Penske Automotive Group Inc (PAG) 2004 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon, and welcome to United Auto Group fourth quarter 2004 earnings conference call. A press release which details United Auto's fourth quarter results was released this morning and is posted on the Company's website which can be viewed at www.UnitedAuto.com. The call today is being recorded and will be available for replay approximately one hour after completion through February 23rd, 2005. Please refer to United Auto's press release dated January 20, 2005, at www.UnitedAuto.com for specific information on how to access the replay.

I would now like to introduce Anthony Pordon, United Auto's Vice President of Investor Relations. Sir, please go ahead.

Good afternoon, everyone. Welcome to the United Auto Group fourth quarter 2004 conference call. Joining us today for the call are Roger Penske, Chairman; Jim Davidson, Executive Vice President - Finance; and Bob O'Shaughnessy, Controller. At the conclusion of our remarks today, we will open the call for questions and I will also be available by phone to answer any follow-up questions that you may have.

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

These forward-looking statement 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 will also be discussing certain non GAAP financial information, such as free cash flow or adjusted EBITDA, that we believe provides useful information about our business. You can find a reconciliation of these items posted on our press release or in the financial area of our Investor Relations section of our web site at www.UnitedAuto.com.

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

Good afternoon, everyone. The fourth quarter was another outstanding quarter for UAG. We achieved double-digit quarterly growth in revenues, income, and earnings per share as we posted our 23rd consecutive quarter of record results.

Let's take a look at the fourth quarter. Retail unit volume increased 10.2 percent to 64,500 units. Our new units were up 12.2 percent and our used units were up 6.3. Our revenue for the quarter increased 19.2 percent to 2.5 billion and just to give you an idea of our revenue mix for the quarter, 74 percent of it was generated in the U.S., and 26 percent was generated internationally. Our revenue mix is in line with our long-term expectations and I think we have bracketed 25 to 30 percent from international operations.

Our gross margin increased 70 basis points to 15.3 percent and earnings before taxes -- EBT -- increased 23.2 to 43 million. Our net income increase 30.1 percent to 26.1 million. Earnings per share increased 16.7 to 56 cents a share which includes an 11 percent increase in average shares outstanding.

These results were supported by same-store retail revenue growth of 7.6 percent, including an 11.8 percent growth in our service and parts business; and this is the fourth and second quarter, by the way, which we achieved double-digit same-store growth in service and parts.

Just breaking out that same-store summit you asked me about international and domestic. Retail revenue in the fourth quarter was up 5 percent in the U.S. and 17.6 percent, internationally, giving us 7.6 percent.

Looking at our overall gross margin, it was 15.3 percent and it was supported by increases in our new vehicle margin which increased 20 basis points despite the challenging environment. And this includes a 6 percent increase in gross profit for transactions, which was $165 and this gave us 28 -- $197 per unit.

Our service and parts margin increased 70 basis points to 54.4 percent. This is our highest S&P margin we have had since we joined the Company.

Our mix of service and parts as a percentage of revenue increased 36 basis points to 10.7 percent. Increasing the percentage contribution and gross margin of our service and parts operations continues to be a critical element in our long-term strategy.

Let me we move on to finance and insurance; but as we noted in our press release we are party to a multiple year arrangement to promote serious satellite radios in new and used vehicles. This is an F&I product like telephones, GPS wheels, etc.

Thought it might be important to you some background on our Sirius relationship today. Over two years ago, Penske Corp. was introduced to Sirius and at that time we saw the beginning of mainstream acceptance of satellite radios. We felt a partnership with Sirius and Penske would support Sirius building their important subscriber base. In fact, approximately a year ago Sirius entered into separate agreements with several of our Penske companies including Penske Truck Leasing, Penske Auto Group, United Auto and our race teams.

From a UAG prospective, we saw the opportunity to have satellite radios available either though OEM or dealer installation as an advantage. Our five-year agreement with Sirius gives UAG the opportunity to earn as many as 20 million warrants through joint marketing efforts and meeting certain targets.

In the fourth quarter as you saw in our press release we recorded 9.2 million in revenues which we have earned under the terms of our current agreement. Our compensation is equity-based and is dependent on the price of Sirius stock. We also must meet certain performance metrics and implement certain marketing efforts.

We have incurred both direct and indirect costs, relating to the setup and administrative of this program which are part of our SG&A. Early in 2005, we converted our equity-based compensation into cash. Excluding the impact attributable to Sirius our average F&I gross per transaction was $893 per unit. New was 905, and used was 810.

Let me move onto the full year. During the full year of 2004, I'd like to highlight some of our achievements. Our retail unit volume increased 6.7 percent, new units up 7.9 for the year and used were up 4.5. Our total revenue increased 17.8 percent to 9.9 billion. Our same-store retail revenue increased 6.1 percent and has averaged 7.8 percent per year since our initial investments in UAG.

Our EBT earnings before taxes increased 35.9 million or 24.5 percent to 182 million. Earnings per share increased 22.5 percent despite a 10 percent increase in average shares outstanding during the current year.

We increased our quarterly dividend as you know to 11 cents per share. We also extended our credit facilities in the U.S. and in the UK providing sufficient capacity to grow our business in the future. Reduced our debt to capitalization ratio from 44 percent to 35.

And finally turning to our brand mix, we finished the year at domestic at 17 percent. Foreign and luxury nameplates at 83 percent and just taking out our luxury in total it was 53 percent just over half of our overall business.

Our brand position, fixed position today at UAG is great and I think the brands that we are associated with are going to grow as we look to the future. In fact, you can take a look at our press release and I think it contains specific information on our brand mix with all manufacturers.

Moving on to acquisitions, we acquired annualized revenues of about $700 million in 2004. In the U.S. we moved into northern California new important market for us, with 3 Honda and 2 Acura franchises. We purchased a Mercedes-Benz dealership in Phoenix -- our largest market -- bringing in our footprint in Phoenix the metro area to 21 franchises and over 1 billion in annualized revenue. That's 10 percent of our revenue.

We also bought a GM Cadillac Hummer operation in Southern California. Moving onto international. We acquired 4 Audi franchises in West London and when you combine that with our existing Audi businesses in the UK we are now the No. 1 Audi dealer in the UK market.

We also purchased 5 high-end luxury franchises in Scotland which include 2 Porsche dealerships. And in Germany -- Western -- we purchased western Europe's largest premium luxury retailer, Tamzen (ph). We also discontinued franchise that generated approximately 160 million of annualized revenue during the year.

So in total, our acquisitions are expected to add 305 million to the U.S. revenue base and 235 million to our international revenue base.

Let me speak on our tax rates, our effective annual tax rates for the year was 37.2 percent and that was in our previous guidance. Balance sheet items, turning to the balance sheet. Total vehicle inventories at the end of the year were 1.3 billion, compared to 1.1 billion at December 31st, 2003. The good news is on a same-store basis new vehicle inventories was only up $41 million at 3.6 percent.

New was up 33 million and used was only up 8 million. We continue to focus on our inventory and our days to apply as of December, new vehicle supply was 55 days and that was down from 57 days at the end of 2003. Our used vehicle inventory was at 36 which was flat year over year.

Looking at capital expenditures. We spent 83 million on a net basis in 2004 and we expect to incur approximately 75 million net in expenditures in 2005.

Turning to cash flow in 2004. We generated free cash flow of 105 million and we define free cash flow as cash from operating activities, less capital expenditures after sale leasebacks. Our free cash flow per share was $2.30. We also as you know raised 119 million through private placement in March and as a result we reduced our debt by 66 million while investing 83 million in new and renovated facilities and acquiring 700 million in annualized revenue.

Looking at our leverage at this time, our debt to capital ratio is 35 percent which is consistent with September 30th and down 44 percent from last year.

Taking a look at our debt position at the end of December, our total debt was 1.9 billion including 1.3 of vehicle debt and 586 million of non vehicle debt, a decrease of 65 million at December 2003. If you break down our non vehicle debt, we have 300 million of 9 5/8, 10 years senior subordinated debt outstanding with a call provision in March of 2007.

We have $286 million drawn under our credit agreements and other borrowing arrangements. I would note that today we have approximately 400 million of availability under our U.S. and UK credit agreements.

As we move into 2005, I thought it might be a good time to review several key strategies we believe will help our continued growth in performance.

Looking at our facility investment program in 2004, we added 200 new service bays. Further we forecast the addition of another 175 new bays during the next 18 months bringing our total to over 3750 service bays. As a result our service and parts revenue has grown at a compound annual rate of 20 percent since 1999 and exceeded 1 billion in 2004.

We believe our same-store growth is a direct result of our major investment activity. I think it is a key differentiator of our Company from the rest.

We also continue to aggressively complete the OEM mandated corporate ID programs in the future.

Turning to our international diversifications, we continue to be very pleased with our investments we have made internationally. We continue to look for acquisitions that complement our existing dealership basis.

Today in the UK, we are the No. 1 retailer for Audi, BMW, Mercedes and (indiscernible) and Lexus. And since our original investment in the UK we have achieved same-store growth in excess of 20 percent and have acquired 36 additional franchises, representing 900 million in additional revenue, including the recent acquisitions in our UK, the business is three times larger than it was in March of '02, just three years ago.

Moving on to our human capital. Our employees at the end of 2004, we had 13,800 associates worldwide. In 2004 we reduced our overall turnover and that is all associates both fixed and variable to 39 percent, which is a decrease of 51 percent since 2000.

We have got more than 40 people in our HR department today who drive these efforts on a local and national level. I think we have created a robust personnel department with training programs that focus on development, recruitment and retention.

These programs include our a start program, a new hire orientation, Apex -- a management development training program, a mini NADA program, a 3 day dealership ops refresher program for our area VPs and our general managers, and a management training program. This is a comprehensive 11 month program to identify and train our next generation of general managers.

In addition, partnerships with companies like UTI help us to identify qualified candidates. Our investment in our people continues to be a major focus which we believe helps us deliver outstanding customer service will also lead to our continued same-store growth.

Finally as I have discussed on previous calls, we selected Reynolds and Reynolds as our platform for our dealer management system in the U.S. We completed more than 50 percent of the planned conversions and expect to convert the balance of our stores by the end of the second quarter. The use of a single DMS provider will provide economies of scale that will allow us to further strengthen in our controlled environment.

Turning to guidance, which we have shown in our press release this morning. As I have previously noted, we believe our rational approach to our growing business is important as we go forward in 2005. Organic growth -- which is currently estimated between 3 and 5 percent for '05 -- and our acquisition growth, which is currently estimated to be in the range of 3 to 500 million on an annualized revenue basis.

These increases will be somewhat offset by the effect of rising interest rates on our variable rate debt. We currently have an estimate in 2005 to be in the range of 232 to 239 per share; and our guidance is based on 47 million shares outstanding compared to 45 6 in 2004. Our first quarter guidance for 2005 are expected to be in the range of 44 to 48 cents per share and are based on investment of 47 million shares outstanding.

The final point I'd like to let everyone know today is the Company has substantially completed an assessment of its controlled environment under Sarbanes-Oxley. Based upon the procedures performed to date, we have not identified any issues we feel will rise to the level of material weakness and I can say this was a big job to complete during 2004.

In closing, I believe UAG performed well in 2004, despite many market-related challenges. I think our brand mix continues to perform well. Many of our investments are starting to mature. We are continuing to grow our high-margin service and parts business. Certainly our metrics show our inventory is in great shape and we continue to generate strong free cash flow.

We put our credit facilities in place; and this is going to provide adequate capital to meet our investment needs as we go into '05 and beyond. I think our management team remains dedicated to building a strong customer-focused business that capitalizes on the investments we have made since 1999. At this point I'd like to open it up for questions. Thank you.

(OPERATOR INSTRUCTIONS) John Casesa with Merrill Lynch.

Just a couple of things I wanted to talk to you about. First on these warrants. Are these warrants issued to Penske Corp. or to United Auto Group?

United Auto Group.

United Auto Group, okay. Secondly --

Let me just -- we have a certain amount -- you got an auto group for 20 million (indiscernible) and the other ones are related to the other companies.

So, the 20 million relates to the United Auto Group.

Got it. Right.

Secondly, do you have an estimate of your service utilization and what you think will happen as you add these bays over the next 18 months, or is it a situation where this tremendous pentup demand here in these bays will quickly get absorbed?

I think that today we are at 55 to 60 percent utilization so it gives us a long run way to grow. People like Mercedes are probably underbayed, certainly Lexus is underbayed because of their units and operation. So we think we're putting these in the right location at the right brand.

You mean 55 percent of your bays are utilized? Or that you are only meeting 55 percent of the demand?

No we have today -- we have, probably based on 3750 bays in the future, we probably have about 55 to 60 percent utilization. So we have about 40 percent available.

So would it be reasonable to expect that your margins would rise further, if you are earning these kinds of service margins, I would tend to think your margins would rise very quickly over the next 18 months.

Well you saw our margin increase this year based on in the fourth quarter because of the higher parts and services. It's going to continue to drive it over time, for sure.

I'd like to ask you about the M&A environment. What, overall, how do you view it in the U.S.? And in the case where good brands are getting 5, 6, 7 times blue sky and some of the weaker brands are nothing times blue sky does it at all make you think if there is enough of a valuation disparity to change your brand mix strategy?

I think that as you look at that the good properties, obviously, continue to receive the multiples that have been consistent over the last couple of years. I think, basically, there is opportunities with many of the OEMs who are looking to re-engineer networks and in many cases introduce us to potential candidates that are thinking about selling and those, obviously, we're able to purchase those at attractive rates. So I think there is a balance both ways.

I don't see us changing our strategy. Obviously as you know we picked up Cadillac Hummer franchise in California and we have done the Tulsa (ph) business with Ford. I think that our 2004 acquisitions really were strategic, kind of in those markets where we already had scale.

Finally, Roger, can you recap for us what the framework agreement environment is like in Europe? Is it different with (indiscernible) in Europe as it is in North America or is it -- how does it compare? My question, therefore, the implication being are there less limits on your growth within the brand in Europe?

We have what we call block exemptions in Europe and we have no franchise loss and we have no PMA -- primary market areas -- which are defined by the manufacturers. And under block exemptions that's if you are a manufacturer or a dealer with a manufacturer, you have the ability to move into any market based on meeting the proper requirements from the standpoint of facilities, corporate ID, and capability.

So there is a lot less restriction to move. However the OEMs are much more antiseptic about what you need to meet these requirements, because in the U.S. I would say they're lax compared to the European Union and also the UK. So from our perspective we see much easier to move in Europe because the OEMs in many cases are coming to us, as Audi did in West London, and introduce us to a potential acquisition which gave us a market area.

Rick Nelson with Stephens.

Question, Roger, on first quarter trends here. Coming off of fourth quarter where you put up a very nice year-over-year growth rate and in the first quarter now you are guiding tortes an EPS decline. I am wondering if there is something you see in the business or is it just a desire to be conservative?

You have got to look at the number. There are 42 million shares outstanding in the first quarter of last year and there are 47 million in the first quarter of '05. So that has obviously an impact on our numbers. Also we are carrying as you know from an interest rate environment probably 4 or 5 cents more in the quarter than we had a year ago. So that has some impact; and I would say as we kicked off in January and I don't -- I'm not a negative person but it was certainly a little choppy for us with as we saw in the Atlanta market ice there the last couple of days of the month and certainly as you saw the Northeast but again you heard weather reports before. We want to be realistic with our investors that we are providing guidance and I think that this is the best ability we have to give you at least a view as we go into the first quarter.

How big a factor was dealer cash in the fourth quarter? And is that gross margin improvement that we saw new cars -- is that sustainable in your mind?

We got some benefit from Honda. There is no question that our Honda brands really did a great job during Q4; and I think that the gross margin was up due to that dealer cash. We didn't give it all to the consumer, yet, we energized the market budget. Honda had lost some momentum I think in October, November, and we got it back in December. (MULTIPLE SPEAKERS)

International same-store growth. Do you have that in local currencies?

I'd better get Tony to call you back on it. I don't have it here with me.

Any comments on profits year-over-year, international, relative to domestic?

If you look at -- I think we showed it in the press release our international businesses generated 26 percent of our total sales for the year and operating income was 77 million or 30 percent, and the U.S. operating income was 186. So we've broken that out for you for the year.

Scott Stemmer with Sidoti.

Can you talk about your interest rate exposure going into this year? Maybe talk about combining all of your debt percent as fixed? If that includes any swaps and also maybe give a metric of every 100 basis points moved in short-term rates, what that will do to your numbers?

Let's use the December '04 balance sheet. We have got 100-- 1.9 billion of total debt I mentioned that in my remarks. About 500 million at fixed rates with an average of 8 percent over the next six years. And I think 300 of that is at 9.65. That's the subordinated 200 million we had with interest rate swaps at 586. We do have the opportunity as we get into March to hopefully pay that off if rates are still in our favor. So approximately 26 percent of our total borrowings are fixed and interest rates -- as you know -- have increased 125 basis points since May of last year. And on a weighted average basis I think this increase will impact our variable rate debt by about 14 cents. So an additional we had an additional 3 cents increased in interest costs associated with the restructuring -- that is restructuring, the increasing of our current 600 million credit agreement. So in this rate environment we can see an 18 cents impact due to rising interest rates.

At some point might you enter into some swaps where you could lock in some rights on the variable side?

We are looking at those always. I know from a floor plan perspective we will continue to get support in floor plan credits. We had about 8.7 million in Q4, up from about 8 million the previous year; so we are seeing some support. That is typically what happens from a floor plan perspective.

Also we are going to have to continue to look at our overall inventory and I think with our 55 days inventory we can't mitigate some of that variable debt and when you look at that a big piece of that debt is floor plan and we typically don't swap floor plan.

As far as the parts and service side, can can't you talk about warranty work versus customer pay? Where that stands right now?

The good news for the domestics, there is no question that the domestics have really turned the corner today. And I would say we are looking at about 60 to 65 percent of our warranty of our total labor being customer labor, and the balance being warranty. So, overall, you are starting to see domestics move to a higher portion of nonwarranty in our CP. Obviously customer pay was up in the fourth quarter.

From the foreign nameplate people like Lexus and Toyota and Honda and on -- these guys have got quality and we've typically seen probably 25 percent would be warranty. One other item you need to look at and be careful is that with more and more full circle -- meaning the customer buys a new car and he then has the maintenance pieces in the purchase. Those costs associated with -- look like warranty where we actually get the money back from the manufacturer. So we are going to have to do some work to try to carve that out and give you a real picture as we go forward.

Lastly, last quarter you gave some metrics about some of the auto malls. I think you talked about (indiscernible) Ranch and maybe San Diego you gave some sales metrics and I think you might have given some EBITDA metrics too. Do you have anything to -- any color on that for the fourth quarter or for the year, maybe, for 2004?

Let me talk a little bit about the big investment is in parts and service and bays as we talked about. If you look at the Tysons there, that is Washington. For the year our service and parts revenue's up 29 percent and our fixed gross is up 28 so we are starting to see a real -- some real traction there. We have seen the same trend, up 25 up 26, between revenue and gross; and Scottsdale and San Diego is up 20 percent revenue and 22 percent in fixed growth. So we continue to see growth; there is no question that those markets are really important to us. When you look at Phoenix, $1 billion market for us. But if you looked at North Scottsdale, specifically, we are seeing 30 percent of our business is coming to the area outside 16 miles. We are starting to attract our customers so we are seeing potentially more service customers. And we are really trying to work on those from a marketing perspective to be able to put more of those people in new vehicle items.

So, overall, I think the concentration as we finish out (indiscernible) in Warwick, RI, we finished our Turnersville Auto Mall. We are going to see these be destinations which there is no question. Just ask people in Phoenix and San Diego today, and obviously, we are going to look at continuing to add on stores that meet our requirements in those areas.

You said 30 percent are coming from outside of 15 miles of Scottsdale?

Yes.

One follow up question about the Sirius deal. That $9.2 million revenue that you received -- that's it for the length of this agreement?

That was for 2004.

Okay and it's fair to assume that in the fourth quarter of '05 you might receive a similar payment?

If there's a lot of dynamics there we have got to meet certain metrics of penetration. We have got some marketing things we have to do and also as I said earlier, we are affected by the stock price also. So it is a variable piece of opportunity for us.

So is it fair to assume that the guidance that you gave does not include that just at this point that you're being conservative from that perspective?

I think that we're trying to be conservative on guidance which I think is important.

Jonathan Steinmetz with Morgan Stanley.

A few questions. Could you elaborate a bit more on the parts and service? Do you have a breakdown on the almost 12 percent comp between domestic and international? Maybe if you could talk about which brands are particularly strong there?

I know and I'm just trying to relate this from memory. I don't have any specifics; when you look at the business from a service and parts what I do have is the same store comps, when I look at U.S. and I look at international. We are up in service and parts revenue about 10 percent year-over-year on same-store in the U.S. And we are up almost 17 percent internationally giving us a total of 11.8. So that continues to grow.

And I think when you talk about brand you really have to look at units and operations. And then you've to look at what about quality because sometimes service and parts are driven by warranty or recalls and other times it's grown by units and operations.

Just a couple of follow-ups on the Sirius. Is this annual milestones so that this would be a fourth quarter event in other words if you hit the milestone for the year you would recognize it in the fourth quarter?

No, it would be an event that we could look at quarter by quarter as we would report our earnings to you.

So you could start to accrue if you felt you were going to make milestones for the year?

What we would do we'd have to market to market as we get to each quarter.

(MULTIPLE SPEAKERS)

-- go up or down now, two of the others, some risk associated just on the Sirius stock price. So I don't want anybody to walk away from here and think this is an automatic.

And I thought you said you turned it into cash. So do you hold any shares at this point?

No.

Do you think if Sirius stock never appreciated above the exercise price on the warrant, do you feel you would make any on the plain vanilla transaction of selling to satellite radio or is this dependent upon Sirius stock and earning the (MULTIPLE SPEAKERS) ?

No, I think this is a real offense for us because if we can give our customers an opportunity on the satellite radio then I think the way we structured it with our teams, I think it is a real plus for us.

Do you have a number on currency translation impact on revenue in either operating income or net income?

I think it was 1 cent in the quarter and, overall, for those 53 million of revenue in the quarter.

Matt Neimer with Thomas Weisel Partners.

Just one more follow-up on the Sirius deal. My understanding is that that was really only up and running at Inskip (ph) for a good part of the quarter. Is that -- I guess I'm wondering if next year you have that up and running everywhere at all your dealerships if there could be a much bigger impact?

We have it up and running at a number of the dealerships. We did original pilot in Inskip but we have done a lot to work prior to that from the standpoint of our marketing setting up the programs. We had a lot of work to do on infrastructure from the standpoint of our MIS programs and I would say today that probably 50 percent of the vehicles that we're ordering that have Sirius available done on a direct basis we'd be ordering 50 percent. And then we have many of the OEMs are coming on as you look at Toyota, Lexus, and you look at Ford coming on we'll do either dealer installed or OEM installations with those.

Is it fair to say that it was not up and running nationwide at the end of the fourth quarter?

I would say it was not fully implemented, absolutely. You're right.

And then I guess my next question is on SG&A. You guys were up just under 100 basis points as a percent of gross profit in '04 and I'm wondering if there had been structural changes like higher rent or changes in your brand mix that account for that and if there's anything you can do to get that back down over time without decreasing your advertising spend or changing your customer service initiatives.

I think some of it has been compensation as we have variable comp and we hit some of these metrics, certainly, in the fourth quarter. We had higher gross profits which kind of hit many of the higher levels far more variable comp. I think from a rent perspective we are up 6 million on rent year-over-year so that is due to the sales leaseback so we get some impact there where we only have depreciation, we now have both interest and depreciation aggregated into the rent factor.

We also continue to put more money into the field from a personnel perspective. We have got some higher health care costs which we are having to do. We have got our 401(k) participations and things like that which do cost us dollars. On the other hand I think it is an area where we are going to focus on to see what we can do to bring that number down. I don't want to stop the growth of the Company because in certain times this will turn into being positive for us from the quality of the people that we're able to hire and maintain.

One last question on Scottsdale 101. I don't know if you can get it into specifics but I guess I had revenue for this dealership somewhere in the $500 million range. I guess I'm wondering if you have any sense of what the net margin or net income would be. I'm assuming the net margin is probably a little bit higher than the Company average.

I think you've got to look across all the brands. I think if you look at something at Porsche we are shooting the lights out. If you look at BMW Mini, certainly as we added the second Audi store, the second JAG and the second Land Rover store in the market, you have some pressures on market as you try to grow share. But the overall complex, if you look at it including Lincoln Mercury and brand new Volkswagen store we moved Acura into that part. They've added another dealer in that market. We are still above probably would be above the average of our overall network.

Am I right if I'm thinking the total investment there was somewhere around $100 million?

That was the investment in the complex excluding some of the equipment but, again, that investment is now being paid for, through our rent factors. So whatever return we have after if you would say servicing those costs we did a sale leaseback on that with Capital Auto Re back a couple years ago.

Gerry Marks with Raymond James.

A bunch of my questions were answered. You mentioned 3 to 500 million in acquisition targets. That seems a little lower than what you gave out last year. I'm just curious, why?

No I think it's the same. Tony is poking me here; said it's the same.

It's the same. All right. And did you mentioned currency impact over the fourth quarter?

Yes, we said it was 1 penny 54 million.

The last thing that I have was I noticed that your assets of discontinued operations were down from 45.7 million last year to 19.6 million. Does that mean you're winding through the ones that you want to get rid of and going forward we are not with going to see see much of a difference between discontinued ops and regular continuing operations?

I think if you go back in the history of UAG, we continue to prune out what I would call non-strategic and maybe businesses that are not going to perform for us. I think you're seeing that with many of the larger players; and we basically, when we put something up, we expect to execute the sale of that within a short period of time. We are not going to carry these for six or eight months. These are typically we would expect to execute within 60 or 90 days.

I'm sorry. One last question. Hate to keep on the Sirius thing but can you give us an idea, you mentioned cost you're outlaying for the benefit that you are receiving. What type of cost is it? You are referring to the SJ&A commission costs or are there other costs involved as well? I think you mentioned MIS?

We've got marketing cost. We've got MIS cost, we have variable cost associated with the sale of the product and if you try to aggregate that it comes in in many many different areas. I can't pinpoint that for you but it's obviously in our SG&A.

They're not very easy to try to determine the contribution margin from that?

Well, obviously, we had the benefit of 9.2 million this quarter. You can take your cost associated with that out. It was probably strong in '04. We've looked to have hopefully some greater opportunity as we go through '05 but, again, as we roll this out to all the stores we will have existing costs associated both fixed and indirect and also variable.

Adrienne Dale with CIBC World Markets.

Could you please discuss for us your outlook for used vehicle sales and margins in '05?

Used vehicles in '05, well, we saw the used vehicle market probably getting a little bit better, it seems to go down. I'm looking at wholesale prices and from our perspective, as we looked at our business we were absolutely -- when we looked at it our margins in the fourth quarter were really up about 3/10 of a percent in the U.S. and up about internationally we're up about 4/10 of a percent and I see that probably maybe getting a little bit better as we go into the first quarter. What happens is, there are some pressures for people to reduce inventories in Q4 and you make some strategic and I guess opportunistic buys of used vehicles at the end of Q4, which would help you at least in our first quarter moving out into '05 at least in the first quarter. Now if the market softens, the whole dynamics of the thing falls apart and overall our average group gross profit was up. If you look at both internationally and domestically, we were up about $100 in the U.S. and up 680 in the UK for the fourth quarter.

So we saw good margin. The only difference between our business and, probably, the other typical retailers is that our average used car sale price is twice what it is in the U.S. running 20,000 in the U.S. and about 40,000 in the UK. That drives our margin down because we typically get not that big a lift on the overall gross profit.

Wholesale auctions. We are looking at our wholesale auction. We wholesaled about 18 1/2 thousand (ph) cars in the fourth quarter. We had a loss of $70 per unit which was down from 75 in Q3. So that shows that there was some strengthening at least in our brands in our locations.

I think you discussed a net CapEx number for (MULTIPLE SPEAKERS)

75 million for next year. It was 83 for this year.

Okay and can I have that on a gross basis?

Gross CapEx for '04 was just over 225 million (indiscernible) so we were able to execute a number of favorable sale leaseback transactions -- both in the U.S. and the UK. The average rates the cap rates in the UK probably were in the 6 +, 62, 63 and in the U.S. they were 8 to 8 1/2 percent average.

For '05, what would CapEx be on a gross business?

I would say probably in the neighborhood of 175 to 180 million gross and the net would be 75.

With respect to your foreign vs. domestic mix, what would you say would be your target balance going forward?

I think we try to keep that in an 80/20 at least. I think we were 17 percent domestic this year and 83 foreign nameplate. Now obviously some of those vehicles were built in the U.S. We really look at relationships with each manufacturer. With DCX we have both Chrysler Dodge and Jeep and Mercedes we have the PAG group with Ford here on a domestic basis. So we need to maintain those relationships where we can and there's opportunistic purchases of stores that we can get domestic we are going to continue or even looking at maybe some GM opportunities and Ford opportunities in Europe.

We've been contacted over there so we are going to take a look at some of those.

I actually meant in terms of international not necessarily your foreign mix here in the U.S., but actual international operations vs. domestic?

Repeat that question again. I guess I missed it. I apologize.

In terms of actual locations and dealerships overseas vs. here in the U.S.?

We are looking at probably 70/30, 70 percent would be dealerships in the U.S. and 30 percent in international.

And you want to maintain that going forward?

I would say between 25 and 30 percent would be, I think we've said that all along, and we are pretty much in that sweet spot. Sorry.

And it sounds like you're mostly in Scotland, UK, and Germany. Do you plan to expand to other countries or just focus on this for now?

We seem to have a lot of activity just in those markets, partnering with the OEMs and, again, where we have scale and have people, it is probably a lot easier. We have got to be very careful moving into the markets that don't have partners on the ground or people that are local to be able to run these businesses because we can't do it from here for sure.

Nate Hudson with Bank of America Securities.

Could you talk a little bit about your outlook for the UK and European businesses. Obviously they've been extremely (indiscernible). What kind of environment are you looking at for '05?

If you looked at the UK, from an overall standpoint, the first half they were up 3.3 percent. They were up 2.2. They were down 3.3. In the second half. So they were flat for the year. There seems to be more pressure on the marketplace in the UK right now that maybe we had a year ago. Their base lending rates have gone up so that's put some pressure on some of the retail but I think the corporate sales continue to be probably okay. I know Germany got a little bit better at the end of the year from the standpoint of the brands we are involved with obviously with Toyota in Frankfurt and that business continues to grow. So I really have to look at it as a brand that's growing in the particular European market. And we think the brands that we are involved with have opportunities.

When you look at Toyota and Lexus in the UK, big opportunity -- we are now going to get some diesel products we haven't had in Europe. Diesel is almost a must in order to get any kind of penetration.

Within your same-store sales assumptions for next year are you counting on any kind of similar growth in the UK as in North America?

I guess you have got to look at it across. We've been getting an aggregate number going across which has been in the 6 to 7 percent. That's what we have averaged and I think we've got to look at 3 to 5. I really didn't break it out. You could probably talk to Tony. He might be able to give you a little more insight on that.

One specific question. What was the total dollar spent on acquisitions in 2004?

I think between 160 and 175 million. I don't have the number right here in front of me.

Charles Grom. J.P. Morgan Chase.

Just to clarify on Sirius, how much revenue are you expecting in '05 and what's embedded in your guidance?

As I said, I think I forget who it was that asked me the question, we discussed it up-and-down. Remember the Sirius product that we are selling as a dealership is sold as an aftermarket product. It is exactly like you would sell a GPS, you'd sell a telephone and these things. So again it is a variable piece and then it might be part of the ability to make a sale and not make a sale. So it is hard for me to give you specific numbers.

But we are hoping, as we go forward, that we are going to have a big portion of our vehicles that we do order will have Sirius satellite radio capabilities. And we also of course have some pressure based on what the stock price of Sirius either achieves or doesn't over the next twelve months.

Moving onto again on your guidance with regards to rates what is your target for the Fed by the end of '05? Essentially what is in your guidance?

I think we are looking at another 100 basis points rise during 2005. You really have to look at that and that has a big impact on us and I think we have got a chance to open this think up to our advantage as we get to maybe pay off that subordinated debt when we get to Q1 one of '07. But it's difficult to predict and I think the variability is not in the floor plan. I have some offense on that by watching my inventories and then we got as we said about 26 percent of our debt is fixed.

Along those lines what was the, I know you don't receive a credit as does AutoNation, Sonic, and the others, but what was the assistance number on an absolute level for the fourth quarter?

The floor plan credit?

Right.

It was 8.7 million. That's up from 8 million same time a year ago. We don't have as much assistance because of some of the foreign nameplates but when you look at the date supply and the foreign nameplates you are turning them pretty quickly. We get some benefit in the UK because many of the vehicles that you have in the UK that are available to you are really on the manufacturers and manufacturers' inventory then you call them down.

Second question -- third question on S&I, even if we back out 9.2 million Sirius (indiscernible) per unit and it was still pretty solid 893, 94 per unit up from I think 801 a year before what would be the leading drivers there and as we look to '05 how sustainable?

I think we had better penetration in our used. We had less leasing. We've gone to menu selling now, based on the issues we had within F&I; and then we always have some retros that you get by hitting certain metrics over the year from some of the what I call aftermarket products guys. I think we're just doing a better job. We've got Steve McCauley who is involved. We didn't have someone heading up that part of our business so there has been a much bigger focus and I think we were somewhat behind the 8 ball as we looked at this business compared to other people over time.

Also with Mike Pearson, the UK, we have been trying to follow up his lead and they have done a great job during the year and then, especially, as we go forward helping us in the U.S. on how to sell and also as we have negotiated our rates with someone other than the non OEM suppliers for us.

Sara Webster with Detroit Free Press.

Your revenue mix by brand for the year. Our audience here is Detroit's automakers and your brand mix for the traditional GM Ford and Chrysler nameplates declined in '04 and I guess I was wondering what your outlook for them is for '05? Do you expect your brand mix for the domestic nameplates to increase in '05 or decline?

I think you are going to see Ford will increase because we can start to consolidate our Tulsa business, which hasn't been involved and I think the overall gross, some of it is driven because of the higher growth in the UK. And that's all nondomestic so you have to remember a third of our business is driving that percentage but when you look at overall, the overall Ford relationship our premier auto group stayed flat year-over-year and quarter-over-quarter.

So I think that for 12 months we were flat with Ford. Chrysler -- we were down 1 percent but we also helped activate one divestiture for them which hurt us, which helped them clear up a market problem they had in Houston. So probably that's some of the impact but, again, we moved out early in the year and bought GM franchise in California. So I don't want anybody to take my comments that we are not actively looking for opportunity. In fact, all three manufactures that have been in contact with us with opportunity we can look at here in the short-term.

So I guess your outlook for '05 then is --?

It's certainly not down. I would say it was flat to up.

Also in the percentage of your revenue mix, your new vehicle and used vehicle revenue mix has declined while your service and parts and fleet and wholesale are up. I guess I wondered do you expect that your revenue mix for new and used vehicles will continue declining even though your unit sales are up?

I think that the good news is that our parts and service are getting traction from the standpoint of our business. Because that's our high margin business in over 50 percent versus new and used vehicles probably (indiscernible) average around 10 percent. Our wholesale was a little bit higher at the end of the day because we are now moved from a 90 day age inventory to a 60 so we are seeing probably more wholesale during the year. But I don't see that it has any impact. In fact as long as we grow the overall units and operation that is going to give us carpark and give us the opportunity for parts and service.

So I guess the decline in the revenue mix for new and used vehicles is a function of -- just is it a function of declining prices in the marketplace overall? Or is it a function of just your increase in service and parts revenue? How would you characterize?

I would say it's the service and parts revenue increase which is really giving us that increase.

Also your inventory, I didn't say in your release anywhere where you mentioned your day supply or --?

Yes. Day supply, our day supply was 55 days on inventory, down from 57 a year ago and our used was 36 days which was flat year-over-year. So we are in great shape from an inventory perspective.

Your competitor AutoNation during the past year made some comments about overcapacity and about GM, in particular, I think overproducing. I guess you share those kinds of concerns or do you find your inventory just fine to manage?

With the capability we have to manage inventory -- we manage it by location by location and I really can't comment on AutoNation's situation. We have a different mix of stores so, basically, our inventory overall is in good shape.

David Siino with Gabelli & Co..

Two quick questions. The 1.3 billion of floor plan or so. Does any of that -- are any of the credits associated with that -- I know Ford does sort of a variable program with their dealers such that if the rate goes up the credits go up. Is any of your floor plan debt structured like that?

Every OEM -- I don't think there is anything different from me that would be different for AutoNation or anybody else, but what will happen in a lot of GM ties here floor plan rate to what you do from a retail finance perspective. Honda does the same. If we do more aftermarket warranties, we give them more of our retail paper, we have the ability to drive down the rates. So you might be at 1 1/2 percent over LIBOR and you have the benefit of driving it down to 1 or 1 1/4 based on vertical integration or penetration in the other product.

And that is the same thing with Ford, GM and I think some of the other domestics. Our floor plan credits as I said are 8.7 million for the quarter so those are not unique to certain dealerships. In fact, quite differently I think anything that is available to what I would call a public company is available to the private entrepreneur, but again we are very very interested in developing a vertical relationship where we would floor plan, we would give the manufacturers captive finance source, the retail paper. And we would also sell the aftermarket warranties that they provide because it gives us a much better CSI with a customer.

So if you give them more business from a retail paper lease perspective and they hope they buy deeper. That's one of the benefits you have being vertical.

The second question. Current bay count is about 3400?

Current bay count. (MULTIPLE SPEAKERS) we will be at 3750 within the next 18 months. We have 175 bays going on right now. During '05.

We will have one more question.

Brad Leonard with DML Management.

Wondered if you could give me the new and used same-store unit comps versus the dollar that you gave in the press release?

Unit counts. I'll have --

Comps.

Units year-over-year -- what? For -- for same-store?

Yes.

I've got it in the U.S. our units for the quarter was 2 percent up and up 7.8 percent internationally.

And that's for the new or --?

In new and used we were up 2 percent roughly in the U.S. and we were down on used in the UK about 12 percent.

So you were up in the units for the quarter in the used?

Yes Sir.

All right. I am just doing back of the envelope calculation here. It just looks like your average dollars per unit was 24 6, maybe, versus about 22 year-over-year in the quarter?

If you look at our average sale on used, we are at about 40,000 in the UK and about 21,000 in the U.S. So it's about 24. That is one of the things -- that kills our margin, too, because as we look at the gross profit that we are generating, we are only generating probably about 15 percent more gross profit per vehicle. Yet our selling price is twice the size. That's one of the things that just -- we have more demonstrators we're selling in the UK because we have a lot of demos and they get sold with lower margins in the UK as used cars.

Thank you very much, everyone.

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