Penske Automotive Group Inc (PAG) 2007 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon, and welcome to the United Auto Group first quarter 2007 earnings conference call. A press release which details United Auto's first quarter results was released this morning and is posted on the company's website, which can be viewed at www.UnitedAuto.com. The call today is being recorded and will be available for replay approximately one hour after completion through May 15, 2007. Please refer to United Auto's press release dated April 17, 2007 for specific information about how to access the replay. I would now like to introduce Tony Pordon, Senior Vice President of United Auto Group. Sir, please go ahead.

Thank you, John. Good afternoon, everyone. Welcome to the United Auto Group first quarter 2007 conference call. Joining us today for the call are Roger Penske, Chairman; Bob O'Shaughnessy, Executive Vice President and Chief Financial Officer, and [J.D. Carlson], Controller. At the conclusion of our remarks today, we will open the call up for questions. We will also be available by phone to answer any follow-up questions you may have.

Before we begin, I would like to remind you that statements made in this conference call may include forward-looking statements regarding United Auto Group's future reportable sales and earnings growth potential. We caution you that these statements are only predictions which are subject to risks and uncertainties, including those relating to general economic conditions, interest rate fluctuations, changes in consumer spending, and other factors over which management has no control. Our actual results may vary materially from these predictions. The forward-looking statements should be evaluated together with the additional information about United Auto which is contained in our filings with the Securities and Exchange Commission, including our 2006 annual report on Form 10-K.

During this call, we will be discussing certain non-GAAP financial measures such as adjusted income from continuing operations and adjusted earnings per share from continuing operations. As noted in our press release, our current year results include an after tax $12.3 million or $0.13 per share charge relating to the redemption of our 9 5/8 senior subordinated notes in March. When you exclude this item from income, adjusted income from operations increased 9.2% to $28.3 million and adjusted earnings per share from continuing operations increased 7.1% to $0.30 per share. We believe this non-GAAP financial disclosure improves the comparability from United Auto's financial results from period to period and is useful in understanding our financial performance during the first quarter. A reconciliation of these measures to the most comparable GAAP measures can be found in today's press release. At this time, I would like to introduce the Chairman of UAG, Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thanks for joining us again today. I'm pleased to report that our business experienced a solid first quarter, generating record revenue and as adjusted income from continuing operations and related earnings per share. On the same-store basis, retail revenue growth was 10.8%, including strong performances from each of our areas of our business. Additionally, as we said in our press release, we made solid progress on the SG&A front, reducing SG&A as a percentage of revenue by 55 basis points to 12.1% and reducing SG&A a percentage of gross profit by 53 basis points to 80.3%. We remain committed to improving our SG&A ratios through a combination of maturity of our campus locations and reducing our controllable expenses.

Our performance in Q1 was outstanding given the current challenging environment in the new vehicle market. We experienced a difficult January and February followed by a strong March in both the U.S. and the UK. The first quarter, the overall U.S. market declined by 1.2% while the UK market was up approximately 3%. Retail in the UK was up 1.8 and Fleet and Corporate was up 5%, giving us approximately a 3% increase in the UK. As we expected, four nameplates continue to gain market share in the U.S., although margin pressures continue. Four nameplates gained 3.7 market share points that are now represent 47.9% of the overall U.S. market.

Looking over the balance of 2007, we expect the current market dynamics to remain challenging. As you may be aware, there's a possibility of another 25 to 50 basis-point increase in interest rates in the UK this week, so stay tuned. If this occurs, this will represent an aggregate of 100 basis point increase in the UK over the last 12 months. As higher interest rates result in higher monthly payments for many customers, we expect margin pressure on new vehicles to continue. Despite this, I continue to remain confident of the luxury market as residual values are strong and generally produce attractive lease rates. In the U.S. we continue to see the new vehicle market in the low $16 million range and continued market shift to foreign nameplates.

Let's turn to the specifics of our performance in the first quarter. Retail unit sales were up 14.2%, 71,000 units plus. New was up 7.6 and used was up 28.3. Note our certified preowned units were 39% of our total use vehicle sales retail in the quarter. Our revenue increased 21.6% to $3.1 billion, including $125 million from changes in foreign exchange rates. To be more specific, new vehicle was up 14.8, used up 41.8, F&I up 18.7, and service and parts up 20.1. Our average selling prices of new and used vehicles also increased. New was up almost $2,300 per unit to $36,000 plus. Used was up $2,900 to $30,700. On a same-store basis, revenue increased 10.8%. In the U.S. we increased 4% and internationally 27.3. If you exclude the changes from foreign exchange rates, our overall same-store retail revenue increased 7.1% and the international increase was 14.5. The components of the same-store increases were as follows. New vehicle was up 7.2%, used vehicle up 20.9, service and parts up 9.7, and financing and insurance up 10.6.

If you take the same areas of our business and then exclude the foreign exchange, new vehicle was up 4.3, used was up 14.6, service and parts up 7.6, and financing and insurance up 6.6. The revenue mix for the first quarter in 2007 was 60% domestic U.S. and 40% international. On a worldwide basis, foreign and premium nameplates represented 94% of total revenues, including 67% from our premium luxury brand with the domestic Big Three contributing 6%. In the U.S., the Big Three was 8% of our total revenue. To look at more specific, our brand mix -- as you can see, our selected data sheet that we showed with our press release this morning. From an operating income perspective, operating income in the U.S. was 54% and international was 46. In total, operating income increased 19.5% to just under $80 million as adjusted income from continuing operations increased 9.2% to $28.3 million and related earnings per share increased 7.1 to $0.30 per share.

Turning to our gross margins, although we achieved strong top line growth, our overall gross margin in the quarter decreased from 15.6% last year in Q1 to 15.1. But this is up from 15% in the fourth quarter 2006. The decrease is due to the challenging retail marketplace which contributed to declines in both new and used vehicle margin, and a change in mix in our overall revenue to a greater proportion of lower margin use vehicles in the overall revenue stream. In addition, 55% of our used revenue was generated in the UK this quarter compared to 47.2 last year in the same quarter. So there was a big difference. Our new vehicle margin declined 30 basis points compared to last year and the fourth quarter of 2006. Used vehicle margins were also down versus last year in all of our markets. In particular, used margins in the UK were 6% this year versus 7.1% last year and 6.7 in the fourth quarter. This is really an impact from the preregistration demonstrator vehicles that we have to sell in the next quarter, and we can see that happen here in Q1. Although used margins in the U.S. were down versus the first quarter of last year, our margin was 10.6% in the first quarter in the U.S., and that was really 60 basis points higher than the fourth quarter of 2006. So there's some dynamics moving in both directions both domestically and internationally.

Let me move on to the service and parts business. In the first quarter, same-store growth was 9.7%. This follows a strong 8.7% same-store growth in the first quarter last year. I think we're making great progress with the maturity of our investments we've made in the past several months. In the U.S. our service and parts revenue increased 30 basis points in Q1 to 12.4. Total revenues in our gross margin increased almost 200 basis points -- 190 to be in fact -- to 55.6%. We also have ample capacity for further service growth. For example in our western operations, we now operate 65% capacity utilization compared to 51% in 2002. We have 400 more service base today than we did in 2002, so we can see how our parts and service business has really taken off. In fact, in many of our facilities, if we have not invested in service and parts capacity, we'd be at full capacity without the ability to grow organically.

Equity and earnings of affiliates -- you may have noticed we've reported a loss related to equity and earnings from affiliate in this current quarter. This is due to a loss rezoning from the sale of a UK subsidiary of QEK, the fleet management business that we invested in during 2005. UAG shared a loss of $2.2 million pretax in the quarter. QEK's UK operations have been loss making since our investment, and the sale of that business represents a beneficial transaction. In fact, QEK's remaining U.S. and Canadian operations are very profitable. After the sale, QEK is in a position to pay a cash dividend that will return our entire original investment. That business represents about $60 million in revenue in the U.S. and Canada, and after the recap we'll have about a 7% pretax, so it's a very good business. I'm pleased to report that each of the UAG's automotive investments -- these are our JVs including QEK -- reported profitable operating results during the quarter. Our 50% JVs in Mexico are Toyota, our Toyota Lexus in Frankfurt, our VW Audi and Lexus in Achen, and our BMW businesses in southern Germany all had profitable operations in the first quarter. We show those on that line as a 50% JVs. Including the loss of the sale of QEK's UK operations, our equity earnings of affiliates increased 200,000 to $1.3 million for the quarter. Let me just cover exchange rates. Changes in foreign exchange rates increased revenue by $125 million and net income by 1.7 versus the first quarter. These increases were anticipated when we provided our first quarter guidance. Our tax rate for the quarter was 34%. We currently expect our tax rate for the year to be approximately 36 plus for the balance of the year.

Looking at the balance sheet, the total vehicle inventory was $1.5 billion, up $81 million compared to year end, and on a same-store basis, vehicle inventory was up $142 million as compared to March 2006, $91 million new and $51 million in used. The end of the quarter, we looked at our worldwide day supply, I think it's in great shape. New was at 41 days, and that's versus 50 days at the end 2006, the end of the year. Used was at 31 days versus 40 days 12/31/06. Breaking it out in the U.S., new vehicle day supply was 48 days versus 67 supply for the U.S. market. And our used was at 30 days. So again, those metrics I think are really in good shape and there's good management control over our inventories.

Looking at CapEx, the net capital expenditure for the quarter was $13 million. Gross was $37 million and we proceeds from sale leaseback of $24 million. So our net CapEx was $13 million. We expect net capital expenditures for 2007 to be between $50 million and $75 million. I think we're on track for that. Again, sale leaseback rates -- I think they're very attractive for us as we look at long-term strategy. The U.S. is between 7 and 7.75. In the UK, it's still between 5 and 5.5%. These are very attractive in these days of cost of money.

Turning to our leverage, as of the 31st of March, our debt to capital was 40%, which is slightly better than the 41% we've projected during our fourth quarter earnings call. As we discussed with you in February, the decrease in results is the redemption of our 9 5/8 notes in March. Addressing the specifics of our long-term debt, we had $875 million of nonvehicle debt consisting of $750 million senior subordinated notes that $375 million at 3.5% and $375 million at 7.75, and we had $127 million borrowed really sitting in the UK under our foreign credit agreements, with nothing borrowed under our U.S. credit agreement at the end of the quarter and we have nothing borrowed as we make this call today. As of March 31, we had approximately $372 million available under our credit agreement. Based on our capital structure at the end of the quarter, 42% of our total debt, including [floor plan] debt, was fixed with an average interest rate of 5.7 and an average maturity of 5.4 years.

Let me move on to acquisitions during the quarter. We didn't complete any acquisitions during the first quarter. You may have seen our press release last week announcing our acquisition of the Classic Group in Austin, Texas. I'm excited about the addition of Honda, Toyota Scion and Hyundai franchises in this rapidly growing market. In fact, it's in Red Rock, which is the homebase for Dell. Overall, the facilities are in great shape and will not require significant capital to expand the operations. In fact, we currently expect to spend approximately 5 million to bring the facilities up to our standards primarily in the fixed end of parts and service. We expect these franchises to add approximately $300 million of annualized revenue on a going forward basis. We will also continue, as I mentioned before, to divest of those franchises that don't meet our return requirements location strategy or have significant OEM corporate ID requirements. During the first quarter, we closed or divested eight franchises representing an estimated $125 million in annualized revenue.

Let me move on to guidance. I think we provided our guidance in our press release this morning. We currently expect second quarter earnings from continuing operations to be in the range of $0.39 to $0.43. We continue to expect earnings from continuing ops to be in the range of $1.40 to $1.50 per share, and that includes expenses relating to smart, which is between $0.02 and $0.04. We had about $0.01 drag here in the first quarter. Please note that our annual guidance does not include the charge we incurred when we called in our higher-yield notes in March.

Turning to smart items -- getting a lot of questions on smart. We continue to make great progress in building our distribution network. I think many of you know we held prospective dealer meetings earlier this year in New York, Atlanta, Detroit and these were certainly in Las Vegas. We had over 300 people send applications in after these meetings, and we're evaluating those applications or in the process of making final decisions. In total to date, we've given letters of interest to approximately 70 dealers across the U.S. to sell service and new vehicles in the smart fortwo brand. Additionally, our road show will begin next week and scheduled to build 50 cities. These will be three tractor-trailer rigs that will go around the country talking about smart and allowing customers to interact with a smart fortwo and learn more about it and experience the passion around these vehicles. We've announced our pricing for the different models which -- I think most of you know this -- but the base pure will be $12,000, under $12,000. The well-equipped passion coupe which is an upgraded coupe will be under $14,000. And the well-equipped passion cabriolet will be starting under $17,000.

Also, we announced a $99 refundable reservation program in March. This was generated out of over 1 million people who've hit our web site. This is the great thing about having the ability to mine your own leads. We're going to go out and determine if our people wanted to be insiders. These are people who wanted to know more about smart and maybe buy one. So far, we've received thousands of reservations and we're very encouraged by the initial interest. In fact, over 12,000 people -- 12,500 as of today -- have sent us the information we want plus given us a $99 refund. This again shows today just the strength of the Internet because we haven't spent $1 on an ad today. It's all been word of mouth or what we've able to generate through magazines and at the auto shows. We remain on track to be selling the vehicle in the first quarter as we mentioned in 2008. We have cars in dealer show rooms hopefully in December. We expect to deliver between 16,000 and 20,000 units in the first year. I guess I said to most of you I think this is a -- smart distribution is another means of our different shading UAG from our other competitors and other people in our space.

In summary, I think we had a good quarter. We've grown our business both domestic and internationally. Going into the traditional selling season, our inventory's in great shape. Hopefully we have enough of the right products. Our debt's been restructured. We've got good long-term liquidity at a fixed rate. We continue to generate good cash flow -- in fact, we made the Classic acquisition without borrowing any money on our lines. We continue to execute our growth plans both domestically and internationally. Projects that we've invested in obviously for long-term growth -- we talked about those -- they're both Inskip and Turnersville. And as I noted on our Q4 call, our focus in 2007 will be to fully integrate the stores' $1.5 billion in revenue in 2006 and focus on reducing our SG&A as a percentage of gross profit. We remain committed to continued growth on our same-store comps. You've seen that continuing. One other note I wanted to make -- finally at our shareholder meeting last week, our stockholders approved our name change from United Auto Group to Penske Automotive Group. This name change will take effect on July 2, 2007. In fact, this just shows we're committed to this business long term. Let me open it up for any questions. Thanks for joining the call today.

(OPERATOR INSTRUCTIONS) First on the line is Matt Nemer with Thomas Weisel Partners. Please go ahead.

Hey, Matt.

Good afternoon, Roger.

How are you?

Good. Just to start off, can you give us any idea what you're seeing out there in April? It looked like the U.S. numbers were a little bit soft. I think the UK came in okay. Just get your takes on April.

Well, as I look at April, we really don't have all of our numbers in for the month of April here in the office, but initial premium luxury, is designed, planned, and we see probably the volume for and domestics are below. Again you've got to take into consideration -- we have pressure in the first quarter and yet we still had strong used cars. We've got to really see how used car balances out. Then we continue to see strong parts and service. So as I said in the call, I think that I'm cautiously optimistic that with all three of the leverages that we can pull including F and I, and our business model seeing growth in all three areas. When one's up or one's down, you get the benefit of the other. I'm cautiously optimistic, especially because of our 67% of our overall revenue comes out of premium luxury.

Great. Turning to SG&A, congrats on a nice move there. Can you give us an update on your progress versus the 100 basis point comp to gross profit goal that you provided last quarter?

Well, we ran in 2006 48%. We were at 47.8 at the end of the first quarter. I looked at some numbers knowing someone might ask just to look to the east. And if I looked at March [axle] we're at 45.1 versus a year ago a year ago at 47.2. They're making some great progress. I think it's a focus. When we did our business planning, we listened to you folks. I think that we re-engineered some of our region, our area and also down at the dealerships and to me that gave us the chance to take some cost out. There's no exception here that everyone's not focused on at this point.

Then on that same topic, it looks like in terms of rent, you leveraged rent as a percent of revenue and as a percent of gross profit. Does that mean that that should start to move the other direction or are there big sale leasebacks coming that will knock that back up again?

I think when we look at sale leasebacks, we've probably got probably $25 million for the balance of the year. I've got to check the number internationally. It might be a little higher than that if you add international to it. Again, we're well within our number of $50 million to $75 million.

Okay. Just a couple of housekeeping items. On the QEK dividend, do you have any idea when that hits your impact statement and what the impact of that is?

Repeat that again? I missed it.

You mentioned that you're expecting a dividend from your QEK

Oh, yes, the dividend. We'll expect they're doing that recap. They're going to do that recap hopefully this month but there's no P&L benefit. Basically, we get our money back. There was no debt in that company. They sold the business off in the UK. They purchased Canada. In fact, they had sold the business if they had a small business in Australia. What they're able to do is recap that. So we'll get our original investment back. It'll just be a cash flow benefit at this point. We'll get the equity earnings on that as we go forward and then we'll get a benefit if the company would ultimately be sold.

Lastly, on smart, can you remind me what the impact of FX is there? Are you paying in dollars or is there any exposure to currency?

All our negotiations are in U.S. dollars.

Okay. Great quarter. Thanks very much.

Thanks, Matt.

Next on the line, Joe Amaturo with Buckingham Research. Please go ahead.

Good afternoon. Just a quick question. Can you provide color on the profitability at Turnersville and Inskip? And what you're expecting for the remainder of 2007?

Let me say this. In the first quarter, they were probably a $0.01 drag when you add the two together but we had, I think, a good, strong March. I think both operations -- one, I think we try to break even and I think the operation at Inskip was a couple hundred thousand positive. If you go back -- let me just take you back -- and their high water mark, before we started all this construction, which we had to do. It probably generated on today's shares outstanding somewhere between $0.10 and $0.12 a share. We've been pulling that load with us as we've gone through the last four years. I see these businesses hoping that they'll generate in the $2 million to $5 million area for the total year. That'll continue to grow as Scottsdale 101 has and San Diego has in the past so I see an upward trend there. It takes 24 to 36 months to get the benefit of the increased service and parts benefit and also the new car business.

When you say $2 million to $5 million, could you give us some comp off of that and what losses were generated from those two in '06?

I'll get Bob O'Shaughnessy or Tony to call you but I just -- a couple data points, though. Our service and parts business is already up 27% in Turnersville. And it's up almost 10% in Inskip. But if you look at last year, just take last year -- I think we were probably slightly profitable on an aggregate basis on both campuses.

Right. That's my point. So you're expecting material improvement?

Still a long way from where we need to go. We made the investment, if you've visited those sites, with 10 or 11 brands available. They're destinations. I can tell you I was at Inskip a week ago Friday. It's world-class. We just opened up our MINI dealership there yesterday. Porsche will open. All we have to do there to finish off the Bentley and the luxury preowned. And in Turnersville we're building just the sales showroom for Cadillac and Hummer and we'll be done. So this has been a four-year run for us on these places. If you go back and look at the results we've had in other markets, it certainly pays off.

Then another question. Regarding the UK, I mean, with another U.S. public dealer looking on making a couple moves over in the UK, are you expecting any material change in valuations?

I've got big competitors over there. I'm glad to see that Group One is looking at some of those things. It validates our model and also I think it's a fertile market over there. We have always had acquisitions in the sideline, but I don't think that Group One will add any more or any less competitive situation there. It's been fertile there. [Inskip] is selling off I think about 45 franchises because they're changing their portfolio. Pendragon has announced the selling of some. So there's lots of movement over there. I think today the public -- or PLCs as they're called there -- many of them are interested in increasing their portfolios. So we've got the same action there that we have here.

Does the Euro play an important part in your decision on whether or not to make an acquisition in the UK?

That'd be the pound there. Not at all.

Thank you.

Thank you.

Our next question's from the line of Edward Yruma with J.P. Morgan. Please go ahead.

Good afternoon, guys. Roger, this is the first acceleration we've seen in a number of quarters on your service and parts same store sales. Can you talk about how much more room you have on that opportunity and if there was anything specific to the quarter that we should be thinking about?

I just think we're starting to get traction -- at many of these places we're adding service riders. We have a menu selling process in many of the dealerships and the service lane. We're doing by use of the Internet, we've got good e-mail captures, so we're going in to our existing customer base and mining that business. Remember, we're in the premium luxury business and there's not many places you can take that kind of vehicle to get worked on, so with a full circle programs with BMW and some of the other manufacturers, we're getting a lot more people coming back to the dealerships. Plus we're now selling the maintenance items which are the tires, oil. I think this is key. Plus we've added second shifts in some places in our units and operations have gone up significantly. This is what we've been hoping to see this gain -- customer loyalty. I'm running every month some metrics looking at customer loyalty. I would say today we're in the 90s on customer loyalty. People who have done business with us in the last three years coming back for service so we track each month every dealership -- ROs from people who did not buy from us and ROs that did. And I think -- and this is over a three year period -- we're looking at almost 90% loyalty. So that's driving it. We haven't done much pricing. In fact, our margin went down in the UK a little bit because they paid out a little bit more from the standpoint of comp in service. We didn't raise the selling price of the customer, so we can get to a tipping point there that might erode the customer loyalty.

Great. Sounds like you've had great progress in your control book costs. Was that a one-time job cut or are there ongoing opportunities throughout the year to continue to cut costs there?

I think I mentioned in the first question with Matt from an SG&A perspective, we really looked at in all areas. A big piece of SG&A is compensation. And a lot of that is variable because we pay our sales people, our service people on a variable basis. So we had to go in and take a look at all of our comp plans at the beginning of the year. I think we put some caps and collars on those which have made a lot of difference. We certainly looked at advertising. Today -- and I guess smart made us a little smarter to be in fact. When you look at advertising in the first quarter on a per-unit basis, we're down about 8%. If you look at same-store, we're down a little over 5. That, of course, was a key part of that. So you've got advertising, got personnel costs. We have CRM. We've gone to trying to reduce the number of CRM providers. In fact, Jerry (inaudible) -- he came over from Reynolds and Reynolds to work with us. He's working on that to try to have it lean across all of our businesses. We had good workman's comp during the quarter. Our lag time was 1.2 days on claims, which drives costs lower. These are all metrics that we put together. I think all of them have made a difference. So I would say if you look at SG&A, we've been down as low as 11.7 based in our second and third quarter typically because of the highest volume, we're 11.8, 11.7, you look at Q2, Q3 last year. We expected to go down based on past history as we get into this quarter and Q3.

Thank you very much.

Okay.

Our next question's from Rick Nelson of Stephens. Please go ahead. Please go ahead.

Hey, Rick.

Good afternoon. Roger, what is driving the strength in the used car business in the U.S.? I think I understand some of the factors with the demonstrator sales in the UK, but not in the U.S.

I think in some of the campuses, what we've done, we've gone to an exclusive used car separate facility. We've done that at Tempe Honda -- we've done it in Austin, Texas. We have it in central Florida Toyota and we're continuing to move in that direction. In fact, instead of having a combined sales force, we've gone to a more focused sales force where we have people who are just selling used cars. I think that's helped a lot. Also, we're focusing on the certified preowned. If you look at -- I mentioned I think in the text, we're at 39%. So there's more advertising going at the certified programs. And to me, the ability from Toyota Financial, Honda and the rest of these folks -- they're very, very aggressive in buying used cars. I think that's a big help to us. We stay vertical with our OEMs on floorplan and also on our retail and lease papers. So to me, all of those things have helped. One thing that might be interesting to note that I've talked about getting the average selling price on used cars down. Obviously, it's been driven up on an average basis because of the UK. But if you look at the U.S. in the first quarter, we're at $21,000, I'm trying to watch CarMax who's done a great job and seeing how they continue to drive that number in the teens. We were are down almost $140, if it makes difference to anyone quarter over quarter. We continue to maybe keep some of the vehicles which we hadn't had in the past. I know that Detroit did Honda Bloomfield -- trying to retail many vehicles that they used to handle in the past. Plus from a margin perspective, using Firstlook in the central area, which has helped us on inventory control. We've gotten better grosses. It's helped us on our wholesale. In fact, we had a $20 per car wholesale profit over the entire company. And the used business in the electronic auction in the UK generated about $1 million worth of profit. I think they sold a thousand cars in the quarter in that business. So through the electronic auction which is certainly up.

Thank you for that. Demonstrator sales have been driving UK used car comps here for -- if there's any way. How do you see that shaking out? Are we coming to the end?

Well, all the manufacturers push for units -- in fact, give you a data point. There was such a push at the end of the fourth quarter by Mercedes and BMW in the UK that Audi outsold them both in January, just to give you a data point. We're in good shape as we go into quarter 2 -- we preregistered demonstrators about 50% of what we did in the fourth quarter of '06 and our forward sold new car business is much better. So we see at least for our business -- I'm looking at Sytner specifically -- we're in better shape, so we would expect that margin to maybe go back up if we don't have the demonstrator to deal with.

I can't. And as you look at the portfolio dealerships you have today in terms of spending projects, ala Inskip or Turnersville, is there anything on the horizon?

Well, we had a project that we're probably a $50 million dollar project in San Diego to build a big parking garage and put that on the shelf. The biggest probably CapEx today would be in two areas. One would be Jersey City, where we have the leading Toyota and Nissan dealership in the New York region. Both of those -- we started a CapEx program there that will take the next 12 months. Then we have Royal Palm which is -- this is companion points of Palm Beach and we'll have probably about $30 million there but that'll be over the next in 2000 through 2008 so that'll come on slowly and will be probably sale leaseback candidates in that area. Then we have some open points which we've been given -- one in Orlando for Toyota and another one for Toyota in Phoenix. So we think that these'll of course come onstream over the next couple of years. Other than that, I can't give you as much of a precise in the UK. We've got a number of small projects there. Again, Dunlop is done. I think that we'll be looking at Audi. We have a new point for Audi in Virginia which will add on next year but there's no big $100 million campuses as we've seen that'll be staring us in the face here in the next 12 to 24 months that I'm aware of.

Are there any plans to brand the Penske automotive group to the dealerships? Any tie-ins?

No. We will maintain -- because when we look at today, that was an idea that AutoNation had I think early on. I think they got some pushback which we have also from the manufacturers. They would like you to be Audi of Fairfax or Toyota of central Florida. And we addressed that and agree with them but we think the brand name, which has some notoriety in the marketplace here and internationally, that that'll be strong for us on the Internet. So you'll probably see us with an Internet presence with Penske Automotive as we go forward which we think will drive some business to us especially as the Internet becoming more and more everyday life.

Thank you. Congrats.

Thank you.

Our next question is from John Murphy with Merrill Lynch. Please go ahead.

Hey, John.

Hey, Roger. How are you?

Good.

Given your strength in same-store sales here, just wondering if you could talk about any regions that were particularly weak or particularly strong. And specifically a lot of your competitors we've been talking to have been alluding to weakness in Florida and California given the housing markets there. I'm just wondering what you were seeing in those markets and regionally in the U.S.?

I talked to Mike Jackson. Happened to run into him the other day and we talked a little bit about that. I think California was weaker. Interesting, our nondomestic Southern California market was up 2%. That would be our San Diego market both in new and used. Northern California was down 9, but interestingly enough, used was up 26%. The domestics in Southern California were down 14, so California was kind of a mixed bag for us. And we were down 12% in Florida but we had one store -- central Florida Toyota -- we'd made a management change. If you took that out, the comps -- I think they're not fair with profitability is back where we want it. We're probably down a couple of percent there. There's no question. There's pressure in California and Florida at this point. That doesn't mean we're not highly motivated to continue adding business in those areas.

If you think about the acquisition market, if you could characterize where multiples are right now, if there's been any shift. And also you were talking about open points and ad points particularly that you're getting from Toyota and Lexus. I was wondering if you can talk about how you're winning those and maybe the tradeoffs and the investments versus returns on these add points versus the acquisitions and how you think about that?

Well, the multiples have been the same. I mentioned the UK -- nothing's really changed there. We brought Classic -- obviously when you're buying Toyota and Honda and Hyundai in Austin, you're at the top of the mark -- but I think generally, the multiples are the same. Let me point out that the point that we're getting, the Orlando market has grown dramatically, with just the general growth there. This is really a companion point. It's an add point -- you could call it add but it's a companion. That's one of the things that's benefit with Toyota. If you're in a particular market and in your PMA, there's growth. They'll give you the opportunity based on your CSI and other metrics to have that. I think that we earned that there. The same thing was in the case of Royal Palm and Palm Beach. And we also had competed for the point in Phoenix. So these are points that we've really earned baseD on the performance in those particular markets. I wish I knew how we could get more. I think most of the dealer groups including the other publics have been able to get companion points. We've gotten some from Lexus. One in Chandler, and also one in Edison, New Jersey we opened up. As far as the returns, there's two schools of thought -- when you open a new point, you have no customers. You have no parts and service. So it could be a year or so before you see any bottom line profitability interesting. Just take the Lexus store in Edison. We carried that real estate for almost a year as we were building it because we were leasing the land we're building on. In the first two months, we're probably showing a loss of $150,000 between the two months. So we hope to get that to a break-even. That's Lexus, now. That isn't a multi brand or a volume brand where you have to have more back in. So I think it's a jump ball, but we feel that those brands that are growing as far as market share are the smart way to invest.

Lastly, Roger, on inventory, there's been a little bit of a creep up. Certainly not too concerned, but there's been a creep up in some of the Japanese inventory levels. I was wondering what you're seeing there and if there was any -- something in the market that was changing or in the product lineup that was changing that was causing those stores to carry more inventory naturally or it's just a function of slowness in the market?

I look at our overall inventory and I can tell you from the metrics we announced here we're in great shape -- better shape than we were a year ago. I think you've got builddown some of those brands, but as we go into the summer selling season, we've got to have inventory because all of a sudden, if you don't have it, you can't go get it because other dealers won't sell it to you. For us from a UAG perspective, I think we're in good shape. Our total inventory is only up $80 million. We've grown our business from the end of the year and the end of the first quarter. That's obviously on a worldwide basis but I don't see the U.S. at the moment. We're not pushing anything back. We're trying to get the right mix. That might be tougher. In fact, on the BMW side, we need less trucks and more cars. We're trying to do that as we look at our SPGs.

Lastly, what are you seeing in the incentive environment out there just in general?

We track this incentive every month, and I think that when you look at March, it's interesting, the average Japanese incentive was about $1,300. Toyota under $1,000. Honda moved up. Honda moved up to try to drive this Accord business. They did 360,000 Accords last year. Their goal is to sell 400,000. So they've got this challenge on Accord and I think they pumped in about $500 a vehicle during the March timeframe. So they're at $1,200. Nissan is the highest at $2,400. Looking at Audi's down $600 to $2,600 for March. BMW's at $4,600. So they really had to support the X5 V8. We saw that at the beginning of the year. Porsche's really got nothing, $300. And Mercedes-Benz is at $2,900. Average industry average is about $2,700 and your average domestic is $3,600. Japanese at about $1,400, European at about $3,500. So they're all over the map but I don't see anything here that's going to be a run away. The good news is that the domestics and I use this very positive from all of them said -- look, we're not going to sell rental cars in order to make our numbers. They're taking the heat on it maybe on market share. On the other hand, I think it's helping the entire market from the standpoint of residuals and in a higher interest rate environment that only can be positive. Thank you very much, Roger.

Good.

The next question's from Scott Stember with Sidoti & Company. Please go ahead.

Hey, how are you?

Good.

Looking to your point on how much you made about Honda and the Accord. If you talk about midline imports and price in the first quarter, maybe compare it sequentially to what we saw in the fourth quarter?

All I can say is when you look at -- talking about Audi, are you talking about Audi?

The Japanese brands -- the Accords, the Camries, so forth.

I don't have the numbers in front of me for the fourth quarter, but when you look at -- there's still margin pressure, there's no question about it. But from an incentive perspective, the only one in March, and I'm looking where the incentives are at a point in time in March, you look at that every month. Honda was up $500 to $1,200. Nissan was down a couple hundred to $2,400. And Toyota was down $60 to under $1,000. That's where they are in March, so I don't know that those are out of control. Nissan is the only one that's higher. Of course they're probably having a tougher time between trying to compete with Toyota and Honda. And these are the volume players in the market today. They're going to watch it carefully. They want to maintain this market share. The good news is, though, they're not adding up the number of dealers. That's the very positive thing for the public companies that own these brands because when you look at every chart -- Lexus, Toyota, Honda -- these are the stores that have the highest throughput, and that's where we're making our investments.

Lastly on parts and services, can you talk about trends in that warranty work and customer labor?

Let me first -- the warranty, the quality is much, much better across all brands, no question about it. I would say we're about 40% in warranty work and about 60% customer labor, but one thing that's driving the warranty a little bit higher is these full circle programs where you buy the full circle maintenance. That really shows up under warranty. I think CP is up, and that's positive. The maintenance items, the wheel alignment, the winter tires, the oil changes and safety checks are all being done at the dealerships now and we're aggressively doing phone calling or BDCs calling these customers in order to get them in for this type of work. So I think that's positive. Again, the complexity, when you open the hood of one of these vehicles, I don't care what it is, the complexity of the vehicle drives the customer to bring it back to the dealership. If there's any kind of CRM system or follow up system, you should mine that customer hopefully for a long time.

That's all I have. Thank you.

Good.

Next question's from Darren Kennedy with Goldman Sachs. Please go ahead.

Hi there. I'm here with Matt Fassler. How are you?

Good.

My question's about your guidance. I believe you had included acquisitions in your guidance and I think it was $350 million ballpark?

Yes. The $350 million is what we gave guidance at the beginning of the year that we'd have on an annualized basis, $350 million of revenue, yes.

So you have $300 million that you've just announced. You've divested [under 25]. Are we talking about a net number that we now have $175 million in the bag or --

If you looked at -- you probably have $200 million on an annualized basis from Classic, less $125 million that came out in the first quarter, so you can say it's a net $75 million.

Okay, so we still have more to come. That would be in your number?

Right.

And so I guess the $300 million or $200 million annualized basis is accretive to your '07 numbers, correct?

It's in our guidance.

In the guidance? That's all I have, thanks.

Thank you.

Next we'll go to Jonathan Steinmetz with Morgan Stanley. Please go ahead.

Thanks. Good afternoon, Roger.

Jonathan, how are you?

Doing well. Just a few. Many of them have been asked. On the deleveraging you saw on the SG&A to gross or the improvement there -- did you see improvement if we parsed it out both domestically and internationally or was that more international driving that number down?

I think when you look at the overall, both domestic and international. I can't give you exact numbers, but I think we had more deleveraging in the domestic but that doesn't mean that the UK Sytner guys and international people aren't working about it. Remember one thing -- from a comp perspective, there's a lot more variable compensation in the U.S., so we have a much better opportunity to put cap and collars on some of those sales commissions versus in the UK where we have more of the compensation is fixed. There they've got to look at advertising. They've got to look at just the management structure they have. I know they've taken out where they have general sales managers in some of the stores there. They have taken them out and really have the sales service and parts reporting into the general manager. So they've taken some good action over there and looking at some of their BDCs and being able to. They've got all of their BMW stores on track now and to have one BDC to answer phone calls for service, place the times to bring the vehicles in appointments. We're trying to accelerate those accommodations under one roof.

Okay. And on the currency, I know you gave a number on the impact on comps from FX. Do you have a number for the total company revenue on either EBIT or net income, however you want to look at it?

Net income was $1.7 million. So it would be probably somewhere about $0.015 on that income.

I apologize, I missed that.

It's okay.

On the add point you talked about, is it fair to think the return on capital on those is better from the company overall and then doing an acquisition? Or is sort of the infrastructure and buildout cost that the OEMs won out of that so high that that would not be the case?

I'd like to answer that maybe on a separate call another time. Maybe we'll get ready for that on the next call. Because we'd have to go back, look at Chandler, look at a couple of these places that have been add points. We'll give an update maybe on Lexus of Edison. We're just now getting into those, so we don't really have a comparison. I think it's a very good question and I think it's very positive. We've got to focus in on building a facility. Also we're able to intake managers and maybe junior managers at our companion point and move them on. From a people perspective, and a process, it's quite efficient. We don't have to go into maybe a new business you buy and have to retrain everyone. You probably bring them in with a consistent process -- but let us come back to you with real numbers. I can't give them to you on this call.

Fair enough. You mentioned a couple of them, but do you think it's the kind of thing where you get the opportunity, given your CSIs and your relationships with the manufacturers -- should we think about you having the chance to get one or two of these a year or do you think it's not that kind of level?

One thing -- you do have to have good CSI or you don't get them. There is no question about -- you talk about framework agreements. I think the manufacturers today look at all of us -- our peers, people who are taking care of the customers and have good CSI. That's a criteria. It doesn't mean any guarantee. I think everyone that is willing to invest in many of these companion points -- you go into a Lexus of Edison, you're talking $17 million, $18 million -- you go to Royal Palm and you're going to spend $30 million. There's not a lot of owner operators that are prepared to spend that, so this gives us a chance in our own markets to invest for the future. And again when you're looking at the brands that are expanding, these are the ones that had fewer dealerships per unit sales driving a higher number. I think that all they're trying to do is balance the requirement for service bays and also outlets throughout the country. So this is not a new phenomenon. I think it's one that will continue and all of us will compete as hard as we can to get these.

Thank you very much.

Next question's from Don [Manerd] with Bear Stearns.

Hi, Roger. I like your comments on the newest thing that's going through Congress. Looks like they passed a bill today increasing fuel efficiency -- in other words, increasing the miles per gallon upgrading the CAFE reform. Curious how you feel this will go. I think the bottom line, of course, is we pay more for our cars, but can this possibly even pass, Roger, 35 miles MPG?

Look, this technology, we were back at 10, 11 miles per gallon. And as technology continues to grow, I think there's going to be hopefully some relaxation on diesel, because if you look at the U.S. versus Europe, the NOx in particular are valued differently. There's some great diesel technology. It will give us better residual, less costs in the future. I've seen some movement in these discussions in Washington about that, but I think that we're in an environment today where people are expecting less emissions into the atmosphere -- the motorcar companies along with the low sulfur fuel. As you know, a low sulfur fuel today -- I think it's 8 or 10 parts per million is required on the diesel side as we go forward. So there's a number to leverage -- all companies, the manufacturers, hybrids, you see fuel cells talked about. I think hybrid technology, Toyota obviously's taking that to the number one position with Prius. There's other models -- you'll start to see this new Lexus 600L will have the same kind of torque and horsepower but yet will give you the emissions you want and also the MPG. There's going to be combinations. I really see more diesel coming into the market on the short term. That's the most inexpensive way to do that, but interesting, Obama was in Detroit yesterday talking to the Economic Club. He was complaining that Detroit manufacturers weren't stepping up enough on fuel economy. We didn't need that in Detroit, I can tell you.

What's your estimate on your MPG on the smart cars?

We said they're between over 40 miles per gallon.

Thank you, Roger.

Thank you.

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

Hey, Rich.

Roger, how are you?

Good.

I want to follow up on John's question about the regions -- Florida and California. Are you seeing any pressures outside of those areas in terms of margins on new vehicles?

No. I think that you know generally what's happening is with list prices on vehicles being compressed with less margin, depending on how the manufacturers are handling incentives, you've got the Honda program. We've probably seen less rate support and more cash, so that gives us a chance to sell more F&I. I think it's market by market. There is no national program that I know of today. I think you've got the local dealer council's organizations that drive certain programs on a monthly, weekly or quarterly basis. You've got the overriding national programs. I think the manufacturers got to look into the market where they think they have an advantage and they'll either add or subtract their support. Detroit -- obviously there's a lot of action here because you've got the domestics competing heavily against any foreign competition in this marketplace and the economy here has suffered because of the supplier base that we have. I think the person that had the equity in their home can run into the bank today. We might have seen the last of that both in California and Florida at the time being. Interestingly enough, when you look at the UK, the economy is up there, and the housing is still strong. In fact, they say housing is growing in values 5 to 10%. So we haven't seen the selldown or flattening over there. In London, numbers -- maybe it's like New York -- they're way over 10 to 20% in value each year.

Just on CapEx this year, this year you're talking about $50 million to $75 million net CapEx. As we look at next year, should that start trending down?

You're looking a little further than I really -- we have all these projects and we'll stay in, I think, a rational range now. There'll be some CapEx required because of the Ryland acquisition in the UK. We bought a number of properties there so we've not sold -- we're carrying what's on our balance sheet. And we're going to make a decision -- do we refurb those and sell them? Do we sell them and move to a different site? So there's some strategic plans that take place there. At the moment, I think we're in -- that range should be realistic as we go forward over the next 12 to 24 months. No U.S. debt today of course, and we already made our acquisitions. We made the acquisition of Classic. My goal is to drive cash flow this year also. So that's a real important part of my strategy.

Thanks, Roger.

Our next question's from Derrick Wenger from Jefferies and Company. Please go ahead.

Hi, Derrick.

Hi. Several things. Two financial details up front, the depreciation and amortization for the year estimate that dividends for the quarter. And guidance -- I believe the revenue guidance is around $12.3 billion. If you can comment on that? Is there any margin guidance? And when is a Q filed?

$50 million is our depreciation and amortization for the year, and then the Q is filed Thursday. What was the other question?

Dividends for the quarter and any margin guidance, and do I have it right with the $12.3 billion of revenue guidance?

Yes. $12.3 billion is our guidance. We were $3.1 billion in the quarter and probably if you took the $3.1 billion and you looked at Q2 and 3 being more than Q1, you're probably somewhere at $13 billion plus. The dividend will be $0.07 for the quarter.

Margin guidance at all?

The margin was at 15.1. That was 10 basis points higher than Q4 of last year. At this particular time we're not giving out margin guidance, to be honest with you.

Thank you very much.

Sure.

Next we'll go to Mark Warnsman with Prudential. Please go ahead.

Hi, Mark.

Hi. You mentioned rising interest rates in the UK as being a headwind for the business there. Do you see any other significant dynamics for the market that you would anticipate would affect sales?

You talking about UK specific?

Yes.

I just think interest rates -- we've seen our guys every time we talk about it over there, they say, wow, we hadn't seen that. It's going to be up 100 basis points. The impact it probably had here -- we have not seen a lot of impact because the majority of businesses over there. We have a lot of lease programs here and lots of programs for the manufacturers to supply there. So I think in the UK, the OEMs really drive the business, and they drive margin up or down, but we're in the premium luxury side here. People still have enough spendable capital that we don't see it. Over there, we're 3% domestic, so everything is premium luxury. And you get brands like Porsche. And Audi, by the way, is probably -- if you looked UK today, year over year the strongest brand. We're the top dealer in the UK. So I think interest rates will be a wait and see attitude. I hope it's only 25 basis points. Obviously it has an effect on our borrowing -- we have $130 million or $140 million over there right now, so we have some (inaudible) on our working capital borrowing there.

In terms of market dynamics in the UK, are you still seeing sales peaks in March and September in car registration?

Absolutely. They seem to drive us. You want to have a license plate that shows March or September. I don't know -- I've never seen that dynamic before. People are always -- in February it's always a scrapethrough in February. We just ring the bell in March. The same thing in September.

I was struck by the shift in your mix from 31% international first quarter last year to 40% this year. Just in terms of your investor base, are you looking to expand your investor base overseas? I mean, are you looking for two more international?

Well, I think it's important that we get international investors. I think our visibility is -- we've done some homework and in the street in the UK. One of the things that's driven us is our acquisition. Remember we made $1.1 billion in acquisitions last year in the UK. That's driven our international piece also.

Okay, thank you.

Good.

Next question's from Greg Wilcox with Wachovia. Please go ahead.

Hi, Greg.

Hi. Thanks for taking my question. On certified preowned, you're at 39% today. Where were you a year ago? Where do you see that going?

Up probably about 3%.

I think that one thing that that does, it gives us the chance to give the customer a typically two or three-year extended warranty as part of the purchase. We end up getting good reconditioning revenue through the shops because we have to bring these cars up to a certain quality level. And there's a lot of interest because as you look in the premium luxury side, they would like the dealers to resell those cars and they don't go to auction. So there's good support with the warranty, and they try very hard to support you.

And they vie deep on the used car financing side. They have some special lease programs also. I think it's here to stay. BMW probably has done the best job on the full circle program to date. All of the other manufacturers are doing it. I even saw in the paper here this morning -- I don't know what paper it was -- it says the new R8 Audi, if you buy one of those cars, you have to sign an affidavit you'll trade it back to the dealer. What's happening is they're trying to get these vehicles back into the dealer's hands to redistribute them, which is only positive for us.

The gross margin associated with CPA versus non CPA, what's the differential there?

I would say it's slightly higher. The only problem is it's higher if you sell them and it's a bigger loss or it could be a loss if you have to wholesale them due to a metric of 60 days because you've added the money in reconditioning and typically you don't get that money at the wholesale.

On turnovers at your dealerships -- you've taken a lot of pride in the low turnover. Where is that today versus say a year ago? What are you seeing in the industry anecdotally?

We're at 31% which is probably 2 percentage points less than a year ago. We're really I think that area of 29 to 30 -- we get less turn in the UK. They're probably at 26. So you can say we're running 31 to 34 domestically. But we're measuring every month and four or five bucket sales, service and parts, other, and to me it really pays off because everybody's focusing on that. Also, as we do our prescreening and our acquisition of new human capital, we're being tough on people getting in and I think it's paying off. It'll pay off long term, I know that.

Last one -- debt to cap target going forward -- have you provided guidance or can you provide guidance for where you'd like to see that say a year from now?

We said we'd be at 41. We're at 40. I said all along we want to try to keep it in the 35 to 41 or 42% range, so I think that we're in a sweet spot right now. Obviously, the debt we have today -- the $750 million is fixed. So if we can create more cash flow, we can look at either do we not do sale leaseback on properties, the UK can pay down their credit line, or do we pay down floor plans. So the good news is we have a number of levers that we can reduce and take some interest costs out.

Thanks, Roger.

Our final question will come from the line of Mike [Mahagan] with Bear Stearns. Please go ahead.

Great. Under the wire.

Last but the best, right?

Okay. It's a nuts and bolts question, actually. I just want to know for same-store service and parts, how do we account for Turnersville and/or Inskip where you have maybe a consolidated service facility but you're getting the benefit of new front end stores coming online?

Each one of those has their own individual service department. We don't have a consolidated big box service department, so we're looking at same-store comps across the campus, but the front ends are separate and those metrics are managed and same on the back end. Overall, we said we were up I think almost 27% at Turnersville and we were up about 8% at Inskip. What's happened, we've been moving these shops around in order to be able to accommodate the construction but this is very positive.

So, okay, so for the 27% and the 10%, is that across the complex or is that --

Yes, that's across the complex, but those are comps against stores they've owned for at least 12 months.

Okay.

So the standard is we would look at Jaguar to Jaguar, Audi to Audi -- and we just aggregated that together. I guess we could be more granular. But when we look at those sales, we're looking at -- does it generate $1.5 million a month going to $1.7 million to $2 million? That's how we're looking at the overall campus.

That is very helpful.

Thanks a million. I appreciate everybody on the call today. We'll talk to you next quarter. If you've got any questions, call Tony, Bob O'Shaughnessy or J.D. Carlson. Thanks. Bye-bye.

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