Good afternoon, ladies and gentlemen. Welcome the Penske Automotive Group Second Quarter 2018 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through August 02, 2018 on a Company's website under the Investor Relations 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, Laurie. Good afternoon, everyone and thank you for joining us today. A press release detailing Penske Automotive Group’s second quarter 2018 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 Company's strategy. As always, I’m available by email or phone for any follow-up questions you may have. Joining me for today’s call are Roger Penske, our Chairman; J.D. Carlson, our Chief Financial Officer; and Shelley Hulgrave, the Corporate Controller. On this call, we will be discussing certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization or EBITDA and have reconciled the non-GAAP measure 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 some 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. I’ll now turn the call over to Roger Penske.

Thank you, Tony, and good afternoon, everyone. Thank you for joining us. I'm pleased to report record results for the second quarter and the first half of 2018 for PAG. In the second quarter, total revenues increased 10.3% to a record $5.9 billion. Earnings before taxes increased 12.3% to $176 million. Income from continuing operations increased 27% to $134.6 million and related earnings per share increased 28.5% to $1.58. EBITDA increased 11.6% to $230 million and as a result of the Tax Reform Act in 2017 our effective tax rate was 23.3% compared to 32% in 2017. A record results were driven by outstanding performance across each area of our business, demonstrating the strength of our diversified transportation services model. I am particularly pleased with the performance of our 14 standalone used vehicle supercenter operation, our 21 location North American retail commercial truck business locations and our investment in Penske truck leasing. Looking at our retail automotive unit for the second quarter, total retail units increased 3.1%, including 1.6% on a same-store basis. Total retail revenue increased 9.1% or 8.8% on a same-store basis. On a same-store basis, gross profit per unit retailed increased as follows; new vehicle plus $32 per unit to $3,127 used vehicles were up $151 per unit to $1,574, and finance and insurance was up $90 per unit at $1,247. Our supply of new vehicles was 72 days at the end of June compared to 70 days at the same time last year. Our supply of used vehicles was 45 days at the end of June compared to 44 days, the same time last year. Just to note, we have 930 vehicles representing $37 million on stop-sale. Service and parts revenue increased 6% on a same-store basis, including customer pay was up 8.9%. Our warranty was…

[Operator Instructions] our first question from James Albertine with ConsumerEdge Research. Please go ahead, sir.

Great. Thank you, and good afternoon, Roger and Tony and team.

Hi Jamie.

So want to ask quickly just a sort of a housekeeping item. There's a preannouncement as you know from one of your competitors, calling out Honda and BMW. Just wanted to get your take on what you've been seeing in those two brands, particularly BMW in your portfolio? And then secondly, I wanted to ask more of a strategic question related to your standalone new stores and the early days kind of progress you're seeing on the parts and service contribution, and maybe the opportunity that you see for parts and service and standalone used over time? Thanks.

Good. Let me just – I’ll take the last question first. Basically, today we are only getting about 1% of our revenue from the standalone parts and service generating about 15% of the growth. So when you compare that to the traditional auto business for our Company overall, we're at 10% of revenue and about 44% of gross profit. So obviously there's a real upside there, I think the focus today both domestically and internationally to be sure as we build new stores and we focus on just the arrangement or engineering of the facility that we've focused on a place for the customers to bring their vehicles back because basically these are used cars. They don't have warranty on them other than what we might sell at the time of the sale. So it can be easy customer for us to capture and bring back. So I think the strategy, obviously is to do that. They've done a better job in the U.S. on that quite honestly, and I think the way the stores are configured in the UK, we need some reengineering, but there's no question that we will make that change and we'll get some benefit. So we're going to advertise service more than we have in the past, and I'm sure look at maybe even some service contracts that we'd execute in the individual store specifically. So that’s I think the strategic forward look on our parts and service in the supercenters. Let me move on to BMW, your first question, Jamie. In the second quarter, our new business with BMW in the U.S. was flat. Our used business was up 10%. And again, when you think about BMW, half of our businesses in the UK, and half of it are international, and half of it…

Thank you both again and best of luck in the third quarter.

Thanks Jamie.

We have a question from John Murphy with Bank of America Merrill Lynch. Please go ahead.

Hey John.

Hey Roger, hey Tony. Just looking at this, I think a lot of this are coming in terms of the idea that the diversification in the used dealers to truck business power and then PTL is really, really working. I'm just curious as you look at that, I mean it seems like there's a good level of diversification and maybe some counter cyclicality there, but as you look at these businesses, how much opportunity do you think there is for growth even if we went into a macro slowdown, really meaning is there just a lot more opportunity for you to buy Greenfield facilities on the used vehicle side or on the truck dealership side to offset and just any kind of macro pressure and really just growing those businesses significantly?

Well, obviously when you look at the heavy truck businesses has been cyclical, there is no question that today we're getting some benefit of ELD, which is electronic logging device, by a guy driving a heavy duty tractor and they can't run two logbooks. So that's put pressure on availability of trucks probably 40,000 to 50,000 short. So that made a big difference. But I see overall that this business there we have a major competitor with a rider there. It does a good job. On the other hand, I see – if there are people want to get out of their business because there's a cyclical drop meaning other dealers. We are definitely on the prowl to add more to our portfolio and I think that from a freight liner perspective where we have agreement to handle all exclusively freightliner that didn't they want to see us consolidate anyhow. So it supports from the OEM, and I see that business being able to grow. You think about we bought businesses in West Texas. We've got businesses in the East, in Tennessee. We've also bought businesses already in Toronto – in the Toronto market area and those are still in infancy from the standpoint of growth. So I see that business continuing to grow from the standpoint of heavy truck. When you look at Penske Truck Leasing specifically, we were at 270,000 trucks, last year where it 287,000 is our review this past week. So we see that considering to grow, both on the logistics and also on the full service contract maintenance and rental side. So to me there's more people wanting to come out of ownership and let us handle the leasing of their vehicles because of complexity, also the cost of the trucks have gone up significantly and it impairs their balance sheet. So overall I see that done with a team we have 800 – unless 850 hundred fifty locations around the country from a full service capability. So we're in a very good position to grow that business and I think the team we have is well seasoned and there's no question. We're a leader from the standpoint of disappoint when you look at revenues and bottom line through the first six months.

And end the used vehicle business as well, I mean we think about that I mean that's you think it's a real growth engine. Do you need to make incremental acquisitions of points that exist already to use a new vehicle in term or can you Greenfield facilities now that you have the D&A both in the U.S. and Europe? I mean is there anything you need to do get from a strategic or operating standpoint you need to enhance or is it really just going after and open in lots?

Well, I think it will be a kind of a hybrid particularly here in the US, where we bought a facility today that we're going to process of reengineering will open that up probably in the next six or seven months. It's right in a sweet spot in our market. We’ve also bought land in two different areas, where we expect to grow and so there will be some of both. In the UK, we've made three purchases of Q1 in Bristol, one Stoke. And we've also bought a big DHL warehouse where we can move into that almost immediately when they would move on and that would be probably sometime early in 2019. So I guess as somewhat of a hybrid, we expend to grow this business on top of that. I think it's important that at end of the day that we will continue to streamline our e-commerce online business because with the capability we have with the consumer and the touch points that we could maybe place into that market would be key to have an online business where we have a hybrid, which might be facilities was with vehicles and then we would have the online capability, where they never came to a location would be delivered to home or to a particular delivery spot. So I think we've got a wide road there as we grow this. We're going to grow it slowly, but I think with people that have experience and then the technology continues to give us better availability better analytics for us to know what kind of cars we want to buy? What color? What model in the particular markets and I think that's one of the things that we've developed in our businesses both U.S. and UK that give us probably…

And then kind of just leases my last quick question. I mean SG&A to gross was actually pretty good in the quarter. So you got some good leverage year-over-year, as you're growing the business particularly as you just mentioned on the used I mean is there real more opportunity to drive this down any thoughts that have on our targets or our progress you want to make in working down SG&A to gross?

Well, look we obviously need to gain SG&A growth traction there's no question. One of the things that probably impacted us another 30 basis points during the first six months would be as you know under the new tax law we decided to increase our 401(k) contribution by 67% going from 1.5% to 2.5%. But ironically the key part of that is that when the enrollment went from 65% to almost 95%. So that had about 35 basis points impact, but I would have to say hopefully every quarter we can tell we made certainly some progress. But are we going to make 100 basis points I don't know that I think we've got to look at that with the size of business we have if we continue to invest in many of these initiatives.

Great. Thank you very much.

All right thanks.

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

Thanks. Good afternoon, guys.

Hey, Rick.

Hi, Rick.

Something to follow-up on that kind of online home delivery potential that’s working on what sort of timeline you're having in mind and this focus for freestanding used car stores or the franchise dealerships and how big of this potentially base?

Well, I think we have to look and we talk about a hybrid, it's ironic I had our guys look at what are we really doing here in the U.S. today and I would say from a car sense perspective the actual home delivery is probably 1% or 2. So with that the option is always there. So at this point we don't see that is something that that's going to drive that business down because we don't do more of it. I think it's communication it's options for the customer. And the UK I think the home delivery is a little bit further up the line from a percentage I can't give it to you exactly. But I think in all cases, all of our sites or mobile enabled in fact half of our traffic comes from smartphones and I think less than 10% of our leads come from third party provider. So looking at it completely on line model I think that we have people out there that are generating a real market value from that I think it's something we're all looking at. But at the end of the day we've got to have a model of we bank money and we can – your money back to our shareholders and on top of that I think if you look at our overall Penske footprint that we have in the U.S. with a number of locations we could really have the opportunity to have delivery points for customers who want to buy online and maybe never go to the specific dealership. Selling through our preferred purchase we have the ability today to do everything online and I think overall there's no question that that we're implementing more preferred purchase across our network and or upgrading that so we have everything is transparent will be able to bring the payment calculation, everything will be down to the penny as we go forward. So full product integration with pricing capability, so at the end of the day I think that there's a wide option – many options for us. Believe me a multi-tiered approach. So I think you stay tuned on that. I don't want to give anybody something that we're doing that we're really not. I just think we're looking at this as we go forward. Remember that from the overall standpoint today a big portion of our service scheduling is really on line. If you took our BDCs on top of that, it's 70%, so people are using the Internet now to connect with us in the service. We do probably 20,000 per week online. So a good opportunity and I think your point on where do we go is going to be interesting as we go into new markets.

Thanks for that Roger. For store growth for the freestanding on used car stores, what are the current plans at the moment?

What the existing growth of the…

Yes. Car center, car shop, car people.

Well from an overall standpoint, I think I mentioned earlier to one of the questions that I think we have right now anywhere from I would say six to seven locations that will activate here in the next 12 to 18 months. So there's no question that we have that capability.

Thanks a lot and good luck.

Thanks.

And we have a question from Carl Dorf with Dorf Asset Management. Please go ahead.

Carl, hi.

Good morning, Roger. Nice quarter. Roger, I'm interested in your thoughts on what this business will look like in two to three years considering self-driving vehicles, electric vehicles. What do you think your model will look like and what are your plans on?

Well, if you're talking about autonomous vehicles, I don't think we're going to see that we will be selling autonomous vehicles in the market over the next two to three years. I don't think that's a possibility. There might be areas that are ring fence that they'll be utilizing those, but to me, I don't think that we will see that. On the other hand, when you look at mobility, you really have today when I think about it three times, mobility got right hailing, which we all know about Uber and Lyft. We got the car sharing today free floating, we got six point period-to-period in vehicle subscriptions. All of these areas are in test, none of them have proven at least in things that I've looked at that they're commercially viable from a profitability standpoint. One thing we know if any of these things become something we should do, we have the footprint and we have the capital to mobilize pretty quickly. So I'm not going to be trying to be the head guy in the race on this. I think that at the end of the day we need to be agile and we need to be flexible with our capital and also our people. So to me, we're going to be in the new and used car business will be obviously growing our standalone superstores will be continuing to look at profitability in stores that might need to be divested during the next two or three years based on the value from the OEM about our own profitability and then we're also going to obviously want to extend our truck business and our truck leasing business will continue to grow. So from a cash flow perspective, I think that we're really in very good shape when you look at different opportunities and look at the commercial truck area, what the growth we have there freightliner with 41% of the marketplace. So Truck, Leasing, we didn't talk much about Australia. But when you think about our business out in Australia today, that business is growing nicely and we're in the position today to be a major provider in the defense area. So those give us long term contracts which are obviously very important for life cycle costs for us in life type cycle opportunities. So I think will be a lot the same. We want to continue to grow. I think the Company, over the next couple years can grow the topline through acquisitions and same-store growth, anywhere 4% to 8%. So that's my goal.

Thank you very much.

Thanks, Carl. End of Q&A

And I'll turn it back to our speakers for closing remarks.

At this time, I have nothing else to say. Thanks for joining the call and we'll see in Q3. Thank you.

Thank you. Ladies and gentlemen, this will conclude our teleconference for today. Thank you for your participation and for using AT&T Executive Teleconference Service and you may now disconnect.