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

James Albertine - Consumer Edge Research John Murphy - Bank of America/Merrill Lynch Rick Nelson - Stephens Brian Sponheimer - Gabelli & Company Bill Armstrong - CL King and Associates Mike Montani - ISI Mike Ward - Seaport Global David Whiston - Morningstar.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group First Quarter 2017 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately one hour after completion through May 03, 2017 on the Company's website under the investor relations tab at www.penskeautomotive.com.

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

Thank you, Cathy, and good afternoon, everyone. Thank you for joining us today. A press release detailing Penske Automotive Group's first quarter 2017 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 Halgrave, our Controller. On this call, we maybe be discussing certain non-GAAP financial measures, such as earnings before interest taxes, depreciation and amortization or EBITDA.

We have prominently presented the comparable GAAP number and 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 results to differ materially.

I'll now turn the call over to Roger Penske..

Thank you, Tony. Good afternoon, everyone and thank you for joining us today. I'm pleased to report another quarter of record performance for PAG demonstrating the overall strength and diversification of our transportation services model. During the quarter, we retailed more than 124,000 new and used vehicles.

Our revenues increased 5.3% to $5.1 billion and our income from continuing operations increased 4.9% to $83.2 million and related earnings per share increased 7.8% to $0.97. Our first quarter results were achieved despite the year-over currency headwinds, mainly driven by the British pound. Foreign exchange reduced revenue by $288 million.

Income from continuing operations by $7.5 million and earnings per share by $0.09. Excluding foreign exchange, revenue would have increased 11.3% to $5.4 billion and income from continuing operations would have increased 14.4% to $90.7 million and related earnings per share would have increased 17.8% to $1.06.

We continue to carry over 500 vehicles or more than $17 million in stop sale inventory for specific OEMs and during that first quarter we recorded a benefit received from that OEM of approximately $2.7 million net of taxes. We also took several steps to grow our business while continuing to diversify.

We announced our completed acquisition is expected to contribute approximately $1.2 billion in estimated annualized revenues, including two standalone used vehicle supercenters, one in the U.S. called CarSense and the other in the U.K. called CarShop.

Our Jaguar Land Rover dealership in Paramus, which is expected to contribute approximately $210 million in estimated annualized revenues and Schumacher European and Mercedes-Benz and Sprinter dealership in Phoenix Arizona contiguous to our existing Scottsdale 101 Auto Collection, Schumacher is estimated to add approximately $250 million in estimated annualized revenue.

Let me now turn to the first quarter performance. As previously noted, revenue increased 5.3%. However foreign exchange reduced revenue by $288 million and excluding foreign exchange, revenue increased 11.3% to $5.4 billion. Same-store retail revenue declined 2.2%. Exchange rate negatively impacted same-store retail revenue by $253 million.

Excluding foreign exchange, retail revenue increased 3.7%. Approximately 94% of our total revenue was generated through our retail automotive dealership. Our revenue mix was 56% North America and 44% international.

During the quarter, 84% of our income was derived from auto retail, 5% from North America and commercial truck dealerships and 11% from other, which includes Penske truck leasing and Australia. Turning to our Q1 automotive retail business, retail increased 11.6% to 124,472 units.

Retail automotive revenue increased 5.4% to $4.8 million, but declined 2.2% on a same-store sale. Exchange rates negatively impacted same-store retail automotive revenue by $253 million. Excluding foreign exchange, same-store retail automotive revenue increased 3.7%.

Same-store variable gross profit per unit that's gross profit from new vehicles, used vehicles, and F&I declined $47 per unit to $3354. Excluding foreign exchange, our variable gross profit increased $158 to $3559. Turning to new vehicles, new units retail increased to 5.8% including 0.6% on a same-store basis.

Same-store units declined 4.8% in the U.S. and increased 8.4% internationally. Same-store gross profit per unit retail declined $164 per unit. However, when we exclude foreign exchange it increased $11 to $3008. Same-store gross margin declined 10 basis points to 7.6%.

Our supply new vehicles were 51 days at March 31 compared to 55 days at the end of March 31 last year. Looking at used vehicles, used vehicle retail increased 18.1% including 8200 units retailed at our standalone used car superstar location. Same-store used units retail declined 1.5% and our same-store used the new ratio is 0.88 to 1.

CPO sales represented approximately 39% of our used unit sales in the U.S. during the first quarter. Same-store gross profit per used unit retail declined $52. However, when excluding foreign exchange, it increased $44 to $1644. Same gross store -- gross margin declined 10 basis points to 5.9%.

Our supply used vehicles was 39 days at the end of March compared to 39 days at the end of March in 2016. Same-store finance and insurance increased $57 per unit. However, when excluding foreign exchange, it increased $124 to $1190.

Service and parts revenue increased 4.4%, including a 0.9% on a same-store basis and excluding foreign exchange, same-store service and parts revenue increased 4.9%. Our customer pay was up 2.2%, warranty up 13.6%, body shops and PDI up 4.5% for a total of 4.9%. As most of you know, we acquired standalone used vehicle dealerships in the U.S. and U.K.

during the first quarter. We believe these used vehicle dealership further diversify PAG's business and provide an opportunity to capitalize on the highly fragmented used vehicle marketplace.

We also believe these businesses to provide an unlimited white space for scalable expansion while giving us an opportunity to learn more about the one price no haggle pricing strategy. We're extremely pleased with the performance of each of these businesses so far. In the first quarter, our standalone used vehicle business is retailed 8200 vehicles.

They generated $143 million in revenue and $24.6 million in gross profit. Variable gross profit, which includes gross profit on the vehicle sales plus finance and insurance was $20.7. Average transaction price was $14,372 and the average gross -- variable gross profit per unit was $2529.

Turning to our retail commercial truck business for the three months ended March 31, premier truck group retailed 1507 units and generated $212 million in revenue and $36 million of gross profit. Gross profit per used truck retailed improved $2589 from a loss of $1471 per unit in the same period last year as used truck prices start to stabilize.

In Q1, our truck dealerships generated 79% of its gross profit from service and parts and the fixed cost absorption was 117%. Recently, we've seen improved conditions, which seem to indicate that the supply-demand balance is improving, including the stabilization of used truck values and the improved new truck orders.

While we still expect generally challenging conditions to continue in 2017, we believe these improved conditions could lead to an improvement in Class 8 truck orders and improved sales later in 2017.

Turning to our Australia truck distribution and power system business, in the first quarter revenue increased 11.3% $112 million and gross profit increased 18% to $29.3 million. We're generally experiencing improved condition in the Australian truck market with the heavy-duty truck market up 23% over March 2016 and 11% year-to-date.

Sentiment in Australia mining industry continues to improve. Several OEMs leap here and Atachi confirm that lead times on new machines has moved out nearly 12 months for the first time since 2012. We recently executed a contract with the Australian Defense Department that is an estimated of $150 million in revenue over the next five years.

Looking at our balance sheet, we have $72 million in cash at the end of March. We had planned debt of $3.4 billion and non-vehicle debt of approximately $2 billion. Approximately 30% of our floor plan in non-vehicle debt is at fixed rate, while the remaining 70% is variable.

Our debt to capitalization was 51.7 at March 31 and our leverage ratio was 2.9 times. We had over $500 million in liquidity at the end of March. New and used automotive vehicle inventory was $3.1 billion compared to $2.9 billion at the end of December. On a same-store basis it was $3 billion up $77 million.

New vehicle inventory up 45, used vehicle inventory up 32. Approximately $38 million of our U.S. inventory is currently on OEM stop sale, representing 1215 vehicles, 88 new vehicles and 727 used vehicles. Capital expenditures in the first quarter were approximately $37 million. We estimate our CapEx of approximately $150 million in 2017.

In closing, the PAG business produced a record quarter of results and reinforces the adaptability of our business to market condition. Now lately, I've heard many comments about the flattening of the SAAR and the slowdown of the new car market. Although the SAAR is important, we continue to build a different model and that's all about diversification.

Our model includes a $7 billion international automotive business in the U.K. and Western Europe, a $1 billion North American heavy-duty truck retail business, used car superstores both in the U.S. and the U.K. and our 23.4% ownership in Penske truck leasing would provide substantial earnings, cash flow and tax saving.

Lastly, we have a strong balance sheet which provide flexibility to be opportunistic within the marketplace with acquisitions and share repurchases as we have demonstrated over the last 15 months. Thanks for joining us on the call today and your continued confidence. At this time, I would like to turn the call back to the operator for your questions..

[Operator instructions] Our first question will come from James Albertine with Consumer Edge. Go ahead please..

Great. Thank you and good afternoon, Roger..

Hi James.

How are you?.

Hi Jamie..

Hi. I wanted to ask quickly on the used vehicle market very briefly if I may, could you help us delineate what you're seeing in the market from a supply perspective and as well from a demand perspective, it's hard for us to peal out those elements just from your used unit comps, thanks..

Just to put our used unit comps I think in position, during the quarter we were down 2.7% in the U.S. However, we were up 11% in the U.K. and we were down in Germany because of Audi Volkswagen business about 40%. So totally, we were down 1.5%, but our wholesale was up about 7% in the U.S. and up 15%.

We just didn't have the vehicles that we could -- that we could retail in the first quarter that would give us the margin that we want and if you look at our margin, I think it was around 6.1% and our GP was up 44%. So that means that our inventory being at 39 days, we need more vehicles.

We certainly see that as we look at our used car superstores from the standpoint of having enough inventory to continue to grow and I think we got to learn how to be able to buy right at these auctions and look at the OEM auctions to get vehicles.

There's no question that the word out there is all these off-lease vehicles coming back and I think that's going to serve us well because when they do come back, obviously, they're going to be mark-to-market and we trade mark-to-market and we look at it as we go down in our day supply, if we have to markdown vehicles because we're high because in markets that only would be probably for one month when you think about 39 days.

So, I think supply is coming, supply of the right vehicles might be a little bit tough because the mix has changed. People today want trucks and SUVs. There seems to be an oversupply of used sedans coming through. So, we're going to balance that out in inventory over the next several months..

Okay. So that's wonderful. I appreciate the detail. If I could just maybe summarize it, it sounds like it's a supply issue and the demand as far as you can tell still quite strong..

Yeah, I would say that the demand is there. It's just getting -- having the right vehicle that we can make them the right gross out from our perspective and there will be a bigger supply of these off-lease vehicles, which I think you've seen them, our market. Our business is about 38% lease in the quarter and probably 55% to 65% in premium luxury.

So, we're going to see vehicles coming back to the OEM captives which will give us more supply I think as we go forward..

Understood. Appreciate that color and if I may just a quick follow-up from a strategic perspective, there is a lot of focus right now on digital efforts and auto retail and sort of where consumers might be shifting perhaps their habits to research online and transitioning that into buying online or seeking financing online.

I am just wondering if you could bring us up to speed as to how you're looking at digital and how Penske is trying to move the ball forward in that regard..

Well I think a couple things; digital volume is increased with us probably 10 to 12% year-over-year and we continue to update our sites with responsive designs. Mobile traffic is probably the primary source today and I think that when I look at it the other day, 50% of all of our PAG traffic comes from mobile. So, we have to be on top of that.

And I think from a buying tool perspective, we've heard about many different opportunities buying online.

Today we have a tool for our preferred purchase, which gives our customer the chance to value his car, look at his credit scoring and come up with financing options before he would connect with a dealership and then we certainly feel it from an overall standpoint the ability for us to deliver a card to a home or to do it to an office is certainly something that's viable and we do that already.

But we think that from an overall standpoint, we've got plenty of flexibility within our systems and there's no question that when we look overall at 32% of our business is digital. So, I think that's a key metric looking at where we're going from a digital standpoint..

Thank you again and best of luck next quarter..

Thanks Jamie..

Thank you. Our next question is from John Murphy with Bank of America. Please go ahead..

Good afternoon, Roger..

How are you?.

Just a first question on CarSense and CarShop, do you think that there will be other opportunities to make acquisitions of other successful used car stores or at least the core for this new platform and you're going to be green fielding new sites with these management teams?.

Well, there are a number of smaller used car businesses around the U.S. We've looked at some of these. Some of them are tied to finance companies and other aspects of the used business. I would have to say our mission probably right now both in the U.K. and the U.S. will be Greenfield sites to grow. The good news is they have a model that's working.

We understand the compensation metrics. We have a parts and service business, which gives us because of the units in operation. That's one thing you got to remember that there's still a parts and service metric on this particular business and I think that's one of the benefits buying an existing business.

I can assure you that I'm sure everyone that's in the space is going to be looking to see is there anybody out there could be an acquisition and if there is, I'm sure we'll be knocking on the door, but at this point, I don't have anything that would be meaningful that we would tuck in..

Got it. Okay. And then as we get back to the new vehicle business there is a lot of noise around intent of activity, but it sounds like it is picking up.

I was just curious what your take is on the pricing environment and also really specifically around leasing, is there a lot of residual support that's going on for a lot of the lease deals that you guys are writing for some of the captive thin coast..

Well, from an overall incentive perspective I think you've heard us said before is approaching 10% to 11% which people say is top end. I think right now you've got to step back and look at what the marketplace is demanding and its demanding SUV and trucks and I don't think that the supply base is matched with what's being sold at the moment.

So that'll take some pressure potentially off incentives if the manufacturers can produce enough trucks and SUVs and slow down the sedan.

From a residual standpoint, I think there's no question that that's been a tool, it's been in the background that the manufacturer's finance subsidiaries have been able to do manage through up or down movement of the residuals to affect the realistic payment in the marketplace. That's up to the OEM.

I can't -- I don't know how they will keep that from the standpoint between the captive and in the sales company, but that we have to have a competitive lease rate and we're seeing most of our leases in the premium luxury being approximately 30 to 36 months and there's no question that that's a great length of payment because we get that customer back in.

And if interest rates would go up and researchers would go down, remember the lessee has the option to turn that vehicle in pick another vehicle that might be at a different price point.

So, there's lots of flexibility and I think that gives us with our model at 72%, premium luxury, probably helps us a little bit against this residual movement that we're seeing over the next 12 to 24 month..

Okay. And then just lastly reasonable strength in the U.K. relative to expectations. There is a lot of concern that Brexit will potentially be the implementation of road tax over in the U.K. could dampen demand.

What you guys seeing for demand in the near term and ultimately long term as you run the business in the U.K.?.

Well, I think number one and the first thing you have to do is you got to think about the last seven or eight years, that the premium luxury business has gone up 10 market share points to from about 9% from 19% to 29% and that's been tailwind for us from a standpoint of our individual business.

On a same-store basis in the quarter, we were up by double-digit and the market was up 6.3% and I think that probably shows you the strength of our business there.

We had two more days, which have some impact on that I guess when the numbers finally flowed out throughout the balance of the year, but the OEMs have raised prices 1% to 2% every single year if you look at it and I think that what we have to look at obviously is the company cars. 50% of the cars that are sold over in the U.K.

are really become company cars for employee as part of their compensation. I don't think that will change and they're typically on a three-year program.

There was a VED tax, which was a vehicle omission type tax, which starts April 1 and that's a zero emission and that takes impact to about 130 pounds per vehicle on a vehicle under 40,000 pound and another 300 pound if it's over. Most of our business has done below 40,000.

So, we don't think the pull ahead will be able -- will impact as much going forward. So, unless Brexit there is some bit issue with Brexit, there is pretty good balance between Western Europe, the EU and the U.K. from the standpoint of export-import.

So, interesting to see how that balances out, but right now as you see in our business, we've grown that business from what about $700 million in the U.K. to over $6 billion and we're leaders in the U.K., leaders in Northern Ireland and premium luxury. So, I don't see that changing at all as we go forward..

Very helpful. Thank you very much Roger..

Yeah, thanks John..

Thank you. Our next question is from Rick Nelson with Stephens. Please go ahead..

Good afternoon, Roger and Tony..

Hi Rick..

I would like to ask you about same-store sales, new vehicle in the U.S. and if we did see a decline there. If you could comment on what you think happened with market share and that's traded off between volume and margin because the margins actually look quite good..

Well, we were I think where we got probably the biggest impact was in the premium luxury side after real strong finish Rick in December. We were kind of spongy coming out in January and February, BMW specifically.

If you look at our numbers and I think there was quite a bit of pull ahead when you think about that, but what's happened is we've moved a lot of vehicles out of new vehicle inventory into loaner cars because we need to turn these cars in three to four months and with that they become used cars and when you look at the used car business i.e.

specifically BMW, we're 1.5 to 1 during the quarter. And I think that overall that had an impact on us. We're still short the Pan-American didn't come out the way we wanted. We were short on some incentives on the Lexis side also. So, I would say it was primarily in premium luxury that impacted our first quarter..

Okay. Thanks for that color.

Also like to ask you about PTL how that is tracking by the time you popped up stuff to stake you provide a guidance of 25 and how you're tracking relative to that target?.

Well, I think a $0.25 is certainly realistic. If you looked at PTL's numbers, for the quarter we had -- we were up 7% versus a year ago and our pretext was up 17%. So, overall, we had a very good quarter and you compare that to our peers, we were really -- we really gained some market share which I think is key.

Right now, we think the investment has been excellent. There's no question we get a 50% dividend on EBT each year and I think that we got $33 million in 2016. We reduced our cash pay taxes during '16 from $115 million to $49 million. So, we're getting cash pay on the dividends.

We're getting our taxes of course supported by the accelerated depreciation and I think that the business itself is gaining market share each quarter, each year. So, we know the people. We've got a big investment in it already. So, as I said to someone, they don't need to build a fancy showroom anymore.

This is just a matter owning more of the company and we would expect it potentially as we get into the third and fourth quarter we'll take a look at our balance sheet and see where there's more opportunity to buy out the balance of the of PTL, which is owned by GE Capital..

Great. Thanks a lot, and good luck..

Thanks Rick..

Thank you. We'll go next to Brian Sponheimer with Gabelli. Please go ahead..

Hi Roger. Hi Tony. Thanks for having me on..

Hey Brian..

If we're thinking about the amount of cars that you all sold and leased over the course of last five years, it would be reasonable to assume that the cars in your bace are getting a little bit older in tenure.

Have you done any examination of the cohorts and maybe parts and service per vehicle as these vehicles maybe aged out a little bit over the course of last couple years?.

Well, I think what you have to look at, don't have to go beyond three years because at end of the day, warranty today coverage is typically 36 month and as we look at the business, in our parts, excuse me, our customer pay margin is almost 50% and warranty is up in the same range.

So, whether we get warranty or whether we get customer pay it is pretty much pretty the same. However, we've seen warranty go down because of probably better quality of vehicles, but I haven't done maybe Tony can get that information for you I don't give you per bay.

What we're seeing I know that our parts and service business is going and we have to be a little bit careful because we have these recalls which all of a sudden hits your warranty line and pump your gross up and it goes away the next quarter and you have a different outcome.

But I think the parts and service vendors from a gross profit perspective we're running at 58.9% when you include our PDI and our body shop and that very important especially when you look at our business in the quarter I think and some of the information we show, it's only 9.8% of our revenue and you had a 42% of our gross profit.

So that is critical and when you compare parts and service in the truck side last quarter was 79% of our gross profit. So, we will we will continue to look at mid-single-digit, I think mid-single-digit growth over the next several quarters even with the fluctuation in warranty and recalls..

Okay. That's more or less what I was getting to. I'll hope back in line and thank you very much..

Thank you. And then our next question will come from Bill Armstrong - CL King and Associates. Go ahead please..

Good afternoon, Roger and Tony. On the heavy-duty truck side, and you referenced to this earlier Roger where you get a big swing in gross profit on used trucks.

I was wondering if you can maybe flush out want you're seeing there?.

I am glad you noticed that.

Listen we've been for the last 12 months when the cycle and heavy-duty truck side when it came down there's about 150,000 probably more tractors you know in in service across the country and many of the big fleets obviously didn't buy so there is some downward pressure on used trucks and we had some that we were committed to take in from customers and we had to work our way through those.

So, we didn't have much front end growth in 2016 some F&I growth, but then as we turned the quarter and in 2017, our inventory was in good shape. In fact, we went on and we're buying truck.

So basically, what it's saying is that our inventory now is well matched the market and we have an opportunity to buy trucks and also make a margin on these and that includes and obviously on top of that the F&I, which is good.

We see the open market purchases be in real positive and makes a big difference as we go forward and there's no question that values have stabilized. We've seen it at the OEM level and also at the auctions..

Okay. That sounds good and on the parts and service for heavy-duty trucks, yesterday Rush Enterprises on their call said that they're starting to see some more activity there.

I was wondering if you guys are starting to see maybe some more positive demand for parts and service on heavy-duty truck side?.

It continues to be a big, big portion. In our fixed coverage, there is a 117% in the quarter, which shows that we had strong parts and service and I can't give it to you by location. We had some weakness as you know out in West Texas and there's no question that we've seen that come back.

The oil prices moved up and that pulled a lot of equipment off the fence. So, I'd say that there an upward trend across the parts and service business. To me it's so important as we look to support these big fleets and the good news is that when you look at Freightliner and Western Star, they’ve 40% of the market.

So that drives, it drives a lot of parts and service business into our shop. So, I Rush, we're seeing similar trends now. Certain locations you might see some softening, but I think that's based on maybe some energy-related activities..

Got it. Right because you still had a negative same-store revenue on parts and service.

Do you think as the energy sector starts to stabilize you will see that turning positive?.

Absolutely..

Okay. Great. Thank you..

Thank you..

Thank you. Our next question comes from Mike Montani with Evercore ISI. Please go ahead..

Good afternoon, Roger and Tony.

Wanted to ask first if I could on strategic side for a moment, just Roger as you look out globally what are some of the markets right now that you guys are more attentive for potential deals? And then secondly, are there other lines of business that you might see as complementary, fleet service, different things around right share etcetera that you guys might be looking into and saying yeah there is opportunities here for new lines of business, we could staple in?.

Well, let me just take the last part, other lines and you talk about right sharing and look I think as we look at our business long-term, with the number of locations we have on the retail auto side and then some 900 captive shops that we have for truck leasing plus are agents of 1500, we have a real opportunity to manage a large fleet of vehicles.

They think about 400,000 one-way moves and we move across the country and we have the ability to manage that. We can plug-in several hundred thousand vehicles and probably do the same things. We have the software. We have the capability and we also have the touch points with our brand added.

So, I think that as we look at that longer term, that's got to be an opportunity to us. I think that we could become a real viable player in fleet management and vehicle services. Now today we understand that because the PTL is interesting in California. We handle most of vehicles for the Highway Patrol.

So, we were in that business to a certain extent and I think at the end of the day, we can take a look at this maybe on a more broader basis here in the U.S. From a strategic standpoint, on a market perspective, I would say that we'll continue to grow in Australia and in that part of the world that you.

We're not saying about China at this point, but I think there's more opportunity for us out there with our military capability our large MTU just distribution business continues to grow nicely with the team we have there. Obviously Western Europe, there's a lot of interest from the standpoint of us growing the OEMs have come to us.

They’ve seen our success in Germany and Italy and as such we have wanted to have more opportunities and I would say that Italy has been a bright spot for us as we've grow that business over the last 12 to 24 months. But the one thing I hesitate on we got to have enough people, the right people to run those businesses.

So, I think we will be cautiously optimistic as we move into those markets..

Okay. Understood and if I could just ask for a moment with debt to capital of 50 and then the 2.9 times leverage, is there a bit of a governing factor here of how quickly you can move on acquisitions and especially with the PTL opportunity, should we think perhaps this year could be over three times leverage or is there more of a goal to actually….

Well, I would say that the three would be a high mark for us.

When you look at we had a little more cash on our balance sheet at the end of the quarter than we might not need -- we did need, but that's obviously, but we're at 2.8 and then I would think as we get through Q2 and Q3, that leverage will come down and looking at the PTL perspective, if we had to do some equity or we had to do some debt we might do that.

And I think at the end of the day, Mitsui has also went who stood in and as you know they own part of PTL already.

So, I think we take a look at it from a PAG perspective and there's no way that I would lever PAG up to put in any kind or risk profile just to get more PTL, but I think we'll do it rationally and we'll look at it as we get towards the end of the year..

Okay. Great. And the last one I had if I could was just on the cost side from that because it was a little bit of an uptick of SG&A to gross and I know there was the $2.7 million for stop sale payments.

So, I just want to understand the dynamics of the payment, should we expect that to continue in the future? And then also what kind of cost inflation pressures might you be seeing in SG&A and what are some initiatives to keep control over the expense side..

We had exchange cost of 50 basis points just to put that in perspective on SG&A and we had some larger healthcare cost as we didn't call out -- we could have called that out to which really offset any of the impact we got from the OEMs, but I think that the first quarter we got certain accruals that we have in the first quarter that we might not have as we go through the balance of the year.

But we're running our business to try to get the margin. I think our flow through if you look at it overall was 20% without FX and from a company perspective, it was 15.4% and to me, my goal is 25% to 30%. So, we got some work to do..

Thank you..

Thank you. We have a question from Mike Ward with Seaport Global. Go ahead please..

Thank you very much. Good afternoon..

Hey Mike..

Just two follow-ups, on the U.K. market on the business fleet business, if I am not mistaken you get pretty good forward color on those types of orders.

Have you seen any softness or any cancellations?.

The only thing with business fleet was maybe a change in OEMs when there was a lot of business being done with Audi and when they had the Volkswagen problem with diesel etcetera, some of the OEMs decided to move that business to Mercedes and to BMW. That's the only thing I can say that would be anything of any magnitude.

But these are three-year programs that they offer their employees and we don't see that changing. It's competitive as hell. When you think about that business, but we've maintained our share of that for several quarters and several years..

And are you seeing any downshift in mix because of some of the price or currency impact?.

Well the only thing you might do and if you're buying a car that was over $40,000 and you had the additional £300 emission tax you might you might move down, but that would be up to the individual itself. So, I really, I really don't see much change in the business fleet business to be honest with you..

Okay. And I just want to make sure I understand when you were talking about the standalone used vehicle, you talked a little about service opportunity.

Do those businesses today have service or is it just reconditioning for sale?.

No. We did a million CarSense. We didn't have -- all of this was on our watch, but CarSense did a 1.5 million in service gross in the first -- in the first three months. So, you can look at about 500,000 a month in parts and service gross.

So, it's a very meaningful part of that business and that's one of the benefits we have when we have units in operation of an ongoing business versus bringing we are bringing up a Greenfield..

Are you able to leverage your new car stores within that service business or no, you just grow the used stores?.

Mike, we want to keep a clear line of delineation between our retail. I just think we start -- we have variable compensation and service writers comp different than we do in the standalone. Our salespeople are paid salaries plus the unit bonus or just so many things, which are good. The CRM systems obviously, we get some benefit of that.

There is no question from a purchasing perspective across the money. The ability to tie together the standalones with our preferred lenders, which would be the banks that we use versus our captives. That's all very positive.

Our real estate and site people as we go through to expand and do some of the tune-up that we like to do, that's all of benefit to the CarSense but overall, I think that we're looking at keeping the two businesses really keeping it separate..

Excellent. Thank you, Roger..

Thank you, Mike..

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

Good afternoon..

David, how are you?.

Good. Good. A couple small questions. Sonic today has said BMW has been pushing them to retail more rather than lease.

So just curious if you're getting that same kind of push back from them or any of your other OEM partners?.

Well I think that Mike Jackson I think that someone told me yesterday that he felt the leasing was probably getting up to the penthouse and then he might be right, I think that as these manufacturers look at their lease portfolios and what they have coming back, it's probably in the 50% to 55% and premium luxury is probably the high watermark and we'll see some pressure, but again we see used car leasing.

We see our loners that come out of service as great lease vehicles and I don't see that stopping. I think the business person advised the premium luxury for Verizon for three years is got a lot of lease, I don't think will change the appetite, the consumer and these guys are going to have to be attentive to what the consumer wants..

Okay.

Also in the premium luxury space have you seen any uptick and chatter from the customers who come in here, Sherlock Holmes and particularly the German 3, Lexus, Bentley, that they are more eager to buy an electric vehicle from one of those brands?.

It's total cost of ownership. You've got a group of people who want to have -- the hybrids are quite popular and there's no question.

Once the cost of these vehicles get competitive with internal combustion engine and/or there is political and state-mandated requirements for certain types of vehicles in cities then you're going to see -- probably see a shift.

Today and we're looking at this café requirement coming up and you're going to have electric vehicle and there's no question I saw this morning that Mercedes is spending a lot more couple billion euros more in the electrical areas.

I know that the Volkswagen Group because of the diesel mess has now shifted gears and going to electric vehicles and to me that could be a great solution, but until we see a better opportunity there from a cost of ownership, I don't see it changing.

You might even think about one of the things we got into is we had one model that we bought or that we were selling that was supported by a state the EV support tax, when those cars come back and you're trying to retail, if you don't have that -- you don't have that support, you're really out of the marketplace on the use.

So, this is not just selling the first EV vehicle. What's the history of that vehicle as it comes down to the next one, two or three buyers. So, I think we got a lot to learn..

Okay. That's helpful and just one more question, it's on acquisitions. On the one hand, it sounds like you're certainly enthusiastic about the possibility of doing more deals, but also its sounds like you don't want to really take on much more debt if any. So, can that annualized revenue of $1.2 billion, can that really get a lot higher this year..

I think that we've -- when we -- look there's that opportunistic something that comes up that we have to have we'll figure it out, but we're going to look for the right ones that are contiguous that we can know we can get scale and get cost out it and make it be accretive out of the box. But we're going to be very selective as we look going forward.

We'll generate this year over $700 million of EBITDA. So, our cash flow is as strong..

Okay. Thank you so much..

Great..

Thank you. We now have a follow-up from Mike Montani with Evercore ISI. Go ahead please..

Go ahead Mike..

So just wanted to follow-up because earlier today Sonic was providing some incremental color about what they were seeing in the U.S. market and how it was developing and they kind of mentioned that it was a bit of a pullback in thinking incentives from some of the luxury names in Jan. Feb.

March was the better month for them and then maybe April had reverted back to some of the Jan Feb trends.

I guess the question that I had was around what you guys have been seeing in the marketplace and how it might compare, contrast to that experience?.

Well they're handling the same brands that we do. In most cases I think we did see January, February, that you come out in December there are gangbusters to close the year and then you look at the -- you've always got pull forwards in the last month of the quarter. So, you'd expect more pressure.

We still at the end March there were great incentives to register cars and move cars into your loner fleets which is something that we do with the premium OEM and in those vehicles when they come out or very good used cars.

But I think there's going to be a balance, we said it earlier between leasing and what people want to do on a conditional sale contract, but I think the market will drive that and I think that we're trying to look at this as a 12-month business and not just one month and I think they're looking at the same There's been some management changes at BMW, which maybe that's going to change their outlook on how they want both in their finance side and the leadership side.

So, there might be some changes there, but at the end of the day, they're still in business and they’ve got great products and I would hope that as we go forward we can continue at 1.5 to 1 used in new because it gives us a chance to take these vehicles that might be new role them through our loaner car fleet and sell them or lease them at very attractive rates to the customer.

So, to me I think you've got to be on both feet here to see what's going to be the market, but at the moment I'm looking forward, we said $17 million, we know the inventory is at $4 million. We know leasing is at an all-time high. These are all things that have been articulated by some of our peers and I agree with those.

But we have to look at our model meaning particularly PAG with our diversification, in our international peace, certainly the truck side, the PTL and the used car superstore. So, I'm looking at all of those levers that I can pull from a standpoint of driving revenue number one driving bottom line also parts and service.

So, I guess we'll see it at the end of the race who gets the trophy..

And just is there any color you can share on a regional basis especially in terms of like the Northeast relatives to say Texas and then the West Coast?.

Well, when I look at our business and quite honestly, Florida was good for us. We were up in the Orlando market and Palm Beach was good. Northern California Puerto Rico by the way has come back. When I look at in the Texas market, Austin, around Rockets, the state capital that seems to be pretty buoyant there.

It's off a little bit but not bad and then Houston obviously and McAllen were a little bit more challenging down as you get to McAllen by the border in our business and DC Metro was a good market for us in Arizona during the quarter..

Thank you..

Okay..

Thank you. And gentlemen we have no further questions. Please go ahead with any closing remarks..

No that's fine. We'll share everybody a next quarter. Thank you..

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