Penske Automotive Group Inc (PAG) 2015 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group first-quarter 2015 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through May 5, 2015. It is on the Company's website under the investor relations tab at www.penske automotive.com.

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

Thank you, John, and good afternoon, everyone. A press release detailing Penske Automotive Group's first-quarter 2015 financial results was issued this morning and is posted on our website, along with a presentation designed to assist you in understanding our performance.

Joining me for today's call are Roger Penske, our Chairman; David Jones, our Chief Financial Officer; and JD Carlson, our controller.

On this call, we will be discussing certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation, and amortization, or EBITDA, and EBITDAR. We have reconciled these measures in this morning's press release and investor presentation, which is available on our website, to the most directly comparable GAAP measures.

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

I would now like to turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us. Today, Penske Automotive Group reported another outstanding quarter, including record first-quarter retail automotive sales, revenue, income from continuing operations, and earnings per share.

For the quarter, revenue increased 11% to $4.5 billion. Income from continuing operations increased 14% to $76.4 million, and related earnings per share increased 15% to $0.85.

The first quarter was highlighted by strong performance across our retail automotive dealerships and our US-based commercial truck business. These results were partially offset by two notable items.

First, the impact of foreign currency exchange rates, which reduced the Company's reported revenue by approximately $185 million and reduced earnings per share by approximately $0.05. And the challenge in economic conditions faced by our Australia commercial vehicle distribution operations, which experienced a year-over decline of approximately $0.04 per share, as the heavy duty truck sales in the Australian market declined 14.3% in the first quarter.

Let me now turn to the specifics of the first quarter. Our quarter results were driven by a 6.7% increase in total new and used vehicle retail automotive units to 101,350 units and 11% increase in total revenues to $4.5 billion.

Our total revenue mix in Q1 -- US 60% and our international markets at 40%. Approximately 93% of our revenue was generated through our retail automotive dealerships, while the remaining 7% was generated through our commercial vehicle businesses, which include both US truck and Australian and New Zealand operations.

Overall gross profit improved $75 million or 12%, while gross margin improved 10 basis points to 15.4%. SG&A to gross profit improved 10 basis points to 77.6% and overall gross profit flowthrough was 23.3%. However, within our retail automotive businesses, SG&A to gross profit improved 70 basis points and gross profit flowthrough was 36.6%.

Operating income increased 12% to $136 million and operating margin was 3%. A couple of points about our operating margin. Operating margin includes $49.9 million of rent expense for operating leases, which impacts margin by approximately 110 basis points. Additionally, operating margin excludes nearly $7 million of equity income we receive related to our joint venture investments.

Our tax rate in the quarter was 33.5% compared to 33.9% last year. EBITDA improved 15% to $151 million. If you add back rent expense of $49.9 million to EBITDA on a rent adjusted basis, EBITDAR was approximately $201 million and our margin was 4.5%.

Let's turn to our retail automotive business. Our brand mix was premium luxury, 72%; volume foreign, 24%, and the Big Three was 4%. On a same-store basis, retail automotive revenue increased 4.6% -- 5.3% in the US and 3.5% internationally. Excluding the effect of foreign exchange, same-store automotive dealership revenue would have increased 8.8%, including 14.1% in our international markets.

New units retailed increased 7% to 53,300 units, representing a 6% growth in the US and a 9% growth internationally. Same-store retailed automotive new units increased 5%, including 4% in the US and 8% internationally.

The UK market remains strong, demonstrating many of the same characteristics as the US market. For the first quarter, UK registrations increased approximately 7%. In March, UK registrations increased for the 37th consecutive month and represented the strongest month since 1999. New vehicle revenue increased 6% to $2.1 billion, commensurate with the increase in new unit sales.

Our gross profit per unit retailed improved $19 or almost 1% to $3,146. Our gross margin was 7.8% and that was consistent with the first quarter of last year. Our premium luxury moved from 8.2% to 8.4% during the quarter. Our supply of new vehicles was 47 days at the end of March compared to 48 days last year.

Looking at our used automotive business, we retailed 48,100 units in the quarter, representing an increase of nearly 7%. CPO sales represented approximately 34% of our used unit sales in the US and our used and new ratio climbed to 0.90 to 1.

Same-store used unit retailed increased 5% and our used revenue increased 7% to $1.3 billion. Gross profit per used vehicle retailed was $1,758 and our margin was 6.6% compared to 7.2% last year. However, gross margin improved 50 basis points sequentially compared to the fourth quarter.

Turning to F&I, within our retail automotive business, revenue per unit was essentially flat year over year at $1,100. Revenue per unit increased 5% in the US and declined 10% internationally. In total, exchange rates impacted F&I by $38 per unit.

The retail automotive service and parts business had another solid quarter, with revenue improving 5.3%, including 3.6% on a same-store basis. Excluding exchange rates, same-store service and parts revenue increased 6.7%. Service and parts gross margin improved 30 basis points to 59.5%.

Let me turn to our commercial truck business. Our US-based commercial truck business operates across Texas, Oklahoma, New Mexico, Tennessee, and Georgia. This business performed very well in the first quarter, retailing 1,335 new and used trucks and generating $193 million in revenue.

Service and parts is a key part of the commercial truck business. In fact, in the first quarter, service and parts represented approximately 71% of the total gross profit of that business.

The market dynamics for medium and heavy-duty trucks remain very strong across North America. In the first quarter, North America sales of Class V to Class VIII medium and heavy-duty trucks were approximately 120,000 units, an increase of approximately 15%. Class VIII heavy-duty market increased 20% to 70,000 units in the quarter and the backlog of orders for Class VIII heavy-duty trucks increased 58% to 185,000 during the quarter.

We represent the Freightliner brand, which represents almost 37% of the current Class VIII heavy-duty market. Freightliner is also a major player in the Class V to Class VII medium duty market, too.

Freightliner's core business is producing over-the-road type vehicles. Being aligned with the market leader gives us the opportunity to drive service and parts business, which covers more than 100% of our fixed costs on a daily basis.

Based on a growing economy, the strength of the order backlog, strong freight metrics, and low oil prices, we expect the medium and heavy-duty truck market to remain strong for 2015 and 2016.

Turning to our Australian commercial vehicle business, this business includes the distribution of Western Star, built by Freightliner, MAN in Germany, and Dennis Eagle from the UK. These vehicles and related parts, as well as their power system business, which principally distributes diesel and gas engines, power generation systems, and the related service and parts for the on- and off-highway markets.

During Q1, these businesses generated approximately $100 million in revenue. We are pleased with the performance of the power system business in the first quarter. However, the commercial vehicle distribution portion of the business continues to be impacted by economic conditions in Australia, mostly notable across the mining and construction, as commodity prices, such as iron ore, remain weak.

In total, our Australian-based businesses experienced a year-over-year decline in earnings per share of approximately 4%. We continue to implement changes to our operational structure in these businesses to drive sales and improve our cost structure. Most recently, we opened new consolidated parts distribution warehouses at the beginning of April, which will foster improved efficiencies while reducing costs.

Over the long term, we view Australia very favorable, as the average fleet age of trucks is approximately 14 years, which is significantly higher than the 6-year average age of trucks in North America. We believe this should foster replacement demand as the economy recovers.

Taking a look at our balance sheet at the end of March, total liquidity was approximately $600 million. Total non-vehicle debt declined $144 million and it was approximately at $1.2 billion. We had $67 million of cash on our balance sheet at the end of the quarter.

Our new and used automotive vehicle inventory was $2.5 billion and increased $176 million when compared to March of last year. New was up approximately $100 million. Used was up $77 million.

And on a same-store basis, new and used automotive vehicle inventory increased to $160 million compared to the end of March of last year. New was up $86 million. Used was up $74 million. Commercial vehicle inventory was $169 million.

Capital expenditures for corporate ID facilities were $33.6 million in the first quarter. We anticipate CapEx of $120 million to $130 million in 2015. We also repurchased 283,000 shares of common stock during the first quarter for approximately $14 million or $49.25 per share.

In closing, I am very pleased with the performance of our business in the first quarter. The retail automotive markets in both the US and international remainder strong. The outlook for the retail automotive market in the US and the UK remain very favorable. Additionally, we have seen overall market improvement in our other Western European markets as well.

Further, the outlook for the medium and heavy-duty truck markets remain robust across North America. We believe our Australian operation will be positively impacted by the changes we implemented, as we see significant long-term opportunities with our commercial vehicle distribution business along with our power systems business. We also remain optimistic about acquisition opportunities across both retail automotive and the US-based commercial truck business.

As we move forward, we will continue to evaluate our market position and remain committed to pursuing strategic and opportunistic acquisitions that help our Company achieve long-term success and prosperity.

Thanks for joining us today on the call and for your continued confidence. At this time, I would like to open the call up for your questions.

(Operator Instructions) James Albertine, Stifel.

I wanted to ask quickly on the heavy-duty side of the business, Roger. Lots of great detail again this quarter. Thank you for that. And in the release.

How does consolidation in that market differ in terms of the duration? So how quickly do you think you could help Freightliner as it relates to growing across interstates coast to coast? And then in the same token, how long -- or how big could it be as a percentage of your total sales over that period of time?

Well, I think, number one, let's put it in perspective. There is 18,000 franchises in the US from the standpoint of retail automotive. There is 2,000 truck locations. So significantly less.

We feel, from a same-store perspective, based on what we have today, that we can grow our business by 50%. We have a framework agreement with Freightliner, which allows us to grow to a certain level.

We think that over the next 12 months to 24 months that there will be plenty of acquisitions that we will be able to look at. And at the present time, we see the multiples on these significantly less than on the automotive side.

We also have the benefit to grow with Freightliner, who, I said earlier, has a 37% market share, where there is tremendous amount of opportunity in the parts and service area.

And I think overall, as we purchased here in the last three months, the business in Tennessee and Georgia, and this gives us a total of 16 full-service dealerships. And our estimated revenue will be about $900 million for 2015. So I see this that we being able to double this business easily in two years.

That is extremely helpful. Thanks for the color there. And then as a follow-up, just wanted to compliment you first on your used to new retail ratio in the quarter. It was, I think, quite strong relative to your public peer group.

Help us understand what Penske is doing as it relates to the used retail approach differently this cycle, maybe versus prior cycles, and why you think you can continue to expand that business from here. Thanks so much.

Well, I think it started in our central area with the -- we went [around] really focusing on used as we had the opportunity to utilize the Internet properly. And I think that our websites -- I think the way we handle the inquiries, whether it is by tablet, by phone, or Internet, we are doing a much better job in execution. Certainly, our Penske cars has played a big factor in that.

What we have is what we call Retail First. We have a metric -- I think I mentioned it before -- the number of cars wholesaled versus retailed. That way, we are trying to keep that down somewhere around 15% to 20%.

So that is driving, I think, some ingenuity with our operators from the standpoint of what they can sell. Because these cars get marketed somewhere and I think that we are seeing the success of that.

Also, we have invested in our facilities to give us more footprint in Atlanta. We have 2 BMW stores that sell each month over 250 used cars. And this is because they have the space and also are working the process quite well using the Internet.

The good news is as we increase the used, it helps us in our PDI and our reconditioning, which is key. And I think that from our CRM perspective, we are seeing a great work done by our people and the ability to control these ups, control these emails, control these inquiries that we get from the customers. And the closing ratio is much better.

So better execution, number one. More inventory, number two. And selling cars that normally we would wholesale.

Thanks as always and best of luck in the next quarter.

Rick Nelson, Stephens.

Roger, recall activity has certainly been a driver of warranty in service and parts. How much tailwind is still there that, there has been some parts shortages, I believe?

Well, I think -- we looked at what the recall activity -- how does it really impact us. And I think it goes from 5% to 10% of our business. It is kind of lumpy. You get a big surge of recall and then you might not have any for three or four minutes -- or for three or four months.

But overall, today we are in this Takata airbag recall, but it is part of our business. And I think if you think back, ever since the inquiries by the safety area of the government -- NHTSA -- with the auto manufacturers, any little defect that is found on a automobile, since the General Motors issue with a switch, becomes a recall.

So we are the depository for that work. And I think we will continue to see that as part of our income stream on a going-forward basis.

I think recall business is good. We welcome it. I think that is why we have committed to the large fixed operations that we have in order to be able to handle it as it comes in.

And I think about it also gives us a chance -- think about this one. Gives us a chance many times to see vehicles, which we haven't seen. So it gives us a chance to connect with a customer with an older vehicle. And in many cases, we are converting those into either used car or new car sales.

Thanks for that. Also, looking at your gross profit per unit and gross margin on the new car side here, one of the few dealers where we didn't see pressure there. And I am wondering how you execute that and whether it is sustainable.

My people tell me that is good management. But on a serious note, we really have two things that we follow in the Company. And that is customer satisfaction and that is margin.

And with the premium luxury, we don't have the interbrand competition that we have. Some of the -- as we look at discounts and dealer discounts and margins are really set up differently. So we get the benefit of that on a going-forward basis.

And because of our mix is really almost 70% premium luxury, we see a little higher margin on that. So we have been able to maintain that. It seems the premium guys always have a few units that are very tough to get. So we're getting maximum margins on those.

So to me, I think a good report card is, as I mentioned earlier, that the premium luxury actually went from 8.2% to 8.4% and our overall was 7.8%. So to me, I think it is management. I think that margins are key.

And I would have to say that the manufacturers, at least in the premium side, are doing everything they can to sustain the gross. Because we can't make these investments in corporate ID and facilities without maintaining a gross profit.

So we are consistently in dialogue with the manufacturers to maintain that. And I think that is one of the things that we are also discussing even in the UK with the fellows over there that we need -- overall, we need the ability to maintain this.

So on the non [the volume of] foreign, we are pretty much flat for the quarter. And we were impacted somewhat in that because of the time that we had with the bad weather in the Northeast and Central, which hurt some of our margins there. So we were pushing to get inventory out to keep our day supply in order.

Got it. And the flow-throughs at the dealership level, I think, were 36.6% for the quarter. I think last quarter, you were just under 30%. Do you think these are levels that can be sustained or --?

Our budget across the Company is 30% to 35%. As we consolidate the truck business and the other parts of our business, we are going to take a look at that. But I would say our goal is 30% to 35%. Some of our peers have done a great job doing more than that.

But I think with our mix of business and the costs that we have associated in the premium luxury side, thinking that we have at Crevier out in Orange County, almost 400 loaner cars and you start putting that into the cost base of your service, you're going to have a higher fixed cost that you have to deal with. So to me, we feel that, overall, we are really in good shape.

Okay. Thanks a lot and good luck.

John Murphy, Bank of America Merrill Lynch.

Just a first question on the Australian business. I know you are taking some action down there to rein in costs and set up the business for what is a weak environment now, but hopefully a stronger one down the line.

Just curious if you can outline some of those actions for us, specifically. And also as we think about this business in 10 years, 12 years, are we going to be looking back at something that is sort of analogous to Sytner, where it didn't look like that much in the beginning and it became a big platform and a great business for you over time?

Look, number one on actions, I mentioned during my prepared remarks that we have consolidated our parts warehouse, both for the power systems business and the commercial vehicle. This is a huge save to have two big master parts warehouse. That is number one.

We have reduced headcount. In fact, if you looked at the -- what we did in the fourth quarter with power systems and moved into a profit in Q1, I think it was a byproduct of taking headcount out. There is many duplications to a back-office and functional areas in both businesses, which we have combined.

We looked at -- on the commercial vehicle side and also on the power systems side, we are looking at areas that we were able to -- maybe weren't efficient. We had some places open seven days a week and were not getting the benefit of that time and the cost associated with that labor.

So we have made those moves. There is no question that we've put on more, I would say, offense from a management standpoint, both on the sales. We split the commercial vehicle side to both Freightliner and Western Star separately to get impact with those dealers.

And I think that, overall, when I look at the future and you talk about 5 years to 10 years, I was in this business when we owned Detroit Diesel, back starting in 1988. So we know the market. It is a loyal market. And I would say that the Freightliner, Western Star have a great reputation there.

And I think that our ability in the off-highway to be able to have that opportunity to sell these engines, which only a few places in the world can rebuild them, and we can do that in Sydney, gives us a real lever up. And this will be another business that can climb -- it can double, I think, over the next three years to five years.

And to me, this profitability, at least the $0.04 drag in the core, you have to remember: we distributed trucks. We wholesaled trucks to dealers in Q3 and Q4. With not having a robust market, they of course don't want any more. Then we would have to supply them with incentives -- which we did -- in order to help them move those trucks, which they are moving now in Q1 and Q2. We won't have those incentives at the level they are as we go through the balance of the year and I think that will make a big difference.

Also, as the dealer inventory comes down, we will be able to wholesale more trucks. And that will give us the benefit to take that profitability at the distribution company.

On the other hand, we have got a number of power generation opportunities on the power systems side. We are dealing with a number of repowers of the large mine haul trucks that you see in the coal and iron ore area. In cases today, where they would buy new equipment, they are doing repowers. And we think there is an opportunity there, because we provide all the parts and service for the MTU products.

So as you put these two together, the engines that are in Western Star and Freightliners. We supply engines. We supply parts and we supply trucks on the Western Star side, MAN, and Dennis Eagle side. And on the power systems side, we represent MTU, which is the big engine business out of Friedrichshafen, formerly owned by Daimler, as the two-and four-liter per cylinder business.

Then Rolls-Royce power systems, obviously, which has the major part of the off-highway business. And that takes us to Australia, New Zealand, Indonesia, and other parts of that part of the world.

So to me, with the team we have and putting our metrics in, and I think in our ingenuity and offense, I certainly know we made the right decision. Lower cost of entry, less competition, and the opportunity to have businesses that have 60%, 70% parts and service gross profit versus the typical automotive at 40%.

So when you take that all in together, I think that as we increase our market share in the heavy-duty truck side, we are about [8%]. That is our goal this year. We would like to get to [10%] over there. It will make a big difference.

Remember, we're not talking about selling hundreds of thousands of trucks. There is really 10,000 heavies sold a year that we're trying to get 1,000. So that the up-and-down of this market will not affect us in a big way going forward.

Interesting. That is great. Thank you. On foreign exchange, I just wanted to make sure that everything we are looking at is pure translation and there is not an economic impact. And also, as we think about the cadence through the year, does this pressure ease as we get into this back half of the year?

Well, I would say as we look at the pound, it really went $1.68 in April. $1.69 and as went through the next three months. And $1.67, $1.68, $1.69. So we will have some impact, because today, we are sitting at about $1.50. So we will have, certainly, some headwind.

And as far as the euro is concerned, we were at $1.36. And I think as we look at the euro today, it is somewhere around $1.09. So I don't expect that to really mitigate itself in this next quarter. We might see it in the third and the fourth quarter.

Okay. And then just lastly, as we think about your customer base or your suppliers, if you will, being the automakers, there is a lot of talk about the German luxury manufacturers instead of shipping some vehicles over to a market in China, which is weakening a little bit on the margin for lux, and shipping those vehicles over here to the US, just because the euro is weak versus the dollar and the flow is just easier for them, are you seeing more of those vehicles showing up here? And are you seeing any price actions being taken by the German lux manufacturers to try to move volume here a bit?

Well, I can tell you one thing. Land Rover, which is -- the Range Rover -- has been very tight. Where we got a major player there, both in the UK and in the US. And we are seeing more availability than we have had.

Also on the Porsche side, we have seen it not only in the sports cars, but the Cayenne and the Macan. Because these are vehicles that were very popular in China, even the Q7 and some of the vehicles at Audi.

So to me, we are getting the benefit out of the slight slowdown, because these were really markets where they could sell those vehicles at bigger margins than they could in the US or maybe in Western Europe. So my answer to that is yes, we are seeing those vehicles come to us. I think it is going to play right into our hand with our premium luxury. In fact, some of that availability, quite honestly, helped our gross margin in the month of March in the first quarter.

That's helpful. And I promise this is the last one, just on currency. Would you ever consider doing a euro-denominated debt offering, considering that rates over there are essentially de minimus? And given that you might want to make acquisitions or fund the business over there in Europe?

Well, our availability now, as we mentioned, is almost $600 million. We have the ability through our banking sources and obviously the capital markets there, the opportunity to do that.

It has been something that has been discussed. I would say at this point, it is not the first thing on our list. But obviously, something we will take a look at.

Brett Hoselton, KeyBanc Capital Markets.

Want to follow on on the Australian truck ops. The $0.04 headwind in the first quarter, you have obviously made some changes here. On kind of a year-over-year basis, as we look at the second, third, and fourth quarter through the remainder of this year, would you expect that there would continue to be a headwind? Does it lessen? Does it increase? What are your thoughts there?

I think that sure, it is going to be easier. The comps will be easier as we get into the third and fourth quarter. I think we will still have a headwind here in Q2 as we go forward. But to me, I think you will see some slowdown of that deterioration in Q3 and Q4.

And then on the used vehicle, the gross profit per unit, it looks like about half the decline was due to FX. But even ex-the FX impact, it looked like there was still a notable decline in gross profit per unit on the used side.

Can you kind of give us a sense of what might have driven that? And is there -- is that structural permanent or is that kind of just a softer quarter and it will probably rebound?

Well, I think if you look at slide 12 that Tony sent out, giving the -- you will see that excluding exchange, we were down $88 or 4.6% from the standpoint of used, on actually a dollar basis. So to me, this is pretty much in line with the market, as we reviewed the peers and what they have been dealing with in the marketplace.

And again, we were moving a lower cost-of-sale vehicle in some cases. And I think that drives a little bit lower margin as these lower price vehicles. But I think the key thing is that sequentially, if you'll look at Q4, forget the numbers, whether it is minus 4% or not, we were up 50 basis points. So I think we are going in the right direction.

Very good. Thank you very much, Roger.

Paresh Jain, Morgan Stanley.

A question on the CV business. You have talked about how defensible the CV business is, with 70% of gross profits coming from parts and services. But when we think about a comp for that business, obviously, Rush Enterprises comes up.

Now Rush is, I would say, a much more mature comp and doesn't have the same acquisition run rate as Penske. But other than that, would you highlight any other key differences between Rush and Penske? Penske CV business, rather.

Yes. That's a good question. Number one, let's kind of look at the market leaders. When you look at Peterbilt and Navistar combined, they have about 26% of the overall heavy-duty market. We are sitting with Freightliner with 37%.

And to me, there is more opportunity from us from a parts and service business because of the units in operation with Freightliner. We have committed today under our framework agreement to grow with Freightliner. And they are encouraging their partners across the country for us to -- not for us, particularly, but for people who want to consolidate to get into that business. And I think that that means a lot to us.

Also, from a product standpoint, Freightliner has not only a heavy-duty offering, they also have a medium duty. Peterbilt has a heavy-duty and more of an owner-operator truck that has been used primarily not only on highway, but more recently, I guess, in the oil fields. And we are not really servicing that many -- any trucks in the oil field, as Peterbilt would be.

Navistar, on the other hand, is coming through kind of a change of life with their engine strategy and other things. So we don't see them having the customer loyalty that we have at Freightliner. And when you look at Freightliner, all the big fleets -- the Walmarts -- you look at Knight, you look at US Xpress, you look at Schneider, you look at JB Hunt, you look at Rider, you look at Penske, all of these are large Freightliner customers and the units in operation drive 100% of the parts and service back to the dealership.

So to me, units in operation a plus; a smaller base of locations for us to cover the US, which gives us a better opportunity; more over-the-road trucks, which drive miles, which gives us parts and service. And I think, overall, when I look at the parts and service absorption in the business, it is 110%, as I mentioned earlier.

So to me, Rush has got a very good model. They have been in the business. They are doing $4 billion in revenue. So it shows you how you can grow that business. The other thing is I think the CapEx is not the requirement for some of the retail auto. CI you need is not necessary in the heavy-duty business.

But overall, being with a market leader I think is a big advantage to us. Their toolbox -- remember, their toolbox includes their Mercedes-Benz trucks in Europe, Mercedes-Benz in Brazil, and Fuso in Japan. So with all of those makes under the Daimler umbrella, that engineering toolbox of product, I think, is a market leader.

And when you look at the integrated drive train, which now that Freightliner has engines, they have transmissions and axles, it gives them a competitive advantage over Navistar, which has to buy engines, transmissions, and axles from a third party. So does Peterbilt. They have some opportunity to use a DAF engine, so I think the vertical integration drives a better value for the customer.

That's helpful color, actually. On the light vehicle business, your same-store new growth in US, one of your peers called out weather in Northeast having an impact on sales as well as cost. You have some presence there as well. How much was that an impact in the quarter and how has demand been since then?

Well, I said I wasn't going to give a weather report in this -- on this call, but you brought it up. We obviously were impacted significantly in the Northeast -- Connecticut, Rhode Island, into New Jersey, even down into Washington. In March, we had times when Washington was down. So I would say that it had a big impact to us.

To say what brands, I would say on the premium luxury side, 50% of our Mercedes business and BMW business is in the Northeast. And our Porsche -- we have a strong Porsche. Three out of our six dealerships are in the Northeast. And our BMW business, really, the main one there that was impacted would have been the new acquisition we made in the Greenwich area.

Patrick Archambault, Goldman Sachs.

A couple of quick ones. A bunch have been answered. But just following up on the used margins. I guess it was kind of flat in the sequentially, but was still down year on year, as per one of the previous questions.

I think you had mentioned that there is kind of your first -- your Retail First strategy that is playing a role there. But how do we think about the trajectory of that number in subsequent quarters?

We keep on waiting for the inventory to improve from an off-lease cycle. Is that something that is likely to help out and improve acquisition costs and improve margins?

Well, I think that there is hundreds of thousands of off-lease cars coming from BMW, Mercedes, and other of the premium manufacturers. And I think it is pretty much in full swing.

Now that is going to give us an opportunity for us to be able to acquire those cars. And the good news is if they give us the benefit of some of the new car rates as we go forward with those programs.

One thing that has had some impact with us and that is internationally -- BMW, we used to get [GBP250] on used financing and that has been taken away from us in this first quarter. We've having to switch some of that financing to a second source, but we need the BMW relationship because of the customer information. So that has been something that we are dealing with as a market condition as BMW is obviously trying to take that money off the table.

So we think that with that in place and also VAT gives us a little bit lower margin. I think, from a Retail First perspective, that is right at top of mind. We will continue that. We will continue to do better with our Internet. We can see as a model, some of the storage in the Central, now even the East and West, that have really taken on this inventory and the ability to execute with the Internet. I think all the peers see that the Internet is a powerful tool and we are getting better at that.

And I am not sure that from a margin standpoint -- we could put more -- less money in the trades and make less money on the front end, too, if you are looking at trades. So that can move around depending on -- we are at .90. You follow me to new now, so we are almost getting 1 to 1. We are at 1 to 1 in some markets.

So to me, I feel good about where we are. Look at our peers, that we are all within that 40 basis points to 60 basis points reduction during this quarter. The first quarter might be the toughest, too, because of the weather.

Okay. So a little tough to call, but certainly some levers that you can pull sequentially, it seems like. And then just to recap what you said on the new side, it does look like some of the gains you saw year on year are holdable.

Well, actually, that is more my question. It sounds like, especially in luxury, the pricing environment was a little bit better for you. How do you think about the sustainability of that as we get into Q2 and the back half?

Well, I think if you look at our premium luxury margins, they have been pretty consistent over the last several quarters. And for me, that shows that we are managing the gross profit properly, because we have been somewhere in the 41.50% to 41.60% all the way back to the second quarter of 2013. And I think if you averaged it, we would be right around 41.50%.

So I think it is sustainable. We've certainly shown it over the last five quarters. I don't see any reason that that shouldn't change.

Okay. Appreciate the color. One last one, just -- on the M&A outlook, you had previously talked about a split between traditional car dealership opportunities and other businesses.

And can you just -- with the perspective of yet another quarter behind you, how do you see the way you are thinking about allocating capital going forward?

Well, number one, we are going to be in our -- opportunistic buyer. We want to be consistent with the brands that we represent. Where we have large campuses, we would like to glue on adjacent businesses.

I think the market still is highly fragmented. The consolidation process is slowly taking place. I think we have seen some higher numbers on some of the premium luxury deals that have gone down here lately.

On the other hand, we see opportunities on the commercial vehicle side. And we bought the Land Rover business in Greenwich and Darien here. That obviously plays into our hand, because it is complementary to our existing footprint we have in that particular market.

So we will continue, as I think I said, our strategy, our book says that we want to grow at 10% -- our top-line growth and our budget. And 50% of that would be on a same-store basis. And we would grow through acquisition another 5%.

And I will say last year, we were at 11% on same-store, but to me, I think that the balance sheet we have, with the liquidity of about $600 million, there is no question. We put our senior debt away last year. So our senior sub debt, $850 million for the next 10 years. So we have plenty of liquidity.

And there is no question that in the UK that the cash flow we generate out of Sytner and the international markets has allowed us to invest into Australia. Because basically, there is no issue from a tax standpoint. We can repatriate the money back and forth without any incremental tax impact. So to me, that is opportunistic.

We are getting calls from OEMs to invest more in the Western Europe part of the marketplace, which, in some of these deals, are very attractive to us. In fact, I talked to one of the manufacturers in Germany this morning. So there is plenty of opportunity.

Our leverage ratio today is between 2 and 2.1 to EBITDA. So we are in position to go, but we are going to be -- I think we got to be smart. This business will never change. There will always be someone wanting to sell. The cost of entry is significantly higher. There is no question that my peers -- the other consolidators -- to have the balance sheets to buy these businesses.

But if you look at our mix around the country, we are really not in much competition to buy these. I think they fit into certain groups. And I think we will continue to monitor that and we are in a position every day that we want to move forward on an acquisition, we will.

But we're going to try to be realistic. When we look at our business between acquisitions and certainly, we were one of the highest payout on dividends. I think we are 26% payout. So we will look at dividends; we look at CapEx. We're going to look at our CI requirements as we go forward. And then we do have excess of $100 million of stock or debt buyback as we go forward. So to me, there is plenty of levers to pull.

Terrific. Okay. Well, I appreciate the color. Thank you.

David Whiston, Morningstar.

Continuing with the M&A idea of moving to Australia, with the slowdown in their economy there, are you getting approached by more businesses wanting to sell to you?

Well, I think -- just so everybody is clear, when you look at Australia, we are a distributor. We are like Southeast Toyota is with Toyota or Gulf States here in the US. We actually source the vehicles from the manufacturers -- MAN in Germany, Western Star from Daimler here in the US, and Dennis Eagle in the UK.

Then we have a dealer base that we support. We have two of our own stores, one in Brisbane, which is in Australia, and the other in Auckland in New Zealand. Those are the only two we have.

So we are monitoring if some of our dealer base wants to sell, we will take a look at it. But the concern is that we would be in competition with our dealers in some cases. So we feel that the best for us is to support them, either if they need capital, need support on facilities, or even as we are doing a lot of training right now, free of charge to the technicians, I think that it gives us this exclusive distribution into those dealerships.

So from the standpoint of other marks, I don't think today that you will see us move into another mark. They are pretty well covered by either local distributors or local OEMs or the OEMs that have their local sales companies at this particular time.

I think the key thing we have to look at is the health of our dealer network. And that is something that obviously is on the radar due to the just overall slowdown. The good news is that most of them have strong parts and service businesses. As we said earlier, that covers over 100% of their fixed costs.

Thanks. That's helpful for the clarification. Moving to Europe, what is your take on the health of the consumer there? Are there reasons to be really aggressively optimistic for the rest of 2015 and 2016 or do you think it has to be very slow and steady?

Well, I think that when you look at the UK, I think I have seen the information that consumer confidence is at a 12-year high. And there is low unemployment, which is driving more wage.

And there is no question that when we look at unemployment, it has dipped below 6%. I think that is the lowest it has been over the last five or six years. And the GDP is probably going to grow at about -- somewhere between 2.5% and 3% in 2015. So inflation rate was zero.

When I looked at Spain, I look at Italy, our opportunities there have continued to grow. Our businesses are year over year are growing probably at least 10%. So to me, those markets are getting better. And we are represented there exclusively in the premium luxury in those markets. And we see those markets in good shape.

Obviously, there is always political ramifications, but the relationships we have with the OEMs, it seems that they are very interested to see us invest more in those markets.

And we have a very good management structure. David Holmes, one of our key guys, is really -- and Jens Werner -- have taken over that market for us and report into the UK. But very proactive. We have got partners with, say, 20% to 30% ownership that have local knowledge. They know the social behavior needed to be in those markets and we bring our expertise on the auto side.

So I would say today, it is working. Minimal commitment from the standpoint of capital. I mean, these are deals that we'd never see them in this country. So getting in now and as that market starts to get better, we're going to have that tailwind.

Okay. And my last question is on the US market. I wanted to continue a conversation we were having on the last quarter's call on Cadillac. At the time, you had expressed some interest -- at least in the right markets of getting some Cadillac and Lincoln franchises.

So is it fair to say that you do think Cadillac's Renaissance, with things like the CT6, that they can actually be a formidable competitor to the German 3 and Lexus?

Well, I love the CT6. And quite honestly, we are in the process right now talking to Lincoln about a potential location for them. I think the commitment that Ford's making to that brand -- again, an opportunity to get in without any significant goodwill will make a huge difference.

There is no question that from a Cadillac perspective, they are down in the first quarter. But Johan de Nysschen, who is the general manager of that division, came out of Audi and I think he has got the right attitude. There is no question.

Reading the papers here in Detroit, knowing that folks here, they are investing in Cadillac. They have got the Escalade. They were bringing out some new product. Understand maybe a smaller version of that, which has been very successful. As they try to transfer some of their customer base into the smaller SUV space, I think that is only going to bode well for both Lincoln and for Cadillac.

Michael Ward, Sterne, Agee.

Roger, I wonder if you can talk a little bit about factory maintenance. I don't know what percentage of your current sales include a factory maintenance program? And it seems like that is going to -- a trend that is going to continue.

And is the profitability for factory maintenance any different than you would get from normal customer maintenance? How does it impact the customer service experience, the loyalty, and those sorts of things?

Well, you have got your full circle program with BMW we have had for a long time, where basically, someone can come in and lease a car. Other than gas and the consumables, that is all they spend during a 24 month to 30 month to 36 month lease. And the work that we do on that would be chargeable on warranty.

So we get our full margin on parts and our full margin on labor, which is very positive to us. And that drives that customer back into the dealership. So to me, from a BMW perspective, we are seeing big increases in our parts and service business from a BMW perspective.

Also, Toyota has Toyota Care. And when you think about Toyota, this has been something they put in place after they had some of the issues with products and acceleration, et cetera. And that has been a home run for us, because we give free oil changes for the first two years and I think that that has been key for us.

And there is no question, when you look at the brands that have that, I think on the BMW side, our parts and service gross has gone up 20% during the quarter due to parts and service. And again, that has a lot to do with our growth in sales, but also their support of that. And when you look at Toyota, we are probably up 5% or 6% and I think that that is key.

These are good. I think the residual values on vehicles that are in these programs are better, which helps us. And when you look at warranty, we were up about 16% for the quarter without foreign exchange. And then with foreign exchange, we were up 19%. So we see those programs being quite positive.

From our perspective today, we have United Auto Care, which we sell on the used car side. And I think that there is some benefit of that, that we go into that business right now. I think that is something you want to evaluate when you get our scale.

But to me, that is just more share of wallet. I like the fact that the manufacturers supply these warranties. We can sell them. They are recommended to the consumer. In many cases, these warranties we sell, we take a demonstrator or a loaner car and we bring those back into the market. Or even these off-lease cars. We get some of these programs that have extended warranties added to the sale of those vehicles, which is quite good and attractive to the consumer.

So I think it is part of the business. They are always going to be different on who wants to supply and without -- today is different than what we have. And I think you will see more OEMs supply them in the future.

I would assume it is a strong competitive advantage for BMW and Toyota to --.

Well, I think that we almost take it for granted, but it is quite a selling tool when you think if you have a lease and you go in for 30 months and all you do is -- we call it gas and go. Then what we are doing is selling even a product around that that says all you're going to do is put gas in your car and it also will reduce -- you will have a lower cost of ownership. Which that's, at the end of the day, no matter what you are doing, what is the total cost. And I think that is part of it.

Well, thank you, Roger. I appreciate it.

Mr. Penske, no further questions in queue.

All right, John. Thanks, everybody. Thanks.

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