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 one hour after completion through February 12, on the company's website under the Investors tab at www.penskeautomotive.com. I will now introduce Anthony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Paul. Good afternoon, everyone, and also thank you for joining us today. 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 are 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 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, 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 will now turn the call over to Roger Penske.

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 to be heavily rated to the U.S. increased 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 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 UK representing $0.51 per share. We opened two Greenfield used supercenters. We generated nearly $700 million in cash flow allowing us to increase our dividend four times, 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 $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…

[Operator Instructions] First question today will come from line of Rajat Gupta with J.P. Morgan. Please go ahead.

Hey, good afternoon. Thanks for taking my question and congrats on the quarter. Just had a question on the Used SuperCenter plan for 2020, it looks like you plan to open two 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. Thanks.

Well, Rajat thanks for the question. I think number one we will be opening, we have two 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 UK and Nottingham, we have a site that is probably 75% completed. We would expect that would open mid-year 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 margin. 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.

Got it. That's helpful. And on the used side in the U.S. I mean it looks like in the fourth quarter, the variable gross for 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?

Well, I think if you're talking about the used SuperCenter gross, 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 to tend to get full margin from the customers. But I think that's the same thing you would have seen in Bristol and the UK. So I think it's a mature sales force and again, there's pressures. I think we have a little bit higher costs of acquisition to get the right cars we want. We're probably spending a little bit more in reconditioning and that would take away from some of that gross.

The next question is from Rick Nelson with Stephens. Please go ahead.

Hey Rick.

Hey Roger, Tony. So I know you’ve mentioned the UK 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?

Well, I think we really – when you look at the UK, 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 mid-year in the UK. So when UK 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 if, and they, I think they have a pause maybe in six 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 is no more uncertainty. As we looked at 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, it's really a registration month. So that'll 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 UK because we really hadn't seen the impact of WLTP, with the world light vehicle testing procedures, particularly on diesel. And you've seen diesel probably drop 25 basis points 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 a 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've probably got FX in our favor as we go into 2020.

That sounds good and helpful. I know the used car Superstore business in the UK. There were some management changes there. I'm curious what the new team, some of the changes they might be making to improve the performance?

Yes. When we bought CarShop, we had a three 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 UK. 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, we'll bring our own people in on that because as we've grown now, it's no longer one or two locations, when you look at what we are 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 Sytner net, 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 that they'll sell. So this is a great resource along with buying from customers at home, than 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 Q2, Q3 and Q4.

That's great. Thanks Roger. Good luck.

Thanks Rick.

We have a question from Armintas with Morgan Stanley, please go ahead.

Great. Thank you for taking the question. When we look at the used truck GPUs that came down from something around 5,000 to something around 500 and effectively in order of magnitude, how should we be thinking about that on a go-forward basis given the increase in used trucks supply.

Well, I think I mentioned before, at least in some conversations I've had here recently that with a 330,000 new trucks being sold. Obviously, there's probably not a market growing too much, but those trucks are rather 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 months 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, 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've got buybacks and other things that we're obligated to as we go forward.

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

Well, I think when you look at new from our perspective, our margin actually went up from 7.3% 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 the ending of the third quarter that I wanted to beat same store and I wanted to maintain the gross. And I think that we've always had 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 the WLTP, so we had the benefit of Porsche margins during the fourth quarter because that volume picked up both domestically and internationally.

So, thinking about it going forward is sort of – this is a run rate adjusting for seasonality going forward then.

Well, I think we got to look at Q4 and so we go into 2020 and we'll relate sequentially maybe to Q4 of 2019 the Q1, I'm sure it will be down some because Q4 is always higher because it's the end of the year, certainly the mix.

Appreciate it, Roger.

Yes. Great, thanks.

The next question is from John Murphy with Bank of America, please go ahead.

Good afternoon, Roger. 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. This year is, you have the fixed ops that will offset that. But will we also see opportunities avail themselves to make some really good accretive acquisitions with maybe some of the – some of the dealers come under some distress or are more motivated to sell.

Well, when you look at our capital allocation. Obviously, we're looking for contiguous 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 no where here few years ago and our returns have been great. So I would say it's a positive, but again, this is a cycle. We don't – we're not burdened with a high CapEx in this business. It's mainly truck inventory and I think that 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 and 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 market. 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, a really a good thing for us from the standpoint of support. We have some weakness in used trucks.

Okay. And 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 other dealers have been talking about sort of mid-single digit growth and they've had to do some back flips on getting human capital or tax in. I'm just curious if there's an opportunity to maybe accelerate the growth there and what might be the, the gating factor for you?

Well look, I've seen some of the numbers coming out with the other players in the market. We're excluding exchange around 3%. And I think one of the areas that impacted us this year with two of our key BMW stores, big stores, we had two 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 our maintenance plan for the customer from free maintenance from four years to three 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 out from a tech perspective, there's no question that we're all looking for the same individual. We’re doing 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.

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 opportunity to take these – take the ratio even lower below – below where it is right now at 79%? Would that be just a function of our business mix? Or is there things you can do inside the new vehicle dealerships themselves?

Well, I think, one of the key things will be when you look at the UK – remember we had – I think we talked to you folks about a $20 million cost reduction in the UK. We'll probably see $3 million of that. In Q1, there will be some increases in cost through rent and some facility increases in depreciation, but we'll see that. We also got to maintain our gross profit. I think our gross profit increased also when you look at the calculation support of 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 overhead as 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 returned 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 is 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've 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 a 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.

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

Yes, 62.8% so – and I think – I don't know exactly what it is in car sense, but I think it's probably in the 60s also in car sense. So to me that's – those would 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, when you start averaging that, that's going to give us some benefit to reduce it overall.

Great. Thank you very much.

Thanks, John.

Our next question will be from Chris Armes with Buckingham Research. [Operator Instructions] Mr. Armes, please go ahead.

Hey, good afternoon, Roger. Congrats on the quarter.

Hey, Chris. Thank you.

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 in the 2020?

I missed the question. Do you said F&I? I missed…

F&I same-store gross profit was…

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 and 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 core planning. And on top of that, I said, we've taken up 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 balance is product. And with the docuPAD, it helps us to 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 with the captives. And we do very little sub-prime, only about 6% this year was sub-prime.

Good, very helpful. And then secondly, just a follow-up on what you were 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?

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 was – remember they put that on when you start, I think the goal of Freightliner is to have less, less owners and that 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 a question when you get towards the top of that cap they've given us.

Great. Thank you.

Next question is from Stephanie Benjamin with SunTrust Robinson Humphrey. Please go ahead.

Hi, Stephanie.

Hi. Good afternoon. 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 in the last couple of years, maybe what you're looking at as you kind of move through 2020. Any color there would be helpful. Thank you.

Well, number one, we had a great year. I think, our profitability went from 448, I think, to 492 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 deflated 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've got to look at all the components. Our full service lease and maintenance contracts that we have, contract maintenance, you can see, we're up – in the quarter we're 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 they are three to five 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 of 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 mid range and light vehicle. That would be a class 5, class 6 and 7 that would be mid range. So we see that really is an opportunity. And during – when you look at the last three months from the standpoint of 6 and 7 mid range, they were up about 1.3% and the class 5 – 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.

Got it. Thank you so much for the color.

Thanks.

We have time for one more question here and that'll come from the line of Derek Glynn with ConsumerEdge Research. Please go ahead.

Hey, guys. Good afternoon.

Hi, Derek.

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

You can sit in the meetings with us if we've talked 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 securitize the way CarMax does in the marketplace. And we think that staying with our captive providers that we have today in the 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 a – 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.

Got it. And then Roger, I 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?

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've seen no reason not to extend credit, I think because of our – at least when we looked at the demographics and the credit scoring of our premium customer, we see almost 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 only – we have less five – 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 – very much the residual values that they're putting on these quite honestly are very – 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.

Got it. Thanks guys.

Thank you.

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

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

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.