Tony Pordon - VP, IR Roger Penske - CEO J.D. Carlson - EVP and CFO.

James Albertine - Consumer Edge Research Rick Nelson - Stephens Paresh Jain - Morgan Stanley Brian Sponheimer - Gabelli & Company John Murphy - Bank of America/Merrill Lynch Bill Armstrong - CL King and Associates David Lim - Wells Fargo Brett Hoselton - KeyBanc Mike Montani - ISI David Whiston - Morningstar Carl Dorf - Dorf Asset Management.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Fourth Quarter 2016 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately one hour after the completion through February 14, 2017. That’s located on the Company’s at www.penskeautomotive.com.

I'll now introduce Tony Pordon, the Company's executive Vice President of Investor Relations and Corporate Development. Please go ahead. .

Thank you, John, and good afternoon everyone. Thank you for joining us today. A press release detailing Penske Automotive Group's fourth quarter 2016 financial results was issued this morning, and is posted on our website along with a presentation designed to assist you and understanding our performance.

Joining me for today's call are Roger Penske our Chairman; J.D. Carlson our Chief Financial Officer and Shelley Halgrave, our Controller.

On this call, we will be discussing certain non-GAAP financial measures, such as adjusted income from continuing operations, adjusted earnings per share and earnings before interest, taxes, depreciation and amortization or EBITDA.

We have prominently presented the comparable GAAP figures and have reconciled the non-GAAP measures in this morning's press release and investor presentation, which is available on our website to the most directly comparable GAAP measures. Also, we may make forward-looking statements about our operations.

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 the results to differ materially.

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

Thank you, Tony and good afternoon everyone and thank you for joining us today. I'm pleased to report record fourth quarter results for PAG, really demonstrating the overall strength and diversification of our transportation service model.

In the fourth quarter, income from continuing operations increased 13.5% to $82.5 million and related earnings per share increased 19.8% to $0.97 per share. Our GAAP results include a $5.1 million income tax benefit from the revaluation of a deferred tax liability on our premier truck investment.

The results also include a 2 million after tax benefit related to the Volkswagen settlement. Excluding the income tax benefit of 5.1 million, adjusted income from continuing operations increased 6.5% to $77.4 million, and related earnings per share increased 12.3% to $0.91.

Our fourth quarter results were achieved, despite the year-over-year currency headwinds, mainly driven by the UK pound. Excluding foreign exchange, adjusted income from continuing operations increased 12% to $81.4 million, and related earnings per share increased 18.5% to $0.96.

Before we discuss the specifics regarding PAG's fourth quarter performance, we'd like to review some of the key highlights from the past year. We retailed more than 457,000 new and used vehicles. Our used and new ratio was 0.83 to 1. Our revenues increased 4% to $20.1 billion. Excluding foreign exchange, our revenues increased 8.6% to $20.9 million.

Income from continuing operations before taxes surpassed for the first time $500 million. Adjusted earnings per share increased 7.1% to $3.93. Excluding foreign exchange, adjusted earnings per share increased 12% to $4.11. our board of directors increased our dividends four times, and the current yield is approximately 2.2%.

We repurchased approximately 4.5 million shares for a total of $167.9 million during the year. We also took several steps to grow our business while considering to diversify.

We announced our completed acquisitions expected to contribute approximately $1.4 billion in annualized revenues, which would include the expansion of our retail commercial truck dealership business in Toronto, Canada, acquiring six locations representing Freightliner and Western Star brands.

A dealer group in the UK representing the Audi, BMW, MINI, Skoda and VW franchises, which are expected to generate $200 million was purchased in the UK during the year. Seven franchises in Italy were purchased, effectively doubling our business. Our business in Italy is expected to generate approximately $400 million in revenue annually.

As previously discussed, we acquired an additional 14.4% interest in Penske Truck Leasing, brining our ownership to 23.4%. We also invested into an automotive dealership joint venture in Japan and increased our ownership interest in one of our Germany JVs from 60% to 68%.

Most recently, we announced the acquisition of two standalone used car vehicle retailers, one in the U.S. and the other in the UK. These are expected to generate approximately $700 million in annualized revenues. These businesses provide added diversification and a greater opportunity to drive used vehicle sales in this growing segment of the market.

Now let's turn to the details of our fourth quarter. Revenue decreased 0.7% to $4.9 billion. However, excluding foreign exchange, our revenue increased 5.7% to $5.2 billion. Same-store retail revenue declined 3.8%. However, excluding foreign exchange, it increased 2.8%.

Approximately 93% of our total revenue was generated through our automotive retail dealerships. Our revenue mix for the quarter was 63% North America; 37% Internationally and for the 12 months, we were at 60% North America and 40% Internationally.

During the quarter, 72% of our income was derived from automotive retail, 4% from North America and commercial truck dealerships, and 24% from other, which includes Penske Truck Leasing, Australia and other non-automotive joint venture investments. Now turning to Q4 retail automobile business, total industry retailed increased 1.8% to $112,129 units.

Retail automotive revenue was essentially flat at $4.6 billion and declined 3.8% on a same-store basis. Exchange rates negatively impacted the same-store retail automotive revenue by $281 million. Excluding foreign exchange, same-store retail automotive revenue increased 2.8%.

Same-store variable gross profit per unit, that’s gross profit from new vehicles, used vehicles and F&I, declined $9 per unit to $3,418. Excluding foreign exchange, our variable gross profit increased $227 per unit to $3,655. Turning to new vehicles, new vehicles retailed increased 4%, while same-store units were flat.

Gross profit per unit retailed was $2,988, down 2%. However, when you exclude foreign exchange, gross profit per new unit retail increased 4.6% to $3,189 or $139 per unit. Our gross margin was flat at 7.9%. This is an added point. Our premium luxury gross profit was 8.3%.

Our supply of new vehicles was 64 days at end of December versus 68 days at the end of 2015. Looking at used vehicles, used units retailed declined 1%, while same-store used unit retailed declined 4%. CPO sales however represented approximately 40% of our used unit sales in the U.S. during the fourth quarter.

Gross profit for used unit retail increased 3.5% to $1,472 or $50 per unit. Excluding foreign exchange gross profit per used unit retailed increased 11.1% to $1,580 or $158 per unit; and our gross margin increased 30 basis points to 5.5%. Our supply of used vehicles is 49 days at the end of December versus 44 days at the end of December in 2015.

Finance and insurance revenue per unit was $1,087. Excluding foreign exchange, F&I revenue per unit was $1,164, an increase of $54. Our service and parts revenue increased 2%, and was flat on a same-store basis. Excluding foreign exchange, same-store service and parts revenue increased 4.8%.

Our customer pay was up 1%, warranty up 14%; our body shops and PDI up 12.8% for a total of 4.8. Turning to the retail commercial truck business, in the fourth quarter, our premier truck group dealerships generated $218 million in revenue and $33 million in gross profit.

In Q4 our truck dealerships generated nearly 83% of its gross profit from service and parts; and fixed cost absorption ratio was a 114%. New and used trucks sales continue to be impacted by a decline in North American Class 8 heavy duty truck market, caused by softer freight demand, and excess capacity.

This continues to put pressure on used truck values. Recently, we have seen improved conditions for truck sales, that seem to indicate that the supply demand balance is improving. We expect similar conditions to continue in 2017 and improving economic conditions could lead to increased freight demand later in the year.

Turning to the Australia truck distribution and power systems business, in the fourth quarter revenue increased 7% to $116 million and gross profit increased 14% to $31 million. We have seen good progress across our commercial vehicle and power system business during 2016.

Recently we were awarded a $10 million contract to supply engines for large ferry boats in Australia. In 2016, we delivered 113 military vehicles to the government of Australia under a long-term supply contract. We expect to deliver 2,500 heavy duty military trucks under this program through 2019.

Looking at our balance sheet, we had 24 million of cash on our balance sheet at the end of December and our non-vehicle debt was $1.9 billion. Our debt-to-total capitalization was 51.2 at December 31st and our leverage ratio was 2.7 times. We had over 600 million in liquidity at the end of December.

New and used automotive vehicle inventory was $2.9 billion, essentially flat when compared to December last year. On a same-store basis, new and used inventory was down $131 million. Still the inventory was down 7%, used inventory was up 15 million or 2%.

Approximately $34 million of our used inventory is currently on OEM on stop sale, representing approximately 1,100 vehicles. The end of the quarter, the first quarter we had approximately 80 million on stop sales. So, we’ve made considerable progress since then.

Capital expenditures for the year were approximately $203 million and include $33 million for land purchases and a lease buyout we replaced with a mortgage.

In closing, we’re very pleased with the performance of our business and continue to believe in our diversification strategy, the strength of our business model and its ability to adapt the market conditions. I’d like to take this opportunity to thank the 24,000 team members who worked tirelessly to drive our business every day during 2016.

Thank you again for joining us on the call, and your continued confidence in our business. At this time, I’d like to open it up for questions. Thank you. .

[Operator Instructions] And first from the line of James Albertine with Consumer Edge Research. Please go ahead. .

I wanted to ask on the used vehicle gross profit side.

Looking ahead to 2017, can you help us understand kind of what the biggest impact's as you see them potentially, in terms of gross profit per unit could be whether, its supply, some combination of new vehicle incentives bleeding into used pricing, or just the influx of the competition perhaps even into the market? Thanks. .

All right, Jamie. The first thing, as far as I am concerned, is got to be driven by the new vehicle sales that have taken place over the last 12, 24, 36 months. And we have significant number of off lease vehicles coming in on the premium side, because we’re dealing primarily -- as you know 72% of our mix is premium.

And we’re looking at about $3.5 million lease returns in 2017, and that’s going to grow to over $5 million when we get to 2018 and 2019. So, we expect this to have a certain impact.

I think the key thing here is though that as we grow our used car business, we found that the sale of our demonstrators, under the new programs, we can take them out in between 3,000, 4,000 and 5,000 miles, and they become high profit cars for us, because we bring them into the marketplace as almost new cars, we get the current financing or lease programs for those, and that's helped us maintain our gross profit.

So, we use that as an offensive tool as we go forward to the rest of the year.

I think from the standpoint of availability, there is no question, with 40 million used cars being sold, there is no question that there is the opportunity for us to understand the used car business, and I think that’s one of the reason's that we made our acquisition in the car center in the U.S.

and also the CarShop will closed in the UK sometime in the next 30 to 60 days. And this gives us another option. When you think about our used car prices, they're typically 26,000 and 28,000. And under the car sense model, its probably $19,000 and $21,000.

So, we’re really going to access a different customer with a different model, fixed priced salaried employees, unit bonuses; and I think that based on our current understanding of that business, it's really a no haggle, no fear buying experience, which we've heard about, and now we're going to experience.

And I think the question is, is this going to be an opportunity that we can then take into other markets? We think we can. There's a lot of wide space. There is no corporate identity and franchise agreement. So I think the used car business is a real opportunity for us, as we see the [indiscernible] putting pressure on new car margins. .

That's extremely helpful. Thank you for that.

And maybe as a follow up, what are the -- how should we think about the growth investments into that business for you? What are the gating factors to keep in mind with respect to the brick and mortar growth? Is it finding real estate, or is there something that we should consider that might split that down, or can this standalone used opportunity grow quite rapidly, quite quickly as we're looking ahead? Thanks.

.

Well I think that our peers have all been getting into this business, and I think they see that capital expenditures, the investment and bricks and mortar bring considerably less than going into the traditional dealership model. And I think that this bodes well for us. And we look at probably adding at least two locations in 2017, here in the U.S.

and also at least one in the UK as we go forward. So the investment is less. The cars are same except we can access those, probably have more tools to access those than a typical used car dealer would have and we can use our back office for all the other items we need to run a business. So I think our model is good. It's less cost.

And the nice thing is there is no goodwill when you go into these businesses. So all your money is in working capital and your fixed assets..

Next we move onto Rick Nelson with Stephens. Please go ahead. .

Hey just the follow up on the free standing used car stores. Your approach to acquire versus build from scratch, some of your peers are executing that strategy. I'm sure you consider that as well. What for you is the advantages for the acquisition as opposed to build from scratch. .

Well look, I think that you can take either course. I'm not sure that I'm any smarter than they are. But I would say that in our case particular, I see a business from car sales, which have been protected over 20 years in that Philadelphia, Pennsylvania and New Jersey market. There is very attractive demographics there. There's a high repeat business.

So we're getting a repeat referral already coming out of that business, and we talked about the culture and hiring process there as key. And I think that it's interesting when we look at this new model, we now have really something that we can use to basis our future growth because we have a successful model.

And I would say to the investment community that the ability to have accretion of $0.06, $0.07, $0.08 for this business in 2017 is another positive. So again, there is plenty of space out there.

And I think with 40 million used cars, three times almost than the number of new sold, when you think about it, there's about 14 million real retail cars sold a year, not 17 million, that's including fleet, there is a real opportunity for all of us and I think you are going to see with the tools we have and the internet obviously to be able to do the branding will be very, very powerful for us as we go forward.

.

Thanks for that color. You've talked about the acquisitions, the open points added $1.4 billion in revenue. I guess about the half of that is going to close here in the first quarter.

As you look forward, do you think 2017, how do you think that's going to stack up from an acquisitions standpoint?.

Well, I think that we're going to continue to look at Greenfield on the used car side, which we just talked about. I think if there is premium luxury opportunities that we can glue on in markets where we have a presence, we will continue to be an opportunistic buyer, and certainly we'll take a look at the balance of the Penske Truck Leasing.

The GE onus could be an opportunity for us as we get towards the end of the year. So if I gave you the full 360, that's where we are looking at capital allocation after dividends and certainly any CapEx that we have to take care of based on our commitments to the OEMs. .

To follow-up on that, most of that the acquisition looked like it came overseas, although PTL, a little bit from there. Not much in the U.S.

Is that kind of the same outlook? More opportunities overseas?.

No, I think that we want diversification. Overseas we were able to add on -- in Bologna, where we had a strong management team, which his key, also sitting ahead of a tremendous year this year. So they have had a tuck-in that they had from a brand perspective. But I see us adding in the U.S. The multiples remain higher here.

So we have to balance that off. But on the other hand real-estate, as we look in the UK and certainly in Western Europe, we don’t quite have the commitment we have to make to the OEMs over there. So it's a balance but I would say we're not shutting the door on a U.S. for sure. .

Next will go to Paresh Jain with Morgan Stanley. Please go ahead..

Just have one question on used demand. There is this belief that with the increase in used supply and a potential fall in used prices, demand for late model used vehicle will increase significantly and perhaps cannibalize new demand. Let's consider the reverse situation for a second.

What we have started seeing is that new cars that are coming in with a lot of active safety content that makes them safer than the average late model car by order of magnitude. A Tavera for example has active safety content that is pretty much standard on its entire line-up.

Do you see something like this perhaps supporting SAR [ph] in the near-term and creating further pressure on used instead?.

Look I have to use the heavy-duty truck market Paresh, as maybe an example.

We had anti-skit brakes, we had lane avoidance, all of those things came on and were opportunities, but it takes a while until people go through their fleet cycles before they add those on based on cost, and then certainly we're finding out in some cases we don’t get the benefit of the residual value.

I don't think it's going to change the SAR, because someone don't have a car with that capability. I think more important is going to be what's going to be assisted driving, what's going to be autonomous. Those things might decide the number of vehicles that we'll need on the road to get the utilization we want.

Porsche is going to raise maintenance costs for us in our shops potentially. So I don't think that you're going to see those types of -- call them safety items or items with technical capability that are going to drive higher SAR. I don't think that.

I think that it's -- it's new models, you certainly would see it if electrification, and there's legislation coming which drive -- and I guess what's going to drive the electric vehicle. The cost of ownership model today on EV; I don't think it gets you there, but it will once the manufacturers have to meet the 2025 emission requirements.

Then you're going to drive some different dynamics as far as mix..

Next we got to Brian Sponheimer with Gabelli & Company. Please go ahead..

Roger, just some perspective on your own used inventory, as you see at December 31st, 2016 versus 2015 just from a mix perspective?.

Well our inventory was actually was up. If you looked at it between 2015 in December and '16, and I think one of the real reason we're not going to buy several thousand vehicles in Europe, both Western Europe and the UK, which drove up our used car inventory at the end of the year, but the mix, obviously today people want trucks and SUVs.

And when you look at our overall inventory, it was only up $15 million at the end of the year. So we are seeing pricing on trucks and SUVs much stronger than we do on sedans, which you've seen that because of the gas prices being low and the incentives really pushed the customer towards the truck. So we still need more SUVs..

As we think about, and particularly for you, the CPO vehicles, or the vehicle that could be CPO coming back; the mix three years ago from a lease perspective, a little bit different than it is now, is that going to potentially create some problems as far as what you do with those excess sedans as they come back relative to the SUVs and crossovers that you want to keep?.

Well I think that's something that's the liability of the OEMs. For me that's good for car sense, because we're going to be buying in the open market. Those vehicles we'll be buying at market price; and we'll see some -- I see some sedans today, that are very well priced because of that. So remember we're not on guarantee buybacks on used cars.

We're not guaranteeing that. So, to me we've the market ability to buy it at market value. Now if you don't turn those vehicles in 30 or 60 days, then you have some deterioration of your margin, and then there'll be no question as we see more incentives on new car, that's going to drive a lower pricing on existing portfolios of used.

So there'll be some dynamics there, which I think it'll be more impactful on the OEM than it would be on the retailer..

I guess last one, just big picture.

I think it's very early in the new administration, but thoughts on potential changes in corporate tax, either the border adjustment taxes and everything that's getting thrown out there right now?.

I don't think I'm the one to be able to give you anything that's going to be meaningful other than to say that a reduction in regulations I think will be beneficial to the business community. No matter what business you’re in, I think that’s a positive. A reduction in the corporate tax rate, today, we’re 33 to 35.

Going to 15 or 20 would be a big help to us as you would expect. The elimination of interest deduction, I'm not sure how impacts us. Certainly read recently that there is a deductibility of capital spending. Instead of amortizing over three years or four years you can deduct that in year one. The bonus depreciation obviously might go away.

So, to me the repatriation of earnings would be a big benefit to PAG, because of our -- the growth of our business internationally. So all of the things that I see on the plate here, I think are excellent. And if we can take regulation out and then simplify the business and certainly with taxes, I think it will be a massive benefit to us.

From a border tax, how it impacts the OEMs, whether they're foreign or domestic OEMs, I don’t know because you’ve got parts coming out of the U.S. going into these foreign countries, then coming back in, is it net import export number you are taxed on. I really don’t know that.

I think that we’re still in the first inning as far as Trump's concerned on that..

Our next question is from John Murphy with Bank of America/Merrill Lynch. Please go ahead. .

Just, we’ve seen some of the luxury brands work their way into and out of some lease bubbles in the past. And obviously you’ve been there with them to help on both ends. I'm just curious if you can kind of highlight or think back to any of the tactics that they use to work through some of these surges in leasing.

And also as they do that, do they get the, sort of the owner to buy the vehicle or the lesser [ph] to buy the vehicle at the end of lease.

Or does it mostly end up in the open market and you guys work with it from there?.

Remember, you’ve got three options. You’ve got one to extend the lease and you can be sure that the OEMs, because of the amount of premium coming back, they'll do everything they can to offer an extension at a lower rate. So that would be -- certainly would be one.

Two would be able to buy the vehicle, and I'm sure there's no question that they'll be offering certainly great rates from the standpoint of buying out the vehicle. Also, what we’ll see is in order to mitigate some of the pricing, and even for us to move them, they'll have longer warranties unused.

There is no question you'll see some probably zero rate financing on used car that we haven’t seen before. So, to me the offer of leasing now used cars is very interesting, because that’s somewhat of a camel ply John on residual value if they're betting on if that car goes back out again maybe for a two, three or four-year cycle..

That’s interesting, and certainly very helpful. And as we look at the CarShop acquisition, you guys mentioned in the press release that you have 15 acres for the prep site for the vehicles. I'm just curious what exactly is going on there on that prep side.

And two, if there are other opportunities to leverage the real estate and the processes that are going on there?.

Well, to put that in perspective, we’ve got approximately 15 acres. We can actually service 45,000 vehicles through that site. We work 24 hours, 7 days a week. Now right now, some of the work that's being done there is some decommissioning of used cars and lease returns for third party.

So we do that to fill in where we don't have the vehicle part for our own utilization. So the good news is we can grow that. And that's one centralized location, and Leighton Buzzard in the UK.

So all vehicles go there and then they go back out to the retail outlets which gives us the reconditioning being complete, and the standards are the same across the entire market, gives us real consistency. So we see that as one point of contact for used reconditioning.

We see it as an opportunity to also -- in some cases I know they're doing business with MG, which is a brand that you probably don't even see over here. But they're doing their reconditioning for them and some of the PDI work. So those things we can pick up, add a little bit of extra growth. But that's not the core business. .

Okay. And then just lastly, you mentioned the stake that GE still owns in PTL might be something you'd consider buying out. I'm just curious how much is left there at GE.

And sort of, how motivated they are to really kind of clean up the books there?.

Well GE has really downsized GE Capital. We've been part of GE Capital for -- since our early joint venture. There is 15% less that we would certainly take a look at. And Matsui [ph] is a partner of ours also in that business.

So I think together we'd look at that towards the end of the year and see if we have the capital available, the market is in the right condition, we would go to GE and try to negotiate a purchase of that last piece. .

And we'll go to Bill Armstrong with CL King And Associates. Please go ahead. .

Good afternoon Roger and Tony. Roger, I think I heard you mention that heavy duty truck sales trends are improving recently.

I was wondering if you could clarify that? And what do you think might be driving that?.

Well I guess, I see this on the truck leasing side Bill. And we saw -- at the end of '15, we saw our rental business start to fall off. And I think when you see that falling off, you know that there is -- either freight has slowed down or there is excess capacity. So we took out about 2000 tractors at the end of '15 early '16.

And now we've seen that rental business start to kick up and our RPU, rental per unit, and RPT, rental per transaction continues to grow.

So we think that showing that this over supply of equipment is starting to flatten out, and in fact we see the business -- and Premier Truck in Dallas just an example, we're out buying used trucks now, where in the past six months we've been trying to get out of the trucks that we've had too many of the same make maybe and model.

So we see going out and buying used trucks. We see the market open for that and we see the fleets probably loving that. What's happened? Most of the big fleets have had to add another year of depreciation. Where they might turn in 2.5 years or 3 years, they're going to 4 so they can equalize book values to market values. So I think that's coming in.

We think by probably the second or third quarter, we'll see that pretty well equalized. .

Got it, very interesting. And on the Penske Truck Leasing, obviously, you have a larger stake on that than you did a year ago.

What would be the underlying income of PTL in the fourth quarter versus a year-ago, if you can disclose that?.

We don’t disclose. The only thing we did was give you that we had 26 million in the quarter, a benefit from Penske Truck Leasing..

Okay, fair enough. And then finally just back to automotive, in Texas we've had industry weakness because of the energy situation.

Any update there? And what you guys saw in Texas relative to the rest of the country?.

The good news is we're in Austin, the State capital and there is no question that we have a BMW business there that's been strong and we're in Round Rock with Toyota, Honda and Hyundai, and that market has been very good for us.

I say when you move over to Houston, we're we have two Honda stores, it's been a little bit weaker, but overall I think that we've had -- in the fourth quarter our units were up probably somewhere between 5% and 7% in the Texas market. .

Okay, that's pretty good. Alright, thank you very much. .

One other thing, just, I would say if you talk about West Texas, where we have our premier truck business, we certainly saw that fall down and go down considerably over the last 12 to 18 months, maybe 12 months.

But that's starting to come back to, and oil prices going up, we're starting to see some -- I think the West Texas intermediate, it's up about 44%. So we're starting to see some truck activity there, and I think that's what boding well.

When you look at the overall heavy duty truck business, you're going to start to see some money spent in that particular market. .

Our next question is from David Lim with Wells Fargo. Please go ahead..

Roger, can you dimensionalize what were the factors that contributed to the gross profit per unit growth on ex-currency basis on new and used in the quarter?.

Well, I think number one, you've got to look at our business, as 72% of business is premium luxury. So [indiscernible] on being 21 and the big three is only 4%. So were getting the benefit when you think about Porsche and Mercedes and BMW, Lexus and these models, and Land Rover.

We're a high profit business and when you look at in the UK particularly, we're the number one dealer in all of those markets, except I think Land Rover and Jaguar. So we're getting a nice GP from there. And when you look at our luxury -- our luxury GP, I mentioned I think on, earlier in my notes that we are at 8.2%, and that's because of mix.

When I go back to the end of 2015 for Q4, we didn’t have the mix of trucks. In fact in BMW we started out the year with 35% trucks and 65% sedans, and mix makes really flipped for us. So we really started to get the model mix we wanted. You look at Northeast, the northeast has been soft.

So a lot of the good equipment has gone to say south Florida or to maybe after the west coast. So Warwick, Fairfield, Greenwich, even D.C. we were short of trucks, and we had a big influx of that product as we looked at the fourth quarter and I think that probably had a big impact honestly from a GP perspective. .

Interesting and when you talk about two more locations in 2017, talking about used vehicles in the U.S., I presume and one in the UK.

Is this going to be under the CarSense brand et cetera, and are these greenfield dealerships?.

I would say that as we go forward, I don't think we have anything on our books today that we would want to convert, or that has the size that we want to convert to either CarShop in the UK or CarSense here.

So we have located I think a couple of locations for CarSense that we're looking at, and I know for a fact in the UK that we've picked out a location already. So those will be greenfield sites. Remember, instead of building a $15 million or $20 million dealership site, we can buy the land.

The land will be the same price, no matter what you put on it but the infrastructure we put on will -- probably I would say 40% of what we're paying for was a full-blown dealership. So the economics will be I think much better.

And one thing that we want to be sure that we do is that we provide the customer experience for service, which really, I think we can bring up to another level.

We have it at CarSense, and they have it certainly to a certain extent in the UK, but I think that's one area that we can bring some expertise to, the technician training and have a proper lounge area for your customers, and they really have gone in the used car business and thought about service after that.

I think CarMax has done a good job in executing both the sale and the service piece. So we'll take our capability and our expertise in that area and try to meld it in with a CarSense or CarShop, but keeping the brands separate.

We're not changing the brand names, we think that there's a lot of capability and certainly there's value in those brands already. So what we want to do as have them be standalone and be able to then go into markets and operate as a separate brand opportunity..

And then just two more.

When we think about the incremental investments, do you guys, I know you just said 40% less, but in order to build a ground up CarSense/CarShop how much CapEx should we think about? And then to follow-up onto Paresh's question, so from your experience, just to be clear, active safety content, you don't think that there's going to be a massive switch from a perspective used car buyer to a new car buyer because of active safety?.

Look I'm -- I understand the technology, but for me to make that kind of a statement I think would be wrong.

Certain -- look, if it takes your insurance down by 50% or 60%, I think there's got to be third party factors that drive that, not just the fact that you can get these things, because some of this is available now, and I'm not sure that's the reason people are buying cars. I think they buy on styling, they buy on comfort.

And obviously with the safety requirements, all cars are much safer than they've been in the past.

So I think it's the autonomous -- I think it's assisted driving and some of those things that ultimately will change the mix, but I think that's going to be 2020, 2025, before you see real impact and a lot of that's going to be because the regulation in most cases done by the government; we'll see what Trump does on some of that, I think that's still -- still open.

Going back to your point on CapEx, I would say that you're probably going to pay $400,000 to $500,000 an acre for your land. So if you're putting 10 acres, it's probably 5 million and I think the facility that you put on that land would be somewhere between $5 million or $6 million.

So, I think we’re probably all in, we said 10 on the low side and 12 or 13 on the high side, we’re probably realistic. That’s my numbers now. Someone could -- a contractor could challenge that, but it depends on where you want to go and what markets you want to be in now.

If its New York City, it’s a different number, but I think that size of around 10 acres, you can 150 cars an acre if you pack them in. So, you can easily put 200 or 300 cars on 10 acres, and that’s what we like to have in most of these, 300 to 400 vehicles on the used car side, to make a proper value proposition..

Next, we’ll go to Brett Hoselton with KeyBanc. Please go ahead..

Briefly on used vehicles, I think you said you had a 67-day supply and it's kind of high relative to your peers.

What are your thoughts there?.

Well. I think I said it earlier, when you look at our day supply we’re up from last year, but that is if we’re looking at the end of a big impact, in Europe specifically due to the fact that we bought I think somewhere between 1,500 and 2,000 used vehicles at the end of the year. And in the U.S. our day supply is 40 days which is well in line. .

Okay.

And then if we look at 2017, and we kind of think about M&A, kind of how are you thinking about deal flow multiples? I know you’ve already mentioned some of this, but light vehicle versus commercial vehicle, and regional and that sort of thing?.

Well, we would like to -- always if we can buy where we can glue on, where we have scale and where we have a centralized office. And it would be a premium brand we’d be looking at volume for [ph] and where we have the expertise with our people. So I would see markets where we have scale.

Number two, from a truck perspective, there is no question that freight liner is interested to see fewer owners and larger dealership groups. So, we'll have a little broader look there, they might not all be contiguous, but I see that as a continued opportunity.

And the multiples there are less than they would be if you were trying to buy a new Mercedes Benz from our BMW business in a prime market.

On the other hand, when you go overseas, there is lots of families over there that have owned businesses for many years, that just basically want to keep the real estate, and you'll get a very attractive rate on the rents on the real estate. In most of those you cases, you now make any CapEx additions, if that’s needed.

And then you actually put working capital and the multiples there are significantly less. .

We’ll go to Mike Montani with ISI. Please go ahead. .

I just wanted to unpack if I could, the 11% increase in GPU on the used side. Can you give us some additional color there about how the U.S.

looks versus the UK? And then also what kind of impact did the loaner vehicles have on that if you were to strip that out?.

Well, I would say that in the premium luxury side, when we look at our BMW franchise specifically, I look at the [indiscernible] and Orange County, we look at San Diego, we look Peter Pan, we look at the stores in Atlanta, just to mention a few, there is just no question that the loaner car change out has been a real plus for us.

That's driven our used car volume and margin nicely, because most of those vehicles have 3000 to 5000 miles on them, and we have to turn them anyhow, and we're not putting vehicles into loaner today that we can't sell. We're putting ones in that we know will hold their residual value. So there is no question that that helped us significantly.

And when you look at the used vehicle gross, overall we were up $50 for when you take the luxury, the volume for them in domestic. So to me overall we're up $30 in the U.S. So I think it's a mix and we're going to continue.

The other thing that I didn't mention, I'll tell you that our gross profit would be, that our wholesale loss was down significantly. I think we were down about $500,000 in the U.S. And we have an auction -- online auction in the UK which was -- I think generated several million dollars' worth of profit during 2016 in the UK.

So when you take that in, and you look at your total gross profit, on use with your losses and your profits, I think that also had a benefit for us. .

Okay. And then if I could just -- thinking ahead you mentioned the off-lease vehicles.

How should we think about the potential to get accelerated used units from that, versus the potential for incremental margin pressure? How do you all think through that?.

Well as the units are going to come out -- I mentioned earlier that a customer can extend his lease, can buyout his lease and then third would be negotiating, the OEM takes it back and then we have a negotiation with the OEM for that vehicle and then we retail it.

And I think the impact to move those obviously is better today with the low interest rates. We certainly have zero rates financing. You've got longer warranties you can put on that if they're certified. And then we have the benefit to move some of these vehicles that are available.

We can go in and try to buy blocks of vehicles and CarSense is a -- would be a perfect place to put those.

Because they will be -- the remember they are two, three or four year leases, you're going to be in that sweet spot around $20,000 retail, which is exactly what we're looking for versus owner cars that are coming out that might be as high as $30,000..

Hey great. and the just last one I have is housekeeping. But can you just give any incremental color in terms of what the split was on the unit comp side, UK versus U.S. UK actually looked quite strong in the quarter..

As far as the gross profit?.

Well I was thinking more in terms of the units, just the unit comp. .

Yes U.S. was down 1% Mike and UK was up about 7% on a same-store basis. .

Our next question is from David Whiston with Morningstar. Please go ahead. .

Hey Roger and Tony. Just a couple of things on the used business first. And can CarShop be expanded ultimately long-term throughout continental Europe? Or do you think that will only make sense in the UK? And somewhat related from either UK or U.S.

used strategy, are you willing to have kept a finance arm for it at some point?.

Well let me say this. At CarShop particularly, we see a real opportunity in the UK. And I would say, a place we might go is South and we might go to Northern Ireland, where we have some people and we have capability there. But I see it -- quite honestly CarMax was so far ahead of the game over here, we really didn’t see that.

Then there has been a couple of businesses similar to CarShop that have popped up in the UK. So I see that there's something that we can do and there's no question that that has an opportunity in western Europe now. So, I think we're going to probably want to populate UK and Northern Island before we go marching into Italy or Germany at the moment.

Because of the language in some cases, it's tougher for us to maybe manage that and move that expertise. From a finance perspective or a finance arm, I think that's something that we have to look at. There is some buy here-pay here options that people have out, there but at the moment that's not ahead of the list for us..

Okay, and as you probably saw, automotive news had a lot of discussion on sales associated turnover recently, 67% I think on average for the industry.

Can you disclose what it is for PAG?.

Our turnover last year was right at 20% and we've been hovering in the 18%, 19% or 20%. I would say our sales turnover is somewhere between 40% and 45%, which is too high and I think that, that's what we're going to look at as there are other ways to compensate.

It seems that in the used car model that we have, there is lower turnover, but that's obviously because there are salaried people. They get unit bonuses and I think that makes a big difference as far as turnover is concerned.

And that might be the model, if you are going to go to one price, the cars are priced, so the negotiation is very minimal and we can probably attract a different type person there, which will -- we'd probably more successful.

So I think that we have to train, train, train and we're using products specialists now, which to me have made a big difference. These are people that really handle the products.

Then you have your managers that can handle the ultimate sale, and that's been something that's been -- I wouldn’t say it's been prescribed but it's certainly from the -- when you look at Mercedes and look at BMW product genius, product support people are making a big difference, because we're able to take a sales person and take a young person that wants to be a product specialist, and you team up, and by the time they get to the floor to be a sales person they know all of the nuances and have the training, and it makes a huge difference.

And to me one of the things we're doing differently is that we have an NADA class for our managers, and we're sending -- and so this is a separate class that we have tailored specifically for PAG.

And we send anywhere from 25 to 30 people there from a management perspective and we're seeing today 85% of those people are still with us and they've moved up into jobs with more responsibilities. So we think that it's up to us, to providing an environment where they can make money. I know that there's got to be flexible hours for.

We've got diversity with women and they have kids. They want work certain hours. So we were adjusting -- we're adjusting the workplace hours in order to meet the employees' requirement. Overall, we’ve tried to make it hard to get in here and hard to get out. So overall, I think 20% in a retail -- and that's kind of moved up.

As employment rate has come from say 7% or 8% down into the 4%, we've seen ours creep up a little bit, because people have other options..

And we have a question from Carl Dorf with Dorf Asset Management. Please go ahead..

Roger, I like everything that you're doing on the diversification side, but what's concerning me a little bit is the level of debt and the fact that if you continue to do deals as well as continue the buyback -- can you give me your feel as to where you see the debt level going and what's your thought on this?.

Our debt to capital, when you look at it, we're at 51%, and I look at our peers who are somewhere higher than that. And obviously if we had to go into the market at some place for more equity, if we felt that was the right thing to do, I'd be the first guy at the door, investing..

Well can you tie in that with the continuation of the buyback and the deals? And are you comfortable leaving it at 50? Do you see it going any higher, or you see it going down?.

I think that we've got to keep our leverage at around 2.7 to 2.5 times. I think that 51 is a high watermark for us. We've been in the low 40s. So, as we've made these latest acquisitions, it's moved up.

But from a buyback perspective, I think right now we would support the stock, and as you saw me support it, or we supported it back here several months ago, I think that when you look at our EBITDA, it was almost $700 million, it was $670 million last year, I feel comfortable where we're.

But I don't think you're going to see it much higher than 51% or 52%..

My perspective is I'd like to see you ease off on the buyback and with the stock where it is and see the debt come down a bit..

That's good. Good input. I appreciate it..

And with no further questions, I'll turn it back to you Mr. Penske for any closing comments..

No that's all. Thank you, John, and we'll see you next quarter. Thanks, everybody..

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