Penske Automotive Group Inc (PAG) 2004 Q1 法說會逐字稿

Good morning, and welcome to the UnitedAuto Group first-quarter 2004 earnings conference call. A press release which details UnitedAuto's first-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 at this time.

Thank you, good morning everyone. Welcome to the UnitedAuto first-quarter 2004 conference call. Joining us today are Roger Penske, Chairman, Jim Davidson, Executive Vice President Finance and Bob O'Shaughnessy, Controller. Before we begin this morning, I would like to remind you that statements made in this conference call today may include forward-looking statements regarding UAG's future reportable sales and earnings growth potential. We caution you that these statements are only predictions which are subject to 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 the additional information about UnitedAuto, which is contained in our filings with the Securities and Exchange Commission, including our 2003 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 introduce UnitedAuto's Chairman, Roger Penske.

Thank you Tony, and good morning. First quarter was another great quarter for UnitedAuto and represented our 20th consecutive quarter of producing record results. We solidified our capital structure by completing the private placement of 4 million shares of common stock to Mitsui for approximately $120 million in March, and this helped the Company reduce its debt to total capitalization from 44 percent at the end of the year 2003 to 37 percent at March 31st.

During the quarter, which is highlighted by double-digit growth in retail units, our revenue, our income and earnings per share, UAG experienced a 12 percent increase in total retail units just under 65,000 and breaking that down approximately 42,000 new units and 23,000 used units with a revenue increase of 24.3 percent to $2.4 billion.

The UK market experienced an overall 6 percent increase in unit volume during the first quarter and had a record March, which to me is very important as we go forward. We also had an 11 percent increase in same-store retail revenue including a 14.5 percent increase in our service and parts business. Looking at retail revenue just a breakout for the quarter the U.S. was up 6 percent; international I talked about the 6 percent increase overall in for a total of 30.7 percent increase in international giving us a total of 11 percent. We had a 22 percent increase in income from continuing operations for 20.8 million or 49 cents a share exceeding the consensus by 3 cents.

On a net income basis we are up 47 percent at 20.2 million, and a 41 percent increase in earnings per share at 48. Just to note last year I think you need to note we had a $3 million, 7 cents a share charge relating to the EITF 0216. Our results in the quarter were positively impacted by the following factors. I think we need to look at our strong brand mix, our internal diversification, our UK strong market again, 2000 basis point, 200 basis point increase in our fixed operations and we had a continued reduction of employee turnover and we had great success in our closed bid auctions.

Taking a look at these a little bit closer, when we look at the brand mix just to break out foreign nameplates were 80 percent of our revenue, versus 78 for twelve months in '03; domestics were 20 percent versus 22 in '03. And for the first time our luxury business was 51 percent of our revenue, which bodes well for the future as we look at the parts and services follows those nameplates. Again international diversification as we look to the first quarter U.S. was 72 percent and international was 28 percent. So again, we are in the range of the 70/30 as we talked about before.

Again I talked about the UK market being up 6 percent in volume, had a strong record registration month. In fact UAG same-store retail revenue UK was up 44 percent. We talked about 200 basis point increase in our fixed operations. I think that is due in part to our facility investment, really the mix of service and parts revenue we are getting higher margin business. We reduced our wholesale parts business. We got a greater percentage of body shop revenues as we look at the first quarter also. WE have had less (indiscernible) labor and more customer labor and customer labor parts associated with that labor gives us more revenue.

The success of our used closed bid auctions on wholesale I think went quite well during the quarter. We wholesaled 19,411 units in the first quarter for a profit of $38 per unit versus 15,330 in the first quarter of '03 with a loss of 67. So quite a swing there and we think we will see that as a positive as we go through the balance of the year. Let me now take a quick look at the first-quarter results.

New retail revenues were up 23, 22.3 percent to 1.3 billion, same-store were up 12.1 percent, so we had very strong new retail. I think the increase was driven by a rich mix of foreign and luxury nameplates and certainly a strong same-store performance by the luxury nameplates. Just as a note, our average selling price in the quarter was 31,300 in '04 versus 28,800 in '03 so we had almost a 10 percent increase or $2500 per vehicle in selling price. That shows you the move to the higher luxury mix.

On the used side our revenues were up 23.7 percent. Same-store up 7 percent. The increase I think was driven by focusing on our inventory mix of preowned offerings and the strength of the preowned market in the UK. Again giving you the average selling price 23,200 in '04 and 20,700 in '03; again an increase of about 2500 per vehicle, so we are getting a higher sale price. F&I for the quarter was up 13.9 percent, same-store was up 6.5 percent or 49 million. Looking at the average gross per transaction in F&I it was $819 versus $805 in the first quarter of '03. Just breaking it down new was 833. Used was 792. For the first quarter our combined finance and lease penetration was 71 percent. Fifty-seven percent which was with our OEM captive finance partners so again its awful important we maintain this vertical integration strategy with our captive and our OEM finance partners.

Leases were 25 percent of that mix, and that was up one percent versus '03, which shows some movement that the manufacturers are moving back into leasing. Extended warranty penetration for the quarter was 35 percent, 32 in new and 42 in used. Moving onto service and parts for the quarter our revenue increased 25.8 percent to 259 million and that is going to give us $1 billion in service and parts revenue for the year for the annualized (inaudible) and same-store was up 14.5 percent.

I discussed earlier that our margin on service and parts increased 200 basis points to 50 percent. Again, I think this is attributable to strong performance to our continued investment in facilities and our success of emphasizing higher margin elements in the service and parts operation. Again where we deemphasize in parts wholesale where you don't make the margins you do associated with your customer labor and longer (ph)labor. As an example in 2003 we added an additional 250 service bays which are now generating revenue for us in 2004. And if you looked at those bays just on a total year basis, we expect them to generate anywhere between 250 and 300,000, so you can see if you do the multiplication there is great opportunity to grow because of that expansion.

The results of our facilities in West Plains (ph) is further evidenced by the performance of our body shop; they were up 27.9 percent to 20 million, we look at almost 100 million in body shop business for the year '04. Same-store were up 16 percent. We got 40 Bodyshop operations domestically and also included in the UK.

SG&A for the quarter was 11.8 percent compared to 11.6 was up 20 basis points year-over-year, most of that was attributable to the increase in rent which was $4 million year-over-year, and we had higher commissions because of the higher gross profit for transactions which had some impact on that year-over-year. SG&A was 80.4 percent compared to 80.1. But again, I think we have real leverage as we go forward. As I look at 11.8 in comparison to our peers, I think we are in pretty good shape, and I think I have said before I am not chasing 0.1 or 0.2 in SG&A. I still want to grow the business and get the units in operation and then you will see I think it will drop to the bottom line.

Interest expense in Q1 was 10.8, up 200,000 versus '03, which was consistent with the fourth quarter only 500,000 higher than last year despite we had the 24 percent increase in revenues. Looking at foreign (ph) plant expense was 13.3, up 1.5 million and basing it was primarily due to higher floor (ph)plan borrowings during the quarter. Based on the current capital structure we've been asked if we had a 50 basis point increase in interest rates what would happen to our earnings? And we look at a decrease per share of about 2 cents per quarter assuming the 46.6 million shares outstanding which reflects additional 4 million shares roughly of the Mitsui transaction. Floor plan credits for the month were 7.6 million versus 6.9 a year ago.

The tax rate used in the first quarter was 38.8, and I think that you can be looking at 38.8 to 39 for the year. The lower rate was really because of the higher foreign earnings and state planning initiatives that we put in place in the U.S.

Moving on to the balance sheet, total vehicle inventories at the end of the quarter was 1.2 billion. Our new vehicle supply at March 31st based on sales was 51 days, which compared favorably to the industry wide vehicle supply of 73 days. Our used vehicle supply March 31st was 30 days, and again I think we are in great shape when we look at our metrics both on new and on used. The sky Capital expenditures for the quarter were $45 million as we continue to complete our expansion projects, we are almost completed (indiscernible) corner, Virginia. We are in the process in (indiscernible) Rhode Island and Turners (indiscernible) in the United Kingdom. So we have continued CAPEX programs going but I think you can the same-store benefits as we move forward.

WE also executed sale leaseback transactions in the month of 4 million; we expect our 2004 capital expenditures to be in the range we have talked about before, 130 to 140 million and then with a net after sale leaseback of approximately 75 million, I think that is pretty much on track as we sit here today. Now let's turn to UAG's leverage.

As I noted earlier, we reduced our debt to capital from 44 percent at the end of the year to 37, and that was due obviously to the private placement and retained earnings for the quarter. Looking at the total debt was 1.8, 1.2 in vehicle debt that was up 77 million. Total non vehicle debt was 573 million, a decrease of approximately 80 million from December 31.

Breaking down our non vehicle debt we had 300 million of 9 5/8 10-year senior subordinated in debt and 269 million under our credit agreements, which is down 78 million since the end of the year, and 145 million down since a year ago, 331 '03. We have 500 million today of availability under our total credit agreements both in the U.S. and the UK so we have plenty of dry powder for acquisitions as we go forward.

Looking at guidance I would like to update the 2004 guidance we gave, provided in February. After the private placement reflecting our first quarter performance we are raising our 2004 earnings to be in the range of 221 to 231. That is based on a year average of 45.6 million shares. Now for the second quarter we are expected to be in the range of 61 to 65 cents, and our second quarter guidance is based on 46.6 million shares, which obviously has the impact of the Mitsui and that compares to 41.2 million shares or an increase of 13 percent year-over-year if we look at second quarter '03 versus second-quarter '02.

Just in quick summary, during the last five years I think we've experienced tremendous growth and it really goes back to the strategies that we employed back in '99. When you consider the 119 million new equity we've added in the first quarter we've raised over $1 billion in capital since our first investment. Over 300 million in net income, Penske has put in 210. We've had private placement and newly issued shares of approximately 200 million and we have our 300 million sub debt. So I don't think we would have thought we would put that amount of capital into the business but I think it has done well for our debt to cap and certainly gives us a position to move forward.

The new capital provided by Mitsui provides us with an updated look at our overall capital structure. We are going to look at other various alternatives to position our long-term prosperity and again looking at interest rates, et cetera, so there is a lot of moving parts as we sit here today.

I think the overall strategy is continue on the same mission, maintain great relationships with our OEM partners; they are the ones who can bring us business, open points, et cetera. Maintain complete financial stability and flexibility -- I want to be able to do these transactions, not have to wait to get it financed. We are going to focus on operations in the high-growth markets where we can add on business where we have leverage. We want to enhance our brand mix. We are certainly interested in increasing units and operations, a car park obviously is important to us as we look at our parts and service (indiscernible) recurring revenue stream. And that's why we're continuing to invest in our service sales and service facilities and service centers throughout the country.

We have a growth fixed operations, and I think it is evidenced by the quarter results that we released this morning we believe our folks continue to put UAG in a position to achieve a market leadership. I also believe that if we continue the execution of our strategies and the financial flexibility we have will continue to allow us to capitalize on future opportunities. As we enter the spring and summer selling season, I am personally and I think our team is optimistic, given our current inventory position along with the many OEM new product offerings that we will have a great next couple of quarters.

Certainly investment in our facilities and our businesses really helps us as we look to grow our profitability in the future. So that pretty much ends up the initial conversation this morning. So let's open it up for questions. Thank you.

(OPERATOR INSTRUCTIONS) John Murphy from Merrill Lynch.

I actually have three questions. The first was on the acquisitions in the quarter and any divestitures that you had and what your plans are for the remainder of the year and what sort of valuations you are seeing in the private market. The second, if you are seeing any change in inventory financing terms with the OEMs if there is any extension going on there. And the third, I didn't really catch what you were saying about your internal auctions, whether you are trying to capture more used or trading, buying, auctions or you are focusing more on the certified preowned.

Okay let me just take the last question first; what we have done, John, is rather than using the typical wholesaler and going to the auctions which would be Manheim, (ph) Odessa (ph) et cetera, we are providing in-house auctions on a either bimonthly or monthly basis where we take the trade ins which we are not going to retail, we sell them in our own auctions and we're finding out that it is very successful from the standpoint of what we're getting for the vehicle. So we've employed that; I wouldn't say it is 100 percent across the country but in most of the major markets and where you can see the impact on our wholesale also, we have actually gone from a loss to a profit.

As far as inventory turns, terms, (ph) with the OEMs at the moment we really haven't seen any. Because we are basically, our rates are based on LIBOR or prime, and those really haven't moved here in the short term. And we are getting the same support from the OEMs from the floor plan support (ph) so there really has been nothing at this particular time.

As far as acquisitions in the first quarter, we made one acquisition in California, a Cadillac dealership. We have acquisitions in that we are working on now both internationally and domestically and we expect to hit our annualized revenue between 4 and 500 by the end of the year. From a pricing perspective the good deals cost more, and its our particular case we haven't really seen any softening. But there certainly is plenty of inventory out there.

Just a quick follow-up on the auction, you are trying to pull the volume in or are you focusing more on the high line vehicles or the vehicles that you see as more profitable?

Let me give you a little better position here. What we have done is we take a -- when we sell a new car and we take a trade-in they are really -- either we retail it so we recondition and retail on our lot, or we set it up for wholesale. And what we've done is instead of having selling that vehicle through an auction that we normally would do, which traditionally most of the industry has used auctions or the manufacturers do, or we would sell it to a wholesaler who would stop by the dealership. What we've done is really precluded both of those, and we've set up probably between 50 and 100 vehicles weekly or biweekly and then we go out and solicit other dealers, maybe some wholesalers would come in to our locations and then buy the cars. And by doing that we are reducing auction fees; the fees of transportation and also we seem to be getting higher prices by doing it internally. So that's really what I was talking about.

Okay. Thanks a lot.

Chuck Grum (ph) from J.P. Morgan.

Just wondering if you could just comment on how much the weak dollar aided top line and earnings during the quarter. And I guess more importantly what FX assumptions are embedded in your full year guidance.

I think the FX revenue was about $82 million, and I think it was about 3 cents for the quarter.

Okay, great. And then second question is what is the breakeven points on service and parts margins that allows you to get to that 50 percent gross profit margin? Are we going to need to continue to do a 14 percent comp in order to get that 50 percent, or is it a little bit lower than that?

Let me get into that in more detail and we will call you back. I'll talk with Jim Davidson, and we will get back to you with specific on that. Our margins continue to grow because this is particular on the labor side we have a fixed component, which is really the flat rate hour that we pay the mechanic. And as we have the ability to raise the labor, let's say the labor rate was 80 and we raised it to 100, in many cases we would not raise the flat rate hour of the mechanic. You might give him 25 cents or 50 cents, but you don't normally give the 50 percent of it away, so that continues to grow the margin.

Also on the customer labor this is where it is not warranty; we have higher margins on that business. And with the quality getting better with both the manufacturers we're seeing margins increasing there and then we have the component of parts which is associated, typically you would have a dollar of labor you could be looking anywhere from 30 cents to 50 cents on parts. And those probably carry anywhere from 30 to 35 percent margins. So we get the lift in both areas. And it is again, units in operation and the numbers of units because the fixed cost of the shop once you've built the shop, we are going to six days, seven days, we are going to two shifts in order to get better utilization and once we fill these shops up we will see more margin and more gross profit.

Last question. Can you just walk through the 7 percent used vehicle comp? You may have said this; I may not have caught it. What is the breakdown between the U.S. and the UK on used (inaudible)?

On the used revenue we were 2.9 percent in the U.S. and 15.5 international, which gave us the 7 percent.

Thanks a lot.

Rick Nelson from Stevens.

Roger, can you talk about performance during the quarter? We understand January was pretty tough, and the following two months improved. What are you seeing in April to date?

I think the headline in January and February was tough, certainly March came through very strong, and we had the benefit as we always do in the first quarter of the UK strong because of the registration month. They had outstanding quarter on top of that, but the business was up 6 percent in the UK. So that all went into the factors that helped us get across the finish line in the first quarter. We saw good tractions on the auto mall near Scottsdale; we heard there business was up 26 percent if you look at it year-over-year, and in a warmer climate so that was a big positive for us. As far as April starts, we are encouraged by the results in our First Call really has us on track for what we are forecasting for the quarter.

If you can provide a little more color, did you say same-store sales were up 37 percent?

No, no, let me give it to you. New retail revenue for Synter was up -- our international was up 44 percent. The U.S. was up 6.2, so it gave us a total of 12.1.

And profitability in local currency maybe for (indiscernible) or international?

I don't have that number here to be able to give you that on the phone, Rick. If that's a number we want, we can try to get that for you. I would only give you the other piece would be if you looked at service and parts, gross profit we were up 13 percent in the U.S. 31 percent internationally for 18 percent overall. So we got lift in all areas in the UK or what I call international.

Okay, and first quarter we saw gross margin improvement in new cars. Is that the mix shift toward luxury that you talked about, or is there some other fundamental change?

I think it has to do with the mix shift. Luxury was 51 percent of our business, so we are up $247 per new vehicle transaction in the quarter. That is over first quarter of '03 on new and we are up approximately $170 on used. So we got lift in both cases, and then we were up $2500 both in new and used on the sale side. So we are seeing that mix change year-over-year, so we are up significantly on the sale side, and we are getting some gross. The used car gross was down or used car margin was down. Primarily it went from 93 in '03 to 9, but that has to do with (indiscernible) increased the sales in the UK on the demonstrators, those are not sold in the new category, they are sold as used and they have a lower margin on those in the UK which drives that down slightly.

Thank you.

Adrienne Dale from CIBC World Markets.

First of all, could you please discuss the trends for the warranty business in terms of what you're actually being paid from the OEMs, just kind of the charge (ph) over the past few years how it is moving.

There's two components to extended warranty. One would be the OEM warranty, which most people are using and then you have a third party like Aon would have warranties. And I think in all cases the warranty cost at least to the dealerships have been pretty much consistent. I see the OEMs being very active in trying to get better penetration where we have been probably not as vertical in that particular category. They now because they are supplying us with the financing want to bubble that with extended warranty. But I haven't seen any dramatic increase at all. I think one of the things that is going to impact it in the future are the full circle programs that BMW and people like that have where you, actually when you buy your car the warranty is embedded in the cost; then you bring the car back for services, the certified preowned those warranties are all not third party, those are provided by the manufacturers. And there's been a huge emphasis by all of the manufacturers on certified preowned; you see the ads on television and you certainly the benefits that the consumer gets is, he almost gets a new warranty on certified preowned because you have to do the reconditioning on the vehicle to a much higher level than you would on a normal non CPO car. So to answer the point I have not seen at least its not been brought to my attention I've been discussing more vertical after extended warranties with the OEMs and I haven't seen any price -- in fact, I think they're getting a little more aggressive as they go out to get more market share.

Okay, great. And then in terms of strong international same-store sales growth, if I remember correctly the second quarter of last year (indiscernible) first quarter in which we actually had Synter and now in the same-store sales basis. So if we kind of assume that once you took over ownership of those and really went through and did all the major cost improvements, should we assume that now once we get into this year's second quarter that that rate of same-store sales increase will come down?

I think the same-store sales were significant in the UK. Don't use the first-quarter as the whole year because we had the registration month. It won't be at that level. We had a number of businesses we acquired probably 24 businesses during since we've had that our initial acquisition. I think that I want you to use from a same-store comps both if you combined international with domestically we were at 3 to 5 percent, and I think that's very realistic as we go out through the balance (indiscernible) we can't expect 30 percent every quarter, obviously.

Okay, so it will normalize?

Yes, and the UK market was up 6 percent year-to-date also for the quarter, and as that moves down that's going to move some of this down also. So it is going to be another record year for the UK, and that's one of the benefits as many people wondered about the strategy. I think the fact that those brands and those markets might be different than the U.S. In fact, it's second-largest market in Europe today, the UK.

And what kinds of expectations for the UK do you have built into your guidance?

Say that again, I'm sorry.

What expectations for the UK do you have built into your guidance?

What, as far as state same-store?

Yes, or just actual growth. You said this is a particularly strong month for the UK -- or quarter, sorry.

I think that we would look over all blended is 3 to 5 percent both UK and domestically. It might be -- it could be a little bit higher, but of course the volume there is lower when you look at the total sales dollars.

Okay, great. And with respect to the 60 minutes piece, I actually in my opinion I didn't think it was too bad, but have you seen any implications from it or repercussions or anything, and do you have any details on the lawsuit?

Number one, I think it was mentioned in the suit that we are in discussions for settlement. So I would confirm that that is the case. Obviously it's not settled until the court approves it. From the standpoint of the market and OEMs, I contacted I think every OEM myself initially when we were in discussions with 60 minutes. We kept everybody pretty much tuned to what was going on that was going to be on and that didn't go on. It was somewhat I think watered-down when it came in.

The impact -- obviously I'm not happy to have any of our stores involved in something like that. On the other hand, we won't reveal all the details of the suit, but at the end of the day it was not an issue. We've seen no volume drop in the dealership locally from a rate perspective. Most all of the OEMs have put cap rates on what you can charge. Most of them are around 3 percent, 2 to 3 percent. And in fact in this one case we charged 4 percent. So it wasn't way out of line. It was just the fact that the individual's credit had had a bankruptcy and it was priced by the finance source.

But long story short, we are not in a position that there is any impact. In fact, probably (indiscernible) won the President's Award this year or last year, so I think we are beyond that. We obviously are going back looking at all of our processes, not only in Tennessee, but across the country to be sure that we are using the cap rates of the OEMs. And I think they've really taken a lead because you know GM had a similar litigation in Tennessee as Nissan did. And once these things take hold I think everyone that looked at how we communicate to the consumer that we do have a rational markup.

Great. Thank you.

Dominic Martilotti from Bear Stearns.

I just want to follow-up on that whole dealer reserve topic and see if you have done any work I guess related to what the impact would be if you went to cap rates across the board. I know the captives in many cases have cap rates but I'm sure there is not across the board. Basically what is your sensitivity to maybe a 2 percent or a 3 percent cap?

Right now we are using the OEM cap rates, which are I think maximum 3 percent; or might be some special financing that might take you higher. So we are already have those imposed on us from a standpoint of the market. And we see that being pretty rational. Our F&I per transaction I think was up a little over $10 year-over-year. Remember part of that reserve we call it F&I, in those products you have the extended warranty, you have the GAAP, you have some other things which are sold which sometimes can take that number up. Certainly today on many deals it really gets flat because of the special zero financing, other things we get flat rates which are really driving us down. I think the increase would probably in the other products, not just in the financing. So the finance piece of that probably is about 60 percent.

Correct if I am wrong the numbers you gave were 71 percent penetration, with 57 percent OEM captive?

That is right. So you could say that today I am operating under the OEM guidelines on 50 percent of my financing. So which I think is in line and the good news is that as the retail market tries to understand finance markups, we've got the OEMs out front helping us communicate that to the retail public because obviously this is a source of income for them and also a source for us.

And that 57 percent is that of the F&I business or of the total sales?

The F&I business.

Okay. Secondly, on the inventory, I know the inventories are pretty low today. With the fact that interest rates are likely to go up, would that change I guess your strategy at all in terms of how you want to approach inventories?

You know, we have a goal of no new vehicles that have an age of over 10 percent, 120 days and used vehicles nothing over 90. Obviously we are running below it. There's always a few stragglers, but we have the ability with our system capability across the country to manage our inventories quite well, and that is an every morning discussion in our managers' meetings. We could move our inventory down if interest rates went up. I think that we have some slots when you look at our total interest costs are a little higher than our peers because I was anticipating interest rates going up probably 12, 18 months ago. So I really haven't experienced that. But we are looking at a number of opportunities now on the long-term basis because there is some attractive products out there as I said earlier. So we are going to try to mitigate any major interest fluctuations as we go forward.

And lastly, looking at the European OEMs, clearly they are under a little pressure here in the U.S. -- granted that the dollar is shrinking a little bit of late but still have you seen anything coming out of the manufacturers in terms of how they are dealing with their retailers here in the U.S. market?

Remember, all manufacturers have had price increases in '04. I don't think there's anyone that hasn't had some on certain models; obviously BMW and Mercedes have raised them. The biggest issue with the OEMs is having the right mix of products available. The stuff that is hot, we can't get and the stuff that is not hot they seem to have more of, but at the moment steel is a question that I was concerned about, maybe 30 to 45 days ago but that seemed to have slowed down. That could have had a major impact or even the scarcity could reduce the availability of vehicles in an important part of the selling season. But I think most of the manufacturers have taken the increase because of currency and also some of the other situations and really have not impacted as basically you got BMW with price increases, the markets going to dictate prices. And prices might go up and the OEMs might have more incentives who knows, because they balance it the other way. I don't see that at the moment. Remember 70 to 80 percent of all the Toyota, Nissan and Honda cars are built in the U.S., and that is the high-volume foreign nameplates that we have and I think they have got it well-managed.

You are not seeing any threat of gross margin pressure from Mercedes or BMW?

The only thing is that because they would not have the good models; I mean I think there is some of that -- I would say this, that some of the weaker models yes, we are seeing gross margins, there is a market, there is availability, where there is too much availability it is driving it down. We see that typically as Honda Accord things like that which are longer in the (indiscernible) you start to seem margin deterioration of them, but the good news is we got a bunch of new vehicles coming out across all brands as we look at the next 12 to 18 months. I think there is probably 100 key models coming out with all the OEMS that we are servicing.

Thank you.

Scott Stember from Sidoti & Co.

Could you talk about (indiscernible) some of the auto malls a couple quarters ago you gave some indication about some of the traction that you are gaining in the all important parts and service business. Have you done any further studies about traffic? How far people are coming and what kind of traction your getting?

I was hoping you were going to ask me that question. Just to give you an actual, Scottsdale 101, our (indiscernible) their revenues were up 26 percent in the first quarter '04 versus '03 did 130 million. Which was outstanding and when you look at the parts and service gross profit, it was up 22 percent year-over-year and in the first quarter. So we're getting tremendous traction. In fact in the month of March we did 2.6 million in parts and service growth. So it is a destination. Interestingly, we are not ramping up our consumer advertising at all.

In fact, I would say its flat to down year-over-year yet our business is up 26 percent. So the mall concept is working from a management perspective, from a destination, from a leverage of all the single office, all the things that we have to do and obviously its the best thing in the world (inaudible) we got Turnersville (ph) going, the business when we look at the same concept in San Diego, which to me is another premium location in a very good market and they were up 20 percent if you include, including the L.A. market where we have just that one new store there. But I would say overall it is better than we expected. And the bottom line, it is growing too. We were 2.6 percent on sales in Scottsdale 101 for March, which is really driving it. And that is where Porsche being number two in the country, BMW number one in the market, number one in the market with Volkswagen from a greenfield site, even Lincoln Mercury, which was a little tougher brand to get started its starting to gain some market share.

And to me we really reengineered the entire Phoenix market because we were on McDonald (ph) before and we've expanded our Lexus store there. We got foreign Maserati now in a separate facility and we've expanded our Jag and Land Rover; those are the second points of that market. So that is a key market. In fact when you look at the combined volume it will be over $1 billion in that greater Phoenix market in '04.

Maybe just to touch on the warranty versus customer pay, what were the trends like in this quarter?

I would say across the board warranties coming down because quality is better. You'll have some tickup not because of quality but because of the certified programs where the customer comes back in to get his work done and the extended warranty. That would be the only thing that would drive that number different, but from a pure customer pay warranty, warranty is coming down on the domestics dramatically. And we've had brands like Lexus, you are probably 70 percent customer labor and 30 percent warranty discounted to the extended warranty that people might buy.

Okay. That's all I have. Thank you very much.

Nate Hudson from Banc of America Securities.

You obviously brought the debt down pretty sharply with the stock offering. I was wondering if you could give us a sense of what kind of debt to cap you are targeting over the next year or two.

I think if we look at debt to cap we are down at 37; it will move around a little bit based on that acquisition but I would say we are going to see it in the low 40s would be my top end target proportionately preferably in the '30s. But it depends on what is available out there that we would make acquisitions. But if you use 35 or 40 percent at the high and low range I think you would be pretty close.

Okay and secondly, just from a regional standpoint it sounds like Phoenix and the UK did extremely well. Any weak points or anything to balance that out?

The weather was lousy in Detroit in the Midwest in January and February, which obviously always with the dealer, (indiscernible)that we talk about every year. But the west was strong. Atlanta was good for us. Houston probably was a little bit tougher. We sold off the one divesture we made, we closed down a Chrysler Dodge Jeep store to help. The factory had too much concentration on the west side of Houston and so we saw Houston being a little bit tougher for us in the first quarter. Detroit also when you look at it is a little bit confused, we got the domestic OEMs charging in the month, (ph) and then we have the foreign nameplates. It's been a little confusing in the first quarter and there hasn't really been a definite strategy by either party. But overall I would say the markets were good. Houston and Detroit, Cleveland were probably a little bit tougher. But we had decent results.

Great. Thanks very much.

Matt Nemer from Thomas Weisel Partners.

Quick question on capacity utilization in your service bays and body shops. Can you give us a number there?

I would have to say that we are probably 60 percent because we can go to two shifts. So I'm assuming that on a one shift basis we are probably 80, 80 to 85 percent on. And as you look at some of the bigger malls we are probably running at 60 percent, that is on a one shift basis. But we have a lot of stretch when we go to two shifts; we've done that very successfully in certain locations, and that gives us a real run rate.

Do you open on Sundays there, too?

Yes, where we have in some markets you can't, Detroit you don't open on Sunday but in California in the west we open. In Houston you can make a decision want to be open on Saturday or Sunday, not both. But where we are in Florida you are open seven days so whenever we are open on the front end of that store we typically have service. And that has been an evolution; I think all of the major players in the business are now going to six and seven-day service to try to get better customer satisfaction and gain the owner loyalty.

What are you seeing in recalls? It seems to me like there are a lot more recalls being announced, manufacturer announcements, voluntary recalls. Just curious what you are seeing there.

You know, I read the same things you do. It is all in the warranty mix and I see warranty going down. Many of these things are -- you know they talk about 100,000 vehicles with a switch, it is something -- these are not major transmission, engine recalls, these are probably small, more electronic that are hitting some of the manufacturers, there has been some gas tank issues. But overall I don't count on those driving warranty revenue quite honestly. I think that pretty much as you look across the whole industry, first the Japanese and then maybe the Europeans brought a quality metric to the U.S. The domestics are doing a terrific job. Ford, General Motors, Chrysler are just outstanding from a quality perspective now.

Do you have any sense of what percentage of recalls you capture if its a vehicle you sold?

I would say that we would get a very high percentage, probably over 75 percent because we are the one that sends out the notifications to the customer. And we follow-up those because it's part of our responsibility as a downstream partner, of the OEM that we must get those vehicles into the shop so I would say we get a big percentage of them.

Great. Thanks very much.

Carl Dorf (ph) from Dorf Asset Management.

Are you factoring in any increase in interest rates in the guidance that you have given?

No, we are not and I said that based on the 50 basis point increase we would look at an impact of negatively two cents per share per quarter.

Thank you. That's all I got.

Gerald Marks for Raymond James.

Good morning. Just curious the number of franchises in the United States declined to I think 136 from 138. Is that kind of a comfortable number that your at and you are going to focus more on internationally, or is this just kind of a --.

That was just the Houston divestiture we did, remember I talked about that earlier. That was -- it has no -- don't read that the wrong way. We really had the three in Houston and then we picked up Cadillac, so don't read that as a signal that we are just set with 130 plus. We are looking at major acquisitions here in the U.S., and we balance those and we're trying to stay in that 70/30 range. The good news is that the stuff that we purchased in the UK is getting good traction to get that market strong.

Thanks. Something in terms of the numbers, but you mentioned earlier that floor plan interest expense climbed because borrowings were up. Floor plan notes payable as a percentage of inventory seemed to come down from the end of the year from 96 percent to 93 percent. Do you have any reason in terms of why there seems to be a discrepancy?

Might be contracts in transit.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Jonathon Steinmetz from Morgan Stanley.

A couple quick ones, most of them have been answered. If I got my calculation correctly the new revenue premium that was up about 8.5 percent in the quarter. I am just wondering if you could give a little bit of color on how much of this may have been FX? How much of this was a mix shift within brands and how much might have been a cost brand.

It's mostly mix. I would say it would be mix.

Mix across shifting across brand kind of thing?

Right.

And the second is on the used comp, are you able to give a breakdown on the domestic used comp between unit change and price change?

The only thing that we have is in the used revenue we were 2.9 in the U.S. and 15.5 -- I'll get Tony to call you and give you that input exactly.

All right, great. Thank you very much.

And there are no further questions in queue at this time. Please continue.

If there's no further questions, appreciate everybody being on the phone today, and we will talk to you next quarter. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference service. You may now disconnect.