Penske Automotive Group Inc (PAG) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group first-quarter 2012 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through May 2, 2012. Please refer to the Company's press release dated March 28, 2012, 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 Relation 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, John. Good afternoon, everyone. Our press release detailing Penske Automotive Group's first-quarter results was issued this morning and is posted on the Company’s website. Joining me for today's call are Roger Penske, our Chairman; Dave Jones, our Chief Financial Officer; and JD Carlson, our Controller. Following today's call, I will be available by phone to address any additional questions that you may have.

Before we begin I would like to remind you that we may discuss certain non-GAAP financial measures such as EBITDA on our call today. We have reconciled EBITDA to the most directly comparable GAAP measures in our press release dated April 25, 2012. I refer you to that press release for additional information. We may also make forward-looking statements on this call including statements regarding Penske Automotive Group's future sales potential and outlook. Our actual results may vary materially because of risks and uncertainties that are difficult to predict. These risks and uncertainties are addressed in our Form 10-K for the year ended December 31, 2011, and our other filings with the Securities and Exchange Commission. Please refer to those filings for additional information. At this time I would like to turn the call over to Roger Penske, who will take you through our first-quarter results.

Thank you, Tony. Good afternoon, everyone and thank you for joining us today. Today, Penske Automotive reported another quarter of record profitability. Marking our 11th consecutive period of quarter over quarter growth and income from continuing operations and earnings per share. For the first quarter we reported double-digit increases in total retail units sold, revenue, gross profit, operating income, net income, and earnings per share. Income from continuing operations attributable to common shareholders increased 37% to $50 million and related earnings per share increased 41% to $0.55.

Let's take a look at the specifics to the first quarter. Revenues increased 17.9% to $3.2 billion. On a same-store basis, retail revenues increased 7.5%, in the US we were up 8.5%, and internationally, we were up 5.9%. Our premium luxury brands were up 6.6% on a same-store basis, our volume foreign brands were up 8.5%, and our domestic brands were up 18%. Excluding the effect of foreign exchange rates, total same-store retail revenue increased 8.4%, versus the 8.5%. When you look at our revenue mix it was US, 61%, and internationally, 39%. Our brand mix shows consistent with last year with premium luxury generating about 68% of our revenue, volume foreign at 28%, and the Big Three at 4%. We retailed 43,099 units in the quarter representing an 11.5% increase compared to last year, and our average transaction prices on new units increased 2% and our average gross profit per unit increased 7.9%. The good news is our gross margin on new vehicles was at 8.4%, a 50-basis point improvement over the first quarter of last year.

Looking at used vehicles I'm pleased to report another quarter of double-digit increases both in units sold and revenue growth. Total used units retailed increased 26.6%. The continued strong performance in our used vehicle business is directly attributable to our Retail First initiative. Our used-to-new ratio was 0.89 to 1 which compares to 0.78 to 1 in Q1 of 2011, and internationally, our new-to-used ratio was 1 to 1, up from 0.97 to 1 last year. Our average transaction prices on used declined 3.3%, and our average gross profit per unit declined 4.9%. Our margin was only down 10 basis points year over year. Our finance and insurance revenue increased 20.2% and was $981 per unit in the quarter.

Looking at service and parts, our revenue increased 8.3% during the quarter, and on a same-store basis, our customer pay was up 2.5%. Warranty was down 5.2%, our body shops were down 2.7%, and our pre-delivery inspection was up 21%. Gross profit margin for service and parts was 57.7%, representing an increase of 60 basis points from last year. Again, a strong move. Overall gross profit increased $67 million or 15.3% and gross margin was 15.6% compared to 16% last year.

First quarter SG&A expenses as a percentage of revenue was 12.3%, representing an improvement of 60 basis points. And I'm pleased that our SG&A as a percent of gross profit was 78.7%, representing an improvement of 220 basis points over the same period last year. Operating income increased 31% to $95 million and was 2.9% of revenue representing an increase of 30 basis points. Our tax rate for the quarter was 35%, compared to 30% in the same period last year. EBITDA was $103 million in the first quarter compared to $77 million in the first quarter last year.

Moving onto the balance sheet, at the end of March, vehicle inventory was $1.7 billion, which was up $186 million when compared to December of last year. New vehicle inventory up $148 million, used vehicle up $38 million. At March 31, our worldwide days supply of inventory was new at 44 days and used at 40 days. Capital expenditures for the quarter were $26.5 million, we continue to estimate our net CapEx at approximately $120 million in 2012.

Our total debt was $2.7 billion, and non-vehicle debt was $862 million, which represents an increase of $12 million from December of last year. Approximately 36% of our total debt is fixed. Debt to capitalization was 42%, flat with last year, and debt to EBITDA is approximately 2.3 times at the end of March. We had $372 million of availability under our worldwide credit facilities at March 31, and $32 million in cash on our balance sheet. We remain well within the limits of our financial covenants at the end of March.

Let's turn to acquisitions and divestitures for a minute. As previously announced in January of 2012, we acquired the Agnew group of dealerships in Northern Ireland which are expected to generate $500 million in annualized revenue. We continue to integrate the Agnew dealerships and are very pleased with the performance of the group to date. We also opened three new points in the first quarter, one a Mini store in Marin in Northern California, and Nissan and Infinity in downtown San Francisco.

In closing, our results continue to demonstrate the strength and diversity of the PAG business model. Over the last nine months we've added significant new top-line growth to the business through acquisition and our business continues to generate substantial same-store growth. We achieved significant expense leverage during the quarter through our focus on gross profit generation, and expense management. I personally remain very optimistic about our business and improving economy, the pent-up demand, strong credit availability, and many new product launches coming to the markets to continue to accelerate the demand in the US. Based on these factors, we expect the US auto market to be between 14 million units and 14.5 million units in 2012 with a 10% to 15% increase at the retail level. So at this point, let me open up for questions. Thanks for joining us.

(Operator Instructions) John Murphy, Bank of America Merrill Lynch.

Just a couple of questions here. First, on the used vehicle business, given the constraints there and getting to 0.89 to 1 across the board, I'm just curious what you're doing in that business to drive the revenue there. Obviously there's not a lot of certified preowneds because there were not a lot of cars sold in the last three years. Just curious, are you dipping lower in the spectrum, how is the focus really driving that business so strong?

Well, I think number one if you looked at our inventory today, only 55% of our inventory our trades, and 45% are purchased vehicles. So we've really been on offense going out and purchasing vehicles, when you look at Carmack's, they don't have a lot of new vehicle franchises, so there are vehicles available. In the UK obviously, we have 21 buyers. I think the benefit that we have, really is the internet. When you think about it, it not only helps us on the used basis from the standpoint the market is the entire world, really, on certain of our premium luxury brands and it gives us also the access to vehicles who people have to sell. So to me, the way we present our vehicles, online I think we've gotten some real rigor around what's expected, by our operators. I think that's made a key part of our success. There's no question that www.Penskecars.com is driving more customers to our brand. To me when we look at our mobile site usage, it's up 36%, over 500,000 visits. So there's a number of levers that we're pulling.

But again, I think that the interesting thing is that we're looking at lower cost of sale vehicles, so as a premium luxury player with 68% of our business, typically on a worldwide basis, we've wholesaled a lot of those cars and I think today, we are saying these are really retailable at certain levels with use of the internet. Again, as I said earlier, that when you look at our inventory, we have 55%, which are trades and 45% purchases. And it's ironic that when you look at overall inventory from the standpoint of what we're selling, over 10,000 of our vehicles we sold in the past quarter were under $15,000. So to me, those are all the things that I think make a difference.

Got you. Then second, on the gross profit for new vehicle units, forgetting about percentage and just looking at the dollars, you said it was up about 7.9%, the GPP per unit, I’m just curious, that's been running very strong really, for the better part of 2011. I think even in the end of 2010. I'm just curious, do you think there is room -- forget about percentage margins, but on a dollar margin basis, for that to continue to increase as we see sales recovery? I'm just trying to get a handle if this $3,000 to $3,100 range we should be using going forward or could it potentially go higher?

Well I think it's going to be consistent. You said don't talk about margin, but when I go back and look into the first quarter of even 2010, we were at 8%, we’re at 8.1% now. And to me, the fact that in the premium luxury side, we don't have the interbrand competition. When you think about it, 300 Mercedes stores, about 300 BMW's, there's 100 or 200 Audi's, so we don't have that interbrand competition. Again, we have to get the margin to because we offer the customer from a customer satisfaction perspective, with loaner cars and some of the other things, so we certainly from our end are not expecting to reduce margins. We obviously can be driven because the competitive set, because at this particular time both internationally and domestically we feel pretty good at the level where we are. I don't see them rapidly going up. But again, I think that we've had a nice change when you look at -- we were up almost 10% in the US. And the UK was up almost 2%, just in the previous quarter. So that's good strength.

Okay. And then just lastly as we look at the acquisitions that you've made, obviously in the UK, and now this JV in Italy, seem to have been the big focus recently. I'm just curious if you're looking at the US market, if potentially the acquisition landscape there is a little maybe exhausted for you. Or if this is just where the best opportunities were? Trying to gauge the relative attractiveness of acquisitions in the US versus acquisitions abroad and into this new market in Italy.

Well, I think our pipeline is good. Not only in the US but internationally. Certainly, we are seeing multiples being pretty consistent to what they were in the past. The good stores obviously drive a higher multiple. What we're looking at really is an opportunistic approach. Where we have scale, we want to grow with brands in our markets, where we can leverage our SG&A. We also are looking at what's require from a CI perspective in a particular location based on the OEM's request. So we're in the market, we'll continue to look at acquisitions.

I don't think we are weighted more to the US or basically internationally. I think the Italy situation was one, that brilliant partnership with BMW. They pointed us to that direction, and we were able to purchase a very nice business in Mansa, at little or no goodwill. With a first-class facility and we have a management team there, we have a partner in that business, a 30% partner, who is experienced in the BMW business in Italy. So a financial person who is part of that team worked for us here in the US for almost 10 years. So we feel we've got a good team and that's going to be part of a further, I think, involvement with us with BMW. As Italy straightens out the northern part of Italy will be an opportunity for us as they do a reengineering. So to me, we'll get scale at that point.

It's fair to say that Italy JV is really sort of at the urging of B&W with the request of B&W?

I wouldn't say urging. It was -- they brought it to our attention and the fact that we had VM Motori, an engine company in Cento, which is in northern Italy for almost 15 years when we owned Detroit diesel so we're familiar with that market, we are familiar with this particular operator, and this just all came together and we think that from a BMW perspective, they thought that we'd be a great partner to energize that market for them.

That's very helpful, thank you very much, Roger.

Rick Nelson, Stephens.

Wondering if we could drill down a little bit into same-store sales, new and used, particularly as it relates to the US and the UK, trying to get some feel for how each of those markets performed.

Well, when you look at our same-store new unit we were up 2.8% overall. Obviously, when you break that out, we were up 1.3% in the US. And up 6.4% internationally. And our inventory, was not optimal. We ended up with a J3 obviously just coming in when you look at the strength of that right now, we're still running at about 70% at Toyota, what we normally would run at a full rate and we're just about flat on a Honda perspective. As I looked at the market, rolling into the first quarter and looking at our inventory levels at the end of December, we decided as a team that we were going to work on gross and not chase these stair steps when we didn't have the right product.

I think the benefit of that was we produced the results of moving the margin on new cars from 7.9% to 8.5%, so to me, you also have to look at brands like BMW that showed a 17% increase in the market. When you look at retail alone they were down 4% and that was consistent with us. We were down about 11% on Porsche because we just didn't have the vehicles and yet when you look on a same-store basis we were up 20% with Audi, up 20% with Mercedes. I think it was a little choppy for us from the standpoint of the US. On the other hand I think the brands performed well, in the UK from a same-store perspective. So, when you look at the business overall, I think margin is most important. We had good growth and our revenue was up more than that because of the mix of the higher priced vehicles.

From a used car perspective, overall, we had a very good month, quarter on used cars. And to me the most important thing there is that we were up 26%, and when you look at the US, we were up 23.3% and we were up 32% internationally, so overall, up 26%. And on a same-store basis, US was up 20.3% and international was up 14%, giving us an overall increase in same-store at 18.1%. Again I think on John's question earlier, we talked about some of the offense we had to generate the used car business and we see that as a real opportunity. Everybody doesn't have the same car and I think the fact that we can bring a new customer into the Company, we can get the internal gross profit from the reconditioning is powerful from the standpoint of gross margin. I think that drove some of our 57.1% to 57.7% during the quarter.

The inventory situation we think here things are normalizing for the Japan auto makers. And some of these other product shortages may be taking care of themselves. How do you see the incentive environment developing? Are we seeing big pickups and we understand that there is some stair steps out there, and how do you see the volume targets for those stair steps? Do they seem reasonable?

I think when you look at incentives, it's based on some JD Power information for the quarter. They were down about 6% versus last year. At about $2650, $2656 to be exact. There is stair step, but we look at these things rationally, and we look at them and if we don't think we can make them and we have to give all the margin a way to get to the stair step, we're trying to have some discipline in the sales process. And to me, a lot of that's we see that in the volume brands, and not so much in the premium luxury. Certainly there is none of that going on in Audi and some of the other portions, some of the places that we play big-time and have big margins. So we're going to watch it. I'm not a big fan of it, personally, but I think on the domestic side, Chrysler has been quite successful doing that, growing their volume so I think each of the manufacturers are looking at it. At the end of today is what's the average incentive? The good news is that the incentives are down. I think that helps us from a retail perspective and obviously, gives the OEMs some profitability that they need in order to support the product involvement they have in investments for the future.

Finally, Roger, if I could ask you about April, sales I realized you were inventory constrained in the US. There is some overall concern about the weather. Going forward, some sales but any commentary about April would be helpful.

I thought we only talked about weather in January and February. I don't know why we're talking about it in April. (laughter) I think overall, April kicked off, it's a tax month, I know you guys in the UK say it looks like business stops when everybody goes on for school out for a week but overall we feel good about the demand. Again we talked about it earlier, there's a pent-up demand, used cars are at the best residuals we've seen in many, many years. And financing's available. So our traffic is good. We don't give guidance, obviously, for each particular month, but I would say I'm positive about -- as I enter into the next quarter.

All right. Thanks a lot. And good luck.

James Albertine, Stifel Nicolaus.

Just wanted to focus actually on the leverage that you showed this quarter. And congratulations to you in that regard. On a 2.8% new car comp, to show north of 200 basis point leverage SG&A as a percent of gross profit dollar, is this a reset in a sense of where your comp hurdle rate is running? And as volumes ramp with some of the inventory constraints lessening throughout the year, as one would expect, do you see more leverage or greater leverage potential there in the future?

Well, our goal I think I've said it before and I've said it in some of the different times I've been talking publicly, I'm not just driving the Company on SG&A. I'm driving on what it takes to grow the business. And I think we've got to focus on two ends. Without the addition to gross profit in the quarter, we wouldn't have had that leverage. I think the good news is the scale that we continue to build through our acquisitions, and we don't have a lot of fixed costs going in, gives us some leverage. And certainly the gross profit benefits we had with only used going down 10 basis points and new going up 50 basis points and the increase in parts and service gave us the $62 million of gross profit.

And I think probably today, our total volume when you look at it was up 27%. And when you look at what drops down out of that gross profit, I think we're generating probably about 32% to 33% benefit, so to me when I look at the additional $500 million of revenue and I said it generated $25 million of EBT, that's 5% on revenue. That would be a tremendous number. Today we're obviously trying to get to 3%, so incrementally, we did get scale and leverage based on two things. Cost, I think we looked at our costs. The internet has helped us, we've been flat on our marketing, not that we're doing less but we're being more efficient and I think the fact that we have the discipline on our comp to gross, when we look at that, that's a metric I look at every month in every location and we had about 60 basis points benefit during the quarter.

That's very helpful. And as a follow-up to one of the things you touched on there from an M&A perspective, given all your learnings in terms of how dealers now have to differentiate in different respects versus history, so transparency is increasing, you have to differentiate in online and some various initiatives that perhaps your independent competitors aren't as aware of or keen on investing in. So from a new store productivity perspective, do you see the newer acquisitions coming on and being more productive at a faster rate earlier? In the maturation cycle?

Well, I would say the tools that we have today, and quite honestly, the acquisitions that we're making currently when you look at Northern Ireland, it was a group of businesses with a world-class management team. We bring in some buying leverage. Again, we talked about back office scale that we have, so that jumps right in and gives us strong returns. You look at Crevier, I call it the number one BMW individual store in the country in Santa Anna. That benefit of consolidating that with the Volkswagen and Audi store that we bought a year ago and putting together a PDI center, which can give us the lowest cost of our get ready and reconditioning, these are the things that we're trying to do. We didn't have the scale in the past and I think when we look at going into these markets, we just don't go into visually into a state or into a city. We want to grow in the volume form, the premium luxury and obviously where we can, in the domestic area, where we have scale. And I think we'll continue to do that.

To me, I said earlier, the pipeline is there. We have some very interesting markets that we're looking at, and obviously I think you have to be creative and take some risks. And I think the Italy situation is one with EUR1.5 million of goodwill and less than EUR0.5 million in real estate cost rent cost per year in a market where you're the exclusive dealer. To me, it's well worth while when you a management team. So we're going to do some of that and then on the other hand we're going to look for the best properties like Mercedes of Greenwich and Crevier, and certainly Agnew, so to me I think our peers are doing the same thing. The good news is that we're not running into each other. I think we all have context, well have strength in certain markets, and what we're trying to do is grow on those strengths and take advantage of leverage.

Very helpful. Thanks again.

Matt Nemer, Wells Fargo Securities, LLC.

A couple questions. One, on the used car business, what inning do think you're in on retail first? I know that you've rolled it out regionally. Just wondering how much more we have to go on some of the process changes in the used car business?

Well, I think that we have a metric that says, what are you wholesaling versus what you’re retailing? We're probably in the high 40%s to 50%s and we should be down in the 20%s to 30%s. So there is a pretty good number there that could be available to us. And at the end of the day, we have to drive that. Probably most important thing on used is we have to get aggressive on buying, just not standing at the auctions. We've got to go out and we have to do a number of things. And I think one of the areas which a lot of people are using these equity calculators, so every time a service customer comes into the shop, we want to give them some ability to have us purchase their car. That’s been quite successful.

We've talked about that across the country here over the last couple of months. Not everyone's implemented that. It takes time to get the discipline across each of the regions. But to me, that's a key area where we can look at cars that are coming in our service drivers that we know the customers have equity and we can offer them a new car in some cases at the same payment or even less. So those are key, especially when you get into some of the hot selling new SUVs. And we're not only just selling certified cars. We're selling cars which are not certified, and we have a new kind of series of vehicles we'll sell in the UK called approved. To me, CPO in the US is only a 33%. So we've got lots of levers to pull, but I think the used car business, we've only tapped the surface.

Okay. Great. That's helpful. And as the new car business comes back, does that put pressure on used in terms of space for these lower-value cars? Or the time of folks at GM and other folks in the store to get those deals done? Do you give some of that back when the new car business comes back? Or do you think you can hold it?

I think that if you look at most of our locations, we're trying to have a sales force that are focusing on used, and then the separate force focusing on new vehicles. And to me, we're turning our inventory on new cars in 44 days. And with premium luxury, you have a real good look in the pipeline. Quite honestly I'm amazed at how much we sold forward in the US in our pipeline where people are coming in and are actually ordering specific vehicles. And with the use of the internet, I think the customer is much more savvy in what’s available. The telematics, which are available and some of the things that we haven't thought of in the past, that are driving some of these orders, so that gives us the ability at the end of some of these periods to deliver a number of vehicles. And to me, we've got -- if you look at the UK, the X3, Evoque, and some of the 3 Series are even presold into the third quarter. So those were things that we’re benefiting about because of great new product.

Okay. And then as we look to bring the Agnew revenue into our models, should we think of that profit margin for that business as being pretty similar to the rest of the business? Or is it a little below or a little above average?

I would say it's average, yes. I certainly wouldn't say -- we have some cost of capital there, which will be some drag on it, but overall, that's the benefit of the low interest rates today. And our debt only went up $12 million, non-floor plan debt, and we did Agnew acquisition, during the quarter, so to me, and we opened up three new dealerships, so to me, the cash generation we have certainly is key. When you look at our cash flow, from operations about $100 million, our CapEx was $26 million, when you look at our net acquisitions around $60 million. We paid $9 million in dividends. We did $8.5 million in stock repurchase, increased our borrowing about $12 million, so ex our increase in cash went up about $4 million. So to me, it just shows you the strength of the model.

It seems like there's more of that come. As you look out into the model over to the next year or two, there would seem to be a lot of excess cash flow generated. Are you inclined to pay down debt or buy back a little more stock or get more aggressive on the dividends? How would you look to allocate that?

Well, when I look at capital allocation, I probably look at four things. First would be acquisitions. Continuing to manufacture the pipeline we have, obviously location strategy was key. And what are the requirements from a CapEx perspective. Also, our capital expenditures will be approximately $120 million. We spent $26 million of that during the first quarter. We continue to increase our dividend. We went from $0.10 to $0.11 in the quarter. The yield is about 1.6%. Again, we’ve got about $100 million I think left now for stock and our debt buyback, which we’ll look at. So to me, we're looking at all those areas, we discussed it with our Board on a quarterly basis, but at this point I think we'll just stay the course, and we’ll probably tapping one of those four areas consistently.

Then just a housekeeping item, the PTL number was a lot higher than what we would've expected this quarter. I think typically in Q1 it's been running around flat. And your equity and affiliate earnings was $4.4 million. So maybe you can just give us a little color on that and -- what should we be baking in for that business into the model for this year?

Well, PTL is off to a great start and I think you've got to look at a couple things. When you look at general tonnage, traveling by truck, it’s up 5% year-over-year, and just to make a data point, all transportation of goods in the US, 80% of it’s by truck and it's been that way for 10 years, so this isn't a -- we just don't have an upswing here that would not be normal. From the overall perspective -- we look at heavy duty truck sales, they’re up almost 60%. They're looking at their start to be $260,000, and we see utilization of equipment over 80%. That drives a lot of rental business for us. Many of our customers who didn't want to extend leases or add to leases, really have reduced fleets are now coming back to us to rent trucks. And that's driving obviously our rental revenue is way up. We see our one-way people are starting to move now, I think there's some job availability.

So one-way moves are up, and overall, I think that when we look at the business -- there is some cyclicality to the business -- we'll see some benefits starting in the second quarter and the end of second quarter, the kids coming out of school. Overall, used truck prices are high, rental is strong, our lease signings are up. And quite honestly, the business is certainly in great shape. We're in the logistics business, about a 25% of our overall $4 billion of revenue there is logistics. And a big piece of that is tied to the automotive industry. So we handle all the inbound raw material for the Ford Motor Company, through our logistics team in that business, obviously is up with Ford’s success.

We're riding a little bit high on the success of the OEMs. And on the other hand I think that the scale of our business, 700 locations gives us a market in a network that really is -- we think it's a premier market in our business. So first quarter is good. We're looking for a strong year as we go forward.

Great. Well, congratulations on a great quarter, and you're new stores out here in northern California look great.

Brett Hoselton, KeyBanc.

Used vehicles really outperformed our expectations this quarter. My question is as you look forward, do you anticipate being able to maintain that used-to-new ratio of 8.9 -- or excuse me 89% or 0.89? What are your thoughts there?

We've got to get to 1 to 1. I don't think that we're through at all. And that's a matter of supply. That has to be through trades and trades on trade. And obviously through acquisitions. So with the internet as I said, our market is worldwide. For everybody, really, not just for us. And I think we're managing that and I think the discipline, of how we market those vehicles on the internet, the way we're setting up our reconditioning, I say wing to wing, how fast can get the car on the lot from the time that we received that car through trade or purchase?

I think there is still runway there. Certainly when you look at the UK, they've run 1.1 to 1. So there also I think on a looked initiative -- they haven't been selling vehicles that they've traded that aren't their brand, they’ve been putting them on sytner.net, and I think that's going to become a real focus for us. Where they reduce their wholesale, they've got a great system there, because it's a live auction, but we think that they can gain a customer with that vehicle that maybe they’re wholeselling on the auction which will drive some more use. So to me, that's a real opportunity.

Changing gears here, thinking about new vehicles particularly in the UK, much better than the market overall. What were the key drivers there? Was it simply you performed in line with the luxury and luxury outperformed the market? Or did you specifically out perform significantly?

The luxury outperformed the market. When you look at the market overall and I'll go back three years, luxury brands had about 18% of the market. Today, they have almost 23% of the market. So we've been riding a tide there but again, when you look at it, 96% of our revenue in the UK is premium luxury. So we're riding that crest of the wave there and I think it's important for people to realize that line of business in premium luxury continues to grow. Remember, the scale we have in that business, we have 11% or 12% of the business in Audi. We have 17 B&W stores, we have almost 25% of Porsche, so we have great scale in those markets, and again, we don't have that interbrand competition, so it's driving some good growth for us as we get unit sales.

Is there any reason for you to believe that outperformance is actually going to change as you move through the next several quarters, next year or so?

Well, obviously I look at it out of my right eye on what's happening in Europe. But it hasn't affected us to date. This was a registration quarter. I think that it was strong for us, we beat our budget, we beat last year, and there's no question that from an overall standpoint, the market was better in the UK than it was in the past. So to me, when you looked at the first quarter of this year, the market itself was up 1%, but when you look at the premium side, it was up 6% or 7%.

Yes. As you think about your inventory on the new vehicle side, do you consider yourself as having any particular inventory constraints, any meaningful inventory constraints whether it be Toyota or Honda or maybe in your luxury brands? I’m not necessarily referring to maybe specific models or anything like that but just generally speaking?

I think we do. Listen, we need more Audi inventory, there's certain models of Mercedes and BMWs, with Cayenne and we just -- we could take every Cayenne we could get. So to me, there's no question. I think this model mix will get sorted out as we go through the year, should be a lot better. You look at the Q5, you look at the Q7, the A4, and the new 3 Series BMW, I know Evoque in the UK has sold out, Land Rover has sold out probably for the next six months. But I'd rather have a shortage than an oversupply because you know what happens there when you get margin pressure.

Thank you very much, Roger.

Robbie Shanker, Morgan Stanley.

This is DJ in for Robbie. If we could focus a bit on service and parts for a second, gross margins there I think were the highest in recent memory, if not ever. And I think during 4Q you guys mentioned initiatives that were put in place to insource certain services like wheel repair, window tinting, et cetera, which are helping to drive margins. Could you talk a little bit about how we should think about the margin trajectory going forward and how much dry powder there still is?

I think one of the things is the mix changes from per member in the past let's say we were 50/50 warranty and customer labor. Well, obviously our warranty labor rate is lower than our customer rate, so as we replace warranty with customer, it will be at a higher margin. When you look at our PDIs, as the volume picks up, our reconditioning and also our predelivery inspection gives us some great margin. You look at Toyota alone, they've got a full circle program today. You look at an oil change that typically we would sell for $19.95, today we're getting 0.8 of an hour for labor let’s say is $80, plus we're getting a markup on the oil. When you think about that, that's a real incentive for every new Toyota buyer, so those things get injected into the market. I think is key. And then we of course have full circle programs for some of the other manufacturers.

But to me, I think it's more share of wallet. We're training our people, better training going on with our service writers. I think the consistency at the end of the day of selling prepaid maintenance contracts, they were up almost 13% in the quarter. Those are all things that are making a difference. I don't think there's the silver bullet, but rapid repair is one -- this is the dents and wheels and small things that we do. And when you have scale in our auto mall like 101 in Turnersville or in San Diego, we can set up a rapid repair and get the benefit of fixing a lot of this stuff in one day which gives us the ability to get great margin and typically, that's the science once you get into it. And to me, it's very key when you look at our international business, I think we really learned about that, they call it chips and dents over there, both in the UK and Northern Ireland, these fellas do a great job and we're trying to replicate that over here.

Got it. Thanks. If we could shift over for a second to fleet and wholesale, apologize if you already talked about this, I may have missed it. But year-on-year I think it was up close to 50%. Could you talk a little bit about what drove that?

We had one order that came through with one of the OEMs I think for 1,500 or 1,600 units which we processed during the quarter. Don't expect that in the future. That was --

Got it.

That was a one-of-a-kind, really.

Got it. Okay. Thanks so much.

Scott Stember, Sidoti & Company.

I missed the breakout of the parts and service. Could you give it one more time, customer pay, warranty, and PDI and collision as well?

When you look at -- on an overall basis, about 70% is customer pay. Warranty now has gone, if you can believe it, to 20% and the balance would be PDI and body shop.

Okay. And I think you said that body shop business was down --

The body shop business was down for the quarter. Probably when you look at it overall, was down about 3%. But we didn't have in the quarter when you think about the US, I really can't comment on the UK we don't have the number of shops over there. But typically in the Northeast where we have these big shops they didn't have any of the weather related issues which drive a lot of that body shop business in the wintertime.

That was my question, you attribute most of it to the weather then?

I guess that's what I'm saying. I wish I knew for sure, but we certainly are continuing to invest in body shop. We think that we have some great relationships on a DPR, direct repair shops, where the insurance companies and debt paying off because we get the genuine parts business, we get the labor. And in many cases, we're able to buy some cars through the insurance companies.

And on the G&A side, you had talked about some of the levers that are helping you right now. I know the last couple of quarters you've talked about tackling a loaner car expense. Could you talk about whether that's kicked in or not?

Well, I don't think I've been successful taking any loaner cars out. I guess the expectations today in order to get the CSI we need in the premium luxury, we've really got to keep a clean track. Some cost might even go up because in the past, we've used maybe rental cars to do that where today, the customers are expecting a BMW loaner car when they have a BMW for service. But overall, from an expense perspective, we really have tied our comp to growth as a key item and we were about 60 basis points better. When you look at total compensation of all mechanics, variable, fixed, versus growth profit. We have a leverage of about 60 basis points, which really is key. I think our pay plans are tied to gross and then we're living with that. To me, if we can continue to dial that in across not only domestically but in internationally, I think that we'll have good control of our fixed costs. Obviously, when you look at our marketing costs, the traditional electronic has gone down, and when I look at it on a car basis, basically, on a per unit basis, we're flat quarter-over-quarter.

So just basically looking out we should not expect much in the way of reduction in loaner car expense?

I would say no. In fact as we grow when you think about the acquisitions we've made, we made them in the premium luxury side where it's absolutely necessary to provide them some of the volume foreign. We would not -- we have a few, but in the premium luxury side, people come in -- we're even saying that Porsche now wants us to have a certain number of cars available to customers. So, those are pretty salty cars when you give them as loaner cars.

Got you. All my other questions have been answered already.

Right.

And with no additional questions in queue, I'll turn it back to you, Mr. Penske.

All right, everybody, thanks for joining us today. We'll see you next quarter. All of us.

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