Penske Automotive Group Inc (PAG) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group first quarter 2013 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through May 6, 2013, on the Company's website under the investor relations tab at www.PenskeAutomotive.com.

I will now introduce Mr. Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Please go ahead.

John, thank you. And good afternoon everyone. A press release detailing Penske Automotive Group's first-quarter 2013 results was issued this morning and is posted on our website along with a presentation designed to assist you in understanding our financial results. Joining me for today's call are Roger Penske, our Chairman; Dave Jones, our Chief Financial Officer; and J.D. Carlson, our Controller.

On this call we will be discussing certain non-GAAP financial measures such as EBITDA. We have reconciled these items to the most directly comparable GAAP measures in this morning's press release, which is again available on our website.

Also, we may make forward-looking statements on this call. Our actual results may vary because of risks and uncertainties, which may cause the actual results to differ materially from expectations. Additional discussion on factors that could cause results to differ materially are contained in our public SEC filings, including our Form 10-K.

I will now turn the call over to Roger Penske, who will take you through our results.

Thank you, Tony. Good afternoon everyone and thank you for joining us today. Penske Automotive Group reported record results today. I am pleased to report that our first quarter produced the highest income and earnings per share in our Company's history.

The record results were driven by a 9.9% increase in total retail unit sales and a 7.7% increase in total revenue to $3.4 billion.

With each area of our business producing solid performance in the first quarter.

Income from operations increased 13.9% to $56.9 million and earnings per share increased 14.5% to $0.63.

We generated $111.8 million in EBITDA in the first quarter, an increase of 9.5%. And we repurchased 410,000 shares during the quarter.

Let's now turn to the specifics of our first quarter. Total retail unit sales increased 9.9% to 85,800 units and total revenues increased 7.7% to $3.4 billion. On a same-store basis retail revenues increased 7.4%, including 11.5% increase in the US and 1.2% internationally.

Foreign exchange rates negatively affected our same-store performance in Q1 by $25 million or approximately $0.01 per share. Excluding the effect of foreign exchange, same-store retail revenue increased 8.3% including 3.3% for our international markets. Our total revenue mix during the quarter was US 63% and international 37%.

Brand revenue mix was consistent with last year -- premium luxury at 69%, volume foreign at 27% and the Big 3 at 4%.

Looking at new vehicles we retailed 45,745 units, representing an increase of 9.7%, including 11.8% in the US and 5.3% internationally. Our premium luxury was up 12.4%, volume foreign up 8.1%, the Big 3 up 2.4% for a total of 9.7%. Same-store was up 6.9%, including 9% in the US and 2.5% internationally.

Total new vehicle revenue increased 12.9% [at] $1.7 billion. Our new vehicle average selling prices improved 2.9% to just over 38,000. And new vehicle gross profit per unit was $2959, and our gross margin was 7.8% compared to 8.4% last year. Looking at our days supply of new vehicles was 49 days at the end of March compared to 44 last year.

Looking at used vehicles, they retailed 40,076 units in the quarter, an increase of 10.2%. The premium luxury side on the used were up 7.5%; volume foreign up 14.3%, and the Big 3 were up 11.7% for a total of 10.2%.

Our used to new ratio was 0.88 to 1, and increased slightly from 0.87 to 1 in the first quarter of 2012. Total same-store used units retail increased 6.6%. US was up 10% and international was flat.

Impacting the international comparison were over 1000 used executive cars we had purchased at the end of 2011 and subsequently sold in the first quarter of 2012. We did not have the same opportunity to purchase executive cars at the end of 2012.

Total used vehicle revenue increased 7.4% to $1 billion. Used vehicle average transition -- transaction prices declined 2.6% to $25,076 while used vehicle gross profit per unit was $1958, and gross margin was 7.8% compared to 8.1% last year. Our days supply of used vehicle was 38 days at the end of March, and that compares to 34 days at the end of last year in the first quarter.

Finance & Insurance revenue increased 11.5% including 9.9% on a same-store basis and our F&I per unit was $1010; $970 in the US and $1095 internationally. In the US we were up $60. Internationally, we were down $80 per unit.

In the first quarter 65% of our F&I revenue was generated in the US and 35% was generated in our international markets.

Service & Parts revenue increased 6.8% during the quarter, including a 3.1% same-store basis and solid growth was seen across warranty, customer pay, collision repair and PDI during the quarter. Total we were up 6.1% in customer pay, 10.4% in warranty. Our body shops were up 2.6% and our pre-delivery inspection was up 5.1%.

Gross margin for Service & Parts was up 60 basis points to 58.4%. Overall our gross profit increased 7.9% to $533 million and our gross margin improved to 15.7% from 15.6% last year. And for the quarter we generated and 80 basis point improvement in SG&A to gross profit to 77.5%. Our SG&A flow-through was 32%.

On a sequential basis SG&A to gross profit improved 200 basis points from 79.5% to 77.5% and the flow-through was 79%. On a same-store basis SG&A as a percentage of gross improved by 90 basis points to 77.1% and our flow-through on a same-store basis was 44%.

Our operating margin improved 10 basis points to 3.1% and our effective tax rate for the quarter was 33%.

EBITDA improved 9.5% to $111.8 million.

Looking at the balance sheet at the end of March, total non-vehicle debt was $892 million, down $46 million from the end of last year. Our total debt to capitalization ratio improved to 40.7% and our debt leverage was 2 times EBITDA.

At the end of March we had total liquidity of approximately $561 million. Our total debt in the UK excluding floor plan was $37 million while revenue in the first quarter was $1.2 billion.

Our vehicle inventory was $1.9 billion at the end of the quarter and versus December our new was [up 9] and versus March of 2012 was up $257 million. On the used basis versus December was up $27 million and versus March of 2012 was up $49 million.

On a same-store basis vehicle inventory increased $56 million. When compared to December last year new was up $25 million and used was up $31 million.

Capital expenditures were $68 million for the first quarter. Corporate, ID and facilities CapEx was $37 million and the acquisition of rental vehicles for our rent-a-car operation was $31 million. We estimate our CapEx for [corporate ID] facilities and the initiatives by the OEMs at approximately $115 million to $125 million during 2013, which is exclusive of Rent-A-Car vehicle acquisitions.

In the UK, turning to the market we remain very optimistic about the opportunities for our business in that particular market. Despite two fewer working days in Q1 to shift the Easter holiday in the UK market registrations were 605,000 new units in Q1 of 7.4%.

The March registration period marked the 13th consecutive month of growth in new car registrations with volumes the highest since 2010 when the scrappage incentive program supported the market. The retail market was up 11.2%, highlighting the strong demand for new vehicles in the UK. The fleet and corporate market was up 4%.

Additionally, the top personal income tax rate in the UK was reduced from 50% to 45% beginning in April this year for individuals earning more than GBP150,000. We view this as a positive development for vehicle sales in our premium luxury customer base.

Let me talk about the key initiatives that we laid out earlier this year. I wanted to update you in these that we highlighted earlier. First is growth.

We continue to target revenue growth of more than 10% in 2013 through a combination of same-store performance and acquisitions. We continue to target acquisitions that complement our brand mix and geographic strategies as we look to build scale in areas of concentration.

In Q1 we completed the acquisition of the Hertz rental car franchise for most of the Indiana market. We now operate over 50 on- and off-airport locations in Memphis and throughout Indiana. We also [broke out on a Toyota open point] which we expect to compete in the first quarter of 2014.

Number two, SG&A leverage. We continue to target 100 basis point improvement in SG&A to gross profit leverage for 2013. As I previously noted we achieved SG&A leverage of 80 basis points in Q1 while generating a 32% gross profit flow-through. And on a same-store basis SG&A leverage was 90 basis points and the flow-through was 44%.

The third area of focus was F&I. We began targeting improvement in our performance through a combination of efforts which includes adding resources to drive additional training, higher product penetration rates, and targeting underperforming locations. We continue to target an increase of F&I per unit sold of $50 by the end of the calendar year.

Our fourth initiative is our virtual showroom and e-commerce activities through our dealer websites and PenskeCars.com. We have been rolling out enhancements aimed at improving the design, the performance and the effectiveness of our dealer websites.

We have completed more than half of the rollout so far this year and we expect to be substantially complete with a website rollout by the end of the second quarter. The new websites are designed to work well with mobile platforms and we expect to launch PenskeCars mobile app this quarter.

In closing, I remain optimistic about our business. I am pleased with our performance in the first quarter and I believe our results continue to demonstrate the strength, diversity and resilience of our model.

We continue to strengthen our markets and are very pleased with the performance in each area of our business. We continue to believe that the pent-up demand, strong credit environment and the many new product launches coming to the markets should keep demand strong.

Our balance sheet remains very healthy and we are poised to grow the business through opportunistic acquisitions.

I want to thank you for joining us today and your continued confidence. At this time, like to open the call for questions. Thank you.

(Operator Instructions). Matt Nemer, Wells Fargo.

So a couple of questions. First, your revenue growth rate guidance is 10% this year. You came in a little below that in the first quarter. Can you just give us a sense for what the acquisition environment looks like out there and how aggressive you could plan to be this year?

I think as we look at acquisitions there is plenty of deals out there. I think right now some of them are priced probably higher than we would expect. And we have a number of transactions in our pipeline, some of those in the international marketplace, which are more reasonable. And we would expect to see some of those get closed in the next two quarters.

So I feel comfortable with our target of a 10% growth.

Okay, and then just turning to the Hertz rental car business, can you give us an update on where that stands and how that ties into your core business? Where should we see that impact to P&L as you get those more integrated into your business?

Well, the current run rate revenue was $7 million in the quarter. We had a loss of $600,000 mostly due to startup costs, and I think that this gives us some real leverage.

When you look at the annualized base it will be about $50 million. And the good news is that we will have somewhere between 5000 and 6500 cars in our fleet, ones that have been ordered with specific model and equipment, which are very strong used cars when they come back in the market.

Our expectation is that we will be taking these cars out and providing them to our key locations six, nine and 12 months or maybe some at 15. So as we try to grow this used to new ratio, we think this is a great strategy.

On top of that, this gives us the opportunity to do warranty work and also service work at our dealerships that are associated in those markets along with, obviously, body work. So to me it is -- we can vertically integrate and gives us a chance to touch more customers and on a service and rental side, but also, potentially conquesting some of those on the retail auto side.

Then, just lastly, on the service business, we have been hearing a lot about pent-up demand improving units and operation in service based on the SAAR recovery. Looks like your customer pay growth accelerated a little bit. Your warranty business has been stronger over the last two quarters than it had been most of last year.

Are we starting to see that? Is this the improving units in operation for your core brands? Or give us a little commentary on that.

Yes, I would definitely feel that we are getting the benefit of the units in operation as they dipped from $17 million annual SAAR down to $10 million and then back up. So I see a larger car park of vehicles now in the one to five years, which obviously will drive our customer labor.

Also, prepaid maintenance has become a real factor with some of the premium brands, offering that to the customers. So we get the benefit of doing that for the customer and that revenue is generated through the warranty line. So I think that is why you see the warranty going up.

I think quality of the vehicles, obviously, just gets better, and better and better and better. But this obviously gives us a chance to get more dollars or more share of wallet.

We are also -- from the standpoint of initiatives -- we have gone to debtless repair, rapid repair in most of our major locations. We are doing window tinting. We are doing the initiative on alignments.

These are things that we really hadn't focused on before, because we want to see that customers stay with our organization, not move out to the smaller shops that we see in specified areas of exhaust, brakes and tires. We think this is key.

And before we really maybe hadn't focused on those, but with warranty slowing down because the quality of all the manufacturers, this gives us the chance to build that back. And I think the [car part] coming back is key. And the good news is, remember, this is over 50% gross margin for us, which will drive more bottom line and cover our fixed expenses.

Great, thanks so much and good luck this year.

John Murphy, Bank of America Merrill Lynch.

Maybe to follow up on that line of questioning that Matt was going on with parts and service, the 58.4% gross margin was incredibly strong. I was just curious what you are seeing in mix, if we are seeing -- we are hitting these limits in this. We are getting to all-time highs here on these gross margins and they're very impressive. Just curious if there is more room and really what is going on there with these margins where they are.

When you look at mix, about 70% of our Parts & Service business in the first quarter was customer pay, and about 22% was warranty. And you get ready in the body shop was another 7%. So, again, we are getting a traditional mix really.

And to me, what is key here is that we're just trying to get more share of wallet. We have this customer. We are trying to get more hours per RO.

And I think efficiency -- we're driving efficiency the way we laid out some of our shops. We have got PDI centers now that we put together in Turnersville; in Warwick, Rhode Island; in Santa Analysis; also in Round Rock, where we bring these vehicles in and do a reconditioning. Rather than in the each individual dealership, we have PDI centers now which give us much more efficiency, lower cost.

And today, right now, the technicians are making a lot of money in our business. We have had very low turnover of our technicians. So the quality of work is much better.

That's great. And second question, just on the gross margin pressure that we are seeing on new vehicles, is that something you are seeing across the market? Are the automakers pushing volume and not helping out as much on the dealer cash? I'm just trying to understand what is going on with the margins there, because we are hearing that from a lot of the mass-market imports.

Well, I think that we had an unusual increase in gross profit last year because there was a shortage of the Japan brand, and certainly in Honda and Toyota. And now these volume brands have got more units available and we are seeing some pressure there. That has really driven our numbers down.

And I think overall when you look at our business, we wrote down an average gross profit about 4.8%. And when you look at margins both in the UK and an internationally we were down about 60 basis points. So I think this is pretty much traditional. We are now getting back to where we were -- these margins where we were a number of years ago. But we are watching that.

One thing that has impacted us in the UK is that there is a lot of low rate financing, which we didn't have in the past. So that has probably taken 100 basis points from us because we are now dealing with that, and the OEMs are attracting the customers based on low rate financing. Something that has been traditional here in the US, but really hadn't been so strong on the international markets.

That's great, and that leads me to my last question. The international business for you tends to -- is much stronger than many people had feared. Is it that low rate financing or is it something else that you're seeing going on, particularly in the UK?

And if we see a lot of weakness, is there potential for the European governments to potentially put some scrap programs back in place like they have or other stimulus for demand? I am just curious what you are seeing in the markets there.

I think we really have two markets. We have continental Europe and then we have got the UK. And if you look at the UK, the market was up -- on a total unit basis was up 7.4%. And I think our brands were up 6.6%, so pretty much equal to the market.

But what I see in the UK is 13 quarters in a row where we have had increases. And what has happened -- we are in a premium luxury side. About 96% or 97% is premium luxury.

If you go back three or four years, you will see that market place from the premium luxury has grown probably 600 basis points. So we are getting the benefit of the premium guys going from being premium down into the Q3, down into the one series, the [A and B] series. For Mercedes you see that going on, going to be with Porsche. So we're getting the benefit of that.

Premium market has gone now for 19% to 25%, so I think that is key. I don't see any slowdown. I think there is a lot of competition amongst the brands.

Certainly when you look at Audi, BMW and Mercedes, we represent all three of them. And I think the benefactor of all this really will probably be the consumer, because they're looking at everything they can do to get a low cost of ownership proposition in front of the customer.

But we see our margins decent there. We certainly could see some more used-car availability.

I talked about executive cars earlier in my comments. We bought over 1000 cars in the fourth quarter of 2011. We need to generate more used cars.

We have got 21 buyers out in the UK. It is ironic but that kind of number of people that we can't generate enough cars. But that, to me, would be key.

And the other thing that has taken place in the past -- and I think this demonstrates the strength of the market -- you have certain targets that they give you in the UK and you have to meet those targets at the end of the quarter. And in many cases there is some pre-registration going on. Cars that you put into demo service are to meet these targets.

We didn't put any cars -- there might have been a few -- but I would say minimal number of cars are preregistered. That would typically roll into a used-car sale the following quarter. So you have got preregistration and our inability to buy a lot of these exec cars at the end of the year, probably drove some of our used-car metrics.

But, overall, I think that market is strong and we did have the impact of two less days in the first quarter due to the fact where -- how Easter fell. And they shut down the new vehicle registrations two days earlier on Thursday, March 28. So that impacted us. We will get the benefit of that wind in our sails as we go into the second quarter.

That's great, thank you very much.

Rick Nelson, Stephens.

Nice quarter. Like to ask you about the acquisitions that you made over the past year, how those are performing relative to your expectations. And as I look at the SG&A to growth and the flow-through, same-store compared to the consolidated would appear like there are some opportunities with the acquired stores, if you could discuss that.

Yes, you can see the leverage was not quite as good on the acquisition stores. I think that is one of the things that all the publics bring to the party, is once you can consolidate back-office and some of the sales processes you get that benefit.

Obviously the biggest acquisition we may last year was the Agnew Group in Northern Ireland, and that has turned out to be a terrific acquisition for us. They have been on budget each quarter last year. In the first quarter they beat budget and we are excited about opportunities to expand in that market which we are, at the present time, looking at right now.

Then we moved into Madison with Lexus and Toyota when we bought the group there. And I think that at the end of the day we have had some tough weather, as you might expect in the Midwest. I think the big thing there is we're trying to get the people up to speed, meaning we were probably short some of the key people we need from a sales perspective.

But as far as metrics and the return on what we had expected when we did our modeling, I would say they are returning quite well. And it is obviously early with just four or five months under our belt, but I would say we made that acquisition, Northern Ireland, back in January a year ago and that has really integrated perfectly.

And that team up there is seasoned. We haven't lost anybody there. In fact, I think the feedback I get and the trips I've made there recently show that they like the push from our [Sinter] guys. The integration is good. There is lot of best practices that we are sharing back and forth.

And I might say that the BMW store in Northern Ireland was the number one BMW store in Europe. It was named by BMW International. So it is quite a kudu (sic) for that group. So we're proud of that.

Got you, thanks. Been a lot of discussion about units and operation and the impact on your service. But looks like the gross per unit and the volume foreign on a used -- from a used standpoint improved year-over-year. How do you see that units in operation now as we get more supply, possibly affecting the margins and the sales in used as we go forward?

Well, I think that, obviously, more units in operation will drive our margin either up or down. I think we have been fortunate with Toyota and Honda being our major brands, those have been strong. And we have gone to retail first.

I think in fact, I think I said earlier that we have 1000 cars on our PenskeCars.com under $1000, and we are starting to see some strong margins in this lower-priced cost of sale unit. So, overall, I think that we have had a slight increase on volume. Foreign was about $23.

And on the premium luxury I think we were down $243, because we are selling some of the older vehicles and we just can't get the finance. You're pretty much capped, Rick, as you get into certain of these vehicles, you do too much reconditioning and you're capped on the margin from a financial lease source. So we hit some ceilings from a certain type vehicle.

And CPL cost is high as well on the other vehicles. But, overall, I am pretty happy with the return from a gross perspective quarter-over-quarter.

Great. If I could ask one final one about April, what you are seeing there in the US. In the UK I know that there was some changes in the personal income tax rate, a reduction at the high end in the UK and how that might be affecting sales there.

I think the reports coming out of the UK, at least what has been written there, the market is up double-digit in April. I can't tell you what it's going to be at the end of the quarter.

And, certainly, we are seeing the same momentum that we ended March with going on into April here in the US, but I really don't -- can't give you a forecast. But I certainly feel good about the market. And I think we are stabilizing, and probably have a run rate here over the next -- hopefully, over the next 3 to 5 years, which is consistent.

I don't think you're going to see 30% and 40% increases by the peer group. I think that we are -- comps are going to get a little bit tougher, but I think we're going to see the businesses very, very solid. And with the addition of more units in operation, and the Parts & Service growth that it generates, will give us a strong coverage of our fixed cost.

And to me, that is going to drive profitability on a net income line and also EPS. And we will see the OEM's report next Wednesday. I think we are on track for a 15 million to 15.5 million SAAR. So I think the lights are green right now.

Sounds good. Thanks a lot and good luck.

Brian Sponheimer, Gabelli & Company.

[A question] for you on some of the capital improvement at your dealership groups. You have been through a number of them over the course of the last four years. Just wondering where you stand as far as from a CapEx perspective, thinking about getting to the end of this run with some of the major improvements that have been required by dealers.

I think if you go back and look at our growth from, say, 2005 and 2006 to where we are today, a lot of that was through acquisition. And part of that acquisition we made a commitment to the OEMs to meet the current CI requirement. So we have done a lot of that pre-2013.

I think the run rate -- we spent about $2.3 billion on capital expenditures over the last 10 years, so I think today we are at a run rate somewhere around $100 million to $125 million, and our amortization and [depreciation] is about $60 million.

I think BMW is coming up now with a new CI program. I think we are consistent at Porsche. We are consistent at Mercedes-Benz. We are consistent at Audi.

So I think BMW is really the only hurdle. Land Rover we have just completed one of those in Phoenix, and the balance of the domestics we are in good shape. So to me, when I look at this, we have to focus on the UK. And the UK has already been going through some of the CI requirements for BMW.

We have one big project, Sheffield in the UK, which will probably fall into 2014. So I think the run rate that we have is pretty much consistent.

And, again, we have invested in our service shops. We are getting the benefit out of that. The investment in the body shops are driving at it now.

We are looking at the small rapid repair capabilities and putting a paint booth in some of our larger dealerships, to do that work right on site. That is one of the things that we picked up as a great opportunity, which has been demonstrated by our guys in the international market.

So, overall, CapEx $100 million to $125 million. Now in our CapEx -- I don't want people to get confused. Accounting makes us put our rental cars into that category, but ex-rental cars, I think that number of $110 million to $125 million is realistic. And for the quarter we spent $21 million in the US, $8 million internationally and $29 million overall.

All right, thank you. And just stay on Parts & Service just for a follow-up here. Some of your peers are looking into getting it into more oil changes and tires as a way to get -- to drive more traffic. And that would be hurtful to gross margin. You are obviously bucking that trend.

What are you seeing coming back to you on the customer pay side that maybe wasn't there before a couple of years ago?

Well, I think that what is driving -- you take Toyota, with their full-service capability, what they have done with oil changes, we get 0.8 -- tenths of an hour at our labor rate, which is probably $100. That is $80, plus we get the oil. So we're making a considerable margin on that comparison, if were going out to a Jiffy Lube.

And to me, it is not just the oil change itself. It is the upsell. It is a safety inspection, tires and then maybe other work that you will do -- wheel alignment -- which these things have high margin. So I think getting that customer in, and I think the hook, obviously, is the oil change or the safety check.

Now internationally, one of the things we have really pushed is winter tires. And then we are now storing tires and special wheels for our clients on the international market. This has turned out to be a big business. We get the car in once and we change over the tires. We refurbish wheels if they have to be, sell tires, and we get a chance to see that customer.

So, to me, this continued connection with a customer through Parts & Service is key. And, I think, and all of my peers on the public side understand this, but I think it puts -- it's going to put pressure on some of these other people that specialize in certain areas. Because the OEM and requirements of the technology to work on these new cars, you have to be well-trained and have all the obviously software in order to be able to diagnose, in many cases, these vehicles. So we are sitting in the right spot.

And, again, in our case over 58% gross margin will drive our overall margin up, I hope, as we go forward and the additional units in operation. Whether it is tires, whether it is oil changes or just details -- we are selling details to customers on the service drive. We incentivized our service writers to do that. So all of that drives more gross profit. And I think that is what has given us, along with our body shop, our revenue. And then the PDI, with more used cars we do the -- obviously, the get-ready on these used cars. And to me, that is also driving margin.

All right, thank you very much.

Brett Hoselton, KeyBanc.

First question, and this is back to Matt's original question, I think. In the first quarter you are up 8%. Your target is to be up more than 10% for the full year.

That either suggests that your same-store sales are going to improve through the remaining three quarters, or that you're going to make a fairly sizable amount of acquisitions. I calculate the difference between 8% growth and 10% growth to be about $300 million. How do we think about you potentially achieving your target through the remainder of the year?

I think that you have got to look at our pipeline. Obviously, we are not commenting today on how big our pipeline is, but we do have acquisitions that we are working on every day, from an M&A perspective. And we are going to be strategic.

And remember, I said to the market we would be [up] 10%. 5% and 5% was really what I gave the market at the beginning of 2013.

Now we over performed on a same-store basis and maybe slightly underperformed on the acquisition side. But it doesn't take much in order for us to meet that requirement. We would expect to do that.

And then gross profit throughput, SG&A leverage. If you run out the full year at 77.5%, it seems feasible given that your revenue is going to be up sequentially throughout the remainder of the year, you're going to be well over 100 basis point improvement year-over-year. What are some of the potential headwinds? Or maybe there aren't any headwinds through the remainder of the year, in your mind.

I think that if I set the speed at 100 basis points I want to be sure I am there. I think that at the end of the day, when you look at this quarter we had the registration period. We have that in the first and third quarter, which give us a little bit more business to drive through the SG&A. So that probably -- the flow-through is a little bit better.

We won't have that benefit in Q2 and Q4, but I am comfortable with [100%]. Our goal, obviously, is just not to sit at 100. And I think sequentially, which I think is really important to us, we [get 200] basis points.

So I think we can stay on track and meet that, and, hopefully, your calculations that will drive some thought process with us that we can get a little north of 100. But I don't want to commit it on the phone to you today.

Fair enough. Thank you very much, Roger.

Simeon Gutman, Credit Suisse.

Same topic on the SG&A, the improvement -- the flow-through was good. Thanks for the extra color on reminding us on the registration piece. But it looks like in general the trends are improving there.

And I'm curious how much you think is coming from blocking/tackling compared to costs that are structurally being taken out of the business? And if you can remind us, I think your buying the real estate versus leasing is helping. I don't know how much -- what that was in the quarter. Thanks.

I think the key thing is that we now have tied our compensation to our gross profit. It is a metric that I use in all of our business, comp to gross. And as the gross goes down the elevator goes down, obviously, in compensation and vice versa.

And I think that our senior management, if you look even at my comp is based on a certain increase year-over-year. And that is what drives my compensation. We have tied that in from the highest level down to the working level, and I think that the team has bought into that. So I would say comp to gross is key.

You mentioned real estate. I wrote that down as you were talking. It is a key area. Areas where we can go in and buy out of some of these higher-priced sale-leasebacks, we are doing that.

Unfortunately, we have one in Warwick, Rhode Island, which is double-digit on a cap rate. And obviously, today we can refinance that at 500 or 600 basis point less. Those are the things that sometimes you're going to have to live with.

But as we go forward with our capital base and our debt to cap, we are in such good shape. And then the OEMs are very interested in giving us support there. We would look at a different structure. But when you were growing at the speed we were in the earlier years, we didn't have that capability. So I see that is key going forward.

The other, obviously, is in our marketing and advertising. With the digital world coming to us now, some of the spending that we did obviously is probably more costly than to be effective today with use of the Internet and some of the tools that are available to us.

And our service business is up, and again, if you look at our service business from the standpoint of gross, we were up $16 million in Q1. And, also, when we looked at the number of repair orders we went from 600,000 to 616,000 in the quarter, so we are seeing that in our new to used ratio.

So it is comp; it is real estate; I think it is blocking and tackling, getting gross in service. And it is certainly, look at the metrics, using our marketing and advertising. I think we're getting more bang for our buck.

And the training that is going into our sales force, the telephone training, the use of some of the technology is driving that, I guess, that productivity and bottom-line benefit.

Okay, and then the targeting of 100 basis points, I guess, some of that is tied to the gross margin on the business. And you're obviously up in the first quarter here, in parts and service or it's a decent piece of that.

So I'm curious what, I guess, the algorithm for gross margin -- is it a stable outlook from here? And you're just going to -- is that 100 basis point of improvement is mostly just volume and just steady SG&A?

I think there is no question that, number one, the biggest piece of the SG&A is compensation. If that rolls with the gross profit, we shouldn't be negatively impacted.

But I certainly see the Parts & Service staying in that [55 to 58] category, going forward. And to me, from an overall gross profit standpoint, I think that it is really about our managers and being able to drive it. I think the metrics, our systems, our browser system we have internally, we have that access to the information here in the US on an hour by hour basis. And we are restructuring some of that in the UK where we can have some of the same metrics available to us.

I think our CRMs are driving better behavior, dealer socket from the standpoint of our sales practices. These are things that are going to continue to grow.

Right now I think our Company, we are in a position -- we have grown, as you know, from less than $1 billion to where we are today. We have a lot of experienced people in the business. And now what we are doing is really fine-tuning our setup.

And then I think we are getting the benefit in the meantime, same-store growth and, obviously, acquisition. I said this to many people -- I don't see a muffler on any of the publics. Where we are consolidated in the US, maybe by 20% by the publics or maybe a little bit less, so there is a big runway for us domestically.

And I think our impact by going into the international markets and today where there is some very, I think, selective good opportunities for us, we have the benefit to grow there, too. So, we are in a global business.

The good news is our OEMs see us a global player. We see them, and whether it is in Italy or Germany or the UK or the US, we see these same key people. So I think -- and they see the progress we have made and I think we represent the brands properly. And with that, we get opportunities that are beneficial to us and we expect to take advantage of those going forward.

Okay, and my last question, can you just remind us what percentage of the business is CPO today and then where -- how that compares historically?

When you look at CPO, we're about 33%, but I want to make a point here. I am not -- and that is in the US. I'm not driving a hard -- to get to 35% to 40%. What I want to do is get the right car CPOed, because if you take cars that need too much reconditioning, you're going to drive the cost of sale up. And you're going to put a cap -- the finance companies will put a cap on what you can get from a gross margin standpoint.

So we are meeting any metric that the manufacturers have, but I think it is real important to say what is a CPO car and what isn't. But to me I think it is a great product that all OEMs have today. There is a lot of -- I see the Mercedes-Benz advertising in the sports page on their CPO stuff. So there is a lot of support there.

But, again, at the end of the day it is certainly a focus of ours.

Okay, thanks.

Patrick Archambault, Goldman Sachs.

Just a couple higher-level ones for me. Number one is, just because we have been getting questions on it, the CFPB discussion on limiting spread premiums, can you tell us a little bit about what the potential impact is? I understand that you being in luxury it's probably not as relevant as it may be from -- for some of your competitors, but just your thoughts on that one. And then I have a follow up just on the yen.

Okay. Well, let me say this. Obviously, from our perspective, the CFPB regulates lenders, not dealers. And we haven't had any of our financial partners approach us, and we have almost 65% of all our business goes through the captives. So we obviously, if there is any impact, it could be in dealer reserve.

I think what we have all done, though, is we have self-imposed caps based on what we would -- could markup. And I went back, because I knew this had been a question before, looks like we are in 150 basis points if you look over the last 12 months.

And to me, at the end of the day our business, 65% is US and 35% is international. So you can say -- take a third of our business and take that off the table. And then you look at our lease penetration rate from the standpoint of our portfolio it is significant. And a lot of those have flat rates from the standpoint of -- from a finance reserve have a flat rate that you can get.

Now from a product standpoint, whether it is extended service contracts, whether it is LoJack, whether it is [gap], whether it is tire and wheel, all of those things, obviously, it can be sold to the customer in a package. But I don't think those are the things that the Board is looking at.

So, to me, I think that we provide a value in the process. And I think the lenders will give us a contribution. I think that is certainly within the legality of the law.

On the other hand, when we send in Dave Jones as a name into one of our manufacturer or finance source or a bank, we send in credit information. Then he is putting -- it is metrics. It is looking at statistics. Then they decide what level his credit would be, and for that they give us a cap and a collar that we can work in.

So, to me, I think it is regulated. And right now it is not something that we are focusing on. I think there has been more noise about it. I am not sure who is doing that.

But if you listen to Mike Jackson, you listen to some of the key guys in the business, I think we all understood that a long time ago in the days of dealer financing, and what has to take place when we put in these caps and collars. And to me, when you look at BMW and Mercedes and Honda and Toyota, just -- and Audi, to mention a few, these people are sophisticated. They understand the financing process. They have big books of this business.

So I am sure that if there is anything that we have to do to change our behavior, that they will be the ones that'll help us manage to that point.

Okay, thank you. That is a helpful way to frame it.

My follow-up was just on the yen. It seems like we haven't really seen much impact in incentives as of yet based on that. But, first of all, maybe two things -- number one, are you sensing that there may be changes in promotional activity ahead, just based on where the yen has gotten? And, number two is how do you think such a thing would really impact you?

Well, I think we have got to look at where we are today. I think that of the Toyota and Honda products, 65% to 75% is built here in the US. Which I think that really takes all the wind out of that sail. And I do think that there would be any more price competition and there has been in the past with Nissan, with certainly Nissan has built plants in the US also.

I think that the OEMs will get aggressive to meet sales targets. You will have -- many times you will have models that will be running out and they will get very aggressive on those. But at this point I think we're in pretty good shape.

In fact, as you probably know, that the RX from a Lexus perspective is being built in Canada, and that represents 40% of the volume. And the VW, obviously 30% of their vehicles are built in Chattanooga. And from a Honda perspective I think almost 80% of their vehicles are built in the US. So I think it is a moot point.

Okay, great. Thank you very much.

Scott Stember, Sidoti & Company.

Can you maybe talk the other line on the income statement, $2.3 million versus $4.4 million, was that related to Penske Truck Leasing?

Yes, that was -- basically in the first quarter of 2012 we had a significant number, or a number of vehicles, used trucks we sold. And that drove that gain on sale. We won't have as many trucks to sell in 2013.

The good news is, though, that the gross profit earnings on each sale is up over Q1 of last year. So we are in good shape. It was about $1.6 million to $1.7 million of that number.

Great. And could you talk about on the Parts & Service side again, if you look at the reconditioning work, could you maybe just talk about how that will go forward, if you break it out between the US and the UK, if you could talk about that, please?

I don't have the numbers on reconditioning in the UK, but it is -- I think I said it was 3% in the US. And that continues to grow, because we are -- I tell you from a sublet -- and that has always been an expense or revenue piece on the financial statements and the dealer statements, what do you sublet? I want to see that zero.

What we are trying to do is do all that inside, and with that, that comes under reconditioning and pre-delivery inspection. And there is no question that rapid repair in the UK is something that we have picked up, where they are doing tire and wheel and some of the small chips and dents. They call them in the UK. So I think that is a key part rather than going outside to a third party to do that work.

So, to me, I think it is key. And when you look at get ready, on a same-store I said it was 3.1%. In total it was 5.1% as far as part of our business in the first quarter.

Got you. And the breakout on the Parts & Service that you gave earlier, 6.1% customer pay, 10% warranty -- was that in the US?

Total.

Oh, that was total. Okay, got you. And just last question on brands, on the new side. Could you just talk about the brands that did better for you than -- compared to the ones that didn't?

When you look at -- overall I would have to look at the overall brand perspective, and there is no question that BMW was strong. Mercedes has been strong for us. Audi, Porsche has been off the charts domestically.

And when you look at these, there is no question. Our BMW business I think was up 26% in the US. And overall, when you look at your -- at Mercedes was up 7% or 8%. Porsche was up 73%. So the numbers are pretty strong. But, again, this is our sweet spot.

And when you look at Honda, Honda and Toyota, we had a big increase in that. When you look at a volume foreign we were up 15% with Toyota and we were up about 5% with Honda in the quarter.

Great, that is all I have. Thank you.

David Whiston, Morningstar.

Wanted to go back to the split in Europe you talked about between the UK and the continent. It sounds like you're not at all worried that the double-digit declines we are seeing in some big Western European/continental markets will spread to the UK. Is that optimism just purely because of all the growth you are seeing in the luxury market, like you talked about earlier?

We have been talking about contagion now for the last 18 months. And there has been 13 quarters that we have seen the UK market continue to grow. And I'm not sure that they are bulletproof from the standpoint of anything happening, but I just have to look at the past.

And to me, I see some stabilization in the premium brands other than in Germany. I was in Italy and Spain in the last couple of weeks and they are seeing a little bit increase in some of those markets. So I think they're divided. I don't think that one runs off the other.

The good news is that the availability of the best models now, which might have been not available to us because they're trying to provide those in the European market, are now available to us in the US -- or I mean, excuse me -- in the UK. So I am managing the business based on a continued increase.

Remember that market is about 2 million people. And I think that at the end of the day with the personal tax rate declining from 50% to 45% for someone making over GBP150,000, I think is very good. So, to me, at the end of the day that will drive, help drive our business.

Okay, that is helpful. Thank you. On capital allocation, do you plan to repurchase shares all the time regardless of where the stock is trading? Or could there be some quarters where you won't make any repurchase activity, depending on M&A activity or where the stock is actually trading?

I think that we have $85 million availability from our Board right now. And the shares that we purchased in the first quarter really leveled out our share purchase based on our shares outstanding where it was a year ago. A lot of the shares were generated through restricted stock and for our key management and some of our management team. So what we have tried to do is keep the shares outstanding level.

Again, when you look at our dividend, it is running at a 2% return and the payout is about 26%. Obviously we will look at share buyback. We will look at increased in dividend and payout. That is something that our Board looks at in every quarter. So I would stay tuned on that.

But, obviously, we think the stock is -- at this rate is a great buy. And to me we are not buying it because it is high or because it is low. I think it is just what capital we have and have the opportunity to make those share purchases.

But that was the basis of the 400,000. I think if you look at that in the past year it was pretty much similar, same type of behavior.

Okay, and lastly, I am sorry if I missed this, but did you give US new vehicle retail unit growth year-over-year? I am just trying to see how you guys compared to the 6% increase for the industry.

We were actually -- when you look at new vehicles for us on a same-store basis we were up 9%. And overall in the US by itself we were up 11.8%. So we really outperformed the market.

You said 11.8%.

11.8%. Yes.

Great, thanks for taking --.

We were up 13.8% on used.

Real strong. Thank you for taking my questions.

Mr. Penske, no additional questions in queue.

Thank you very much, John. See you next quarter. Thank you.

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