Penske Automotive Group Inc (PAG) 2005 Q2 法說會逐字稿

Welcome to the UnitedAuto Group second-quarter 2005 earnings conference call. A press release which details UnitedAuto's second-quarter results was released this morning and is posted on the Company's Website which can be viewed at www.UnitedAuto.com. The call today is being recorded and will be available for replay approximately one hour after completion through July 26, 2005. Please refer to UnitedAuto's press release dated July 7, 2005 at www.UnitedAuto.com for specific information about how to access the replay.

I would now like to introduce Anthony Pordon, Senior Vice President of UnitedAuto Group. Sir, please go ahead.

Good afternoon, everyone. Welcome to the UnitedAuto Group's second-quarter 2005 conference call. Joining us today for the call are Roger Penske, Chairman; Jim Davidson, Executive Vice President Finance; and Bob O'Shaunesey (ph), Senior Vice President of Finance. 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.

Before we begin today 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 the risks and uncertainties including those relating to general economic conditions, interest rate fluctuations, changes in consumer spending and other factors over which management has no control. Our actual results may vary materially. These forward-looking statements should be evaluated together with additional information about UnitedAuto which is contained in UAG's filings with the Securities and Exchange Commission including our 2004 annual report on Form 10-K.

During this call we will be discussing certain non-GAAP financial measures as defined under SEC rules such as adjusted net income. Adjusted net income excludes certain items disclosed in our press release this morning. We have reconciled this measure to the most directly comparable GAAP measures in the press release. We believe this non-GAAP financial measure improves the transparency of our disclosure and the period-to-period comparability of UnitedAuto's result of operations. For additional information about adjusted net income please refer to our press release posted in the Investor Relations section of our website at www.UnitedAuto.com.

At this time I would now like to introduce the Chairman of UnitedAuto, Roger Penske.

Thank you, Tony, and good afternoon, everyone, and thanks for joining us this afternoon. Before I discuss the second quarter I'd like to summarize our performance for the first half of 2005. Our total units have increased 10.5% to 135,400 for the first six months with our new business up 12.9% and used up 6%. Our revenues increased 16.7% to 5.2 billion, new up 16.8, used up 13.1, service and parts up 21.2 and finance and insurance up 18%. Also total same-store retail revenue increased 3.8% for the first half of 2005. I know in previous calls I've mentioned that our goal for the year is to have between 3% and 5% comps for the year, so we're on track for that.

Moving on to the second quarter, UnitedAuto completed its 25th consecutive quarter of record revenues. I think our business has remained strong while posting a double-digit growth in our retail unit volume and in revenue. Our performance was highlighted by a 20% increase in total revenue to 2.7 billion. Our same-store growth through the quarter was 7.2% including another outstanding quarter in our parts and service business with a growth of 8.7 and a 25 basis point increase in gross margin to 14.8%. Net income for the quarter was 33.2 compared to 33 million last year ago. If you go back, our second-quarter 2005 results include a 1.2 million or $0.03 per share after-tax severance charges as UnitedAuto rationalizes its cost structure in certain of our markets.

As you look at last year's numbers you'll recall our second-quarter 2004 results included a 4 million or $0.09 per share net after-tax gain relating to the sale of our investment in Universal Technology Institute. Adjusted for these items net income increased 18.4% to 34.4 million in '05 compared to 29 million in the second quarter of last year.

Looking at the second-quarter highlights in detail, our retail unit volume increased 13.4% to 71,000 units; new was up 16% and used was up 7%. Our revenue mix for the quarter -- U.S. domestic revenue was 71% and international was 29%. We continue to expect international revenue to represent approximately 25% to 30% of our total revenue for the year. The impact from exchange rates during the quarter, revenue was up 19 million, net income up 200,000, EPS up $0.01 per share had a negative impact on net worth of about 21 million.

Looking at our brand mix, our domestic was 12%, foreign and luxury was 88% and when you look at luxury by itself it was 56% of our brand mix. This mix is really consistent with our first-quarter results. So far this year the four name plates in the marketplace have captured another 0.7 points of marketshare and now represent 41.7% of the market. To see our specific brand percentages we'd like you to refer to our selected data sheet contained in our press release.

Looking at same-store performance for the quarter, our overall same-store comps were 7.2% up, new up 8%, used up 3.7, F&I revenue up 14.6 and service and parts revenue up 8.7. I broke it out a little bit differently this time -- in the U.S. same-store growth was up 6.1%. The good news is that our international same-store comps are up 10.3%. Average selling prices on both new and used vehicles were increased driven by a mix shift towards premium luxury vehicle brands. In fact, new increased $1150 per unit to $32,700 and used increased $1875 per unit to just over 26,000.

Turning to our gross margin -- one of our key initiatives is to increase our gross margin as we go forward. In the second quarter our overall margin increased 25 basis points to 14.8%. And I think the market increase is really a result of new vehicle margins up 20 basis points, used vehicles up 20, service and parts margin up 30 basis points to 54.7. And I think the highlights include an increase in gross profit per transaction for both new and used vehicles and a 19 basis point increase in our overall service and parts revenue as a percentage of revenue.

Let me talk a little bit about acquisitions today. So far this year we've completed acquisitions representing approximately 145 million in annualized revenue. And as a reminder, our acquisition target is to be somewhere between 300 and 500 million this year. Also during 2005 we've performed an extensive review of all of our franchises. We've identified certain franchises do not meet our return requirements, location strategy or have a significant future capital expenditure requirement. This process identified opportunity to rationalize our network between $500 and $600 million. And as of the end of the first six months we've divested of approximately 325 million and that's broken down roughly one-third foreign nameplate and two/thirds domestic. Our tax rate for the quarter was 36.9% which was consistent with the first quarter of 2005.

Moving on to our balance sheet -- as we move through the traditional spring and summer selling season I wanted to make a note of our inventory -- I think it's in great shape. Total physical inventories at June 30th were 1.2 billion versus 1.3 billion at the end of Q1 '05 and it's flat compared to December 31, 2004. On a same-store basis vehicle inventory is up only $9 million versus December of 2004; in fact, new is down about 7 million and used is up about 15 so we're in great shape. Our new vehicle inventory at the end of the six months was 950 million and used was about 250 million.

Looking at days supply, on a worldwide basis as of the end of June, our new vehicle inventory was 54 days, used vehicle inventory was 31, and in the U.S. our new vehicle days supply was 55 days versus a 67 day supply for the entire U.S. market. So I think we're in great shape as we move down to the end of the model year. Our used vehicle inventory was 35 days. I've mentioned before, but today now we can announce -- we've rolled out a 60-day supply target on all of our used vehicles except for our ultra premium brands. We believe this has had a positive effect on our used profitability as evidenced I think by the increases in our margin to 11.1% in the U.S. without an increase in wholesale losses. For the quarter we wholesaled 20,000 units with a loss of $7 per unit.

Moving on to CapEx -- we continue to be very efficient with the funding of our investments. After sale leaseback proceeds we spent 48 million during the first six months and we expect to incur a total of 75 million of net CapEx worldwide in 2005 which is in line with our predictions earlier in the year.

Looking at our leverage, our debt to capital ratio at the end of June 30th was 36%, and when you look at our debt position a little further we had 600 million of non-vehicle debt which is essentially flat versus March 31, 2005, the end of our first quarter, and up only 22 million since December of '04. Breaking down our non-vehicle debt, we have 300 million of 9 5/8 10-year senior subordinated debt outstanding with a call provision in March of 2005. We had 308 million outstanding under our credit agreements and borrowing arrangements. And importantly -- I think this is important to the people on the phone today -- at the end of the second quarter we had approximately 400 million of availability under our U.S. and UK credit agreements.

I want to take a couple of minutes this afternoon just to update you on the status of our two main campus development projects, one in Providence, Rhode Island and the other in Turnersville, New Jersey which is just 15 minutes south of Philadelphia. We expect to complete both of these projects over the next year. In fact, in Turnersville, where we have a 60-acre site under development it has eight franchises including a new state-of-the-art collision center.

Our hot (ph) end Chevy franchise will open in 30 days and Acura will follow one month later. In Providence at Inskip, where we have over 35 acres under development with 11 franchises, we've already completed our central PDI center and new Infinity facility. We expect to open up Mercedes Benz, Lexus and Acura facilities within the next 60 days. Additionally, we just acquired the Nissan franchise in this destination market. We remain committed to the OEM corporate identity programs and will continue to complete these programs throughout our network.

Moving on to international and specifically looking at the UK, we continue to be pleased with our performance of our Sytner investment. As you know, new vehicle registrations in the market are down in Great Britain 5.8% year-to-date and in the second quarter registrations were down 4.1%. However, Sytner experienced an 11% increase in same store new unit volume in the second quarter and a 12% increase in new vehicle revenue. That was a great job.

Also our investments in new facilities in the UK and service capacity are driving service and parts growth in the UK as well. Service and parts revenue increased 24.6% in Q2 and remains an important element in our continued growth. Just to note, we recently opened the UK's number one BMW site at High Wickham (ph) on the London Road and a state-of-the-art mini site also. I think that this is going to be a great business for us as we move forward. In fact, we consolidated two businesses into that site. We also opened up a new BMW sales outlet at Canary Wharf, London's new financial district.

Moving on to our human capital, our people -- as you know, one of my major focuses continues to be our employee turnover metrics. I think we perform very well in this area compared to the norm. In fact, in 2005 our annualized turnover, which includes, by the way, all of our employees through June 30th, is below 33%. This represents a 15% reduction from 39% in 2004. One way we continue to manage our employee turnover is through an annual employee survey. Over 9,000 responses were collected in the U.S. and that's a 90% response rate. This survey asked our employees 54 different questions on a range of topics designed to gauge the overall satisfaction in areas such as communication, compensation/benefits and working conditions. The employer response has shown an overwhelming satisfaction across all of these areas. We intend to refine this project each year to ensure that we are taking the right steps to build a quality workforce.

Let me now turn to earnings guidance. We updated our earnings guidance for the third quarter and full year 2005 in our press release this morning. As I have previously noted, we believe a rational approach to growing our business, which includes really the 3% to 5% increase organically -- again we're at 3.8 year-to-date -- and acquisitions of between 300 and 500 million on an annualized basis. We currently estimate our third-quarter 2005 earnings to be in the range of $0.66 to $0.71. And we currently estimate 2005's earnings to be in the range of $2.37 to $2.44 and the guidance today is based on an average number of shares outstanding being 47.2 million.

Finally, to summarize our second quarter -- I think you've all seen our business has performed well. We continue to generate solid same store increases in all areas of the business especially in the high margin service and parts area. I also think it's important to note that our international strategy remains a key differentiator for the Company. As our investments continue to take hold we look for margin growth to continue and a further leveraging of our expense structure. We will continue to look for opportunities to rationalize our SG&A expenses when we make the necessary investments to meet the business growth.

As we end the model year I think you would agree that a 55-day supply of new vehicles is we're really in great shape. We've got ample room in our credit facility to act upon acquisition opportunities if they arise and we will continue to make the necessary investments to drive future growth. At this time I'd like to open up for questions. Thank you for joining us.

(OPERATOR INSTRUCTIONS). Rick Nelson, Stephens.

Congratulations, Roger, on the results. The new vehicle growth you point out is up by 20 basis points, I'm wondering how you see employee pricing affecting gross margins in your dealerships?

Number one, if you look at employee pricing the GM program in June really was successful. I think what it did, it really stimulated the overall market and obviously you've got Ford and Chrysler joining the programs in July. What happens is I think you drive dealership traffic. We've got specific margins that we'll get on that mix of business, but what it let's you do is then focus on the back end of the transaction. I think we probably end up with a better penetration. But from a UAG perspective, our mix really is a 21% to 22% domestic and the balance for a nameplate so we didn't quite get the bump that you would if your mix was different.

But again, I think it created a lot of selling frenzy which was good and I like fixed price selling. In fact, as you look at that over time, we get more to the transaction price I think it'll give the whole industry a much better reputation. So from our field calls in this last week we had -- we saw that the Ford and DCX (ph) program was also gaining some support. So overall I think we're in pretty good shape. But just to recap, our domestic is 22% -- or 12, not 22.

Thank you for that. The acquisition pipeline, is that import focused?

Let me say this, the acquisition pipeline today -- you know, typically we're looking for larger scale acquisitions so in many cases it's a mix between foreign nameplates and domestics. As you know we added Hummer, we made a great acquisition on the Hummer in New Jersey where we have Cherry Hill in the South; we made the Cadillac acquisition in California which is performing well. So overall I think that there will be a mix. We had Honda in the Mall of Georgia in Atlanta during the first six months. So the pipeline -- I would say it varied internationally obviously, all of it would be foreign nameplate.

And is there much international? I know you've -- we haven't seen too much over there of late on the acquisition front?

Well, I think our goal there was to stabilize what we had. We've grown that business from 900 million to 3 billion in three years and I think that we added Chrysler-Jeep franchise during the first six months. So that was the only really domestic acquisition there, and we've got a number of things in the pipeline. But again, we're being very selective. I think you see that with all of the public retailers.

How about SG&A? That rose as a percent of gross profit, what is the outlook there and with any specific programs you have in place?

We are absolutely looking at SG&A as a percentage of gross and also as a percent of sales and it went up during the quarter. But remember, we've probably got 25 to 30 basis points which has to do with our sale leaseback because we have a rent factor versus depreciation and SG&A and interest expense below. In fact, when you take our rent out of about 8 million and we were up for the quarter in the severance that we had, we'd probably be down at 11.2, we'd be at 76% of gross profit which I think puts us in pretty good shape. But I'm not satisfied just like you're not as we go forward and we're looking at more office rationalization. We've completed all our rentals and rentals back office conversions now so we should start to see some savings there. And we're doing the same thing as we look at the overseas market to have one provider there.

Very good. Thank you.

Chuck Grom, JP Morgan.

When you look at your service and parts business, I realize it fluctuates from quarter to quarter, but how big a piece of the pie could we see down the road -- call it two to five years out?

Well, as we've increased, it went from 10% of revenue to 10.2, it doesn't seem like much but, of course, it's the high margin business. And on a year-to-date basis we're up to 10.6 from 10.2 last year. I see it continuing to grow because what's happening -- the dynamics in the marketplace for all of us that are in this business is the small Pep Boys and people like that, the technology of the vehicles takes a trained technician. And we're seeing more and more customer labor and more cars coming back to the dealerships today as we had the basis which would include -- obviously when I say basis, the bays -- we see us filling those up today in the (indiscernible) for example where we've made a lot of the expansion we're probably between 65% and 70% utilized and our businesses up there almost 14% for the first six months and growing.

In fact, overall we were at $281 million in service and parts revenue and that was up 22%. So I see it continuing to decline. You also see the benefit of the UK where we were up substantially. So we're getting the benefits really in all markets because the manufacturers are trying to drive the customer back to us and that's exactly what we want. You're going to have a better CSI (ph) from a manufacturer, owner loyalty will be better and hopefully dealer loyalty will be better because we do a better job. Then of course you've got the certified pre-owned which those vehicles, in order to be serviced under warranty, have to come back to the dealership and not to some outsider or someone down the street that has just a non-OEM shop.

Great. And then along those same lines, just on the margin side of the equation, what are the three to four key drivers to getting the GPM on service and parts -- call it 100 basis points higher over the next several years?

Well, what we do -- when you look at margin, obviously it's labor rate and as we get a mix shift from warranty to more customer labor you're going to see that be a benefit because we have a door rate -- let's say our door rate is $100, we typically maybe have a $90 or $92 rate for warranty. So the more shift you can get to customer labor, you're going to see a benefit on margin because our costs are the same from the standpoint of our technology.

Also from our perspective as we've added body shops, and I think that's been one of our key focuses, that's going to drive our margins also because it's a big driver in the parts side of our business and obviously we're very efficient with our new shops with the technology we have. So I see that continuing to grow. In fact, in some of our stores we probably have margins of 60% or 65% in the super premium Luxury, the Ferrari, Mazarati; there we tend to be lower because we have to spend more time to do the work properly. And you just don't get the benefit of time studies on work being done; you really have to do it per job and we've got to be careful that we don't lose the customer because we do lousy work.

So some of your markets you're seeing a 60+ type GPM?

Oh, yes. Look, we're giving you the average, but on some of the stores that we see a much higher -- where you have a higher mix of I would say -- in the foreign nameplates you have a higher mix of customer labor, those would typically drive a higher margin versus where you had warranty where you're limited on time and you don't have the menu selling.

Okay, great. That's helpful. And switching gears a bit, could you speak to the composition of the discontinued ops piece in the quarter? How many dealers are included, when do you expect to sell those dealers? And I guess most importantly, what's going to be the benefits going forward for you?

Well, when you look at what we've done -- what I did at the beginning and I think I mentioned it on our call is that we were looking at every single franchise throughout the network really and wanted to look at the overall footprint and we looked at the performance of the dealership, the capital expenditures that would be required, the ability to consolidate SG&A and then we even had -- during the last quarter we had some rationalization with two OEMs where we sold off two stores to minority candidates which helped them meet their requirements.

But overall, and I think I said earlier in the call, we were approximately 120 million that we sold off -- out of 325, 120 was foreign nameplate and the balance was domestic. It's pretty well balanced and we would see probably another couple hundred million coming out before the year end.

What kind of CapEx, could you quantify that for us, Roger? I know you expect to save maybe not in '05, but on an annualized basis in '06.

Well, I would say that -- well, the problem is it takes us probably two years in CapEx. What we're really doing is we are avoiding CapEx because probably I would say 6 out of 10 of these were ones that I was going to have to spend 5, 6, $7 million. And the other problem is when you take an existing facility, you can't build new. You've got the business disruption. That's taking place in Detroit right now. We see that even in Inskip in Turnersville where we're trying to run a business and we have got a new CapEx. So what we're really looking at is try to re-engineer this thing to get the benefits of our margins and our management and not be worrying about all these projects.

I know The Street continues to ask us where our CapEx is. This just gives us a chance to look at profitability, what the network looks like, is it a standalone location where we're not going to be able to glue on other locations. So we basically made a decision with our Board, let's take a hard look and make the decision, and we're managing these out to people who are in the markets who are interested, plus being able to partner with the OEMs. And in some cases, in fact in one case, we closed the dealership for the OEM because they had one too many stores on the market.

Last question, Roger. With the big three and the employee discounts, what do you see as the long-term benefits and risks associated with these discounts going forward? Not necessarily for the month of July but kind of longer-term, is this going to be a structural change in the industry?

Well, I can't predict what is going to happen in the programs. Obviously, it has worked. I think the long-term effect is really still undetermined, but I am encouraged with the process. I'll tell you one thing, I looked at my inventories on GM, and they made a huge impact. We're probably down 50% from where we were with the program, and I think that is terrific. The only downside to that is, am I going to have enough cars as we get to -- at the end of the model year? I think the interest is, obviously, to get more domestic vehicles in the car park (ph) to an operation will help us in parts and service as we go forward.

In fact, when you look at it, all of this discussion about high oil prices, when you look at our SUV market, large SUVs, we were up 17% and GM was up 64%. And in the pickups, you could see exactly where the pickups were because at the end of the day, we were up substantially in both of those areas. So, again, I think it is good. Ford, and I said earlier, I think, on the call that with our Daimler Chrysler business we have seen more traffic. The interesting thing is what happens on August 1st when these are over. My hope is it will maintain the momentum, but the good news is our inventory is going to be clean. And you tend for about three months after the model year-end, you are selling your one-year-old models and you tend to give more discounts. It costs you money in inventory. Typically, you've got to reclean those vehicles, re-PDI them (ph).

So I think this is going to be a real benefit to us from a margin perspective where we'll be able to kick off the new models and with GM, Chrysler and Ford coming out with a lot of new products I think it really cleans the bench for them. So I would have to say it was like getting America rolling, I thought it was a great program and I think if you're entering in the market -- but my one take away is that we have a one price -- the closer we can get to one price in this business the better we're going to be long-term.

Thanks a lot.

John Murphy, Merrill Lynch.

Just a quick question on the divestitures. Post the divestitures can you sort of estimate what your sales mix is going to be of domestic brands? And do you envision a period of time in the future where you have essentially no exposure to traditional domestic brands and are just exposed to (indiscernible) Hummer and the four PAG brands?

Let me say this, when you look at divestitures to date it was one-third foreign nameplate and two-thirds domestic. So I don't see -- my goal is to maintain 85 to 90 in foreign nameplate and 10 to 15. But remember, we're in the downstream end and we have the benefit of as these different brands -- and there's availability -- we're not in the position to rule out strong Ford, DCX or GM stuff. We jumped on a couple of those lately and we continue to do that.

Remember, we can acquire whatever we want if there's a seller. I think we qualify with all the manufacturers from the standpoint of our capability. So that's one of the benefits. We're not the manufacturer, we don't have the governmental issues. We're really the downstream partner. So I love the position we're in.

On S&I PVR (ph), you're at about $860, some of your competitors are closer to $1000. Is it possible -- how much room and how fast could you potentially get up to that $1000 range?

I wouldn't expect to get there at all because at the end of the day, when you look at the mix of our business, a lot of it's luxury and many of those buyers here are cash buyers and/or they're ones that do leasing. And typically when you lease vehicle there's less back end which would create less per unit. And also with Audi and B&W and some of the other brands, they've got these three-year leases and in many cases the maintenance is included in the sale price so you really don't get the benefit to sell the after sale product.

So I think as we go forward one of the things I'm trying to do is really emphasize our F&I training in order that we can do a better job and what we've done also in the market to be able to grow this to a certain extent is we're looking at additional preferred lender arrangements, Steve McCauley (ph) has come on board with us -- spent a number of years with GE Capital in our fleet leasing area. We're certifying all of our F&I managers and in fact we just put out of a code of ethics throughout the entire sales organization which everyone has to sign including myself and then we're developing electronic menus so we have a consistent process and it's amazing as we do this that we'll be much butter and I think that we'll continue to grow it.

But there's competition in that area because the OEMs are trying to get a piece of the after sales, the extended warranties and in many cases they're putting that right into either the lease or sale price. So I think you're going to see us in that 800 to 900 range. At least I don't know a way today to jump to 1000 because of our mix.

On July sales, how do you feel the new programs are driving sales -- I mean more just on showroom traffic? Do you fell like you're getting quite the bang for your buck? Or showroom traffic is getting the bang for it's buck as it did in June with these employee discounts?

Well, there's no question that we're seeing a bang for our buck at Ford and Daimler Chrysler. And it's just a matter of inventory availability at GM. I think that the programs continue to be good. We had our call last week with the entire market and our guys were really -- really I think felt good about what they saw.

Just one last housekeeping question. The $0.03 in restructuring in the second quarter, is that included or excluded from your new guidance range for the year?

I would say -- our guidance for the year really is the third and fourth quarter and there's a lot of dynamics that go up and down in that. So I would say that we're going to get some benefit of that. But remember, we've got costs that are increasing in many, many areas -- in comp, in other areas -- insurance, employee benefits. So as we take out overhead we're also gaining overhead which is just natural in any business. So from my perspective it's embedded into the total numbers and you can talk to Tony more about that off line.

Thank you very much.

Adrienne Dale, CIBC World Markets.

A few things. First of all, on the order side, now that you've gotten your inventories down to this kind of level, are you looking to keep them in this range or do you think you'll be ramping up on some orders, particularly GM, or what are you thinking on that front?

Well, I think that everyone's going to be looking for GM, Ford and probably Daimler Chrysler product at the end of the model year in order to meet probably their sales targets. I don't think the manufacturers can react and bump production especially because they've been on vacation or are on vacation now. At least here the Detroit manufacturers are. From my perspective, our days supply on a worldwide basis is 54 days and I think we need to be in that range with interest rates up 225 basis points we're going to watch that. But I can tell you this, we are not going to affect our ability to sell, but we can be more efficient with some of our CRM systems and our ability to look at our inventory at every location hour by hour we have a much better chance to be able to develop this and manage it.

But we've been pretty much on a pull system. From the foreign nameplates to the domestics might have been different, but I think we're seeing some change there. But overall I think the inventory for everyone as they report -- at least from the publics and on the retail end -- are going to be in pretty good shape.

Okay, great. And then now that the three OEMs have these programs in place, how are sales doing so far in July? What kind of magnitude of increase are you seeing for those three?

We continue to see, as I said earlier, the increase in General Motors and there's definite momentum at Daimler Chrysler and Ford. But for me to be able to calculate the specific benefits, I really don't see their numbers on an aggregate basis, but I can say for us we're seeing a benefit.

Okay. And it looks like there further isn't much pressure on the used vehicle side either on the volume or the margin side. Do you think that's going to continue or do you think once programs really come into play full force, was it three different OEMs that could put some pressure on the used vehicle side?

Well, actually used vehicles over the last probably three or four months I've see, at least in the brands that we're dealing with, inventory -- used car prices have gone up. And from our perspective on a same store basis from a unit perspective we were down about 3% and down about 1.3 internationally, but from a revenue standpoint we were up because of our mix. And I think you're going to see some slight pressure downward, but to me it's the dynamics of the market because everyone is focused on new. You had over 17 million in annualized I think based on the June sales.

Okay, great. And then one quick item. What did you say gross CapEx was for the quarter or did you say it? If not can you say it?

Our gross CapEx was 100 million.

100 even?

101 -- that's for six months.

Great. Thank you.

Scott Stember, Sidoti & Co.

Can you maybe talk about some of these severance costs and which regions they were in and if they were part of any broader SG&A containment measure?

Basically we looked at the way to rationalize our expenses -- we looked at both regional, corporate and down at the local level. It's across the board so we don't have anything specific, but I would say to you that as we look at this on a long-term basis, this is going to give us the chance to either replace with lower-cost people or completely eliminate as we go forward.

Okay. And can you circle back to the parts and service, maybe talk about customer pay versus warranty, any trends domestic versus -- on the warranty side any trends domestic versus foreign?

I can tell you the trends on the domestic side, the quality is much, much better and we're seeing less warranty. In fact, I would have to say it's probably -- today for UAG probably 65% is customer labor for UAG and 35% would be warranty. Tony says maybe 35 to 40, but overall we've seen that trend and typically the ability for the foreign nameplates have had headstrong quality and we continue to have good penetration on customer labor.

From the standpoint of labor rates, we probably had a 3% increase if you looked across the board in labor rate increases that would both be from a warranty perspective and from a customer labor posted rate. Now because of menu pricing where you come in and you can get a number of things done for a flat amount, sometimes that would reduce that. But we're seeing some creep in the ability to raise the top end, but I think that competition out there brand to brand is going to eliminate that.

And remember, when we go out to pay our technicians we actually -- we do a survey in the marketplace so we're competitive. One market might be paying a technician ex and in another market it might be paying a technician ex plus 2 because of the higher cost of living in those areas. So I think it goes around differently from the standpoint of market to market.

Okay. And last question on the certified pre-owned, can you talk about percentage versus last year of total unit sales? And maybe increase or decrease over year-over-year?

I can't give you that info. One thing I noted though, you saw that article in the Wall Street Journal about certified pre-owned and there was a question whether they were better; I can assure you that the money we put into certified pre-owned in order to meet the OEM's requirements, the vehicles are definitely better. And we see higher margins on those. The only one downside is that we put anywhere from $750 to $1500 worth of reconditioning in it, based on a 60-day turn sometimes we have to sell those vehicles and we have a higher wholesale loss because of the reconditioning. But it's a great program.

That's all I have, thanks a lot.

Jerry Marks, Raymond James.

Most of my questions have been answered -- just a few. Acquisitions, you said you're still (indiscernible) 300 to 500 million. Did you mention how much you fell in year-to-date now?

145 million.

And your F&I, it was up year-over-year pretty nice but it looks like it's running down sequentially over the last couple of quarters. I remember in the fourth quarter you had that big pop because of Sears (ph). What seemed to happen this quarter, why --?

I think the fact of our mix and you've got your -- a lot of flat -- I don't know how much the other publics are going to show, but because of leasing and because of our mix in the super luxury we don't have the benefit, and I think I mentioned earlier, to get to some of the back end money that might be available to the other retailers. But pretty much we're in pretty good shape. I think when you compare Q1 '05 at 869 and Q2 '05 we're $9 different. So I think we're pretty much flat. I'd like to see it go up, but also I'm very sensitive to all of the issues around F&I. So we want to really be sure we're meeting this product properly or selling it properly in the market.

In terms of -- one of the things you guys have been articulating is that you want to grow your service and parts revenues, so that increases your gross profits at a faster pace. And we kind of saw that this quarter where growth was up about 22%. But yet when we look at the operating line, operating income was only up about 18%, EPS was only up about 15%. How come now that we're seeing the fruits of the investments in the service and parts we're still not seeing it drop down to the bottom-line?

Well, I guess it's the old story where SG&A has gone up. But again, as we said, probably 30 basis points of that is the investment we made in facilities and we're getting that hit because the rent is up because we have both depreciation and interest costs and our rent factor would be some part of that. Our rent expense was up almost 8 million, but when you look at the affect of these, and I think Tony has mentioned it before to me and to other people at some of our conferences, that it takes us probably anywhere from 12 to 24 months to really get the benefit of some of these big expansions because you've got to get people.

You've got to go out and get the customers to come in, but when I look at (indiscernible) in Washington, at that point we did 21,000 customer labor hours in the month of June which is up from somewhere around 11,000 or 12,000 before we started our construction. So we're going to start to see that. You can see what's going on in the UK and if we can sustain our SG&A and maintain our margins I think we'll get where you want us to be.

Okay, last question. I heard you talking about a lot of the new processing systems you've put in place on the F&I side and there's been a lot of talk in terms of look at what you said with the GM programs really kind of stimulating demand in the market and the question ultimately becomes how long does that last? And we're constantly going through these big swings in the inventory and volatility in the industry. What kind of systems and processes are you putting in place to help you kind of -- if we do have some payback later this year that can kind of help you manage through on the inventory side of the equation? I know you guys have recently gone over to a similar DMS system. Will that help and what other kind of processes and systems have you put in place there?

Well, I think you've got -- obviously we have one DMS system with rentals across the entire network. Obviously that gives us the ability to manage inventory on an hour-by-hour basis if necessary. Also as we go to our electronic menu items we're able to be sure that our F&I people are looking at every one of the products that we have available. And certainly as we look at the management process that we've put together in F&I, we think we've got much better training taking place, and for our position that's going to be key in order to give us the ability to maintain our back end of our business.

But inventory wise we're in good shape and from an F&I perspective I don't think that we need to worry. We're in a variable business, remember. Our costs go up based on our selling, so we're not -- in fact, I think we're about 66% of all of our fixed costs are covered with our variable parts and service gross (multiple speakers). Probably not a very good answer, sorry.

So 66% fixed absorption rate. Are you noticing any better processes and systems over like in the UK that you can bring over to the U.S. or --?

Well, I guess from a CRM -- customer relationship management -- we have a system that we're using from Reynolds & Reynolds; we have another competitive system that we're benchmarking because I'm not sure that any of us really track the traffic as specifically as we can and we're starting to see where people buy into the old story -- well, we talk to the customer with a real tracking system and we're now trying to look at customers. We think about 20% of our service customers that come in every day didn't buy a car from us. So if we can focus on those people that have come to the dealership for one reason or another and get some penetration that's going to help us grow our business.

Okay, thanks.

John Tomlinson, Prudential Equity.

Just a couple of housekeeping items. Could you guys quantify how much the -- or if there was any serious warrant benefit in the quarter?

Yes, we have between $0.02 and $0.03 in the quarter; of course that's before any expenses. As you know, we're rolling out -- we rolled out Toyota in the quarter where we're going to do all the dealer installation which will give us a real opportunity. Just to go back, John, we have 20 million warrants that are available to us over a five-year period and we have certain things that we need to do to complete to get those from the standpoint of giving our customers the serious product, the activation and then we get the benefit of about 25% of 2 million each quarter and that's all based on the share price.

Now, when we got into this early on SIRIUS didn't have the traction; but as I see satellite radios over the next three to five years I think it's almost got to be standard equipment. I think it's going to bode well for us for the future.

Do you have any kind of penetration rate that you can talk about in terms of --?

And remember, the key thing is some SIRIUS is not available in obviously the GM products because they're tied in with XM. And then as you go down the road certain models today it's not available. But from our perspective, we think about half the vehicles that were available we're being able to activate and that will continue to grow. We think there's a great opportunity with Toyota as we go far because we have dealer installed -- we can put them in every Scion (ph) product, we've got Camry, we've got some of the truck product.

So as that expands it's going to give us the chance to grow the SIRIUS product. And again, if you've experienced satellite radio, I think it's exactly where you want to be. So we're on track with that and I think it's a good product. And quite honestly, it's a plus for us in the selling.

Sure. To change gears on the next question -- you guys mentioned the severance cost in the quarter. I mean are you at a different stage now where you're really starting to focus on SG&A maybe going to more commonized pay plans, or can you just expand on what your plans are for cost control going forward?

I tell you, if I'd been on this call for the last five years, I'm always thinking SG&A continues to be a question. But we are on that, and certainly as we start to rationalize our back offices and we look where we can consolidate, and with some of the divestitures it has given us that opportunity, not only in the field. And we will start to see more of those as we go into the next couple of quarters. But that is again offsetting inflation and other costs which are going up as we go forward.

All paid plans -- and I think I would be in real trouble if I started to have the same pay plan for everybody across the country. This is a variable business. You have got different product lines. You look at selling, Scion and selling a big Mercedes, there's different gross required. You got one price selling at some stores. So we're looking at that. I think we want to be consistent by brand, but I'm not sure that we can have a standard plan that would fit all across the network.

Okay. So it's fair to say that you're still early days with any kind of cost containment (indiscernible).

Well, no, listen, we're on it. I wouldn't want to mislead you. We are definitely on it, and we are looking -- I sat with Sally Hillen in New Jersey and the team last week, and we were getting down to some very specific things that we could be looking at from the standpoint of costs. For example, in our Reynolds & Reynolds program, Porsches cost you money. And we went out into the field and said how many Porsches do you need in an individual dealership, and we were able to take out 75. Well, you take that plus the Microsoft fee times 12, it becomes real money on an annualized basis. So we're getting that granular which we have to do in order to stay competitive.

Thank you very much. Just one final question is, did you mention ballpark capacity utilization rate in your bays for the quarter?

I just think overall, we're in the 65 to 70 if we utilize one shift, and obviously it is not easy just to go to two, but that is the next step we would make. I think we have got the bricks and mortar we're putting into the existing dealership base where we have done our CapEx it is efficient to grow, and we still have capacity if we go a second shift. We're pretty much -- today we're open Saturdays, and in some places we are already open on Sunday.

Thank you and congratulations on the quarter.

Matt Nemer, Thomas Weisel Partners.

Great quarter. Most of my questions have been asked. Just a couple of quick ones here. Does the current environment delay acquisitions? That is, the strength that we are seeing certainly at the domestics and some of the other brands, does it keep sellers in the store a little bit longer?

All they try to do is say we had a good month and they want to raise the price. That's probably the only negative. I think that the market for people selling or individuals who have made the decision, they don't have heirs (ph) within their families or the requirements from the OEMs on capital expenditures are just too much, and they decide to sell. And there's activity out there, and I know that every one of our peers probably gets calls every day. I think that that is one of the benefits of having 400 million of capital available. We can look at any size transaction today, and quite honestly, we expect to make some acquisitions between now and the end of the year. We have not stopped from the beginning when we bought the Company, and we will continue to go forward, hopefully picking the right brands and right markets.

Second, in the UK what is driving that, the 25% service and parts growth?

The same thing here, we spent money on facilities. I mean, you look at Nottingham, you look at the Mercedes-Benz stores, you look at the Porsche stores that we have, you look at the Audi stores. All of them we've made significant CapEX expenditures that are all filling up their bays. It is amazing. They were not in that mindset, I can tell you. They had barely enough places to park the new cars where we've gone in on many of these new sites and we have added three and four-acre facilities and it has made a huge difference, and we'll continue to do that. In fact, this new store that we built on the London Road for BMW, we will have the capacity there for 500 or 600 vehicles on that site, and typically the other two locations we consolidate probably at 150 between the two.

Do you feel like -- I guess how sustainable is that? Do you feel like there is still a few years ahead of you where in the UK they can crank out double-digit comps in service and parts?

I wouldn't want to announce today it would be double-digit. I'd like to delight you that it goes that way. But we would continue to see that growing probably 8%, 9%, 10% I would hope based on what we've committed to date.

And then on SG&A, I guess if you back out the increase in rent and the severance you're at 76% of gross profit which is --.

11.2%, yes.

Which is down about 130 basis points year-over-year. Should we -- is it fair to kind of flow that through forward that your underlying SG&A will be down kind of in the 100 basis point range or --?

Well, you're going to have the additional cost up of the rent. You do want to pull rent out and normalize it you probably would see numbers like that, but I've also got other costs going up from the standpoint of your legal, all your benefits, etc. We're still all tracking that to see how we can be fair to our employees and we have to keep ourselves in line with the costs. And they're going to be seasonal to a certain extent based on volumes.

And then we get into -- the good news is I think from a variable perspective I'm really excited about this inventory where we're going to be because my goal is to have no '05's left by the end of January and we might be able to see that even sooner based on the ability of these domestic programs and obviously the four nameplates follow-on with support.

And then lastly, I know that you're using a different DMS provider in the UK; is it possible to use your current U.S. provider in the UK or is there some structural difference over there?

Reynolds & Reynolds doesn't have the footprint or the base of business and the capability of the UK. So you've got (indiscernible), you've got Kalamazoo, you've got (indiscernible) over there. And we're in the process of selecting one provider there. But again, we'll have a common set of accounts which will be comparable to the U.S. as we put the businesses together. But again, it's an opportunity for us because I think there's probably some duplication there that we can look at by consolidation of offices as we've done over here.

Great, thanks. Solid quarter.

Fred Taylor, Lord Abbett.

Just kind of an historic perspective. As you've grown the business a lot of your financial ratios have stayed pretty steady to slightly improved in terms of interest coverage or leverage whether that be debt to cap or some kind of debt to EBITDAR. Is your idea to continue to keep those ratios kind of where they are? Do you see a slight improvement as you continue to get bigger, the balance sheet tends to naturally delever? Or will it kind of be saw-toothed with if you make a big acquisition you could level up to be followed with equity offerings? Just noticing that most of the industry is in the high yield universe with one in the investment-grade universe where you'd like to be long-term?

Well, number one, if we'd make a significant acquisition we would -- probably the debt to cap would move up. But I think historically what I've tried to do is put equity into the business to maintain we think the 35%, 36%, 40% is probably reasonable in our business from a standpoint of being able to operate it. Certainly our debt to cap would even have been lower this -- when you start to look at our equity because of the other currency fluctuations moving up and down. But right now I think we're in pretty good shape.

From a Penske investment perspective, we're prepared -- with our ownership of the business we're prepared to continue to support more equity in this business if it's required. So I don't want to be in a position where I was when I came in where we had 9 million of availability back in '99 from the standpoint of working capital. We want to have the opportunity to be in a position to make an acquisition of really any size.

Thank you.

Jonathan Steinmetz, Morgan Stanley.

I think most of them have been asked already, but just one question on as you evaluate the portfolio of dealerships -- or actually two. So you have a hurdle rate that you would share that you're looking for either in current return or perspective future return? And also, does this tilt the balance -- within the U.S. footprint is this going to tilt the balance geographically towards certain areas of the country?

Well, first I think on a hurdle rate, I guess the key thing is what's been the performance to date because in some of these cases we've owned these businesses for some period of time. Some were businesses that we have had from the very beginning, and some in fact we've made some acquisitions early on that maybe didn't turn out to be what we expected, but we're looking at across the entire network. I don't see us from the standpoint of tilting it one way or the other, I think the areas where we have strength -- i.e., when we looked at Phoenix and we were able to pick up the Mercedes store there, we got a Lexus companion point going in -- we're going to try to grow where we have destination shopping, there's no question. That would be one requirement.

But another driving force would be what is the required CapEx as we go forward? And I think that's key. But our major markets are where we're going to continue. Obviously we have one store in Austin, we'd like to grow there, but we have a strong BMW franchise there. We're also on the lookout if there's a strong domestic in a market where we are we're certainly going to look at those also. I don't think there's a direction that we could say would be a focus more than -- other than looking at past performance and also the capital required to maybe take a dealership and bring it to what we would call modern standard. And in some cases in some markets the OEMs have added more franchises and we might not be in the best location to maximize their market penetration so we'd look at that also.

Thank you very much.

Jordan Heimowitz (ph), Philadelphia Financial.

All my questions were answered as well. The only question I have is does your earnings guidance include or exclude the $0.03 of severance charges?

Say it again, I missed it, I'm sorry.

Does your earnings guidance include or exclude the $0.03 of severance charges?

I think I answered that before. When I look at the guidance for the third and fourth quarter it takes in cost reductions which would be not only severance but other cost reduction, but also takes into state that you're going to have some increases just based on inflation and other areas. I think the guidance has everything baked in quarter-by-quarter.

Okay, thank you very much. Congratulations on a great quarter.

Don Meder (ph), Bear Stearns.

First, Roger, let me say that it's nice to see the stock up almost 7.5% to a new high.

(indiscernible)

Yes, 34.33 last and a high of 34.55.

It took six years.

And I've been with you all six.

Thanks.

Just want you to touch on something you mentioned much earlier about what we need is one price, one price, one price. Obviously I'm talking about selling cars. Have you ever seen that in your career and how could that ever happen?

Well, I would say this, that not specifically at UAG, but there are some dealership groups and private groups that do one price selling. Obviously CarMax has a one price selling philosophy on their used and they're successful. We see it in Scion, it's one price; we see it typically in some of the highline super cars. There's one price for our Ferrari, one price in many of the highline Mercedes and Porsche products throughout the network where we do not discount. And I think the customer sees the price, knows the price and we work off that.

But what's happened is with a big discount structure, and that keeps coming down as the OEMs take that away, we're starting to get people now with the Internet and having the ability to look at pricing and costs, you're starting to see the transaction price closer to the advertised price and I guess that's the dynamic that's taking place. And then when you get into the employee discount -- when people say, look, I'm buying it at the employee discount that's the same price whether they buy it in Detroit or they buy it in Cleveland or in Los Angeles. And I think that bodes well for a market where people -- some have looked at us as car dealers, am I really getting the best price? And every salesman says they are. So this is a positive for the market and hopefully we can continue to have people understand that.

Yes, I'd like to see that. Thank you, Roger.

Yes. And it also helps the customer satisfaction which I think is super key.

Absolutely, thank you.

Sarah Webster, The Detroit Free Press.

Sorry if you've already answered this. You said your new and used days supply and I wonder if you could break that down for import and domestic brands in the U.S.?

I don't have it -- I will tell you this, that my General Motors inventory is down 50% from where it was at the beginning of the year and I'm -- certainly you'll see the other domestics come down as they add these programs. But I think it's been a great program. We're 35 days on used and we're 54 days globally on new and I think in the U.S. we're 55 versus the market which is 67. So we're tracking pretty close.

I guess I wonder if you're still high on your domestic for your overall -- compared to your overall days supply?

The domestics have always been higher than the foreign nameplates, but I would say we're in line today. If you look at vehicles -- I look at vehicles over 120 days that are still in our inventory, forget days supply, and I think that the domestics are in much better shape than they've been.

Thank you.

Mr. Penske, no further questions in queue.

John, thanks. Great job, thank you. Thank you, everyone. Bye-bye.

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