Penske Automotive Group Inc (PAG) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and good afternoon and welcome to the UnitedAuto Group fourth quarter 2003 earnings conference call. A press release which details UnitedAuto's fourth quarter results was released this morning and is posted on the company's website, 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 Anthony Pordon, UnitedAuto's Vice President of Investor Relations. Sir, please go ahead.

Thank you, John. Good afternoon, everyone. Welcome to the UnitedAuto Group fourth quarter 2003 conference call. Joining us today are Roger Penske, our Chairman; Jim Davidson, our Executive Vice President of Finance, and Bob O'Shaughnessy, our Controller.

Before we begin this afternoon, I would like to remind everyone that statements made in this conference call may include forward-looking statements regarding UnitedAuto's future reportable sales, earnings growth potential and issuance of common stock. We caution you that these statements are only predictions which are subject to the risks and uncertainties, including those relating to general economic conditions, interest rate fluctuations, changes in consumer spending, and other factors over which management has no control. Our actual results may vary materially.

These forward-looking statements should be evaluated together with additional information about UnitedAuto, which is contained in UAG's filings with the Securities and Exchange Commission, 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 in today's press release posted under the Investor Relations section of our website at www.unitedauto.com. I would now like to turn the call over to UnitedAuto's Chairman, Roger Penske.

Thank you, Tony, and good afternoon everyone. Our fourth quarter was another outstanding quarter for UnitedAuto. I'm pleased to report that we achieved double-digit quarterly growth in revenues, income, and earnings per share. This was our nineteenth consecutive quarter of producing record results.

With the private placement that we announced this morning we have strengthened our capital structure, reduced our leverage, and will secure capital to allow us to continue to grow our business. Upon closing the private placement, our ratio of total non-vehicle debt to total capital will improve from 44% to 33%.

Let me cover a few highlights during the quarter. We had a 7.9% increase in total retail units to almost 61,000. New units were up 7%, used up 9.6%, for a total of 7.9%.

Our revenue increased 18.4% to $2.2 billion. We had a 7.1% increase in same-store retail revenue, including an 8.2% growth in our most important service and parts business. Net income was $20.1 million for the quarter, up 44.1%. Earnings per share increased 41% to 48 cents per share, which exceeded the street estimate for the quarter.

Before I discuss the fourth quarter results any further, I'd like to recap highlights that we achieved during 2003. Overall retail unit volume increased almost 14%, up 11% in new units, up 19.4% in used, for a total of 259,000 total units. Our total revenue increased 20.3% to $8.7 billion, and again, the important same-store comps were up 6.5%. Income from continuing operations and earnings per share increased more than 16%. During the year we initiated a quarterly dividend of 10 cents per share, and we reduced our debt to capitalization before the private placement, from 49% at the end of 2002 to 44%.

Looking at our brand mix, at the end of the year domestic was 22%, foreign and luxury combined was 78%, and our luxury category was 46%. Foreign and luxury name plates continue to perform well in the U.S. market. Honda, Acura, Toyota Lexus, BMW and Mercedes, which represent 57% of our total business in the U.S., gained 1.5 market share points during 2003. On a same-store basis in 2003, UAG's unit sales for these brands increased six points, 6.2%. You can refer to the data sheet in our press release to get more detailed information on the other brands that we represent on an overall basis.

From a revenue mix, in the U.S., we were at 80%. Internationally we were 20%, and this is in line with the comments I made in the past. We'd like to keep this revenue mix between 20% and 25% for international operations.

Acquisitions during the year, we had net acquisitions of over $500 million. Nine U.S. acquisitions totaling $300 million, and 19 in the U.K., totaling $450 million, and we had $250 million of divestitures on an annualized base.

Looking at some of the initiatives that we initiated during 2003, the first one is our used car initiative. We continue implementing our closed bid auctions, and I'm really pleased to report the results we've seen at these auctions. In fact, I guess the real tell-tale number is, in 2003 we wholesaled almost 70,000 units and had a total wholesale loss per unit of $14, and that compares to just over 60,000 units, 63, in fact, in 2002, at $108 per unit. So, again, these auctions are taking good hold and giving us more margins.

On the personnel or human capital side, again, turnover is the key metric that I look at every month at every store. Overall turnover was reduced 22% in 2003. If you look back to 2000, we were at 80%. We reduced that in '01 to 64, in '02 to 54% and '03 to 42%

Now I'll take a little closer look at fourth quarter results. New unit sales were up 7%. Our retail revenues on new were up 16.7%, as we reported. Same store sales were up, revenue at 7.7% I think the increase was driven by our mix of foreign and luxury name plates and the strong same-store performance in our luxury name plates. Just as a data point, our average selling price in '02 was $28,800 and in '03 it was $31,400. On the used side, unit sales were 9.6% business, used retail revenues were up 19.1%, and our same store sales were up 5.1%.

During the fourth quarter we were able to build our used vehicle business, despite a challenging used vehicle market. The increase was driven by an increase in the average selling prices of used vehicles. In fact, as we look at the same metrics '02 versus '03, average selling price on used in '02 was $20,000. The average in '03 was $21,600.

In the F&I area, our revenue increased in the quarter 11.1% and same-store was up 3.9%. And our gross per transaction, was $789 versus $766 in the fourth quarter of '02 and when you break that down, new was at $823 and used was at $721 per transaction. For the year, our combined F&I lease penetration in the U.S. was 74%, and 58% of that was our OM captive finance plan, so again, we're integrated pretty well from a finance perspective.

Leases represented 24% versus 30% in '02, so again you can see the manufacturers and the bank moving away from leasing into the retail finance area versus leasing. Our extended warranty penetration in 2003 was 36%. New was at 33%, used was at 43%.

Looking at service and parts, our revenue increased 18.5% and our same-store sales was up 8.2% Our body shop also increased 21% for the quarter, and we were up 8.8% on a same-store basis. We've got 35 body shops in operation throughout our network.

In the fourth quarter, our margin increased 160 basis points to 49.3% in service and parts, which really bodes well for the future. Our service, parts, and body shop performance I think can be attributed to the capacity expansion and the benefit of an increasing units in operation which we've talked about before. I expect this strategy will continue to generate same-store growth as we go into the future quarters.

Moving on to SG&A in the fourth quarter, with 11.4% of total revenues compared to 11.7% in the fourth quarter of '02. And for the year, our SG&A was 11.3% to total revenues. SG&A was 79.1% of gross profit in the fourth quarter of '03, compared to 80.8% in Q4 of '02, so we've made some progress there also.

Looking at interest expense for the quarter, it was $10.6 million, down .5 million dollars versus Q3 of '02. Our interest expense really in the fourth quarter was consistent with '02, and this is due primarily to increase was in debt levels for acquisitions offset by decreased borrowing costs. Our floor plan interest expense in the fourth quarter was $11.9 million, up $2.5 million, versus the $9.4 million in '02.

The current year increase is due primarily to a $1.8 million incremental interest from the swap we did in March, fixing $350 million of our variable rate debt at 3.15% for five years coupled with a floor plan debt in related acquisitions. Based on our current capital structure, people have asked me, if we have a 50-basis-point increase in interest rates, what would that do to our earnings per share, and on an annualized basis, this would reduce our earnings per share approximately 7 cents.

Looking at our tax rate, for the year it was 39.5%, which was consistent throughout the year. Let me just move into balance sheet for a moment. Total inventories at the end of the year was $1.1 billion, that was vehicle inventory. And new vehicle supply at December 31st was 57 days, which compares favorably with the industry-wide vehicle supply of 69 days. And our used vehicle supply at the end of the year was 36 days.

Move on to capital expenditures. In 2003, our net cap ex was $66 million. During the year, we spent $200 million of gross expenditures on capital projects. We executed sale/lease-backs during the year of $134 million, which we think were at very favorable terms. And if you look at the $134 million, approximately $73 million was in the U.S. and $61 million in the U.K., so fairly well balanced in both internationally and domestically.

The cap rate in our U.S. businesses were approximately 8.75%, and the cap rate on our international leases were 6.4%. So you've got blended basis that would be slightly over 7%, and these commitments go for anywhere from 20 to 25 years, and this single-digit cap rates, and the site control we have afforded by the leases the way we negotiate them, I think is a really efficient means of financing our capital programs and gives us all the flexibility in the future. You'll ask me the question about cap expenditures in 2004. We look to be approximately net $75 million.

Looking at UAG's leverage, at the beginning of '03, based on questions we've had from many of our investors, we've focused on leverage in our capital structure. As a result, through retained earnings and other work on our balance sheet to reduce our debt to capital from 49 to 44, which I mentioned earlier, and once we complete our private placement, it would be at 33%, based on end-of-year debt.

Looking at UAG's debt position at the end of December, our total debt was $1.8 billion. And, of the $1.8 billion total debt, approximately 47%, or $850 million, is fixed, with a weighted average of 6.1% and an average term of 5.6 years. We've got approximately $1.1 billion in vehicle debt.

And then, turning to non-vehicle-related debt, this was $652 million, a decrease of $135 million from September 30th, and it was $14 million lower than 12/31/02. Breaking this down we had $300 million of 9 5/8 ten-year senior subordinated debt outstanding with a five-year call. We had 347 million under our credit agreements which were reduced by $135 million since 9/30, and again, $20 million down from year end 2002 at 366.

The decrease in borrowings, I think, was driven by our cash flow from operations and proceeds from sale and lease-back transactions. And at the end of the year, we had approximately $423 million of availability under our U.S. and U.K. credit agreements, so we've got plenty of drive power going into 2004. Our debt-to-cap ratio again was 44%.

Let me just make a few comments about the private placement we announced this morning. As noted in our press release, the company has entered into a definitive agreement to sell just over 4 million shares of common stock for $29.49 per share in a private placement to Matsui.

The proceeds from the offering will be approximately $119 million. We'll use these funds to pay down existing indebtedness under our credit facility. This capital will be available as we continue our acquisitions and capital investment programs. Again, if we use these proceed from the private placement to pay down our non-vehicle debt, our debt-to-capital ratio would be 33%. Pending shareholder approval and the normal other customer and closing conditions, I expect the transaction to close around March 31st.

Guidance. I'd like to address 2004 earnings guidance we provided you this morning in our press release. Prior to the private placement with Matsui, we estimate 2004 earnings in the range of $2.28 to $2.38, which is based on 42 million shares outstanding. After reflecting the issuance in connection with the private placement, we estimate 2004 earnings to be in the range of $2.17 to $2.27, and this is based on an average outstanding of 45 million shares. The first quarter earnings are expected to be in the range of 43 to 47 cents. And again, I make note that the first quarter guidance is based on our estimate of 42 million shares outstanding, because the private transaction will not close until the end of the quarter.

In summary, I'd just like to take a moment here to reflect on the goals we established when Penske invested in UAG four years ago. Initial business plan outlined the following initiatives: create financial stability, certainly strengthen our OEM relationships, focus on operations and high growth markets, generate industry leading growth in revenue and profits, increase our units and operations, invest in facilities to expand sales and service capacity, grow our fixed operations, and enhance brand mix.

I think it's evident that by our outstanding quarter and full year that we released this morning, that our approach and execution has allowed UAG to achieve the market position it deserves, and we're certainly excited about the results in the future. Given our strong cash flow, and the private placement we announced this morning, I believe that our financial flexibility and continued execution of our strategy places us in an outstanding position to capitalize on future opportunities.

On a personal note, I remain very optimistic about UAG's growth prospects. And, on a final note, I'd like to announce today the Penske Corporation today purchased an additional 357,000 common shares from Charles Bank in a private transaction at 29.49. This will eliminate the overhang from our original investors. At this point I'd like to open the call up for questions. Thank you for joining us.

And ladies and gentlemen, if you would like to ask a question, please press the star, then 1 on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. If you wish to remove yourself from the queue, please press the pound key and we ask if you're using a speaker phone, if you would please pick up your handset before pressing any numbers. Once again, if you do have a question press star 1 on your touch-tone phone. And first go to the line of Adrian Dale with CIBC World Markets. Please go ahead.

Hi, thank you.

Hi, Adrian.

I have a few questions for you. First of all, what are your acquisition expectations for 2004? Do you think they will be similar to '03?

As we've spoken before, we're looking at a net between $400 million and $500 million for 2004. This would be consistent with what we've had over the last couple of years.

Consistent as well in terms of the geographic mix?

I meant in dollars, really, in millions of dollars. From a geographic perspective, as you saw this past year, we were almost 50/50, domestic and U.S., and we would see strong opportunity in the U.K. because of the reengineering by many of the OEMs and the effect of the block exemption.

Okay. Great. And then, with regard to the 60 Minutes program, just had a question on dealer reserves. Are your dealer reserves currently capped, or if they're not, do you have any intention of placing a cap on them?

Well, the 60 Minutes story, which has not aired at this point, is on dealer reserve, and from a UAG perspective, you know, we are dealing with the OEM captive finance companies. I think we were 57% or 58% financed through our captive finance sources, and each of those are capped at a maximum of 3% today, and I think GMAC announced 2.5% just a few weeks ago.

So, the majority of our business is already capped with our finance partners. Now, you have some other types of credit that might have higher than that, but at the moment the preponderance of ours are aligned with our OEM finance partners.

Okay. Great. And then is there any FX impact as a result of these UK operations?

There is one cent benefit in the fourth quarter and three cents for the year.

Okay. Great. Thank you very much.

And next we'll go to the line of John Casuso (sp?) with Merrill Lynch. Please go ahead.

Good morning, Roger. Just a handful of things. First of all, I wanted to ask you, on this private equity deal, what made you choose private equity as opposed to going to the public markets?

Well, I think that at this particular time it was a much easier transaction for us. We've had a relationship with a major shareholder that came to us interested in investing more in the company, and to me, at this particular time, I said earlier in my comments, that there was certainly, looking at our balance sheet at least the past, maybe not the presently, as far as our leverage, so we felt that it would be a prudent time to do that. I think the long-term strategy, I think the execution certainly is easier on a private transaction and we certainly didn't have the fees that would be part of doing a public transaction.

I understand. Let me just ask a related question on M&A activity. How would you characterize the market right now? Is it particularly attractive for buyers or for sellers, and related to that, with this pending Pendragon deal in the U.K. , do you think that creates unique opportunities for you as an acquirer in the U.K.?

Let me just start out. I think that as far as the U.S. is concerned, from an acquisition perspective, you know, we're focusing on areas where we already have scale or we can buy a property that would give us scale in a market that we're not already in. And from a UAG perspective, you know, we have activity today that would give us opportunities to execute transactions during, you know, during 2004.

From an international perspective, I would say it's a pretty hot market right now because, especially in the U.K., because of the block exemption, most of the manufacturers are trying to realign their network and put them into primary market areas, giving people with existing territories the chance to expand. So we're getting some benefit out of that as we look at 2004. From a Pendragon perspective, I'm sure that if that deal closes, they might be interested in selling off certain of their non-strategic locations, and we certainly will communicate with them our interest. But,overall, you know, as I said earlier on the first question, we're looking at the opportunity of $400 million to $500 million net of acquisitions. We closed the Cadillac business in Torrance during January, so we already one have one acquisition in place as we start the year.

Thanks very much, Roger.

Thank you.

Next we'll go to the line of Rick Nelson with Stephens. Please go ahead.

Thanks. Roger, do you see the debt ratio creeping back up toward the 50% level or is this low-30% area a new level that you'd like stay around?

Well, I think that, you know, obviously, this wasn't just a one-time situation. In fact, I looked at our debt, you know, at the end of the month and we're only up $12 million, you know, (phonetic)and we had an acquisition during January, so I think that, you know, we see our debt to capital staying down. My goal was, I said, 50% in the past. I would say that, based on acquisitions, you'll see some movement going up, but I don't see it going up in a large way at all.

And can you provide a little more color on Sytner performance during the quarter, particularly as it relates to used vehicles?

Looking at Sytner overall ,we did about a billion dollars worth of business overall at Sytner, and I think when you looked at, on a pretax basis, they were approximately 2% for the year, and which would give you $1 billion U.S. versus a billion in pounds, so it's 1.7. So, really, they were on plan. For our used cars in the fourth quarter, their margins were down, but they had a lot more demonstrators that they had placed in service and those were sold at lower margins than you would see a traditional used car, so there was some downward pressure on used, you know, during the fourth quarter.

Was that the case in the U.S. as well? Used margins were down 100 basis points?

Well, basically they would be -- they were down basically due to the U.K.'s average.

Okay. Thank you.

Our next question is from the line of Charles Grom with J.P. Morgan. Please go ahead.

Good afternoon. (inaudible) In January we saw a real-- a pretty challenging market, and I was hoping you could comment on how business has trended thus far since the end of December.

Well, I think that everybody that's been in retail that lives in the Midwest or in the northeast has had some weather report on the tough weather story. I would say that January was challenging, especially in the Midwest and the northeast, but overall, you know, in some of the markets, we don't really go by market to market, but, you know, the weather- related areas, California, where we had good weather, in San Diego, certainly Phoenix, you know, we felt it was decent. Looking at the overall selling rate, as we look at that quarter, we think that this year is probably going to be similar to 2004, or 2003, from a U.K. perspective, that market was up 1% last year. They ended up the second best year in sales, and it put them really in a position of the number two market in Europe. So, overall, when you really consolidate our businesses, you know, we feel that we'll manage the first quarter.

Great. And then another solid quarter on the same-store sales front. Could you break out for us the -- break out between the U.S. and U.K. dealerships? Is one doing better than the other, or on both, new, used, maybe parts and services?

I think that-- let me break it out. I don't have everything here in front of me, but when you look at the U.K., we were up 3% in the U.S. for the quarter. U.K. was up 30. Go back to Q3, we were up seven-seven, U.K. was up 21. Look at the second quarter, we were up 10, they were up 15.6, and we didn't have them in the first quarter, and we have 3.4. (phonetic) So our strong point is obviously, you know, during the midpoint of the year. But overall it's been positive and I think that's, you know, one of our strategies is to make the investment internationally and I think people are starting to see the benefit of that -- those investments as we go forward.

Great. And the last question is, the vehicle registration month, if I recall, is in the first and third quarter, is that correct, for the U.K. market?

That's right, yeah. We get the benefit in the March quarter and also in September.

Okay. Great. Thanks.

The next question is from the line of Scott Stember with Sidoti & Company. Please go ahead.

Hi, Scott.

Hey, Roger, how are you? Can you talk on the U.S. side once again about the used car side? You mentioned that there was some challenging conditions. Last quarter we saw there was, I guess, some abating of the valuation issues, and seems likes things have started to tighten up again. Can you talk about how that's going?

Let's look at that the used car business on a quarter-by-quarter basis. Obviously, as you get to Q4, you get wholesale rates, used car prices trend down because there's-- many of the wholesalers are trying to dispose of the cars they have. We're careful on dispositions during that time. Our closed auctions have helped us basically, but our margins weren't bad in the fourth quarter. We had -- we really had an increase from 10.1 to 10.3 in the U.S. in our margins. We think overall margins were down because of the impact of lower margins in the U.K., and that was really based on the fact that we sold a lot more demonstrators. These are usually the same year as the current new car model year, which we don't get the margin on, so that was some dynamics during the quarter.

Anything on Chauncey Ranch as far as any metrics you can give us about service and parts or BMW, Mercedes sales, anything?

Let me just give you an overall. We get a lot of questions on -- we're calling that Scottsdale 101 now, just so we can answer the question on Scottsdale 101. Basically, at this particular time, we saw about 10,000 units retail new and used in the first full year, which met our expectations. The margin on a pretax basis was between 1.75% and 2%. We had strong growth in Porsche. I think I've mentioned before it went from I think in the top 20 to the top 5 in the country. Our BMW business had an outstanding year.

We had new challenges with Greenfield sites of Volkswagen and Lincoln-Mercury were number one in the marketplace, with Volkswagen already. And again, from our parts and service business, our -- we're running at our annualized rate now about 2.2 million per month, so that's pretty good coming out of the ground. This is long-term investment. We certainly are not making any excuses. I think if you've been there, you'll see the traction we're getting and overall that's the right place to have these dealerships. Plus, from a strategic perspective, we've got a second Audi point, a second Jaguar point, a second Land Rover point, in that marketplace, and you know what the growth is like in the Phoenix market, so we feel real good.

All right, and one last question. Are there any other of these big auto mall concepts down the road that you have planned?

Well, we have one that we're in the process of developing and that would be Turnersville,south of Philadelphia where we already own those franchises. It's a matter of upgrading the facilities, and as you know we bought the Inskip properties in Warwick, Rhode Island, last year, and we're in the process of an upgrade there. But there's no acquisitions or Greenfield points going in at this point, strictly dealing with the existing brand.

We completed our BMW -- new BMW store in San Diego, so that gives us Mercedes, BMW, Lexus in one complex, one contiguous strip in Kearny Mesa, so those would be our primary major malls that we have today.

That's all I have. Thank you.

Thank you.

We'll next go to the line of Domenic Martilotti with Bear Stearns. Please go ahead.

Good afternoon. Just a couple of follow-ups. First, on the acquisition front ,you mentioned $400 million to $500 million net for the year. When you look at divestitures, are those largely coming from the acquisitions in terms of (inaudible) you don't want? Are there still stuff in your portfolio that you do not want long-term?

Well, I would say there might be one or two that we deem not to be strategic as we grow in other areas, as we try to maximize our management penetration, but it would be a smaller amount in 2004. There could be some that we would sell off in the U.K. because, as we realign the network there with the OEMs, where we might take some -- we did this with BMW, we actually sold a store to a competitor and we picked up two stores in the London area. So we sold one and got two back. So, that will go on as they realign in U.K., at least over the next 12 months. But I think that will settle down and basically we would only look at things that were not strategic.

We're getting pressure from some of the manufacturers where you have, you know, multiple brands, say in one showroom or in one location. They might want to you move into a different location. We have to evaluate the economics of making that sort of move. That might drive us to sell off a particular location or brand. But again, as I said earlier I don't think this is going to be in the scale it was in '03.

And looking at-- you made one already in January, history, you pretty much been more active I think in the first quarter, first half of the year. Is that safe to make that assumption again this year?

That's a pretty pointed question. I wouldn't go back and say that I was the most active. I guess Inskip would state that last year. I think internationally you're going to see it pretty well balanced throughout the year. The first acquisition was in California, the Cadillac. But I think you're going to see Q2 and Q3 where the real activity will take traction.

Okay. And following up on the Matsui investment, what's been the historical relationship with them? Have you maybe in Penske Corp. had other relationships and what has their kind of investment horizon been?

Well, I'm not sure that everyone knows who Matsui is. They're probably one of the world's largest trading companies. They've been involved in the automobile business in other parts of the world.

Today, you know, they are a 50% partner with Toyota in Canada as a distributor. We have a relationship with them through Penske Corp. on a truck distribution business, a small one, in the U.S. They also give us the front door to other international markets. I mean, I hear people talking about China. I don't want anybody to think we're running to China today with UAG, but they have their footprints that could make this business very interesting.

They're really $112 billion business. I think they were ranked 6th by the International 500. We had relationship with them during the Detroit diesel days, as we were looking for strategic partners to help us develop a specialized diesel engines. So, overall, they come with an existing ownership of 7.6%, so they're not -- they're not new to us, and their ownership will move something over 15% with this acquisition -- or with the purchase of these shares.

Okay. And just lastly, kind of going on to that motor mall concept, can you kind of give us a little more color in terms of what type of investment of your cap ex is going towards those projects here in '04?

Well, when we look at Inskip all of the, I would say, maybe we might spend $5 million additional, but all of the cap ex that's going to be required at Warwick will be done by the landlord. That was part of the acquisition strategy when we bought it, so we really have no cap ex exposure there. That's all going to be provided by the seller in that particular transaction.

We will have probably a third to 50% of the Turnersville business at the end of the day in Turnersville. Most of the other transactions we're dealing on will be single-store image programs which are required by the manufacturers. I think the one good thing as I look back and look at the sale/lease-backs that we've been able to do, we got these when the interest rates were down, we made the investments, and I can tell you the manufacturers, at least from a public perspective, seem to be driving those image programs stronger and tougher with us, not just us specifically, but I think across the public group to be sure we get those done on a timely basis, and we're way over 50% completed at this point.

Okay. That's all I had. Thank you.

Our next question is from the line of Nate Hudson with Banc of America Securities. Please go ahead.

Hey, good afternoon. A couple more questions on your cap ex. You threw in a 75 net number for 2004. I was wondering if you had the gross number. And then, just more generally, how much -- what percentage of your stores would you say you've modernized over the last five years, and is '04 the last kind of big expenditure year? Are we going to see a tail-off after that?

I think I just said to Domenic that I think we're well beyond the 50% point, probably 60 to 65 once we finish Inskip and the opportunity in operations we have in Turnersville. From a gross perspective, we're probably looking at $130 million to $140 million in 2004. And as long as these sale/lease-back rates continue, as I said earlier, was about 50/50, roughly, U.S. versus the U.K., we'll continue to take advantage of those, and those rates are very, very competitive when we look at what it gives us from a site control and flexibility.

Directionally, would you expect the cap ex numbers to start to go down in 2005?

Yeah, I think we're probably running-- today we've got about $40 million in depreciation. And of that, you know, we've got cap ex, maintenance cap ex probably in the 18 to 20, and we would look at this coming down. But when we look at acquisitions, there will be some that have to be spent. But, as we look at an acquisition, we look, number one, at that brand, number one at the location, certainly the profitability, and the ultimate profitability as part of our model. But we also look at what do we have to spend and what is the way we can finance or handle the cap ex. But I think that, based on being stationary today our business, that we probably are 65% to 70% through the image programs that will be required by our OEMs. We might enhance or enlarge certain locations because we see it.

We might add a separate used car location where we see we can get some traction there rather than have it on the same (phonetic). Those would just be normal things that would be done in the line of business.

Okay, and one other cash flow question. For the year, how much was spent on acquisitions? You mentioned you bought 750 and sold 250, but what was the net cash out the door?

113.

Thank you.

Our next question is from the line of Janet Clay with State Street Research. Please go ahead.

Hi. I was wondering if could you give the new and used vehicles days supply at the end of the quarter?

We were at 57 days supply on new and 36 days on used, and I think that compared to 69 days for the market. So we were in good shape.

Okay. Thanks.

Next we'll go to the line of Jonathan Steinmetz with Morgan Stanley. Please go ahead.

Jonathan, how are you?

Good. A couple of questions on parts and service. The 8.2% comp, do you have a number for the increase in the comparable service bay count, and in addition, I was just wondering if could you break down a little bit for us customer pay versus warranty on the service or U.S. versus U.K., maybe a little flavor by brand, that kind of thing?

First, let me -- I'll get Tony to get back to you on service bay count. I don't have that information here. But I will say the phenomenon that's taking place today in the parts and service area is, we're seeing the quality much much better at the domestics. So we're actually seeing some reduction in overall parts and service in the domestics. because warranty has gone down, which is good news because that certainly shows that there's quality. We're getting the benefit of units in operation. We've been driving the units in operation in the foreign name plate side, and they continue to grow. And the other thing is that the new programs, full-circle programs, which have been initiated by many of the foreign name plates, where you actually buy your car and as part of the purchase price, you bring your car back, which I would call for the maintenance items, and those are all-inclusive and we get reimbursed from those from the factory. From a mix perspective, I would say today we're 60% to 65% customer pay and 30% to 35% -- 35% to 40% warranty.

As far as the U.K. is concerned, we are just now starting to see the traction as we get these larger service departments, BMW in Nottingham, for instance, where we opened up a shop that's twice the size and now our significant big issue there is to understand how to handle it. We just have not had the service departments like we have in the U.S. and we need to train our people, we need to take the best practices from the U.S. and try to align those with the U.K. as we go forward. But, again, units in operation on the foreign nameplate side is very strong. On the other hand the good news is on the domestics, we're seeing a much, much better quality on all three major domestics.

Great. And just a real quick one. You gave a 1 cent impact due to FX. Do you have the revenue and operating income impact?

I think the revenue was $124 million for the year.

Okay. Do you have one for the quarter?

$37 million.

Great. Thank you.

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

Jerry.

Hi, Roger. Most of my questions have been answered. I just have a quick question. With your new target on going to low 30% debt to cap, have you incorporated capitalized leases into your thought process as well? And maybe if Jim's there, if we could get the rent expense? And the only reason why I ask, Roger, is because some of your competitors have been buying out their leases, indicating they're getting pretty attractive returns on investment. I was wondering now, with you guys' new focus on your debt structure, if you were considering that?

Let me say this, I don't want you to think I'm going to be sitting at 33%, because we're going to have some acquisitions, but our goal would be to try to maintain debt to capital, a number with a 3 on it, and then stay below 50% for sure.

Now, from a lease perspective, I think that there's probably two schools of thought, you know, do we use our capital and tie it up in real estate or do we put it in working capital and acquisitions? And I think at the end of the day, and remember all of our lease -- leases are in our SG&A, so we're trying to stabilize our SG& A as a percent to our total, but it gives us the flexibility, site control from 20 to 30 years ,depending on the lease terms, and I think that it's an efficient way to run our business. We're not in the real estate business. I see some of the people in the U.K., a lot of their profits are below the line because they've sold real estate. At the end of the day, you know, we're taking advantage of 6.4% to 8% rates that would give us, you know, site control for 20 years. So I think it just depends on who the operator is. I think that probably there's good reasons to be in either camp.

You know, our rent expense in the fourth quarter was $22 million and for the full year it was $84 million.

It was $44 million for the full year?

$84 million.

Eighty four, sorry. Thanks. And last question, SG&A as a percentage of gross really kind of improved this quarter. Are you guys now targeting a certain level, like 80% or something, because this is the first time we've really going to notice a pretty dramatic improvement.

I got two messages from the street. One was leverage and the other was SG&A as a percentage of gross profit, and I can tell you we're focusing on that at every one of our locations. In fact, we see some opportunity in the MIS area, as we would consolidate, you know, some of those business offices and then I think you're going to see that come down. We obviously need to be, you know, where our peers are, and I see some peers in the mid-70s.

I guess, you know, I'd like to see this continue to trend down, based on aggregation of corporate overhead, scaled across a larger business base because I think we've invested on the personnel side, on the finance side, certainly on the brand side. We've put these people in the field in our areas and also here at -- in Detroit, and we can grow this business significantly with, you know, with less SG&A, and also, you know, one of the things that's going to drive our SG&A down is if we have less turnover. I think the metric I gave you earlier today was 42%, and that's every single person that came into or out of this organization. We track every dealership, not only domestically but on an international basis, and that's going to drive SG&A down as we go forward.

That's very impressive. Thanks a lot, Roger.

Thank you.

And, Mr. Penske, we have no further questions in queue.

John, thank you, and thanks, everybody, for being on the call.

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