Penske Automotive Group Inc (PAG) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group third quarter 2011 earnings conference call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through November 9, 2011. Please refer to the Company's press release dated October 14, 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.

Thank you, Lori. Good afternoon, everyone. A press release detailing Penske Automotive Group's third quarter 2011 results was issued this morning and is posted on the Company's website. Joining me for today's call are Roger Penske, our Chairman; David Jones, our Chief Financial Officer; and J.D. Carlson, our Controller.

Before we begin, I would like to remind you that we will be discussing certain non-GAAP financial measures related to adjusted earnings from continuing operations and related earnings per share on our call today. We have reconciled these items to the most directly comparable GAAP measure in our press release and refer you to our press release dated November 2 for additional information. We believe these non-GAAP financial measures will help in understanding the comparability of our reported results from period to period.

Also, 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 confidence, consumer credit conditions, vehicle availability relating to OEM and supplier operational issues, interest rate fluctuations, changes in consumer spending, macroeconomic 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 would like to turn the call over to Roger, who will take you through our third quarter results.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today.

Today, Penske Automotive reported record third quarter results, representing the highest quarterly profit in the history of our Company. Our performance in the quarter continues to exhibit the strength and diversification of our business model and the benefits of our brand mix. For the third quarter, income from continuing operations attributable to common shareholders increased 63% to $56.7 million, and related earnings per share were $0.62, compared to $0.38 in the same period last year. Our results for the quarter included a net income tax benefit of $11 million or $0.12 per share, as described in our press release and the related financial tables. After adjusting for the net tax benefit the Company recognized in the quarter, third quarter results were still a Company record for profitability. Adjusted income from continuing operations attributable to common shareholders increased 31.3% to $45.7 million or $0.50 per share.

Although we faced inventory challenges, particularly with the Toyota, Honda, and Lexus brands in the quarter, third quarter results were driven by a 6.2% increase in total retail units sold, including 3% on a same-store basis. In Q3, total revenues increased 10.5%, with each area of our business demonstrating revenue growth. On a same-store basis, retail revenues increased 6.4%. In the USA they were up 5.1%, and internationally, they were up 8.7%. The same -store retail revenue increase includes up 8.8% for our luxury brands, plus 8% -- 0.8% on our volume foreign brands and plus 12.4% for our domestic brands. Excluding the effect of foreign exchange rates, the total same-store retail revenue increased 5%.

Our revenue mix during the third quarter was 62% in the United States and 38% internationally, and that was the same as it was in the third quarter of 2010. The brand mix was different. Big 3 was 5% this year and 5% in the third quarter last year. However, our volume foreign fell from 29% of our revenue mix in 2010 to 25%, and our premium luxury picked that up and went from 66% of our revenue to 70%.

Looking at new vehicles, we retailed 38,487 units in the quarter, representing a decline of 1.2% to last year. Total same-store new retail units declined 4.4% in Q3, comprised of a 3.5% increase in units in our international markets and a decline of 7.5% in the US. The decline in the US is attributable to the earthquake and the tsunami in Japan on the Toyota, Lexus, Honda, and Acura brands. PAG was down 13.6% versus Toyota in the US at 18.5%. We were down 8.9% with Lexus, the US was down 13.4%. Honda was down 21%, PAG was down 21%, Acura was down 19.3%, and we were down 23.9%. Although new unit volume declined, we increased average transaction prices on new units by 8.4%, an average gross profit per unit by 14.8%. Gross margin on new vehicles improved 50 basis points to 8.5%.

Looking at used vehicles, I'm pleased to report another quarter of double-digit increases in both units sold and revenue growth. Total same-store used units retailed increased 16.1% in the United States and 7.6% in our international markets, for a combined increase of 12.9%. The new to used ratio was 0.88 to 1, which compares to 0.75 to 1 in the third quarter of last year. Average transaction prices on used units increased 2.2%, and average gross profit per unit increased 2.8%. Gross margin on used vehicles increased 10 basis points to 7.5% over -- quarter over quarter. Our finance and insurers per unit was $1,015 or up 5.9%. In the US we increased 4.8%, and internationally, we increased 7.5%.

Our service and parts revenue increased 8.6% in the quarter, including 4.1% on a same-store basis. Our customer pay was up 6%, warranty was down 1%, body shops were up 1%, and our PDI was down 13%. That's a byproduct of less PDI on our Asian brands. Gross profit margin for service and parts was 56.8%, down 30 basis points from last year.

Overall gross profit increased 11.7% to $467 million, and gross margin was 15.8%, compared to 15.7% last year. SG&A expenses as a percent of gross profit improved by 70 basis points to 80.4%. On a sequential basis, SG&A declined by approximately $5 million, while gross profit increased by almost $3.5 million. Our tax rate for the quarter was 19% and included the net income tax benefit of $11 million, as disclosed in our press release. Adjusted for the net income tax benefit, the effective tax rate for the quarter would have been 34.7%, compared to 33.2% in the third quarter of last year.

Looking at the balance sheet at the end of September, vehicle inventory was $1.4 billion, which was up $24 million when compared to June. New vehicle inventory declined $4 million, and our used vehicle inventory increased $28 million. On a same-store basis, vehicle inventory declined $37 million from the end of June to $1.34 billion. New vehicles same-store down 53, used vehicle same-store increased $16 million. As of September 30, our worldwide days supply of inventory was 43 days on new and 47 days on used. Our floor plan debt was $1.5 billion, compared to $1.4 billion at the end of December. At the end of September, we had $851 million of non-floor plan debt, which represents an increase of $71.7 million from December.

During the third quarter, we acquired 1.8 million shares of our common stock for an aggregate price of $31.9 million and an average price of $17.39 per share. So far this year, we have acquired approximately 2.4 million shares for an aggregate price of $44.3 million or $18.07 per share. We ended the quarter with 90.2 million shares outstanding. We remain -- we have remaining Board authorization to repurchase up to $106 million of outstanding stock or debt. Capital expenditures in the quarter were $80 million for the first 9 months of this year, including $28.5 million in the third quarter. Our CapEx is estimated to be approximately $95 million to $100 million this year, net of any sale leaseback transactions or mortgages. At the end of October, we had approximately $330 million of availability under our worldwide revolving credit facilities. We also remained well within our limits of our financial covenants at the end of the quarter.

As we noted on previous calls, our intention was to grow our business organically and through acquisition, acting opportunistically on acquisition candidates. So far this year, we have completed the acquisition of 7 franchises that are expected to generate approximately $525 million in annual revenue. We have either sold or are in the process of disposing franchises representing approximately $300 million in annualized revenue. On a net basis, we estimate our acquired annualized revenue to be approximately $225 million at the end of the year. We also remain on track with three new dealership points. Construction is underway on the new MINI dealership in Marin, California, and the Nissan Infiniti franchise is located in downtown San Francisco, all which are expected to open during the first quarter of 2012.

In closing, our results for the third quarter continue to demonstrate the strength of our business model. We continue to grow the business organically, and with the acquisitions we have completed during the third quarter, we have added significant new top line growth to the business. I am very optimistic about our business. The auto retail market is improving. We see pent-up demand in the market. With many new products coming into the market over the next 12 to 24 months, we expect to see continued growth in the market next year. In fact, recently J.D. Power forecasted a SAAR for the US market to be 14.1 million units in 2012. However, while the delivery of Toyota, Lexus, and Honda product recently began to improve, both Toyota and Honda have announced production delays to conserve parts in the wake of the flooding taking place in Thailand. Production delay will impact delivery of products. We do not expect normalized levels of inventory until the first quarter of 2012, at the earliest.

Thank you, and I would now like to open the call up for questions.

(Operator instructions).

We have a question from the line of John Murphy with Bank of America Merrill Lynch. Please go ahead.

Good afternoon, Roger.

Hey, John.

One question with five parts. I'll try to lay this out simply. The business seems to be hitting a nadir here where revenue is starting to increase a little bit, the industry is starting to recover a little bit, and all the great actions you've taken in the past couple of years that have been tough are shining through. And I just wanted to run through five and just see if you could comment on each of them, because it seems like there are big structural shifts in the business.

First, it seems like new vehicle inventory is running tighter. I was just wondering if you think that will hold as sales recover. Second, you have an increased focus on the used business, which is coming through in spades in growth there. So, just curious if you think that will hold going forward. Third, parts and service margins have been very strong, a little bit down in the quarter, but still very strong. Will that hold? The fourth, you have had much tighter SG&A control. Will that hold? And then fifth, you seem to have an even better relationship with the automakers than you did going into the downturn. Just curious if that will hold.

So, new vehicle inventory, used vehicle focus, parts and service improved, tighter SG&A control, and better relationship with the automakers. Do you think all those structural positives are things that you can hold onto as sales recover?

John, let me try to comment on each of the items. Certainly, our new inventory, we balance that inventory every day, and we've never been afraid to push inventory back at the OEMs, whether it's internationally or domestically. So, we just are not taking vehicles when we don't have the sales rate. And I think overall, we've held our inventory pretty much consistent. If you look at our days supply, we are sitting at 43 days, so I don't see that changing. Obviously, there might be more pressure as the Asians get back into business in the first quarter, but we certainly don't see it today in any of the brands where we are having -- really, it's almost a pull right now, and there's many hot models that we are really short of.

From a used perspective, the focus on used has been retail first. We have had a goal going from roughly 0.5 to 1 used to new retail to get to 1 to 1. We have over 1 to 1 in the UK, our central region is 1 to 1, and I think that, that's going to be a continued focus. And what we are doing is we are retailing first, meaning instead of wholesaling and since we are a premium luxury player primarily, we wholesaled a lot of cars which were not consistent with the brand. And we would then wholesale those and not retail them. Today, we're taking those vehicles and retailing them, so that's giving us some upside, which I think is key. And obviously, we are following the CPO requirements from all of our manufacturers.

From the parts and service side, there's no question, this is key. We have made a significant investment in CapEx in our facilities. We've given our technicians, our service departments, the service drive-in lanes to our customers to advantage ourself with repeat and referral customers. And I think we see those paying off today, because we continue to grow our business. The benefit of the CPO may be 37% of our used cars have to go through those shops to be reconditioned, and we have our rapid repair. And those are some of the activities we have done to grow our parts and service business, and I don't think that we will stop that. We are in the body shop business, which drives a lot of parts business. And also, from the end of the day, our customer pay continues to go up as warranty comes down, and we have to look for other benefits of revenue, because the quality of all the vehicle is better.

From an SG&A perspective, obviously, I'll look at our peers, our number is higher. I think we have more comp in our SG&A due to the fact that our grosses are higher on new vehicles than used, but again, that's a focus of ours. I see some benefit coming from the marketing and advertising line that was down about 3% this quarter overall on a per unit basis, and I think that's a byproduct of using the Internet which has certainly, certainly been key. One of the things that we have to look at, because we are premium luxury, we have to supply a significant amount of loaner cars, i.e., if you look at Crevier in California, 350 loaners. The Mercedes business and Lexus and BMW business in San Diego with over 300, and this is a cost to doing business, but it's required when you're in the luxury business, so that adds a little bit more of our SG&A. But I think overall, we will have some rent increases, because we have done sale leasebacks over time. We have some ratcheting there, but we are going to take opportunistic looks to see if some of the other people have done, buy some of those out, which might give us a better metric.

Overall, on OEM relationships, I think we've got a tremendous team of brand managers that have worked for the Company from the very beginning, and I think that they play a big role, not only with our brand relationships but also tying together our area VPs, our operating guys in the field. So, overall, I think the model is working, and I think those five areas are critical. And we are focused on all of them.

Right. Thank you very much, Roger. Keep up the great work. Thank you.

Thank you.

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

Hi, Rick.

Thanks. Good afternoon, Roger.

I'd like to ask you about gross profit improvement that we are seeing in new cars, coming from the supply constrained vehicles, or is it broader than that? And as inventories normalize, how do you see that shaking out?

I think one thing, we've got to go back and we've got to look at the mix. You remember, we went from 66% premium luxury to 70%, and typically, the luxury vehicles have been probably 130 to 140 basis points higher in margin. So that obviously would drive that, because we went with a higher mix of premium. Also, our volume in foreign, which was running at about 7% was up 100 basis points, and that's due to the shorter supply and I think a better -- our team is managing that better from the standpoint of getting margins. So, also, I think there's less incentives out there. There's less 0% financing, so it's giving our -- the captive finance company giving us more runway from an advance rate, which gives us the chance to get higher margin on some of these deals. As we maybe put more money in the trade, they will give us more money in the overall transaction. So, our average price is up 14%, and our gross profit is up -- our gross profit is up 14%, and the average selling price is up 8%, so I'm sure that is a part of it. Thank you for that color. Days supply on the new car side, 43 days, wondering if you can provide inventory for Honda, Toyota, and maybe Lexus and -- Yes, we were running -- from a Honda and Toyota perspective, when we looked at our business, we were typically two to three days below what the industry was in the marketplace, and they have cranked up a little bit. We've gone up from September 1, but just nominally, and I think with this latest news on Thailand is going to have some impact basically as we go forward. But we are in the 35-day range, probably, with those brands.

I'd also like to ask you about the big acquisitions you did earlier this year, Greenwich and Santa Ana. Those are performing relative to your expectations?

I can tell you when you think about Crevier, which, it was not just Crevier, it was also what we did in the Santa Ana Auto Mall when we bought the Audi business and the Volkswagen business. And I think our Volkswagen business was number four in the country last month, and obviously, when you look at Crevier, ranked number five in the country, we are in one of the best premium luxury markets in the US. And to me, we have seen a tremendous workforce there. The management team is engaged, we are going to add some capability there from a used car perspective and maybe a little better service drive for them. But overall, the numbers are good, the volume is good, and I think they did 224 new BMWs last month and I think almost 80 MINIs. And I know that those are big numbers when you look at BMW across the country, so I would say we are in great shape there.

And as far as Greenwich is concerned, they have come out of the box as an excellent purchase. It's a bedroom community in New York, and I think when you look at the business and through September 11, they were 39th out of 353 dealers in the US, and we have improved five spots since we have owned them. So, I would have to say with a facility that's under construction, basically we are in great shape. And just another key point, our Audi store in Stevens Creek was number one in the country last month, so these premium brands are really driving our business. We have 11 Audi stores now in the US, and you can see they are up almost 200 basis points in premium market share, so I think we are riding the right horses right now.

So going forward the pipeline is luxury focused as well?

Yes, I would say that where we have scale and there's a big 3 opportunity, obviously, we did that in Jersey City. We are adding some Fiat capability in Puerto Rico and one out in Arkansas where we have facilities available, but the focus both domestically and internationally will be on premium luxury. I think we've got a pipeline that we are -- kind of is in our windshield as we look into 2012.

None of these will close here in the fourth quarter, but we think that there's a good pipeline coming at us as we go into 2012, which will help us on the top line growth. And as we -- as I think you saw in our press release, we are in a position -- or in our comments today, we are looking at stores which today are not strategic. They are not giving us the returns that you expect from a market perspective and in many cases will have a significant CapEx requirement on a going-forward basis. So, what we are trying to do is evaluate every store we have, and where we don't have a long-term return that we think is necessary, we will look at those as divestitures. So, that's also a part of our process as we go through the end of the year.

Thanks, Roger. Congrats on a great quarter, and good luck.

Thanks, Rick.

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

Hello Matt.

Hello Roger.

So, just a couple of questions. One, on new and used gross profits per unit, as we look out to next year and Honda and Toyota are hopefully a larger percentage of the mix as those brands recover, is there any reason why the unit margins won't maybe back off a little bit year over year or could be down next year?

I'd have to think that if we go back to, say, 65% premium luxury and 35% volume in foreign, we are going to start to see some lower gross. But hopefully with the increase in the acquisitions we have made and a divestiture of some of our weaker locations, we are going to try to hold that now. It's interesting, I ran into one of our key guys here this afternoon, and he talked about the big focus is on maintaining these gross profits. I'm sure that there will be price pressure with more inventory.

Anybody would understand that with the supply and demand, but I don't think it's going to be dramatic. And we are going to have to manage it, and we are going to have to manage it by not letting the OEMs push too many vehicles on us, whether it's in any premium or volume or foreign or the big three. I see where the domestics now are up over 80 days, and I think that we've got to have the discipline now to keep these factories running at a rate that we can sell the vehicles. And we don't need to be number one in volume. What we need to do is be able to meet the metrics that the shareholders want.

And then related to that, one of the automakers was out this week talking about unusually high incentives at Mercedes and BMW in -- last month, and I'm wondering if there's anything that you have seen, if you can comment on that. And maybe there's been a change in the seasonal pattern in terms of the model year changeover or just the way they are thinking about incentives in the fall versus December.

I think those guys are racing each other, quite honestly. I think that there had been more incentives, but overall, what's happened, probably we have seen more incentives and maybe less on a leasing perspective. But on the other hand, I don't see that affecting our margins at all. I don't see that at all, and I can tell you one thing, that the captive finance companies of Mercedes and BMW are really strong at this point. I would say they are generating a lot of opportunity for the dealer.

Got it. And then lastly, on SG&A, you really kind of shot the lights out. The flow-through, your gross profit was up in dollars, and your SG&A was down in dollars. How -- is there anything in there that might not be repetitive, and how do you think that could go for the next few quarters?

Well, I hope that we are going to get the same kind of leverage that we got. Obviously, we got more gross profit, we've talked about the leverage there, the service and parts, the new and used car sales and even finance and insurance. I think we are focusing on our marketing spend, obviously it was down 3%.

One thing that drives a lot of SG&A, I mentioned it in the call, was this service loaner costs. And we are trying to look at that from the standpoint, because it could run as high as 8% or 9% of your parts and service gross profit. So, we think there's some opportunity there, maybe taking people home rather than giving them a loaner car, some things we can do across the network. Doesn't seem like much at one store, but when you add it up, it's key. And I think we've got to continue to focus on gross in order to have that gross to test SG&A ratio come out in our favor. But I think that we are focused -- we've had some rent increases, which we have had to eat also, and we are taking a look at is there any properties where we are leasing that potentially we could purchase which would give us a different metric from the standpoint of SG&A.

So, I think overall, we just need to focus on all the areas. And I know that Dave Jones, and certainly J.D. Carlson, we've got a lot of people looking at that. You look at it globally here in Detroit, but we are focusing on it all the way down to the individual store, and I think there's opportunity. We seem to be at the high end of the peer group. Maybe it's because of our brand mix, but I still think there's opportunities and we are going to focus on it.

Great. Congrats again. Thank you.

Thanks.

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

Good afternoon, Roger.

Hello Ravi.

Can you just comment on your outlook for the UK? I think you've heard from maybe one or two of your smaller peers there that it looks like luxury may be slowing down?

When you look at our business in the UK, we were up 3.3% on a same-store basis in the market. The market was down just about 1%, and I think the key area there is that we are in the premium luxury side, and with that, we have seen some real growth. Audi was up 23%, you've got BMW who is up 6%, Lexus was way up, Mercedes. And I think with those marks up where we have high penetration, that's going to continue to give us opportunities, plus the service revenue coming off those vehicles is certainly higher than maybe some of the volume models.

Also what's benefiting us is the new to used ratio. We are 1.02 to 1 versus 0.97 last year, and we see that growing, because they are taking the same approach as we have, is they want to retail first, rather than wholesaling. But when I look at the UK from the standpoint of the business, inflation was about 5% in September. We are looking at the Bank of England has kept their rate at 0.5%, at least as of what I understand today from Tony, and they have injected about $75 billion into the economy.

There's a lot of those government jobs that have come out, but I'm not sure when we are 95% premium luxury and some super premium luxury, that that's going to affect our customer, because a lot of our vehicles are sold to the corporate community. And it's part of their compensation, so I don't see that slowing down. It's different than we have in this country so, again, overall I'm -- we are cautiously optimistic on the UK, and we've just got to keep charging there. We have managed our way through the last several years, and I think they have done a terrific job.

One other point, from the standpoint of the management team there, we have the lowest turnover of any area of our country, and it's at 15% in the UK. So, that's got to drive better metrics for us from the standpoint of the seasoned management team.

Understood. Thanks for that.

And I'm sorry if I missed this if you gave it earlier, but have you given any details on the divestitures in terms of the brands and the geographies and what's the strategy there?

Well, what I did, I didn't get into individuals. And basically, what we have looked at is really areas -- an example would be, we have a Toyota dealership, a small dealership in Waterford, Michigan that does 35 cars, that basically is one that does -- it doesn't fit our portfolio today. Part of the divestitures, we have about $60 million of that $300 million would come from the smart locations, which did not go over to Mercedes-Benz, because they were non-Mercedes dealerships. And the other ones are more -- are non-strategic around the country where we didn't have scale. We want to be in markets where we have multiple locations so we can utilize one office, one management team for oversight.

Great. And finally, a bigger picture question.

Both of the domestic luxury brands -- that's Cadillac and Lincoln -- are probably going to launch a product offensive over the next couple of years. As an industry veteran, I wonder what your thoughts on that are and what that means for the traditional German and Japanese luxury. Cadillac is already in a fairly strong position, but do you think it can gain more share from here? And what do you think the future is for Lincoln?

Well, we have two Cadillac dealerships, and I would say if we're -- as we are trolling around looking for opportunities on the domestic side, I would be interested in Cadillac, where we could pair them up in markets where we had other premium luxury. I think the product line is good. I think now with a finance source through GM financial and I think Allied being more aggressive with them, we will make that a good brand. I'm anxious to see Lincoln coming out.

I talked to Farley and the guys there, and I'd like to take one of those franchises and -- in a market, again, where we have capability and see if we can't grow it. Because I think they are going to put the money behind it in the US. Now, how they will do internationally, I can't really say. And I think that overall it's an opportunity for us, and we are looking at those. But for me to forecast Cadillac and Lincoln over the next three to five years, you've probably got the wrong guy. But I would say we are going to be involved with the brands in some way.

All right, sir. Thank you.

Thank you.

We have a question from the line of Simeon Gutman with Credit Suisse. Please go ahead.

Hello, Simeon.

How are you? Congratulations.

A follow-up on the SG&A, I guess last quarter there were a couple of items that may have crept in, at least relative to maybe the street, and the dollar growth was a little high. This quarter, an exact reversal. And separate from how well it was relative to gross profit, it looked like the actual rate came in. And I think it was asked about one-time items, but was there anything structural that was focused to take out, or this is just better across the board?

Well, I think last quarter, I think we talked about the loaner cars was a big number. We had -- I think we had some rent increases which were high. And also, there was some CapEx that has to be expensed I think that might have gone through during the second quarter. But overall, I think that we had more gross this quarter, which obviously offsets the SG&A to gross.

Follow-up, bigger picture, this quarter, for I'd say the rest of the -- or a lot of the public dealers, you saw a little moderation in some of the strength that we saw in the second quarter. You saw an acceleration, things got better, and some of it could be brand mix. Curious what you think, if any of that had a role in this quarter. And when the Japanese supply eventually comes back, whether it's fourth quarter or first quarter, will some of this momentum fade because this was a good pocket, this was a great window? Or I'm just curious what your thoughts on that are.

What I look at, sequentially when you look at our revenue, our operating income and our net income was all up quarter to quarter. It went with some top line growth and we got some leverage on our expenses, and we are going to manage to the same level as we go forward. One of the things you have to realize as we go into the fourth quarter, we don't have the registration month or quarter like we have in the UK. Remember, March and September are two registration quarters, so we get a little bit of a hypodermic needle in those quarters with more business.

So, we might not see that growth in the fourth quarter, but I think it's only going to be beneficial to us when we see the Asian brands. We have 17 Honda stores and 15 Toyota stores, plus Acura and Lexus, and that's only going to benefit us if we get more product. The good news is that if you look at our service and parts -- I looked at Mercedes, I looked at Lexus, I looked at BMW, I looked at Audi, and every one of those cases on a year-to-date we are up $6 million to $8 million in gross year-to-date on the parts and service area. So, these units in operation that we have put in over the last several years are now paying off in the service department, so that's going to help us drive gross and certainly will help our SG&A to gross.

Okay. And then a final question on gross profit. As the supply comes back, is it as simple as that you'll see some gross profit or gross margin compression or some of the disciplines that I think you and others in the industry are benefiting from? Do they hold, do they extend this gross profit expansion that we are going through?

Well, I think Matt Nemer asked the same question, and I think that it's the law of supply and demand. I think there will be some pressure, hopefully, that the OEMs will see that they have less incentives out now. And remember what happens. We get too many vehicles, the OEM puts out more incentives to help us sell those cars, so we got low interest rates, so the cost to carry for us is minimal today with floor plan rates below 2%. But I think at this particular time hopefully they will be able to be in a position to moderate the supply. And if they do that, we should be in good shape.

But there will be pressure. I don't want to -- I don't think anybody else in our business would say there wouldn't be. But the good news is, remember, our mix is between 65% and 70% premium luxury, and we have had no disruption of supply in those brands that I know of other than individual models. There may be some electronic pieces, but basically, it's been business as usual. And I think that's given us probably a little smoother highway to run on here over the last maybe couple of quarters.

Thanks, Roger.

Yes.

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

Hello Scott.

Hello Roger. How are you?

Good.

Can you maybe just dig little deeper and talk about where your, let's say, Honda inventory is as we speak right now? And with the Thailand situation, what would be the bumpiness or the lumpiness of sales from that side of it as we move into the first quarter?

Well, if you go back at the end of the year from a Honda perspective, we had probably 5,000 units. And we got down at the end of September, down to below 2,000, and I think we are up -- I looked at some numbers this morning. As you ran it this morning, we were somewhere around 2,400, so we are still 50% of what we had at the end of the year. So, there's significant opportunity, and so we are running on a -- I think the days supply is low 30s from the standpoint of Honda and Toyota. And when you look at Lexus, we are about flat from the end of September to where we are today, so we haven't seen much growth. So, what we are getting, we are selling, and from a Toyota perspective, we are pretty much in the same boat as we were. We were at about 5,000 units in Toyota at the end of the year, and at the end of September, we had about 2,200 units, and currently we have about 2,800. So, still almost 50% below where we were at the end of the year, so that's pretty much the real numbers.

Okay. And just talk about on the gross profit on the used side again. Most of your competitors have been seeing their gross profits compressing. Could you maybe just touch on the key points there, why you've been able to expand your gross profits in the used segment?

I think one of the reasons is, we said before, that on the luxury side, we have always had a higher margin on the luxury side. And I think because our mix when you look at our used car business, today I'm looking at, on a year-to-date basis, our Audi business is up 40%. You look at our Porsche business up 22% -- I'm just giving you some numbers -- BMW is up 12%, and at the end of -- Mercedes is up 22%. So, in these luxury brands, we have had a significant increase. Those are in units, and with that, they carry big margins.

I think when you average it all out, you're seeing an increase in the luxury side. And I think the volume -- and when you look at the volume in foreign, we've had an increase, obviously, due to the supply. So overall, when I look at used cars, I don't have other than, say, Land Rover and Jaguar, I don't think we have one of our premium luxury brands where we are not up double-digit from a used car perspective. So, that's driving some of this margin.

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

Thanks.

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

Yes, thanks.

I just wanted to actually piggy back on that last question in terms of used. It does seem like used days supply has crept up a little bit, if I'm not mistaken. Is that something that is going to lead to greater wholesale and margin compression as we look forward? And just kind of tying that into just a forward-looking view of where margins are headed. A lot of -- I believe that a number of your competitors are sort of optimistic about better acquisition costs potentially playing a part in lifting margins up. Wanted to just get your thoughts on that as well.

From a used inventory, let's just talk about the US. At the end of the day, we had about 10,000 units in stock at the end of the year. We had 12,000 in September, and we are now down to about 11,000 -- or 10,900, so our used car inventory has come down, and we've got a different focus. And our focus today, obviously, is to retail first.

So, cars that we would have wholesaled, we are looking at the number of cars we are wholesaling. And we are retailing about 65% of all of the units we retail are trades, so we are being much more aggressive on trades. So, our inventory might creep up some, and 35% we buy from the outside. So, I think that it's our focus on keep cars maybe some of the cars we would have wholesaled. If I wholesaled 50% instead of retailed some of those cars, the number of days supply would look like it's crept up. But I think from a business standpoint, the raw numbers shows me from the end of the year, I'm actually lower than I was at the end of the year on total inventory, and we are doing more business and getting better margins.

Okay, yes. No, I was looking at days supply.

And just in terms of the prospects for inventory acquisition costs to go down and help margins, is that some ways off --

Are you saying used, where we are out purchasing used vehicles, we see that acquisition price coming down?

Yes, just, I guess a lot of that has to do with the volumes picking up on new, right, for trade-ins. And then I suppose lease residuals would be a big part of it. That may take longer. Just wanted your view on that.

Let's think about it. If we are able to today -- I think it's a perfect time for people to buy, because residuals are higher. We are putting higher numbers into used, so if 65% of my business is trades, I'm probably going to see a higher, higher cost of sale for a used car, at least in the continuing future. And right now on the premium luxury side, a big flow of vehicles on the used side used to come from lease returns. Of course, when leasing got shut down at the end of '08 and '09, so we are not seeing some of those three-year-old cars come through, but that's going to build up for us. And in many cases like Audi and places like that, that part of our margin structure is we have got to buy used cars.

And I can tell you today because of the shortage, those aren't cheap, but I don't see -- I think we are going to buy opportunistically when we can in the market. When we trade for a car, we look at the total wash-out of the deal, that's the new and used. So, I'm not worrying about that particular piece. What I worry about is, can I get the customer financed? Is the captive aggressive enough to take a high trade and then give us the margin we want on the new car? And to me, that's going to be important as we go forward.

Okay. Great. Very helpful. Thank you.

Thank you.

Thank you, and I'll turn it back to our speakers for any closing remarks.

No, I think that's it. We appreciate everybody joining the call, and we will see you the next quarter. Thank you very much.

Thank you. Ladies and gentlemen, this will conclude our conference call for today. We thank you for your participation and for using AT&T executive teleconference. You may now disconnect.