Penske Automotive Group Inc (PAG) 2002 Q4 法說會逐字稿

Good afternoon. And welcome to the United Auto Group fourth quarter 2002 earnings conference call. A press release which details UnitedAuto's fourth quarter results was released this morning and it's posted on the company's web site which can be viewed at www.unitedauto.com. This call is being recorded. If you have any objections, please disconnect at this time.

I would now like to introduce Mr. Roger Penske, Chairman of UnitedAuto. Please go ahead at this time.

Good afternoon, I'm pleased to present our report for the fourth quarter of 2002. Statements made in this conference call may include forward-looking statements regarding UAG's future reportable sales and earnings growth potential. Our 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 additional information about UAG which is contained in UAG's filings with the Securities and Exchange Commission.

Today with me in chief caucus are Jim Davidson, Executive Vice President of Finance. Bob O’Shaughnessy (ph), our Controller and Tony Pordon (ph), Vice President of Investor Relations. I appreciate you all joining us to review our results this afternoon.

This was a great quarter for UnitedAuto. It was a quarter where we proved the resiliency of our business model despite nearly 10% decrease in U.S. new vehicle sales during the fourth quarter of 2002. We achieved strong growth in sales earnings before one time items. In fact, revenue increased 24% to $1.9b. Our same store retail gross profit increased 3%, despite 1.6% and 5.3% declines in new and used retail revenues, compared to the industry record fourth quarter in 2001. Our same store service and parts revenues increased 7.6%, really further validating our strategy of including units and operations and investing in capital improvements in capacity expansion in all of our locations.

We enjoyed strong growth of 8.4% in same store F&I revenues compared to the fourth quarter of 2001. And income from continuing operations before one time items, increased 25% to $13.9m. EPS from continuing operations before one time items increased 10%, despite a 15% increase in weighted average shares.

Now before I discuss the specifics of the fourth quarter results, I'd like to highlight some of the accomplishments we achieved during the past year. As you know we raised $365m in additional capital through the sale of newly issued shares and subordinated debt. We increased the available float of our outstanding stock by 6m shares or 65%. I think Penske itself demonstrated its continued support and confidence in this business by investing an additional $62m through the exercise of warrants during the year. We also purchased one million shares of our stock under our board authorized 3m share repurchase program.

We acquired 69 franchises with an estimated annual revenues of $1.2b and as you know from our press release this morning, we announced the signing of a definitive agreement to acquire INSKIP Autocenter in Warwick, Rhode Island with $300m of revenue.

We also strengthened our international presence with the acquisition of the premier auto retailer in United Kingdom, the Sytner Group. We also divested five dealerships, with annualized revenue of $240m. We generated same store sales and gross profit growth in 2002. And this really is the fourth consecutive year since our Penske investment in management.

Just let me go over the components of the full year same store growth. Retail revenue of 4.9%. F&I revenue up 9.9%. Most important service and parts revenue up 6.2%. And retail gross profit, and this excludes fleet and wholesale, of 5.9%. Overall same store retail growth revenue was 3.8%. I believe increases in units and operation resulting from our vehicle sales in the past will continue to drive the growth of our higher margin service and parts operation. I'd like to point out that 73% of our revenues were generated from foreign and luxury name plates and that 37% of our revenue was derived from luxury name plates.

As we've discussed, the foreign luxury name plates continue to perform well in our market. We invested over $100m in capital projects during 2002. We improved personal turnover metrics by reducing company wide turnover by 16%, from 64% to 54%. This compares with an industry wide average of 80-90%.

Despite a difficult new and used vehicle market in the fourth quarter, we're pleased to report full year EPS from continuing operations of $1.82 per share for one time items which was in line with our guidance.

Now let me take some time and review specifically our fourth quarter results with you in detail.

One time items. You will note in our press release we recorded an after tax charge of $13.6m or $22.8m pretax, 33 cents per share during the quarter. This charge relates to the settlement of long-term contracts in conjunction with a streamlining of our western regional structure and these contracts are related to acquisitions that were made in 1996. Also, we expensed a non-compete agreement with a former member of management, which has no longer future value with the company.

Moving on new retail sales. As you know we face considerable headwind in the fourth quarter of this year as we were up against a difficult comparison versus the industry record 2001 fourth quarter. The fourth quarter new retail revenues increased [15.8%] to $1.1b. Same store new retail revenue declined only $15m, or 1.6%, compared to last year, demonstrating the strength of our brand mix and our geographical diversity. Our new unit sales were up 9.7% to almost 39,000 vehicles.

Used vehicle retail sales for the quarter increased 43% to $385m. Our used unit sales were up 19.4% to just under 20,000.

As I've noted I think in our recent quarterly reports, this past year, 00 financing and other significant cash incentives offered by the OEMs have continued to result in a migration in the buying habits of our consumers to affordable new vehicles. Our priority in the future is to offer our customers a meaningful shopping opportunity for a quality used vehicle, including certified OEM programs. And to that end we have continued to actively monitor the quality of our used car vehicle inventory and have maintained our used vehicle inventory supplies at approximately 36 days.

Finance and insurance during the quarter. F&I revenue increased 24.2%. And our same store growth was 8.4%. Just to note on our average growth per transaction was up $71 per unit to $766. Our ability to continue to realize increases in F&I gross per transaction is due in part to our brand mix of foreign and luxury name plates. Of these brands selectively, I say selectively, participate in incentive programs from to time. They do not participate as aggressively in the heavy incentives offered by some of the domestic name plates. Our combined F&I lease penetration was 73% during the fourth quarter and 57% of these was with our OEM captive finance partners. Leases represented 23% of our new vehicle finance and lease transactions during the quarter. Our extended warranty penetration was 37%.

Moving onto the most important parts and service part of our business, in the fourth quarter our revenue increased almost 39% and our same store increased with 7.6% to $156m. Our body shop revenue increased during the quarter 12.9%. And our same store body shop revenue increased 12.4%. So we've had significant traction in our body shop operations. During 1999 to 2002 same store service and parts revenue growth has averaged 7%. I believe this industry leading performance is a result of our capacity expansion and our emphasis on putting units in operation. We expect to continue this as we go forward.

On the gross profit side we were up 29.5% during the quarter. On our same store retail revenues declined as I mentioned before, modestly for the quarter 1.1%, our same store retail gross profit increased $6m or 3%. Also, we had some margin expansion during the quarter. An increase of 67 basis points from 13.8 to 14.5.

On the SG&A front, excluding one time items, SG&A was 12.1% of our total revenues. Excluding the effect of goodwill amortization in 2001, SG&A increased $59m versus the fourth quarter of '01. Approximately $52m of this or 88% of this was an increase as a result of acquisitions. Other components have contributed to the increase obviously as we see pressures on employee benefits, primarily medical, up almost $2m. Insurance up $1m, and rent and depreciation up $5m. The rent and depreciation increases result from our facility improvement and capital expansions along as many of the image programs required by our manufacturers. These commitments will increase our revenue and gross profit in the future, as they have been shown by the increases in the recent quarters.

Interest expense for the quarter was $10.7m. Our core financials was $9.6m, which includes a $3m swap expense and our floor plan credits for the quarter was $8.2m. And those floor plan credits are recorded at the cost of sales. Our effective tax rate was 40.5%.

Let me just take a quick review of the balance sheet that you've seen today. Total inventories at the end of December were $973m, which includes $229m from acquisitions. Inventory turns, or days supplied, new, was 7 turns of 51 days, supplier used at 10 turns, that’s a trailing 12 month by the way, of 36 days, parts at 6.3 turns or 57 days. If you took December sales and inventories, we'd have a 59 day supply of use or again with that good management controls within our new inventories.

Capital expenditures, major dealership projects continue to grow in San Diego and Turnersville at Philadelphia Metro. Net CAPEX for the year was $100m.

Moving on to our debt. UAG's debt position at the end of December, long-term debt was $666m. If I broke this down, borrowings under our $700m credit agreement, $343m, which leaves us with more than $350m available at the end of 2002. We also have $300m of ten-year senior subordinated debt outstanding. And $23m of other long-term debt which is basically summit Sytner and seller notes that were taken during certain acquisitions.

Our debt to capital ratio is 49% versus the same period of 52% in '01. Our goal is to maintain the debt to cap ratio at approximately 15%. Our total debt was $1.6b, including $908m of floor plan as of December 31, 2002. And approximately $500m is fixed, the weighted average rate of 8.1% and average turn of 7.9 years. At the end of the year our blended average borrowing rate for the entire company was approximately 4.5%.

Excluding one time items, EBITDA was $42m for the quarter, which represents a 14% increase over the fourth quarter of 2001. Excluding one time items, EBITDA for 2002 was approximately $189m, which represents a 29% increase over '01.

Let me just provide additional information on our acquisition Sytner in the UK. Obviously as I've stated before it's the premier prestige auto retailer in the United Kingdom and certainly exceeded our expectations during 2002. We operate 67 dealerships out of 49 locations. Revenue for the ten months was approximately $1.1b. And that included approximately 14,000 new vehicles and over 10,000 used. The new to used ratio was 0.7, which is excellent, which compares to our 0.5 in the U.S. We’re the largest BMW and Mercedes retailer in UK. And we’re the second largest retailer of the PAG brands which are Ford's, which include Jaguar, Land Rover and Volvo. Finally, Sytner’s overall gross margin for the quarter was 14.9%, compared to 14.4% for our U.S. operations. Just to give you additional note. International revenues were at 16.5% of total revenues for the quarter.

Let me make a few comments quickly on the Internet. The Internet continues to be an important part of our business. In fact in 2002 we sold over 22,000 units via the Internet, roughly 10% of our total new and used retail unit sales. Our top Internet brands which were aligned very closely, are Toyota, Honda, and Nissan and also the partnership with carsdirect.com continues to dividends.

Before I open up the call for questions, I'd like to review some additional important facts about our organization. We continue to demonstrate our ability to grow our business organically and also through acquisitions. Our capital investment program continues to pay dividends. We've been able to grow our same store retail revenues every year since our Penske investment in 1999. In fact, same store retail revenues have grown on an average of 7.9% in 1999 through 2002. Perhaps most importantly, same store growth in the high margin service and parts business has been an average of 7% through the same period of '99 through 2002. We will continue to invest in facilities and markets where we see the greatest return potentials.

Let me take a few minutes to review just a few of our major projects which will give us scale in the future and major market presence. As I said before, investments we make in new showroom, service and repair shops, body shops, are for the long-term. And in many cases these are one time and they'll generate an annuity of revenues for 25 plus years.

Just to mention a few - in San Diego, the Kearny Mesa auto mall is located ten minutes outside of downtown San Diego. The site includes four contiguous dealerships, BMW, Lexus, Mercedes Benz, and Toyota on 28 acres, the 227,000 square feet of building which will include 207 service bays, nearly double the number we had prior to our capital investment. We expect this complex to generate over $500m in annual revenues.

Looking at the Scottsdale, Phoenix market, our Scottsdale Phoenix market has 20 franchises. Our Scottsdale auto mall features 11 franchises on 40 plus acres offers 450,000 square feet of facilities and has 253 service bays. Our Phoenix area also consists of nine additional franchises including Lexus, Ferrari, Bentley, Rolls Royce, two Ford, a second Audi, Land Rover and Jaguar points. The total Scottsdale, Phoenix area will generate in excess of $900m in annualized revenues, that's really over 10% of our annual revenue forecasted.

Moving on to Arkansas, we operate 13 franchises in Little Rock and Fayetteville. Our franchises in Little Rock are located across 75 acres, with almost 300,000 square feet of facilities that include 207 service base. In northwest Arkansas, Fayetteville, we operate four dealerships in single auto mall including Acura, Chevrolet, Honda and Toyota, with 59,000 square feet of building. This area represents the sixth fastest growing region in America. It's the home of the University of Arkansas and serves as the headquarters of Wal-Mart. Our entire Arkansas operation is expected to generate $800m in annualized revenues.

Washington D.C. Tysons Corner, Virginia. We operate three franchises Audi, Mercedes Benz and Porsche in the Washington D.C Metroplex. This is the second fastest growing county in the U.S. and right near the top of household income. These franchises represent over $200m in annualized revenue.

And finally we've just started on the projects which will redefine automotive retailing in the Jersey and Philadelphia metro markets. We have seven dealerships currently operating in outdated facilities which include our Acura, BMW, Chevy, Honda, Hyundai, Nissan, and Toyota. We have 66 acres where we'll build 210,000 square feet of facility to grow these businesses. Upon completion our service bays at this location will increase to well over 170. Expected completion is 2004 and these dealerships will generate over $300m in annualized revenue.

So if you just combine markets I’ve talked about this afternoon they'll provide over 30% of UnitedAuto's total annualized revenues. They provide an example of regional presence and market scale which we've been able to generate in a short period since our investment in 1999.

I'd also like to reiterate our announcement this morning that we have signed an agreement to purchase the INSKIP Autocenter in Rhode Island, a major complex representing nine luxury brands. This acquisition will further compliment our strategy of generating scale and market presence.

And finally our 2003 guidance, as we move into 2003, we expect to earn $1.96 to $2.06 per share with first quarter guidance of 35 to 40 cents share. Our estimates are based on 41.2m shares, average weighted shares, and same store retail growth of between 2-4%.

So at this time let me open it up for questions. Thank you.

If you would like to ask a question, press the 1. If you pressed 1 prior to this announcement, we ask you please do so again at this time. You may remove yourself from the queue by pressing the pound key. If you are using a speaker phone, please pick up your handset before pressing the numbers. Once again, if you have a question, please press 1 at this time.

Our first question is from the line of Nate Hudson (ph) with Banc of America. Please go ahead.

Congratulations on a good year. Couple of questions for you. First, the charge you're taking in the quarter, how much of that is cash and how much of that is non cash?

Well, basically it's all cash.

Was that paid out in the fourth quarter?

No, it will be paid out over the term of the contracts that we have settled.

Second question. The Rhode Island acquisition, how much are you paying for that, and how much investment do you expect to make in that over the next year or so?

We haven't in previous calls given the dollars, especially since it has not closed at this point. But I would say that one of the things that made it quite attractive was that the seller had aggregated about 45 acres of land in one location, and we have the ability to lease that facility over a long period of 25 years which includes obviously a five-year option and also the ability to spend approximately $20m in bringing it up to world class status. Those brands are Lexus, Toyota, Mercedes, Audi, Porsche, Acura, Infinity, and Volvo and Bentley.

So we have some world class brands there. And I think it fits right into our strategy of major presence where we can leverage the back office. We can leverage the movement of our key people across different brands and have significant scale from the standpoint of other savings through leverage of costs.

And one last question. Your SG&A, as measured as a percent of sales or of gross profit has drifted up over the last couple of quarters. What should we be looking for going forward? Are you looking for cost reductions there or are you consciously investing in the business?

I think we've said that our numbers should be somewhere between 11.5-12%. And I guess when you look at Sytner, over in the UK, that had a specific part of the increase. In fact, $59m. We were up on a quarter to quarter basis. And I think 70% of that came from Sytner, and then the balance from acquisitions, plus as I've said we've had pressure on health care, obviously insurance is getting tougher and tougher to get. I would say if you're looking at a model going forward we'd be somewhere in the 11.5-12%.

Thanks very much.

Our next question is from the line of Domenic Martilotti with Bear, Stearns.

Good afternoon. Couple questions. First, could you touch on the whole vicarious liability issue, particularly here in the northeast and what's your view on that? I know in the luxury brands it's more of a leasing component there. Give me a little color what you see there.

Let me say this, vicarious liability really follows the organization that owns the vehicle. And that would be the captive finance companies, whether it be a bank or the OEM. So we have no ownership of leased vehicles from the standpoint of UnitedAuto. We don't do any direct leasing out of our own balance sheet. So all that liability would be specifically located in the risk at the lessor. We sell the vehicle from our dealerships into those entities and then they provide the leasing contract directly with the specific individual.

I'm aware you guys aren't involved in originating the leases but just in general how could it affect demand for those particular brands and what are your talks with the manufacturers in terms of trying to find a remedy for that issue?

Let me give you our experience in our truck leasing business, with our one way business, we have states who put caps on vicarious liability. You'll see over time as we go across the country there will be legislations in certain states to limit that liability. I can't say today the impact.

Obviously, we've seen leasing be less of a component, I think it was 23% of our business in the last quarter. So that's gone down as people have really looked at the low rate financing, shorter terms and the benefit of some of the cash incentives that have driven some of that lease customer base into a buy. So in areas where leasing doesn't have that risk, I think you'll see manufactures probably use that as an offense in order to have vicarious liability problems that they would obviously get out of that. I know I've read some of the same things you have about the northeast.

Secondly, looking at acquisition environment, you haven't given any guidance in terms of what you're looking to acquire this year. Is there some sort of range in terms of revenue you're looking to ---

I think – and we always say net, I think net is somewhere between $300-600m, there’s Warwick, RI deal if it's completed will be approximately $300m. We'll be 50% there, based on that. We expect that to be closing early second quarter.

Okay. As far as currency issues, given the Sytner and the weakening of a dollar. Do you have any sort of number in terms of what the impact was perhaps in the last half of the year to the earnings and if there's any hedging in place going into next year as well?

We have no hedging in place and I guess I'm not equipped here today to give you any specific number on any press or minus on the currency movement. I think it would be worth while to call Jim Davidson for you need on that. But there was nothing specific or major that would impact us minus or plus.

What does it look like in the UK, perhaps in continent Europe in terms of dealerships with the whole block exemption in a transition stage. What are you seeing there?

Well, the first thing. There's really two pieces. As we go into the end of this year, there will be the ability for people to, on a selective basis, apply for service capabilities. And that would really give us the opportunity, if we wanted to open up satellite service locations throughout Europe we'd have that opportunity. Obviously it's quid pro quo, someone else could do the same thing.

On the sales side, where that's not going to be addressed for another couple of years. So to me in talking with the OEMs and I just recently had a meeting with the major OEMs there. They're looking at the selective criteria which will require you to have certain capabilities technically. Certain capabilities from a facility perspective, from a capital base.

So I think that's what we'll be looking at. And I'm assuming that the larger parties will play a big part in keeping that market without going into turmoil. We feel good about, in fact we're seeing reengineering today both in some of the premium brands and we're being offered more locations with minimal costs and in some cases just a franchise in order to develop a stronger footprint with less operators.

That's all I have. Thank you.

Our next question is from the line of Rick Nelson (ph) with Stephens Incorporated (ph). Please go ahead.

Thank you. Good afternoon. Can you provide more color on this one time item? And exactly what's happening in the western region, who is leaving and who is coming in as replacements.

Let me go into it in more detail but I appreciate the question. Number one we've taken no charges since our Penske stewardship, that would be point one.

Point 2, the former chairman of UAG had a non-compete contract. And we determined as I looked at this entering into the end of 2002 there was no real economic value to the company so we determined to take the charge.

As far as the west is concerned, if go back to 1996, I think that's early '96, UAG entered into an agreement to buy the Sun Group. That's a group of dealerships in the west, primarily in the Phoenix metropolitan area. And with this purchase there were employment contracts which were tied to that sale. And as I ended up looking at these, obviously I looked at them when I first came in and realized that they had an end game, which is approximately three years from now and that really managed through that until the end of 2002. I decided to sit down with some of the senior management to determine how they were aligned with the company as we would go forward. Obviously, if you have a contract that's quite lucrative and ends in approximately three years, the decision on what you will do to a personal basis is up in the air and to be able to commit today would be tough.

Based on those discussions with some of the key people, we made the decision it was better to settle those contracts today, which gave me the opportunity to look in the organization and offer opportunities for other people to grow, which had a longer runway as far as the company was concerned and go forward. It also gave us the opportunity to really focus more on area management in the west so we could focus more on personnel people in the field. More training, more legal capability out there at this point. And certainly from the standpoint of the business, give us the legs to move forward and really not thinking about what's going to be the end game. This was a good discussion with the people involved. I don't think names are important now.

But on a more important basis we've made a significant investment in CAPEX. I think we want to be able to capitalized on those as we go forward. So I would say it was the alignment of the company's interest on a long-term basis, and also maybe somewhat in conflict, people ending contracts that would end in 3 years we thought, let’s address them at this point, we’d settle and we’d move on. And I think that in that case George Brocheck (ph), who now has the responsibility for western operations will take that on and we won't have the two other layers of management that we had in the past. So with that said, I think the charge was prudent and we'll move on and see the results.

Is that $22.8m pretax, is that all related to contracts or is there other write downs?

It's all related to the contracts in the west and also the former Chairman non-compete.

How many people?

Coming in and out there will probably be a dozen people from the standpoint of people coming in out and people coming in.

Any comments on first quarter trends, how your inventories look today, and what sort of sales you need in March to hit the guidance that you've provided?

Let's talk about inventories. I think I mentioned, if you took our ending 2002 inventory and divide it by sales, we on a new basis, we'd have 59 days, which I think is a pretty good metric. And we have the ability in our system at our headquarters to have daily visibility of not only models but brands and locations across the country. We drive those metrics, basically our inventories are in good shape. There's no question that OEM pushed hard at the end of the year to fill up the pipeline. You'll probably see someone taking the inventories down as they see the inventories going up. Our inventories are in good shape. All we need to do is execute.

The first month of January we had a strong finish in December. I was a little bit concerned as we all were in October, November, but December finished on a high note, getting off in new year is always tough, if you’ve higher accruals associated with Social Security and other unemployment benefits going out so you have a little higher headwind in January, but my biggest concern obviously has just been the world has changed over the last three and a half months and everyone is kind of reacting to that we cautious optimism.

Of course we've been hit here in the Northeast and I don't want to give a weather report. In Annapolis, Washington, New Jersey, Connecticut with three specific sales days we were shut down, and then our impact on the service shops. We might get the sales back on the new and used, but highly profitable parts and services, that’s going to be pushed off, so there could be some impact there. And I think our guidance reflects our best estimate which we have to give you on a call like this for Q1.

One of the things that has a key effect on our quarter is Sytner's first quarter. They have two registration periods in the UK. One in the end of September, which would be our Q3. And one in March which is our first quarter. And there's a registration benefit to the consumer there. So there's a big spend that goes on during that March number. And we expect to see some real momentum in the first quarter which will help us drive us to our numbers.

Manufacturer assistance, was it $8.2m for the quarter?

You're talking about floor plan? Yes, $8.2m.

Why is it for UAG, you don't fully cover floor plan expense as we see amongst other companies.

I think if you take our floor plan expense, our number was $8.2m. We have $3m of swap costs so you deduct the $3m. We'd be at $5.2m or $5.6m and I think we had credits of $8.2, so I think the net benefit was $1.6m. Sorry, I was wrong on my numbers when I went in. But we did have the benefit -- we take those floor plan credits as I said during the call in the cost of sales, we rerecord that at the time the inventory comes into the dealership. There's been consistent with our practices since we joined the company.

Why don't you do that at the time that you sell the vehicle?

I think that ever manufacturer has a different program. Some have none, some this back-end money. We have international operations that have no floor plan credit. So I guess we've elected, it's been consistent with our policies, since I arrived here with nothing really has changed.

Our next question from the line of Gerald Marks with Raymond James. Please go ahead.

Good afternoon. The debt to cap level of 49%, when did you guys -- I guess you haven't closed on the $300m in revenues with INSKIP? Can you give us an idea in terms of what the considerations were for INSKIP and are you still going to be able to hit your 50% debt to cap target with that acquisition?

We'll be able to maintain as I said in the call, our goal is to maintain around 50%. We've been as high as 52%. We've been back at 48%. Ended the year at 49%. But with INSKIP, we'll still maintain that guidance between that cap and color around 50%.

And the charges that you guys announced, I guess the filings indicated [Marshal’s] contract, but I haven’t seen anything regarding some of these other contracts with these other employees in the western region are there any others still kind of lingering employees that you may be considering parting ways with and if that could impact you future in the quarters?

We have no other contracts with employees that I would expect. We have no other ones that I can remember right now that we would be addressing on this basis. Everything else would be -- and I think in the past, all of our separations have been run through the income statement. But these were contracts that as I mentioned earlier in one of the questions, had a useful life for another 3 years and we felt the alignment of our future mission would probably not be aligned with individuals who were going to be possibly leaving the organization within three years. So there's no other people who would be involved in a similar situation. This again, remember, was tied together with the acquisition of the Sun Group in the west.

Chauncey Ranch (ph), did I catch the number right, $900m in annualized revenues, that I presume is at full maturity.

No, $900m is the total Phoenix market in total.

You have a pretty big base there.

Phoenix and Scottsdale but over half of it would be generated out of Chauncey Ranch, so you could say if you looked at it about $500m out of Chauncey and $400m out of the other locations.

Did you guys move some franchises when you built Chauncey Ranch?

We moved Porsche. We moved BMW. We had added a second Audi point, second JAG point. A second Land Rover point. We moved our Acura. We received Volvo additional franchise and an additional Mini franchise with BMW, and a Volkswagen franchise in that market. There were a number of pluses we received, plus giving us certain brands where we really have both north and south coverage from a parts and service and sales location with brands like Audi and some of the one I just mentioned.

Net increase in revenues from Chauncey revenue would be more like a couple hundred million. I want to make sure we don't have $900m left

I would say $200-250m. BMW obviously on a same store basis though, we've seen the stores that we operated in the old location, moving out there have had significant increases. I'm talking about 30-40% increase in parts and service and significant increase on the new and used sales side.

Finally, I just wanted to give a little bit more flavor. In '03, can you tell us what unit comps you expect in new and used and parts and service?

I said 2-3%% on same store increases and again we really haven't factored into our model acquisitions, because, again not knowing what's out there, this is INSKIP transaction, I think we'll be very positive, because it gives us scale in one location from a management perspective, but I'm not prepared here today to give you specific new and used information.

I will say, though, in our numbers, I think that we provided you this morning, we had nice growth for the quarter and for the year in gross per transaction both in new and used and also F&I. So we see that continuing to grow as we have more, less turn over in our sales function drives a better process in the business office.

The next question is from the line of Carla Casella (ph) with J.P. Morgan.

Hi. There are several articles about SUVs and potential slow down in SUV sales. Have you looked at what the percentage of your new car sales are or even used car sales are, what percentage are SUVs and how that trend has been?

I think if you looked at light truck and SUVs, today it's almost 50% of the market. I don't have it specifically here. But it's a big portion of it. We have not seen, Carla, any impact from the SUV noise out there at this particular point. I will say this, that from a used perspective, that the residual values on SUVs really have never been better. And I can tell you as we look at Chauncey Ranch we're getting a lot of interest in the Lincoln Mercury Navigator and Aviator products. You have Porsche coming out with the new Cayenne. And X5 for BMW certainly has been a homerun. And I think Volvo is almost reengineered today because of the sports utility XC 90. So you read these things. There's no question from a vehicle dynamics perspective that all manufacturers will look at some of the information that's been provided in some of these issues that have come to light here recently.

But there's the cross over vehicles. The Pacifica you see some of these crossover between SUV and station wagon. There's been great work done by Audi. You'll see more of it coming into play. It's a blur for me to determine are these really SUVs or are they just big station wagons.

50% about the new vehicle sales, are you seeing that same division in the parts and service or are they still relatively, because they're relatively young?

I guess one of the things that happened or is happening, that the quality, from all the manufacturers, we track quality metrics hours per repair order from all of our manufacturers. We're seeing on a warranty basis that going down. I don't see much different, you can see in Land Rover because people may be taking these off road. You might see more hours from a service perspective. But I don't see that there's more people coming in to get their SUVs serviced. One thing with SUV you see people towing trailer and other ancillary parts. That might put more stress on the drive train. But in most cases they're robust enough to taking it in the basic or towing packages et cetera. There's no more impact of services that have been generated unless you're going off road then you would have a specific vehicle.

I'm trying to get at I would assume the service on the SUV would be higher priced point or more expensive than the traditional vehicle car and I was wondering if you think that's driving the comps in service at all?

Let me say this. You have two components of service and parts labor. The first component is your warranty labor rate and this is negotiated with each individual manufacturer market by market. It might be higher in New York than it might be in Cincinnati or higher in Los Angeles. And basically that warranty labor rate is across all vehicles. It's not higher on trucks and lower on passenger cars. So from a warning perspective, that rate is consistent by brand, by location and by market.

Now, we can talk about the retail labor rate. That's the rate I charge the customer that comes into the dealership for service. And again the warranty rate is driven off of a percentage of your retail rate. And those are consistent, too. So we don't have a variable rate by product line and we don't see that there's any change between mix of warranty and I say, mixed price between warranty and customer labor.

I will say that one of the things that's happening is that the manufacturers are selling a more full circle program and the customer will buy a lifetime service package. That means oil changes, rotation of tires, tune-ups, et cetera and that customer will come back to the dealer. Also, we're seeing the benefit of the extended warranty programs and the certified programs on the used cars. You've seen today many ads by manufacturers talking about certified programs. And these programs drive the customers back to showroom so the Midas, Meinekes, even the Penske Autocenters and people like that are loosing business because the complexity of the vehicle and the fact that they’ve signed a contract at the time they bought the vehicle is driving that parts and service visit. So what we're doing, to accommodate that, certainly is our CAPEX program, air conditioning shops for our mechanics, hours, in some cases seven days a week, two shifts. So body shops all of those are driving those comps.

Great. Thank you.

Our next question is from the line of Jeff Lick (ph) with Pyra Capital (ph).

Quick question about the contracts. I understand they’re cash payments, but were the cash payments actually accelerated or just the accounting for them?

The accounting for them would have been accelerated we'll pay them out over the period.

In terms of cash effect there's no real change it's just the accounting effect.

That's correct.

Then focusing in on the 2003 guidance, I realize that guidance is what it is. You don't necessarily even like to give it. But with specifically as it relates to the first quarter, last year you made 40 cents a share -- you've had about a 5% share increase over the 41.2 that you're using now. You say you have same store growth, you have the addition of the $1.2b in revenue from the acquisitions, Sytner, and BMW, Austin and whatnot, which really wasn't there in the first quarter of last year, your Chauncey Ranch incremental effect and it also looks like your gross margin on the S&P is going up as well.

So I'm just curious as to how do you get to a situation where you're actually going to go backwards in Q1 when you have all these new things in the system?

I think if you look on our revenue, after discontinued operations, we’d probably be about 39 cents, if I calculate it properly. Obviously to do the math the way you have, you would expect it to go up. As I said, based on the current times that we're facing here in the first quarter really on a worldwide basis and you have seen the same information I have, I'm concerned about just the impact during this quarter. Obviously, we didn't change the upward number from the standpoint of the year.

I don’t want to give a weather report here in the first quarter. But at the end of the day we have a number of things that could be positive for us. If you look at our number, we didn't adjust in Q4, and I think that from a going forward basis, our number is reasonable. I think it's in line. And we hope that all of the things that you've mentioned will hit and we'll see a very positive quarter and maybe we'll beat the guidance.

But as you said we don't like to give guidance because we have to answer questions like this. I think we're committed to running the business same store and the obvious is the past that we've had the ability to grow and continue to beat these estimates. But I am concerned about the first quarter not so much internally, as I am externally. And you'd have to be, I think in my situation, probably -- state the guidance in the same way.

I can't blame you. I just looked at, for instance, if you did the exact same dollar amount in service and parts, but you did a 46% gross margin last year, if you said you could do fourth quarter, this year's fourth quarter of 47.6, so you basically have 160 basis point increase, that's additional 7.2 cents a share right there. So that's -- then you have obviously like a 20% increase in revenues just from Sytner and Chauncey Ranch and whatnot. So I'm looking at it and scratching my head saying how bad do things have to get?

The next question I have, just because in looking at the expense structure, then, you did put an SG&A as a percent of sales above 12% in this fourth quarter. You've never done that in the past, if you look back at 2001 and 2000.

What is it that happened in the fourth quarter this year that caused you to go over? I kind of look at 12% as a pretty key threshold?

Number one, I mentioned to you that with Sytner, we didn't have Sytner in the fourth quarter of last year and the fourth quarter for Sytner really is the weakest quarter due to the fact that we have these registration periods, which would be the end of Q1. So we have some fixed costs. Our SG&A, which we can't take out just quarter by quarter and put it back in. So with had higher impact from that which drove that. And obviously as we have lower volume in that quarter, it would drive that percentage up.

Do you have a rule of thumb in your head based on same store new unit sales how far they'd have to decline give it 5%, 10%, whatever, where the SG&A starts to get up over 12% on every quarter?

I can't tie it to numbers of units to SG&A. The good news is that the biggest part of our costs, are variable. I think 35% of our total costs are fixed. And we're running today, if you take both the field SG&A and also the corporate G&A, we're probably running on what we would call absorption or fixed coverage. Somewhere in the high 60%, probably 64, 65%. So we really have to manage that other 35% based on a downturn. We have the ability on the variable side to reduce advertising probably $250 to 300 dollars per car based on coming down all of our sales comp is variable.

On the service side, though, I think you'll see many times is the new car business would start to deteriorate, you're going to start to see people then bring cars in. You probably see service that you didn’t see in the past that that margin would obviously run about 8.5% on new and 10% used and probably blended in parts and service somewhere in the high 40s. So it's somewhere almost five times. So that will benefit us on a going forward basis.

But go back to your original question. I can't really tie together numbers of units. Obviously, we've added some CAPEX. I think it was $5m in the quarter on depreciation and amortization based on new facilities. That takes us sometime to fill those up before we get the benefit. So that has impact also.

Last question on the SG&A on variable versus fixed.. I know that roughly 25% of SG&A is the variable commission or variable comp. 10% of the SG&A is about advertising. So there's 35% there. Let's say that 30-40% is your fixed. So there's a gap in there of 25-30%. What are those expenses and what make them variable?

Well, you mention -- I think that the fixed expenses would be rent, would be other salaries. Would be taxes. Heat, light and power. And when you look at the variable expenses really you're looking at salesmen’s compensation and advertising and fixed really would be 30% of your costs and those again would be rent, heat, light and power, would be certain advertising, which you can obviously reduce during the period. Amortization, all depreciation, obviously is fixed.

But as I look at the business on total expenses I'll just give you this metric. 70% are variable and 30% would be fixed. And we cover over 60% of those fixed costs through our parts and service. But I think the thing to do is probably that you and I and maybe Jim Davidson get together and we could maybe give you a little more information on this rather than trying to do it on the call.

I'd love to. Tony has promised me such a meeting.

Thanks.

Our next question is from the line of Adriane Gale (ph) with CIBC World marked.

I think on a call you discussed a net CAPEX figure for the year could you give us the gross CAPEX number?

We probably did about $85m in sale lease backs. The biggest portion of that would be Chauncey Ranch.

Okay. That's for the year?

Yes.

And could you discuss the performance of Chauncey Ranch thus far in the first few months versus CAPEX versus actual sales.

I would say that we've seen a significant increase in traffic. Obviously we have new brands. Volkswagen, Lincoln Mercury Volvo which have not been up there before so we're growing that traffic in the market. Specifically our BMW business is probably up 50% from the sales side and up 45% in service. We're the number two Porsche dealer in the country last month, out of 200. And we probably haven't been in the top 15 life to date. So we've seen some strong metrics there. We sold every Mini we can get our hands on in that market.

Okay. And what was your borrowing availability at year-end?

Well, we have in our line of credit, is a $700m line. We had about $340m that had been withdrawn down. And we had approximately $350-360m available at year-end.

All right. And could you also discuss the breakout of your sales by brand? Or by maker?

I think we had it in the press release today, but let me just go over it with you. Lexus 23%. Honda Acura 12%. BMW 12%. General Motors 12%. Mercedes 10%. Chrysler 9%. Nissan Infinity 5%. Ford 4% and Other 13%. That's for the fourth quarter. And the year-to-date pretty much reflect the fourth quarter.

Okay. Great. Thanks a lot.

Our next question will be from the line of Carl Dorff (ph), Dorff Asset Management.

Do you have what the days sales inventory were last year versus 59 days you gave for this year?

I don't have that in front of me. Jim Davidson just said to me he thinks it was 55 days. So there's been some -- we've had a deterioration maybe of four days.

I guess what troubles me in looking at the rise in inventory even though you indicated how much is from the acquisitions, is that it doesn't seem that there's as much of that flow through in terms of revenues generated for that magnitude of increase in inventory.

If you look at last year remember we came out of 9/11 with a business shut down. We had a tremendously strong quarter and I don't think year-end inventories last year really would depict the picture of what the market was. We're looking at days supplied. We have certain metrics with the manufacturers and I think as you look at ours on a trailing 12, we're in pretty good shape. We've added a number of new franchises. Someone asked a question earlier about Chauncey Ranch. When you open these new stores they ship you new inventory and it takes time to balance some of that as we were coming out of the chute with a franchise we hadn't operated before. We might have had some expansion there. But on an overall basis, our inventory, when I look at 59 days, is well in line and certainly 75% of our increase was foreign.

Was Chauncey Ranch a net contributor in the fourth quarter?

Yes. Let me say Chauncey Ranch opened up in November, and really the first real full quarter that we could really look at that would be Q1. I misstated there, because obviously the portion of BMW stores were open but we really didn’t really get full traction until early in, and in fact Acura just opened in late December.

I guess what I'm trying to get at is when you look at the overhead you absorbed as a result of opening them and the revenue that you generated, was it a net drag for the couple of months it was opened or did it about break even or generate some --

I guess I don't have the specific numbers of what we carried. Obviously, we had a grand opening. Those costs were expensed during the quarter and certain carrying costs but we had training costs because we have 600 people working there. And those people couldn't be all put on the same day so there was some training and costs associated with that which had to be taken into the income statement during the fourth quarter.

I'm not -- obviously I'm not throwing stones. I would expect it might have been a net drag that's why I was curious. I would hope that getting back to the outlook for the first quarter that having a full quarter in there you might see some improvement in that area.

There definitely will be an improvement. I can tell you as I look at the gross profit and the service side, it's growing at about 20% a month since we've been open. So meaning, if we started with $300,000 of service, parts and service growth, that's been growing at 20% a month. So we see that -- I'm not saying that was the number, but we've seen tremendous growth.

So overall I'm not sure what the answer you want. But trying to address it, Chauncey Ranch has been a homerun for us. It's given us a scale in a market of Phoenix which has 3.5m people, giving us brands where we have both locations both north and south, which gives us that market to operate in without another competitor.

Thank you.

Next question from the line of Keith Hogan (ph) from Eaton Vance (ph).

I know you mentioned your total CAPEX for '02. Can you give me what your gross CAPEX is going to be for '03, excluding any acquisition related CAPEX?

I think we're looking at net CAPEX about $80m and we would probably end up doing, depending on the programs that we commit to and finish in the UK, there would probably be $60 or 70m where we would do a sale lease back on facilities.

On INSKIP, it's about $350m revenues.

$300m.

$300m in revenues, does that give you enough critical mass that you would be satisfied sort of as is with that exposure in the northeast or what do you have to take it for the northeast to be sort of critical mass, a valid platform, what do you have to do to tuck in to get that up to sort of critical mass?

I would say $300m on one site is significant. I think it's exactly what we want. When you look at the brands, BMW, Lexus, Mercedes Benz, you've got Porsche, you've got Audi. You've got Acura, Infinity, Volvo, and I think Bentley, these are premiere brands in the state of Rhode Island you have a 20 mile [beater] law so it gives us ability to give us tremendous platform there.

You don't feel you have you to go out make some tuck-ins to make that acquisition make sense?

We have about $1b in revenue in the northeast before we do INSKIP. So we've got real scale in this part of the country and have experience operating in the northeast. A lot of the bigger groups, there's some private groups that are of significant size in the Boston area. I think [Rt. 1] is up there, we see it as a real opportunity for a couple reasons. There's more density of population in those markets. And with these brands and I think that basically the family that owned that INSKIP did a terrific job in accumulating those brands and now it's up to us to try and finish the CAPEX. The good news is when we look at the rent factors there, they'll be within really good guidelines from a percent to sales.

And we don't have to put out -- number one we're not buying real estate, which I think is key. And number two, the CAPEX that will follow that facility and this is about 40 some acres, 25 on the primary site and another 20 which is contiguous, those CAPEX expenditures will be negotiated into the primary lease.

Okay. Great. I don't mean to beat a dead horse, with these charges I'm trying to put it together. I know it's a fully cash charge, but it's just an impact from an accrual perspective. And you said in an earlier question that you're going to still pay this out over time?

That's correct.

So if these people are still getting paid out over time, these key executives I know your strategy was to resolve the issue but what's been resolved in the sense if these people are still with you --

These people are no longer in the original agreements. We had the right to terminate the contracts without cause. And we elected that provision. These individuals are now off doing something on a personal basis. So we do not have them involved in the day-to-day operations.

Okay. But they get paid out over time.

Over time, right.

Great. That's all I had. Thanks.

We'll go to the line of David Siino with Gabelli and Company.

Looking at the current stock price, approaching five and a half times earnings, are you more inclined to repurchase the stock instead of making acquisitions? And I guess if not, does that imply that you're buying dealerships at lower multiples? Is that necessarily the trade off to be looking at?

I guess if you looked at the multiple, I‘d say I’m very disappointed after 3 years to see a multiple in that range. Obviously, companies of more significant size than ours have seen their multiples deteriorate over the last 12 months. We have a stock repurchase program that's been in place up to 3m shares. We also think it's time to go out and continue to expand our business. And as we see opportunities out there, we're going to continue to utilize our capital for that. Obviously, it's a discussion at board meetings about repurchase. But I think the real case is we've added shares and had some small repurchase where we thought it was opportunistic. But we don't see that as a way to generate more EPS over the next 12 months.

Okay. Thank you very much.

Our next question is from the line of Peter Cirrus (ph) with Gorilla (ph) Capital. Please go ahead.

I'd like to sort of follow-up on the last gentleman's question in two ways. First, the insiders, including you Roger, bought a lot of stock at higher prices. And I'm curious from your perspective, what do you see in the business that the rest of the world doesn't, or to ask it another way, what do you think the rest of the world is missing?

Well, I think the rest of the world or specifically to answer the question that way, I think that we have a model here that has been proven over time to be able to be resilient during fluctuations in the economy. When you look at the basic retail automobile business, the people that have had long investments have made significant returns. And we're talking about double digit returns on shareholder equity. And I see that as a value. And we're a long-term player here.

And obviously, I've been in this business for a number of years, almost 35 years. And I don't see that things have changed. In fact, I see the opportunity for some of the larger private and public players to really have an opportunity, because they can afford to invest in facilities, they can invest in training, and we can have a large -- where can you get an $8b, $7b retail business. What we need to do is drive some of the fundamental business practices that are in some of the bigger retailers into our organization. I think we can increase margins. We can increase bottom line returns. And I like it for a couple of -- for another reason, it's a downstream business. I don't have a lot of CAPEX for equipment. I have little or no government regulation here. All the EPA, all the safety, all those things are handled by my supplier, which are the OEMs. So today -- and I like the service business. I think the service business, once you gain loyalty from your customers, and we're driving a CRM, a customer relation management process within UAG which will be able to drive our penetration, same repeat referral business, and with that we can continue to grow.

Also, from a consolidation perspective only 6% of the entire industry you know has been consolidated on the public, in the public area. So I see the growth opportunities are really forever from the standpoint of the people that are in the public sector today. And some of the big private players too. I don't want to leave them out because there's some Hendricks (ph) and some of those people are significant on the private player.

Given that, what are the economics of making acquisitions versus the economics at these kinds of prices of buying back stock? I'm not asking which you do, I'm asking can you run by how you're looking at that issue?

Let me say this. If you look into some of the covenants in our subordinated debt, you would see that we're limited to the amount of stock buy back based on those covenants. In fact, I think Auto Nation, in the Q4/Q3 last year made a payment to the bondholders to raise that roof. And at this particular time we're going to live within those baskets based on that income and give us ability if you want to buy stock back we can. But right now we have no limitations, other than our credit agreement, based on acquisitions. So that has some tempering of stock buy back.

And last question, I understand pretty well the business here. I'm curious, as you're now into it a little more, if we were looking say at this business three years from now, would you be a bigger piece of the business than it is now? Or smaller? And to what magnitude?

You're talking about the Penske investment?

Yes.

I would say as we have the ability to have capital generated from our other investments, we exercise warrants. We put capital in, in the past. We would expect to continue that.

I'm sorry. Maybe I didn't make that clear. I'm asking about Sytner, European?

I thought you said your.

I apologize. I'm asking about the -- I switched subjects. I should have explained better. What I'm asking is, the Sytner investment, you think your European or your outside the United States business will grow faster than the company as a whole or slower?

We have right now, based on discussions with our board, a 20% threshold from the standpoint of where we want to be internationally. Now, as the block exemption comes into play and some of the opportunities appear on an international basis, we'll look at those. But again we need to use local players there, local management, because we're not going to be successful parachuting people in from here. So I would say on a going forward basis you'll always see probably 75% of our business being in our home markets versus internationally.

Thank you very much.

Thank you for your question. And our final question will be from the line of Carla Casella with J.P. Morgan.

I'll end with an easy one I missed the net CAPEX number that you said you spent for this year.

$100m.

Okay. Thank you.

Mr. Penske, at this time I'll turn the call back to you.

Thanks everyone for joining our call today and we'll look forward to talking to you next quarter. Thank you.

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