Penske Automotive Group Inc (PAG) 2003 Q3 法說會逐字稿

Good afternoon and welcome to the United Auto Group third quarter 2003 earnings conference call. At press release, which details United Auto's release was posted on the company's web site which can be viewed as www.UnitedAuto.com. This company is being -- this call is being record. If you have any objections, please disconnect at this time.

I would now like to introduce Anthony Pordon, United Auto’s Vice President of Investor Relations.

Thank you, John. Good afternoon, everyone. I would like to welcome everyone to the United Auto Group third quarter 2003 conference call. Joining us are Roger Penske, Chairman, Sam DiFeo, President, Jim Davidson, Executive President of Finance, and Bob O'Shaugnessy, Controller.

Before we begin this afternoon, I would like to remind that you that statements made in this conference call may include forward-looking statement regarding United Auto Group's future reportable sales and earnings growth potential. These statements are only predictions which are subject to risks and uncertainties including those related to general economic conditions, interest rate fluctuation, changes in consumer spending, and other factors over which management has no control. Our actual results may very materially.

These forward-looking statements should be evaluated together with additional information about United Auto, which is contained in United Auto Group filings including our annual report on form 10-K. During this call, we may also be discussing certain non-GAAP financial information such as adjusted EBITDA that we believe provides useful information about our business. You can find a reconciliation of adjusted EBITDA to GAAP metrics posted under the Investor Relations section of our web site at www.unitedauto.com.

I would now like to turn the call over to United Auto's Chairman, Roger Penske.

Thank you, Tony, and good afternoon, everyone. The third quarter was another outstanding quarter for our company, with record revenues and earnings per share. and outstanding same-store metrics. As we saw in the press release, during the quarter UAG delivered earnings per share of 61 cents. And I just want to note that this is the most profitable quarter in the company's history.

Earnings per share increased 15% compared to the third quarter of 2002, despite a flat U.S. new vehicle market, further demonstrating the strength of our United Auto Group business model. Our continued strong performance enabled to us declare the first dividend on common stock, which will pay 10 cents per share on December, first. We are pleased to offer shareholders an opportunity to enhance their return on investment through the payment of this dividend.

Other key highlights in the quarter--new units were almost 48,000, plus 11.4%, used units were up 18%, to [23.5 thousand] and total of 27 and a half thousand. Revenue increased 18.3%, as noted in the press release, to $2.4 billion. And we continued to have growth in our same store revenues. And during the quarter, our new retail revenue was up 8.8% used retail up 12.3% F&I revenue up 16.2%, our service and parts revenue was up, 9.6% and our total retail revenue as shown earlier was up 9.9% and the related retail (inaudible) profit up 9.8%.

All areas of our operation had same store retail unit sales and retail revenue growth including our UK operations. New unit, same-store growth in the UK was particularly strong since September with plate registration month. We continue to increase units in operation and we believe this strategy will continue to drive the growth of our higher margin parts and service operation.

Again, as I said many times, our brand mix is really a key differentiator at United Auto Group. For the quarter, 21% of our revenue was domestic, and foreign and luxury represented 79%, luxury alone was 47%. Revenue in the U.S. represents 80% of our total revenue, and our international revenue represents 20% of total, which is in line with our long-term forecast being between 20% and 25% international.

You can refer to the selected data sheets contained in our press releases for more brand information and detailed percentages. Again, foreign and luxury nameplates tipped to perform well in the U.S. market. In fact imports gained 1.6 market share points did you during the first 9 months of 2003.

The most notable elements of the U.S. market share changed during this period where Honda and Acura total Lexus, BMW and Mercedes, those brands have gained total 2.1% market share this year and represent approximately 57% of our business in the U.S.

On a same store basis in 2003, UAG's unit sales in these brands in these brands increased 7.9%, compared to a 7.2% overall increase for these brands in the market. So obviously, we're gaining share. I think this highlights the execution of our brand strategy in most all of our markets.

I'd like to comment this afternoon on four key management initiatives, and accomplishments that we've achieved so far this year. The first one is human capital, our employee base. On a human capital side, we made great strides in reducing our overall employee turnover. When we acquired UAG, our turnover was high. In fact, in 2000 it was over 80%. We reduced that to 64% in 2001, and in 2002 we tracked at 54%. 2003, now, is currently tracking below 45%.

Low employee turnover at the retail level helps to create a quality customer experience, and certainly strengthens our repeat and referral business. Second initiative I'd like to talk about this afternoon is inventory management. We continue to manage inventories. Our vehicle inventory levels have declined 8.5% to 948 million from June 30 on new and used vehicle sales increase of over 19%. On same-store basis our inventory is down 9.8% to 934 million since June 30th, on new and used vehicle sales increase of 9.7%.

On overall day supply 50 days versus 56 in the second quarter, use is up slightly at 34 days, versus 31 in the second quarter. At the end of September, only 1% or 2.2 million of our used car inventory was over 90 days. The third area initiative is used cars. As I mentioned in our second quarter call we are taking advantage of our scale in certain of the markets by implementing closed bid used car auctions. As a result, we continue to see improvement in our wholesale results.

The results in the third quarter of '03 (inaudible) income of $45 per unit on over 19,000 wholesale units compared to a loss of $100 in the third quarter of '02, on just under 18,000. We continue to put these programs in place across the country. We expect these programs to continue to improve our overall used vehicle metrics.

Last and fourth initiative was acquisitions. Finally, I wanted to address your acquisition program. During 2003, we've acquired business that is will generate approximately $650 million in annualized revenue. Just to break that out internationally and domestically, $300 million in the U.S. and $350 million in the United Kingdom. In total, these acquisitions represent 9 franchises in the U.S. and 14 in the UK.

Let me move on now and I'll discuss the third quarter results in detail. New retail sails. In the third quarter new unit sales were up 11.4% to just under 48,000, for the same store increase of 4.6%. The new retail revenues increased 17.6% to $1.4 billion. And same-store increased 8.8%.

In the U.S, our [6.2] same store new retail revenue growth is impressive. I think when you view that against the flight industry wide on new retail sales environment in the third quarter of '03. Just a data point that you might want to have. Domestic-- average domestic incentives in September was [3810.] Asian (inaudible) was [1401] and European incentive was [2377.]

Same store growth was driven really by a 12% increase in foreign nameplates. It was offset with a slight decline of 2.3% in domestic. The tremendous growth rate of the foreign nameplates further demonstrate the strength of our brand mix. We were up both in Ford and GM and down slightly in DCX.

Used car resale sales, in the third quarter, I think was a real good story for UAG. Our unit sales up 18%, to 23 and a half thousand units same store up 8.3%, and revenues increased 24.7% and same store up 12.3%.

During the third quarter, as we said again in the last quarter, we continue to strengthen our used car business. Our capital investment program is greatly benefiting us in this area. During this quarter, each of the 48 locations in the U.S., which have completed major facility improvement reported same store growth in used vehicle sales. We believe our used same store sales growth further validates our capital investment strategy and demonstrates our commitment to grow this business over the long-term.

We also attribute a portion of the same store growth to our focus on the sale of certified preowned vehicles and our stringent management of used car inventories. Just as a point of interest I might make this afternoon we have number 1 and number 2 dealerships nationally, with BMW for certified preowned sales—a BMW in San Diego and a United BMW in Atlanta UAG certified used vehicle volume change at the other brands, BMW were up 54% on year to date basis over the last year. Audi up 28%, Honda up 17%, Acura up 18%, and Mercedes up 5%. So you can see we've had tremendous growth even with the other brands.

As of September 30th, we have a 34 day supply of used vehicle on hand. Moving over to F&I finance and insurance revenues increased 21% to $58 million. Same store growth on F&I was up 16.2%. Let me give you the average gross per transaction for the quarter. It was $813 versus $763 in the third quarter of '02. New was at $834 and used at $770.

Our combined financial lease penetration in the U.S. was 75% during the third quarter, I might point out that 60% of which were OEM captive partners that further strengthens our vertical strategy.

Leases represented 21% of our new vehicle financed leased transactions during the quarter. Due to reductions in overall residual values, we've seen a decline in the overall level of lease business. And I think this is due to the fact that the OEMs are not supporting lease residual values, as well as the high retail incentives on new vehicle sales. As a result lease something not as an attractive at the retail level because of higher payments at this time.

But I want to point out something I think is important to date. I feel this will benefit us at UAG as a result of our brand mix. As customers ultimately will be driven to the brands that are sustaining continued higher residual values. Our set in warranty program (inaudible) penetration 37% in the quarter, 34% in new and 42% in used.

Moving on to the important parts of service area, revenue increased 19.9%, to $243 million and same store sales up 10.6%. Our body shop revenue increased 23.6%, and same store sales increased 15.5%. On a worldwide basis we have 31 body shop operations.

I think our service parts and body shop performance can be attributed again to our capacity expansion programs and our emphasis on putting units in operation. Our team expects this strategy will continue to generate the same store growth in the future.

Moving on to gross profit. Gross profit up 20.7% in the quarter to $336 million, and our margin was 14.2% up 30 basis points versus 13.9% in Q3 of 02. On the same store retail gross profits increased 9.8%, or $25.8 million, on a 9.9% increase in related same store retail revenue. SG&A was 11.1% of revenues compared to 11.1% in Q3. SG&A was 78.2% of gross profit, in the third quarter-- comparison to 78.1% in the second quarter of '02.

Interest expense to cover that in the third quarter, interest expense was $11.1 million, up $1.2 million versus the third quarter of '02. The increase in our interest expense in the current quarter is really attributable to borrowings in connection with acquisitions. And this was partially offset by decreases in weighted average borrowing rates of 50 basis points and 20 basis points respectively on our variable rate debt in the U.S. and UK and I'll talk about that a little later.

Turning to our floor plan, expense in the quarter was $11.2 million up $2.3 million versus $8.9 million in '02. The increase in expense in the current year is due to a $1.8 million increase in expense in the current quarter resulting from our $350 million swap we did in March of '03 of floor plant debt at [3.15] for five years, coupled with floor plant debt related to acquisitions.

Although the expense is higher than it would have been if we did not fix our rate, I think this is the best long-term strategy for UAG, based on what we see potentially as interest rate increases. If you look at our current capital structure, just as a data point, 50 basis point in increase in interest rate annually would decrease our earnings per share by approximately 6 cents. Our tax rate for the quarter was [39.5.]

Let me turn to the balance sheet. Total vehicle inventory at the end of the quarter we're $948 million. On a same store basis versus June, new vehicle inventories were down $107 million versus the end of the second quarter. On same store basis versus June, used vehicle inventories were up only $5 million despite a $50 million increase in our UK as a result of the registration month in September. As I noted Earlier, our vehicle inventories down 8.5% compared to June 30. Our new vehicle supply is 50 days, which is down 11% from June 30th.

Looking at our inventory turns, on a 30-day basis, based on September 30th, new -- we had a 7.2 turns or 50 days, used was at 10.6 at 34, and parts was 6.6 at 54 days.

Let me just recap, our capital expenditures year to date was $124 million. We have a number of sale leasebacks in line with close in the fourth quarter. We expect net cap ex to be $100 million, which is compared to last year. And last conference call we had given prior guidance of approximately $80 million. This increase really reflects the spending we've had in the UK as a result of our significant franchise growth overseas.

We're seeking financing on our capital projects and we're finding amazingly, very attractive lease rates and. In fact we might hit the sweet spot right now in the U.S. and overseas, which are allowing us to lock in great rates over the long-term. And just to give you a data point, sale leaseback rates overseas today we're seeing them as low as 6.4% and that compares to approximately 225 basis points higher in the U.S. at 8.75%.

We continue to emphasize that the facility work we are doing has allowed to us expand our industry leading same store comps and leaves us with sufficient capacity to continue that growth into the foreseeable future.

As I've noted in the past, all dealers will be required to meet all OEM standard brand and image programs. And in fact, because of our acquisition strategy over the last 24 to 36 months-- when we acquire our franchise most of the OEMs stipulate a timetable for facility renovation in terms of the new franchise agreement. What I’ve done is we just moved forward on these commitments immediately and I think that's paying off for us in our comps, as you review our numbers not only this quarter but in the past.

Let's take a look at the debt, our debt position at the end of September, total long term was [787 versus 758] at June 30th. And breaking this down we have our $300 million dollar ten year senior [supported] debt outstanding at 9 5/8 with a 5 year call. We have got $426 million under a U.S. credit agreement flat compared to [6-30] and 56 million under our UK credit agreements which is up 28 million versus [6-30.]

Really the increase related to acquisition and spending on facilities in connection with most of our new franchises. We had $5 million of other related debt. Availability under our U.S. and UK lines is $300 million. Our debt to cap is 50% compared to 51% in the second quarter of '03.

In addition in addition to our long-term dead wavy $880 million of floor notes payable. On a combined basis our total debt is $1.7 billion, I think I've noted this before but as of September 30th, 51% or $850 million is fixed, with a weighted average rate of 6.1% and an average term of 5.9 years.

Let me give you a quick update on our international operations. The overall UK market was up 1.4% in the third quarter, and is up .5% on a year over year basis, and this compares favorably to the market in Western Europe, which has declined 1.5% this year. In total, the UK market has sold 2.1 million vehicles in 2003 and still second largest market in western Europe. In the third quarter our retail revenues were up 40.8% versus last year on an international basis. And on a same store basis, retail revenues were up almost 21%, and that compares to same store retail revenues in the U.S. which were up just under 8%.

The components of the same store retail revenue increases in the UK are as follows. New retail revenue up 25%, used retail up 16%, F&I revenue up 21%, service and parts revenue up 14.9%, and total revenue up 21%.

We acquired the Sytner Group in March of 2002 for $135 million. At the time of the acquisition, their tangible net worth was $25 million and we estimate an annual revenues were approximately between $900 million and $1 billion. Since the origin investment, I make this point since the origin investment we've added 19 new franchises with estimated annual revenues of $450 million, just to recap those, five Mercedes-Benz, 7 Toyota, 1 Lexus, 2 Premier Auto, 1 Bentley and1 Portia for a total of 19.

The total consideration including working capital and goodwill amounted to approximately $37 million. In 2003, the businesses are expected to return approximately 2% on total revenues.

UAG's return on investment capital in Sytner is approximately 20% on pretax basis. We've been able to grow our business as the OEM reengineered their markets in the U.K. under the new block exemption rules. All manufacturers are reorganizing larger market areas in aligning with dealers who are best able to represent their brand, both in experience, reputation and capital. We believe that our international platform provides UAG another distinguishing features investors look for differentiation in auto retailing industry.

Now let's look at our North Scottsdale 101 business. During the second quarter conference call there were questions about our Scottsdale.

Many wanted to know if the mall was attracting customers from the surrounding area. So we did a little study here over the last several weeks, and I'm happy to report that after analyzing our sales and service customers that each dealership for the first nine months of operation, 52% of our sales customers and 47% of our service customers are coming from a distance greater than 11 miles away.

Based on this data we believe the auto mall is attracting customers to North Scottsdale. In fact, as I talk today, the strength of this market in North Scottsdale is supported by the fact that a new Mercedes Benz and a new Cadillac dealership will be built across the street from our complex.

Let me provide you some other data points related to the mall. The mall was built with six new franchises awarded by the OEMs and five relocations from other areas in Phoenix.

The open points were object taped without having to pay any goodwill premium. The new points were Mini, Land Rover, Jaguar, VW and Lincoln Mercury.

We have exclusivity now in the greater Phoenix market with Audi, Land Rover, Jaguar, Portia and Mini. We also have received questions regarding the performance of the mall in North Scottsdale. Our BMW store, since opened has gone –from 49th in the nation to 28th.

On a year to date basis new unit volume is up 25%, and our service business is up over 15. Our Portia stores currently number 4 in the U.S. and ranked number 2 in the western region and in October of '02 was number 9 in the country. And on a year to date our unit volume is up 66%. Our new VW open point is already number one in the Phoenix metro area in zone.

I think it's important to remember that the mall has the cost to allow these businesses to grow many times over in this particular market. To illustrate, I think this point, our existing service facilities have a capacity you had today of about $4 million a month, and we are today currently averaging $2 million a month as the business continues to grow.

If any of you have been in north Scottsdale you'll see the rapid development taking place there and we're estimating the business should generate approximately $500 million in annualized revenue.

One last point I want to make before I open it up for questions, is to discuss some of the changes we made in our management reengineering and realignment to help us manage the day-to-day operations even better as we go forward. We've realigned operating responsibilities in the U.S. into two regions. One in the East and the other in the West. The West being managed by George Brochek (ph), and the East by Roger Penske, Jr. These two Executive VPs will each be responsible for roughly one half of our domestic operations.

Each will have a dedicated team consisting of finance, HR, and fixed operations expertise and together they will oversee 18 separate market areas. The UK will continue to report in to me and has a similar structure in place. We believe this redeployment of our resource will allow to us streamline our management functions, maximize opportunities scale and bring additional focus as we continue to grow our business and reduce costs.

I think in summary this afternoon, you can see the results were released this morning, UAG delivered a great quarter. All of our businesses continued to perform well as we grow our base of operation and continue to add service capacity, and strive to exceed expectations in every level.

As noted in our press release, we have provided a range of 45 to 49 cents per share for our fourth quarter earnings, which would bring our full year earnings projection to $2.04 to $2.08 per share. We will not be providing 2004 guidance during this call. We're in the process of completing our 2004 business planning process, and we will issue a press release with our guidance prior to the end of the year. And now I would now like to open it up for questions. Thank you very much.

(Operator instructions) And first the line of Rick Nelson of Stephens. Go ahead.

Good afternoon and congratulations.

Thank you.

Roger, you acquired $650 million in revenue in '03. I'm wondering what reasonable target might be as we look forward over the next year. And secondly, does it become more difficult to maintain and import heavy brand mix given manufacturer restrictions on the import side?

Well, let me first answer the question on restrictions. Lexus today is the only brand that we have any ceiling on at the moment. I think that's similar with most of all of the other public players.

Typically, we have a framework agreement that gives us a certain percentage of the overall sale and at this point I don't see any, at least as I go through the next 12 to 24 months where I'd have any restriction on growing either foreign or domestic nameplate brands. There hasn't been any pushback at all at least at this particular time.

As far as looking to the future, we've tried to stay in the net $400 million to $500 million of acquisition revenue, which has been pretty consistent I think over the last couple of years and we would look to 2% to 3%, growth on organic basis. So that's pretty much as I look to the future.

And capex projects, maybe you can update us where you are. California's done, Scottsdale done?

Yeah, all -- well, we'll move into the new BMW store in San Diego, which is probably 95% done. All of Phoenix work is done. We're just opened our Ferrari Mazerati store and it has given us more of a foot print for Lexus.

One big project we haven't started yet is Turnersville, New Jersey, as we're looking at getting permits and the cost there. When you look overseas, we've had a significant number of opportunities there, which through this block (inaudible), reengineering, we'll be adding some new facility there. But-- and I would assume that we're going to start to see the cap ex starting to come down.

The good news is that we hit this thing at the right time because there's a great appetite for sale leaseback. If you look at our balance sheet, we typically have not carried a lot of real estate. Inskip (ph)will be another project that will take 12 to 18 months to complete, which will start sometime in the first quarter of '04.

And any comments on what you're seeing to date in October, I know the new vehicle sales numbers were quite soft recorded yesterday.

Well, as I looked at our overall business, we really had good traction in October. One point that probably hurt us was the fires, as we had in San Diego. We were shut down for three days there, no employees, no business.

And that started to wind back, and I think as of last Friday we started to see that come back. So, there was some pushback there.

Also, in California, we don't have a big concentration in California, but we saw certainly in the higher volume brands, this situation on the new registration license plate registration, you know, had some pull-forward I'm sure into September, that dampened some of the sales in October.

But overall, the east, the northeast, I think was good for us. So, on an overall basis, I would assume that our same-store metrics would continue to build, except maybe the one dent we'd have would be San Diego because of the fires, and maybe some slight impact in California.

How much revenue has come out of California?

Somewhere between 4% and 5%.

Thank you.

Next question is from the line of Steve with Morgan Stanley. Please go ahead.

Good afternoon. Can you hear me?

Yes, how are you, Steve?

Good Roger. Do you know how much currency aided the revenues and the profits in the quarter?

$20 million in revenues.

And any profit impact, or no?

Probably between $500,000 and $1 million dollars.

Okay. Could you -- I know you talked about your projects for next year. Is cap ex next year going to be down from this year, or no?

You know, Rick asked that question a just a minute ago. We're estimating that we're probably going to be somewhat in the same line.

But we have the benefit where most of these projects before we start them, we have targeted a sale leaseback partner and what we've continued to do is take control of those projects, built them and then spin them off when the facilities are complete. So I would think our net capex, you know, will be down, closer to $80 million next year.

Okay. And --

That would be a reduction from the last two.

Sure. And I was just trying to get my arms around the SG&A leverage here. It didn't look like there was a lot of SG&A leverage in the quarter given the gross profit growth. Was there anything going on there, or no?

Well, let me say this. When I look at, it I looked at the same situation. We had about half our SG&A in real dollars growth was from acquisitions, probably when you looked at variable -- remember our variable selling expense which cover our sales people along with our parts and service, that increased about $11 million.

That's due to the pay plans that are in place, and also when they hit these higher targets. We are also increased our advertising, the used car area it was up about $4 million, and then we have a balance of -- would be workman's comp, and also employee benefits. We have from [rent related] probably about $2 million.

So I think they're all in line. Obviously it's very difficult to change pay plans when you have most of your people on variable pay plans, you know, within a quarter. We're going to look at these because as we hit these higher targets are there pay plans that may be, are not realistic but again those have to be looked at on a case by case basis.

But basically, half of the increase of SG&A was -- had to do with acquisitions.

Great, thank you.

One other point. I just got a note here and I just want to give this back to you. I was wrong on the currency effect on profit. It was only $300,000, not $500 to $1 million. I'm sorry.

Thanks.

And next the line of Don Meter with Bear Stearns. Please go ahead.

Hey, Don.

Roger, I understand in Europe the UK, there's another large operator or consolidator that's been active. If that's true, do you know who it is and can you comment on how long they've been around and their size?

Well, there's a company called Pen Dragon, which would be the largest of the there's also a -- they're also an operator of Premier Auto Group stores, primary Land Rover and Jaguar in California. They would be the largest player there and you've got CD-Bramele (ph). I just don't know all the names offhand. But I'll get them for you. Have Tony Pordon get them for you. We have a list. I just don't have them here today.

Next question, you're concentrating your efforts just in the UK. Do you plan to go out of the UK?

We have two small joint ventures, one a Toyota operation, which we don't operate. We're 50% partner in, in Germany, which is Toyota Lexus, and similar situation in Germany with BMW. We have our operation in Mexico, as you know, which was (inaudible) to us by Toyota. But right now our focus certainly would be in Germany and in the UK. The UK has given us so many opportunities, when you look at the amount of capital that we've invested to generate that revenue.

That's wonderful.

What we have to spend here, it's been a home run.

Is there, on the drawing board any new large auto malls in California being contemplated for 2004, 2005, anyplace in the state?

Well, let me say this. We have an auto mall of considerable size that we're going to grow and Turnersville, New Jersey, south of Philadelphia. That's 60 acres. We're already on about 25 there. So we'll put in all new facility.

And as I pointed out in my comment we're committed to the manufacturers, as on this aggressive growth targets to make these changes in facility. So that will be one, the Inskip acquisition in Rhode Island, which has the facilities and an infrastructure will really need some leasehold improvements and that's all going to be funded by the seller, as a landlord.

So, there's nothing big planned in California that you're aware of right now in the next two years?

I just don't know. You've got the Cirinos (ph) auto mall, it is there, probably the number one auto mall. Auto nation has a bunch of great stores there. San Diego, we think that we've put together the luxury mall there. And I think there's one in Berkstrom has in the midwest. I just can't give them all. I'm just not aware of anybody today that's aggregating the franchises like we have.

Okay, thank you

Next, the line of Jerry Marks with Raymond James. Please go ahead.

Hi, Jerry.

Hi, Roger. Just a couple quick questions. You indicated, if I wrote this down right, that September was the registration month in UK.

Right.

and that provides some strength. Why is that? What exactly does a registration month mean?

Well, what happens is the end of the first quarter and the end of the third quarter, there's some benefits on licensing for vehicles in the UK, so they call these registration months.

So they're times when like a model changeover but they have a benefit on licensing, so it drives a little more traffic in those two quarters. I'd like to see it flat to be honest with you, but that's the way they do it over there.

So, seasonally the first and third quarter are stronger. The 20% number we might not see that the in second and fourth quarter?

Yes. That is correct. You see that level out. Why I pointed it out-- we had a little higher used car inventory as more trades came in right at the end of the month, so we end up with more inventory (inaudible). You see that Q3 and you’ll see that in Q1.

Okay. Any idea in terms of how much of a difference that makes, like 5% had?

I can't give that you here, I don't have it, to be honest with you.

Okay. And then, the only other question I had, your net capex of about $100 million, if we assume maybe $25 million in maintenance capex, which is your depreciation level, is that $75 million remaining all in these new store additions, or are there also some store upgrades going on?

Well, the bigger pieces are many of their big -- their staple stores that we've had to go out and add additional service bays, add sales capacity. We've gone to a lot of single-used car separate locations and then the larger stores.

But the majority of it has to do with many of the new acquisitions-- a new Honda store in Tempe, new Toyota store in Orlando, and new expansion of Lexus in New Jersey, and the list goes on. As I said, I think 48 of them we looked at them this year, just to see what really was the impact again, because we keep talking about our investment and we can see that the same store used. A big investment in San Diego and also, obviously we have one going on in Landers in Arkansas where we had the tornado really tear the whole dealership up.

Okay, thanks.

Thank you.

Now we'll go to the line of Domenic Martilotti of Bear Stearns. Please go ahead.

Quick question on the used car side of the business. I know one of our competitors had a little problem -- your competitors had a little problem in the quarter and you've shown some pretty significant rise in revenue per transaction and I know you're doing this local auction.

How much of that is attributed to the local auction and how much is just to the certified used and are you guys buying a richer use mix of used cars out there.

Let me not confuse the audience here. Auctions are having to do only with used car wholesale. None of this increase has anything attributable to the auction. All we're doing there is we're able to put more money in new car trades in many cases, and used car trades because we have a more efficient way to dispose of the used.

Primarily what we're doing is we've gone to example BMW in Atlanta, we built a separate used car facility, same thing separate extra location in Orlando Toyota area. So we're seeing the expansion is starting to differentiate revenue and having the same sales people we're going to dedicated sales forces with certain metrics they have to meet.

And then of course you tie together all the incentives on the certified pre-owned. Those are the things that I think are driving a lot of our success.

I mean, you think it was more a function of what you're doing rather than what's going on in the overall market?

I always say the used car business is something that doesn't really get affected by incentives unless they're so high we saw that I think maybe 9 or 12 months ago, when we originally came out with zero-zero on some of the very aggressive trunk money.

But what we're trying to do is we have each one of our locations and where we have the scale we're able to advertise them all, and we get some benefit on the destination location for used. And then we also get the benefit of certified pre-owned. And the third benefit would be, obviously, having the pre-owned be not in the same selling environment as the new.

I think you got to have that differentiation because it's too easy for a combination salesman to put someone in a new car rather than selling a used car.

Okay. And following up on the cap ex question, I think you've given us a metric before on what your general maintenance cap ex --

Yeah, $25 million to $30 million. What I'm going to do when we have our next call, it continues to grow, obviously, because we've invested money, we have leaseholds that aren't -- that we put in which are not sold off in some of the sale leasebacks. But I think $25 million to $30 million is probably realistic today.

That's aggregate number. But what would you say is a normal number for your average dealership? I know they differ on size, but --

I guess if we have 120 dealerships (inaudible) in the $25 million, so --

All right, all right.

That could be high and some could not spend any money on. In fact, as we look at our budgets and we see spending money on new facilities we're asking them the question why.

Okay. And lastly, just looking at acquisition opportunities, you said you're looking to keep your business at 20% to 25% international. But if opportunities really present themselves greater in the UK, could you see that ratio changing over time?

Well, I think that obviously we're building the domestic base, too, which is 80/20 today, but there's opportunities in the UK. And, I think that we're seeing probably more consolidation going on with OEMs and the players that have the capacity and our committing the facilities to go forward, we'll see that grow.

At the moment, I don't see a billion dollars acquisition in the UK at all. Or sales. We would look at just adding on and trying to get scale in the markets where we have already a presence, so these would be-on acquisitions. But obviously, we're going to look for opportunity and we would communicate those to the market appropriately.

Okay, thanks, that's all I had.

Mr. Penske, no further questions.

Okay, I want to thank everybody for joining our call and we'll talk to you next quarter. Thank you.

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