Penske Automotive Group Inc (PAG) 2004 Q3 法說會逐字稿

Good afternoon and welcome to the United Auto Group third quarter 2004 earnings conference call. The press release which details United Auto's third quarter results was released this morning and is posted on the company's website, which can be viewed at www.unitedauto.com.

(OPERATOR INSTRUCTIONS) I would now like to introduce Anthony Pordon, United Auto's VP of IR. Sir, please go ahead at this time.

Good afternoon, everyone. Welcome to United Auto's third quarter 2004 conference call. Joining us today are Roger Penske, Chairman, Jim Davidson, EVP Finance, and Bob O'Shaughnessy [ph], Controller.

Before we begin this call this afternoon, 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 the additional information about United Auto 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 such as adjusted EDBITA 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 under the investor relations sector of our website at www.unitedauto.com.

I would now like to introduce United Auto's Chairman, Roger Penske.

Thank you, Tony, and good afternoon, everyone. The third quarter, which proved to be challenging, yet rewarding, represented United Auto's 22nd consecutive quarter producing record results.

As we reported in our press release this morning we reported a 16% increase in revenue to $2.7b. Our same-store revenue growth was 3.7% and we had a 28% net income growth to $32.4m.

Before I talk about the specifics of the third quarter, there are a few items currently that I'd like to cover with you this afternoon. First, many of us felt the impact of the severe storms that affected the Southeastern part of the United States. With approximately $1b of annual revenues generated in this important region, UAG was adversely affected by the storms, as well.

Our operations in Florida were hit especially hard, with several of our locations having to shut down for a significant portion of the month of September. Specifically, the Palm Beach Auto Mall was closed for 11 days during September, including the Labor Day weekend. The Toyota dealership in Orlando was impacted by each of the four storms that hit Florida, causing several lost days of business.

As a point, during this time we paid all of our employees even though the stores were closed for business. Most important to me was the well-being of our employees and their families.

Second, I'm pleased to report that our focus on inventories is continuing to pay off. In fact, our inventory is in great shape today. As of September 30th, we've reduced our overall days supply to 46 days on new vehicles and 31 days on used vehicles. Just as a point, the industry was at 63 days at the end of the quarter.

Third, we closed several transactions during the quarter which we expect will add approximately $600m in net annualized revenues, meeting our acquisition objectives for the year. We purchased three Honda and two Acura franchises in Northern California, representing a new market for us of approximately $300m. Also, numerous luxury and high-line franchises in Europe with an estimated net revenues of $300m. Including these transactions, United Auto's become the largest Audi retailer in the U.S. and in the UK.

Also, we executed a new three-year, $600m revolving credit agreement in the U.S. plus $50m in letters of credit. This new agreement, combined with the $137m UK facility, gives UAG the total borrowing capacity of $737m and again provides a sufficient capacity to allow for the continued investment in our businesses.

Now let me turn to the highlights for the quarter. Revenue increased 16.2% to $2.7b, including new vehicle revenue up 12.9%, used vehicle up 16.1%, service and parts up 22.3% and finance and insurance up 4.0%. We experienced continued strong same-store retail revenue growth at 3.7%, but a 10.7% in same-store service and parts revenues for the quarter.

We also mentioned in our press release this morning some unusual items. I want to comment on those at this time.

11 cents per share gain resulting from a refund of a UK consumption tax, I think it's called VAT, which was a credit to SG&A during the quarter. An 11% charge, principally in connection with the planned relocation of certain franchises in the UK, which includes depreciation, amortization and SG&A. A 3 cents per share income tax benefit due to a reduction in our estimated 2004 effective tax rate from 38.8% to 37.2%.

A 7 cent per share gain resulting from the sale of the balance of our investment in Universal Technical Institute, which is included in other income. To date, our investment in UTI has yielded a six-fold return over the past two years. In addition to the return we made on our investment in UTI, UTI has proved to be a valuable resource for providing well-trained technicians who staff our growing service and parts business.

Let me move on to our brand mix for the quarter. Foreign nameplate was 81%, domestic 19%. I might mention that was up 18% in the second quarter of '04 based on the strong General Motors and Ford business at the end of September. And luxury was 51% of our overall brand revenue.

Average selling prices for the quarter were $31,292, up $2000 on new and $23,810, up $2600 on used.

Our revenue base mix was United States at 72% and international at 28%.

Now let's go on to some specifics of the third quarter results. New retail sales and revenues increased 12.9% to $1.6b. This revenue increase was driven by our acquisitions and obviously the performance of our luxury nameplates. Same-store sales were up 3%.

Looking at used, for the third quarter, our used revenues increased 16.1%, and same store sales were up 3.4%. F&I for the quarter, revenue increased 4.0% to $60m. The average gross per transaction during the quarter was $807. For the quarter, our combined finance and lease penetration was 72%. Leasing has increased to 26% of our vehicle and lease transactions during the third quarter. Our extended warranty penetration was 34%, and just breaking it down, 32% on new and 40% on used. This area continues to be a focus, as I mentioned in our last call. In fact, we recently added a dedicated management who will be responsible for increasing penetration rates with our captive finance partners and our extended warranty business. We're also continuing to strengthen our F&I training programs and standardizing menu selling processes at all of our stores.

Moving on to service and parts in the third quarter, revenue increased 22.3%, to $266m and our same-store increase was 10.7%. [inaudible] parts as a percentage of UAG's overall revenue increased almost 50 basis points, from 9.4 to 9.9 for the quarter. Our margin was flat, at 52.8%. As you're aware, we consider the expansion of our service and parts operation to be critical in our growth strategy. Given the significant advance we've made in fixed operation, I just want to make a couple of comments on our accomplishments in this area.

Same-store growth was 12.5%, in service and parts for the first nine months of 2004. As you know, we added 400 service bays to our business in 2003, which represent about $100m in potential revenue, and we're on track to add another 250 bays, or $62m in potential revenue, in 2003.

Just commenting on Tyson's Corner in Virginia, we've added 69 bays, which gave us a total of 138, including our state-of-the-art, 36-bay body shop. We now have the capacity to generate $5m a month in revenue and almost $2.5m in gross profit. And with these additions, we've almost eliminated our service wait times. In fact, if you go back a year ago, we had almost five weeks on Audi, ten days on Mercedes-Benz, and two weeks on Porsche, and these are now are almost to a one or two-day wait, at the most, which is certainly helping us with our customers.

In fact, we've seen a significant growth this year in the level generated in Tyson's. Our ROs are up 27%, labor revenue is up 20, parts revenue is up 31%. In fact, our collision revenue is up 92%, and our total fix-up, 32.

The other areas where we've made significant investments, we've talked about these before, specifically Scottsdale, 101, and Phoenix and San Diego. In Scottsdale, our year-to-date S&P revenue is up 29%, San Diego is up 21. When we look at current capacity as a percent of our revenue, we've got 46% utilization today in Scottsdale, so we have some real good runway there. We're already at 81% of current capacity in San Diego. The good news is our EBT is up 165% in Scottsdale and up 20% in San Diego.

I mentioned with the lead times going down, I think we've seen a definite increase in our CSI scores as far as customer satisfaction, that bodes well, you know, for customer retention.

We have a number of similar projects and just to mention a few, our campuses in Providence, Rhode Island, and Turnersville are under construction and we expect to add almost 80 bays at [Inskip] and over 100 bays in Turnersville, south of Philadelphia.

Our body shop revenue for the quarter increased 17.6%, and same-store were up 7%. We have now 39 body shops in operation, both domestically and in the UK.

And third quarter SG&A was 11% of total revenues, as compared to 11.3 in the second quarter of '04. After adjusting for the benefit relating to the UK tax consumption taxes, our SG&A was 11.3, which was consistent with the second quarter. Interest expense for the quarter was $10.5m, up $0.4m versus the second quarter of '04. And really, our interest expense increased as a result of borrowings in connection with our acquisitions and the increase in average borrowing rates. Going forward, we expect increases in interest expense, due to increased costs related to our new credit agreement.

Turning on to our floor plan, interest expense in the third quarter of '04 was $12.3m, up $1.2m. The increase compared to the second quarter of '04 is due primarily to a decrease in floor plan borrowings, offset by an increase in interest rates. Our floor plan credits for the quarter were $9.8m, and I might point out because of our mix to foreign nameplates, we don't get quite the benefit of interest rate credits that you might have if you're more highly weighted towards the domestics.

Q3 was impacted about 2 to 3 cents per share due to the higher rates. Just a comment on our tax rate -- we adjusted our estimated annual tax rate downward, to 37.2%. This decrease is principally due to an increase in our earnings from foreign jurisdictions, with lower tax rates than the U.S.

Turning to our balance sheet, total vehicle inventories at the end of the quarter were $1.2b, down $66m from June 30th, the end of the second quarter, and on a same-store basis, inventory is down approximately $110m since June. As I noted in my opening comments, inventory is in great shape -- again, new vehicle inventory at 46 days, versus the industry at 63 days, and our used vehicle day supply is at 31 days. Year-to-date capex, net capex, is $106m, and just breaking it out, $42m in the U.S. and $64m in the UK. We finished a number of projects in the third quarter.

We expect to incur approximately $10m of additional net capex by the end of the year.

Let me now turn to UAG's leverage for a moment. Due to our acquisition activity during the quarter, our debt to cap, total capital ratio, increased from 35% to 40% at September 30th. This is down, however, from 50% in the same quarter of '03. Taking a look at our debt position at the end of September, total debt was $1.8b, we have $1.1b of vehicle debt, a decrease of $96m since June 30th. And non-vehicle debt was 683, an increase of 138 from June 30th. If you break that down, the non-vehicle debt, again, we have our $300m of 9 5/8, ten-year subordinated debt with a call provision in March of 2007. We have $372m drawn under our credit agreements. I'd just make a note that we had $365m of availability under our U.S. and UK credit agreements at the end of September 30th, '04.

Let me now move on finally to our guidance, and address our future earnings projections. We currently expect the fourth quarter to remain competitive and challenging. I've heard that from everyone, you know, in our business. I think declining consumer confidence, the uncertainty in connection with the presidential election, again, the overcapacity we have in the industry, and I think concerns over oil prices are expected to impact in our business. How much, I really can't tell you. In fact, indications so far this quarter point to- we still have margin pressures, you know, in all our brands, as we move out our 2004 models and start to take in our 2005s. We will face, at UAG, costs from our new credit agreement, along with the higher interest rates. In fact, if we estimate that interest rates and the cost of our new credit agreement will decrease earnings by approximately 3 to 4 cents in the fourth quarter.

In light of these considerations, we expect our Q4 earnings per share to be in the range of 43 to 49 cents, which assumes 46.6m shares outstanding, an 11% increase over last year. On a full year guidance basis, we're looking at $2.32 to $2.38, which includes the benefit of the 16 cents of special items we have reported on so far this year.

In summary, this afternoon, I'm looking ahead and manufacturers are planning more than 200 new product offerings over the next four years, which represents more new products being introduced than at any other time I've really been in the business. In fact, the industry will be replacing almost 80% of its current models. As a result, I think it's a great time to be an auto retailer. With our business model, and our commitment to customer satisfaction, and the continuing investment in facilities, if we can drive further sales and growth, we believe we're positioned to prosper, even in this challenging marketplace. Thanks, and let me open it up for questions at this time.

[Operator Instructions] Rick Nelson, Stephens.

You are, UAG, is the only company that has reported an improvement in new vehicle gross margin. I'm wondering what you're doing differently?

Well, I think it's due to our mix of premium luxury. I think that's really driving it, you know, because a lot- they have a lot of new models and because of the scale of our dealerships, I think with a 51% mix, that dries a higher margin and we get also that benefit because of the premium luxury business we have in the UK. You know, we're strong Porsche. We've had Bentley businesses in the UK, which obviously, are selling everything we can at full margin.

OK. I did see a little bit of slippage in the F&I per unit; wondering if you could comment there, and are we reaching any sort of ceiling?

Well, you know, I looked at that, too, and we did a little homework on it, you know, here this morning, and basically what you've got to look at, we are primarily dealing, over half of our business, in premium luxury, and typically, you know, that customer has the access to other than just what I call ``vertical financing,'' through the captives. And in order to sustain that penetration we have to be a little bit more price sensitive from the standpoint, you know, of our margin. And also I think that, you know, we're up $20, you know, from the second quarter, but think about my- I guess my mission, with the captives, is to give them as much business as we can, and this is always a negotiation with our F&I managers, because they think if we go to the bank, we potentially can get a little more reserve. But I'm more interested in more vertical integration, because then we can push the captives to take, you know, more used financing. But I think $800 per vehicle is very realistic on our model.

In fact, if you look at us, we make more money on the front end than we do on the back end, and I think that bodes well, because with the payoffs, and because we've gone from 24 to 36 to 48 to 60 months, in many cases, those reserves are charged back, and I'm trying to manage the chargebacks, and I think that by not being too aggressive, you know, on the F&I side, we won't have the impact of chargebacks. So that's-- maybe it's a little different model than the other-- our other peers have, but I think makes some sense.

And how about your mix, presently, of '04/05 models?

We're in good shape. We probably have somewhere in the neighborhood of 35% to 40% of our inventory is still '04, but I look at that-- we look at that on a weekly basis, and we're in better shape this year, '04s to '05s, than we were a year ago, '03s to '04s, so I would expect a real good clean up. When you look at our inventory, you know, at 46 days, we're really in pretty good shape.

And by better shape than a year ago, you mean you have more--

Less '04s versus '05s in stock, where last year I probably had more '03s than I wanted to have. I think some of that was driven, too, this year, because of the strong program that Ford and General Motors had at the end of September. Those zero deals for 72 months was on '04s.

And the tax rate, I know when we pull out some of the unusual items, it looks like the tax rate dropped in the quarter?

Yeah, our tax rate, where we've set up our tax for the year, at 37.2%, and basically when you start to aggregate the work we've done on this, at the state level, along with the lower tax rate in the UK, with their earnings, we aggregate a lower tax rate, which is obviously something we've been working on, you know, from the very beginning. I think we were over 40% at one point, you know, when we first took over the company. So I think you could be looking at a mid 37, probably, consistently, you know, for our tax rate as you look into next year.

Charles Grom, JP Morgan.

Could you guys break out for us same-store sales for new and used on both domestic and international fronts?

Well, when you look at our new vehicle revenue in the U.S., on a same-store, we're up about 1%, up 16% internationally, and overall retail revenue, we were about flat domestically and up about 18% internationally. Now you get that because, you know, we have a strong quarter in the UK because of registration laws.

Right. And how about on the used?

We were down about 5% on used in the U.S., we're up 21% internationally.

And the FX impact on the top line and net income?

About $80m in revenue and probably about 2 cents in EPS.

OK. And to be honest, listening to the other retailers and then listening to you guys, it doesn't sound like business is as bad, yet you took down your guidance, relative to where the Street was. Can you give us some sense of what's embedded in your guidance and how conservative you're being at this point?

Well, I've learned a lot, you know, in guidance and I-- some people are not giving guidance and you know, what I'm trying to do is be realistic, and being a major shareholder in the company myself, I've got to look in the mirror every day and say what's the proper guidance to give. And I think when you look at, you know, at our business in the fourth quarter, I mentioned, you know, earlier on in the call, you know, we've got consumer confidence, we've got some higher interest rates, you know, don't think that this $55 a barrel won't have some impact. We're seeing it on the bigger SUVs. Fortunately, we don't have quite the impact, you know, on our foreign nameplates. But based on that, you know, I'm seeing that, you know, my minimum is at least, you know, what we made last year during the quarter. And we see some upside. Remember, our EPS is impacted with about 11% more shares. Look, our goal obviously is to be in this range and when you look at it realistically, we've got about 4 cents of interest impact, you know, from the guidance. So if you looked at guidance at 53, where it was before, you would get to the high end at $49 and quite honestly, trying to be realistic with you guys, you know, we looked at $43 to $49, and we'll continue to offer guidance.

OK, I respect that, and lastly, can you just speak to trends during the month of October?

You know, the month is just over. I can tell you that at the end of a quarter, you have a big push to get stuff out. You know, the first week was probably softer but we saw each-- I track Friday, Saturday, Sunday sales in the U.S. in the East and West, and we saw the trend get better. You know, obviously as we look, we've got one more weekend here, and hopefully if the weather is good, we'll end up with a decent month. But I wouldn't say it's a barnburner. And then again, I've got to consider what's going on in November/December. You know, we come off a strong third quarter in the UK because we have the registration month, so we always expect October to be a little bit softer. But overall, that market is up about .3% year-to-date, and we're looking for a [SAR] of about mid 16 million as we go forward, you know, for the year. So I think that our business certainly, I feel good about it. I'm in the process of doing 150 business plans myself with our operators and about halfway through, and my big goal here is to identify the people, as we go forward, you know, that can help us lead the business as we grow and so I'm pretty much-- I'm a ``half full'' guy, not ``half empty,'' so I've got some confidence as we roll into the fourth quarter.

[Scott Stemmer], Sidoti.

Could you talk about the used car? It looks like the gross margin was down. Was that coming on the retail or the wholesale side?

OK, number one, we had a little-- we had $75 loss per wholesale this quarter per unit, which was higher than we had expected, but in order to drive the used car inventory down, because of, as we get model changeover, we saw in the past that we needed to be a little bit more aggressive, so we had some impact there. But most of the impact has to do, when you look at our domestic business, our domestic grosses were down in the U.S. as we looked at it during the quarter. And on top of that, when you look at the UK, we run between 300 and 400 demonstrators over there, and we turn those cars in between four and six months, and when you turn those, they become used cars, not new, so you have-- in order to sell a current model, versus a new current model, you probably a 4% to 5% impact on gross. So that's one of the reasons, when you look at us versus the peers, we have a lower gross margin on used.

But when I looked at the numbers for the quarter, you know, we saw that the domestics, you know, margins were down during the quarter.

And relating on the retail side to the certified pre-owns, can you talk about some percentages in the quarter?

About 30% of our business is certified pre-owned, and I would tell you this -- I don't want anybody to get the mistaken about certified pre-owned. You know typically our margins are not that much greater on CPO. In fact, we have a higher risk factor with CPOs because you start to add anywhere from, say $750 to $1,500 on a premium high line of reconditioning. If we stick with our out in 90 days from ownership of a used vehicle, and we have to move it out, we see higher losses from a wholesale perspective, so it's somewhat of a catch-22. But CPO is good because what it does is it retains the customer, number one. It gives him a certified, pre-owned, OEM extended warranty, which helps us, because it brings that customer back, so you might say you lose a little bit on the front end but you're going to gain it on the back end.

Going back to the new car gross margins, they obviously held up pretty good in the quarter, but could you maybe characterize the competitive pressure on some of the better selling popular foreign brands, like Honda and Toyota?

Well, you know, these margins have come down a little bit because there's a lot more availability of vehicles, as Toyota and Honda now have added-- I know Honda added a little bit more trunk money during the quarter than they had in the past, so they're getting a little more aggressive. You know, the Odyssey is out now, so we're getting a little bit of gross margin plus there. But overall, I think that when you look at Honda's business, you know, for the third quarter, they were down about 6%. We were down about 4, you know, so to me there's some pressure on volume.

But overall, I think that new product, as I mentioned in my final comment, the new product coming in, we can see the Chrysler 300 has given us some margin, the Dodge Magnum is giving us margin. You know, the new SLK in Mercedes is a homerun. And in the UK, you know, we're seeing, as I said, the Bentley and the Porsches are very, very strong. The Odyssey at Honda continues to be sold out.

My understanding, just in a quick review, in the last couple days, on the Ford 500, has been real strong, along with the Mustang, so that's going to give us some traction with our Ford stores, which have been lagging as far as profitability on a year-to-date basis.

[Matt Neimer], Thomas Weisel Partners.

First question is, given the new product introductions that are coming out that you referenced, does it get harder and harder to sell used vehicles in that kind of environment, where the manufacturers are doing everything they can to make sure these introductions go according to plan?

Well I would say the new product intros are going to drive the margins up, because you're not going to sell those at reduced prices. The problem is, is when they put the trunk money on and the special incentives, it gets the standard car, you know, maybe not the new model, to be really a jump ball with the customer, because he's putting $2,000 or $3,000 down and he can get $2,000 or $3,000 from the manufacturer, he's probably better off buying a new car because he gets a standard new car warranty, in many cases. I don't think that the new models will affect the used cars as much as probably what I would say ``run of the mill,'' that maybe is not the right terminology, but I'm saying the standard products that would be receiving the incentives. In fact, you're seeing many of the manufacturers pulling back the incentives. In fact, we need that, because then that differentiates, you know, the new vehicles, what we're trying to get, are the new models, where we're trying to get the margins, versus the older ones. But used continues to be under pressure because it's so easy to buy a new car, and quite honestly, you know, we're driving our sales people and we've gone, as you know in many cases, independent used car management and sales people versus combination in order to be sure people are focusing on used. Also, we've been very aggressive, buying, you know, on the Internet with the manufacturers, the off-lease cars, which gives us the opportunity to help. And then you've got the lease pull-ahead programs, you know, that the manufacturers have, which really take the customers out of the market, and those do affect people not buying a used, where they might rather sell their current car and maybe trade into another new vehicle. So there's a lot of dynamics. I wish I knew the exact answer, because I'd be focusing specifically in that area.

Is anybody other than-- I read about the GM lease pull-ahead program. Are a lot of other manufacturers doing that? Is that pretty common?

I tell you, I can't keep up with them all. Living in Detroit, you've got everybody and your brother is a pull-ahead in order to get business, so I'm not sure how it affects across the country. I think that the big impact, you know, or individually-- I think BMW has done some, I think Mercedes -- all the manufacturers, and they do it sometimes regionally, sometimes not a national program. And we like programs that are really affected in markets, not just on a national basis. We have a little more flexibility, then, to maybe maintain some better gross margin.

OK, next question is on Europe, you seem to be doing really well over there. I guess I'm wondering what sort of acquisition multiples are you seeing in that market?

As far as purchase?

Yeah.

Well, I would say it's probably half the cost of what it is over here. But the key thing is what's driving a lot of this and the holiday might be over, because we had block exemption, where all the manufacturers were involved in re-engineering their markets, and you know, we had the ability to pick up four markets with Audi, because what they're trying to do somewhat differently than the U.S., they're saying, ``Let's have a retailer that might have the Phoenix market for a brand,'' you know, rather than today, if you look at a brand in the U.S., they'd want three or four dealers there. So we get West London for Audi, we have the Milton-Keynes area [ph] or Mac 15 for Mercedes-Benz. We have Bristol, the southern part of the UK, you know, for Mercedes. Toyota has given us the whole market of Birmingham, so when we start to do that, it's either take existing facilities or build new facilities that are strategically located in those markets, so it's a little bit different coverage, and I think that the benefit we have is that the manufacturers see us committed to facilities. [Sitner] had a great reputation, they've got a strong management team. And quite honestly, if you look at that, you know, in just about two years, we've almost doubled that business, and again, I think it's the right strategy. We're not all-- it's like you got the West Coast, East Coast, and Southeast in the U.S. We happen to have our business in the UK, and our business, the [Tansen] that we bought in Germany, you know, runs between 5% and 6% on sales from a EBT to sales, which is way north of anything we see here.

And just to follow-up on that, have you thought about going elsewhere? I understand that the head of the Ford dealer council just opened a dealership in Shanghai.

Yeah, I read that, interesting-- in ``Automotive''-- I'm not ready to go to with UAG to China. What I have done is we've invested a little money from Penske Corp. with Matsui, you know, in a small investment, United and an OEM, but in more of an importer in China, just to get an idea of what's gong on there before we would jump in with UAG. We want to get our feet wet.

But from a international, pan-European vision, we see Germany today-- we're very strong, we're probably the strongest Toyota-Lexus operator in the Frankfurt market. We've got BMW in the southern part of Germany, and then we have in Bremen and Hamburg, we have this premium luxury, so I see some filling in there. I see hopefully, probably, a purchase of a Mercedes block in Germany. We've got a number of people that we're talking to at the moment, and I see continued glue-ons in the UK, because we're pretty much have replicated our brand management, you know, our HR functions, and our financial functions that we have in the U.S., we've replicated those there, so you know, we're consistent.

And last question is, just wondering if you can give us an update on your relationship with Sirius? They've been in the news a lot, and Sirius Satellite Radio, just wondering if that's working, if you're installing a lot of those radios and getting fees for that?

Yeah, well, we're excited about that. You know, Sirius, we made a strategic move to align ourselves with them. You know, the interesting there is, they have now started to penetrate-- they announced Ford will have the benefit, with the Ford program, in mid '05, on 150s. We're now up and running with Infiniti. BMW now is releasing Sirius, so it gives us a very interesting opportunity, especially in high line. People like the radio, it's something we have to demonstrate, but once you have a satellite radio, you'll never go back to your standard, and I think it's working out well for us.

And you do get a fee for each one that you install?

You get a volume incentive fee, yes.

[Dominick Martilati].

First, on the inventory, obviously you've done a good job there, but are you kind of strategically kind of changing your view on that, given the cost of carrying that inventory, as you go forward, or is it just kind of more of a one-off thing in the quarter?

No, no. No, no. I think that the way to offset, try to offset some of the increased, 75 basis points on floor plan, you know, obviously is to reduce it. But you know, prudently, we talked a little earlier in the call about '04s versus '05s. You know, every time you carry 04s into 05, you're going to have to discount 'em, pay special sales spiffs to the sales people, so if we can focus our people on selling '05s, that's going to be a benefit. We did a real good job in two years ago, not such a good job last year. I think we're much better focused as we go into this year.

And on the used car side, quite honestly, in the UK, they've got their inventory way down, and they're looking now to make some strategic buys here at the end of the quarter which will give them a real running room, as they go into 2005, and I would say that's quite the same feeling we have here. An example is, you know, Audi called us and said the had some demonstrator A8s in the UK, and would we buy 40 of them? Well, of course, with our scale with Audi, you know, it was a homerun for us to be able to buy those, and then we spread them out between our locations and you know, it gives us the chance, you know, to build a customer base. So I think inventory management is important.

You know, I have told our people that, like a credit line, you know, when you've used your line up, you can't have any more vehicles, and we've established credit lines. And also, on the used car side, we're getting-- I think we had about 3% of our-- all of our used over 90 days, from an aging, which is terrific. We're trying to operate, you know, the 60 days, which probably falls over to close to 90, but that's in real good shape. And it's a-- I guess as part of the DNA of the company, we're looking at it every day, you know, with our ability through our browser system. There's no manager that can't that data on his lap every single day. No one has to call him, plus with our brand managers following up and our operating guys, you know, with the size of the company, I think that's gotta be an everyday process.

So when you look at the manufacturers, have there been any more or less push from them in terms of saying, ``take some more inventory off our hands,'' just given what's been going on in the industry?

They push all the time, and we've got to say no, and I think that, you know, typically, the- you almost have a pull system with the foreign nameplates and you have a push system with the domestics. They just don't have the model synchronization as good, you know, as say, Honda or Toyota might have. And obviously, with Lexus and some of the hot cars, BMW and Mercedes, I mean, you're asking for every one you can get. Then there's certain models that are being-- we've got the M class. We're going to run out of M class. Ironically, we had too many. Now we're going to run out and we won't get new M classes until the first quarter. So, you know, these are the dynamics that we're playing with. But overall, I would say that my discipline and my communication to our management team is, ``Look, we can't have too much inventory,'' so what we have to do is say no. On the other hand, when we can help an OEM, and we think we can-- it makes good sense for us from a business perspective, on both sides, you know, we'll take more vehicles.

OK. You talked about F&I a little bit before, just in terms of it being a nominal penetration dollar rate, but look at the same store numbers, there are off a little bit. Is that anything to do with the fact, you know, the dealer reserve on any sales going on there?

Well, I think that there's a lot of dynamics going on. You have so many flats right now, and in many cases, for us to get a premium luxury customer, even to get him to finance, you're finding we have to go with a flat, and I think you're seeing some of that, you know, have some impact. But again, I'm-- my mission here is to make my profit on the front end, because I don't have to share that with anybody. And on the back end, if a contract is canceled, you know, obviously you end up losing some of that reserve when you get charged back, so we're trying to manage that carefully. And Steve McCauley, who's come with us from GE Capital, is doing a good job, trying to assess out exactly where we have opportunities and risks in that area. So I said earlier I think $800 is realistic. You know, it's something we're focusing on. We also, as you know, we're menu selling. We've adopted the captive rate from a standpoint of capping our reserve capability, so you know, all of those initiatives probably play into it. But maybe that's not a very good answer to your question, but there's a lot of dynamics, let me say that.

Lastly, on service bays, obviously it's been a big investment for you guys in several areas, and in many places, you've been probably under-capacitized, but in areas where you probably are a little over-capacitized, I mean, do you look at that business as possibly service share from somebody else, or it is more growing into the market? And also, I think some of the concerns, you know, perhaps with the Inskip market, you know, trying to pull out of Boston, that people will come and buy their car but won't service there. Can you give a little more color on that?

Well, let me say this -- that if you look where our strengths are, you know, with the foreign name plates, their market share, they've grown probably 10% to 11% over the last three or four years. They've not added any dealers, so with more units in operation, we're going to have more opportunity, and I think as you're seeing with Mercedes and with Lexus specifically, they're adding companion points, because in your PMAs, your Primary Market Area, you've got more units in operation, which need service bays, so I think it's a good idea. And in fact, Mercedes came to us two and a half years ago in Washington, at Tyson, and said, ``Look, you guys are under-bayed by 50 to 60%.'' It's ironic; we added the bays and we're filling them up.

Now conversely, because the quality is a lot better on the domestics, meaning Ford and General Motors, we sometimes see at two o'clock or three o'clock in the afternoon, you know, we don't have the work flowing in, so now we're out with the quick lubes, the tire business, and other initiatives to try to drive, you know, more hours or more content in each bay. But you talk about Inskip, I mean, we have a tremendous opportunity there to get business.

When you think about North Scottsdale, when we moved out to North Scottsdale with our Porsche business, you know, we doubled the service because to me, we had people going to people who were not authorized. We saw that in Audi, we doubled our-- put two locations in and doubled our service business. So I think the ease of entry-- you know, we were almost two weeks out in some brands in Washington. So I think today we probably have added, when you look at $250,000 per bay and you look at 700 or 800 bays, you know, we're talking about a huge opportunity for us. And overall, we're probably, you know, in the 60% to 70% utilization. Now if you go to shifts, we can get more. Remember, every dollar of revenue on the labor side drives anywhere from 75 cents, depending on manufacturer, to $1 in parts, and we're getting some tremendous lift from our body shops.

Jonathan Steinmetz, Morgan Stanley.

Just one on the new vehicle gross profit margin. I may have missed this, but if we break this up between the international and U.S.-based, would the U.S. based be up or would it be down?

Wow, I can't-- well, I guess from a gross profit perspective, probably because we have primarily high line in the UK, we have the benefit, you know, of Porsche and Bentley, but it's a smaller number, as far as units, and I guess- I'll get you that information, have Jim Davidson or Tony call you. But I don't think it's far off, because we're- you know, we're 50%, when you look at it overall, premium high line, but I don't think you can say one is, you know, 5% or 10% higher than the other. I think we're fairly flat, because you know, some of the high line brands are bringing the same margins here that we would have in the UK.

In the UK, the only high volume brand we have over there, really, is Toyota.

OK, thank you very much.

John Casesa, Merrill Lynch.

Hello, Roger. Roger, can you say what your overall service bay utilization is for the whole business?

I think I just said it's probably in the 60% to 70% range, and some might be, I think I mentioned that-- [inaudible] we're running 46%, probably 50% in the West, because you know, we've had so many- increase in bays there and we're going to do the same thing as we get into Turnersville and go into Inskip. But believe me, this is good growth and good opportunity, because remember, the parts and service gross runs about 50% versus vehicle gross, let's say, just at 10%.

Right. Then I wanted to you ask you about the captives -- do you- in terms of the sort of credit picture out there, do you think the captives are buying deeper now, or what do you think is the credit environment like for the captives?

I can tell you one thing -- if the captives don't buy, it's going to impact their market share. I think that's specifically true of the domestics. The dynamic you have is that from the domestics, because their credit ratings are lower than some of the foreign name plates, you know, it's tougher for them to buy in the used car area, because in many cases, they aggregate those contracts and then they sell them off. But I find all the manufacturers and one of our goals is to be 90% of the paper that we place across all brands, we want to go to the captive, and sure, we'll use Chase. We have some special finance, but you know, that would be, you know, not a big portion of it. But to me, the captives today, the domestics are, I think, aggressive on new. I would say they're weaker on used. And you take the foreign name plates specifically are very aggressive both on new and used.

Just finally, are there any markets or brands you're running up against the framework limits you have with your OEM partners?

Well, the only framework limit we would have now would be Lexus, and we're not there with an [ASK] right now, but I'm assuming that, you know, as all the manufacturers have set the framework agreements up, that they're doing it so there's a caution light. You've got to come and you've got to talk to them. But at the moment, you know, I've been reading some speculation about Ford having some heavier pressure on the relationships. I don't see that at all. I mean, we've got a very open dialogue with Ford, GM, and Chrysler. In fact, you know, they're coming to us to work with us on opportunities. You know, we made-- had bought five Honda/Acura locations in Northern California, it was a matter of just communicating, you know, with the OEM, and what we try to do is communicate with the OEM where it's possible ahead of time, so you know, we're not surprising them with something in case they want to do some re-engineering of a market. Maybe we can even help them to get that done. But I would say this -- I'm not looking at a framework agreement, I don't look at a franchise agreement. I really think that in our case, and I would say, you know, all of the public guys, that you know, we're working hard, and the problem is, we've got a hell of a lot more visibility than the guy sitting out in Bethune, Georgia, and you know, we're targets from a standpoint of where we are. But I look at our CSI: you know, we're probably somewhere around 75% of all of our dealerships are hitting both the service and the sales CSI requirements. Obviously, that's not good enough for me, but you know, those are things that we're looking at, and I wouldn't characterize, you know, the [publics] as under any pressure. I mean, we all have our-- they push us hard for capex and they've got some outside consultants that make our-- sometimes make our life, you know, not as happy as we want from a standpoint of what they require, but it's just part of the business.

Nate Hudson, Banc of America Securities.

First, could you repeat what the domestic/international mix was for the quarter, and where do you see that going over the next couple of years, with the better opportunities internationally - do you see that drifting further in that direction?

I think I said it was 81/19 was the mix during the quarter. 81% foreign name plate, and 19% now-- you know, on an international, it was, I think, 28/72 -- 28% revenue internationally, and 72 domestically, and that's in line with what we talked about.

OK. You don't see it drifting too much towards the Europeans, then?

Well, I think this- as we grow the Northern California piece of our business, you know, we only have that in for just a short period of time, you'll see that kind of modulate a little bit. But to me, you know, that's been strategic and certainly 28% of our revenues, when you look at a profitability, you're probably running in the same, you know, in the same range, so you know, I think it's been a good move.

OK. And second question, on capital expenditures -- where do you see the gross number coming in for this year, and any early thoughts on where that's going to end up next year?

I think the gross number is probably 140 to 150. And next year, you know, we'll be completing Turnersville, we'll be completing Rhode Island. Both of those have already been, or being funded by a sale-leaseback transaction we did at the time that we purchased, you know, the existing facilities or land.

In the UK, I mentioned it earlier, we're seeing rates now under 6%, that we're getting on leaseback transactions in the size of, let's say, 4 to 7m pounds, so we're hitting this thing, you know, as interest rates are very attractive for us, and to me, it's pretty good long-term funding for us, because it gives us site control yet we don't have, you know, we don't have it in on our balance sheet. And on top of that, we've got a lot more flexibility with the lessor than we'd have with a bank, because we can replace these. You know, if we want to sell a particular location, let's say, in Allentown, Pennsylvania, and we have a property that has $4m or $5m of value, we could go back typically to our sale-leaseback provider and replace that like for like with another property let's say, in out of Cleveland. So that gives us a lot more flexibility and can do, you know, if you were in another mode.

OK. And one last, just accounting question -- where on the income statement did the $4.9m after-tax charge show up? Was that in SG&A?

The 11 cents? Yeah, the 11 cents, as I said earlier, that the- we got the benefit in SG&A. Then depreciation and amortization were impacted, along with some SG&A, was the offset.

OK, so they just balanced out?

Yep.

OK, thanks very much.

[Carl Dorff], [Dorff Asset Management].

I was wondering what caused the substantial rise in depreciation? Was it fully related to that 11 cent--

Exactly. You're right on.

OK. And the other question that I have is, your long-term debt, Roger, you know, has gone down from 50% to around the 40% area, yet you said the new credit agreement costs have increased. Why is that?

Well, number one, we didn't have a cost for the unused portion of it, which, you know, we have our credit agreement with the manufacturers and the manufacturers are not trying to be banks, so you know, they're charging us an unused fee, and we have probably a 60 basis point increase in the general-- in the overall credit agreement, which is very competitive, and we felt, you know, we would pay. So you have those two components which, you know, between the two, you probably drive 100 basis points.

OK, thank you.

And we have-- and by the way, the other good news, we got an evergreen agreement, which, you know, if we perform properly, this thing will continue to roll, which I think is a real benefit to us, so we're not, you know, we had to negotiate, because we'd shown-- we had one year to go on our existing agreement, and we didn't want to show it current, so we negotiated and had it completed before the end of the quarter. And we've got very, very good relationships, you know, with our working capital providers and that's one of the reasons that I'm so committed to floor plan vertically and also using the manufacturer's captive finance companies, because I think it all ties together, you know, when you negotiate.

All right, thank you, sir.

Gerry Marks, Raymond James.

In terms of the gains that you guys have been getting from these investments, you still have a fair amount of minority interest. What other investments are you getting from those minority interest from--

No, that's all we have. We're out of our UTI now. We don't have any other investments at this point.

So going forward, that's going to be a zero number?

I'm sorry, you I thought you were talking-- Tony's helping me here. I though you were talking about the UTI investment.

Right. You sold that, but I guess you have other investments, correct?

The only other investments we have would be in our joint ventures, which would be with [Nix] in Germany, would be with [Rysocker] in [Memingham], from a standpoint of 50-50. Those would be the only other ones. And we have, in our Mexico dealership, you know, we have a-- we have a partner down there, Medea, and then there's-- we have a small minority partner in Fairfield and then in HBL, but that's-- you know, under I think under 10% or 15%.

OK, so that's what's going to flow through. And then in terms of the 11 cent charge, you guys have done franchise relocations in the United States and not kind of broken that out separately. What kind of makes this a little different?

Well, I think the fact was the size and than what happened is that as we-- let me just frame this thing properly, is we committed to go to the UK, and as Mercedes-Benz really is the major driver of this, and they went to what they call from 134 partners to 30 partners, they constructed what they call MACs - Market Area Concepts. And in this case, they cancelled dealers, and then we had to come in and pick up locations and continue to operate. Well, what happens on that particular case, we had to go to temporary facilities, in many cases, you know, and in Swindon, in fact, we want to an old Volvo dealership, and we had to put the [inaudible] in, we had to go a warehouse and [inaudible] and when you lease these places, they don't always-- the lease doesn't end the day when you move in, so you know, those were some of the significant costs we had. We've not relocated anything here in the U.S. at this point.

Remember, you've got the PMAs here -- Primary Market Areas, so we have a much, much more difficult time, you know, moving in the U.S. because of the franchise laws and the PMAs.

Last question I had, and I'm not sure, I apologize, I got a little bit late, but you've been talking a lot about the parts and service opportunities and you actually had an acceleration in your same-store sales, but your gross margins year over year seemed to be down about 10 basis points, and I was just curious--

--we're at 52.8-- you know, on our parts and service gross. It was 52.8 for the-- and that's, again, I think from a standpoint of the rest of our peers, that's pretty good.

OK.

And you know, Tony is showing me here, Gerry, that we were at 52.8, 52.9, so you know, it's-- you know, again, as we increase-- maybe some of the body shop margin isn't quite as high, but I think overall, we're in terrific shape.

OK.

We're up probably 100 basis points since the beginning of the year.

Oh, yeah, I see, so-

I don't have the data right in front of me, but I know we're. But I know we're at 52.8, and Tony said we're at 52.9, I guess, so we're down 110, but I don't think that's any indication that we're losing any steam.

OK, thanks.

Thank you.

[Adam Komura], [InTrust Capital].

Just two quick questions. The first is, can you talk a little bit about sequential trends in used, sort of how it went throughout the quarter, and into October here, and sort of your six- to 12-month outlook for used? And the second question is, how do you account for the additional service bays in comps? If you add a bunch of bays at a dealership, is it still in the comp this year and last?

Let me answer that one first. If we would add bays, you know, obviously that would add grow the comp parts and service revenue.

OK.

But typically what we're doing, we're taking an existing facility and adding bays on that facility, and that location, or in some cases, we might build a PDI Center and then add bays there, which all gets consolidated in that same same-store revenue. That's basically-- that's how we're growing. There's no question about it. And then we're getting, hopefully, more efficiency in the existing bays, because of- I know in the UK, we've gone to a team system, something they didn't have there, that we operate here with, so we're trying to give us a better-- plus you have the units in operation, as our mix has gone, as you know, from- to more foreign name plates, and with their penetration in the market, we're getting more units in operation in our area, so we should hopefully capture some of that business.

Explain to me exactly the sequential trends in used; I want to be sure I understand the--

How it went, you know, throughout the quarter, July, August, September, and into October, and then sort of your six to 12-month outlook in used. Has it been sort of consistently weak, has it gotten weaker, strengthened, that kind of thing.

I would say it's pretty much been the same. You know, you get-- at the end of the-- you know, as you start to see '04s for 72 hours at the end of September, you know, zero financing for six years, it drives everybody thought process to buying new, but there's been some up-- used car prices, I think, are pretty decent right now. You know, we see that on the truck side. You know, overall, the domestics, as I said earlier, we have a weaker margin in used during the quarter. And on the UK side, we probably, because we had the registration month and we probably moved out a bunch of demos, and we probably saw a little downward pressure there. But overall, I think that the affordability today on new cars has gone to approximately 20 weeks of pay, which is, you know, way south of where it was maybe four or five years ago. And as long as there are going to be incentives on new, it's going to put more pressure on used.

[Operator Instructions]

Again, thank you very much.

[Operator Instructions]