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Edited Transcript of PAG earnings conference call or presentation 5-Feb-20 7:00pm GMT

Q4 2019 Penske Automotive Group Inc Earnings Call

Bloomfield Hills Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Penske Automotive Group Inc earnings conference call or presentation Wednesday, February 5, 2020 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony R. Pordon

Penske Automotive Group, Inc. - EVP of IR & Corporate Development

* Roger S. Penske

Penske Automotive Group, Inc. - Chairman, CEO & Director

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Christopher Alex Armes

The Buckingham Research Group Incorporated - Associate

* Derek J. Glynn

Consumer Edge Research, LLC - Analyst

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Rajat Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Fourth Quarter 2019 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through February 12 on the company's website under the Investors tab at www.penskeautomotive.com. I'll now introduce Anthony Pordon, the company's Executive Vice President, Investor Relations and Corporate Development. Sir, please go ahead.

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Anthony R. Pordon, Penske Automotive Group, Inc. - EVP of IR & Corporate Development [2]

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Thank you, Paul. Good afternoon, everyone, and also thank you for joining us. A press release detailing Penske Automotive Group's fourth quarter 2019 financial results was issued this morning and is posted on our website along with a presentation designed to assist you in understanding our performance and our strategy. As always, I'm available by e-mail or phone for any follow-up questions you may have. Joining me for today's call is Roger Penske, our Chairman; J.D. Carlson, our Chief Financial Officer; and Shelley Hulgrave, our Corporate Controller.

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

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

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [3]

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Yes, thank you, Tony. Good afternoon, everyone. I'm pleased to report another strong quarter results for PAG. We reported this morning record Q4 revenues, which were up 8.1%, a 10.2% increase in earnings before taxes and an improvement in Q4 SG&A to gross profit of 70 basis points or 110 basis points when compared to adjusted 2018, a 3.9% increase in Q4 income from continuing operations to $101.6 million and related earnings per share increase of 8.7% to $1.25.

When compared to an adjusted Q4 2018, record income from continuing operations was up 7.1%, and related earnings per share was up 12.6%. The shift in mix of earnings can be heavily rated to the U.S. increased of the effective tax rate in Q4 from 27.4% this year compared to 23.4% in the same period in 2018.

Before discussing our results of Q4 today, I'd like to highlight some of the achievements we had in 2019. We retailed more than 500,000 new and used units and increased our new to -- used to new ratio from 1.28 -- to 1.28 from 1.20. We generated over $23 billion in revenue, and we earned $435.5 million in income from continuing operations and $5.28 in related earnings per share, which includes a net $42 million headwind in the U.K., representing $0.51 per share.

We opened 2 greenfield used supercenters, we generated nearly $700 million in cash flow allowing us to increase our dividend 4x, which currently yields 3.4%. We repurchased 4 million shares of stock for $174 million, representing approximately 5% of total shares outstanding at the beginning of the year. We have a $200 million share repurchase authorization from our Board at this time. We invested $226 million in net CapEx, which includes $42 million in land for future development. We also acquired $1.1 billion in estimated annualized revenues.

In total, we returned $305 million or 70% of our income to shareholders through share repurchase and dividends, and we returned 8% to shareholders when compared to our market cap. We had 33 PAG dealerships who were named best dealerships to work for out of 100. In this year's automotive news, we had the #1 dealership in 2018, and we had the #1 dealership in 2019.

Since 2010, we've grown our revenue at a 10% CAGR from $9.7 billion to $23.2 billion and income from continuing operations, a 16% CAGR from $119 million. Today's reported earnings of $435.5 million. I think our results continue to highlight our business and our diversification strategy.

Let me now turn to the details of the fourth quarter. Our retail auto business represented 88% of our revenue and approximately 87% of our gross profit. The good news is total automotive units retail were up 2% on a same-store basis. New was up 1% and same-store used was up 3%. We outperformed the market both in the U.S. and the U.K. during the quarter.

In the fourth quarter, our CPO sales in the U.S. increased 12% and our CPO represented 43% of reused vehicle unit sales. Same-store gross profit per unit retailed was strong, increasing sequentially quarter-over-quarter.

In Q4, our new vehicle gross profit was up $245 or 8%. Used vehicle was down $25 or 2%. Our finance and insurance was up $95 or 8%. Our total vehicle gross profit per vehicle, retailed, increased $187 to $3,519 or up 6%. Our service and parts revenue same-store increased 2.7% or 2.9% ex foreign exchange, customer pay was up 4.2% ex FX, warranty was down 1.1%, and our collision repair was up 5.2%.

As we said before, business conditions remain challenging in the U.K. during Q4. However, we've seen improved business conditions in 2020 with an increase in order inquiry, and we expect the market has some pent-up demand.

Let me move on to our used vehicle supercenter business. We operate 16 dealerships, 6 in the U.S. and 10 in the U.K. We expect to grow the supercenter business through a combination of e-commerce initiatives and greenfield sites. We opened 2 locations in 2019, 1 in the U.S. and 1 in the U.K., both locations have had successful openings and outperformed our initial expectations and are profitable.

We remain on track with the develop of 4 new large supercenter sites. We expect to open 2 of these in 2020 and another in early -- 2 more in early 2021.

In Q4, we retailed 15,400 units, up 3.1% and generated almost $300 million in revenue. The average gross transaction price was $15,700 and the average gross per unit retail increased 3% to $1,951 for a gross margin of 12.4%.

Looking at our retail commercial truck dealership business in the fourth quarter, our commercial truck business retailed 3,728 new and used trucks and generated $600 million of revenue and had a return on sales of 3.5%.

Service and parts represented 69% of our total gross profit and covered 120% of our fixed cost.

Due to the acquisition of Warner Trucks we made in July, our new and used truck sales increased 41%. However, our same-store unit sales declined 29%, mainly due to the timing of deliveries and bankruptcies of two of our largest customers in the fourth quarter.

In 2019, Class 8 retail sales in North America increased 6% to 334,000 units. At the end of December, the backlog was $123,000.

ACT Research is forecasting a return to a more normal demand environment in 2020, which may result in a potential decline of the Class 8 truck sales of approximately 20% to 30%.

However, with our recent acquisition of Warner Truck Centers last July, the strength of service and parts and a positive trade cycle with many of our OEM customers that will come up next year, we expect our business still to perform well next year.

Turning to our commercial truck distribution and power systems business. We are combining the 2 entities to operate under a single structure called Penske Australia.

In Q4, we generated $120 million in revenue and $4.8 million in EBT, an increase of $1.9 million compared to Q4 last year for a return on sales of 4%.

Turning to Penske Transportation Solutions. Our 28% ownership provides PAG with equity earnings, quarterly cash distribution and tax benefits generally associated with accelerated depreciation.

For the 3 months ended December 31, 2019, PTS generated $2.3 billion in operating revenue and income of $126 million. Accordingly, we recognized $36.4 million of equity earnings. Over the past 12 months, our investment in PTS has provided cash benefits of $90 million through distribution and cash tax savings. PTS is now managing a fleet of over 320,000 vehicles. Although the Class 8 heavy duty truck market is expected to decline in 2020, the longer-term nature of truck leases along with solid rental and logistics businesses is expected to drive another strong year of performance in 2020. We continue to improve our digital and enhance our capabilities and customer tools. Today, we have over 58,000 vehicles online and ready for purchase.

In the fourth quarter, over 40% of our new and used unit sales in the U.S. originated from digital sources for the first time. We saw an increase in traffic, an 18% increase in leads and a 40% increase by customers engaging in our Google business listings.

We also completed the rollout of docuPAD technology to all of our U.S. locations, which allows us to engage customers digitally by creating and processing and securing funding of a transaction electronically, while improving efficiencies and providing cost savings in our back offices.

Customer satisfaction with our self-service tools, such as ability to pay online, make appointments and online estimating for our collision centers continue to improve the customer experience. Their success has encouraged us to pilot new technology, such as videos and digital pictures for service updates and buy your car now. We continue to enhance our proprietary online closed bid wholesale auction site in the U.K. We have approximately 4,000 active online bidders, and we sold 21,000 vehicles through that source last year.

Finally, I'm pleased to announce the initial pilot of our new digital dealership and retail sales platform in the U.K. we're testing with our INFINITI partners. It's performing very well, and we continue to roll out enhancements that will result in a full digital transaction.

Looking at our balance sheet at the end of the year, we had $28 million of cash. Our inventory was $4.26 billion compared to $4.04 billion last year. This increase is all related to the Warner Truck acquisition. Our supply of new vehicles was 71 days compared to 72 last year. Our used was 52 days this year compared to 57 last year. Our floor plan was $4 billion, and our nonvehicle debt was $2.4 billion, of which 33% is at fixed rates. Our nonvehicle debt increased $144 million, of which $134 million was mortgages to take advantage of low long-term interest rates. Our debt to capitalization was 46%, consistent with the end of 2018. Capital expenditures were $245 million, which included $42 million in land acquisition for future development. At the end of December, we had $700 million in liquidity.

In closing, I'm very pleased with our performance in the fourth quarter and almost recently completed year and remain optimistic about the coming year. We remain committed to our diversified model, which as you can see, generates significant cash flow, providing us the opportunity to make acquisitions and return capital to shareholders.

Our service and parts operation throughout the organization provide reoccurring revenue, which generates 46% of our company gross profit. We continue to demonstrate that PAG's business model is much more than a monthly new vehicle sales or the S -- or the SAAR. In total, we returned $305 million or 70% of our income to shareholders through share repurchases and dividends.

Thanks for joining us on our call today. I'd like to open it up to the operator for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question today will come from the line of Rajat Gupta with JPMorgan.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Just had a question on the used supercenter plan for 2020. It looks like, you plan to open 2 new stores. One question was, are both of those going to be in the U.S.? And then on the supercenter side, is there any discussion around potentially approaching the market differently, perhaps in the lines of what Sonic is doing with EchoPark? And I have a follow-up.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [3]

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Well, Rajat, thanks for the question. I think, number one, we will be opening -- we have 2 really points that we're in the process of completing. One will be in New Jersey, and one will be in the Phoenix market. And they would be operational, hopefully, both of them, one for sure by the end of 2020. In the U.K. and Nottingham, we had a site that is probably 75% completed. We would expect that would open midyear, and we have another piece of land in Stoke, which -- that we will be working on, following the completion of the Nottingham site. So to me, we'll continue to build bricks-and-mortar from the standpoint of the supercenters. From a Sonic perspective, they have a different model, probably higher volume, lower margins. Because when you look at our margins today, we're in the 12% to 13%. And you compare that to the traditional used car business, which I think we were at 4.7%. So we see this as a -- is the way we want to continue. On the other hand, is there an opportunity to have an electronic, opportunity to do the same thing where we don't have units and dealerships for the customers to view, so that's an opportunity in the future. But I would say that we're going to be on the same track we are, and we can see that the profitability of these stores that we've opened, at least in 2019, it probably took 60 to 90 days, and they were profitable.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [4]

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Got it. That's helpful. And on the used side, I mean the U.S., I mean, it looks like in the fourth quarter, the variable gross per unit was down substantially, it was roughly 9%. I mean is that just a function of the new stores ramping up as you just highlighted? Or is it just trying to drive more volume and sacrificing some of the GPU there?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [5]

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Well, I think, if you're talking about to used supercenter growth. Obviously, in Q4, we had the opening of the stores, and we don't have mature salespeople at that point. So we would tend not -- tend to get full margin from the customers. But I think that's the same thing you would have seen in Bristol and the U.K. So I think it's a mature sales force. And again, there's pressures. I think we have a little bit higher cost of acquisition to get the right cars we want. We're probably spending a little bit more in reconditioning that would take away from some of that growth.

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Operator [6]

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Our next question is from Rick Nelson with Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [7]

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Roger, Tony. So I know you've mentioned the U.K. cost you $0.51 year-over-year. I'd like to get your crystal ball there. And do you think it's possible that you could recover that decline in 2020?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [8]

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Well, I think we really -- when you look at the U.K., we really got to go back and think about Brexit and what happened to us. During -- really, it's the last 18 months, but it really became really tougher when there was no decision midyear in the U.K. So when U.K. exited the EU in January -- at the end of January, obviously, lots of things happened. And they have a year now to negotiate trade agreements with EU and other countries. And I think they have a pause maybe in 6 months, where they could push that out. But Boris Johnson, my understanding is, wants to be sure that he completes it at the end of the year. So what we've seen at this point a much better business condition, and we think there's consumer confidence, and there's no question that people have a better understanding where they are, and there's no more uncertainty. As we looked at -- as January, our inquiry rates were up, our margins were up. And I think, generally, people feel a lot better with consumer confidence where it is. So there's no question that we're going to see us back, hopefully, back to a strong March, which is really a registration month. So that will give you a pretty good idea. But we also have to look at Q1 of last year, still was a pretty good year for us in the U.K. because we really hadn't seen the impact of WLTP, was the world light vehicle testing procedures, particularly on diesel. And you've seen diesel probably drop 25 or 30 basis points during the year, and that really confused the marketplace, not only on new, but also on used. So I think that's pretty much been through the process. We had RDE, which is the real driving emissions, and I think that the Brexit uncertainty really started in March. So I think when we look at Q2, Q3 and Q4, we're going to really see some benefit. And quite honestly, we probably got FX in our favor as we go into 2020.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [9]

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That sounds helpful. I know on the used car superstore business in the U.K., there were some management changes there. I'm curious what the new team has some of the changes they might be making to improve the performance?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [10]

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Yes. When we bought CarShop, we had a 3-year earn-out and the existing management team, obviously, took the role at that particular point. We made the decision towards the end of Q4 to move on with our own internal team. And that team, obviously, the person, Nigel Hurley, who's running that today spent almost 15 years in our BMW brand and did a terrific job, our leading brand in the U.K. And he's brought over a team of people that understand the purchasing side of the business, the pricing and also with big impact and focus on parts and service. And I think stock management will bring our own people in on that because as we've grown now, it's no longer 1 or 2 locations, when you look at what -- where we're going to be 10 or 12 as we go forward. And I think that will make a big difference. And to me, focusing on procurement, the right pricing and the right vehicles. And then one other opportunity is we have Sytnernet, which is a closed bid auction that we have about 4,000 people, I mentioned it on the call, and this is a great source for vehicles now for CarShop. They'll probably buy this year, 20,000 vehicles out of, say, 50,000 that they'll sell. So this is a great resource along with buying from customers at home and then the normal auction. So remember, when we bought this business, there was no buying of any source of purchase from Sytner. So when we couple that together, I think we're going to see a really good year for us as we enter into the Q2, Q3 and Q4.

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Operator [11]

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We have a question from Armintas with Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [12]

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Great. When we look at the used truck GPUs that came down from something around 5,000 to something around 500 effectively in order of magnitude. How should we be thinking about that on a go-forward basis, given the increase in used truck supply?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [13]

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Well, I think I mentioned before, at least in some conversations I've had here recently that with the 330,000 new trucks being sold. Obviously, there's probably not a market growing too much, but those trucks are replacing, which are now used trucks, which is going to put real pressure on the marketplace as they come in, and we're going to see that probably now for the next, I'd say, 12 to 14 months. So that's going to have an impact on our gross profit. However, we still have the ability of our finance and insurance products that really recap with that. And I think that at the end of the day, the availability of that is going to be in supply and demand and that's going to drive that. But to me, at the end of the day, it's part of the cycle and we got to deal with it, and we did that before. But still, overall, our used business is a key part of the overall sales process because we have certain trades. We got buybacks and other things that we're obligated to as we go forward.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [14]

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Okay. And then profitability on the light vehicle side, both on new and used were quite strong. How much of that was maybe on a new side based on the exposure to luxury versus emphasis on profitability and some of the drivers on the used side would be helpful as well.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [15]

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Well, I think when you look at it, new, from our perspective, our margin actually went up from 7.3% and to 7.5% and luxury went from 7.5% to 7.7%. So overall, our -- only place where we lost any margin was on domestic, and it's a very small part of our business. And I think our team -- I said at the beginning, actually ending the third quarter that I wanted to beat same store, and I wanted to maintain the growth. And I think that we've always said strong grosses in the fourth quarter on the luxury side because it's a big lease market, probably 60% to 65%, and we are able to get our strong gross margins at that time. And I think that one of the things that we saw during the year. Again, we had some divestitures during the year that had low gross profit, which also probably helped us in the quarter. And you look at Audi, up almost 17%; Mercedes was up 13%; our BMW business was up 7%. So -- and remember, Porsche had been down for almost a year because of WLTP. So we had the benefit of Porsche margins during the fourth quarter because that volume picked up, both domestically and internationally.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [16]

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So thinking about it going forward. So this is a run rate adjusting for seasonality going forward then?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [17]

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Well, I think we got to look at Q4. And as we go into 2020 and we'll relate sequentially maybe to Q4 of '19 to Q1, I'm sure it will be down some because Q4 is always higher because it's the end of the year. So will be the mix.

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Operator [18]

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Our next question is from John Murphy with Bank of America.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [19]

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Just wanted to follow-up on the truck business. I mean, obviously, everybody is expecting there to be some pressure there on the volume side. Just curious, you have the fix stops that will offset that. But will we also see opportunities avail themselves to make some really good, accretive acquisitions as maybe some of the dealers come under some distress or are more motivated to sell?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [20]

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Well, when you look at our capital allocation, obviously, we're looking for contiguous, the right brands on the car side, and there's no question. We're limited to Freightliner through our agreement with them. But we see that as a real opportunity, and we will be looking to make acquisitions. As you know, we built this business from almost nowhere here few years ago, and the returns have been great. So I would say it's a positive. But again, this is a cycle. We're not burdened with a high CapEx in this business. It's mainly truck inventory, and I think the fixed cost coverage at 120%. And in some cases, some of our locations cover 100% of their costs through their parts and service. And remember, units in operation, when you look at Freightliner, Western Star and look at Thomas bus, which we represent to the dealerships, they've got almost 41% of the heavy-duty and medium-duty truck markets. So that's all parts and service units in operation, which will help drive our fixed coverage. And that's why when you look at our overall business, 46% of all of our gross profit comes from parts and service. And in this business, it's 65%. So I think it's a good -- really a good thing for us from the standpoint of support we have some weakness in used trucks.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [21]

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Okay. And then just a second question on parts and service on the light vehicle side. I mean you put up almost -- I think it was about 3% in the quarter. So it was a good quarter, but just curious how we should think about growth going forward? I mean some of the dealers have been talking about sort of mid-single-digit type growth, and they had to do some backflips on getting human capital or the techs in. I'm just curious if there's an opportunity to maybe accelerate the growth there, and what might be the gating factor for you?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [22]

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Well, look, I've seen some of numbers coming out of the other players in the market. We're excluding exchange around 3%. And I think one of the areas that impacted us this year, I mean 2 of our key BMW stores, big stores, we had 2 new open points, which obviously, one in Austin and one in Phoenix, which had certainly an impact for us. And also, BMW, which is our largest brand, reduced their maintenance plan for the customer from free maintenance from 4 years to 3 years. So obviously, that had some impact on us from a parts and service. But I think that our plan really is to be single digit, somewhere 4% to 5%, which I think will be normal in the market. But again, I'm not unhappy with the results. When we look at the growth from a tech perspective, there's no question that we're all looking for the same individual. We're doing the same thing on the sales side, ironically. And certainly, body shop, we see our technician, the age of our technicians in the body shop is growing. So we're really entering into an apprentice program to try to build that because it's a very profitable part of our business.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [23]

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Got it. Okay. And then just lastly, on SG&A, and I apologize, I missed the early part of the call. But I mean, it was a great performance in the quarter. I mean is there an opportunity to take these -- take the ratio even lower below where it is right now at 79%? Would that be just a function of business mix? Or is there things you can do inside the new vehicle dealerships themselves.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [24]

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Well, I think one of the key things will be when you look at the U.K., remember, we had -- I think we talked to you folks about a $20 million cost reduction in the U.K. We'll probably see $3 million of that in Q1. There will be some increases in cost through rent and some facility increases and depreciation, but we'll see that. We also got to maintain our gross profit. I think our gross profit increase also when you look at the calculation, supported that. But for us, particularly, as we've looked at different areas of the business, docuPAD has allowed us to decrease some of our SG&A overheads. We do our financing across the network. And overall, when you look at -- we got more mortgages now.

When you look at our business, remember, we had a lot of sale leasebacks as we return to maybe out of that particular mode into more mortgages, that will help us from an SG&A. It probably impacts us about 500 to 600 points today just when you compare with the other peers we have.

Loaner cars is a big focus of ours. Also when you start looking at our loaner cars at 10% of our parts and service growth, we think there's a big opportunity there. And also from the standpoint of collision repairs, when we look at our -- when we look at that surrounding those cars we loan out. And we got certainly back-office efficiencies when you look at docuPAD, this is an asset that we really never knew how good it was until we started using it. We end up with little or no paper in the offices we can access information from anywhere in the country with your phone. And to me, that's going to be the future of the business.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [25]

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And maybe just a follow-up, Roger, as I recall, I think the SG&A growth in the commercial truck dealership business is in the mid- to low 60% range. Is that correct? And that business grows over time. I mean that would sort of naturally drag down the total rate. Is that a fair statement?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [26]

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Yes, 62.8%. So -- and I think I don't know exactly what it is in CarSense. But I think it's probably in the 60s also in CarSense. So to me, that -- those will be good things when we look at it and when we start to bring all that together. So at the end of the day, we can -- what Tony just said, it's 67%. So again, in 60s, you start averaging that, that's going to give us some benefit to reduce it overall.

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Operator [27]

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Our next question will be from Chris Armes with Buckingham Research. (Operator Instructions)

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Christopher Alex Armes, The Buckingham Research Group Incorporated - Associate [28]

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Congrats on the quarter. If I can just touch on auto F&I, it looks like gross profit same-store was up about 10%. Could you just bucket the components of that growth? I know you have some of those internal initiatives? And just kind of what's driving that? And also, can you touch on what would be -- what you think is a sustainable growth rate going forward into '20?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [29]

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I missed the question. You said F&I? I missed...

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Christopher Alex Armes, The Buckingham Research Group Incorporated - Associate [30]

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Yes, F&I in same-store.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [31]

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Yes. Well, I think one of the initiatives is certainly the commitment we've had with docuPAD because this is a digital process now with a customer. It's much more formal. We have less mistakes, and the other thing is our contracts in transit have been reduced significantly, which gets us capital to fund our floor planning. And on top of that, I'd said we've taken out certainly some SG&A. And we think as we roll out across the country, we'll see that even better. When you look at our F&I penetration, only 38% of it's really financed the balances product and with the docuPAD, it helps us drive that penetration much better. And I think that's key for us as we go forward. I see us continuing to grow that with the efficiencies that we have. And remember, today, that the most of our business is done with the captives, when you look at that overall. Probably about 67% overall are where the captives. And we do very little subprime, only about 6% this year was subprime.

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Christopher Alex Armes, The Buckingham Research Group Incorporated - Associate [32]

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Great, very helpful. And then secondly, just a follow-up on what you're discussing with being opportunistic in the commercial vehicle market in a down year. Can you briefly talk to kind of how big of a runway you have to grow within the brands that you sell right now?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [33]

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Well, I think that we have a ceiling of, I think, 10% of their business, and that's when we acquire something. I think our runway probably has 30% to 35% still available, if we take those calculations at this point. So there's plenty of room and I think with -- remember, they put that on when you start. I think the goal of Freightliner is to have less owners and then have a bigger scope so they can invest. And I think that with our track record, hopefully to date, that would give us that opportunity. But that's always the question when you get towards the top of that cap they've given us.

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Operator [34]

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A question from Stephanie Benjamin with SunTrust Robinson Humphrey.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [35]

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I was hoping you could just maybe provide a little bit of an outlook for the Penske Truck Services business, nice growth that we saw really the last couple of years, maybe what you're looking at as you kind of move through 2020. Any color there would be helpful.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [36]

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Well, number one, we had a great year. I think our profitability went from $448 million, I think, to $492 million from an EBT perspective, which was a great increase year-over-year. We obviously had some slowdown in Q4 in the rental business because most of these new vehicles in the SAAR of 330,000 trucks got delivered. So the requirement to utilize our trucks probably was down. We also de-fleeted, knowing that this was going to happen. We took out about 5,000 trucks in Q4, and we had some lower gain on sale of those, so that had some impact on our percentage of the profit. We were down about $1.6 million when you look at it. But overall, you got to look at all the components. Our full-service lease and maintenance contracts that we have, contract maintenance. You can see were up in the quarter, were up 12% in the quarter. On full-service lease contract, maintenance was up 5% and we had logistics that had a very good increase. And all of those businesses have economic escalators and typically are 3- to 5-year contracts. So we see that really strong with the growth. We have more customers, and we'll have that as we roll into 2020, which hopefully will offset any smaller reduction we might have on the rental side.

But one thing we're seeing with all this mode of transportation, where everybody wants to be in the overnight delivery business or same day. We're seeing a lot of interest in midrange and light vehicle, that would be Class 5 to Class 6 and 7, that would be midrange, so we see that really as an opportunity. And during -- when you look at the last 3 months from the standpoint of 6 and 7 midrange, they were up about 1.3%. And the Class 5 and 6, were up probably about 5% and even the heavy-duty was only down 13%. So again, I see this business normalizing still with the opportunity from a retail truck perspective to be very positive for us because the mix of product that Freightliner has or Daimler has in their portfolio. And certainly, with a 41% market share, the repeat and referral should be very good.

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Operator [37]

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We have time for one more question today, and that will come from the line of Derek Glynn with Consumer Edge Research.

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Derek J. Glynn, Consumer Edge Research, LLC - Analyst [38]

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Just had a follow-up on the stand-alone use. As you further scale that business, is there any need or appetite to establish your own captive financing units similar to what CarMax has?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [39]

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Some -- you could sit in the meetings with us. If we've talking about this once, we've talked about it 20 times. And then -- we just don't have the scale at this point to be able to secure ties the way CarMax does in the marketplace, and we think that staying with our captive providers that we have today in banks and people we have as our premium providers for financing and leasing, that's really what we have at the moment. This might change as we get real scale on the used car side, can we carve that business out and become -- have a finance company. But at this point, I'll be honest with you. I don't see a lot of traction on that within our Board right now. A lot of the people have had experience in this area. And I think CarMax has done a terrific job in setting that up. And of course, their scale drives that every day. But I think it might be hard to start from scratch right now. It might not be a focus. We might want to put our capital into something else.

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Derek J. Glynn, Consumer Edge Research, LLC - Analyst [40]

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Got it. And then, Roger, just wanted to get your pulse on the auto credit environment broadly. If you've seen any changes in credit availability or any irrational behavior from lenders?

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [41]

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Well, as you know, we're utilizing our captive finance companies, but I've seen no weakness at the moment from the sources we use. Credit really remains strong, and there's really very, very competitive pricing at all levels. And to me, we see no reason not to extend credit. I think because of our -- at least when we look at the demographics and the credit scoring of our premium customer. We see almost a 90% approval rate as we go forward. Obviously, the captives are very important. And to me, I don't see much zero financing at this point right now. I think we see more rebates and we all -- we have less 5 -- only 5% of our volume is 84 months. So our customer, because the leasing in the premium side, we see that as a, say, maybe a 24 to 36 months. But right now, we don't see any reason for pulling back the captives. Plus we got unemployment lower. People have got their jobs. They've got income. And I think there's a very, very much -- the residual values that they're putting on these, quite honestly, are very aggressive in some cases, to make it very attractive to buy a vehicle today. So I don't see anything right now that I would be concerned about, at least right now. We'll maybe see something later at the end of the year.

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Operator [42]

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I'll turn it back to the company for closing comments at this time.

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Roger S. Penske, Penske Automotive Group, Inc. - Chairman, CEO & Director [43]

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I just want to thank everybody for being on, and thanks for the support, and we'll see you after the next quarter.

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Operator [44]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.