Penske Automotive Group, Inc. (PAG) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Second Quarter 2012 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately one hour after completion through August 7, 2012. Please refer to the company's press release dated July 10, 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 Relations tab at www.penskeautomotive.com. I would now like to introduce Mr. Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Communication. Please go ahead.

John, thank you. Good afternoon, everyone. Our press release detailing Penske Automotive Group's second quarter and 6 months results ended June 30, 2012, 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 will be discussing certain non-GAAP financial measures, such as EBITDA, on our call today. We have reconciled these items to the most directly comparable GAAP measures in our press release dated July 31, 2012. I refer you to that press release for additional information. We believe these non-GAAP financial measures will help in the understanding, the comparability of our reported results from period to period. Also we may make forward-looking statements on this call. Our actual results may vary because of risks and uncertainties, including external factors such as consumer confidence, consumer credit conditions, vehicle availability relating to OEM and supplier operational issues, interest rates fluctuations, changes in consumer spending, macro economic factors and other factors over which the company has no control. Any such forward-looking statement should be evaluated together with the information in our public filings including our Form 10-K. At this time, I'd like to turn the call over to Roger Penske, who will take you through our second quarter results.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us for our conference call today. I’m pleased to announce Penske Automotive reported record second quarter results this morning. For the quarter, income from continuing operations attributable to common shareholders increased 26% to $49.5 million and related earnings per share increased 31% to $0.55. Additionally, the first half of 2012 represents the best 6-month period for revenue, income, and continuing operations and earnings per share in the company history. Through the first 6 months, revenue increased 19% to $6.6 billion, income from continuing operations increased 32% to $100 million, and related earnings per share increased 34% to $1.10 per share. Based on the strengths of these results, our Board of Directors recently authorized a 9% increase in the cash dividend to $0.12 per share representing a 2% yield based on the closing market price of our stock yesterday. Further, I'm pleased that our strong cash flow and operating performance allowed us to redeem the remaining $63.3 million or 3.5% convertible notes outstanding. We completed the redemption in early July using our cash flow and availability under our U.S. credit facility; no shares were issued in the redemption. Let's now look at some of the specifics behind the second quarter results. Total retail units increased 21% to 84,346 units, and total revenue increased 19% to nearly $3.4 billion. On a same-store basis, retail revenues grew 9.4%, United States, they grew 14%, and internationally they grew 2%. Same-store retail revenues increased 6.1% on our premium luxury brands, 16% in volume foreign, and 19.9% in our domestics. Excluding the effect of foreign exchange rates, total same-store retail revenue increased 10.7% versus 9.4% we reported. Looking at our revenue mix for the second quarter pretty much consistent U.S. of 63%, and our international…

[Operator Instructions] And first from the line of John Murphy with Bank of America Merrill Lynch.

Just looking at the new vehicle margins, you fared a lot better than in some of your competition in the pressure there, wasn't that much, if you just for the shortage of supply last year. Just curious what you're seeing in your brands in general, and how you're holding those grosses so strong relative to competition, it seems to be a little bit more cutthroat recently?

I think you really have to look John, at our mix primarily when you look at 68% premium luxury. Our luxury vehicle margin, if you look at the second quarter of ‘11 versus the second quarter of 2012, only went down 30 basis points from 8.5% to 8.2%. On volume foreign, because we had obviously the J3 inventory problem a year ago, and now we have plenty of supply. We're down -- we're down 70 basis points, and in our domestic we were down 80 basis points. So I think the mix makes the big difference. We see probably a lot more discipline at least we do in our markets we’re in both domestically and internationally with the premium luxury side. So I think that would play a big part of our strong new car margin.

And then a second question on new vehicles as well, I mean the availability of credit seems to be ramping up pretty dramatically, just curious what you're seeing in your dealerships just as far as financing and in particular, because leasing play such a big part, are you seeing some real attractive leases out there getting people into these luxury cars?

Well, there's a lot of credit available right now, I think you’ve heard that from some of our peers. One dynamic that's taking place in our business, we’ve been pretty much conscious of being vertically integrated with our captive finance sources. But we've seen the banks very aggressive over the last probably I would say 6 months in trying to penetrate the market. We've seen in our new penetration has dropped from about 85% to end of the 70% from a penetration from the captives and we've seen the same on used obviously from a leasing perspective. I think everybody in the business is taking advantage of the special rates we get on leases. So there's a lot of credit availability. I think aggressive rates along with the incentives, we’re not really in the subprime business, which drives a little bit more of reserves, because in the premium luxury side, we just don't see that customer. You might see it more than on the domestic side. But overall, there’s plenty of credit availability, the captives are open for business and the good news is that we’re seeing some of the captives now who really had shied away from financing used vehicles of other makes are now being more aggressive. And then obviously, we want that as we look at our retail first step initiatives where we’re trying to retail all makes of vehicles from each brand.

That's helpful. And then on parts and service, the same-store sales were a little bit on the light side, I’m curious what’s going on there particularly juxtaposed to the higher gross margin, there 58.6%, which I think is an all-time record. just trying to understand the weakness in the revenue, but then really to strengthen the margin if that’s really sustainable going forward?

John, I think you got to break out the international and the U.S. piece. Our customer pay was up almost 4% in the U.S. Now, warranty was down 1%, but when you look at the U.K., they’re off 1% in customer pay, and they were down almost 7.5% in warranties. So to me that was probably the difference of our growth. And I think, we don’t have today the benefit of Lexus and Toyota warranties that we had over the past. So that's driving some of the warranty reduction. Again, a big pickup was in our PDI, pre-delivery inspection and our reconditioning, because it was up 55% year-over-year. So that drove probably some of the 130 basis points increase in the margin.

And then lastly, just equity income was particularly strong. Is there anything going on at PTL, I mean it seems like that market is a little bit challenged, but you seem to be benefiting from folks that are renting trucks as opposed to buying them. I’m just curious if you expect that to continue into the third and fourth quarter, and what we should think about for the second half of the year?

Well, we had a great quarter, a peak tail obviously. I talked about it earlier, we hedged -- our lease sales have been increasing nicely year-over-year. Our rental product line is very strong because people are just not going out buying more trucks because their business is up. So we’re getting the benefit of that right now based on our readily utilization, you can see that both on the tractors, and also on the mid-range trucks. And our used truck market is very strong. We’re seeing some benefits, and we see that carrying on through the balance of the year. The third quarter is always our strongest because of the strong one-way business that we’d have. But our logistics business have lots of quotations out on that, because obviously we’re related to automotive and the automotive sector is strong. So you might also note, people are not aware of it that we placed almost $4 billion of bonds in the market over the last probably 8 weeks for PTL to finance our trucks. So we’ve been formerly being financed by GE Capital, and got an investment grade there, and that’s kind of proved to be very strategic for us as we go forward.

Our next question is from Rick Nelson with Stephens.

Roger. Can you comment on July sales, what you’re seeing in the U.S. and U.K. and are the Olympics having any impact on sales?

Well, I was at the Olympics, for a couple of days, I saw a lot of BMWs, a lot than I can assure you that those will be good used cars for us when the Olympics are over. I think that internationally, July is start of a quarter, which is a registration quarter for the U.K. So we see that quarter along with Q1 being strong. So I think there is a -- always the chance that there will be some disruption because of the Olympics, but most of our storage are outside the M25 so it should give us a good year. I don't think at this particular time that we see changing different from the standpoint of July going forward. We report -- OEMs report tomorrow, I haven’t seen those numbers, but I think that we're in line with what our budgets and business plans areas we go into the quarter.

And I wondering how to tell [ph] if you could comment on the acquisition pipeline and how acquisitions rank in terms of priority with, the alternatives for your free cash and -- or the acquisition opportunity is more so in the U.S. or international.

Well, number one, when you look at capital allocation I have to say, we have certainly our CapEx what should be $115 million this year, our depreciation’s, I think is around $60 million. So that’s our first priority based on requirements from the OEMs. And our dividends, we talked about raising our dividends and having a 2% return on those. At the end of the day, as we go forward, acquisitions had fall probably in third place and we’re saying a lot of activity from the standpoint of opportunities. But I would say this, as everyone else, we’re looking at them strategically. The brand, the location, they are in a market, where we already have scaled or it is to open up a new market for us is attractive. I would see the pricing significantly lower in the international markets than we do here in the U.S. for good properties. We like to be in negotiations, where we’ve negotiate directly. We’re the seller it’s not an option and certainly as we’d same there some opportunities international. We just made of an acquisition in Italy, obviously people say why do you go to Italy, but there is a real opportunity there with BMW. They want to reorganize that market, they have given us an opportunity to get in, very little goodwill if any, and very little capital expenditures. So we'll see those grow as we did with Sytner as we go forward. So I would say we're open for business and we're not shutting down on acquisitions.

Okay. And finally, if I could ask you about inventory, up-to-date supply is 56 days. It sounds like Japan, Toyota and Honda have normalized, we’re hearing about some tight supply with the luxury makers of -- if you could comment there on what you…

Well, I would say that we’re getting back to the normal inventory rates with Honda and Toyota, no question. We’ve seen it -- I think we’ll see it with our numbers as they come out from the OEMs in a next couple of days. And our inventory is certainly in good shape. Our issue right now is in the premium luxury side. Audi is very tight with vehicles, our BMW inventory probably is less than 30 days, the 3 Series, the xDrive cars, are hard to get. Q5’s with Audi, Q7’s obviously the ML we’re down at Washington trying to compete down there with 4 or 5 MLs in stock. So I think that as we see the inventory, I looked at some BMW numbers that if you look at July's production for the U.S., I think it’s going to be about 17,000 and it's going to ramp up to 34,000 when we get to December. So there's going to be plenty of product and I know there will be a lot of action with leasing incentives and other things. So that should bode well for the premium luxury sector at least as we look at the last 6 months.

And next we go to Ravi Shanker with Morgan Stanley.

This is Yejay Ying in for Ravi. It seems like your floor plan interest expense has stepped up a bit recently in 1Q and 2Q. Could you talk a little bit about what you’re seeing in terms of interest rate environment or is that purely because your inventory has been normalizing?

I think one point that I didn’t make obviously on the remarks I made earlier. We did a forward swap on $400 million of floorplan back, early last year, counting on LIBOR to move up and that’s costing us about us about $600,000 a month almost $1.6 million for the quarter. So that’s driving our interest costs up. So that's forward swap we felt or the LIBOR would go up, obviously we were wrong. but we want to be safe and secure.

Got it, that's helpful. And could we also dig into your used margins a bit more. It was a bit lower than what we were expecting, what are you seeing there in terms of pricing, acquisition and cost demand?

Well, I think a couple of things here on the used car side for us. Obviously, when you look at the luxury site, we've been running about 7.4% on margin and we’re only down 30 basis points. So I would say we’re in pretty good shape there based on where we are, remember when you get to the volume foreign, but we really had an erosion of our margin and to me, it was down about 170 basis points. And that's because we were selling used cars last year, pretty good margins in the J3 categories. Now with new cars available we’re bumping up against payments and things where people could buy a new car. So I think that had some indication. Remember when you look at our used car margins, all of our used cars internationally, at least in the U.K. have a 20% VAT. So if we make $2,000 on a car, we got to pay 20% to the government, so we only make $1,600. So that also drives our margin down in comparison to a U.S. number.

Our next question is from Matt Nemer with Wells Fargo.

It's Josh [ph] on for Matt. We’d really appreciate an update on PenskeCars. Any color of penskecars.com, any color that you can give us on how e-commerce shopping is trending, if you are seeing anything unique going on there?

There is no question that there’s been a shift to the Internet. We are really religiously trying to populate all of our websites with our inventories. And I think with pictures and trying to drive that traffic, there is no question that from in the second quarter from penskecars.com, probably 74% of the visitors were new and about 26% were returning. And there is no question, when we look at Internet sales, we think they’re about 30% of our retails and pretty much consistent with the first quarter. But it’s about a 20% increase over last year. We’ve got our partner programs, where we’re including people like Verizon and Shell and Cintas, AAA and SKF along with other people like Cooper-Standard, these are partner programs that we can utilize in our websites for access for inventory and sales. That’s working out well. And certainly the visibility on dealership websites, I don’t think I’m alone or PAG is alone. We’re doing a lot of work to reengineer those to making them more sticky, and certainly there is no question that that’s the wave of the future and being able to use your phone and lot of things that will go forward with the technology. The good news is we’ve got a strong IT team, which is integrating the country for us with all of these capabilities. So I feel good about that -- obviously all of us know that are in the business the OEM websites today probably drive along with the dealership-specific websites drive the majority of the traffic so, in a way might believe that penskecars.com is a home run, it's very valuable, but I think we got to realize that the OEMs are the probably one of the key places people go and that aggregated all that stuff of these other players have to deal with.

Sticking with the technology theme, is there any other advancement maybe with iPads in the service bays or in sales that you’re looking at or that you’re trying.

Well I think there is many different options out there, I don't think we’ve standardize on any, we’ve trying a different things in different markets, we have the ability to identify cars because the chips on mirrors as they come in for the customers and service. One of the things that we’re looking at probably, in our most, most important would be that -- our call centers, we’ve had such good success and service, where we aggregate, say our 17 BMW stores, in the U.K., into a one call center for service, and we can manage the inbound and outbound calls much better we can upsell, and that technology now has been driver, you’re going to look at doing a couple of pilots for 2 of the premium brands in the U.S, which we think will be key. So we're looking at more scale or we can take the service side of the business and to me then what we will do is utilize the tools that are available. Obviously BMW at North Scottsdale are using tablets and service, so they also are in Texas, so we're doing some testing on those, we’ve not rolled it out across the country to be honest with you.

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

I want to get your view in light of some of the increased production, and new models that are coming in the back half of this year as an example of the xDrive, BMW, I would imagine pricing at a premium to the rear-wheel drive offerings that would come out earlier this year. So just want to get your view on where you think sort of ASPs are going in the back half?

It’s hard for me to, see I think that there are so many new models coming out, and when you talk about xDrive and you got to look at the different parts of country. But what we don't want to do as vehicles that have content in them that they're not utilizing. We do not want to have 4 wheel drives in Phoenix, unless there is a jeep going up in the mountain. So I think that the products that are coming, I think are very competitive now and I think that we’re all going to be fighting for market share. We’ve got a real battle going on with Lexus, BMW, Mercedes and Audi. And I think we're going to be a benefactor of that, because we’re the downstream partner. We are the ones that have to deliver to the customer and the used cars we are all looking for used cars, so we can be very aggressive in on the trades today, which obviously will be key. So to me with the new Civic, new Accord coming and the X1 from BMW, that X1 I’ve saw that over in the U.K. when I was over there for the Olympics, and it's a great vehicle. And I think that's going to be very, very competitive in the market.

I appreciate that, it's very helpful. And then wanted to touch on looking back now for the second quarter, any sort of regional breakdowns that you had on performance maybe the Northeast was lag relative to some other regions, but just some thoughts there as well. And then as a follow-up your expectations around consumer demand dynamics particularly considering the elections coming and some of your competitors have commented on the fiscal cliff.

Well, when I look at the market from a overall, the West was up about 20%, say 21%, Central was up 19%, and the East was up 15%. So excuse me, 13% and U.K. obviously was up almost 7%. So overall we were pretty much stable across the country. You got to look at the brands and look at the locations. So I don’t see anything changing, that’s pretty much consistent what we’ve seen in California, obviously it’s gotten a lot better. Florida is gotten better. There is no question about it. Probably, the areas where we have 4 nameplates, in Michigan are much tougher because the domestics have gotten a lot stronger. I’d say that was the one area that we saw things go down. On the other hand, in Indianapolis, where there’d been a high level of domestics there and penetrations we're up significantly. So there’s a story probably in every market. As far as our fiscal cliff and what happens after the election, I think the key thing that we should look at is we need to look at this third quarter, and I think that we’re going to have with the new product offerings, with still this pent-up demand and the low, low interest rates, this is the time for people to buy cars. And I don’t think, from a premium luxury standpoint that we’re going to see much change. I guess after the election, I really can’t tell you what’s going to happen. We don’t what the tax rate is -- if they’re going to change the taxes, there will be no tax changes that will be one thing. But we get into a lot of tax changes from the standpoint of Washington. We could see some impact. But at this particular time, we’re going to do business as usual. I think 14 million to 14.5 million units is a good number. And I think I’m looking really at the retail side and that should be up between 10% and 15% over last year, and we had an increase last year. So when you take the 2 together in our retail market, probably it’s going to be up almost 25% over the last couple of years. So I would be as I looked into 2013, I have to take the election and what’s going to happen in Washington to make any further predictions obviously.

Our next question is from Brett Hoselton with KeyBanc.

New vehicle gross profit per unit down about $100 sequentially quarter-over-quarter and about $200 year-over-year. And I’m wondering, is that primarily attributable to maybe some of the foreign brands, getting a little bit more availability there? And then more importantly, as we think about the outlook into the back half of the year, typically we see some seasonally stronger gross profit particularly in the fourth quarter. I’m wondering if you see any change in that trend through the remainder of this year?

Well, again, I go back to mix. If you remember, I think you got to look at us with 68%, -- 67%, 68% premium luxury 28% in volume foreign. And when you look at our premium luxury sequentially we’re only down $99 year-over-year and we were really short of vehicles in Audi, in Porsche and BMW. Our volume foreign was down only $76, and domestic was down $32. so overall our change was only $95, which I think based on what I’ve heard around the industry and around the U.S., I think we’ve managed grosses pretty well. We’re not in a volume -- trying to be the volume leaders, we’re trying to get the maximum dollars we can out of each transaction, and I think that’s good and on the used side we’re really only down $71 sequentially. so we didn’t have a cliff, we didn’t fall off a cliff here during the quarter.

Okay. And then as you think about the used vehicle side, how do you think the move to more value used vehicles might impact your gross profit per unit, not just the margins, but the gross profit per unit. Do you think that, you're going to put some pressure on the gross profit or do you think you’re going to be able to continue to sustain at the current level?

Well, as you know, we've moved to a retail first mentality, so we’re selling vehicles less than $10,000 probably for the quarter, we sell almost 4,000 vehicles below $10,000 where these been wholesale previously, I know that in the U.K., we're looking at it, we have a continual Internet auction going on. And I said to our guys, if there are opportunity take those vehicles and retail them at location. So there is some move in that direction, but overall obviously the big mix is greater than $15,000. Our cost of sale is higher than our peers, because of our luxury mix, but I don't see the gross is really much different in each one of the categories obviously as we get more new car programs, and especially in the J3 category, you’re going to see us bumping up against some of the new car leases and payments, and quite honestly people talk about certified kind of carefully, because as you certify a car you're probably in a luxury side, you could be putting $1,500 and $3,000 with the reconditioning you tend to cap your opportunity for gross margin, because of the cost of sales goes up. Now we get some benefit for that from a used perspective in reconditioning in the parts and service, but I would say there's going to be a balance there what you certify and what you sell as you get into this market with more supply.

And then part of the certified, it appears as though, it's kind of a recent inflection point, I mean sequentially we saw a nice uptick there in the margin side, year-over-year we're seeing an uptick on the margin side, I mean do you see this as being kind of at that inflection point with parts and service margins where they are or either at least going to be stable and might actually see some improvement?

Well, I think that we're getting we have process. We have facilities, and I think we’ve got people, which are making the difference, because we've made the investments in these shops. In our drive-thrus and we had a lot of customers coming in, I think that we’re doing a much better job or taking the time to upsell. I think the opportunity to have these call centers like we’ve seen it in our reservations and truck leasing by having a call center, not a coin-operated when we have some third-party doing it, where you have people that understand the brand, understand the product. We can upsell and take a better chance with our customer, and that’s going to give us the chance to have more margin. And I think one of the things we’ve done is rapid repair, we call it. We’re doing wheel repair. If you went to the U.K. and looked at the stores there, we’ve got dentless and rapid return almost at every location. We’re doing the same thing in a more consolidated way in the U.S., which is really getting us some benefits. And obviously tire and wheel is big on the luxury cars with aluminum wheel. So we’re in a position to have more share of wallet, what I call it share of wallet really where people would go to the outside for that tire business, it’s a big business for us now. That’s again having the environment, and people pull into a first class drive-thru where you can set the person down the customer and talk about his vehicle, and to me that’s critical. And doing at efficiently and that to me will drive it. Also in the premium luxury and we’re offering [indiscernible] customers, which is key and some stores we have 350 loaners that’s an expense, but on the other hand, I think it pays off in customer loyalty.

And next we’ll go to Simeon Gutman with Credit Suisse.

Roger, recently we’ve heard or we’ve seen some cracks hit some high-end retail or luxury goods sellers, cars sales have hung in but it’s been more about the past 4 to 6 weeks. I’m curious if you have any comments regarding the health of the customer’s push in the luxury end, anything anecdotal with traffic, dealerships or closing rates?

Well, our closing rates have been consistent. And I guess, you’re talking about coach today, I saw that. I think that the driving factors today, I’ve said it, I’ve heard our peers say it we’ve got an older car park, we’ve got high residuals, and we’ve got low-cost financing. And people see that and also from a fuel economy standpoint, today people might go to diesels, because 25% better fuel economy to drive down total cost of ownership. All of these things are playing a factor. But at the moment, I see a good market in a premium luxury side. I think it’s a different market, I don’t think that those are casual things when you’re going into coach and maybe different. But I think today, the vehicle with transportation and probably is a different mindset, we see people making their car payments, not making some of their other payments. So to me, I think we’re in the right spot.

Yes. That makes sense, I don't know if you said anything about this in the prepared remarks or if it’s even a big issue, but U.K. sales in light of the Olympics what happens, do you think, you get a pause or it keeps going, and then you get some pent-up demand period, and then we’d see the sales come through in the future quarter?

Well, just remember, Q3 is a registration quarter. So it’s driven obviously the third month in the quarter is always very strong, and we’re starting out in the month of July. But most of our business is outside the M25 and to me, August is always a smaller month anyhow as we go forward, but September is the one where all the action comes in all the registration. So I’d see it to be consistent and one of the good things I feel is we’ll have, there’ll be a lot of BMW, used BMWs that have been used during either 4,000 vehicles that that were put into service by BMW there. The car of the Olympics which is been terrific, great visibility for the brand, and we'll have an opportunity for dealers there to buy those hopefully.

And what about as far as trading goes, are you seeing trade-ins stable or they increasing and if they’re increasing, I mean does that mean the supply of desired vehicles starts to get better?

Well, our used car business is up year-over-year and I would say we buy obviously from the outside but, I’d say it's pretty much consistent, but I couldn’t give you a specific number, I think Tony tells me that 75% of our June business were trade-ins, so 25% purchase would be the mix.

Okay. And then I apologize, if I missed this, but on F&I, I think the year-over-year looks pretty good, sequentially it ticked down a little, and I’m curious about what's behind that.

If you look at in our F&I, one of the areas that we have is we bought the Agnew Group in U.K. which is in Belfast. They didn’t have the finance programs that we had at Sytner. And so we're down there about $700 per vehicle versus about $1,200 so that’s dragging us down a little bit, but as we put some of these programs in place, that we have -- I think we’ll be in good shape. On a same-store basis, I think we were pretty much flatter, maybe up $12. Something like that.

Our next question from Patrick Archambault with Goldman Sachs.

Wanted to follow up on the M&A question, you did, kind of give views on Europe there, one other thing I’d like to hear about is, just the environment in the U.S. There have been a few folks on the dealer side, who have said that, it's been harder to consummate transactions more recently, because multiples have gone up along with the expectations for auto sales generally and just wanted your thoughts on that?

Well, I would say this, we’re open for business. We’ve made acquisitions this year. We will continue I’m sure. The multiples are in line. The ones we’re looking at as I said earlier, we’re trying not to get into auctions where we get a negotiated purchase where we have someone that wants to do business with us for particular reason or it’s a market we want. I think every deal is different. And we have grown the business from a $1.2 billion, to almost $13 billion through acquisitions in same-store growth. So to me there’s no reason to stop now.

Okay, understood. In a changing gears little bit, on SG&A another good leverage quarter below 80%. Can you remind us just where for our modeling purposes where you’ve think this could go presuming that start normalizes that level certainly above where we're now?

Well, I guess you have to look at our SG&A a little bit different, because we have a lot of sale lease backs as we grew, we’ve got a number of sale lease. It’s hard for me to predict here. I probably think if you looked at us there without real estate, we’d be around between 71% and 72% would be a number that I can give you, if you took the real estate costs out or rent costs.

Well, I guess let me ask the question in another way. I guess you’ve invested a decent amount in some good infrastructure, you have the campus system that I’m assuming you could continue to leverage pretty well as sales recovers. So I guess I’m just trying to get a sense of how much additional margin you have on a year-on-year basis improvement is there last as sales get better from here?

Well, I think the CapEx is embedded in the depreciation, because of on GAAP it's consistent. so from an SG&A perspective, it’s compensation. And basically we’re trying to drive our comp plans with our managers, and with our salespeople, and technicians based on gross profit. So if we continue to monitor that as we grow our business and sales grow, our overall margin was at 15.2%. So we have a certain piece of that will be SG&A from the standpoint of comp. Other things you look at obviously as we get into some of the support we have to our store service customer with loaner cars. There’s more and more of the OEMs warning us to give more to the customer. So we do have some pressure on the other side, what the customer expectations are. we could have someone coming in once an oil change and leave his car and we give him a card to use for a day. There’s really no margin or gain on that. So we’ve got to balance that with customer satisfaction. So to me, the SG&A is a number that’s going to move, and our goal is to get scale. One thing we are doing, we have consolidated offices. Most of our market like Phoenix is $1 billion one office. We think that’s an opportunity as we go into the U.K. They’ve had single offices primarily in their model. We’re going to tend to bring that into a capability where we can scale those into one large office in many markets or maybe even do it by brand. So those are all our initiatives that we have in the future. And that’s going to help drive down SG&A. When you look at the potential call centers that we would have, we talked about that earlier that we’re going to have 1 or 2 of those in the test market where we could take one brand, and then take all the inbound service calls and handle the Internet. So to me, it’s been successful in the U.K. But again, I think we’re about making short-term, which you’re really looking long term.

Our next question is from Brian Sponheimer with Gabelli & Company.

So you’ve got about 40 dealerships now in the German market and there is an article out today discussing self-registrations and some potential market dilution there, have you seen any of that and…?

Well, there is a dynamic, let me say this. When you look at the U.K., you look at the German market, the Italian market, a little bit different. They have what they call pre-registered vehicles, they will come to an end of a quarter and they might register 1,000 vehicles. And then these then are sold as demonstrators and used cars, and these are vehicles that are quite attractive to the retailer as we get those at somewhat of a discount. It’s a way to move vehicle, so not putting heavy incentives on them and basic they move them from new into used and it’s a value proposition for the retailer, and that’s been going on for years. I mean there is all brands in those markets and have that activity going on typically.

So this isn’t something where at some point that’s musical chairs, when the music stops and there is a -- I would guess a lack of supply of inventory or some sort of price dynamic that would change in the marketplace?

I would tell you, I would think, no in Germany, as I do there is plenty of cars available in Germany, I doubt if those guys will stop that process. I think that’s one thing I like about the U.S. market, there is a lot more discipline. We might have incentives. But you don’t see the preregistration of vehicles. We sell a demonstrator, we typically has a few miles and it’s always a new vehicle. But they are vehicles for people to be targets. We have different, all in Europe, and in Continent and in U.K., the uncertain sales targets as a retailer, and then to make those targets are sometimes you take new vehicles and pre-reg them you’ll be able to meet your targets, which then give you these vehicles at bigger discounts, and it's something if the OEM's have been doing for a long time, I don't think, it's anything it's not consistent with the markets.

Okay, that's very helpful. And if I could, just talk one more, just how are you thinking about use of cash going forward, you been through a lot of facility renovations over the course of last 5 years, you’ve got the convertible in your rear-view, and you’re looking about $115 million in CapEx this year, which could potentially go down over the next couple of years. Given this and given where that the share price in given more that the share price to us, and should we be thinking about share repurchases of something that you may get -- give more aggressive about?

Well, I think, I said initially that CapEx obviously should be in that $100 million range going forward, I think the big expenses we feel are pretty much behind us, we have a few international years of SheffieldBMW in the U.K., which will be a big one. But I think it's going to be pretty much in line with where we are this year may be slightly lower. I think obviously, we're looking at dividends, which we raised our dividend, we have $100 million of authority from the Board both on debt and stock buyback. We basically kept our shares flat, we’ve had people who had restricted shares and gone in the market to sell those, so we're trying to keep the share count pretty much stable. I would think that would be our mode here for the foreseeable future, because we've got CapEx we've got our dividends, we got our acquisitions and the fourth bucket obviously would be buyback.

And we'll go to Tom Judson with Husic Capital.

Roger. Could you talk a bit more about the leasing? How is that going, I mean with rates so low, it should be pretty exciting area?

You’re talking about cars or trucks?

Cars.

Well, obviously today, we’re in the premium luxury side. and probably, I’m going to give you a number, I think it’s pretty much on target 50% to 55% of our business in that Audi, BMW, Mercedes-Benz and Lexus probably are in that range, that's good for us, you get a customer comes in 36 months. It doesn’t give us the opportunity to sell a lot of extended-service contracts, obviously. So that's one downside, but gives us good used cars coming out, and they’re very proactive in that. And to me, where you don’t have the OEM active and maybe some of the super luxury we have the banks. So leasing to me has been a good product and they're strong residuals so, their affordability is good in many cases, your credit profile is proper, you can get in with really no down payment, and that’s pretty attractive to a lot of people.

What kind of rates are out there on the leases?

These are monthly -- these will be monthly rates, Tom, basically rates that are set by the OEMs, it depends by model, I mean I don’t have. And it’s not always $300 a month, it would depending on model and mix and also equipment.

And Mr. Penske, we have no further questions in queue.

Thanks everybody for being on. We had a good quarter. We’re looking forward to the balance of the year. Thanks for the support.

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