Penske Automotive Group Inc (PAG) 2006 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon. And welcome to the United Auto Group fourth quarter 2006 earnings conference call. A press release which details UnitedAuto's fourth 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 February 21st, 2007. Please refer to the UnitedAuto's press release dated February 1st, 2007, at www.unitedauto.com for specific information about how to access the replay. I would now like to introduce Tony Pordon, Senior Vice President of United Auto Group. Tony, please go ahead.

Thank you, John. Good afternoon, everybody, and welcome to our conference call for the fourth quarter. Joining us today is Roger Penske, our Chairman, Bob O'Shaughnessy, our Executive Vice President and Chief Financial Officer, and JD Carlsson, our Controller. At the conclusion of our remarks today we will open the call for questions, and I will also be available by phone to answer any follow-up questions that you may have.

Before we begin today, I would like to remind you that statements made in this call may include forward-looking statements regarding UnitedAuto Group's future reportable sales and earnings growth potential. We caution you that these statements are only predictions which are subject to the risks and uncertainty, 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 from these predictions. The forward-looking statements should be evaluated together with the additional information about UnitedAuto, which is contained in our filings with the SEC, including our 2005 annual report on Form 10-K.

During this call today we will be discussing certain non-GAAP financial measures, such as adjusted gross income, adjusted income from continuing operations and adjusted earnings per share from continuing operations. These adjustments to these items reflect the exclusion of the fourth quarter 2005 gain from the sale of our remaining variable profits relating to the pool of extended service contracts sold by the Company from 2001 through 2005. We believe this non-GAAP disclosure improves the comparability of UnitedAuto's financial results from period to period. At this time, I would like to introduce the Chairman of UnitedAuto, Roger Penske.

Thank you, Tony. And good afternoon, everyone, and thanks for joining us this afternoon. Before I address the specifics of our results today, I wanted to take a minimum to comment about the current environment and some thoughts about what we're seeing in the marketplace today. As you have seen or heard, the fourth quarter was challenging. Product availability and margin pressure contributed to the difficult operating environment we saw here at UAG. Further, I expect that interest rates, which are driving higher monthly payments for customers returning to lease a new vehicle, will continue to be a headwind for the retail space as we see 2007. I am also cautious about the pending labor negotiations in the U.S. automotive space and what impact these negotiations might have on the overall car market here. Having said that, I remain bullish on the luxury end, as residual values seem to be holding and helping to produce relatively attractive lease rates for many of the brands. I am also happy to see that the Big Three continue their efforts to reduce sales to daily rental fleets, which I believe will have a long-term positive impact on their residual values. We look for a 16 million low year on a continuing market in 2007, and I see a shift again -- a continued shift to foreign name plates.

Turning to our UAG '06 performance, I am really pleased to announce we achieved record revenue and income from continuing ops and earnings per share during '06. We grew our overall business 16.4% on the top line through a combination of same-store growth and acquisitions. Retail sales units increased almost 12% to 272,000 units. New was up 9.2%, used up 17.8%. On a same-store basis, retail revenue increased 4.3%. If you look back over the last five years, we have really grown same-store between 5% and 6% each year. On an average, obviously, it has been quite good. Components of the same-store increases were new vehicle up 2.2%, used vehicles up 9.2%, service and parts up 6.9%, and finance and insurance up just close to 1% or 0.8%. Our revenue mix was in the U.S. 68% revenue versus 71% a year ago. So we had a shift of almost 300 basis points to the international revenue. So for '06, 68% in the U.S. and 32% internationally. Our operating income mix was 69% in the U.S. and 31% internationally, and that compares to the U.S. last year at 73% and international at 27%. In total, operating income increased 7.6% to $303 million. When you exclude the effect of the extended warranty gain from our '05 results, income from continuing operations increased 14.7%. Related earnings per share increased 14.9%.

Also during '06, we solidified our capital structure. We raised $750 million in long-term debt at attractive rates. We've also announced recently our intention to call our $300 million 9.625% Senior Sub Notes in March. As a result, we have extended the maturity and lowered the average interest rate on our fixed rate debt. We have also evaluated the level of our revolving debt capacity based on our projected future cash flows. Based on our review, we have elected to reduce our U.S. credit agreement from $600 million to $250 million. This will reduce the commitment fee expense associated with the unused portion of our line. These changes to our capital structure provide a solid foundation for future growth and profitability for UAG.

Let's now turn to the fourth quarter. As noted in our press release today, we experienced a challenging retail selling environment during most of the quarter. We saw good performance in our used vehicle and service and parts business, highlighted by same-store growth of 14.5% in used vehicles and 6.2% in service and parts. Although we achieved strong top line growth, we experienced pressure on both new and used vehicle margins, as the push for market share impacted our operations in certain markets. During the quarter revenue increased 22.8% to $2.9 billion. Income from continuing operations was $31.1 million and related earnings per share was $0.33 per share. Prior year results include the $5.2 million or $0.06 per share extended warranty contract gain. Excluding this gain from our '05 results, income from continuing ops increased 16.1% and related earnings per share increased 17.9%.

Looking at the quarter in detail, our revenue increased 22.8% to $2.9 billion including $85 million from changes in foreign exchange rates. New vehicles up 16.8%, used vehicle up 43.9%, F&I was flat, and S&P, service and parts, was up 23.4%. Average selling price of new and used vehicles increased. New was up $1,586 to over $36,500. Used was up $2,567 to $30,000. I think it is interesting when you look at our used selling prices, in the U.S. they average $21,000 in the quarter, and in the UK they were $46,000, more than double.

Turning to revenue mix, our international operations generated 35% of our total revenues and 27% of our operating income. On a relative basis, the contribution to operating income of our foreign operations was lower than in the past. This is due primarily to the significant ramp-up in the used vehicle revenues bringing down the average margin in those markets. On a worldwide basis, foreign and premium name plates represented 94% of total revenues, including 66% from premium brands, with the domestic Big Three contributing the remaining 6%. If you looked at the U.S. alone, in the U.S. the Big Three was approximately 9% of our overall revenue. To see the specific brand mix percentages, you can take a look at our selected data sheet that was part of our press release first thing this morning. I would also like to note that foreign exchange rates had no meaningful impact on the fourth quarter operating results.

Turning to margin, our overall gross margin in the quarter decreased from 15.7% to 15%. And just to give you a little more color on that, over half the decline comes from two items, a 29 basis point decrease due to the extended warranty gain last year, and an additional 13 basis points due to a decrease in F&I revenue resulting from the decline in the market value of Sirius common stock. The remaining decrease in gross margin really relates primarily to a more difficult selling environment for new vehicles in the UK, as certain of our brands were influenced by excess product availability, and the strength of our used vehicle business, as our used vehicle revenues increased to 23.6% of our total revenues in '06, compared to 20.2% in '05. A big change.

Turning to same-store comps for the quarter, retail revenue growth was 7.1%, including 4.5% increase in the U.S. and 14.2% internationally. We getting some good traction there. New retail revenue up 5.5%, used retail revenue up 14.5%, service and parts revenue up 6.2%, and F&I was down 9.6% for the quarter. So overall total same-store for the quarter was up 7.1%. The 9.6% decrease in same-store F&I is due to two items, the extended service contract gain we talked about earlier was recognized in Q4, $8 million or $0.06 per share. The decrease in the amount of income we recognized on Sirius in Q4, $400,000 in '06, and $3.8 million in '05. That's $0.02 per share. Our tax rate for the full year was approximately 34% compared to 36% last year. The decrease is attributable to tax planning and an increase in the amount of income from lower tax foreign operations.

Going onto the balance sheet, total vehicle inventory was $1.4 billion, which was up $127 million compared to the end of the third quarter of '06. On a same-store basis, inventory was up $109 million compared to a year ago in December, up $69 million in new and $40 million in used. At the end of the fourth quarter, our worldwide days supply is in great shape. New at 50 days, in comparison to 49 days a year ago. Used was at 40 versus 33. That's on a worldwide basis. And when you look at the U.S., our new vehicle was 46 days versus the 63 days supply for the U.S. market. Our used was at 37 versus 34 a year ago. In 2006, we wholesaled nearly 79,000 vehicles, and our wholesale [offs] was only $200,000. So our auctions and some of our processes we put in place really created some real benefits for the entire year.

Let me just talk a minute about CapEx. Net capital expenditures were $120 million during the year. And that was versus $101 million a year ago. Gross CapEx was 222 in '06 to 219 in '05. Trying to look out a little further in '07, we expect net capital expenditures to be between $50 million and $75 million for '07.

Turning to UAG's leverage, as of December 31st, our debt to total capital was 48%. The increase is primarily the result of our current year acquisitions and the issuance of our 7.75% high-yield notes in December of 2006. In total, we had $1.2 billion of non-vehicle debt, and that debt consisted of $300 million of 9.625% ten-year Senior Sub Notes, $750 million of senior subordinated notes at varying rates, and $132 million under our foreign credit agreements. At the end of the year we had nothing outstanding under our U.S. credit agreement. And as of December 31st , adjusted for reduction to our U.S. credit agreement I mentioned earlier, we had approximately $377 million of availability under our overall credit agreements. Based on our capital structure at December 31st, 56% of our total debt, including floor plan debt, was fixed, with an average interest rate of 6.6%, and an average maturity of 5.6 years. As we announced, we'll call our 9.625% Senior Sub Notes in March, and we intend to fund the repurchase of those notes with the reborrowing under our U.S. floor plan arrangements. After completing the call, we expect our debt to capital ratio will be approximately 41%. In addition, after the call, approximately 43% of our total debt, including floor plan debt, will be fixed with an average interest rate of 5.7% and an average maturity of 5.7 years.

Looking at acquisitions in 2006, we acquired annualized revenue of approximately $1.5 billion. $1 billion of that was in international. We did not complete any acquisitions during the fourth quarter. We also continue to divest franchises that did not meet our return requirements, location strategies or have significant OEM ID requirements. During 2006, we divested 23 franchises which generated an estimated $500 million in annualized revenue. Of the franchises divested, 13 were foreign premium, and the balance were the Big Three. I would also like to point out that ten of these divested franchises were located in the UK.

Let's look at our guidance. We showed it this morning in our press release. But our guidance assumes the same-store growth of 3% to 5%. We've been in that range, I think, for the last five or six years.So we feel that's consistent with our mission. Acquisitions totaling approximately $350 million in annualized revenue on a gross basis, and an average outstanding shares of 94.6 million. Based on these assumptions, we expect earnings from continuing ops to be in the range of $1.40 to $1.50 per share, which includes $0.02 to $0.04 in expenses relating to our Smart franchise. For the first quarter of '07, we expect earnings from continuing ops to be in the range of $0.26 to $0.30 per share. Please note that our guidance does not reflect the charge we expect to incur when we call our high-yield notes in March of this year. We currently expect to record an after-tax charge of $12 million or $0.13 a share.

Let me turn to Smart. I have had a lot of questions about Smart here in the last several weeks. In January, we held four meetings for prospective dealers. These meetings were attended by approximately 600 potential dealers, where we highlighted our plan for rolling the Smart brand out across the U.S. During the first phase, we expect to have 50 to 60 dealers, and then we'll hope to name those as we end the second quarter. We also debuted the Smart ForTwo at the North American Detroit International Auto Show, where it was well received. In fact, the ForTwo was rated one of the ten best cars to see at our show. You might have seen it was featured on the MSN home page. In fact, our number of unique hits continues to grow. We're over 600,000. And we now have 33,000 insiders who have registered to receive more information about purchasing this unique car. We intend to announce a $99 reservation program within the next 60 days that will allow our customers and insiders an opportunity to reserve a place in production. Remain on track to begin distributing this vehicle in the first quarter of 2008. Again, the Smart distributorship further differentiates us and the strength of our business.

Now in closing, before we get into any questions today, I think UAG had a great year. We reduced our employee turnover from 34% to 31%. That's our human capital. Our key brands gained market share. I think our inventory was in good shape. And we definitely improved our capital structure for long-term future. We generated strong cash flow. And we continue to execute our growth plans in many markets, completing construction of several new facilities. These projects are intended to provide long-term growth for our business. We look forward to completing these projects in Turnersville, New Jersey, and Inskip during the first half of this year. We look to reverse the negative carrying effect we've experienced during construction. And when you go back and we talk about Scottsdale 101 in Arizona today, the fixed coverage there is now at 73%. In San Diego, we're at 88%. And at Tysons we are at 84%. So we have got real opportunities as we bring these Inskip and Turnersville locations on line. It will take us 12 to 18 months to see real value, but we think we've got a great start.

Given our significant activity in acquisitions in '06, our focus for the upcoming year will be to fully integrate the stores we have acquired, both in the U.S. and internationally. Having said that, we will be, and will continue to acquire stores opportunistically. I have always said that before. We remain committed to the continued growth of the Company through the improved same-store profitability and selective acquisitions. And we continue to believe we can grow our EPS from continuing ops. I want to thank our team for their performance in '06, and we look forward to another great year in '07. So at this point, we'll open it up for questions. Thanks for joining us today.

[OPERATOR INSTRUCTIONS] Kelly Dougherty, Calyon Securities.

Hi, Roger, thanks for taking my call. I wonder if you can just give you us a little bit more color on expectations for Turnersville and Inskip now that both of them are nearing completion. Specifically, I guess I am wondering if we should see an improvement in the cost structure in the second half of the year, once you're through with most of the costs associated with these locations? And also wondering if you can just put any numbers around the impact you expect once they're fully ramped? And, third, just if there is any large scale projects you have in the pipeline? Or should we expect capital spending to be closer to the 50 million to 75 million unit -- or I am sorry, million dollar level you expect in '07?

I think we've looked at the CapEx carefully. I will answer that question first. And I think that the net CapEx should be $50 million to $75 million, because these two larger campuses now are almost in completion, and we expect to see them on line. From an overall cost perspective, obviously, as we looked at the drag that these have over the last couple of years, it is because we're moving franchises to temporary buildings, working out of trailers, building shops. And at the end of the day, we look at the fixed gross in these places continuing to grow and they'll start ramping up now immediately. So I see we'll have the benefit of both Turnersville and Inskip moving out of the conditions they are. In fact, I think we had probably about a $2 million negative drag in the fourth quarter for both of these. So we see the opportunity for next year and beyond. And I think there is no question as you look at this, you'll see a continued growth through '07 and '08 from both of these campuses.

We're already carrying the fixed cost structure at both of these. In fact, an example, we're building a new Lexus store in Edison, New Jersey, that's been under construction for almost a year. And we're expensing almost $85,000 a month with no revenue and no gross profit. So these are some of the things that, based on the accounting requirements, that we have to carry. So if we're going to grow, we're going to have these types of expenses. But you got to go back and take a look at 101, where we had a lot of people saying what happened, what will happen there. I's been a homerun for us. The same thing in San Diego, and certainly the same thing in Tysons. So we feel pretty good about where we're going.

Thanks. Any more large scale type projects in the pipeline, or should we expect this to be the bulk of it for now?

I think that Edison will complete -- we'll open up Edison in the first week of March. We have a Companion Point in Florida, which is where we're now moving dirt near Royal Palm. And Jersey City would probably be one of our biggest projects where we're rebuilding our Toyota and Nissan. So those are super-sized stores. So those will be projects, I think, in the U.S. And certainly in Europe we completed Fort Dunlop. Most of the BMW businesses have been changed and meet the CI. Obviously, we're now looking at the Ryland requirements, that's the BMW businesses and Mercedes businesses we bought at the end of the third quarter. But nothing of the magnitude of Turnersville or 101, like you would see over here.

Great. Thanks. Then I am just wondering if you could talk to some of your better or worst performing domestic regions. In particular, some of your peers have pointed out California and Florida. And I am just wondering if you would attribute any weakness in those markets to the softer housing market? Or do you feel you're less vulnerable to that, given your relatively low reliance on trucks and your higher end brand mix?

I think that's a quick answer. We wouldn't attribute plus or minus based on the scale. We're around where 90% of our total revenue comes from the domestic. So I wouldn't -- I say we would have no reason to say we had a negative or positive effect because of a particular geographical region, and certainly not related to housing.

Great. Thanks very much.

John Murphy, Merrill Lynch.

A question on SG&A. SG&A in the quarter looked like it was a little bit on the high end versus our expectations. And when we think about this going forward, or more importantly, when you think about this going forward, is that something that you're focused on on cranking down here in the near term? And do you have any targets on that? Or are you sorted of taking a longer-term perspective on the business, and thinking that that level is reasonable here in the near term for long-term returns? I mean, you tend to be a longer-term investor than I think some of the people on the phone. So just curious how you look at this?

Well, look, I want to see good short-term results. But at the end of the day, the number of shares that we own, we're a long-term player. There is no question about it. So the decisions we make are not for short-term benefits. They're more for the what's best for the business long-term. But let me -- I knew I was going to get this question. So I am going to take a little time, so everybody on the phone gets a chance to listen. I want to first start with SG&A as a percent of revenue. When you look at '04 -- Q4 in '06 and '05, I think you got to take the '05 numbers and take out the Sirius $3.8 million and the warranty of 8.1, to kind of get an adjusted revenue. And then you take our rent out altogether, because remember, we're growing our business. My mission at this Company is continue to grow. We did it in truck leasing. We're doing it here.

We're going to continue to grow the business. And when you look at that after those adjustments, we're really looking at 10.9 versus 10.9, so they're really as a percent of revenue, with flat quarter over quarter. And when you look at it on the gross profit line, pull out that margin again, and take the rent out, we were at 71.4 in '05 to 72.8. So we had an increase of roughly 160 basis points. But --- so, to me there wasn't big adjustments. Look, we need more gross, and we need to take costs out. You're absolutely on track. And I'll tell you, we spent a lot of time as we ended the year with our senior management team, to review all management compensation, all variable comp, because if we start to look at compensation as we grow these businesses, it is going linear, we need to take a look at that. . So our goal is to reduce comp as a percentage of gross profit overall during 2007 by at least 100 basis points. And when you look at that in the quarter, , it is about $4 million. So you can look at that. That's not in our guidance, because it is a goal we're trying -- that we put out to go forward.

Also, we're looking at our floor plan costs from the standpoint of can we lower them because we might change suppliers? Do we have opportunities to do that? You saw we reduced our overall credit line, because we're carrying $600 million of credit line and paying a commitment fee, which obviously, we had never touched anywhere near the total last year. And then we're also implementing the back office consolidations, which all of the key publics are doing. I think it is very good for us for controls, and I think we've got a big step on that. Also, looking at some standard CRM programs, we're consistent with rentals in all our back office. So we're trying to have CRM programs, which will give us the gains we expect. I think we're all over the map right now.

Then you're looking at marketing costs. There is a huge change going TV, radio, newspaper, into Internet. And I think it is really important that we need to take a look at this, and see where these expenses are going to be really taken down, because we have too many different suppliers, and I think we need to be more consistent. So those are a few areas that we see that we can reduce SG&A. And remember, I have to look at it without the rent factor, because at the present time as we continue to grow and we make these commitments to the OEMs, we have got to spend the CapEx or we won't be able to value these businesses. So to me overall, I think the employee turnover is coming down. That obviously brings down our workmen's comp and some of the other things that are associated with employee turnover, and also your training costs.

Roger, do you think it is okay to have a slightly higher SG&A as a percent of gross, or as a percent of revenue, to keep that turnover down and to keep employees around for a longer term and keep the Company going forward for the next three to five years as opposed to the next one or two? There is an interesting cost benefit analysis there. But is that a good trade-off potentially?

Well, let me say this, that when you go in a store, you like to see the same people to do business with. And I think long-term, we'll have much better customer satisfaction with less turnover. I know that. We'll have less issues from the standpoint of retail sales. Again, I think we've got to look at ways to drop it. I am not sure, John, what is the right number. I think we've got to continue to drive it down. And I think the discussions we have quarterly with you and a number of your peers, we have got to do the same thing. They want the same. So when I look at it and I look at our numbers, and I say my adjusted number is 10.9, I think that's okay. I am not sure as we look at comp plans -- remember, we have an international piece of this. Our comp plans in the internationally are not variable. There may be 20% variable and 80% fixed. So we've got another piece there that we have to take a look at how we might be able to readjust some of those to give us a better ratio. Also, most important, and I think the bottom line, is we have got to grow our gross profit.

And actually shifting gears, Roger, to gross margin here. Parts and service dipped to 54.9% gross margin. Not a big concern, but you guys have been riding a little better than 55% for awhile. I mean, will that crank back over time as capacity utilization, and you get Inskip and Turnersville and these other larger facilities up and running? Or should we kind of think of that as sort of a 55% run rate, and as those revenues grow, the total margin will -- the total margin mix will actually improve over time?

I think we've got to be careful. If we see that continuing to grow 25 or 50 basis points each quarter, I think it is going to be tough, because we'll start pricing ourselves out of the market. And with customers today buying some of the other services, oil changes, we can't be hitting them with big gross numbers from the standpoint of parts and services. In fact in many cases, we're going to menu selling. And I think 55% is a good number. And again, when we look at gross profit in the UK, they get less margin on parts than we get over here. In fact, many warranty campaigns, they get very little other than handling costs, which will drive some of our parts and service margin down on a quarterly and annual basis. But I think overall, John, 55 is strong. And to me, I'm looking at our peers, I think that we're in good shape.

Just one last question on acquisitions, Roger. The 350 that you're looking to do in revenue in 2007, clearly it is a lot lower than the $1.5 billion you did in 2006. Is that just the natural ebb and flow of the pipeline of acquisitions, and maybe a little bit got pulled forward here? Or is there the potential that all of a sudden you just see these huge opportunities and you have another $1 billion year?

Well, let me say this. We got the capital to make the type of acquisitions that we want to. But I think at the end of the day, when you look at last year, we had Ryland hit our deck there right at the end of the third quarter. Which gave us a total of I think 15 BMW stores and 14 Mercedes stores, and we didn't want to let that go because it was in a key market area. I don't see any of those in the horizon. We've been working on a number of particular acquisitions. But to me, I think the 350 annualized, net of any sales we would do, I think is very realistic.

Thank you very much.

Matt Nemer, Thomas Weisel Partners.

A couple of questions. The first is, I may have miss this. But can you go through the impact of foreign exchange on the income statement and made any metrics, like ASPs?

I think it was 0.007, if I am correct. So it had no impact, and it was $85 million on the revenue line.

Okay.

No impact.

Okay. And then second, I think you covered most of my SG&A question. But if I look at -- if I scrub the SG&A and take out Sirius, the extended service contracts, rent, D&A, and then the equity in earnings of affiliates, I am getting a year-over-year change of about 80 basis points. And I guess I am wondering, are there any other one-time factors, or any factors you can call out, like investment in the Smart distributorship, or severance, or anything else that we would be thinking about?

Well, look, the severance, there is nothing in severance that would be meaningful. So I wouldn't -- . But remember, we had probably somewhere around $0.005 on Smart in the fourth quarter. And as we talked about, that's going to be 2 to 4 as we go forward.

Okay. And then just a clarification on guidance. Is it a change in policy that you're now including unannounced acquisitions in the guidance forecast? Or is it -- I don't remember it being that way. So I am just curious.

I think we're consistent with -- Tony says we're consistent with last year. This guidance thing is a real hot potato, because some people are not giving guidance, some people do. I made the decision at least through today, that we'll try to give annual guidance and quarterly guidance. And we'll continue that. But again, as I look at the market, and I am certainly optimistic or I wouldn't be in this business, I think that the market is a little tougher, and we have to look at credit. We have to look at manufacturers, good manufacturers trying to gain market share. We've seen Honda and Toyota margins come down in the fourth quarter on all models. And those are things that, because as you start to build more market out there, and you've got availability, some of the dealers give them away. So I am taking an approach as we go into '07 that we're going to build our Smart program. I think we've done a good job on our dispositions. And I think when you look at the UK, BMW, and Mercedes, we've negotiated a much better allotment target for 2007, so we don't have to have the pre-reg cars to get our bonuses, like we had to this past year. Those are things that I think will help us as we go into next year, and also we'll be able to meet what the market expects from us.

Okay. And then lastly, you mentioned that one concern would be labor negotiations in the U.S. market. What do you think is sort of the worst case scenario there that we should be looking out for?

I wasn't sure I should even say that. But, look, it is coming up. And they're going to be around the table. You see Chrysler today has announced the closing or shuttering of two or three plants. And to me, there has got to be -- the unions have got to make a decision as they go into these negotiations, they've got to make the domestics competitive, because they've got competitors moving in from all over the world that don't have the labor costs, the legacy costs, that we have associated with the Big Three. But to me, this is a time for the union to get smart and the companies, the Big Three, to make a deal that will give them long-term stability. And I think with Mullaly at Ford, certainly with LaSorda at [inaudible] Daimler-Chrysler, and we've seen what's going on with Delphi and some of the other disposals they're doing at GM, I think there is going to be some meaningful discussion. And I think they're on the right track.

Great. Thank you, Roger.

Paul Swinand, Stephens, Inc.

I am on the line for Rick who is out today. Just to get back into the margin a little bit, you did mention, and we've been also hearing in the marketplace that there is some pressure on the mid-line imports. Is there any more color on how you see that evolving in 2007, and why you don't think that will continue to be pressure?

I think there is going to be pressure out there. As long as these guys are building the number of cars they are, and dealers are dealers. And we got targets, and to me, hopefully they can adjust the availability, because it is all about availability. And as we see too much availability in these high volume foreign brands, it is going to drive margin down. And we're fortunate that we don't have the number of outlets that you do in the Big Three, or there would be a real blood bath.

Okay. And then you also mentioned that you thought you won't have to do the preregistrations in UK to get your bonuses. Is there some reason that it won't repeat itself in -- ?

Well, what we do, we sign up for targets for certain sales bonuses. And what happens at the end of a particular quarter, is these OEMs, as an example, if you look at BMW, in the fourth quarter they had 9% of the UK market. For the whole year they had 4%. So there was a big push for everyone to make their targets. And what we've done each year, which is different than the U.S., you sit down with your OEM, and you negotiate your sales targets over the year. And I think they break it down quarterly. And I think there might be some pre-reg. But it is our goal -- these go into demonstrators and then be sold as used cars, and that drives our used car volume up obviously. You saw that from our numbers. But I think it is going to be -- we know it is smaller, because we've already negotiated with them. So I think we're going to be in better shape. To say we won't do any, I wouldn't say that is the case.

So you're just saying you negotiated a situation where you don't think you're going to run into that -- ?

Not in the magnitude. A lot of this is dictated by the corporate accounts, not fleet, but corporate accounts, because compensation, part of compensation in the UK is people getting cars. So a little of that is moving around. And the manufacturers are taking some of the pressure off that, because what people would do would be to run out in order to meet their targets, reduce margins, and sell to these corporate accounts, which did nothing for the retail buyer.

Got it. And then I know you're probably sick of questions about the market and housing, but given your premium brand mix, is there any segment of the market, or any particular customer that you do see weakening in? Maybe an aspirational customer, are there trends in the financing that you're seeing that maybe shows a little pressure in a particular segment?

Well, look, let me say this. One of the things which is consistent and growing, is in the premium luxury side, over 50% of our sales are leased. Now, what we got to be careful is that if the manufacturers don't support residuals, artificially or because they have them, that could put higher lease payments to the customer. So I think that's always a danger out there. In fact, when you look at the market today, leasing is up, I think overall, about 15%. And then you've got the lease returns coming back. I know that from Mercedes Benz perspective, they have several thousand cars coming back into the market. And I know they're working on programs where the dealers can be involved with that. That should give us a real good opportunity potentially to get more used volume. Because we never get enough used volume in these premium luxuries.

But I don't see -- Cayenne, we had no Cayennes to speak of at Porsche, they're coming in now with a new model. X5 has been a problem, because the V-8 is almost $250 more in payments than the same vehicle was in the previous year, due to higher interest rates and more content. So we've got to be careful that they don't put too much content in the vehicle. That's another one. But I think SUVs are back. I think hybrids are -- we're seeing incentives on hybrids. So those don't have the margin that we had in the past. And certainly on the truck side, lots of new trucks coming out, some good stuff. And I see that market being okay. But again, the trend today, people want to be sure they're getting fuel efficient vehicles.

So in conclusion, though, you would say that the lease payments don't look like they're going to go up, and you think the market will stabilize?

I think that's -- and you talked about in the premium luxury side, I think leasing really is a foundation of those brands, short-term and long-term, because it helps them maintain residual values. They can have shorter terms to get those customers back in the marketplace. So I don't see that strategy changing. And CPOs obviously, certified pre-owneds, these programs are becoming bigger and bigger. With all the manufacturers you get an extended warranty with those, a factory warranty, and typically you get better finance rates on CPOs.

Thank you very much.

Scott Stember, Sidoti & Company.

Could you maybe talk about some of the high line luxury products, as far as pricing on those units, as well?

Well, when we look at high lines, you talk about Lexus. Lexus, the 460 has been a home run, high gross. We just can't get enough of those. I think the S-Class has been strong. There is no question that some of the BMW numbers have gone off a little bit from the standpoint of margin. I think the GX470 Lexus, it's the SUV, they've got a new one coming, that's been down. But overall I would say the newer vehicles are averaging, giving the high line probably decent margin. But there is pressure still even at the upper level.

But not at the same level as some of the mid line?

Oh, no, not at all, not at all. Wouldn't be anything close.

Okay. And circling back to the used side of the business, could you just revisit U.S. versus the UK, and explain a little bit better the 60 basis point gross margin erosion?

Well, one of the key things when you look at our revenue for the quarter, we were up almost to 24% of overall revenue in used versus a year ago at 20%. And a lot of that has to do with the mix of the used vehicle, because in the UK, the average UK vehicle is almost 46,000, and in the U.S. it is 21,000. So as we increase that business with some of those preregistered cars, that drives up that number. And obviously the margins in the UK have been anywhere from 300 to 400 basis points less on used versus the U.S. So that's always going to drive our margin down, so I think there will be some balance there. We got a good used car business there. What we have to do is try to get a little more margin. And to me, when you look at the U.S., our margin was only off 30 basis points, and on a gross profit basis was off I think somewhere around $60. So to me, it is what are people going to pay, and it might be part of it is our salespeople. Our salespeople, I don't think when they go into a transaction, think about a percentage of margin they are going to make on the transaction. I think they're more thinking about, do I make $3,000 or $4,000. And depending on what model it is, it might be a higher margin or lesser margin. So I think we need to do some education maybe on our sales teams.

That's all I have. Thank you.

Jonathan Steinmetz, Morgan Stanley.

A few follow-ups here. On the service and parts, you did a 6.2% I believe overall comp. You did about 13.5% internationally. What was the domestic number on that? And can you just talk domestically a little bit about the trends between customer pay and warranty, because Auto Nation, for example, I think said their warranty was down about 8% year-on-year. I am just trying to understand that portion of it.

Well, let me say this. The domestics are way down on warranty versus customer pay. And then what we're trying to do is fill those bays up with tire and oil changes. But overall, customer pay continues to climb. And I think if you looked although Honda and Toyota, it is probably 70% of it is customer pay versus warranty. The only thing that changes that, something we're going to have to keep an eye on, is they sell these full-circle programs, where you buy the vehicle and all the maintenance items are handled by the factory. You pay those up front. Those come through as warranty, not as CP, so there is something we got to do some -- I will have to look at some numbers here to give that to you completely. But I see the quality of all manufacturers much, much better. And I would much rather have customer pay, because I get more margin on that, than I would normally on a warranty program. Overall, I think that you could say for the business, 60% would be customer pay, and probably 40% would be warranty. And I think it is trending -- I think it is trending up.

Okay. Switching gears, on the equity and affiliates line, you were at $2.7 million. Can you talk a little bit versus one, the prior year, can you talk a little bit about the big driver there? And then is this a sustainable level? Should we be thinking about almost $3 million a quarter from that line item in the future?

Well, because of the size of the equity accounting, we had to put it on a separate line. We basically have joint venture partners in Mexico. We have it with Nix in the total Lexus store in Germany and we have Jacobs in Aachen, Germany and the Audi an Audi Volkswagen business. So with those particular dealerships continuing to grow, we'll see more value there. Before, that was really tucked back into SG&A. So we pulled it out of there, and put it out where everybody can see it, based on because of the size of it now. I think you will see it there in the future.

Okay. And do you think we should be thinking about $10 million or $12 million a year coming from -- is that like a reasonable level? Or is there something that made it very strong in this quarter that might not repeat itself?

Let me get -- let me have Bob or Tony get back to you on that. I'm not sure. I don't want to give you a number just off my back here this morning.

Okay. And last question for you. On the new vehicle grosses, and it has been asked a little here before, but to your comment on Toyota and Honda grosses, it's not the first time we've heard that. But certainly a little jarring given how large you guys are Toyota and Honda. Was the 3,266 number versus the 3,149 on new vehicle retail per new vehicle retailed? What did that look like domestically? Do you have that sort of U.S. comparison? Was that still up? And I am just trying to get an idea the magnitude of the pressure you're talking about on those import brands.

Well, let me see here. We've got some data from a revenue perspective. Internationally, we average $33,000 on a new vehicle in '06, and we were about the same in '05. In UK, we were almost $50,000 per unit. That shows you the mix of high line luxury, the Mercedes and BMW versus 43 a year ago. And from a gross profit per unit, in the U.S. we were 2,789 versus 2,792. So I would have to say there on a gross profit in the U.S. we were flat, and in the UK we were up $546.

Okay. So I guess there is something that's offsetting some of this Toyota Honda pressure?

Absolutely.

What is it? Is that Mercedes or something?

Well, I would think you've got -- we've got Porsche, we've got Audi, we've got other brands. And, look, I don't want to put a red flag up here, but I can just tell you, with more volume brand available, the foreign name plate, there has been pressure. What I didn't like to see was people offering $3,000 to $4,000 on new Camrys where we couldn't get them some in some part of the country, and they're discounting them like that in others. And we get to see that, because we're doing business across the country. But I think that those manufacturers are smart enough to tighten up the supply a little bit in certain areas, and that will cure itself.

Makes sense. All right. Thanks, Roger.

Edward Yruma, JPMorgan.

Thank you for taking my question. Actually most of them have been answered. But I wanted to delve a little bit into the European market. I know you've addressed kind of your outlook for the U.S. market. But talk a little bit more about the preregistration environment, and also talk kind of about what you're seeing in the UK market more generally.

Well, the UK market was down for the second year in a row overall. We fortunately, with our brand mix, had a decent year, as we've shown from our numbers. Again, there is a corporate element there which is somewhat of a wild card because people, as part of compensation, get their vehicle. So what happens is, these bigger companies, say Barclays or Royal Bank of Scotland, people like that, aggregate these purchases. So what happens, they go out to the dealers knowing that they have these targets at the end of the month, or the end of the quarters, and they place orders. And that's played a little bit of hell with the margins. But it is interesting, BMW has stepped up when we negotiated our targets this year, and I think that overall we have to say that they're going to do something about it. The only other problem we have over there, with Mercedes, we have factory stores that compete with us. BMW only has one. Mercedes might have a dozen. So that's another wild card we don't have here in the U.S., and I am thankful for that. And we keep telling those guys that they have to be sure that people they're managing those factory outlets aren't giving these cars away to meet targets.

Great. And Roger, can you talk -- I know you touched on it very briefly. But can you talk a little bit more about what you're learning now that you've had about a quarter since you closed Ryland? Are you still as happy with the acquisition as you were when you made it? And kind of talk a little bit about the conditions of the stores that you're in. Thank you.

Well, number one, the Ryland business was a home run for us. It gives us great concentration, giving us the northern part of England and Newcastle where we weren't before. With Mercedes [inaudible] and Sunderland, those are good markets. Not a lot of CapEx to do there. As part of the purchase, of course, we had some real estate we bought, and will be taking that real estate and doing sale leasebacks because the rates are so attractive. That's going to drive -- we had $132 million of debt over there at the end of the quarter, and we see that will come down by year end, because we will off load some of those real estate pieces. I think Ryland -- as we bought Ryland, unfortunately there was a lot of pressure from BMW over there to make numbers. So the size we are in the marketplace was 15 stores, we saw some pressure in the fourth quarter. But that has nothing to do with the long-term vision. I think it is great.

The other thing, as you know, Mini is going through a changeover. So we had no Mini gross to speak of, because you were running out the old model in the fourth quarter. And over here we only have 83 Mini stores in the whole country, and I guess we would all like to have more. But that's the overall allotment here. Where, over there, every BMW store has Mini. So we lost some good used business there, and also some new business. But overall I would say we didn't have to buy anything with Ryland we didn't want. With William Jacks, remember, we bought those to get certain stores and we've off loaded a number of those stores which were not strategic for us. So I think when you look at the UK, in the fourth quarter they were off 5%, and for the full year '06 they were off 4%. So I think we're pushing against a little bit of headwind there, but again, our positioning, our brand mix, our facility -- and we have got a terrific team there. I think some of you have met Gerard and his team over there. They have done a great job, and Mark Carpenter, and our guys.

So I think Ryland was great. The William Jackson has come in nicely. And we're going to opportunistically look at some acquisitions. But I think the team there said look, let's really digest. Because remember, we got Ryland at the end of the third quarter, so we're just kind of getting our feet on the ground. We made some management changes, and overall, I think the team is melding nicely. We put some Sytner people into the Ryland stores, and vice versa. So overall, I think it is going to turn out to be a nice acquisition.

Great. Thank you very much, Roger.

Deron Kennedy, Goldman Sachs.

I am here with Matt Fassler. As with some others, most of my questions have been answered. But if you could just discuss briefly the tax rate, or put a little bit more detail behind why it was so low, it kind of took me by surprise, at least with an eye towards what we can expect in '07 and '08?

Well, when you look at the tax rate, I think the first thing that you got to take a look at, the percentage of our UK income for '06 was much greater than the plan we had at the beginning of the year. And based on that part of the world and tax rates there, it's at 30% versus 35%. So to me that gives us a benefit. So we'll see that on a going-forward basis. Then we had a number of foreign tax planning initiatives with our joint ventures in Germany and some of the other areas where we have the benefit of some -- I think some unique tax planning. And overall, we had a reduction in our state tax due to the same type of planning. Greg Morrow is our guy here, and he has done a real good job for us. Because we have a different, I think, equation here because of the international aspect of the UAG business. So we expect our tax rate to be 36% in 2007. Obviously we had a very, very good positive in Q4 of '06. But again, we're going to maximize our tax benefits every year. And I think that in many cases we'll leave the capital in the UK and in these foreign subsidiaries because we can grow in those, and don't have to have the -- repatriate back here and have higher taxes. So I think we'll leave that money in. In fact, Sytner, we've made no investment in Sytner, I guess other than $25 million additional since we bought that business and grown it from $900 million to almost $4 billion. So it has all been by -- cash generated by the entity.

Okay. And then two more. One of them is about Smart car. And you've spoken about the $0.005 this quarter, $0.02 to $0.04 next year. Can you share with us any projections, even on the conservative side of what kind of impact it could have on your '08 numbers once the product launches?

Well, I think based on some people were able to attend our dealership session.

We were there.

There we talked about 16,000 to 20,000 vehicles. And I think for me to provide guidance would be difficult. We're just getting our cost structure in place. There is some negotiations going back and forth with DCX to determine which costs we pick up and which costs at the distributor versus the OEM. And I think that at the end of the day, we've not put out our specific wholesale and retail price. We have told the dealers that they will have a 9% margin with this product, so I feel good about it. We've got a team here. They're UAG people that we've been able to put into it. Dave Schembri, who was a Daimler-Chrysler individual was working on Smart. I think with all of that in place it is going to be a positive for us. And I think overall, we'll have the opportunity to build a world-class distribution system. And I tell you I expect to make money with it.

Fair enough. Final question is a little more detailed. Regarding floor plan assistance, I never see it really broken out. You talked about your floor plan data quite a bit.

I think we had about 31 million versus 26 or 27 last year, when you look at it overall. And what we're looking at today, we try to be vertically integrated with the manufacturers vis-a-vis floor plan, finance, and what have you. But when I have to pay 25 or 30 or 40 basis points higher for floor plan that the market is today, I have got to take a real good look at it. Because that could give us benefit as we go into 2007.

So on the fourth quarter, how much was it, or is that something you have?

I think in the fourth quarter it was, I think around 7.5 to 8 million, and it was in the 6s last year.

Okay. And is there any difference in the way the floor plan works for you -- floor plan assistance with -- over in Europe and the UK, versus here? Is it through the OEMs?

Well, the OEMs -- one of the differences over there, we get no assistance in the UK. The only thing that happens is, they hold the vehicles. You have vehicles, they have these big marshalling yards where they do a PDI, and they hold the vehicles up to a certain point. I think we get 60 days. And then at that point, you either pay for the car, put it on your line of credit, or that car goes into open solicitation, meaning that any dealer can take that car and put it into his inventory and sell it. So there is kind of -- it's two-prong situation there. No interest for 60 days, and obviously, we don't want cars sitting for 60 days, but that's how they handle it. In many cases, if you have a corporate customer, they not only handle the marshalling of that vehicle, they do the PDI and do the delivery to your corporate customer. So it is much, much different than here.

Okay. Very helpful. Thanks for taking my call.

Rich Kwas, Wachovia.

Wanted to get your view on used sales -- used vehicle sales this year. Particularly on the luxury end, what are you looking for overall market-wide?

Well, let me say this. We have to do a better job in the U.S. on used vehicles from the standpoint of units. We tend to probably be only for every one new vehicle we sell, we're in the 0.3 to 0.4 vehicles. Where in the UK, they might be 0.6, 0.7. I think overall we're about a half a used to every one new. And to me, CPO is the big thing here in the U.S. that's driving the customers where they see these higher leased rates on new vehicles, there is the opportunity today to see the CPO help us. And in fact, I think if you looked at the fourth quarter of '05, it was about 34%, if you looked at the premium luxury side. And I guess that included the domestics. It is almost 40% now, so there's a big push. Advertising, extended warranty. And one of the real pluses is that there is very low interest rates. They give special rates on CPO. And you as a buyer get the same new warranties -- or same warranty you'd get if you bought a new car.

Are you seeing any increased interest on the entry level luxury, given the higher rates here versus taking away from new entry level luxury?

I'ss tell you, that's one of the problems today. When someone comes in with $3,000 to $5,000, there is a number of creative ways, either through leasing, or there's some [inaudible] rates and other things to get that entry level buyer into a new car. In fact, one of my problems is I think our people think it is easier to sell a new than a used. And also, when you look at our cost of sale, when you look at 20,000 in the U.S. and we look at Car Max, who has done a great job trying to -- they're probably down to 11,000 or 12,000. Our problem is, because we have a much higher mix of trades on premium luxury, so that drives it up. And I think that's one of the areas we have to work on. In many cases, in our premium luxury locations, we have a combination new and used car sales floor. And the places that we do the best, we split that out. When you think about San Diego, you think about places in Scottsdale, where we have separate used car operations. I think we're going to see more of that. As we do these new campuses we're focusing on better used car capability at the premium luxury.

Okay. And then just on the used vehicle initiatives, I believe you're going to be using First Look for your software program. Wanted to find out where you are in the implementation of that?

Well, we -- First Look obviously is one of the products that's out there. And we've been piloting that for quite awhile. That's the Ryan product. And also, our people are piloting it in one other location, American Auto Exchange. So we've not -- at this particular time, I think that everybody has a product. It is kind of like the CRM, and what we're going to try to do here is have a bake-off here at some point, where we can be consistent with one. But right now, it is a great tool to help manage and identify areas where we can sell cars, wholesale cars, when you've got to take cars out of your inventory. And I think one of the things that doesn't change is the -- I always say the mentality, but the process for the used car management. I think they're great products.

So is there any time frame on picking one?

No. I think we push that down. Unfortunately, or fortunately I guess, we try to give that latitude to our area and retail managers. And to me, we've done a good job on our auctions, in-house auctions, the electronic auctions in the UK. We've reduced our total wholesale off on 80,000 vehicles during -- to $200,000. So to me, that's a $3 or $4 a unit, which I think is terrific. So we're looking at the back end. And now what we have to do is determine what we can do to grow that front end.

Okay. Thanks so much.

Rex Henderson, Raymond James.

Good afternoon, and thanks for taking my call.

No problem.

A number of my questions have been answered, but I wanted to revisit one concerning SG&A. Roger, earlier you said you were working to reduce SG&A as a percentage of gross profit by 100 basis points. I wanted to revisit that a little bit and understand where that's going to come from. Is it going to come from better managing sales compensation, from efficiencies in support staff, where you might find some of those efficiencies?

Well, let me just be sure, we're talking about comp -- overall comp in the dealership as a percentage of gross profit. That's everybody, not just on the sales side. That's everybody. So what my goal is is to reduce that 100 basis points, because we have some stores that are in the 35% to 36%, and we have other stores that are over 50. And it is typically when you look at pay plans and you look at productivity, starts to drive this. You could take people out in many cases, from a sales manager perspective, do we have desk people who basically are really paid as sales managers? Do we take a look at the F&I area, specifically, as we have all of these rules and regulations today, and the kind of products we want to sell our customers, we might have the salesperson do that versus having a specialist. These are all areas that we're taking a look at. But to drive that down, I think that comp, we have to look at service writers, we have to look at technicians, we look at parts counter people. This is not just -- it is not a sales side. It is across the whole dealership. And it is going to take some time. But it is a metric that everybody that's a manager in UAG today understands what comp the gross is, and we're going to drive it down.

Are you going to try to provide some guidance from the corporate level to the GMs about their compensation systems? Or are you going to leave that in the hands of the GMs and the regional people?

We're starting with the discussions with the senior executives, our regional area guys. And then what they would do is implement the same processes down in the organization. Because, remember, your different at a Mercedes store than maybe you are at Porsche, or you are at the or the Wynn Ferrari. Because in some places, we pay only a salary. In fact, at Wynn you get paid no commission to sell a new Ferrari. You get paid a variable commission to sell a used car. So you remember you have got to be careful that one shoe doesn't fit all on this.

Okay. Second question. Different area. That is the Sirius warrants. Given the amount of volatility that that's introduced to your earnings, we saw it here in this quarter, I wondered if you thought about a disposition for that position?

No. I think, look, we've got a lot of benefit. You can't run when things get tough. I think you know us better about that. . We wouldn't do that. I think at the end of the day, the Sirius stock has been under some pressure, and obviously our warrants become under water in some cases, so we don't get the benefits. I think from the future, though, we see the satellite radio business basically is really coming together. In fact, they even talked about the two -- the two organizations getting -- we hold very little equity. In fact, once we get these warrants and they're in the money, you follow me, we execute them and move on.

Okay. All right. Well, thank you very much.

Greg Wilcox, Wachovia Securities.

Thanks for taking my questions.

Is it warm there?

A little bit. It is still winter here, though. Cash taxes and cash interest. Can you give me those for either Q4 or for the year? I don't think that's been covered yet.

You said cash taxes?

Correct.

And cash interest? Let me get Bob to help me with this. 75 in taxes and 49 in interest.

For the year.

For the year.

Okay. Great. And then just two other quick ones. You lowered your credit facilities. Can you talk about any near term negotiations or changes that may be in the works, as far as your floor plan facilities?

Well, we're looking. We have a number of -- it's amazing how many people have come to us looking at offering floor plan opportunities. So we're looking at those ourself today. Look, I don't want to give the wrong signal to anybody on the phone. We just said there is no reason paying a commitment fee for $400 million or $500 million you're not using. I mean, we're being pushed on costs here. And then also, that just goes to the next step. What are we going to do as we look at our floor plan. And I think that there is some very good competitive rates out there. Now, I say that, but we also have to understand that we're -- we like to be vertically integrated with the OEMs, because they're the ones that buy the retail paper, provide us great funding on our used programs. So I think there is a trade-off there, and you don't want to go in one direction that might long-term have a negative impact on you. So again, I think we have got great relationships with our OEMs. But when you got a $1 billion worth of floor plan, it makes a difference. We also had a little negative carry in the quarter, because we paid down floor plan with the high yield notes that we had on the -- on our offering. And of course we'll get -- we'll have some of that same negative carry during the first quarter, and then we'll be back to our normal rates as we pay off the 300 in March.

Okay. Great. And just one final question. On working capital, you kind of had some builds in the second half of the year, a lot of it obviously driven by acquisitions. But how do you think working capital is going to look in '07 relative to '06?

I think it will probably be flat.

Okay. All right. Thank you.

Mr. Penske, I will turn the call back to you for any closing comments.

I just thank everybody for coming on. I know the quarter wasn't maybe what people expected. On the other hand, I think our business is solid. We've had some areas here trying to mitigate the impact of the international businesses, some margin pressure. But when I step back and see what we've been able to build as we made our investment, and being the largest shareholder, I think I've got the Company's interest at heart. And there is no question that we see the future very strong. And any questions you have on any of the information, I know Bob, JD or Tony will be glad to talk to you. And I can tell you there is no change in strategy. Same-store, acquisitions are still right ahead of our screen. So thanks very much.

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