Penske Automotive Group Inc (PAG) 2004 Q2 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the UnitedAuto Group's second-quarter 2004 earnings conference call. A press release, which details UnitedAuto's second-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.

Good morning, everyone. Welcome to the UnitedAuto second-quarter 2004 conference call. Joining us on call 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 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 additional information about UnitedAuto, which is contained in UAG's 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 that we believe provides useful information about our business. A reconciliation of these measures to the GAAP metrics can be found 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, everyone. The second quarter represented UnitedAuto's 21st consecutive quarter of producing record results and was highlighted by a 3.2 percent increase in our same-store retail revenue, a further strengthening of our brand mix with increases in gross profit per transaction, and the continued growth in our service and parts operation. Our performance in a mixed sales environment demonstrates the strength of our model. We believe our focus on making capital investments coupled with our international diversification were the drivers for our performance in Q2.

During the quarter, our business saw a 12.2 percent increase in revenue to 2.5 billion. New vehicle revenue increased 9 percent. Used vehicle revenue increased 12 percent. Service and parts increased 18 percent. For the second quarter, income from continuing operations increased 37 percent to 32.5 million or 70 cents per share. Net income increased 38 percent to 33 million. Earnings per share increased 22 percent to 71 cents per share.

Our second-quarter net income included a $4 million gain from the sale of an investment in UTI. UTI is a technical training company; this has been a strategic investment. We have had many of our technicians graduate today from this UTI University; and of course this added 9 cents a share to our EPS. We believe our brand mix and international operations provide diversification and allow for continued growth. Looking at the gain that we had on our UTI, then looking at all other non-reoccurring items for the quarter, our net income increased 12.4 percent to 29 million.

Our brand mix during the quarter increased for nameplate to 82 percent. Our domestic was 18; and our premium luxury was 50 percent. Looking at average selling prices for the quarter, on the new they moved up almost $1900 per vehicle to 31,000. On used it was up almost 3,000 to 23,500. Our revenue mix for Q2 was 75 percent domestic U.S. and 25 percent international.

On the international side of our business, the UK market continues to be on pace for a fourth consecutive record year of sales. The premium luxury brands in the UK market were up 5 percent during the quarter, despite a 2 percent decline in the overall market, validating our strategy of focusing on the premium luxury marks.

Let's now move to the second-quarter results. New retail sales in the quarter, revenues increased 9.4 percent to 1.4 billion. Same-store sales were up 4 percent. The revenue increase was driven by our foreign and luxury nameplates, offset by lower sales from our domestic brands.

On the used side, used retail continues to be challenging in certain U.S. markets as affordability of new product pressures in this area of our business. However, our certified preowned sales continue to perform well. In the second quarter CPO accounted for 32 percent of our retail units versus 25 in Q2 of '03. Margins on our used car sales in the U.S. increased from 10.5 percent to 11.9. Q2 used retail revenues increased 12.2 percent to 532 million; and our same-store was down 1.4 percent.

Our closed bid auctions continue to reduce wholesale losses. We wholesaled almost 19,000 units during the second quarter without a loss. Finance and insurance revenue increased 1.3 percent to 53 million. On a same-store basis we were down 3.1 percent. Q2 F&I average gross per transaction was $787. Our new was $808. Used was $746.

For the second quarter, our combined finance lease penetration in the U.S. was 72 percent. Leasing has increased to 26 percent of the new vehicle finance lease transactions in Q2 '04, versus 24 percent in '03. Our extended warranty penetration in '04 second quarter was 35 percent. This area continues to be an area of focus. We recently added dedicated management who will be responsible for increasing penetration rates with our captive finance partners and in our extended warranty businesses. We are also continuing to strengthen our F&I training programs and standardizing menu selling processes at all of our stores.

Service and parts for the quarter increased 17.6 percent to 264 million. Total service and parts as a percentage of revenue increased 50 basis points to 10.7 percent. Our margin on service and parts increased 190 basis points to 49.9 percent during the quarter. We are forecasting service and parts revenues to be over $1 billion in 2004.

Our service and parts business has grown from 348 million in 1999, averaging in excess of 7 percent same-store growth on an annual basis. Same-store growth was 9.5 percent in the second quarter of '04 and 12 percent -- up 12 percent for the first 6 months of this year. We believe our strong same-store performance and margin expansion in this area are attributable to our investment in facilities and our success in emphasizing higher-margin elements of our service and parts operation.

To note, we added 400 service bays to our business in 2003, and we expect to add another 250 service bays in 2004. In the areas where we have made significant investments in facilities, the benefits are really starting to have an impact. I will just mention a few; we get questions many times. Scottsdale 101, our Chauncey Ranch revenue up 21 percent, fixed gross up 26 and EBT up 121 percent. In San Diego our revenue is up 12 percent, fixed gross up 25, and EBT up 24 percent.

In addition to these increases, we have seen improved CSI scores and stronger employee loyalty at the new and refurbished facilities. In fact in 2003 we will complete our renovation in Tyson's Corner, Virginia, where we will be increasing our service facilities from 33 bays to 99 bays; and we have generated over 2 million in service and parts growth the first month. Similar projects will continue at our campuses in Providence, Rhode Island, Inskip, and in Turnersville, New Jersey.

In the second quarter our SG&A was 11.2 percent of revenues, compared to 11.8 in Q1 of '04 and 11.1 in the second quarter of '03. Our interest expense was 10.1 million, down 700,000 versus the first quarter of '04. This expense decreased as a result of the debt reduction in connection with our equity offering in March.

Our floor plan interest expense in the second quarter was 11.2 million, down 200,000. Based on our current capital structure, a 50 (ph) basis point increase in our interest rates would decrease earnings per share by approximately 2 cents assuming 46.6 million shares. Our floor plan credits for the quarter were $9.2 million. Our effective tax rate remains the same at 38.8 percent.

Let me turn to the balance sheet at this point. Total vehicle inventories at the end of the quarter were 1.2 billion, which is consistent with March 31. Our new vehicles supply at June 30 was 61 days, which compared favorably with the industrywide vehicle supply of 72 days. Our used vehicles supply at June 30 was 33 days.

Capital expenditures on a year-to-date basis was $78 million net. We expect to incur net capital expenditures for the year of approximately 110 to 120 for 2004; and that includes both the U.S. and UK.

Let's turn to UAG's leverage. We reduced our debt-to-capital ratio from 37 percent at March 31 to 35 percent at June 30. This is down from 51 percent in June of 2003. Taking a look at our debt position at the end of June, total debt was 1.7 billion. We have 1.2 billion of vehicle debt, a decrease of 13 million since March 31.

Total nonvehicle debt was 545 million, a decrease of 28 million from March 31. Breaking our nonvehicle debt down, we have 300 million of 9 5/8 10-year senior subordinated debt outstanding with a call provision in March of 2007; 241 million under our credit agreements, which is down 28 million since 3/31 and down 211 million since 6/30 of '03.

I think this is an important point, so let me recap our debt. If you go back to the beginning, 6/30/03, we had 452 million of debt. Our cash flow from operations for the previous 12 months was 176 million. We had equity proceeds of 136. Our acquisition spend was 44. We had dividends of 13. Our net CapEx was 60 (ph); we had other of 16. So our ending debt was 241 million, a reduction of 211. This leaves 590 million available under our current credit agreements.

Acquisitions. Turning to acquisitions, we continue with our strategy of developing scale with growth brands in growth markets. We recently closed on 300-plus million of annualized revenue in Western Europe including the UK. We acquired Tamsen, a high-end luxury business consisting of 10 franchises in Germany, which is the number-one luxury dealer in continental Europe with estimated revenues of 85 million. Aston Green, which consists of 4 Audi franchises in Central and Western London, making Sytner the largest Audi dealer in the UK with revenues of 150 million. As a point, Audi is re-engineering its market areas in the UK pursuant, with which the number of dealer partners will be reduced to approximately one-third of the historical number. Glenvarigill, a luxury business in Scotland consisting of Bentley, Maserati, and 2 Porsche franchises with estimated revenue of 70 million. Sytner now has 4 of the 31 Porsche franchises in the UK.

In the U.S., we acquired Mercedes-Benz of Chandler, Arizona. This adds the MB luxury brand to our scale in Phoenix, bringing our total revenue in this market to over 1 billion. This is an estimated revenue of about 70 million. The Chandler site is in a growing demographic area, which will allow expansion opportunities as we further develop the site. In fact, we have been awarded a Lexus companion point in Phoenix that we plan to build on this 24-acre site by the end of 2005.

Adding to our scale in California we recently announced a $300 million acquisition in the San Francisco Bay area from the Stevens Group. We are in the process of completing this acquisition of 3 Honda and 2 Acura franchises. These acquisitions are expected to close in August. Capital Honda is the number two year-to-date volume Honda franchise in the U.S. today. This acquisition fits with our existing businesses in California, bring our total footprint in the number one vehicle market to approximately 900 million on an annualized basis.

These acquisitions total approximately 600 million in annualized revenue on a net basis, meeting our acquisition objectives for the year.

Before we open up for questions I would like to review our guidance. I would like to update the 2004 earnings guidance we provided in April. We are increasing our full-year guidance based on our performance in the second quarter. Considering announced acquisitions and the expected performance of the businesses, and the anticipation of higher interest rates, we currently estimate that earnings per share will be in a range of $2.30 to $2.39 for the full year. This estimate includes the effect of the 9 cent gain recorded in the second quarter and is based on an estimated 45.6 million shares, a 10 percent increase in shares over 6/30/03.

The third-quarter earnings are expected to be in the range of 61 to 63 cents. Our third-quarter guidance is based on our estimate of average shares outstanding of 46.6 million shares, a 12 percent increase over last year. So at this point, we can open it up for questions. Thank you.

(OPERATOR INSTRUCTIONS) John Murphy (ph), Merrill Lynch.

I have three questions for you. One, if you could just comment on the capacity or utilization in your existing service bays. Two, how July sales are going and incentives are affecting the business. And three, why is the F&I same-store sales down when your retail sales are up?

Okay. From a capacity perspective, we're continuing to build capacity. At the moment you probably would say if we used second shift at all locations we would probably have 25 to 30 percent more capacity once we build out the additional 250 bays. So, again that is not on an 8-hour shift; that would be utilizing our stores on two shifts. We are operating today typically 6 days; in some areas we operate on Sundays, but on a smaller shift.

As far as July is concerned, we track our weekend sales Friday-Saturday-Sunday in the U.S.; and our sales rate for the first 4 weekends has been stronger than in June. So we feel good about that.

From an F&I perspective, we looked at that I think that at the present time where we have seen some of our weakness is really in the aftermarkets products. This would be the extended warranty and other things that we sell beyond the F&I.

Just one follow-up on acquisitions. You guys are all full up for this year, right? Are you done? Or do you see valuations as so attractive that you have run pretty fast through what will be the end of August, and there might still be opportunities out there to get above your full-year target of 600 million?

We are always looking if there is something that looks attractive to us. But again most of our acquisition impact, obviously, is in the last 4 or 5 months of the year. We had 1 acquisition. At this point we have nothing on the horizon that we would be prepared to announce at this point.

Thanks a lot.

Domenic Martilotti, with Bear Stearns.

Just a follow-up on the F&I story. Are you seeing any pressure there in the fact with this whole limited dealer cap in terms of finance rate on there? Is that causing any headwinds for you?

Let me said this. There has been a lot of notoriety on finance reserve; there is no question about that. But I think that what is key is -- we said our last conference call we have adopted the cap rates that are mandated really to us now by the OEMs. So that is not an issue at all.

I think overall, when you look at penetration, I think our penetration is decent. It is just the finance penetration and then also the dollars per deal, and they are down because of the extended warranty. What is happening is most of the manufacturers are now going to extended warranties that you almost get with a vehicle. So it is getting tougher to sell those. I think overall the total finance costs really become a burden sometimes on payments for the customers.

So, again, we're looking at this area. It is just a number that came up this quarter. I think that, as I mentioned in my comments, we are focusing more on this with people that will take on this on a role of across the U.S. We have someone in place in the UK, and it has worked out quite well over there, the penetration and actually dealing with the banks and the captives. So hopefully we will see some improvement.

Okay. Looking at new car gross margins, down a little bit sequentially, up a little bit year-over-year. Are you seeing any pressure there in terms of trying to close deals, having to throw a little more dealer money at it to make the sale?

Quite honestly, when you look our margin, year-over-year, on new we went from 8-4 to 8-5. When I look at that in comparison to our peers we're in pretty good shape. Where we get pressure is on the used side, because in the UK they run a lot more demonstrators. Most all their salespeople, there is a number of more (ph) demonstrators. We don't have those many in this country.

And those cars -- when they are sold in the U.S. they would be sold as new, under the new category. In the UK they are sold as used. And typically they are turned every 90 to 120 days, so that has downward pressure on the used car margins. But overall, the incentives are out there. We all know what they are.

Again on the foreign luxury, I think Honda and Toyota are realistic. We have seen some pretty good traction I would say from Chrysler on their new models, certainly the Magnum and the Chrysler 300. But overall, I don't think there's any more pressure than there has been over the last 4 or 5 months.

Okay. Lastly, looking at in exits (ph) you guys made in Europe, I know there was a lot of store relocations with the older stuff that you bought over there, in terms of putting some capital. Moving stores and expanding stores. How do you look at those assets in terms of what needs to be done over the near term?

Well, the good news is that the Tamsen acquisition in Germany, which is really 2 locations with the 10 franchises, I would say that the Hamburg location on a scale of 10 is an 11. And certainly in Bremen there is probably about $1 million to be spent there, but there is no real CapEx there at all.

The Aston Green facilities are all facilities that we lease through Audi in the UK; and they are all very good shape. One site in West London will be replaced by an Audi statement site, which Audi will build for us. So from a CapEx perspective on that acquisition, we see very little.

In Glenvarigill in Scotland, very good facilities. Maybe the Porsche dealership that has the new image program in Glasgow might be a little small for what we would expect to do over a longer period of time. But as I look at those acquisitions, very minimal CapEx.

Lastly on the UTI sale, what was the strategic significance of getting rid of that now? And do you still own any part of that?

We wanted to monetize it. It is cash flow for us. I think we have owned it for a couple of years. Certainly my feeling was when we went into that, we need mechanics, we need body people, and they have a terrific training program. We were able to put capital in and also make introductions to them to the OEMs, which I think proved to be quite successful, as they have got programs now -- significant programs. We take people from BMW, from Porsche, from many of the luxury brands that have gone through the UTI program. So this is a great tie in for us.

Okay. Thanks.

Rick Nelson, Stephens.

Roger, you gave us sales data on Sytner. I am wondering if you can provide some profit performance year-over-year for Sytner and how currency affected results in the quarter?

We really haven't broken out the profitability of Sytner on a quarter-by-quarter basis. From a foreign exchange, we are 65 million for the quarter. But Sytner is on budget. You know, as we move into the second quarter, they have a strong first quarter based on they have the registration month in March, and that usually has some impact on April. May was better, and I think June was decent.

I think the market is still strong. The marks that we have over there are up 5 percent. We are in many cases exceeding the OEMs' numbers in the UK. We expect September to be a strong month, and Sytner is right on budget from the standpoint of our original forecast.

We heard from another public dealer group that their Toyota dealers are facing more profit pressures. I am curious how your Toyota dealers stack up versus the other nameplates, and are you seeing that?

I think that in high-volume stores, in order to maintain your volume there is some downward pressures on the brand. But we are up 2.2 percent year-to-date over a year ago on the combined units, on a same-store basis. So I would say we are okay.

Again, it is hard for me to say that downward pressure when we take that into consideration -- there's a difficult time. We have that as models get older, you've got new model up (ph). We would like to have more Priuses. There's a lot of the Lexus products, the RX300 and things like that you would like to have more. But on an overall basis, in the high-volume brands whether it is domestic and/or foreign nameplate, if you are a large dealer you're going to some pressure to maintain the volume. Because you have the inventory and the manufacturers expect you to move it.

On the SG&A front, the ratio as a percent of gross profit -- higher compared to last year, similar trend I guess as the first quarter. Any signs where we might see that ratio begin to narrow?

We were at 11.2 for the quarter, and I think that if you looked we were up about $7 million, 6 to 7 million in rent. If you took that out, year-over-year we actually would be flat. We're facing the same increases on insurance, etc., in that category.

But I think that when you look at us in the marketplace, we are in pretty good shape. We expect to move that down. I think we were 78 percent of gross versus 77.6 a year ago. But I think we would have been flat if you take the -- where we have done the sale leasebacks which increased our rent line.

Got it. Okay. Thank you.

Jerry Marks, Raymond James.

A couple questions. First of all, Roger, I didn't hear you mention employee turnover. Could you give us an update on how that went this quarter?

Employee turnover is down. We're forecasting to be below 40 percent for the year, and we are in good shape.

When you mentioned that the 50 basis point change in interest rates impacts you by about 2 cents, that was on a quarterly basis?

Yes.

Does that assume floor plans, or are you assuming stable inventory levels? Or how are you looking at it from that way?

It all depends. Our goal, our inventory is in pretty decent shape. We like to move our inventory down as we get into the last quarter. What happens though, many of the manufacturers start flooding you with cars at the end of the year to make their numbers.

But we are going to manage our inventory. We're sitting at 61 days today and we would expect to try to stay in that range overall. But the impact on interest of course we think is about 2 cents per quarter. We've got 25 baked in already; and we think there could be another 50 basis points before the end of the year.

Okay. So this basically assumes kind of a stable floor plan interest expense per vehicle, though. Is that the right way to look at?

Say that again?

Kind of a stable floor plan interest expense per vehicle? So if we get lower inventory levels, that will move commensurately.

Exactly, yes. Remember we have -- one thing that you need to know, we don't get -- because we are more foreign nameplate, we don't get the floor plan support that the domestics get, too. That is one thing we have probably never talked about before. Just as a data point.

Because they are doing it on a flat percentage of invoice?

We get 30 days or 60 days or transit time. So I think our credits were 9.2 million for the -- I think I mentioned in the call in the quarter, but we typically get transit time or so many free days of interest, but not the support that you would get that the domestics give you. So we have less support probably than people that have a different mix.

Speaking of inventories, can you give me an idea in terms of your mix of '04 models versus '05 heading into the clearance season?

You know something? I should have that. But I will get Tony to get that for you. We're just now starting to get '05s, and we always do a pretty good job on cleanup. But it becomes a real point for us as we move forward.

But, with the inventory today, I think we had about 3 percent of our used inventory over 90 days. We were in the 19 to 20 percent of inventory on an age basis over 120. So again we are in pretty decent shape. I would like to see that over 120 be only 10 percent of our total inventory, but you always have some that stick out there. But overall, aged inventory both new and used, turns I think are respectable.

Last question, in terms of your acquisitions in Germany, how big of a piece of the pie can Germany become in the coming years? Are you going to look at other markets like France or Italy? Is this now an expansion into all of Europe?

As you know, we have had 2 joint ventures where we have 50 percent ownership. We don't operate the business. That is Reisacher with BMW in southern Germany. We have a real nice investment in NIX Automotive in Frankfurt, really the leader in that marketplace. We have that whole market. So this was just an extension into northern Germany.

Tamsen is absolutely the number one retailer from the standpoint of premium luxury in continental Europe. We had a chance to make a 75 percent investment there. He holds 25; he is under a management contract; and I think that we would look to expand in either markets where we are around -- growing a little bigger share in the Memingham market where BMW is. I think what we will be able to do is providing these guys with more working capital; they can grow those businesses in their particular markets.

But we would probably like to pick up a Mercedes badge in Germany at this point. I don't see us racing into France or Italy at the moment. We have nothing on our radar screen at this point. We would like to stay where we have management capability. Anzwarner (ph) is really in charge of our businesses in Europe.

Okay. Thanks.

Adrienne Dealy (ph), CIBC World Markets.

I was just trying to get a little bit more color and I'm sorry if I have missed this already; but did you give the split of inventory between cars and light trucks?

I will get Tony to call you back. I don't have that split. Basically, we have a higher car volume because of the Honda Toyota brands and Nissan; versus if you would have just domestics where the light truck and SUV are really their main breadwinners.

Are you seeing any slowing in the pace of sales of light trucks?

I have been reading a lot. I guess we're looking at overall sales. We have vehicle inventories that probably reflect 90 days ago, as they would be ordered. So you might see a little higher inventory in some of the heavier SUVs because of the gas discussion. But I think that has really softened now. There is incentives on those vehicles, there's some special finance rates, which really help us, move those. Those are not typically a big percentage of our overall revenue -- our overall inventory.

Great. Thanks a lot.

Matt Nemer, Thomas Weisel Partners.

First question is, I am just looking at your guidance and I am wondering if there is some factor that is shifting Q3 business into Q4? Maybe it is seasonality in Europe. It's just that your guidance seems to imply a little bit of a slowdown in Q3; and then you make it up in Q4.

Well, guidance is an interesting subject, and we have pretty much maintained our guidance. We gave you -- I think we took one penny off the top of the year. We were looking realistically at the third quarter. When you look at that, and we tie into where we're going in the UK based on the market there, and what we have here, and with the interest increases from the standpoint of interest rates, we wanted to tighten up our guidance and try to be realistic in Q3.

The second question I have is, is it possible to break out the traffic increase in parts and service? Because you were up almost 10 percent; and then I look at some of your peers. Monroe Muffler was a little weak at the end of the quarter, the rest of the group has been up kind of 1 to 2 percent. Is that all new bays, or is there a real traffic increase in existing bays?

I think you've got to stand back and say, what is changing in the auto repair business? Today, the complexity of vehicles -- whether they are a small KIA or they're an expensive BMW 7 series -- these vehicles continue to come back to the dealerships. That has really been the case over the last couple of years.

And certainly with our brand mix, people who buy premium luxury vehicles typically don't go to Monroe or go to Pep Boys or people like that for their vehicles. Again BMW today has a full circle program where all the maintenance items, which would be maintenance items, they are in the sale price. So they come back to the stores.

Certified preowned also gives you the ability to have those vehicles. In order to be able to qualify under the certified preowned you must bring those back to the dealers to get your work done. So that has been a benefit.

I think wait time because we have increased our capacity. We have also extended hours. Most businesses are open on Saturdays, some on Sundays, some have a second shift. When you think about HBL in Washington, we have gone from a two-week wait, in some of the models there down to realistic time frames and I think that is helping us.

But we have focus on that. We have added capacity. I think with 650 bays, if you look at that '03 '04, each bay generates about $300,000 in parts and service revenue. So we need to fill these and that is what is giving us I think the lift.

Can you break out customer paid versus warranty?

I would say that quality is much better. I think quality is much better and that bodes well for us. We are probably 60 percent customer labor and 40 percent warranty.

The last question I have is on the inventory. You were up from 51 to 61 sequentially. I am just wondering, is it possible to break out that increase between domestic and import? Do you have a sense of what (multiple speakers) ?

The sales are up during the quarter, so our inventory would go up. Remember we take a lot more vehicles in at the end -- towards the end of the second quarter to get ready for the build out. So that would typically go up. I would say from an overall basis that we have a much higher inventory on our domestics than we do in our foreign nameplates.

Okay. Thanks very much.

Nate Hudson, Banc of America Securities.

I have a couple questions. First on capital expenditures. I think you threw out a 110 to 120 net number. What is the gross associated with that? And is that an increase from what you were previously thinking about?

What we have, we have some projects here we're completing in the UK that we have trued up; and depending on the sale leasebacks those things have to come as we get to the end of the year. That has probably moved it a little bit. There has been some shift in expenses now that we have started in Turnersville as we go forward. But we will probably have about 60 million, 50 to 60 million in sale leasebacks for the year.

Okay.

When you look at the two years, I think we had the benefit last year -- we had 60 million of net CapEx; and we had some benefits of some sale leasebacks that we had gotten done from previous years that dropped that down. So that should help us as we level that out.

But again our interest -- our rent expense went up about 7 million year-over-year. When you look at our cash flow, I went through that I think on the call, it was still very strong, with the debt going down 211 million. So I think we are well balanced.

In the big projects, Phoenix is done, San Diego is done, we've got Inskip already set up in a sale leaseback, we have Turnersville coming. The acquisitions in the UK, which primarily we made in this quarter, in the third quarter, those really take very little or zero CapEx. We've got some larger ones. We've got a big BMW location in High Wickham on the London Road, which will finish up before the end of the year. So there are some larger ones.

But in the U.S., I think you will have your normal maintenance CapEx, which will run between 30 and 40 million a year, and the balance would be normal CapEx nonacquisitions. But, again, I think we've got to point out and I am sure the other public retailers would say that the manufacturers expect us to meet these brand requirements. We might be going a step further by air-conditioning our shops and adding extra bays and separate used car facilities.

But in every case -- I mentioned the growth in Scottsdale 101, the growth in Phoenix, we can see the growth even overseas as we make these investments. And these are 25-year investments. These are not something we've got to redo again because the shop stays the same, the payments stay the same. You might have to do something in your showroom or some outside signage based on corporate identity for the manufacturers. But overall this is part of going into a market, buying a business.

The Scottsdale location, former AutoNation site, which has 24 acres, having Mercedes-Benz there, so we have 2000 feet along the freeway on the 10 freeway. In Phoenix, being able to add Lexus there and potentially even another brand will make that a tremendous site for us. And we did a sale leaseback on that property at the time we bought it from the seller.

Okay. You still think that number is going to trend lower in '05?

I would say it would in '05, yes. Listen, I want to be careful. I hate to say I think it is going to trend lower; I think it is better that we do a real wrap-up, but we could probably give you some guidance on that in the third quarter. Because at that time we will be able to look at all the projects, see what's been started. Planning permission on a lot of these things that hold us back from going forward. But we will give you that much more precise.

Different subject. Could you talk about what do you think happened to your market share in the quarter? Do you think the 4 percent increase in new vehicles revenues was indicative of what happened for your brands in your markets?

That's not a - that's on a same-store basis. You look across our domestic businesses -- you know, we probably we were down domestically probably about 9 percent year-over-year. We were up 3 plus on our foreign. And we were up about 20 percent in the UK. So, you add that all together, we get some market share increase.

Okay. Thanks very much.

Jordan Heimowitz (ph) with Philadelphia Financial.

A bunch of questions actually. The 9.2 million in credit for this year, for floor plan; what was it last year?

I think it was mid-8.

One of the things you guys should point is you guys get -- I mean, other companies disclose that number in the Q. You get a lot less interest credit than other people do. So it hasn't really helped the earnings to the same extent.

We take it against cost of sales. That is right. I mentioned that earlier, maybe you missed it. But because we don't have as many -- we are not domestically balanced we don't get quite the credits that you would get normally on that type of mix. You're right.

I got that, but it is not in the Q like other people put it in. Second, what was the foreign exchange dollar benefit? Someone asked that question; I didn't get the dollar amount in the quarter.

65 million.

65 million in the quarter? Or 6.5 million?

Revenue of 65 million. Revenue, revenue, revenue.

How about on a net basis?

Approximately 1 to 2 cents.

1 to 2 cents? Okay. Next, is the F&I growth, year-over-year for the past quarters as you mentioned has kind of slowed down. Usually F&I growth has tracked somewhere close to new and used vehicle sales growth year-over-year. Do you think going forward modeling we should maybe assume 50 percent of what new and used vehicle sales grow at? Or what number would you kind of plug in that number at?

For 6 months, we are up slightly. We were down in revenue about 1.6 million year-over-year in the second quarter. As I said, this is revenue. Remember the components of revenue are finance, they're insurance, and then other products. This could be extended warranty, it could be GAAP, it could be other things.

What we're seeing is from a customer perspective, that by the time you add all these extra products on extended warranty, that your revenue will be down per transaction as we saw that. I think from an overall standpoint, when you look F&I, the main thing is to get the customer financed, and in many cases there are some flats from the standpoint of getting flats versus getting -- this would be with our leasing going up from 24 to 26. You get less of reserve. And our used units were down for year-over-year for quarter-for-quarter.

If new vehicles grow at 10, let's say, just to pick a number, where do you think finance grows at going forward? 5?

We're forecasting our same-store 3 to 5. That is what we have traditionally said, that is per quarter; on an annualized basis 3 to 5 percent. So, I can't -- I would rather come back to you with a more precise divisor there, from the standpoint of F&I for new units sold.

Because in many cases it is revenue which is divided per transaction. And then obviously if there is more extended warranty that goes with the sale of the car which we cannot sell, that is going to bring that number down. And again I think everybody is looking at the F&I practices throughout the process, and I think that could have some impact on it. I think today, we have 72 percent penetration, which is still pretty good.

That's great. Last question is, you had 3.2 increase in same-store retail revenues. Can you break that out between the U.S. and the UK? Or the U.S. and foreign, I should say, because you had Germany and Mexico.

I guess when you look at it, we said the UK was up over 20. Our U.S. foreign nameplates was up over 3, and our domestic were down about 9. That was same-store. (multiple speakers) that netted about 3.2 percent.

So U.S. plus 3.2 percent; the UK plus 20 percent.

Yes, yes.

Wait, that can't can be right, because overall it was 3.2.

Let me say it again. Up approximately 20 on the UK new and used. On the U.S., we were up 3 percent on the foreign nameplates. We were down about 9 percent on the domestics.

What would that average to? For just the U.S., what would it average to? The negative 9 domestics, positive 3 foreign.

We are probably close to flat; flat to -1; and we were up obviously overall 3.2.

Lastly, when does your Sytner anniversary? Is it this quarter or next quarter?

It was March of this past year. So we're into same-store now.

Thank you very much. I appreciate it.

Charles Grom, J.P. Morgan.

Obviously June was a tough month. I don't know if you answered this earlier, but I was just wondering what you guys are seeing in July. We're hearing that things have begun to improve.

I think I said earlier on the call, we take a weekly weekend traffic count; and for the first 4 weekends in July our average traffic in both (ph) across the U.S. is up over June. So we see that positive; and that is new vehicle ups, and that is sales. So we feel that July is good.

We are seeing obviously in the UK that July is coming -- it looks like it will come in on plan. The big month there certainly is August because people are getting ready for the registration month in September, which is March and September, the two strongest months of the year there. So, they're selling into the later part of the third quarter.

Second question is with regards to acquisitions. Given how active you have been on the front, I was wondering if you could provide some color on what you are seeing in terms of private multiples?

If you looked at the businesses that we bought, including the acquisition, we are below 6. We are probably in the 5 to mid 5 from a multiple perspective. So we have been selective. Obviously when you look at the premium brands and you look at a group like Stevens, that is the market leader in San Francisco. You look at Tamsen. Glenvarigill was very strategic for us as we looked at Scotland. We basically have the Porsche and high-line (ph) business in Scotland today. And this move with Audi gives us a tremendous capability in the UK.

Because what is happening across Europe, where initially we saw in the U.S. manufacturers were concerned about large dealer groups, it is quite the contrary now as you look at Europe. Because they are trying to find partners who are willing to invest in facilities. They will buy out other dealerships that they want to either close or reengineer. We are getting a lot of support from the manufacturers.

I think that was evident by Audi and we getting West London. They're going to build a statement site there that we will have. We will also have the benefit of the Forum in Piccadilly across from the Ritz, which we will have and have our corporate sales team there. That will be a place that we will have no rent cost there. That gives us downtown London capability. We obviously will be the number one Audi dealer in the UK, and that couples with our strong Audi position here in the U.S.

Just a follow-up to that. The 600 million in annual revenue for the acquisitions you have done or are planning to close, how much in dollar terms will you realize in this fiscal year, do you estimate?

Let's just say we will have, what? 4, 4.5 months probably; I would say we will have less than half. (multiple speakers) one acquisition which was the Cadillac dealership in California in January, the rest of it is all now as we move into the second half.

That is entirely embedded in your current guidance that you just put in today?

You got it.

Good luck, guys. Thanks.

Jonathan Steinmetz, Morgan Stanley.

A few quick questions; most of them have been answered. On the domestic new vehicle comp, are you able to break that into the unit component and the price per vehicle component?

The only thing I have on the price per unit is obviously the gross profit. We're seeing our gross profit per unit overall going up. It went up from roughly 2,450 to 2,630 year-over-year. In fact, used went up a couple hundred dollars. I think that is basically the mix between our foreign premium luxury versus the normal domestic.

I guess what I'm trying to sort of sort out is what the average per vehicle delta was on the new side?

I don't have that information here. I will get Tony to get back to you and give that to you specifically.

Thanks. The second one is I just wanted to try to understand on the CapEx, it looked like the net went from 75 to 110. I was just trying to understand how much of this was an increase in the gross versus the timing of sale leaseback type of activity.

I think the timing is real critical here. Because we had said last year we probably would have been probably at 80 or 90; we came at 60. So what happens is as these projects start, we fund these projects out of our cash flow. And then what we look for, based on rates -- and especially in the UK the rates still seem to be in the 6s, very competitive -- what we end up doing then is getting a partner to step up. But typically they don't fund those in the UK until the projects are done.

Sometimes in the U.S., we have the benefit of they will fund them, the base piece, maybe the land; and then they will fund us on a quarterly basis based on treasuries. So, a lot of that is timing. But I think that is a realistic number as we look at where they will come in this year.

Great. Thanks.

Poornima Gupta, Reuters.

My questions have been answered. Thank you.

Jordan Heimowitz.

Two more quick things. In your guidance, what do you have for interest rates this year? And what do you have for currency this year?

Interest rates from a guidance perspective we have 25 basis points, which we have already taken. We're looking at another 50.

So there is an additional 50 in the guidance from this year.

That's right.

That alone is basically 4 cents; and that would explain the difference to a large extent between previous guidance and today's guidance?

I think you're on the right track. From a currency perspective, it moves around quarter-to-quarter, but we assume it will be flat.

Okay. Last question is, I think it was last year in the UK Sytner got a bunch of new points. Was that in the second quarter or was that in the third quarter of last year?

They have had a number -- I would have to go back and get the timing of those quarter by quarter. But they have made significant investments. In fact we have doubled that business on a sales perspective since we bought it.

But from a location point of view, the number of locations has also gone up a lot, hasn't it?

Yes, it has.

Do you know like what it's gone? From what to what approximately?

I think we're probably up about 35 locations.

When you bought it, it was like 18, right? Or something like that?

No, no, no. We have 60.

So it's gone from 35 to 60?

No, from 60 to 95. Total international.

No, but just the Sytner part.

Let me get that for you. I do not want to give you -- just throw a number out here. I don't think that is fair to everyone.

Thank you very much and congratulations again.

Mr. Penske, no further questions.

Thank you very much. Thank everybody else on the line. Thank you.

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