank sources..

Okay, great. Just the last thing I had. One was a quick housekeeping thing, which was how to think about CapEx needs for the next couple of years.

And then on the UK side, I was backing into some level of gross profit pressure per unit, like possibly high single-digit type levels, I was wondering Roger, if you could just talk about how that compares to recent trend and what might be driving that, is there something that sort of temporal that would, of course correct in the next quarter?.

Someone asked me today about gross in the UK. We were under some pressure on gross profit in BMW and Audi, particularly, so we were down. But with JLR, Porsche, our specialists area was up, so you are going to see those things back and forth.

We do know that with the brands that have the higher volume, luxury brands in the UK, we have got pretty much a six-month target and we will have some benefit to collect some of that back we hope at the end of the year. But when you look at the margin, just the front end margin, without the finance and insurance we showed you a negative number.

But in some cases, we picked some of that back up through our finance product, which we think is – will help us as we go into the fourth quarter. It’s a management. And to me, we maintained our market share there and we have these targets. It’s a little different than you have here. We have targets that we have to hit.

Over here, they will put a target in one month, it will be something different the next month. Over internationally, you pretty have much an annual target and they just chop it up quarter-by-quarter that you have to meet. And of course, there is some benefits when you hit them. And sometime, there is a carryover.

From a CapEx perspective we have been spending somewhere between $125 million and $200 million on CapEx. Now some of that we are buying land, some we are buying out some leases or we want to own the property.

But I would say that we are probably going to be 150% to 160% of our depreciation and amortization pretty consistently if you look at pure CapEx and that would include our maintenance CapEx..

Got it. Thank you very much..

Okay, thank you..

And there are no further questions here in queue for us..

Alright. Thank you very much, Derek. We will talk to everybody next month – next quarter. Thank you..

And ladies and gentlemen, that does conclude the conference for this afternoon. We thank you very much for your participation and for using our executive teleconference service. You may now go ahead and disconnect..