Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group First Quarter 2016 Earnings Conference Call. Today’s call is being recorded and will be available for replay approximately 1 hour after completion through May 3, 2016 on the company’s website under the Investor Relations tab at www.penskeautomotive.com. I will now introduce Tony Pordon, the company’s Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Lori and good afternoon everyone. A press release detailing Penske Automotive Group’s first quarter 2016 financial results was issued this morning and is posted on our website, along with a presentation designed to assist you in understanding our performance. Joining me for today’s call is Roger Penske, our Chairman; J.D. Carlson, our Chief Financial Officer; and Shelley Hulgrave, our Controller. On this call, we will be discussing certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization or EBITDA. We have reconciled these 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. 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. Additional discussion on factors that could cause results to differ materially are contained in our public SEC filings, including our Form 10-K. I will now turn the call over to Roger.

Thank you, Tony. Good afternoon, everyone and thank you for joining us today. We reported another outstanding financial performance, including record first quarter results. This follows record financial performance posted by our company in 2015. For the first quarter, income from continuing operations increased 4.2% to $79.3 million, and related earnings per share increased 7.1% to $0.90 per share. Foreign exchange rates negatively impacted earnings per share by $0.03 during the first quarter. The resiliency of the U.S. and UK markets drove solid performance from our truck dealership operations and drove our business to another quarter of record results. During the quarter, we increased our dividend to $0.26 reflecting the continued strength of our business. PAG offers shareholders a current yield of 2.9%, the highest in the automotive retail space. During the quarter, we acquired a 49% ownership interest in the Nicole Group, located in Japan that operates 9 dealerships, including 4 BMW, 3 MINI, a Rolls-Royce and a Ferrari, along with 2 standalone service centers and 2 pre-owned showrooms. We increased our ownership in our Germany-based Jacobs Group from 60% to 68% and we divested of three non-core dealerships. We repurchased 4.5 million shares of common stock for approximately $168 million. Additionally, in April, our Premier Truck Group subsidiary acquired Harper Truck Centres located in Ontario, Canada, with 5 dealership locations in Greater Toronto. The acquisition is expected to generate approximately $130 million in annualized revenue. Now, let’s turn to the details of our first quarter performance. Revenue increased 7.6% to $4.8 billion and same-store retail revenue increased 2.5%. The revenue increase was driven by acquisitions, along with a 9.9% increase in retail units sold. Excluding foreign exchange, revenue increased 10% to $4.9 billion. Approximately 94% of our total revenue was generated through our retail automotive dealerships. The U.S.…

Thank you. [Operator Instructions] Our first question is from John Murphy with Bank of America-Merrill Lynch. Please go ahead.

Good afternoon Roger.

Hi John.

Just a first question on capital deployment, because what you did this quarter was relatively diverse, I mean the buyback was almost 5% of the shares outstanding, you upped the dividend yield and you bought Harper right after the end of the quarter, just curious as you look at the opportunity to deploy capital, how do you think about that now relative to buyback, the truck business, the franchise new vehicle business, I mean what is sort of the opportunity that you see out there and where do you think you are going next and can you continue to be this aggressive?

Well, look number one, we have certain commitments to the OEMs for capital expenditures on CI, so that obviously becomes key. We also want to maintain the increase in our dividends, which as I said earlier in the call, we are at almost at 2.9% dividend yield. But I think we are going to continue being an opportunistic buyer. I would say that as we look at the business today in the U.S., the multiples are at pretty high. And unless they are strategic and would be contiguous to where we are, we would probably have our pencils down at the moment. However, when I look at the truck business, Daimler continues to ask us to look for other opportunities and we see those options in the heavy truck business, the multiples being probably anywhere from 50% to a third of what we pay. On the auto side and with less CapEx is very attractive to us. Also in Europe, with the success we have had in Western Europe, we see many opportunities there that we are looking at with the premium-luxury brands, which we have relationships with. I would say, in the UK, it’s a little tighter because of the size of our company there. But I think overall, we will continue to look opportunistically for acquisitions that fit. With the stock price, I think that we were – looked at lower stock price. It looked to me that that was a very good buy for us during the quarter. We have a Board meeting coming up in the next couple of days and we will probably reload our stock buyback plan. But to me at the present time, I think that we will watch the costs of dealerships look at our stock price and again look for opportunistic purchases, but we are definitely in business.

It’s very impressive. Then a second question, as we look at SG&A, this was one of the best quarters you got on leverage, it seems like there was a real focus on cost, I mean what changed as you are going through the end of last year that gave you this kind of benefit in the first quarter and is this the kind of thing we should think of going forward as getting this 30% to 35% SG&A or operating leverage to stay on the total business or flow through?

Well, I think we looked at our business plan at the end of the year as we looked into 2016 and we got together with the key guys and we say, okay. What are some of the cost takeouts that we can do to really ensure the plan and maybe do even better and I think our guys have jumped on that. Basically, our advertising and marketing costs are flat. We have now really tailored our comp plans. So to gross goes up or goes down, our comp plans or comp to gross is staying pretty much the same. And from a personnel standpoint, I think when you look at the U.S. we really haven’t added any personnel at all during the year, in fact we are down and that will give us some benefit from a personnel perspective. But when you look at this, I think the key thing is that we are focusing on our growth, which obviously we are maintaining our new car growth to down 10 basis points, which gives us some benefit on flow through of our confidence, right. So I think it’s the basic. Our insurance was in line. I think overall, our capital expenditures are in line with what we are expected to spend. So our interest line is in line. So overall, probably most important area would be loan cars and when we have looked at that very carefully, in fact Bob [ph], one of our key guys has really done a study and we are seeing that there our loan car costs were somewhat almost 10% of our service and parts gross in 2015 in some stores. We are trying to get that cut in half. Obviously, with Takata airbag and some of these things it has a little different ring to it. But there, we are getting reimbursed more from the manufacturer. So I think we can look at still good flow through as we see Q2 and Q3.

Okay. And then just lastly on the Premier Truck Group on the truck business, it looks like that the parts and service business stepped up from 71.3% of gross to 79.5%, so it looked like it was like almost a 13% improvement in aggregate parts and service on the commercial truck dealership business, what’s going on there, is that something that is sort of countercyclical or was there something as far as your efforts or something that changed in the market and you can get that bigger a step up in parts and service work there?

Well, of course we had an acquisition last year and in the first quarter when we bought the businesses in Tennessee and Georgia. But more important is we have added that geographical area. We picked up some key fleets. So, as you start to look at the gross that we get on the fleet business versus the pure retail it had some impact on gross mix. But to me, overall, we are focusing on our parts and service real-time and trying to understand how we can get better throughput. We have taken some of the same things we have learned on the car side and putting some of those processes in place. We hired a person to be specifically in line to take a look at what the benefits are in getting our process better at the locations, but parts and service is driven by the truck market. And if you look at freight, in the month of March, it was up 2%. Now, we get some impact on energy-related markets, but the construction is still up. And I think that we are going to see trucks continue to be using our parts of the new truck business slows, we will see more maintenance on the use, which is certainly a benefit. And when we look at our bid overall, I think the business, the model, the parts and services, why the reason we invested.

And Roger, just one last follow-up on that, I mean, as you think about the opportunity in the market, how much more opportunity is there to win some of this fleet business? And also how much capacity you have in the service base for or the service area for the commercial truck business where you could potentially absorb that business?

Well, we are operating not on three shifts and tipping some locations. We are operating at three shifts. I think we are in our South Dallas operation, but we see that as an opportunity and we are making some acquisitions to build a big body shop to take body shops out of our existing service facility so we can open up those bays. And we’ll be consolidating those in Oklahoma and also in Texas. So, I see that as a way to get more expansion from a parts and service standpoint.

Okay, great. Thank you very much.

Yes.

And we have a question from Rick Nelson with Stephens. Please go ahead.

Hi, good afternoon.

Hi, Rick.

Roger, your margins on the new car side held up a lot better than some of your peers. Volume foreign, I would say, was higher year-over-year and domestic kind of flat, some pressure in the premium luxury, but how – what’s changed there that is helping your flow-through as well?

I guess my guys would say good management on grosses, but I think that – I think our plan and when we really invested in the company was to be involved in premium luxury and volume foreign. And when you start to look at the business from a gross perspective, I think we have to look at the number of dealers. And when you look on the domestic side, you look at Chevy and Ford, you have approximately 3,000 dealers. I think FCA has somewhere around 2,300. So, when you start looking at that interbrand competition in these markets, with the Big Three having about 45% of the market and we think about Toyota and Honda with 1,000 or 1,200 dealers and then you look at a premium luxury I think Lexus has around 250 and BMW, Audi and Mercedes-Benz are in the 300s, you start to look at the margins. And I think that we have less interbrand competition in volume foreign. We do and certainly, in the domestic, we are a small player. But I think what happened to us in the luxury side, our margin was down, but I think that was primarily due to where we were in the Northeast, because we have been down the last three quarters. I think we have been really affected by the stock market, a byproduct of the stock, but also mix. And we have not had the SUVs. When you think about what’s been the real success of the Big Three, it’s been trucks and SUVs. Well, as we are starting to see the plants change over and give us more SUVs, I think we will see some tighter penetration that really got our grosses back up, because it’s all driven by product. We can see it at Land Rover. We can see it at Porsche and McCann. And I think when you look at our business overall, in the markets we have done a pretty good job. And when I look at Texas alone, there has been a lot of discussion about Texas. We are up really in Texas over 2% on our used cars. And I think from a new car business, we are up almost 6%. But again, profit was up. Gross profit was up in those markets. So, I think we are in Austin, which gives us a little better base because of the state capital. But overall, I think the mission is right. We don’t have the interbrand competition. And I think our guys are really focused on margin. We have some daily tools that we use not only in the U.S., but internationally to monitor gross profit every single day on our deals and I think it’s paying off.

Thanks for that color. Finally, I would like to ask you about any updates on the progress that you are making from a e-commerce standpoint and the Preferred Purchase program, how that’s progressing?

Well, I guess a couple of points to make on e-commerce. We have really worked hard to refresh our websites and this is an ongoing process to make it more responsive. And of course, mobile is certainly something we have to enhance those designs and have better navigation. I think our people – Terri Mulcahey and our people have been a great job there. We are also right now, Rick, we are piloting some cloud technology to update our inventory photos. So, all sources can pull right out of the cloud rather than us having to send them individually, which is much more efficient. And our website traffic was up about 10% so far in the quarter. And I think when you look at that in our digital lead volume was up 35%. And mobile growth, which is something we are all looking at, was up 26%. And that represents today almost 42% of all of our traffic. But even more important, I think is what are we doing in social media? What are we doing in reputational management? We are looking at our stores for Google reviews every single day and every month. And we have had – we have gone from 65 to 75 Google reviews for dealership during the first quarter and our star rating has gone from 4.1 to 4.2. So, I think that with those actions, along with keeping our advertising expense for vehicle flat year-over-year has been key. And a couple of things we have done. We have got a mystery shop program to be sure that our people are trained properly. And we have got some e-mail campaigns, which are really called to action. And there is no question that we have had growth from our digital advertising. 10% of our leads come from third-party sites that would probably be Cars.com and AutoTrader. So, there is a lot going on in the marketing area. And I think the good news is we are keeping our costs flat. And Preferred Purchase has been great year-to-date. The rollouts will be complete in May. I think our conversion rate is 3x higher and the closing rate is almost 19%. So, transactions are streamlined. Many of them are under an hour, which the people like that. We are looking at it from a CSI perspective and we are seeing strong CSI and Preferred Purchase. We are going to rollout an F&I product associated with that early in the next quarter. So, I think, overall, our guys are doing a great job on the e-marketing and our e-commerce.

Thanks a lot for that update. Congrats and good luck.

Thank you.

And we have a question from Brian Sponheimer with Gabelli. Please go ahead.

Hi, Roger. Hi, Tony.

Hi, Brian.

Another great quarter from an execution standpoint, I guess the one thing that jumps out is what’s not there and that’s an increase in inventory. Roger, talk about how you and your dealerships are managing kind of the released valve and making sure that you are not seeing the inventory build that maybe the rest of the industry is?

Well, look we had a build, if you look – go back a year, but I don’t think that’s fair. I think we got to look at December. And we had $2.2 billion in inventory on new cars at the end of the quarter and about $800 million in used cars. And I think that at the end of the day, we had about $400 million in trucks when you look at both Australia and our Premier Truck Group. So at the end of the day, from a retail truck car standpoint, I think we are in really good shape. What happened is our inventory went up $31 million in the U.S. on new and it went down $37 million internationally. Now premium, where we had – remember, we were very high in BMW and Mercedes and we have been able to manage that down on premium luxury. We are down about 44 million. But our volume foreign where we were light on Toyota and Honda that’s picked back up again. So, I would say we are up about 46 there. So pretty much level that we go on to increases in Land Rover, Porsche, Toyota and Honda. We have just kind of rebalanced inventory. I think you are going to see that for the rest of the year. We are going to see 17 million plus in SAAR. We are going to see market share moving around. And I think with low fuel prices, you are going to see trucks and SUVs being what people want. And I think all these manufacturers are rushing to change over their plants to build these crossovers. So to me overall, I think it’s just a matter of us really rightsizing our premium side. We think the mix is going to get better. And remember, we are going into the best selling season. I know everybody is concerned about inventory. But at this particular time, with the size of our business and I look at it on a domestic and international basis, we are in pretty good shape. Overall, I think I said on the call, we have 55 days new and that compares to 68 days at the end of the year. So that was down. But you look at the U.S. alone, we are about 70 days. So we are in line with some of our peers. But again, our used car is at 39 days. So it’s our focus, but again I think more important is what do we do with these cars we are sitting with that are on stop sale, that’s my biggest concern.

That’s very helpful. And just a broad industry comment Roger, as far as your thought on health of the retail environment, broadly speaking and your thoughts on lease penetration and maybe some of the levels that, that’s elevated to?

Well, let me just talk about lease, here on the premium-luxury, we have been in our business, over 50% has been leased. And we like that business. We are stickier from the customer standpoint as we deal with them. When they bring their cars back, we can deal with them when they are getting serviced, so I think leasing has been key. And when you look at us overall, at 41% of our new units, we are leased and 30% of our total. So it’s a pretty strong part of our business. And when I look at the business overall, I think that leasing is quite positive from the standpoint of where we are going. And from an off-lease perspective, just to put it in realistic terms, just in BMW alone, we have got 10,000 vehicles coming back this year from BMW. And we like those vehicles coming back because we buy those and we are good – they are good cars for us to recondition, to certify them and then resell them. And we keep that customer. So I think that’s important. What was the first part of your question, I jumped on the lease...?

Just broader health of the retail environment and what do you think the manufacturers are doing the right thing to move the vehicle, maybe not on the premium side, but also within your volume foreign as well?

Well, let’s just say premium, they have got to shift more to trucks and SUV. Let’s say, that’s point number one. I think from a credit perspective, I have never seen the OEM captive stronger from a standpoint of – on the retail side, you see that Toyota and Lexus have announced leasing on used. We have been doing that already, with some of the other premium luxuries in the last 18 months. But credit is strong. From an overall standpoint, there is some discussion about sub-prime. Our business is probably less than 6%, so I can’t really comment on that. But there is people popping up everyday that want to finance us. We have about 60% of all of our financing is done with the captives on the retail side, 100% on leasing. So the balance would be best with our preferred lenders. So I look at a strong 17 million SAAR. I see competitive situations with the OEMs. And there is no question that from a lease perspective, I like them better because what it does are typically 24 months to say 36 months or 39 months and gets that customer back to us. Now we don’t have the benefit of selling as much aftermarket products on those, but I guess I would rather have the customer back in my shop on a going forward basis. So overall, I don’t see anything but a good market here for the balance of the year. And to me on the truck side, freight is still positive in March. I think there is some adjustment in inventories across retail, meaning just overall consumer retail, but construction is still strong. And I think that we will still see that market stay there and our parts and service will of course drive that continued revenue stream.

Great job by you and your teams. Thank you to have me on.

Yes. Thanks.

And we have a question from Brett Hoselton from KeyBanc. Your line is open.

Hi, Brett.

Hi, Roger and Tony.

Hi, Brett.

Wanted to kind of circle back around and talk a little bit about the airbag recall and I guess some of the other retailers are talking about a large percentage of their used vehicles in a stop sale position. And how may be on the new vehicle, to a lesser extent, but on the used vehicle, to a greater extent, being a little bit of our hampering to sales, I am wondering are you seeing a negative impact on your new sales and are you seeing a negative impact on your used sales and do you feel it’s meaningful or you have you work around?

Well, I don’t – I can’t say that I have got a negative. We lost maybe some Volkswagen TDI business for obvious reasons because people did like that vehicle from a diesel perspective. But quite honestly, it’s probably the inconvenience of having these vehicles. And you have to store them and in some cases, we have run flat tires that we have to deal with, we have batteries on these premium-luxury cars that have to be charged. So there is no question it’s becoming more challenging. But it’s difficult to really predict the cadence on when we are going to get these spare parts. Today, we have approximately I think I said earlier, about 60 million of stop sale vehicles. And if you look at those, 20 million would be in used and 40 million would be on new vehicles. So to me, it’s a matter of storing these. The good news is that the manufacturers are supplying us floor plan credits or floor plan assistance. I am sure in some cases, we are not getting all of our costs or giving us money to give rental cars to consumer. My issue is CSI, turning us from a customers satisfaction perspective when you can tell the customer, we don’t know where we are going to get the parts. So that becomes a little bit more problematic. And I know that some of the publics are wholesaling some of these cars. We can do that. And we don’t have the safety related stop sale. We probably would take the same action.

And then in terms of BMW specifically, some of the dealers are telling us that there is kind of dirt in the first quarter of off-lease vehicles due to a program about 3 years ago, lease program about 3 years ago. And just kind of pushing back or pushing out some of the off-lease vehicles in that kind of May, June, July timeframe that we normally would have seen in the first quarter. So my question is how – how do you feel about the cadence of BMW sales and as you look at your BMW sales, are you seeing the same impact on your sales that these other dealers are talking, I mean I presume you are, but maybe they are making too big a deal out of it?

Well, each one of us, BMW is a very important partner of ours, our number one partner. So we are with them everyday. I would say this, we definitely saw a slower lease return because of the 39-month lease that they had. But also, they got Takata airbag issue with a number of their cars. So even if we got those cars back, many of them we couldn’t even sell because of stop sale. Now what we have done, we have taken a little bit different action. We have gone returning our loaner cars. We have a number of loaner cars, just take Caribbean, West Coast there is 350. We have gone returning those at a higher rate, which is giving us a young used car and we can take the financing leasing opportunities there. So we have kind of filled the whole with those until we can get some of these stop sale cars or maybe a better flow of off-lease returns. But we live off those and I think it’s going to be important. I said earlier, we have 10,000 coming back in 2016.

Excellent. Thank you very much, Roger.

Alright. Thanks.

We have a question from David Lim from Wells Fargo. Please go ahead.

Hi, good afternoon Roger and Tony. So Roger I wanted to ask you, when you compare 2015 to what you are seeing so far in 2016, are you seeing some noticeable bad practices reemerge such as over-inflated residual values when it comes to leases, aggressive incentives, channel stuffing or even pre-registering of vehicles?

Well, I think that you are seeing the same information, I see. I looked it up before the call. And right now, the industry average on incentives is about $3,100. It’s up about $400 from a year ago. It’s interesting when you look at it. The European brands, which we have a lot of conversation about is only up $100. And the domestics are up $800. So there is probably more incentives going on, on the domestics. Now from a stair-step perspective, we talk a lot about that. I don’t see that much in the premium-luxury side at all. I think that I look at Porsche, probably Mercedes, I think maybe Cadillac, I don’t see any stair-step at all. And Audi has a BPO goal, which has been consistent. We always say they are too high, but we figured out how to get there anyhow. And at the end of the day, I don’t see anything more than we are all pushing for the different commitments that we have made, because there is typically a pot of money at the end of that. And I don’t know that I go back a year ago that we were in the same situation. I mean, I think today, the big issue is that we are facing is what are we going to do with these stop sale cars. And it’s becoming a bigger and bigger problem, because there is no question that we have to handle those for the OEM, that’s the downstream partner’s responsibility and we have to do that. But that would be a bigger concern for me. That’s what I would look at today as these campaigns that are safety-related. And the OEMs are looking for share. And because China has been obviously soft, they are pushing those vehicles here. But I know for a fact that Audi has slowed down there, I think they have taken 10,000 to 15,000 out of their production here over the Q2 period. So, we will start to see that inventory certainly tighten up. It will help us on our gross profit.

So, you mentioned that Audi is taking down production. Are you seeing any kind of other production cuts from other OEMs? And then a follow-up question to that is on industry sales, 17.3 million, 17.4 million is what we did last year. Is that something – is that something that can be achieved in 2016 or do you have an opinion either way?

Well, I have never been anyone to forecast it. But I certainly feel that 17 million SAARs, we are now into April and April seems to be a good month so far. I don’t see anything other than that. And I don’t know that any other OEMs specifically have cut back. I know that here that there is some plants have been shutdown here just lately this week, some of the domestics, some of that has been maybe through parts shortages. I don’t know that for sure. But I think everybody understands at the end of the day and the OEMs, we have conversations with them everyday. You push cars to us it’s going to cost you money to make it and sell them incentives. And I think they all realize that. But again, I guess we will have to wait and see.

My last question if you don’t mind is, is Penske Automotive Group pushing back on any orders in the OEMs?

Well, we say no one a lot of times.

Got it.

I mean, we have to say no. And I think that we can only take so many vehicles. And the problem is it’s not that we don’t want to take them, it’s the mix. And you just cannot continue to take vehicles, where you have got an overload. And that’s probably – if you look at everybody’s inventory, that’s just talking about over inventory, it’s probably mix. And if we had the right mix, we would be in good shape. But to me, we haven’t been able to convert the plants fast enough to go to these SUVs or crossovers. And I think it’s different by brand. And certainly it’s different by market and certainly by segment. But again, I think we – this market, after a while, will shift to where we have the right supply of the right product. But trust me we have to be able to say no.

Thank you, gentlemen.

We have a question from Bill Armstrong with C.L. King & Associates. Please go ahead.

Good afternoon, Roger and Tony. Couple of questions on the commercial truck area. So your gross profit per unit is down year-over-year. For used, it was negative. Conversely, you had a huge increase in F&I per unit. So, I was wondering if you could maybe just discuss those – the different directions in those metrics?

Well, on the new side, when we added the group in Tennessee and Georgia, we have picked up some larger fleet business, which obviously had an impact on gross as we didn’t quite the retail growth on a fleet business. So that had some impact there. But then as we looked at the end of the year, we looked at our used truck inventory, because as the fleets have topped off and now with, say, freight we have kind of leveling out, there are some overfleeted. So, we saw some fleets trying to wholesale trucks. So, we saw the used truck market to drop. So, we took action and really have compensated our sales guys to move these trucks at what the market is. And sometimes, that’s obviously below our cost. So, what we did we put some good incentives on the Finance & Insurance side and you can see that we were $3,400 per used truck, but again, negative. We sold 271 used trucks in the first quarter. Our inventory is about a 60-day. We are sitting just under 500. So we are sitting in pretty good shape now. But I think that action was really as we do in the car side, it’s a downsize and so we are in a position to be able to take more trades in the future.

So, should we see maybe more normalized F&I and gross profit per unit going forward than now that you have kind of cleared that out?

I think we still probably have 25% of our trucks that we need to move. There is those ones at the back end that we have had. And instead of wholesaling, they have been taking a big loss. So, we are better off to retail them and get the benefit of our finance reserve. And I think that it will take us probably through Q2. And then we are going to be aggressive and continue to take trades where it makes sense, because we will get the front end deal, too. But again, we want to be sure that it’s in line with the marketing. And there is no question that as we look at our used truck F&I growth at 3,400, it’s strong. And when you look at it overall, it certainly makes sense to take on this action. And our – we got a little bit higher sales cost also, too, because our sales guys don’t have much on growth, so we are paying them on a flat. That’s had some impact on our compensation from a variable standpoint.

We are hearing that obviously used truck prices have been depressed, especially for Class 8 and that lowers the trade-in value when these fleets are looking to replace their vehicles. Are you guys seeing that in your dealerships where the buyers just maybe aren’t able to replace these trucks as soon as they would like to, because their trading values have been diminished?

Well, that’s the one thing about a heavy duty truck. You can run it longer in order to get depreciated to what we – with the supposal of the market prices. The only thing there you have some higher maintenance costs, well of course, that drives more parts and service to us. But I think there is a guy pretty smart in the business that it takes about a year for people to realize because what’s happened, it’s really been a sellers market in the truck, in the used truck side for the last, what, 5 years? And now, with production up and with the fleets being full, it’s now going to be a buyer’s market from the standpoint of the truck dealer. And I think that it will have to be some will come to the 50 yard line here, probably over the next 6 to 12 months and people understand their values that if they have to affect the depreciation life, you will have to do that. But I think that typically, on a heavy duty tractor, if you have got 5 or 6 years of depreciation, you probably are not affected by any big swings in the markets.

Got it. Thank you.

You’re welcome.

We have a question from Paresh Jain from Morgan Stanley. Please go ahead.

Paresh, how are you?

Good, good. Just a follow-up actually on the inventory and production topic, in the past, you highlighted how both UK and U.S. were seeing some of the production that was originally meant for China, how has that trended more recently?

Well, let me say this. I think Land Rover particularly has been very positive for us, both in the UK and in the U.S. So, those inventories are picked up. I would say Porsche also and we are getting some benefit, I think in ML, in GLS, GL and the Mercedes side. But that certainly will help us. When I look at the numbers, Tony gave me the numbers specifically we are seeing our inventory up about 13 million in Porsche in the U.S. and another 7 million in the UK. And you look at Lexus is up 16 million. Honda and Toyota are up about 30 million each. And Land Rover is up about 47 million. So, again then you balance that off with the reduction in Mercedes and BMW, I think we are in pretty good shape. But this is a balance. And with interest rates where they are, it’s not a big impact. But I would tell you one thing we are definitely keeping an eye on it. And if this mix doesn’t change, we are going to have to take some action and move and probably take some less gross to move it.

Got it. And then just one follow-up on the U.S. F&I, in the quarter where most of your peers are seeing meaningful uptake, F&I in U.S., vehicle in U.S. was kind of flattish, what drove that flattish performance?

No, I think you have got to look at it, I think we were up about $47 if I remember, but releasing was up. And when we have leasing up in a quarter, we don’t have the benefit of the back end on F&I, which you have on a pure conditional sale contract.

Understood. Thank you.

We have a question from Michael Montani with Evercore ISI. Please go ahead.

Hi, good afternoon. Just wanted to ask if I could Roger, on the 7% decline was used GPUs, there has been a bit of a trend there of declines really since the back half of ‘14. And now we have seen manhunt index [ph] come in a little bit, so is there any way you can share some additional color maybe by U.S. versus UK and also on how do you see that evolving, given the rising of leased vehicles?

I guess I get Tony to give you the input later on UK versus U.S. But what we are all trying to do, we have gone from 0.5 to 1 used to new to 0.9. So there is no question that we are retailing first. So there is a lot more focus on used cars. And I think with that, that’s driving some of our lower margin. And when I look at Germany specifically, in the Jacobs Group that we had last – this past quarter, we had 1.2 used to new, and Jacobs margin on used is probably around $800 – €800, which drives a bad number for us when you consolidate it with our U.S. And I think that it probably – Tony says that Jacobs probably cost us about $50.

Okay. I guess if I could, on a slightly different topic, but related on retention rates that you may have actually for off-lease vehicles. And I guess what I am thinking about here is used day supply is 39 days, how would you all think about trying to retain a certain percentage of the off-lease vehicles that you all have and then convert to CPO versus balancing the days inventory to make sure that you are disciplined on GPU, can you just talk about strategically the trade-off there and I guess how you think about what percentage of the off-lease you actually want to keep versus maybe send back to auction?

Well, I would give up a little bit on margin to have – to either keep a customer in the used or to get a new customer. And then we get the benefit of the parts and service gross profit in the reconditioning, which is key now today. And we are doing tires on our own now. We are doing our glass work. We are doing our dent-less repair, our rapid repair. All of that now is done internally to try to keep the sublet down. But we see the off-lease vehicle is a very important part of our business. And I think that we watch our inventory, but remember we have – we really have three ways to get used vehicles. We can buy them on the curb, we can trade them and then when we have, we call young used is the ones that we take out a demonstrator service or loaner car. And we can turn those typically in a minimum of three months if we want to. So as we need to fill the bucket up with good pre-owned, we have those three levers to pull.

Great. And the last one, if I could sneak it in is just any update you can share, the Northeast market in particular, what you are seeing then trend wise either from a new unit comp or GPU standpoint?

Well, I would say that we see the Northeast down for us. It’s probably the Connecticut, New York – out in New York, we see probably a 5% reduction year-over-year. And Jersey was down 4%. Now we think that’s a by-product of the financial markets in New York. But again, we have got good businesses there. All those businesses are making money. We are just not getting the up-tick that we see in some of the other markets.

Got it. Thank you.

Thank you. And we have time for one final question and that will be from Patrick Archambault with Goldman Sachs. Please go ahead.

Hi Patrick.

Yes. Hi Roger. Yes. Thanks a lot for squeezing me in here, just building on the used question, I think tying back a couple of thoughts, it sounds like I mean you have 39 days of inventory, which isn’t excessive, but you are seeing at least in the U.S., some degradation in the manhunt, not a lot, but a little. Is that something that is off-settable or should just the depreciation of that inventory in terms of price for 40 days be something we think about as being adverse to used vehicle margins as we go forward?

Well, I think if I am going to dump them in the marketplace at wholesale. I am probably going to – we have a different outcome and if I retail them. And remember, if I have to take as I said a little bit earlier, if I were to take a smaller gross in earnings to have a customer and get some F&I like we are doing on the truck side, I think it makes sense because we get reconditioning. Now to me, if you are in the 40 days to 50 days and you are returning your used inventory, I think you are in pretty good shape. You are not going to run into a bus saw with a big drop. You will be able to manage that. The big problem is as the cars get over, you have some cars that’s probably trailing to 60 days. And we try to have some pretty good discipline to move those out when we have to. But I think the fact that we are 0.9-1, used to new, from a company perspective, shows us that we can sell used cars. And I will tell you, we didn’t focus on that as we forgot into this business. And I think at the end of the day, we are certainly in a much better position. And as I said, we get – when we look at our variable growth, if we look across our new or used or F&I, we are getting almost $3,500 per unit. And to me, that’s what makes sense. What’s the total all-in and you look at the front end transaction being maybe a new car, the used car and then you will also look at the impact on our parts and service. And our parts and service margin is running I think anywhere between 58% and 59% and that’s been pretty consistent. I don’t like to get into any higher and that’s because we are going into glass, we have gone into window, we have into window tinting, all those things that we are sending stuff out, where we are leaving money on the table. So our process is more vertical integration and I think that’s what we are doing on used. And I think all the other public guys are – I hear Asbury and I know what other nation is doing and certainly Sonic with the special used car programs. Remember there is a lot more used cars sold over new. So it is the market that we need to understand and how we can penetrate it.

Got it, that’s helpful to contextualize and put it all together. In terms of just getting back to – and I am sorry if this is in the doc somewhere, but on commercial vehicle, if you exclude the acquisition of that Tennessee dealer point, how much – was it up on a same store same sales basis. And again, if this is a number that’s out there, I apologize. I just didn’t see it.

I don’t have that with me. I will get Tony to come back to you on that. Obviously, we had a benefit of – I haven’t really looked at it on a same-store basis because it was really – we guided in January of last year. So we did have part of it in February and March. Almost, I would say, it was same-store. We have only one month and that would have been January.

Okay. That makes – that leads well into this final question, is just your revenue was up, and obviously you have had the dynamics of orders and retail sales for Class 8 are difficult, how much of that is some of the market share gains that you spoke to with DTNA, you did speak to a pretty brisk used business because you would try to clear – you had cleared out some units, so maybe just trying to kind of put the pieces together there?

Look, let’s say this, we represent only one brand, and that’s DTNA or Daimler, which has Western Star, Great Liner and Cummins built buses. And of course, they have good share last year. I think as we look at our business, we have got the retail piece of this, which basically, we were in when you looked at – we didn’t have some of the big fleets that are located in the Southeast. The U.S. Xpress and Covenant and people like that, which now that we have. And those fleets today I think are in a position where they are going to have. I don’t think you are going to grow their fleets. There are going to be replacements. So we are going to have to play ball with them on trades. We are going to have to play ball with them on pricing, which is going to drive – will drive some margin down. But on the other hand, it gives us a margin we didn’t have. It gives us chance to do the pre-delivery inspection and provide parts and body shop work. So I think that the model is working fine. And we will see probably less in what you would call a SAAR for trucks. I think it will be down probably from 310 or 320 down probably to mid-200s. But on the other hand, I think with Daimler’s share, we are going to get a bigger piece of that and the good news is that we have the units in operation, which will drive the 79% gross profit, which is so key. And remember, when you look at the business in the first quarter, we would do anything to get 117% fixed coverage and that’s what we had in the truck side. So, when you look at the model, I think that we are in the right spot. It’s good diversification for the company. Thanks, everybody.

Got it. Appreciate all the color. Thanks, again.

Great, thank you.

Thanks, everybody.

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