Penske Automotive Group Inc (PAG) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Penske Automotive Group first-quarter 2010 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through May 7, 2010. (Operator Instructions). 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 and welcome, everyone. A press release detailing Penske Automotive's first-quarter results of released this morning and is posted on the Company's website at www.penskeautomotive.com. Participating with us on the call today are Roger Penske, our Chairman; Bob O'Shaugnessy, our Chief Financial Officer; and J. D. Carlson, our controller. At the end of the call, we will open the line up for questions after, which we'll be available by phone to answer any follow ups you may have.

Before we begin. I would like to remind you we may make forward-looking statements relating to Penske Automotive on this call today. Actual results may vary because of risks and uncertainties, including external factors such as consumer credit conditions, interest rate fluctuation, changes in consumer spending, macroeconomic factors or adverse conditioning affecting a particularly manufacturer or parts supplier and other factors over which management has no control. 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 will be discussing certain non-GAAP items, including adjusted income from continuing operations and adjusted earnings per share from continuing operations. Adjusted earnings discussed on this call exclude after-tax gains of $0.4 million in the first quarter of 2010 and $6.5 million in the first quarter of 2009 relating to repurchases of our 3.5% convertible note. 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'd like to turn the call over to the Chairman of Penske Automotive, Roger Penske.

Thank you, Tony, and good afternoon, everyone, and thanks for joining us this afternoon. Today we reported that adjusted income from continuing operations more than doubled to $20.4 million, or $0.22 per share, compared to $10 million, or $0.11 per share last year. I and the team are extremely pleased with the performance of the business in the first quarter. Despite challenging weather conditions in many of our markets the improving retail environment contributed to our operational performance. In the quarter we generated double-digit same-store retail revenue growth; our premium luxury up 17.6%, our volume foreign up 14.8%, and our domestic was up 16.9%. We realized significant same store growth in many of our key markets. In the US we saw increases in Florida, up 29.7%, Rhode Island was up 20.3%, New York/New Jersey was up 13.0%, and Arizona was up 12.1%, so again markets that we had some troubling times over the past twelve months showed good increases during the quarter.

On the same-store basis the US was up 14%, the UK was up 20.7%. We also continued to benefit from our cost saving initiatives that we implemented at the end of 2008 and early in 2009. In fact, as noted in our press release our SG&A decreased 182-basis points to 83.1% of gross profit compared to last year. We also benefited from a decrease in interest expense as lower interest rates and a reduction of our non-vehicle debt produced solid benefits for our business. Let's look at our operating results for the quarter. Retail units were up 9.2% at $63,000, new was up 17.7% and used was flat. Our revenues increased 15.4% compared to last year, and on the same-store basis total retail revenues increased 16.4%, including double-digit increases in new vehicle and used vehicle and F&I revenues. On a same-store service and parts basis we were up 1.4%. Excluding the effect of foreign exchange rates, same-store retail revenues were up 13.1%.

When you look at our revenue mix for the quarter, in the US it was 61% versus the international at 39%. And when you look at the brand mix, the domestic big three were 5%, pretty much similar as it'd been in the past, volume foreign at 30%, and premium at 65%. When you look at our operating income, United States was 43%. In fact, that was up from 39% in Q1 of 2009 and 57% internationally. During the quarter gross profit was up $43 million, and our gross profit margin was at 16.5%. I am really please that had our retail margin remained strong in the quarter, including new vehicle margins of 8.2%. That was up from 7.3% last year. Used vehicle margin was at 8.1%, down 100-basis points from last year when it was 9.1%.

The good news is the gross per transaction increased compared to last year. New vehicles were up $487, used up $39, and F&I was up $104 per transaction. Our service and parts margin came in at 56.4% versus 54.1% last year. This includes the impact of the Toyota campaigns. During the quarter we completed 56,000 recall actions relating to the acceleration and sticky pedal issue at Toyota. We estimated these actions generated about $4.5 million in service revenue during the quarter. During the quarter SG&A was $29 million. It was up largely due to an increase in compensation relating to the increase in gross profit. However, I mentioned that SG&A has declined 182-basis points as a percentage of gross profit to 83.1%. As a result, operating income increased 34% to $57.2 million, and our operating margin increased 32-basis points to 2.30.

Let's take a look at the balance sheet. Total inventory was $1.3 billion, up $78 million since December. That included $66 million increase in new and $12 million in used. On a same-store basis total vehicle inventory was up $43 million from December. As we approach the summer selling season I think this is certainly a good place to be. On a same-store basis vehicle inventories are down $12 million from last March, new down $73 million and used up $61 million. At the end of the quarter our worldwide day supply of inventory was 45 days and that in comparison with 52 at the end of December of 2009 and 69 a year ago and on the used side we were at 32 days in comparison to 41 days at the end of the year and 32 days at the end of March a year ago. So again, our worldwide days supply is in excellent shape. Looking at CapEx, our gross CapEx was $19 million including $13 million in the US and $6 million in the UK for the quarter. We expect our gross CapEx to be approximately $60 million in 2010.

Looking at the liquidity and debt as of March 31st we had $875 million -- $879 million of non-vehicle debt outstanding, which represents a reduction of $67 million during the first quarter. This reduction is in addition to the $117 million reduction during 2009. As a result, our debt-to-capital ratio is now 48% compared to 57% at the end of 2008 and 55% in March of last year. As of March 31st we had $366 million of availability under our credit agreements.

Let me make a few comments on our convertible notes. As you know we have 3.5% convertible notes that mature in 2026. During the quarter we repurchased $71.1 million amounts of these notes. In total we have repurchased $140 million principle amount for $123.2 million. As a result, we currently have $235 million principle amount of notes outstanding. These repurchases were made using cash flow from operations and existing working capital. As you know, the holders of our notes have the right to put them in April of 2011, which we probably expect them to do at this point. We currently have the ability to refinance the remaining $235 million of notes with cash flow from operations, existing working capital, and borrowing capacity under our US credit agreement. We're also evaluating other capital market transactions that will provide us the opportunity to refinance the convertible notes. In either event we're currently very comfortable that we have sufficient liquidity to finance the retirement of the notes in April of 2011.

Looking at acquisitions, during the first quarter we acquired three franchise that is we expect will generate annualized revenues of approximately $100 million. In total we paid $3.5 million of goodwill in connection with these acquisitions, it was about two times multiple. Also during the first six months of this year we expect to open five new open points; three Mini stores, two that open now, one in Tempe, one also in Austin, Texas, and a third will open in San Diego. We just opened last week an Audi and Mercedes store in Dulles Airport, Chantilly, Virginia, which we expect to generate $150 million from these three -- or these new acquisitions, these five open points over the next twelve months. And obviously it takes probably about six months for them to really generate any bottom line, but again, focused in right markets with the right brands. Obviously we continue to be selective in our acquisition activity. We expect to be more opportunistic as we look at acquisitions this year that would complement our existing brand mix.

Let me turn to smart. During the quarter distribution margin was negatively impact by incentives of the 2009 model year inventory. The distribution business lost $0.04 per share in the first quarter, but I have to say we implemented a number of initiatives that have reduce the our inventories and operating costs. We've also launched a number of changes to smart marketing programs designed to highlight the smart for two, including we have a new test drive program, we're back on our road show, we have a major digital campaign, we've got product placement. We've really increased our advertising in the lifestyle media. In March we held a dealer meeting in Phoenix, and I am pleased to say that the dealer body was enthusiastic about the forward initiatives.

In addition, I am not sure people have caught up with it, but we believe the recently announced Daimler-Renault alliance, which will result in long-term product enhancements for Smart, will be really key to us as we go forward over the next 24 months. Today Jill Lajdziak, our GM and President, is focused on balancing our inventory with demand while working to enhance the smart brand awareness. We believe the long-term success of smart in the US is going to be great, and I think we're right on the right track. Obviously we had over inventory on 2009s, but I think we have taken that into consideration with our counter measures.

Let me talk about Toyota before I finish. I'd like to address the ongoing Toyota recall campaign. As I mentioned during our call in February, our customers have been very understanding during the process, and Toyota has been focused on making sure its customers are treated well. I believe both of these statements are still true. Toyota took aggressive actions to drive sales in March, including attractive incentive and financing offers. Toyota customers responded, as you can see from all of these actions. Despite the stop sale announced by Toyota in February, our results for Toyota were strong in the first quarter, as our new unit sales on a same-store basis increased 17%. Toyota has extended these intentive offers into April, and I think now into May, which continued to drive increased traffic and sales activity at the stores. We expect to continue servicing through the recall activity through the end of the second quarter, and we are certainly fully committed to the Toyota brand.

Again in closing, thanks for your attention and we'll open it up for questions.

(Operator Instructions). First go to the line of John Murphy with Banc of America- Merrill Lynch. Please go ahead.

Good afternoon, Roger.

Hi, John.

In your two major markets, the UK and the US, first in the UK, there's a lot of concern about a potential payback or fall off in demand. Obviously your sales in the quarter were pretty strong. Just curious what your thoughts were there, what you saw in the first quarter, and what you're seeing in April as these scrappage programs are beginning to roll off?

The UK was up 27% in the first quarter, and if you took scrappage out it was up 9%. The good news is when you look at our brands that we're associated with if you take the total scrappage to date, which is probably around 500,000 units, only 12% of that total would have been affected by sales through the brands that we represent, so we don't see that as a major impact at all. Toyota, we got some benefit and we got some benefit in our VW stores, but beyond that we didn't see so much in the premium luxury. When you look at the market, it was two million last year and forecasting 1.9 for this year.

Obviously some of the concerns right now is what's going to happen with the election that's coming up in a week, but there was a tax -- value-added tax increase at the end of the year of 2% that could have some impact on it, but I don't think that's -- at the moment we didn't see that hurt us in the first quarter. The first quarter is a registration quarter, and our March numbers were as good as they could be and in fact, March was up 11% if you look at the market by itself without scrappage.

And then on the US, just what are you seeing on show room traffic patterns? Were they improving through the quarter and into April and was there any change in your ability to close just based on an increase in financing ability or lack thereof?

We looked at the numbers pretty carefully, and we look at show room traffic the best way we can look at it. We look at it on the weekend traffic, and if you look at the first quarter, our show room traffic was up 1% the dates that we look at it, but our closing ratio was at 35%, which we had real buyers out, which I think is key. But then as we went on into the next -- if we look at the month of March, we certainly had a much better picture because March the traffic was up 13% over a year ago, so we're seeing some traction. If you look at sequentially on traffic fourth quarter versus the first quarter of 2010, traffic was up 10%. And we're getting good closing ratios, it's better than we have, so there's definitely customers are out buying.

So we feel confident that we're going to see a 10% increase in the retail SAR for 2010. I can't comment on the total SAR because there's a lot of activity when you look at the business. Through the first quarter retail is only up 7%, and fleet was up 51%, so J.D. powers is looking at about 11.7%, but we're looking at about a 10% increase in the retail side.

And then just lastly on the open points, ir you could just sort of discuss the process of the automakers coming to you to have these open points or grant you these open points. If there might be more coming in the future and do the five points you've talked about include -- or are they included in the $60 million in gross CapEx?

Basically, yes, because the Mini stores that we have -- that are in place today, the one has been completed in Tempe, Arizona, it's our second Mini store in that market, which we got that CapEx is included. We have completed the Austin, Texas. We had really a build to suit by a lessor in that particular case, and we're finishing -- we're about halfway through the Mini store in San Diego, which will be about a $3 million CapEx, and that's in our forecast. And the two stores, the Chantilly Audi, and the Chantilly Mercedes store, those are all in our CapEx numbers.

And is there potential for more down the line? Just how does that process work on these open stores -- these open points?

I think what really happens you're really -- in these particular markets we have to compete against the people that put in proposals. Obviously when you look at Chantilly, that was really a companion point to our Tyson's Corners and we had the other Mini store in the market. I think that at the end of the day we're going to compete with everybody else and to me we see these opportunities where there's going to be growth. We have the opportunity for an open point for Hyundai, which we're going to active ate in Austin, and I think we see some of the same things in Europe. We've gotten three Sprinter points. This is the Mercedes van point, which we've added to three of our locations.

So I think it is active out there. It's not anything that I think will continue maybe at this level, but we've worked on these points probably for four years. We've been in process with the Chantilly points, getting the approvals from the county, the city, and then putting it together from a facilities standpoint, and we just opened last week there. So these points will generate $150 million of what we see as revenue for the ongoing twelve months.

Great, thank you very much.

Thanks, John.

Next to the line of Matt Nemer with Wells Fargo Securities. Please go ahead.

Good afternoon, everyone.

Hey, Matt.

Could you provide -- you may have already given this, but could you provide the service and parts performance excluding the impact of the Toyota recalls?

Well, let me -- I think by memory here we were up 4% in total on customer labor, and we were down 4% on warranty. I think that warranty obviously has been something because the quality of the car has come down. Without the Toyota warranty we were down about 10%, 9.8% to be exact. Our customer pay is up. Our predelivery inspection is up, which I think is key. We're also -- as we look at the whole parts and service business what we've done we're doing quick change now at all the dealerships on Saturdays. We're in the tire business. We're in the rapid repair business. These are dents. These are all things we really haven't been involved with in the past. We're expanding our body shop footprint.

And again, the e-mail capture is something we worked on hard. The tire and wheel repair to me is something with the premium luxury wheels this is a great business for us. And what I did, I know there's been some questions, Matt, on what's going on in the parts and service business, and potentially because of the lower SAR, what's really happened. So I looked at some numbers, and I compared really the business -- the average business in 2007 and 2008 by the big three, and really when you look at that business, they were down almost 2.7 million units when you compare 2009 to the average 2007 and 2008, and the brands that we represent, which are the premium luxury plus Nissan, Honda and Toyota, they were only down 1.2 million units, so we really are in good shape.

I don't think that the deterioration of the market is going to affect us most because most of that deterioration was in the big Three, and we see the market share increases will really pay dividends in the future. Plus as on -- something that will mask this is the fact that the warranties are going to -- are longer. It used to be 24 months. We see 36, 48 and 60, so we're going to get those people back in the dealerships anyhow.

I notice that most of the companies in the sector have talked to service ex Toyota as it relates to warranty but not necessarily customer pay. Do you think it also drove the customer pay business, as well, or is it not worth breaking that out?

It is pretty hard with the Toyota situation. What we were trying to do was execute on the things that had to be done based on the recall, not if an oil change of needed. But we wanted to be careful, we didn't get aggressive on the up sell in that process. We see the customer paying. In fa -- remember we were -- it wasn't the Toyota recall, just the general business conditions had some impact to people not spending the money on their car. Quite honestly, I see that as a benefit because people that haven't been in to spend money on the older cars we're going see those that didn't trade in for new cars will be a benefit for us as we go forward. We also had the Lexus impact. You remember last year there was a steering recall on the Lexus, which gave us some momentum, which we obviously don't have this year.

And then turning to expenses, your gross profit was up about I believe $16 million versus the prior quarter, and your EBIT was up about a third of that amount, so you had about one -- a 30% or so flow through of incremental gross profit to EBIT. Is that -- and that was in line with most of the other companies in the group. Is that kind of a new level going forward or do you think -- it suggests that the variable percent of expenses is higher than say 50/50, or is there catch up in costs that we're seeing in Q1 that's brought that down a little bit?

It is a very complicated question for me but let me try to answer it. I think basically our comp to gross, which was running say around 49%, really has dropped to 47%. That's a number we look at, which is a key number, and some stores, obviously, are below 40%, but overall we think that's in good shape. And it's hard to tell as we look -- our gross profit up $43 million for the quarter, and probably about $14 million of that would've been sales compensation. We reinstituted our 401(k) and I think at the end of the day we had some creepage on our marketing spend, which was key. So again I think that the metric of one-third I really can't comment on that at this point. I think Tony can give you some input on that later.

Lastly, just we're hearing some discussion about financial regulation and how it might relate to the dealers. .I know a number of dealers in Washington this week lobbying to be excluded from whatever bill is coming, and I'm just wondering how the proposed legislation or any legislation might impact the F&I business? Have you thought through that at all?

Well, right now we have -- we are capped on the rates that we can charge, so that took place, I think, 24 to 36 months ago, so we have already been regulated from the standpoint of APR rates for the consumer. In our particular case, because a big portion of ours is leasing, that wouldn't really affect us. I think there's also some parts of the proposed legislation that talk about having the F&I professional not be on a variable commission, you'd have to be on a salary. In some cases that could be a benefit to us so again, I really can't comment. Again, we've got attorney generals, we've got the FTC who are already regulating financial transactions with us, so I think it is great that the whole retail network is mobilized to try to push this back. I think this is a byproduct of New York and the financial market more than it is just the dealer people operating outside the lines. There'as been some talk about a military coalition, but I think that's very small when you look at the overall business.

Great. Thanks, Roger, thanks very much.

Our next question's from Rick Nelson with Stephens. Please go ahead.

Thank you. Good afternoon.

Hey, Rick.

Have you seen any change in your ability to get customers financed and if you have average FICO scores, that would be helpful?

Well, we have not -- in fact, let me back up a minute. Let's look at the mix of our business. When we look at 65% of our business is leased, and we have a big portion of those customers coming back, so there's a trail of credit capability with that lease customer, and we're seeing leasing still strong with Mercedes, with Lexus. In fact, Lexus has increased their residuals probably double digit, and with BMW and Audi we see that all very strong and with no issues at all. And on the APR side there was some concern on used cars early on because the values had gone down so far there wasn't the advanced right we might wanted on used cars, but we see that pretty strong now because of the increase in values. But to me is really when you look at our business, overall,

I haven't had anyone complain to me they couldn't get financed because I think probably all but 35% of our business goes through the captives that we do business with. So they all have strong balance sheets. They're able to securitize the financing, so to me there's not been anything because when you look at BMW Financial, Audi, and you look at Mercedes and Honda and Toyota, these guys are all in good shape. In fact, I think that's one of the -- really one of the competitive advantages they have in a weak market and also in a good market because they have the balance sheets in order to handle the retail paper, both retail and leased. So we've seen nothing. I can't comment on there it is a 700 Beacon or a 650, I just don't have that granularity to give you today.

Thank you for that. Also, I want to follow up on smart and how long you think it's going to take to fully right the inventory situation and the outlook for 2Q and the remainder of the year for that business?

Well, key thing here is -- Jill's done a great job and the team. We entered into the 2009 with big eyes, and we ordered 20,000 vehicles from the factory based on selling 40,000 between the first two years. Unfortunately, we carried over a number of vehicles then we had to set up reserves and also costs of moving these out, the 2009's. The good news is we have about 1,500 2009s left in the total network, which is good. We've only committed to 3,000 2010s, which we'll roll through easily between now and the end of the year and we bring our 2011s out. So we balance that inventory that obviously will reduce the incentive load we have to have, so again I think that's key.

And another thing that is -- which I think is important to note is we did our -- remember our reservation system, which was very good. We saw more content added to the cars. What we're seeing now that the sweet spot for this car probably is between $11,900 and $13,900, so the mix of vehicles that we'll have in the marketplace will be a lower cost of sales, and some of the vehicles that we're now moving out are the [Cabreles] -- the [Travis Coups and Cabreles] and we have $3,000 on those, so once those are gone we won't have that kind of incentive load.

What sort of unit expectations would you have for the remainder of the year and second quarter?

It's all what we wholesale. I would expect we wholesale close to a couple thousand during the quarter and then we'll move -- that would move up as we enter into the balance of the year, but we're trying -- our target would be to get the 10,000.

Good, tank you for that. Also wondering about the refinance that converts. Given the options that you have do you think that would be dilutive, accretive, or no impact to EPS?

We've looked, obviously, at refinancing. We've looked at the cash flow, as I talked about in the discussion earlier. From cash flow that we have, we've used the capital generation, we've been able to bring to the table for the last 15 months, and we think it would be neutral on any refinance we would do. So we got a board meeting coming up, we're going to take a look at what are the options. These are things we to want discuss with some of the key members of the board as we look at the capital structure for the future.

Thank you for that and good luck.

Thank you very much.

Next we go to Christian Buss with Thomas Weisel. Please go ahead.

Hi, Christian.

Hell, congratulations on the nice quarter.

Thank you.

Wondering if you can provide additional color on trends in the UK business?

I think the key thing there is when you look at the UK we had a very good quarter, and I think it's important to note that from our perspective our same-store units were up 3.3% and new was up 20.8% and our used was down 11%. As you remember, if you were on the call a year year ago, we had a -- we made a big buy from the OEMs at the end of 2008, which gave us real momentum in Q1 of last year. We didn't have that benefit this year because used cars got so strong we didn't have that benefit, so overall we're seeing some nice changes. We've seen Land Rover get very strong. I think that's key. We have the new Jaguar coming in. Audi is off the charts.

Our new store in West London -- in West London did 176 new and 105 used and made money four months out of the first six, which is the world record with a facility of 200,000 square feet. So overall, when you look at BMW, for the same store we were up 21% for the quarter. I think Mercedes was up in the 20s, and then when you look at Porsche we've nice lift there and we've added two stores last year. They were up 8%. And again, Toyota was up obviously with the incentives that are around Toyota. So overall we've had a pretty good year, and I think the -- when you look at the market they looked at the market being down about 5%, so they go from two million to 1.9 million, so to me the VAT increase from 15 to 17 plus obviously has not -- we haven't seen an impact on that. I think the key thing when talking to our guys is what's this election, we're going to have a hung parliament, is that have any impact on the business.

That's very helpful. I'm wondering if you can also provide some help with this -- for us on the SG&A expenses associated with the acquisitions and those new points of sale that are ramping up here?

Well, I would assume that they're going to be in line. In fact, it will be higher, obviously, as we start because we won't have the gross profit coming out of parts and service, and we'll have -- we don't have variable revenue and gross profit, but we ramp these stores up. We have done a number of them. We ramp them up with a small number of people. The good news is we take sometimes people can be upgraded from their existing jobs in adjacent stores into these so it is a real opportunity, and I see that in the operations at the Dulles Chantilly operations. Taking people out of Tyson's as the key people and adding to that fact. So I see SG&A to be in line, and we're hoping that within six months we'd see those stores start to turn profitability.

And Mini, obviously when you look at -- we'll be the exclusive Mini store in San Diego, there's probably 2,000 or 3,000 units in operation around that marketplace. The same thing in Austin where we opened in Austin. You had to go to San Antonio to get a Mini, so we should have some real good fixed business there. On the hand, when you look at Tempe we're adding the second point in the market that could be dilutive to our store, which we have in North Scottsdale, . So overall I think that these are very good when you think about spending $20 million or $30 million for a premium luxury store at some multiple in the past and then when you look at these five stores our working capital in total would be about

That's very helpful. Good luck.

Thank you.

Next go to Matt Fassler with Goldman Sachs. Please go ahead.

Hey, Matt.

Hi, this is actually Mark Conrad filling in for Matt. How are you?

I'm fine.

Good. Just one quick question. Looking at understanding that there's the compare issue in the UK in terms of used that could've driven the -11% comp in the quarter, I was wondering even taking that into account the overall comment implies that the US comp was also not that high, I'm wondering if there is anything in the used US sales that we should think about?

Well, I think that what's happened -- we have a couple dynamics here. In the UK we had the big buy at the end of 2008, which generated huge amount of momentum in Q1 of the [comparant] quarter of 2009, which we didn't have, so that certainly mitigated the good work we did. You remember they were at 1.26 used per new in the UK last year in the first quarter. They're still at 1:1, which I think is key, and no question that as we -- the used car prices came up here in the US, that drove many of the people that were buying our premium luxury used cars into new, and I think that's also key.

Now, when I look at our new -- our used to new, we run primarily 0.6, but when you look at some of our peers where they have a high penetration of domestics, where they've been able to be able to be very competitive, they're higher -- probably a higher used and new on the domestic side than we would be. So overall, I think the incentive that is are in the new side are driving the customers to new cars, and there's no question that the lease rates and the residuals that have been bumped have made it very attractive. What's happened is the used car guys are doing fine in the last 12 months, but the plants have been shut down, and what they're trying to do is generate more business. So, look, it is a balance. You're seeing new cars down, used up, but the good news is in our case that our margins were up, both on new and used, which to me shows that there's still -- we're able to operate in both cases profitable.

Got it., that's very helpful. And just a a follow up on the parts and service that we discussed earlier. Just in the US seems that parts and service was a little light versus what it was in the UK. I know you've talked about it a little bit, but was that all due to the Lexus recall compare or was there something else there?

Well, I think probably the Lexus was part of that and guess what, we're seeing the quality of the vehicles much better. We saw that back over the last 12 to 24 months, and people have not taken our hands out of their pockets to spend money on their cars, and we're going to see -- I think over the next six to 12 months some increases to customer labor, and that's what we're focusing ongoing back into our databases and getting the folks coming in. In fact, and in many cases we have a different menu for people that have cars that are over three years old so they don't go to the Pep Boys, they don't go to the Wal-Mart service centers, they come into us. But as cars get more complex as they are today we're going to see those people having to come to us as we have good CSI. So I feel pretty strong, especially when you look at our business model and you look at the gross profit generated. It's probably 44% of our total gross profit in our business comes out of parts and service, so we have a chance to continue to grow that. And when you look at the -- just one other point, when you look at the first quarter, in our parts gross profit was down because we had no -- really on warranty because we really had no parts profit to speak of with the parts we put into the Toyota recall.

Got it, that's very helpful. Thank you.

We'll go to Scott Stember with Sidoti & Company. Please go ahead.

Well, good afternoon.

Hey, Scott.

Hey, Roger. could you just talk about how things translated over into April?

I would say that from our standpoint I think the first thing you've got to remember is we don't have a registration month every month. I wish we did and March was gangbusters in the UK. The team over there is just really done a great job. But I would say from a budget perspective, as I look at April we'll be able to meet the budgets that we have in place. Obviously that's a lower budget than we had in the month of March because of the UK, but I feel good about the business. And certainly Toyota is continuing to spend during the month, and I understand that they'll be spending through the middle of May, so that can't hurt us at all with the number of Toyota stores, I think we have 19.

So we're still pretty strong compared to --?

When I say strong, remember -- I think everybody's to ground themselves. When you look at the first quarter, really look at the business, fleet is up 51% when you look at the business in March and the retail is only up 7.5%, so overall we really got to see on the quarter basis we didn't have this huge increase in retail. And the 7.5% increase for the quarter I think that we have the ability to see that grow, but we're cautiously optimistic from a standpoint of the quarter.

As far as the Toyota recall, could you just tell us how long you expect to be performing warranty work on these cars?

Well, they're about -- there's something came out I didn't know -- I couldn't send you the bulletin, but I think they said they're 40% through the recall and they've got Corolla coming and they've a couple other ones out here. But the customers are very patient. They appreciate us bringing them in on -- we're working Saturdays and nights in many cases, and we really with no issue, and that's really a benefit and there's no question.

Okay. And as far as the buyback, obviously you're weighing all of your options as far as refinancing, but is it fair to assume that your main goal is to have as much of this paid down as possible before we get close to the (inaudible)?

Absolutely.

All right. And just finally on smart you said you would hope to get to like 10,000 run rate for this year. Would that be enough to turn a profit, assuming that the incentive environment comes right back to normal?

I just think we just -- it depends on the incentive environment as we end up -- as we go out into Q3 and Q4. I think the right thing that Jill's doing, she's the inventory down where we're now almost through all of our 2009, both at port and at the dealer stocks and what we've tried to do is to not load the dealers up. We're trying to keep under a 60-day supply at the dealers' locations, which is important for us and for them. But I think that we'll see a decent quarter from the standpoint of wholesaling in Q2, but I can't give you -- I don't want to give you -- I think we'll still have a drag with smart over the next two quarters, but I don't think it'll be in the range it was the first quarter.

But to that point, it's fair to assume that the comparisons get a lot easier because last year I think it was April and May when the sales started to fall off?

Well, we have Cash-for-Clunkers last August.

It was last August so --

So we really got to remember that one. We did almost,1,900 units last -- I think 1,862 last August.

All right, that's all I have. Thank you.

Good deal. Thanks.

We go to Himanshu Patel with JPMorgan. Please go ahead.

This is Ryan Brinkman for Himanshu Patel. I understand you are bullish about longer-term outlook for smart sales in the US and seeing exciting things in the product pipeline. Is there a minimum level of unit sales, however, that justifies the continued investment in the business and what level of smart wholesales do you think that's required to earn an adequate rate of return from your perspective?

Well, Ryan, I think you've got to look at the investment we have to date. Basically we have a team of people that we put together at smart headquarters here in Detroit. We've invested -- we have seven locations ourselves, and I think if you looked at the average investment it's about $600,000 from a PAG perspective, and when you look at most of the dealers, I would say almost all the dealers that were on the first wave have gotten their investment back, and we certainly have ours back when you look at this year even and look at the first two years. So I don't think there is any risk from the standpoint of our commitment, and I think with Daimler and Renault coming that this is going to be quite exciting because we'll have the benefit of one of the best small car producers in the world teaming up with Daimler to give us a new smart product in two years, and that's going to be a benefit.

So we're looking at double digit would be what we think we'd like to see as we go forward, and it could grow from there as we get new product. But remember, this is not a situation where we have spent millions of dollars in tooling. We have regulations to worry about from an EPA perspective. It is all at the manufacturer, and I think that as the distributor we take on a certain liability in order to move these cars through the system, and we certainly, when you look at 25,000 in year one and 15,000 in year two, these were quite profitable years for us. So again, I am not in any way shape or form backing off on smart. In fact, we have the electric vehicle coming out. We're going to have a big show with that in New York coming up in the next 90 days, so overall when you look at the ROI, it was high.

Okay, that's great and I think as we expected and of course, small cars should continue to perform -- should perform better in a high gasoline-type environment. What are you seeing in terms of penetration and in the F&I business and what can you comment about trending in leases as a percentage of total sales? Has this fully normalized now?

Well, I think you asked about leasing. I think when you look overall, about 75% of all of our business in new and used is either leased or financed, and I think it is 50% in the UK if I have the number right, so we see this, very proactive. The good news is as I mentioned earlier in the call we've got very strong finance subsidiaries associated with the OEMs we do business with and they're very aggressive, so we don't see any backup as far as supporting the retail. On top of that, when you look at floor planning all of our business --I would say 90% of our business is floor planned by the OEMs, and we're floor planning that at rates at 160 over LIBOR or above, so we're really in very good shape from a cost of our floor plan. There's been no issue at all. Got a $1.365 billion out right now on floor plan and I would say there's never been an issue as far as curtailing our ability to floor plan vehicles.

Great. Thanks a lot.

Our final question is from Ravi Shankar with Morgan Stanley. Please go ahead.

Thanks very much. You've spoken about the other services that you're introducing in the parts and service business, stuff like quick lube and tire change and such. Can you talk about where you see those businesses going cumulatively in terms of percentage of P&S revenue and what kind of margins we can expect there?

Well, let me say wheel repair, I would say we have 50% to 60% margin on that. To give you a number, I'll get Tony to get that for you. I'd guess we'd have to go back and look at it. It doesn't take much when you look at the premium luxury vehicles and we now have in the UK and most all of our locations we actually have a paint booth small that we can buy that is just for wheels, sandblasting and repairing wheels. We're doing the same thing here. Our rapid repair at the 101 Complex in Scottsdale is generated double-digit EBT for us in the quarter, so we see that as really key. It's just getting more share of wallet from the customer. We're doing the window tinting now.

We're doing all of that work in-house where before we had these vendors coming in so I think that's key when you talk about window tinted, wheel repair, rapid repair, and certainly custom details. We've got these wraps we're putting on the smart cars. And again, alignments, as we look at programs alignments that we're running [specs] for our service writers also on detail. So these are things that we're implementing across the country on a monthly basis, and I'll get Tony to give you some idea of what kind of impact that has. But again, it's more share of wallet. Obviously the predelivery inspection and the used car reconditioning are going to drive some nice margin for us from an internal basis.

Got it. Can you give us a little more color on the state of Florida, California, and Arizona? We've heard some of the other dealers have -- speak pretty highly of the recovery in Florida, as well, but I think some of the comps that you said look pretty impressive but must be against pretty easy comps. So at what point do you think you're comfortable with the pace of recovery in those three regions?

You said Florida, Arizona, what was the third?

California.

Oh, California, okay. Well, I would say this, that we had a little bit of headwind in California for the quarter because there was a tax increase at the beginning of the year. I think Northern California was a little bit tougher, but our business in San Diego is continued to be strong throughout the last, I guess, 36 months. We've seen some little deterioration, but I think that part of our business is strong. We're primarily in San Diego, Escondido, then we move up to Northern California.

Florida's up 30% which is key, and in our Arizona business we started to see -- because we're in the premium luxury we started to see the portion of business Bentley and our BMW and Mercedes business get much better, so to me that's, I think, positive. Florida, we have three Toyota stores so I want to be careful stating to exactly how strong that's going to be long term because we did have the benefit of the counter measures that Toyota has given us from a retail incentive standpoint over the last 30 days or 45 days. But we feel good in those states, much better, and we're seeing more service business, too, which is key.

[You also have a fair few of new launches coming up model in (inaudible) models for the luxury brands; the five series, the Cayenne, the A8 XJ.] Do you think that these models will give you a pretty -- a tangible margin boost in the second half of the year as you sell out the old ones or is it more going to be on top of each other?

I think it's replacement. It seem -- you always have the new models giving you strong grosses and then you're trying to move out the older models, so I think it's a balance. But I think overall if you looked across from the standpoint of our peers that are the public companies, I think margin is better as we go forward. I think we're learning how to operate with less inventory, which also helps margin, and I think there's more discipline in the system. So to me to say one vehicle XJ5 Series, the Cayenne, look, these are going to be great for the brands because we need freshened product, but I'm not sure that they're going to change the overall brand profitability thousands of dollars.

Got it. Finally, have you said what the electric smart's going to cost?

We haven't come out with the electric smart yet. We're work -- it'll be a lease program the first units that come into the market and we're not going to announce that until we have our program, but we're anxious to get that into the market as soon as we can.

Great, thanks very much.

All right, thank you very much. Thank you.

And Mr. Penske, I'll turn it back to you for any closing comments.

Thank you for joining us today. It's a good quarter and we'll talk to you next quarter. Thank you.

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