Penske Automotive Group, Inc. (PAG) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group First Quarter 2012 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through May 2, 2012. Please refer to the company's press release dated March 28, 2012 for specific information about how to access the replay. An audio file of today's call will be available on the company's website under the Investor Relation tab at www.penskeautomotive.com. I would now like to introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, John. Good afternoon, everyone. A press release detailing Penske Automotive Group's first quarter results was issued this morning and is posted on the company's website. Joining me for today's call are Roger Penske, our Chairman; Dave Jones, our Chief Financial Officer; and J.D. Carlson, our Controller. Following today's call, I will be available by phone to address any additional questions that you may have. Before we begin, I would like to remind you that we may discus certain non-GAAP financial measures, such as EBITDA on our call today. We have reconciled EBITDA to the most directly comparable GAAP measures in our press release dated April 25, 2012. I refer you to that press release for additional information. We may also make forward-looking statements on this call, including statements regarding Penske Automotive Group’s future sales, potential and outlook. Our actual results may vary materially because of risks and uncertainties that are difficult to predict. These risks and uncertainties are addressed in our Form 10-K for the year ended December 31, 2011 and our other filings with the Securities and Exchange Commission. Please refer to those filings for additional information. At this time, I'd like to turn the call over to Roger Penske, who will take you through our first quarter results.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. Today, Penske Automotive reported another quarter of record profitability, marking our 11th consecutive period of quarter-over-quarter growth in income from continuing operations and earnings per share. For the first quarter, we reported double-digit increases in total retail units sold revenue, gross profit, operating income, net income and earnings per share. Income from continuing operations attributable to common shareholders increased 37% to $50 million and related earnings per share increased 41% to $0.55. Let’s take a look at the specifics of the first quarter. Revenues increased 17.9% to $3.2 billion. On a same-store basis, retail revenues increased 7.5%, in the U.S. we were up 8.5%, and internationally we were up 5.9%. Our premium luxury brands were up 6.6% on a same-store basis, our volume foreign brands were up 8.5%, and our domestic brands were up 18%. Excluding the effect of foreign exchange rates, total same-store retail revenue increased 8.4% versus the 8.5%. When you look at our revenue mix it was U.S. 61% and internationally 39%. Our brand mix was consistent with last year with premium luxury generating about 68% of our revenue, volume 428%, and the Big 3 at 4%. We retailed 43,099 units in the quarter, representing 11.5% increase compared to last year. And our average transaction prices on new units increased 2% and our average gross profit per unit increased 7.9%. The good news is our gross margin on new vehicles was at 8.4%, a 50 basis point improvement over the first quarter of last year. Looking at used vehicles, I’m pleased to report another quarter of double-digit increases both in units sold and revenue growth, total used units retail increased 26.6%. The continued strong performance in our used vehicles business is directly attributable to…

[Operator Instructions] And first we will go to the line of John Murphy with Bank of America Merrill Lynch.

Just a couple of questions here, first on the used vehicle business, given the strength there and getting to 0.89 to 1 across the board. I’m just curious what you are doing in that business to drive the revenue there, I mean obviously there is not a lot of certified pre-owns because there weren’t a lot of cars sold in the last 3 years, I was just curious, are you deep and lower in the spectrum, how is the focus really driving that business so strong?

Well, I think number one, if you looked at our inventory today only 55% of our inventory are trades and 45% are purchased vehicles, so we’ve really been on offense going out and purchasing vehicles. When you look at CarMax, they don’t have a lot of new vehicle franchises, so there are vehicles available. In the UK obviously, we have 21 buyers. I think the benefit that we have really is the internet, when you think about it, it not only helps us on the used basis from a standpoint the market is the entire world really on certain of our premium luxury brands and it gives us also the access to vehicles who people have to sell. So, to me the way we present our vehicles online, I think we’ve gotten some real rigor around what’s expected by our operators and I think that’s made a key part of our success. There’s no question that penskecars.com is driving more customers to our brand. And to me, when we look at our mobile site usage, it’s up 36% over 500,000 visits. So there is a number of levers that we are pulling. But again, I think that the interesting thing is that we are looking at lower cost to sell vehicles. So as a premium luxury player with 68% of our business typically on a world-wide basis, we’ve wholesaled a lot of those cars and I think today, we are saying these are really retailable at certain levels with the use of the Internet. And again as I said earlier that when you look at our inventory, we have 55%, which are trades and 45% purchases and it’s ironic when you look at overall inventory from the standpoint of what we are selling over 10,000 of our vehicles we sold in the past quarter we are under $15,000. So, to me those are all the things that make a difference.

Got you. And then just second on the gross profit for new vehicle unit, forgetting here about percentage, just looking at the dollars, you said it was up about 7.9% of GP per unit. I’m just curious that’s been running very strong really for the better part of 2011, I think that even in the end of 2010. I’m just curious do you think there is room, forget about percentage margins, but on a dollar margin basis, for that to continue to increase, as we see sales recovery, I’m just trying to get a handle of this $3,000 to $3,100 a range which we should be using going forward or could it potentially going higher?

Well, I think it’s going to be consistent. You said don’t talk about margin, but when I go back and look into the first quarter even 2010 we were at 8%, and were at 8.1% now. And to me the fact that in the premium luxury side, we don’t have the inter brand competition. When you think about it 300 Mercedes stores, about 300 BMWs, there is 200 Audi’s, so we don’t have that inter brand competition. Again, we have to get the margin because of what we offer the customer from a customer satisfaction perspective with loaner cars and some of the other things. So we certainly from our end are not expecting to reduce margins, we obviously can be driven because of the competitive set, but at this particular time both international and domestically we feel pretty good at the level where we are, I don’t see them rapidly going up. But again I think that we’ve had a nice change when you look at, we’re up almost 10% in the U.S. and the UK was up almost 2% just in the previous quarter, so that’s good strength.

Okay and then just lastly, as we look at the acquisitions that you’ve made, obviously the UK, I know as Germany and Italy have been a -- seem to have been the big focus recently, I am just curious if you are looking at the U.S. market, potentially the acquisition, landscape there was a little, maybe exhausted for you or this is just where the best opportunities were [indiscernible] sort of the relative attractiveness of the acquisitions in the U.S. versus acquisitions abroad and into this new market in Italy.

Well, I think our pipeline is good not only in the U.S, but internationally. Certainly, we’re seeing multiples being pretty consistent to where they were. In the past, the good stores obviously drive a higher multiple. What we are looking at really is an opportunistic approach for we have scale, we want to grow with brands in our markets where we can leverage in our SG&A. And we also are looking at what’s required from a CI perspective in a particular location based on the OEMs request. So we are in the market we will continue to look at an acquisition. I don’t think we’re weighted more to the U.S. or basically internationally. I think the Italy situation was one that really in partnership with BMW. They pointed us to that direction and we were able to purchase a very nice business in Monza, it did little or no good will with the first class facility and we have a management team there, we have a partner in that business of 30% partner who is experienced in the BMW business in Italy. So, a financial person who is part of that team worked for us here in the U.S. for almost 10 years. So we feel we got a good team and that’s going to be part of a further, I think involvement with us with BMW as Italy straightens out. The Northern part of Italy will be an opportunity for us as they do a reengineering. So to me we will get scale at that point.

Okay it’s fair to say that Italy JV is really at the -- sort of at the urging of BMW or the request of BMW?

Well, I wouldn’t say urging it was, they brought it to our attention and the fact that we had VM Motori an engine company and Cento, which is Northern Italy for almost 15-years and already tried diesel. So, we are familiar with that market. We were familiar with this particular operator and this just all came together and we think that from a BMW perspective, they thought that we would be great partner to energize at market form.

And next go to Rick Nelson with Stephens.

Wondering if we could drill down a little bit into same store sales new and used particularly as it relates to the U.S. and the UK trying to get some feel for how each of those markets performed.

Well, when you look at our same-store new unit we were up 2.8% overall. Obviously, when you break that out we were up 1.3% in the U.S. and up 6.4% internationally and our inventory was not optimal we ended up J3 obviously just coming in when you look at the strength of that right now, we’re still running at about 70% in Toyota, what we normally would run at a full rate and we’re just about flat on a Honda perspective. But as I looked at the market rolling into the first quarter and looking at our inventory levels at the end of December, we decided as a team that we were going to work on gross and not chaise stair-steps, so we didn’t have the right product in. I think the benefit of that was we produce the results of moving the margin on new cars from 7.9% to 8.5%. So, to me you also have to look at brands like BMW that showed a 17% increase in the market, when you look at retail alone they were down 4% that was consistent with us. We were down about 11% on Porsche, we just didn’t have the vehicles and yet when you look on a same-store basis, we were up 20% with Audi, up 20% with Mercedes. So, I think those are little choppy for us from the standpoint of the U.S. On the other hand, I think the brands performed well in the UK from a same-store perspective. So, when you look at the business overall, I think margin is most important, we had good growth and our revenue was up more than that because of the mix of the higher price vehicles. From a used car perspective, overall, we had a very, very good quarter on used cars and to me the most important thing there is, we were up 26%, and when you look at the U.S., we were up 23.3% and we were up 32% internationally. So, overall up 26%. And on a same-store basis U.S. was up 20.3% and international was up14% giving us an overall increase in same-store at 18.1%. And again I think on John’s question earlier, we talked about some of the offense we had to generate the used car business, and we see that is a real opportunity, everybody doesn’t have the same car, and I think the fact that we can bring a new customer into the company, we can get the internal gross profit from the reconditioning is powerful from the standpoint of gross margin, I think that drove some of our 57.1% to 57.7% during the quarter.

And the inventory situation we think things are normalizing for the Japan automakers, some of these auto product shortages maybe taking care of themselves. How do you see the environment developing, are we seeing big pickups and we understand there is some stair-steps out there and how do you see the volume targets for those stair-steps, do they seem reasonable?

I think when you look at incentives it’s based on some JD Power information for the quarter. They were down about 6% versus last year at about $2,650, $2,656 to be exact. They are stair-step but we look at these things rationally and we look at them and if we don’t think we can make them and we have to give all the margin away to get to the stair-step. We're trying to have some discipline in the sales process and to me a lot of that we see that in the volume, volume brands and they are not so much in the premium luxury, certainly there is, there is none of that going on in Audi and some of the other portions some of the prior places that we play big time and have big margins. So, we're going to watch it, I'm not a big fan of it personally, but I think on the domestic side Chrysler has been quite successful doing or growing their volume. So, I think each of the manufacturers are looking at it, at the end of the day is what's the average incentive, the good news is that incentives are down and I think that helps us from a retail perspective and obviously gives the OEM some profitability that they need in order to support the product involvement they have in investments for the future.

Finally, Roger, if I could ask you about April, also I have realized your inventory constrain in the U.S., there is some overall concern about the weather fully forward some sales, but any commentary about April would be helpful?

I felt we already talked about weather in January and February, and we are not talking about it in April. I think overall April has kicked off, it’s a tax month, I know. The guys in the UK say that it looks like business stops when everybody goes on for school out for a week. But, overall we feel good about the demand, again we talked about earlier there is a pent-up demand there is used cars at the best residuals we’ve seen in many, many years and financings available. So our traffic is good, we don't give guidance obviously for each particular month. But I would say I'm positive about -- because I enter into the next quarter.

And we'll go to James Albertine with Stifel, Nicolaus.

Just wanted to focus actually on the leverage that you showed this quarter and congratulations to you in that regard. On a 2.8% new car comp to show north of 200 basis points leverage SG&A as a percentage of gross profit dollar, is this a reset in a sense of where your comp rate is running? And as volumes ramp with some of the inventory constrains lessening throughout the year as one would expect, do you see more leverage or greater leverage potential there in the future?

Well, I mean our goal, I think I have said it before. And I have said it some of the different times I have been talking publicly -- I’m not just driving the company on SG&A, I’m driving on what it takes to grow the business. And I think we’ve got to focus on 2 ends. Without the addition of gross profit in the quarter, we wouldn’t have had that leverage. I think the good news is the scale that we continue to build through our acquisitions and we don’t have a lot of fixed costs going in gives us some leverage and certainly the gross profit benefits we had with only used going down 10 basis points and new going up 50 basis points and the increase in parts and service gave us the $62 million of gross profit. And I think probably today our total volume when you look at it was up 27% and when you look at what drops down out of that gross profit, I think we are generating probably about 32% to 33% benefit. So, to me when I looked at the additional $500 million of revenue and I said it generated $25 million of EBT that’s 5% on revenue, I mean that would be a tremendous number today we are obviously trying to get to 3%. So incrementally, we did get scale and leverage based on 2 things. Cost, I think we have looked at our cost, the internet has helped us, we’ve been flat on our marketing not that we’re doing less, but we are being more efficient. And I think the fact that we have the discipline on our comp to grow, so when we look at that, that’s our metric I look at every month and every location and we had about 60 basis points benefit during the quarter.

Great, that’s very helpful. And sort of a follow-up to one of the things you touched on there from an M&A perspective, given all your learnings in terms of how dealers now have to differentiate in different respects versus history right, the transparency is increasing, you have to differentiate in online and from various initiatives that perhaps your independent competitors aren’t as aware over keen on investing. And so from a new store productivity perspective, do you see the newer acquisitions coming on and being more productive at a faster rate earlier in limit maturation cycle?

Well, I would say the tools that we have today and quite honestly the acquisitions that we’re making currently when you look at Northern Ireland, I mean it was a group of businesses with a world-class management team. We bring in, some buying leverage again, we talk about back office scale that we have. So I mean that jumps right in and gives us a strong returns you look at Crevier really, I call it the number one BMW individual store in the country in Santa Ana. That benefit of consolidating that with the Volkswagen and Audi store that we bought a year ago and putting together, PDI center, which can give us the lowest cost, get ready and reconditioning. These are the things that we’re trying to do and we didn’t have the scale in the past. And I think when we look at going into these markets, we just don’t go individually into a state or into a city we want to kind of grow, we want to grow in the volume form, the premium luxury and obviously where we can in the domestic area and where we have scale. And I think we’ll continue to do that. And to me, I said earlier the pipeline, I think is there. We have some very interesting markets that we're looking at and obviously, I think you have to be creative and take some risks. And I think the Italy situation is one with 1.5 million yields of goodwill and less than 0.5 million yields and real estate cars, rent cars per year in a market where you are the exclusive dealer, to me it's well worthwhile when you have a management team. So we're going to do some of that and I think on the other hand we’re going to look for the best properties like where cities of Grange, and Crevier and certainly Agnew. So to me I think our peers are doing the same thing. The good news is that we're not running into each other, I think we all have contacts, we all have strength in certain markets and what we’re trying to do is grow on those strengths and take advantage of leverage.

And the next question from Matt Nemer with Wells Fargo Securities.

So a couple of questions, one on the used car business, what you're thinking in on retail first I know that you sort of rolled out regionally, and just kind of wondering how much more we have to go on some of the process changes in the used car business?

Well, I think that we have a metric that says what’s your wholesaling versus what’s your retailing and we're probably in the high 40s to 50s and we should be down in the 20s to 30s. So there is a pretty good number there that could be available to us and at the end of the day we just have to drive that. Probably most of the important thing unused is we have to get aggressive on buying just outstanding at the auctions. We’ve got to go out and we have to do a number of things and I think one of the areas, which a lot of people are using this equity calculators. So every time a service customer comes into the shop, we want to give them some ability to have us purchased our car, and that's being quite successful, we've talked about that across the country here over the last couple of months that not everyone is implemented that. It takes time to get the discipline across each other regions. But to me that’s a key area where we can look at the cars that are coming in are service driver, we know have the customers have equity and we can offer them a new car in some cases at the same payment or even less. So those are key especially when you get into some of the hot selling SUVs. And we’re not only just selling certified cars, we’re selling cars which are not certified, and we have a new kind of series of vehicles we sell in the UK called approved and to me CPO in the U.S. is only at 33%. So, we've got lot of levers to pull, but I think that used car business we’ve only tapped the surface.

Okay, great, that’s helpful. And as the new car business comes back, does that put pressure on used in terms of space for these lower value cars or the time of folks at GM and other folks in the store to get those deals done? Do get some of that back when the new car business comes back or do you think you can hold it?

I think that if you look at most of our locations, we're trying to have a sales force that are focusing on used and then the separate force focusing on new vehicles. And to me, we’re turning our inventory on new cars in 44 days. And with premium luxury, you have a real good look in the pipeline and quite honestly, I'm amazed at how much we have sold forward in the U.S. in our pipeline, where people are coming in and also ordering specific vehicles. And with the use of the Internet, I think the customer is much more savvy in what's available and in the telematics, which are available, and some of the things that we haven't thought of in the past are driving some of these orders. So, that gives us the ability at the end of some of these periods to deliver a number of vehicles. And to me, if you look at the UK, the X3, the Volk, and some of the 3 Series are even pre-sold into the third quarter. So, those are things that we're benefiting because of great new product.

Okay. And then as we look to bringing the Agnew revenue into our models, should we think of that profit margin for that business as being pretty similar to the rest of the business or is it a little below or a little above average?

I would say it's average, yes, I wouldn't say it’s low. We have some cost of capital there which it will be some drag on it, but overall that's the benefit of the low interest rates today. Our debt only went up $12 million non-floor plan debt. And we did Agnew acquisition during the quarter, and we opened up the 3 new dealerships. So to me, the cash generation we have certainly is key. When you look at our cash flow, from operations about $100 million, our CapEx was $26 million, when you look at our net acquisitions around $60 million, we paid $9 million of dividends, we did $8.5 million of stock repurchase, increased our borrowing about $12 million. So as to our increasing cash, it went up about $4 million. So to me it just shows you the strength of the model.

And it seems like there is more of that to come. I mean as you look out into the model over the next year or 2, there would seem to be a lot of excess cash flow generated. Are you inclined to pay down debt or buy back little more stock or get more aggressive on the dividend, how would you look to allocate that?

Well, when I look at capital allocation, I probably look at 4 things. First would be acquisitions. Continuing to manufacture the pipeline we have, obviously to location strategy was key. And what are the requirements from a CapEx perspective. Also, our capital expenditures it will be approximately $120 million we spent $26 million of that during the first quarter. We had continued to increase our dividend there. We went from $0.10 to a $0.11 in the quarter. The yield is about 1.6% and again we have got about $100 million I think left off for stock and debt buyback which we’ll look at. So to me we’re looking at all those areas we discussed with our Board on a quarterly basis, but at this point, I think we will just stay the course and will probably be tapping one of those 4 areas consistently.

And then just a housekeeping item, the PTL number was a lot higher than what we were expected this quarter I think typically in Q1, it’s running around flat and your equity and affiliate earnings was $4.4 million. So maybe you can just give us a little color on that and what should we are baking in for that business into the model for this year?

Well, PTL is off to a great start and I think you have a got a look at a couple of things when you look at general tonnage traveling by truck, dropped 5% year-over-year and just to make a data point all transportation of goods in the U.S. 80% of it’s by truck and that’s been that way for 10 year. So this isn’t, we just don’t have an upswing here that would not be normal. And from the overall perspective, we look at heavy duty trucks sales they are up almost 60%. They’re looking at their side to be 260,000 and we see a utilization of equipment over 80% and that drives a lot of rental business for us and many of our customers who didn’t want to extend leases or add to leases, really have reduced fleets are not coming back to us to rent truck. And that’s driving obviously our rental revenue is way up. We see our one-way, people are starting to move now I think there is some job availability. So one-way moves are up, and overall I think that when we look at the business there are some cyclicality that the business will see some benefits starting in the second quarter and at the end of the second quarter where the kids coming out of school, but overall used truck prices are high, rental is strong, our lease signings are up, and quite honestly, the business is certainly in great shape. And we are in the logistics business, a quarter of our overall $4 billion of revenue there is logistics and a big piece of that is tied to the automotive industry. So, we had all the inbound raw material for the Ford Motor Company through our logistics team and that business obviously is up with Ford’s success. So we're riding a little bit high on the success of the OEMs and on the other hand, I think that the scale of our business, 700 locations gives us a market in a network that really is, we think it's a premier market in our business. So first quarter is good, we are looking for a strong year as we go forward.

Our next question is from Brett Hoselton with KeyBanc.

Used vehicles really outperformed our expectations this quarter. My question is, as you look forward, do you anticipate being able to maintain that used to new ratio of 8.9 or excuse me, 89% or 0.89. What are your thoughts there?

We ought to get to 1 to 1. I mean, I don't think that we are through it all and that's a matter of supply, that has to be through trades and trades on trades and obviously through acquisition. So, with the Internet, as I said, our market is worldwide for everybody really, not just for us, and I think we're managing that and I think that discipline about how we market those vehicles on the Internet, the way we're setting up our reconditioning, I'd say wing-to-wing, how fast can we get the car on the lot from the time that we receive that car through trader purchase. So, I think there is still runway there. Certainly, when you look at the UK, they've run 1.1 to 1. So they're also I think going to look at their initiative. They haven't been selling vehicles that they’ve traded that aren't their branding and putting them on Internet. And I think that's going to become a real focus for us where they reduce their wholesale, they got a great system there, because it's a live auction, but we think that they can gain a customer with that vehicle, but maybe they're wholesaling on the auction which will drive some more use. So, to me, that’s a real opportunity.

Changing gears here, thinking about new vehicles, particularly in the UK, much better than the market overall. What were the key drivers there? Was it simply you performed kind of in line with the luxury and luxury outperformed in the market or did you specifically outperformed significantly?

Luxury outperformed the market. When you look at the market overall and go back 3 years there was -- luxury brands had about 18% of the market and then today they have almost 23% of the market. So we’ve riding a tie there, but again, when you look at it 96% of our revenue in the UK was premium luxury. So we are riding that crest of the wave there and I think it's important for people to realize that line of business in premium luxury continues to grow. But remember, the scale we have in that business, we have 11% or 12% of the business in Audi, we have 17 BMW stores, we have almost 25% of Porsche. So we have great scale in those market. And again, we don’t have the inter-brand competition. So it’s driving some good growth for us as we get unit sales.

And is there any reason for you to believe that outperformance is potentially going to change as you move over through next several quarters, next year or so?

Well, obviously, I look at out of my right eye on what’s happening in Europe, but it hadn’t affected us to-date. This was a registration quarter. I think that went strong for us, we beat our budget, we beat last year, and there is no question that from an overall standpoint the market was better in the UK than it was in the past. So to me when you looked at the first quarter of this year, the market itself was up 1% and when you look at the premium side, it was up 6% or 7%.

As you think about you inventory on the new vehicle side, do you consider yourself as having any particular inventory constraints, any meaningful inventory constraints whether it would be Toyota or Honda or maybe in your luxury brands, and I’m not necessarily referring to maybe specific models or anything like that, but just generally speaking?

Yes, I think we do, I mean we are -- we need more Audi inventory, there are certain models of Mercedes and BMW with Cyan and we just -- we could take every Cyan we could get. So to me, there is no question, but I think this model mix will get sorted out as we go through the year should be a lot better. When you look at the Q5 and you look at the Q7, the A4, and the new 3 Series BMW, I know the Vulcan in the UK has sold out: Land Rover is sold out probably for the next 6 months. So I’d rather have a shortage than an oversupply because what happens there when get margin pressure.

Our next question is from Ravi Shanker with Morgan Stanley.

This is Yejay in for Ravi. If we could focus a bit of servicing cars for a second, gross margins there I think were the highest in recent memory, if not ever, and I think during 4Q, you guys mentioned initiatives that were put in place to in-source services like wheel repairs, window tinting, et cetera, which will help in to drive margins. Can you talk a bit about how we should think about the margin trajectory going forward and how much dry powder there still is?

I think one of the things is as the mix changes from -- remember in the past, let's say, we were 50-50 warranty and customer labor, well obviously, our warranty labor rate is lower than our customer rate. So as we replace warranty with customer, it will be at a higher margin and when you look at our PDI, as is the volume fixed up, our reconditioning and also our pre-delivery inspection gives us some great margin. You look at Toyota alone. They've got a full circle program today, and you look at an oil change, typically we would sell for $19.95. Today, we're getting 8/10 of an hour for labor, let's say it's $80, plus we're getting the markup on the oil, and when you think about that, that's a real incentive for every new Toyota buyer. So those things get injected into the market, I think is key. And then we of course have full circle programs with some of the other manufacturers, but to me, I think it's more share of wallet. We are training our people. There's better training going on with our service riders. I think the consistency at the end of the day of selling prepaid maintenance contracts; they were up almost 13% in the quarter. Those are all things that are making a difference. I don't think there is a silver bullet, but Rapid Repair is one, this is the dents and wheels and small things that we do and when you have scale in our Auto Mall, like 101 or in Turnersville or in San Diego, we can set up a Rapid Repair and get the benefit of fixing a lot of this stuff in one day, which gives us the ability to get great margin and typically that's a science once you get into it. And to me, it's very key. When you look at our international business, I think we really learned about that, they call it chips and dents over there, both in the U.K. and Northern Ireland, these fellows do a great job and we're trying to replicate that over here.

Got it. If we could shift over for a second to region wholesale. I apologize if you already talked about this and I have missed it, but year-on-year I think it was up close to 50%, could you talk a little bit about what drove that?

We had one order that came through with one of the OEMs I think for 1,500 or 1,600 units, which we processed during the quarter, don't expect that in the future that we…

Really they're one of a kind, one of a kind really.

And we'll go to Scott Stember with Sidoti & Company.

I missed the breakout of the Parts and Service. Could you just give us one more time customer pay, warranty, and PDI and I guess the collusion as well?

When you look at on an overall basis, about 70% is customer pay. We already now has gone, we can believe it’s a 20% and the balance would be PDI and body shop.

Okay. And I think you said the body shop business was down in the quarter?

The body shop business was down for the quarter, probably when you look at it overall, it was down about 3%. In the quarter when you think about the U.S., I really can't comment on the UK, we don't have the number of shops over there. But typically in the Northeast, where we have these big shops, we didn’t have any the weather related issues, which drive a lot of that body shop business in the wintertime.

That was my question, you attributed most of the weather then.

I guess that's what I'm saying. I wish I knew for sure, but we certainly are continuing to invest in body shops. We think that we have some great relationship on a DPR direct repair shops where the insurance companies and that paying off, because we get the genuine parts business, we get the labor, and in many cases, we are able to buy some cars through the insurance companies.

All right. And on the G&A side, you had talked about some of the leverage that are helping you right now. I know over the last couple of quarters you talked about tackling a loaner car expense, could you talk about whether that's picking it up?

Well, I don't think I've been successful picking a loaner cars out. I guess the expectations today in order to get the CSI we need in the premium, luxury, we really got to keep the premium pack, there is some cost may might even go up, because in the past we use maybe rental cars to do that, where today the customers are expecting a BMW, loaner car when they have a BMW for service. But overall from an expense perspective, we really have tied our comp to growth to the key item, we are at about 60 basis points better when you look at. Total compensation of all mechanics, variable, fixed, versus gross profit, we had leverage of about 60 basis points, it’s really is key in. I think our pay plan are tied to gross and then we’re living with that and to me that if we can continue to dial it in across not only in domestically, but internationally, I think that we’ll have good control of our fixed cost. Obviously, when you look at our marketing cost, the traditional electronic has gone down. When I look at on a car basis, basically at a per unit basis we’re flat quarter-over-quarter.

Just basically looking out, we should not expect much in the way of reduction in loaner car expense?

I would say no, in fact as we grow, when you think about the acquisitions we’ve made, we made them in the premium luxury side where it’s absolutely necessary to provide them some of the volume for and we would not, we’d have a few. But in the premium luxury side people come in or even saying it portion, I want just to have a certain number of cars available to customers. So those are pretty salty cars when you give me, as loaner cars.

And with no additional questions in queue, I will turn it back to you, Mr. Penske.

All right everybody. Thanks for joining us today, we'll see you next quarter, all the best.

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