Penske Automotive Group Inc (PAG) 2005 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the United Auto Group Third Quarter 2005 Earnings Conference Call. A press release, which details United Auto’s third quarter results, was released this morning and is posted on the company’s website, which can be viewed at www.unitedauto.com. That’s www.U-N-I-T-E-D-A-U-T-O.com. The call today is being recorded, and will be available for replay approximately one hour after completion through November 1st. Please refer to United Auto’s press release dated October 12th, 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 United Auto Group. Sir, please go ahead at this time.

Thank you, Barb (ph). Good afternoon, everyone, and welcome to the United Auto Group’s Third Quarter 2005 Conference Call. Joining us today are Roger Penske, Chairman; Jim Davidson, Executive Vice President, Finance; and Bob O’Shaughnessy, our Senior Vice President of Finance. At the conclusion of our remarks today, we will, of course, open the call up for questions. I will also be available by phone to answer any follow-up questions that you may have.

Before we begin, I would like to remind you that statements made in this conference call today 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 risks and uncertainties, including those relating to general economic conditions, interest rate fluctuations, changes in consumer spending, and other factors over which management has no control. Our actual results may vary materially. These forward-looking statements should be evaluated together with the additional information about United Auto, which is contained in our 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 measure in the press release, which is available on our website. We believe this non-GAAP financial measure improves the transparency of our disclosure and the period-to-period comparability of United Auto’s results of operations.

At this time, I’d like to introduce the chairman of United Auto, Roger Penske.

Thank you, Tony, and good afternoon everyone, and thanks again for joining us today.

I’m pleased to report that our business produced another great quarter of financial results while facing many challenges, certainly product availability, the gas prices, changes in consumer buying patterns, and certainly rising interest rates. Despite these obstacles, UAG recorded its 26th consecutive quarter of record revenues and posted quarterly net income of 32.8 million, or $0.70 a share. This represents the best quarterly net income since the Penske investment in 1999, and represents an increase of 16.7% in earnings per share compared to the adjusted third quarter 2004 EPS of $0.60. As noted in our press release, adjusted third quarter 2004 earnings excludes 4.19 million of non-reoccurring net income.

Before discussing our third quarter performance, let me review the first nine months to date of '05. Our retail units have increased 9.9% to just under 210,000 units. New is up 11.9%, used is up 5.7. Total revenues increased 14.6% to 8 billion, and our new vehicle revenue is up 14.8. Used vehicle revenue is up 11.2. Service and parts have increased 18.8, and finance and insurance has increased 17.4.

Our same-store retail revenue has increased 4.6%, and we exclude both fleet and wholesale in these numbers. Same-store retail revenue in the United States was up 3.6% for nine months and, internationally, 7.3%. The components of the same-store increase, our new was up 4.6, used vehicle up 2.5, our service and parts business increased 7.8%, and finance and insurance was up 11.5, giving us a total of 4.6%. Our operating income for nine months increased 13.9% to 218.1 million, and that's despite absorbing approximately 10 million of incremental interest expense this year, and our net income increased 16% to 88.9 million when you exclude the items disclosed in our press release this morning.

Let me now move on to the highlights of our third quarter. Our business posted double-digit growth in retail revenue, service and parts revenue, and finance and insurance. Our performance was highlighted by an 11% increase in total revenue to 2.8 billion, our same-store growth of 7%, including another outstanding quarter of service and parts growth of 8.5%. And again, our same-store growth is without fleet and wholesale. Our gross margin increased in all areas of our business, and we got a 50 basis point increase in the overall gross margin from 14.2 to 14.7%.

Looking at the quarter in detail, retail unit volume increased 8.6% to 74,000 units, new units up 10, used units up 5%. Our revenue mix, just showing both US and international, the US was 72% of our overall business, and international was 28. And that's, by the way, down 1% versus '04, probably due to the impact of the employee pricing and the domestic business in the third quarter. We continue to expect international revenue to represent approximately 25 to 30% of the total revenue as we go on in the future. Changes in foreign exchange rates had no impact on our third quarter results. Average selling prices went up both in new and used during the Q3. New increased $283 to 32,078, and used increased $598 per unit to 25,232.

Looking at our brand mix, and I think it continues to be a key element of our growth strategy, our domestic revenue was 13%, our foreign and luxury revenue was 87%, and our luxury revenue by itself was 55%. Again, as the market-- as you know, foreign nameplates gained another 1.3 market share points over the prior year. If you want to see the specific brand mix percentages, you can refer to the information that we put out with our press release this morning. Looking at same-store performance for the quarter, overall same-store retail revenue growth was 7%, new retail revenue was up 7%, used retail up 5.2, F&I up 14.7%, and service and parts revenue increased 8.5. Breaking this out, same-store growth was 5.4% increase in the US and 10.9% internationally, including another strong quarter in the UK.

Turning to gross margin, one of our key initiatives we highlighted at the beginning of the year was our desire to increase our gross. In the third quarter, overall gross margin increased 50 basis points to 14.7. That margin increase really was a result of new vehicle margin up 10 basis points, used vehicle margin up 60, and used margin in the US-- just to point out because we're lower probably than some of our peers-- we were up 11.2%, up 90 basis points for the quarter, and the UK was at 6.4. Service and parts margin increased 100 basis points to 54.2 and, on a per-transaction basis, we were up in gross profit $37 on new vehicles to 2724, up 194 on used to 2292 and up $60 on our finance and insurance to 880.

Turning to acquisitions, during the quarter we announced our agreement to acquire Cush Automotive Group in San Diego this morning. This represents two Honda two Acura, a Jag and Aston Martin and Mazda franchises, which will represent approximately 300 million in annualized revenue. This acquisition provides us the opportunity to further expand our base in California, a very important base for us. After this acquisition is completed, our San Diego-based revenue will be approximately 1 billion. This acquisition is obviously subject to the customary closing conditions, but we expect to close the transaction in the first quarter of 2006. We also recently announced the acquisition of Porsche Audi dealership in San Jose, California. This business complements our existing northern California Acura and Honda franchises, and will add approximately 100 million in annualized revenue as we go forward over the next 12 months.

So far, we've completed acquisitions representing 245 million in annualized revenue. As we indicated in our call with you last quarter, we continue to identify certain franchises that did not meet our return requirement, our location strategy, or have significant CapEx requirements which we don't believe will be a sound use of our capital. And to date, we've divested of approximately 350 million of revenue through the end of the third quarter. We expect to divest approximately, on an annualized basis, between 4 and 500 during 2005.

Turning to the balance sheet, our business faced a short supply of many models through the third quarter. I think, even though SUVs have been tough, there was a big-- lot of interest on that during employee pricing. We pretty much sold out of this that period of time. The new 3 series of BMW, Corolla Camry with Toyota, Civics with Honda, and the Lexus has been pretty much tough to get across-the-board. I think, when you look at the industry data, the days supply of the inventory it is currently far below the historical five-year average as of September 30.

I think our inventory is in great shape. Our total vehicle inventory is 1.1 billion, or down 126 million when compared to June 2005, and 109 million when you compare it to December 2004. On a same-store basis, vehicle inventory is down approximately 119 million, so inventories are in good shape, and I think that bodes well as we go forward in the closeout of our '05s. The end of the third quarter, our worldwide days supply was new at 39 days versus June '05 at 54, and our used was at 33 versus 31 at 6/05/05.

In the United States, new was 49 days versus the industry at 56 days, and our used was at 34 days. We continue to maintain a 60-day supply target on all our used vehicles except for ultra -premium brands. We believe this has had a positive effect on used profitability as evidenced by the increase in our used margin to 11.2% in the US without an increase in wholesale loss. In fact, during Q3, we wholesaled approximately 21,000 units with a $55 loss versus a year ago at 59 negative.

Moving on to CapEx, we continue to be very efficient with the funding of our investments. After-sale leaseback proceeds for the first nine months, we spent 93.8 million during the first nine months. I'd like to point out that we plan to pursue further sale-leaseback before the end of the year. I think we have approximately 50 to 75 million in process at this point. As a result, we expect our net capital expenditures to be approximately 100 million in 2005.

Looking at our leverage, our debt to cap was 36% at September 30 and, when you took a look at our debt position, we had 624 million of non-vehicle debt, which consisted of 300 million of 9-5/8 10-year senior subordinated outstanding with a call provision in March of 2007, and we had 324 million borrowed under our credit agreements. And importantly, at the end in the third quarter, we had approximately 370 million of availability under our US and UK credit agreements.

Looking to our earnings guidance for Q4 and for the rest of the year, we updated that within our press release this morning. We currently estimate the fourth quarter of 2005 earnings to be in the range of $0.51 to $0.56 per share and, for the full year, we expect earnings to be in the range of $2.40 to $2.45. Our guidance is based on 47.2 million shares outstanding.

Finally this afternoon, before I open up the call for questions, I'd like to reiterate our strategy for building a sustainable and profitable growth for UAG. Our model is driven by a strong brand mix, with a focus on premium and luxury brands, increasing units in operation, and expanding our profitable parts and service businesses. We'll expand our market presence with strategic acquisitions while enhancing the core attributes we believe are important to the long-term prosperity of UAG, such as the look and feel of our stores, our campuses, adding additional service capacity, certainly improving our CSI and, most importantly, focusing on our human capital and our employee turnover. Our turnover today, with all aspects of our people base, is 35%, and that's down 10% from last year on the same basis.

We see areas for future improvements in our cost structure, such as commonality of pay plans, electronic funding with lenders to reduce contracts in transit. We are going to continue our accounting office consolidation, and we are implementing a standard CRM system across all of our brands. We are also looking at electronic menu for our F&I process. I think if you looked at areas where we made significant investments, like Orlando, Phoenix, the Washington D. C. area, San Diego and across the UK, we can see the investments paying off in increased unit volume and the strong service and parts growth and improved CSI.

In fact, looking at Scottsdale 101 in Phoenix, we earned $18 million of certain and parts gross during the first nine months of '03. When you look at the same metric for the first nine months of '05, the service and parts that Scottsdale 101 generated 25 million in gross profit, a 39% improvement two years. And our fixed coverage at that location entirely is 72%, and fixed coverage is the amount of service and parts gross compared to total fixed cost, so again, a very important metric to us as we go forward.

The same type of comparison in San Diego, our four stores are averaging about 4 million per month in fixed gross profit, our compounded annual growth rate of 20% since 2002, and our fixed coverage in San Diego is 90%. I think the maturity of our campuses is the key element to building sustainable long-term profit for UAG. As these campuses mature, I believe our margins will increase, and we'll leverage expenses. I know the process is working. I think it takes time for us to see our investments mature. But, I can tell you I’m bullish on our business. I’m pleased with our performance. And, based on this, I look forward to the completion of our major projects in Warwick, Rhode Island (outside of Providence), and our Turnersville, New Jersey (below Philadelphia) operations.

So, at this point, I’ll open it up for questions. Thanks for joining us.

Great. [OPERATOR INSTRUCTIONS.]

John Murphy from Merrill Lynch.

Just a question on your portfolio rebalancing. It sounds like you’re divesting dealerships a little bit more aggressively than you have in the past. And on a net basis going forward, it sounds like you’re almost flat on your divestitures versus your acquisitions. Just wondering if I’m characterizing that correctly, and what your focus of divestitures is. I mean, are we going to get to a point where you’re zero percent exposed to the big three for the domestic brands?

Well, the first point is we’re looking right now at 350 million divested through nine months, probably will be somewhere in the neighborhood of 500 by the end of the year based on what we have committed. Again, these transactions have to close, and we’re looking at about 350 million of acquisitions. So, you could say, if we close everything during the year, we’ll be negative 500 versus-- the divestitures versus acquisitions. But, I think that’s a point in time as we look forward, look at the interest rate rising scenario, look at areas where we have to make significant CapExs. And of course, as we look at markets where we can glue on other franchises where we have single-point locations, we’re looking at those from a standpoint of divestitures. I think that it’s kind of a re-engineering. We’re not saying domestic. In fact, we have divested of two foreign nameplates during the last quarter along with some domestics. But, I don’t think you’re going to see this each year from the standpoint of a going-forward basis. We take out floor plan, we get capital out of these divestitures, and, in all cases, they’re not having any material effect on our bottom line.

Then, just what are you seeing as far as dealer valuations out there right now in the acquisition front?

Well, I think they’re the same as they’ve been in the past. The attractive high-line brands are bringing a strong multiple. I think where you are in a marketplace where you have a relationship, you might see medium to lower multiples. But, I don’t see really anything changing. One thing I do see is the multiples in the UK about 50% of what they are in the US, or where we’ve got some nice things in the pipeline over there. So, to me, overall, multiples are in, I would say, the three to six times EBT from a goodwill perspective.

And then, just on floor plan interest expense, it looked like it came in a little bit lower than we were looking for. Is that just a function of lower inventory at domestics, or was there something else going on there?

Oh, no, that’s-- again, I think, when you look at our days supply over the last nine months, our inventories have been down. We’re down 126 million quarter to quarter, so I think that bodes well. I think the-- obviously, seeing the domestics hit the employee pricing had a huge impact on cleaning out inventories as we go forward. It’s going to help us, by the way, as we look at the fourth quarter. Some momentum will be lower inventories, fewer ‘05s, which we don’t need to give special commissions to the salespeople, and also some additional PDI costs we have. So, I see the inventories in great shape. In fact, our new inventory is down 140 million, and we expect it to stay in very low as we end the year.

Rick Nelson from Stephens.

SG&A we saw leverage this quarter as a percent of gross profit. I’m wondering what is contributing to that, and is that sustainable?

Well, I think we talk about SG&A at every call, and I think you’re starting to see the maturity our parts and service business. And when you look at what that does to our gross margin, it certainly helps us. Our margin now is at 54.2%, and I don’t know if it’ll go much higher than that in parts and service. But, what’s happened is we have reduced the number of sublet category in our parts and service. I think warranty has decreased, and we’re seeing a higher margin on our customer labor. And specifically, in the third quarter, we went from 9.9% to 10.3 as a mix of our service and parts to our overall sales, and I think that drives the gross profit, and I think that’ll continue.

Okay. What was the gain on Sirius Satellite in the quarter?

The revenue was about $3 million, and then we, of course, have a cost associated with that.

Okay. And fourth quarter is when you have the tough compare there. Is that correct?

Yeah. Last year, we had a big gain on Sirius, which I think was about $0.12 last quarter. So, we’ve got a big comp going against that. We don’t expect to see that-- quite an increase in profitability at the end of this quarter. We see it to be typical of what we’ve had for the last two or three.

More like $0.03 or $0.04?

That’s right, yes.

Inventory, can you break that down? New vehicle inventory is-- between trucks and SUVs and cars?

I don’t have that data, to be honest with you, in front of me. But again, you’re talking specifically. I think that you see, if you looked at Toyota, probably 25% of their products would be trucks and SUVs. But again, I think they had a little longer days supply there, probably somewhere around the 60, and we try to trend the same way. I know that Honda, with their Ridgeline, and also with the Pilot, we’re a little bit soft as we entered the fourth quarter. But, in our domestic SUVs, really we sold most of those and the big trucks during the employee time, and we haven’t-- where they cut their schedules, we haven’t seen a lot of those 2006s really on our lots. We’re obviously going to be cautious as we order those because of the fuel economy benefits of the smaller engine vehicles. But, overall, I don’t have a specific number because our mix is so much skewed toward the franchises that have more cars.

Roger, hearing about a very weak October, I’m wondering is our big disparity between the domestics and the imports, or traffic differences there?

I don’t want to give you a weather report today because, I guess if you looked at the Northeast over the last week or 10 days, and certainly the Southeast, you could say we’re going to be impacted by the weather. Our inventories are in pretty good shape. I know that Carlos Gome (ph) came out and talked about very little business, at least from a Nissan--“Automotive News” had an article. I think you’re seeing some areas being choppy. I’ve just done business reviews on the west coast. Our traditional stores, which have large parts and service operations and big fixed coverage seem to be doing fine. Obviously there might be some incremental reduction, but again, with us not having to give away the ‘05s to complete our inventory, I think that will bode well on grosses. And remember, last October was a rebound month after a series of hurricanes that affected the Southeast in August and September. So, it’s really not a fair comparison I guess if you looked at this October. But, I’m cautiously optimistic for the quarter, or we wouldn’t have given the guidance we had.

What is it going to take to stimulate the business? More aggressive incentives?

Well, I think you’ve already seen the domestics come out with some pull-aheads. I think GM has, from a lease perspective, and some incentives. They’re looking at value pricing (ph). I’m not sure that that’s done a lot of-- given them a lot of benefit, at least here in the first several weeks here and a few weeks in October. I think you’ll have a program from Toyota, what we have every year during the end of December. We had the Culliver (ph) program in Honda. Lexus and BMW are short supply of the great models, so I see no issues there as we go forward. So, again, it depends on what your mix is. I’m fairly confident that our mix will drive a pretty consistent quarter.

Matt Nemer from Thomas Weisel Partners.

First question is I was wondering what impact the second quarter and third quarter divestitures, if any, have had, and will continue to have, on your gross margins and sort of your SG&A ratios. Is that going to be a benefit to you, or can you give us a sense?

Well, number one, if you look at the divestitures, you see those are below the line. We have some impact above the line as we close out these businesses, there’s some cost associated with those which are above the line. So, I say, from an overall standpoint, we really had no benefit. Above the line, I think we’ve had some on the sale below the line from the standpoint of our numbers. The divestitures that we’ve taken to date are out of our numbers both on a year-to-date basis and also in previous years. So, what you’re seeing is the actual numbers ex those divestitures. But, we know that from a management time, from an overhead time, re-engineering some of these markets is going to give us a lower cost base going forward and, quite honestly, we can focus on the stores that are giving us better results. As I was asked, I think, the question earlier, we see this as an ongoing process, but, looking at the markets, looking at higher interests costs where I was carrying lots of inventory in some of these stores we divested, I think we’re going to see some benefits on the floor plan line specifically, and certainly hopefully will benefit our margin in the SG&A.

And then secondly, San Diego is becoming a major piece of the puzzle here. I’m just wondering what types of synergies are available with the Cush acquisition relative to the other stores you have on Kearny Mesa Road.

Well, the good news is the Cush acquisitions, the Acura, the Jaguar and Aston Martin are contiguous to us, plus they have some excess property there, which will serve us well for BMW. So, we see that market, as I said earlier, about $1 billion, and the Escondido Auto Mall is where the other primary brands are, Acura, Mazda and Honda, and then there’s another-- one other Honda store, San Diego Honda, near the stadium. And I think that we’ll look at the back office. Initially, we don’t try to consolidate the back office in the first year until we understand the business. Certainly from an advertising perspective, we’re going to be in great shape. There will be a destination, and we’ll be able to combine our management structure there and many of our metrics. They’ve got Reynolds & Reynolds, which is a real plus for us. I think our interest rate, from our floor plan perspective, will be an advantage at that location. So, I think we look real good, and we’ll also have the benefit of our closed bid auctions there, which will probably give us a better used car picture than maybe they’ve experienced.

Okay. And then, the next question is on CapEx. Can you give us a sense of what we should be looking for in 2006, both on a gross and a net basis?

I think I’m not ready to give you that number. We’re just going through our plans now. But, we’re going to finish up Turnersville. We’re going to finish up Inskip. We’ve got Jersey City to look at now, from a Nissan/Toyota perspective. There’s some going on in the UK, but we’ll need to get back to the group here on that net CapEx, probably give you more input later on.

Okay. And then on that same front, there was an article in “Auto News” about a new Toyota brand identity program, and I guess I’m wondering how many of your stores are already there. I think they’re saying the cost is about $150 per square foot, so I was just wondering kind of where you’re at relative to that.

Well, I think the good news is stores that have been refurbed to the existing brand, we’re not expected to turn those in the next 12 to 36 months. We have two or three stores that are in progress today for Toyota new locations, which we’d have the new brand image. But, it’s normal. It’s nothing catastrophic from a standpoint of cost, but, as we build new facilities, we have to enter into that program just like we have with the other manufacturers. But, not mandatory to keep the franchise. We’ll have to do it over a period of time, but there’s not any pressure at this point, at least from our standpoint.

Okay. And then lastly, on the SG&A, any sense of how much the ratio of SG&A to gross profit can improve in ’06? And if you don’t have an exact number, what are some of the factors we should be looking for that can help you there, like Inskip and Turnersville, et cetera?

Well, I think you’ve got to be careful. These big campuses, as they come out, you’re hit immediately with a big rent factor, and it takes you probably 12 to 18 months to get matured to get the real benefits out of that. But, I think the gross margin improvement, which we’re expecting to get through our mix of back-end, as you saw it move up even 100 basis points in service and parts, we’re going to see that with the mix going from 9/9 to 10/3, as I mentioned, of our total sales. That’s going to drive gross margin and, when that does, it’s going to-- as a percentage, our SG&A will go down. And we’re really, in many cases, we’re capacity-constrained in some locations and, once we open up the floodgates at these bigger locations, I think we’re going to see more service and parts. It seems to follow, because you’re seeing less warranty, which you get paid less from the manufacturers, then do your door rate on customer labor. And certainly, your parts margin is better, and we’re taking more and more things inside. We’re trying to not use outside services as much as we have in the past, and I think, by that, we’re going to see a continued margin increase. Obviously, with 100 bays at Turnersville and 80 in Inskip, plus the body shop, so I think you’re going to see that be-- really impact us. We’re also going to have the negative drag as we do sale-leasebacks because your interest is below the line, typically, in depreciation above on a traditional way, and we have our rents above the line in SG&A. I think it was about 20 basis points drag on us this quarter.

Jon Steinmetz from Morgan Stanley.

A few questions. I think it was a 5.4% domestic comp store sales figure that you gave?

Right.

Was that for the total, or was that for the new vehicle sales?

Total.

Do you have that number for the new vehicle sales?

Let me check here and see if we have that. New vehicle sale-- new units were up-- revenue was up 5.4.

Revenue up 5.4, and were the units up commensurate with that?

Up 3%.

Do you think you were inventory-constrained in a lot of areas on the units? Because, when I look at, like, Toyota up 10 or Honda up 15 nationally, it seems below that. Do you think that was a market-by-market issue or an inventory issue?

Well, there’s no question that we were short of inventory, of the popular stuff. We had talked to our people. Even today we are because, with the tremendous growth of Toyota and even Honda, we were-- as I say, we were a little long on Ridgelines and Pilots. But, other than that, certainly from a Lexus product, we were tight. And you had the 3 series at BMW that has just come out, and that had us hamstrung here for the last probably four or five months.

Do you think you can get more of this stuff as the production starts to ramp on some of these things and as the manufacturers adjust their schedules for this car/truck mix?

Well, there’s no question that we will. I think, when you look at Cleveland and Detroit, when you look at those markets because of-- and that’s where we have Honda and we also have Toyota-- those markets were hit really strong during the quarter because the domestics had such a penetration here, and I think they took most of that product and moved it around the country, and we really had no Camry or Corolla inventory across the Toyota line.

My other question is on the F&I. It looks like, even if we back out the 3 million from the Sirius, which I think you bucket into that line item, it still looks like a pretty good increase. I’m just wondering what was driving that.

Well, I think that we’re using our menu pricing. I think Steve McCauley has made a big impact there from the standpoint-- the way we’re managing that process in the field. But, when you look at us in comparison to the peers, we’re really still below the market, and we’re tying to the traditional caps by the OEMs, so I think you’re seeing a slight increase. Probably was about $20 here quarter-over-quarter.

Mark Irazzeri (ph) from Goldman Sachs.

Roger, if you can maybe just help us understand some of the key metrics that you’re looking at for the service bays in terms of utilization, kind of the number of repair orders that you’re writing there and the ramp-up of the service bays, that would be great. Also, if you can give us just a sense of how you’re finding technicians, if there is a lack of technician supply out there. Thanks.

Well, let me hit the technician thing. We’ve had a relationship with Universal Technical Institute for a long time. I think some of the other players have the same. We probably take 100 to 150 technicians from the UTI programs. They’ve got schools in Boston, Philadelphia, Chicago, California, Houston, and I think that, in our facilities that we’re building, when you bring the technicians in with what we offer, I think we’ve got a pretty good opportunity. And we go to those schools. We actually recruit technicians on a full-time basis with our training folks. So, I see that as an ongoing process. Are we short of techs? The answer is no. An example would be in Washington, at Tyson’s, the Mercedes dealership there. We added 50 bays and we’ve added 50 techs, and they all came out of the marketplace or UTI. So, to me, we’re getting some good young people. It’s a great job for them. Now, obviously you have some turnover there because kids want to go back to home. We recruit them, they come work in Washington for a couple of years, so there is some turnover typically after the first two years. So, what we’re trying to do is look for people who are close to their-- where they lived or where they grew up. So, that’s one aspect.

From a service bay perspective, we’ve added probably 400 bays over the last 36 months, and we’ll add another 180 when you look at Inskip and Turnersville, just to be specific. We look at these bays generating about $300,000 per bay. So, I think that gives you the idea of what-- of where we are. We’re looking at about 50% margin if you just took that, so each bay generates $150,000. That’s both parts and service. And that ramp-up is so important to us as we go forward, and the good news is that, if you can fill those bays-- and we’re now looking at guides. Each of the OEMs are really looking at penetration, especially the four nameplates are looking at their penetration as we go forward, and we’re kind of building to those guides so we can be ready when those commitments on market share really take place.

On the other hand, as we look at the domestics, we’re even finding in the afternoons, because their quality is so much better, we have less utilization of the bays in the afternoon, so we’re going out, doing the tire business, doing front-end alignments, a lot of the quick services that we didn’t do before because the bays were being consumed for warranty. So, I think that’s a positive for the OEMs and, certainly with the growth in UIO (Units In Operation) by some of the foreign nameplates that have the penetration, it drives them right into our bays. So, I see the continued growth there, and that’s going to help our margins, too.

Right. And then, just if you can help me understand overall your capacity utilization of those bays at this point, maybe the targets, where you are--.

--I think we’re 70% on a single shift. Remember, with the benefit we have now, with the scale and the property, we really haven’t talked about you’re running, say, four 10-hour shifts or going to two shifts. I know in Washington we did that until we got our capacity. Obviously, I’d like to do a lot of it on the first shift because the management controls there. But, I think we have a lot of runway from the overall standpoint what we’re building.

And you’re able to find qualified technicians even for those later shifts, as well?

Well, what you typically do, maybe you’re on a swing shift where you might work four weeks on the day shift, then you work one week on the night shift, because what we don’t want to do is just have-- we want to continue to keep our guys current, and the same thing we do on the weekends. We’re opening up now many locations on Sunday for service, so that gives us, again, more opportunity. I think we’re starting to take that business away from the typical Jiffy Lube or Midas Muffler, et cetera. We’re trying to get that business into the dealerships. And all the OEMs have programs now to support us in those areas.

Got you. And then, if we can just shift gears for a second and talk about the UK, the strength in that business is a bit surprising. Can you just add some color in terms of pricing and units and what you’re seeing in business overseas?

Well, if you look at the UK specifically, that market was down 4% in the quarter versus our business being up 6.6%. I think when you look at margins, we have a lower margin on used vehicles. We’re running about 6.6% on a year-to-date basis. And basically, that’s due to us taking demonstrators. In the US, when we sell a demo, it’s classified in the new vehicle area, but, in the UK, those demos are sold as used and, typically, the gross per transaction on those is much lower. So, that drives us lower margin. But, when I look at the overall business on a same-store basis, our international was up 10.9%, and I think that our Sytner acquisition has been terrific, and I see our revenue, by the way, was about 800 million for the quarter, and that was up 10%. And on a same-store basis we were up 15.6%, and I think that’s a good delta when you look at the marketplace. Revenues were up 28%, or accounted for 28% for the quarter, and our operating income was 25%. So, to me, it’s a good balance for this marketplace. Obviously it’s not the size of the US. We don’t seem to have the big fluctuations that we run into in these markets and, over there, we’re all foreign nameplate. No domestic.

Jerry Marks from Raymond James.

Maybe kind of following up on that whole used demo impact, why did used ASPs go up over $500? Did that have something to do with your UK mix?

I missed the question. I’m sorry.

Your average selling prices on used went up over $500 per unit, it looks like. Did I do that right?

Yeah. The used-- the US was up about $300, and the UK was up $1,000.

Okay.

So, that really drove that. Overall, we were up 2.4%.

Is that because of the portfolio divestitures and change in mix there, or why is that?

I think that it’s really the revenue per transaction. We continue because of the mix, and I think some of the full circle programs that we have with these manufacturers are driving a higher margin because we have-- on the certified programs, we have warranties that go with those, so those are [inaudible] going to help us drive margins. I think we’re just doing a better job, too, with our 60-day policy in the US and, obviously, they have a strong used car policy in the UK. In fact, we’re following-- they have actual used car managers in each of the brands that drive pricing every day, and also doing the [inaudible] things. So, I think, coupled with that, has given us some traction because, to me, we’ve got great inventory, and our goal is to have a 60-day supply except on the super-premium luxury, like Ferrari and Bentley and things like that. We can’t turn those cars that quickly. But otherwise, we’re using our closed bid auctions, and I think that’s driving some of the margin. But overall, we were up $303 in the UK-- or in the US, and up1,000 in the UK.

Okay. Some of your competitors are talking about going more towards some of these lower priced vehicles as well, that-- kind of this good/better/best strategy. Have you guys thought about that at all?

Well, we always-- we’re pushing our guys to do more volume. They say, “Okay, let’s go down on the cost of sale.” The issue there is, with people today expecting quality, you have a real difficult time, unless you put a lot of money in those older, high-mileage cars, to give them a car that doesn’t have an issue. And I think that, from a premium luxury perspective, we’re staying pretty much aligned vertically, meaning for a BMW, or selling used BMWs, and certainly we’ll go downstream with those, but probably staying in the mix where we can qualify them as certified. So, we’re doing some of that, but we probably wholesale a bigger portion of our cars because, I guess at the end of the day when I look at the complaints that come across my desk, a lot of it is people who had expected to buy this car and drive it for a year with no problems. It’s a-- I think it can go either way because we’re so aligned to the luxury side, I have to say we could get ourselves in trouble.

I got you. It’s tougher to kind of control the quality. Your revenues were up about 10%. Same-store sales were up about 7%. But it looks like you’re divesting more than you’re buying. So, does that mean that the stores that you’re buying have-- are bigger stores with more revenues?

Well, just so you know, the divestitures that we divested, if you look at all of our numbers, those numbers have been pulled out both in ’04 and ’05. So, whatever you see there is actual. There’s no impact there. But, what we’re buying, there’s no question that we’re buying stores with probably higher revenue and higher volume. The answer would be yes. I’m trying to have less locations-- you follow me-- to manage, and higher volume stores, which I think we then can afford to consolidate back offices if they’re contiguous, and we can also pay managers a higher salary and wage in order to manage them.

You mean that you would just have one kind of centralized purchasing manager for that?

Well, it would be scale. I mean, you’re going to get benefits. San Diego is-- someone-- I think Matt Nemer asked the question on San Diego. When we have $1 billion worth of business there, we get all sorts of scale on purchasing, advertising, our cleaning, a lot of the things that go-- really, it’s start-- that you show the scale. I think the used car managers can work together. They can trade vehicles across different lines if they have it. To me, the key point-- in fact, probably one of the other key points is on the personnel side. When we have many stores side-by-side, we could take people of lower level and move them up from store to store, which is a real positive thing from an employee turnover perspective.

Do you track percentage of outside hires and how that’s kind of changed over the last several years?

Well, our turnover, from the standpoint of our business, we’re in a situation today that our turnover is down. We’re at 35%, and that’s down from 39, roughly, at the beginning of the year. so, we’re tracking outside hires. We’re trying to bring new people into the business. Probably 50/50 of our new salesmen come from outside of the industry, and 50% come from inside. But, we have a three-month program for those people that come in for training. They just don’t go on the floor in four or five days.

Got you. Last question. I just want to check-- we’ve been hearing a lot of, like, really low fee supply numbers, 36. How are you accounting for it? Is it over three months? And also, if the rumors about October are true and we can see this-- see kind of sluggishness, if your daily selling rate starts to really go down, do those days supplies just kind of normalize when we get into the fourth quarter for you guys?

Well, we look at 30 days. I’d say it will normalize, but with the traditional four nameplates being at low days supply, I don’t see a lot of movement there because they’re selling almost everything they’re building, in most cases. And then, from the standpoint of the domestics, they have a little different ordering pattern. But, I think it’s going to normalize. We typically try to be below the national average from the standpoint of both domestically and internationally, and I think that’s when you saw the difference in our floor plan costs for the third quarter, I think we made a lot of progress during Q3. I haven’t looked at the other peers, but I think all of us probably got a benefit there.

Okay. But, so just to clarify, is it over a three-month average, or is it the last 30 days?

30 days.

John Saul from Dow Jones.

Roger, question for you is, sort of hearing from various dealers that there’s some impact that are being felt on a dealer level in regards to cost-cutting efforts at GM and Ford, and I wonder if you can speak to that a little bit. Has there been an impact on your operations base that are directly attributable to the cost-cutting efforts at GM and Ford?

I personally haven’t seen anything that would affect us. I mean, they’re looking at areas that they need to look at from the standpoint of costs associated with the downstream distribution. But, from our dealership, we haven’t seen it. The blue oval was discontinued at Ford a year ago. I think they’re looking at warranty claims and areas where there might be some ability to reduce cost. But, floor plan rates that-- we’ve seen some floor plan rates go up because of the domestic credit ratings. But, other than that, I wouldn’t see anything that would be a negative, from my perspective. In fact, I think it’s important that they get their costs out in order for them to be more competitive.

I guess as a follow-up, Chrysler just announced its earnings for third quarter and they’re up $379 million operating profit in the period. That’s Chrysler group alone. I’m just wondering if you can talk a little bit about, from a dealer perspective, what is it that’s fueling consistent momentum for them? A mix of product? I mean, they consistently have pretty high incentives, but they’re still making money and posting gains.

Well, I think, number one, you’d say product, product, product. There’s no question that with the 300, with the Magnum, the Cherokee, all of those things, the Grand Cherokee, they’ve had some great products come into the market, and they’ve had cars available to sell. And their trucks have diesel engines in them, which has been a positive for them, and I think that, overall, there’s-- they’ve had value pricing, I think, or transaction pricing. They were the leaders in that probably a year ago when they brought out the 300. I think that’s been a benefit. And, of course, they don’t have the infrastructure costs that some of the other manufacturers have, I think from a total workforce perspective. They’ve probably done a better job.

Peter Siris from Guerilla Capital Management.

Your CapEx is-- if I compare you, say, to Auto Nation, which is twice the size, you’re spending twice the money on CapEx that they are, or something like that. And I’m curious to understand what the strategy is for the heavy CapEx expenditures. Does it-- why are you spending more money than somebody else?

Well, I think if you go back and you look at our business, we started out with about 2.9 billion in revenue in 1999, and we’ve divested today of about 1.8 to 1.9, so we had a business, let’s say of $1 billion. You go from 1 billion to 10, and most of this is through acquisition. Obviously, we’ve had 5 to 7% same-store comps. Most all of our acquisitions are required. As we go to the OEMs with an acquisition, let’s say, to buy a certain group of businesses, they expect us to bring the CI to the current specs. We’ve gone a little further, to air-condition our shops. When you look at us from an overall standpoint, I looked at the peer group just to see what we’re spending. And I think the average peer group’s spending about 2.3 million per franchise, if you take the total franchises and you look at what’s been shown as their CapEx. We’re spending about 3.5 but, again, our-- majority of our business is luxury, and I think that, from the percentage of what’s required on a luxury side, we’re probably spending a little bit more (ph) on that side.

But, I think that world-class facilities are driving hiring the right people. Our turnover is down. Go to San Diego. Go to Washington. Go to those markets and see what we’ve done there, and I think that, certainly, the business is paying off. And to me, it’s like going to a high-class mall, and we feel that the investment is well worth it. And many of the things we’re doing might be an expense today. It won’t be an operating expense in the future because we’ve tiled the floors in our shops. We’ve done things that-- put cement curbs in rather than asphalt. I could go through a litany of things that we do differently but, at the end of the day, I think it’s going to reduce our maintenance. We did this in our truck leasing business, and it paid off over the years.

So, would you guess that the extra CapEx that you’re spending now would give you everything in-- everything else being equal, a faster rate of growth in the future?

Certainly if you look at our shops and what we’ve been able to do, I think we’ve proved that. We’ve had quite a growth rate when you look at same-store comps. It’s the same-store comps over the last five years. And we’ve been doing this right from the beginning. We’ve spent probably about 850 million, maybe 900 million by the end of the year. Now, unfortunately (ph), that goes to sale-leaseback, but I think it’s investing in order to get-- be in the right markets to develop the customer base. And if you look at the stores that we bought and the ones that we have redone, I mean, you’d say the same thing. And the good news is the sale-leaseback rates today, we’re talking about 8% roughly in the US, and we’re talking about 6 in the UK. We probably got ahead of this thing because, if these rates go up, those rates won’t be available in the future. So, we probably bought us some profitability or some bottom-line benefits in the future.

One more question. You’re doing so well overseas. Are there other international markets you’re interested in, or might be interested in?

Well, we’re in Germany with-- we’re in Bremen, Hamburg, we’re in Frankfurt, we’re down in the south in Memmingen and Ulm. We see those markets. In fact, I’m going over tonight, and we’ll look at an opportunity potentially in Stuttgart. But we’re continuing to grow in the UK. That business was 700 million. It’s now almost 3 billion, if you look at our revenue of about 28 or 29%. And we see the manufacturers are very supportive of our model. In fact, we’re getting a lot of support, and they’re directing us in some areas where we have acquisition opportunities. And I think that we’ll continue to grow where we’ve got contiguous operations and expand the brand. Today, we’re the number one BMW, Mercedes dealer-- and Audi dealer in the UK, and I think we’re setting the standard in the UK from the standpoint of our CSI. Certainly from a facility standpoint, I think they are made to what we’ve been able to do and what we’ve been able to gain in market share, and also units in operation.

Jordan Heimowitz from Philadelphia Financial.

Couple quick questions, and I know I’ve written down all these numbers wrong. You said, internationally, revenues are up $10 or up 7, units were up 3? Is that right?

Let me give it to you from a retail revenue-- retail. This includes all aspects of-- we’re up 5.4% in the US and up 10.9 internationally to give us 7% for the quarter.

And that’s the revenues in dollars or units?

Revenue in dollars.

What was it in units?

We’re up 3% in new, 15.6% internationally, and 3% in the US.

I apologize, Roger. That 15.6% internationally, is that new internationally or total internationally?

That’s new units international.

Okay. So, that’s-- now, the industry was down 4, you said, and so you were up a lot better than the industry. Was there one or two brands that you were in that did a lot better than the industry, or is it--?

--I just think we’ve got it across all BMW, Mercedes, Audi, Porsche. I mean, I think it’s all of them. I mean, that’s-- those are our-- we have some Toyota there, which is our volume brand, so-- remember, it was a registration month. We have both September and March are registration months, so we typically have a lot of momentum in those months, and we’re hitting the benefit of our scale.

The other question is your service and parts continues to roll out more bays, which is a lot of the growth story in the company. I’m just wondering, do you have a G&A impact? Because, in other words, these are higher margin products than new and used vehicle sales? So, as the mix of business continues to shift more towards service and parts, there should be more operating margin and leverage in the business. So, I’m just wondering, just with what you have now when you slow down on some of these CapEx expenditures, where the SG&A ratio could go to, excluding new deals and things of that nature.

I think we’re at 78.4. I think we were for this quarter. And remember, our revenue-- our parts and service revenue went from 9.9 to 10.3, almost 50 basis points. And with that margin, that’s going to drive our gross up and, certainly, SG&A as a percent of that will come down. So, I think it’s going in the right direction. And again, I have not been-- I’ve said it before on the phone calls. SG&A is an important piece, but I’m going to spend the money that it takes to manage the businesses, and if the bottom line is growing, return on equity is growing, I think we’re doing the right thing.

Okay, so you don’t have a target, per se, for just the mix that you have? Because, as you said, as-- the more the service and parts kicks in, everything else being equal, this number is to trend lower?

Well, our SG&A is 11.6, and I think if you compare that with our peers, SG&A as a percent of revenue, we’re right in line with them. so, I don’t think we’re way out, and that’s with a lot more sale-leaseback probably impact because you’ve got the rent factor up versus having depreciation and SG&A and interest below the line. so, I think it’s a percent we are (ph). We just need to get more gross.

Let me ask the question a different way, then. How much do you think the rent adds? In other words, if you didn’t do sale-leasebacks--.

--I think it was at 20 basis points in the third quarter.

John Murphy from Merrill Lynch.

Sorry, I just have two quick follow-ups. Roger, one thing that you mentioned made it sound like you were getting either add points, new points, or satellite points for Toyota. Is that a correct assumption?

Well, we are-- from a-- there are satellite points which are being-- I guess they call them companions, which we’re getting in Lexus. One we’re opening-- be opening in the next month in Phoenix at Chandler. A second one will be in Edison, New Jersey, and we have an add point, which has been indicated for us in the Florida market for Toyota. So, again, these are based on these markets growing units in operation, and the good news is they’re going to their partners, who they have experience with and have a good CSI, and we’re able to expand our presence with it.

Okay, so those would be three all-new stores for you?

That’s correct.

And then, just real quickly on customer paver’s (ph) warranty, what’s the split this quarter in parts and service, and what was it last year at third quarter?

I can’t give it to you exactly, but I would say we’re running somewhere about 60% is customer labor. We’re probably running around 30% in warranty, and the balance is internal and PDI. So, there’s no question. I think the whole industry, because of the great quality coming out of the domestics and trying to match the foreign nameplates, we’re seeing less warranty, which is good for us because, then, we can develop these full-circle programs. Also, the certified used cars, in order to be able to take advantage of the warranty on certified used, you must bring it back to the dealer, so that’s driving some more business for us, from a used car perspective.

We have no further questions in queue.

Thank you. Thanks, everyone. Bye-bye.

Ladies and gentlemen, that concludes your conference for today. Thank you for your participation and using AT&T Executive Teleconference. You may now disconnect.