Group 1 Automotive's (GPI) CEO Earl Hesterberg on Q3 2016 Results - Earnings Call Transcript

| About: Group 1 (GPI)

Group 1 Automotive Inc. (NYSE:GPI)

Q3 2016 Earnings Conference Call

October 20, 2016 09:00 AM ET

Executives

Peter DeLongchamps - V P of Manufacturer Relations, Financial Services and Public Affairs

Earl Hesterberg - President, Chief Executive Officer and Director

John Rickel - Senior Vice President and Chief Financial Officer

Analysts

John Murphy - Bank of America, Merrill Lynch

David Tamberrino - Goldman Sachs

Michael Montani - Evercore ISI

David Lim - Wells Fargo

Bill Armstrong - C.L. King & Associates

James Albertine - Consumer Edge Research

Rick Nelson - Stephens

Operator

Good morning, ladies and gentlemen. Welcome to Group 1 Automotive's 2016 Third Quarter Financial Results Conference Call. Please be advised that this call is being recorded.

I'd now like to turn the conference call over to Mr. Pete DeLongchamps, Group 1's Vice President of Manufacturer Relations, Financial Services and Public Affairs. Please go ahead, Mr. DeLongchamps.

Peter DeLongchamps

Thank you, Jamie, and good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related slide presentation that include reconciliations related to the adjusted results we will refer to on this call for comparison purposes have been posted to the Group 1 website.

Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the call, statements made by management of Group 1 are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to, risks associated with pricing, volume and the conditions of markets. Those and other risks are described in the company's filings with the Securities and Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the company.

In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website.

Participating with me today are Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; and Lance Parker, our Vice President and Corporate Controller. Please note that all comparisons in the prepared remarks are to the same prior periods, unless otherwise stated.

I'd now like to hand the call over to Earl.

Earl Hesterberg

Thank you, Pete, and good morning, everyone. I'm pleased to report that Group 1 earned $42 million of adjusted net income for the third quarter. This equates to record third quarter adjusted EPS of $1.96 per diluted share, an increase of 2.6% over last year, despite some economic and political headwinds in many of our key markets. For the quarter, total revenue increased approximately $23 million, or 1%, to a third quarter record of over $2.8 billion. On a constant currency basis, revenue grew over 3% for the quarter.

Turning to our business segments, during the quarter we retailed over 45,000 new vehicles. Total consolidated new vehicle revenues increased 1.6% on a constant currency basis as the average new vehicle selling price increase of 5% was partially offset by 3% fewer unit sales.

As I’ve indicated throughout 2016, the volume weakness was same throughout the oil-dependent markets in the United States and in Brazil. UK market growth has also slowed due to economic uncertainty regarding Brexit. Additionally, the British pound has weakened 15% versus the dollar in the past 12 months creating a currency translation challenge.

Consolidated new vehicle gross profit was up nearly 4% on a constant currency basis, as gross profit per unit increased over 7%.

U.S. new vehicle margins were up for the second consecutive quarter with an increase of nearly 10% as I will cover further in a moment.

Our new unit sale geographic mix was 76% U.S., 19% UK, and 5% Brazil. Our new vehicle brand mix was led by Toyota/Lexus sales, which accounted for 25% of our new vehicle unit sales. BMW/MINI, Ford, VW, Audi, Porsche and Honda/Acura each represented at least 10% of our new vehicle unit sales and General Motors and Nissan accounted for roughly 7% of unit sales.

We continue to make progress during the quarter on reducing our above average U.S. new vehicle inventory levels. Our U.S. new vehicle inventory stood at 26,900 units on September 30th, the 2,700 unit or 10% decrease from June 30th on a same store basis. This equates to a supply of 74 days, down from 83 days at the end of June.

During the quarter, we reach out over 33,000 used retail units. Total consolidate used vehicle retail revenues grew roughly 5% on a constant currency basis as we retail 1.6% more units, and the average used vehicle selling price increased 3%. Used vehicle retail gross profit increased roughly 1% on a constant currency basis, as the retail unit increase was partially offset by a slight gross profit per unit decline.

U.S. used vehicle inventory stood at 13,500 units, which equates to a 33 day supply. Growth at the stop sale inventory, we currently have approximately 400 new and 500 used vehicles in stock under an OEM stop sale order. This represents less than 2% of our U.S. new vehicle inventory and less than 4% of our used vehicle inventory.

Total consolidated parts and service revenue increased 7% on a constant currency basis, while consolidate parts and service gross profit rose 6%.

U.S. same store revenues increased 3.4% as collision and warranty comps were difficult coming off of a 13% and 8% same store growth from the prior year respectively.

U.S. parts and service margins declined 60 basis points to 54.8% as there were several high margin labor intensive warranty campaigns in the prior year.

We maintain our guidance of mid-single-digit same-store revenue growth throughout the remainder of the year and for 2017.

Finance and insurance gross profit increased 2% on a consolidated constant currency basis. This growth was driven by an increase in F&I for retail unit of 4%, as retail unit sales were down 1%. U.S. F&I penetration delivered another quarterly year-over-year increase up $73 per unit to $1,588.

Regarding our geographic segment results, our U.S. same store operation saw a total revenue decline of 2%, driven by an 8% decline in new vehicle unit sales. Sales were once again heavily impacted in the Texas and Oklahoma markets due to the weakness in the oil industry with decreases of 10% in Texas and 18% in Oklahoma.

As previously mentioned, we’re able to offset most of the volume decline with improved new vehicle gross profit per unit resulting in new vehicle gross profit decline of only 1%. So despite of 8% decline in new vehicle unit sales, we were able to hold total same store gross profit roughly flat, due to focus on improving new vehicle margins, the further expansion of our parts and service operations and strong F&I per unit results.

Our UK operations have a solid quarter of total same store revenue growth on a constant currency basis of 6% driven by a 6% increase in new vehicle revenue, a 5% increase in used retail revenue, an 8% increase in parts and service revenues, and an 18% increase in F&I revenue.

We did experience more volatility than normal during the quarter following the Brexit vote in late June. July and August results were weaker than expected with September coming back closer to normal as customer had time to observe exit implications. The vote also had a significant impact on the exchange rate with the pound weakening about 15% from the third quarter 2015. This had a meaningful impact on our results as same store revenues on the U.S. dollar basis decreased over 10%.

Our reported earnings per share were also negatively impacted by about $0.04. While it’s too early to give a definitive 2017 industry forecast for the UK, we are tentatively expected an industry sale decline next year.

In Brazil, Q3 industry sales were down an additional 17% and are down 23% year-to-date. Partially offsetting the weak new vehicle environment, our process improvements the team has implemented in our user car operations where we saw same store used retail margins improved 360 basis points to 7.6% and total used gross profit dollars increase nearly 70% on a constant currency basis. Underlying business improvements such as, have a louder team [ph] to mostly offset the deep down turn of new vehicle sales and have us well positioned to take full advantage of the future recovery in the local market.

I’ll now turn the call over to our CFO, John Rickel to go over our third quarter financial results in more detail. John?

John Rickel

Thank you, Earl, and good morning, everyone. For the third quarter of 2016, we reported adjusted net income of $42 million. On a fully diluted per share basis, adjusted earnings increased 2.6% to $1.96. These quarterly results for 2016 exclude $6.6 million of net after tax adjustments, primarily explained by $6.7 million of net non-cash franchise rate impairments, the largest of which was cost by an OEM braded an open point to another dealer group.

Starting with the summary of our quarterly consolidated results. For the quarter, we generated an all-time third quarter record of over $2.8 billion in total revenues. This was an improvement of $23 million, or approximately 1% over the same period a year ago. On a constant currency basis, which ignores the change in foreign exchange rates, total revenues increased 3.3% for the quarter.

Our gross profit increase $8.3 million or 2.1% from the third quarter a year ago to $406.7 million. As a percent of gross profit, adjusted SG&A increased 110 basis points to 73.6%, partially reflecting the mix effect of our increased UK business which inherently has a higher cost structure.

Floorplan interest expense increased by $1.4 million or 15% from prior year to $11.1 million. This increase is primarily attributed to higher LIBOR interest rate versus the third quarter last year. Other interest expense increased $3.2 million or 22.8% to $17.1 million, primarily reflecting the issuance $300 million of our 5.25% bond in December 2015. Our adjusted consolidate effective tax rate for the quarter was 36.5%.

Turing now to our geographic segment starting with U.S. market on the same store basis. For the quarter, total U.S. same store revenues decreased 2% to $2.2 billion driven by decreases of 4.4% in new and 1.8% in F&I. These decreases were partially offset by 3.4% increase in parts and service and 1% increase in total used. The 3.4% increase in same store parts and service revenue consisted of increases of 5.1% in warranty, 3.5% in customer pay, 3.2% in collision and 2% in wholesale parts.

As Earl mentioned, prior year comps were especially difficult in our collision, warranty segments. We reiterate our guidance for mid-single-digit same store revenue growth through 2017. Our 1.8% F&I revenue decrease was driven by 5% decrease in total retail units, partially offset by a PRU increase of $51 or 3.3% to $1,578 per unit.

Total same store gross profit decreased 0.2% driven by decrease of 3.9% in total used vehicles and 1.2% in new vehicles, partially offset by 2.4% increase in parts and service. As Earl previously mentioned, we displayed improved pricing discipline as our new vehicle gross profit per unit increased $121 per unit to $1,769 which mostly offset the 7.9% decline in new vehicle retail unit volume.

Our adjusted SG&A as a percent of gross profit increased 40 basis points to 71.1%, and adjusted operating margin remained flat at 3.9%.

Related to our UK segment on a same store basis, the percentage change metrics on a constant currency basis, for the quarter, total revenue decreased $34 million, $293.5 million but increased 5.5% on a constant currency basis.

Gross profit for the UK segment was up 7.2% from prior year. New vehicle gross profit grew 1.3%, driven by unit sales increase of 1.5%. Total retail used vehicle gross profit increased 6.8% as a 2.4% increase in unit sales combined with 4.3% increase in gross profit per unit.

Parts and service gross profit improved 7.4% and our F&I income increase 17.6% which is attributable to both 15% increase in gross profit PRU and a 2.3% increase in total retail units.

For the quarter, our adjusted SG&A as a percentage of gross profit decreased 10 basis points to 77.5% and adjusted operating margin was flat at 2.2%.

Related to our Brazil segment on a same store basis, as Earl mentioned, the total industry new unit volume decreased 17% from the third quarter of 2015. Our local team did a great job increasing both parts and service and F&I revenues as well as the improvements in the used business which Earl covered previously which mostly offset the new vehicle sales decline and allowed to about breakeven for the quarter.

Turning to our consolidated liquidity and capital structure. As of September 30th, we had $22.9 million of cash on hand; another $82.2 million that was invested in our floorplan offset accounts bringing immediately available funds to a total of $105.1 million.

During the quarter, we repurchased 244,000 shares of our common stock in an average price of $50.61. Year-to-date, we have repurchased approximately 2.3 million shares at an average price of roughly $55.90 per share for a total of $127.6 million. These repurchases equate to an approximate 10% reduction from our year-end diluted common share count of 22.6 million shares. As of October 20th, we have approximately 20.6 million diluted common shares outstanding and $22.4 million remaining on our board authorized share repurchase program.

During the third quarter, we used $4.9 million to pay dividends of $0.23 per share, an increase of 9.5% per share over the third quarter year-ago in an annualized yield of approximately 1.5%.

For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted in our website.

With that I’ll now turn back over to Earl.

Earl Hesterberg

Thanks John. Related to our corporate development efforts, the company is pleased to announce the addition of two UK Ford stores that were purchased this week increasing our UK dealership count 31. This now brings our Ford UK portfolio to six stores and our total company Ford portfolio to 18 stores. These two dealerships are contiguous through our existing Ford operations in the UK and are expected to generate approximately $65 million in annual revenue.

The company also divested two dealerships which included a Hyundai store in California and a Porsche store in Massachusetts. In October, the company also divested a Honda store in California. In total these dealerships generated approximately $120 million in trailing-twelve-month revenues. The disposals are consistent of Group 1’s portfolio management strategy.

During the quarter, the company was also awarded a Porsche open point in El Paso, Texas. The Store’s targeted to open in late 2017.

This concludes our prepared remarks. I will now turn the call over to the operator to begin the question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from John Murphy from Bank of America, Merrill Lynch. Please go ahead with your question.

John Murphy

Good morning, guys.

Earl Hesterberg

Good morning, John.

John Murphy

Just I had a couple of questions here, I mean first on the new vehicle gross profit per unit in the U.S. I mean that’s really good news. I am just curious you know how you think you’re achieving that and if you potentially were to drop that, could you drive significantly higher volumes? I am just trying to gauge really you know the competitive environment out there and how you are trading off volume versus this gross profit per unit? And also if you could maybe comment on sort of the inventory levels right now sort of in conjunction with that?

Earl Hesterberg

Certainly John, this is Earl. It is a bit of a tradeoff but there were certain brands that were continuing to give us sales targets that were significant year-over-year increases in markets that are way down as you know and so you just get into a point where you can’t chase every target every month or every quarter. And you just have to trade off some volume and avoid settling you know so many cars of losses, there are certainly a lot of vehicles sold at losses to hit these targets. And we’ve just been working hard to have more disciplined on that.

Now that said each store is its own challenge, so I would say in some cases, we may have gone too far with a half dozen stores or so and we’ve got to get that balance right, because when you lose too much volume then there is impact on used vehicle trade-ins and F&I opportunities and so forth. But generally it’s a discipline to balance volume and margin. And I think many dealers in the U.S. have gotten very bad habits with a lot of this volume pressure at getting away cars and that’s long term health of the business.

Relative to the inventory, we made a dramatic improvement. I wouldn’t say we’re any longer significantly over stock. It’s still little bit higher than I would like and certainly in the couple of brands but it’s now totally manageable in my opinion.

John Murphy

And Early just a follow-up on the GPU point, I mean do you feel like the competitive environment out there in the markets that you are in has gotten a little bit more balanced from a dealer perspective or do you believe there our dealers out there that are chasing volume still too aggressively that needs to hopefully at some point cool off?

Earl Hesterberg

I think it’s starting to turn but there are still many dealers including us in some places chasing volume. And the problem we have is many of our locations are in these markets where the industry is down double digits. And when you have targets that are up almost double digits, I mean it just you know it’s a disconnect. And that’s the problem when OEMs provide target is they can't necessarily fine tune them and prescribe for some of the pockets like the oil industry or the industry isn’t behaving like it is another parts of the U.S. So it really get some disconnects on some of these targets versus reality.

John Murphy

Okay. Then just a second question, as we think about diversification, considering some of the markets here in being the UK and Texas, Oklahoma diversification in the short run seems like it's hampering you a little bit in the long term obviously this diversification is a good idea, is there any region that you would sort of focus on is expanding into to diversify away from what are these weaker markets right now or is there the real potential because some of these markets are weaker to make good accretive long term acquisitions as these markets are depressed?

Earl Hesterberg

Well generally speaking John, the best places for us to invest are where we have some concentration already. We could benefit from significantly more scale in Brazil for the market is very much sound. And the same in the UK, we just added some scale earlier this year, but that takes some time to digest, but we'd be willing to add more scale in the U.K. or Brazil.

Within the U.S. clearly it would be nice to have more scale outside of the oil patch on the east coast, southeast and other growing markets in the U.S. So I would say we would have a high interest outside the oil patch in the U.S. give little more diversification within the U.S., but we will get the best leverage from operating in those three markets where we are concentrated today.

John Murphy

Okay. And then just lastly, as we think about leasing, I mean it was a significant push in the first half of the year. I just curious what you saw in the third quarter from the automakers you represent and you first still looking at lease rates that are you are north of 30% across the industry and really how you think that will shake out as far as an opportunity in an issue for you both in the near term and ultimately as those vehicles come back to the market?

Earl Hesterberg

Sure John, my impression is that OEMs are starting to back off or slow down a little bit on leasing, leasing is not as big for us because of our geographic concentration in south central U.S. where about 17% leasing where as the industry is as you say closer to 30%. So it's not the same concentration for us, because leasing is quite heavy in the northeastern U.S. and California.

But with used car values likely having peak sometime in the past, my impression is the OEMs are starting to become a little more prudent about how aggressive they get in pushing higher levels of leasing.

John Murphy

Great, thank you very much.

Operator

Our next question comes from David Tamberrino from Goldman Sachs. Please go ahead with your question.

David Tamberrino

Great. Good morning. Just a couple of from us here, as we think about the quarter. I think one of the biggest surprises was the SG&A leverage here mainly for the U.K. and Brazil. We've been seeing at least in U.K. some year-over-year improvement look like you took a step back during the third quarter. Is that partially from the integration of the acquisition from earlier this year or is that as a result of the lower volumes within the market. And then if you could add on to that in Brazil it looks like we went back up over 100 for SG&A flows through there some percentage of gross profit maybe just speak to what you're seeing on the ground there and what changes you're implementing in the near term to get that back below 100?

Earl Hesterberg

Yes, certainly Dave. This is Earl. Yes, in the UK which now is about 18% of our business whereas this time last year was about 11%. We made a large acquisition in February and although it included poor very high performing outer healthy stores, the rest of those dealerships were generally broken and are still broken today, although I think a bit less broken and they were at seven or eight months ago.

So that is a big factor and it's going to take us some time to integrate those stores and get those stores contributing. So that is a big issue are much bigger in the UK. The U K is structurally always five or six percentage points higher in SG&A as a percent of gross profit even one a good today. And in some of our recent acquisitions stores are going to take a while to fix and integrate.

John Rickel

Yes, Dave this is John Rickel, just a dimension of that, if you look at the consolidated UK results, we were at 83.4% SG&A as a percent of growth on a same store it was 77.5% that kind of gives you the GAAP, the work that we've got to do to Earl’s point. And we're working through those things, but it does take longer in the UK to get some of those cost out. You've got redundancy processes to go through et cetera so there's more to be done there, but it just takes a little bit longer.

And on Brazil, you're right. We clearly have gone back to just a little bit of a loss on there, driven by two things, one the volumes obviously continue to be very challenging. The industry was down another 17% in the quarter and at some point you can only take so much cost out, and that's to Earl’s other point about at some point, we're going to have to have some additional scale down there.

But I think there are some lease initial signs of hope down there, the Central Bank cut rates overnight 25 basis points that's the first time in a couple of years, you've seen rates start to come down, you’ve got new political situation down there. So we think that there may be some opportunities next year but near time, it’s do everything we can to take cost out, improve the processes and get ready for things to hopefully start to turn around.

David Tamberrino

That's very helpful. And for my second one, can maybe you talk about the pace of sales in October that you've seen so far, and then still more specifically how is it tracking in the oil regions Texas, Oklahoma and then maybe in the U K as I think we saw a little bit of improvement throughout the quarter from July to August, September, as October getting better in the U K, or is it getting worse in Texas?

Earl Hesterberg

It's hard to really say that. I don't really expect any improvement in Texas, and the impact on auto sales in Texas has played out quite slowly and steadily over this year kind of settling down, decreasing a percentage point or two every month or so, I don't see certainly any uptick yet. By the same token, I don't see any step function change down.

Oklahoma was probably the market that surprised us the most with the 18% decrease. But I think we always recognize that the Oklahoma economy is not nearly as diverse as Houston or many parts of Texas, so it's very heavily energy dependent. But I think there's a general feeling of getting closer to the bottom in Texas, but I don't think there's any declaration that we've hit the bottom yet.

In the U K it's still just mostly suffering from uncertainty, I don't think markets particularly weak, but uncertainty is never good for consumer confidence, which is the main driver of auto sales. But I had certainly haven't any input that says the U K market is especially weaker than it was in September and it was fairly reasonable in September with retail sales down only 1%.

David Tamberrino

Understood. Thank you very much for the time this morning.

Operator

And our next question comes from Mike Montani from Evercore ISI. Please go ahead with your question.

Michael Montani

Yes, hey guys good morning. Just wanted to ask first if I could in the U K, can you just remind us a little bit of your mix there in particular the premium side relative to the rest of the business, and then you mentioned an outlook for a decline in sales, just help us understand your thinking around that as we head into next year?

Earl Hesterberg

Yes, in the U K, we have nine Audi dealerships and 11 BMW dealerships, so that's our heavy mix. We mentioned earlier that we just expanded the six Ford dealerships and we have a few other smaller franchises. So we're very heavy in Audi and BMW. I believe we thought on the UK markets not being in a growth mode at the moment relates simply to our consumer confidence and this uncertainty, of course you have a 15% exchange rate difference with the dollar probably lesser amount with other currencies. But certainly the pound has weakened, so you're going to have imported goods increasing in price that will also include imported cars. And I believe it's fair to say the real estate market is noticeably softer in the U K in recent months and we normally find a correlation of weakness in real estate markets with the consumer confidence.

Michael Montani

Okay understood. And then if I could just ask for your thinking as it relates to some of your OEM partners, so curious to hear from the standpoint of BMW or Audi in the UK, are you anticipating price increases from those OEMs next year, have you heard anything specific there yet? And I just had a U.S. follow-up.

Earl Hesterberg

I’ve not heard anything specific on BMW and Audi pricing, but I was responsible for automotive brands in Europe, two different brands, two different times and when the exchange rate changes that much, I can assure you there will be some pricing actions taken off set part of it. When and how much that’s up to each OEM, but that’s too much currency movement to offset.

Michael Montani

Make sense. And then if I could just on the U.S. side, you’ve mentioned there was a disconnect in some markets where incentives and stair steps were just unrealistic given the volumes that you're seeing in those markets. We had heard that there was some changes made in particular from Ford, but I guess the question I'd ask is has there been any more widespread changes and how are the discussions going at this stage with the OEMs about balancing production versus the need to incent to move the medal?

Earl Hesterberg

Actually that is a good point you made, and your input is accurate. Ford eliminated their stair step some time ago, which was an extremely positive move in our Ford business improved almost immediately. I'm sure there have been some other adjustments, but of course these things take time and frequently there are commitments made for a quarter. And so some of these reactions are slower than others, but I'm quite sure that most of these OEMs will have adjust to the market, because I don't know where the - I don't think only the oil patch is suffering in some of the sales softness.

Michael Montani

And did you guys give the same store inventory units last year just to get a handle on changes and the improvements made there?

David Lim

Yes, we're down about 2,700 units on a year-over-year same store basis.

Michael Montani

Okay, great. Thank you.

Operator

Our next question comes from David Lim from Wells Fargo. Please go ahead with your question.

David Lim

Hi, good morning, everyone. I just wanted to follow-up on that last one. John, you said 2,700 units same store sales basis, is that U.S. and what is it on a day supply on a basis?

John Rickel

Yes, that's U.S. and that's about nine days supply, David.

David Lim

Nine days supply down year-over-year?

John Rickel

Yes.

David Lim

Gotcha. The other question I have is, are you guys pushing back on, continue to push back on dealer on a factory orders, and are you seeing that kind of same behavior with other dealers in your competitive markets or other dealers continue to except inventory from the OEMs?

Earl Hesterberg

Hi David, this is Earl. I don’t think any of us are having to push back as much as we did 90 days ago, because many of the OEMs have now reacted and reduced production. It is true that we're still very sensitive to our inventory levels and they’re still not quite where we'd like them to be. I think we like them to still be another six or eight days lower. But they are coming into line and I think you’ve probably read about many of the production cuts that the OEMs are making. So I think the entire industry understood the problem, and we're working together to get it back in line with.

David Lim

Gotcha. And then are you - do you have a view on - or you have an view on 2017 industry volumes, I mean what we've been hearing the right channel of is a lot of OEMs are actually assuming outside of the ones that already have announced are assuming a down industry environment for 2017. Can you maybe sort of dimensionalize that and what you're thinking?

Earl Hesterberg Jr.

Well I think there's two camps, I think there's a camp that says flat and camp it says a slight decrease. And I think there's some factor that will gain some clarity after we get a presidential election outcome, and then we'll see what the mood of the public is, because so much of consumer confidence are psychological and most experts would contend that the current electoral process is creating some distraction.

David Lim

Relative to what you're seeing when you're in past cycles, are you seeing your Texas consumer when it comes to parts and service, are they climbing up a little bit or not paying for the higher margin repairs? And then I have one follow-up after that.

Earl Hesterberg Jr.

Yes, that's a good point and it’s valid. We are seeing the Texas customer paid business in Oklahoma being little stickier, so we're increasing our marketing efforts accordingly, there's still lot of the good potential what the unit and operation profile, but as you would expect when a new vehicle sales soften up due to consumer confidence and financial pressure on it, consumer, customer paid service tends the follow along with that.

David Lim

Okay. And then finally can you sort of John or Pete or Earl, can talk about transaction price relative to MSRP in general terms have you seen that percent widen over the quarter and year-over-year, I know that the OEMs like to talk about AGP incentives as a percentage of AGP, but we like also take a look at overall transaction price versus MSRP, any color there would be very helpful? Thank you.

Earl Hesterberg Jr.

David, this is Earl. I don't really have any data. You're better with the data and I know you followed personally quite closely, but it's true that incentive activity has been more intense in this past quarter, some of that is clearly, because inventory levels were high and in a time period when model years were changing. And certain brands and certain models were bit high as a model year change. So normally I would claim that there is pressure on transaction prices one of those incentives get as high as they did in the last couple of months. I don't know if that's true at this moment, because as you can see the inventories are starting to adjust in a positive way.

John Rickel

David, this is John, what I can tell you is that our average transaction prices in total in the U.S. continue to increase. We're up about $1,300 on a year-over-year basis. Some of that is obviously mix as we've seen a richer mix of trucks. We've seen about five points of swing from car to truck, but to your detail point on transactions, I don't have any better down to what Earl as mentioned to you.

David Lim

Gotcha. Thank you.

Operator

And our next question comes from Bill Armstrong from C.L. King & Associates. Please go ahead with your question.

William Armstrong

Good morning, everyone. Back to the energy market, so we're seeing our rig counts actually creeping up over the last several months, looks like the deceleration in your sales in the Oklahoma and Texas markets are still pretty weak. At some point if we see stabilization in the rig count and in oil prices, where do you expect to see or I should say when do you expect to see yourself sort of beginning to lease stabilize and sort of stem the bleeding?

Earl Hesterberg

Well, I wouldn't profess to be an expert in that, I think we've all been surprised a bit it at some of the time lag in the impact of these job losses and in associated impact on vehicle sales. But I would hope sometime next year, we'll start to get some stability. We’ve lost 80,000 energy jobs in Houston alone, although we've actually offset them all as you can believe that, but generally speaking with lower income jobs at the moment.

But for example, General Electric announced layoffs in their energy industry operations here six months ago, but the jobs actually just disappeared last week. So there is some time delay even when they announce these layoffs and when they actually take effect. And the same with when they continue drilling again and the rig count goes up before they actually hire back more people and there's likely to be some time delayed. But as I mentioned earlier, we do believe we're getting much closer to a bottom. So we would hope that sometime next year hopefully in the first half, we'll find that bottom, we started to work our way back up.

And in Houston, we're quite strong, our sales are only down 6%, so there is still some places where we outperform the market, which on a relative basis for the long term is quite important.

William Armstrong

Got it, understood. And in Brazil, you had a new unit comes down 30% which was worse than the industry which was down 17%, now in more recent quarters, due to brand mix you guys have actually outperform the industry and then this quarter you underperform the industry, maybe you can give us some color on why that relative performance has shifted and what do we should look for going forward?

Earl Hesterberg

That’s a good question but it is quite a granular answer, but the answer is that we’re the biggest Honda retailer in Brazil and they just introduced the new Civic and the price on the new Civic which is almost luxury car in Brazil is dramatically higher than it was before and we had a large amount of Honda volume. That was in a fleet category which would be somewhat more ability in the UK if you know what that is its government subsidized fleet sales for handicapped people and so forth. And the pricing on these new Honda models no longer qualifies for that scheme, so we lost a lot of fleet business. But generally speaking absent that I’d say we’re still pretty much in line with the market which is still weak as you can see.

William Armstrong

Got it. So should we - so it sounds like maybe that Honda Civic issue may kind of be a drag on comps until the anniversary that is that fair to assume?

Earl Hesterberg

It will be a drag on volume comps and actually the margins on the new Civics compared to those fleet ones we’re doing is much, much better. We’re just doing less of them because they’re retail now not fleet.

William Armstrong

Understood. Okay, thank you.

Operator

And our next question comes from James Albertine from Consumer Edge Research. Please go ahead with your question.

James Albertine

Thanks and good morning, everyone. Quick question for you to sort of a different version of an earlier question that was asked on new vehicles, I wanted to get some insights on the incremental supply and availability of used vehicles and then what you’re seeing in terms of margin trends within that segment and maybe how we should think about it for the balance of this year?

Earl Hesterberg

Yeah, this is Earl, that’s a good question. There is dramatically increased supply on used vehicles and that does put some pressure on the margins I think. But the good news is the used vehicle market appears to be quite strong even in the - in a market like Oklahoma where new vehicle sales were down 18%, used were only down 2% or 3% and some months the market still somewhat flat on used. So but yes, there is more supply which will give us more volume opportunity but it will probably have a little bit of margin trade off.

James Albertine

And if I think - that’s very helpful, thank you for that. And then if I may a sort of a question. I think given that you’re in Texas and Oklahoma in probably more scale than your public peers, so that gives you this interesting insight we think maybe a window into what a recession would look like. And our question is, is your business acting like you would expect, it sounds like on the used side, your top line was down 18 for newer energy, for used down 2 to 3 that’s a good thing. Specifically, don’t want to ask an F&I. I think a lot of people are asking, what would happen to F&I they’re performing quite well on a PDR basis relative to history, but if the broader U.S. or the UK or elsewhere gets more challenged what happens to F&I environment. So the question is Texas and Oklahoma weak top line, call it recessionary type markets, what’s happening to F&I within those markets?

Peter DeLongchamps

So, Jamie, this is Pete. Our F&I performance in both Texas and Oklahoma still remains good. I think the biggest headwind that we get base in F&I is raising interest rates. But so far as you can see, we’ve produced and with the volume that we do in Texas and Oklahoma the F&I is held up.

Earl Hesterberg

Yeah, my impression is where we haven’t seen a penetration issue. It’s a just a lack of opportunities when sales volume decreases, is that fair Pete?

Peter DeLongchamps

Yes. Yeah, the PRU said differently the PRU has held up, Jamie. It’s just the volume impact that all through.

James Albertine

And you’re seeing incremental opportunities I would think on the used side as maybe customers are looking more at late model given that supply increase?

Peter DeLongchamps

Directionally yes, but there is some tradeoff with the CPOs which will come with the off lease vehicles.

James Albertine

Got it. Thanks so much.

Operator

And our question comes from Rick Nelson from Stephens. Please go ahead with your question.

Rick Nelson

Hi Earl. Just to follow-up Jamie’s question about Texas, Oklahoma with that top line, that downturn. Can you speak to the dealership profitability in those markets what sort of declines we saw?

Earl Hesterberg

Yeah, I would say, Rick that the profitability of those dealerships very much mirrors that new vehicle percentage decline. I would say, it probably correlates somewhat reasonably. So if you’re down 10% in new vehicle sales, profit is probably somewhere in that vicinity as well.

Rick Nelson

So you’re able to manage the expenses in those markets and get given the variable costs follow?

Earl Hesterberg

Yeah, to a certain degree. I don’t think you can really leverage SG&A when you’re down 10% to 18% because it’s certain, percentage of your personnel costs are fixed. But yeah, we are just the best we can on both the personnel cost, advertising and you’ve seen the work we’ve done on inventory. So yeah, we are pretty good of flexing the cost structure, but it’s not like you can really leverage when your sales are down that much.

John Rickel

Rick, this is John Rickel. The other thing to bear in mind is, the volumes were down that much, but as we indicated, we saw the same improvement in margins in those markets as we did overall. So the gross profit dollars were not pressured nearly as much as the volume headline would make you think. So that’s why you’re able to hold the profit decline to about that level.

Rick Nelson

Gotcha. Good enough, thanks. Also I want to ask about the acquisition environment, what you’re seeing in terms of pricing with the weakening environment, are you seeing more give like from in terms of seller expectations?

Earl Hesterberg

Yes, Rick, there is probably been an explosion in deals in recent months in both the U.S. and the U K for obvious reasons. I don’t have any indication that prices are more reasonable. But I think they will become more reasonable just because of supply and demand there, there are many people that understand that the market growth is in the same profile potential as it was a few years back.

Rick Nelson

Yeah, it looks like herein pays, so divestiture is actually is outpacing acquisitions at least this quarter.

Earl Hesterberg

No, it’s just coincidental, Rick. I mean we’re just always cleaning up, sometimes you come up on a CapEx point or you have to invest in a facility and generally the dealership isn’t a good return. Now, more CapEx isn’t the answer to your problems. So those are mostly clean up actions that wouldn’t read anything into that. We’re still interested in expanding our company in all three of the markets if we can find opportunities that are return on investment.

Rick Nelson

And just a follow-up to that, you could tell us what our net debt-to-EBITDA stands today and what sort of level you would be comfortable to beat the acquisition environmental if the multiples were in every part [ph].

Earl Hesterberg

Yeah, Rick, it’s John. I mean what we look at is rent adjusted total leverage and we’re just around kind of highest rates to close to the 3.9. We’re really from a protect the balance sheet standpoint don’t want to go much above four times, so there’s a little bit of dry powder. If it was really the right deal, you might stretch for a short period but in general, we’re really kind of want to protect that four times gap.

Rick Nelson

Good. Good enough. Thanks a lot and good luck.

John Rickel

Thank you.

Earl Hesterberg

Thank you, Rick.

Operator

And our next question is a follow up from Michael Montani from Evercore ISI. Please go ahead with your follow up.

Michael Montani

Hey guys, thanks for taking the follow up. So I wanted to ask just in terms of credit availability, if you’ve seen any impact, you mentioned leasing a moment ago, but have you seen any impacts broadly both in the energy market and then in the U.S. on a larger scale.

Peter DeLongchamps

Oh, Mike, it’s Peter DeLongchamps. We probably has much communication interaction with our lenders as we’ve ever had. And I’ll tell you from our perspective, we have nothing to pull back in credit, whether it’s the U.S. or in Texas.

Michael Montani

Got it. Okay. And then I guess a follow-up maybe on used vehicle pricing. I don’t know John if you can parse it out at all but used vehicle ATPs were still up for you all. Is there any way to tease out kind of what like-for-like pricing did versus mix impact?

John Rickel

Not really, I mean our sense is that overall used vehicle prices have been pretty solid, but I can’t really give you an analytical cutoff how of that is mix versus like-for-like.

Michael Montani

Which you generally tend to follow like NADA index that’s showing down low single digits or do you think the Manheim kind of up on the two is more accurate at this point?

John Rickel

For our mix, I would tell you I think Manheim is probably a little more accurate.

Michael Montani

Okay, thank you.

Operator

And ladies and gentlemen, at this time, we’ve reached the end of today’s question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Earl Hesterberg

Okay, thanks everyone for joining us today. We look forward to updating you on our fourth quarter earnings call in February. Have a good day.

Operator

And ladies and gentlemen, that does conclude today’s conference call. We thank you for attending today’s presentation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!