Penske Automotive Group Inc (PAG) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group second quarter 2010 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through August 5, 2010. Please refer to Penske Automotive's press release dated July 13, 2010, 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, Laurie, and good afternoon and welcome, everyone. A press release detailing Penske Automotive's second quarter results was released this morning and is posted on our website at www.penskeautomotive.com. Participating with us on the call today are Roger Penske, our Chairman; Bob O' Shaughnessy, our Chief Financial Officer; and J.D. Carlson, our Controller. At the end of the call, we'll open up the line for questions and we'll be available by phone to answer any follow-up questions you might have also.

Before we begin, I'd like to remind you we may make forward-looking statements relating to Penske Automotive on this call. Actual results may vary because of risks and uncertainties, including external factors such as consumer credit conditions, interest rate fluctuations, changes in consumer spending, macroeconomic factors, or adverse conditions affecting a particular manufacturer or part supplier, and other factors over which Management has no control. During this call, we will be discussing certain non-GAAP items. 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. Any such statements should be evaluated together with the information about Penske Automotive in our public filings, including our annual report on Form 10-Q.

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

Thank you, Tony. Good afternoon, everyone, and thanks for joining us. Today, we reported income from continuing operations of $29.4 million, or $0.32 per share, compared to $19.9 million, or $0.22 per share, last year.

Let me talk about some highlights for the quarter. Revenue increased 16.6% to $2.7 billion, including double digit increases in new vehicle, used vehicle, and F&I revenue. Our same-store revenue increased 13.3%. Breaking it down, premium luxury up 12.2%, volume foreign up 15.6%, domestic up 16.7%. Geographically, we had same-store growth of 15.8% in the US and 9% in our international markets. We continued to reduce our leverage, decreasing our non-vehicle debt by $86 million since the beginning of the year, which has resulted in an improvement of our long-term debt-to-capital ratio from 50% to 47%.

Let me turn now to our operating results. Total retail unit sales were 68,900 for the quarter, up 16% compared to last year. New was up 19.6%, used was up 12%. Overall on a unit basis, premium luxury was up 23.3% and import was up 18%. In the US, our new retail unit sales increased 20.5% compared to a 9% industrywide increase, and in the UK, our new retail unit sales increased 13.9% compared to 11.8% industrywide increase, so, again, in both markets, we exceeded.

We also continue to see strength in our used car operations throughout the world. During the quarter, our used unit vehicle sales increased 17% in the US and 4.2% internationally. In the US, 40% of our used car sales were certified pre-owned, and in the UK, we maintained our new ratio to used one to one. In total, our same-store retail revenue increased $283 million, or 13.3%, due in large part to the increases in new and used retail unit sales. Excluding the effects of foreign exchange rates, our same-store retail revenue increased 15%. International was up 13.7%, but we reported at 9%. Our revenue mix in the quarter was United States at 65% and international at 35%, consistent with last year, and our brand mix was domestic Big Three 5%, volume forward 31%, and premium 64%.

During the quarter, our gross profit increased 9.3%, or $37 million, and our margin was 15.9%. Our retail margins remained strong in the quarter, including new vehicle margin at 8.2% versus 7.9% last year, and used vehicle margin was 8% versus 9% last year -- but on a sequential basis, it was the same as the first quarter. Service and parts margin came in at 57.4%, up 226 basis points versus last year where we had 55.1%. I'll make a comment there that probably 1% of that benefit was due to the Toyota recall. Operating income increased 20% to $63 million, and our operating margin increased to 2.3%.

Moving on to the balance sheet. The total vehicle inventory remains in good shape at $1.3 billion, and that's down $14 million from March 31, 2010. Vehicle inventories are up $67 million on a same-store basis compared to last year's historic lows. New was up $23 million and used was up $44 million. At the end of the quarter, our worldwide days supplies new was 56 days compared to 65 last year, and used was at 36 comparable to the same period of 36 last year.

Let me talk about CapEx. Year-to-date gross CapEx was $38 million, including $28 million in the US and $10 million in the UK. We currently expect our gross CapEx in 2010 to be somewhere between $65 million and $70 million.

Turning to liquidity and debt. We had $861 million of non-vehicle debt outstanding as of June 30, an $86 million decrease since the beginning of the year, and we were compliant with all of our financial covenants as of June 30. In fact, we reduced non-vehicle debt by more than $200 million since the beginning of 2009. We also [omitted] our US credit agreement, increasing the revolving capacity by $50 million to $300 million. Including the $50 million increase, we currently have $250 million availability under our US agreements, and $75 million available under our UK agreements, giving us a total aggregate of $325 million availability.

Let me take a moment to talk about and update you on our 3.5% convertible notes. As a Company, we remain focused on refinancing or retiring the convertible notes. Over the last 18 months, we've bought $224.4 million of principal notes for $208.8 million. As a result, we currently have $150 million principal amount of convertible notes outstanding. These repurchases were made using cash flow from operations, existing working capital, and borrowings under our US credit agreement, and, as of today, we have $45 million out on our credit agreement. And today we have the ability to refinance the remaining notes with the availability under our US credit line, so I think we're in good shape as we turn to pay that notes off in the first quarter of next year.

Let me talk about Smart for a moment. We continue to generate enthusiasm and media attention for the Smart brand, including the electric vehicle that is coming to the US market in the fourth quarter. We're doing this through our road show and related marketing activities. I feel we've made progress on our Smart related initiatives over the last six months. In fact, Smart sales have increased compared to the first quarter, and Smart's wholesale inventory levels have decreased 55%, or $32 million, compared to last year. Smart's inventory is now more closely aligned with market condition and expected sales levels. As a result of the increase in sales activity, and certain cost reduction initiatives, the distribution business lost $0.02 per share in the second quarter compared to $0.04 in the first.

In closing, we continue to be optimistic about the recovery in our business. Credit has improved. Closing ratios are higher and leasing is better. We've also noted significant increases in our approval rates at our captive finance lenders and through our preferred lender network. The UK market has been strong. In fact, market registrations in the UK are up almost 20% this year and are projected to reach $2 million for the full year. We also are very optimistic about the early operating results at the new Mini Audi Mercedes Benz franchise that we opened up in the first six months here in the US. On balance, I believe we've reported a very solid quarter. In fact, if you exclude the Smart distribution business, our EPS would have increased 60%.

Again, thanks for your attention today and let's open it up for questions, thank you.

(Operator Instructions). And our first question from the line of John Murphy with Banc of America. Please go ahead.

Good afternoon, Roger.

Good morning, John, or afternoon.

It's hard to tell these days. Just looking at the SG&A, it was a little bit higher than we were expecting. I'm just wondering if there's any more leverage that will come as sales recover and you can control those costs, or if there's any more cost cutting that you need to do there on SG&A? Just trying to understand a little bit better if we can see better SG&A performance going forward.

Obviously that's a focus of the entire team each quarter. And when I look at our SG&A, 12% of SG&A is in our rent line because of the number of sale leasebacks we have. But I think, when you look at our quarter, we had 60 to 70 basis points either sequentially or year-over-year benefit in SG&A leverage. But if you took the Smart business out, we had some large expenses in marketing and other expenses during the quarter. If you took it out, we would be 150 basis points better. So, I think that we're on track, we're focused, and obviously I've seen our peers get great leverage during the quarter and I'm taxing our guys to do as well.

And Roger, if we think about that Smart business, it sounds like it's getting better sequentially from the first quarter to the second quarter. As we go through the second half of the year, will it continue to be as big a drag on the business and SG&A? Or is there the potential to get that closer to breakeven? And just wondering, on a year-over-year comparison, does it get a lot easier in the second half as well?

I think when you look at comparisons second and third quarter to last year on aggregate, the six months we should be better because last year we had some incentives that we had to set up because we had a significantly high inventory. So, we'll get some benefit for that for sure.

And then I'll ask a last question and let everybody else get in. Just the quarter was pretty good. As we look at the third and fourth quarter, the run rate of sales in the US looks like it's picking up a little bit. Sounds like the UK is doing okay for you. How repeatable do you think the performance that you had in the second quarter is in the third and fourth quarter, and could we quite simply take the second quarter and multiply it by two and would that be a decent starting point for our thought process for the second half?

Well, two things. Obviously we have a registration month or quarter in the UK which is always strong -- it's not quite as good as Q1, so we have to look at it -- and then we really look at the fourth quarter and see what happens in the business. I would say that we're forecasting as we go forward -- not to say it's twice, but I think there's opportunities if we continue to take cost out of Smart and we continue to get the leverage on our margins. The good news is right here, our margins have been strong both in new and used sequentially, and I think that, if you look at first half, we hope that that would equal the second half as we go forward for this year.

Great. Thank you very much.

Our next question is from the line of Rick Nelson with Stephens. Please go ahead.

Hi, Rick.

Rick, we have your line open.

Oh, I'm sorry. Good afternoon, Roger. I had my phone on mute. A question about the balance sheet. You made some great progress delevering. Is there a target debt ratio you have in mind?

I don't think we have a target debt. We said we wanted to be between 45% and 55% has always been our target, but there's no question -- as we delever, our percentages are going to get better. I think the main thing is to have the capital available to run the business, and today, we do have the benefit of the strong cash flow. Certainly our CapEx is down to where it needs to be. We got maintenance CapEx and we have some of the acquisitions and open points that you're going to have to build facilities. But we're looking at some -- mortgages versus sale leasebacks right now seem to be attractive from our captive lenders. But I think that the goal here is to be able to retire the entire $375 million by the end of obviously of the first quarter next year. I think if you look at the balance sheet and working capital availability that we're going to be in good shape, and that's going to drive our leverage down. And certainly, at the end of the day, we want to still be able to do acquisitions and have the benefit to grow the business.

Thank you for that. Wondering if you could provide some more color on what's happening in the UK. We see the new unit registrations have been pretty healthy. Can you discuss what's happening on the used car side and the outlook there, and then any regional strengths or weaknesses in the US? That would be helpful.

Well, let's talk about the UK from a used perspective. We're up 17% here in the US, and we were down 1% in the UK, but I think the thing you've got to remember is that we're running one-to-one in that business in the UK entirely, and new unit sales were up 13%. So, you could say, really, we were up 13%, but the problem is we had a big second quarter last year, which is key. Right now we're at about 10,100 units versus 10,200 last year. So we're pretty much flat. But overall, we see some pressure on used car margins, not only in the US but in the UK, because at the present time, residual values have moved up so high, and the advanced rate from the captive and our preferred lenders caps us on what we can get from a gross margin. So, I would say that's one dynamic that we see in the market, because people can end up buying a new car versus used. And then also, there is some shortage of certain models of used. I think all of our peer group are looking at selling -- retailing all of the used they can and reducing the number of units wholesale. But overall, I think that the UK market should be good for the registration quarter. We've seen our order banks strong going into the September timeframe.

And then in the US, probably it's a little better to say by brand or across the country, when I look at the regions, we've seen an uptick in Florida, there's no question. And we've seen some benefit in California, both Southern and Northern California. But I think Honda is pretty well positioned right now -- they're between some product changeover. But again, Acura has been strong for us, up 30%. Mercedes has been good year-over-year. We've had good growth as far as that's concerned, and BMW had some portholds during the quarter, which held us back on some of our volume, but we think the new 5 series will be strong. Mini continues to be good for us across the country based on the new points we've opened up, so year-over-year we're going to have good gain. And then Toyota Lexus -- there's lots of discussions about Toyota Lexus and really what's going on there, and I think that when you think about that, we're getting some benefit, obviously, because of the strength of the residuals. And when I looked at residuals on the Toyota product, I think in most cases they're up 3% to 5% and some even up as high as 10%, which gives us some strength on the Toyota side. And again, we have these recalls which are not good. On the other hand, that is driving some service and parts business. And when you look at Audi, Audi's brand is strong across the country and it's in short supply. But again, I think that you're going to see that continue to grow.

From my perspective, when you look at the markets for, as far as we're concerned, Arizona was up 12% new and used combined, Northern California was up 11%, Southern California was up 19%, and Florida was up 24% on new. So again, I think you look at the markets. Texas was flat for us, and -- but profit is good.

That's very helpful. Thanks a lot and good luck.

Thank you.

We have a question from the line of Matt Nemer with Wells Fargo Securities. Please go ahead.

Hi, Matt.

Hi, Roger. So, my first question is -- just looking at the product cycle, particularly in luxury and for your European business, how important is it that you've got all these new products coming in the same year, the 5 Series, E-class, Cayenne, XJ -- relative to past product cycles, how do you rate that, and what could it mean for units and profit on the luxury side?

Well, sometime with the new units coming in, they're short supply. So, sometime we don't see the specific unit growth overnight, but we do see margin. You take the 458 Ferrari, we're sold out now for two years. The Cayenne, I think we're sold out through the end of the year, just to mention a few. And certainly the 5 Series has been very strong in the order bank, over in the UK is excellent -- because we're primarily, as you know, 95% of our business is premium luxury. And we don't have the interbrand competition there based on the way the markets are structured. But I think all of the brands have got good product coming in, but I would see margin benefit, and I'm not sure you're going to see unit benefit overnight until they get the pipeline opened up. And quite honestly, I'd rather have a few cars short than a few cars long.

Okay, and then turning to service and parts, what is your outlook there, assuming the Toyota recall benefit probably runs off maybe in the current quarter? Does that -- do you think that's going to be a slightly negative number going forward, or are there initiatives in place to get that back into positive territory?

Well, when you look at our parts and service revenue overall without foreign exchange, we were pretty much flat in the US, down 0.4%, and in international down 2.7%, and I'd say we had the benefit even in those numbers maybe of 1% from the standpoint of Toyota. We've had recalls on and off. The one thing is the mix. In our business, 70% of our service business was customer labor and 30% was warranty. So we've seen a deterioration, which is good from a quality perspective, we've seen the warranty reduced significantly. And one thing that people don't realize in the UK is that we don't get the big markup on parts. We get 33% in the US, I think we get 5% in the UK on warranty. So, we don't get a big gain on warranty parts. But I think the more share of wallet, I've heard other people say we're in the wheel repair business, we're big tire initiatives, oil changes, and I think that Toyota's only completed half the recalls to date.

So, I think that's going to be an ongoing story for us. But it's one maybe that I don't like to see, but on the other hand I think Toyota has done a good job and I take my hat off to all of the dealers that are supporting that product, because we've had very few problems with customers. And again, I see residual values increasing on most of their brands. So, parts and services getting some lift because of new and used car sales, the PDI on new and obviously the reconditioning on used. And I think a goal for us is to do more inside rather than outside where we get these margins.

And then lastly, you increased your credit line by $50 million. Doesn't seem like you really needed to do that relative to the convert, because you appear to have that more than covered. So, was there another reason for that, or were there any other changes in the credit agreement in addition to the overall availability?

No, I think we saw it as a window at this particular time. We go into our credit on an annual basis, and from the standpoint of going forward, we think we want to have the liquidity. And the rates are right today, and then we also are in the process we'll look at -- we're extended now through 2012, and we'll look later in the year to move that out another year. So we'd like to have an evergreen three year program. And obviously in the UK, we're in good shape too, with $75 million there. So overall, I just wanted to be sure that we had the dry powder. Obviously if we want to do something on a bigger basis we could, but we're being awfully careful on what we look at from a goodwill perspective. There's been too many things that we're able to do this past 12 to 18 months supported by the OEMs and lower goodwill payments, which make a big difference as we go forward, and I think that will help the bottom line.

Great. That's all I've got. Thanks, Roger.

Thank you.

And a question from the line of Patrick Archambault with Goldman Sachs. Please go ahead.

Hi Patrick.

Hi, yes, good afternoon. Just wanted to recap on Smart. It sounded like you'd mentioned that there were maybe some one-off issues in this particular quarter that would help you get to a better improvement in the back half. And could you describe those in a little bit more detail? And then I guess related to that, you'd mentioned some costs in terms of reducing inventory. Were there any of those in the quarter or was that largely behind you by the time -- ?

Well, I think all you can do is go year-over-year. We were down $32 million. So, for the three months ending Q2, we have less [port] inventory, which we have -- obviously have costs associated with it. I think when you look at overall from a standpoint of Smart, we had some significant marketing that we took place during the third quarter in order to move some of these units which were in stock. We won't have that as we go forward, and we feel that -- we were $0.02 in the quarter, and we think that we should use that as a target, $0.02 in three and $0.02 in quarter four is a negative. But again, we had a big writedown last year or incentive impact on our numbers. So, we don't expect to have that in Q3 or Q4, so I think we're in good shape. We've got a good balanced inventory, and to me, we're not going to be going into the 2011 model with -- I think we only have 2,300 2010s in the whole market, both the dealers and at the ports. So that's much different than-- we had 4,500 I think last year, of 2009s. So, it's a huge difference and that will certainly help us. Obviously we've got Jill Lajdziak and her team challenging the cost. But on the other hand, we want to be sure that we announce and deliver this electric vehicle in the fourth quarter, so there could be some higher costs associated with that.

Okay, and I'm sorry, just so I understand it -- like a $0.02 loss run rate is something that would be probably appropriate to model for over the next couple of quarters?

I don't think you should -- we're going to try to do better than that, but that to me -- from our forward look, unless there's something in the market that we haven't been able to look at, I think that's fair.

And then, what gets you to breakeven beyond that into next year? I guess you have this new product and then just better utilization, is that the idea?

Well, I think more units in operation, we'll have more parts business, we'll get some benefit, hopefully, out of the electric vehicle, and the big thing will be is we won't have to put the incentives on the vehicles because of the high inventory. Inventory was double what it is today last year. So, a couple thousand units -- when you start thinking of the kind of money that you got to put against those in order to move them or APR support or lease support, we hope not to have -- and then also our mix has changed now too. We had a lot of higher priced units in inventory. And as the gas prices went down, we're finding that people now that are buying this vehicle are looking for low cost of ownership.

Got it. Okay, and then your equity income align was actually pretty up sequentially -- pretty meaningfully. I take it that was -- sounds like maybe some seasonality in there and just better results at Penske Truck Leasing.

Well, PTL had good growth. About $3 million on the equity line came from PTL. Obviously we're starting to pick it up in Q2. And then we have a strong Q3 due to the fact that our one-way business, with kids going back-to-school, we see some real good utilization. And truck tonnage is up about 7%. And when I look at the heavy duty truck market, I think you'll start to see that they're going to be -- the buying is going to go up to probably 150,000 this year versus 124,000. And that's -- probably dictates that there's more freight out there, and that certainly is good for us. And the seasonality obviously is important where -- in the first quarter we don't get the rental utilization in our one-way fleet, but we've had very good rental improvements. Our consumer and commercial were up 12% year-over-year. So, to me, that's important. And then also, we're seeing, even in the truck side, we're seeing our used truck prices go up -- on our sale we've got a different number of initiatives. We've got an online sale process going on. We've got some consignment vehicles with certain of the truck manufacturers rather than giving them to wholesalers. So, our guys have done a real good job and we're seeing a nice gain on sale.

Okay, great. Thank you very much.

We have a question from the line of Patel Himanshu with JPMorgan. Please go ahead.

Patel, hi.

Hi, how are you? Can you just give -- I think someone touched on this a little bit earlier, but just, given all of the economic developments in Europe in the last couple of weeks, what's your sense of just the state of the UK consumer overall now? Are you guys seeing any softening in that business?

Well, I think the UK economy is in decent shape. I think the GDP rose between 1% and 1.3%, and then it was up again versus April. When we look at the SAR over there, we're looking at 2 million units, and that's pretty good based on the fact that we had the scrappage going on. So, from a business standpoint, I think that we're cautiously optimistic. We're going to have a couple of benefits to us as we look at the federal tax rate as we would call it here. Today it's 28%, and it's going to go down, we think, to 24%, and that's going to be 1% a year. And then we have a VAT increase, which will come in the first quarter, and that might drive some business into the fourth quarter of this year. So, you got VAT going up, we're going to get benefits next year on taxes.

But overall, new car forward orders for the September quarter, and talking with the team over there in the last 24 hours, they feel it's strong. Obviously, the big challenge is getting enough used cars to meet our one-to-one new to used ratio.

Okay, and then you made a reference earlier about used margins coming under pressure, partly because used prices have gotten to a level where it sounded like a lot of customers were just moving into new. Any thoughts on how we should think about Penske's used margins going forward, or is it -- now that we've seen some stabilization in used car prices, should we think of margins sequentially stabilizing there as well?

Well, when you look at our margins, we were sequentially -- if you look, we were at about 8% on used at Q1 and Q2. And that's driven -- basically we're 9.4% in the US and we were 7% in the UK. So, they were down 150 basis points year-over-year. But I think it stabilized from our standpoint. We've had good used car margins now for the last several quarters. But it depends on this residual, as I said earlier and you said it -- used car prices get to a certain point and it limits us, it really caps us. It's an artificial cap that goes on the advance rate from the finance companies. And basically, we do 75% of our business with finance companies, with our captives. And at a certain point, they're going to rather see us put the money into -- a customer into a new car. So, I think that there's some risk out there, but we're going to try to maintain our margins.

Okay, thank you.

And we have a question from the line of Scott Stember with Sidoti & Company. Please go ahead.

Hi Scott.

Hi Roger. Did you give what the customer pay was versus warranty in the quarter?

70% would be internal customer pay and 30% is warranty.

No, but as far as the same-store numbers.

Well, we were up 2% on our customer pay and we were down 6% on warranty, and our body shops were down 6% -- primarily down in the UK. We were pretty much flat here in the US.

And how much of the warranty was taken up by Toyota?

I can't give you that exactly. I think we calculated, Bob and we calculated it gave us 1% of margin, so it probably -- on a sales perspective it might have been $4 million to $5 million.

Okay, and I know that BMW has some supply constraints in the quarter.

Sorry, what?

BMW had some supply constraints.

Oh, supply constraints, yes, I'm sorry.

Overall, how did the brand do here in the US, and how did Toyota Lexus do as well?

Well, from an overall standpoint, BMW, I think, across the country was constrained because of a port problem. I think some of it had to do with some port work that they had to do, but BMW was up 12% for the quarter.

And how did Toyota Lexus?

Toyota Lexus -- those brands were both up, and I think that, if I recall, Toyota was up to 20%. So, they've had good lift during the quarter, and I think people thought that maybe those businesses wouldn't be as strong because of maybe some of the noise out there in the marketplace. But overall, I would say Toyota Lexus was up an average of 15% to 16% for the quarter.

And just last, I hear reports that July is going to be a pretty good month in the US. Could you just talk about what you've seen so far from a new car standpoint?

Well, I think, on the used car side and new car side, there are going to be two different scenarios. You had Cash For Clunkers, and there's no question that the high volume foreign and some of the domestics have big numbers that they're going to have to beat for the quarter last year. I think we didn't quite get the benefits, and we're so highly weighted on the premium luxury side, I don't think that we saw the lift last year. So, I think that in our new car business, we're hoping that they're forecasting it, it should be at least as good or better than last year. And I guess the question mark is availability of used, and I think that we've got to look at margins in the third quarter to be sure that we can maintain the margin structure on both new and used.

That's all I have. Thank you.

Thanks, Scott.

We have a question from the line of Ravi Shankar with Morgan Stanley. Please go ahead.

Hi Ravi.

Hi Roger. So, a question on the used. I mean, just to rephrase the question that was asked earlier, your used to new ratio is pretty high right now. To what extent do you think people are actually buying used because they can't find or afford to buy a new vehicle? Do you think there's an incremental buyer there?

Well, I think that right now, people are limited on what kind of a down payment they can make. Used cars obviously are certainly something that they have to take a look at if they need a vehicle. CPO is attractive. There's extended warranties on CPO, which is driving the used car business. But I think overall, as I look at this again, used cars were so attractive a year ago because of the low residual values and low cost of sale. I think there's a crossover point here where we're going to see some of that traffic go to the new car side because they are going to be driven by the finance sources. But when we look at our business, our transaction price actually went up a couple of percent across our businesses. And I think that's pretty good from the standpoint of our used. And, to me, at the end of the day being able to hold our margin sequentially first quarter to second quarter at 8% also shows that we have some strength in our model. But again, the consumers are going to be the ones that ultimately are going to decide on what they are going to buy, and it's going to be what they can afford.

So is this affordability issue on the used side as well? I mean, we've been hearing of some inventory shortages on the used side, especially for the crossovers and the trucks. Are those customers who are not able to find those cars just waiting, then, or are they going to used, or what are they doing?

I don't want to give you just, I'm not sure. We'll get our team to try and give you a little more specific on it. I'd hate to give you a bad answer here.

Got it, and just finally, you said that approval rates have improved significantly. What are you seeing in terms of down payments in the new side? Because we have been seeing some data that shows that those down payments have been going up. Do you think that that's now a proxy for approval rates in terms of difficult credit conditions?

Well, I think that down payments are going to be based on your credit capability. I think each individual consumer is going to have his own credit. But at the end of the day, when you look at approval rates from just the standpoint -- we put some notes together and Honda is up 10 points on what we give Honda, we're up 10 percentage points on approval rate at Honda, we're up 7 on Toyota, up a couple of points on Mercedes, and when you look at the banks, we're up about 5% to 6%. So, everybody is moving forward on approval rates.

But again, when you think about it, 75% of all of our retail and lease transactions are with the captives, and I think that our captives take over half that business. So, they're looking at residual values, and they're much more aggressive on vehicles that they have -- of their own brand. I think that's one thing with Toyota, that people need to remember. Toyota has a tremendous number of units in operation, and a lot of these are financed or leased. And I can tell you the residual value that Toyota will put on those to keep those customers and maybe even work with down payments to try to continue to conquest them into -- to keep them in the brand -- you're going to see that be the offense. And I think they are doing a great job on it. Very difficult for a Toyota buyer to go someplace else and get the same residual value or ability to trade that unit to a competitive mark. So, even with all of the trouble, I think it's one of the reasons they're being able to grow their business, and as I said we've grown our business between 15% and 20% in the quarter in Lexus and Toyota.

Great. Thanks for the color.

Thank you.

We have a question from the line of Brian Sponheimer with Gabelli & Company. Please go ahead.

Hi, Brian.

Hi, good afternoon. Just staying on leasing -- it's obviously a very important part of your business. Are you at the point now where you're seeing captive support leasing like they did, say, second quarter of 2008? Or is this potentially another step up on volume that we may see over the course of the next couple years?

I don't really see a big change. I think there was a big backoff here as we got into the fourth quarter of 2008 when the market went to hell and residuals went down and the captives lost a lot of money when they sold the vehicles coming in off of lease. But they've turned around 180. I've heard at Mercedes some of the residuals are up $3,000 to $4,000. And remember, today, 60% to 65% of all when you look at Mercedes, you look at BMW, you look at Lexus and Audi, are leased. And, to me, I think that it's a strong product lease on the foreign nameplate, and I think the domestics really haven't gotten into the business to the extent that the foreign nameplates have. So, it's a big part of the business, and I see residuals up from all those manufacturers around the premium luxury side. So, they are definitely in business. I can't tell you whether it's 62% or 63% of our sales, but I know it's over 60%.

Right. I was just thinking more directionally there, thank you. And just from a strategic standpoint, with the cash flow that you've been able to generate and the delevering that's already taken place, I'm wondering if store acquisition is becoming more of a possibility in the next six months, since you clearly have the availability to handle the converts that are remaining?

Well, we've got $250 million of annualized revenue to date, and I think our total goodwill that we paid out was probably around $3 million. So, we're seeing -- prices are still pretty rich. You've probably heard the noise on a couple of these Lexus stores. We can't buy a Lexus store because of our framework agreement, the [number] we have, but we're going to be very opportunistic. I know there's a couple of programs that we're looking at in the UK that could give us some growth. But I would say we've got to look at what -- is a project from a CapEx perspective, what's going to be expectations on CI from the manufacturer, is it one that we can consolidate into a central office that we might have in a particular area, and then we're going to look at the brands, obviously, that we think have legs. I think the domestics today offer some opportunity for us, because, as they've [culled] down the number of dealerships, there might be some good opportunities for us in markets where we have strength. So I would say we're certainly not -- the door's not closed, and already we've got $250 million of revenue that we've generated through new points and acquisitions already in 2010.

Great. Thank you very much. Nice job.

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

I think that's it for the quarter. Thanks, everybody, for the good questions, and certainly thank our team if any of them are on the call today. And we'll see you next quarter. Thank you.

Thank you. Ladies and gentlemen, that will conclude our conference call for today. We thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.