Penske Automotive Group Inc (PAG) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Penske Automotive Group third quarter 2010 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through October 29th, 2010. Please refer to Penske Automotive's press release dated October 7th, 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. Please go ahead.

Thank you, John. Good afternoon, and welcome everyone. A press release detailing our third quarter results was released this morning, and is posted on our website at www.PenskeAutomotive.com. With me today are Roger Penske, our Chairman, Bob O'Shaugnessy, our Chief Financial Officer, and JD Carlson, our controller. Before we begin, I would like to remind you that we may make forward-looking statements relating to Penske Automotive on this call.

Our 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. Any such statements should be evaluated together with the information in our public filings including our annual report on Form 10-K. During this call, we will be discussing certain non-GAAP items. We believe such non-GAAP items improve the comparability of our financial results from period to period. Roger will now take you through our results.

Thank you, Tony. Good afternoon, everyone and thanks for joining us today. This morning we reported income from continuing operations of $31 million or $0.34 a share, which compares to $27.7 million or $0.30 a share last year. Our total revenue increased 6.5% to $2.8 billion on the strength of another solid quarter of used car sales growth. Total retail unit sales were 70,479 units, up 4.7% compared to last year.

Breaking that down, new was down 2.6%, but our used was up 16.5%. I think the new vehicle retail market was challenging during the quarter obviously because of Cash for Clunkers last year at the same time. On a same store basis, new retail units were down 6.6%, in the US and down 5.8% internationally. Again, it's important to note that both markets faced tough comparisons due to the government incentives in place last year. As noted, we experienced continued strength in our used car operation.

During the quarter, our same store used unit sales increased 12.9%. US was up 17.5%, and our international business was up also, at 5.4%. Importantly, our used to new ratio remains one to one in our overseas business, and it increased from 0.52 to 1, to 0.64 to 1 in the US. On a same store retail revenue basis, it increased 3.8%, including growth of 4.2% in the US and 3.1% internationally.

Breaking this down, the same store increases, premium luxury was up 6.9%, volume foreign was down 2.9%, just to make a point there, our Toyota and Honda business was down 2,000 units during the quarter compared to last year. Domestic was up 9.2%. The decline in our volume in foreign stores is due in large part to the significant lift in the US last year again from Cash for Clunkers. Excluding the effect of changes in foreign exchange rates, our same store retail revenue increased 6%. International up 9.1% versus what we reported, at 3.1%, due to FX. Our revenue mix in the quarter, United States, 63%, international, 37%, and that was consistent with 2009.

59% of our operating profit was generated in the US with a balance overseas. Our brand mix was domestic, Big Three, 4%, volume, foreign, 30% and that was a 2% decline from last year, again, associated with Cash for Clunkers. And our premium business was up 2% from 64% of revenue to 66%. During the quarter, gross profit increased 1.7% to $430 million, and our gross margin was 15.6%. Average selling prices increased $2800 per new unit and declined $700 per unit on used vehicles.

Our new margin was 7.9%, down 30 basis points sequentially. Q2 in 2010 was 8.2%, Q3 in 2009 was 8.4%. And used margin was at 7.4% down 60 basis points and sequentially the second quarter of 2010 was at 8% and the third quarter of '09 was 8.8. However, we continue to experience strong margins in our service and parts operation. In our third quarter, our service and parts margin came in at 57.3%, which compares to 55.3% last year.

Our SG&A to gross profit was 82.8 in the third quarter, compared to 82.5 in the second quarter this year. Moving on to the balance sheet, our vehicle inventory remains in good shape as of September 30th. Our total vehicle inventory was $1.4 billion, up $71 million since June, and if we look at it on a same store basis our vehicle inventories were up $69 million compared to the second quarter, new up $36 million and used up $33 million. At the end of the quarter our worldwide days supply of inventory, new was at 49 days compared to 56 days at the end of June, our second quarter and used was at 36 which was flat with 36 at the end of the second quarter.

Moving on to CapEx, year-to-date CapEx was $63 million including $47 million in the US and $16 million internationally. We currently expect our gross CapEx to be approximately $80 million for the year. Looking at liquidity and debt, we had $853 million of non-vehicle debt outstanding as of September 30th. And that's a $93 million decrease since the beginning of the year.

Our debt to capital ratio continues to improve. As of September 30th it was 45% compared to 47% at the end of the second quarter and 57% at the beginning of 2009. We remain compliant with all of our financial covenants as noted in the press release. As of September 30th, we had $322 million available under our credit facility to fund our capital commitments and grow strategies including $262 million in the US and $60 million in the UK. As you can see, our operating cash flow and credit availability provide significant liquidity which we expect to use to redeem any of the convertible notes put to us in April of 2011.

Let me make a few comments on Smart at this time. During the quarter, we wholesaled approximately 1165 Smart Fortwos compared to over 3,000 during the third quarter last year. We are in far better shape at the turn of the model year than we were last year. We have approximately 1600 model 2010 years in inventory to be sold through the retail channel. If you looked at the inventory October 1st including dealer stock, we're down about 3,000 units, which is significant as we go into the 2011 model year.

We announced an incentive program in October designed to move out the remaining 2010 inventory, which resulted in a $0.01 per share aftertax expense. We expect to start delivering the updated 2011 models in the first quarter of the year. Also, the Smart EV is being well received. In fact, we've already presold 70% of the stage 2 EVs and expect to deliver them over the next six months. First units will be arriving in the next couple weeks.

On October 6th we announced an MOU with Nissan to design and build a new subcompact five door vehicle to be sold throughout the Smart retail network. We currently expect to have this vehicle available for sale in the fourth quarter of 2011. If you read our press release, we noted we expect to spend approximately $25 million on the design homologation and production of this vehicle. We estimate that approximately $17 million will be expensed between now and the launch of the vehicle with a balance being capitalized and amortized over the production life of the vehicle and its parts. We expect this vehicle to be in the market some time in the fourth quarter of 2011. The third quarter we recognized $1.1 million of aftertax expenses relating to this vehicle.

Take a look at acquisition and investments. In 2010, we've acquired three businesses that operate six franchises and we developed 10 open points. On an annualized basis, we estimate these open points and acquired franchises will generate annualized revenue of approximately $350 million. Our goodwill in these transactions was about $3 million and our working capital is approximately $10 million. I think we'll look at spending about $27 million on CapEx when we're completed with all the projects. We'll continue to pursue opportunities obviously to generate incremental revenue while maintaining financial discipline as we don't see paying the large multiples we did over the last several months.

In closing, before I open up for questions, I wanted to talk about PenskeCars.com, which PAG launched this week. PenskeCars.com is our latest effort to leverage the Company's infrastructure, our significant vehicle inventories and our operating scale and of course the Penske brand. It offers customers the opportunity to search our entire new and used inventories of more than 25,000 vehicles in the US using simple and convenient search tools. PenskeCars.com brings all of PAG's US dealerships together and it's designed to drive sales and service fleets to each of our PAG stores. We've also launched a social media campaign in the US under the Penske name. The campaign is designed to connect with our customers through Facebook, Twitter, and blog sites, augmenting our local market presence in each of these forums. Again, thanks for joining us today, I'd like to open it now for questions.

First go to the line of John Murphy with Banc of America, Merrill Lynch. Please go ahead.

Hi, John.

Good afternoon, Roger. Couple of questions. First, just on the parts and service margins, I mean, they were a lot higher than we thought they were going to be, and they seem to keep ramping up. Just wondering if there was anything going on in mix there, or an increased focus on cost in the service lane, trying to understand how those margins got that high, and how we should think about them going forward.

Well I think that as we've seen the mix change, John, from more warranty to more customer labor, we have more margin both on parts, and on the labor hours that generate across the service lane, with retail customers versus warranty. That's point number one. I think point number two, that our internal, our PDI, is really increased, as we look at the number of vehicles that need to be redone from a reconditioning perspective, which gives us internal gross profit, which I think is key. And then we also, in over the last several months, we've initiated strong tire programs. Quick Lube service has been something we're in, in all of our stores, and certainly we've seen that give us large RO numbers with high margins. So I think that at the end of the day, we've got a lot of programs in place, the way we're getting to our customer base through some of the programs we have in CRM.

I don't think you're going to see this continue, because embedded in there, has been some of these recalls we had. Last year we had the Lexus recall, which we don't have this year. We've had Toyota, so you might have 100 to 150 basis points of stretch in there now, just based on the recall campaigns. But overall, I see the offense that we've all put into the retail service lane, the fact that the mix has now gone to customer labor, obviously we have big margins in our body shops. We'll do $100 million just in our body shops this year. So I think you put that all together, you'll see why we have this good margin.

Got you. Then a second question, just on the pressure on new vehicle margin. I'm just wondering if that is a mix issue as well, or the consumer's really coming in to showrooms, and really looking for a deal that's pressuring margins. Just trying to understand what's going on with new vehicle margins, and how we should think about those going forward as well.

I think what you're doing, you're comparing margins quarter to quarter 2009 and 2010 to Q3. We ended a very strong quarter last year, where we had Cash for Clunkers. We had people really paying almost sticker price MSRP, plus they were getting the discount, really the benefit of the discount from the government. Now, what's happened, during 2010, the OEMs have slowed down their incentive spend, so consequently it's putting a little pressure on the dealer to make some discounts to get some of these payment prices in a line where they want to do their transaction.

And quite honestly, as we look at the numbers that we're seeing on the lease side, we're having to give some of the customers in the premium luxury who are coming out of vehicles, they want to see a payment in the same area, so we're having to discount the cars some in order to meet those requirements. I don't think it's a tragic situation, I just think it's what's happening as the market is now more normalizing after what we had last year. Overall, I think that Cash for Clunkers had an impact, but to me, when you look at the volume, foreign is really where we've had the impact, as we've seen our margins.

Then just lastly, as the market does hopefully normalize, and we see a rebound in sales, just trying to see what you are thinking about, or seeing, in the showroom floors, as far as consumer traffic, and close rates, and ultimately is there a pickup in the cadence or the interest of consumers, or are we just still seeing a lack of showroom traffic and that's the reason we're still seeing some pressure or lack of big recovery in demand at this point.

Well, when you look at our numbers, in our new unit, volume was down 2.5%, and our used was up. So if you look, just take it geographically, if you look at the east, we were really flat new and used, quarter to quarter, and central was up 10%, and the west was down 2%. So I think across the country you're getting different dynamics. Yet when you look on a year-to-date basis, the east is up 10%, central's up 11%, and then the west is up 5%. So I think that the third quarter was probably obviously a quarter that comes down from the standpoint of sequentially during the year, because the model changeover, but then we had the comparison against last year.

I think that when I look at the business, right now, it's consistent. I think there is an upward trend. I don't think we're going to get knocked out of the box by some big U-shaped curve here over the next six to 12 months. I think that what's happening, the market is up 10%. Retail is up 3%. And fleet's up 48%. So some of this drive in the market has been because of the fleet.

I think traffic is up marginally. We'll see a real good weekend, and then we'll see kind of an average week. I don't think we have any issues from a credit perspective, because the captives, at least we do 70% all of our financing, all of our deals are done either on lease or retail, retail finance contractor with the captives and they're all buying more along with the banks. I think right now, I think we've got a steady increase, but it doesn't have high momentum.

Great. Thank you very much.

Good.

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

Hey, Matt.

Hey, good afternoon, Roger. So I just wanted to start on the UK for a minute. Can you give us a feel for what the Q4 order book looks like in the UK? And then any commentary you have around the increase in the VAT that's coming? Do you think that creates a little prebuy activity in December, and what does that leave in store for us in the first quarter of next year?

Well, let's talk about VAT. We had an increase in VAT already at 2%, I think in the last year, and basically, remember, VAT is charged to the retail consumer. VAT is not charged to a business. And many of our brands that are premium luxury, they get VAT, they get that rebated to the Company. So basically, it will be hard to say until we see it. What I think is really there will be some pull-ahead, maybe in December, we'll get some benefit of that, but I think right now everybody in the UK is talking about they're taking 400,000 or 500,000 jobs out of the government, and what kind of impact is that going to have just on the general economy.

So I think we've really got to wait until we get into next year, get through Cash for Clunkers, excuse me, through the first quarter, then we'll see how our registration month goes and we'll kind of flatten out there. I think that we don't have a robust fourth quarter in mind. I think it's going to be a steady quarter, as we've seen in the past, and we have some prebuy or orders that are coming in, but those are on some very large premium luxury vehicles, Ferrari, Maserati and some of the Porsches that we didn't get in Q3, we'll get some of those in Q4. We haven't seen what incentives the manufacturers are going to put in for people to pull ahead, but that usually will happen in December.

How are you feeling about your inventory right now on a worldwide basis in terms of the composition of inventory? Do you have -- are you heavy on 2010s? Do you have enough 2011s in the models that you want? Just a little more color on inventory.

When you look at our inventory and you look at days supply, we're in the best position we've been in. You go back to 2008, we had 72 days supply. We're sitting in the mid-50s now, so we're really in pretty good shape. I think when you look at overall, there's really some brands where we like to have more Q5s. There's certainly the 3 Series BMW is hot, some of the Mercedes cars. It's difficult overall when you think about what brand is up or down. I think we're in great shape on 2010s as we go into 2011. I don't think we'll have any carryover there.

I think I said that on Smart. It's one of the things that hurt us last year, carrying over 3,000 more 2009s than we needed, and that just killed us from an incentive perspective. When you look at Audi, we've got a 40 day supply. I don't see Q5, I think someone said is only a 14 day supply. Honda, we have no issues on Honda. All the vehicles are pretty good. We're looking for the Odyssey which will be out in 2011. We've got a new Civic coming in 2012.

Overall, I think Mini has the Countryman coming out in December. And MDX at Acura is really in short supply. It's kind of a mixed bag. I look at overall, then I look at it by area, and one of the good things we have the benefit to do, if we're heavy in one OEM's brand in one part of the market, and we're short in another, we have the ability to move those vehicles intercompany, which really is a very efficient for us, and helps us balance the inventory.

And then on Smart, in terms of this incremental expense to get the new vehicle ready, if we assume that of the 17, maybe 13 or 14 or 15 hits in 2011, is that kind of the negative gross profit number that we should use for the year, or do you think that the profit in the business can offset most of that expense?

Well, remember, we're going to have a year with one model like we've had this year, into the fourth quarter. We'll be amortizing you could say, probably $15 million, between now and the end of next year, on a straight basis, because we've taken about probably $2 million -- we'll have done 2 to 3 by the end of this year. That will all be expensed. That's research. That's development.

That will all be in SG&A, and then of course that will come out as we go into 2012, and we'll get the benefit of the gross profit and we'll be amortizing about $8 million of tooling over the life of the vehicle and the part stream. Really, the big impact of that will be over the next 12 or 13 months, but we can manage that I think. It's going to put us in much better shape, the network in better shape, and I think that it will turn us back into a profitable brand.

I guess at the gross profit level, Smart is maybe flattish with this year, but then you've got the $15 million actually down in SG&A?

Yes. And again, we've got a little bit of a cushion there, because we're not going to blow our brains out with $2,000 or $3,000 bucks on incentives for cars that they're sitting in stock, we hope.

And then lastly, just turning to CapEx, any early sense for where that number could be for next year? Is it going to be lower than this year, given that you don't have as many open points?

I think that there's a little more going to be done in the UK, because we have some projects there for Audi, and one for BMW, and a new Porsche site. We're going through those. My goal is to keep it in the same range where it was this year.

Okay. Great. Thanks. Good luck, Roger.

Thanks.

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

Hi, Rick.

Good afternoon, everybody. It's actually Nate Mendez in for Rick.

Hey, Nate.

I was just able to get in on the call, so I apologize if I'm going to ask you to repeat yourself, but I was wondering if you could give us a little bit more color on the cadence of sales through the quarter, as well as any noteworthy areas of regional strength and weaknesses?

I'll give it to you. We did cover that, but I'll give it to you quickly. When we look at the quarter, the east part of the US, our region, east, was flat. That's new and used combined. The central was up 10%, probably driven by strong used cars. The west was down 2%. So overall, we were down 2% on new, and of course we were up significantly on our used car business. You compare that to a year-to-date, where the east is up 10%, central's up 11%, and the west is up 5%, so I would say the quarter didn't have the cadence of the year-to-date numbers, but again, it was a good quarter when you compare it to last year, when you had Cash for Clunkers.

Okay. Thank you for that. And then with the UK, can you give us any additional color there? I know September industry data was pretty soft. How did you guys fare in that registration period, and I guess what do you see for the remainder of the year there?

Well when we looked at what we retailed in the third quarter, we were down 0.8%, and basically I think that's pretty good, when you think there was some scrappage which we had in the third quarter of last year. We had none of that. So we were down 5.7 on new and we were up 4.9 on used. So September registration is consistent with March, these are the two strongest quarters we have. We talked a little bit about the VAT increase, which is coming in as we start into the first quarter of 2011, and we think there might be some pre-buy in December. But we really haven't seen any of the OEMs' programs yet. I think we'll wait to see what October and November bring and they'll announce them there, right at the end of the year.

Okay. Okay guys, thanks alot for that, and good luck with the quarter.

We'll go to Patrick Archambault with Goldman Sachs. Please go ahead.

Good afternoon,.

How are you?

I'm good, thank you. Just on revenue per unit, new sales it was up quite a bit, yet margins sort of offset it and it looks like on a sort of gross profit per vehicle basis, it was I believe close to unchanged. Can you just tell us a little bit more about -- is that sort of a Euro impact, or a mix impact, that was sort of at the high end that was offset by incentives?

Well, number one, when you compare the two quarters, what you're doing from the standpoint of revenue and also margin, you've got to think about -- we sold 2,000 less Toyotas and Hondas during the third quarter this year versus last year, which obviously -- when I looked at those numbers, I did the same thing you do. When I looked at it I saw that our margin was down between $300 and $400 per unit, just on those, on all the total units we sold. So we had a reduction in the volume, foreign, from the standpoint of units, these are our two key brands, we also had a deterioration of the growth because of Cash for Clunkers. To replace that unit volume and the revenue, we had the premium luxury obviously which has a higher MSRP, and that really was offset because of lower margin on the volume, foreign. So overall, when you look at the business, we were really at 6.8% in margin on volume, foreign, in the third quarter this year, and were 8.3% last year, so I think it's all tied up in Cash for Clunkers and our reduction in volume, foreign. When you think about our business, 48% of our business in the US, 46% is volume, foreign and only 50% is premium luxury.

And looking forward, I mean, that's consistent with what some of your competitors have been saying about just the competitiveness of the new vehicle space, which is a bit counter intuitive, just given that you would think that with lower incentives, maybe some of that would carry over to better discipline. Do you think this is something that with higher sales, is going to get better, or are we just kind of at a -- are these pricing pressures and competitive pressures that just given the landscape you see might persist for a long time?

I think we've got to step back and look at the market right now, and I think there's a couple of dynamics. I don't think that the manufacturers are spending the kind of money they did last year on -- let's say on advertising, and from a marketing and incentive spend they pulled it back, so there's less noise in the market to get this customer out there. So we're challenged to close deals. Our guys don't make any money unless they close deals, and quite honestly at this particular time on the used car end, when you think about it, we get a lot of our vehicles come off lease from the OEM captives, and these guys are taking advantage of a better used car market. So the used cars were being pushed a little bit on margin, because of -- we've got to buy them at higher prices. There's only a limit of what we can get financed on a going forward basis.

So I think we're normalizing here. I don't think there's anything to be concerned about. When you go back, you can look at where we were 12, 18, 24 months ago, and I think these margins are fairly much in line. As the market picks up, when you get momentum, it seems that your people probably are not afraid to ask for more margin. When it gets a little tighter as it is now, and a comparison to last year in the same quarter, there might be some pressure on the sales force to deliver the units.

But overall, we felt good about the margins, and good about the traffic and what we're able to -- our closing rates are good. I think we probably have a better sales force today than we had a year ago. The people that dropped off were probably our poorer performers. So with discipline and some of the tools we have, we should get more. There's also the Internet out there, and people are more and more involved in the Internet and shopping, so they come in, when they come in to the dealership, they're well informed as far as what margins are available to the dealer, and also for them.

And I guess a separate question for you, S&I was very strong this quarter with -- because I guess that tends to track new, right? And it was up quite a bit despite the fact that you guys saw a little bit of a dip in volume. What was behind that?

Well, I just think that -- we were up about $50 per unit. We're lower than most of the people in our peer group, because the majority, when you look at our business, 55% is premium luxury, and that's leased, and we don't have the ability to sell some of the add-on, the extended warranty, and some of the other things that people are leasing out BMW, for instance, on a full circle program. So overall, I think that you had a lot of cash deals last year in many cases when you had Cash for Clunkers. So some of that financing might have come back in to the market.

Great. Thank you very much.

Our next question's from Scott Stember with Sidoti & Company. Please go ahead.

Hi, Scott.

Hi, how are you, Roger?

Good.

Did you comment on how October sales are tracking so far?

Well, I would say they're consistent with what we saw in September. I mean, it's a longer month. We've got new models in now. I think there's some deals on the 2010s that I would say I feel decent.

You talk around the country, you see pretty much the same thing we saw. The east feels pretty good coming out of the gates. The central is strong, and I say west, is the same as it was as we ended last quarter. The good news is I think the used car business is still good. We see that and with our retail first mentality now, and lowering the sale price on used, I think is paying off for us.

Going back to the parts and service area, could you break out what your customer paid, same store growth was in the quarter.

I think customer pay, I know that our internal was up 24%, and our customer pay was up about 2% and warranty was down about 4%.

And was there any notable benefits from the Toyota recalls within that number?

I guess what we said from a recall perspective, I think the number I remember is about 20,000 that we completed during the quarter. There was probably 80% of those were floor mats and the other was the pedal. The revenue, the gross that generated, we looked at, that was somewhere between $1.7 million and $2 million, and we completed about 110,000 recalls. The one thing you have to realize is we had big Lexus recalls at this time last year, which we don't have. So one's offsetting the other. I think I said earlier in the call, probably about 13 basis points of benefit we've had on the Toyota recall, as far as a margin in parts and service during the third quarter.

Lastly on Smart, could you talk about the EV, electric vehicle? You talked about how 70% are presold already. Who's buying this car, and what's the market for this?

Well, we have -- it's interesting. Give an example. AAA in California has taken of group of these vehicles. You have a number of national companies are taking them. We have individuals. We cranked back into our old reservation concept, and went out to our consumers that's already driving Smart, so we had a lot of interest from those.

I would say it's early adopters that want to have the EV. I think there's companies in New York, in Southern California, Northern California, that are committed to green initiatives, and where we have infrastructure going in, we're starting to see a lot of interest. So to me, we'll see some at universities. It looks like we're going to have some vehicles at Pepperdine, and there's a couple other ones that are very interested, so it's a myriad of customers, and these are 250 stage two vehicles, which will have a range of about 100 miles. Will have a top speed somewhere around 65 to 67 miles an hour. And I've driven the Stage Three, which will be coming out in the next probably 12, 18 to 24 months, and what we'll do is exchange this customer that has this vehicle, we'll exchange his Stage Two vehicle for Stage Three, and that's an 80-mile-an-hour vehicle with considerably more range, and to me, I've driven the vehicle, and I think there's -- it's very interesting as you get in these and start to drive them, I drive a Smart during the day here back and forth, and I can tell you that the EV version is very interesting in that particular vehicle.

There's been some complaint about the manual automatic transmission. Of course, you have no transmission, it's a direct drive with this vehicle. So the ride is good. You've got maybe 150 pounds more of weight. But with the motor technology and the converter, you've got a nice vehicle. So we're excited about it. It will play a place in our product line. We'll have a two-door gas version. We'll have electric version, and we're going to have our new five door V segment vehicle, which we'll bring in next year.

And the electric, what's the price point on that?

We have a lease at $599.

Got you.

It's a lease at $599, and then when the new vehicle comes out, we'll offer the customer the opportunity to convert his lease into the next technology.

That's all I have. Thank you.

Thanks.

Next question's from Ravi Shanker with Morgan Stanley. Please go ahead.

Thanks. There's been some talk that because of the uncertainty around tax rate policy in 2011, that there's -- that buyers of luxury cars are kind of holding off purchases, to see what happens with tax rates and the election results and such. Do you think that there's some pent-up demand on the luxury side?

We're all waiting to find out what the tax is going to end up, for sure. I don't know whether anybody's sitting back. I can't validate that at all, to be honest with you. It could be talk that I haven't been involved in, but you never know from the standpoint as we go forward, but we'll have to see. Our same store sales were up in the third quarter, so something's going on and I would say that we've seen more activity in our super premium luxury in Porsche, in high end of Audi, BMW and the M-Class, M-Series. There's no question. In Phoenix, which has really been hit hard, and even Las Vegas at the Wynn, we've seen those businesses perform much better year-to-date.

Got it. Can you give us an update on Penske truck leasing? Are you seeing any signs of commercial recovery there?

We had $5.7 million of income from the joint venture on our 9% in the quarter, and one thing we are seeing is that our rental utilization has gone up into the high 80s, which is just terrific. We down-sized our rental fleets over the last 12 to 18 months, but one other factor is that it takes about 220,000 new tractors a year, to keep the average age at six years, and we've been -- we saw 120,000, 140,000 this year. So there's a big demand for new equipment, and people are utilizing our rental fleet as they're re-evaluating their fleets, and we're seeing also, because of that, we're seeing our used truck prices go up, which really makes a lot of sense.

Got it. And you said something really interesting earlier in the call about the UK, about how the VAT does not apply to corporate purchases. What percentage of your UK sales are fleet versus retail?

Well, I think that when you look at all of the Lombard and the banks, RBS, and a bunch of these people have these big -- GE has -- they have big Company fleet programs, because from a tax perspective, it's better for a Company to offer you a vehicle, I think, versus -- because of VAT, versus you buying it personally. So there's a play there which I think I'll get Tony to give you all the details on that. But, again, the VAT, you get that rebated. If I buy something, there's a VAT on it, I'm a Company, I can apply to get that VAT refunded, as far as I know.

Got it. Finally, one maintenance type question on the quarter. It looks like your tax rate was a little lower than historical level. Is something special going on this quarter, or do we expect it will stay at this level.

I think when you look, the full year, we'll probably be at about 34.7% and it was 35% I think last year. What took place in the quarter, we got the benefit -- there's going to be a 4% ironically in the UK, if you can believe it, we're going to have a 4% corporate tax rate reduction over the next four years. We got the first 1% reduction in the third quarter of this year, so that obviously generated some benefits for us. And I think as you look at our tax rate anyhow, it's driven -- you have some ups and downs. It's not linear.

It goes up and down, based on our mix of income, foreign earnings between -- you have higher earnings in March, higher earnings and sometimes we get benefit in the third quarter because of the registration month. So again, lower taxes in Europe also have helped us during the quarter. Consistently, we're going to see that. So I think overall, that you're going to see our tax rate at that level. In fact, when you look at Europe, you see a tax reduction of probably 4% to 5% down during the quarter.

Great. Thanks very much.

The next question's from Brian Sponheimer with Gabelli & Company. Please go ahead.

Good afternoon. Great quarter on used, no matter how you look at it. Obviously the comp was more difficult in new because of Cash for Clunkers. Could you take us back to last year and talk about the used environment, given potential substitution last year, new for used?

Well, of course last year, there's a byproduct of Cash for Clunkers. Obviously everybody was running to get new cars. We had a lot of used cars that were generated from Cash for Clunkers since we got a benefit of that in the following period, because some of those cars were either kept by the families, or they were traded to us. But I think overall, the used environment today, I think everybody realizes and we learned this during this meltdown of the economy, that we've got to sell everything. And where we were wholesaling cars, and I'm sure my peers were in if same boat, we're now seeing we've seen the Carmax model where they can sell cars at $17,000, we should have the ability to sell lower cost of sale vehicles through our network. That's what's going on. I think that really started last year.

Okay. So as we're looking the next year, the next couple quarters, the gross margin on used is likely to either come in or stay where it is, because you're trying to generate gross profit dollars as opposed to margin?

There's two dynamics here. I think that we're all going to be selling more used cars. The issue is, that we've had values of used cars go up. There will be some in the fourth quarter that come down some, as the wholesalers are trying to relieve their balance sheets of vehicles. As those used cars go up in value, and the finance companies start to look at the advance rates, you get an artificial cap, which will reduce maybe or hold our margin. And I think that you'll see, when the new car market recovers, you'll see some fall.

But right now, I think we've got a cap based on just how much you can get financed, because a lot of it has to do with being able to finance a used car customer. Especially if you're going deeper in the beacon scores and even the subprime. The amounts you're allowed to finance, or the subsidiary, will let you finance, will be less. So there will be some ability to hold on to some margin, but you'll have a cap. On the other side, people talk to us, well, what's going to happen? Because we've seen all these new vehicles come out of the market. We're going to have a starving of used vehicles on a going forward basis. One of the benefits we have is that 55% of our business in the premium luxury is leased. So we have the first call on lease and finance deals coming out of our captives, and that was whether it would be new, or whether it be used.

So we're going to have the opportunity. The prices might be higher than we want, but we're still going to have some inventory, and have the accessible vehicles available to us to be able to purchase and then resell.

Thank you. I appreciate that color. One more question, if I may, on your volume, your volume brands in the states. The financing environment for Toyota and Honda customers, has that changed at all regarding the near prime, or the subprime market there?

These guys are buying. I think when you look at -- when I look at Toyota, 75% to 78% of all our new and used, they're buying. These guys are in the market. That's one of the strengths of those brands. And Honda is -- for a long time, Honda wouldn't finance other makes. They've even moved into other makes financing. So I think that the strength that I see from those two brands, is also in a position to support the financing.

So to me, subprime is still difficult. We don't have much of that. I think there's some benefit. I talked to our guys at the Cadillac store this past week, and they said with General Motors buying Americredit, it opened up GMAC, and they're buying deeper now. I think it's all about captives, and Toyota and Honda are increasing some incentives from a financing perspective, and they can do that because their brother, sister, a little more difficult when you've got a third party.

I see those guys in the game. Obviously their business was down in the third quarter based on a year ago, but even when we talk about Honda and Toyota, our businesses have been consistent, and I think the brands, certainly Toyota has worked their way through the mess they had a year ago, and we see it still as a very strong brand to be associated with.

Thank you very much. Appreciate the color.

Next we go to Carl Dorf with Dorf Asset Management. Please go ahead.

Hi, Carl.

Hi, Roger. I just have a question relating to your cash fees and the potential for paying some kind of a dividend again. Will the expenses on Smart and net possibly on some of your convertible debt prevent you near term from any cash dividend? Can you give me some kind of feel as to when we might be able to look for that?

We discuss at the Board meeting, every time we have a meeting, do we have a stock buyback? Some of our peers have done that. Do we reinstate the dividend? I think right now as we look at least over the next six months, I'm focusing -- my mission is cash generation to reduce, or to have the ability to pay down our convert, people who put the convert to us. We're watching our capital expenditures. Obviously, just having -- owning a big portion of the Company, everybody wants to get a return.

So I'm looking at it as an owner. But I also want to look at it from the standpoint, what's safe and secure for the Company. And I think right now, as we look at it, we're focusing on April. We can see good visibility on how we'll take that convert out, and then following that, I think then we might have a different view of whether it's stock buyback or dividend. But we're going to look at it again at our Board meeting coming up here in the next couple of weeks, so we'll keep you posted.

Appreciate that. That's kind of what I thought. Thank you.

Next we go to Ashvin Dhingra with PioneerPath Capital.

Ashvin, how are you?

Good. Thanks for taking my question, Roger. I had a question on your new car margin. Looks like it was about 7.9% in Q3. But if I look historically from, say, 2002 to 2007, it was in the 8.5% to 8.7% range. So my question is, as volumes pick up, is there any reason why new car margins shouldn't return to this historical range?

Well, when I go back, I look at that new car margin, I go back to the first quarter of 2009, and we were at 7.2% in the US, and 7.6% in the UK. And I think in the second quarter we were at 7.7%, and I think we peaked somewhere in the third quarter of 2009, then we started to come back again. So I think that -- and I kind of look at where our peers are, then I look at the mix of business, and right now I think that this margin in the 7.5% to 8% is realistic.

The UK probably -- we lost some of the real expensive cars during the quarter, because we weren't able to get them. There's some cyclicality of this also. But I think overall, margin should stay in that 7.5%, at least for us, with our brand mix. Some of it might be lower.

Okay. Got it. Thank you.

Mr. Penske, we have no further questions in queue.

Okay. Thanks, John. Thanks everybody for joining us. Goodbye.

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