Tony Pordon - EVP of IR and Corporate Development Roger Penske - Chairman, CEO J.D. Carlson - CFO.

Rick Nelson - Stephens John Murphy - Bank of America Merrill Lynch James Albertine - ConsumerEdge Mike Ward - Seaport Global Andrew Fung - Berenberg Capital Markets David Lim - Wells Fargo Brett Hoselton - KeyBanc David Whiston - Morningstar.

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Third Quarter 2017 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately one hour after completion through November 01, 2017 on our 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, John, and good afternoon, everyone. Thank you for joining us today. A press release detailing Penske Automotive Group’s third quarter 2017 financial results was issued this morning, and is posted on our website along with our business update and results presentation designed to assist you in understanding our performance.

As always, I’m available by email or phone for any follow-up questions you may have. Joining me for today’s call are Roger Penske, our Chairman; our Chairman; J.D. Carlson, our Chief Financial Officer; and Shelley Hulgrave, our Corporate Controller.

On this call, we may be discussing certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization or commonly refer to EBITDA.

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

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 the additional discussion and factors that could cause results to differ materially.

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

Thank you, Tony. Good afternoon everyone and thank you for joining us this afternoon. I’m pleased to report another record quarter of record results for PAG. During the third quarter, new and used units retailed increased 9.9% to over 130,000 and our revenues increased 7.2% to 5.5 billion.

Income from continuing operations increased 7.9% to 94.3 million and related earnings per share increased 6.8% to $1.10. We increased our investment in Penske Truck Leasing by 5.5% and now own 28.9%. These record results were achieved despite the disruption from hurricanes Harvey, Irma and Maria.

In these areas, our operations included 19 dealerships and 3 collision centers. Hurricane Maria severally impacted the island of Puerto Rico, disrupting the power grid and communication system. Obviously, our top priority has been the welfare of our employees.

We continue paying our employees despite being non-operational and instituted a GoFundMe page, so our team members could help their colleagues. Operations remain challenging on the island are expected to remain so for the foreseeable future.

As a result, third quarter income from continuing operation was adversely impacted by approximately 3 million or approximately $0.4 per share. During the third quarter foreign exchange increased revenue by 19 million but had no impact on earnings per share.

The results continue to highlight the benefits of our strategy of focusing on diversification as a transportation service company. As such our revenue in the quarter was generated 92% through retail automotive dealerships, 5% through our commercial truck dealership operations and 3% from the operations in Australia and New Zealand.

Our earnings before taxes were derived 68% through our retail automotive and 8% through our commercial truck business, 24% through our operations in Australia, New Zealand and non-automotives joint venture such as Penske Truck Leasing. Let me now turn to the details of our Q3 Retail Automotive business.

Total units retailed increased 9.9% to 130,257 units and automotive revenue increased 6.6% to 5.1 billion. On a same-store basis, retail units declined 2.9% and revenue declined 1%. We estimate the loss of approximately 900 to 1,000 in unit sales as a result of the hurricanes.

Same-store total gross profit, which includes new vehicle, used vehicle, and finance and insurance gross profit, was [technical difficulty] for the quarter, representing an increase of $98. Turning to new vehicles, new units retailed declined 6.2% on a same-store basis which includes decline of 3.3% in the U.S. and 10.5% internationally.

You will notice sales were impacted by the hurricanes and diesel engine challenge in Germany. Despite the unit decline, we increased gross profit per unit retailed by a $186 including a $150 on a same-store basis. New vehicle gross margin increased 20 basis points to 7.5%.

The supply new vehicles were 57 days at the end of September compared to 53 at the same time last year. Turning to used vehicle business, total units retailed increased 25% and the new used ratio improved to 1.02 from 0.8, mainly due to the acquisitions of CarSense and CarShop, which I’ll discuss shortly. Same-store used units retailed decreased 1.2%.

Same-store gross profit for used unit retailed declined $110 per unit. CPO sales represented approximately 41% of our used unit sales in the U.S. during the third quarter compared to 40% in the third quarter last year. Used vehicle margins declined 10 basis points to 5.7%.

Our supply used vehicles was 45 days at the end of September compared to 41 at the end of September last year. Our finance insurance revenue grew 17.8% including 5% on a same-store basis. F&I revenue per unit was up $79 to $1,167.

Our service and parts revenue increased 5.8% including 1.5 on a same-store basis, and our gross our margin increased 200 basis points. As most of you know, we acquired standalone used vehicle dealerships in the U.S. and UK during the first quarter.

We believe these used vehicle dealerships further diversify our business and provide an opportunity to capitalize on the highly fragmented used vehicle market place. We also believe this business will provide an unlimited white space for scalable expansion.

We’ve identified several new markets for expansion of the CarSense and CarShop brands and on track to double those number of locations within 24 months of the initial purchase. In the third quarter, our standalone used vehicle businesses retailed 11,600 units, generating 200 million in revenue and 34 million gross profit.

The average transaction price when we combine the U.S. and the UK, the variable gross profit was $2,340 and the transaction price was $14,200. Turning to the Retail Commercial Truck dealership business, we operate 20 dealerships in North America. We continue to experience improved condition in the U.S.

truck market place including improved heavy duty truck utilization rates, the stabilization of used truck values and quicker inventory turns. For the quarter, our premier truck group retailed 2,096 units, generating 300 million of revenue and 44 million of gross profit. Same store revenue increased 11.8%.

Our service and parts business represented 71.6% of total gross profit and our gross margin improved a 130 basis point. Fixed cost absorption ratio was 120% in the third quarter. Our largest market, North American Class A truck is not forecasting to be much stronger this year than initially planned.

According to act, third quarter net orders for the Class A market increased 62.7% while retailed sales improved 11.9. Looking at 2008 Act production forecast is at 289,200. Class A retail sales in 2018 are forecasted at 286,000 representing a 17% increase over 2017.

We believe these improved conditions could lead to an improvement in Class A truck orders for our business and improve sales later in the year and in 2018. Turning now to the Australia truck distribution and power system business, the third quarter revenue increased 27% to 138 million.

We’re generally experiencing improved conditions in Australian truck market with the heavy duty truck market sales, up 19% year-to-date. Our market share of the products we distribute has increased 300 basis points compared to the same period last year. If we look at our balance sheet, we had 37 million of cash at the end of September.

Our floor plan debt was 3.6 billion and our non-vehicle debt was 2.2 billion. During the quarter, we fixed 300 million of variable rate debt through a senior subordinated note offering a 3.75%. As of September 30th, 32% of our floor plan on non-vehicle debt is at fixed rates, while the remaining 68% is variable.

We had over 600 million in liquidity at the end of September. Our debt to total capitalization was 51.5% and leverage ratio was 3.1 times on a trailing 12 month basis. New and used automotive vehicle revenue was 3.2 billion compared to 2.9 at the end of December.

On a same-store basis, it was 3 billion up 55 million, new vehicle inventory up 6 million, used vehicle inventory up 49 million. Our team did a great job managing new vehicle inventory given the product pressure from the OEM. Approximately 22 million of our used U.S.

inventory is currently on stop sales, representing 489 vehicles, 17 million of new vehicles and 5 million of used. Capital expenditures year-to-date were approximately 180 million, which include 8 million of land purchases for future development.

In closing, I think our business produced another record quarter results despite the challenges of three hurricane which disrupted operations across several significant markets. My personal thanks to our team members many who suffered personal hardship for their outstanding effort.

For the 26th consecutive quarter, our Board of Directors increased the dividend we pay to our shareholders, representing a sector leading 2.9%. The Board of Directors also increased our buyback authorization to 200 million providing us with flexibility an opportunistically in repurchase shares.

We will continue to build a different model that is about diversification. Our performance continues to demonstrate and reinforce to adaptability of our business to changing market conditions.

Finally, I’d like to again congratulate the 20 Penske Automotive dealerships which were renamed to the Automotive News 100 Best Dealerships to Work For list 2017 including five that were ranked in the top 10. Thanks for joining us on the call today. At this time, I would like to open to the operator. Thank you..

[Operator Instructions] First, we will go to the line of Rick Nelson of Stephens. Please go ahead..

You’re really holding your GPU and the frontend yield should be used, but a challenge for the industry.

Is that mix or exactly what do you think are the drivers are?.

Well, I think that we are obviously highly involved with the premium luxury side and I think that some of the OEMs gave us additional support on vehicles that we have taken out of loaner car use and put them into used car inventory when we retail those. We got some additional margins.

So that certainly probably helped us here in September and obviously across the quarter..

And also the service and parts gross margin, we saw a nice expansion there.

What is the driver to that?.

Well, I think the key thing we were up about 8.4% on warranty with all these recalls and what’s going on, we actually have a higher margin, and our warranty is probably 50.52% where our normal customer pay is 47. So, there is a 500 basis points and I would say that had some benefit.

And also when you look at our gate rigger PDI, we have now gone through selective larger locations where we do PDI for multiple dealerships and that’s taken our cost down and our margin. There is now up to almost 82%. So, that’s also given us the ability to raise that margin in parts and service..

Can I ask on the acquisition front, this year you required 1.2 billion in revenue, you kept us stepped up stake in PTL.

How does the pipeline look to you as we push forward? And what well the balance sheet support in terms of future acquisitions?.

Well, Rick, we have got 600 million of liquidity. I would like to see debt to cap below 50%, as we go forward, we are going to look at -- obviously, there are opportunities for us to generate some cash and maybe take some of the variable debt down.

But I would think, I would look at three areas, I think number one, we are going to continue to invest in our standalone used cars centers I think both in the UK and in the U.S. And we would expect to add four to six at least in 2000 sometime along, in the first six months in 2017.

I think obviously from a retail auto standpoint, there are still some very attractive opportunities for us, but we have scaled in certain markets, we would continue to invest. And then on the third side is, there is a tremendous amount of interest for us to continue to grow in the heavy duty truck side.

And we think that as we’ve seen the execution there, you look at the numbers on the premier, they’ve had an outstanding quarter. And I think it’s a business that’s approaching almost 4% return on sales. And we want to continue to grow that, we have opened up in Toronto as you know this year, and that’s turning out to be a very good acquisition for us.

And I think that also we are looking to add, we have some opportunities in Italy in order to add there with our current business. So, we are looking at all those areas, but again we are going to be mindful of that leverage we put on the Company..

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

Just a first question kind of following up on some of your comments there. We didn’t hear you talk about making more acquisitions on the new vehicle side. So, I was just curious if you think about your capital priorities, we really should be thinking about CarSense and CarShop, the truck business as sort of priorities.

And how should we think about potential acquisitions on the car side or reinvestment in open points there?.

Well, I guess what I did, I probably missed that. We are looking at and I think I said we have some -- in the pipeline, we have automotive both in the U.S. and internationally. We’re not going to forget this business, but they have to be once that are contiguous and we can get scale. Our scale would help us from the standpoint of profitability.

But I think look certainly new car franchises both domestic and internationally, I think the premier truck there is no question that we have from the standpoint of the ability on the used vehicle side with the standalone car center to see. And of course, we have our capital expenditures that we’re going to have look at and then continue our dividend.

.

Okay. That’s helpful. And then as we think about CarSense and CarShop, it sounds like you’re going to be reasonably aggressive in opening new stores there.

But how large do you think that can ultimately get and the management bandwidth with these platforms, both in the US and Europe? I mean how much room do you have since they have to really grow maybe potentially national footprints or European footprints? I mean how confident are you that you can capitalize in those acquisitions?.

I think first you have to look at the concentration in the U.S. We’re primarily in the East where we’re around the Pennsylvania. Now, Philadelphia area, we have one store over New Jersey, so we’re getting the benefit of our advertising.

So, I would see us rolling offset base with stores that are not competing with each other, but getting the benefit of the umbrella-type either digital or overall TV or radio advertising. And the same thing in the --and we have a very good management team there. The management team has stayed in place. We’ve learned a lot from them.

I think we’re bringing certain capability to them that they didn’t have in the past and capital -- for capital expenditures which I think is taking place I think will have all locations up to the level we want to by the end of the year.

And then at CarShop, the team we have there with Jonathan Dunkley is not a not a -- and the question that they have the bandwidth to grow, and we’re also -- there is some acquisitions that potentially in the European markets, which we could tuck in very easily.

So, these are ones that we’re looking -- and then we’re going to kind of branch out maybe in the markets where we have scale and people across United States where we would then look at maybe property we have or areas that we think would be good for this type of a business.

And we’d open up it -- we need to open up at least two or three stores in the market to get the scale from a marketing standpoint. So, I’m very confident on the management team. Whit Ramonat, who runs our Central Head, the overall responsibility for the -- and he’s keenly interested to see it grow.

The interesting thing is when you look at those two businesses, take all the inventory out, probably the total net book value of the fix asset is probably around $5 million or $6 million. So, we don’t have tens of millions of dollars of fix assets that we basically have. We have cash and we have cars and we have profit.

So, to me that’s significant, and at the present time, we are leasing the facility. I think we own one over in the UK. We have less CI.

And then we’ll look at what we do in the future, do we mortgage these properties, do we got our OEM partners who are very interested in providing us blending for mortgages and then we have certainly our preferred lenders which are evolved in handling many of the leases and finance there.

So, I think we’re good to go and there is certainly a better expense structure and just to put it in particular, when you look at the retail auto business in the U.S., the typical variable cost of sales is about anywhere from 28% to 30%. I think anybody could be up or down interesting enough. When you look at CarSense, it’s about 17%.

So almost 1,200 basis points less. So you start baking that into the profitability on a going forward basis. And when we look at the gross profit per new or used at CarSense in this last quarter was about $2,850 probably about $400 more than our traditional business here in the U.S., So again I think it shows the opportunity..

And then just lastly on the truck dealerships, it looks like there was great performance on used GPUs. It looks like I think from negative 5,900, deposit 5,500.

Wondering how much of that is market factor? How much of it is a focus on that business? And particularly as we think about the growth in the truck dealerships overtime, how does the acquisition pipeline looks like there? I mean I think we’re all more clear with the regular new vehicle dealership acquisition pipeline, but what does that the pipeline look like on the truck side?.

Let me just step back, we signed a framework agreement back when we got into this thing that we would be exclusive on the Freightliner and Western Star, Thomas Bus business until we got to 10% of the overall sales of say, Daimler. Obviously, we’re a long way from being there and give us some real runway.

So the acquisitions that we would do would be in the same brand and there’s no question, we’re getting contacted not daily but frequently of people who have some interest in talking to us about our strategic sale to us, and we’re looking at those. And I would hope that we would get something on the platform in 2018 and then continue to grow.

And by reason of the OEM saying to us, we want to see less individual operators and reduce that down where we have people that have larger scale. So I think we’re really walking in unison with the OEM..

Next question is from James Albertine with Consumer Edge. Please go ahead..

Just a clarification point. Apologies, if I missed it in your prepared comments.

Can you just help us rank the transaction multiples that you’re seeing sort of on average when we think about used standalone stores relative to the truck stores relative to the new vehicle franchises, just trying to sort of mention order of magnitude?.

If we’re talking about premium luxury, we’re probably in the six to seven for the right stuff. I think that -- and you’d see the Toyota, Honda probably four to five. When you look at the used car stores, I would say you’re probably in and around five, if you look at what we’ve done so far. And on the truck side, we’re probably at four times.

And this would be the good real times the trailing 12 EVT..

And then if I may, I believe [Rider] reported earlier this week, they had some pressures on a year-over-year basis in their business. I noticed your earnings and equity from affiliates was up sequentially and looked to be I think up as well year-over-year, but there’s been some ownership change there.

Just want to get your view on what PTL? How that’s been going in the quarter and kind of your views long term on that business?.

Well, just -- I’m not sure by on the phone realizes, we’ve over 260,000 vehicles at PAG or PTL, and I think the revenue was up 10%. And when you compare with our competitors, they were up four and you look at our EBIT margin, we were 13.5% and they were 8.3%. We’ve a little more depth than they have, but we were up 10% on leased truck.

Our contract maintenance was up 16%. Our commercial rental was up 11%. Our consumer rental was up 2% and logistics up 11%. So we have an excellent quarter. And I think the only thing that had some impact was we had less vehicles to sell, so our sale [ph] was down $6 million or $7 million.

So, from a performance standpoint, I think that we really outperformed the market and market share. This investment is certainly strategic for us in a number of ways. We know that business. We have got a great number of people, are some 24,000 in that company today, we built it from 300 vehicles, if you can believe it, back several years ago.

So, to me, we continue to grow this. We are focusing, not just on logistics but focusing on a full service struck, leasing and also rental. So, we’ve got a great management team. And I think that this investment also gives us some tax benefits, we would not have otherwise in PAG.

So, we get 33% -- roughly 30% of the tax benefit that would accrue because of the accelerated depreciation and that helps us from a cash flow base here at PAG..

Understood, all very helpful color. And then, last one I have for you, if I may. With respect to your stores in an around the Houston and sort of Hurricane Harvey impact region, just wanted to get a sense for sort of how replacement demand has played out there. Immediately following the storm, it sounds like there was a big uptick.

Has that bled into the fourth quarter as well or has it sort of, if you will, sort of flamed out, or fizzled out since that uptick? Thanks..

When I look the Texas area, let’s just look at the area, look at it through the 25th, we are up 2.3%. So, at the end of the day, one Honda store is up 50% through the 25th and the other one was up 15. And those are the only two stores we have there. Obviously, we were out of business there for a while.

But we have seen some help on that in September, but don’t see it being a long-term benefit at the moment..

Next question is from Mike Ward with Seaport Global. Please go ahead..

Thanks. Good afternoon. Turning to the UK a little bit.

Excluding the new vehicle business, how are the other segments doing? What’s going on with parts and service and the second hand cars, whatever they call them, and also [indiscernible]?.

Well, from a used car perspective, with CarShop, we’re up significantly on the used car basis. And when you look at -- you look at our margin, we had some margin pressure on new because the push of the OEMs. And we have to take those vehicles and turn them into used vehicles, if we pre register them. And that’s given us some pressure.

But overall, our parts and service business was up. And I think that on a same-store basis on our used, I think we were up 7%, which certainly is good from the standpoint of overall. And I think we’re almost probably 1.2% to 1% on used to new over there. So to me, and you look at, take the used up 7%, and our parts and service business was up 8%..

Okay. And then, on the new, is that a function of -- if my math is right, the pound has weakened about 10% to the euro since Brexit, but it looks like the new vehicle pricing is only like 3% to 5%.

Is that what the manufacturers are trying to do, are they just trying to bogey the pricing?.

I am not sure. I am not smart to figure that out. I think that we don’t have any impact on foreign exchange from our reporting in the quarter. And we had $19 million of revenue, nothing on these, just to speak of. But, we have had a consistent 1% to 1.5% increase in cost of vehicles over the last three to five years.

So, I don’t think that there is anything going on there that we would have to look at. The only thing we have tried to do is communicate, we cannot be in this situation where we have these targets which are not reachable on a normal basis money for metal.

And we have to pre-reg these vehicles for them to get the registration and we get certain bonuses, then they have to return into used cars for us to sell them. And that’s not the model that we want to see on a long-term basis.

I have been communicating that recently to many of the top people over there, and I think that they are starting to understand that and adjusting some of the targets as we go into the fourth quarter..

So that target process that’s going on, should stabilize….

We are doing everything. I think there is a rationale coming up now that we have been living in this growing market. And one thing I would say in the UK, which is I think is important. The market was down almost 9%, we were down 3%, and the premium luxury side of the market was up to 30%.

So, we are riding on 95% mix of our business on this premium side that continues to get market share. That’s another way that we mitigate obviously the down market. And people talk about Brexit; we have talked about it and here we are now well into Brexit discussions.

And our guys are managing around their used car business, our parts and service, we got units and operation. And I think that’s key to us. And when you look at our business year-to-date, we are up 2.3%..

In the UK in total?.

Yes..

I think unfortunately, it sounds like the adverse impact from Puerto Rico is going to continue on for at least couple of quarters?.

Yes. Look, our people are down there today, we have been down there, there is no question. If you look at the numbers in Puerto Rico, we are down 50% through the 25th of October. We are still on generator sets at our locations. We have been paying our people; we want to keep them and really having them focus.

We don’t have enough work form them in a particular day to go home and work on their own personal situation. But it’s a day to day situation. And look, I think that fortunately San Juan, we had less damage there. But when you look at Ponce and Mayagüez, that was a real storm went through there and we had some significant damage.

So, we will be reporting on that, I am sure in Q4. But, I feel much better that we are up and running, even though -- and the doors are open. We are not seeing a lot of service right now to get people really worrying about fixing their homes before they bring their cars in with the money they might have to spend..

Our next question is from Andrew Fung with Berenberg Capital Markets. Please go ahead..

I wanted to drill little bit more into Europe or I guess UK in particular. One of your competitors cut their earnings outlook earlier this week and they cited weaker than expected demand, margin pressure from certain OEMs, on the premium side pushing volume. You guys seem to be a bit more constructive on that outlook but at this point….

When you look at our mix of businesses, we are -- we certainly have -- we’re across all of the brands and we are also -- when we include the UK, we include Northern Ireland, and they have had an exceptional year for the first nine months. And with the addition of our used car superstore business over there, that’s been a real benefit to us.

And I think when you look at Porsche is up 9%, we have got almost 30% of the market there, our Jaguar, Land Rover business is up, our Ferrari/Maserati business is up, Lamborghini, and I think our BMW business is down 4%, and our Mercedes Benz is down -- is got I think 0.8%.

So, when you look at it overall and with the strong parts and service we talked about earlier there, I think that the units and operation are paying off. Because our business is -- I think we got $6 billion business in the UK from a U.S. dollar perspective. So, we’ve got some real scale there. I think, it makes the big difference. .

Right.

And how should we think about, I guess in Germany the diesel, I guess the issues surrounding diesel there from that perspective?.

That would be my biggest Achilles Heel right now and the thing I’m working on the hardest myself is in northern Germany [ph] where we have significant footprint of Volkswagen and Audi. And we’ve seen that business off 50% on the Volkswagen business. So, that concerns us, residuals are down.

Now, I met with the head of Volkswagen, and they assured me that they were monitoring this and would take action to support the dealers as we go forward fourth quarter and into next year. So, we’re going to look at what we have as a footprint, what do we need, is there some divestitures that we could make.

All those things are under thought process right. And I would assume that we can write that shift. We have a good business there, just a fact that this hit us, because as you know diesel from a Volkswagen standpoint and even an Audi standpoint, that’s the engine you had in your car if you were in Europe.

But sooner or later, when they announce in Germany you can’t take a diesel into Frankfurt or Munich or Stuttgart or some of the other cities, everybody came to address. [Ph] Nobody wants to buy a new vehicle with the diesel in it. The problem is, they got one to trade with the diesel. So, those residuals are down, so we kind of have a catch 22.

But look, you’re always going to have some, you’re going to have to work on that. And that probably hurt us in the quarter, probably a couple of cents, if you really, if we got down to the real detail there. That would have been another couple of cents that we had to take a negative in the quarter..

Great. And I guess lastly as a follow-up on just your capital -- use of capital. Fair reported that. I guess, you guys have an investment in that approximately. Where else do you see opportunity beyond I guess the more traditional role of a dealer as we look at technology and some of the other kind of innovations with regard to your....

Let’s look at capital allocation, I think I mentioned earlier. Obviously, we want to maintain our dividend. Today, we’re returning about 30%, we’re increasing our dividend, we’ve done this 26 consecutive quarters. We’ve got our capital expenditures and obviously, our share repurchase, our debt reduction.

And then, what we’ll do, this investment by the way has gotten a lot of noise on Fair. We invested $1.2 million, less than 1% ownership. We think this is an interesting start-up. You’re saying GM and Ford, always other people investing in some of these different business ventures and ideas.

So, we’re going to learn from this one and see if there is any way that this might have application to us at this particular time. And we are going to look at maybe some other things and ride-sharing in areas like this and we might make what I might say, $1 million to $5 million investments over the next 12 months.

But, I don’t have any news that we’re going to make some big acquisition and utilize all of our capital. And also, Fair is a lead generator also..

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

Hi. Good afternoon, Roger and Tony. I just wanted to dive into the UK. I know that you guys have been benefiting from a greater premium luxury mix.

And I was wondering if you could dimension like where could this mix go? I mean, obviously the luxury mix can’t be 100%, but is it 35%, 40%? I mean, can you give us some color to that Roger?.

Our luxury mix in the UK and Northern Ireland is 95%..

I’m sorry I mean for the market?.

Well, look, the market has gone, it was at 31.8% in Q3 and it is 30.6%. And I guess, Tony, if we go back, what, four or five years ago, was down 18.5…..

18.5% to 19%, right. Yes..

So, look, it will go to 100%. But remember, what’s happening is that it was -- BMW 7 Series of this class is -- all of a sudden, now we’re down into X1s, we’re into different models. So, what they’ve done, they’ve actually come down and are moving into some of these, what you would call, traditional market pricing levels and providing vehicles.

So, I think they’ll continue to be leaders. Consumers like the foreign nameplate, like the German cars. Look at Porsche, started out as a sports car company, Cayenne, then Panamera, now Macan; it’s taking big market share from the standpoint.

And I think that at the end, you’re going to see the business cars that people are buying, part of the -- remember, in the UK, 50% of the cars that are sold in the UK are really provided to people who work in their business, part of their compensation. And I think, at the low end, you’re going to see Audi and BMW attack that segment..

So, the market, so the expansion and segmentation is definitely helping the stronger brands that you’re levered to?.

Well, there’s no question when you look at it -- when you look at -- I think I said earlier, BMW is down 4; Mercedes, I think was down 0.8; Porsche was up 9. So, these are all brands that we’re involved in. So, you don’t see this dramatic impact.

The other thing is that remember, the marketplace today is shifting from cars to SUVs, and those SUVs provide higher MSRP and also higher margin for us..

One of the questions that I wanted to dive in on was a little bit more on the electric vehicle side. Definitely, there’s talk and there’s positive headlines. Going forward, on few things, there’s an argument maintenance for electric versus regular gas engines.

And we’re hearing that the maintenance is not really all that different as in the dollar, the average dollar. The other thing is, what can you guys do from like overall dealership level versus the Tesla for example when it comes to electric vehicles, when it comes to servicing? If you could sort of frame that for us that would be helpful..

Remember, the dealer is involved, number one, to serve the customer. And all the vehicles that are sold have an extended warranty or some warranty provision. So, we’re always going to be there and have to be at the downstream end to take care of the customer’s requirements from a warranty perspective.

Then, when you look at our parts and service business, you start to think about maintenance items. And many of these vehicles are sold with a maintenance package. Again, we’re going to be at that end. And those margins, the maintenance packages are many times higher than 50%.

Now, I would tell you that I’ve got an interesting question to say, what’s the government going to do, they’ve all of these taxes on engines which are not available -- that have engines, let’s say naturally aspirated gasoline engines, or diesels, what have you.

Where is the tax revenue going to go when everything goes electric? So, I think that today nobody is making money on electric vehicles. I think that the technology is terrific, but what’s going to happen is I am not sure that the consumer is going to be ready with all the direct injected engines today and commodities [ph] we’re getting.

Are they going to be ready to spend more money for a vehicle they don’t know what the residuals are going to being on them, because as the battery technology gets better, you certainly want to have your vehicle have the highest level of performance from an MPG perspective with the increasing technology in battery.

I am not sure where we are going to get to a level where we won’t see that year-over-year climb. We have seen a 100 miles, we have seen 150, now we are talking 200, to 300. And I guess that’s going to continue to change, and that will have some downward pressure on residuals.

So, when you think about total costs of ownership, I think it’s going to be expensive. So, I think there is going to be a balance. And I think there is still going to be a lot of naturally aspirated or turbocharged engines being sold. So, to me all the OEMs are investing billions.

And I think the good situation is when you look at the leadership, when you talk about this, the brands that we’re involved in on a premium side, seem to have the technology, they certainly have the scale, and I think will bring the right product to market I guess what we are going to sell it now.

Today, we’re going to have to make more money on the front end to offset maybe some lost profit on the parts and service..

Roger, obviously, you are very well connected and know the pulse of what’s going on, consumers as well as OEMs. I guess, the question that I really want to ask is 2018, I mean, what’s your best guess right now and how 2018 could shape up from an industry sales standpoint? And then, I have one sort of a housekeeping follow-up question. .

Well, I am thinking that we’re going to have to SAAR something around -- somewhere in the $16 million range, something there I think would be realistic, $16 million to $17 million. I don’t know at this point anything is going to change it. It looks like interest rates are going to be reasonable. There is plenty of credit available.

There might be some pressure, depending on pricing of the OEMs, if they got to get more margin there, might push people to buy certified pre-owned, which might make a difference. So, I think you will see obviously the used car business grow in 2018, because of all the leased cars coming off that we’ve leased over the years.

And production is still high. And I think it was $4,000 per unit was the incentive. So, as long as the incentives are out there and they have got their room at the OEM level in their margin, I think they will continue to drive the business here in the U.S..

And then, finally, and maybe this is Tony for -- both you and Tony, is the SG&A leverage. Can you gives us some rough guidance on how we should think about that going into 2018, given let’s say, 2017 as a jump off point? Thank you..

Well I think that -- a big impact on SG&A has been in Germany because of this -- as I told you, probably impacted us at least $0.02 to $0.025 and that’s had some impact on that. But look, our goal is to continue -- we’re not give you a forecast we’re going take two or three points of SG&A overnight.

I think that we need to use a benchmark there to continue to reduce it. And I would hope that we can see as we go into 2018, 50 basis points to 100 basis points reduction in our SG&A costs. I think that’ realistic. We are growing -- I don’t look at that number.

I am looking what’s coming out at the bottom line, what’s my return on investment, and what kind of foundation am I building for the futures, is really what I look at on a quarter and a month-on-month basis..

Our next question is from Brett Hoselton with KeyBanc. Please go ahead..

I think to start with UK, you commented on your thoughts about the U.S. and outlook and expectations and so forth.

What are your thoughts about the UK?.

I think that the UK market is down, as we talked about, 6.9% for -- year-to-date, it’s down about 4%. And I would think that you are going to see that probably down 1% or 2% next year. Our goal of course is to outperform the market, like we have done through the third quarter. We are up actually 2.3%..

And then, I think earlier this week, one of your competitors commented on BMW product cycle and so forth.

And wondering, obviously you’ve got some pretty good exposure there as well, your thoughts there?.

Well, there is no question. We have got some great product coming from BMW. When you think about, we get this X7, which is a three seat SUV, which should be a full growth car for us, the new X3 is coming. They have got a really bank of vehicles coming really over the next 18 months, which has proved to be very good for us.

This 2 Series model is very, very popular, and we will see that also. So, to me what we need to do is just make sure that the targets that are expected by the OEM don’t drive bad behavior from a growth perspective as we sell these vehicles in all the markets, not only in Europe but also here in the U.S..

And then, as -- you’ve obviously had a little while here with -- interact with the folks at CarSense and CarShop and so forth.

Has anything changed in your thinking in these past two months or so?.

Yes, it’s changed; I like it more. No. It’s -- I think we are very fortunate to get into this business. The technology, the people, we had no turnover with senior management, both of these businesses. I think they applaud the fact we’ve come in with capital, with ideas, with an expansion mode, offense.

And these are things I think they are paying off and what we want to do is take those things we’re learning there and find out can we put those and deploy in our traditional businesses..

I think also, again, one of your competitors is chasing CarMax let’s say, and has a pretty aggressive store opening schedule....

CarMax has done a terrific job. Look, they are really on a zip code that we are not, they provide financing, they have had 10 years of managing this business across the country.

And what we are trying to do is look at areas that we can go into where we have scale and we have people that we could transfer from the traditional business into this business as we expand. And I think that I’m very confident that we will see at least six, either through acquisition or new store openings take place in our two businesses next year.

And I think that’s what we talked about when we started this back 12 months ago. And I don’t see anything that’s going to stop us. The credit availability is there. Our turnover, our people is in great shape. Our parts and service business is a real opportunity.

I would have to say at CarShop, they really haven’t taken advantage of its customer base, to bring these customers back for parts and service. The guys at CarSense have done terrific job and we have just enhanced our drive-throughs, our waiting areas for our service customer. And those margins are very good.

And I think that’s an opportunity, as you know in our business, it’s 44% of our gross profit and only 11% -- 10% to 11% of our sales. And there is no question that the lower variable cost is key. The one price, we’re learning a lot about one price, I’m not sure that we can develop that into the U.S. retail side on new but there might be on used.

I know AutoNation might respond [ph] to that and really haven’t talked to them on the health or success. But we had one store that we tried to do that out in Arizona and we weren’t very successful; so, available both on new and used. So, I think there is learning that we can take in both in the U.S. and the UK..

And we’ll go to David Whiston with Morningstar. Please go ahead..

Hi, Roger, hey Tony. Just I got three for you, guys. First on new vehicle GPU and gross margin, you actually had a little bit of improvement there, a lot of the other public so far, I haven’t really seen that.

Just can you talk about what’s driving that in new?.

I hope it’s management discipline, because we can’t sell cars and not get margins, and I think that we hit our targets in the third quarter which paid us nice bonuses from the standpoint of the targets we had. And I think when we spread that across the quarter, obviously, it gave us an increase of 20 basis points. I think we’ve had a better mix.

And I think there were more SUVs available to us in the third quarter that we didn’t have last year. So that was a positive. On the other hand, our used was down 10% but that really -- or 10 basis points that really had to do with a lot of these loaner cars and demonstrators that have to be sold as used, we just didn’t get the margin on those..

Okay. And moving over to trucks, I’d love to hear your thoughts on pure electric trucks.

I know it’s not really a class 8 type of product but do you think there is a lot of demand for that amongst customers?.

I’m not sure I’m going to be around when we have 80,000 electric tractors running. That’d be a long stretch for me. Look, we’re involved and nothing that I would announced today, but we’re involved in some testing of fully electric. Daimler probably is furthest along with that over in Europe; they’ve run some fairly significant tests.

We’re being one of their key customers worldwide, probably their largest world, but hope that we would have access to that technology and we would obviously bring into our fleet a big deal when it was reasonable. But, I don’t see it happening overnight. I think you’ll see platooning and other things take place before you probably see fully electric.

But, I mentioned to see the trucks when they do come out and just what is the -- when you look at the total cost of ownership, because if we lease a truck, we have a residual risk, we have the maintenance risk and we want to be sure that the cost per mile for the customer is not more. So, that’s something we’re going to have to manage.

And I don’t really have a -- I can’t give you an honest answer of when we’re going to see a big fleet; maybe you’ll see some fleet that actually have a hub and spoke where they can run in and run out charge, you might see that, but there might be more in a daily delivery truck than you’ll see it in a class 8 tractor..

Okay. And this is probably for Tony on -- it’s actually presentation question on the slide deck. You used gross profit per unit on retail automotive of 1,434. Does that include the much higher number for the standalone business, U.S.

GPU?.

Yes, it does..

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

All right. John, thanks, and thanks everybody for joining us. See you in Q4, all the best..

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