Penske Automotive Group Inc (PAG) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group second quarter 2012 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through August 7, 2012. Please refer to the Company's press release dated July 10, 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 relations tab at www. PenskeAutomotive.com. I would now like to introduce Mr. Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Communication. Please go ahead.

Jon, thank you. Good afternoon, everyone. A press release detailing Penske Automotive Group's second quarter and six months results ended June 30, 2012, 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 J.D. 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 will be discussing certain non-GAAP financial measures, such as EBITDA, on our call today. We have reconciled these items to the most directly comparable GAAP measures in our press release dated July 31, 2012. I refer you to that press release for additional information. We believe these non-GAAP financial measures will help in the 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 rates 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'd like to turn the call over to Roger Penske, who will take you through our second quarter results.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us for our conference call today. I'm pleased to announce that Penske automotive reported record second quarter results this morning. For the quarter, income from continuing operations attributable to common shareholders increased 26% to $49.5 million, and related earnings per share increased 31% to $0.55. Additionally, the first half of 2012 represents the best six-month period for revenue income and continuing operations and earnings per share in the Company history. Through the first six months, revenue increased 19% to $6.6 billion, income from continuing operations increased 32% to $100 million, and related earnings per share increased 34% to $1.10 per share.

Based on the strength of these results, our Board of Directors recently authorized a 9% increase in the cash dividend to $0.12 per share, representing a 2% yield based on the closing market price of our stock yesterday. Further, I am pleased that our strong cash flow and operating performance allowed us to redeem the remaining $63.3 million of 3.5% convertible notes outstanding. We completed the redemption early in July, using our cash flow and availability under our US credit facility. No shares were issued in the redemption.

Let's now look at some of the specifics behind the second quarter results. Total retail units increased 21% to 84,346 units, and total revenue increased 19% to nearly $3.4 billion. On a same-store basis, retail revenues grew 9.4%. In the United States they grew 14%, and internationally they grew 2%. Same-store retail revenues increased 6.1% in our premium/luxury brands, 16% in volume foreign, and 19.9% in our domestics. Excluding the effect of foreign exchange rates, total same-store retail revenue increased 10.7% versus 9.4% we reported.

Looking at our revenue mix for the second quarter, pretty much consistent, US at 63% and our international revenue was 37%. Our brand mix was also consistent with last year, premium/luxury at 68%, volume foreign at 28%, and the big three at 4%. Looking at new vehicles, we retailed 46,766 units in the quarter, representing a 25% increase compared to last year. Total same-store retail units increased 15%, representing an 18% increase in the US and 7% internationally. During the quarter, we outperformed new vehicle sales both in the US and the UK. Gross profit per unit was $2,969, a gross margin of 8%, compared to 8.5% last year when a lack of inventory within the J3 brands drove stronger new vehicle gross profits and margins.

Looking at used vehicles, we retailed 37,580 units in the quarter, and our used-to-new ratio was 0.8 to 1. We continue to focus on our retail first initiative and recently rolled it out to several locations in the UK. Total same-store used units increased 8.5%, including a 9% increase in the United States and a 7% increase in our international markets. Gross profit per unit was $1,972, a margin of 7.7%, compared to 8.3% last year. Our finance and insurance revenues increased 20%, including a 13% increase on a same-store basis. In the US we increased 18%, and internationally 5%.

Service and parts revenue increased 9% during the quarter, including a 0.6% gain on a same-store basis. Excluding our foreign exchange rates, parts and services grew 1.6%. Our customer pay was up 1.2%, warranty was down 3.3% on a same-store, and our body shop was down 2.4%. Our used car reconditioning body shops and PDI was up 55%. Gross profit margin for service and parts also improved 130 basis points to 58.6%. Overall gross profit increased 13% to $513 million and gross margin was 15.2%, compared to 16% last year, largely due to a mix shift in our revenue.

SG&A expenses as a percent of revenue improved 110 basis points to 12.1%, while SG&A as a percentage of gross profit improved 230 basis points to 79.8%. We're getting traction in SG&A with throughput and efficiency. For example, our same-store revenue base increased 8.5% for the first six months when compared to last year, and in our same-store headcount was only up approximately 3%. Operating income increased $21 million, and operating margin improved by 20 basis points to 2.7%. Equity income from affiliates increased 3.6% to $8.2 million, as Penske Truck Leasing continued to perform well during the quarter. We see increases in lease sales, strong commercial rental, with utilization on our tractors between 80% and 85%, and the gain on sale on used trucks is very strong. Our tax rate for the quarter was 35%, compared to 34% in the same period last year, and our EBITDA was $102 million, compared to $83 million in the second quarter of 2011.

Looking at the balance sheet. At the end of June, vehicle inventory was $1.7 billion, which was up $255 million when compared to December of last year. New vehicle inventory was up $183 million, and our used was up $72 million. Looking at it on a same-store basis, vehicle inventory only increased $66 million from the end of March. New vehicle inventory was up $31 million, and used vehicle on the same-store basis increased $35 million. At June 30, our worldwide days supply of inventory was 56 days versus 53 last year, 43 unused versus 39 last year.

At the end of June, our total debt was $2.6 billion -- or $2.7 billion, excuse me. Non-vehicle debt was $807 million and was down $55 million from March 31 and $43 million from December of last year. Approximately 31% of our debt was at fixed rates. Capital expenditures were $57 million year-to-date, including $26 million in the second quarter. Approximately $12 million of the CapEx was used to repurchase a dealership facility which had been previously leased. We estimate our net CapEx at approximately $115 million in 2012. Debt to total capitalization also improved to 40%, compared to 43% at the end of last year, and we have $359 million of availability under our worldwide credit facilities as of June 30. We remain well within our limits of our financial covenants at June 30.

I'd like to take moment and share some additional information about our international and UK business. Some of you may know that Sytner, our Company name in the UK, has been recognized as one of the best big companies to work for in that market. In fact, we are the leading prestige luxury retailer in the UK, and we rank number one in brand mix with Audi, Bentley, BMW, Ferrari, Maserati, Mercedes-Benz, Porsche, and number two with Lexus, Land Rover, and Jaguar. The prestige luxury market continues to grow in its presence in the UK while gaining market share. In fact, if you look at the luxury market, it had a 15% share of the market in 2001, and has grown to nearly 25% of the market for the first six months of 2012. Our revenue in the UK has grown from approximately GBP900 million in 2002 and is expected to be nearly GBP3 billion in 2012. UK new vehicle registrations are up 2.7% this year, with a market on pace to register between 1.9 million and 2 million units in 2012. So far this year, the retail market in the UK is up 8.7%, including a 9.8% increase in the month of June.

Before I open the call for questions, I want to congratulate five of our US-based dealerships for being named to the Automotive News list of the top 100 dealerships to work for. This recognition is earned by BMW of Austin; Crevier BMW of Orange County, California; Wolfchase Toyota in Memphis, Tennessee; Honda Fayetteville, Arkansas; Honda Danbury of Connecticut. Congratulations to you, gentlemen, and your teams. Thank you very much for the strong efforts.

In closing, I believe our results continue to demonstrate the strength and diversity of the Penske Automotive business model. Over the last 12 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 first half of this year through our focus on gross profit generation and expense management. I remain optimistic about our business. Pent-up demand, strong credit availability, and many new product launches coming to the market should continue to keep demand strong in the US and our international markets. Based on these factors, we expect the US auto mart to sell between 14 million units and 14.5 million units this year, with a 10% to 15% increase at the retail level. At this time, I'd like to open the call for questions. Thank you.

(Operator Instructions)

First from the line of John Murphy with Bank of America Merrill Lynch.

Just looking at the new vehicle margins. You fared a lot better than some of your competition in the pressure there, and there wasn't that much, if you adjust for the shortness of supply last year. I'm just curious what you are seeing in your brands in general and how you're holding those grosses so strong, relative to the competition. It seems to be a little bit more cutthroat recently.

Well, I think you really have to look, John, at our mix. Primarily, when you look at 68% premium/luxury, our luxury vehicle margin, if you look at Q -- the second quarter of '11 versus the second quarter of 2012, only went down 30 basis points, from 8.5 to 8.2. On volume foreign, because we had, obviously, J3 inventory problem a year ago and now we have plenty of supply, we're down 70 basis points, and in our domestic, we were down 80. So I think the mix makes make a big difference.

We see probably a lot more disciplined, at least we do in our markets we are in, both domestically and internationally with the premium/luxury side. So I think that would play a big part of our strong new car margin.

And then a second question on new vehicles as well. The availability of credit seems to be ramping up pretty dramatically. Just curious what you're seeing in your dealerships, just as far as financing, and in particular, because leasing plays such a big part. Are you seeing some real attractive leases out there getting people into these luxury cars?

Well, there is a lot of credit available right now. I think you heard that from some of our peers. One dynamic that is taking place in our business, we've been pretty much conscious of being vertically integrated with our captive finance sources. But we've seen the banks very aggressive over the last probably, I would say, six months in trying to penetrate the market. We've seen -- and our new penetration has dropped from about 85% to into the 70%s from the penetration from the captives. And we've seen the same on used.

Obviously, from a leasing perspective, I think everybody in the business is taking advantage of the special rates we get on leases. So there's a lot of credit availability. I think aggressive rates, along with the incentives -- we're not really in the sub-prime business, which drives a little bit more of reserves, because in the premium/luxury side, we just don't see that customer. You might see it more on the domestic side. But overall, there is plenty of credit availability.

The captives are open for business, and the good news is that we are seeing some of the captives now who really had shied away from financing used vehicles of other makes are now being more aggressive. And obviously, we want that as we look at our retail first initiatives where we are trying to retail all makes of vehicles from each brand.

That is helpful. And then, on parts and service, the same-store sales were little bit on the light side. Curious what is going on there, particularly juxtaposed to the high gross margin at 58.6%, which I think is an all-time record. Just trying to understand the weakness in the revenue but then really to strengthen in the margin and if that is really sustainable going forward.

I think you got to break out the international and the US piece. Our customer pay was up almost 4% in the US. Warranty was down 1%, but when you look at the UK, they were off 1% in customer pay, and they were down 7%, almost 7.5% in warranties. That was probably the difference of our growth. We don't have today the benefit of Lexus and Toyota warranties we had over the past, so that is driving some of the warranty reduction. The big pickup was in our PDI, pre-delivery inspection, and reconditioning, because it was up 55% year-over-year. That drove probably some of the 130-basis-points increase in the margin.

And then lastly, just equity income was particularly strong. Is there anything going on at PTL? It seems like that market is a little bit challenged, but you seem to be benefiting from folks that are renting trucks as opposed to buying them. Just curious if you expect that to continue into the third and fourth quarter and what we should think about for the second half of the year?

Well, we had a great quarter at PTL. Obviously, I talked about it earlier, we had lease sales increasing nicely year-over-year. Our rental product line is very strong, because people are just not going out buying more trucks because their business is up. So we are getting the benefit of that right now, based on our rental utilization. You can see that both on the tractors and also on the mid-range trucks. And the our used car -- our used truck market is very strong. We are seeing some benefits.

And we see that carrying on through the balance of the year. The third quarter is always our strongest because of the strong one-way business that we have. But our logistics business, lots of quotations out on that, because obviously, we are related to automotive, and the automotive sector is strong. So you might also note, people are not aware of it, that we placed almost $4 billion of bonds in the market over the last probably eight weeks for PTL to finance our trucks. So we had been formerly being financed by GE Capital and had credit investment grade there, and that is going to prove to be very strategic for us as we go forward.

Thank you very much. Great quarter.

Thank you.

Our next question is from Rick Nelson with Stephens.

Can you comment on the July sales? What you are seeing in the US and the UK? And are the Olympics having any impact on sales?

Well, I was at the Olympics for a couple of days. I saw a lot of BMWs in London, I can assure you of that, and those will be good used cars for us when the Olympics are over. Internationally, July is the start of a quarter which is a registration quarter for the UK. So, we see that quarter, along with Q1, being strong. There is always the chance that there'll be some disruption because of the Olympics, but most of our stores are outside the M25, so it should give us a good year.

I don't think at this particular time that we see anything different from the standpoint of July going forward. We report -- OEMs report tomorrow. I haven't seen those numbers, but I think that we are in line with what our budgets and business plans are as we go into the quarter.

Got you. And I was wondering also if you could comment on the acquisition pipeline and how acquisitions rank in terms of priority with the alternatives for your free cash. And are the acquisition opportunities more so in the US or international?

Well, number one, when you look at capital allocation, have to say we have -- certainly, our CapEx, which will be $115 million this year, our depreciation is, I think, around $60 million. So that is the first priority, based on requirements from the OEMs. In our dividends, we talked about raising our dividend and having a 2% return on those.

At the end of the day, as we go forward, acquisitions then follow probably in third place. And we're seeing a lot of activity from the standpoint of opportunities, but I would say this, as everyone else, we are looking at them strategically. The brand, the location, or the end of market where we already have scale or does it open up the new market for us that is attractive. I would see the pricing significantly lower in the international markets than we do here in the US for good properties. We like to be in negotiations where we negotiate directly with the seller. It is not an auction, and certainly, as we have seen, some opportunities internationally.

Just made an acquisition in Italy. Obviously, people say, why do you go to Italy? But there is a real opportunity there with BMW. They want to reorganize that market. They've given us an opportunity to get in. Very little goodwill, if any, and very little capital expenditure. So we will see those grow, as we did with Sytner as we go forward. So, I would say we're open for business and we're not shutting down on acquisitions.

Great, and finally, if I could ask about inventory. We've got the days supply at 56 days. Sounds like Japan and Toyota and Honda have normalized. We're hearing about some tight supply with the luxury makers. If you could comment there on what you --

Well, I would say this, that we are getting back to normal inventory rates with Honda and Toyota. There is no question. We've seen it, and I think we'll see it with the numbers, is they'll come out from the OEMs in the next couple of days. Our inventory is certainly good shape. Our issue right now is in the premium/luxury side. Audi is very tight with vehicles. Our BMW inventory probably is less than 30 days. The 3 series, the xDrive cars, are hard to get. Q5s with Audi, Q7s. Obviously, the ML were down at Washington trying to compete down there with four of five MLs in stock.

So, I think that as we see the inventory -- I looked at some BMW numbers that if you look at July's production for the US, I think it is going to be about 17,000. And it's going to ramp up to 34,000 when we get to December. So, there's going to be plenty of product, and I know there will be a lot of action with the leasing incentives and other things. So, that should bode well for the premium/luxury sector, at least as we look the last six months.

Good to hear, and thanks a lot and good luck.

And next go to Robbie Shanker with Morgan Stanley.

This is E.J. in for Robbie. It seems like your floor plan interest expense has stepped up a bit recently in 1Q and 2Q. Could you talk a little bit about what you're seeing in terms of the interest rate environment? Was that purely because your inventory has been normalizing?

I think one point that I did make, obviously, on the remarks I made earlier, we did a forward swap on $400 million of floor plan back early last year, counting on the LIBOR to move up. And that is costing us about $600,000 a month, almost $1.6 million for the quarter. So that's driving our interest costs up. So, that's a forward swap we felt or the LIBOR would go up. Obviously, we were wrong, but we wanted to be safe and secure.

Got it. That is helpful. And could we also dig into your used margins a bit more? It was a bit lower than what we were expecting. What are you seeing there in terms of pricing, acquisition costs, demand?

Well, I think it couple of things are on the used car side for us. Obviously, when you look at the luxury side, we've been running about 7.4% on margin, and we were only down 30 basis points. So I would say we are in pretty good shape there, based on where we are.

Remember, when you get to the volume foreign, where we really had an erosion of our margin, and to me, it was down about 170 basis points. And that is because we were selling used cars last year at pretty good margins in the J3 category. And now with new cars available, we're bumping up against payments and things where people can buy a new car. So, I think that has some indication.

Remember, when you look at our used car margins, all of our used cars in the -- internationally, at least in the UK, have a 20% VAT. So if we make $2,000 on a car, we have got to pay 20% to the government. So we only make $1,600. So that also drives our margin down. It compares to a US number.

Got it. Thanks.

Your next question is from Matt Nemer with Wells Fargo.

It's Josh on for Matt. We would really appreciate an update on Penske cars, any color --PenskeCars.com. Any color that you can give us on how e-commerce shopping is trending, if you're seeing anything unique going on there?

There is no question that there has been a shift to the Internet. We are really religiously trying to populate all of our websites with our inventories. And I think with pictures and trying to drive that traffic, there is no question that from in the second quarter, from PenskeCars.com, probably 74% of the visitors were new, and about 26% were returning. And there is no question when we look at Internet sales, we are about -- we think they are about 30% of our retails, that's pretty much consistent with the first quarter. But it is about a 20% increase over last year.

We've got our partner programs, where we're including people like Verizon and Shell and Cintas, AAA and SKF, along with other people like Cooper-Standard. These are partner programs that we can utilize our websites for, for access for inventory and sales. That is working out well. And certainly the visibility on dealership websites, I don't think I'm alone or PAG is alone. We are doing a lot of work to reengineer those to make them more sticky. And certainly, there is no question that is the wave of the future and being able to use your phone and a lot of things that will go forward with the technology.

The good news is we've got a strong IT team, which is integrating the country for us with all of these capabilities. So, I feel good about that. Obviously, all of us know that are in the business, the OEMs website today probably drive -- along with the dealership-specific websites -- drive the majority of the traffic. So, I don't want anybody to believe that PenskeCars.com is a home run. It is very valuable, but I think we've got to realize that the OEMs are probably one of the key places people go. And then that is aggregated all of that stuff with these other players that you deal with.

Thank you. That is very helpful. Sticking with the technology theme, is there any other advancements, maybe with iPads in the service bays or in sales that you are looking at or that you are trying?

Well, I think there is as many different options out there, I don't think we've standardized on any. We've tried different things in the different markets. We have the ability to identify cars because of the chips on mirrors as they come in from the customers and service. One of the things that we are looking at, probably most important would be our call centers. We've had such good success in service where we aggregate, say, our 17 BMW stores in the UK into one call center for service, and we can manage the inbound and outbound calls much better. We can upsell, and that technology now is being driven.

We are going to look at doing a couple of pilots for two of the premium brands in the US which we think will be key. So, we are looking at more scale where we can take the service side of the business, and to me, then what we will do is utilize the tools that are available. Obviously, BMW in North Scottsdale are using tablets in service, and they are also in Texas. So we are doing some testing on those. We have not rolled it out across the country, to be honest with you.

All right, thank you. That's very helpful.

We will go to James Albertine with Stifel Nicolaus.

Congratulations on a great quarter. Wanted to get your view, in light of some of the increased production and new models that are coming in the back half of this year, as an example, the xDrives at BMW. I would imagine pricing at a premium to the rear-wheel drive offerings that have come out earlier this year. So, we wanted to get your view on where do you think ASPs are going in the back half?

It's hard for me to say. I think that there are so many new models coming out, and when you talk about xDrive, and you've got to look at the different parts of the country. What don't want to do is have vehicles that have content in them that they are not utilizing. We don't want to have four-wheel drives in Phoenix unless it is a Jeep going up in the mountains. So, I think that the products that are coming I think are very competitive now, and I think that they are all going to be fighting for market share.

We've got a real battle going on with Lexus, BMW, Mercedes, and Audi, and I think we're going to be the benefactor of that, because we're the downstream partner. We're the ones that have to deliver to the customer, and the used cars, we are all looking for used cars. So, we can be very aggressive on the trades today, which obviously will be key. With the new Civic, new Accord coming and the X1 from BMW -- that X1, I saw that over in the UK when I was over there for the Olympics. It's a great vehicle, and I think that's going to be very competitive in the market.

I appreciate that. It is very helpful. And then, wanted to touch on -- looking back now at the second quarter, any regional breakdown that you had in performance? Maybe the Northeast was a lag relative to some other regions, but just some thoughts there as well. And then, as a follow-up, your expectations around consumer demand dynamics, particularly considering the elections coming. And some of your competitors have commented on the fiscal cliff. Thanks so much.

Well, when I look at the markets from an overall, the West was up about 20%, say 21%, Central was up 19%, and the East was up 15%, so -- excuse me 13%. And the UK, obviously too, was up almost 7%. So overall, we were pretty much stable across the country. You've got to look at the at the brands and look at the locations. So, I don't see anything changing. That's pretty much consistent with what we've seen.

California has gotten a lot better. Florida has gotten better, there is no question about it. Probably the areas where we have foreign nameplates in Michigan are much tougher, because the domestics have gotten a lot stronger. I would say that was the one area that we saw things go down. On the other hand, in Indianapolis where there had been high level of domestics there and penetration, we are up significantly. So you could -- there is a story probably in every market.

As far as a fiscal cliff and what happens after the election, I think the key thing that we should look at is, we need to look at this third quarter. And I think that we are going to have with the new product offerings, there is still this pent-up demand, and the low interest rates, this is a time for people to buy cars. And I don't think from a premium/luxury standpoint, that we are going to see much change.

After the election, I really can't tell you what is going to happen. We don't know what the tax rate -- if they're going to change the taxes, there will be no tax changes, that will be one thing. But we get into a lot of tax changes from the standpoint of Washington, we could see some impact.

But at this particular time, we're going to do business as usual. I think 14 million to 14.5 million units is a good number, and I'm looking really at the retail side. And that should be up between 10% and 15% over last year, and we had an increase last year. So when you take the two together, our retail market is probably going to be up almost 25% over the last couple of years. So, I would be -- as I looked into 2013, I have to take the election and what is going to happen in Washington to make any further predictions, obviously.

Great. Thanks again, and good luck.

Our next question is from Brett Hoselton with KeyBanc.

New vehicle gross profit per unit, down about $100 sequentially quarter-over-quarter and about $200 year-over-year. And I'm wondering, is that primarily attributable to maybe some of the foreign brands getting little bit more availability there? And then more importantly as we think about the outlook into the back half of the year, typically see some seasonally stronger gross profits, particular in the fourth quarter. I'm wondering if you see any change in that trend through the remainder of this year.

Well, again I go back to mix. Remember, I think you've got to look at us with 68% -- 67%, 68% premium/luxury, 28% in volume foreign. And when you look at our premium/luxury sequentially, we're only down $99 year-over-year, and we were really short of vehicles in Audi, Porsche, and BMW. Our volume foreign was down only 76%, and domestic was down 32%. So overall, our change was only $95, which I think, based on what I've heard around the industry and around the US, I think we managed grosses pretty well.

We're not in a volume -- trying to be the volume leaders. We're trying to get the maximum dollars that we can out of each transaction, and I think that is good. And our used, on the used side, we were only down $71 sequentially. So, we didn't have an cliff. We didn't fall off a cliff here during the quarter.

And then, as you think about the used vehicle side, how you think the move to more value used vehicles might impact your gross profit per unit, not just the margins, but the gross profit per unit? Do you think that is going to put some pressure on the gross profit, or do you think you're going to be able to continue to sustain the current level?

Well, as you know, we've moved to a retail first mentality. So, we're selling vehicles less than $10,000. Probably for the quarter, we sold almost 4,000 vehicles below $10,000 where these had been wholesale previously. I know in the UK, we're looking at it -- we have a continual Internet auction going on. And I said to our guys, is there an opportunity to take those vehicles and retail them at locations, so there is some moved in that direction. But overall, obviously, the big mix is greater than $15,000.

Our cost of sale is higher than our peers because of our luxury mix, but I don't see the grosses really much different in each one of the categories, obviously. As we get more new car programs and especially in the J3 category, you're going to see us bumping up against some of the new car leases and payments.

And quite honestly, people talk about certified, and we've got to be careful. Because if you certify a car, you're probably in the luxury side, and you could be putting between $1,500 and $3,000 worth of reconditioning. You tend to cap your opportunity for gross margin because of the cost of sale goes up. Now, we get some benefit for that from a used perspective in reconditioning in the parts and service, but I would say there's going to be a balance there, what you certify and what you sell as you get into this market with more supply.

In the service and parts department, it appears as though you've had a recent inflection point. Sequentially, we saw a nice uptick there in the margin side. Year-over-year, we're seeing an uptick on the margin side. Do you see this as being at that inflection point with parts and service margins, where they are either at least going to be stable and might actually see some improvement?

I think that we are getting -- we have process, we have facilities, and I think we've got people, which are playing -- are making the difference, because we've made the investments in these shops, in our drive-throughs, the way we handle our customers coming in. I think that we're doing much better job. We are taking the time to upsell.

I think the opportunity to have these call centers, we see it in our reservations, in truck leasing. By having call center, not a coin-operated one where you have some third-party doing it, where you have people that understand the brand, understand the product, we can upsell and can take a better chance with our customers. And that's going to give us the chance to have more margin.

And I think one of the things we've done is rapid repair, we call it. We're doing wheel repair. If you went to the UK and looked at the stores there, we've got dentless and rapid repair almost every location. We're doing the same thing in a more consolidated way in the US, which is really getting us some benefits. Obviously, tire and wheel is big on the luxury cars, the aluminum wheels.

So, we are in a position to have more share of wallet -- I call it more share of wallet, really, where people would go to the outside for that. The tire business is a big business for us now, and that's again having the environment when people pull into a first-class drive-through where you can sit the person down, the customer, and talk about his vehicle. And to me, that is critical. And doing it efficiently, and that me will drive it. Also, in the premium/luxury, we are offering quality cars to our customers, which is key. And in some stores, we have 350 loaners. That is an expense, but on the other hand, I think it pays off in customer loyalty.

And next we go to Simeon Gutman with Credit Suisse.

Roger, recently we've heard or we've seen some cracks at some high-end retail or luxury goods sellers. Car sales have hung in, but it's been more of the past four to six weeks. Curious if you have any comments regarding the health of the customer, especially in the luxury end. Anything anecdotal with traffic, dealerships or closing rates?

Well, our closing rates have been consistent. I guess you're talking about Coach today. I saw that. I think that the driving factors today -- I've said it, I've heard our peers say it. We've got an older carpark, we've got high residuals, and we've got low-cost financing. And people see that, and also from a fuel economy standpoint, today people might go to diesels because 25% better fuel economy to drive down total cost of ownership.

All of these things are playing a factor, but at the moment, I see a good market in the premium/luxury side. I think it is a different market. I don't think that -- those are casual things when you're going into Coach and maybe Tiffany, but I think today, the vehicle is transportation, and it probably is a different mindset. We see people making their car payments and not making some of their other payments. So to me, I think we are in the right spot.

Okay. That makes sense. I don't know if you said anything about this in the prepared remarks or if it's even a big issue, but UK sales in light of the Olympics, what happens? Do you think you get a pause or it keeps going and then you get some pent-up demand period and then we see the sales come through in a future quarter?

Well, just remember Q3 is a registration quarter. So, it is driven -- obviously, the third month in the quarter is always very strong, and we're starting out in the month of July. Most of our business is outside of the M25, and to me, August is always the smaller month anyhow as we go forward. But September is the one where all the action comes in, all the registration. So, I see it to be consistent.

One of the good things I feel is we will have -- there will be a lot of BMWs, used BMWs that have been used during the -- I think there is 4,000 vehicles that were put into service by BMW there, the car of the Olympics, which has been terrific, great visibility for the brand. And we will have an opportunity as dealers there to buy those, hopefully.

And what about -- as far as trade-in goes, are you seeing trade-ins stable? Is it increasing? And if they are increasing, does that mean the supply of desired vehicles starts to get better?

Our used car business is up year-over-year, and I would say we buy obviously from the outside, but I would say it is pretty much consistent. I couldn't give you a specific number. Tony tells me that 75% of our June business were trade-ins. So, 25% purchase would be the mix.

Okay. And then I apologize if I missed this, but on F&I, I think the year-over-year looks pretty good. Sequentially, it ticked down a little, and I'm curious what is behind that?

Well, if you look at our F&I, one of the areas that we have is we bought the Agnew Group in the UK, which is in Belfast. They did not have the finance programs that we had at Sytner. So we're down -- they are about $700 per vehicle versus about $1,200. So that is dragging us down little bit, but as we put some of these programs in place that we have, I think we will be in good shape. On a same-store basis, I think we were pretty much flat or maybe up $12, something like that.

All right. Thanks for the color, Roger.

Our next question is from Patrick Archambault with Goldman Sachs.

Wanted to follow-up on the M&A question. You did give your views on Europe there. One of the things I would like to hear about is the environment in the US. There have been a few folks on the dealer side who have said that it has been harder to consummate transactions more recently because multiples have gone up along with the expectations for auto sales generally. And just wanted your thoughts on that.

Well, I would say this, we are open for business. We have made acquisitions this year. We will continue, I'm sure. The multiples are in line. The ones we are looking at, I said it earlier, we're trying not to get into auctions where we get a negotiated purchase, where we have someone that wants to do business with us for a particular reason, or it's a market we want. I think every deal is different, and we have grown the business from $1.2 billion to almost $13 billion through acquisitions and same-store growth. So to me, there is no reason to stop, now.

Okay, understood. And changing gears little bit on SG&A, another good leverage quarter below 80%. Can you remind us just where -- for our modeling purposes, where you think this could go, presuming that SAR normalizes at a level certainly above where we're trending now.

You have to look at our SG&A a little bit differently, because we have a lot of sale leasebacks as we grow -- as we grew, we've got a number of sale leasebacks. Hard for me to predict here. I probably think if you looked at us without real estate, we would be around between 71% and 72% would be a number that I could give you, if you took the real estate costs out or rent costs.

Let me ask the question another way. You've invested a decent amount in some good infrastructure. You have a campus the system that I am assuming you could continue to leverage pretty well as sales recover. I'm just trying to get a sense of how much additional margin on a year-on-year basis improvement is there left as sales get better from here.

Well, I think that CapEx is embedded in the depreciation, because of on GAAP, it is consistent. So, from an SG&A perspective, it is compensation. Basically, we are trying to drive our comp plans with our managers and with our salespeople and technicians based on gross profit. So, if we continue to monitor that as we grow our business and sales grow, our overall margin was at 15.2%, so we have a certain piece of that will be SG&A from the standpoint of comp.

Other things you look at, obviously, as we get into some of the support we have to our service customer with loaner cars, there is more and more of the OEMs wanting us to give more to the customer. So we do have some pressure on the other side of what the customer expectations are. We could have someone coming in and wants an oil change and leave his car, and we give him a car to use for a day, there really is no margin or gain on that. So we've got to balance that with customer satisfaction.

So to me, the SG&A is the number that's going to move. And our goal is to get scale. One thing we are doing, we have consolidated offices, most of our -- take a market like Phoenix, it's $1 billion, one office. We think that is an opportunity as we go into the UK. They've had single offices primarily in their model. We're going to tend to bring that into a capability where we can scale those into one large office in many markets or maybe even do it by brands.

So, those are all initiatives that we have in the future. And that's going to help drive down SG&A. When you look at potential call centers that we would have, we talked about that earlier, we're going to have one or two of those in a test market where we can take one brand and take all the inbound service calls and handle the Internet. So to me, it's been successful in the UK, but again, I think you're not about making short-term moves here. We're really looking long-term.

Okay, that is helpful color. Thank you very much.

Our next question is from Brian Sponheimer with Gabelli & Company.

So, you've got about 40 dealerships now in the German market. And there's an article out today discussing self-registrations and some potential market dilution there. Have you seen any of that, and --

Well, there is a dynamic -- let me say this, when you look at the UK, you look at the German market, the Italian market, it's a little bit different. They have what they call pre-registered vehicles. They will come to the end of a quarter, and they might register 1,000 vehicles. And then these then are sold as demonstrators and used cars, and these are vehicles that are quite attractive to the retailer, because we get those at somewhat of a discount.

It is a way to move vehicles without putting heavy incentives on them, and basically, they move them from new into used, and it is a value proposition for the retailer. And that is been going on for years. All brands in those markets have that activity going on, typically.

So this isn't something where at some point it's musical chairs, and the music stops and there is a -- I would guess a lack of supply of inventory or some sort of price dynamic that would change within the marketplace?

I would tell you, I would think, knowing Germany as I do, there is plenty of cars available in Germany. I doubt if those guys will stop that process. I think that is one thing I like about the US market; there's a lot more discipline. We might have incentives, but you don't see the pre-registration of vehicles. We sell a demonstrator, typically has a few miles on it sold as new vehicle, but there are vehicles for people to be targets.

We have different -- in Europe and the continent and in the UK, we have certain sales targets as a retailer. And to make those targets, there sometimes you take new vehicles and pre-reg them, and you'll be able to meet your targets, which then gives you these vehicles at bigger discounts. And it's something that the OEMs have been doing for a long time, and I don't think it's anything that's not consistent with the markets.

Okay, that's very helpful. Thank you. And if I can just talk one more, just about how you're thinking about use of cash going forward. You have been through a lot of facility renovations over the course of the last five years. You've got the convertible in your rearview, and you're looking at about $115 in CapEx this year, which could potentially go down over the next couple of years. Given this and given where the share price is, should we be thinking about share repurchase as something that you may get more aggressive about?

Well, I think I said initially that CapEx obviously should be in that $100 million range going forward. I think that we've -- the big expenses we feel are pretty much behind us. We have a few internationally. There's a Sheffield BMW in the UK which will be a big one. But I think it's going to be pretty much in line with where we are this year, maybe slightly lower. I think obviously we are looking at dividends, which we raised our dividend.

We have $100 million of authority from the Board, both on debt and stock buyback. We have basically kept our shares flat. We had people who had restricted shares by market to sell those. So we've tried to keep the share count pretty much stable. I would think that would be our mode here for the foreseeable future, because we've got CapEx, we've got our dividend, and we've got our acquisitions. The fourth bucket would obviously be buybacks.

Understood. That is very helpful. Congratulations on it. Outstanding execution, and the Greenwich facility here is a gem.

Not done yet. When you're done, come and see us. Thank you very much. Appreciate it.

And we'll go to Tom Judson with Husic Capital.

Could you talk a bit more about the leasing and how that is going? With rates so low, so it should be a pretty exciting area.

You are talking about cars or trucks?

Cars.

Obviously, today, we are in the premium/luxury side, and probably -- I want to give you a number, I think it's pretty much on target, 50% to 55% of our business. And that's Audi, BMW, Mercedes-Benz, and Lexus probably are in that range, and that is good for us. You've got a customer that comes in 30 month, 36 months, it doesn't give us the opportunity sell a lot of extended service contracts, obviously, so that is one downside. But gives us good used cars coming out. And they are very proactive in that.

And to me, where you don't have OEM active, and maybe some of the super-luxury, we have the banks. Leasing to me is any good product, and there are strong residuals so their affordability is good and in many cases your credit profile is property to can get it with really no down payment. And that is pretty attractive to a lot of people.

Wow, what kind of rates are that out there on leases?

These would be monthly rates, Tom, basically rates that are set by the OEMs. It depends by model, I don't have -- it's not always $300 on Monday. It would be depending on model mix and also equipment.

Okay. Thank you.

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

Thanks everybody for being on. We had a good quarter. We're looking forward to the balance of the year. Thanks for the support.

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