Penske Automotive Group Inc (PAG) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group third quarter 2008 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through November the 6th, 2008. Please refer to Penske Automotive's press release dated October 15th, 2008, for specific information about how to access the replay.

I would now like to introduce Tony Pordon, Senior Vice President of Penske Automotive Group. Sir, please go ahead at this time.

Thank you, Lori, and welcome, everyone. A press release detailing Penske Automotive's third quarter results was released this morning and is posted on the Company's website at www.penskeautomotive.com. Participating on the call today are Roger Penske, our Chairman, Bob O'Shaughnessy, our Chief Financial Officer and J.D. Carlson, our Controller and as usual at the conclusion of our remarks, we'll open the call up for questions. We will also be available by phone to answer any follow-up questions you 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 fluctuations, 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.

During this call we will be discussing certain non-GAAP financial measures, such as adjusted income from continuing operations and adjusted earnings per share from continuing operations. Adjusted 2008 earnings for the third quarter exclude $2.7 million or $0.03 per share of after tax costs relating to severance, transaction termination fees and property damage deductibles. Adjusted 2007 earnings exclude $12.3 million or $0.13 per share subdebt redemption charge we recorded in the first quarter of 2007. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance.

At this time I would like to turn the call over to our Chairman, Roger Penske.

Thank you, Tony, and good afternoon everyone, and thanks for joining us today. Obviously it it was a difficult quarter for our industry. However, I think our business posted a solid profit despite the market conditions.

In fact, we had several bright spots. First our smart USA distribution business continues to grow. Our investment in Penske truck leasing provided a solid return and our operations in Turnersville, which is in the Philadelphia area seemed to have turned the corner.

However, we did face several challenges that seemed to accelerate through the period. By far the biggest challenge was the lack of consumer traffic in our dealerships, particularly in September. However, I think it's important to note contrary to many media reports we believe the decline in new vehicle sales at our dealerships is related to consumer traffic, not a lack of credit availability. I still think qualified consumers can get financing. In fact, I saw a quote from George Borst, are is, it, did that came out just a little while ago from Toyota Financial Services and he said, "We've actually been able to extend our lending to buyers, we've been acting in leasing and our approval rate on prime customers remains well over 90%." So I think you see, in fact, many of the captive finance companies continue to offer (inaudible) rate financing or attractive lease deals to move the product. In the third quarter captive finance partners provided funding for more than 75% of our units financed or leased at the dealerships and our suite of preferred lenders provided another 16%. So again almost 91% of our business was done with our key players. Having said all that our retail automotive results are still somewhat disappointing.

Let's take a look at performance of our business in the third quarter. Retail unit sales decreased 8.9% to just under 72,000 units, new declined 14.6% but the used units stayed resilient increasing 3%. Total revenue was $3 billion compared to $3.4 billion last year. New vehicle was down 17.4. Used down this is revenue down 8.2. F&I minus 13.1% as parts and service plus 2.2. On a same-store basis revenue decreased 17% and just to put it in perspective 15% in the US and 20.4% internationally. Excluding changes in foreign exchange rates, same-store retail revenues decreased only 14.9%. When you look at CapEx -- excuse me, FX we had approximately 3% impact in all categories, new vehicle use, service and parts during the quarter, example meaning new vehicle was reported 21.4 and it was actually without FX was19.6, service and parts was 2.9 negative and without FX it was down 0.8.

Looking at our new vehicle business, same-store units were down 19.3% and the average transaction prices declined $1,150. Used vehicles same-store units were flat during the quarter. However, the average transaction prices declined $3,300 as consumers moved to I think more affordable vehicles. I think this shows the flexibility of our model as we're able to adapt our inventory to meet the needs of our customers.

Service and parts also is a source of relative strength. During the third quarter revenue was flat on a same-store basis in the US. Internationally service and parts revenue declined 7.8% on the same-store basis, but only declined 1.7% if you exclude the impact of movements in the foreign exchange rates. On an aggregate basis our same-store F&I revenues declined 16.1%. This decline really was primarily due to the softness in the US new vehicle sales market coupled with a reduction in the revenue we recorded relating to our serious warrants. In total the change in serious stock price caused a $0.02 per share decline in earnings if you compare it with the third quarter of 2007. Additionally, changes in exchange rates resulted in $64 million of decrease in revenues or a $0.01 a share on EPS in the third quarter.

Looking at the revenue overall, the US was 64% and international was 36%. On a worldwide basis foreign and premium name plates were 95% of our total revenues, including 64% from premium brands. The big three contributed about 5% of our revenue. In the US, the big three was 7%. During the quarter our mix of operating income was US retail 45%, international retail 31%, smart 12% and PTL12%.

Let me move on to the gross margin. Our overall gross margin in the quarter increased 64 basis points to 15.4% as service and parts represented a higher percentage of our revenues this quarter. New margins declined 30 basis points to 8.2% and used margins decreased 8% to 7.3. F&I decreased 46% per unit to $949, was only down $32 if you exclude the impact of our serious stock warrants. And our service and parts warrant margin, which was great was 55.6 was consistent with last year.

Moving on to SG&A. SG&A is a percentage of gross increased compared to historical norms consistent with the first half of the year. This can be largely attributed to a deleveraging of our expenses as same-store gross profit declined 14.4%. As we noted in our press release we took steps to align our variable expenses to the current business environment. As a result, we reduced our worldwide headcount during the quarter by 4.3% or 670 -- 67 people. We expect these actions to reduce annualized personnel expense by 24 million. We also reduced our advertising expense by approximately 11%. We've continued to challenge staffing levels in all non-essential spend. As a result, we have identified incremental cost reduction opportunities that will also help us in 2009.

Let me comment on our tax rate for the quarter was 35.9% up from 34.4% last year. This increase had a $0.01 a share impact on EPS for a comparison. We currently expect our annualized effective tax rate to be approximately 36%.

Let me move on to the balance sheet quickly. Total inventory was $1.6 billion which was down $64 million compared to June of last year. Down $24 million in new and $40 million in used. On a same-store basis vehicle inventory was down $91 million compared to June of this year, down $46 in new and down $45 in used. The end of the third quarter our worldwide days supplies of inventory was 69 days versus 68 in the second quarter and 35 on used, again 35 and the United States our inventory mix consisted of 53% in cars, 40% SUVs and 7% trucks as of September 30th with 40% of our truck inventory being in our big three franchises.

Let me move on to CapEx. Gross CapEx for the year is year-to-date is $165 million. Proceeds from sale leasebacks and mortgages during the quarter were $53 million year-to-date and as a result, net CapEx for nine months was $112 million. We expect gross CapEx and net CapEx to be $210 million and $140 million respectively for the year.

I'd like to note that we recently completed a comprehensive review of our capital spending program for 2009 with a view towards minimizing our spend. As a result, we expect CapEx in 2009 to be less than $40 million which represents an 80% reduction from 2008. Other than projects we have already started construction, all non-committed capital spending has been placed on hold. Obviously we'll have some maintenance CapEx and many of that probably will be expensed through the income statement. The level of capital expenditures is less than our projected depreciation and amortization which is approximately will be $60 million in 2009.

Let's turn to leverage. Let me take a moment to review the tenure of our long term financing agreements. Today we have $479 million credit facility in the US supported by Daimler Financial and Toyota Financial that matures in September of 2011. We also have a $200 million credit facility in the UK supported by the Royal Bank of Scotland that matures in August of 2011. To make a point, the only amortization required under either facility into 2011 are quarterly term loan payments of $2.7 million in the UK. And our 7.75 subordinated notes mature in 2016. Since our -- and 3.5% convertible notes mature in 2026 but have an investor put in 2011. We also have a mortgage facility with Toyota Financial services that has a seven year fixed rate return. In total we have $1.1 billion of non-vehicle debt as of September 30th and this would consist of the $750 million of senior subordinated notes which have a blended rate of 5.625, $219 million of turn debt under the US credit facility at LIBOR plus 250 and $83 million under our foreign credit facility at a blended rate of approximately 6.1% and, of course, we have the $33 million in mortgages. As of September 30th, we had no outstandings on our US revolver. As a result, we had approximately $380 million availability at the end of the quarter.

I know that covenant compliance for our peer group has been getting a lot of attention recently. We currently are in compliance with all of our financial covenants. Since covenants are such a big topic I wanted to let you know that we stress tested our model using various declines in new and used unit volume, service and parts, F&I changes in interest rates and also even changes in foreign currency as we've seen the pound go from $1.95 to roughly $1.60 and also with earnings down as much as 50%. We believe we would remain in compliance with our covenants. Further, you might have noted that we amended our fixed charge ratio in the UK credit agreement last month and amended our US credit agreement to allow mortgages, also, and we did that through our 10-K -- our 8-K filing about 30 days ago.

Also as part of our ongoing process that started several months ago, we are currently in discussions with our lenders to amend our US credit facility, provide for addbacks in the case of franchise or goodwill impairments. With this there will be no change to the term of the agreement or fee structure in our agreements. We expect to file these amendments in our credit facility in the very near future hopefully when we file our 10-Q next week. So at the end of September our capital ratio, our debt to capital ratio, was 44%.

Turning to floor plan, we also have $1.6 billion in floor plan notes outstanding. All of our floor plans with captive finance companies, not banks. Our exposure worldwide to GM and Chrysler floor plan is $90 million. We have swaps in place to convert $300 million of variable rate floor plan to a fixed rate of 4.65 through January of 2011 and 42% of all of our debt including floor plan was fixed with an average interest rate of 5.1% and an average maturity of 4.4 years.

Let me just make a couple comments on discontinued operations. Today assets of businesses we have classified as held for sale has decreased to $7 million compared to $91 million at the beginning of the year. At the end of September we have only one franchise categorized as held for sale. I'm pleased also to report that we've been successful in selling underperforming and non-core businesses without significant operational or financial impact.

Looking at acquisitions, as noted in our press release we remember it nature an acquisition agreement during the quarter. The related costs are $1.1 million after taxes. We believe that preserving our capital for our uses was a prudent action at this particular time. During the year we've acquired $415 million of annualized revenues in 2008 and we have divested of dealerships that generated $325 million during the same period. We'll again continue to evaluate opportunities to be an opportunistic inquirer but at this particular time I don't see anything on the horizon that we're going to go after at least under these current conditions.

Turning to our smart distribution business, during the quarter we wholesaled almost 6,700 smart fortwos bringing the total wholesale deliveries to just over 19,000. Smart contributed approximately $0.05 in the quarter in Q3. Year-to-date $0.15 EPS. We now expect to wholesale between 25,000 and 27,500 vehicles in 2008. The US has already become the third largest country in the world for smart fortwo sales behind Italy, Germany with 18% of its worldwide sales. The smart fortwo has received unprecedented media coverage and has earned outstanding customer scores. In fact, the 2008 fortwo was recognized by the EPA as the most fuel efficient all gas powered vehicle in the United States and recently consumer reports rated the fortwo as one of the most reliable small cars.

As we look out to 2009, we intend to bring a limited production of [Sport Bravis] versions of the vehicle to the US. We offered, in fact, the [Bravis] reservation holders just a week ago and received 1,800 orders on the first day. We certainly remain excited about smart and believe it will continue to be a key differentiator for our Company.

Share repurchase during the quarter, we repurchased over 3,500 shares or 3,500,000 shares for $50 million for an average price of $14.04. As a result, we have an additional $100 million of authorized share repurchase availability today. We will continue to monitor the market and may make purchase opportunistically subject to market conditions, obviously trading windows and alternating uses of our capital.

Looking to earnings guidance you will note that we did not update our guidance in our press release this morning. This is consistent with the position we took last quarter. We expect to be in a position to provide guidance relating to fiscal '09 when we released our fourth quarter earnings after the close of the year.

Let me summarize quickly here in closing our business is profitable despite the current economic environment. We have sufficient cash flow and committed long term borrowing capacity to fund our current and future operations. I think our brand mix remains strong. Our smart distribution business continues to grow and the cost reductions we have implemented in the natural variability of expense structure on our business model should help us navigate through the current market conditions. I appreciate all your support and thanks for your attention. Let's open it up for questions. Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our first question from the line of Rick Nelson with Stephens. Please go ahead.

Thank you and good morning.

Hey, Rick.

You've got no acquisitions on the table. You're pulling back on CapEx and there appears to be lots of room on your covenants. I'm curious how you look at debt paydown versus buybacks in the current environment.

Well, you asked me that question today. We've had lots of discussion about it and I think that we're pretty much going to stand in neutral. We want to see what October, November and December goes for us because I think the most important thing today is to, look at your relative credit position, your cash position. I think opportunistically as we look at our cash flow, positive cash flow, over the next quarters we'll take a look at either stock buyback or debt. The one thing you have to look at is you buy back your subordinated debt, the senior lenders look at that as really quasi-equity. So we want to be careful as we look at buying back subdebt. Even though it's very attractive at this time we do have at least three years on our convert and we have, eight years to go on our -- on our 7 3/4. So to me I think it's important to be prudent at this particular time and really have some dry powder for the future.

Okay. Thank you for that. Wondering also about the cost cuts, $24 million program. When will you start to recognize those benefits?

We should see part of that obviously in Q4 and that's really was, stage one. We started that, at the beginning of the third quarter and, we'll have another I'm assuming another $10 million to $15 million that will take place during Q4 along with associated costs.

How much did you see in the third quarter in terms of cost cuts?

Well, to give an example, we cut 11% of our advertising on an annualized spend rate in Q3. We expect that at least in Q4 and we would see, at least 25% of the cuts we had in people and that was 667 people, about 4.3% of our headcount and we'd like to get to 8% on a worldwide basis prior to the end of the year.

All right. So I have a follow-up. Did you disclose the EPS contribution on the quarter?

$0.05.

Five cent. Any preliminary thoughts on 2009 in term of volume or earnings contribution?

Well, I think that, to really, be open here, we have the ability to probably access, up to 34,000 vehicles next year which will be 6,000 or 7,000 more than we had this year, but as far as planning purposes, when I look at our reservations, we have 58,000 reservations today. We'll probably deliver about 6,000 or 7,000 -- I think we delivered our 20,000 vehicle in the last couple days. We'll deliver another 5,000 or 6,000. You take that out of the mix and we get approximately a 30% loss on reservations at least in this current environment. So I would say to be safe that we'd have a model that would look at the same number of smart vehicles next year. Obviously that would be terrific and I think there could be upside but it's purely going to be based on, where the consumer is and from the standpoint of, how they feel about purchasing vehicles. I think the power, the brand obviously is shown with Bravis going out and saying to our reservation holders here's a vehicle that's $3,000 to $4,000 more and in less than eight hours we've sold out approximately 1,800.

All right. Thank you and good luck.

Yeah, thanks, Rick.

And our next question from the line of Matt Nemer with Thomas Weisel Partners. Please go ahead.

Hey, Matt.

Good morning, Roger. So my first question is on the UK and I'm just wondering, I know you've taken some restructuring actions there. Do you think that we've seen the bottom on profit in the UK? In other words, do the cost cuts start to outpace the market decline?

Well, to get specific the market is off in the third quarter about 19% and in September it was off 21% and it had a fairly significant impact because that's one of the registration months and what's happened, we've had five really consecutive months of decline in the market. On the other hand, we are -- I'm quite happy with the action that's been taking place there. They've got about 4.3% of their headcount out already and another six million pounds of stuff I would call it, other things that they've taken out, during the last 90 days and with a Bank of England reducing its lending rate hopefully this thing has hit bottom. The good news is that the captives, BMW, Mercedes, are certainly coming to the party with us and Audi especially, supporting us, with some good used car buys. The one good thing that they've done is we had 130 million pounds of used car inventory and we reduced that down to 75 million. So we've actually been in a buying mode which I think will help us as we go into the fourth quarter with some very low priced vehicles and you saw that our sales price on used has come down. Some of that has been in the UK because we really had -- were selling cheaper cars versus maybe the higher luxury vehicles, during the quarter.

Okay. And then on the ad spend down 11%, obviously not quite as sharp as the decline in unit sales. Just wondering how much more room there decrease advertising if you've tested going dark in some markets and seeing, what kind of impact it has on the sales rate?

Well, it's hard to tell a car guy to go dark in a market point number one, but I would say that because of the strength of the Internet which we've seen demonstrated by smart that most of our operators are really looking at their Internet opportunities and specifically will continue to utilize advertising whether it's electronic will probably reduce significantly, newspaper primarily for used but we'll be using the Internet, as really the leader from the standpoint of displaying our used cars. And again we're going to go to experiential probably more sales promotion and we might be spending more money on parts and service to try to, really motivate some of the customer base to come in and do parts and service work, which obviously has a 55% margin versus, you know on, a new car sales. So I would say it's going to be a mix but we expect -- I would expect to see it down at least another 10% next month.

You also mentioned that -- in your remarks that Turnersville was turning the corner. I'm just wondering if you could give us some more details on that.

Well, I think the key thing, we can look for the quarter that the earnings were up about a $500,000, over last year and it's solidly profitable now which is key even in a very tough time and Inskip obviously was profitable in the quarter and I think that it was announced in the last couple of days that Rhode Island had the highest unemployment rate second only or first only to Michigan.

Okay and then just a couple of quick housekeeping questions, on CapEx for '09 the under $40 million, what would be the potential sale leaseback benefit in '09 so we can get a net number as well?

Well, we're looking at, basically I would say the sale leaseback opportunities out there are minimal because the rates if they're going to want many of the people who are in that business in the US are finding it tough probably to find long term financing. So we would be looking at mortgages, but what I wanted to do was really look at it on a gross basis and we've really scrubbed this not only domestically but internationally. We think it's about $35 million and I would say 90% of those projects are ones that have already been committed and where we are also already in the ground. So this would be finishing up existing products. So I don't think there will be a big difference there. We might opportunistically have something that we could -- I think there's a couple of opportunities in the UK. We have a BMW, new BMW mini operation in Lester which we finished and we might be able to get a mortgage. There's some interest by BMW supply funding on those. So we'll look at those as we get into the first quarter.

Just lastly for modeling, for modeling PTL should we assume that the profit this quarter is kind of what we should be looking for going forward or is this earnings seasonality?

Well, the third quarter probably is maybe about 15% higher, 15% to 20% higher, because it's the biggest quarter we have for one way. As this is the rent it here leave it there and the kids come out of school and go back to school. So we see a stronger third quarter, but one thing I will say, that the sensitivity in that business is a lot less than we have in the retail automotive business because almost 75% to 80% of our revenue is fixed on contracts which are three to five years and have some escalators in them based on CPI and we're not fixed on any fuel commitments because we have fuel pegs on most of our trucks and the logistics business obviously is very important to many of the customers, so we don't see that. It's been strong and has had some nice growth during this year. So I would say that probably if you looked at a model, you'd probably have 15% to 20% difference if you annualized it looking at the third quarter.

Great. That's all I've got. Thanks very much.

Yeah. Thanks, Matt.

And our next question from the line of Rich Kwas with Wachovia. Please go ahead.

Hi, Rich.

Hi. Good afternoon, Roger. Just want to follow up on the restructuring. Did you say that you have cut 4% of the workforce and you said you were looking to cut 8%?

Go from four to eight. We're going to try to get 8% out on a worldwide basis.

Okay. And I guess there will be additional costs associated with that in the next quarter or so?

Yeah. We're obviously, we're looking at -- I thought we had minimal costs coming out, during the third quarter, but you'll have some more associated with that and the other thing obviously we're on a no hire, so we'll see some of the people just go out on their own. So we're going to try to mitigate, the severance costs to a minimal as much as we can.

Okay. In terms of floor plan with the captives, the luxury captives, what are you seeing BMW and Mercedes and some of the others do in terms of spreads? Mercedes do in term of spreads?

Let me say. This I've been an advocate of utilizing the captive since we bought this business back in '99. All of our working capital lines except the small amount in the UK was sitting there when we bought them and all of our floor plans, have been with the captives and, and also we're very vertical from the standpoint of our retail finance and lease contracts and when you look at today, you know with, that vertical integration giving the captives, all of the finance and lease paper, we've been able to negotiate, good market rates for our floor plan and we've had no pressure at this point, for higher rates and we'd expect because of our commitment to them and the loyalty we've had with them we'd see those things stay in place. Also I see no risk at all in losing any floor plan lines. In fact, the only reason you get your floor plan line pulled today I would assume in any whether it's GM, Ford or Chrysler, unless they just don't have the funding would be because of fraud because it's an asset-backed facility and I would think it's very secure for the lender.

And so do those comments apply across the board not just for luxury, but for all your major OEM partners?

Well, when you look at, when you look at the amount of what we've probably got $300 million out with Toyota, $300 million out with BMW in the US, probably $200 million out with Mercedes-Benz and I don't think that, we have any issue. The only rates that have gone up, have been with GM and I say we've got GM and Chrysler. We have about $75 million out here in the US and quite honestly, I want to support those guys and, I think that we can move that floor plan if necessary, but at the moment, we'll look at that as an opportunity over the next 90 days.

Okay. And then finally in terms of multiples, when do you think multiples, the correction in multiples, occur? It seems like there's still a bit of a disconnect in terms of what the sellers want and what the buyers are willing to pay and how soon do you think that comes down?

Well, I don't see a lot of buyers out there right now especially on the bigger deals and, just, listening, to the calls and the questions that have been asked, on the previous calls I think at the moment if we have something that's opportunistic that's in the -- would make a market for us or we could fill in a market where we've got scale, you'd look at it, but I have not tested anything right now and, in fact, because of market conditions, we pay to break -- we paid a breakup fee on an acquisition that we had set up, in the last quarter. So I think you're going to see them come down, but again I won't know until I go out and test it and we're not prepared to do that. I'll call you when I do.

Last question. F& I PVR, it was down. How much of that was related to leasing? I would have thought you would have had a little bit better performance with the higher percentage of purchases versus leasing. What do you see?

Well, let me tell you the one thing was that the -- as you look at used cars, we were down about $3,300 per used car from a sale price. So that's going to obviously give us, less finance reserve and typically in all financing especially on new ex-leases you've had the opportunity to get anywhere from 110% to 120%, even 130% advance. That means if MSRP is 30,000 in, some cases you're able to finance 39,000 to help make up the difference maybe if someone is upside down on their used car, we saw many of the captives going back to tightening up on the advance rates which obviously was with less outstanding, we would have the -- we wouldn't get the finance reserve. Then I think from a payment, the buyers today, some of the after market products, the penetration wasn't quite as high as it had been, in the past and we also had probably I think it was $10 to $15 of impact on serious.

Okay, great. Thanks, Roger.

Bob just mentioned to me. He said we also had foreign exchange impact on that, also.

Okay. Thanks.

Sure.

Our next question is from the line of John Murphy with Merrill Lynch. Please go ahead.

Hi, John.

Hey, Roger. How are you?

Good.

Just following up on Rich's question on acquisitions. I mean if you don't foresee any, multiple compression in sort of a more favorable environment to make acquisitions in the near term and you look at your own stock price which is clearly I mean below where we think it should be valued and I imagine you think --

So do I. Yeah.

I mean do you ever sort of scratch your head and say well, I could take this Company private and, come back to the market sometime when I can get a much better price for it? I mean it's pretty attractive relative to private acquisitions right now.

Well, obviously, having, controlling almost 55% of the stock, that goes through your head but I also want to be prudent as a business guy here. If we do -- if you would do a buyout, yeah, you have to refinance the convert, because of the conversion part of the divestiture quite honestly when you look at the market, there is no long term market for that. The markets are locked up and that doesn't make a lot of sense and I wouldn't want to leverage up myself or a Company to make that happen. I think I'm a lot smarter. I don't think that the value of the Company today is less than it was 90 days ago. So we want to take on the offense and action plans that we have to do in order to be sure that we have a viable enterprise, let the cash flow generate within the Company and maybe at that particular time maybe what we'll do is continue our stock buyback. I think Rick asked that question earlier. I think what we'll do is, look at stock buyback and maybe, we would take some of our debt out but I think we got to be careful because this could be 12 months or it could be 18 months of this type of pressure and I think at that point I want to be sure that all my credit arrangements are in position and the cash that I do generate that I can save for dividends to the shareholders because a pretty high return right now.

Okay. And then sort of following up on that theme of potential, extended pressure here, we think about your CapEx at $40 million as you mentioned. I mean how much of it is purely maintenance? If you got through a period where you finished the programs you have in place right now and blacktops and signage? What do you think that level is right now?

We're not going to do much blacktops or signage. Let's put that anywhere.

Okay.

I would say you got $4 million or $5 million and most of the CapEx unless it becomes over $150,000 in most cases we have to expense it. We look at it. We expense it through the income statement. I don't think we, we capitalize a lot of thing other than, one of the major projects. So I would say in our spend which has been, significant over the last four or five years and a couple hundred gross spend that we would see $40 million as a big step down and those are strictly projects that we have and maintenance CapEx could be $4 million to $5 million.

Okay. Great. Then also on the SG&A as far as the components that are fixed and variable, what are the rough break between fixed and variable there?

Well, the biggest piece of SG&A, is your sales commissions become SG&A. You certainly have got your advertising. You know, you've got rent. You've got legal. You have insurance. Interesting we looked at our health insurance over the last 12 months and we feel very positive that we're going to have minimal increases in health insurance based, on our current information. So, that's also one that would be significant and really, your fixed is probably 30% to 40% of your SG&A and variable is 50% to 60%. So if you're looking at a model if you lose margin or gross profit, you'd probably take out about 50% of your SG&A.

Okay, great. Thank you very much, Roger.

Yup. Good.

Our next question from the line of Scott Stember with Sidoti & Company. Please go ahead.

Good afternoon, Roger.

How are you?

Good. You talk about the UK and, how things have trended into October? We still have September was off 21% and it was obviously an important month. What are we seeing right now and what would you expect for the next quarter or so?

I don't see anything turning up. I think that, obviously the Bank of England's down 50 basis points on the lending rate. Our big story there is was getting our used cars in line because we were seeing a 5% reduction in value for probably three or four months. That seemed to have flattened out now because we've gone on the offense to buy, some good buys that we have from the OEMs but I would assume you'd still see that negative of about 20% to 22% off, over the next, 60 to 90 days.

Okay. And with the growth of smart it's obvious that you've still been able to fill the pipeline pretty aggressively. What are the retail numbers look like at smart? What are you seeing at the dealerships and are these cars, holding up better than some of your other vehicles?

Well, let me say this. Every vehicle we're getting, we're getting MSRP, and then, obviously vehicles which fall out we, really call those orphans, ones where the consumer doesn't follow through with his reservation. We have the opportunity to put additional equipment on. What I'm trying to -- we're trying to keep the dealers from, selling these vehicles over MSRP. We've seen some used vehicles actually go through the auction at higher values and I think Dave [Schembry] told me the other day that one of the used car guides showed on a three year car they're looking at somewhere between 60% and 65%, which would be excellent. Now I don't know that as a fact. That's a hearsay, so I don't want anybody to -- Tony said that might be ALG. I'm not sure, but we see good residual value and the good news is that the mix of the cars that we're selling 61% are the smart fortwo coups, the passion coups, which obviously are key for us and most of them have taken the luxury package which adds to the residual of these vehicles in the marketplace where initially we thought that the inexpensive vehicle which was going to be in the 11,000 range, would be 10% or 11% of our mix. It's only four. So it's interesting. In the Bravis, in the up with 1,800 orders, over 60% wanted the convertible. So I don't think it's a price sensitive vehicle. I think it's a vehicle that people want. As I said, it has great fuel economy. I've driven the '09 and the continued enhancements are only going to make it better and I think that, we got a vehicle at the right time at the right price.

All right. Just a couple housekeeping issues. Did you say what the actual dollar and EPS contribution from PTL was in the quarter?

Around $0.04.

Okay. And as far as on the parts and service one last thing, what was the comps for customer pay versus warranty?

You know, I don't have that here, but I think it's up and down based on brand. I just don't have it at this particular time. To me what we're seeing is that you have some manufacturers like BMW that have the full circle maintenance and obviously, that's paid for by the manufacturer and what we are seeing is that the consumer is probably wanting to spend a little less on his car. He might run his tires a little bit longer, doesn't go for the wheel alignment, but, overall I think that our customer repair orders are probably up comparison to warranty because the quality of the vehicles are getting better and better. Bob said to me, Bob O'Shaughnessy said that the PTL EPS contribution net of interest was $0.03.

Great. Thanks a lot.

Thank you.

And our next question from the line of Rex Henderson with Raymond James. Please go ahead.

Good afternoon. I wanted to get back in focus on the SG&A savings you've been talking about a little bit. You mentioned several different sources of SG&A savings, $24 million on an annualized basis from personnel cuts you've initiated in 3Q and then you mentioned $6 million in additional savings or six million pounds of additional savings in the UK. You mentioned some add cost savings that you've done. I was just wondering if you aggregate all that together in addition to further personnel cuts you're talking about, how much are we talking about? How much annualized savings are we talking about in October?

I would say that we could approach $50 million.

Okay. Then the second part of that question is if the sales rate in the United States and the UK remain at September levels or below, do you think that is adequate or would further cost cuts be required to maintain the levels of profitability you'd be happy with?

Well, I think I said earlier that we stress tested, our models and looked at different fluctuations down from, where we are today even the lower margins in the quarter and, we feel that we'll be -- we believe we'll be profitable. Now, obviously I just can't anticipate, all the different levers that you have to pull. The good news is that we saw, interest rates should come down. That's some tailwind for us. I think that at the present time our big issue is consumers coming through the front door. It's not financing. It's not service and parts and the good news is when you look at we're about 70 -- 69% to 70% is our fixed coverage, for the Company. That means that the parts and service cover, 60% to 70% of our fixed costs. So, as we're able to adjust our personnel and some of the other areas, we should be able to dial in a model that, gives us profitability and when you think about it we've taken 24 million out already plus the other things in the UK, I don't think it's a big stretch to get to 50.

Now will we see that in the fourth quarter? The answer is no, but can I tell you we put our final numbers together. We will certainly see a reduction and we really capped any personnel acquisition at all basically and it takes the top people to approve that. We've cut our travel, just another area just to give you an idea. We had our winner circle in Las Vegas, for all our sales, top salespeople and managers throughout the world coming in. We canceled that. Our Board meeting was in New York at Christmas time for our Directors. We canceled that. We're having it here in Detroit. So, we've taken some real action. Travel by our people has to be signed off, at the higher level. So to me at the end of the day, this is something we're just starting. These actions have taken place and, certainly I think we're going to see the benefit of that. It's hard to sit here today and say well, just take your number and take 50 away from it. You know, these will happen over time but I think we're going to try to get ahead of, any more major impact.

Okay. And my second questions relate to the smart fortwo and impact of lower gas. Have you seen as gasoline prices come down over the past couple months, the rate of new reservations and the rate of reservation losses? Have you seen any changes in those as gas prices have come down?

We see obviously, I don't think the gas price -- the biggest spike we had on reservations was back I think in May and June when we got the consumer safety reports really spiked that up. We're looking at about a 29% fallout on reservations and I think basically that's pretty much flat. We'll have to take a look at input on orders because remember, you have a different scenario now. We have cars that are being sold to customers that are coming in that some of the orphan cars are sold to people coming in. So at the time I don't think that, we're looking at a big reduction but let's just say that if we got today no more reservations, we have 58,000 in the -- in at the moment. We take the deliveries of 7,000 to 8,000. That gives us 50. We take a 30% reduction on the 50, what would get us down to 35,000. So, and take a little off that.

I think that our number next year, based on where we are, we're solidly in 25 to 27,000 then just to reinforce that when you look at the Bravis version that we went out and within eight hours we had reservations for every -- to reservation holders. They reconfirmed and wanted to buy a car, with more costs to it. So I think we've got the right car at the right time and this isn't a sign on buyer. This is someone that sees this car as a Metro car, certainly from a 41-mile per gallon. We have an electric version of that being tested today in London, 150 vehicles. We expect to bring some of those into the US and I think we've got a brand that will sustain itself. We had a meeting with all of our dealers in Detroit a couple weeks ago. You know, the average investment was about 700,000 across 72 dealers, very thrifty for them. That meant CapEx. That meant everything and I that I that they're seeing at the moment selling the cars at MSRP that they have the ability to make money and to me the biggest test is they all want more cars.

Okay. Thank you.

Thank you.

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

Hi, Carl.

Hi, good morning, Roger. I got a question relating to your domestic franchises. Your competitors have written off their values. Didn't see any mention do you have done the same. Can you indicate whether or not you have the same kind of problem with yours and, if not, how come?

Well, as I think I said it in the prepared text that 7% of our revenue in the US was domestic and on a worldwide basis it's 5%. Obviously we have franchise value on our balance sheet, but we have under $5 million on our balance sheet at PAG for domestic franchises, so it's no risk to us at all.

Thank you, Roger.

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

That's all I have and thanks for your support. We'll talk to you next quarter. Thank you.

And, ladies and gentlemen that does conclude your conference call for today. You may now disconnect.