Group 1 Automotive Inc (GPI) 2013 Q2 法說會逐字稿

Good morning and welcome to the Group 1 Automotive Incorporated second quarter 2013 financial results conference call. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions).

Please note this event is being recorded. I would now like to turn the conference over to Pete DeLongchamps. Please go ahead, sir.

Thank you, Maureen, and good morning everyone and welcome to today's call. The earnings release we issued this morning in a related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been updated to the Group 1 website.

Before we begin I would like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the conference call, statements made by management of Group 1 are forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve both known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks include but are not limited to risks associated with pricing, volume and the conditions of markets.

Those and other risks are described in the Company's filings with the Securities and Exchange Commission over the last 12 months and copies of these filings are available from both the SEC and the Company. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call as required by applicable SEC rules the Company's provides reconciliations of any such non-GAAP financial measures. The most directly compared to GAAP measures on its website.

Participating with me today are Earl Hesterberg, our President and Chief Executive Officer, John Rickel, our Senior Vice President and Chief Financial Officer and Lance Parker, our Vice President and Corporate Controller. Please note that all comparisons and prepared remarks are the same prior period unless otherwise stated. I will now hand the call over to Earl.

Thank you, Pete, and good morning everyone. I'm pleased to announce that Group 1 reported record results in the second quarter driven by strong revenue growth and continued expense control.

On a consolidated basis Group 1 reported all-time records for both second quarter adjusted net income, $39.7 million, which was up 33.6% over last year, and adjusted earnings per common share of $1.52, which grew 21.6%.

Total revenue increased 23.2% to an all-time record of $2.3 billion with double-digit growth across each business line. In total new vehicle units sales rose 26.1% to 41,531 vehicles with US unit sales up 5.9%.

Our average new vehicle selling price increased 1% to $33,137.00 per unit, which, coupled with the unit growth, drove a 27.3% increase in new vehicle revenues and a 25.9% increase in gross profit. Group 1's new vehicle unit sales mix was 78% US. Brazil, with our first full quarter results, increased to 13% and the UK contributed 9%.

Toyota Lexus sales accounted for 26.5% of our new vehicle unit sales with Honda Acura, Ford Lincoln, Nissan Infiniti and BMW Mini contributing more than 10% each. Consolidated new vehicle inventory was at a 67 day supply or 30,502 units with US inventory at a 73 day supply, or 26,297 units, on June 30th.

Used vehicle retail units sales increased 16.5% in the second quarter. This generated a retail gross profit increase of 12% on 17.2% higher revenues. The average selling price increased about $100.00 to $20,863.00 reflecting an expanded mix of used vehicle sales at our luxury stores.

Used vehicle inventory was at 33 day supply on a consolidated basis and 34 day supply in the US. Total consolidated Finance & Insurance per retail unit was $1,188.00, reflecting a mix effect of the increased UK and Brazilian sales. While the U.S. results were an all-time record at $1,351.00, reflecting a $121.00 increase per retail unit.

Consolidated F&I revenues grew 22% on the same 22% increase in retail units. Parts and service had an outstanding quarter with revenue up 18.4% and gross profit up 17.3%, with same-store revenue up 8.8%. We made significant progress during the quarter on our costs leverage.

On a consolidated basis adjusted selling general and administrative expenses as a percent of gross profit improved 180 basis points to 72.8%. On a same-store basis the leverage was even more pronounced with a 250 basis point improvement to 71.2%. I will now turn the call over to our CFO, John Rickel, to go over our second quarter financial results in more detail. John?

Thank you, Earl, and good morning everyone. Our adjusted net income for the second quarter of 2013 was $10 million or 33.6% over our comparable 2012 results to $39.7 million which is the best quarter in our Company's history. Adjusted earnings per diluted common share improved 21.6% over the comparable prior year results to $1.52 which is also the best quarter in Group 1's history.

These results for 2013 exclude $2.3 million of net after-tax adjustments including $6.8 million of charges related primarily to the previously-announced hailstorm and $400,000 of charges related to noncash asset impairments.

These adjustments were partially offset by a $4.9 million net after-tax gain on our previously-announced dealership disposition. The comparable results for the second quarter of 2012 exclude $1.1 million of net after-tax adjustments including $1.7 million of charges related to a hailstorm partially offset by a $700,000 net gain on our real estate transactions.

It's important to point out that 1.7 million shares are included in our weighted average diluted share [count] for the second quarter relative to the accounting dilution on our convertible notes. For your reference we provide tables in both our Investor Presentation and our quarterly SEC filings that calculate the share dilution for these notes at various stock prices.

Starting with a summary of our consolidated results we delivered all-time record revenues in the second quarter of $2.34 billion which were up $439.3 million or 23.2% compared to the same period a year ago. This record reflects results from our 2013 acquisitions as well as increases in each of our business units.

Our gross profit increased $55.9 million or 19.6% from the second quarter a year ago to $341.3 million which represents another all-time record quarter for the Company. The growth in gross profit, coupled with strong cost control, resulted in additional leverage on SG&A.

On an adjusted basis for the quarter SG&A, as percent of gross profit, improved 180 basis points to 72.8% and operating margin was 3.6%. [Floor] plan interest expense increased $3 million or 38.3% from prior year to $10.9 million. This increase is primarily explained by a $350.2 million increase in weighted average borrowings as overall higher inventory was required to support rising sales and recent dealership acquisitions as well as the addition of Brazil.

At June 30th, 2013 our new vehicle inventory stood at 30,502 units with a value of $1 billion compared to 22,990 units with a value of $773.9 million as of June 30th, 2012. Other interest expense increased $380,000 or 4.1% to $9.6 million, explained by increased mortgage borrowings associated with recent dealership acquisitions.

Our consolidated interest expense includes non cash discount amortization of $2.7 million related to our convertible notes. Now turning to the second quarter same-store results which include stores from the US and UK owned during the same period. In the second quarter we reported revenues of $1.96 billion which was $121.9 million or a 6.6% increase from the comparable 2012 period.

Within this total new vehicle revenues were up 6.7%, used vehicle retail revenues improved 5.7%, Finance & Insurance revenues rose 15.3% and at 8.8% parts and service posted the largest increase in same-store revenues in the Company's history.

New vehicle revenue increased 6.7% to $1.12 billion on 5.1% higher new vehicle unit sales and an increase in our average new vehicle sales price of $487.00 per unit to $33,504.00.

Our used retail revenues improved 5.7% to $467 million on 4.2% per units and a $302.00 increase in our average retail used vehicle sales price to $21,125.00. Given the strength of last year's vehicle sales performance, comps of 21.5% for new and 18.8% on used vehicle sales performance, we're pleased with our results this quarter.

F&I gross profit for retail units rose 10.1% to $1,328.00, driven primarily by increases in both penetration rates and income for contracts for most of our major product offerings. The overall revenue growth in parts and services is explained by increases of 4.6% in customer pay, 14.3% in warranty, 22.1% in collision and 6.7% in wholesale parts.

As a reminder, our parts and service revenues are not impacted by increases in internal business. The revenue associated with internal work is eliminated in our consolidation. This varies across the sector, as some our competitors account for internal work differently. Overall our same-store gross profit grew $21.8 million, or 7.9%,to $298.6 million.

Our same-store new vehicle gross profit dollars declined four tenths of a percent. These higher volumes were more than offset by declines in gross profit per unit. Our used vehicle retail gross profit dollars increased 3.6%, primarily explained by volume growth.

Parts and service gross profit grew $11 million, or 9.8%,primarily reflecting the strong revenue growth and a 50 basis points improvement in margins to 53.5%. Finally, our F&I gross profit grew 15.3% reflecting the unit volume growth in the improved PRU that I mentioned previously. With these increases in gross profit, a rough rule of thumb is that we expect that each incremental gross profit dollar will only add about $0.50 of variable SG&A expenses on a same-store basis.

For the second quarter we grew our total gross profit by $21.8 million and held the increase in adjusted SG&A expenses to $8.4 million. This equates to a 61% flow through of gross profit EBITDA. As a result our adjusted SG&A, as a percent of gross profit, improved 250 basis points to 71.2%. The leverage realized from our efforts to improve processes and cost structure also enabled us to improve our same-store adjusted operating margins by 40 basis points to 4%.

Turning now to our geographic segment starting with the US market on an actual basis. Total revenues grew 7.1% to $1.9 billion, driven by increases of 7.5% in new vehicle revenue, 6.6% in used retail revenue, 7.1% in parts and service revenue and 16.2% in F&I income.

New vehicle revenues grew as a result of increases in retail unit sales of 5.9% and in our average sales price per unit of $492.00 Used vehicle retail revenue improvements reflected 5.6% growth in retail units sold and a $193.00 increase in our average retail sales price per unit. The increase in parts and service revenue is attributable to growth in all elements of the business.

Our F&I growth reflected the increase in retail vehicle sales volumes coupled with an improved profitability per retail unit which grew $121.00 or 9.8% to $1,351.00. Total gross profit improved 7.8%, driven by increases of 8% in parts and service and 5.8% in used vehicle retail, as well as the F&I increase that I just mentioned.

These gross profit improvements helped leverage our cost base by an additional 250 basis points, resulting in adjusted SG&A, as percent of gross profit, of 71.6%. Adjusted operating margin for the US business segment improved 40 basis points to 4%. Related to our UK segment, total revenues increased 50.1% driven by the acquisition of four Ford dealerships in the first quarter of this year and the fact we bought our Audi dealerships in the middle of Q2 last year as well as growth in all business segments.

New vehicle revenues grew 43.2% on 68.1% more retail unit sales and used vehicle retail revenues improved 64.6% on more than double the number of retail units sold. Parts and service revenues improved 54.5%, primarily attributable to a 51.4% increase in our customer pay parts and service business. Our F&I income growth of 76.2% reflects the 81.1% increase in total retail unit sales, partially offset by a $17.00 decline in income per retail unit sold to $579.00.

Total gross profit grew 50.5% on improvements in each of our business divisions. Similar to our results in the US these gross profit improvements in the UK helped leverage our cost base by an additional 430 basis points, resulting in SG&A, as percent of gross profit, of 78.2%. Operating margin for the UK business segment improved 60 basis points to 2.2%.

Related to our Brazil segment, the market in the second quarter lacked strength and also suffered from comparisons against abnormally strong sales in late May and June 2012 triggered by our major vehicle tax reduction. Even with this challenge we effectively covered earnings dilution for the quarter with our profit results. For the second quarter we retailed 5,337 new vehicles and 1,182 used vehicles and generated $246 million in total revenues and $27.1 million in gross profit.

Our SG&A, as a percent of gross profit, was 80.5% while our operating margin for the quarter was 2%. Turning to our consolidated liquidity and capital structure, as of June 30th, 2013 we had $10.9 million of cash on hand, another $82 million that was invested in our [four plan] offset account, bringing immediately available funds to a total of $92.8 million.

In addition, we had $263.6 million available on our acquisition line that can also be used for general corporate purposes. As such our total liquidity at June 30th, 2013 was $356.4 million. As we previously announced, we completed the extension and expansion of our US credit facility during June. This agreement locks in a total of $1.7 billion in floor plan and acquisition line capacity at improved pricing through mid-year 2018.

We estimate this should reduce our ongoing floor plan expense by $300,000 per quarter. With regards to our real estate investment portfolio, we own $540.5 million of land and building at June 30th, which represents more than one third of our total real estate. To finance these holdings we've utilized our mortgage facility and executed borrowings under other real estate specific debt agreement.

As of June 30th we had $49.4 million outstanding under our mortgage facility and $230.4 million of other real estate debt, excluding capital leases. During the first quarter -- during the second quarter we used $3.9 million to pay dividends of $0.16 per share, an increase of $0.01 per share over the second quarter of 2012.

For additional detail regarding our financial condition please refer to the schedules of additional information attached to the news release as well as the Investor Presentation posted on our website. With that I will now turn it back over to Earl.

Thanks, John. Before I turn the call over to the operator for your questions let me update our market outlook for the remainder of 2013. While the US market remains very competitive the conditions for buying vehicles is positive with many exciting new products being offered, widely available credit at very low rates and solid used car values.

All of this is supported by significant pent-up demand as evidenced by the age of the car park. We have seen the pace of sales begin to accelerate over the past few months with June coming in at 15.9 million units. Given this we are raising our outlook and now anticipate the new vehicle industry sales will range from 15.4 million to 15.6 million units in the US in 2013.

The UK continues to outperform the rest of Europe. Vehicle registrations increased 13.4% in June and for the first six months of the year are up 10%. Ongoing low interest rates and improving employment levels should continue to support solid growth through the remainder of the year. With our strong luxury mix and exposure to the leading volume brand, we are well-positioned for this environment.

And finally for Brazil, June industry sales were down 11% compared with the prior year. But it should be remembered that the government stimulated sales with a tax reduction action in May 2012. The Brazilian economy is facing many challenges and not demonstrating significant growth at the moment. The recent protests clearly impacted new vehicle sales in the last half of June and are likely to continue to negatively impact sales in the near-term.

Some of these near-term challenges, and the elevated sales in the second half of 2012 due to the tax reduction, we would expect industry sales to be flat at best this year. We remain bullish on the longer-term outlook for the country and auto sales but recognize, as with any developing market, there will be some bumps along the way.

In the meantime I am pleased with how our team is managing in this environment and take some comfort that, even though industry sales are running below our initial expectations, the business is generating enough profit to cover dilution. This demonstrates the resilience of the model and has us well-positioned when sales begin to recover. That concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session. Operator?

Thank you. We will now begin the question-and-answer session. (Operator Instructions). At this time we will pause momentarily to assemble our roster. Our first question is Elizabeth Lane, Bank of America Merrill Lynch. Please go ahead.

Good morning, guys. We've heard some commentary from some of your peers that the environment is getting a bit more competitive, particularly in the mid-sized car segment, which is putting pressure on the gross profit per vehicle dollars. Looks like you're experiencing some of that as well. Can you just comment on the competitive environment right now?

Yes, Elizabeth. This is Earl. I think that's a valid input. This year there's some new models in that segment.

I think last year you saw, for example, the new Volkswagen Passat had extremely massive sales increases. It drove VW sales up and this year the VW doesn't have that type of increase because this year there's things, like a new Accord, a new Ford Fusion, better supply of Sonata. And Camry is always going to fight to maintain their share. I just think the competition in that volume car segment is much more intense this year with several new models.

Great. And then in the UK it looks like the gross profit per unit for both new and used came down pretty dramatically year-over-year. Is there anything going on there that's an anomaly or is that the way the market has been trending over there?

We added some Ford dealerships, which were our first non luxury brand.

Yes. This is John Rickel. Earl's right. It's basically the mix effect of bringing in the volume brands where everything previously had been luxury stores.

Got it. Okay. That makes sense. And just one more quick one, which is that the press release mentioned that you don't expect any further dealership dispositions in California specifically. But are there underperforming stores in other markets that you expect to take out or, at this point, is that dealership base more or less rationalized?

At this point we're more or less rationalized. We don't have any dispositions we're considering at this moment in time. But every month, every quarter we continue to revisit that so we can keep our capital redeployed for the best return to our shareholders. But, no, at this moment we don't have any other dispositions planned.

Okay. Thank you very much.

Our next question is Rick Nelson from Stephens. Please go ahead.

Okay. Good morning.

Hi Rick

Good morning, Rick.

The gross profit flow through seems to (inaudible) I'm calculating 61%, on a consolidated basis 36%. I'm wondering if there's opportunity with the acquisitions or is there something structural given that Brazil and UK is largely where they've occurred -- if there's opportunity to narrow that down, that difference?

Yes, Rick. This is John Rickel. Obviously with the acquisitions, it takes a little while but the bigger issue on the consolidated is, you're right, it's the mix effect of Brazil and the UK which have higher SG&As, percent of gross metrics. Primarily real estate is more expensive in those two countries.

We don't own as much there so I don't know that, near-term, we'll be able to close a lot of that gap but clearly we had a great quarter on the same-store basis and with the acquisitions themselves we do think there's some opportunities to continue to work that.

And on the new car side, same-store units sales in the US up 5.9%. The industry 8.5% growth. I'm wondering if you can discuss market share and brand how it trends within your markets?

Yes, sure, Rick. This is Earl. There are two factors. One is that our brand mix wouldn't generate quite the same sales increase that the industry realized, but another factor is our business in the northeast, New England in particular, is extremely weak.

In fact, it's not growing in new car sales at all this year. So the northeast has been an anchor on our new vehicle sales performance in the second quarter and also in the first quarter.

And Earl, if I can ask you about acquisitions, the pipeline US, UK, Brazil, where do you see the most opportunity over the near-term?

Rick, we're looking to grow in any of those three markets and we have the financial wherewithal to do that clearly. But at the moment we don't have anything material lined up.

I would say the US probably represents the best opportunity for us primarily because we have the most experience in that market and we have to be double careful when we're dealing in these higher real estate costs markets like the UK and Brazil. But we're looking to expand in all three, but I would -- if I had to prioritize one I would say the US, Rick.

Okay. Thanks. And good luck.

Thank you.

Our next question is Scott Stember, Sidoti & Company. Please go ahead.

Good morning.

Good morning, Scott.

Acknowledging that, obviously, the comparisons for Toyota and Honda were much more difficult in the first half of the year, could you talk about how you expect those comps to improve as we move through July and the rest of the year?

Yes. Third quarter, Scott, was also pretty strong for us and I think we really get into the fourth quarter where they start to come back to kind of more single-digit sort of levels. So I think on a year-over-year basis the third quarter comps are still pretty stout as well.

Okay. And could you talk about sales disruptions from the storms in Oklahoma City?

Yes, Scott. This is Earl. We had probably the best part of a month of disruption before we could replenish inventory.

As you could tell from the financial magnitude of that storm, which is almost unbelievable for a hailstorm, it took us best part of the month to replenish our new vehicle inventory at virtually all of our dealerships up there. Used, we were able to replace in two weeks or so, but it took us awhile to get back to normal inventory levels on new.

The third quarter should see more normalized sales levels at those locations then?

Yes, indeed.

Okay. And just the last question on the parts and service comps up 7% in the US. Could you give a little bit more details on the break out of that between the different segments, John?

Yes. The [seven one] was on an actual basis. If you look at it on a same-store, US was pretty close to what the consolidated same-store was, which was up [eight eight], which we're really proud of that performance.

Of that, as I mentioned, customer pay was up 4.6%, warranty was up 14.3%, wholesale was up 6.7% and collision was up 22.1%. So a great quarter in our parts and service activity.

And that breakout you gave was on a consolidated basis?

No. That's just, basically, similar for the US operations.

Okay. That's all I had. Thank you so much.

Yes.

Our next question is James Albertine, Stifel. Please go ahead.

Great. Thanks and good morning everyone. So just to kind of stay on the parts and service side, I absolutely think great result as you alluded to moments ago. Just want to be clear, were the catastrophic event impacted stores, the Oklahoma stores, also shutdown from a service [bay] perspective? I would assume they would have been but I just wanted to clarify that.

Yes. They were shutdown but only for a very brief period of time. Only a couple days.

Okay. Great. And then if you could just dig in on the customer pay side a little bit.

You know, we're hearing from some of your peers that warranty work is elevated by recall so I don't want to get into that as much but I want to understand what you're focusing on, what initiatives you're implementing in the customer pay business to drive that higher? And then as a follow-up to that if you could break out, by your US geographies, the various performance in customer pay? That would be great. Thanks.

Yes. The customer pay business is what we basically put all of our effort into. That would include collision, of course, also. There's another factor on the warranty that may be -- hasn't been discussed and that is the factory paid maintenance. We book our Toyota, BMW factory paid maintenance in warranty because the factory pays those claims. In the past that would have been customer pay business.

Toyota Care is available, I think, or offered on every vehicle. That's two years free maintenance. BMW offers, I believe, it's four year free maintenance. And those two of our biggest brands and so that customer pay -- Historically, customer pay business is in our warranty numbers so that's also maybe something that's giving that a little strength that we haven't seen before in addition to recalls.

But we've been investing in our parts and service business in terms of technology facility and man power since before the recession so some of that is just starting to pay off now that the unit operation profile is starting to build again. So there's no magic to that business but I think over time we've become more competitive, though, the harder we work at it.

And, Jamie, to your question there's really not a lot of difference across the US. I mean we have seen a pretty comparable lift across all regions of the country.

That's very helpful. Thanks, guys, and good luck in the third quarter.

Thanks.

Our next question is Bill Armstrong, CL King & Associates. Please go ahead.

Good morning. The big increase in collision revenues was that from hailstorm repairs or were there other things going on also?

Part of that was related to hail. Our increase -- if we took all of the collision business out in the hail affected areas the increase would have been 15%, not 22% or whatever it was.

I thought that there--

You're right. There was a hail impact.

Okay. So the 15% also, excluding hail, is very strong. What was driving that?

For the last three years we invested in a number of new body shops and improved the equipment in some existing shops and some of those shops have just started to hit stride this year. It's kind of a cumulative effect of prior year investments.

Okay. And those are same-store sales increases just to clarify? Or totally?

That's correct. But it takes some time for these shops to mature after you-- We probably opened them 12 to 24 months ago, so, a couple of these shops.

Got it. Okay. Great. Thanks.

Our next question is Jordan Hymowitz, Philadelphia Financial. Please go ahead.

Thanks guys. Two questions. One, have you noticed any differentiation in car versus truck sales? In other words, car sales have been staying very strong and truck sales may be moderating a little bit given the increasing correlation of trucks with commercial use?

Well, our numbers are probably a little muddy that way since we've added Brazil and the UK growth, which are car driven. But the truck business is very, very strong at the moment in our core markets like Texas and Oklahoma.

That's right because you have the energy boom.

Yes. Very much so. It's noticeably stronger.

Okay. And second question, can you comment on any CFPB changes in pricing by lenders towards flat rate? Has anyone moved to a flat rate that you're dealing with and has anyone cut their yield spread premiums they're charging?

Jordan, it's Pete DeLongchamps and the answer is no to both of those questions. We've had very transparent and fluid discussions with all of our major lenders but, at this point, there's been no appreciable change in the way they're buying, spreads or a flat free strategy.

Okay. Thank you.

Our next question is Brett Hoselton, KeyBanc. Please go ahead.

Good morning, gentlemen.

Good morning, Brett.

Let's see. I was hoping to ask you some questions about same-store sales. I know you have given us the overall market but, first of all, just from a units perspective, is it possible that you can give us a sense of the same-store sales in the US, UK and Brazil?

Well, there isn't a same-store for Brazil because we haven't had them for 12 months, right? So it's just US and UK and basically the numbers that Earl gave you are not significantly different between US and UK. So US was up on new vehicle units in the mid fives as was the UK.

And then as we think about your gross profit on a new and the used side, looking at the UK results, both down significantly. I know you had the Ford acquisition. I guess I'm wondering can you give us a sense of what's going on there on the same-store basis? Were they essentially flat or was the same-store also down significantly or is it simply just you acquired the Ford store and the margins are just lower there?

Yes. Basically, on a same-store basis, Brett, they were basically unchanged in the UK.

Same-store only would include our BMW dealerships in the UK.

Okay.

So we purchased Audi dealerships in the middle of the second quarter last year and the Ford dealerships only four months ago. So our same-store UK is just our BMW business.

And then brand specifically how are you thinking about your BMW performance through the second quarter and into the third quarter and so forth? Because as I think about last year the general sense is there were some constraints, particularly in the 3 series, which is a high volume. So it seems like your comps may be a little bit easier as we move through the second quarter and into the third quarter.

Is that, in fact, the case? Have you seen some outperformance there? Do you expect to see outperformance in the third quarter?

Yes, I think it's fair to say that the BMW growth potential is still significant, that the strength of their product and availability continues to give us a good chance to grow with BMW. That said, Mercedes and Audi and Lexus are all pretty feisty these days as well. But BMW remains a very good business for us with good growth potential.

And then, finally, can you comment on the acquisition outlook, maybe specifically talk a little bit about the number of deals that may be in the marketplace today versus where they were maybe a year ago? Where you see valuations relative to where they've been and then your interest level from a geographic standpoint?

Yes. I haven't seen any appreciable change in the acquisition dynamics this year. I think for the last year, year and a half there have been a good number of sellers and buyers in the marketplace and I think all the valuations are pretty stout and -- which is limiting the number of transactions that occur. Because there's a good number of buyers and sellers in the marketplace.

Probably the most that we have seen, but it hasn't changed -- hasn't changed recently. Geographically, we continue to look for opportunities along the East Coast, in the Sun Belt and California and the southern half of the UK. And we'll have to see in Brazil but generally we're operating in Sao Paulo, in the states to the southwest of that, (inaudible), which is where we'd most likely look to expand.

Thank you very much, gentlemen.

The next question is Scott Stember, Sidoti & Company. Please go ahead.

Just had a follow-up question on the parts and service end, the inbound call center that you guys have put in place. Could you talk about the impact that that's had on your business? And what percentage of your stores are now running on that system?

We probably have 90% of the stores rolled out, Scott, on that call center. And we think it's a critical part of the way we're going to do business. And, certainly, couldn't be separated from our level of performance.

Got it. Thank you.

Our next question is Simeon Gutman, Credit Suisse. Please go ahead.

Thanks. Good morning. I jumped on late so I apologize if this was asked in some form or another.

The through put was pretty solid this quarter. I didn't look at it in every division but just looking at the US and the UK, it looked really good. Thinking about the next few quarters, most of the centralization initiatives or efficiency initiatives will have ramped. Do you think that, assuming gross profit holds in, you're past the point where we should see it more consistent going forward? Meaning, north of that 50% mark? Any thoughts on that?

Yes. Simeon, this is John Rickel. As we've stated pretty consistently over the last couple years, our goal, our benchmark is basically a 50% throughput. We obviously out performed that in the second quarter at 61% but I think, I continue to think that that 50% level is the right way to think about it.

And then if we calculate the US only piece, I mean it comes in much higher. Are there allocated costs that we're not seeing if we capture that -- the way we do it on the US business where you get almost a 60% -- is that the right math?

Well, the 61% for the second quarter is US, UK same-store. And we continue to think same-store is the right way to think about it. Any time you have acquisitions they bring in their own load of fixed costs so I think the only really way to think about throughput is on a same-store basis. And, as I said, I think our goal of 50% flow through is the right way to model it.

Okay. That's fair. And then just one on the credit environment.

You know, past few years or past couple years a lot of anecdotes of increasing willingness for lenders to put money towards auto paper. Can you just describe the current environment, whether the tick-up in interest rates has -- And I know it really hasn't affected auto loans but just the broader market in terms of the willingness or banks coming forward with balance sheets.

Well, yes. Clearly the strategy we put in place with consolidating our lenders over the last few years is -- has played well for us and interest rates are something we clearly watch. But we still truly believe that with the OEM captives in place and what they can do to help bolster that business and make sure that there's some [insulation to] interest rate certainly is a benefit to the auto retailers.

The other thing, Simeon, to bear in mind is -- this is John Rickel -- most of that interest rate increase is out on the longer end of the curve. The auto paper is three and four year paper so you haven't seen nearly the same sort of increases. And even to the levels you are seeing 30 and 40 basis points sort of moves is off of what we're already, you know, record low time rates that -- it would have to move quite a bit, I think, for it to become very impactful.

Okay. Thanks for the color and nice results.

Thanks.

Thank you.

(Operator Instructions). Having no questions this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Okay. Thanks everyone for joining us today. We look forward to updating you on our third quarter earnings call. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.