Penske Automotive Group Inc (PAG) 2002 Q3 法說會逐字稿

Good afternoon and welcome to the United Auto Group third quarter 2002 earnings conference call. A press release which details United Autos third quarter results was released this morning and is posted on the company's web site which with can be viewed at www.unitedauto.com. This call is being recorded. If you have any objections, please disconnected at this time. I would now like to introduce Mr. Roger Penske, Chairman of United Auto. Please go ahead.

Thank you, operator. Good afternoon. I'm pleased to present our report for the third quarter of 2002. Statements made in this conference call may include forward-looking statements regarding UAG's future reportable sales and earnings growth potential. Actual results may vary materially because of external factors such as interest rate fluctuations, changes in consumer spending and other factors over which management has no control. These forward-looking statements should be evaluated together with the additional information about UAG, which is contained in UAG's filings with the Securities and Exchange Commission. We meet today in New Jersey. Our president, Jim Davidson, Executive Vice President of Finance, Bob O'Shawnessy, our Controller, and Tony Porten,Vice President of Industrial Investor Relations. Thanks again for joining us this afternoon.

Before I discuss the specifics of our third quarter, I would like to highlight some of the key items for you that took place during the quarter. Revenue increased 37% to $2.1 billion, our same store retail revenue increased 7.4% and related gross profit increased 6.1%. Overall gross profit increased 36%. Income from continuing operations increased 70% to $22.6 million. And EPS from continuing operations increased 46% to 54 percent, despite 18% increase in average weighted shares outstanding. The repurchase during the quarter approximately 1 million shares at an average price of $15.85. We acquired two businesses during the quarter. The BMW dealership in Austin, Texas, and a Honda dealership in Bloomfield Hills, Michigan. The aggregated revenue from these two locations on a year basis would be $140 million. 2002 year to date acquisitions are expected to generate in excess of 1 billion in average annual revenues. During the quarter, we also contracted the divest of three non-strategic businesses with average annual revenues of $150 million. This brings to five the number of businesses divested this year and the average annual revenues for those businesses is approximately $240 million. We continued to realize same store sales and gross profit increases. The third quarter represents our 14th consecutive quarter of same store retail revenue growth and the metrics of our same store performance are as follows. New retail revenue up 9.2%, used retail revenue up 1.9%, F & I revenue up 10.3% and services and parts revenue up 6.3%. We believe increases in units and operations resulting from our vehicle sales in the past will continue to drive the growth of our higher margin service and parts operations and this will obviously add to our operating income. During the quarter we received same store vehicle revenues increases of 10.2% for our domestic nameplates and 8.8% for our foreign and luxury nameplates. I would also like to point out that 73% of our revenues were generated from foreign and luxury nameplates and that 35% of our revenue is derived from luxury nameplates. As we discussed, the foreign luxury nameplates continued to perform well in the marketplace.

In our continuing efforts to enhance our brand mix and product offerings, we will be celebrating the grand opening of our premium luxury auto retail complex in North Scottsdale, Arizona on November 9. UAG is a dominant premium and luxury dealer in this rapidly growing market. Today we operate five stores at this new location, BMW, Mini, Porsche, Audi and VW. The remaining 6 stores are scheduled to open during the fourth quarter and they will include Jaguar, Land Rover, Lincoln Mercury, Acura, Volvo and Aston Martin. We believe this luxury auto complex will enhance the already significant market leadership we enjoy in this important market. UAG's North Scottsdale location will be the home of 11 franchises. Just to report, six of these, which are open points that have been awarded us by OEMs. When fully operational, we expect the annual revenues to approach $500 million from the stores at this location. 250 will be incremental. Since we've been operating the North Scottsdale location to date, we have seen significant increases in retail traffic and our service and parts business. Our overall long-term strategy really has not changed. Our objective is to be the most profitable, growth oriented automotive retailer in each of our markets.

We continue to intend to grow organically, grow through the acquisition of the right brands and right markets, expand our higher margin lines of business, enhance our already favorable brand mix and provide outstanding customer service. During the past three years since Penske Corporation's investment in UAG, we have successfully executed on these objectives. We believe that maximizing sales volume, continued expansion of our service capacity and achieving market leading customer satisfaction levels will help UAG maintain same store growth and lead to future margin expansion. We also believe that favorable interest rates, manufacture incentives and vehicle affordability will continue to benefit our dealership operations. As a result of the above and the continued execution of our strategic objectives, we're confirming that our 2002 EPS guidance to be in the range of $1.82 to $1.86 per share from continuing operations. Please note that this estimate is prepared assuming 41.2 million shares outstanding. This forward guidance assumes no significant acquisition activity for the balance of the year. Let me move into the details of our Q 3 information. The new retail sales point Q 3 new retail revenues increased 44.2% and same store was up 9.2. The retail side revenue up 50.7% and same store increased 1.9. As we've noted several times during the past year, the zero-zero financing and other significant cash incentives offered by OEMs as a result of some migration of buying habits of consumers to affordable new vehicles. Despite this challenge, we've been able to maintain our levels of used vehicles at the level we enjoyed last year. Our priority in future quarters to offer our customer a meaningful shopping opportunity for a quality used vehicle including certified OEM programs.

To that end, we have continued to accurately monitor the quality of our used vehicle inventory and have maintained our used inventory supplies at 33 days. Financing and insurance revenue increased 30.3% for the quarter and same store was up 10.3. Our average F & I gross per transaction increased $30 to $765 for the quarter, and to break that down, new was at 8.13 and used was 6.63. Our ability to continue realize increases and our financing and insurance gross per transaction is due part to our brand mix of foreign and luxury nameplates. I might point out these brands selectively participate in incentive programs from time to time, and they do not participate as aggressively in the heavy incentive offered by the domestic nameplates. Our financial lease penetration increased during the third quarter to 73% and 57% of that was with our OEM captive finance partners. Our extended warranty penetration was 37%. Moving on to service and parts in the third quarter revenues increased 36.3%. Same store sales were up 6.3. Our body shop revenue increased 21.4%, and same store was up 13.4. Both of these areas obviously will help grow our bottom line in the future because of the high gross profit. Moving on to gross profit for the quarter, we're up 35.7% and same store was up 5.6. Our margin decreased 10 basis points from 14.1 to 14.0, and that compares to 13.9 for all of 2001. SGNA for the quarter was at 11.2 of total revenues and that compares to 11.4 in the third quarter of 'O1 and 11.3 for the second quarter of '02. Interest expense in the third quarter on working capital was $10 million. Our flow fine interest was $9 million. We had 8.6 million dollars worth of flow fine credits during the quarter and that compares to 7.3 in the third quarter of '01. A note on our tax rate effective tax rate was 40.5, which has been consistent throughout the year. Looking on to our balance sheet, let me review some items.

First, inventory. The end of the third quarter with $886 million worth of inventory -- of that $173 million was from Sytner. Excluding Sytner our vehicle inventories were down 1.8% versus the same period a year ago, despite a 10% increase in sales. Just a quick note on inventory turns. Our new turns were 7.6 of 47-day supply. Use was at 10.8 of 33-day supply and our parts turned 6.6 times or 55 day supply. Capital expenditures major dealership projects continue in San Diego, Turnersville, New Jersey, which is the Philadelphia metro market and Phoenix. Our net capex on a year to date basis is $60 million after sale leasebacks. As I said before the capital investment we make into retail locations are for long-term. Many of these investments in fact will have a sustainable life of over 25 years. Our debt at the end of the quarter was $656 million. Breaking this down, borrowings under our credit agreement were $328 million, leaving approximately $372 million of dry powder. We also have $300 million of ten year senior subordinated debt outstanding at the end of the quarter and also an additional $28 million of long-term debt, which is basically Sytner. Our debt to cap rate showed at the end of the quarter was 49%. That compares to 50% in the third quarter of '01. As I mentioned before, our goal is to maintain a debt to capital ratio of approximately 50%. Floor plan borrowings as of September 30 were $791 million. To aggregate our total debt it's $1.5 million including floor plan as of September 30. Approximately $500 million of this is fixed with an average rate of 8.1 percent and a average term of 7.8 years. EBITDA for the quarter was $54 million. This represents a 35% increase over the same period in '01. EBITDA expectations for 2002 is $191 million. We've had a number of questions over the last quarter about our acquisition in the UK. I thought we might take a little time this afternoon to give you some additional information.

Obviously, Sytner is the premiere, prestige auto retailer in the United Kingdom. Certainly year to date has exceeded our expectations. Integration of UK operations, which comprises of 67 dealerships operating at 49 locations is complete. We certainly have a solid management team in place to drive the business. Revenue for the seven months is approximately $780 million and includes nearly 11,000 new vehicles and 7300 used cars. I would like to note that they used a new ratio. In fact, it's better at ours at .7 to 1. I think this compares favorably to other operators in the U.S. Sytner is the largest BMW and Mercedes auto retailer in the UK and the second largest of the premiere auto group, which is on the Ford nameplates. Drilling down a bit further for nine months year to date in the BMW franchise we represent we're up 60%. The market is up 47. Mercedes were up 15% the market is up 6%. For the first nine months of 2002, the UK new car market sold approximately 2.1 million units up 5.1% over the prior year. This compares to the U.S. market, which is essentially flat for the first nine months. Since the acquisition in the UK, we've also been awarded a Toyota market area in Birmingham, England, the UK's third largest market. Toyota's market share in the UK is up .2 year to date as compared to 4.3%. We were awarded three Volvo franchises in southwest London and a new Lexus franchise in Milton Keen. In addition we've acquired four Mercedes-Benz franchises as part of a new market area concept in the UK. Finally, overall gross margin for quarter was 13.9%, which compares to 14% of UAG in the U.S. Our total international revenues were 17.3% for the third quarter. Let me just give you an update on our year to date 2002 brand mix. Toyota and Lexus 24% of our revenue, Chrysler, Mercedes-Benz or DCX 18%, General Motors 12, Honda Acura 12, BMW 11, Ford, Jag, Volvo, Mazda and Land Rover 11%, Nissan, Infinity 6 and other at 6%. In summary in the three years since Penske Corporations $260 million investment in UAG, we've grown organically and through acquisition. During this time we've implemented many initiatives that we believe will yield continued growth and profitability. We've established a strong reasonable management structure operating out of six regions. We've complimented this regional structure with national brand managers who foster our relationships with OEM. We've changed our brand mix to reflect the changing dynamics of the marketplace, we've focused our dealer principles on inventory metrics that improved our inventory turn over and certainly our profit abilities. We've implemented CSI processes at all of our dealerships to support outstanding customer service in order to build repeat and referral business. Establishing training centers with national reasonable training programs to attract and retain outstanding personnel. We've consolidated the back office in many markets to provide scale and lower cost. We've established an outstanding Internet presence at our dealerships through www.carsdirect.com. Most important, we have reduced employee turn over by 11%, compared to the year 2001. We've talked about the strategic investments in several markets, Washington D.C, San Diego, Atlanta, Scottsdale, Indianapolis, and of course the UK. Our initiatives have paid dividends as shown by our consistent industry leading same store growth metrics. Looking at the overall business since our investment, we've successfully grown our revenues on a compounded basis 21%, our net income at 41% and our EPS at 22%. When we invested in UAG, we had questions. There were certainly questions about the long-term ability of public retailers to sustain growth, especially in a soft economy. In the midst of these difficult times, we've shown that our business is resilient, due in part to our business practices and strategies. Despite the sluggish economy and the effects of 9-11 we've grown volume and profitability. We continue to believe that our emphasis on customer satisfaction and retention our relationships with the OEMs, the stability offered by state franchise laws, and protection from our primarily market areas will continue to allow us to experience organic growth. In addition, with only approximately 6% of the market controlled by public retailers and the excess to significant capital, we believe we have the ability to continue to generate substantial returns. At this point I would like to open up the call for any questions operator, thank you.

Thank you, Mr. Penske. Ladies and gentlemen, if you wish to ask a question please depress the one on your touch tone phone. You'll hear a tone indicating you've been placed in queue. You may remove yourself from the queue at any time by depressing the pound key. If you are using a speakerphone, please pick up your hand set before pressing the numbers. Our first question is from the line of Jeff Lignelli with Stone Brook Fund Management. Please go ahead.

Hey, Jeff.

Good morning. I know you didn't give guidance for 2003, but what is your preliminary thinking given how many incentives have been implied to the market this year and your ability to grow your revenues organically next year and also to grow your earnings in 2003.

Number one there's a lot of conversation on what the SAR is going to be in 2003. I'm really not one to give you that number today. I think that the good news we have is that if you look at history and you look at 2002, the brands that were associated with them had growth. They really had incremental market share increases, and I would expect that with our mix that we would see not a lot of deterioration with our brands as we go forward to next year.

And do you still see meaningful earnings growth in 2003.

At the present time, the street has UAG at $2.08, and you know that is comfortable with us at this point.

Thank you.

Thank you. Our next question is from the line of Nate Hudson from Bank of America Securities. Please go ahead.

A couple of questions for you. First, on the gross margin side, it looked like it came in a little bit in the quarter. Give a sense of what caused that, where you see it going and is the weakness concentrated on the domestic brands?

When you look at our margin, you know, during the quarter, there's a couple of dynamics actually in the used area. Sytner's margins is at 7%. Ours are 10. When you aggregate that, that has some downward pressure. The domestic margins were down for us during the quarter, obviously with all of momentum and us trying to maintain our market share, we've probably had less margin, but if you go to the individual transaction, gross profit per transaction, which was in our selected data with our press release, new vehicles actually were up almost $100 versus the same quarter a year ago to 2270 and on a nine-month basis we were up, you know, almost $150. So a per transaction basis, actually, we were up, we talked about the F & I, but on the overall basis because of the mix of vehicles, we had some downward pressure.

Okay. Question on your debt. Picked up a fair amount this quarter. Where do you see that going towards the end of the year and over the course of next year?

We really have no acquisitions at the present time contemplated, and we'll have a positive cash flow you know during the quarter, so we should see our debt coming in equal or slightly below year-end based on the current forecast.

And last question, could you just update us on what you expect the total gross and net Capex to be for 2002 and then if you have a number for 2003?

Well, our year to date is $60 million. I would assume it's probably in the range of $70.

And for 2003?

2003 probably will be a little bit less based on what we have you know on the drawing board. I would say it's in the $50 to $60 range.

All right. Thanks very much.

Sure.

And our next question is from the line of Rick Nelson with Stevens. Please go ahead.

Hey, Rick.

Thank you, congratulations Roger. Can you comment, Roger on the tone of business as the quarter progressed and also what you're seeing in October?

Well, I think we started out the quarter or the September a little soft, and then when the incentives kicked in, there was a little more momentum as we ended the quarter. During the month of October, we don't see at least at the domestics we're not seeing some of the zero-zero have the impact that it had in previous times as they move forward. There is some foreign nameplate movement with incentives on 2002's. You know this is kind of a transition time, even some manufacturers haven't brought out their 2003's. You know so you could say it is a little choppy between what's going on from a domestics and the zero-zero, and some of the foreign nameplates moving in with some incentives you know to move older inventory. But our inventories are in good shape. We probably have about 22% of our inventory across the country in '02, which puts us in good shape as we move forward. That should help us in the first quarter.

How would you characterize October compared to September, better, worse, or about the same? .

I would say that it will be flat to slightly better.

Uh-huh. And how about the out look for used vehicles?

Well, one thing we wholesale 18,000 vehicles during the quarter, and our average loss probably was up about $25. Again, we're driving metrics to try to keep the slow day supply and we think in the long-term as these incentives take down and push residuals down we're better off to have a much fresher inventory, so you know at the moment that would be our situation. .

And are you saying any turning at all in unit volumes? Given the price declines? .

As far as used volumes?

Yeah.

Well, you know everybody is after that good car, and one thing that is probably having a negative margin impact on used as you look across the industry, all manufactures have gotten into certified programs. And with certified programs, you probably add anywhere from $1000 to $1500 more cost to sale which puts real pressure trying to get that margin and we're seeing some of that, you know, manufacturers want to be sure that we're merchandising these used vehicles properly. I've seen Chrysler get in. General Motors is in. You know obviously some of the foreign nameplates like Lexus and BMW have had these programs before. So I think that you're seeing more of the used car business aligned by brand. We're not that successful in some of the high line being able to sell other makes. So I think the industry is shifting because of certified and commitments you have to make with the manufacturer, you're seeing more vertical integration on used. And to me, we never have enough of the right used cars, even in a market where there's a lot of cars available, because today, the requirements for customer satisfaction, you got to be awful careful what car you put on a used car lot, and obviously the cost of sale we're not moving down into the lower priced car. We tend to be a little bit higher.

Thank you.

The next question from the line of Dominic Martelarte with Bear Stearns. Please go ahead.

Hi, Dominic.

If I could just follow-up on the used car side there. Are you seeing any real difference in terms of values between the foreign and the domestics?

There's always been a difference, if you took $12,000 domestic and took a $12,000 acquisition price of say a foreign nameplate, and you looked at it at 6, 12, 18, and 24, there's always a difference, meaning that the domestic would lose some ground. Now there's been some firming in the SUVs and trucks on that side, but from a passenger car perspective you would probably see a better residual in a foreign nameplate high volume.

So would you say that over the quarter you didn't see the declines as great on the -- or on excuse me the foreign as you did on domestic?

Let me be honest with you. I don't have that in information specifically available. I would hate to give you an answer here that wasn't, you know, right on. We do know that our margins are being compressed because of the higher cost of sale, and that's to meet the OEM requirements in the certified programs.

All right. That's fair. You spoke of vertical integration, I guess, in terms of new and used. The instance of say, Chauncey Ranch, would there be an opportunity where you would take in I guess used cars from say an Acura and if it was a BMW somebody was trading in you would shift it to the BMW dealership. Is that something that you guys see?

We're balancing in a lot of markets that way. We have a first look program that helps us look at our inventories on a daily basis what cars have been selling and we'll even move those vehicles to a brand in that particular market that could use that vehicle. We're trying to do that efficiently. That's one of the benefits with public retailers that have scale in certain markets they can take advantage of taking a Ford in and moving to their Ford store or vice versa with a Toyota or Honda. We're continuing to do that where we have the scale. We'll definitely move it. But you know at Chauncey ranch, we're going to have a pre-owned facility there also, which I didn't mention, and there because it is a premium luxury we might have some Ferraris, we might have other cars that would be able to be sold in that particular market.

And lastly just touching on kind of what you're seeing out in the acquisition market, you said that you really don't have anything in the hopper for the fourth quarter. Is it looking, are things more available, less available, and looking out to next year, do you see UAG doing close to $1 billion in revenue again next year?

Well, I think I said earlier that we have nothing that would close during the balance of Q 4. We've communicated to the street in the past and I think that our actions really speak louder than words, that we've averaged between $500 million and $1 billion in over the last three years, and we would, you know, we would look at, you know, at the marketplace as far as is it easier or tougher, look, you've got a lot of smart people out there in this industry, not only public but private, and the locations, you know, ones that we want we want aggregate to where we have scale and in many cases those are not available. But I think strategically you know we'll continue to look at areas of the country that we can get scale and add on and those would be you know primary, you know, obviously the acquisition, the UK has turned out to be outstanding because we've gotten four or five franchises with no Goodwill, and the right brands to aggregate with our capabilities. And you know we see that there is some expansion by the OEMs in the U.S. for new points but I would say those are you know few and far between.

Okay. Thank you.

And our next question from the line of Rene Shaw with Morgan Stanley. Please go ahead.

Good morning, how are you?

Good, thanks. Could you just talk about regions and any brands, regions that may have performed better or worse than expectations in the quarter and Roger, I don't know if you have it, but could you give it if you have it the used units versus the pricing in the quarter on same store sales basis. Thanks.

Used units. I think our used units were up just slightly and the revenue was up 1.9%. So we had a higher cost, higher sales value on our used. What was the other question, I'm sorry.

Just on how different regions and specific brands performed, anything that performed better or anything that performed a little below plan.

Well, from a regional perspective, you know, all of our regions have business plans and you know we have more scale, in certain areas than we do in the other, but I think overall, you know, we were well balanced. We came in and let our estimates, our forecasts, the zero-zero obviously continues to create momentum in the marketplace for all brands, even though you're not offering that. But I don't have a specific region in the country that was way up and another one that was way down. I think that everyone was pretty much on pretty much on plan. And when you look at, you know, at our same store, and you go by brands, you know we were up almost 10% in Mercedes, you know for the quarter, you know we were up 21% in BMW. Lexus we were flat. Jaguar up almost 28. And Infinity up 14. Acura up 4.7. Land rover 78, Porsche 36, Volvo down 6. Ford we were flat. Chrysler up 1.3. Dodge up 7. And GM up 10. So then you go onto the high volume Toyota is up 4, Mazda up 11. Nissan down 5. 18 up Honda and 15 up Hyundai. When you really look at same store and are our key drivers, we were in pretty good shape.

Great, Thanks.

Next we'll go to the line of Michael Millman with Solomon Smith Barney. Please go ahead. .

Michael, how are you?

Okay. Thank you. Maybe you could give us and this might be more rule of thumb, sensitivity, by that I mean if everything else being equal, if Saab is off by 10%, what does that do to results? .

Well, I think that one of the things that we haven't done probably very well in communicating the investment community is the ability of our parts and service gross to cover our fixed costs, and if you look across the different, the public retailers, you'll see that you know one of the drivers we're all trying on achieve is fixed coverage, covering our fixed cost. And when you look at the balance of our costs, you know, we have a big variable piece, and to me, my goal is to have 100% of my fixed covered by our parts and service, so incrementally your profitability goes when you sell the first vehicle. To give you a sensitivity analysis on the phone today of 10% reduction, I think an overall 10% in the market might be one number, but then you've got to go down by manufacture. You just can't do it on a general basis you've got to say where is Honda going to be, where is Toyota, where is Chevrolet, where is Ford going to be, because then we could give you a much better number, because even this year you've seen manufacturers down, and you know we've been able to out perform that from the standpoint of some of the OEMs and I think we would expect to be able to do that you know next year. But again, you know there's a lot of noise out there, in the marketplace, both industrial and consumer sectors, and you know I'm certainly not in a position, be in a different business I guess to tell you exactly, you know, what the market is. What we need to do is be sure we're on offense and that is to be sure that we're looking at our cost, we're looking at our inventories, and you know we tend to look at our budgets by brand by each market, and I just not predicted the SAR's in the past. I'm sorry.

Maybe can I ask another way. Is there relationship in the near term between P & S, and new vehicle sales for SAR?

P & S... oh parts and service. Well, I think that your parts and service grows based on what you've done in the past. See, that's the good news. This units in operation, and with the extended warranties, the full circle like BMW, and the complexity of vehicles, these are not going to go to the quick fix you know or to the Jiffy Lubes and places. We're bringing those vehicles back into the stores. In fact, big tire programs are out there, Quick Lube. If you build a new Honda dealership you've got to have quick service. I mean this is just part of the new structure. So I see that trying to drive that customer back to get that satisfaction level, and in many cases, that full circle program is sold at the time you make the sale to the customer. So I think that we need to manage through extension of body shops, seven day a week service hours, in some cases 24 hours a day to be sure that we do not lose that customer and help us drive this fixed coverage. .

Currently, how much of the fixed cost is covered by parts and services or service and parts?

60% of our total costs, including our corporate GNA, is covered by our fixed parts and service gross. And if you took the, took our corporate GNA out, it probably would be 65%.

Thank you.

Next we'll go to the line of Jerry marks with Raymond James. Please go ahead.

Hey, Jerry.

Hi, Roger. Just kind of a quick follow-up. You guys posted some really great numbers on parts and service given at least compared to some of your competitors. Did you guys see some of that growth offset by what a lot of people have been talking about a weakness in the collision and repair, or is it just that with these new centers you're getting incremental business.

Well same store is up 11%, so I didn't see any softness in that business. In fact, you know we would have to go back and same store some of for a year, we've seen that grow. We absolutely made it a condition you know on the service drive to be sure we communicate to our customers that we have you know body shop capabilities. So I see that has been a real benefit to u us. And as far as the service and parts, you know, we have people have said gee, you're spending a lot of money on facilities. Yes, we are. On the other hand we're air conditioning all of our shops. We're opening them six and seven days. And many times at least two shifts. And this is giving us better utilization, and it's driving more parts and service growth. Also I think you know we're training our people. We're putting more emphasis on getting the right people in the service drive, because you know that's a sales process it takes there. Our average dollars per repair order, you know, are going up, and I think that's key. You know just to give an example as we were trying to generate traffic in North Scottsdale at our second Audi point out there, we had a free oil change program and then the average repair was $428 -- that was incremental business. So we not only think about the front end of the business but we also have to think how to generate margin in the back end.

Have you increased number of service technicians you have, because I understand that's a problem of getting service technicians. Have you had to add?

We've obviously had to add because we have new facilities. I think there was one number that I remember just in the Phoenix area, you know over the next two years we're probably going to need 300 technicians you know to meet the requirement. Now we have, we made an investment, not UAG but Penske has in UTI, Universal Training Institute, which is the premiere training for mechanics and we're using that not only to help feed our dealership operations but also our truck leasing. So we're committed to taking this individual that wants the route of being a technician or someone in our business trying to train them properly and we'll sponsor those individuals and put them through the training program, then they will land in our dealerships. You know, in fact Porsche, BMW, people like that have really endorsed those programs.

Great. Thanks a lot. Great quarter guys.

Next we'll go to the line of Carl Dorf with Dorf Asset Management. Please go ahead. .

Hi, Carl.

Good morning. Good quarter. Just a couple of questions. One, I wonder can you tell me first in the international area, is it all UK currently. Do you have anything anywhere else?

We have a joint venture with Warner Knicks in Frankfurt with Toyota. We have a 50% joint venture there, and that covers the Frankfurt market with approximately two locations with one under construction, that's Toyota-Lexus and then over there, they have sub dealers either the small service stations that they have there, which we also cover, and that business by the way is up, these are equity investments. We also have an equity investment in the market in Mexico. As you know, Toyota decided to move into Mexico this last year. They had six dealerships open. I think four in Mexico City. We have the Monteray market and there's another operator in the Guadalajara market, so that would be our operations and then we have an equity investment in Brazil in Toyota Lexus and Chevrolet.

Did I hear you correctly before when you said that 17% of your revenue in the quarter was from international?

That's correct. .

Could just very, very briefly go over the pros and the cons and some significant differences between the international and the U.S. business? In other words, what is better there, what is worse there? You know you did mention that margins are lower, that kind of thing.

Well, the margins are lower, but the ratio of new to used is higher and we run .5 I think aggregated here total UAG they run up .7. So that's obviously a plus. From the standpoint of the UK and that's where our real presence is, you know we have the dominant share of BMW and Mercedes and the ability for us to go into this country, and add three or four or five brands like that would be impossible. From the standpoint of the purchase prices, I think that there's no question that we hit at a very, very good time. We've seen those prices expand you know quite a bit over the last three months. There is a lot of consolidation going on by the OEMs and that's why they are offering certain markets as they reengineer their marks they are looking at larger players there and allowing us to take on these franchises with no Goodwill cost. So it's a matter of us expanding our management and also we think that there's an opportunity to continue to grow there. So that's UK. I think as you get into Europe, we want to be sure if we partner with someone it's an investment where we have local knowledge and local investment, and those people obviously having some capital in the game. When you look at our UK transaction, from the standpoint they ran 26/24 per transaction on used, versus our 17/87 here in the U.S. So even they were good as far as margin. .

Would you say, think that you have more opportunity internationally than you do domestically?

Well, I've said before that based on, you know the current management capability, the good news we bought a public company, which had all of the requirements and duties of a public ownership, and to me that was very positive, because we got a management team in place. We're able to strip away some costs there, which obviously are involved in public ownership. But I see our mix of foreign domestic probably we would not want to go more than 20% based on at the moment, that's only because of the knowledge I have today. I wouldn't, wake up tomorrow and think we would want to go 50/50. We've got a great marketplace here. It's competitive. We all have framework agreements, which at the moment limits you to certain amount of franchise and by brand, those obviously get reviewed on a periodic basis. But you know there's a lot of opportunity, I think, on the international side, and in the cost our last obviously, can you manage those businesses that's one of the things that you know, we were so key to buy Sytner because of the key guys in place.

Do you do any currency hedging.

No.

Okay. On Goodwill, do you review that on a quarterly basis?

Well, the Goodwill amortization, you know, obviously has gone away, and we made no adjustment to our Goodwill under the current statutes that were available to us, you know, during the first quarter. .

Is it reviewed, though, Roger on a quarterly basis, do you review it once a year, how often...

I'm sorry, I missed question. We have sat down with our auditors and we have aggregated you know in our regions the Goodwill, and we look at that from a standpoint of empowerment, absolutely, it's part of our, you know the due diligence you know of our auditors on a quarterly basis.

Thank you very much.

Next we'll go to the line of Peter Cirrus with Gorilla Capital. Please go ahead.

Hi. I have actually two questions. First, Michael was asking a question before about you know if sales declined 10%. I have a little different question. If you look at the prices of the stocks of your company and the other companies in the industry, they are all selling as if the world is going to come to an end sometime soon. And I guess what I'm curious about is have you ever, you know, stopped to think about what trough earnings might be? In other words, you know, if bad things happen, let's say the industry, let's say every company declined the same amount and you know the industry did 14 million in sales in new cars but higher percentage of used cars and you know whatever the percent repair and stuff like that, have you stopped to figure out what sort of the worse case scenario with your earnings might be?

Well, you asked me for the trough scenario. Probably not ready to answer that. I think you have to go back and most of the people that are involved today in this business have really been operating for a dozen or more years, and we've had ups and downs, but what we do have is a variable compensation structure, which allows to us pull the throttle back as the business changes. Today, we probably run of our gross profit. 30% of gross profit is variable. So you know that goes away if the profit goes away. On the other hand, when you look at the total business, this fixed coverage, which I talked about, you know, is very, very important. We don't have the cannibalization that you have in the fixed box retailers. You know we have a primary market area, which today is typically giving us, unless there's some grandfather stores, 10 to 15 miles, plus we have franchises. So we have this repeat referral business, and remember in other industries you've got to buy something new, and some of the big retailers are going into service. That service is the backbone of our business, so we get that customer back, and with complexity of the vehicles we bring that customer back, we want to now go out and get the muffler business, we want to get the tire business, and the oil change, something we let go, but overall I think that will drive us, and to me I can't give you a number and I would be wrong to do that, if the industry was down 10%. I can tell you this. If the industry is down 10%, I've got to do better. Done better on same store basis than the industry has this year. Now, to me we've built a company in the last three years where we probably have added overheads in the area of training, in all of the areas that we think will build this company to have the metrics that we need to be successful, and to me the overall industry at least from the public side are committing capital, and we talk about body shops. Who wants to be in the body shop business. We think it's absolutely important that we're there, because then we are able to take care of that customer, you know from start to finish. So to me, this industry will out-perform you know a down turn. It has in the past, we can sell used cars, we can lower our inventories, we don't have huge printing presses, you know or big factories that we idle. We basically pull our people back and in most cases we'll make no change at all as far as people costs in the parts and service area.

I just want to say I agree with everything you say, and the reason I ask the question is that I believe that if you and the other guys who runs the dealers can articulate to people what the trough earnings are that will take a lot away of the fear and the stocks will go up. So that was you know why I was curious about the question. The other question I had is again a doomsday kind of a question, but if something bad were to happen to one of the big manufacturers, does that change... would that benefit or hurt the larger publicly owned dealers?

Well, look, number one, if something happened to a big manufacturer, the market is probably going to stay the same, so those units are going to be spread across. There will be winners and losers. Obviously, you know we would have the public players would spend more capital. Look at the situation today. Oldsmobile getting out of the marketplace. We made the decision 30 days after it was announced to get out of the business, we've taken that location and put a Honda dealership in it in Indianapolis and it's number one in the Midwest. So we have a lot more flexibility to utilize facilities that might become redundant in the time you call doomsday. I can't really comment on other private retailers, but you know we would have the ability to take those and be able to modify those or use them for something else.

Thank you very much.

Next we'll go to the line of Earl Eldridge with USA. Please go ahead.

Hi. How are you?

Great.

I guess I'm going to stay on the doomsday bandwagon here a little bit. Only reason is we've seen so many indicators, consumer confidence was out today, and it's really low, I don't know you've seen that yet or not. And we see so much incentive out there by the manufacturers, GM, Ford, everyone they are not only doing the 0% but they are expanding the 60 months, no payments for until next year, and they are even doing some early bird bringing the leases back in. I mean it looks like we're starting to see almost desperation levels from the automakers. And I want to get a sense from you in terms of the future, how bad is it going to get? I know you're saying, and you know, I tend to see some agreement on this, that you know you guys can weather the storm of service, parts, used cars, and lowering your inventory, but I mean, you got to think that things are going to get bad for the market as a whole, given all the indicators that we're seeing.

Well, number one I think that we have to go back and we have to look at each OEM, and if we look at the market in aggregate, we'll probably come up with a wrong answer, because each one of these brands has had certain successes, you know, during the last nine months. And depending on the size of the incentives, the guaranteed leases, the pullbacks, the zero-zero, could affect those brands you know maybe greater than ones that didn't have that. Now, at the end of the day what is going to drive the success of any one of these brands is going to be residual value and quality. And that continues to be the benchmark. And I don't know today, you know, how much has been pulled forward. I think that the travel habits of the U.S. population has changed since 9-11. The complexity of going to an airport to try to get through. We see people driving through Detroit to Cleveland. You will see some people driving to New York. So we're seeing a little higher mileages on cars in some areas. So I think there's some other dynamics. Look, obviously consumer sentiment is lowered from the standpoint of the current situation. I don't know if that's due to the stock market number, due to the Iraq situation. All of these things are dynamics. But just talking about the automobile business by itself, we have to as individual companies utilize all our resources, and one of the benefits we have to mitigate a reduced marketplace, is the ability to reduce our cost, because of big portion of our costs are variable. And it's been that way for many, many years, and that's why there's been a conscience effort by many of us, including UAG, to build this fixed gross profit, and then that gives us a margin of 45% versus selling a new or used car at around 10%. So we'll continue to do that. As far as the market, you know, we have said we have acknowledged the range from the 1.82 to 1.86 so we see this next quarter, at least the current quarter we'll be able to navigate whatever the outside news might be.

Well, given your vast experience in the auto industry, any suggestions for the automakers? I mean I don't know they are running out of ideas for incentives? Should they continue to put more cash on the hoods or what?

Well, I'm trying to be a downstream, not a manufacturer. So, like I said, you have to give them a lot of credit because they've got this whole nation rolling you know after 9-11. You know we had zero-zero in California, In 2000. So this wasn't the first time. Obviously now there's a lot more of it, and I'm not sitting in those meetings to determine the benefit. There has to be some reason. Maybe because low interest rates it's better off to give zero-zero than guarantee residuals on leases. So it may be the ability to securitize retail paper that comes from these zero-zero leases versus finance contracts is easier than doing it with leases. So there is a number of things that might drive that particular offense.

Earl Eldridge. Thanks a lot. And where was that Oldsmobile Toyota switch? Sounds like that was a pretty creative thing to do.

That was in Indianapolis, my favorite town.

Thanks a lot.

We have a question from the line of Keith Hogan with Advance. Go ahead.

Hi. A couple of questions. Going back to your prepared comments on Sytner?

yes, Sytner.

You talked about some dealership wins you said you won a Toyota marketing area, three Vovlo dealerships, one Lexus, one BMW. Can you drill down a little bit. First of all, I don't understand what it means like winning a marketing area. Are you all of a sudden the dealership in this marketing area, and if that's the case, was there no dealership coverage there before?

Well, let me take that one on first. We were awarded the entire market area. This would be if you said someone like Cleveland, Ohio, you would have all of the Toyota outlets in that particular market. We were given Birmingham, England. Obviously the market share is about 4%. So this is third largest city in the UK. They had one dealer there and they had some other dealers, which they had canceled. And we the benefit of picking up that entire market because of the experience we've had with Toyota and we're making a considerable investment to strategically locate three or four locations in that particular market. So this was awarded with to us with no Goodwill. Obviously we have to make an investment in people and in working capital. Volvo franchises also were new locations in southwest London. In the Lexus franchise in Milton Keen. As they have expanded their footprint in the UK we've been the been the benefactor.

So in terms of that Toyota marketing area, there's one that was fairy well established there? Is that one, did they pull the plug on him?

They had a dealer there that was also a Ford dealer and ran into financial problems, and they, the franchise was terminated, and we picked up that franchise plus the market.

Okay. So you have to build a Greenfield facility or do you pick up that facility.

No we picked up a facility in central Birmingham Then we're going to put in three satellites to cover the market.

Okay. And then on these other new dealerships, are all of these Greenfields or some of them going to be next door to an existing other brand.

Well, in the Lexus situation, Milton Keens we'll lease the facility of a previous dealer that has vacated and also we'll rent facilities in southwest London for Volvo.

Okay. So it sounds like, is this business that will start rolling on in 2003, or is this beyond 2003 at this point?

We're getting incremental business now, and that business will roll on obviously and be fully mature as we get into 2003 and four.

Okay and what portion of the capex guidance for next year represents the commitment to fund these new dealerships over there?

I would say probably about 30%. Not just these but I mean the total capex for the UK.

And given, you must have to make some sort of sales penetration rate assumptions when you decide what kind of capital to put into these dealerships. You know, when these are up and running for say, a full year, what kind of incremental revenue do you think you glean from all these dealerships you listed in the UK?

I just don't have that available to me, but let me say this. We would expect to do in the market areas that we go, we would expect to out perform the country penetration, and I gave you some numbers here, hang on, during, you know, during our discussion, so that would be our first bench mark. And then we look at a return. You know, obviously in the U.S. and around the world people try to look at 3% minimum, at the dealership line, from an operating income perspective based on sales.

Okay. Two other questions, which are simpler, quicker than that one. On the used vehicle side, is your mix of used vehicles similar to the mix you walked us through in terms of the new vehicle sales or is it much more random than that? Like 24% of your new car sales are Toyota Lexus. Is that your biggest used vehicle business or do you break it down to that degree?

I guess, if you looked at each individual brand, at least 50% of that brand would be vertical. Now, some might be more, BMW and Mercedes might be more. Porsche obviously would be maybe 90%. So I see the industry moving more vertical because of the certified programs.

Okay. And then the last question, because you have so many foreign nameplates, current disruptions to supply given you know the continued slow down in disruptions the west coast ports are you seeing much of that?

Yes we saw an impact this past month. In fact that's a good point I didn't make you know during the discussion about October. We will have some negative impact and we'll get if back, because those vehicles are you know in the queue to come out. We saw Acura, we saw some Honda, some Lexus just to name a few that I can think off the top of my head, plus there were some supplier components. You know they shut down some plants because they couldn't get some of the components, in fact, a GM Toyota joint venture plan.

Okay. Great. I appreciate that. And congratulations on a pretty successful IRL season.

Thanks.

Our next question will be from the line of Zafar Nava with JP Morgan. Please go ahead.

Yes. Hi. One quick question on your new gross margins. They have declined slightly year over year. It seems a little surprisingly seeing that you have Sytner in this quarter, which you didn't have last and it's more high-end. Can you explain what is going on here, and also can you talk a little bit about floor plant assistances provided by dealers, do you see that being back a little?

Let me talk about the margin. We were at 8.4% last year, and in the third quarter, and we're 8.2. I mentioned earlier that our margin was down, on our domestics. Slightly in the third quarter we had some pressure. You know also, I think that just in order to maintain our market share, you know, you're seeing some of that, but our overall mix of vehicles, when you look at the gross profit for transaction, which I'm following, you know that was up. You asked about floor plan credits?

Yes.

Yeah. We were at $8.6 million this year versus 7.2, so we're up roughly a million three. So I think you'll see that, in fact, as you go forward you will see, if the industry gets tighter, we've seen it it's at least been a practice in the past that there's nor floor plan support by the manufacturers.

Okay. Thank you.

Ladies and gentlemen, as a reminder, if you do have additional questions at this time, you may press one on your phone keypad. Next we'll go to the line of Ted Bernhart with Shankman Capital. Please go ahead.

Hey, Ted.

Just to follow-up on Hudson's earlier question. What was the gross capex for the quarter?

Gross capex for the quarter was $52 million.

You still looking at $155 for the year for growth capex?

I would say probably $140 to $150 would be, and you know the balance would be offset through sale lease back.

And of that about $100 is for the Arizona facility?

Well, Arizona, yeah, that would be right.

And then for next year, I know you gave us the net number of about I guess 50ish, what would be the gross number for next year?

Well, we have a project in Turnersville, New Jersey, which we'll have seven dealerships -- BMW, Toyota, Honda, Nissan, Acura, Chevrolet and Hyundai and to that we have a commitment. It will be probably a project in the $50 million range, and we have a commitment to do a sale lease back on that. Now, I don't know how much of that will get done next year. That would be the major problem that we're dealing with. So you know we will tend, the rates today are very attractive from the standpoint of sale leasebacks. There's a real appetite out there for our type real estate, and we would expect to in most cases on our major projects to use sale lease back to keep our out-of-pocket capex in the 40 to 50 million dollar range net if you looked over the next three on four years.

That makes sense. And of the large boxes like the Scottsdale or this new seven-dealership in New Jersey, how many do you have like that or how many will you have by the end of '03, do you think?

Well, let's take North Scottsdale. San Diego, we have contiguous BMW, Lexus, Toyota and Mercedes, which are just are being completed. We have northwest Arkansas in Fayetteville with a big complex. We see these as really, really great opportunities because you really have one back office, in many cases you have one sales management. You can, your customer service in fact, you know, we have 400 loaner vehicles in North Scottsdale. We have a separate area we take the customers to get those. So the complexity of the customers waiting there's a lot of nuances from the standpoint of customer service that we can generate. The body shop aggregation and these big locations, so we'll have five or six of any magnitude, you know, in place you know by the end of next year.

So usually you have enough data point to prove return invest in capital building more and more of these things.

There is no question. When you look at it, you know, it's not invested capital. It's probably the efficiencies are generated by productivity. I mean, you can have five factories of 10,000, you're probably better off to have one factory of 50,000 from a management perspective, you know, from security, from a availability of inventory, the ability to access your vehicles. We're having on many of these big sites we have silent auctions on our used cars, you know, one day a week we'll aggregate all the cars on the brands and then have an auction and bring the wholesalers in rather than having five or six taking place some other way. So those become you know very efficient for us.

I'm sorry. Profitable on the wholesale side?

Well, we lose money on wholesale that we have on a year to date basis. But I will say where we're running these aggregate auctions we're getting probably, I would say, I was going to say $100 to $200 more per car in many cases when we operate rather than just sending them to the sale with not having this type of sales opportunity on an aggregate basis.

Thank you very much.

Thanks.

Thank you for your question and Mr. Penske, at this time we have no further questions in queue.

That you very much operator. We'll sign off the call. Thank you. .

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