Penske Automotive Group Inc (PAG) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group second quarter 2011 earnings conference call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through July 28, 2011. Please refer to the Company's press release dated July 5, 2011 for specific information about how to access the replay. An audio file of today's call will be available on the Company's website under the Investor Relations tabs at www.penskeautomotive.com. I would now like to introduce Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Ladies and gentlemen, again this is the conference operator. We do apologize for the delay on the conference call. Please continue to hold. We will be starting this call momentarily. Again, we appreciate your patience. Thank you.

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group second quarter 2011 earnings conference call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through July 28, 2011. Please refer to the Company's press release dated July 5, 2011 for specific information about how to access the replay. An audio file of today's call will be available on the Company's website under the Investor Relations tabs at www.penskeautomotive.com. I'd now like to introduce Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Lori, and good afternoon, everyone. Thanks for joining us today. We apologize for the delay at the start of the call. There was some technical difficulty as they tried to bridge the call from us to you with respect to some equipment, but we believe now that that has been fixed through a workaround and we are ready to go. So, again, thanks for joining us today. A press release detailing our second quarter results was issued this morning and I hope you've all seen that, and it's posted on the Company's website. Joining us for today's call would be Roger Penske, our Chairman; David Jones, our Chief Financial Officer; and J.D. Carlson, our Controller.

Before we begin, I'd like to remind you that we may make some forward-looking statements on this call today. Our actual results may vary because of the risks and uncertainties, including external factors, such as consumer confidence, consumer credit conditions, OEM and supplier operational issues, interest rate fluctuations, changes in consumer spending, macro economic factors and other factors over which the Company has no control. Any such forward-looking statements should be evaluated together with the information in our public filings, including our Form 10-K. At this time I'd like turn the call over to Roger Penske who will take you through our second quarter results.

Thank you, Tony, and I apologize for the technical difficulty there as we got started this afternoon, but good afternoon, everyone, and thanks for joining us. Today Penske Automotive reported 2011 second quarter income from continuing operations of $39.9 million, or $0.43 per share, which compares to income from continuing operations of $31 million, or $0.34 per share, for the second quarter of last year. Our total revenue increased by $273 million, or 10.5%, to $2.9 billion. Total same-store units retail increased 4.6% to 69,755 units. Same-store retail revenues increased 9.8%, with each area of our business posting solid revenue growth. Same-store retail revenues increased in the United States 7.5%; internationally, they increased 13.6%. Our same-store retail revenue increase includes 13.8% for our premium luxury brands, 1.9% for our volume foreign brands and 8% for our domestic brands. Our revenue mix for the quarter was 62% in the United States and 38% internationally. Our brand mix, Big 3 was 5%, volume foreign was 27%, and that was down 2% compared to year-end 12 months 2010, and our premium luxury was at 68%, up 2% since year-end.

Looking at our new vehicles, we retailed 37,830 units, representing a decline of 1.1% compared with last year's, as the effect from the Japan earthquake was felt within the Toyota, Lexus, Honda, and Acura brands. On a worldwide basis, our Toyota business was down 15.5%, Lexus was down 29%, Honda was down 11.1%, and Acura was down 10.3%. Total same-store new units retailed declined 2.6% in the quarter. Although unit volume declined, average transaction prices on new units increased 9.3% to $37,600, and an average gross profit per unit increased 12.4% to almost $3200.

Gross margin on new vehicles improved 20 basis points to 8.5%. Looking at used vehicles, we retailed 33,000 units during the quarter, representing a 16% increase over last year. The good news is our used to new ratio was at 0.87 to 1, which compares to 0.74 to 1 in the second quarter of last year. Our international business was over 1 to 1. On a same-store basis total-use vehicles retail increase 14.3% in the second quarter. Average transaction prices on used units increased 2.9% to $26,600, and average gross profit per unit increased 6% to almost $2200. Gross profit on used vehicles increased 20 basis points to 8.2%. Our finance and insurance per unit was $976, up $52 per unit, or 5.6%.

Moving onto service and parts, it increased 7.5% during the quarter, including 6% on a same-store basis. Our customer pay was up 8%, our warranty was up 2.7%, our body shop business was flat, and our pre-delivery inspection revenue was down 23.2%, reflecting the Asian brands' lower volumes. Gross profit margin for service and parts was 57.2%, which is very consistent with last year. Overall gross profit increased 11.2% to $464 million and gross margin was 16.1% compared to 15.9% last year.

SG&A expenses were 13.2% of revenue and 82% of gross profit. The increase in SG&A is attributed to several factors including increases in compensation expense for some staff increases to support business levels and the elimination of the pay freeze we had in place since 2008. Also during the quarter we had higher rent expenses due to many contractual increases. An increase in number of loaner vehicles in some of our luxury dealerships also contributed to higher cost, higher fuel costs, especially on used cars and loaner vehicles, and increase in employee benefits all contributed to a little higher SG&A for the quarter. Our tax rate for the quarter was 34.2%, compared to 34.7% in the second quarter last year.

Moving onto the balance sheet, at the end of June our vehicle inventory was $1.4 billion, which represents a decline of $44 million from the end of March. New vehicle inventory declined $58 million and used vehicle inventory increased $14 million. At June 30, our worldwide day supply of inventory was 55 days when you exclude the Japanese brand, and use is at 40 days. We estimate our day supply for the Japanese brands to be somewhere around 30 days, and we see that the environment is certainly improving, Honda probably is 60 days behind Toyota, in fact, from the standpoint of moving forward with a good line of inventory coming at us. Floor plan debt was $1.4 billion, compared to $1.5 billion at the end of March. The change in floor plan debt was commensurate with a change in inventory during the quarter. The end of June, we had $717 million of non-floor plan debt, which represents a decrease of $79 million from the end of the first quarter.

During the quarter we repurchased $87 million of our 3.5% senior-subordinated convertible notes using working capital and borrowings under our US credit facility. We also acquired 618,000 shares of our common stock during the quarter for an aggregate purchase price of $12.4 million and an average price of $20.08. We ended the quarter with 92.1 million shares outstanding. We have remaining Board authorization to repurchase up to 138.6 million of outstanding stock or debt.

Capital expenditures were $52 million for the first 6 months of the year, including $31 million in the second quarter. Our CapEx estimate is expected to be approximately $95 million to $100 million, up slightly from our last call. At the end of June we had approximately $380 million availability under our worldwide credit revolving facilities. We used a portion of that availability under our US credit agreement to purchase BMW, MINI and Mercedes-Benz dealerships earlier this month. We also remain well within the limits of our financial covenants at the end of the quarter.

Turning to acquisitions. We have noticed on previous calls our intention was to grow our business organically, which you saw from our numbers, and also through acquisition, acting opportunistically on acquisition candidates. I'm excited about the franchise that we acquired so far this year. We have completed the acquisition of 7 franchises that are expected to generate approximately $525 million in annual revenue. Each acquisition adds scale to existing markets where we operate, allowing us to leverage our current infrastructure. The Porsche and Audi franchise in Ohio compliments the existing Honda, Infinity, Mercedes-Benz, and Toyota brands in the Cleveland market. While the acquisition of Crevier, BMW, MINI located in the Santa Ana Auto Mall add significant volume and scale to our existing Audi, Volkswagen and separate pre-owned operations, providing us with a leading position in the Santa Ana Auto Mall, which is in the center of Newport Beach, California. One of the best premium luxury markets in the United States.

Mercedes-Benz of Greenwich, which we announced earlier this week, compliments our premium luxury brand mix in Connecticut, and will allow us to grow our presence in this highly-desirable demographic area. We also remain on track with 3 new dealership points that are expected to open later this year. Construction is underway on the new MINI dealership in Marin, California, and the Nissan Infinity locations in downtown San Francisco, which are expected to open at the end of the year.

Before we close, I want to talk about Smart to summarize our recent transition of the Smart USA distribution business to Mercedes-Benz USA. The transition occurred on schedule June 30, and I thank the dedicated people at Smart USA, Smart Germany and MBUSA for their efforts as our transition was seamless. We fully support the strategy of combining Smart distribution in the United States with a Mercedes-Benz footprint, which should allow the Smart brand to capitalize under a stronger and broader network. MBUSA purchased the assets of Smart USA including the vehicle inventory parts, other accessories. Most existing contracts were assigned to MBUSA or were given notice and cancelled. The 26 employees that we had at smart USA were either hired by MBUSA or placed within the Penske family or accepted positions outside our organization.

In closing, our results for the second quarter continue to demonstrate the strength and resiliency of the Penske Automotive business model. We continue to grow the business organically. With the recent acquisitions, we have added significant new top line growth to our business. Further, we expect the impact of supply from the Japan earthquake to continue in the third quarter and expect some supply challenges with certain brands. However, we feel the situation is improving. Our OEM partners have made substantial progress in their ability to increase production earlier than originally anticipated, and I remain confident in our ability to manage through any continued supply disruption. I expect the inventory situation to be near normal conditions during the fourth quarter. I now would like to open it up the call for questions. Thank you.

Thank you. (Operator instructions). John Murphy with Bank of America Merrill Lynch.

A couple of questions. First, just on pricing, wonder if you could comment on what appears to be some pretty strong pricing in the second quarter, particularly at the end as inventory tightened, and how you expect that to progress going forward as the Japanese restock and really how that will impact your business?

Well, I think, when you look, on a combined basis, the pricing was up on new 9.3%, and our profit per unit was up 12.4. So, overall from a gross standpoint, we are up $354. And, just basically on pricing, we went up from $34,000 roughly to $37,000 on sale price, so we had a nice lift.

From a gross profit standpoint, I think we will see some pressure as we go on into the third and fourth quarter on the volume brands because we will see more inventory. But, I think that gross will be replaced by additional volume, and it's our confidence that, as we did following Cash For Clunkers, that we will try to manage these margins.

That's 1 of the great things about the model is we are going to start to get back some of the models which have been in short supply that we typically get higher grosses on which have not been part of the product mix we have had in inventory here for several weeks. So, that's going to help us maintain a higher gross profit.

And second question just on parts and service, I mean, the strength there is pretty remarkable given the decline we have seen in the past couple of years in sales. Just curious, what's really driving that strength on a revenue basis, and also this 57% gross margin is once again really on the high end of the range. What was the real driver there? Can you keep that up?

Well we bid at 57.2%, and I think what we tried to do, we had some benefits over the last year with some of the recalls from Toyota and Lexus, but I think what's key is that we are looking at more share of wallet. We have added body shops, we have dent repair, we are going in the tire business.

We certainly think that those are things that are driving it because we are trying to sell details and things that maybe we were outsourcing before. We have pretty much decided our glasswork, our window tinting, all of that is coming inside, and when we have these campuses and in many of the areas around the country and also overseas, we have the benefit to set up one location to do that internally rather than do it externally. So, it gives us efficiency and certainly the scale helps us and we get the productivity and also we get better pricing when we do it internally versus externally.

And then maybe just 1 last question, thank you, on capital allocation. You bought back some shares, you paid down debt, you're paying a dividend right now and you've made acquisitions. So, you're doing a little bit of everything with the cash flow that you're generating. I was just wondering as we go forward in the next 6 months of the rest of the year and get into 2012 what your priorities will be for cash flow, and will we see this rapid rate of acquisitions keep up or will you be paying down more debt? How do you think about this capital allocation as we go forward?

Number 1, we are going to continue because all of our ratios are in good shape. We've got plenty of capital available to us. We are going to look at opportunistic acquisitions in the premium luxury area, both domestically and internationally. And I think that from a CapEx perspective, we have some hill to climb there with some of the newer acquisitions we have made, specifically in Greenwich, but we will continue on with the dividend.

We will have some discussion with our Board in reference to the 3.5 % convert that now is into money, what do we do, so we leave it out, do we buy it in, and those are things that we will talk with our bankers about. But, at the present time, I think it's pretty much business as usual. If we have excess cash, the first thing we will do is pay down our debt.

Rick Nelson with Stephens.

Can you talk about the multiples that you paid for Crevier and Mercedes-Benz of Greenwich? I think Crevier included the properties, if I'm not mistaken.

When you look at Crevier, it was in the mid six multiple range. I think that we felt that it was a property that you have once an opportunity to buy in the best premium retail market. One of the things, the strategy there was that we already owned the Audi store and the Volkswagen store which was contiguous to those locations with Crevier. So, it gives us a campus location, and when you combine those together, we bought that about a year ago, we are probably in the mid-5 multiple range-, so to me, it was well worth it.

We think we had not a lot of fixed assets, we were able to purchase the property at very realistic rates. BMW Financial provided us a mortgage for that with, again, attractive rates. So, to me it was in line with what we paid for other premium luxury locations in San Diego and other areas in California.

From the standpoint of our friends in Greenwich, I think that it's once in a lifetime you're able to get the Mercedes-Benz store in that particular market, and we pro forma that in the same range. So to me, we have some more CapEx to do there than we did obviously at Crevier. Those facilities are pretty much done from the standpoint of an image perspective with a manufacturer.

So, I think you should look at mid-six multiple as kind of the range, and very few fixed assets. And, again with the real estate in play in the West Coast, and we have a very attractive lease on the facilities in Greenwich, so we have probably about $10.5 million to spend in leasehold improvements at the Mercedes store, but then we think we will have the finest location in Greenwich when we are done.

So, all in all, it was opportunistic. And I think that when you look at these 2 properties and what they will generate from us in the future, and again, when you think about Greenwich, it's only 23 miles south of our Fairfield complex where we have Mercedes, Audi and Porsche, so it's a great area. We can move some of our good people, give opportunities for them to move up in the organization.

So, you've got a human capital play there, too, that's important, and we have a lot of scale when you look at Southern California. Obviously, we are the largest BMW dealer in the West with Crevier, and it's number 5 in the country in BMW and in the top 10 in MINI, and we hope to drive that even higher.

How much liquidity do you have available to you for future acquisitions?

I think when I looked at a pro forma cash flow statement for the end of the month, we have used about $100 million, $105 million of capital for the acquisitions, after utilizing any cash flow that we generate during the month, so we've got plenty of dry powder.

And back to the gross margin question. The improvement that we saw in the current quarter, was that confined to the Japanese nameplates or did the other brands show expansion as well?

I think when you look at the premium luxury brands, overall, we were up probably a couple of tenths of a percent on premium luxury, and obviously the volume foreign was up 50 basis points. So, we saw a good increase in the volume foreigns because obviously the short supply drove that what, which you would expect.

But, again, in the UK, we were pretty much consistent over there at 8.3%, and the volume foreign was flat. So, overall I think that our salespeople, our managers understand that, we've got to get margin. The costs of doing business for us is up. We've got loaner cars for our customers, we are providing them with fuel. The fuel has gone up and we can't charge more for the car because we are putting fuel in the tank, but those are the things that they are expected. The manufacturers are asking us do more work around the car, which we have to pay our technicians.

So, again, I think that the margins are going to continue to go, and I think the good news here is as we look at the market, there was only $2400 average incentives during the quarter, and I think that was down double-digit from the second quarter of last year, and once they kick back in, that's going to give I think the market a pretty good lift because people are going to see some very opportunistic prices out there.

We will maintain margins, and I think that when you look at the mix, 66%, that we have in the premium luxury, and a big portion of those leased, there's really not too much effect on gross when you have these lease products because they are pretty much announced through the Internet and also by the manufacturers.

So, I feel our guys did a good job and there's no question that we had probably 50 to 75 basis points in the different Asian brands and the volume foreign where we got a lift. I'm hoping we can hold onto some of that and then increase the volume as we go into the third and fourth quarter.

And in terms of the financing environment, are you seeing any changes on the new or the used side or the captives still aggressive?

Well, I think we have always said that we are dedicated to be vertical, and at the end of the day, I think almost 75% of all of our lease and retail transactions took place, you know, with our captives, and the good news is that that's up from last year. So, I would say the captives are aggressive, they certainly are out there where the credit is decent.

I've seen some of our peers in the business that the captives are involved in supplying working capital lines, so I think they've got, I think, a good feeling from the standpoint of the stability of the business. Overall we have some preferred lenders which are our banks which probably generate about 20% to 25% and then another 2% or 3% go through credit unions, and that's pretty consistent as we look at our business.

Overall the total floor plan in the US was approximately $800 million and in the UK it was $550 million, and Germany was $34 million when you look at how the mix is. Our rates are pretty consistent with the rest of the peer groups from a floor plan perspective. They are very competitive. And, again, from our standpoint 75%, as I said, are with our captives on a worldwide basis.

Matt Nemer with Wells Fargo Securities.

Hey, everyone, it's Josh on for Matt. Last quarter you gave us a great update on PenskeCars.com and what was going on with vehicles that you normally would wholesale and getting rid of them off of that website. Can you guys give us an update on what's going on there?

Well, we've had a real good lift with PenskeCars. This is something that we initiated here near the beginning of the year, and I think that as we now aggregate, if you look onsite, we've got over 25,000 new and used vehicles on the site, and we are seeing, some good business generated from that.

I think it helps us with the umbrella brand over the rest of the manufacturers brand, and I think that as we go forward, we see this as being a key for us. We now have the ability. Smartphones are really going ahead of PCs from the standpoint on the Internet, and we think the mobile apps will be key for our stores as we go forward and we tie this together with PenskeCars.com.

You can go online and you can see 200 Porsches, you can see 100 Ferraris, you can see 1000 BMWs, and this is important. The customer sees this and then I think we get the trickle down effect at the stores themselves. So far, so good.

We've got some opportunities to link PenskeCars with some of our bigger business partners that we have at Penske truck leasing where they know us and they have got big families of employees that we are going to hook together with their access directly PenskeCars.com. So, we see this business piece of this even growing using that as the vehicle.

Scott Stember with Sidoti & Company.

The used car business here in the US, obviously those rates are pretty strong. Talk about your success in maybe placing people that were not able to find Japanese vehicles into late model used cars in the quarter?

That's getting pretty specific for me. I think that the general approach that we have now retail first. When you look at 0.87 to 1, used to new, we were up 16% for the quarter on used. By the way, we were up 22% in the US and up almost 6% internationally, so I'm not sure whether you could attribute that higher used car business, because basically didn't have the availability on the Asian side.

Also, our wholesale units were down by 20% when you compare it year-over-year. Traction prices were up about 3% and the gross margin was up about 6%. When you look overall, we had a very good quarter.

But, I think it's focused. We are taking this wholesaler out of it. At CarMax, I look at the job that they do and they are buying cars outside and they sell used every day, cost of sale is about $17,000.

Obviously, ours is almost $10,000 more because of our premium luxury. This used car business should be the retailer, OEM retailers business, and I think that's what we are doing at our shop I'm seeing the same thing happening within the other peer group, which I think is good for us.

And also the big gorilla in the room is the Internet. We've got such greater reach for people who are looking for a particular vehicle with the use of the Internet. In many, many cases, people can go right to the Internet to see what they want to buy in a particular area.

We've done a study looking at customers on new, and I would say customers typically were in a radius of 15 to 25 miles. When you get into used, you can see them coming from significantly longer distances to buy a particular vehicle.

You can price vehicles by cost categories, by OEM brands, many different ways. And I think that's adding to the success. I think we are all going to grow with the used business. That again helps the model. It helps us drive through these peaks and valleys that we are all involved in from the standpoint of the OEMs.

And I guess that's just a little bit surprising, particularly with pricing being as strong as it is on the used side with many used cars almost being as expensive as some of the new. So, can you maybe just talk about the mind-set of the consumer that's coming in, just to explain that?

Well, I think that they are reconditioning. Listen, our unit volume, being up 16%, we're up almost 5000 units, I would say if you looked at that in most cases, that would be a lower cost of sale because we are selling cars -- we are, at least, selling cars, -- which we normally would have wholesaled.

We get good margin on those. We offer a free buyback on those over a period of time. I think that at this point we have not hit a ceiling. We are buying everything we can that's coming off lease.

In many cases we've done the maintenance on those leased vehicles. We get an option to purchase those online. Those vehicles are very attractive in the market where people have the ability to buy a certified used car that's come off lease, and they get the same benefits of buying a new 1.

To me, I think that when they can't get what they want new, in many case, they will move to used. Very attractive programs on certified used. The incentives are low today on new cars, so there's really no reason to drive to a new car. It makes the new car price a little bit higherm maybe temporarily, until those incentives go up.

And last question, is it too early to comment on the July trends so far?

Yes, I would say that we've come off the quarter, the holiday, July 4 is always a big weekend, and then we take a deep breath, we are getting into the summer. Obviously in Europe, August shuts down over there with everybody going on vacation.

So, I can't give you a forecast at this point, but we think it should be similar to last year, as we go through the next 90 days. J.D. Power has said in a recent notification I saw today that business is better on the retail side, and the SAR could be somewhere around 11.9%. When you go back and you think of April was at 13.1%. May dropped to 11.7%,

We had the fuel price right there at the beginning of May and everybody didn't know whether to buy a truck or a car. I think the market stuttered. We had the debt crisis. We had unemployment still as a problem.

Then we moved on into June and with the Asian brands really feeling the inventory shortage, we went to 11.4% and I think it's good news now that J.D. Power is saying that we will go back and can be up at 11.9% and retail would be up. So, that bodes well, at least as I look at the quarter.

(Operator Instructions) Mark Mandel with Thinkequity.

I realize you're up against some challenges on the SG&A front but I was just wondering if you could discuss with us what your strategies are, what your plans are to tackle some of these issues and how we should think about modeling our SG&A expense numbers on a going-forward basis, both I guess in an absolute sense and relative to the gross margin?

Well, I think 1 thing, we obviously look at SG&A like you do. Our rent was up just because we have leases and sale leasebacks, was up $2.5 million, and when you look at that, just, that small flex gets us into going the wrong direction. So, to me, as we drill down, we are going to look in our marketing expenses.

Again, we had higher transportation costs because of -- and when you look at your transportation costs as a percentage of your parts and service gross profit, that moved up I think about 50 to 100 basis points, and that's all rental cars and fuel that we provide to consumers. So, with the fuel prices going up, we had some increase there.

So, we will be looking at our service loaners and what we are doing in service. Obviously watching our marketing. But again, we typically, because we are a premium luxury player, our comp has been a little bit higher, not that that's the reason to say it has to be, but I think it's more realistic.

I think that comp is driving less turnover. So, there's not just one particular area. Again, my comp, part of my variable comp is based on my SG&A to gross, so believe me I'm looking at it also.

So, if we look out in the second half of the year, do you think you'll move back to an inflection point where you see an improvement in an SG&A-to-gross profit ratio?

Well, I'm not a betting man, but I would say we are going to work on it. I hope to see some benefit there, yes, as we go into Q3.

Amy Patel with JPMorgan.

This is actually Amy Caroll in for Himanshu Patel. Just a quick question. Do you guys have a view on how to -- or have you guys estimated what new vehicle sales would have been excluding the impact of Japan?

Boy, that's a tough 1, but let me give you just a couple of statistics. We go back in our business, back to December 31, we had almost 6000 Toyotas in stock and we have 2400 at July 20. So, the end of the day, you can see our inventory is way down, almost over 50%. When I look at the wholesale rate in June, we only got 1300 vehicles. Now we've gotten 1400 so far this month, so we will end up with 1000 more, and that obviously bodes the right way, but I can't tell you what that would have done to our friends at Toyota on an overall basis.

I think, at the end of the day when you look at Honda, again, almost 5000 units in stock in December, we had 1800 units on July 20. So we are down significantly. We have some stores with less than 10 days supply depending on where they are in the US.

So I think there's been a significant impact based on this. I'm not sure what the peers are saying but at the end of the day, the Honda inventory at the end of the year was 191,000 units, and as I think I looked at it at the end of June, it was 65,000. So roughly one-third.

To me there's a lot of variables here and it's hard for me to say that, but there's no question that when we look at this coming back, we will see a much better SAR on a retail basis, and you'll start seeing the incentives back in the market, which I'm sure will help drive a lot of the public back into buying cars.

Yes, that's great color. Going onto used car prices, I guess I understand that we've been a little bit surprised at how strong it's been. Given like the expectation for recovery in the second half, where do you see these price trends going? Are they going to be a steep fall-off or do you think that because the amount of inventories coming on back is relatively slow that these used car prices will still be relatively healthy?

Well, our transaction price on used, I think I said earlier, on a worldwide basis went up just about 3%. When you look at the US, it was pretty much flat, and we got the big bump in the UK where we are primarily 95 premium luxury there. So, we are moving to a lower cost of sale. And I don't think there's going to be -- in fact, what might happen, we will have more availability if the business picks up, which, obviously will be key.

And I think gas prices make a huge difference, because as soon as the gas prices went up, Prius sales went through the roof, as soon as they came down, we could see it slow down. And I think you're going to see the same thing, we saw cars versus trucks.

So, those are all variables, and I think that the incentives can be a tipping point here. Once you get the new car price closer to the 1-year-old new car price, then there might be some downward pressure.

And then the last question is, I was also very surprised by the strength in your parts and services segment, and I was wondering if you could give us a breakout between what the margins are within those sub-segments because you mentioned that a lot of the driver is through the smaller detailing that you're adding. So, if you could give us a little bit more color by sub-segment with the drivers of growth are, that would be great.

Well, I think we run about 60% to 65% on labor and I think we run 30% to 35% on parts. In the UK they don't allow us the larger margin or the higher margin on the warranty, but as warranty is becoming less and more of our business is customer labor, we see that growing.

Body shop is about 60%. So, and then when you combine them we come up with you know 55%-plus and on the PDI side, there could be 80% margin there because you're probably paying an hourly person to do that PDI and you get a flat rate from the manufacturer.

Brian Sponheimer with Gabelli.

I had a question for you regarding cadence of new vehicle sales in Europe during the quarter. UK is obviously far away from what's taking place in Greece, but any trepidation with your customer group there regarding new sales?

Well, when we look at in the luxury side, because that's basically where we operate, we continued to be strong in the markets. The one thing they have in the UK where the majority of our business is, we have market areas so we don't have the interbrand competition, and to me that has driven a strong luxury business over the last quarter. Now the overall market over there has been weaker but again, part of compensation in the UK is the automobile, and a lot of that's what we call corporate business and from the corporate business side, we have seen that be pretty steady in the UK.

Again, some of the smaller vehicles, we are not really in that business. We have had the impact of Toyota and Honda during the last quarter, but overall I think that when we look at the marketplace, the registrations were down about 5% and if you took scrappage out, this is like our cash Cash For Clunkers, I think registrations would be down 2%. So overall, still the quarter was good, it was within 10,000 units of the same quarter last year, almost 500,000.

And just talking about acquisitions, we are about 3 miles away from the Greenwich facility you just bought and I congratulate you on such a good purchase. Is this what we should expect going forward where you have the capital and the ability to renovate facilities where the OEMs are saying that you need to come aboard if you're going to be part of the program. So, will we see more legacy franchises being purchased where you would go in and renovate the facilities?

I think the trend today when you start to look at the OEM CI requirements, corporate identity, and what you need for the customer satisfaction, these are big numbers and you get into these premium luxury locations, it's a big investment. And typically the owner operator today has maybe decided he wants to pass it on, he doesn't have someone in his family that would take it over and they look to the outside, and I think each 1 of us in the public sector, our peers, people contact us and some work because we've got scale and infrastructure and markets and we step up and buy them and other 1s we don't.

But, I think there's a string of stores that will be available to us not only in 2011 but as we go forward and to me the good news is that we are able to buy these stores in terrific markets. I've seen some of the peers getting great stores in markets that they will do very well with. And then they bring in their systems, they can take costs out.

To give you an example, when we looked at Greenwich, the back MIS was almost, you know, 50,000 a month. When we aggregate that into our system, it will be 15,000. So, you see those kind of cost saves just before you get started. So, to me that's this integration that we are able to put together because of the scale we have.

Aditya Oberoi with Goldman Sachs.

I had a question on the acquisitions again. Most of the acquisitions you have announced this year have been in the US. Is there any focus on UK/Europe going forward or the focuses remains on the US?

Well, we had one 1 BMW MINI store in the UK that we had bought in Maidenhead in the first quarter, so, we definitely have the door open over there and we've got a couple of things we are looking at. That's going to generate about $50 million in revenue.

We don't have a focus particularly US and/or the UK. I think it's just generally, opportunistically, where we have scale and infrastructure, as I mentioned before.

And I have another question on the inventory acquisition costs on the used side. Obviously the used car prices are going through the roof. So, has inventory acquisition cost been a headwind or you are seeing some benefit on that side just because of increased trade-ins or what's going on there?

I think 1 of the things that we are lacking is some of the lease returns which we had before when the SAR was at $16 million. So, there's some shortage of leased cars coming off lease, which hurts us. But, I think the key thing here is cars that we normally would have whole wholesaled we now are retailing, which is filling in that gap.

So, basically that is the driver of the increased margin in the use segment?

Well, I think when you think about 0.87 to 1 used to new, we were in the low 0.5 probably for a long time. And I think that the other thing that's probably maybe, I should mention, is that today our used car managers don't have to go to the auctions, they are all these electronic capabilities.

He can sit there at his desk and buy every morning or buy during the day and these vehicles are delivered to us, and the good news is that they are coming from a manufacturers' auction, it might have a leased car or rental car or something else, they stand behind these. So, we pretty much get a price and we get a condition and then if we have a problem, we can turn that vehicle back or renegotiate it. So, it made it a lot easier for us to buy cars, we are not sending people to sales or getting wholesalers to go buy cars.

Obviously, some of that still takes place, but typically, I know in our super premium luxury, we are all over cars that are for sale on the Internet, and today people that have cars for sale are using the Internet, and that's a great place for us to shop.

We have no further questions. I'll turn it back to our speakers for any closing remarks.

Lori, thank you, and, everybody, thanks for joining us today. See you next quarter. Bye-bye. Sorry for the interruption at the beginning. Bye-bye.

Thank you and ladies and gentlemen, this concludes our conference call for today and we thank you for your participation and for using AT&T's executive teleconference service, and you may now disconnect.