Penske Automotive Group Inc (PAG) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group first quarter 2011 earnings conference call. The call today is being recorded, and will be available for replay approximately one hour after completion through May 12, 2011. Please refer to Penske Automotive's press release dated April 5, 2011 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, sir.

Thank you, John. Good afternoon, everyone, and welcome. Our press release detailing Penske Automotive's first quarter 2011 results was released this morning, and is posted on our web site at www.PenskeAutomotive.com. With me today are Roger Penske, our Chairman, Bob O'Shaughnessy, 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 on this call. Our actual results may vary because of risks and uncertainties, including external factors such as consumer credit conditions, OEM and supplier operational issues, our transition of the smart distribution business to MB-USA, interest rate fluctuations, changes in consumer spending, macroeconomic factors, and other factors over which the Company has no control. Any such statements should be evaluated together with the information in our public filings, including our Form 10-K. At this time, I'd like to turn the call ever to Roger, who will take you through our first quarter results.

Thank you, Tony. Good afternoon, everyone, and thanks for joining us. I'm extremely pleased with our first quarter operating performance. Our results were highlighted by a 13.9% increase in retail unit sales, and a 15.3% increase in total revenue. Same-store retail revenue increased 11.6%, including growth in each area of our business. And our UK operations generated another outstanding quarter of profitability, highlighted by new vehicle unit sales that outperformed the overall UK market registrations in Q1. As a result, our income from continuing operations increased 51.7% to $36.4 million, and earnings per share from continuing operations increased 50% to $0.39.

Looking at some of the specifics of our performance in the quarter, we retailed 71,627 units, up 13.9%. New units were up 10.8%, and used were up 18.1%. Retail unit sales increased 17.9% in the US, and 6.3% internationally. On a same-store basis, retail unit sales increased 9.9%. New was up 17.3%, and used was up 13.5%.

As a result, total revenue increased 15.3% to $2.9 billion. And same-store retail revenue increased 11.6%, including 12.7% in the US and 9.8% internationally. The same-store retail revenue increases include 14% at our premium luxury franchises, 13.4% of our volume foreign franchises, and 7% at our domestic franchises. Same-store service and parts revenues increased 3.4% in the quarter, including a 5% increase in the US. Excluding the effect of changes in foreign exchange rates, our same store retail revenue increased 10.1%.

Our revenue mix in the first quarter in the United States was 62%, and internationally was 38%. Our mix of operating income was 50% from the US, and 50% internationally. Our brand mix, domestic big three 4%, volume foreign 29% and premium 67%. During the quarter, average selling prices increased 5.1% on new vehicles, and they were flat on our used cars. Our new margin was 7.9%, down 30 basis points from Q1 last year and down 60 basis points versus the fourth quarter of last year.

Our Q4 margin, I think, was impacted by various year-end incentive programs offered by the OEMs last year. However, while our new vehicle margin declined, average gross profit per new vehicle sold increased 1% compared to Q1 of last year. Our used margin was 8.1%, which was consistent with Q1 of last year. However, gross margin on used vehicles increased 90 basis points versus the fourth quarter of 2010, and gross profit per used unit sold increased 12%, compared to the fourth quarter. Our service and parts margin was 57.0%, up 60 basis points from Q1 last year, and up 80 basis points compared to Q4 of last year. In total, gross profit increased to $454 million, and our gross margin was 15.9%.

Looking at expenses, SG&A to gross was 81.3%, an improvement of 54 basis points, compared to the first quarter of last year. Our tax rate for the quarter was 30.1%, which compares to 37.3% in the first quarter of last year, and is lower than our expected annual effective rate, which should be somewhere between 35% and 36%. The lower tax rate is due to the continued reductions of corporate tax rates in the UK, and an increase in our income in lower tax countries, and a release of certain reserves relating to loss carry-forwards that we expect to be able to realize due to our exit from the smart brand.

Moving on to the balance sheet, our vehicle inventory remains in great shape as of March 31. Our vehicle inventory was $1.5 billion, up $46 million since December. And on a same-store basis, vehicle inventories were up $34 million since December. New down $8 million, used up $34 million. At the end of the quarter, our worldwide days of supplies was 42 days, compared to 45 days in the first quarter of last year. Used was 34 days versus 32 days. Moving on to CapEx. CapEx was $21 million in the first quarter, including $8.8 million in the US, and $12.2 million overseas. We currently expect CapEx spending in 2011 to be in the neighborhood of $85 million.

Turning to our liquidity and debt, as of March 31, we had $796 million of non-floor plan debt, up $16 million from year end. On April 1, we repurchased $87.3 million of our convertible notes at par, using available working capital and borrowing under our US credit facility. After the repurchase, $63.3 million of those convertible notes remain outstanding with a fixed interest rate of 3.5%, and are callable at par at our discretion. As of today, we've repaid all the borrowings incurred under the US revolver in connection with the repurchase, and have $702 million of outstanding, which leaves us $400 million of availability under our worldwide credit facilities, and also, we remain well within our financial covenants.

Looking at acquisitions and investments in 2011, we acquired two businesses that operate three franchises. On an annualized basis, we estimate these franchises will generate revenues of approximately $100 million. In total, we spent $8 million on goodwill and working capital for the acquired franchises. We will continue to pursue acquisitions to generate incremental revenue on an opportunistic basis.

Let me turn to smart. As previously announced, we're in the process of transitioning the smart distribution business to MB-USA. We're making good progress and expect fully to complete this transaction before the end of the second quarter of this year. In the meantime, we continue to operate and support smart USA, and will continue until the transaction is complete. We incurred net losses of $3.5 million relating to smart in the first quarter, including costs related to our exit from the business. Those losses have been included in discontinued operations in the financial statements, included in our press release this morning.

Before I finish my remarks, I want to take a moment to talk about the earthquake in Japan. First, I'd like to express my deepest sympathy all the people impacted by this tragedy. Similar to our efforts relating to the earthquake victims in Haiti, we've initiated a fundraising campaign at all of our Penske Companies to contribute to the disaster relief efforts underway worldwide. We also are maintaining ongoing dialogue with our OEM partners who provide frequent updates to us regarding production changes. Each manufacturer is evaluating their supply chain and working diligently to maintain production at the highest-possible levels. But as we all know, production will be impacted, particularly at the Asian manufacturers over the next few months.

As a result, we've instructed our stores to be vigilant about their new vehicle inventories, and to avoid discounting simply to sell units. We also sought to increase our used vehicle inventories to ensure that we have an outstanding supply of vehicles for our customers to consider. Currently, we have roughly a two-month supply of new vehicles at our stores in the US that represent OEMs that have announced production delays. In fact, new vehicle inventory today remains fairly close to the same level of units at our dealership lots at the same time last year. For perspective, the Asian manufacturers generate roughly 33% of our total revenue, and the remaining manufactures have not reported significant production impact relating to the earthquake.

Looking at our parts supplies, we've been told the supply of parts should not experience significant declines. Based on the fact that our service and parts operations contribute 45% of our gross margin, this uninterrupted supply of parts will benefit as we navigate through these difficult times. We continue to monitor the activities daily, and will manage our businesses accordingly. Thanks for your attention. And I'd like to open it up for questions.

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

Good afternoon, Roger.

Hi, John.

Thanks for the color on Japan. I was just wondering, I understand what you guys are doing to offset the potential pressure there. Are you getting any indication from the automakers that there's any special programs or anything that they're doing to help you retain customers or is there anything you can do to retain these customers and that you don't sort of net lose these new vehicle sales?

I received some communication here just in the last couple days from Toyota financial, and they're raising all residuals on 2011 models by two points. They're increasing advance rates from 120% to 130%, they're placing off-lease vehicles, which are not purchased in dealer-direct closed-end sales into a second sale, which is good. They're also, for the dealer perspective, they're offering 180-day interest only for Toyota and Lexus dealers who have real estate loans. No principal reductions, just interest only. And they're also providing lease extensions up to 12 months. So, this is a good program for us, and I think that as this trickles down, we'll see more of this from the other manufactures.

And Roger, on the used vehicle side, given that's a business that's likely to ramp up in the next couple of quarters as an offset, what kind of financing terms are you seeing for your consumers on used vehicle? I mean, has anything changed? Do you think the financing will be there to help support that volume in the coming quarters?

Well, I've never seen the OEM captives more aggressive. We did, during the quarter about 75% of all of our financing of new and used through the captives. They've got higher advance rates. Obviously, a number of different interest rate [subvention], and to me, I think that one of the most interesting thing is they're very aggressive on other OEM trades. So, if we would trade a Honda on a Toyota, they're stepping up and giving us good finance rates. And also giving us additional money to take these trades in and then finance them, where we make a decent gross profit. Again, aggressive CPO programs are out there, and I think, again, I just think residuals will continue to grow as there's short supply but again, this is temporary.

Okay, that's helpful. Then on the acquisition front, looks like you're active in the quarter, but you also got a new open point down in San Francisco. I was just wondering if you could talk about the acquisition potential that you're seeing in the market now. Is that getting better or worse? As far as volume and ultimately multiples, but also on the ability to win these open points, and what you've seen recently, and what you see down the line for PAG?

I think on multiples the top businesses that are for sale will be traditional multiples. I'm sure -- I think that most of us will look and see, can they be contiguous to markets where we have scale so we get cost benefits and advantages that we might have because of that. Certainly from an open point perspective, there are a number of those we were able to get last year. Particularly from Mercedes and Mini. I think there will be some opening up, as we go forward in 2011.

Most important is, there's a tremendous amount of pressure on the dealer/operator today for his CapEx. And I think when some of the people who are deciding whether to stay in or get out of the business, see the check they have to write for that. We're seeing more of these people coming into the market and looking for potential purchasers. I think that bodes well for the public groups that have the capital and want to continue to grow through acquisition. Certainly, our program that we've entered into in San Francisco with Nissan and Infiniti to have a world-class building in that marketplace, I think will be excellent if we get the same kind of lift out of that, the transaction we had with Audi in London, it will be terrific.

We're going to be opportunistic. $100 million of annualized volume in Q1 already. And we look forward to building on that as we go through the rest here. We have plenty of capital available. On a worldwide basis, almost $400 million. We expect to deploy that reasonably as we go forward.

And then just lastly, it's easy at the end of April for us to forget the bad weather that occurred in January and February. I was wondering if there was any impact from weather in the quarter on a year-over-year basis on the new, used, or parts and service business?

If you talk to our people on the East Coast, they all had shovels in their hands many days during the week. I'd say -- that we didn't try to add it up. I know that we spent a lot of money on snow removal from Warwick, Inskip, all the way down to Washington. Throughout the East Coast. It was a significant -- and January and February, obviously things improved tremendously as we went forward into March. Atlanta, also, had an impact. We had some in the UK.

So, overall we lost days in both sales and certainly you can't get those service days back. So, even with an increase of 4%, 5% of our service revenue in the quarter, and even on impact, I think that service and parts are on the right direction. But it's hard to put a number on it. We did spend some extra money and obviously lost a gross benefit.

Great. Thank you very much. Keep it up.

Thanks, John.

Next we'll go to Rick Nelson with Stephens. Please go ahead.

Hey, Rick.

Good afternoon, congrats, as well.

Thank you.

Wanted to ask you about new car margins, if indeed you're seeing an improvement there since the supply seems to be getting tighter? And is that occurring in the non-Japanese plants, as well?

Well, I think it's a little too early. As soon as we had this -- I acknowledged the situation in Japan. We communicated to the organization that we want to -- as I said in my remarks, we want to look at our margins. So, we're managing that on a day-to-day, week-to-week basis. And I think you'll see some uptick on that, we were down 40 basis points when we looked at year-over-year, first quarter of 2010 versus 2011, we've seen good gross, I guess, management by our managers. There's no question that we got to continue that, especially if we want to be some short supply with the Asian brands. I think it's a continuing situation.

On used cars, the only thing that could hurt our used car margins could be cap advance rates on used, that you just get too high and they just won't finance anymore. That could have some impact. It might have some impact on finance reserve when you're trying to sell associated products along with a used sale. Overall, I think the margins will be a little bit smaller, because you have the smaller cars that are being sold. Typically, they have less margin available to them than you do in larger cars. The good news is our mix is primarily premium luxury.

Thank you for that. I'd like to also ask about service and parts. You saw good growth there, particularly in the US. And I think you mentioned 5% same store growth in the US. You had some tough weather condition in your markets. What is the driver there, Roger?

Well, I think as we've talked in previous calls, we're into the tire business now. Our Saturday Quick Lube is important. We have this Toyota Care, which gives us the ability to have customers come back, and our margin on that business is significantly more for an oil change than we had in the past with our Full Circle program. I think our smart Repair which is wheel repair and dents and small cosmetic repairs is something that we've instituted across all of our big campuses. And our customer pay is up 5%, which is good, as we said, on a same-store basis. We've had some increase in rate so I wouldn't say it's attributable to that. I just think we have people coming back into the market who really were not bringing their cars in.

And we've done a big job on our CRM systems in parts and service to try to generate more service business. But it's just more share of wallet. We're not outsourcing a lot of the things that we were doing before, windshields, window tinting. A lot of that work is being done internally. And I think that there's certainly more internal work, when you look at the used car business was up double digit, and that creates additional internal work, which also drives our parts and service. And when you think about the selling price of the premium luxury, some of the costs on those to recondition to CPL will give us some good internal GP.

And on the acquisition front, are the opportunities more so in the UK or the US, or --

No, I would say that, maybe there's more in the US right now. I think we had an opportunity, a contiguous business in the UK with BMW and Mini in the first quarter. But we've had good opportunities here in the US, and we'll continue to work on those. But to me, as I said before, I think a lot of this is driven on what do people want to spend, on their facilities to meet some of these CI requirements. And as soon as this market has gotten better, it seems that the OEMs have decided to push harder for CI, and I think it's the wrong time.

We need to be sure that for people who are going to take their life savings and put them back in their buildings, it's probably a time they're going to make a decision do they stay in, or get out. Again, we're in a position that we like to grow, we want to grow in markets where we have strength. And I think that's probably the same you'll find with the other public retailers.

Finally, I'd like to ask you about the smart closing. Seems like it's on track. Do you still expect them to pick up the inventory and signage?

Yes, we're in the process of negotiating with MB-USA, those are things I think which we'll come to agreement on here over the next 30 to 60 days. We're in the process of negotiating wind-down with -- there's about 21 retail locations which will not continue on under the new MB-USA requirements. And we're in the process of negotiating those. Those will all get cleaned up in the second quarter.

Great. Thanks, good luck.

Next we go to Simeon Gutman with Credit Suisse. Please go ahead.

Hi, Simeon.

Hi, good afternoon, thanks. Quick question first on the used car business. What the potential you see for that is. Maybe, where that used-to-new ratio goes, and what sort of successes the website PenskeCars.com is bringing to that business?

Look, I think that's one of -- probably the best things that happened to us during the quarter. We've instituted retail first. And that means that before we wholesale it, we're going to retail it. With the use of the internet, it really has given us another tool we didn't really have in the past, more and more people are using the internet. And our used to new was 0.79 overall, and in the UK was 0.97. And I think our goal obviously is to be 1-1 or more. I think we're getting certainly a lift from PenskeCars.com, it gives us the consolidation of all of the vehicles available online and to me we continue to market that brand.

More and more important is, we have metrics that some of our guys are working on. It says it's a metric of what do you wholesale versus what's your retail used. And I think that we're finding out our best operators wholesale only 20% of what they retail. And I think that's a good metric that we're using. It's not a secret. It's just where we're going. We have not decided to go and take lower-valued vehicles offsite. At the present time, we've had good luck selling those directly, either on line or to the casual traffic that would come in through our local promotions.

To me with the success we've had, I think it proves that we probably were giving up the business opportunity across the entire public networks, on this used car area. We've seen the success of Carmax and other people, so it's going to drive the cost of sales down. We get the benefit of reconditioning, which is certainly important. And we're selling more cars at a lower level. In fact, on PenskeCars we have a button of cars for $10,000 or other which, interestingly, gets lots of play.

Okay. And then, a question on the supply situation. Sort of two of questions in one. First, is the supply of the vehicles that are in the most demand where you'd like it to be? Maybe it's not ideal already with some of the fuel-efficient vehicles or just some of the hot sellers right now. And then second, you also mentioned something that we've heard across the board, which makes sense -- that selling closer to MSRP or less discounting, just want to challenge that, just to think about it because that seems to be the prevailing wisdom just to supply/demand, that's what it would dictate. But is there a scenario where that doesn't happen? And such that, whether you don't have the supply of what people want, and then there is some more discounting on what people necessarily don't want?

Well, let me say there's one advantage I think we have. We have a number of campuses that have 6, 7, 8, 9, 10, 11, 12 franchises that are contiguous. Where one brand might not have the model the consumer wants, he can move, just walk within three or four minutes and be at one of our other stores, which I think we've seen good traffic in our campuses. In fact, we're driving more marquee advertising dollars to those destinations, but to me, I think the margin -- I mean, a perfect example is the margin increases we saw during Cash For Clunkers. We saw it not only here domestically, but we saw scrappage in the UK drive higher margins. Now again, remember, our salespeople, at least in PAG in the US, are all paid out of commission. So, there is some incentive for them to drive for higher margin. There is less margin in these smaller cars, because higher gas prices have been some shift over. I don't think we're going to see much change.

One thing that has happened, the manufactures have announced -- I know Honda's announced a reduction of incentives on certain models where they're hard to get. I mean, they've done that right away. And I think that we've always had low inventory positions. I know Prius probably, today is at the lowest average day supply, probably 11 days, and I think we've got short supply on X3, X5, and Audi Q5, these seem to be vehicles which are very attractive in the marketplace. So, I don't think -- I think the law of supply and demand is there.

I think there's so many options for the consumer. If we have the ability to have multiple franchise locations, we can take advantage of that. You will see, when I look at incentives for the first quarter of 2011, versus incentives last year, it's down about $3,000 versus $3,250, it's down about $250. The OEMs are playing in the same game. Let's reduce incentives as the market demand might pick up because of a shorter supply.

Okay, just last -- this is anecdotal, do you think consumers have the appetite to keep demanding vehicles during this period, or do you think there's some reluctance -- just maybe wait it out, wait until the other end of this.

Well some of this is a purchase because they have to do it commercially because of their business, some of it's impulse, I can't tell you what are the other drivers. To me, if the margin is 10% on a vehicle, I'm not sure that 2% higher is going to make a big difference if someone has got to finance or lease the vehicle. Remember, in our particular case, 66% of our total revenue is from the premium luxury, and most of those vehicles that are sold are leased. So, you really don't see that gross too much in your lease payments, and some of those are set by the manufacturer, and we advertise those and those are sold on those particular amounts that we would promote in the marketplace. So, there's a lot of different situations today. And again, I would go back to your comment that it's a law of supply and demand.

Thanks. Appreciate it.

Thank you.

The next question is from Matt Nemer with Wells Fargo Securities. Please go ahead.

Hi, Matt.

Hi, Roger. So, two quick questions. One, on the Japan situation, you seem a little bit less pessimistic than some of your peers in terms of the potential impact this summer. How are you thinking about costs, the cost structure in some of the stores that might be impacted most, like Lexus stores? Are you planning on taking any costs now, or are you going to wait and see how things play out?

Well, let me make a comment here. I'm more concerned about the people that are going through a traumatic situation, families and businesses, et cetera, in Japan. I think that's my first thoughts. This is temporary. I think the Japanese are resilient. We'll see these manufactures, they're working 24 by 7, just some of the contacts I have within the organization, working 24/7 to try to re-change and resource the supply chain.

One thing that I think is important and maybe hasn't been brought out is that both Honda and Toyota have separate supply chains for service parts. That's the high-margin part of our business, that's 45% of our gross profit. So, from that perspective, we don't see a disruption in our parts and service, which is key. And when you look at our new car sales, it's in the 7%, 8%, 9%, depending what retailer it is. I think we're going to see impact in the third quarter, and there will be lower supply. But we've gotten down after the Cash For Clunkers, we were down 11 days at Toyota, 22 days, I think, at Honda.

So to me, when you talk about Lexus, Lexus is an interesting brand. I mean, it's a smaller piece of our overall Asian brand, because we're limited to the number of locations. But when you think about Lexus, we probably run the highest fixed coverage in our Lexus stores because of the parts and service business fee, the loyalty factor of the Lexus customer is up six, seven years. We might lose some of those sales early on, but we'll get those back, I think, and I think the used Lexus product has been obviously very productive. One of the things the manufacturers at Lexus is doing, is saying you do not have to change your loaner cars now after six months. You can re-come back to us, and we'll support for keeping them in and running them longer.

So, you start to see some pretty rational programs that are coming in from the OEMs. So, I'm not the one to say where the SAR is going to go. I think what we all have to do is operate our businesses accordingly. I think one thing that's apparent, there will be very few cars being sold to fleets. And there's 200,000 or 300,000 or 400,000 in a quarter, and those vehicles are not sold to the fleets. They would go to retail, it can make a big difference. And, I think once the supply and these people are able, it's going to rebound quickly. So, there's a tremendous amount of capacity on a worldwide basis. They could even shift some of this capacity as is necessary.

Okay. That's very helpful. Secondly, on the smart Car business, can you share with us, for modeling purposes about how much of a pre-tax impact that business had in the last nine months of 2010?

I don't have that number in front of me. What I'll do is, I'll get Bob O'Shaughnessy to get you that information, all right?

But should we assume -- is it fair to assume that business was a slight negative in 2010? I can't remember.

Look at 2010, it was -- I think it was somewhere around $0.15.

$0.17.

$0.17.

$0.17 we lost last year. For the year.

Got it. Okay. That's all I've got. Great expense performance, Roger.

Appreciate it. Goodbye.

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

Hi, Scott.

Hi, Roger. How are you?

Very well.

Can we flush out the parts and service by category, how it performed in the quarter?

Okay, when you look at -- obviously, we talked about our customer labor being up. We're seeing a trend on warranty coming down, based on just better quality. We were, as I said, up 5% on customer labor, probably up 1% on our warranty. Then we get good PDI income. Pretty much consistent, where we're getting more share of wallet on the retail side.

The strong PDI, does that explain the strong performance in the gross margin in this segment?

I think it's in customer pay. We're doing things today on the customer pay side, we'll repair things that we weren't doing before. Obviously on your internal, we get full margin on internal for used cars.

Okay. And on the used car side of the business, you talked about having adequate supply to possibly offset some of the shortages on the new. Can you talk about what you did this last quarter to bulk up in your inventory?

Well, we're very active at the sales. I think we're buying more cars at the curb, which for people we advertise for those. And I think we're a lot more aggressive from the standpoint of where we would wholesale vehicles in the past, and I think I made that point earlier. Now we're looking at a metric, you want to wholesale 20% of what you retail. So, in the past we might have done, might have been 50% or 60% we wholesaled. So, we have a tremendous used car flow from trades, and then additional trades on those used cars. What we're doing now is, as the other public retailers are, we're looking at avenues to retail those to the public.

As I said, our under $10,000 button on our PenskeCars.com is getting a lot of action. I think that's driving a lot of the customers to us rather than us having to sell those vehicles to wholesalers, and then the customer goes to another used car operator. And I think that we will even buy your car if you don't buy a car from us. And I think that's also important. That's nothing -- we're not setting a new standard here. I think this is just basics.

We're try to get more share of wallet utilizing our facilities, utilizing the revenue stream and unit stream that we have. We're buying cars on the service drive from customers. There's a lot of thing now, I think our loaner cars where we were turning those, we're now keeping those and getting that -- whatever we can't supply from the OEM and using those as retail opportunities, both new and used.

You said that you had a two-month supply of the Japanese brands affected by the production cuts. Obviously, second quarter probably won't feel an impact?

I think that maybe at the end of June we will. We'll see what the travel rate is in April and May. But when I look at just to give you the numbers, at 3/31 from our perspective, we had 53 days at Toyota, Lexus was 46, Honda 42, Acura 63, Nissan 52, and Infiniti 83. You can see Honda and Toyota averaged just under 50 days. So, at the end of the day, we're looking at it, and we're moving vehicles if necessary to balance our inventories. If we're long on one model we'll move those on this to a contiguous dealership, or one in a market that makes sense for the retailer.

Okay. Last question. Could you touch on how sales have looked, so far in April?

I haven't really gotten enough information to give you a forecast for April. I would always say it seems that we are commodity strong quarter ends, and then we've got to run it hard as we go forward into the quarter. This is tax time, but I know over in the UK things have stopped over there because of the wedding. I'm glad the wedding will happen tomorrow, so we can get back to business next week.

Great. That's all I have. Thank you.

Our next question is from Patrick Archambeault with Goldman Sachs. Please go ahead.

Hi, Patrick.

Hi, thank you. Good afternoon. I wanted to just ask you a little about the leverage performance. Clearly, you've seen your SG&A as a percentage of gross do quite well, compared to same period last year. How much of that is getting better traction from your campus footprint? Maybe you can tell us just a little about how much more there is to go there, as you put more throughput through those facilities you've invested in.

Let me say the first thing, I don't think it's good enough. I think that we've got a lot more runway of our SG&A, as a lower percentage of our total gross. There's no question, as we get traction at -- if the campuses we saw good traction in Turnersville, we're seeing some bright lights up in Inskip and Warwick, Rhode Island. With the high unemployment rate there, that's been a little tougher push for us. Chandler's been very good.

To me, I look if the current quarter, we had significant costs around this weather, supporting the weather and the snow. And also, we spent additional dollars from the quarter from the standpoint of marketing destination locations at these multiple franchise campuses. But to me, we're going to see that number continue to come down, through work not only by the end of store operators, all of our compensation is tied around SG&A leverage. In fact, if you look -- the public will show that my compensation even is driven by leverage at SG&A. So, to me to give you a specific number would be wrong. But it's a continuation, and as we increase our gross profit, as service and parts move up and that's very important on giving us leverage because of the high margin on our parts and service sales, will drive this number better.

Also, you got to think about, we were sitting for almost 24 months with no compensation increases within the Company. And I think in the first quarter we had some adjustment in that across our businesses. So, we had some headwind there. And, of course, we've seen some of our health care costs go up also. So, there's a lot of leverage that we have to push there. But I would say overall, 50 basis points is good. I see some of our peers did a lot better than we did. So, I'm certainly not satisfied. And that's -- the good news is we got more runway there for us, it will only help our bottom line.

Okay. Great. One question, one last one on Penske Truck Leasing. I remember in the fourth quarter, you had a very, very strong number there. I think it was like $8 million or something. And sequentially, that went down this quarter. Anecdotally, it does seem like freight and all those things have held in there pretty well. On the commercial side, can you tell us a little about, is there seasonality there, why the sequential downtick I guess?

We always have a big fourth quarter, we have -- there's lots of extra rental trucks out I think we had 5,000 to 6,000 units out for the quarter for UPS and FedEx. What we're seeing now, and we had a good first quarter. In fact, our profitability was up almost double in Q1 versus a year ago. We're starting to see used truck prices firm, ton miles are up, but I think that's going to drive some nice EBT for us as we go for the rest of the year. And, I think that tonnage has increased, about 6% in the first two months of 2011. So, we'll get the benefit of that as we go forward.

And what's happening is, there hadn't been any truck buys. It's been down in the low 130, 140, and because of that, the fleet age has gone up significantly throughout the US. As people need more trucks, as there is an increase, we're starting to see our rental reutilization up, substantially -- running up close to 80% to 85% which is something we haven't seen in probably 18 months. So, that's all going to bode well for us as we go forward. Typically, the first quarter is our lowest quarter, and we'll see that certainly pick up as we see the one way business with kids coming out of school. This becomes a big quarter, and then we'll get the benefit of the used truck sales.

Okay. Great. Very helpful, thank you very much.

We'll go to Brian Sponheimer with Gabelli & Company. Please go ahead.

Hi, Brian.

Hi, Roger. Thanks for taking my phone call.

Sure.

Just want to talk to you about the fuel impact that you may see for your mix of vehicle. Clearly, the premium luxury buyer is a more affluent one, than say you would find in the domestic three or volume import. Maybe there might be a mix change within the brands? Did you think that is possible?

Well, one thing -- I think I got to go back and kind of catch time here. We go back three years ago, roughly three years ago, when fuel prices went to $4, there's been a tremendous amount of technology that's taken place by all the engine manufacturers. We see, of course, hybrid in all the premium luxury. We see now, diesel's becoming very apparent in the Q7. We see it in ML and a lot of the brands, you'll see more of that. And that's giving some of the premium guys an opportunity to experience non-gasoline engines. But the gasoline engines are a lot better. We see many of them advertised today. Maybe the small four cylinders that, over 40 miles per gallon.

I don't see, at least on the premium side, I don't see a lot of people trading down. I mean, our 7 Series BMW certainly when we look at the Audi A8-L, these brands are very strong right now. So to me, when you think about our cost of $4 and you just take that and compare it to the UK, that's $10 a gallon in the UK. 50% to 55% are diesel. So, when you look at what are the options, you can go to a smaller vehicle, depending on what your requirements are, you can go to a smaller vehicle and probably get 40 miles per gallon or you can go to diesel and get a 25% increase.

When you look at the market, the market's about 2% has been hybrid. And it was 350,000 units two years ago. It went down to 270,000. Now, it's up about 40% in the first quarter. We've seen -- and it's about 2% of the market and diesel is about 1%, but I start to see diesel sticking its head up here. I know that in the -- in our VW business, we can't get enough of the TDIs because of the great fuel economy that we see there.

So, small SUVs are hot, the Q5, the X3, the X5, the Q7 with diesel in it, I think 60% of what we're selling because it gives such great fuel economy. But I don't see the big impact, right now, of the fuel -- at least our customer base. Now, that might change. In 90 days from now when we talk, I might have a different version. But that's my own personal opinion.

Okay. Thank you. That's very helpful. Looking at the UK, I think you had said in previous quarters that corporate buying was making a comeback. Any color on that in the quarter?

Well, we outperformed the market from a unit volume in the UK. And I think that the market was down about 8.5%. And I think that, some of that, we didn't have the scrappage impact benefit in the quarter. But again, I think the corporate person is still getting his compensation through his vehicle. So, I don't see a big change there, and we just, I think right now what my guys tell me when I talked to them the last couple of days, that everybody's focusing on the wedding. That's why I said earlier, this wedding has got to take place, which I think is terrific. But the impact from VAT, people have asked me that question. Certainly, we had a VAT increase. But again, some of that is rebated depending if it's a business.

So overall, the financing is available. We don't see any curtailment in advance rates. Again, we're pretty vertically integrated over there with finance sources, with all of the key manufactures. We're either number one or number two in all the premium luxury, because it's 95% of our business. And we continue to have great leverage and scale in the markets where we operate. I think that's one of the reasons we outperform the market.

Right. If I can ask just one more, just thinking directionally about used vehicle prices going forward. Presumably you're going to be selling an older vehicle as you're looking to wholesale fewer, and retail those on trade-ins. Should we start thinking about a drop in average selling price on a quarter-over-quarter basis?

I think that we haven't seen it -- I think we were down a little bit over $200 per unit in the US. And in the UK, I think we were up because, remember in the UK, we have -- what we call demonstrators. Any demonstrator that's put into service, we're required to do that as parts of our franchise agreement. When those demonstrators are sold, they're sold as used cars, and of course they bring less margin. So, it drives our margin a little bit lower than you would see historically here in the US.

But we think our cost of sale will come down. There's no question. And I don't know -- drop down dramatically because we've got such a big portion of our business is premium luxury. But it did go down in the US a couple of hundred dollars in the quarter.

Outstanding quarter. Congratulations.

Thank you very much.

With that, we have no further questions in queue.

Thank you, John, very much. Thanks, everybody. See you next quarter, goodbye.

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