Penske Automotive Group Inc (PAG) 2006 Q3 法說會逐字稿

Good afternoon.

Welcome to United Auto Group third quarter 2006 earnings call. A press release which details United Auto's third quarter results was release this had 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 October 31st. Please refer to the United Auto Group press release dated October 12, 2006, at www.unitedauto.com for specific information about how to access the replay.

I would now like the introduce Tony Pordon, Senior Vice President of United Auto Group.

Sir, please go ahead at this time.

Thank you, Penny and good afternoon, everyone.

Welcome to the United Auto Group third quarter 2006 conference call.

Joining us for the call today are Roger Penske, our chairman, Jim Davidson, our Executive Vice President - Finance; Rob O'Shaughnessy, our Senior Vice President - Finance, and JD Carlsson, our Controller.

At the conclusion of our remarks today, we will open the call for questions. I will also be available by phone to answer any follow-up questions you may have.

Before we being, I would like to remind you that statements made in this conference call today may include forward-looking statements regarding United Auto Group's future reportable sales and earnings growth potential. We caution you that these statements are only predictions which are subject to risks and uncertainties including those related 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 & 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.

The third quarter highlighted the resiliency of our business model at United Auto and achieved strong results despite a challenging new vehicle sales environment. During the quarter revenue increased 15.2% to $3.1 billion, and income from continuing operations increased 8% to $36.4 million, and related earnings per share increased 8% to $0.39 per share. Our performance was highlighted by strong growth in our used vehicle and service and parts operations which generated same-store growth of 8.9% and 5.7% respectively. In fact, our service and parts business increased from 10.4% to 10.7% of our total revenue up 33 basis points, and 114-basis point increase in the gross margin of our service and parts operations to 55.3%.

Looking at the quarter in detail, our revenue increased 15.2% including new vehicle revenue increase of 9.8%, used of 27.9%, F&I 9.3%, and service and parts 18.9%. During the quarter selling prices of new and used vehicles also increased. New increased approximately $1,000 to $33,164, and our used was up $2,300 per unit to $27,866.

Our gross margin increased to 14.9%. Our margin was positively impacted by the performance of our service and parts operations. Our service and parts operations in the quarter highlight the continuing success of our facility investment strategies. As you know, we've invested more than $1.2 billion in facilities expansion and renovation since 1999. The dealerships where we have invested in the expansion of our fixed operations, we're experiencing solid growth and increasing absorption rates. In fact, at the end of September, absorption at the dealership level was 72% which compares with absorption rates in the mid-60's five years ago.

During the quarter our international operations generated 33% of total revenues and 36% of our operating income. On a worldwide basis foreign and premium name plates represented 92% of total revenues, including 59% from premium brands. With the domestic big three contributing the remaining 8%. When I look at the U.S. foreign and premium name plates represented 90% of revenue with a remaining 10% from the big three.

Our brand mix continues to be a key differentiator as foreign name plates gained another 3.7 market share points over the prior year. You can see our specific brand percentages, if you look at our selected data sheet that was part of our press release this morning.

Looking at same-store performance for the quarter, same-store retail revenue growth was 1.6%. New retail revenue was down 1.7, used revenue was up 8.9, service and parts up 5.7, and F&I revenue was flat.

We faced a challenging new vehicle market during the quarter. In the U.S. our same-store units declined 1.5% which compares to an overall 6% decline in the U.S. market. I would like to point out the overall U.S. market decline includes a 3% decline at the premium high line stores, in fact our BMW stores were down. BMW in the quarter was down 10%.

In general the U.S. market for our brands was influenced by product availability, constraints for many of the most popular models -- and is just to give you a data point, Civic was twelve days, Camry was twelve, RAV-4 was twelve and in the Lexus line we had LS at 14, ES at 7, and Rx at 9 and we really had no Mercedes Benz 4matic vehicles of any supply during the quarter.

In the U.K. our same-store units declined 12.7% compared to an overall 2.3% decline in the market. The U.K. market was influenced I think by an overall reduction in demand. In our stores we experienced majority of our decline really at DCX and BMW stores down 19 at BMW and 20 at M-B. In fact, Porsche was did 22%, but on the other side we're up 161% at Lexus, Audi was flat, Jag was up 18%, and [Toyota] up 10.

The decline at the DCX stores was primarily at our Smart locations which saw reduced sales volumes in units as a result of the new model launch scheduled for next month. At BMW we elected not to pursue the lower margin corporate transactions during the quarter. Also, we preregistered a number of vehicles as demonstrated at the end of Q2 which were able to be sold as used vehicles during the quarter. Although this resulted in lower new unit sales volumes, at the BMW outlets we're able to increase our used vehicle operations which obviously helped us maintain our profitability.

I think overall I was pleased with the same store performance in Q3, same store retail growth was up 1% in the U.S. and was up 4% internationally.

Looking at our interest expense, we've seen the effects of rising interest rates on our business this year. We're glad to see rates stabilize for the time being. In fact, including floor plan interest, total interest expense increased $3.7 million in the third quarter. In the quarter our floor plan interest expense increased 41% to $16.7 million due to the higher rates and increased inventory levels associated with current year acquisitions. During the quarter other interest expense decreased 9% to $11.1 million due to, in large part, the interest savings resulting from the convertible notes we issued in January of this year offset in part by higher rates on our variable rate debt.

Based on our current capital structure, the question we get, a 25-basis point change in interest rates would impact earnings per share by approximately $0.02 per share.

Looking at the balance sheet, our total vehicle inventory was 1.4 billion which is flat compared to the end of the second quarter, and on a same-store basis vehicle inventory was down 10 million compared to December of 2005 and down 100 million compared to June of 2006.

Looking at days supply -- at the end of the third quarter thinking about a worldwide inventory, new was at 42 days and that's down from 53 in June; used was at 29 down from 30 in June, and then in the U.S. specifically new vehicle days supply was 51 days versus the 63 days supply for the U.S. market, and our use was at 35 days.

Moving on to CapEx, our net capital expenditures were $89 million during the first nine months of the year. After sale leaseback proceeds in the final quarter, we expect to spend approximately $100 million during the entire year.

Let me give you a little update on Turnersville and Inskip We continue with the construction at both our Turnersville and Inskip Auto Complexes in New Jersey and Rhode Island. As you know we've been in the construction process at both of these locations for the past three years. We expect to complete both complexes during the first half of 2007. Each mall offers an outstanding mix of brands and destination locations, and have been built to meet expanding requirements of these brands in those particular markets. At Turnersville we have nine brands on 66 acres with a Test-track collision repair center and added 100 new service bays. At Inskip we have the best brand mix of any acquisition we have made at a single location. We have a premium mix of franchises with 10 brands on 25 acres, and we have doubled our service capacity.

I am really pleased with the response we're getting from our employees and customers at these new facilities. We're starting to see volumes increase, especially in service and parts. We're also beginning to see improvement in the CSI scores at these locations as we're better able to meet our customers' needs and expectations. Based on our experience with our capital construction projects in San Diego and Phoenix, these typically take 24 to 36 months to mature. While investing in infrastructure can impact our operating efficiencies in CSI, we at UAG remain committed to building our business for the long-term growth.

Looking into our leverage at the end of the quarter, our debt to capital was 41%. This increase is primarily the result of our current year acquisitions. We had $866 million of non-vehicle debt and that consisted of $300 million of 9-5/8s 10-year Senior Subordinated debt outstanding with a call provision from March of 2007, and $375 million of 3.5 Senior Subordinated convertible notes, and $191 million under our credit agreements and other borrowing arrangements. As of September 30th we had approximately $645 million of floating rate availability under our credit agreements and 44% of our debt including floor plan debt was fixed, with a weighted average interest rate of 6.1% and average maturity of 4.2 years.

Let's talk about our acquisitions.

We've acquired businesses this year that we expect to add in 2007 approximately $1.5 billion in annualized revenues which is certainly in excess of the target we established at the beginning of the year, and during the quarter we completed the acquisition of the Ryland group in the U.K. which consists of 22 franchises, 10 BMW, 10 main BMW and 5 mini, 12 DCX, 5 Mercedes Benz, 2Smart and 6 Chrysler Jeep Dodge. These franchises complement our existing operations and footprint in the U.K. while providing scale and expense leverage opportunities in the future. In total, the Ryland land group franchise are expected to generate approximately $700 million in annualized revenues.

We continue to see attractive acquisition opportunities in the U.S. and overseas, and have not noted any change in the multiples on acquisition targets we have been looking at. We also continue to divest of franchises that did not meet our return requirements, location strategies or that have significant OEM corporate ID requirements.

Let's talk about earnings guidance. In our press release this morning we reiterated our 2006 projections of earnings from continuing ops in the range of $1.35 to $1.40 per share for the year. We also provided guidance with respect to the fourth quarter which during we expect earnings from continuing operations to be in the range of $0.30 to $0.35 per share.

Before I open up the call for questions I would like to take a few minutes to update everyone about our Smart car distribution agreement. As you know, the Smart ForTwo is a vehicle that's enjoyed tremendous success throughout Europe. It is a two-seater that is sold in 36 different countries and has over 750,000 units in operation. We're excited for the worldwide debut of the all new Smart ForTwo held early next month in Germany. The U.S. version will be a derivative of the model that will be introduced and will be sold in the U.S. in January of 2008. It is a vehicle that's loaded with safety features and gets 40 miles per gallon. I can tell you it is fun to drive.

Our announcement brought a lot of positive response. So far we received over 375,000 hits to our website. There is approximately 12,500 people registered as insiders. In fact, we get over 1500 hits per day. We're on track to begin selling these cars in the U.S., as I said earlier, in the first quarter of '08. To do so we're look to go develop a distribution system consisting of 50 to 70 dealers. I mean the best dealers across the country. Once the new European product debuts, we'll be sure to load our website with product information and pictures so everyone of you in the U.S. can see the newly designed and exciting new vehicle ForTwo. I have had the opportunity to drive the preproduction model at the plant a couple of weeks ago, and I tell you you won't be disappointed. We will have three models to sell in the U.S. Those models will be called the Pure, the low end, Passion and Passion cabriolet. We expect to offer those versions of the vehicle at MSRP that is below 15,000. Stay tuned for updates and visit our website www.smartusa.com for further details.

Let me quickly summarize the third quarter.

Overall I believe our business performed well despite the challenges of the new vehicle market. Our international diversification and capital investment projects provide UAG with a solid foundation of continued growth and profitability. We continue to generate solid same-store increases in our service and parts operation. As our past investments continue to mature, we look for margin growth to continue and for further leveraging of our expense structures. As we head into the end of the model year, I believe our inventory is in great shape, new vehicle inventory 42, used vehicles is 29, and our credit facilities have ample room to fund our capital investment projects and to pursue additional acquisition opportunities as they arise and most important to me our employee turnover now is down to 31%.

Thanks for joining us today and let's open it up for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from John Murphy of Merrill Lynch.

Hi, John.

Good afternoon, Roger.

I got on the call a little bit late, but I want to go over the F&I PVR number. It looked light and I think it had something to do with the serious [warrants] in the quarter but I also just wanted to think about that going forward as we're in a higher rate environment. Is there natural pressure there and what might be the opportunities to make up for that pressure in F&I PVR?

Of course we had probably in gross about $2 million pressure on serious during the quarter versus a year ago due to the stock price. We were at 392 on September on 30th and 475 at the end of June and also significantly less than that or higher than that last year. I think one of the key things I would look at in F&I, as we looked at the mix of business, and also the term of financing, specifically going out to six years or 72 months, Toyota has come back and now capped the rate at 175, so we're going to start to see as terms go out, as far as financing terms we're going to start to see the captives I think close down some of the higher opportunities for finance reserves. So what we'll continue to do is look to sell the after-market projects, our things that we have to sell, of GAAP we have other things, a 3M product for some support on the front of vehicles for stone chips. In the U.K. we have a number of projects selling there, so we need to work harder on better penetration.

The only negative I see coming forward is the mix of our business is primarily premium high line. If you look at BMW, you look at Mercedes, you look at Audi, most of these OEMs have high penetration in leasing, and with leasing up and your typically leasing for three years, you don't have a real opportunity to sell some extended warranties, and in fact when you look at the leasing product by itself, we're up about 13% across all the brands.

Thanks, Roger.

On acquisitions, I mean what are you seeing as far as multiples of valuations in the private market and do you think that as we go through the end of '06 and '07, once again a higher rate environment, real estate under a little pressure, we might see more realistic or lower valuations with acquisitions more attractive going forward?

I guess I felt that the acquisitions we made a have been realistic, and the multiples that we're seeing are pretty much the same as what they've been in the past. I would say they're stable.

What we look at is basically location. Can it be part of a market that we're already involved in? Does it give us more scale in a particular brand in a marketplace in fact, in the U.K. if you look at our BMW business with Rylands we have 13% of the total market which gives us a great spread of vehicles. We can be very proactive and use, and move them between the different markets, so I see it continuing.

The individual who has been the owner/operator obviously has to make a decision whether or not he wants to step up to larger facilities because as the brands have gained momentum and market share, they're expecting a bigger footprint, and just depends on whether people want to commit to the kind of CapEx that's required, because I can assure you as we make these acquisitions, one of the first tests that the OEM does is let's look at the facilities and we have to sign up at the front end to make the changes. That's going to keep the dynamics going, and also CSI is driving as there is more back end money on CSI, you're starting to see some people decide to drop out of the game.

Just one last question. What's the capital commitment on the Smart distribution agreement? Is there any capital commitment?

Well, we had 500,000 dollars worth of costs that in the third quarter.

We're basically a distributor. We'll have some infrastructure, but it will primarily will be people and inventory and other items that we'll have to carry, but it is not going to be a significant CapEx requirement which is one of the positive things about the arrangement.

Great. Thank you very much.

Thanks, John.

Our next question comes from Matthew Fassler of Goldman Sachs.

Thanks a lot. Good afternoon.

Hi, Matthew.

I have two questions.

First of all, If you could comment on the continued surge we're seeing in average selling price for used vehicles which has obviously been helping your revenue quite a bit.

I didn't get it -- say it again, I'm sorry.

The continued increases that we're seeing in average selling prices for used vehicles through the Company? If you could comment on the drivers of that.

I got it. I am sorry.

No worries.

I think one of the things is obviously, as we see in the U.K., the number of vehicles that we register which are new as demonstrators those have a much higher selling price than a standard used would and because of mix of premium/luxury, and as we continue to grow those businesses and I don't want to say we're putting pressure, but we're starting to manage the used side of that business rather than wholesaling these vehicles and we're getting the opportunity to buy a number of these off-lease vehicles from the finance sources, we see that continue to go grow, and I think it is our mix that keeps driving that.

Gotcha.

Second question, you gave us days inventory numbers for the U.S. Do you have the year ago numbers handy? New and used for the U.S.?

The only thing I can give you is a number I looked up earlier when I looked at the 2006 models still in stock versus '07's, and we week or 30 days ago was 50%. Today it is 30, and I looked at the same number a year ago, and we're consistent to about 30% at this time with roughly two months ago to get out, sell out of our '06's, so our inventories in good shape. In fact, when you look at overall inventory from the standpoint of new, and we run that report on a daily basis, and if I go all the way back to the end of December, for our business, we had $683 million in inventory and as of today we had 661, and then we have some acquisitions in the U.S. now, and we have some acquisitions in there, so overall our inventories in great shape.

That's on new, and I would say from a used perspective, we're $145 million versus 146, so we have no upward pressure on used and yet our used when you look on a same-store basis is in great shape because we have a 60-day policy on used vehicles except maybe the real premium luxuries like Ferrari and some of the big Porsches, and then on the other hand we're moving any new vehicle out with an age of 100 to 120 days.

And Roger, by the way, a very quick follow-up, I know that mid-line domestics represent a very small piece of your business, but if you look at days inventory in those dealerships, have they also come down a bit or does that remain a challenge, do you think?

They're obviously higher than the volume foreigns, and we had the impact in our Chrysler Jeep Dodge stores because we had to hold back on the trucks due to a restraint problem which obviously is not a lot, but those are the kind of little things that hit us, but overall I would say that we've been very careful with the domestics to manage our inventory. Unfortunately you get billed out and you have to take a lot of vehicles. There is some pressure there, but overall I think we're in pretty good shape.

Thank you so much.

Yep.

Our next question comes from Matt Nemer of Thomas Weisel and Partners.

Hey Matt.

Good afternoon, Roger.

My first question is to follow up to Turnersville and Inskip -- can you quantify the incremental expense, the non-capitalized expense associated with these construction projects? Is there expense running through your income statement that you been enduring for the last few years to get these up and running?

I think I put it in perspective of total expenses, you know.

We operate these businesses with a rent factor probably 0.4, 0.5, and as you start rolling out these businesses, you could go to 1.5 to 2 based on the rent costs, and we have to expense where we have a lease, an example would be just a divert a minute to the companion store of Lexus we're building in Edison, New Jersey. We're leasing the land there. We've got probably 180,000 a quarter of cost even though we haven't been in the building.

When you go back to Turnersville and Inskip, we have not only costs associated with the real estate moving up and haven't had the benefit of full access because we're in trailers, we've moved service departments three or four times, and just as a data point today in Turnersville our BMW sales are in a trailer, and our service is in the body shop and sharing with Hyundai service. Once these get completed, we'll see start to see a lot of traction there, but if you looked at just from an EBT perspective, you know, for the first nine months of the year, I would say we probably getting 25% of the profit that we made last year at these stores because of the confusion until we build up the sales volume in front and back due to the new scale.

There is an impact. There is no question.

Great. That's very helpful.

Secondly, turning to Smart car, it looks like you upped the number of dealers you plan to have in the United States. Is that more dealers per market or going deeper into smaller markets?

Well, we had looked at maybe having two phases, first and second phase as we start to really drill down into the markets and want to have the proper coverage we think 50 to 70 is probably -- we said 40 to 50 and then we would have a second wave, so I guess I am hedging my bet a little bit. We want to have the best dealers, and we're going to be sure the major markets where we think we'll have traction will have sufficient representation.

Okay.

Turning to the U.K., can you give us an update on the integration of William Jacks and Ryland and on the integration of William Jacks and Ryland and should we expect a quieter pace of acquisitions over there for the time being.

I would say that I am sure we will see a quieter pace. We won't have it at the size and scale. These are ones that -- in fact, Ryland we worked on and off for a couple of years. When we bought the business, the business was even larger, and we were able to pick out the Mercedes Benz and BMW business, there was other businesses we didn't buy specifically, so we were able to keep the right pieces. From a William Jacks perspective, I think that has great traction. Ryland, we just got it under our belt less than 30 days ago. It is very little time for us to activate any of the things we want to do, but on William Jacks we've had good traction there and just closed selling three of the Volvo stores that came along with that acquisition which were not strategic when we bought it. I think overall we're in great shape; we have a great management team there, and I think that we had our Board of Directors in the U.K. last week for three days to review our facilities and meet with management, and I think they came back realizing the real value we have there, and it is certainly evident when you look at the stocks and the pricing supporting the other PLC's in that market.

Last question, if we look at your SG&A as a percent of gross profit, it looks like taking out the change in rent and maybe adding back the change in the serious gross profit, your SG&A was flat to down. Can you point to anything other than those two items that's moving that back in the right direction?

Well, everyone talks about office consolidation.

In fact, we're doing the second round in San Diego, and also in Phoenix, and as we had one consolidated office, that's going to be I think critical.

One of the upward push is we're adding more financial, finance people in the marketplace because of the control requirements we have under Sarbanes-Oxley on all of the documentation we think that we needed to add more people, so there is some upside costs there, but when you think about the rent at, about $4 million, you have Smart at $500,000 and Sirius $2 million, I think we're going to still see that downward pressure. I am not sure where Sirius stock is going to go over the next couple of months, but at the present we're running 77.6 as a percent versus 77.9, and we've had some traction visibly last quarter, and I think that margins are under pressure as you sell down the current year products, and with the additional Smart and some of the key things that hit us, we thought it was better to kind of highlight the ones that you could understand. There is obviously lots of ins and outs as we look at the total numbers.

That's all I've got. Thank you very much.

Yeah, Matt, thanks.

Our next question comes from Edward Yruma of J.P. Morgan.

Hey, Ed, how are you.

Hi, how are you, Roger, thank you for taking my question. Question about Inskip in Turnersville. I think you said before it was kind of a back half of '06 opening and I think it shifted to fourth quarter '06 and first quarter '07 and I think you tempered that even a little bit more. Is there something that gives you pause or any kind of delays in construction?

Not really.

I think we're building a Mini -- we were awarded a Mini point at Inskip which was a late starter, so obviously that won't be completed as one of the areas. Today we're in pretty good shape.

That's the only thing. We'll finish BMW.

We're in the final process of our Porsche and Bentley showrooms. There was a lot of moving parts there, and we just opened up Audi in the last 30 days. We've moved Nissan by the way twice. We made the Nissan acquisition during the start of this construction, so we've had to fit them into the total picture there, but I think we're on track.

The Mini would be the reason we're pushing it into late 2007. As far as Turnersville is concerned, we'll have -- we'll be in the BMW store here in the next 60 days, Hyundai will be done early first quarter, and then we've made an acquisition, we haven't announced it yet or really closed on a Cadillac franchise, so that will add another bit of construction on that site, but other than that, we'll be in good shape. We just opened Toyota, in fact, in the last 30 days, so those are pieces that will bring it together.

I don't think -- I hope I didn't mislead anybody on previous calls from the standpoint because we have been wide open on on these projects from the very beginning. It is tough, though, when you have to move them in and out of believes, put them in trailers, and this doesn't help the CSI. In fact, it is a tougher situation on the employees, and we got to be careful we don't lose good people as you go through some of these peaks and valleys.

If you go down and look at these facilities and see where they are today, we're close to third base.

Can you talk a little bit more about Rylands a little bit more? I know it has only been around 30 takes since you've closed, but how does that portfolio compare to when you acquired Sytner?

How much capital dollars do you think will need to be invested and in terms of just the general conditions of the stores? Thank you.

As I look at Ryland, in central Birmingham, they have three locations, central Birmingham, Worely and Sutton Coldfield. Sutton Coldfield is a great site and probably too small to grow in the future and there might be an opportunity to put Mini there and build a new show room and keep servics. The Downtown Birmingham has all the requirements we need from a standpoint of service and parts -- it probably needs a parking structure. When I think of Worely, it is a brand new facility in great shape in a great market and we'll add the Mini there on the same property.

As you go down south, those facilities are all in good shape from a BMW perspective. Then we really are -- our Mercedes stores are up in Newcastle and Sutherland in the north. Three out of the five there are like brand new. I think the opportunities we have quite honestly is to do sale leasebacks probably on 6 or 7 of the properties that we ended up with, and that will generate some capital for us so we can pay down any of the acquisition debt.

To me the BMW stores are located near our core operations, and this gives us the opportunity to move people in and out of those stores, people that might have high potential from Ryland, we can move into one of our locations, but I like the market that we've been able to get into there, and it was a once in a lifetime opportunity because you just don't get a chance, here was an individual operator who built these stores in that market. Many of them are contiguous to us. That gives you scale which will be important as we want to move into the used car business.

The financing leverage we have from the finance sources are going to be terrific. I think our personnel and training metrics that we'll add into those businesses, you could not have a better opportunity. We could sit there for a number of years trying on get that scale, so we didn't want to let that one get away.

Great. Thank you very much.

Our next question comes from Rich Kwas of Wachovia Securities.

Hi, Rich.

Hi, Roger, how are you?

Good.

I wanted to ask you about the wholesale software you implemented in the U.K. a couple quarters ago.

Where are you on the implementation of that and what's the transferribility over here to the U.S. operations?

As you know,we set up our auction online auction for wholesale and what's -- the thing that really moved 50% of our vehicles today that were wholesaled are going through this auction, and we're getting about 5% to 6% more than our inventory value, and then we don't have the transportation costs and/or the auction fees as we go forward. The software we continued to update it, and it will be our goal once we have had a year of opportunity to run this we're going to look at seeing if we can't implement it here.

One of the things we do in the U.S. they were not doing is we have our closed bid auctions here, so somewhat of a different type of auction, but again where we have numbers of people being able to bid on vehicles, not in 30 seconds as they would go through an auction line, but being able to take a day and then in the U.K. obviously you have a reserve price and you have a couple days to bid on it.

One of the interesting things that's come up now which our guys are started is we're able to take cars which we know are coming in on trade, describing those cars, putting them up on the auction, ones we know we might not want to retail and we're preselling these vehicles before they come in which is very efficient, and we think that's one of the areas that would be a real positive over here.

We've wholesaled 60,000 vehicles companywide in the first nine months, and that's up from 54,000 a year ago, and from a year-to-date profitability, we're sitting with about $13 profit per vehicle versus a $-1 a year ago.

Those aren't big numbers when you look at it, but again we want to be sure we're putting enough in the used car. If we made too much money on used on wholesale, we would say we weren't stepping up hard enough to get the new vehicle business. Lots of dynamics here but the software is doing well, and I think it is an opportunity for us to look at in '07.

When do you anniversary it?

We really rolled it out at the beginning of '06.

All right.

And then on F&I, is there more opportunity to sell more products at your stores to drive F&I? Where do you see the opportunity?

I think one of the things by speeding up the F&I process with E-contracting and electronic menus will give us a chance to spend more time with the customer, you know, to sell some of the other products. Obviously extended warranty has been the key. We've added more people on F&I, and I think the focus as we take on these acquisitions we notice that there hasn't been the focus on F&I.

I think we're going to get just some natural traction due to more penetration, and certainly training is critical here. We don't want to have too many products, and what we don't like is if you don't have ads that you put on the vehicles, we like one that are hard ads because if the car is sold we don't have a chargeback. You have to be careful today on what you put on and quite honestly I mentioned it in my prepared remarks, that Toyota has, on 72-month financing, has reduced the cap rate for reserve down to 1.75 from 3, and I think you're going to see that across the board, so there will be some pressure, you know, on F&I, but I think that we're doing a pretty good job.

Also, remember in our case we get flats because we have a number of the premium luxury OEMs that are doing leasing. We have a higher penetration of leasing than maybe many as you would look at one of the domestic big three's.

Sure.

Thanks, Roger. Appreciate it.

Our next question comes from Michael Geoghegan of Bear Stearns. Sorry if I mispronounced you last name.

Guh-HAY-gun. That's all right.

That's all right. We know you as Mike.

Two questions for you, I guess. The first is with the latest acquisition. I guess I am calculating a sort of a 37 or 38% mix from international operations, sort of pro forma.

Am I on the right path there?

Well, yeah, we're at 33 now, and as you annualize it, I haven't done the math to be honest with you, but we have some coming out. Remember, as we made some of the these acquisitions earlier on, we'll be taking some out because we had to buy the entire business.

Jacks was a perfect example. I talked about it earlier where we decided we don't have the strength in Volvo so while we can opportunistically sell those to other players in the market, we'll continue to take those down, but I think you're going to see 35, 36% would be the mix.

And that's sort of -- I guess your current thinking on the optimal mix, the target?

I guess we're going to look at it. It depends on growth. The OEMs, some of that is driven by market share.

Sure.

In Germany, you know, we've had good luck with our Toyota Lexus business joint venture there, our super premium luxury, they continue to grow at Tamsen, so we'll see opportunities that will continue to give us -- in fact, Peter Ulrich is joining Hans Werner in our UAG Germany, and he spent a big portion of his name running a factory in [Niedersachsen] for Mercedes Benz, and we will give us more operating expertise as we look at Germany going forward.

Okay. That's helpful. Thanks.

Second question is on after or I guess late night hour service, late service hours. What percentage of your facilities offer that now?

Boy, I will get Tony to get back to you. I wouldn't want to give you a number.

Typically we're now stretching to every Saturday we have, I have been doing business plans. I would say we're running at anywhere from 50 to 75% utilization of our shops on Saturdays, and there is some cases where we're open on Sunday. Typically our night business would be where we would have technicians in to do predelivery inspections and used car reconditioning, so we would save the day for the customers.

Okay.

So my understanding is that night time might be a growing practice in the industry. Does it make more or less sense for UAG and can you walk me through the decision making process on a maybe a case by case basis where you might add a bay versus adding hours.

Well, where we were in a situation where we didn't have -- we were capacity constrained, i.e. the numbers of base and customers were waiting two and three weeks for service, we'd immediately go to a second shift.

The question is is the cost of additional supervision, you have to have your parts department open, you have to have your loaner car and the premium luxury available for customers, so it becomes, probably runs your costs up. I would say this where we needed it because we didn't have the capacity to meet the market requirements, we would do it immediately, but I think I would rebalance and do my internal work at night where I didn't need to have the whole retail side of the business open and focus on the customer during the day.

Working hours. Okay. That's all I have.

Thank you.

Good. Thanks.

Our next question comes from Rick Nelson of Stevens.

Thanks. Good afternoon, Roger.

Hi, Rick.

Can you compare acquisition pricing in the U.S. with other markets like the U.K. and Germany?

I didn't hear the first part of the question. I am sorry.

Can you compare acquisition pricing in the U.S. with that in the U.K. and Germany and other markets?

I would say that acquisition pricing here I think has been consistent with the right brands and the right places. I don't see that, probably 4 to 6 times EBT plus net assets on an asset purchase. You get some stock sales that's become a little more complicated, but I think overall we've seen probably less costly acquisitions internationally from the standpoint of overall. The good news is in many cases the OEMs are trying to reduce the number of partners, and there is a strong move to give dealers a market area where they would have not just one dealer in that market but would have maybe a core location and contiguous similar to what Ryland had in Birmingham central. They had central Birmingham, and then they had two locations which were contiguous in the same market. Those were the things we're saying Audi did that with us and the west London business with four stores. We have it in the northern part of the U.K. with Audi. Certainly Toyota and Lexus have that same strategy where we have the entire Frankfurt market with three stand alone Toyota Lexus stores and 15 subdealers associated with those, so those are things which I think are somewhat more used in the international markets where you might not have that because of our franchise laws here in the U.S.

And are there any limits that you see or targets in terms of international exposure for UAG or could international some day outweigh U.S.?

I don't see that. I think that we're continuing -- we built the Company on acquisitions, and same-store growth. You've seen the numbers. I think they speak for themselves, and I didn't have any mission plan that says "let's go more internationally than domestically". Quite honestly, we'll continue to look in the U.S. We had big acquisitions a couple of years ago when you think about San Diego and you think about Phoenix just and look at Inskip. Inskip is going to be some day will be $1 billion dollar business, and as we grow out Turnersville, and to me markets that will be attractive to us will be ones where we already have scale.

And then on the debt levels, you're at 41% today compared to 34% last year.

I think I said in the remarks that 41, but we have probably $50 or $60 million of sale leaseback that will come off before the end of the year which will reduce that.

We obviously have the opportunity and we let the cash build up in many of the stores for working capital, and that we'll pull that out as we get to the end of the year, and the registration month drives that number up significantly in the U.K.

Okay. Thank you.

Our next question comes from Kelly Dougherty of Calyon.

Good afternoon.

Hi, Kelly.

Hi.

In the past you mentioned that you had an opportunity to increase your used vehicle margins by selling lower price vehicles although that might be somewhat difficult for guys given your brand mix, but I am wondering if you have any intention of selling possibly fewer certified vehicles to lower the sales price or alternatively what other actions you may pursue to increase your used vehicle margins?

Tony said I would get that question. I'm glad you made him -- he'll feel good about that.

Basically we have the pressure due to the lease returns and some of the other activities, the preregistered vehicles which become demonstrators internationally drive that cost of sale up, but I would say this, you know, our Honda store in Detroit decided now it sell all their trades not wholesale, so we're looking at that and by doing that, we have not doing the reconditioning necessarily to make them certified.

I think it is going to take some time where you see the numbers change dramatically because when you look at 59% of our business is premium luxury, and the cost of sales, it is going to be much more difficult, but I think overall when you look at certified compared to as a mix, we were about 31% last year through nine months, and we're about 36% for the same period this year. So there is pressure on from the manufacturers. One of the things that you get with a certified vehicle, you get an automatic extension of the standard factory warranty which is a real hook for the customers, a good hook, in fact, and we also get a higher advance rates from the captive finance sources on certified vehicles. So there is a rationale that says certify as many as you can because from a warranty perspective the customer is going to get a real benefit, and you're going to get the parts and service business back in your shop.

Understood. Thank you.

And for the past few quarters you've had like $100 or $200 million or so in assets of discontinued operations on your balance sheet? Are these many of the same assets that you've had and not yet sold or are you constantly selling and adding new assets to this category?

I think when you look at assets held for sale, and you look at it in reference to the end of the year, we're down about $60 million, down from the six months another 30, so some of this were assets which were are taken in and put into the category when we make some of these acquisitions specifically when you look at the U.K., I talked about Jacks. We sold three Volvo stores here in the fourth quarter, so I think it is coming in and out wherein I mentioned as we see stores that are not strategic, and we make acquisitions where we have to buy the whole business. Fortunately with Ryland we didn't have to do that and some of the other acquisitions we have to, then we'll work out in the marketplace.

We've had -- the only negative we had in fact no one asked me the question. When you look at below the line in net income, we had $2.5 million when we sold off an Acura store due to the fact that we had four Acura stores in the northern California market, and we had to write off the franchise value there, so there is some times it hits us, but normally we're able to take these actions with little or no impact to the bottom line.

Do you think this will be a pretty continuous process as you call your bottom performers and acquire dealerships that is you may not want to keep?

I think that right now we're in real good shape from a standpoint of our U.S. mix of dealerships fortunately; there is always one or two that you will take a look at, and maybe conditions change.

I think significantly the ones we would be dealing with are ones which we picked up through acquisitions, and we mark those to come on and typically under the accounting regulations, those have to be moved out if they're classified discontinued within I think twelve to fourteen months.

Okay. Great. One more quick question.

I was just wondering if you could maybe give us your thoughts on the new vehicle sales environment year-to-date sales have been softer than many were expecting, and I am wondering if you think the OEMs are likely to meaningfully increase incentives as year end push particularly maybe on the light truck side of things?

Well, the light truck business was really up a little bit as we saw fuel prices come down. I think that $3 scared everybody, and we could even see Toyota and even Honda SUVs that were a little slower moving off the lots.

I think there will be continued pressure certainly in the DCX, to move their inventory, and that's going to be a benefit potentially to the consumer, and then the dealerships that have those hopefully as we close out, but I think the grosses are okay, but with a selldown in new product, to try to be ready for the '07's because have you a lot of new product.

If you're sitting there, most of the product we sit with are probably the one that is have the bigger engines in them and the one that is aren't as efficient now fortunately our day supply when you look at our foreign name plate high volume stuff we're in great shape, but I see the market looking to try to find out our interest rates going to be flat, the OEMs have been able to mitigate that in the payments and lease payments because they're probably looking at stronger residuals in most cases, but overall I think we're going to see a push here to the end of the quarter where we will see some pretty strong incentives. We've seen some of that already here in the last couple days.

I think -- I don't want to see the customer going to 84 months. I think then we'll never see that customer again, so I am an advocate of a shorter term for a lease or continual sale contract, so with the customer has some equity in the vehicle when he comes back, so those are things that we have to weigh, and I think we all have to as the dealer and also an OEM.

Great. Thanks very much, Roger.

Thank you.

Our next question comes from Jonathan Steinmetz of Morgan Stanley.

Jonathan, how are you?

Good afternoon. This is Jane Park on behalf of Jonathan.

One quick question on the new vehicle side.

Gross profit per retail transaction for new vehicles was about 3% this quarter. Can you just comment on some of the specific drivers here ,and the increases at domestic versus international brands or mix shifts within brands? Thank you.

Well, from a new vehicle perspective, when you look at the margins, we had probably a difference between the U.K. and the U.S.

We were 8.1% in the U.S. and 9.5 in the U.K., and quite honestly that gave us 8.5, and it was pretty much flat between the two. We were probably down a little bit in the U.K., and we were up in the U.S., and I wish I could tell you what were the drivers of that.

We had probably last year we had the lot of Bentley business and the Porsche business off this quarter primarily due to availability, and then we maybe had some other vehicles such as some of the Lexus products which we sold out over here which gave us more margin, but again I think Tony probably should call you and try to drill down that in detail.

I am having a tough time giving you an answer that I think would be accurate right now.

Okay. Thank you.

Our next question comes from Peter Siris of Guerilla Capital.

Peter, good afternoon.

Hi hey, Roger, how are you.

Great.

I have a question about Inskip.

The -- I had actually the opportunity to have some service done there. It was great, but if you go in the service bays of Inskip, they are unlike anything I have ever seen. I mean they're spectacular.

The question I have is how much did those service bays all cost to bill, what's the return on them, and is that what the future looks like?

I think that as we start to look at CI requirements, you know, in shops, we're getting many of the OEMs and in fact it is interesting, you talk about service bays.

If you're building a new Toyota dealership today, the width of the building has to be 80 feet because of the trucks coming. They're starting to dictate, you know, certain dimensions as they did outside and also in the show rooms they're doing it in parts and service.

What we've done is taken the liberty to provide all our technicians toolboxes so then we have proper spacing within them. I think they look better, and we're able to in many cases attract technicians that don't have the ability to maybe spent money for those toolboxes and put it in their home or maybe in their vehicle, but I think we set a standard, the new stores I see not only this the U.S. but in internationally are all now going to what I call consistent hardware in the shops.

One thing we do, we use all in-ground lifts. We think they're more productive. They're safer. They're cleaner. They have less accidents surrounding those, so what you saw in Inskip is pretty much our standard pattern, and the returns that we're getting, you know, at this time, I think we get the payback on a bay in one year.

I think that's really what we look at, and again the question was asked earlier about two shifts. Once we have these stores that we made these types of investments, we would go either doing our internal work at night or adding a second shift to get the payback, but overall we see the back end really paying the bills because if you look at our margin, you know, our parts and service margin went up 114 basis points to 55.4%, and I think that with that it is showing that we're getting the traction.

We're also being able to attract the best technicians, so overall what you saw I think is what we want, and I am glad you had a chance to look at it yourself and to me, the people that we know that can go into these shops and survey them or give us our best answers of what we should do.

The other thing is if you look at our employee response, we're doing a dedicated employee survey, and we break it down into the skill groups. We're getting very high marks from our parts and service people today on the environment. In fact, "Will you be working at the company another year" and "Will you be working in five years" and we're getting high marks on those. Evidently we're making a difference.

Inskip was always a top of the line dealer.

As I went into the bays, the original Inskip bays, the ones that you haven't yet finished, you know, changing around compared to what the new bays are, I mean the difference is really substantial.

It is night and day. Plus we have service drives where you don't have to stand outside in the rain or snow.

No.

You drive right in, they take care of you, and there is internet access. You know, I am not saying it is worth driving up from New York to Rhode Island, but it sure makes getting service a pleasure.

We'll do a pick up on your car for you.

Thanks, Roger.

Thanks for the comments.

Our next question comes from Scott Stember of Sidoti and Company.

Scott, how are you.

Good and yourself.

Good.

Just real quick, Roger, can you talk about how the sales progressed during the quarter by month and maybe talk about -- it sounds like October has maybe picked up a little bit. Can you verify that?

Well, we seem to always come off the quarter and run maybe at three quarters speed, and then as we get the second and third month of the quarter with all the incentives which are typically provided by the OEMs and our guys trying to hit their targets, we always see a strong finish, but when I look at October, you know, it is a longer month, so we'll have the benefit I think of two or three extra service days which will help us from a parts and service perspective, but I think we've talked on the call about the market itself. I think it is challenging, but our inventories are in good shape, and I don't see that the fourth quarter is going to be any different.

We're going to be driven in a fourth quarter by the incentives by the OEMs and particularly UAG on what the weather is going to be like around Jersey City and up the Northeast Corridor up through Inskip and Turnersville because those are key markets for us, and that last week between Christmas and New Year's is critical.

And last question on BMW, obviously down in the quarter and part of it probably had to do with the new SUV lineup they have coming out.

Can you talk about the timing of that and when you expect --

We expect that the new product coming up here shortly both here and in the U.K. and I think that they have been terrific with the new 335 that's a coupe which is a great entry level vehicle and can't get enough of and I was in Austin the other day and they said we can sell every one of them for full margin.

As the manufacturers go through the model changeovers, you can see some deterioration of penetration, and I think that we're very, very strong on that product as you know we've invested in a number of the major markets, but X5, 335, you know, they got the best diesels, Mercedes and I think Mercedes, Audi and BMW have the best diesels overseas, and I think that's critical as we look at some of the fuel prices overall.

That's all I have. Thank you.

That does conclude our Question and Answer Session. Gentlemen, would you like to conclude with any concluding remarks?

No, Pattie, thank you for the time. Thanks for everyone being on board. We'll talk to you next quarter.

Thank you.

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