Penske Automotive Group Inc (PAG) 2005 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon. And welcome to the United Auto Group fourth quarter 2005 earnings conference call. Our press release, which details United Auto's fourth quarter results was released this morning and is posted on the Company's website, which can be viewed at www.United Auto.com. The call today is being recorded and will be available for replay approximately one hour after completion through February 21. Please refer to United Auto's press release dated February 1, 2006, at www.UnitedAuto.com for specific information about how to access the replay. I would now like to introduce Mr. Anthony Pordon, Senior Vice President of United Auto Group. Sir, please go ahead.

Thank you, John. And good afternoon, everybody. Welcome to the United Auto Group fourth quarter 2005 earnings conference call. Joining us today for the call are Roger Penske, Chairman; and Bob O'Shaughnessy our Senior Vice President of Finance; and from our offices in Secaucus, New Jersey, Jim Davidson our Executive Vice President of Finance. At the conclusion of our remarks today, we will 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 the conference call may include forward-looking statements regarding United Auto'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 may be discussing certain non-GAAP financial measures as defined under SEC rules such as adjusted income from continuing operations, and adjusted earnings per share and free cash flow. Adjusted net income excludes certain items disclosed in our press release this morning. You can find the reconciliation of these items posted in the financial area of the Investor Relations section of our website, at www.UnitedAuto.com. We do believe these non-GAAP financial measures improve the transparency of our disclosure and the period to period comparability of United Auto's results. At this time, I would like to introduce the Chairman of UAG, Roger Penske.

Thank you, Tony. And good afternoon, everyone. And thanks for joining us today. I'm pleased to report that our business produced another solid quarter of financial results, while the whole market faced several challenges. I think we had a weaker new retail market, certainly product availability, you heard us in certain markets, we had rising interest rates and all of us faced the higher energy prices. Despite these obstacles, UAG posted increases in revenue, our gross profit income from continuing operations, and our earnings per share.

Just to make a couple of points, our performance was highlighted really by same store growth of 3.9%, including a 9% increase in same store service and parts revenues in the U.S. We also had a 50 basis points increase in revenue contribution of our service and parts business, to 11.4%. Gross margin increases in all lines of our business and an overall 13 basis point increase in our gross margin to 15.7%.

Let me go over the fourth quarter in specific detail. Our revenue increased 7.5%. Our new vehicle revenue was up 6.1. Used was up 6.5. And service in parts was up 11.8. Average selling prices in Q4 on both new and used vehicles increased. Our new business per unit was up $1,349 to 34,700 showing us really our premium luxury mix. Used increased 1,320 to 27,200. In addition, the average gross per transaction increased 5.6% on new and 9.5 on used. We continue to believe these increases are directly attributable to our brand mix strategy. For the quarter, we had no meaningful impact of foreign exchange in our fourth quarter results.

Looking at our brand mix, when you look at the quarter and on a year to date basis, four nameplates gained another 1.8 market share points over the year, and I think that when you look at our overall mix for the year, our domestic brands represented 10%, foreign and luxury was 90, and if you just took the premium and luxury brands alone, it was 58% of our total. So as we look at the dynamics of our markets, we think our premium luxury brand ownership is certainly an important element of our business strategy. If you want to see the specific percentages on our brand mix, they were shown this morning and are available in our press release to give you the specific numbers with each OEM.

Looking for comps and same store performance for the quarter, overall retail revenue was up 3.9%. New retail revenue was up 3.4. Used was up 4.9. S&P was up 6.4. And F&I revenue was down 2.5. Same store growth in the U.S. for the quarter was up 2.6%. And we had a strong international same store. And that was up 7.5. So again, I think that outlines the balance of our strategy between domestic and international.

Looking at gross margin, one of the key initiatives we highlighted at the beginning of the year was the desire to increase our margin. I'm pleased to report that our overall gross margin increased 13 basis points to 15.7 for the quarter. The gross margin increase is a result of new vehicle margin increasing 20 basis points to 9%, and used vehicle margin increasing 40 basis points to 8.7. And I would like to point out that our international used margin was up 100 basis points to 6.6. Obviously we have different dynamics there on the used car side where we don't meet the same margins on used in the U.S. versus internationally.

Our service and parts margin increased 60 basis points to 55.1. I think it is important to note that the gross profit in service and parts was 40% of our total gross profit, up from 38% in '04, and I think that just demonstrates as we get the capacity utilization of many of the bays that we've been able to build over the last four years. On the balance sheet, our equity increased 70 million in '05, to 1.15 billion, and our return on average equity was 11%. Our total vehicle inventory was 1.2 billion which was up 34 million compared to December '04, and on a same store basis, inventory was flat, so we had good metrics in all of our inventory work during the quarter. At the end of the fourth quarter, our worldwide days supply was 49 days, and in the U.S. it was also 49 days, versus 66 for the U.S. market, so again, with our metrics and the way we run our business, I think we've had good inventory control. On a used basis, we were at 33 days, on a worldwide basis, and 34 days in the U.S. So again, good inventory control. Obviously, it is important as we see the costs of floor planning continuing to go up. Our floor plan support was about $7 million in the quarter, that was down 300,000 from a year ago, and if you looked at the entire year, we had about 3 million left in support approximately versus a year ago, so we're getting less support on floor plan, so it is important that we have good inventory controls.

Moving on to CapEx, we continue to be very efficient with the funding of our investments. I know there's lots of discussions about ownership versus sale lease back. We've taken the route on sale leaseback, and we spent on a net basis 100 million during 2005, and we had an additional 118 million proceeds from sale leasebacks that we think this is an economical and efficient means of funding our capital requirement. As we've grown, the OEMs always have -- give us the responsibility to meet the current CI, that's the corporate ID standard, so it is important that we meet these standards early on as we build these facilities.

We continue to evaluate our funding sources and search out the lowest cost of funds while maintaining maximum flexibility at all of our lease locations. During 2005, our free cash flow, which we define as cash flow from operations, less CapEx, was about 51.2 million. I would like to point out that we remain on track with our two largest development projects in the U.S., the nine brand Turnersville auto mall in Turnersville, New Jersey, south of Philadelphia, and 11 brand Inskip campus in Warwick, Rhode Island. We expect both of these projects to be substantially complete by the end of this year.

Looking at our leverage, our debt to capital ratio at the end of the year was 34%, and as of December 31, we had approximately 580 million of nonvehicle debt, which was 6 million less than we had outstanding last year. Our debt consisted of 300 million of 9 and 5/8, 10-year senior subordinated debt with a call pression in March of 2007 and 280 million under our credit agreements and other borrowing arrangements. As previously announced we completed a private placement of 375 million of 3.5 senior subordinated convertible notes just less than approximately 10 days ago. We used the proceeds from this transaction to repurchase 500,000 shares of UAG stock at 37.91, approximately $19 million. The balance was used to repay outstanding debt under our U.S. credit agreement. As of today, we have approximately 650 million of floating rate availability under our credit agreement. So we have plenty of dry powder.

Based on our current capital structure, 46% of our total debt, and that would include our floor plan, is fixed with a weighted average of interest of 6.1%, and the average maturity of approximately 4.8 years. So I think that is very strong in this recent transaction. That puts us in great shape as we look at potentially higher interest rates. Including the impact of the convertible note offering, we currently estimate our debt to capital to be 38%.

Now I would like to summarize the highlights of the performance for the full year ended 2005. Retail unit sales were up 9.3%, to almost 260,000 units. New was up 10.5, used up 6.7. And our total retail revenue increased 13.5%, to 9.4 billion, and total revenues increased 14%, to 10.2 billion. New vehicle was up 13.6. Used vehicle was up 11.4. Our service and parts grew 17.3%. Again, our high margin business and F&I was up 13.6.

When you look at same store retail revenue, we were up 5.2%, and when you look at breaking that out, the U.S. was up 4.5%, for the year, and our international business was up 7.2. The components of the same store increases were new vehicle up 5.1, used vehicle up 4.1, S&P up 7, 6 service and parts, and finance and insurance up 9.2. The revenue mix during 2005 was 70% in the United States and 30% internationally. Our operating income increased during the year to 293 million, and the mix of operating income was 73% from the U.S. and 27% internationally. So roughly 30% of revenue giving us 27% of our operating income. Despite the impact of higher interest rates, contributing to a 13.5 million increase in interest costs, income from continuing ops increased 8% to 120.7 million. If you exclude the effects of the unused items we disclosed relating to both periods income from continuing ops increased 12% to 117 million. And our earnings per share increased 9%.

During 2005, we acquired 245 million in annualized revenue, adding to the scale of our presence in several markets. We also identified certain franchises that didn't meet our return requirements, location strategy, or had significant OEM corporate ID requirements. As a result, we divested of 17 franchises during the year, representing about 500 million in revenue.

Looking to earnings guidance, we provided our guidance this morning in our press release, again as we've talked before, we're looking at same store growth 3 to 5%. That seems to be in line with the history of the Company. Acquisitions, we think -- we didn't quite hit our target in 2005, but we have had a number of deals that were in the pipeline, and we're looking at acquisitions totaling between 6 and 800 million of analyzed revenue on a gross basis during 2006. We've also baked in 25 basis point interest rate increase per quarter, on our variable rate debt. We also, in our guidance, have taken into consideration, a $0.10 interest expense reduction from our convertible note offering.

I think it is important to point out that the interest savings from the note offering is partially offset by the amortization of the deferred finance costs deal fees, and also the unused fees under our $650 million U.S. credit agreement. Our guidance also assumes an average number of shares outstanding of 47 million. Based on the assumptions we expect earnings from continuing ops to be in the range of 2.70 to 2.80, for the year, and I think as we look to the quarter, we expect earnings from continuing ops to be in the range of $0.53 to $0.57 per share and we will continue to offer guidance at our quarterly calls.

In summary, UAG performed exceptionally well in 2005, despite obviously many market challenges. Our brand mix represents the brands regaining market share. This is an interesting point. I looked at the data in January, and if you take the fleet out, targeted at 110,000 units, Ford and General Motors were roughly 102, and 106,000, and so you can see that retail is what we really got to focus on as we go forward, and we certainly think the brands that we're involved in, at least on the foreign nameplate side are gaining some good share. Our investments I think are maturing as our back shops are gaining utilization, as we built the additional base. Our high margin service and parts business increased 32 basis points to 10.8 of our revenues in 2005.

Inventory is in great shape. We had a little higher wholesale loss in the U.K., in the fourth quarter, but again, that was to be sure that we were in good shape as we entered into 2006 with our premium brands. We reduced our employee turnover from 39% to 34. This is the human capital, probably the most important part of our business. That was 11% improvement for the year. I take my hat out off to our HR people and the types of people that we're trying to get on on our roll here, and the process that we go through here has been a big portion of that reduction. We're generating good free cash flow. Also, we haven't talked about it but there had been lots of discussion about back office consolidation and providers. We completed the migration of our U.S. back offices to Reynolds and Reynolds completely during 2005, so all of our offices are on the same chart of accounts, and all are using Reynolds and Reynolds back office plane, that is in the U.S.

We completed the construction of many new dealerships that will provide future growth, major projects were completed in Chandler, Arizona. Obviously, the Warwick, Rhode Island businesses, we had some of those constructions were completed in Turnersville New Jersey, and in the U.K., we completed three new BMW franchises, two Mercedes, an Audi, and one Lexxus. So again, we think the international strategy continues to be one of the key elements that differentiates us, United Auto's business model. And as a reminder, we acquired Sytner in the U.K. in March of 2002. In three years that we've owned Sytner it has grown from 900 million in annual revenues to 3 billion today. 30% of our 2005 revenue. And in Germany, the ultra premium luxury business we acquired in 2004, Tamsen, continues to perform well, earning 6% on sales on 90 million during 2005.

In total, our international operations as I said before, generate 30% of our revenue, and 27% of our operating income. And going forward, 650 million of availability under our credit limits provides us with the financial flexibility to continue to improve and grow the business. We expect to continue to generate the same store growth through the execution of our model and we'll continue to pursue acquisitions both in the U.S. and overseas. I really want to thank our team for 2005 and there performance and obviously we're already in gear for 2006. So at this point we'll open it up for questions. Thanks for joining us today.

[OPERATOR INSTRUCTIONS] And first, we will go to the line of John Murphy with Merrill Lynch. Please go ahead is.

Good afternoon, Roger. Just if you could expand a little bit on the international ops, and just talk about how big that opportunity is, and why you're over there, and if we could ever get to a point where it is 50% of the Company, and the profitability matches what we have here in the U.S.?

Well, I think number one, there was a lot of push back initially when we went to the international marketplace, but as we went into the U.K., we bought a company called Sytner which had a very good reputation, specifically in premium luxury, and with the block exemption, there was a lot of reengineering going on in Europe and certainly the OEMs were looking to consolidate many markets and we have had a lot of support from them in the U.K. which we are starting to see that also in Germany. So today, as you look at 70/30, we thought that that would probably be the high watermark. But as these acquisitions come to us, and in many cases as you read maybe in Automotive News this week, there was a great article on acquisition costs of dealerships. I would say internationally, today, at least as you pick them up, on an individual basis, they're probably 50% of the costs, so we're going to look to valuing our equity money, as we put into these acquisitions, so there could be more available.

We see this opportunity really in two different directions. One, is outright ownership and the other certainly is in joint ventures. And we have two 50% joint ventures. One in Audi and Volkswagen and AC in Germany and then we have the Toyota Lexxus business and the entire Frankfort market with Verner Nicks, Nicks Automotive and as we see those markets continuing to grow, what's happened is is we have visibility both domestically and internationally, we're getting a lot of calls on opportunities so we continue to look at those, certainly from the standpoint of the future. We also have a joint venture with [Risoccer and Memingman, and Oileman], that gives us a chance, south of Munich to maybe open up another market which we think would be very profitable.

And if we switched to parts and service, and maybe if we stepped back a little bit into the international ops question, also, I mean where are you currently on your service bay capacity utilization, and how high do you think this gross margin can go? Because we're above 55% already. That's pretty impressive. Is there a lot more room, as you fill these bays up?

Well, I think when you look specifically in the west, we're probably getting about 60% utilization. The east, we haven't been able to grow as many big campuses when we finished Chartersville and Inskip. We will see that probably come down some. But we're at 71%. In the central, we're 70. I think that as we look at the business, we see the margins in parts and service probably growing, because on the customer labor side, there has been a big shift away from warranty, to more customer labor, and we seem to get a -- we seem to get a little more margin on the customer labor, because you don't have some of the specific operations, you can do more menu pricing, but I think 55% was a good target and we see some, maybe 100 to 200 basis points more opportunity as we go forward.

Do you have that same opportunity in the international ops? I would imagine so.

Well, there's more small shops doing service in the international side, and there really hasn't been the desire, because of the land is so scarce to build big service operations but every place that we build a big operation, we've seen that growth. So all of our new facilities, we're adding, probably doubling the bays, so there has been a real opportunity and when you look at the growth during last year, we had strong growth in service and parts on same store, on the same store basis. We added approximately 184 bays in 2005, and we're about 3,500 I think totally and we will pick up another 100 bays during 2006, when you look at Turnersville and Inskip and our international.

And just one last question. On the acquisition landscape, you guys were a little bit slow in 2005. It sounds like you're reaccelerating in 2006. Is there anything that is changing out there? Or is this just the lumpiness of acquisitions?

We were actually -- as we closed Cush, we've announced that -- there has been an announcement that we purchased 69% of William Jacks in the U.K. These are deals that were just -- ended up falling over into 2006, but we're pretty consistent on the 500 million and we will be a little bit higher this year based on the deals that didn't get done in 2005. But I don't see any lumpiness. I see that the pricing pretty consistent. In fact, I read with interest the multiples that people are paying in the automotive news on Monday, it might be good for people to take a look at.

Certainly. Thanks a lot, Roger.

Good. Thanks, John.

And next we will go to Rick Nelson with Stephens. Please go ahead.

Hi, Rick.

Thanks. Good afternoon. Hey, Roger. Your import percentage is the highest of all the public dealer groups, and now you're at 10 billion in revenue. Do manufacturer restrictions provide any obstacle to maintaining that type of proportion as you look forward?

With this particular -- other than Lexxus, which has a specific number of dealerships in the domestic market, all of our framework give us plenty of runway. And what we've -- what we've done really is looking at the manufacturers in total, because as you look at Ford and PAG, and you look at -- look at Daimler-Chrysler, and General Motors, in total, we still have significant businesses with them which we see as just a different area of the arm of their sales business.

So we don't at this point -- the only thing I will tell you that has an impact, and that's CSI. We have seen the manufacturers taking a much different task, as you go in for approval, and buying businesses, if your CSI, that's your customer satisfaction index is either be service or parts, it becomes much more of a discussion. I'm not saying it eliminates you from being able to buy, but that is one of the metrics that obviously we have to be on top of, and I think we did a calculation, we were between 75 and 80% total of all of our dealerships were green both in service and parts, at the end of the year. And I think that that has obviously got to be over 80, and going to 90, and I think that's one of the ways we are paying our managers, too. So I think that is important as we go forward.

And just a follow-up on the acquisition front, several of your peers are also talking about growing the import proportion of their revenues. Can you comment on pricing of the import dealers?

I would say that there's such a big landscape out there, that -- and many of these deals come to us because people -- we either had contacts in the marketplace, or some business manager brokers who are serving some of these up, but I really am not -- I can't remember where I've competed head-to-head, that I know of, with any of the other publics, maybe there has been some competition, but I think there are so many -- with thousands of dealers out there. And we're all operating in different markets. I think that is key. We get deals done quickly. I think that -- and it is a matter of what you're looking at, we've been in the northeast, some people are very strong, in the small states, and so it is a matter of your appetite, I guess.

Okay. Thank you very much. Congratulations.

Thanks.

Our next question is from Matt Nemer with Thomas Weisel. Please go ahead.

Hey, Matt.

Hey, good afternoon, Roger. First question is on the U.K. sales. I think you were up 7.5%. The market was down mid single digits. Your brands may have been up a little bit. But I'm wondering what is driving your outperformance or Sytner's outperformance relative to the marketplace?

Well, I think if you looked at Sytner's brands, they were up 2.6% for the year. So I mean the brands themselves. So we outperformed the brands from our perspective in the stores we have, obviously some of it's due to the new facilities. I think it is the reengineering that is taking place in those markets, where we might have three dealerships serving three contiguous markets, so in those cases we have the benefit to maybe get less shopping done outside the areas. So I think those have been some of our benefits. But just as a datum point even though the market was down, about 5%, the brands that we're involved in were up 2 to 3% from an OEM perspective and we had the benefit of 7.5.

Okay. And then this is just kind of a housekeeping issue. But it looks like your franchise count internationally is up to 126, which I think is a pretty big move from the last quarter. I was just wondering if that's just something that we missed or?

No, that would be because of probably the William Jacks acquisition today, which was 18, which would have driven that up, and as you know, we made a tender, we actually settled with a major shareholder route with a tender process that will take 21 days, and to see acceptance. We got a little the bit of input already on it, about 5% of tender, the balance weight and I think till the last day, because there's lots of different transactions going on over there right now in the automotive space.

Got it. Okay. And then on the SG&A, it looks like you're actually -- your rent expense was up about 18 basis points as a percent of sales. If I back that out, and I back out the one-time warranty gain, your pure SG&A was actually down about 20 basis points year-over-year. So I guess the first question is, what drove the rent so much higher? Was it a particular sale lease back transaction? And then of the SG&A decline, is that -- what's driving that? Is it advertising, compensation, a little bit of both?

Oh, I think from a rent perspective, as these things go on line, we had a number of -- we had 200 and as you know, over 200 million of CapEx that we funded so those would have been ones we completed and all those -- you capitalize your interest, and then of course, when you move out, you have those costs associated but it is a normal flow, both domestic and internationally. From an SG&A perspective. I've said it before, we continue to monitor that, but on an overall basis, I think we're in line as we -- I think some of our higher costs on our SG&A you might look at would might be our personnel process. We've got a very strong group of people out there. That is also helping us drive down our employee turnover.

So the plan going forward is more to leverage the existing expense structure rather than kind of look at places where you might be able to take out some expense?

Well, listen, we've got to look across the board. I think it is a balance, a delicate balance. I mean believe me we're looking at all our costs. As we get into some of these bigger sites, where their destination, you take Scottsdale 101 in Phoenix, really just the identification of the brands that are there and then the inventories and location, reduces some of our costs of advertising, I think that we've really grown the business from 3 billion to 10 billion over the last five years, and we've had to add people. Our comp, you have comp plans that are in place, and then some of these new locations, and the higher units we end up paying out maybe a little more comp as a percent of revenue. And I think you got to watch that. Because we come in and try to have one comp plan that fits all we could lose people. And I think that is in the sales side, where it is the highest turnover, I think that we've got to be selective on that.

But our back office consolidation continues to go well. At the corporate level, would he have our own legal staff. We have put in a great insurance department here. So there is a number of things that we're looking at. Obviously, our dealer management system in the U.K. has taken some more costs. We didn't have probably as efficient a system there that we have here and we are now starting to look at that, we brought in James Henderson who came in, has done a good job and is being facilitated by Sally Hill in Secaucus. So they're working together to bring that common chart of accounts, which we have to do under Sarbanes and then have you higher audit costs. When you've got an international business, I can tell you we have two sets of auditors, so those things obviously bring higher costs but there is no excuse for us not to be trying to drive that down in all areas. So we're looking at it, when you look at it, amongst the peers, I see some are lower than we are, but I think we're kind of in the middle of the pack right now.

Okay. Great. Thanks very much.

Our next question is from Jonathan Steinmetz with Morgan Stanley. Please go ahead.

Jonathan, how are you?

Doing well, thanks. Good afternoon, Roger. A few questions. First, on the service and parts, on the 9% domestic comp store sales increase, can you give any type of break down between customer pay and warranty? Maybe which brands or campuses really drove this? And sort of whether this was more repair orders or dollars per repair order?

Well, I think number one, we've seen a tremendous increase in our Scottsdale 101 and also the operations in Phoenix. We've doubled -- our service and parts gross in Washington, was running less than a million dollars, and we're running almost 2.2 to 2.3 million per month. So we've got a lot more bays. Which is driving that. And I think that at the end of the day, it is just better utilization. And we have to put the techs in. We've used UTI to supply us with a number of technicians, a lot of those come on as trainees. There is some lower costs there. They mature into full line techs so we maybe get some benefits in gross there, also.

I think it is the growth of the bays. We've done the same thing in the U.K. From a mix, there is no question that the quality of all the manufacturers is very, very good, including domestics. So I would say we are running probably 60 to 65% overall, on customer labor, and 35 to 40 on warranty. Now, you got to take into consideration, with the extended warranty, and the certified used cars, when those cars come in, obviously, they're driving a little bit higher warranty mix, but the good news is, we're getting that into the shop, where it might have gone elsewhere, on a used business. Any more of the specifics, I think maybe you could get a hold of Tony offline and he might be able to give you a little more vision on some of the other reasons. But those would be my initial thoughts for the question.

Okay. Switching gears to the used side, your grosses were up a little over $200 a vehicle. What does that look like domestically, and what does that look like internationally? In other words, was it similar both places?

I can't give you that. I think that we have continued both, because of mix, we've continued to see a growth in our gross profit, but that one I think you will have to check with Tony Pordon.

And last question, if you happen to have data sitting in front of you, Toyota has got a new Camry coming out. I'm trying to figure out what that is going to do for you. You will clearly sell more vehicles but do you happen to know how many of them you sell? And then maybe what are the grosses today and how much do you intend to get in increase in grosses when a new product like that comes out per vehicle?

Well, let me say this. That is going to be a hot car. How many we are going to get obviously I can't tell you. I'd have to go to all the dealerships and really look at what the forecasts are. But we will see probably for the first I think 120 days you will see full margin on those vehicles. The good news that none of those will go in the fleet market. Some the fleets we will see a real spike there. But that's what's going to happen during 2006. There's so many new products coming out, not just at Toyota, but as you look across the board, with Audi, you look at BMW, you've seen Mercedes come up, all of these are going to drive, are going to drive some margin for us, so you've got the Porsche came and obviously the Lexxus 460, these are all ones that will help us get more margin. Purely Toyota discussion, I would say that the Camry obviously is the leading brand for Toyota, and with their ability in adding the new plant, I think we're going to see nice availability. But again, I haven't, I can't give you that precise a number here on the phone.

Okay. Thank you very much.

Next, we will go to Jerry Marks with Auto Retail Stocks. Please go ahead.

Hey, Jerry.

Hi, Roger, how are you? I just want to get your thoughts on the Pendragon/Vardy merger over in the U.K. Is that going to have an impact on Sytner at all?

Well, it is going to have a positive impact if it goes through because it is going to value -- it should value Sytner 8 or 900 million and when you think our initial purchase price there three years ago was 135 plus 20 of debt I think it is a very active transaction, Pendragon increased their offer, Lookers now is out of the picture, so I see that thing being completed over the next short period here. So that won't have any effect on us. In fact, the good news is there might be some things that would drop out of there. We might take a look at to fill in some areas where we need more scale.

You mean parts where the manufacturers won't let them--?

Well, yes, that, and also the Pendragon, it is a pretty fluid discussion over there, as you make acquisitions, certain of the PLCs are strong in certain brands. We happen to be in the premium luxury. Other ones are maybe in more of the volume brands. And there is always a discussion going on between the senior management and the ability to offload ones that might not be strategic.

Okay.

I see that as a benefit, and Pendragon has done a good job. It is a big company over there. They have many volume brands they're involved in. But at this particular time, I see the benefit to Sytner is that it gives us some real value in this international strategy and because when you look at our businesses, and compared to Vardy's I would think that we would get equal or more value from the standpoint of the market.

Kind of a sum of the parts if we were to look at it in that way?

Yes.

Last two questions. Could you refresh my memory, guidance, does that include the new stock options rule?

Jerry, we really have moved away from stock options, but we have always -- we have expensed those for the last I think two years and we're using restricted stock units for our -- for key management, with a vesting period over typically three years depending on the program. And it gives us the opportunity to have our key management people, have equity in the business. And then there is some value there on day one when they get them, it's a matter of them vesting over a three to four-year period.

Okay. So that's not going to play an impact to you guys. And the last question, your growth rate, there are a few extraordinary items but if I'm looking at it, it looks a little bit higher in '06. The midpoint of your guidance range. Than what you did in 2005. From kind of 5% up to 7%. Just wondering if there is something that gives you a little bit more confidence looking out into 2006? Or am I missing something in terms of the extraordinary items that we include and exclude?

I just think that the range represents an 8 to 12% increase, if you go back, and you get the real number, $2.49, when you take out the unusual items, and then we get the -- obviously, the benefit of the accretion due to the sub-debt we had. Because money costs are key. And with us having almost 50% of our total debt, including floor plans fixed now, I think that gives us another benefit.

No real change in your outlook for kind of an 8 to 12% long term growth rate or?

Well, I think if you looked overall, you would probably say 5 to 10% would be more realistic. It is so hard. I know you people on the phone want to have a hard number. But we're trying to be realistic here. Because we are giving you guidance.

Okay. Thanks, that's all I had.

Thanks, Jerry.

Our next question is from Peter Siris with Guerrilla Capital Management. Please go ahead.

Just a simple question. Your return on equity was 10 point something percent?

11%. Average equity, yes.

You have been spending very heavily on building these fantastic facilities. I'm curious, as -- if you look at sort of your more mature properties, or as time passes, where do you see two, three years from now the return on equity going?

Well, I'm going to be a disappointed guy. As a major shareholder, we 15 is our target. And we need to get there. Not only from a Penske perspective but also from the other shareholders and I can tell you that the maturity in Washington of the Tysons complex, the Scottsdale 101, the McDowell road in Phoenix, and then also San Diego, all of these are showing excellent results. If you looked at probably from a parts and service standpoint, we've seen anywhere from 20 to 25% increase in our back office -- in our parts and service gross profits, so this is strong, and we will see that.

Obviously, when you build a complex in Turnersville and do you one in Inskip like we have up in Rhode Island, initially you pick up all of this overhead. And you've seen our rent has gone up 24 million year-over-year. And obviously, that is because of these increased campuses but also it is also driving our growth.

But on a go-forward basis, we could expect the return on equity to move up to 15 level say over the next three or four years.

I certainly would expect so, yes.

Thanks, Roger.

And we will go to Joseph Amaturo with Calyon Securities. Please go ahead.

Hey, Joseph.

How are you doing, Roger? Just one quick question. We have enjoyed a very robust housing market over the past several years. I was just wondering if you could share your point of view on any kind of noticeable interaction correlation between the increased demand for premium luxury vehicles and housing values, and/or any other noticeable demographic trends that are driving the premium luxury segment today.

Well, I see the financial markets in the northeast, the people that work in those financial markets, still buying the premium luxury cars. And one thing that is quite attractive, if you start to look at that premium luxury segment, there is a lot more leasing going on there, where to me, that somewhat takes out any effect of maybe higher interest rates, and I don't see a correlation, at least at this point, when you look at specific brands today, Lexxus, about 58% of their business is leased. Now, that's a plus, one thing it does have a little impact on us, that we typically can't sell as much after market extended warranties for those because they are typically three to four-year leases and the customer turns them in. Acura is about 38% and when you look at BMW, they are at 56. So it's very easy if someone has decent credit to be able to get into one of these premium luxuries. And that has really been the strategy.

They don't have to worry about the big numbers of cars coming off lease. In fact today with the full circle of programs and the certified used, they are really enhancing their business, because we just don't have enough good used cars now in those premium brands so I don't see housing, at least I don't, I mean I'm not an expert on that obviously, but I don't see them, the housing, whether it is softening or up or down have any real impact. I think you look at financial markets and you certainly, in the U.K., and you looked at New York and the northeast, lots of people got bonuses and they're buying new cars. We saw a very, very strong December.

Okay. Yes, and then I mean to my knowledge, it looks like the U.K. housing market has softened and given your outperformance there, that just reinforces your comments.

It is all brand related. I mean remember, the U.K. market was down around 5 or 6% on a retail basis. The brands that Sytner represents were up 2.6. And we were up 7.5. So we outperformed the brand in total as an average. And I think that -- I expect us to do that.

Roger, well, congratulations on a very solid year, and quarter, and I will speak to you soon. Thank you.

Thank you very much.

[OPERATOR INSTRUCTIONS] We will go to Marc Irrizarry from Goldman Sachs. Please go ahead.

Hey, Roger, how are you?

Very good.

Nice quarter. My question, actually first question, on the SG&A to gross profit, if you take out the $0.11 charge from this quarter, it looks like your SG&A gross profit rate actually went up to about 79%. Up about 100 basis points. If you could just kind of explain when should we start to see operating leverage as opposed to deleverage?

Well, I think you also Marc, you probably should look at, we had a rent increase that almost offset the warranty, the warranty was about 8 million, and the rent increase was about 6.2, so when you factor those in I looked at SG&A to gross, probably we were down about 200 basis points versus 2004. 77.5.

Okay. Got you. So once you kind of get past the rent, you would expect to start to see, maybe as you get closer to '07, some more of the higher margin revenue dropping through the bottom line?

I would expect so. But again, I made a comment, I forget who it was that asked me earlier on our SG&A, we are going to drive SG&A but again, there are so many components, you've got your variable comp and all of these different disciplines in the business, and we need to drive that, and if business gets better, you can't adjust someone's pay plan. I mean we can't get it done in our place. So we're very sensitive to that because we don't want turnover. But again, there is a number of factors. We've got our back office consolidation, our advertising and our legal, our insurance obviously is all part of our back office support. But I don't think when you look at it overall, running anywhere between 11.7 and 12% is certainly anything that is -- would look that we're not going in the right direction. But I've debated this with you and many others in our own organization and I'm looking at top line growth because if I don't have the top line growth, I'm never going to get the business where I need it to go.

Got you. And then just on the finance and insurance piece, it looks like you're running about $1,000 per car, and I guess part of that is probably the Sirius impact.

Well, the $0.11 -- the $0.11 took us to roughly 1039. You probably take $139 out of there, in the fourth quarter. And it would be more like 900. And in the 900, we have baked in there probably about 40 to $50 that would be a Sirius benefit. So you take the $0.11 out, and you take -- you would be at roughly 900. I think that is a pretty good range for us, as we go forward, when you look at our mix. We don't get quite the benefit of F&I in the back end finance in insurance because there are so many lease programs. I mentioned earlier, on an earlier question, and we don't get the benefit to sell many of the products because of leases, you don't get the extended warranty which is one of the key products we sell.

Great. Okay, thanks. Great quarter.

Thank you.

And Mr. Roger Penske, no further questions. Thank you.

All right, thanks, everyone, for being on board. We will talk to you next quarter. Thank you very much.

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