Penske Automotive Group Inc (PAG) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Penske Automotive Group third quarter 2007 Earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through November 1, 2007. Please refer to Penske Automotive's press release dated October 16, 2007, for specific information about how to access the replay.

I would now like to introduce Tony Pordon, Senior Vice President of Penske Automotive Group. Sir, please go ahead.

John, thank you very much. Welcome, everyone.

A press release detailing Penske automotive's third quarter results was released this morning and is posted on our website at www.penskeautomotive.com. Participating with us will be Roger Penske, our Chairman, and Bob O'Shaughnessy, our Chief Financial Officer. At the conclusion of our remarks today, we'll open the call up for questions. We'll also be available by phone to answer any follow-up questions that you may have.

But before we begin, I would like to remind you that statements made in this conference call may include forward-looking statements regarding Penske Automotive'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. These forward-looking statements should be evaluated together with additional information about Penske Automotive which is contained in our filings with the SEC, including our 2006 annual report on form 10-K. During this call, we may be discussing certain non-GAAP financial measures, such as adjusted income from continuing operations and adjusted earnings per share from continuing operations. We believe such non-GAAP disclosure would improve the comparability of our financial results from period to period. At this time, I would now like to introduce the chairman of Penske Automotive, Roger Penske.

Thank you, Tony. Good afternoon, everyone.

I'm pleased to report that our business performed exceptionally well during the third quarter. Our results continue to showcase the strength of our business model and the diversification provided by our premium luxury brand mix and our International operations. During the quarter, revenue increased 15%. Operating income increased 18%. Income from continuing operations increased 17% and net income increased 29%. As a result, earnings per share from continuing operations increased 18% to $0.45 per share, and EPS on a net income basis increased 28% to $0.46 per share. We had another great quarter of same store growth. On a same store basis retail revenue increased 8.5%, including 14% at our high line stores and 11.8% in our used vehicle businesses.

Breaking this down geographically, same store retail revenue growth was 2.5% in the United States and 21.9% in our International markets. Same store growth was favorably impacted by exchange rates. If you take out the impact of exchange rates, overall same store growth was 5.8%, including 13.2% in our International operations.

The components of the same store increases were as follows. New vehicle, as we reported, was 7.4%; excluding foreign exchange, it was 5.3%. Used vehicle as reported was 11.8%; excluding foreign exchange, it was up 7.5%. Service and parts business as reported was 6.8%; excluding foreign exchange, it was 4.5%. Finally, finance and insurance was up 10.6%; excluding foreign exchange, was up 8.4%. In total, changes in exchange rates resulted in approximately $88 million in revenue increases and approximately 1.5 cents per share benefit to our EPS in the third quarter. I just want to remind everyone that the guidance we supplied at the beginning of the year anticipated most of this foreign exchange impact.

Our third quarter results also include $900,000 in direct cost relating to the ramp-up of our smart distribution operations. In total for the quarter, operating income increased 17.6% to $95.9 million, and income from continuing operations increased 17.4% to $42.4 million. Net income increased 28.7% to $43.4 million and EBITDA for the quarter was up 14.1% to $91 million.

Let me go now to the specifics of our performance in Q3. Retail unit sales were up 6.8%, approximately 79,000 units. New up 6.4. Used up 7.5. An important factor in our used business was that our pre-owned certified sales were 38% of our used total sales in the U.S. during the quarter.

One of the things we've done is to pilot a program with Firstlook in our central region, and I think today I can say the pilot has been very, very successful. During this time, for the stores using Firstlook, this was primarily the model we used in our central region, used retail units were up 38% and accompanying the increasing unit, the gross was up 34% and our margin increased 30 basis points. So, again, this had strong support in the quarter. Wholesale unit volume decreased by 26%, while wholesale gross improved 400,000 because of process controls we put in during the quarter on aged units. As we look to the future, we want to expand this program across our areas of our business. In fact, as I've been going through our business planning process, this has been a major focus on our used retail businesses.

Our total revenues increased 14.6% to $3.4 billion. Just to break it out specifically, new vehicle was up 13.5%. Used vehicle was up 16.6%. FNI was up 18.3% and service and parts was up 17.9%. Let's take a look at the average selling prices on new and used vehicles. New was $2,200 per unit to $35,600. Used was up $2,395 to $30,852, so you can see there is a $5,000 difference between our new and used selling prices. Primarily this is justified by the higher luxury premium used car business that we do on a certified business with the key OEMs we represent.

Looking at our revenue mix for the quarter, it was 62% in the U.S. and 38% Internationally. And that compares to 67% and 33% in the third quarter of 2006. On a worldwide basis, foreign and premium nameplates represented 95% of total revenues including 65%-- again I mentioned, 65% from our premium brands. The U.S. big three contributed 5%. If you look at the U.S. alone, the big three was 7% of our revenue. That does not count the PAG business in that particular number which is obviously owned by Ford.

To see our specific brand mix percentages, you can look to the selected data sheet that accompanied our press release this morning. Our operating income for the quarter in United States was 59%. International was 41%. A year ago the U.S. was 65% and International was 35%. Let's take a look at our gross margin for Q3. Overall gross margin in the quarter decreased from 14.9 to 14.8%.

Let me give you a little more color on our margin for the third quarter. We continued to see a change in the mix of our overall revenue to a greater proportion of lower margin used vehicles, particularly in our International markets. In fact, the percentage of used vehicles revenue increased 39 basis points versus Q3 last year, and our used margin declined 30 basis points. While vehicle margin declined, average gross per transaction used increased $114 to $2,472. The decline in margin was partially offset by increases in our FNI and service and parts business. In fact, FNI increased $98 per unit to just over $1,000, including an $8 unit increase because of our serious sales. On our service and parts business continued to perform well, with our margin improved again in service and parts up 20 basis points to 55.6.

Our tax rate for the quarter was 34.3% and again, this rate reflects the strong contributions in our International operations, which are taxed at lower rates. In fact, when you look at the U.K., the rate's 30% and it will go down to 28% as we move into next year. We're also seeing lower rates potentially in Germany and Mexico.

Moving on to the balance sheet, our total inventory was $1.5 billion, down $70 million compared to June. If we look on a same store basis, vehicle inventory was up $133 million as compared to September 2006. That was $95 million in new and $38 million in used. The end of the quarter when we look at it on a day supply, our worldwide day supply is in great shape. New is at 43 days; to compare that to June, it was at 50. At the end of the year, 12-31-06, it was at 50 days, so again we're getting a good turn on our new cars. Used was at 34 days, which was consistent with June 30, 2007. In the U.S., new vehicle day supply was 49 days versus a 59-day supply for the entire U.S. market, and our used was at 37-- 37 days.

Moving on to CAPEX, we continue to fund our capital expenditures through sale leaseback transactions. Gross year-to-date CAPEX is approximately $115 million, which compares to a gross CAPEX of $225 million in 2006 on a full-year basis. Year-to-date sale lease back transaction proceeds are approximately $106 million. I think this is important. In 2007, we expect net capital expenditures to be between $25 and $50 million. That's down from $119 million in 2006.

Looking at leverage at the end of the quarter, we had $808 million in non-vehicle debt. Now consisted of $750 million of senior subordinated notes at a blended rate of 5.65%, with $55 million borrowed under our foreign credit agreements at a blended rate of approximately 6%. We had no outstandings under our U.S. credit agreement. As a result, we had approximately $400 million of availability under our worldwide credit agreements at the end of the quarter. As of September 30, our debt to capital was down to 37% as compared to 48% at the end of 2006. When you include the $1.5 billion in floor plan, 44% of our debt was fixed, with an average interest rate of 5.7% and an average maturity of 4.9 years. So, I think we're in great shape. And obviously if we see some interest rate reductions, that's going to bode favorably for us on our floor planning.

Looking at acquisitions in October, we completed a purchase of a Ferrari franchise in Great Britain that we expect will generate $50 million in annualized revenue. This business represents the original home of Ferrari in the U.K. and is currently the largest used Ferrari dealer in the U.K. market. While we did not dispose of any franchises during the third quarter, we continued to evaluate franchises who do not meet our return requirements or location strategies, or where we feel OEM-mandated CAPEX requirements are not warranted. To date, we've divested of ten franchises that generated an estimated $215 million in annualized revenue. As a result, our net annualized acquired revenue during 2007 is approximately $235 million, a that's really as-- close to our estimated $250 to $300 at the beginning of the year.

Looking at earnings guidance, I think you've all seen we've updated our guidance in our press release this morning. We currently expect fourth quarter earnings from continuing OPS to be in the range of $0.31 to $0.35 per share. As a result, we expect earnings from continuing operations to be in the range of $1.47 to $1.51 per share, including the expenses relating to Smart. One point I want to make, our annual guidance does not include the $0.13 per share charge we took, when we called our high yield notes in the first quarter.

Let me give you a little insight on our Smart distribution business. We continue to make great progress under Dave [Shemre's] leadership in building our distribution network, and we remain on track for the first quarter of 2008 for our launch. The $99 reservation program we launched last March continues to exceed our expectations. In fact, we now have over 34,500 reservations to date as we sit here this afternoon. In August, we initiated a new process, and that was a reconfirmation whereby reservation holders are contacted through the Internet and asked to let us know the exact specifications of the vehicle they would like to purchase. We then use this information to order cars from the factory, creating a real build-to-order system. It is interesting, as we look at the mix on the reconfirmation, that people are moving up from the standpoint of the cars they want to buy and have added more content. We believe this will allow for an efficient ordering and distribution process for us and will lead to outstanding customer satisfaction.

We also talked about our Smart roadshow during our last call. As most of you know, we launched a 50-city tour that started in May. We are nearing the completion of the tour, which has been well received and has led to an enormous amount of process and publicity. Our street teams have reached out to more than 70,000 potential customers during the process. It has allowed us to gain valuable insights about our customer base. Many of you have asked about our first year volume. We currently expect to sell between 20,000 and 25,000 vehicles in 2008. We've announced a base retail pricing for the Smart line-up. These prices exclude registration, title, tax and destination charges. For any of you who might have missed it, the pricing will be on our Pure Coupe at $11,590, that's our entry level, our Passion Coupe, $13,590 and $16,590 for our Passion Cabriolet.

Let's turn to the retail side of Smart. We've identified our retail network and have worked with our dealer candidates to ensure their facilities meet our specifications. I'm pleased to tell you that the dealers should be ready for the first Smart vehicles, which we expect to hit the showrooms in the latter part of December. I'm real excited about the Smart business and believe we really have an opportunity to create a unique shopping and driving experience in the retail automotive space. And again, I think for this reason, you know, we continue to believe the Smart distribution business will be another key differentiator within the Penske Automotive business model.

Before I close, I wanted to mention that our board approved an increase to our next dividend payment to $0.09 per share. We announced this in a press release this morning. I'm pleased to be able to make this increase because it enhances the return to our shareholder base. Based on the current share count, the annual costs of this dividend at this rate is approximately $34 million annually, and based on our current share price, our dividend yield will be improved to 1.8% from 1.3%, an increase of 29%. Given our strong cash flow and balance sheet, we fully expect to grow PAG to continued investment in our core strategies as we continue striving for superior returns for all of our stakeholders.

In summary, I'm pleased with the performance of the business during the third quarter. As I indicated at the beginning of the call, the results continue to showcase the strength of our business model and the diversification provided by our premium luxury brand mix and our International operation. Again, I want to thank everybody for being on the call today and I would like to open it up for questions.

(OPERATOR INSTRUCTIONS) First we'll go to the line of Edward Yruma with J.P. Morgan.

Roger, congratulations to you and your team on a phenomenal quarter.

Thanks, Ed.

You had some very impressive SG&A growth leverage. As you think about this longer term, what are the key drivers to see that kind of continued growth?

Well, I think as you start to look at, you know, the business, we've looked at a number of things. We've got metrics on SG&A as a percentage of gross profit. We have compensation, you know, we're looking at back office consolidation, as you know, it's been key. There has been a big shift in advertising, too, as we've been looking at traditional models of advertising, electronic and newspaper, we're shifting a lot to Internet and we've seen the benefit of the Internet as we've developed the Smart model.

Fantastic. And one other question. Many of your competitors are complaining about the environment and based on the strength of your results today, it seems you've been a bit insulated. What are you hearing from your consumers? Are they complaining about credit? And how has housing impacted sales in those particular regions? Thank you.

Let me first try to differentiate, you know, our business from the home building business. You know, basically, our customers come in and make a buying decision in 60 days to buy a vehicle, and we're not into a situation where we have inventory that sits for four, five or six months as it is being built, as you see in the industry-- the home building area. What I've seen is big inventories and no customers and then with the sub-prime issue, all of a sudden the costs to purchase or finance a home has gone up. We've got just the inverse situation in the auto business. Our inventories, we turn quickly. We can shut down the pipeline from the OEM, which gives us the benefit of the downstream end, being able to maintain a day's supply. And then our particular business model, 65% of our business is leasing. We have some [vetted] rates that are coming in from the manufacturer.

So, unless the individual customer out there is impacted because of his-- maybe a redo of his interest on his mortgage, that might have some impact to our customer. But to date, I think our premium brand mix and in those brands we see a lot of new models, and its giving us the continued momentum. So, I don't see that the housing has had any effect, at least on our business. I think the brand mix has been key, and also a number of these projects that we've been working on, you know, over the last two and-a-half years, in fact, I'm in Turnersville today, for the call. We started this four years ago. I think that, you know, we're in a position to get some benefit out of those as we go forward. The other thing we do obviously with our customers, we work with them on a payment or lease which they can afford.

Great. Thank you very much, Roger.

The next question is from the line of Matt Nemer with Thomas Wiesel Partners. Please go ahead.

My congrats as well. Hi. My first question is on Turnersville and Inskip. Can you provide an update on how those campuses are progressing?

Well, the first thing that we should talk about when we look at Turnersville and Inskip, Turnersville, we're in the final process of completing our Hummer and Cadillac showrooms. We'll then be 100% complete from the standpoint of sales and service. We're finishing the Bentley and premium luxury pre-owned showroom in Inskip and those-- both of these facilities should be completed by the end of the year. We've opened the new mini point in Inskip and from an overall perspective, in the third quarter, Turnersville broke even for Q3, which is a $250,000 improvement from last year. And from Inskip, they earned approximately $175,000 more in the quarter versus a year ago. So, we're seeing some traction. They're just now getting all of the costs associated with the construction obviously, you know, baked into their rent factors. I think we've got a pretty level playing field going forward.

One of the things that we're doing now is working on processes and to me, once we do that, we're going to see our volume go up and I think we'll see grosses go up also because we've had some inefficiencies as we've been moving the service departments and sales sites in and out of trailers over the last couple years.

Got it. My next question is, a couple of your peers are working on an Internet-based vehicle purchasing system where you could potentially buy the car from home and potentially even have it dropped off at your house without going to the store. Is that something that you've thought about? It seems like given your luxury and lease penetration, it fits well with your product.

Well, I think at the end of the day, the strength of the Internet is obvious to all of the players in the space. And you know, with a U.S. footprint in the major markets, there's no question that you have the benefit to transact business on the Internet. The OEM sites primarily are driving most of the traffic to the dealers. So, you know, we get leads from the OEMs and then we can either deliver those directly to people's home or we can even put our inventories on-line. Today, most people have their used inventory on-line anyhow. I think we would look at potentially maybe not just selling on-line but looking, having an auction on-line for our used vehicles in the future because, you know, today, everyone has the ability to put new vehicles on-line and also then obviously have selling prices.

The issue is that you've got to be able to transact business-- you've got trade-ins, you've got financing, so the model becomes somewhat complex from the standpoint of-- I'm not sure whether the OEMs will weigh in on this type of activity. Early on, there was a real pushback from the OEMs from the standpoint of the Internet. They are now obviously embracing it because they can see the benefit that we've seen from Smart. So, I think it is a good strategy and one that, you know, we obviously are working on and we have-- we're using the Internet for a virtual auction going on in the U.K. We've been doing that for three years. So we have some experience.

Turning to Smart, obviously that's going well, perhaps better than expected. Has that created a desire on the part of manufacturers, other manufacturers to use Penske as a distribution network in the United States? Are you getting leads from potentially other distribution-- for other distribution businesses?

Well, you know, you're always hoping that a success story will lead to other business. At this point, we're not in any negotiations to be a distributor for any other products. Obviously if there would be an opportunity, you know, we would-- we would look at that. There was an article in Automotive News about our potential involvement with Alpha. I had a conversation about that at the Frankfort Auto Show and saying, "Listen, it would be great if they came to the U.S., potentially, we would love to be a distributor," and then it turned out to be an article. So you got to be careful at this point. We have nothing that's pending that I could report on today.

Ok, thank you. Great quarter.

Thanks.

The next question is from Rick Nelson with Stephens, Inc. Please go ahead.

My congratulations as well, Roger.

Thank you.

Service and parts looked like it lagged on the other segments. The growth rate there will still be at high levels. Any signs the consumer is holding back on service and parts and if you could talk about trends?

Well, I think one of the things we're seeing is that the quality of cars today is so much better and there's much less warranty. In fact, I think warranty is down across the board 15% or 20% and you know, when you look at-- you know, service and parts, our comp in the second quarter was 6.1. and we were 6.8. So, actually our same store was really up third quarter over second. We're starting to see some benefit of the investments we're making in the U.K. which I think will continue to drive that. But of course, the number gets bigger as we start to activate many of these investments. But you know, the good news is that the gross profit on that incremental business is, you know, 55% to 60%.

And what was the [time] that customer [paid to] warranty?

The customer pay to warranty, I think we're down probably 15 to 20 points, you know, overall, for-- CP going up and customer pay going down. One thing also we're doing, we're capturing a lot of the quick lube business and the [quick] service where we guarantee a customer will be in and out in 30 minutes. So, there is a lot of that activity going on. We kind of got to shift our focus away because we don't have the luxury of working on warranty and to me, that's good news and bad news. It is bad because we make good money at it. On the other hand, we have the benefit of, you know, of a better quality car and potentially holding our customer. One of the things in some of the states, you know, we had been limited on the markup on warrantied parts and I don't know the exact details. Maybe Tony can get them for you. I know one of the manufacturers now will pay a list price for our warranty parts which will be a benefit for us as we go through next year.

Thank you for that. Some of the dealers, Roger, are talking about Toyota, margin pressures and inventory build and, you know, starting to feel more like some of the domestic brands. It is an important brand for you. Wondering your thoughts on that subject. Well, obviously, Toyota is one of our leadership brands. And you know, there's no question, as we get into these push times, for volume, that there's been some-- we've been under some pricing pressure, and it is basically on models-- as you start to end the model cycle that you'll see some of that. But we continue when you looked at the metrics I gave you earlier on the call, on our inventories, our inventories are in good shape. Look, there is no question, there's margin pressure on every single brand. I wouldn't just, you know, say that it is only in Toyota. I think we see it in all brands depending on what model. Thanks.

Our next question is from Joe Amaturo from Buckingham Research.

Good afternoon, Roger. Could you just touch on any impact you have-- that you're seeing from the California fires on your dealerships out there?

Well, you know, it is interesting you would ask that question. I was in Escondido on Sunday doing business plans and drove from Escondido down to San Diego through this mess and in fact, Monday morning we closed our campuses up in Escondido north of San Diego, and those stores have been shut down for three days because it was so important, because most of our people living in that area had been evacuated from their homes. And then on Tuesday, we determined that because the Interstates were closed, we would close our businesses in San Diego. Now, we've reopened today and probably 90% to 95% of our employees have showed up in Kearny Mesa, which is San Diego. Only about 80% have returned to Escondido, where the real impact of the fire was. The phones are busy. I think we're getting some service business. We did a little check before the call. We had 62 cars in for service at BMW San Diego.

We probably had half a dozen people who have lost their homes. So, that will be an impact to those families that work for us, and we're going to set up a program to support them through some means that we can do from a corporate perspective. And we still have two or three G.M.s that haven't been able to get back to their homes yet. We read these things or see them from afar but I experienced some of that, you know, at the beginning of the week. So, I think it is going to have an impact on our business as we look to the next, you know, week or two and maybe even further into the quarter. But we'll keep everybody posted.

Ok. nd then secondly, could you just give us your view of what you think the [SORS] going to be in the fourth quarter that underlies the fourth quarter guidance that you put out there?

Well, I've said all along, I think we're going to be 16 to 16.2. But I'm the wrong guy to tell you what that's going to be. You got to take out the fleet. think that-- there's a lot of moving parts there and it will be interesting to see what kind of incentives are going to flow here and what inventories are in place as we end up, b cause that's always an interesting time, not only domestically but also you get that in the U.K.

Right. Do you expect incentives to increase from where we are today, as we approach the end of the year?

I think you're going to see some incentives come out to drive inventory, some of the brands. I don't know what's going to happen with Chrysler. I haven't heard to date quite honestly whether they were able to settle. I guess Tony said they settled the strike, so that won't have an impact. Basically, everybody's going to manage their inventory. We don't want to go into 2008 with any 2007 inventory that isn't already continuing to be produced because they don't have a model change. So, you know, we're going to push that out and obviously that has some impact.

But when you look at the overall market, the four nameplates have gained three market share points. I don't think they want to give those up before the end of the year. Then you have Chevy coming out with the Malibu, which is going to be a strong entry. So the brand mix, you know our brand mix is going to be key. I see leasing as one thing we didn't talk about on the call. Leasing continues to grow from the standpoint of the premium luxury brands.

All right. Thank you. Good quarter.

Thanks.

Our next question is from the line of Rich Kwas with Wachovia.

Hi, Rich.

Good afternoon, Roger. Could you give us an update for the quarter in terms of SG&A, particularly compensation as a percent of SG&A? You laid out this goal earlier in the year of 100 basis points. What did you do in the third quarter, and are you on track? And then the other piece here is ad spending per unit. You were down in the second quarter year over year. How did you do in the third quarter?

Well, you know, we said we want to get 100 points out of our personnel cost as a percent of gross. Year-to-date, we're down 50 basis points. We were down 40 basis points for the quarter. In September, we saw real effects of our actions. We're down 90. I think we're going to get close. And you know, basically, our total advertising, as you look at the business, was down from $22.8 million to $22.4 million. In the third quarter, we were down approximately $13 per unit to $290.

Thank you. Then on Smart, it looks like you've upsized it from-- if I've got it correct, you were looking for 16,000 to 20,000 units before and now you're looking for 20,000 to 25,000. As you look at next year, that 20,000 to 25,000, is there potential for upside from that other than more reservations, meaning are you going to run into any capacity issues with Smart on the manufacturing side or the engine side, beyond the potential 25,000 units?

My biggest risk is the Euro to dollar, because they probably can sell those vehicles in other markets, so the exchange rate is probably our hurdle. I think we're going to be in the 20,000 to 25,000. That's what we're negotiating. Dave [Shemre] is doing that right now. Obviously they've had tremendous interest in this vehicle. I think their capacity is 130,000 to 140,000 vehicles on an annualized basis, once they get in full production. So, I think that's a pretty solid number as we look at 2008.

Ok. Then finally, what is your number of refunds off that reservation base year-to-date?

We've had 1,783 refunds and the $35,400 is net of those refunds. So, we're in great shape. Interesting, as we go out on the reconfirmation process, you know we're getting back-- 85% of the people are queueing up almost within say seven to ten days, re-doing their reservation, and overall with the number-- we've been out now I think with over almost 5,000, 75% have reconfirmed. We have that group that we're still mining, then we have the group that falls off but that 1,783 includes the people who have decided not to buy at this time. But now we have them as a customer list. We got their e-mail address, so we'll be able to mine them not only for Smart cars but we'll start to communicate with that group obviously on an overall basis on Penske Auto Group. And the option content, which is really interesting, we thought that Pure was going to be 10% when we set back with our crystal ball initially. It has now moved down to about 3%. So people are buying a car with more content. In fact, the reconfirmation reservation is adding another $1,000-- interesting, over 50% want leather seats, and things that we might not have expected as we were sitting around the room initially.

Great. Thanks so much.

Thank you.

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

Good afternoon, Roger. I was just wondering if you could talk about how Firstlook exactly works in that pilot in the central region, and how it could potentially be rolled out in your other two regions?

Well, you know, we entered into an agreement with Firstlook and I think there's lots of Internet technology, lots of software, but I think the key thing there is building a process. And Firstlook has a-- really a strong process, and we need to get our people to buy in, because used car guys usually know more about it than anyone else, and I think with a we've been able to do is generate a list of best practices and that's the way you show your vehicle. The way you reprice the selling price, at least the selling price shown on the sticker, you know on a 30, 45, 60, 90-day basis, if you keep your cars that long.

Then we have the understanding of, you know, what vehicles are selling and probably most interesting is the fact that we have lowered in the central region, we're running about 30,000 as our average selling price. With the process in the central region, we've dropped that down considerably based on the Firstlook, and that's given us more margin on the cars we have sold. It has reduced the loss on any wholesale we might have, and I think that the average price, in fact, is 15,000. So, we've kind of found a new beachhead where we're taking all of these vehicles that we were wholesaling out and maybe making $200 or $300 wholesale, cars that have higher mileage, and we are now able to sell those at retail and again, when you think about 15,000 in the central as an average selling price and 30,000 for the company, there is a real model there, and I would have to say that Firstlook were the ones that kind of turned our thinking because we've been so focused on premium luxury.

Roger, is there any update on any ad points that you may have gotten recently or you think that might be on the horizon?

I don't have anything now to communicate.

Ok. Then on-- your debt to cap level of 37% has improved quite a bit recently. Are you comfortable with those levels or I mean-- meaning, is that something you're focused on, the target in the mid- 30s?

I would say, you know, we've always said we want to be between 35 and 45. I think we're right in the sweet spot here. Obviously, our cash flow and the ability to pay down our debt, we have nothing under our credit lines, and we have a small amount borrowed over in the U.K. but we expect the debt level to be pretty much where it is now at the end of the year, even though we have some ongoing CAPEX. We probably have $25 million of projects which ultimately, today, that we've spent that we can't convert into CAPEX because the projects aren't complete. So, we'll keep our debt to cap in good shape.

Then lastly on the guidance on the fourth quarter, a $0.04 spread there, a little on the wide side. Is there any reason for that or is that the general macro uncertainty that's out there?

Well, you know, we moved the top range up. If you look, we made $0.33 last year and you know, that's a 7% to 8% increase. We're impacted sometimes in the fourth quarter with weather on the East Coast and you know, really not knowing, you know, what that is and I just don't want to get too far out from the standpoint of the fourth quarter. And I think that, you know, it is consistent, you know, with our fourth quarter guidance in the past.

Thank you very much.

Thank you.

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

Jonathan, how are you?

Mr. Steinmetz, your line is open. Please take yourself off mute. And we will move on to Scott Stember with Sidoti & Company.

Good afternoon.

Hey, Scott.

Roger, did you give the customer pay increase in the quarter and the actual percentage decline on the warranty work?

You know, I'll let Tony get that exactly. I just know that we've seen that go down because it has been trending down, you know, from the beginning of the year because the quality of not only the four nameplates but the domestics now, there's some costs in there which don't reflect warranty CP where we have these full circle programs. Those are paid for by the manufacturer, so those would look at-- as if warranty had gone up, but pure warranty work is definitely down and I really can't - I can't give you a good number here and I'll get Tony to communicate back with you.

But customer pay [work] clearly is up, the offsetting factor there.

Customer pay work is definitely up.

Ok.

We're doing a lot more, you know, things-- we want the quick lube, we want the alignments and things like that that we really weren't focused on because our shops were typically filled up with warranty and customer pay. So we've got to be a lot more aggressive and I think, in many cases, sell a full circle maintenance package with the cars we're selling. We're looking potentially to offer that with Smart. So someone knows it is going to cost them $100 per year for the maintenance and the dealer can buy into that in the beginning, we're looking at programs like that once we communicate the final details before we launch.

As far as stall utilization, where are you right now? And how many-- you know, in total for 2007, how many new stalls would you suggest we should look for to be open to maybe --

We're probably at 70% to 75% utilization and, you know, we have 200 probably bays today that we would see increasing over the year.

Ok. And going back to the used side of the business in the U.K., the demonstrators. I think on the last call, you had indicated that you were trying to limit the issues that you had during the demonstrators.

Well, they called it a pre-registration, we did limit though significantly at the end of the third quarter and the end of the second, so that should bode well for us and we would hope to see, you know, that margin move up because we're over 10% in the U.S. on used car margin and we're probably mid-6% in the U.K. because of the pre-registrations. All demonstrators in the U.K. have to be sold as used cars, whereas in the U.S. the cars are sold as new. So, you've got a larger volume of vehicles to take that demo impact from a margin perspective.

So we should probably see in the fourth quarter, things improving a little bit on that front.

It is hard for me to say. I definitely-- in the discussions with the management team, feel that's-- that's an area of opportunity for us.

Ok. Fair enough. And just last couple of questions here. Last couple of calls, you've given same store growth profit in the parts and service business and Inskip and Turnersville, and just trying to give an indication of how that's taking off over there. Do you have any figures for this quarter?

Well, I think when you look at our parts and service gross, you know, from the standpoint of Turnersville, we're up probably about 22%, you know, versus a year ago, now that we've gotten many of these facilities up and running and we've got technicians hired. And we're up at Inskip probably in the neighborhood of 6% to 8%.

Ok. Just last question, any comments on what you're seeing in October so far, here in the U.S.?

I'll tell you, we talked with our guys this morning. The central region looks to be pretty well on track. Obviously in the U.K., I would say these guys take a big, deep breath after the registration month. They have to kind of get their engine running for the last quarter. So, we'll probably see a much lighter quarter in the U.K. and it is going to be up to the weather and certainly the situation in California is going to have some impact on us. We'll have to work our way out of that hole. But overall, you know, I think-- I never can base the quarter just on one month, and it is typically coming off the end of a quarter, we tend to start a little bit slower than the momentum we had finishing. So, it is-- I think it's going to be again-- it is hard work and we'll see how we end up.

All right. That's all I have. Thank you, Roger.

Thanks a million.

And we'll go to Darren Kennedy with Goldman Sachs. Please go ahead.

Hi, there. Darren Kennedy with Matthew Fassler here.

Hey Darren, how are you?

Great, thank you. You had spoken about California in terms of the wildfires. I don't know if you ever gave any specifics about how that market is in general for you, since many companies with exposure-- high exposure in Florida and California have tried to kind of separate it out for us.

Well, you know, when I look at California, our new units were down 7%, you know for the quarter. Used were only down 1.5% and yet you look at San Diego, you know, they were pretty strong. I think it is pockets. We saw the Honda business a little softer up in Marin County and up in Clovis, but yet the premium luxury stores down in Kearney Mesa and San Diego were pretty strong.

If you think about Florida, we had one Toyota dealership there which changed management. If you would exclude that, new units down in Florida were up 1.5%. Used units were down about 10.

o, it is a mixed bag and depending on, you know, the other OEM-- or the other publics, what's their mix in those markets, so I think it is an unfair comparison, you know, with us and someone else unless you knew exactly the specific market in northern California because there is a difference we see in the business level. Los Angeles, our domestics were down in Los Angeles, let you go-- and then down to San Diego, we had pretty good strength with the foreign nameplates.

Yes. I was just trying to get additional color. I know you may have a unique mix there. Finally, you had spoken about leverage in advertising and payroll, and combined the leverage you spoke of, I think, approaches the leverage you achieved. I don't know if there was less of an expense impact as a percentage of sales or gross from investments coming off Turnersville and Inskip, and how much of your fixed costs de-levered, if at all, or if you got a leverage on fixed costs.

Well, you know, we don't have all the fixed costs in at Turnersville now, as we're just starting to finish the final projects. But you know, from a fixed absorption basis, you know, overall, you know, we went up to 80 basis points to 55% absorption, which is the amount of parts and service business in our overall fixed costs. So, I think that's positive. Now, I expect that to grow significantly. And you know, when you look at Inskip, we went from approximately 69% to 73%. So, we've got-- there's 400 basis points at Inskip and not quite that at Turnersville because there's-- they've had more construction going here this last year finishing up than inskip had.

But everything is still on track in terms of completion of those projects that you spoke to us last about, for next year?

It will be done-- they'll be done-- done I think by the end of the quarter and you know, the big thing now is us to be able to attract and hire the right kind of people, as we need more sales staff. We need more technicians, because you can't have these people standing by until you have the facilities done. So, we've got our HR guys in full gear on recruitment here in both locations as we enter the fourth quarter.

One final question. You have spoken about your expectations for CAPEX gross and net this year. Do you have anything to tell us about next year, your plans?

Wow.

Or is it too early to ask?

I would rather give you precise number because we actually go project per project. I will say though that we'll spend on a net basis probably 75 to $90 million less this year than we did last year. So that's obviously positive cash flow, which is important as we go forward.

Ok. That's all I got. Thank you.

Thanks a million.

We'll go to the line of Carl Dorf with Dorf Asset Management. Please go ahead.

Carl, how are you?

Good, Roger. Great quarter. I just got a quick question. Looking at-- your inventories on the balance sheet are relatively flat. Your floor plan debt is up a lot and correspondingly, the rate-- the interest you've paid on floor plan is up in the quarter. Are you shifting using floor plan more than long-term balancing debt or what's going on there?

We've had higher interest rates. If you're comparing quarter to quarter Q3 this year versus last, our inventory is-- we're in great shape. I think we said we had on a same store basis, we had about 80 million more in the U.S. than we did a year ago and our overall on a same store basis, so the impact on interest would be strictly new-- any acquisitions. I remember we had Ryland, which came in last year, would be, you know, the total overall but it is all interest rate on the variable side for floor plan.

But for floor plan itself, the aggregate amount on the balance sheet is up, I don't know what the average figure was.

Oh, you might be looking -- I'll tell you what you're probably looking at. Under the new accounts rules, we have floor plan listed as floor plan that we get directly financed by GMAC or Ford. And if it is not, if it is by - if we have, let's say, under our credit agreement we have today, we have DaimlerChrysler financing other manufacturers and we carry that in another category and I forget-- Bob O'Shaughnessy is here, what we call that category. That might be the difference.

That's floor plan, non-trading. Carl, are you comparing it to the September-- or the December '06 balance sheet?

I'm comparing it to the balance sheet that you showed on the-- in the press release.

Right. Well, what you have to remember is if you recall, last December, we went out and raised money. We did a senior sub-note offering for $375. We took the money that we raised there, paid down floor plan, and then called our high yield notes in March of the next year and we borrowed the money back. So, at December 31st of '06, we had an artificially low floor plan liability.

Ok. That explains it.

Ok. Sorry.

Thank you.

Thanks, Carl.

(OPERATOR INSTRUCTIONS) We'll go to the line of Mike Hagen with Bear Stearns.

Hey, Mike.

I hope I didn't miss this but you talked about, you know, strength in used vehicles being helped by certified pre-owned business. And I'm wondering if you could put some color around, you know, whether that business is a lot more robust in the premium lines versus volume brands or whether you're seeing it sort of evenly distributed. And what I'm really trying to get at is, you know, whether there are-- whether there is a difference among income groups as far as, you know, macro economic pressures.

Let me say this. It is a good question. When we look at the premium luxury, the BMWs, Mercedes, Audis, Lexuses, they have pushed hard on these full circle programs and certified vehicles. In fact, they're giving us extended warranty on those to the customer and in most cases, we get better finance rates. So, that's driving behavior in our sales area. And I think that we also have the opportunity now to take vehicles that are coming off lease where we've leased them in the past, and we get first choice on those to purchase and then they become-- we certify those and we get the benefits of obviously longer term warranties and better financing.

So, I would say that the premiums have really started this program and a number of them are copying BMWs program, which probably had the most success to date. We have Toyota and certainly Honda certified programs but I don't see that customer, you know, quite as interested in a certified versus a standard car because, you know, it is hard to get used Toyotas and Hondas quite honestly and the ones we do have significant miles on them, and when we sell those we don't like to certify them because you have to add quite a bit of cost into the inventory, a price-- so then if you have to sell those and you haven't sold them in 60 days, you take a loss typically because you don't get reconditioning back.

But those customers-- so those customers are still very interested in used cars, they just care less about the certified pre-owned designation.

I think when you get into a buyer in the 10,000 to 12,000, they're more interested in the transaction price than they are whether it is a certified vehicle or not.

Right. Ok. Regarding new cars, were there any particular models that you had trouble obtaining this year, or during the quarter? Or any model year transitions that were lumpy for you?

Well, the toughest car always to get is a Ferrari. I know we don't sell a lot of those but I just say that's the toughest car to get. We've had-- with BMW, you know, because we've grown these stores so much, we've had a tougher time getting, it's interesting, getting passenger cars out of BMW. But that's good news and bad news. I would rather have them short C class, obviously. We've waited for the C class and, you know, we're going to be short of this new coupe that they have at Audi. Really brand to brand, each of them have that-- the new Accord obviously has been very successful, and I think the manufacturers are doing a much better job in managing these new model entries and obviously the exhausting of the other models. But I can't give you anything that comes to mind and I'm fairly-- I'm close to the field where people are screaming that we don't have particular models.

Ok. That's helpful. Thank you.

Mr. Penske and Mr. Pordon, no further questions in the queue. Thank you.

All right, John. Thanks a million for your help. Thanks, everybody for being on.

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