Penske Automotive Group Inc (PAG) 2006 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon and welcome to the United Auto Group first quarter 2006 earnings conference call. A press release which details United Auto's first quarter results was released this morning and is posted on the Company's website, which can be viewed at www.unitedauto.com. The call today is being recorded and will be available for replay approximately one hour after completion, through April 25th. Please refer to United Auto's press release dated April 11th 2006, 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. Please go ahead, sir.

Thank you, John and good afternoon everyone. Welcome to the United Auto Group first quarter 2006 conference call. Joining us today for the call are Roger Penske our chairman, Jim Davidson our Executive Vice President of Finance, Bob O'Shaughnessy, our Senior Vice President of Finance and J.D. Carlson, our Corporate Controller. At the conclusion of our remarks today, we will open up the call 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 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 2005 annual report on form 10-K. At this time I would like to introduce the Chairman of United Auto, Roger Penske.

Thank you, Tony and good afternoon everyone and thanks for joining us this afternoon. I'm pleased to report that our business produced another solid quarter of financial results, despite facing several challenges impacting the retail consumer, including the impact on the economy of rising rates and higher energy prices. Despite these challenges, UAG performed very well during the first quarter and posted double-digit increases in revenue, gross profit, income from continuing operations, and related earnings per share. We believe our strategy of aligning our brand mix with strong brands that are gaining market share helped us to perform in this tough first quarter market.

In the quarter, revenue increased 11.6% to $2.7 billion. Our margin, our gross margin increased 29 basis points to 15.6% and income from continuing operations increased 10% to 26.2 million. And related earnings per share increased 10%, to $0.56 per share.

Our performance during the quarter was highlighted by same-store retail revenue growth of 4.2%, including a 10.7% increase in retail revenues from our service and parts operations here in the U.S. A 15.5% increase in retail revenues, at our premium brand dealerships in the U.S., our service and parts revenue grew to 11.6% or 46 basis points in the quarter. An average of 85 basis point increase in the gross margin of our service and parts operations.

Looking at the quarter in detail, our revenue increased 11.6%, including new vehicle up 10.1, used vehicle up 11.6, F&I up 10.5, and service and parts up 16.2. Our average selling prices over the quarter on both the new and used vehicles increased also. New is up $707 per unit to $33,680 and used increased $1450 per unit to 27,445. Changes in foreign exchange rates had a modest impact on the first quarter. Our revenue was negatively impacted about 67 million. Income from continuing Ops -- $1.2 million, and EPS about $0.03.

Looking at our brand mix, I think it was a key differentiator during the quarter. In the U.S., as we know, foreign nameplates gained another 2 percentage points over the prior year and in our first quarter, foreign and premium brands represented 92% of total revenues, including 60% for our premium brands. The domestic Big Three, represented the remaining 8% of total revenue. If you just take the Big Three in the U.S. our brand mix was 87% foreign nameplate and 13% Big Three. If you want more specifics on our brand mix, you can see our press release that we put out this morning, it has the specific data by manufacturer.

Looking at same-store performance for the quarter. New retail revenue was up 2.8%, used retail revenue was up 5.6, service and parts up 8.2, and F&I revenue was up 5%. This gave us an overall increase in same-store 4.2%. In the U.S. same-store retail growth was up 7% and it was down 1.7% internationally, as our business in the U.K. faced challenging environments in their new vehicle retail sales environment. New retail actually if you took it by specific U.S. internationally, U.S. retail revenues up 6.2, and the international was down 6.4, giving us an increase of 2.8. On the other hand, used was up 8% in the U.S., it was up 3.1% internationally for a 5.6 and service and parts up 10.7 in the U.S., 2% internationally, giving us an increase of 8.2 on service and parts. And again overall, 4.2%.

Let me address interest expense for the quarter. We certainly have felt the effects of our rising interest rates. Short term interest rates in the quarter increased 50 basis points. This represents the 14th and 15th increases in federal funds rates since June 4, '04. This results in an aggregate increase of 3.75% to our floating rate debt. To be specific, for point interest expense increased 21.2% to $15 million in the quarter, primarily as a result of these recent increases in rates. Our other interest expense increased 5.2% to 12.1 million, as we felt the impact of the increased rates on this debt also. During this period of rising rates, we have continually looked at ways to reduce our interest expense or lock in long-term financing at attractive rates.

As I have discussed in previously, we actively participate in the sale leaseback market to finance our capital projects. I continue to believe that this is an efficient financing source as we are able to lock in very attractive rates on a long-term basis. If the current trends today in the first quarter, looking into the second, we're looking at U.S. rates in the 7.5 to 8% and then internationally, specific of the U.K., we're looking at 5.5 to 6%. You know, very efficient financing on a long-term basis giving us site control on many of these properties. We also have managed our long-term borrowing arrangements, to provide long-term financial flexibility at attractive buying rates. I think you are well aware of our recent, convertible debt offering at 3.5%, this is another example of how we are actively managing our interest rate exposure. I will cover the specifics of our indebtedness in more detail in a few minutes.

A quick note on taxes. We currently project our tax rate for 2006 to be in the range of 36.5 to 37%.

Let's talk about a few balance sheet items. Total inventory was 1.3 billion, up 94 million compared to March of '05. I think the most important thing, is on a same-store basis, vehicle inventory was down $11.6 million versus last March in '05, and again the uptick, specifically, is based on the acquisitions we made in the first quarter.

At the end of the first quarter, our worldwide days supply on new, was 42 days, versus 49 at the end of the year. And on used it was 30 days, versus 33 days at the end of the year. If you just take out and look at the U.S. by itself, new vehicle inventory was 50 days versus 70 and our used is at 33 days, so we've had great inventory management during the quarter. And we get the benefit of the big volumes generated, because of the registration month in the U.K., so that drives our overall worldwide number down.

Moving on to CapEx, we continue to be very efficient with funding of our investments. After the sale leaseback proceeds we expect to spend 100 million during 2006, and the net capital expenditures in the quarter in Q1 '06, gross was 38 million, sale lease back proceeds of 19 so the net was $19 million in Q1. Looking at our leverage, our debt to cap was 37% at March 31st and as of that date we had a $688 million of nonvehicle debt. And that consisted of 300 million of 9.625%, ten year, senior subordinated debt outstanding with a call provision in March of '07 and 375 million of 3.5 senior subordinated convertible notes and approximately 13.5 million under our credit agreements and other borrowing arrangements. As of today, we have approximately 650 million of floating rate availability under our credit agreement, and based on our current capital structure, 45% of our total debt, including floor plan debt, is fixed with a weighted average rate of 6.1% and a weighted average maturity of 4.6 years.

Looking at acquisitions during the quarter we closed on 5 and we expect that they will add approximately $580 million in annualized revenues. In the U.S. we acquired the Cush group, in San Diego which included 7 franchises, including 4 that are located adjacent to our existing dealerships in Carne Mesa. Two Honda, two Acura, a Jaguar, Aston Martin and Mazda. We expect Cush to add approximately 300 million in annualized revenues, and when you take the Cush acquisition with the other business we have in San Diego, we have almost $1 billion dollars of annualized revenue in that very important market to us.

We also announced our agreement in principle to acquire Motor Works BMW Mini, in Minneapolis, which we expect to generate approximately 80 million in annualized revenue. Motor Works represents our entrance into the market, which is the home of corporate headquarters of companies such as 3M, Target, Best Buy and General Mills. And pending on customer due diligence and approval, we expect this acquisition to close sometime in the second quarter. Internationally, we acquired William Jacks, a PLC that includes 11 franchises, which we expect will add approximately 150 million in annualized revenues.

Again, we continue to see attractive acquisition opportunities in the U.S. and internationally, and we'll continue to expect to acquire businesses in 2006 which will meet our annualized revenue targets from acquisitions of 6 to 800 million. We're also continuing to divest franchises that did not meet our return requirements, our location strategy or had significant OEM corporate ID and CI requirements.

Let me move to guidance. You've seen the press release this morning, we reiterated our 2006 our projection earning for continuing ops in the range of $2.70 to $2.80 for the year. We also provided guidance with respect to the second quarter, in which we expect earnings from continuing ops to be in the range of $0.75 to $0.78. As I outlined in our last call, our guidance assumes same-store growth of 3% to 5% percent for the full year and I think if we go back and look at the last 5 years I think we've have had, I think a 6% comp., each year, so we're in line with history. Acquisitions again totaling between 600 and 800 million on a gross basis and we also put in 25 basis points interest rate increase on a per quarter basis. So, 100 basis points for the year. Also $0.10 in reduced interest expense from the convertible note offering we completed during the first quarter. If you go through the math in the first quarter, you know, based on the savings and the cost of the - of the bond offering and some of the standby fees, that we had approximately $0.02 benefit in the first quarter. We have an average outstanding of 47 million shares as we ended the quarter.

Before open up the call for questions, I'd like to bring up to date a new initiative we have testing in the U.K. During the quarter we began to roll out a new program aimed at improving our performance in wholesaling used cars in the U.K. This new program represents a constant online auction dedicated solely to wholesaling vehicles. It would be similar to other Internet auction sites we have here in the U.S. It provides our potential bidders access to our entire stock of preowned vehicles that are available for wholesale, instead of those locally at the local dealership or some that you might see at local auctions. So far the initial response has really been terrific. In the first quarter, we were able to increase our wholesale profit over 400%. We made 100,000 pounds last year we made 400,000 pounds this year. We intend to continue to develop this product in the U.K. and if it's successful, we will investigate the possibility of bringing it to the United States.

So in summary, for the quarter, UAG performed well. I think despite some difficult markets, I continue to believe our strategy on focusing on brand mix, capital investment, certainly the expansion of our service and parts operation, reducing our employee turnover and improving customer satisfaction are driving our business. Our investments are maturing as evidenced by the strong growth in our service and parts revenue this quarter and also our gross margin. Our employee turnover continues to decline. In fact, for the year we are averaging 31%, which represents an additional 10% improvement over the prior year. And our customer satisfaction scores are driving our repeat and referral business. So, at this time let's open it up for questions. Thanks for joining us this afternoon.

[OPERATOR INSTRUCTIONS] And first going to the line of Rick Nelson, with Stephens Please go ahead.

Thanks. Good afternoon Roger.

Hi Rick.

Can you address the decline in same-store sales internationally down 6.4%? The industry I know was down, but not that big, and given your brand mix?

Well, I think that the key thing, we were only down on new. You know, that market has had some pressures, and what we decided to do, not chase this corporate business in the first quarter because it was lower margin. And I think that, you know, overall with an increase in used and our service and parts, we really gained some share. When you look at specifically in the U.K., you had for the quarter, you know, BMW was up 16%, Mercedes was up 22, Land Rover was up 17, and Lexus up 59%. So, basically, you know, that's right in our sweet spot. But to me, we really outperformed the market when you think it was down overall, when you look at both retail for the period. Also, we had the impact of foreign exchange during the quarter.

And the gross margin, which I guess segues into this, you were able to hold down grosses really well on both new and used in an environment that we hear there's lots of pressures. How were you able to do that and then also I want to follow-up with SG&A, the widening there was, as a percent of revenue and of gross I guess rent was a big factor there?

Well, I think on gross margin, I guess I've talked to some our people, I think our lower turnover, is-we have better people now on the sales side and we are able to execute I think in a better way. And also with some of the new product coming out in the premium luxury probably helped us, you know, maintain or increase that margin. It went from 15.3 to 15.6. And that to me, I think it's part of our overall mix when you look, our service and parts revenue, we've talked about in the past, I think we've gone from roughly 9.2% of total revenue over the last three or four years up to 11.6. So I think that had -- I think that had a big reason for the increase.

You asked about SG&A. You know, SG&A went from 12.3 to 12.6, up 30 basis points. We looked into it in detail, and basically, you've got about 15 basis points which relates to -- to rent, increased rent, on a same-store basis, and there's another 15 that relates to utilities and property taxes based on the scale of the new businesses that we've built in most of these markets. And that's pretty much would cover - would cover that increase. We see, you know, our SG&A to be similar to where it was last year, up slightly this year because obviously we've got a bigger spend on facilities, as you know, we rent our facilities through the sale leaseback versus depreciation up and SG&A and interest being below the line.

When do you think we will start to see leverage there, Roger?

That's a good question. That seems to be the question that people are asking me. We're continuing to grow, and I guess Rick, if you look at our business, you know, we are continuing to put people in place and infrastructure in place that drives employee turnover down. Certainly, we've seen that. We've grown our business, on a comp. basis 6% a year and I'm not getting into reducing the revenue or maintaining just the same revenue, I'm try to grow. So, you're going to have some additional costs with that, but I feel when you look against-when last year I looked at SG&A, you know, for the total year in 2005, and from an SG&A perspective, I didn't think that we were out of line, last year basically with 11.9 when you looked at the other people in the space, obviously we were up slightly the first quarter last year with 12.3 so we're up slightly this year, but we’re continuing to consolidate our back offices.

But I would say this, I want to be careful, you know this is different than a manufacturing business where you have a lot of bar coded costs and then you bill your customer. Everything we do is a negotiation. I think the controls that have to be in place - and we have a little more cost associated with an international operation because we have a separate set of auditors internationally, some of the consolidation, there's more people involved. But I think overall, you know, we're quite efficient when you look at the overall business and at the rate of our growth.

Okay. Thank you for that and good quarter.

Thank you.

And next we go to Scott Stember with Sidoti & Co. Please go ahead.

Good afternoon.

Hey Scott

Maybe talk about in the U.S. of the new sales, maybe by a month and can you maybe comment on what you're seeing right now in April?

Well, you know, if I look at the first quarter, I think, you know December was strong as we ended 2005. And quite honestly, you know, January and February were -- you could say were relatively soft, with a gangbuster March. And, you know, we had, obviously we get the benefit of the U.K. it's a registration month. But you add some new products that came out. The Camry, you certainly have the Q7, you've got some of the art class of those the things which are starting to hit the market, the S class on Mercedes. So, those gave us some good margins.

And I think when you look at overall business, our climate looks pretty decent. As you look into April, the first two weeks were good, we end up this past weekend because of Easter probably, you know, it's a little bit softer. It's still a challenging market, you know as you go forward, but I think our brand mix is good. And when you look at the increase of the four nameplates, they’re up 2 points and then you really take a good look at the first quarter, you know, fleets were a big portion of the Big Three. And you know, we don't participate in those from the standpoint of our business.

And as far as, you know, service growth capacity, you've obviously added a lot of capacity over the last couple years with these automotives, could you talk about where you are with filling up these stalls, what your service capacity is right now, utilization rates and so forth?

Well, I think we have about 3400 stalls, give or take a few, and will add another 175 '06, '07. And it's interesting, if you just took - we've talked a lot about Scottsdale, you know, 101 that we built in Phoenix. The service and parts gross was up 12.6% this past year. San Diego, for the quarter, San Diego was up 16% and Washington was up 19%. In fact, when you look at our Mercedes-Benz store in San Diego, we had 105% fixed coverage. This has 100,000 square foot facility and it's got a big rent factor. So the parts and service are absolutely driving, you know, our margins. And we can see it across the country because we've made these investments and you’ve got much higher rent factors in this kind of fixed coverage. And probably when you look at capacity, were sitting at probably about 60% in the West, and probably 70% if you looked at the rest of the world in our other markets.

And the last question has to do with SUVs and truck sales. And we've seen evaluations pretty much fluctuating all over the pace place. Now with the gas prices popping back up, are you seeing any trends right now, in March heading into April?

Yeah, there's pressures on the wholesale market on SUVs, these- there's no question about it. The good news is, that a lot of our high volume brands Toyota and Honda, they're perceived to have the best fuel economy, and the mix of those products, primarily if you look at the market, the big percentage of their share is in cars. And you know we’re not involved in big SUVs. I think there's been a slowdown in the hybrids. Prius continues really to be the leader in that space. They did almost 21,000 units in the quarter. And they only had a 5.5 day supply. Now, you look at the SUVs with-and many of the nameplates, I know Ford put out a 0% financing for 5 months on the Escape. I think the Lexus 400h probably had about 45 day supply. So, if that's really an indication of the market even on the hybrids there is some slowdown.

But, you know, we look at gas prices and we look at interest rates. And when you look at our mix between Audi and BMW, Mercedes and most of the premium luxury brands, over 50% of those, you know, are leased. So, you know, we don't see a lot of impact there at the moment. And we think that the typical customer drives 15,000 miles a year. Let's just say the vehicle gets 20 miles per gallon, if you had a $0.50 increase in your purchase price at the pump, probably going to cost you about 30 bucks a month. So again, you know with a big percentage of our being premium luxury, 60%, we're not seeing a big impact. And I wouldn't see that at the moment. I just can't believe, $70 a barrel obviously. But at the moment I don't see that as a big issue for us at the moment.

Alright that's all I have. Thank you very much.

Thanks.

And next, we have a John Murphy with Merrill Lynch. Please go ahead.

Thanks guys. Quick question, Roger on your wholesale and used vehicles in your international operations there in the U.K.. I was wondering why you decided to try that first over in the U.K. and really what potential you see here in the U.S. considering there's a developed auction system here in the U.S.?

Well, number one, we felt that you've got costs associated with taking vehicles to auction. You've got, you know, auction prices -- or actually fees, the fees that you have to pay at these auctions. You've got, again, the transportation expenses. And what this did, it gave us a customer base that buys wholesale vehicles from us all over the country, that can be anywhere in the country. It could be on line, you know, bidding on these vehicles. And it was a very efficient way -- in fact, we tracked this, and said that we're getting 106% of what you and I would call blue book, you know, without any associated costs.

So this is something our guys put together over there. They wrote the software, they've looked at all sorts of auction products and it seems to be very efficient. You can take a picture of the car with a phone camera. You put it online and you also have a description of the vehicle. And I think we tell them that there could be up to 150 pounds of other reconditioning required. You give a complete history of the vehicle. Then what happens is the online bidder can see how what how many people are bidding, when the last bid was, what the increment was, so it's a real live auction.

In fact, I participated in one - I was over there the other day just to see how it worked, and again, I think if we get the continued efficiency with this product, we're going to show it to our guys over here and see if we can't, you know, open up our entire used vehicle inventory in the U.S. to a similar type product. Now, we might do it regionally , we don't know yet, but I think before you roll something out like this in the magnitude of the United States, we'd want to be sure that we have a model that's secure, efficient and gives us the value.

You know, we have gone over here almost to exclusive closed bid auctions, which I know a number of dealers are doing that have multiple locations in certain geographical areas, which has proved to be very good for us. You know, we don't use, I would say of the 20,000 cars that we wholesaled in the past quarter, I wouldn't think probably more than 10% of them went to what you and I would call live auctions. That's - it would be an estimate. We've got a 60 day policy on most all of our brands except the super premium luxury.

Okay and then on international versus U.S. also, what you're seeing out there for transaction multiples on the - on dealership today, it seems like the multiples is certainly a dichotomy over in the U.K., where it sounds like there's certain deals that have gone really high but it sounds like the average transaction multiple is lower in the U.K. than the U.S. I was wondering if you could expand on that.

I think it's about 50%. If you looked at whatever multiple you're paying here, it would be about half over there. And there's a lot of support by the OEMs in helping us consolidate certain of the market areas. Mercedes took 134 dealers and now have 34 partners. All the manufacturers are in that same mode. And William Jacks, obviously, was a public PLC, which we made a tender offer for, it’s probably work in process. But I think in the end, what we'll have there will benefit us in the region where they are.

Why do you think there's that huge discrepancy in multiples? I mean, does it have to do with state franchise laws or what's going on?

Well, we have state franchise laws here. Over there, we have block exemption, which is a little more open market, but I think what's happened is there's so many smaller dealerships over there which are, you know, the owner/operator type that are now confronted with the large CapEx for C I, they've just decided they're going to hang up and in many cases the manufacturer helps them find, you know, a suitable partner. But there's a lot of consolidation going on. I think you're going to see these being driven up, probably over the next 12 months, but at the moment it's a pretty fluid market.

Okay, and then this last thing on SG&A. You know it sounds like there's a lot of balancing going on there, I mean, the SGA as a % of gross might be on the high side, but you think that helps drive your gross margins higher, keeps your turnover lower. You know, as we, at the point in life cycle the company is at, is it going to be two or three or maybe four or five years out before you start, really focusing on SG&A and just keep it at its current level for the foreseeable future as you grow the top line?

Well, I guess I'd rather have, probably as I see the margin expansion and the gross profit expansion, I think will be good for us long term because of the gross in the business. It would be hard for me to say whether I've got 18 months or 24 - we've been up and we've been down. If you go back and look at our history, you know we're focused every day certainly on SG&A, but I'm also trying to grow this business. You know, if you look at the growth since 1999, you know, we really have -- the business we started was about 1.5 billion. You know, we've got a running rate this year of potentially close to 12. You know, I can't look at every corner. I think were very efficient. We don't have the turnover of our people, so if you said how's your comp., you know, I would say, comp. must be okay because we don't have a big flood of people leaving the organization. And I think better people are going to get better CSI, we can reduce advertising because we'll get repeat referral. This is the same formula I used when we built the truck leasing business. And, you know, we’re number one in that industry today.

Thank you very much, Roger.

Thanks.

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

Hi, Matt.

Good afternoon, Roger. First question is, on the floor plan expense, what's your inventory forecast going forward? Can you maintain this level? And then, also, can you give us an update on floor plan credits and any changes that you're seeing there?

Well, you know, we don't get as many floor plan credits because we’re not -- our mix is not domestic. And I think that, you know, we're going to look try to, over the next quarter to see, probably a day’s supply, 50, 52, 53 days would be pretty consistent. You know, we had a benefit, versus a year ago you know when we look at our year-end meaning, at the year-end because of the registration month and our credits for the quarter were 7.2 million versus 5.8 last year. So, we did have some benefit. But remember, days supply -- used 30 to 35 and I think we want to have a 5 on it from the standpoint of our new inventory.

Okay. Next question is on Minneapolis. Is that just a one-off purchase or are there other stores in that market and maybe potential for a campus in that market?

I don't want you to raise the prices on that market with that question, obviously. We're interested-we're not going into that market because we don't think there's other opportunity. We've got a great store in Motor Works, it's a premium BMW Mini store. You know there's only about 80 Mini stores in the U.S., they were in the top 10 last year, big fixed operations and, I think, it would give us a basic platform [Peter Hass] of course, a fellow that has worked in that area will be our area VP there and our goal is to grow that market over the next 12 to 18 months.

If you look at the market, there's only two BMW stores in that entire market, and we're right across from Best Buy, you've got Target there. So there's real opportunity. I think the driving - average drive there to work is about 30 minutes. So it's a No. 14 ADI market in the country. So, to me, a lot of people don't like the snow. There's not enough room, I don't think, in South Florida for all of us, so I've moved into different parts of the country.

Got it. And then, lastly, following up on John's question on the SG&A, is there a point where -- obviously it seems like there's a correlation between SG&A and your turnover and I'm wondering if you feel like there's a point there where the balance is moved too far the other direction? So, in other words, the turnover is too low, essentially, because the compensation expense is higher than it could be?

Well, I don't see anybody asking me to reduce their pay. That's point number one. I think it's a good balance. I think fixed costs are driving our as SGA. I think our rent and our taxes and our utilities are going up. We've got energy costs. I'm not talking about health care costs. I think we’re managing those well -- the defined contribution of our 401Ks. And it seems to be the biggest focus, you know, that you folks have with us. We are absolutely, when you look at the size of the Company and the capability we have, the infrastructure is in place to run this business, I think we've got, you know, some of the basics covered. And I hoped to see that that would come down.

However, as we do more sale leasebacks, you know we are running against the grain there because we have both interest and depreciation baked into that SG&A. And with larger facilities, more lights, separate used car operations, you know you're going to see some costs. But when you start looking at the numbers, and the increases in fixed gross, as we head to San Diego, Scottsdale, and [Tyson’s] you probably have an average of a 15% increase in gross profits, and these places only really started maturing over the last 12-say 12 months. So, I see us being able to drive this down, you know, as we go forward based on our continued growth at least based on our same-store commitments and also an overall increase in revenues.

Okay. One quick one. It's just a housekeeping question. But your international franchise count was down slightly, is that due to William Jack's divestitures that's driving that?

Well, that's a number, I would have to have you talk Tony about that; I'm not up to speed. We have some stores that have been set up for divestiture, but we really don't say which ones those are because from a customer base and also an employee basis we really don't like to identify those at this point.

Got it. Okay. Thanks, Roger.

Our next question is from Jerry Marks with AutoRetailStocks.com.

Hi, Jerry.

Hi, Roger. I just want to clarify something. Did you mention a $0.02 benefit in the quarter or was that from last quarter?

No, I mean from the-it was $0.02 we benefited from the convertible 375 million at 3.5%. The net benefit-because it wasn't for the full quarter – the net benefit was $0.02. But we had baked that into, you know, into our guidance well after we did that. We had the call on that.

Okay, so I guess, on a comparable basis though, on a kind of an apples to apples, was the growth, EPS growth kind of more like 6% then, if I back out that $0.02 benefit? Does that sound about right?

I'm not sure --

I'm just trying to look at things on a continuing operations basis.

Maybe you can talk to Tony. Maybe he can add some light on it. Tony?

Jerry, go through that again please.

Instead of $0.56, if I say $0.54 I come up with close to about 6% [inaudible] Does that sound about right?

Where are you coming up with 54 though -- because you're pulling out the $0.02 benefit on the convert?

Mm-hmm.

We’d have to go back and then reconstruct, you know, last quarter and the first quarter. But that was in our guidance when we regave (sic) guidance after the convert.

Right, that's what I'm trying to clarify. The benefit, though, came in this quarter or was it in last year's?

No the benefit was in this quarter, first quarter this year.

Okay.

And that was in our guidance because we gave our guidance in the middle of February, after we completed the convert, so it was in the guidance that we gave of the $0.53 to $0.57 per share.

Okay. Last question, Roger, we're hearing, I guess I'm reading a little bit about some of the new rules. With the block exemption, I guess they're coming up with new interpretations over there, about maybe being able to sell multiple brands at a single store. Can you comment on that all?

Well, the European Union, the EU has always been trying to get a level price position across all markets, and I think they've done that through the last 5 years. You know, there's a site, clausenow, that allows you, if you have a particular brand in one country, you can take and go into another country. If you met all of the requirements of the manufacturer, and you --then there was availability of supply, you could set up in another market, but basically that really hasn't happened. And the fact that you can put multiple brands-we could not put multiple brands in any of ours based on the current dealer agreement. So, I'm not sure where you're getting that information. You must meet the training and then the CI, quite honestly, is much more stringent in the U.K. than it is here in the U.S. from the standpoint of from specific standards. But, at this point there's been no impact on us all. In fact it's generated a number of opportunities versus, you know, any issues.

So it's still kind of big, getting bigger, over there?

I would say so. You can see the consolidation with Pendragon you know buying Peter Vardy. There's been other sales - there's more public auto retailers in the U.K. than there is in the U.S. I think there's 16 versus in our group over here.

Okay. Thanks a lot.

Thank you.

Our next questions are from Jonathan Steinmetz with Morgan Stanley. Please go ahead.

Jonathan, how are you?

Thanks. Good afternoon. A couple of questions. First on the 2.8% new vehicle comp., can you break that down between units and price per unit?

Okay. Units were up about 1%, total new. There were up 1.7 in the U.S. and as I said, in the U.K. they were down 4.1.

Okay, so it was 1 and about-almost 2% worth of price per unit, roughly?

Right.

Okay. On the 90 basis point improvement in the parts and service gross, was that operating leverage on the facilities or was there a brand mix component? If you could just elaborate on what you think caused that?

Well, I just think basically it's capacity that we're starting to fill up now and probably our processes we are getting better. And, you, know basically we're attracting, you know, more people into our service departments which is giving us, you know, a better mix. I think you're seeing less warranty across the board and an increase in customer pay which is typically- you typically are probably 7% to 8% to 10% higher on customer pay work than you are on warranty and also our body shops, we've talked about in previous calls. We've got a significant number of body shops, and these are ones that do almost 10 million in revenue a year. They've been continuing to grow as we've increased capacity there and added some of the latest equipment.

Does brand mix matter at all on that line? In other words, is the margins on a Mercedes store for instance much higher than a Toyota, or would that be pretty similar?

No, I would say it's driven by market. But what you do, typically, you go into a market, you look at your competitors, it might be BMW, Mercedes, and Lexus, and you find out what the door rates in those areas are. So, you're driven. And it might be higher on a premium brand than it would be obviously on a domestic in many cases, or a high lined foreign nameplate. But, I think overall, we're seeing the growth because of more efficiencies, when you don't have to have the technician out looking for a vehicle. We have them parked. We have the space. In many cases, we're delivering parts to the technician in his bay, which we weren't doing before. The efficiency of some of the equipment we have in our parts department. Also, were getting overnight delivery. We don't have as many vehicles held up because now warranty is down so you have more a more menu driven process.

Okay. And the last question, I know you want to get into what's exactly in the discontinued operations, but the increase in the loss there, is that more stores in that line item or is loss getting more acute at what's sitting in there, so to speak?

75% of that was the sale of Pioneer Ford at Pioneer Ford West in Phoenix during the quarter.

Ok so that's out going forward?

Yes.

Okay. Thank you.

Our next question is from Rich Kwas with Wachovia. Please go ahead.

Hi Rich.

Hi. Good afternoon, Roger. Just wanted to check in on used cars. You've showed solid same-store sales growth here. Are you seeing any discernible change in demand in your store base maybe a little bit away from new, towards used?

You know, we have what we call a U project. Year On Used, we’re calling it -- we've got everybody focused. When you look -- when you look at our business, you know, we're sitting .5 to 1 used per new. And I think there is a lot more focus as we've now taken some of our premium locations and divided the used cars into a separate site. That's helped us considerably, and with the Full Circle programs, that are now at BMW and Audi and some of those people are getting access to a much better used car mix. And we have a lot of cars coming off lease, that we might have put out over the last 24 to 36 months, so that's driving up, I think, a little better used car business for us.

You know, Toyota and Honda, it's always been tough. These trades typically are hard to get because people can sell locally or give them, you know, to their relatives. So, it's still the - a market for the right car is difficult to get in. What we're doing is wholesaling the cars that we don't want to recondition because with our 60 day turn, we want to be careful that were not spending a lot of money on these cars and have to sell them because typically, you don't get the benefit of the recondition. So overall, I think that we-our average gross is up, you know, on our used and I think it's due something to the mix, but it's also something that we’ve gone and split some of these departments apart and we have specific people that are selling used and not combination.

So it sounds like there's some opportunity to go there?

Well, we think it's one of our great opportunities because, you know, the model is new, and parts and service, but we have the opportunity, you know, there's a lot more used car potential for us where you're not competing with a new mark and if we have the availability, but it has been so easy to put people in new cars with all this special financing and special lease rates that have been subsidized, you know, we've now got to get back to basic blocking and tackling on used. And I think we've got a bigger focus on it this year, especially in our super high line stores, because you might sell 200 Lexus' and sell only 60 used. And what we need to do is move that up into .7, .8. In the U.K., in many of the stores there, say Jaguar for instance where they've had a real tough time on new, we are selling new, 1.2 used to 1. So, on the other hand, when we have to we will take advantage of the used market.

And then can you give us an update on Turnersville and Inskip where we are with that, you know, in terms of SG&A leverage and capacity utilization?

Well, I can tell you that if you look at Turnersville and Inskip, year-over-year we've probably had a negative carry of 2 or 3 million bucks because of the increased carrying costs from an interest perspective. You know under the accounting rules as of the first of the year, and the fact that we're just now opening up those projects-which we can get through them, has basically been construction sites, we’re about 80% completed in both locations.

Okay. Thanks for the update.

Our next question is from [Mike O'Hagan] with Bear Stearns. Please go ahead.

Hi Mike.

Good afternoon. I just want to clarify, I guess, that even with the little bit of weakness in new units internationally versus domestically, that the language in the release about the challenging and competitive retail market pertains to the U.S., in fact, and not just international operations.

Well, what I said, in fact, in my comments to you that we had a challenging new vehicle sales environment in the U.K.. Used was good. We were up, really, when you look at used units internationally, there up 4.6%. So I would say that, you know, if anybody said it was challenging, the retail business is challenging out there, but I would say both internationally and domestically.

Okay. I was just worried that I misunderstood that it was more on the domestic front. Okay.

I would say, when you look at, you know, at the U.S., you know, we were in pretty good shape, even with a tough January and February.

Right. Okay.

We have a big portion of our strong markets are in the Northeast, and you know what the Northeast is like in January and February versus San Diego or Phoenix.

Right. And that was actually my next question, are you seeing any pockets of regional difficulty?

I'd say the Midwest is the toughest, where we're getting kind of the overflow of some of the auto and auto suppliers' stuff and this Detroit, you know, Midwestern market is tougher.

Okay. Should we expect, if I try to reconcile your insulation from your premium mix, you know, with the impact of interest rates from the demand side, should we expect that there's going to be any negative impact on financing spreads down the pike?

Financing spreads, you mean from the standpoint of what we might do in leasing or in retail finance products available to the customer?

Yes. That's what I mean.

Well, there's no question that we're 50 to 55 percent of all premium luxury is leased. And today, you have cap rates on all of the finance rates, you know, by what's really been imposed by all the lending. You know, we're pretty much vertically integrated and those are in the 2 to 3% range so, those would stay consistent. But I think we've been using those caps now for over a year and the leasing rates, you know, really are a pretty good thing for us because with any interest increases this for the point of show of residual benefit, baked into the rate by the OEM, will offset any interest increase at the moment. So, we don't see a big impact or at least for the balance of the year.

Okay. Thank you very much.

Good.

The next question's with Joe Amaturo with Calyon Securities. Please go ahead.

I was just wondering if you could touch on-it looks like F&I-the F&I business did well, excluding the accruals for Sirius. Could you just explain this and should we expect this growth to continue for the remainder of '06?

I think we've had – you know, on F&I, we were up probably $25 per unit excluding Sirius. And when you look at that, we're focusing on a menu-driven F&I process and with that process, you know, we’re selling certain products which from my perspective, you know, are going to consist of -- these are hard adds, and we'll continue to do that. And I think that [Steve McCauley] has done a great job for us, who has come in from GE Capital probably, I think, 18 months from now we've added more people in the field. And I think, you know, that's a real benefit. When you look at the first quarter of '05, we were at 855 and Q1 of '06 we're at 875. That's without Sirius. So that's roughly, as I said, 20 to 25 bucks, you know, benefit. And we had $34 on Sirius versus $27 last year, so up seven. So overall were up $27. So that should stay pretty consistent.

Okay. Thank you.

Yes.

We have a question from Sarah Webster with the Detroit Free Press. Please go ahead.

Hi Sarah.

Hi, Good afternoon. Your brand mix shows that your domestic revenues decreased 2% for the first quarter compared to last year. And I guess I wonder if that's mostly attributed to a decline of sales or divestitures of some domestic brands stores? You did mention you sold 1, Pioneer Ford in Phoenix?

Right. Right. I think the key thing is you've had the foreign nameplates increase during the quarter. So that had some benefit, we had the strength of the U.K. market. And when you look at overall, we’re at 13%, Sarah, if you it took U.S. to U.S., you follow me? But when you add the U.K., you know, which has no domestics, and we had no divestitures, you know, in the first quarter of last year.

And I know it is a small percentage for you, but how much pressure do you see your domestic business being under? And I guess I wonder if you can tell me your gross profit per transaction for domestic vehicles?

Well, I don't know that I-we can get you that information, but you know, we find that there are certain markets that, you know we've added Hummer, we've added Cadillac, we're right now in negotiations on two or three domestic opportunities. So, you know, we're looking at certain markets where we can get the right brands that will be additive to our - when we looked at Phoenix, we really -- that whole market we were premium luxury. And, we thought at that point that we would focus on that-on those markets.

But I don't see any pressures, you know, where we are obviously, there's more incentive driven activity, you know, on fact, if look at Detroit, you've got pull-aheads, you've got employee programs, which, a lot of people around the country don't experience that because they're not living in this particular market.

I guess if you can address, I'm not seeing how you're feeling these days, about the turnaround effort that GM and Ford, even though they are a small percentage of your business?

Well I'm certainly an advocate of the domestics and certainly when you look at GM in particular, I think the board is taking the right action. I think that, you know, they have high legacy costs. They have high costs associated with labor. I think the buyout provisions gives the individual worker gives a chance to make a decision. I think it's a very efficient way to do it. It's costly, but I think that in the assembly plants there's too much capacity and they've got to deal with that. Jobs banks are very expensive, and certainly, hopefully, through negotiations they'll be able to reduce those. And to me, the supplier base here has been under tremendous pressure. And I think when this all works out-

Some one asked me the other day what's going to happen to GM? And I said they're going to be here alive and well. They will maybe have a smaller downstream distribution but they've got good products, we see the warranty both at Ford and General Motors and Chrysler way down at in comparison to the past, so their quality is excellent. In fact in many cases it's equal to the best in the business. So, our strategy is picking brands and markets where we have scale. And, if that means adding domestic franchises, we will do that. And I think that, you know, we're paying some pretty good premiums in some cases to get the brands we want in certain markets.

One final question on SUV sales. You told another one of the callers that you're not big in SUVs. I think that’s presumably because you don't have a lot of domestic representation in your mix, but overall, do you think SUV sales are going to suffer a lot with the $3 gasoline prices that seem to be approaching? There does seem to be some new resiliency in the SUV sales it appears, they're up 8% for the largest SUVs this year in part because of GMs new Tahoe. I guess, what are your thoughts on that?

Well, I think that the new product is, is driving the market share increase, because again they're more fuel efficient, and that's certainly a positive. Again, as we look at $70 a barrel, I'm not sure that anybody has the real answer, what mix product is going to sell. You know, some people need capacity and can't drive a small car because of their business or the size of their family. And I think, when you look at $.50 a gallon, I think I went through just a quick formula, up $.50 gallon is about $30 per month based on 15,000 miles a year and 20 miles per gallon. So, there is more efficiency in the cars. Obviously, hybrids have helped some. I think that there's been some slowdown in hybrids at the moment.

I'd love to see diesels in the U.S. Unfortunately, we've got to get the government to take a look at it because you have to have your NOX to be 8 times lower than you have to have in Europe in order to meet the emission requirements without aftertreatment. And again, we don't get the benefits of a lower diesel price. In fact, we go to the pumps, it's probably in parity with gasoline. So, we don't have the incentives and then you have the increased cost of the vehicle with a diesel engine. But I think that the noise vibration and harshness of diesels certainly when you look at the efficiency of roughly 25% more efficient, it would be a very cost-effective way to, you know, give us better MPG across all manufacturing. And ironically, I think most manufacturers have vehicles today they are selling in the foreign markets which have diesels already -- already engineered in. So, it should be a matter of us dealing with the EPA here to try to get them to open up, you know, some of the classifications.

Thank you Roger.

Thank you.

We have a question from Peter Siris of Guerilla Capital. Please go ahead.

Hi Peter.

Hey Roger, how are you? I have a completely off-the-wall question to ask you. You were talking at the beginning of the call about the things that you're doing in England for wholesaling used cars.

Right.

And my question is, when I look at the profitability of people in the auto auction business, or people like CarMax in the used car business, even people in the buy here, pay here business, it looks to me that there's a lot profitability in what I would call the close-out piece of the industry. And if I look at sort of traditional retailing models, you know, there are a fair number of traditional retailers who have their own outlet stores or whatever. And I guess my question is, why do you and some of the other -- many of the other, you know, large publicly owned dealers, why aren't you taking advantage of the profit opportunity in that, sort of, you know, used and closed-out niche more than you are?

Well, you know, number one, we have a OEM franchise which specifically, we have certain requirements in our primary market area to meet sales targets. So, those have to be met. And we get the benefit of the reoccuring revenue stream out of the parts and service business. So I think you’ve got to look at the total value proposition when you look at the gross margins just being in used or just being in new. I think that there's no question. I call it washout. And, you know, you sell a new car, you make a profit. You take in a used car, and then you sell that. There's-you really have 3 ways. You can go to an auction, and sell the vehicle and you'll kind of get market, and then you can do a closed bid auction, which we have, and these are vehicles typically that a new car dealer doesn't want to sell because of the CSI requirements, they have to put too much reconditioning in them to sell them. Because people that come into a new car operation expect, you know, that organization to stand by them. And we've said that we don't want to certify a car that we think we have to rebuild in order to do that.

And then, of course, the third part of washout, is retailing the used car, you know, to a customer, you might even say a fork now that were looking at this electronic. Look, if we could get more used cars and there's no question, I won't be satisfied until we're at least 1 to 1, and that would give us a significant margin opportunity through the washout.

So, you know, overall, I think that we're in -- we're focused in the right direction. You take CarMax, which has done a great job in focusing on one product line, in fact, they were in the new and used, and I think they've really, at this particular point, have decided to go further and expand it. You know, the good news is, if we want to open up used car sites, we have no limitation to do that. On the other hand, I think our model is to build both new and used and have leasing and have the captive finance sources, don't take risks on financing of used cars. We're vertically integrated with the OEM finance companies around nonrecourse. So, you've got to balance all those things as we get into higher cost money and interest rate environments.

But I guess the question I'm asking is, do you think we were looking, you know, 2, 3 years down the road, are there opportunities to capture more of the profit in the used end, than you're currently --

I think that, number one, I think we've already started that because if you've been on some of our calls in the past, we talk about losses on wholesale. Those are cars today, you know, we’re making money on wholesale because we're more efficient, we're getting out of the transportation, we’re getting out of the auction fees. You know, we're having closed bid auctions, and now with this opportunity potentially to go electronic and have everybody sitting in the U.K. having the ability to bid on vehicles without having to be at the auction or coming to your site, is I think is process efficiency, you know, which will benefit us. So, to me, if we get better at it, we can stretch for, pay more maybe for used cars on trade, which will generate more new car sales and then if we're more efficient in moving these, we will. And when you look at our days supply on 30 days on used around the world, that's a 12 turn, that's pretty efficient. And we don't write down our vehicles. We actually take them in, we either sell them for a profit or we sell them for a loss.

Thanks.

Thanks.

Our final question is a follow-up from Jonathan Steinmetz. Please go ahead.

Yes, Jonathan.

Yes, just a quick follow-up. I just want to make sure I heard you right, on the Sirius benefit the- was that $34 per vehicle, so if I multiply that through by the 65,799 it should be about 2.2 million?

You're right. Less then we have the costs associated dealerships. You're right.

Okay. Do have any estimate as to the explicit costs that sort of go against that or is that just impossible to estimate?

These are commission costs that go against that plus installation, other costs we have associated with that.

Okay. So you actually pay a commission if somebody sort of signs up?

Absolutely. Well, we provide that, in many cases we provide that at no cost to the customer, depending on the individual deal.

Got it. Okay. Thank you very much.

Okay.

And Mr. Penske, any closing comments?

No, that's fine. Thank you, John.

You’re welcome.

Thank you.

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

Thank you.