Penske Automotive Group Inc (PAG) 2017 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group First Quarter 2017 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through May 3, 2017, on the company's website under the Investor Relations tab at www.penskeautomotive.com.

I will now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Kathy, and good afternoon, everyone. Thank you for joining us today. A press release detailing Penske Automotive Group's first quarter 2017 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; J.D. Carlson, our Chief Financial Officer; and Shelley Hulgrave, our Controller.

On this call, we may be discussing certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization or EBITDA. We have prominently presented the comparable GAAP number and have reconciled the non-GAAP 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 about our operations. 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. I direct you to our SEC filings, including our Form 10-K, for additional discussion on factors that could cause results to differ materially.

I will now turn the call over to Roger Penske

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report another quarter of record performance for PAG, demonstrating the overall strength and diversification of our transportation services model. During the quarter, we retailed more than 124,000 new and used vehicles. Our revenues increased 5.3% to $5.1 billion. And our income from continuing operations increased 4.9% to $83.2 million, and related earnings per share increased 7.8% to $0.97.

Our first quarter results were achieved despite the year-over-year currency headwinds, mainly driven by the British pound. Foreign exchange reduced revenue by $288 million, income from continuing operations by $7.5 million, and earnings per share by $0.09. Excluding foreign exchange, revenue would have increased 11.3% to $5.4 billion, and income from continuing operations would have increased 14.4% to $90.7 million, and related earnings per share would have increased 17.8% to $1.06. We continue to carry over 500 vehicles or more than 17 million in stop sale inventory for specific OEMs. And during the first quarter, recorded a benefit received from that OEM of approximately $2.7 million net of taxes.

We also took several steps to grow our business while continuing to diversify. We announced our completed acquisitions' expected to contribute approximately $1.2 billion in estimated annualized revenues, including 2 stand-alone used vehicle supercenters, one in the U.S. called CarSense and the other in the U.K., called CarShop; a Jaguar Land Rover dealership in Paramus, which is expected to contribute approximately $210 million in estimated annualized revenues; and Schumacher European, a Mercedes-Benz and Sprinter dealership in Phoenix, Arizona contiguous to our existing Scottsdale 101 Auto Collection. Schumacher is estimated to add approximately $250 million in estimated annualized revenue.

Let me now turn to the first quarter performance. As previously noted, revenue increased 5.3%. However, foreign exchange reduced revenue by $288 million. And excluding foreign exchange, revenue increased 11.3% to $5.4 billion. Same-store retail revenue declined 2.2%. Exchange rates negatively impacted same-store retail revenue by $253 million. Excluding foreign exchange, retail revenue increased 3.7%. Approximately 94% of our total revenue was generated through our retail automotive dealerships. Our revenue mix was 56% North America and 44% international. During the quarter, 84% of our income was derived from auto retail, 5% from North American commercial truck dealerships and 11% from other, which includes Penske Truck Leasing and Australia.

Turning to our Q1 automotive retail business. We retailed -- increased 11.6% to 124,472 units. Retail automotive revenue increased 5.4% to $4.8 billion but declined 2.2% on a same-store sale. Exchange rates negatively impacted same-store retail automotive revenue by $253 million. Excluding foreign exchange, same-store retail automotive revenue increased 3.7%. Same-store variable gross profit per unit, that's gross profit from new vehicles, used vehicles and F&I, declined $47 per unit to $3,354. Excluding foreign exchange, our variable gross profit increased $158 to $3,559.

Turning to new vehicles. New units retailed increased 5.8%, including 0.6% on a same-store basis. Same-store units declined 4.8% in the U.S. and increased 8.4% internationally. Same-store gross profit per unit retailed declined $164 per unit. However, when we exclude foreign exchange, it increased $11 to $3,008. Same-store gross margin declined 10 basis points to 7.6%. Our supply of new vehicles were 51 days at March 31 compared to 55 days at the end of March 31 last year.

Looking at used vehicles. Used vehicles retailed increased 18.1%, including 8,200 units retailed at our stand-alone used car superstore location. Same-store used units retailed declined 1.5%, and our same-store used-to-new ratio was 0.88 to 1. CPO sales represented approximately 39% of our used unit sales in the U.S. during the first quarter. Same-store gross profit per used unit retail declined $52. However, when excluding foreign exchange, it increased $44 to $1,644. Same gross -- store gross margin declined 10 basis points to 5.9%. Our supply used vehicles was 39 days at the end of March compared to 39 days at the end of March in 2016. Same-store finance and insurance increased $57 per unit. However, when excluding foreign exchange, it increased $124 to $1,190. Service and parts revenue increased 4.4%, including a 0.9% on a same-store basis. And excluding foreign exchange, same-store service and parts revenue increased 4.9%. Our customer pay was up 2.2%; warranty, up 13.6%; body shops and PDI, up 4.5%, for a total of 4.9%.

As most of you know, we acquired stand-alone used vehicle dealerships in the U.S. and U.K. during the first quarter. We believe these used vehicle dealerships further diversify PAG's business and provide an opportunity to capitalize on the highly fragmented used vehicle marketplace. We also believe these businesses provide an unlimited white space for scalable expansion while giving us an opportunity to learn more about the one-price, no-haggle pricing strategy. We're extremely pleased with the performance of each of these businesses so far.

In the first quarter, our stand-alone used vehicle businesses retailed 8,200 vehicles. They generated $143 million in revenue and $24.6 million in gross profit. Variable gross profit, which includes gross profit on a vehicle sale plus finance and insurance, was 20.7. Average transaction price was $14,372, and the average gross -- variable gross profit per unit was $2,529.

Turning to our retail commercial truck business for the 3 months ended March 31. Premier Truck Group retailed 1,570 units and generated $212 million of revenue and $36 million of gross profit. Gross profit per used truck retailed improved $2,589 from a loss of $1,471 per unit in the same period last year as used truck prices start to stabilize. In Q1, our truck dealerships generated 79% of its gross profit from service and parts, and the fixed cost absorption was 117%. Recently, we've seen improved conditions which seem to indicate that the supply/demand balance is improving, including the stabilization of used truck values and the improved new truck orders. While we still expect generally challenging conditions to continue in 2017, we believe these improved conditions could lead to an improvement in Class 8 truck orders and improve sales later in 2017.

Turning to Australia, truck distribution and power systems. In the first quarter, revenue increased 11.3% to $112 million, and gross profit increased 18% to $29.3 million. We're generally experiencing improved condition in the Australian truck market with the heavy-duty truck market up 23% over March 2016 and 11% year-to-date. Sentiment in Australia mining industry continues to improve. Several OEMs lead here, and Hitachi confirmed that lead times on new machines has moved out nearly 12 months for the first time since 2012. We recently executed a contract with the Australian Defence Department that is an estimated value of $150 million in revenue over the next 5 years.

Looking at our balance sheet. We had $72 million of cash at the end of March. We have floor plan debt of $3.4 billion and non-vehicle debt of approximately $2 billion. Approximately 30% of our floor plan and non-vehicle debt is at fixed rates, while the remaining 70% is variable. Our debt-to-capitalization was 51.7 at March 31, and our leverage ratio was 2.9x. We had over $500 million in liquidity at the end of March.

New and used automotive vehicle inventory was $3.1 billion compared to $2.9 billion at the end of December. On a same-store basis, it was $3 billion, up $77 million; new vehicle inventory, up 45; used vehicle inventory, up 32. Approximately $38 million of our U.S. inventory is currently on OEM stop sale, representing 1,215 vehicles: 488 new vehicles and 727 used vehicles. Capital expenditures in the first quarter were approximately $37 million. We estimate our CapEx of approximately $150 million in 2017.

In closing, the PAG business produced a record quarter of results and reinforces the adaptability of our business to market conditions. Lately, I've heard many comments about the flattening of the SAAR and the slowdown of the new car market. Although the SAAR is important, we continue to build a different model, and that's all about diversification. Our model includes a $7 billion international automotive business in the U.K. and Western Europe, a $1 billion North American heavy-duty truck retail business; used car superstores, both in the U.S. and the U.K.; and our 23.4% ownership in Penske Truck Leasing, which provides substantial earnings, cash flow and tax savings. Lastly, we have a strong balance sheet, which provides flexibility to be opportunistic within the marketplace with acquisitions and share repurchases, as we have demonstrated over the last 15 months.

Thanks for joining us on the call today and your continued confidence. At this time, I'd like to turn the call back to the operator for your questions.

(Operator Instructions) Our first question will come from James Albertine with Consumer Edge.

I wanted to ask quickly on the used vehicle market briefly, if I may. Could you help us delineate what you're seeing in the market from a supply perspective and as well from a demand perspective? Just it's hard for us to sort of peel out those elements just from your used unit comps.

Well, just to put our used unit comps, I think, in position. During the quarter, we were down 2.7% in the U.S. However, we were up 11% in the U.K. and we were down in Germany because of our Audi, Volkswagen business, about 40%. So totally, we were down 1.5%. But our wholesale was up about 7% in the U.S. and up 15%. We just didn't have the vehicles that we could retail in the first quarter that would give us the margin that we wanted. If you look at our margin, I think it was around 6.1% and our GP was up 44%. So that means that our inventory being at 39 days, we need more vehicles. We certainly see that as we look at our used car superstore from the standpoint of having enough inventory to continue to grow then. I think we're going to learn how to be able to buy right at these auctions and look at the OEM auctions to get vehicles. There's no question that the word out there is all these off-lease vehicles coming back, and I think that's going to serve us well. Because when they do come back, obviously, they're going to be mark-to-market. And we trade mark-to-market, and we look at, as go down in our days supply, if we have to mark down vehicles because we're high, because the markets there only would be probably for 1 month when you think about 39 days. So I think supply is coming. Supply of the right vehicles might be a little bit tough because the mix has changed. People today want trucks and SUVs. There seems to be an oversupply of used sedans coming through. So we're going to have to balance that out in inventory over the next several months.

Okay. So that's wonderful, and I appreciate the detail. If I could just maybe summarize it. It sounds like it's a supply issue and the demand, as far as you can tell, is still quite strong?

Yes, I would say that the demand is there. It's just getting -- having the right vehicles that we can make the right gross on from our perspective. And there will be a bigger supply with these off-lease vehicles, which I think you've seen them. Our market, our business is about 38% leased in the quarter and probably 55% to 65% in premium/luxury. So we're going to see vehicles coming back to the OEM captives, which will give us more supply, I think, as we go forward.

Understood. Appreciate that color. And if I may, just a quick follow-up from a strategic perspective. There's a lot of focus right now on digital efforts in auto retail and sort of where consumers might be shifting perhaps their habits to research online and transitioning that into buying online or seeking financing online. I'm just wondering if you could kind of bring us up to speed as to how you're looking at digital and how Penske is sort of trying to move the ball forward in that regard.

Well, I think a couple things. Digital volume has increased with us probably 10% to 12% year-over-year. And we continue to update our sites with responsive designs. Mobile traffic is probably the primary source today. And I think that when I looked at it the other day, 50% of all of our PAG traffic comes from mobile. So we have to be on top of that. And I think from a buying tool perspective, we've heard about many different opportunities of buying online. Today, we have a tool called Preferred Purchase, which gives our customer the chance to value his car, look at his credit scoring and come up with financing options before he would connect with a dealership. And then we certainly feel that from an overall standpoint, the ability for us to deliver a car to a home or to do it to an office is certainly something that's viable, and we do that already. But we think that from an overall standpoint, we've got plenty of flexibility within our systems. And there's no question that when we look overall, 32% of our business is digital. So I think that's a key metric, looking at where we're going from a digital standpoint.

Our next question is from John Murphy with Bank of America.

Just a first question on CarSense and CarShop. I mean, do you think that there will be other opportunities to make acquisitions of other successful used car stores? Or are these the core for this new platform and you're going to be greenfielding new sites with these management teams?

Well, there are a number of smaller used car businesses around the U.S. We've looked at some of these. Some of them are tied to finance companies and other aspects of the used business. I would have to say our mission probably right now, both in the U.K. and the U.S., will be greenfield sites to grow. The good news is we have a model that's working. We understand the compensation metrics. We have a parts and service business, which gives us -- because of the units in operation. That's one thing you've got to remember, that there's still a parts and service metric on this particular business. And I think that's one of the benefits buying an existing business. I'm -- can assure you that I'm sure anyone that's in this space is going to be looking to see is there anybody out there that could be an acquisition. And if there is, I'm sure we'll be knocking on the door. But at this point, I don't have anything that would be meaningful that we would tuck in.

Got it. Okay. And then as we get back to the new vehicle business. I mean, there's a lot of noise around incentive activity, but it sounds like it is picking up. I was just curious what your take is on the pricing environment. And also, really specifically around leasing, is there a lot of residual support that's going on for a lot of the lease deals that you guys are writing for some of the captive [in cos].

Well, from an overall incentive perspective, I think you've heard us said before, it's approaching 10% to 11%, which people say is the top end. I think right now, you've got to step back and look at what the marketplace is demanding, and it's demanding SUV and trucks. And I don't think that the supply base has matched what's being sold at the moment. So that will take some pressure potentially off incentives if the manufacturers can produce enough trucks and SUVs and slow down the sedans. From a residual standpoint, I think there's no question that that's been a tool. It's been in the background that the manufacturers, finance subsidiaries, have been able to manage to up or down movement of the residuals to affect a realistic payment in the marketplace. That's up to the OEM. I can't -- I don't know how they book keep that from the standpoint between the captive and the sales company. But we have to have a competitive lease rate, and we're seeing most of our leases in the premium/luxury being approximately 30 to 36 months. And there's no question that that's a great length of payment because we get that customer back in. And if interest rates would go up and residuals would go down the -- remember, the lessee has the option to turn that vehicle in and pick another vehicle that might be at a different price point. So there's lot of flexibility on it. And I think that gives us, with our model at 72% premium/luxury, probably helps us a little bit against this residual movement that we're seeing potentially over the next 12 to 24 months.

Okay. And then just lastly, I mean, reasonable strength in the U.K. relative to expectations. There's a lot of concern that Brexit, potentially the implementation of a road tax over in the U.K. could dampen demand. I mean, what are you guys seeing for demand in the near term and ultimately, in the long term, as you run the business in the U.K.?

Well, I think, number one, the first thing you have to do is you got to think about the last 7 or 8 years, that the premium/luxury business has gone up 10 market share points to -- from about 9% -- or from 19% to 29%. And that's been tailwind for us from a standpoint of our individual business. On a same-store basis in the quarter, we were up double digit and the market was up 6.3%. And I think that probably shows you the strength of our business there. We had 2 more days, which have some impact on that, I guess, when we -- when the numbers finally flowed out throughout the balance of the year. But the OEMs have raised prices 1% to 2% every single year, if you look at it. And I think that what we have to look at, obviously, is the company cars. 50% of the cars that are sold over in the U.K. are really become company cars for employees as part of their compensation. I don't think that will change, and they're typically on a 3-year program. There is a VED tax, which was a vehicle emission-type tax which was -- starts April 1. And that's a 0 emissions. And that takes an impact of about GBP 130 per vehicle on a vehicle under GBP 40,000, and another GBP 300 if it's over. Most of our business is done below GBP 40,000. So we don't think the pull ahead will be -- will impact us much going forward. So unless Brexit, there's some big issue with Brexit, there's a pretty good balance between Western Europe or the EU and the U.K. from the standpoint of export/import, so be interesting to see how that balances out. But right now, as you see in our business, we've grown that business from, what, about $700 million in the U.K. to over $6 billion. And we're leaders in the U.K., leaders in Northern Ireland in premium/luxury. So I don't see that changing at all as we go forward.

Our next question is from Rick Nelson with Stephens.

I'd like to ask about same-store sales, new vehicles in the U.S. We did see a decline there. If you could comment on what you think happened with market share and as a trade-off between volume and margin, because the margins actually look quite good.

Well, we were -- I think where we got probably the biggest impact was in the premium/luxury side. After a real strong finish, Rick, in December, we were kind of spongy coming out in January and February, BMW specifically, if you look at our numbers. And I think there was quite a bit of pull ahead when you think about that. But what's happened is we've moved a lot of vehicles out of new vehicle inventory into loaner cars because we need to turn these cars in 3 to 4 months. And with that, they become used cars. And when you look at the used car business, i.e. specifically BMW, we were 1.5 to 1 during the quarter. And I think that, overall, that had an impact on us. We're still short. The Panamera didn't come out the way we wanted. We were short on some incentives on the Lexus side also. So I would say it was primarily in premium/luxury that impacted our first quarter.

Okay. Also, like to ask you about PTL, how that is tracking. At the time you [pumped up, stepped up stake], you provided guidance of $0.25 annualized, how you're tracking relative to that target?

Well, I think the $0.25 is certainly realistic. If you looked at PTL's numbers for the quarter, we had -- we were up 7% versus a year ago, and our pretax was up 17%. So overall, we had a very good quarter. And you compare that to our peers, we were -- really gained some market share, which I think is key. Right now, we think the investment has been excellent. There's no question. We get a 50% dividend on EBT each year. And I think that we've got $33 million in 2016 reduced. We reduced our cash pay taxes during '16 from $115 million to $49 million. So we're getting cash pay on the dividends. We're getting our taxes, of course, supported by the accelerated depreciation. And I think that the business itself is gaining market share each quarter, each year. So we know the people. We've got a big investment in it already. So as I said to somebody, they don't need to build a fancy showroom anymore. With this, it's a matter of owning more of the company. And we would expect that potentially, as we get into the third or fourth quarter, we'll take a look at our balance sheet and see where there's more opportunity to buy out the balance of PTL, which is owned by GE Capital.

We'll go next to Brian Sponheimer with Gabelli.

If we're thinking about the amount of cars that you all have sold and leased over the course of the last 5 years, it would be reasonable to assume that the cars in your bays are getting a little bit older in tenure. Have you all done any examination of the cohorts and maybe parts and service per vehicle as these vehicles maybe age out a little bit over the course of the last couple years?

Well, I think what you have to look at, you're going to have go beyond 3 years because at the end of the day, warranty today, coverage is typically 36 months. And as we look at the business, our parts -- I mean, excuse me, our customer pay margin is almost 50%. And warranty is up in the same range. So whether we get warranty or whether we get customer pay, it is pretty much the same. However, we've seen warranty go down because of probably better quality of vehicles. But I haven't done -- maybe Tony can get that information for you. I don't -- I can't give you per bay what we're seeing. I know that our parts and service business is going, and we have to be a little bit careful because we have these recalls, which all of a sudden, hits your warranty line and pump your gross up. And then it goes away the next quarter, and you have a different outcome. But I think the parts and service business, from a gross profit perspective, we're running at 58.9% when you include our PDI and our body shop. And that to me is very important, especially when you look at our business in the quarter. I think in some of the information we showed, it's only 9.8% of our revenue and yet it's 42% of our gross profit. So that's critical. And when you compare parts and service in the truck side, last quarter, it was 79% of our gross profit. So we will continue to look at least single-digit growth, I think mid-single-digit growth over the next several quarters even with the fluctuations in warranty and recalls.

And our next question will come from Bill Armstrong with CL King & Associates.

On the heavy-duty truck side, you referenced this -- to this earlier, Roger. You had a big swing in gross profit on used trucks. I was wondering if you can maybe flesh out what you're seeing there.

I'm glad you noticed that. Yes, we -- listen, we've been, for the last 12 months, when the cycle in the heavy-duty truck side, when it came down, there was about 150,000, probably more, tractors in service across the country. And many of the big fleets obviously didn't buy, so added some downward pressure on used trucks. And we had some that we were committed to take in from customers, and we had to work our way through those. So we didn't have much front-end growth in 2016, some F&I growth. But then as we turned the quarter in 2017, we were -- our inventory was in good shape. In fact, we went out and were buying trucks. So basically, what it's saying is that our inventory now is well matched to market, and we have an opportunity to buy trucks and also make a margin on these. And that includes then obviously -- on top of that's the F&I, which is good. We see the open market purchases being real positive and makes a big difference as we go forward. And there's no question that values have stabilized. We've seen it at the OEM level and also at the auctions.

Okay. That sounds good. And on the parts and service for heavy-duty trucks. Yesterday, Rush Enterprises on their call said that they're starting to see some more activity there. I was wondering if you guys are starting to see maybe some more positive demand for parts and service on the heavy-duty trucks side.

Well, it continues to be a big, big portion. Our fixed coverage was 117% in the quarter, which shows that we had strong parts and service. And I can't give it to you by location. We had some weakness, as you know, out in West Texas. And there's no question that we've seen that come back. I mean, the oil prices moved up, and that pulled a lot of equipment off the fence. So I'd say that there's an upward trend across the parts and service business. To me, it's so important as we look to support these big fleets. And the good news is that when you look at Freightliner and Western Star, they have 40% of the market. So that drives a lot of parts and service business into our shops. So -- and I would say, Rush, we're seeing similar trends. Now certain locations, you might see some softening. But I think that's based on maybe some energy-related activities.

Got it. Right. Because you had a negative same-store revenue on parts and service, do you think as the energy sector starts to stabilize, you -- we'll see that turning positive?

Absolutely.

Our next question comes from Mike Montani with Evercore ISI.

Wanted to ask first, if I could, on strategic side for a moment. Just, Roger, as you look out globally, what are some of the markets right now that you guys are more attentive to for potential deals? And then secondly, are there other lines of business that you might see as complementary, fleet service, different things around ride share, et cetera, that you guys might be looking into and saying, "Yes, there's opportunities here for new lines of business we could staple in?"

Well, let me just take the last part. Other lines, and you're talking about ride sharing and -- look, I think, as we look at our business long term, with the number of locations we have on the retail auto side and then some 900 captive shops that we have for truck leasing, plus our agents of 1,500, we have a real opportunity to manage a large fleet of vehicles. Today, think about 400,000 one-way moves. And we move across the country, and we have the ability to manage that. We could plug in several hundred thousand vehicles and probably do the same thing. So we have the software, we have the capability and we also have the touch points with our brand on it. So I think that as we look at that longer term, that's got to be an opportunity to us. I think that we could become a real viable player in fleet management and vehicle services. Now today, we understand that because of PTL, it's interesting in California, we handle most of the vehicles for the Highway Patrol. So we're in that business, to a certain extent. And I think at the end of the day, we can take a look at this, maybe on a more broader basis here in the U.S. From a strategic standpoint, on a market perspective, I would say that we'll continue to grow in Australia and out in that part of the world. We're not saying anything about China at this point. But I think there's more opportunity for us out there with our military capability, our large MTU. This distribution business continues to grow nicely with the team that we have there. Obviously, Western Europe, there's a lot of interest from the standpoint of us growing. The OEMs have come to us. They've seen our success in German and Italy, and asked us if we want to have more opportunities. And I would say that Italy has been a bright spot for us as we've grown that business over the last 12 to 24 months. But the one thing I hesitate on, we got to have enough people, the right people, to run those businesses. So I think we would be cautiously optimistic as we move into those markets.

Okay, understood. And if I could just ask for a moment. With debt to capital over 50 and then the 2.9x leverage, is there a bit of a governing factor here of how quickly you can move on acquisitions? And especially with the PTL opportunity, should we think perhaps this year could be over 3x leverage? Or is there more of a goal to actually (inaudible) that down?

No, I would say that the 3 would be a high mark for us. When you look at -- we had a little more cash on our balance sheet at the end of the quarter, we might not -- we didn't need, but that's obviously. But we were at 2.8. And then I would think as we get through Q2 and Q3, that leverage will come down. And looking at the PTL perspective, if we had to do some equity or we had to do some debt, we might do that. And I think at the end of the day, Mitsui is also interested in -- as you know, they own part of PTL already. So I think we'd take a look at it from a PAG perspective. And there's no way that I would lever PAG up to put it in any kind of risk profile just to get more of PTL. But I think we'll do it rationally, and we'll look at it as we get towards the end of the year.

Okay, great. And the last one I had, if I could, was just on the cost side for a minute. Because there was a little bit of an uptick of SG&A to gross. And I know there was the $2.7 million for stop sale payments. So I just want to understand the dynamics of the payment. Should we expect that to continue in the future? And then also, what kind of cost inflation pressures might you might be seeing in SG&A? And what are some initiatives to keep control over the expense side?

We had exchange cost of 50 basis points, just to put that in perspective on SG&A. And we had some larger health care costs that we didn't call out. We could have called that out too, which really offset any of the impact we got from the OEMs. But I think that the first quarter, we've got certain accruals that we have in the first quarter we might not have as we go through the balance of the year. But we're running our business to try to get the margin. I think our flow-through, if you look at it overall, was 20% without FX, and from a company perspective, it was 15.4%. And to me, my goal is 25% to 30%, so we've got some work to do.

We have a question from Mike Ward with Seaport Global.

Just 2 follow-ups. On the U.K. market, on the business fleet business, if I'm not mistaken, you got pretty good forward color on those types of orders. Have you seen any softness or any cancellations?

The only thing we saw with business fleet was maybe a change in OEMs when there was a lot of business being done with Audi. And when they had the Volkswagen problem with the diesel, et cetera, some of the OEMs decided to move that business to Mercedes and to BMW. That's the only thing I can say that would be anything of any magnitude. But these are 3-year programs they offer their employees, and we don't see that changing. I mean, it's competitive as hell when you think about that business. But we've maintained our share of that for several quarters and several years.

And are you seeing any downshift in mix because of some of the price or currency impact?

Well, the only thing you might do if you were buying a car that was over GBP 40,000 and you had the additional BGP 300 pounds of, say, emission tax, you might move down. But that's -- that would be up to the individual itself. So I really don't see much change in the business fleet business, to be honest with you.

Okay. And then on -- I just want to make sure I understand. When you were talking about the stand-alone used vehicle, you talked a little bit about service opportunity. Do those businesses today have service? Or is it just reconditioning to sell for sale?

Oh, no, no. In the -- we did 1 million – CarSense, we didn't have -- all of this was on our watch. But CarSense did $1.5 million parts and service gross in the first 3 months. So you can look at it about $500,000 a month in parts and service gross. So it's a very meaningful part of that business. And that's one of the benefits we have when we have units in operation of an ongoing business versus bringing up a greenfield.

Are you able to leverage your new car stores within the service business or no? You just grow the used stores?

Mike, we want to keep a clear line of delineation in our retail. I just think we start -- we have variable compensation and service writers comp different than we do in the stand alone. Our salespeople are paid salaries plus a unit bonus. There's just many things which are good. The CRM systems, obviously, we get some benefit to that. There's no question from a purchasing perspective. Our cost of money, the ability to tie together the standalones with our preferred lenders, which would be the banks that we use versus our captives, that's all very positive. Our real estate and site people, as we go through to expand and do some of the tune-up that we would like to do, that's all a benefit to CarSense. But overall, I think that we're looking at keeping the 2 businesses, really keeping it separate.

Our next question is from David Whiston with Morningstar.

Just a couple small questions. Sonic today had said BMW has been pushing them to retail more rather than lease. So just curious if you're getting that same kind of pushback from them or any of your other OEM partners?

Well, I think that Mike Jackson, I think said, someone told me yesterday, that he felt that leasing was probably getting up to the penthouse. And then he might be right. I think that as these manufacturers look at their lease portfolios and what they have coming back, probably in the 50% to 55% in premium/luxury is probably the high watermark, and we'll see some pressure. But again, we see used car leasing. We see our loaners that come out of service as great lease vehicles. And I don't see that stopping. I think the business person that buys the premium/luxury for -- drives it for 3 years, is going to want to lease it. I don't think we'll change the appetite of the consumer, and these guys are going to have to be attentive to what the consumer wants.

Okay. And also, in the premium/luxury space, have you seen any kind of uptick in chatter from the customers coming to your showrooms, particularly the German 3, Lexus, Bentley, that they are more eager to buy an electric vehicle from one of those brands?

It's total cost of ownership. You've got a group of people who want to have EV. The hybrids are quite popular. And there's no question, once the cost of these vehicles get competitive with an internal combustion engine and/or there's political and state-mandated requirements for certain types of vehicles in cities, then you're going to see -- probably see a shift. Today, we're looking at the -- this CAFE requirement coming up, and you're going to have electric vehicles. And there's no question, I saw this morning that Mercedes is spending a lot more, couple billion euros more in the electrical vehicle area. I know that the Volkswagen group, because of the diesel mess, has now shifted gears and going to electric vehicles. And to me, that could be a great solution. But until we see a better opportunity there from a cost of ownership, I don't see it changing. You might even think about -- one of the things we got into is we had one model that we bought -- or that we were selling that was supported by a state EV support tax. When those cars come back, and you're trying to retail, if you don't have that support, you're really out of the marketplace on the used. So this is not just selling the first EV vehicle. What's the history of that vehicle as it comes down to the next 1 or 2 or 3 buyers? So I think we've got a lot to learn.

Okay, that's helpful. And just one more question that's on acquisitions. On the one hand, it sounds like you're certainly enthusiastic about the possibly of doing more deals. But also, it sounds like you don't want to really take on much more debt, if any. So can that annualized revenue, $1.2 billion, can that really get a lot higher this year?

I think that we've -- when we -- look, there's always that opportunistic -- something that comes up that we have to have, we'll figure it out. But we're going to look for the right ones that are contiguous, that we know we can get scale and get cost out and make it be accretive out of the box. But we're going to be very selective as we look going forward. We'll generate this year over $700 million of EBITDA, so our cash flow is strong.

We now have a follow-up from Mike Montani with Evercore ISI.

So just wanted to follow up because earlier today, Sonic was providing some incremental color about what they're seeing in the U.S. market and how it was developing. And they kind of mentioned that there was a bit of a pullback, I think, in incentives from some of the luxury names in Jan, Feb, March was a better month for them, and then maybe April had reverted back to some of the Jan-Feb trends. I guess the question that I had was around what you guys have been seeing in the marketplace and how it might compare and contrast to that experience.

Well, look, they're handling the same brands that we do in most cases. I think that we did see January, February -- you come out of December, they're gangbusters to close the year. And then you look at the -- you always got pull forwards in the last month of the quarter, so you'd expect more pressure. We still, at the end of March, there were great incentives to register cars and move cars into your loaner fleets, which is something that we do with the premium OEMs. And then those vehicles, when they come out, are very good used cars. But I think there's going to be a balance. We said it earlier, between leasing and when -- what people want to do on a conditional sale contract. But I think the market will drive this. And I think that we're trying to look at this as a 12-month business and not just 1 month. And I think they're looking at the same. There's been some management changes at BMW, which maybe that's going to change maybe their outlook on how they want it, both on the finance and the leadership side. So there might be some changes there. But at the end of the day, they're still in business, and they've got great products. And I would hope that as we go forward, we can continue at 1.45 to 1 used to new because it gives us a chance to take these vehicles that might be new, roll them through our loaner car fleet and then sell them or lease them at very attractive rates to the customers. So to me, I think you've got to be on both feet here to see what's going to be the market. But at the moment, I'm looking forward, as we said 17 million SAAR. We know the inventory's at 4 million. We know leasing is at an all-time high. These are all things that have been articulated by some of our peers, and I agree with those. But we have to look at our model, meaning, particularly PAG with our diversification, our international piece, certainly the truck side, PTL and the used car superstores. So I'm looking at all of those levers that I can pull from the standpoint of driving revenue, number one; driving bottom line and also parts and service. So I guess, we'll see at the end of the race who gets the trophy.

And just is there any color you can share on a regional basis, especially in terms of like the northeast relative to, say, Texas and the West Coast?

Well, when I look at our business and quite honestly, Florida was good for us. We're up in the Orlando market, and Palm Beach was good, northern California. Puerto Rico, by the way, has come back. When I look at -- in the Texas market, in Austin and Round Rock, the state capital, that seems to be pretty buoyant there. It's off a little bit, but not bad. And then Houston, obviously, in McAllen, we're a little bit more challenging as you get to McAllen by the border in our business. And D.C. Metro was a good market for us and Arizona during the quarter.

And gentlemen, we have no further questions. Please go ahead with any closing remarks.

No, that's fine. We'll see everybody next quarter. Thank you.

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.