Penske Automotive Group Inc (PAG) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group second quarter 2008 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through August 13, 2008. Please refer to Penske Automotive's press release dated June 4, 2008 for specific information about how to access the replay. I would now like to introduce Mr. Tony Pordon, Senior Vice President of Penske Automotive Group. Please go ahead.

Thank you, John, and good afternoon, everybody. A press release detailing Penske Automotive Group's second quarter results was released this morning and is posted on our website at www.penskeautomotive.com. Participating on the call today are Roger Penske, our Chairman, Bob O'Shaughnessy, our Chief Financial Officer, and Jamie Carlson, our controller. At the conclusion of our remarks we will open up the call for questions. We will also be available by phone to answer any follow up questions that you may have. Before we begin I would like to remind you that statements made in this conference call may include forward-looking statements regarding Penske Automotive's future reportable sales and earnings growth potential.

We caution you that these statements are only predictions which are subject to risks and uncertainties including those relating to general economic conditions, interest rate fluctuation, changes in consumer spending and other factors over which management has no control. Our actual results may vary materially from these predictions. These forward-looking statements should be evaluated together with additional information about Penske Automotive, which is contained in our filings with the Securities and Exchange Commission, including our 2007 annual report on Form 10-K. At this time, I would like to turn the call over to the Chairman of Penske Automotive, Robert Penske.

Thank you, Tony, and good afternoon, everyone, and thanks for joining us this afternoon. Looking at the results for the second quarter, PAG's model performed well despite industry challenges we all are aware of at this point. During the quarter, we faced several business headwinds, the rising gas prices, declining consumer confidence in the US, and the UK pressured new and used car vehicle sales also. In fact in the US overall industry sales declined 12% and in the UK new vehicle registrations declined 2.5%. I think despite these challenges our results continue to showcase the strength of our business model diversification. Looking at the highlights for the quarter, we retailed 78,472 new and used units in Q2 and that's about 1% up versus last year. Total revenue was $3.4 billion, gross margin improved to 14.9% versus 14.6% in the second quarter of last year.

Income from continuing operations was up 1% to $40.5 million and related EPS was up 2% to $0.43 per share. Turning to the specifics for the quarter, new unit sales declined 1.7%. However, we had great momentum and our used unit sales remained strong and they were up 4.9%. The other end average selling prices of new and used vehicles declined approximately $1,000 on new down to $34,500, and used was down approximately $1,600 to $29,000. With a total revenue flat compared to last year, new vehicle revenue was minus 4.4, used was flat, F&I was up 1.1 and service and parts overall was up 3%. On a same-store basis worldwide we decreased 5.9% and breaking it out the US was down 6.8% and international was down 4.4%. If you look at the revenue for same-store, our new vehicle was down 8.7%, used vehicle down 2.8%, S&P up 1%, service and parts that is, and financing and insurance down 3.5%. There was no foreign exchange impact in the quarter at all.

Our revenue mix in Q2 was consistent with last year, 63% of the revenue was in the United States and 37% was international. On a worldwide basis, foreign and premium name plates represented 95% of our total revenues, including 63% from our premium brand mix. The big three in the US contributed the remaining 5%. Looking at our specific brand mix and percentages, you can look at our press release and the specific data that was provided there this morning. During the quarter our operating income was 65% and international was 35% and that was consistent with last year. Looking at the gross margin I talked about earlier, margin was increased from 14.6 to 14.9 during the quarter. New margins, by the way, remain stable at 8.4% despite lower selling environment and used margins decreased slightly from 8.0% to 7.8% down 20 basis points. F&I increased $5 per unit to $968.00.

And our service and parts business continued to perform well also, with margins of 56.1% compared to 56% in the first quarter of this year. Moving on to SG&A. SG&A to gross profit was 79.5% compared to 78.2% in Q2 last year. On a same-store basis, SG&A was down $5.8 million in the quarter, or 1.5%, so we made good traction within the same-store group. SG&A declined 130 basis points from 80.8% reported in the first quarter. The tax rate for the quarter was 35.2% compared to 37.1% last year. We currently expect the annualized effective tax rate to be between 35% and 36% for the entire year. Looking at the balance sheet, total vehicle inventory was $1.7 billion, which is down $33 million compared to March. On a same-store basis, total vehicle inventory was down $56 million compared to March. New was down $4 million. The good news is our used was down $52 million. In the US our vehicle inventory really is in pretty good shape.

Earlier this week I asked the team to give me really a breakout in three categories, pickup trucks, specifically pickup trucks, and SUVs and passenger cars. We are only sitting with 10% of our inventory in pickup trucks, 40% in SUVs and 50% in passenger cars. If you look at the UK, really our inventory really is pretty much flat at GBP149 million and that's consistent of what we had at the beginning of the year. We are going into a registration month, so we look at some buildup. We expect that to come down after September. On a used car basis in the UK, we are really flat again at GBP100 million or $200 million. We expect that to be down to 75 million by the end of the quarter. More than 40% of our new truck inventory, obviously, is related to our domestic big three franchises. And the balance would be Toyota Tundra and Titan trucks from Nissan and as you know they have announced plant closing or strong incentives on those businesses. Again only $80 million in total in trucks.

We expect all of our vehicle inventories to decline in the second half of the year as we have announced production cuts which will help us better align our supply with demand. At the end of the quarter our worldwide days inventory was 68. Used was 35. Moving on to CapEx. Gross year-to-date CapEx was $117 million. Sale-lease proceeds for the first six months were $20 million. As a result net CapEx for 6 months was $97 million. We are currently planning to close transactions that would generate approximately $100 million of proceeds before the end of the year subject obviously to market conditions. As a result, we are currently projecting net CapEx of approximately $50 million for 2008. Looking at our leverage, as of June 30th we had $1.1 billion of non-vehicle debt, $750 million of senior subordinated notes at a blended rate of 5.65%, a $375 million at 3.5%, a convert, and $375 million at 7.75%. And another $310 million under our credit agreements with an average rate of 5%.

As of June 30th, we had approximately $370 million of availability under all of our credit agreements, both domestically and internationally. Our debt to capital ratio was 42% compared to 39% at the end of June. We have $1.6 billion in floor plan notes outstanding. We have swaps to convert $300 million of our floor plan to fixed at an effective rate of 4.65% through January of 2011, Of the remaining $1.3 billion, approximately 50% is in the United States. When you include the $1.6 billion of floor plan, 40% of our debt was fixed with an average rate of 5.1% with maturity of 4.6 years, which puts us in real good shape. Looking at acquisitions year-to-date, I think we have already reached our guidance that we had guided earlier. During the first six months we've had estimated annual revenue of $415 million. Breaking that out acquisitions $200 million in the US, $215 million internationally.

We have also divested of 11 franchises with an estimated annual revenue of $325 million, $255 in the US and $70 million internationally. We continue to evaluate transactions. Obviously the Company wants -- basically looking for any acquisitions which we think would be opportunistic as we go forward over the next six to 12 months. Let me quick talk about our smart distribution business. During the quarter we delivered over 7700 fortwos to our dealer network bringing the total wholesale deliveries to the year to 12,646 units. We now expect to, we have increased really our availability and we will wholesale between 24,00 and 27,500 vehicles in 2008. During the quarter we reported $98 million in smart revenue and the smart business contributed $0.07 in earnings per share. Smart fortwo continues to receive significant media coverage, as you know, and has earned an outstanding reputation against our customer base, who have taken delivery to date.

I would also like to point out that the 2008 fortwo was awarded the highest rating from the Insurance Institute for Highway Safety for front and side crash worthiness, the best of all ratings from any cars. The IHS, coupled with today's higher gas prices, have led to continued strong consumer interest. In fact, we received 20,000 new reservations over the internet in May and June and we are on pace to receive over 7,000 here in the month of July. Obviously I am excited about smart and I believe it is going to continue to be a key differentiate for us at Penske Automotive. Let me take a quick note on guidance. We updated our guidance in the fresh release this morning. As noted, we currently estimate our annual income from continuing operation to be in the range of $1.54 to $1.60 per share and our guidance was based on 95 million total weighted shares outstanding. Before I close the call I want to talk a little bit about share repurchase. We talked about this in February.

We announced it. I believe our shares represent a great value, however, we did not purchase any shares under this program in the second quarter due to restructuring within our internal securities trading policy. We will continue to monitor the market and expect to make purchases opportunistically, as we have said before, subject to market conditions and our trading policies. In summary, I am pleased with the Company's operating performance during the second quarter. Although the vehicle market was challenging, our brand mix and diversified structure allowed us to achieve earnings growth in the second quarter. While we expect the macroeconomic challenges facing us to continue in the second half, I believe the diversification provided by our geographic footprint, our import luxury nameplate brand mix, certainly smartUSA, and our investment in Penske truck leasing will put us in a position to maintain earnings growth throughout the balance of the year. At this point, let me open it up for any questions and thanks for joining us this afternoon.

(OPERATOR INSTRUCTIONS). First with the line of Matt Nemer with Thomas Weisel Partners.

Hi, Matt.

Hi, good morning, everyone. So the first question is on the UK. Just can you give us a sense for what your guidance assumes for this coming September registration month and then any changes that you are thinking about to the cost structure over there before we get to September?

Well, lets first say, as I said, the market registrations were off 2.5% for the quarter. That would be Q2 and I know inflation has gone up to 3.8% over there. We have seen certainly some softness in our super premium luxury. People even canceling some of the Porsches and Ferrari we've seen. So that is obviously giving us some guidance in where the market will go over the next six to 12 months. Certainly from our perspective, we probably have haircut our UK guidance probably about 20% based on that as we look at the guidance for the balance of the year that would include Q3, certainly from a cost saving and offense, we are looking at 6% to 10% reduction in headcount as we go forward. We have about 5,000 people there and I think that our average cost of our people is probably $150 million, so there's a chance for a descent savings there.

Also we have reduced, as we said earlier on the call, we are reducing our inventory down on used cars to a target of $75 million down from $100 million. We will also reduce our demonstrators. Over there we have a lot more demonstrators for our sales people and for use and we will cut those back by 10%. We are also doing the traditional looking at any of the marketing activities that are taking place as we go forward. So number one, we will look at people cost, we will look at inventory cost, and obviously any other marketing cost associated with a balance of the year. And I think the real test will be how does the September registration month really activate the market or deactivate it as we see this over the next 60 days. I will keep you, stay tuned.

Okay. Great. And then just turning to this topic of leasing, any sense for what impact reduced leasing would have for your premium brands, not that we have seen any significant announcements there but if they pull back on leasing what do you think would happen to both sales and potentially profit per unit.

Well, this first on the big three, I think they have a different picture than the domestic or the foreign name plates do because their credit ratings and the ability for them to securitize leases. So I think the offense they're taking probably is prudent for them. Maybe as dealers we might not like it but I think long-term it will probably work out well for them because what will happen is they will put the money at the customer or at the dealer level and they will know what the transaction costs them on a day-to-day basis. Conversely, as we look at the premium luxury and we look at Toyota Financial, we look at BMW and Mercedes, there's no question that their credit ratings are certainly high. In fact I think Toyota is a AAA. And they have obviously been very active in leasing and I think there [residuals have not taken the hits that maybe some of the big three have. I think what's going to happen is I see more finance penetration because obviously the customer in this case won't be paying cash.

I think today about 25% to 30% of our customers pay cash and the other ones are either leasing or actually buying on a lease payment program their vehicles and with that happening I think that we will end up with maybe more reserve on our finance contracts we've had in the past because on leases you have a difficult time some times selling the extended products we have in the future. So today leasing is 33% of our total mix so I think you have got to stay tuned on that. I can't really tell the impact. There has been some pushed back, I think, at BMW right now as far as leasing and I think they're just looking at their overall portfolio. But typically we get the benefit of those lease cars because they come back to the dealership and we sale those as preowned certified. So that program has worked out pretty well for us and I think you will see that continuing with all the premium luxury brands.

Okay. And then lastly, can you give us any early sense of what you are thinking in terms of capital expenditures for '09 and then on top of that, it seems like you are generating at least $150 million in free cash per year. I am just wondering how you prioritize the uses for that cash.

Well, number one, as we -- the good news is that the big campuses that we have invested the heavy money in over the last two years are complete. I would think you would see it anywhere from a 30% to 40% reduction in our gross CapEx as we went into '09 and basically then what we are going to do is also look at projects that could even be pushed off further six months. Obviously some of that will be involved with discussions with the OEMs. Not that we won't continue on them, but from a cash perspective share buyback will obviously be a key at the top of the list, at least in today's share price. We will continue to pay our dividend and we can do debt repayment. So we have uses for our cash and I think that we are going to also have an opportunity to look at some acquisitions. But they will have to be strategic in markets where we already have scale.

Great. Nice job keeping earnings flat in a down market.

Thank you.

The next question is from the line of Rich Kwas with Wachovia. Please go ahead.

Hi, Rich.

Hi. Good afternoon, Roger. Regionally speaking some of the other retailers have talked about Florida getting precipitously worse here in the second quarter. What are you seeing in terms of your dealerships and what is your outlook for the rest of the year for Florida and some other parts of the country.

I think our toughest market right now is Arizona and Phoenix would be our toughest market and then you would have to say that south Florida. We don't have a lot of concentration there, but it certainly was down when you look even in the foreign name plates. We were down in Florida. Obviously down more in new, probably down about 20% and then used was only down less than 3%. On the other hand we go to southern California, our used business is up 5% and then the new car business was down around 10% In northern California, on the other hand, was up 3% on new cars. So we are seeing some, some stabilization in northern California might be the high-tech areas there that is driving that. I don't know. Certainly when you look at Florida you are looking at housing and some of the other things and there's no question that we are see that impact in Arizona, which you know we have over $1 billion worth of sales in the Phoenix area. So I would have to probably go along with the statement that Florida is softer at the moment.

Okay. Parts and service, I think you were up a little bit and customer pay was up a little bit. What are you seeing on customer pay, are you seeing a pull back on kind of the bigger ticket repairs and maintenance? Any discernible trend there.

Our parts and service up 1%. The one thing that we are seeing is that warranty is reducing. That's a little bit of a headwind for us because that's labor hours and parts that we are selling. That would be the only thing I see. I haven't -- obviously people will do what they have to but with the extended warranties we have sold we are getting some benefit of those at this point. But there's some delayed service, but I would say where they might only do safety required items, tires, alignments, things like that. But my big concern is that this warranty, we saw it in the domestics probably back two and a half years ago, where all of the sudden the quality got so much better that the warranty went down and we had bays available. Right now we are running around 70% utilization of our bays across the country.

Again, when you look at margin, we are at 56.1, we are up 0.001 for the quarter. So I wouldn't think that we are in any downward slide and our e-mail capture is key for us today. We were really penetrating our database and we are running a lot of loyalty programs because we have got to market to that customer because ultimately that is the base that is going to buy new and used cars from us.

Okay. And then finally, in terms of real estate ownership versus sale lease back, what are your current thoughts there and if you were to go the real estate route, how long would it take you to transition to that?

It is interesting. We have followed what some of our peers have done in the market and obviously we are looking at the same time. There's some of the sale lease back providers who today have decided to liquefy some of their portfolio. So opportunistically we will look at those and see that they're make any reason that we might move those to mortgages. I really want to look at that carefully. We have got about $100 million right now that is earmarked for sale lease back, US and domestically, and we probably will move on that, but we will look again. As we go forward we will balance a line of credit from the standpoint of mortgages and I think there's some benefit from a standpoint of overall cash flow over a longer period of time. I think we have got to weigh that for any short-term cash requirements we might want to have because I think it is going to be important to keep our balance sheet liquid here as we go over the next 12 months.

Okay. Thanks. That's all I have.

Good.

Next to the line of John Murphy with Merrill Lynch.

Hi, John.

Hi, Roger, how are you.

Good.

You mentioned cost cutting efforts that you were potentially implementing in Europe. I was just wondering if there might be anything in the US that you would consider in the face of the weakening environment.

Number one, we saw the SG&A come down about 5 million plus during Q2. What we are going to do is we will go out and look at all of the locations and see if we probably -- I know they have done this in the UK, what they have really done is really put a non-hire in so what happens is you are going to have to try to look and see can you retrain some people to take over jobs. So normal attrition we run about a 30% attrition rate turnover in our business. That gives us some ability to tread out some of the people. We will look at our people obviously. We are going to be sure that our comp to gross, all of the variable composition from the standpoint of pay plans are working. As the elevator goes up they make more money as it comes down. They will be impacted just like the Company is. But in our advertising we are going to target a percent reduction everybody is talking about.

I think it is more mix and we just have to get comfortable with whether it is internet, whether it is going to be electronic or newspaper. But from the standpoint of purchasing with the Penske truck lease, we have got a tremendous opportunity to piggyback all of their purchasing synergies and we look at phone and things like that, there's a huge opportunity that we pretty much operate on a region by region or area by area. So we see all of those. Those are all activities that are in place today and we are on offense. So I don't want to give you a number. I think that what we would do as we got towards the end of the year we would say this is already in place. These are the run rates that we are seeing and just like we saw in Q2 with the SG&A down on same-store, what we want to be able to do is kind of identify that for you as we go forward.

Roger, on the inventory levels, the mix seems like it is a little bit out of line, you said it is essentially with the sales in the market on pickups and SUVs being 50% of your inventory. Do you see the need to the work that down aggressively as we step forward and how much help are you getting from the, I apologize, from the auto makers to fix that inventory sort of in-balance?

I guess I used the category of pickup trucks and then I had passengers cars and then I had all other and that was in SUVs. Some of those SUVs would be shown as cars in normal, I guess there is so much crossover back and forth. I just tried to -- want to see where I was on trucks. I think we are in, really in pretty good shape because our inventory is down on a worldwide basis down significantly and to me, if you look at the volume foreign, June versus March we are down $32 million, but where we have got some increases really when you look at Toyota and LEXUS we are up $31 million and believe it with the truck plants shut down and with Toyota taking some schedule out, I think that we are going to be in good shape. If you look at the same-store basis, we are down $56 million. $4 million on new and $52 million on used, so I don't think that we are in any trouble. I have looked at it. We are looking at it on a -- we really have the ability with our systems to look at it on a daily basis.

To me the UK, as I talked about, they have got about 300 million of inventory and that's flat since the beginning of the year and that will come down after the registration month and they're used car business will be -- we got another GBP25 million, which is $50 million and used cars is at 35 days now, so we don't any other new initiatives that we haven't had in place in the past. The good news is when you look at the UK, 80% of our business is on consignment on new cars. If the world came to the end and we are not expecting this, we would have the ability to put those cars back to the manufacturers. I insert a lot on this call to indicate that I am doing that, but that's a safety valve we have here and then as we see Mercedes and BMW, really their plants in the international side are down during the month of August, we will sale down some of those inventories which have creeped up on us over the last couple of months. We can't get enough small cars. We are selling everything we have, there the days supply is minimal.

Then lastly, Roger, on the success of smart here it is actually much better than we thought it was going to be. Do you think there's the possibility to replicate that distribution model potentially with new brand as we step forward in the next two or three years when the US market stabilizes and there might be other brands that want to enter or potentially even reenter the US market.

I would say this, we'd have our hand up. Obviously other people will to to take on that roll as a distribution partner. We are not just looking at the US. We have a couple of markets in eastern Europe and even Asia Pacific that we are looking at today that we might be able to step in with a distribution model. We are not yet to talk about those, but we see those as opportunities and I think with the reputation we have gotten through the smart distribution here and the way we have handled it, we could be on the top of the list. Now I don't have, again, I don't have anything to report but certainly that's an opportunity. We are seeing more and more people looking at this model and saying does it work on a longer term basis because today I think US based entrepreneurial management might take some cost out of what I call the routine typical distribution process from the standpoint of being able to get their vehicles to the market, working with the dealers and taking really cost out of the supply chain.

Great, thanks a lot, Roger.

Next to the line of Rick Nelson with Stephens, please go ahead.

Hi, Rick.

Hi, Roger. Thank you for taking my question. Just want to follow up on smart car, you talked about $0.07 contribution.

Go ahead.

About $0.10 year-to-date and your prior guide had been $0.08 to $0.12 on a contribution, of this here you got to be thinking about some bigger numbers for this year. Cam you -- ?

Yes, I think we should look at $0.18 to $0.20. We have the month of August we get no production and there's a changeover, I don't know what from going from '08 to '09. We have not experienced that with these guys. One will happen -- one of the benefits we've had is that there are logistics that we set up is probably 15 days faster than we had expected. So that's given us more vehicles into the market and we are going to expect -- remember we had said 20,000 to 25,000, where we are saying now probably 24 to 2750 and we are seeing really from the standpoint we have got a certainly less marketing costs because you have seen the internet action we've had. We talked about the orders we are getting through the internet. Just our general -- as we rolled out the product our logistics costs are coming in lower. Again we talked about marketing and personnel costs are certainly in line and I think as we go forward -- one thing that we have never talked about was mix.

And in smart we had figured that 10% would be the cheapest car that was available to the public. And that particular vehicle carried the lowest margin for us and what has happened is that mix has gone from 5% in our model to 10% and again when you look at, when you look at the coupe it is at 60% and the Cabriole is at 35%. When you take that inexpensive car that we thought would be 10 down to 5, we are then getting bigger margins on those other cars. Plus as the customers have an opportunity now on their own to go into the internet and actually speck their vehicle, we are seeing at least $1,000 per vehicle more in content which gives the dealer and the distributer more profitability. So those are things that we would have been way out on the edge if we thought those as we came in. So those are all serving to give us a little more margin. I think that will insure us the opportunities as we go forward.

Okay. Given the strong demand there, how do you see supply and unit potential for next year.

Everybody asks me that question. I am not sure how many to bring in. I don't want to break the bubble here. That is the big problem. I want to have at least two less than we need, but I would like to see probably the run rate in the 30 to 32,000 to be realistic. I think we are running at those rates today. If we look at the wholesaling, we did 7700. That's more than 2500 a month, so that would be 30,000 and I think there's some stretch there. So that would be if you were looking for the future I think that's probably the right thing. The other thing that has turned out to be a real plus for us is our -- we use the Penske truck leasing SOS.

We really have a connection with our customer now. We see any units down on a daily basis, we are able to take tech calls from the technicians in the field and it has really worked out for us. We get a number of customer calls on something or questions they want to get answered. Then we are doing a CSI contact because we are getting about -- all of our customers we have their e-mail capability because that's how they ordered their car. We are getting probably a 65% return on our CSI and we are seeing about 96% to 97% satisfied or extremely satisfied. What we are doing is going back to those ones that are not. We are really being able to go back to those people and finding out what their issues are on an individual basis. I think that it is key. We are getting about 250 calls per day into our customer call center. So that's another plus. So we are really taking these early adopters and they are becoming are marketing sales people in the marketplace for us.

Thank you for that. I see your margins and new cars are stable year-over-year but I am not certain, given the mix of internationally/US exactly what is happening out of the pond there with -- .

I think in the US, obviously we were up I think $100 per car in the US. And Tony said we are down 100 in the US and we were up 100 internationally. On the used care basis, the margins we were down from a growth perspective, down really 250 in the US and about 200 internationally. But the point here is with less volume and with the focus on growth is probably the first word I talk to people about is turnover, the second is gross. Quite honestly we are managing to gross and with less people coming in the door and most of our sales people domestically are working on a commission basis, they have got to go for gross and I think that's the key. Obviously the other piece of that is to be sure that we are putting the right number on the used cars. So there's real focus there right now.

And just want to ask about the divested dealerships, is our market for especially for the domestic stores today and what sort of valuations are you looking at on the asset sales.

I think if you look at our discontinued operations for the first six months, we've had a negative impact of 600,000. So we are able to market these stores, some with a plus and some with a minus. But overall our discontinued for -- we've had, what, $300 million and stored 11 stores. We have divested only with a 600,000 negative. So we are able to get the value out of the stores that we are selling and certainly we are seeing some multiples come down on the new sales. We have done a pretty much a 50/50 between international and domestic. We are going to be really, very opportunistic as we go forward. I think there will be less pressure on multiples going, as we go into the market on stuff we might buy. But I am sure you have talked to the other, the other peer group. There's many people calling us. In fact I think the fallout, if we keep our powder dry, I think the fallout is going to be really positive for us once this thing turns. You might see some very attractive purchasing opportunity. People have got to look at CapEx with these manufactures. They need bigger facilities.

They have got to move or they have got personal situations that they want to solve from the standpoint of who would take over the businesses and I think there's going to be quite a movement of these franchises, plus the good news is from a domestic standpoint that there's no question they're getting, they're getting a lot of action on reducing the number of points because today there's twice as many domestic stores as they there are foreign name plates for roughly the same amount of volume. Lots of different pieces here and I think certainly with our case with the capital available, we are in a position that we can take advantage of those when they come to us. We've had the, internationally, we have had some of the brands come to us already and offer us -- . I had a fax today from Toyota saying there's a real opportunity in Europe that they want me to talk to them about. So those are the things that are coming out of the sky

Very good. Thank you and good luck.

Thanks.

Thanks, Rick.

We will go to the line of Matt Fassler with Goldman Sachs, please go ahead.

Hi, Matt.

Thanks a lot. Good afternoon, good afternoon, excuse me. How are you? A couple of questions. A lot of the juicy ones have been answered. Your used business from a sales perspective was quite resilient, especially in a couple of markets. What's your sense about what customers are thinking about used versus new these days when they are thinking about a car and are you surprised by how the traffic has held up.

Interesting, I talked to George Brochick yesterday and we were talking about Land Rover in North Scottsdale, how the new was down, but used was up. These used vehicles you can take a two-year-old vehicle that you pay 18 for and then sell it for 22 or 23 and the new one is over 50. There are some real bargains out there from the standpoint of some of these this premium luxury. One of the things that we have done is we have got a term around here, retail first. What we are really looking at is trying to retail our used cars. They won't all be certified, obviously, and we will put a certain probably a six month warranty for the customer but there's no question that from the standpoint our transaction price in the US has dropped probably about $1,300 because we are going more of this retail first selling lower cost to sale.

We looked at the Car Max model and some of the other peer group who are really have a lower cost of sale. Obviously with our large premium luxury component, it is probably hard to drive it down, but we are seeing a reduction in the selling price of about 1300 in the US and about 2,000 internationally. But we are pushing the used because the good news is what people don't realize, if we can increase our new used by 7%, we are also getting some internal gross profit through the shops, because we are doing some routine maintenance and upgrade of these vehicles before we retail them. It is a business we are in. And then of course we have the finance subsidiaries, which will finance those on a non-recourse basis for us, which keeps us in the game.

Fair enough. And that's very helpful. My second question. We have seen your parts and service held in quite well versus Q1. We have seen probably a little more industry weakness in parts and service than we have seen in some time and I think, not for you, but for a couple of your peers that might have been the biggest surprise of the quarter. How do you manage your parts and service cost structure differently in this environment given that you had bulked up and invested so aggressively over the past couple years.

I think we are getting the benefit of the scale we already have and we are now, since we got the bricks and mortar, we are really looking into how we can penetrate this customer base. We kind of casually would send out a mailer every four or five months, but now we have a dedicated group of people who are calling customers, e-mailing customers on a daily basis to drive more parts and service. We extended our hours. We are working very hard to compete with the quick lubes and some of these alignment and tire places. We are selling a lot more tires today. In fact, the service writers are compensated on tire sales, so I think that's key. We reduced the tech turnover, which certainly helps us, so we are getting more productivity through the shops and with the business units being able to e-mail customers, I think that's -- look, it is a customer base out there which we own. We probably have not done the best job really cultivating that. So we are going to continue.

The one negative is that the quality is so good on the cars coming through now, that warranty is down. We get some benefit because the CPO, certified preowned, the OEMs provide us with the warranty coverage here. That's going to drive some of that CPO business back into the shop. But I am not at all concerned. I think we are really with 70% utilization, we have got a couple projects in Austin where we are building a bigger service capability where we need it, but generally when you look at the major markets you certainly look at California and San Diego. We look at Phoenix. We look at Inskip. We look at Turnersville. We look at Fayetteville out in Arkansas where we have these campuses. We won't spend anymore money on those places other than just maintenance CapEx over the next two or three years, to give us a chance to really get the benefit of what we spent.

That's very helpful. Thank you so much.

(OPERATOR INSTRUCTIONS). We will go to Rex Henderson with Raymond James.

Good afternoon. Wanted to shift the focus away from the questions on the top-line. Look at the cost line, you did a pretty good job on SG&A. I am just wondering where those SG&A savings, was it -- some of it must have been in just in variable cost related to lower sales but were there some fixed and structural costs that come out too and where are the opportunities for that.

You are going to have some variable cost down, but I think you look down through the lines. It is hard to say one particular area, but other expense, which is a cadre of legal and insurance and other things that services and things like that. We were down significantly. So, overall and yet our rent expense was up. So we were able on a same-store basis get the 1.5% even with a kick up in our rent. We will continue to -- these are all small bites and it is -- we can say, well, we will reduce advertising by 20%. Our advertising, quite honestly, if you look at it for the quarter was pretty much flat. So we see an opportunity to take that down even further as we go into the next quarter.

And if we continue to see weakness in the market or maybe even further weakness than we have seen so far in unit sales, where would you start looking to take cost out?

Well, I guess headcount would be the human capital side would be the first one. What you would want to do is go back through your stores and look -- . Remember, we have a variable comp basis. But you still have, even though you have got variable comp, you have got a certain amount of fixed cost and benefits that go with that. I think you try to decide what are the minimal sales that you expect people to sale by brand and you try to right size your shift with that. You can do that pretty quickly. And then through the attrition, I mentioned it earlier, we will be able to take people out. But we are going to look at that ASP and I can tell you that we are not going to sit around and to me that's probably the first place because with headcount you have

Okay. Second question I want to focus on the F&I business. I would think that with the shift in mix away from new and toward used, there would be some more F&I opportunities here. F&I was okay but it wasn't up much. So I just wondered whether you think that your F&I has got some opportunities to grow more aggressively in the back half of the year.

Remember, if I sell a used car it will cost the sales probably half of what it is on a new car. So I might have unit sales up, but if the selling price of the used car is less than a new, you are going to see you won't get the finance reserve you would on new. But I think there's more opportunity there and to me today with the cash up front, on new you will drive some of that business to the new side because it is really the, it is the down payment but overall when you look at our F&I we were up for the quarter, really up greater in the UK because we are able to sell these personal lease contracts and we have got a much better, I think, system there that they have really now has matured to give us that.

I also want to be careful to not point out -- the customer today is so fragile and we can load him up with lots of extra products and the payments are going to get out of his range and quite honestly, if this whole industry shifts to retail selling and not leasing, the credit responsibility really lies on the lessee or on the customer and today with a customer, the consumer being levered up, there could be some tension and some pressure to say wow the credit scores are going down, your equity in our home is going down. So that could put some pressure on who we can finance. That signal is probably always out there and that's why I think you will see used move up because people can only afford payments at a certain level.

Okay. Have you - drilling down on the F&I, have you seen any increase in chargebacks in F&I.

Really, some cases -- there are some stores where we have a little more responsibility for chargebacks but in certain markets I would say yes, but you remember we are a non-recourse, I think after 90 days, I don't want to give it to you -- it is not across the board. We have no chargeback responsibility.

Okay.

We are a non-recourse, remember that. I would say that, you never say 100%, but I would say 98%, 99% we are a non-recourse. Obviously on all leases we are not guaranteeing and residuals. So the manufacturer has that responsibility. We have none of that as a retailer.

Okay. Thanks. That covers my questions for now.

Thanks.

We will go to Rich Kwas with Wachovia, please go ahead.

Hi, Roger, just a follow up. On Turnersville and Inskip, could you just give us an update on how things are trending at both those facilities.

Yes, the good new is that in the month of June Turnersville made $0.5 million and Inskip made over $200,000 in June. We have seen them turn the corner. Their unit sales were up for the quarter in both cases, so all the CapEx is done there. So now it is about getting down to business. So I would say in that challenging market, those guys did a good job. I think the management teams that we have in place there with Peter Cline and Marcel our ale in Inskip and Eric, these guys are doing a good job. So we are in the used car business. We have got in -- down in Turnersville, we have got an auto outlet where we are selling vehicles where we do our closed bid wholesaling, we have got a small retail outlet there for cars under 10,000 which you don't wholesale. That has been opened up here in the last 30 days. Lots of offense. And again, Turnersville and Inskip were becoming destinations.

Okay. That's pretax; right.

Yes.

Great. Thanks so much.

We don't talk EBITDA here.

We will go to Scott Stember with Sidoti and Company. Please go ahead.

Hi, Scott.

Hi, Roger, how are you.

Good.

Can you talk about the UK maybe just drill it down a little bit more current what we have seen last month heading into August, have things deteriorated in July.

There's no question that we saw softness in May and June. April was pretty good, even coming off the March registration month. Overall they were down 2.5% registration. It is so difficult to really say what is going to happen in September, but we have seen a deterioration and what I said the super premium luxury ,which is driving that, and used car prices are dropping over there the same as we have seen the books change here. So the inventory management is supercritical both in the US and internationally. So I would say that we are in for some tougher times in the UK. Frankfurt market seems to be decent.

Mexico has been good for us. That's obviously primarily Toyota. The premium, super premium luxury in up in Hamburg and Bremen where we have Ferrari, Maserati, Bentley, Lamborghini, Astin Martin. Unfortunately, there we carrying more inventory than we want, or new inventory. There is no issue with it but we have just almost sold those as they'd come off the truck and as the manufacturer has been a little more aggressive to get more market share in those, we have probably carried more inventory. Probably have got $10 million to $15 million more inventory in those stores in Hamburg and Bremen than we had last year. But those cars we are talking about small volumes and those will go through very quickly by the end of the model year.

Okay. Last question on Penske truck leasing. Has anything changed from a few weeks ago when you made the announcement with regards to 2008 guidance.

No, no, we are looking $0.02 to $0.04 on this next quarter. We've had our team meeting last week on our corporate sales initiatives. The [Fersig] teams have been together already and we see that quite positive. Their business they ended up with a good first six months and seem to be on track. Remember in their business probably 65% of their business is contracted, meaning it is on either a three to five year lease or a logistics contract. They don't have the ups and downs that we would see in a retail business, so that is somewhat of a good guide for us. And the only thing that is down would be their rental business. That's obviously a small piece of that and that's the commercial rental, which is typically 50% of commercial rentals revenue comes out of the leased customer base. So what you do you lease a Company ten trucks and if they need the extra trucks they get them from you and that would be commercial rental. That's down somewhat, obviously, because the general economy is down.

We looked at delinquencies in that business and quite honestly they are in line with expectations and the sales there's a number of more people looking at leasing their equipment because their own credit lines are being challenged and we have the opportunity to leverage our relationship with GE and our AAA credit in that particular Company. So I see that being a real positive. We are going to -- what we are going to do is try to have an analysts and interested party meeting in Redding sometime between now and the end of the year to do a deep dive in that business.

That's all I have. Thank you.

We will go to Sid Wilson with Kevin Dann & Partners, please go ahead.

Sid, hi. Hi, how are you? Most of my questions have been answered but one question that I have. Can you touch a little bit more about the change in leasing policy on BMW as it relates to (inaudible) of how we should be thinking about this going forward given that BMW is such a high percentage of your business.

Yes, BMW. Of course you remember with a bigger mix we have probably have got 8% or 9% here in the US and 13% in the UK. The UK is the biggest driver of the BMW business. And over there we don't quite have the effect we have here. But what has happened, I would say where they have gone from 60% to 50%, but again now they're putting some serious money on the customer. They have got a 0.9% buy down rate today, which is very attractive to many of the buyers. And their residual values they've been pretty realistic on those. And then we have the opportunity to buy those vehicles and sell them as certified preowned. I don't see anything there at the moment. Our BMW stores, as I think about them, in the month of June, I can't go back for the full quarter just sitting here today, but they have all done quite well from a standpoint of their earnings on a relative basis. And Mini is out of sight, it is as strong as it has ever been, a lot like smart.

Okay. Thank you very much.

Good.

And next Jonathan Chin with Private Management Group.

Jonathan, how are you?

Good. How are you. I want to ask you a question regarding the fact that we are going to see smaller vehicles is that really going to affect parts and service?

Well, I would say that this mix change is not going to happen overnight, when you're listening to these manufacturers. I posed the question the other day if fuel gets down to $2, what happens, do we now retool trucks. This is a real changing time here when you look at oil prices. I think that there's no question that the sophistication on the bigger cars drove more customer labor and labor hours, but I think it is going to take a long-term before you see a big mix change and you will see said affecting your parts and service business. I don't think it's going to happen overnight. Remember that today you really have to look at what's going to happen and you look at your, let's just take a quick check by BMW.

You have got a one series, three series and you have a C class. With Mercedes they're talking about an A&B coming over here. These are high-tech vehicles and you are not going to have -- be able to just take those to any gas station for them to work on. It could happen. It is a very good question and I really -- I don't want to give you any data that would be misleading at this point. I would just say that I don't think we are in the ninth inning yet on what the mix is going to be long-term.

Okay. I appreciate that. And also if you could just comment on what type of buyers are coming into show rooms.

I hope they're real buyers. I think that at the moment you have got the group that still has money and is buying the premium luxury cars. You can see that today, it is off slightly. You would expect that. In the financial markets we are seeing some people not buying new Porches and maybe expensive BMWs and Mercedes, but people need transportation. That is one thing in this, when you look at public transportation across the US, we are not, -- we have some but there's still a big gap from the standpoint of vehicle requirements. We have seen people not driving their vehicles maybe for pleasure. We seen that at the Nascar races where there's some attendance slippage that really people just can't afford the fuel prices. But there's still going to be a need for the guy that is in the construction business that needs to buy a truck, but he probably not going to buy one with a Lincoln interior in it anymore, he's going to buy a regular work truck. We sale those and I think that's still be an opportunity.

You have got your soccer mom that is going to be using the SUV and buying the sport utility and the mini van. We tend to shift so fast into motion in this business and I think from a retailer, I have been around a long time and we have seen us go through some of these things where we couldn't even get gas and it seems to level out. We will be fine because we have this customer base who already has their cars. The good news is they're not going to trade them. We are going to get more services and parts business where we have got our highest margin.

Very good. Thank you very much.

Ladies and gentlemen, we have time for just one more question, that will be from the line of Saul Rubin with Silverstone Capital. Please go ahead.

Hi, Saul.

Good afternoon.

How are you.

Good thanks. Just a few questions here. Did you say what your gross CapEx would be for the year.

The gross CapEx this year will be probably somewhere around 180.

Okay. Then did state that could come down quite considerably next year?

I think I made a comment that we thought it would be 60% of that, so I would say somewhere in the 100 to 120 million gross CapEx and we are going to look at that. That's one lever that we can pull back. Now we have some commitments we have given to the OEMs and we will certainly talk to them about that, but won't means that we are going to delete it. It would mean that we would push it off six to 12 months. Now there are some places where we know we need to do it because it will help us in our business and our efficiencies and our profitability will move forward. But that is a lever that we can pull back and we plan to do that not only here domestically but internationally. We look at project by project. We have a review on that here over the next couple of weeks and we will be able to give you a much tighter number as we talk at the third quarter.

Okay. Great. And can I ask, Group One had their conference call yesterday and they talked about an accounting change that would affect 2009 pertaining to their convertible. I think you have a similar convertible.

Yes, we have 3.5%. We have to mark that on the accounting change, I think we have got to mark that to market and I am not sure there's two pieces of that, but it would increase our interest cost probably 300 basis points at least as we reflect on our financial statements next year. Maybe slightly, Bob is saying maybe slightly more.

Okay. Okay fine. So that would be 300 basis points on that piece or overall.

On that piece. Say today we are 3.5. We have another piece that is just like it at 7.875, so I think we have got to mark that to market. As we get some other benefits. I'm not sure, there's two pieces to it and I'm not sure how it all accounts right now but we can give you that specifically at the next call.

Okay. And just quickly back to Penske truck leasing deal. Can I just ask is that on, was it completed in the quarter? Is that in the balance sheet?

We do it -- use it as a one line investment. It is only -- we have a 9% increase. So it would be below the line in our investment line. The same we have our other joint ventures, our other assets.

It was done in the quarter. So it would be presented in the balance sheet.

That's correct.

Okay. Fine. And did I understand that the $0.02 to $0.04 accretion you expect could come all in the third quarter?

Yes.

Okay. Fine. And lastly on PTL can I just understand, if GM preliminarily came to you with an offer to sale this, how did it work within the sort of Penske, various Penske organizations? I mean I would assumed Penske Corp would have had a right to first refusal, if you like, and wondered why Penske Corp didn't take up the offer.

Well, I think that number one, Penske Corp. owns today 40% of that business and has gone from 21% to roughly 40% in the last two years. And it is over $200 million, that's a significant bite, but we looked at what we could do with our capital and our leverage capital here and the synergies that generate this, this commercial corporate sales capability with our team and we saw that this investment, because of the -- we get the accelerated depreciation benefited this Company, that we could invest roughly $200 million and we could see 60% to 70% of that come back during a 3 to 4 year period. It was prudent.

Plus it had the brand. It gives us a different mode of selling because today none of the retailers have a corporate sales fleet or sales staff, excuse me. And today we get the benefits of probably 600 or 700 of our sales people will have another -- will really have another menu item and that would be selling vehicles to our network. We will set that up all internet based. We do some of that in the UK now but we might have a Company that is down in the city that we would have for their employees have the benefit to go online and be able to buy vehicles that we would represent through our brand mix.

Okay. And so just lastly on that, I mean does GE have any sort of right to sell or put anymore of the business to you and if so would you be interested in, would Penske take more of it?

Let me say this. We would like to own as much of the Company as we could. I would be lying to you if I didn't say that. It is just a matter of capital availability from the standpoint of the purchaser. GE, there's no pressure under GE at all from the standpoint of of selling that business. It is not strategic for them. At this particular point we have, we have negotiated arms length with them to do these transactions and we would expect as we go forward if we have the capital available and we think it is prudent, we would continue to own more.

Great. Thank you very much.

Appreciate it.

Mr. Penske I will turn it back to you for any closing comments.

That's all we have today. Thanks for the support and we will talk to you at the end of next quarter. Thank you. Bye bye.

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.