Penske Automotive Group Inc (PAG) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Penske Automotive Group third quarter 2012 earnings conference call. Today's call is being recorded, and will be available for replay approximately one hour after completion through November 9th, 2012. 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 Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Laurie, and good morning, everyone. A press release detailing Penske Automotive's third quarter and nine month results ended September 30, 2012 was issued this morning, and is posted on our website.

Joining me for today's call are Roger Penske, our Chairman, David Jones, our Chief Financial Officer, J.D. Carlson, our Controller. Following today's call, I will be available by phone to address any additional questions that you may have.

However, before we begin, I would like to remind you that we will be discussing certain non-GAAP financial measures, such as adjusted income from continuing operations attributable to common shareholders, adjusted income per share from continuing operations attributable to common shareholders, and adjusted EBITDA on our call today.

We have reconciled these items directly to our most directly comparable GAAP measures in our press release dated November 2nd, 2012. I refer you to that press release for additional information.

The Company believes that these widely accepted measures of operating profitability improve the transparency of the Company's disclosures, and provide a meaningful presentation of the Company's results from its core business operations, excluding the impacts of items not related to the Company's ongoing core business, and improve the period to period comparability of the Company's results from its core business operations.

Adjusted income from continuing operations and related earnings per share attributable to common shareholders for the third quarter 2012, excludes after tax costs of $13 million, or $0.14 per share associated with the redemption of the Company's $375 million of 7.75% senior subordinated notes in August.

Adjusted income from continuing operations and related earnings per share attributable to common shareholders for the third quarter of 2011 excludes $11 million, or $0.12 per share of net income tax benefits as noted in our press release.

We have posted a presentation to the Company's website designed to assist you in understanding our financial results today. We urge you to refer to this presentation during our call at www.penskeautomotive.com under the Investor Relations section.

Finally, we also may make some 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 Penske, who will take you through our third quarter results.

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

I am pleased to announce that Penske Automotive reported record third quarter results on an adjusted basis. Based on the continued strength of the US and UK vehicle markets, total revenue increased 17.4%. to $3.4 billion. Revenue was driven by a 23.6% increase in retail unit volume, including 21.1% in the US and 29% in our international operations.

Adjusted income from continuing operations attributable to common shareholders increased 19.1% to $54.3 million and related earnings per share increased 20% to $0.60 per share.

During the quarter, we strengthened our balance sheet by issuing $550 million of 10-year senior subordinated notes at 5.75%, and used a portion of the proceeds to refinance our existing $375 million in senior subordinated notes.

In doing so, we reduced our interest rate by 200 basis points while extending our long-term debt maturities from 2016 to 2022.

During the quarter, we also redeemed the remaining senior subordinated convertible notes outstanding in cash, and we extended our existing US based $375 million credit facility for an additional 12 months under the evergreen provision of that agreement.

At September 30, we had $487 million of availability under our credit facilities. Based on the continued strength of the Company's results, our Board of Directors recently authorized an increase in the cash dividend to $0.13 per share, representing approximately 1.7% yield calculated using the closing price of our stock yesterday.

Now let's look at a few specifics behind the third quarter results. Total retail unit sales increased 23.6% to over 88,000 units, and revenues increased 17.4% to just over $3.4 billion.

On a same store basis, worldwide revenues increased 11.7% including a 16.6% increase in the US, excluding the effective foreign exchange rates total same store retail revenue increased 12.2%.

Our revenue mix during the quarter was consistent with last year, 63% in the US, and 37% internationally. Brand mix was also consistent with last year, premium luxury 68%, volume foreign 28%, and the Big 3 4%.

Looking at new vehicles, we retailed 48,300 units in the quarter, representing a 26% increase compared to last year. Premium luxury was up 21%, volume foreign up 34%, and Big 3 up 12%.

Total same store unit retail units increased 19%, representing a 25% increase in the US, and a 7% increase internationally. We outperformed the US market increase of 15% in the third quarter.

Our gross profit per unit was $2,821, and our margin was down 80 basis points compared to last year when a lack of inventory within the [J3] brands drove stronger new vehicle gross profits and margin.

Looking at used vehicles, we retailed 39,800 units in the quarter, an increase of 20%. Our used to new ratio was 0.82 to 1. Total same store used units retailed increased 13%, or approximately 4,300 units. The US was up 15%, internationally we were up 10%.

Our gross profit per unit was $1,824, and our margin was down 20 basis points to 7.3%.

Finance and insurance revenue increased 17%, including 13% on a same store basis. Our financing insurance per unit was $969. Service and parts revenue increased 7% during the quarter, including 1.9% on a same store basis, excluding exchange rate same store service and parts revenue increased 2.5%.

Our customer pay was up 1%, warranty up 3%, body shop was up 1.4%, and our PDI was up 36%. Gross profit margin for service and parts improved 80 basis points to 57.8%.

Overall gross profit for the quarter increased 11% to $511 million, and our gross margin was 15% compared to 15.9% last year. The decline in gross margin is largely due to revenue mix associated with the strength of our new and used vehicle market.

Selling, general and administrative expenses as a percent of revenue improved 80 basis points to 12%, and SG&A as a percent to gross profit improved 20 basis points to 80.1%.

Equity income from affiliates was $8.8 million, and compared to $9.6 million in Q3 last year. The decline is attributed to lower earnings at our German joint ventures, and Penske Truck Leasing which incurred additional costs associated with its debt refinancing.

Our effective tax rate for the quarter was 27%. The lower effective tax rate in the quarter is due in part to approximately $2 million, or $0.02 per share of benefit from revaluing our deferred tax liabilities, as a result the reduction in corporate business tax rate in August.

Based upon our mix of income in the new UK tax rate, we estimate our annual tax rate at 32% to 34% in the future. Adjusted EBITDA was $100.3 million, compared to $93.8 million in the third quarter last year.

Let's take a look at our balance sheet. During the third quarter we completed two significant transactions. First, we redeemed the remaining 3.5% subordinated convertible debt outstanding in cash, no shares were issued in the settlement of the convertible notes.

We also refinanced $375 million of 7.75% senior subordinated notes which were due in 2016. We replaced these notes with a newly $550 million in senior subordinated notes that are due in 2022, and reduced the interest rate on these notes by 200 basis points to 5.75%.

The result of these transactions coupled with our cash flow for the first nine months improved our debt to capitalization ratio to 39.6%, compared to 43% at the end of 2011.

Our total non-vehicle debt was $831 million, down $19 million from the end of last year, and we are well within the limits of our financial covenants at the end of September 30.

Our vehicle inventory was $1.8 billion, which is up $413 million when compared to September of last year. New was up $369 million, used was up $44 million.

On the same store basis, vehicle inventory increased $313 million from September of last year. Our new was up $296 million, and used was up $17 million. Approximately $200 million of the same store increase relates to the Japanese brands.

At September 30, our worldwide days supply was 49 days versus 42 last year, used was 38 days versus 40 days last year.

Capital expenditures were $96 million year-to-date, including $39 million in the third quarter, and we estimate our CapEx at approximately $115 million to $125 million this year.

Acquisitions during the quarter, we acquired the Hertz Car Rental franchise for the Memphis market area, which includes both on-airport and off-airport locations. The Hertz opportunity will complement our existing dealership operations, and provide access to additional used vehicle inventory, while same branded dealerships would benefit from service activity as well.

During October we completed the purchase of a BMW and MINI dealership in Ontario, California, adding scale to our market presence in Southern California. We expect these dealerships to contribute approximately $125 million in annualized revenue. So far this year we have completed acquisitions expected to contribute over $625 million in annualized revenue.

Looking at our international business. We remain very upbeat about the opportunities we have in our international markets. We have recently entered the Italy market with BMW/MINI brand in Monza near Milan and Bologna. These businesses are performing well, and provide a footprint for growth in northern Italy with the BMW brand.

In the UK, we have recently completed our tenth year in that market. During that time, our revenue has grown from approximately US$900 million and it's estimated to be over $4.4 billion in 2012. We are the leading prestige luxury retailer in the UK. We ranked first in brand mix with Audi, Bentley, BMW, Ferrari Maserati, Mercedes Benz, and the Porsche brands.

The prestige luxury market continues to grow and gain market share. The luxury market had a 15% share back in 2001 when we purchased Sytner, and has grown to 25% of the market in 2012.

During the third quarter, UK registrations increased 7.5%, including an increase of 8.2% in the key registration month of September. So far this year, the retail market in the UK is up 11.4%, highlighting the strong demand for new vehicles in the UK.

The market is on pace to register over 2 million vehicles, compared to 1.9 million registrations in 2011. Additionally, our used to new ratio in the UK market is 1.04 to 1 on a same store basis.

In closing, I believe our results continue to demonstrate the strength and diversity of our PAG business model. We also continue to grow. Over the last 15 months, we have added significant new top line growth through acquisitions, and our business continues to generate substantial same store growth.

We will continue to focus on growth through acquisitions that complement our brand mix and geographic strategies, as we look to build scale in our areas of concentration.

I remain optimistic about our business. We continue to see strength in our markets, and are very pleased with the pace of new and used vehicle sales in our dealerships.

Pent-up demand, strong credit, and many new product launches coming to the market should continue to keep demand strong in the United States and our international markets.

Before I open up the call for questions, I want to provide you with an update on the effects of Superstorm Sandy on our business.

Over the course of the past week we have had disruption of operations in our locations along the Eastern seaboard, including Connecticut, New Jersey, New York, Rhode Island, and the Washington DC metro area. Collectively, we are using our best efforts to get each store back on line and operational.

However, our first priority rests with the personal well-being of our employees and their families. While many have suffered personal losses, their efforts in preparing for the storm and responding to the damage have been outstanding. Generally, we lost a minimum of three to four days of business at each of the locations. These operations represented approximately 17% of our retail unit volume and revenue for the three-months ended September 30, 2012.

Our operations in New Jersey were more severely impacted than others. I made a personal visit to Jersey City on Wednesday for a firsthand look, and to provide some moral support for our team.

From our initial assessment, the most severe impact on our business was felt in Jersey City, where our Toyota, Nissan, and Chrysler dealerships suffered severe flooding, with up to four feet of water in our showrooms and service shops, resulting in water damage to over 750 vehicles.

Without power at these locations, it has been difficult to complete our assessment of potential damages. We would expect to incur charges for insurance deductibles on the loss of inventory and for property damages during the fourth quarter.

In addition, we are aware that many OEM parts depots are not delivering parts yet, and other OEMs suffered losses on vehicle inventory located at East Coast ports when the storm came ashore. At this time we are uncertain how this will affect vehicle deliveries in the first quarter.

I think the good news is that all our employees are safe.

Thank you for joining us today. At this time, we would like to open it up for questions.

(Operator Instructions). Our first question from the line of John Murphy with Bank of America Merrill Lynch. Please go ahead.

Good morning, Roger.

How are you?

First question. Just generally if you could comment on why you think the UK market has been so strong really in the face of a tough macro environment over in Europe, and really specifically why has it been so strong around the luxury brands, which are obviously more discretionary purchases over there? Just curious on your thoughts in the UK?

I think the GDP in the UK, if I am correct, has grown about 1% in the third quarter, and I think the UK government has provided roughly $375 billion in quantitative easing that is in place right now, and we have the unemployment hit a new 15-year low, so I think those are some of the basic reasons.

But also we have got a pent-up demand as we have had --- we have in the US, and furthermore, with the traction that the premium luxury players have gotten, which I mentioned during my comments, that has given us some wind in our sails from the standpoint of benefit.

They've also are now moving up and down where they have typically been premium luxury with high MSRP vehicles, they are moving down into one series, two series, and three series, which certainly has made a difference. You have got the Q3, X1 and Evoque from Land Rover that made a big difference.

I think it is product, I think it is the pent-up demand, I also feel it is the government's stimulus that has made a difference.

Okay. Then just a follow-up on that.

Obviously, you have strong relationships with the auto makers you are dealing with over there, and you are dealing with them over here in the US as well.

I am just curious. You seem to have gotten really strong -- strengthened relationships with the premium luxury in the UK. I am just curious if you are seeing the same relative strength or cooperation or recognition of the strength of your brand in dealerships here in the US with those same brands, and actually with more of the mass market import brands, and even the Detroit 3 at this point?

Just trying to understand the relationships with the auto makers, and how they are -- seem to be improving? But I am just curious what your thoughts are?

John, I always felt that our relationships were good both domestically and internationally. I don't think they have deteriorated at all. In fact, as we have tried to grow our businesses and meeting the CI requirements with our facilities, training of our employees, and when you look at our CSI metrics, they are best in class.

We have low employee turnover, so I would say the relationships with the manufacturers, not only internationally, but -- would be similar here in the US. We have brand managers that drive that process on a day-to-day basis, which I think is has proven to be beneficial to us.

To me overall, the relationships that we have had, we had Jim O'Donnell who obviously was heading up BMW in the UK, came to the US. Ludwig Willisch is here now, he was in Germany, we knew him.

So I think our global nature gives us the opportunity to have access to the senior executives across many of the OEMs in Europe. Overall, as I would say, all of the public retailers have really generating good morale and good feelings with the OEMs.

I think initially they looked at us as maybe troublemakers, but today I would say that in every single case, the guys are doing a great job and I think we are a part of that group.

And then just a last question on gross margins and SG&A. Some of your competitors have indicated that there is some real opportunity on potentially improving new vehicle grosses, which are generally under pressure across the industry, as well as cost cutting SG&A costs.

Just wondering if you see any opportunities on both of those line items?

Well, I would have to say that my discussions after seeing margins at the end of the quarter has only been about gross margins within our team, both the senior level and also down at the dealership level. I think that some of our pay plans generated more compensation based on many of the J3 brands hitting some of these upper levels of unit volumes, which drove a little bit more comp, probably about 40 basis points of SG&A during the quarter.

But I think as I look at grosses and margins as we go forward into the fourth quarter, I feel that we are at a level that we are going have to deal with. I think there are individual cars, Porsche will have more availability. There are certain car lines, the 3 Series, all-wheel drive will drive higher margins.

So at the end of the day what I am hoping is it will stay stable, and there might be some creep up, but I wouldn't expect it to be too big.

Great, thank you very much, Roger.

Thanks, John.

Your next question from Rick Nelson with Stephens. Please go ahead.

Hi, Rick.

Thank you, good morning. I would like to follow-up on what you had indicated about the UK, the used to new ratio, 1.04 to 1. Are there Best Practices that you can take from the UK and bring those over to the US to help you on the used car side in the US?

We have a used car buying operation that is probably more robust by brand in the UK where we are actually out, probably have 21 buyers that do nothing but buy by brand, which has helped us significantly, that would take a big group of people here in the US with the geography we would have to cover.

But I think if you look at the international markets typically, used cars have always been a higher new to used ratio. It is different in certain markets but to me, we do have the pre-reg models. This is where we register demonstrators at the end of certain time periods, was those have to be sold as used, where demonstrators here in the US, if we sold a demo, it would be classified as a new vehicle. So there is a little bit of noise in those numbers.

I think overall the focus on used because we just never had the new car volume, when you are looking at 2 million units compared to what we have, and the ability to have a profitable business, you have had to be -- have focused not only on new but used, and also your parts and service.

I would say overall it is just the marketplace. And I think that the certified sales, in fact, in some markets in some brands over there, you can't sell a used car at an OEM dealership without it being certified. I am not sure I agree with that, but those are some of the things that would be in play in the UK.

Got you. Also like to ask you about the acquisition opportunity, the pipeline as you see it today, how that looks in the US, and Europe, and the BRIC countries. Where do you see the most opportunity?

Well, as I said, we have got annualized acquisition revenue about $625 million, and that is not just US or internationally. We have had the benefit in Italy where we see in some of these troubled markets, it is the right time to get in because you can make great acquisitions, very little goodwill, and certainly the real estate side of it is very beneficial as we have seen profitability right out of the box in Italy.

Certainly, the acquisition that we made with BMW and MINI in Ontario was strategic, because we are in San Diego, we will be in Ontario, then also in Orange County, and then we signed a purchase agreement which will close at the end -- some time this month on a Lexus and Toyota business in the US, which shows you that there is activity.

And to me we are looking for businesses that are strategic, they fit within location and geography that -- where we can utilize some of our scale, and to me, that makes sense.

I go back to a comment I made in the past. There is 18,000 franchises -- dealers here in the US, about 6% of those are represented by the public retailers, so there is many people out that don't want to meet the current CI requirements of the manufacturers. I would have to say it is good fishing time for the public retailers.

We think that the deals we want to get into are ones where we negotiate pricing, there is not an auction. I think most of us have contacts and that takes place. There are some brokers which obviously try to set up an auction environment, which sometimes pushes the price.

But I think if you have got a store that is in your market, it's a brand that you have confidence with, and have exposure and have people that understand it, you are going take a good look at it, because the capital is available, right now interest rates are low. We have loaded up our gun with money through 2022, so I feel pretty good about what we have.

We lease the real estate. I have seen where there has been leverage on SG&A on real estate. We have 5% of our real estate we own, and that is about $300 million. You can see we have got a strategy that shows that we would lease rather than own, and I think that has pretty much been our strategy from the beginning.

And finally, if I could ask what your crystal ball tells you about the fourth quarter, particularly for the luxury segment? I guess last year we saw the big battle between the luxury makers. Do you see another year of that sort of competition?

Well, I guess you have got to go back and really at the market. If you start out in October, I think the market was up overall about 7%, and the luxury side seemed to take a bigger bite. They were up almost 11%, and then we slowed down a little bit in the volume foreign. They were up about 8%, and then the domestics were up 4.5%.

So to me, the market is up. We still have this pent-up demand. We have got credit availability, and obviously, I am not sure what the East Coast is going to be like with the storm, there will be a lot of cars that have to be replaced. I think there is probably tens of thousands of cars that have been damaged, so that is going to create an opportunity, unfortunately, as we go forward, but we will deal with that probably over the next three to six months, as insurance companies come in and make settlements, as people are worried probably about their homes.

But I think the market is stable. I think margins will always be something we all have to manage on a going forward basis. But the US market is good. I think when I look internationally, the big thing for us then is what do the OEMs come to the party with in December, because that is always a big month where they are trying to hit their targets, and they typically offer some real incentives to the retailers.

So I guess we will wait and see.

Okay. Thanks so much and good luck.

Thank you.

We have a question from the line of James Albertine with Stifel Nicolaus. Your line is open.

Great, thanks for taking my question and good morning.

Good morning. How are you?

I am doing well, thank you.

A quick question. What are you seeing obviously through the third quarter here, as it pertains to sort of the proliferation or the condition of trade-ins? And then separately, any color you can provide on F&I penetration rates across maybe FICO scores? And what I am trying to get is, based on what your data is telling you, is it more or less -- is the $14.5 million to $15 million range we have seen here recently, more or less driven by the increased penetration of a sub-prime consumer, or more vehicles that are older on average coming back into dealerships as trades?

Well, I think you have got one of the momentum obviously is the impact of the J3 coming back. I think we are seeing higher mileage trades, there is no question and older cars.

When you have a car park that is 11 years old, you obviously are going to see some of those trade. But we have the benefit today, most of us are retailing where we have wholesaled cars in the past, our cost of sale on used has gone down about $2,000 during the quarter. That is demonstrating that we are selling older cars in the marketplace, so we will continue to do that because this is a profit opportunity, an internal reconditioning margin opportunity, plus a customer.

So I think that over the next 12 months, we are going to see a lot more leased vehicles that are coming off leasing.

Because remember leasing really stopped at 2008, then it picked back up again, and I think in the premium luxury side, that is going to add a lot more vehicles for us as we look at 2013, when you look at BMW, Lexus, Audi, and Mercedes Benz. There will be a lot more vehicles coming off, so that will help feed our used car business, and those obviously will be good for us.

In fact, when I look at the leasing strategy today of the manufacturer, there are a lot more two-year leases now. They want to see these cars come back in the market, and I think they are holding the residual values now. We will see whether they hold obviously at the end of the year. You see some depreciation piling up from the standpoint of residual.

Overall, I think the trades are older, more mileage, there will be some competition as we go from 2014 to 2015 to 2016, where the used car prices will go down, you won't have the ability to sell used cars, and people want to jump into new.

So I think there will be an inflection point here where maybe that our new to used or our used to new ratio will have a little harder time trying to get to 1 to 1.

That is very helpful, thank you for that additional detail.

As a follow-up, in past quarters here you have talked about a supply and demand sort of imbalance, particularly among, I believe it was BMW, and maybe they were a little bit off sides on getting the right 3 Series, whether it is the X Drive in the Northeast, or what have you to market, as well as some demand in other parts of the world.

So just wanted to get an update as to where you see that as we have now entered the fourth quarter. Is it more normalized, and are you seeing better allocation of the high demand products come to market? Thanks.

I am not sure what the real normal is, but I can tell you this that we look at our availability just going from the end of September to the end of October, our BMW inventory is up $50 million, our Lexus inventory is probably up about $20 million to $25 million, some of that has to do with we were shut down at the end of the month in New Jersey, and Mercedes Benz is up about $10 million. Our Porsche inventory will be much better than it was.

I would say overall, we are looking at same store basis, we are up $300 million, and $200 million of that is obviously the J3, and the balance would be the premium luxury.

I know that BMW will push volume, because we have plenty of bullets in the X3 and cars like that certainly, and the 3 Series are going to be strong. Mercedes has a great lineup. Audi is strong, our dealership in San Jose was number one last month in the Audi network. So we are starting to see the product we need to be able to perform, and that was the good news in our results is that we did drive both new and used car on a same store and overall revenues and product.

So we feel good about going into Q4.

Thanks as always, and best of luck in the fourth quarter, and with the cleanup in the East Coast.

Thank you.

We will go to Matt Nemer with Wells Fargo Securities. Please go ahead.

Good morning.

Good morning. First question is, your F&I PVRs were down a little bit, and I am wondering, is that primarily mix, or as you look at your luxury brands, maybe those were -- can you comment on whether those were up or down? Thanks.

I think the first thing you have to look at, we can't really compare exactly to the US. But as we look at 38% to 40% of our revenues coming from the international markets, and then specifically in the third quarter BMW really went to low rate financing, and didn't put money at the dealer -- or on cash that we could take advantage of on rates, because they were really below rate financing for the consumer. So that had a big impact in the UK.

And beyond that, Agnew's, which is in Northern Ireland, we have not been able to negotiate, at least to date we are in the process of negotiating better rates for us on F&I. So I think that had some of the drag when we looked at quarter-over-quarter. We were down about $60 I think overall.

But overall, I think that F&I is important. As you know, with leasing and with the premium luxury, we have a lot more leases. The margin on those from just the income margin, finance income margin is less.

Obviously, we have the ability to sell other products, but when you think about today BMW with full circle, and some of the other manufacturers to add-on three, four, five-year extended warranties is a little bit tougher. We want our customers to leave the dealerships with a good product from the standpoint of the transaction so they will come back.

So as you look forward into the fourth quarter, if we have a very competitive environment between the luxury brands and you have more leasing, should we expect that that F&I PVR could be flat to down for the next few quarters?

We have been hovering around $1,000, as many calls as I can remember. Obviously, we are doing more training in F&I. My eyes are wide open when I look at some of the peers that are doing $1,100 or $1,200, now they don't have the international mix that we have, but I would say it has got to be a focus.

But I think that is probably where we are going to be, at least as we model and look at our business plans for next year.

Okay. And then just looking at the UK, was there any -- could you sort of quantify the impact of any pre-registration activity, particularly with BMW?

Well, there is pre-reg obviously to get to certain quotas, Matt, every registration quarter. I can't give it to you exactly by brand, but obviously there were some across all of the lines. But most of those cars get sold because they have got good discounts on them, get sold in the first 30 days of the next quarter.

Okay. And then just lastly, I am sure you are obviously still assessing the damage, but as you look at the impact of the Hurricane, what sort of a financial impact do you think we will see in the fourth quarter? And if there is replacement demand, does that hit in Q4, or do we see that really hit next year?

I think that people without cars are going to have to do something, and we are located with strong brands along the East Coast, and I think we will see that in our New Jersey operations.

It is hard for me to quantify, to put certain costs in perspective. We have got $1.5 million deductible probably that we will have to eat in the fourth quarter based on vehicle inventory, and then another $100,000 or more on our facilities. Those are ones we know would be costs that we will have to -- that will impact us.

I am not sure the loss of business. Obviously, as we look at the last week, we have really been out of business in most of the New Jersey, central New Jersey businesses. Edison is still without power. We are out without power in Jersey City. And when I think about Toyota and Lexus, they lost 3,800 cars at the Port over the last several days they reported. And also, that their parts operation is not open.

So it is hard to tell, but what I would like do is step back here over the next say week, and then be able to come out with some, probably better number that wouldn't just be an off the cuff guess, or idea that I might have today, because having been there and seeing what the guys are going through, and we are spending money to get generator sets in, and having to bring fuel all of the way from Pennsylvania to keep them going.

There are some expenses that you don't get reimbursed that we will have. But I think we will manage through it. The team is motivated and we are hoping to be open even with temporary lights in Jersey City tomorrow to sell cars.

Great. Well, good luck with the cleanup, and good luck in the fourth quarter.

Thanks.

And our next question comes from the line of Ravi Shanker with Morgan Stanley, please go ahead.

Good morning, Roger. This is E.J. in for Ravi.

How are you?

Good. First question. Unless I am mistaken, you guys didn't do any acquisitions in the third quarter aside from the Hertz franchising announcement. But you guys saw a bigger tailwind than what we would have expected from acquisition units and revenue. Was that some of your previous acquisitions outperforming, ramping up quicker? Any color on what drove that?

I would think Agnew's probably in the UK, that was in Belfast, that we announced at the beginning of the year, that might have made a bigger impact, and I don't know if we are getting some benefit. We have got Greenwich, we have got Crevier, and then MINI of [Morin] would be ones just come to mind.

Got it. Second question, a bit more modeling focused I suppose. Could you talk a little bit about SG&A leverage? It seems like you guys had a roughly 20% drop through from gross profit to EBIT this quarter. Year-to-date you guys have been averaging I think 35%, last year it was more like 25%.

Is this just normal fluctuation, or is there something more structural going on here?

Well, when we looked at SG&A for the quarter, I guess I think there are three components of probably headwind that we had.

The first, we had a couple of million dollars of stock-based compensation that had to be marked-to-market during the quarter, which was about 40 basis points of headwind.

And then our variable comp went up on our J3 brands, because we basically had much higher volumes than we normally would in a normal year, and some of the targets that the sales people hit paid off a little richer than we might have expected, and that was probably somewhere around 30 or 40 basis points.

Then we stepped on the gas on advertising. As you saw, we took some market share. When you look at the market it was 15, and we were up significantly more than that, so when you add those up, it is probably in total, somewhere about 100 to 120 basis points.

To me, that would have given us the 100 basis points of leverage that we wanted. Also when you think about on a same store basis, our flow-through was somewhere between 35% and 36%.

That is very helpful. Thanks so much, guys.

And our next question from the line of Scott Stember with Sidoti & Company. Please go ahead.

Good morning, Roger.

hey, Scott, how are you?

Good, thank you. Can you talk about how BMW did in the US in the quarter? And how any potential brand shift from luxury to mid line import might have impacted your gross margin in the quarter?

Well, let me say when talk about --- let's talk the volume foreign as we talk it. Obviously, the margins were down there, that really had -- that had impact for us from the standpoint of margin.

But from a BMW perspective, on a same store unit sales, we were up 2%, and it really, for the BMW brand, in the third quarter in the US was flat for them, so we really outperformed the business. And the UK was up 3%.

So I think it was all driven by availability, because we know from the standpoint of availability when we look at what was available to us in the third quarter, probably if you compare it to a year, it was down probably 25%, and I think that you are going to see that we are going have about 25% more product available.

When you look, there is probably about 85,000 vehicles that 90,000 that will be shipped by BMW during the quarter into the network. Obviously, we don't get all of those before December, but we have good availability. I think I said earlier we're up about $50 million in inventory. So that is going drive I think some sales.

So look, the good product coming in X3, we have got X1, the 3 Series, they have got some great product, and I think that we have been starving for that in many areas. So we see that Crevier had a big month in the West Coast this past month with 369 new BMWs, and 130 or so MINIs.

To me it just shows you once you get the bullets, we can --- we have a real demand for them.

Okay. That leads me to the next point. As you are selling more BMWs in the fourth quarter heading into 1Q, that would naturally alleviate some of the margin pressure in the new segment?

Well, I guess if you got the inventory, we got to move it. We are not going to wait for the highest margins. I think that -- my goal, and we have told our people starting several weeks ago, that we need to get more margin and we are going to drive comp plans to be able to do that. But to me if I was looking, modeling the fourth quarter, we want to sustain what we have and if there'd be a slight increase, I would be very happy.

Excellent. Last question. On the income from equity and affiliates. It seems to be some moving pieces in there with Germany and with the refi over at PTL. Could you just talk about what we can expect or how should we think of that line item on a year-over-year basis in the quarters coming up?

I think the fourth quarter should be consistent pretty much what we had last year. I can't tell you about Germany. Obviously, they have had a little struggle, the JVs had in Northern Germany, Frankfurt and up in Aachen during Q3. So I wouldn't expect that to turnaround at this particular time.

I know one of the JV partners put in a Volkswagen commercial vehicle business which impacted their quarter, and that would probably see that that's negative in Q4. But from a truck leasing standpoint, our maintenance contract, maintenance and contract sales were up in the quarter, rental continues to be strong.

A lot of people are sitting back and not signing long-term leases on trucks, because of they are more expensive, and they are not sure what the economy is going to be, so they will pay a little bit more on the rental side, and then be able to turn them in.

To me, overall, I think that I look at the financing costs at PTL, we have a partnership which owns the operating company, and we had some interest cost there when we were able to put some capital down in the operating company to have it become investment grade, and as you know, we have probably done about almost $5 billion in financing of trucks. It was a great time for us to step away from the GE supported financing to market financing similar to Ryder.

So we had some costs associated with that and those costs, we will still carry those as we go into the fourth quarter. So I would say there will be maybe some downward pressure.

Got you. That is all I have. Thanks so much.

Thanks.

(Operator Instructions). We will go to Simeon Gutman with Credit Suisse. Please go ahead.

Simeon, how are you?

Good thanks, good morning. Roger, you mentioned earlier that it may be hard to get back to that 1 to 1, given faster pace of growth for new.

In light of that, what is your instinct on the cadence or on the direction of used car pricing? Meaning should we see it gradually taper off, I guess moderating from some of the strength we have seen, or do we have to see something sharper on the price side?

Look, I think we had used car prices have gone much, much higher than any of us expected.

You know, there is two points there. As they have gone higher, you have somewhat of a cap on profitability, because the advance rates on used cars when they get too high, the finance companies just won't, by the time you put financing costs and anything you are selling from an aftermarket standpoint, and then what the market is, the finance companies really -- the ability to offer the amount of financing they would provide for a particular deal is capped.

So I see that -- we have been probably touching the limits there on advance rates, but on the other hand, I think you will start to see some deterioration.

Obviously, we see it normally in the fourth quarter because of the year-end. A lot of the used car guys need to get rid of their cars and pay their banks. But to me we are still going to look at digging deeper and selling lower into the lower cost of sales areas, which will give us more volume.

But with the new car business out there, and the low interest rates available to the OEMs to provide low leases with higher residual values on some of their products, I think it is going to be -- that will give the SAAR momentum going into next year.

And I think overall, that monthly payments are really going to be the key thing. Can I get a lower monthly payment and a few dollars more and buy a new or used. So you have got a number of things. You have got higher -- the used car prices are high today, with the advance rates being capped by the OEMs. The normal fourth quarter deterioration of used I think is key,

And then the availability of new cars, obviously, will make a difference too, especially as we look at availability across all brands. I think that we are up $400 million, $300 million on a same store basis. So that means that there is product available.

And that is going to drive -- that is going put pressure on margins.

Okay. Then a follow-up on the gross profit discussion. In general, what has been the philosophy, or your own philosophy regarding the trade-off between the margin or the gross profit dollar in sales? And are you seeing anything -- I mean competitively we know it has always been competitive and prices are becoming more transparent. Is one of those factors becoming worse in general, or is there a local competitor -- competitors in general local markets getting stiffer because transparency is becoming greater?

Just curious, your thoughts?

I don't think --- you know we are in the premium luxury side, and with the State franchise laws and the PMAs by the manufacturers, I think the inter-brand competition I am talking about luxury probably is less.

Because as we look at -- if you look at premium luxury, we are probably running in the 8%, you are in the 7.5%, 7% to 7.5% on domestics, and then the volume foreign, because we have this big schluck of cars, I think has dropped down, and we are probably somewhere around 7%.

So I think inventory availability is driving some of the pricing, but also the internet today would be our biggest competitor, because you have got TrueCar and other people who are giving the consumer information.

In fact, what we -- trying to train our sales people, sometimes the consumer comes in with more knowledge about the cars than our sales people, which is a shame. But on the other hand, the OEMs are pushing volume.

And I really think that when we had no inventory, what happened? Supply and demand, something we all learned, margins went up. But I would say internet has some issue there from the standpoint of pricing. But I think we are at a level that we can maintain, and people still want to feel good about doing business in their neighborhoods and where they live. And the way the markets are set up I think with the Big 3 taking a substantial number of dealers out, their inter-brand competition has gone down.

Something we have to deal with. We have been that way in the business for a long time, and I think we are going to survive, no problem.

Okay, thanks, Roger.

Thank you.

I will now turn it back to our speakers for any closing remarks.

That is it. Thanks for joining the call, and we will see you next quarter. Thanks.

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