Penske Automotive Group Inc (PAG) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group second quarter 2009 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through August 5, 2009. Please refer to Penske Automotive's press release dated July 10, 2009, 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, sir.

Thank you, John, and welcome everyone. A press release detailing Penske Automotive's second 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 JD Karl, our Controller.

Before we begin today, I'd like to remind you that we may make forward-looking statements relating to Penske Automotive Group on this call. We caution you that these statements are only predictions and are subject to risks and uncertainties relating to economic conditions, interest rates, consumer credit, confidence, spending, and ongoing restructuring of the US-based automobile and auto parts sector, and other factors over which management has no control. Our actual results may vary materially from those predictions. Any such statements should be evaluated together with the information about Penske Automotive in our public filings including our annual report on Form 10-K. During this call, we may discuss certain non-GAAP items including adjusted income from continuing operations and adjusted earnings per share from continuing operations.

At this time, I would like to introduce the Chairman of Penske Automotive, Roger Penske.

Thank you, Tony. Good afternoon, everyone. Thanks for joining us today. Today, we reported second quarter income from continuing operations of $19.8 million or $0.22 per share. The company's performance in the second quarter represents an improvement over the first quarter and exhibits resiliency of our business model. And I think it also shows that the retail auto business through these tough times can sustain its profitability. As you know, the economics in both the US and the UK continue to struggle and, as a result, the US new vehicle industry unit sales declined 32% and market registrations in the UK declined 21% compared to last year. Our revenues declined 30% compared to the second quarter last year. However, excluding the foreign exchange rate effect, the decline was 24%.

Despite the difficult operating environment, I'm encouraged by the performance of our business. The cost saving initiatives we discussed with you on our last call contributed to our positive earnings results. In fact, our SG&A was down $65 million compared to last year. More importantly, we've seen an improvement in our results versus the first quarter of this year.

The following are some highlights of our second quarter performance compared to Q1. New and used unit retail sales increased 3% to almost 60,000. Total revenue increased $164 million or 7.6% to $2.3 billion in the second quarter. On a same store basis, new units were up 7.8% and used units were down 3.5%. Same store retail revenues increased 8.1% versus the first quarter and same store F&I was up 12.2%. It is also important to note that our service and parts business remain resilient at 1% increase on a same store basis versus the first quarter. We achieved the increase in our service and parts, but it's despite a continued reduction in the predelivery and inspection through the decline in our new vehicle inventories.

Our revenue mix in the quarter, second quarter in the United States was 64%. Internationally was 36%. When you look at our brand mix, as far as revenue is concerned, domestic Big Three was 5%, volume foreign was 30%; and premium was 65%. This is pretty much consistent with last year's Q2 and also Q1 of 2009. Our mix adjusted operating income was 54% in the United States and 46% internationally.

During the quarter, we realized higher margin in most areas of the business compared to the first quarter. New vehicle margins increased 60 basis points to 7.9% used vehicle margins remain strong at 9%, and F&I per unit increased $76 per unit or $923 per unit (sic -- see Press Release). Our service and parts margin increased 100 basis points to 55.1%. In total, our 17% margin was consistent with Q1 due to an increase in lower margin vehicle revenues as a percentage of our total revenues.

Moving on to SG&A, the cost curtailment efforts we've discussed on the last two earnings conference calls continue to benefit our operating results. As I noted earlier, SG&A spend is down $65 million versus the second quarter last May, and on a same store basis, it is down $74 million. More importantly, our SG&A as a percentage of gross profit improved 186 basis points versus Q1 to 83.2%. Our tax rate for the quarter was 34.2%, reflecting the relative strength of our operations in foreign markets with a lower tax rate. We currently expect our annual tax rate to be approximately 36%.

Let me move on to the balance sheet. Our inventory is in great shape today. In fact, we're experiencing tight levels of inventory due to the worldwide production cuts over the last six months. Total vehicle inventory was $1.2 billion, down $91 million since March and down $324 million since the end of last year. If you can compare it, including FX changes, it was down $400 million from the second quarter of 2008.

The end of the quarter, our worldwide days supply of inventory also improved. New was at 65 days and used was 34 days. Our CapEx year-to-date -- this is gross CapEx -- was $44 million. We currently expect gross CapEx to be in the range of $70 million to $80 million. We've not executed any sales leaseback or transactions during the year, but we'll continue to evaluate opportunities as the market develops.

Turning to our liquidity and debt, we have $1.2 billion of floor plan notes outstanding, and of the $1.2 billion of floor plan, approximately $1 billion is with Toyota, Honda, BMW, Daimler, and Audi. We also have approximately $962 million of nonvehicle debt at the end of June, an additional $361 million of availability under our credit agreements, and at the end of the quarter, we had nothing outstanding on our working capital line. At the end of Q2, we had $70 million. So, we had a gain there. I would also like to point out that we're in compliance with all of our covenants under our agreements, none of which mature before August of 2011.

Turning to our securities repurchase programs, we did not repurchase any of our securities during the second quarter. We currently have $44 million of authorized availability remaining under the program to repurchase stock, debt, or convertible debt.

Turn to smart USA. During the quarter, we wholesaled 3,659 smart fourtwos compared to 7,700 during the second quarter of last year. For the year, we expect a wholesale approximately 18,000 smart fourtwos compared to 22,000 plus in 2008. Like the retail automotive segment generally, the microcar segment has struggled. Smart fourtwo sales are down 22% so far this year, which compares to a 38% decline for its comparative vehicle group.

In response to these challenging conditions, the smart team has initiated several finance campaigns to help boost sales. We're expecting the Cash for Clunkers program to positively affect sales as we go forward. In fact, we've delivered 120 units under that program so far through our dealer network. I understand there are 190 deals pending on the Cash for Clunkers initiatives. Very positive for us. Further, smart has initiated cost saving initiatives that are expected to reduce annual SG&A expenses by approximately $3.5 million.

Let me turn to the GM and Chrysler bankruptcies. I would like to comment on the impact of GM and Chrysler bankruptcies on our business. Despite the numerous closures announced by both companies, we'll only use one GM franchise in 2010. We expect fully to utilize that facility for other franchises, so we do not expect any significant financial impact. Unfortunately, two Chevrolet franchises we sold in the fourth quarter of 2005 were casualties under the GM bankruptcy, as the operator was told they'll lose the franchises in 2010. We remain liable for these lease payments relating to those facilities. Based on the loss of those franchises, local market conditions, and the facilities in question, we provided an estimate of costs bearing to those properties in our Q2 discontinued operations. We do not currently expect any incremental adverse impact from the bankruptcies.

Let me turn to Saturn before closing, and I'll make a few comments. As you know, we entered into an MOU with GM to acquire certain assets relating to Saturn. We're making good progress with our due diligence, but we're limited in what we can say about the transaction. What I can say is that we'll operate Saturn similar to smart as a separate distribution company, whereby we'll be the exclusive distributor of Saturn vehicles in parts of the US and potentially in Canada. We're not buying any manufacturing assets, nor do we intend to enter the manufacturing business. We do not expect to buy any of the existing Saturn retailers. As you know, Saturn has a world-class dealer network and we hope most of them will join the new company. As a matter of fact, we expect to offer all Saturn dealers a new sales and service agreement. At the closing, we'll buy the existing Saturn parts inventories and potentially a limited number of vehicles. We hope to close this transaction subject to the completion of due diligence -- obviously we have regulatory and other approvals -- sometime at the end of Q3.

Thanks for your attention. I would like to open it up now for questions.

(Operator Instructions). First to the line of Rick Nelson with Stephens, please go ahead.

Thank you and good afternoon. Congratulations, Roger.

Rick, thanks.

Do you think the used car performance is sustainable, given the price rise that we're seeing at wholesale -- higher sourcing prices that you need to pass along as well as the bank and their LTV requirements?

Let me first say that we saw higher margins on used cars, and certainly as we see the marketplace, what's happening, we're going to see less used cars available because we didn't have sales in 2008 and we see that in the UK also. There has been two years of downward new car sales. As I see a supply of used cars really tightening up, you're going to see obviously the wholesale price going up, which I think is good in one case because it gets the transaction closer on a used to a new price. So we'll be able to generate new sales.

Overall, we've seen our certified business go up. There is no question that we'll start seeing probably some limits from the standpoint of advance rates from our lenders. But at the moment, I think it has been good and I don't see it changing. Last year at this time, I talked to our guys in the UK -- this morning, they started to see at the end of June, used car prices falling. They don't see that now.

So, I see a strong wholesale market. If you look at our wholesale, we lost money on wholesale last year and made money this year. I think when you look at the gross per unit year-over-year without foreign exchange, we were up $385 per unit. So, it was significant.

I would also like to ask you about regional areas of strength and weakness and specific commentary on California and Florida, if you could?

Well, let me say this. Our Florida business has been tough. We've done some reorganization down there with some of the brands that we have. But I would say southern Florida hasn't really improved. I know that there's more action there based on Cash for Clunkers. I would say California is a little bit better. We really are in San Diego, and that market is staying -- even through the downturn has been probably one of our best markets. Northern California has certainly gotten better. Vegas is still tough. And we experience in the Midwest the tougher markets. So, overall, I would say Florida is still tough and California better. The Northeast, basically, with the financial markets in a meltdown, we see some pressure in Jersey City and the areas close to New York. United Kingdom, on the other hand, continues to perform well for us.

Thank you for that. Also, would like to follow up on Saturn. I realize there's lots of similarities to smart, but there are a number of differences. If you could size up those differences? Any look at potential structure of the deal would be helpful.

Well, we'll form a stand-alone company that will capitalize for Saturn as we have in our smart operation. The one difference that we have today and -- basically, the aspects of the deal are confidential. But from an overall basis, the difference is we had to build an organization with smart, go out and actually register new dealer candidates and pick them. With the operation on Saturn, we'll have roughly 350 rooftops and 200 owners. Now, they'll be given an agreement, sales and service agreement for the future. And this is a distribution business, as I said earlier, not a manufacturing business. So, similar to what we have at smart, we'll have more people obviously because you've got units in operation of over 3.5 million, which has been registered before. And I think when we started out smart, we had no units in operation.

So, I think that we'll have to have a risk associated with this, obviously, because we started with Daimler with our friends smart. And we're going to have GM to start with in this business and then we'll be moving on to another OEM in the future. So, I would say those are some of the key points that would be different.

Do you have that OEM lined up now post-GM?

The answer is no. We've had conversations. There's been speculation, domestically here and Internationally. We're not prepared to confirm or deny anything today relative to who that partner might be.

There's some speculation as to purchase price out there, too. I'm wondering if you could comment there.

That's confidential based on our agreement with GM at this point. Obviously once we get to -- further along the due diligence and we've got a deal, we'll make it transparent to the market.

Very good. Thanks, Roger.

Thanks.

Good luck.

Our next question is from Joe Amaturo with Buckingham Research. Please go ahead.

Hi, Joe.

Hi, Roger. How are you?

Good.

Couple of questions sticking with Saturn. Could you give us your thought on what the recourse for the dealership, the Saturn dealerships would be in the event let's say two or three years from now, you elected to exit the business or something doesn't go exactly as planned?

Well, as you know, we are providing the current or the new Saturn retailers new sales and service agreement under our terms and condition. And at the time that they sign up, they have the right to accept or reject this agreement. I'm sure while many of the laws differ state by state, the agreement that we have to offer will limit our liability subject to the requirements in each of the states.

Okay. And then sticking with the structure, I know you're limited in what you could say and what you can't say, but would it be inconceivable to assume that PAG owns less than 100% of the new separate entity?

Well, we've done JVs before and I would say this -- that if we have strategic people or businesses that we think that should be -- own part of that business, we certainly will look at that. But at this particular time, we're still in the formative stages as far as what the capital structure will be and if there will be any minority shareholders. Obviously, that will be transparent once we get going.

Then with the business you have right now, I mean it looks like CapEx is tracking slightly ahead of what I had thought about. How do you think that goes for the second half of the year?

Well, let me say this, just to go back. We had talked in the neighborhood of net CapEx around $40 million at the beginning of the year. Since then, we've had a little better market in the UK. There was two acquisitions we made. There is some CapEx associated with those. We also had an opportunity in Cleveland where we have the opportunity to pick up a shopping center and redo it for our Honda dealership there.

So those are in our plans. We're looking probably at between $25 million and $30 million in the second half. But also, we're actively pursuing some sale leasebacks both in the UK and here. Also in Audi at Turnersville, we were able to add that franchise, which had some CapEx associated with it. But we're on a real decrease there when you look at the annual spend we've had over the last couple of years. And a lot of these projects are just finishing up that we had online, which we'll complete here in the next 30 to 60 days. But I think we have it well under control.

Okay. Then just one last one. Given this potable debt issue that you have out in the future and given the stock performance, are you entertaining any capital transactions to better -- to address that potable debt in the future with some sort of equity transaction or -- ?

I would say this, that we're always looking. Now that the markets have opened up, our share prices -- obviously we're very happy that the sector, not just us, but the whole sector has moved positively. We're going to look at options over the next 60 to 90 days obviously.

Okay, great. Thank you. Good job in a tough environment. Thank you. Thanks a million.

We go to John Murphy with Bank of America Merrill Lynch. Please go ahead.

Good afternoon, Roger.

How are you?

Good. Just thinking about cadence through the quarter. Just wondering if you could talk about it, because it seems like from the first quarter to the second quarter, the environment has gotten better. Obviously you're cutting costs further, so things are going pretty well. Just if you could think about the months -- then maybe even into July, how you're seeing the business shape up, particularly toward the end of the month with the Cash for Clunkers?

You use the word cadence. I would use the same thing. We saw our new and used retail business get better April, May and certainly it was better in June. We probably were off about 20% in June versus the same month a year ago. One of the good things is we did our homework before the call. In June, 24% of our dealerships in June of this year had retail sales increases versus the same period last year. So that has to show that things are better.

I think the showroom traffic is off probably 25% now. Certainly, this Cash for Clunkers has changed the ball game here over the last six or seven days. I mean, we've seen traffic we haven't seen before. So, the issue there is how do we handle this traffic? There's lots of confusion over MPGs on vehicles that can be traded that get $3,500 to $4,500. Accessing the Treasury and the government at the register has been a real burden for the dealers. And now, my understanding from our guys, it could take 15 minutes just to get one deal approved through the system.

So, I'm sure we're going to be working the night shift to try to get all of this stuff through because, to me, if you just did the math, if they said $1 billion and you've got 250 vehicles at $4,000 per vehicle, you've got 250,000 vehicles. We've got 20,000 dealers. It doesn't take 20,000 dealers to do 10 or 15 deals and the deal is shut down. I know in the UK and in Germany, the program was much larger. We've had probably, this latest count last night, somewhere between 1,000 and 1,500 deals that we know are Cash for Clunkers. We've had some special programs. In fact, we had a clinic in Austin, Texas, asking people to come in to understand what it was about. We had a smart USA advance program which I think was good. And a number of e-mail blasts -- in fact, smart USA, we had an Internet action site. We had 35,000 page views and we ended up with about 3,000 leads, which obviously has been converted now into roughly 300 deals.

So, I would say that's helping the market. And it was a stimulus in Germany, it was a stimulus in the UK. I would have to say I hope this last -- I don't know how we're going to get through the process here. The paperwork is probably my biggest concern now for us, and I'm sure the guys and all of the other retailers out there. But the market is better. I would say that the parts and service business is continuing to be consistent and that's giving us the fixed coverage. When you take your fixed costs and structural costs down, our coverage is better. So, our model starts to work during these kind of times.

Roger, maybe just following on to that, you know, obviously you've had some experience with these scrappage programs or Cash for Clunkers program in Europe. Do you get the impression that we're seeing a surge of true incremental demand in interest in the US or is this just pull forward demand? Because it seems like the residual values, the used car values of $4,500 or less is probably bringing in an incremental consumer. Is that what's going on? What are the buyers looking like, do you think?

The buyers that we have seen have pretty good credit. These are cars that have been handed down through the family, or some way, and these cars are coming in. And we see credit being a little bit better. You can say it is a pull-ahead, but what I think it has done -- there's more noise about Cash for Clunkers and someone thinking about buying cars. I think it is a positive. To me, we know that the UK, it was 2.1 million units. They were thinking it would be 1.6 million for the year. Now, they're looking at 1.8 million, and when you look at traffic, for us this last weekend is one of the very best weekends we had all year. So, sure, it is a pull-ahead, but we need something to drive an interest into the dealerships. So, when you're talking about a 10 million SAR, we need a big pull-ahead to get to 16 million.

Let's hope we get there, soon.

Yes.

Then just lastly on Saturn, I hate to beat a horse here, but I mean you were mentioning that you have the agreement obviously or you're working on the agreement for the US. Is there the potential to launch this brand in the UK and Germany where you have a presence already and really expand over there? And also, what risk do you see with this in the near term with GM? Obviously, they can be a tough customer in deals like this. What are the near term risks that you see maybe in dealing with them for the next two years as sort of a place where you would service the people from?

Well, I would say this -- that our relationship with GM has never been better. We, in 1988 -- 20 years ago, we had the opportunity to do the Detroit diesel deal with them which went well. And I think that some of that benefit is getting us in the chance to have this transaction. So, I see no risk -- GM certainly, the plants we're interested in sourcing vehicles from -- Fairfax, Kansas, Mexico on the Vue, and certainly Outlook at the Delta plant in Lansing. Those are going to be strong plants for them because they're building sister products. So, I see that going on well.

We have, today in the negotiations, we have these service agreements which we're trying to go through, because you just can't unplug Saturn overnight, as it is embedded in GM, and turn it on the next day. So, these transition agreements we're working on today, our teams are working together. I would say GM has been very open, obviously -- one of the key things had to happen, they had to have the bright line from a bankruptcy perspective and then they could focus on this.

As far as the product, as we announced earlier that we would have the rights to the Saturn name and who knows, maybe if we're successful completing this transaction that we could use the Saturn brand somewhere else in the world. But at this point we're dealing strictly on this market -- we're looking at Canada at this point. But right now, the focus is on North America.

But you would wholly own the brand globally? It would be your brand?

Absolutely. All of the things around the brand, that value which we think is part of this transaction, is certainly there. And then, of course, we have the ongoing parts and service business which is one of the benefits. I don't know if I said that with Rick or someone asked the question. That's one of the benefits of this transaction because as you start a new brand in this market and don't have any car part, you wouldn't have the parts and service revenue for your retailers. That's one of the things that we have here because we've got 4 million units in operation.

Great. Thank you very much, Roger.

Great, thanks.

Next, from the line of Matthew Fassler with Goldman Sachs. Please go ahead.

Thanks a lot. Good afternoon.

Hey, Matt.

Not to bore anybody, but I want to take a look at the geographic mix of business and just think about the financial performance that you experienced in the US versus the financial performance you experienced in Europe compared to last year. If we could talk about perhaps the same store sales trends and the year on year profit trends that you saw in those markets?

Well, it is hard to give you here the specifics, but I would say this -- that from a UK perspective, our same store business was pretty consistent, to the first six months a year ago. I think -- we know the Northeast has been tougher. The Midwest has pretty much been the same, continues to be down. There's lots of unemployment -- when you think about the market we're in here in the Midwest here in Detroit, we've got 15% unemployment in Michigan and where I live, four miles north in Pontiac, it is 25%. Retail revenue was down 28% in the US and internationally was down 36.1% -- so, when you look at revenue. But what I really look at is the bottom line. I would say that the expense reductions in these markets has given us the -- our ability to generate a profit.

Got it. Okay. I guess the second question I would ask you relates to Cash for Clunkers. And other than smart, where clearly the price point is appropriate for the vouchers and for the customer, how would you think this would impact your luxury dealerships, if at all? That's 65% of your mix. Are they seeing flow as well? Or are they out of the picture as it relates to that program?

Well, I think that the key thing here is we've seen this program both in Germany and the UK. We did not get the big uptick in the premium luxury and those markets because most of the people trading in these kind of cars are not going to step up for probably a premium luxury. Sure, they're the one series, you've got some of the lower series in the premium luxury, you might see that though. I think it is a volume for, and it is certainly going to benefit the Big Three domestic players.

Interesting, when you look at our inventory now, too, we've got an inventory shift that primarily now is cars versus trucks. So, I think everybody is in a pretty good shape, too, because most of the cars that are being built in the last six months, people have been looking -- at least the manufacturers, the OEMs, cars that have better mileage, and probably lower MSRP. So, I think we've managed ourselves from an OEM inventory perspective into the marketplace, and the Cash for Clunkers is going to fit nicely. The question is it going to come and go so quickly we won't get the full benefit of it because it is only $1 billion. To me that seems light compared to what they had in Germany and the other countries. So we'll wait and see.

Roger, my last question. Your new car gross margin rate improved nicely. It is the best it has been in three quarters, almost back up to 8%. It sounds like industry inventories are coming down to rational levels. Do you think that margins can break through the 8% level again and stay there or would there be reason for more volatility on the new car side?

I've got two comments every time I talk to our key guys. That's gross and CSI. I can tell you with a market that's been slowed down, we've got to get paid for the cars we're selling. I would see that going through 8%. There's no question when you look at it. And to me, we have the ability to manage it. That is strictly managing it.

If production speeds up and all of a sudden we get loaded with vehicles, and then we -- the consumer demand would slow way down further than it is, you might see a downtick. I think right now, we saw good management of inventories in the UK and we felt inventories and grosses were in good shape. Now, I understand they're going to push hard in the second half, so there might be some deterioration. But I think at the moment, 50 basis points, I think is really -- should be the responsibility of the management.

Got it. Thank you so much.

Good.

Your next question is from the line of Lucy [Minah] with JPMorgan.

Hi, Lucy.

Hi, this is Himanshu Patel, JPMorgan. Two questions on Saturn if you could answer them. When you think of the negotiating parties at the table, whether it is GM, the other OEM or OEMs you may pair up with, or the dealers, could you at least shed some color on where are the negotiations the most stickiest and the hardest to get through right now?

I think I said to someone if you ask me about negotiations, I think that we're past midfield with GM. And there is always issues you have to deal with as you go through this. But I would say they're progressing well. And I think that, at this time, we're basically -- we're in cadence on where we're going. It is going to take time.

One of the things that had to happen, GM had to get through their bankruptcy. That was the first priority. Now, they're looking at the divestitures, Hummer and Saab and Saturn, et cetera. We've said to I think everyone that our goal is to close this transaction by the end of September. We're prepared to do that if we can get all of the regulatory and other things. We have Hart-Scott-Rodino we have to file, et cetera. There are other things we have to do.

Okay. And then also on that same line of thinking, just given that you would have to enter into many of these transitional service agreements with GM and maybe the vehicle pricing terms with GM, maybe different than what it would be with the eventual future OEM. Is it possible that you would enter into a deal on Saturn that would actually be dilutive to earnings in the initial few years for the hopes that it could get better down the road? Or are the financial metrics you guys are looking at such that you want this thing to actually add to the bottom line from day one?

Well, I really can't give you the specifics of the transaction obviously because we're in due diligence. But I would hope that if we went into this project and transaction that it would be profitable for the company. But again, I can't measure the markets that we're going to be into starting in the fourth quarter. We'll have two years, minimum two years with GM on product. It depends on do we have a domestic or an international supplier of vehicles to us in the future. So, there's plenty of things to deal with.

Thank you.

We have a question from Scott Stember with Sidoti & Co. Please go ahead.

Scott, how are you?

Good. Yourself?

Good.

Just back to the Cash for Clunkers, I know you said you're not expecting a big benefit on the premium side, but have you seen traffic just increase just as people are coming out to the showrooms?

Absolutely. As I said, I thought -- maybe I didn't make it clear, I think there is a benefit, and we do see more people out thinking about buying cars. To me, that's positive. So, it has absolutely stimulated the market. I'm not sure -- I haven't talked to many of my peers, but from what I can see in the newspaper, it has been key.

All right. Can you talk about the customer pay business versus warranty on the parts and service side? What were the comps there?

As we looked at our customer pay for -- we were down probably about 5% in the US, and warranty, we were up almost 2%. And I think that was consistent on warranty in the UK. We were down in customer pay probably just around 10% in the UK. Then you've got to use the FX on that. So, I can't give you the tight numbers. But overall, you have some warranty which is involved in these full circle programs. As you know, our BMW warranty was cut, and that probably had a $2.5 million impact on us on gross profit in BMW in the first six months.

And on the cost cut side, you've done about $66 million at least?

$65 million if you looked at the financials today. Year over year, it is $65 million. On the same store basis, it is $67 million. We're on track. I think the guys have done a tremendous job.

What's the full year goal again?

$100 million.

Okay.

Remember when we get into Q3 and Q4, we got to realize, some of the cuts started to happen there. But I think it is important -- it will have some increase in SG&A because part of that cost is variable. And as our gross goes up, you'll have some of the cost. So, the key thing is we need to have SG&A as a percentage of gross going down. I think we had 250 or 300 basis points in the quarter. That's going to be the real test as we go forward.

Last question, circling back to the Cash for Clunkers. Can you talk about how you would expect to impact your late model used car business, since those cars are not included in the program?

Well, I think probably what it's done right now, we'll have -- the key thing to remember is we have to take these vehicles, I have a metric which you probably haven't heard. You can't move this vehicle more than ten miles, because when the customer signs in with the vehicle, if it has 100,000 miles, it can't have more than 100,010 when you get it to the junkyard. So there's going to be no reselling of these cars, even though some of them in the old days, you might have sold as a transportation piece. That's coming out of the market. I think the standard used car business though, we're going to -- we're still looking for trades. I don't think that unless there's such an attractive new car pricing out there, I think I've seen GM this morning, the Wall Street Journal said they're going to get back into leasing. Then you might see a little more impetus in the new car side. Right now, I think that used vehicle prices are strong. We've certainly seen no deterioration in the UK, which is key for us because last year, I think that you know, we saw UK prices go down quicker. And I think we're going to see the price stay firm for a couple of years.

All right. That's all I have. Thank you.

Great.

next, from the line of Ed Antoian with Chartwell. Please go ahead.

Hi, Ed.

Parts and service, just a little more detail. You talked about the weakness in new car prep. Can you give us that negative comp number without new car prep?

Let me get -- why don't you talk to Tony Pordon on that? I don't have that with us here today. When you think about the new and used car vehicles down, it is a high margin part of our parts and service, too.

That was the other question I wanted to ask just on margin mix in parts and service. What did you do, what happened to get it to start to improve again?

Well, I think you're not dollar for dollar labor to parts. Typical parts margins are in the probably 30% to 35% and then your labor is -- could be from 50% to 60%. So, when you get the mix, we were at 55%, and today, we see that pretty much consistent. What's going on for us is we're getting utilization. Today, we can see some of our mechanics where they work a 40-hour week with the ability to turn more hours. We're getting utilization in some of our bays at 120% to 130%, which is driving more gross for us overall.

Thank you.

(Operator Instructions). We'll go to the line of Chris Sommers with Greenlight. Please go ahead.

Hi, Chris.

How are you?

Good.

I've noticed your used margins are tracking very healthily. I know you talked about new vehicle margins earlier. But just wanted to better understand what's helping out a lot on the used margin side?

Well, I think that we have been focusing on used based on where the market was. We didn't have any new car business and I think that the sales guys are motivated to grow the used car margin. And I think, again, that's a management piece of that. When you look at overall, the big increase on that -- we've always been lower in the UK. We were up about 300 basis points in the UK during the quarter and the US was down about 10.

That's on a margin basis?

That's on the gross profit, yes. On a pure dollar and cents basis, we were up about $400 per unit in GP across both the domestic and international markets.

Got it. When you said US was down 10, you mean 10 basis points?

Yes.

Got it. Secondly, the fleet and wholesale gross margin, which has historically run negative, is running nicely positive this year. What's behind that and should that continue?

That's just used vehicle prices. That's just strictly, we're able to get more money as we wholesale -- we cannot certify, and because we're so committed to [CSI], have to be so careful just to sell cars and then have them come back in 30 to 60 days. So, we've had the ability to sell some of the vehicles. There is a lot of people want those. So, where we had negative losses, maybe on wholesale, we're seeing -- we have our own in-house auctions we're running in many of our markets. So, they've been very efficient and we've been getting a better return on those auctions. And what I'm really saying, the market is strong on any used vehicles. We've seen seen it on the clunkers, if you want to call that.

Got it. Okay. That's all I had. Thanks a lot, guys. Congrats.

Thanks, Chris.

Mr. Penske, no further questions in the queue.

Okay, John. Thanks, everyone, for joining us today. We'll talk to you at the end of next quarter. Thanks, bye-bye.