Penske Automotive Group Inc (PAG) 2003 Q1 法說會逐字稿

Thank you. Ladies and gentlemen, good afternoon and welcome to the United Auto Group 2003 earnings conference call. Our press release which details UAG's first quarter results was released this morning and is posted on the companies web site which can be viewed at www.unitedauto.com. As a reminder, 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 United auto. Sir, please go ahead.

Thank you, John and good afternoon everyone.. I am pleased to present our report for our first quarter of 2003 report.

I want to just read our disclaimer. Statements made in this conference call may include forward-looking statements regarding UAG's future reportable sales an earnings growth potential.

We caution you these are strictly predictions which are subject to risks an uncertainties related to economic conditions, interest rate fluctuations, changes in consumer spending, other factors which management has no control. Our actual results may vary materially.

These forward-looking statements should be evaluated together with additional information about UAG which is contained in United Auto Group filing with the Securities and Exchange Commission including our annual report and form 10-K.

During this call we'll be discussing certain non-GAAP financial information such as EBITA we believe provides useful measurements of our business. You can find a reconciliation of amounts to get metrics posted on our web site at www.unitedauto.com.

With me today in Detroit are Jim Davidson, Executive Vice-President of Finance, Bob O'Shawnessy, our Controller, and Tony Porden, Vice-President of Investor Relations.

Thanks again for joining us this afternoon.

The first quarter is another outstanding quarter for United Auto with record revenues and outstanding same-store metrics. This quarter exhibited the strength of our business model. We're able to grow same-store retail revenues by 3.4% despite an overall 4.4% decrease in U.S. new vehicle unit sales.

During our quarter we sold over 61,000 new and used units, up17%. We increased revenues 25% to 2 billion. We grew our same-store revenue components and our metrics in new retail revenue were up 2.4%, used retail up 4.2 and F&I up 11.6 and service and parts revenue up 6.2%.

Again overall same-store retail revenue growth was 3.4% and the retail growth profit increased 3.9%.

Since our investment we have sold over 750,000 new and used vehicles. We believe increases in units in operation resulting from these vehicle sales will continue to drive the growth of our higher margin parts and service operations.

Again our brand mix continues to be a key differentiator for United Auto. During the first quarter, 76% of our revenue was generated from foreign and luxury name plates and 43% of our revenue was derived from luxury nameplates.

Revenue in the U.S. represented 81% of revenue and international revenue was 19% of the total. You can refer to our data sheet which gives you additional information on our brandmix both revenue and percentages for the quarter.

Foreign and luxury nameplates continued to perform well in the U.S. market and we have seen that in the first quarter. Foreign nameplates gained 1.8% market share points during the quarter. Major components for that market share change are Hyundai Acura (ph) up 1.2, Toyota Lexus 1.5, BMW was flat and Mercedes was up one point.

In these U.S. foreign luxury brands, Honda Acura, BMW, Mercedes, represented 57% of our total revenue in the first quarter, so you see we're matched quite well to these -- increases in market share.

We're pleased to report despite the economic, political and weather related challenges during the first quarter of 2003, our EPS from continuing operations before the cumulative affect of the change in the accounting principle was 41 cents.

Let me now make just a few comments regarding accounting changes made in the first quarter.

You will note in our press release that we recorded a cumulative effect to adjustment result from the change of an accounting principle. The change in accounting principle relates to the company's fourth quarter adoption of EITF 2-16 which addresses the accounting for cash consideration we received under various assistance programs offered by the OEM's.

Historically, we recorded nonrefundable floor plan and certain nonrefundable credits when received. As a result of the EITF, these credits are presumed to be reductions in the cost of purchase inventory and must be deferred until the related vehicle is sold. The after-tax affect of this accounting change representing the amount of nonrefundable credits that had been received on the vehicles in our inventory on January 1st, 2003, amounted to 3.1 million or seven cents a share.

Let me now review their specifics in the first quarter results. New retail sales for the quarter, revenues increased 18% to 1.1 billion and same-store was up 2.4. Our 2.4 same-store new retail revenue growth is impressive when viewed against the overall 4.4% market decline in new retail sales.

The same-store growth was driven by a 5.9% increase in foreign name plates partially offset by 6.8% decline domestic name plates. I think this further demonstrates the extent of our brand mix. On the used side, in the first quarter of '03, retail revenues were up 48.6% to 446 million and our same-store sales were up 4.2%.

As I said before, our priority in the future is to offer our customers a meaningful shopping experience for a quality used vehicle including certified OEM products and to that end we have continued to actively monitor the quality of our used vehicle inventory and maintain our used inventory supplies at the end of the quarter of 37 days and that compares to 36 days at the end of December 31st of '02.

In the financial insurance area our revenue increased 29.5% and same-store sales were up 11.6. Just to reveal our gross per transaction (inaudible) was up $78 to $803 and that compares to 725 in the first quarter of 2002 and 766 in the fourth quarter of 2002.

Breaking down further on new rate 819 unused 773. I think our ability to continue realized increases in F&I gross per transaction is due in part to our brand mix of foreign and luxury name plates. While these brands selectively participate in incentive programs from time to time, they do not participate as aggressively in the heavy incentives offered by the domestic nameplate.

Just as a little information, the average domestic incentive in the first quarter, that would be cash or subsidized rate was $2800 per unit. The average foreign was $830 so there is quite a disparity. Our combined financial and lease penetration was 76% during the first quarter. 56%, which was what our OEM captive finance partners, leases represented 27% of our new and used vehicle leases during the quarter. Our standard warranty penetration was 37%, 33 on new and 45 on used.

Moving object on to parts and service in the first quarter our revenue increased 32.1% to 215 million same-store was at 6.2. Our bodyshop revenue increased 23.3% with same-store up 11.6, just to note we have 21 body shops today domestically.

Our service and parts and bodyshop performance can be attributed to our capacity expansion programs and our emphasis on putting units in operation. I expect the strategy will continue to generate the same-store growth in the future.

Our gross profit was up in the first quarter, 25.9% and our margin was consistent at 14.5 for the quarter versus 14.5 in the fourth quarter of '02. Same-store retail gross profit increased 3.9%. Or 8.1 million on a 3.4% increase in related same-store retailed revenue.

On the SG&A front it was 12.1% of revenue and that compared with 12.1 in the fourth quarter of 2002. Overall SG&A increased $54 million versus the first quarter, 45% of that or 83% was an increase as a result of acquisitions.

The other components really contributed to rent depreciation utilities at 6.4 and employee benefits primarily medical at 1.3. Our end depreciation increases resulted from our facility improvement and capacity action expansion program.

As we continue to grow our overall business we anticipate these programs will continue to have a positive effect on our revenue and profitability.

On interest expense, interest for the first quarter was $10.4 million, up 2.5. And this increase in interest expense in the currently year is due to principally 300 million of 9 and 58 (ph) sub-debt we issued in March of '02 offset in part in the reduction of our overall borrowings resulting from our equity transactions in Q1, '02 and also by a reduction in the overall borrowing rate.

Our (inaudible) was 9.1 million and during the quarter we entered into an interest swap rate which fixed the interest rate on 350 million of floor plan debt at 3.15 for five years.

Our tax rate for the quarter was 39.5. Let's take a quick look at some balance sheet items. Inventories are 1.1 billion. 840 new vehicles, approximately 200 in used and parts were at 48 million.

Only one half a percent of our total U.S. inventory relates to 2002 left over units approximately $4 million. Inventory turns and day supply for the trailing 12 as of March, '03 new was at 6.5 for 55 days, used was at 9.9 turns of 37 days and parts was at 6.2 or 58 days.

Just going another step further if I looked at new turns just on a 30 day basis we're 6.1 of 59 days and our used was at 10.1 or 33 days and our parts was at 6.5 at 55 days. All pretty good metrics.

Capital expenditures again we have talked about major dealerships projects continue in San Diego, Washington, Tyson Corner, Virginia, Turnersville in the Philadelphia Metro. (inaudible) CAPEX was 42 million compared to three or four in the first quarter of '02. A full year 2003 CAPEX is expected to be between 140 and 150 million dollar gross and approximately 80 million net on a net basis after sale lease backs.

Let's take a look at our debt at the end of the quarter. Long-term debt was 720 million. Breaking list down under outer borrowers, 700 million credit agreement for 376 million. Borrowings under U.K. credit agreement with 37 million that. That gave us approximately 344 million of availability at the end of the quarter.

Also we have 300 million of ten-year senior subordinated debt outstanding. We have another approximately 7 million of other debt. Our debt to capital ratio was 50% compared to 49 the fourth quarter of '02. This is another point I want to mention this afternoon . Of our $1.7 billion in total debt, including 1 billion of floor plan as of the end of the quarter approximately 50% or 850 million is fixed, weighted average rate of 6.1% and an average term of 5.7 years.

EBITA for the quarter was 46 million which represents a 20% increase over the first quarter of '02.

Before I open up the call for questions I would like to highlight a few additional items. Today we expect to close on the purchase of Inskip (ph) Automotive in Rhode Island, Inskip which includes nine luxury brands on a single site expected to contribute 300 million in annualized revenues.

Also in the four years since our Penske Corp investment (inaudible) we have grown organically through acquisition as a result UNG ranks 244 on the fortune 500 list. We strongly believe that this business in fact Penske purchased an additional 1.9 million shares from J.P. Morgan in April.

Since the original Penske we have bought many initiatives we believe will continue to yield (inaudible) growth and profitability.

As you know, we have established a strong reasonable management structure with six operating regions. We have complimented this regional structure with a brand manager who (inaudible) our relationship with the OEM's.

We changed our brand mix to change the marketplace and capitalize on market share growth enjoined by major foreign name plates. Our performance I think in this quarter demonstrates the benefits of our continued strategy.

We have implemented CSI processes at all of our dealerships that support outstanding service in order to build, repeat and referral business models. We have established training centers with national regional training center to attract and retain outstanding human capital.

Again we continue to reduce employee turnover while growing our business. Our employee turnover is well below the national average for our industry. And, in fact, in 2002 we reduced our employee turnover by 10% to 54% which represents almost 1200 fewer terminations in the previous year.

I looked at this metrics so far in 2003 in the first quarter we're down another 10%. We've also made strategic investments in several major markets to renovate or build larger dealerships we believe will benefit this business in a long-term and we talked about this in San Diego, Scottsdale, Washington and our Philadelphia markets as examples.

The benefits from these larger scale dealerships I think allow UAG to develop a destination retail auto location. Probably attract and retain the best human capital our employees. Gives us leverage in the local community. We have one senior management team with separate brand managers. We have a single back office. We have enhanced leverage of fixed operations. We leverage security costs. We combine our PDR pre-delivery and in many cases our employee parking. We leverage our advertising dollars and we enhance training and human research efficiencies.

When we invested in UAG there were questions about the long-term ability of really all of the public retailers to sustain growth, especially in a soft economy. We continue to believe that our emphasis on customer satisfy and retention, our relationships with the OEM's, the stability offered by the State franchise laws and the protection of our primary market areas will allow us to continue to experience organic growth.

With approximately 94% of the retail automotive market unconsolidated coupled with our access to capital will also believe we have the ability to generate substantial acquisition related growth. We believe that our business model is demonstrated to resiliency in the last year and believe we can continue to grow our business and enhance shareholder value by executing on our strategies and making prudent acquisitions.

As noted in our press release this morning, we reiterate our earnings to $1.96 to $2.06 per-share excluding the accounting change and second quarter guidance of 55 to 60 cents per-share.

Thanks for joining us today and I would like to open it up for questions.

And, ladies and gentlemen, if you would like to ask a question, please press the one on your touch-tone phone. You'll hear a tone indicating you have placed in queue. If you have pressed the one prior to this announcement you'll need to do so again at this time. To remove yourself from the queue, please press the pound key and we ask if you're using a speakerphone if you please pick up your handset before pressing any numbers. Once again if you have a question, please press the one at this time.

And our first question today is from the line of Richard Nelson from Stephens Inc. Please go ahead.

Hi,.

Good afternoon.

Roger, can you talk about Sydner's performance during the quarter and how currency translation may have affected performance?

Well, number one, the currency transaction had minimal impacted and Sydner had a great quarter. They were really within one or 2% of their budget so I would say they continue to lead both in BMW and Mercedes is another one retailers for luxury in the U.K. so it was a great quarter.

And secondly, I'm wondering how you evaluate the return on capital of projects like (inaudible) Ranch (ph) and what you're doing in San Diego?

Well, I think we look at the assets employed and I think that in all of these cases we're trying to build from a base of 3% on sales to 5% in the luxury areas and approximately the areas of the value foreign nameplates probably in the 3.5% but I really look to the overall business model of getting to a 15% return on equity, beginning equity.

Uh-huh. And any comments on April's sales trends both new and used?

Well, when we look at, you know, look at April, I think that it's really as we expected. It's -- it was not as strong as March obviously because we had weather related, February and March came off very strong. I think we had tax time and maybe still with some of the war but overall, you know, it's in line with our expectations.

And we're hearing used vehicle prices are beginning to firm. Would you buy into that?

Well, one of the things that I look at is if you look at our used for the quarter, we were very strong and really our day's supply is way down on a 30 day basis. So we had great success in wholesale in -- during the quarter from the standpoint of, you know, having a real good inventory. That really shows that used prices are firming.

Great, thank you.

Our next question is from the line of Nate Hudson (ph), Banc of America securities. Please go ahead.

Good afternoon, Roger.

Hi, Nate.

Can you give us an update on some of these big capital expenditure projects and in particular when do you expect to have Tyson's Corner complete and if you could give us an initial status report on how Chaunsey (ph) Ranch is working on?

Let me start first start, we have probably about 12 months to finish up at Tyson's. As far as Turnersville is concerned, we operate their dealerships in mediocre facilities and we have all the permitting done and we expect to start pushing the dirt there some time, you know, in the next 60 to 90 days on the outside.

You know, Chauncy Ranch is really up and running and I can say that, you know, we're looking at including all of the amortization of the investment, CAPEX in total, you know, we are forecasting that that complex will generate between 3 and 5% in the first year and we've had significant increases, you know in our business there, BMW is up probably 40% year-over-year for the quarter, Porsche has moved to the number two retailer in the country operating out of that facility in the fixed operations we're approaching $3 million in just the PAG complex and we think that that can get to 5 million.

So, you know, overall, the Volkswagen dealership is number one in the market in the first quarter, our pre-owned business continues to grow and obviously many has been a homerun we can sell and get so I would say the strategy was right in our museum. We have had over 13,000 people that at least have registered or come through the museum since we opened it in November. So overall I would say it's strong.

Nate Hudson Great. Do you have any more of these larger complexes on the drawing board at this point?

One we have not talked too much about, we have Northwest Arkansas, Fayetteville obviously we have five brands there and just expanding there both in service and in new car capability in that particular complex which houses Acura, Honda and Toyota and Chevrolet and Hummer.

We have built some facilities for Hummer there. When you look at the latest acquisition which we talked about earlier on the call, Inskip, it's a perfect operation for us in Rhode Island, about 40 minutes south of Boston, 20 minutes north of the Connecticut line and we'll have nine luxury franchises there, BMW, Lexus, Mercedes, Porche Audi, Acura, Infiniti, Bentley and Volvo and it all on one site and we have a sale lease back already on that facility and the seller is providing us up to 25 million in capital expenditures so we can bring that into the world class facility. I think it will be a shopping destination for that part of the country.

Thanks very much.

Our next question is from the line of Mike Milman from Smith Barney. Please go ahead.

Thank you. You probably heard at the World Nation (ph) conference call and they said their second quarter is likely to be sequentially bottom line flat. You're saying your second quarter might be up 40, 50% compared with first quarter bottom line. Do you think that is all mix or do you see some other things involved and secondly with the market the way it is, is this an opportune time to be buying domestic dealership (inaudible), real deals.

Let me just, you know, relate to, you know, we are at 41 cents and normally our second quarter is stronger than first quarter and I think if you go back and look at the last year we were at 54 cents and we have guidance now of 56 -- 55 to 60 cents. That is in line without any acquisitions. That is based on a tax rate of 39.5% in the approximately 41 million shares outstanding.

As far as acquisitions, you know, we have made acquisitions in the last year both domestic and foreign nameplate and then had good success really, you know in all cases. So we don't specifically go out and buy in one area. We're more looking for scale in a market where we had leverages we talked about earlier. We bought the little operation in Detroit which is contiguous with the GM center with some 50,000 employees. Those are the areas we look at and have strong brands and certainly support those.

Our operation we bought Seretos(ph) GMC out in California in the Los Angeles area which has had a terrific increase over the last year.

So I don't have a -- I don't have a perfect formula that says here by know that the Cadillac franchise has been very strong and there has been great acquisitions in the Cadillac side.

I think the key point is if you have to drill down and look at market share and look at it by individual OEM's and you'll see where the market share is going. If you want to be on the right side of the curb, that would tell you to remove the foreign nameplate. I would be careful of that. I think what you want to do is have a good mix and today I think we're 7327 foreign nameplate versus domestic.

Well, I was asking the opposite. Is it because everyone goes the foreign is strong that you should be buying the domestic? Would you sort of discussed it so I wanted to --

I guess probably get your thoughts on that. You know, we've got international diversification, too, which I think is important. All these brands are global now. GM is in Europe, Ford is in Europe, Toyota, Lexus and Mercedes and we're not building a relationship on a worldwide basis selectively in these markets.

As we said, we're 19% of our revenue was international so I think that as you look at an acquisition, many cases you might buy four or five stores and dispose of a couple that get exactly what you want to fit your model so that is going on I'm sure as we all dispose of may be non-strategic and non-performing locations.

Thank you.

Sure, Mike.

Our next question is from the line of Scott Stember with Fidelity. Please go ahead.

Good afternoon. Could we get back to talking about some of the big air boxes you're talking about like Chauncy Ranch, Roger, you mentioned you're looking for a 3 to 5% return?

On sales.

On sales, okay.

When we will we start to see if you have a timeline if you were to blend some of these projects in when we can really start to see some of the leverage starting to come out with the -- be able to combine the overhead, the advertising and all these synergies that you're talking about. When would you expect, you know, expect of course assuming that nothing dramatic happens on the negative side on the sales market you can start to see this hitting the bottom line?

Well, I think if you look, you know, at the specific benefits just to give you some metrics, you know, we talked about used earlier and how we were up and used and if you took a look at just South San Diego, because of the capacity (inaudible ) the separate used locations, our Toyota business was up 20%, 2% for the quarter, our Lexus business was up 79 used, Mercedes was up 13, BMW up almost 200% and this is a case where we were to get the scale of these locations obviously we see some of the benefits right now.

The goals as I said earlier get to 5% on these luxury name plates as a percent to sale. I think the response in Chauncy and we'll start to see that as the year goes on. I think that giving a forecast of 3 to 3.5% on sales with all the brands that we have got, new Volkswagen coming out of the ground, Lincoln Mercury there and we have Volvo there. With those included in some of the brands you already have, I think that is a good return based on the investment we have there the first year.

Okay.

We'll be able to obviously as you think about this these units in operation and that is why if you look at our history, every single quarter we have had the increase, you know, on same-store sales I think other than one in the new unit area. But specifically in the parts and service and even our margin increased in parts and service growth again this quarter and we're up almost 15% from about four or five quarters ago so I see that part of the benefit already.

And I think the scale today, I think from an admin perspective, brand manager, regional management, personnel people, I think that we have pretty much all the key people in place so we could see quite a bit of growth before we have to add on other than some economic impact we get from certain healthcare costs.

But I think our -- one other thing I think it is good to mention that is our employee compensation plans, you know, are really built to be a variable but on the other hand to maintain and not have turnover. I think at the end of the day the quality experience of the customers is really gained through seeing some of the same people that have returned to the dealership for parts and service in future sales so I think that all ties into our strategy.

If I can touch on Tyson's Corner, what is going to go on there and how many brands will be relocated and how many brands will just be new?

Well, when we moved into Tyson's corner about three years ago, we had four brands operating out of one location. That was Land Rover, Mercedes, Audi and Porshe. We sold off the Land Rover business to the associate that had Jaguar and we will maintain a single location for Mercedes and we're relocating across the street for Porche and Audi in separate showrooms, separate service facilities, (inaudible) ask that Aston Marvard (ph) and a separate -- (inaudible) we have seen the benefit of that where we had a number of contiguous lots and we have been able to put them in one location and also doubling the service capacity when you look at the three brands before bringing in asked and Aston Marvard were doubling the service capability as far as lifts and capabilities. Also in that -- in that process we've set up a 50,000 square foot bodyshop as we didn't have before and we also will have Mibock (ph), that won't be a big impact (inaudible). So that is going to be a great premium, auto location.

My final question. You talk about warrantee claims, some of your competitors have talked about on their domestic side of the business the warrantee claims on some of the domestic brands are down dramatically year-over-year. Have you guys been seeing that and obviously since you're geared towards the foreign market it wouldn't hurt you as much but can you comment on that?

I think I'll say this, I think all of the domestic OEM's have used Toyota and Honda and Lexus probably as benchmarks. They have made a lot of progress in quality. There is no question about it. What we have had to do is obviously grow, you know, grow our -- what we call customer labor which is not associated with, you know, with warrantee but there is another dynamic taking place, a lot of what we call full-circle programs. When you buy car all the maintenance is included in the purchase price. So that's driving more and more the customers and the foreign nameplates to the dealerships so we're seeing some growth in those areas.

But if you looked at our top GM Ford and Chrysler locations, we've had significant increases, you know, over the last -- over the last quarter. And in total, labor and parts, not just in warrantee. Warrantee has obviously been down and I think that is good for us because it gives us a good satisfied customer. Many cases the real potential is repeat referral.

Okay. That is all I have. Thanks.

Sure.

Our next question is from the line of Domenic Martillotti with Bear Stearns. Please go ahead.

Good afternoon, guys.

Hi.

I'm looking at used car business. Obviously there is some pressures there on pricing and your gross margins are down as a result of that. There is anything else you can do besides managing your inventories and the mix of what you have there to kind of counter that? I mean, it's tough to say we're regularly going to see used car prices stabilize maybe in the short-term but I think the long-term direction is negative.

Well, I think what you have in overall gross margin is it has been sitting there now for the first full quarter in our used car margins. They have a lower margin that we do domestically. When you blend that in that has had the major impact on our margins being down approximately I think 125 basis points, you know, versus last year.

So quarter-to-quarter on, you know, comparing same-stores and limiting Sydner, they were not that high (inaudible)

They have much higher prices because primarily they're in the premium side and from the standpoint of our new vehicle or the used transaction, you know, we're at 1932 so, you know, basically our used vehicle gross profit transaction really was flat on a quarter-to-quarter. If you go back and look at 2002. I think the metric is -- let me give it to you specifically. Really when you look at a year ago, let's just go back on new, we were at 2350 and 2411. This year on new we were 1936, last year on used and 1932 so you say it is pretty much flat, you know, year-to-year.

Okay. Also looking at F&I again, done a good job growing that business. I think there is probably still more potential there but in real terms, how much more do you think you guys can get per car on that metric.

Well, what is driving that in many cases we don't just get flat compensation because of certain 00 in other programs. We have had the benefit that the majority of our business hasn't had the incentivized customer looking for 00 and don't have some of those programs. So that has given us a chance to grow that margin. I think that -- I don't know where the ceiling is. I think we need to be careful we don't overload the customer on a long-term basis with lot of the products that go along with the purchase so I'm not here to give you a number.

I think that, you know, we continue to have, you know, good penetration because of our vertical strategy on floor plan and also retail outstanding on both the finance contract and the lease contract with the OEM's and I think, you know, we're negotiating the best deals we can with those partners to give us the most gross.

Just lastly looking at the acquisitions out there, you guys have kind of set a precedent of doing a fairly large acquisition in the fourth first quarter and then doing some smaller ones in the latter part of the year. Is that what we can expect this year?

Well, you know, right now, you know, as I said as we're speaking I'm assuming that that transaction is closing. In fact, I got a nod here that it closed early information on it, just closed and we would look our guidance was 300 to 600 million annualized for the year and, you know, I think the other public retailers probably have noted in some of their comments that there is -- there is a lot of deals out there obviously we need to find ones that fit our individual strategies and we're working on probably five or six situations. None of them are at any point that we can offer that information out today but we would expect additional acquisitions during the quarter.

Domenic Martillotti Okay. That is all I have.

I'm sorry, during the year.

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

Hi, Jerry.

Hi, Roger. Most of my questions have been answer ed. Just to follow up. People have been asking a lot about the projects and everything else. The 140 to 150 million in CAPEX for this year seems quite a bit higher than what your maintenance CAPEX would be if I were to assume we were at depreciation. How many more in terms of new projects do we seeing coming out? Are you going to run them as a premium to what your maintenance CAPEX would be or does that start to abate as we go forward.

It will come down. Remember as we go into these projects and I don't think that we are -- I just know from experience in the truck leasing business getting the right network an place in facilities we are able to grow the businesses and we can see the products being used, we can see the body shop expenses are paying off, the separate used car facilities and allotted of things we didn't have and in many cases the businesses we have purchased have not been at, you know, at the maximum RPM. We have been able to grow that through the enhanced images.

Also, when we look at the future we have some CAPEX obviously that has to be included from Sydner and as you know, we have had the opportunity to pick up probably five or six different franchises in the premium area with very little blue sky then they will need a certain amount of CAPEX at this time. Certainly the CAPEX is important going forward because there is no manufacturer that is going to allow a public retailer to get away without doing the image programs, I can assure you that.

I've had a lot of discussions with them and I think that, you know, we're all in the same boat and quite honestly if we step up and do it now I think that that is going to drive future business. In fact, probably that is one of the initiatives that is getting people to sell their businesses because a lot of the independent auditors do not have the capital or willing to step up and add the additional service bays. Mercedes is probably underfall advertised by 35% from the standpoint of vehicles in operation so they're not only expecting an image program but expecting more bays and multiple hours so this is driving it. I think that is going to be something we're going to see. I see that this net 80 PE end of the at the end of the year coming down on '04 and '05 but again if we do more acquisitions, we'll see that go up.

But the good thing is that there is the ability through strong markets outside that are specializing in automotive retail facilities that are making a pretty good business in -- supporting capital in these areas and they are very flexible. I think you'll see a number of the part of retailers have used some of these sources outside. So I just want to give you a number that is realistic. I'm not afraid of the number.

On the other hand, we have split the business and we have -- that is why we have had the same-store growth for the last three years.

Your inventory number, I caught the trailing 12 month. What was new and used for fourth quarter?

New and used for the first quarter --

Yes, first quarter.

We had a 6.1 turn on new and a 10.1 turn on used.

Which equates on a day's supply basis?

59 days new and 33 days unused.

Okay.

So again someone asked me earlier about used cars, I think that used cars prices have firmed. We're seeing it in, you know, in wholesale capability to wholesale vehicles and I think everybody is -- sees that as positive. Plus our used car business was up, you know, for the quarter nicely on a same-store basis.

The new day supply is a couple of days higher than I recall in the fourth quarter of last year. Is that --

I don't have that. I have the trailing 12 was -- was 55 days. If you looked at the trailing 12 as of '03.

Okay. Yeah, I just wondered if it was because you guys were not anticipating -- just getting ready for the spring selling season.

I would have to go back and look at March of '03 what it was because as you come into the selling season, you really want to have the inventory, what is going to happen, they will shut down and you will go into the next model year. Again I think our '02's we were down less than half a percent so I think they're gone and the majority of them are in Puerto Rico, sorry to say.

Okay, just on the F&I side, you mentioned the driver, you guys have not been as impacted by the 0 percent programs. Is yours including documentation fees in that number?

No.

You're not. Because then it does seem that you guys have somewhat higher F&I than some of your peers and, yeah -- not to ask the same question but I'm just wondering, you talked about not wanting to overload the customers, just kind of why that continues to perform so well and how far you can go?

Well, again, I think it also depends on what is the cost, you know, of your retail whether it's, you know, the finance cost of your money that you're putting into the deals, what are you paying as is the commission to your -- to your sales people and, you know, we have taken an aggressive approach that basically some of the compensation levels at F&I have been out-of-sight. We basically have sold a vehicle and it's more of an admin function than it is a big -- a variable sales function.

Do you measure compensation as a growth as a percentage of F&I?

All your compensation, your variable comp., you know, all your areas whether it's service managers , whether it's service writers, sales people, F&I, all is variable. Just depends on what percent that -- it is an incentive sales position obviously.

I was just wondering if you have seen it come down by like several percentage points?

I think overall we have looked at probably -- there is more to save on a variable side than there is on the fixed so we have been looking at that in all our compensations as we grow some of these businesses. If we can get more people through the door, you know, we're looking at advertising per car, what are we spending there. What are we spending certainly from a sales incentive -- sales compensation standpoint and those are some of the areas we're working on to reduce those sales costs.

Okay, thanks.

Yeah.

Next we go to the line of caller Carl Dorff (ph) with Dorff Asset Management. Please go ahead.

Hi, Carl.

Nice quarter, Carl.

Thank you.

My question relates to your thinking in regard to debt. Can you tie together to me the opportunities in terms of acquisitions you need for remodeling capital expenditures and the debt level and what your objectives are there?

I have said it before and I think I'm -- it takes 130 million to generate about 1 billion in revenue. So, you know, that is -- that is what we would look at from the standpoint of future expenditures for -- for the business.

From a CAPEX perspective in most cases, you know, we would look at the ability to fund CAPEX either by the seller who would become our landlord or develop a transaction where we would have an outside source that would supply that to us.

We're not going to use our working capital lines if at all possible, you know, for CAPEX. We want debt traditionally to be put wrapped up in some of the facility programs like we did in Chauncey Ranch and also we would go back to the landlords.

It's interesting in the U.K. we got running lease rates in the nine to 9.5 and they're in the seven to 7.5 in the U.K. So quite honestly the rates over there on the transaction side are not quite as big but there is quite an appetite over there. So we don't see any impact on our gross strategies because of the CAPEX requirements by the manufacturers.

What I'm really getting at, Roger, there is probably some attractive deals in the marketplace now. Are you looking to keep your debt level overall where it is? Will you do more deals? Will you write it? What is the goal where debt --

We're going to keep our debt to cap around 50%. As you have seen in the past, if we need to put more capital into the business, we have not gone to a share by back program. You know, maybe a lot of people said why don't you buy shares back. At the moment we want to keep our debt to cap in a position that is realistic and use that money, you know, for acquisitions and keep our leverage in line. And, you know from this a covenant perspective, we are in a great position and we have 300 million available so I think that pretty much answers the question.

Thank you.

Thank you.

And, ladies and gentlemen, just a quick reminder, if you do have a question, please press the one and we have a question from the line of Peter Cirrus with Royal Capital. Please go ahead.

Hi, Peter.

Hi. I have a retailing question for you. When somebody is looking around to buy a car, I can -- I'm dying for -- I would love to find, you know, like some dealership out here that has 112 different brands like, you know, you do in Phoenix. My question is, if you -- if you plant -- if you build the dealership with all these different brands, people will drive longer distances to buy a car. What is the challenges in attracting them back for servicing? And what is the trade-off between the two?

In many cases you might lose that service business to a local service provider but, you know, today with the service loner cars that we have and in fact that is part of our requirements as a dealer that we provide the customer with a service loner, I think that is -- I think that looks to me to be one of the areas that we can continue to maintain this customer.

There are buyers that are strictly buying at price and at the other time other people are buying certainly on the quality of the service and the closest to where they live. What we have tried to do is gain that scale, you know, in that particular market. I'm not counting on everybody driving 1.5 hours to come but on the other hand if we have a selection and somebody could drive 45 minutes and be able to look at the other brands and use the Internet as a tool, then they can have a shopping experience at one of our locations but I can't tell you -- I probably should look at that to see, you know, as we go through the second second quarter, you know, take a sample at the larger stores and say how many people are buying within a 5-mile, 10-mile, 15-mile radius?

I think from an Internet perspective, people go on the Internet and we found out they're within 20 miles they are the ones that ultimately shop at your stores.

In Scottsdale you have a huge number service bay, right?

Yes, sir.

You obviously figured that you're servicing people in Scottsdale from a longer distance than you're servicing them in other markets, right?

I think in some cases, there is two things. Many of the new OEM programs are driving the customer because it is full circle for all the maintenance items to the dealerships. Also because we reduce the wait times. If we have a capacity, lets say in Washington in Tysons corner, we double our Mercedes Benz capacity for service and we take the wait times, now we're going to get market share from the standpoint of that service customer and that is what we're trying to do.

So you provide them with a loaner car and are you actively marketing to pull them back or, you know, is it -- is that yet not a core part of this?

We're marketing to our customers anywhere from three to six months out or sales contract or a lease contract to see if them to buy the car, do they want to give it to -- to one of their children, do they they want to trade it in for another vehicle. We're in that process and that is daily business. Based on our CSI, if we're satisfied where you bought your vehicle, there is a good chance you're going to go back there and talk to your location on your next buy or look for another vehicle within the network of that customer base or facility. I think that is paying off for us, too.

When you -- I just -- just one more question. When you sell me a car, what percentage of -- when you sell me a car, how much are you making selling me the car versus servicing me -- servicing that car to be over the lifetime of the car?

We make about 8.5% on the front end of the new vehicle gross. On a service, any service work we do we're probably making 45 --

No, I understand that. What I'm asking you is have you looked at over the life of a car how much dollar profit you make on service? That is what I'm asking.

Let me -- I'll have one of our guys figure that out. Why don't you call us. I don't want to make a stab here. I've got some ideas what it is but I don't want to answer on the phone because I don't have the right answer. Why don't you call us or we'll call you and give you that information.

Great, thanks a lot, Roger, I appreciate it.

Yes.

We have a question from the line of Sam Defay from Alliance Auto Group. Mr. Defay, do you have a question? And Mr. Penske, no further questions in queue. Please go ahead.

Thank you very much. Appreciate it.

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