Penske Automotive Group Inc (PAG) 2007 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon and welcome to the Penske Automotive Group fourth quarter 2007 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through February 26, 2008. Please refer to Penske Automotive's press release dated February 19, 2008 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 at this time.

Thank you, Lori, and welcome, everyone. A press release detailing Penske Automotive's fourth quarter results was released this morning and is posted on the Company's website at www.penskeautomotive.com. Participating on the call with us today are Roger Penske, our Chairman, Bob O'Shaughnessy, our Chief Financial Officer, JD Carlson, our Controller. At the conclusion of our remarks today, we will open up the call for questions. We will also be available by phone to answer any follow-up questions that you may have. Before we begin, I would like to remind you that statements made in this conference call may include forward-looking statements regarding 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 fluctuation, 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 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, included adjusted income from continuing operations and adjusted earnings per share from continuing operations.

Adjusted fourth quarter 2007 earnings exclude $4.5 million, or $0.05 per share, of after-tax impairment charges. For the year, adjusted earnings exclude the $12.3 million, or $0.13 per share, sub debt redemption charge we recorded in the first quarter, as well as the Q4 impairment charges. We believe such non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance. At this time, I would now like to introduce the Chairman of Penske Automotive Group, Roger Penske.

Thank you, Tony, and good afternoon, everyone, and thanks for joining us this afternoon. 2007 was a great year for the Penske Automotive Group. Our results continue to showcase the strength of our business and the benefit provided by our brand mix and diversified revenue streams. Our business sold nearly 300,000 units in 2007. That represents a 10% improvement over 2006. New was up 7.5% and used was up 15.8%. We had a solid top-line growth of 16% and our adjusted earnings per share from continuing operations increased nearly 9% to $1.53 per share. I would like to point out that our 2007 results also included $5.5 million, or $0.04 per share, of expenses incurred in the connection with the launch of the SMART 42 in the U.S. And in the fourth quarter we had a $0.02 impact from those additional expenses and $0.04 for the entire year. Further, our business generated 7.9% same-store retail growth, posting positive comps in both the United States and the international markets.

For the year, U.S. was up 2.7% and international was up 20.9%. 2007 marked the ninth consecutive year of same-store revenue increases for Penske Automotive. These results showcase several benefits that I would like to highlight for you this afternoon. First, the auto retail business model is resilient. The gross profit from our service and parts operation, which is less cyclical than the vehicle business, generates more than 40% of our gross profit. Second, preowned vehicle sales, which tend to increase when new vehicle sales decrease, are an important element in the business model. Our 2007 results show this very clearly. Third, we have a variable cost structure that we believe allows us to react to the changing market dynamics over time. And finally, our international operation provide a unique element versus our peers.

Looking at our revenue mix in 2007, 62% was generated in the United States and 38% internationally. And our mix of operating income was 61% in the United States and 39% internationally. Before I address the specifics of the results today, I wanted to take a minute to comment on what I think is the current environment. Like many retail sectors, the fourth quarter was challenging for our business. While we did experience some weakness in the new vehicle market in the U.S., luxury specifically, the UK luxury market performed well throughout the entire year. We also experienced a robust preowned vehicle market in the U.S. in our luxury, volume foreign and domestic big three brands. And our service and parts, finance and insurance business remains strong during the fourth quarter. As of today, we have not seen any significant credit availability issues in our overall businesses.

I'm pleased to see the Federal Reserve react to the slowing economic growth and the 225 basis point reduction in interest rates is a positive sign that should help our business. As of December 31, $600 million of our floor plan notes in the U.S. have variable interest rates. As a result, a 25-basis point decrease in our borrowing rates results in $1.5 million, or $0.01 per share, of annualized savings. Let's turn to the fourth quarter. Retail unit sales increased 5.5% to just under 70,000 units, new up 5%; used up 6.5. On a same-store basis, used unit sales increased 8%, as we continue to implement programs to enhance our used vehicle operations. Revenue increased 7.7% to $3.1 billion, new vehicles up 6.2%, used vehicle up 9.6, F&I at 15.5 and S&P up 8.7. And our same-store retail revenue increased 4%, 1% in the U.S. and 10% internationally.

To exclude the impact of exchange rates, overall retail same-store growth was 1.9%, including 3.6% in our international operations. In total, changes in exchange rates resulted in a $66 million increase to revenues and less than $0.01 per share benefit to EPS in the fourth quarter. Average selling prices of new and used vehicles increased, new was up $422 to approximately $37,000, used was up $871 to $31,100. Our revenue mix in the fourth quarter was 64% and international was 36%. And that really compares to last year at 65/35, so there wasn't much change between the fourth quarter '06 and '07. On a worldwide basis, foreign and premium nameplates represented 94% of total revenues, including 65% from our premium brand. The U.S. big three contributed the remaining 6%. If we look at the U.S. alone, the big 3 was 7% of our revenue. To see our specific brand mix percentages, you can refer to our selected data sheet that accompanied our press release this morning.

During the quarter our mix of operating income was 68% in the U.S. and 32% internationally. And that compares, again, for the quarter of 64% revenue in the U.S. and 36%, so we got some good traction in the fourth quarter. Adjusted income from continuing operations was $31.8 million and related earnings per share was 34%. Turning to gross margin, our overall gross margin in the quarter increased to 15.1%. Consistent with recent quarters, we have seen a decline in our vehicle margins compared to prior year, coupled with a mix shift to used vehicles. Decline in vehicle margin was really offset largely in the quarter by our F&I and our service and parts business. F&I increased $85 per unit to $981 and our service and parts continued to perform well, with our margin increasing during the quarter 110 basis points to 56.1%. Our tax rate for the year was 34.2% compared to 33.9% last year.

The current year tax rate was positively impacted by increased earnings in the UK market, which was taxed at 30%, and the reevaluation of our deferred taxes due to decreases in corporate tax rates in the UK and Germany. In fact, you can see the rates will move down 2% to 28% in the UK and down 9% in Germany to 31%. You may also remember that our 2006 taxes were positively impacted by foreign tax planning. Our Q4 rate in '06 was 25%. Moving on to the balance sheet, total vehicle inventory was $1.6 billion, which is up $123 million compared to September. On a same-store basis, vehicle inventory was up $90 million compared to December 2006. New was up $85 million and used was up $5 million. At the end of the fourth quarter, our worldwide day supplies of inventory was in solid shape. New was 59 days, used was 43. If we look at the U.S. alone, new vehicle supply was 53 days versus a 61 day supply for the U.S. market and our used was 39 days.

Moving on to CapEx. In 2007 our CapEx was approximately $195 million, which is down $29 million from last year. That's gross CapEx. Sale leaseback proceeds in 2007 was $132 million. As a result, our net CapEx in 2007 was $62 million. If we look at 2008, we expect net capital expenditures to be in the range of approximately $50 million. Turning to our leverage, we had $850 million of non-vehicle debt consisting of $750 million of senior subordinated notes at a blended rate of 5.625%. We had borrowed under our foreign credit agreements $91 million at a blended rate of 5.7%. There were no outstandings under our U.S. credit agreement at the end of the year. As a result, we had approximately $350 million of availability under our credit agreements. As of December 31, our debt to capital ratio was 37% compared to 48% at the end of last year, 2006.

When you include the $1.6 billion in floor plan, 46% of our debt was fixed with an average interest rate of 5.1%, and an average maturity of 5.1 years. Looking at acquisitions, as we discussed on the last call, we completed a purchase of a Ferrari and Maserati franchise in the UK in October and we expect that will generate approximately $50 million in annualized revenue during this year. We acquired 11 franchises that expect to generate approximately $450 million in annualized revenue, $300 in the U.S. and $150 million internationally. In addition, as I said before, we continue to evaluate franchises that do not meet our return requirements, location strategy, or what we feel OEM, mandated CapEx requirements are not warranted. During the fourth quarter, we divested four franchises that generated an estimated $155 million in annualized revenue. As a result, we divested of 21 franchises during 2007 that generated an estimated $370 million in annualized revenue.

Let me turn to the smart distribution business for a moment. I would like to briefly summarize certain accomplishments of the smart team. In 18 months, we built a national distribution network from scratch. We initiated a reservation program. We implemented a road show to introduce the product to the U.S. market, with over 50,000 test drives and 20,000 intercepts in 50 cities. We built the smart one customer care center for sales and roadside service. We participated in three auto shows. Based on all this hard work, we were ready for the introduction of the 42 in 2008. Retail sales began in the middle of January at 68 smart centers that we selected. We ultimately expect to have 74 smart centers doing business as we end 2008. We currently project the dealership network will consist of 28 exclusive smart centers, 33 shop and shop centers inside Mercedes Benz facilities, and 13 standalone sales centers, which will share MB service facilities.

We also opened up the smart USA national headquarters in Bloomfield Hills, Michigan. We continue to estimate 20,000 to 25,000 wholesale deliveries in 2008, in which we believe 5000 will occur in the first quarter. We did 1400 in January. We're expecting 1500 in February, and 2000 in March. We expect to see approximately 2000 retail deliveries in the first 45 days. I'm really excited about the smart business. I think it's the right time with the right product and I think that the smart distribution business will be another key differentiator for the Penske Automotive model. Looking to guidance, we provided in our press release this morning, our guidance assumes the following. Modest same-store growth for the full year based on expectations of a challenging new vehicle market in the U.S. and UK. Our acquisitions will total approximately $300 million in annualized revenue on a gross basis. No changes in interest rates from the current interest rate levels.

An average of 95 million shares outstanding. Based on these assumptions, we expect earnings from continuing operations to be in the range of $1.63 to $1.71 per share for the year. For the first quarter in 2007, we expect earnings from continuing operations to be in the range of $0.32 to $0.34 per share. Before I close, I want to address the 150 million share repurchase program that our board approved recently. Based on recent market price of our shares, we view the potential repurchases as a solid investment. Based on today's costs of capital, the rate repurchase will certainly be accretive. Given our strong cash flow and balance sheet, we expect to implement this program without limiting our ability to invest in our core strategies. In closing, I think PAG had a great year and I'm pleased with the performance of the business during a challenging year.

As I indicated at the beginning of the call, 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, and of course our smart distribution. I personally look forward to the challenge of another exciting year in our business. I appreciate the hard work put forth by our nearly 16,000 associates to achieve the results and these accomplishments. Thanks, again, for your attention today. I look forward to opening it up for questions.

Thank you. (OPERATOR INSTRUCTIONS) We have a question from the line of Rich Kwas with Wachovia. Please go ahead.

Hi, had a question on the swing factors for your guidance for '08. What are the big factors that would get you to the lower end of that range, the 163, and then what are the positive factors that would get you to the higher end of that range?

Well, I think if you look at same-store comps, we were projecting flat both here in the U.S. and also internationally. If that was moved up, obviously that would add to the bottom line. Expense controls, which we're working on from a standpoint of comp as a percentage of gross profit, certainly plays in. And also the traction that we would get on Turnersville and Inskip as they get more mature over the next year because, basically we have them in right now probably for about $0.04. And I think that F&I could decline based on lower volumes in both new and used, so that could be a downward trend. Then if we didn't get the distribution of a SMART car into 20,000 or 25,000, that obviously could be a negative. On the other hand, if we hit those numbers, it could be at the higher end. We have nothing in there for additional benefits from the standpoint of interest rate. So that could also -- it could work both ways really.

Okay and how do you feel about Turnersville and Inskip right now and where do you kind of expect those facilities to be, say, at the end of 2009?

Well, if I look, if I kind of give you some impact on Turnersville, we are up almost 600 units, parts and service gross was up 21%, and really profit improved. We went from a loss of $1.8 million last year to a loss of $800,000 in the fourth quarter. And the good news is that our fixed coverage went up a couple of points almost to 55%. But again, that can go as high as 70 once we get the traction in parts and service. So to me, another key component will be getting the comp to gross, which today we made a 300 basis point move to the positive during the year, so I think these things will all bode well. As I said we're looking at $0.03 to $0.04 out of these stores. I think, at Inskip we were up about 300 units year-over-year, our parts and service grew almost 10%, and I think as I look at the business, we really have an opportunity there now that we have all of the facilities complete that we'll be able to meet that target between the two key locations where we had the investments during the last, really almost three and a half years. This should be a breakout year for us.

Okay. Then finally on the acquisition front, seems like your guidance of $300 million in acquisition, revenues from acquisitions, it seems a bit understated relative to kind of your normal run rate. What do you see in the market and is there anything kind of limiting your decision-making on going out and becoming more aggressive?

Well, we have a pipeline right now in the UK and we have a pipeline here in the U.S. And we're in the process of negotiating those deals and, hopefully, we can meet those targets. Obviously we'll be opportunistic if we see something that fits our core strategy and also geographically, where we can combine back office and management, but I think that we've got to really look at our stock price buyback versus our ability to purchase at the right multiples acquisitions in the marketplace.

Okay, great. Thank you.

And our next question from the line of Matt Nemer with Thomas Weisel Partners. Please go ahead.

Hi, Matt.

Hi, Roger. Congrats on your win in Daytona.

That was the most important thing yesterday, thanks. Or Sunday.

Just to start, the used business was really strong and I'm wondering if that's primarily in the central region or sort of what's happening there from a processes standpoint?

Well, I think when you look at, overall, we were up in revenue almost 11% in the U.S. and we were also up in over 9% in the UK. I think what we did, we took our first look program that Whit initiated really in the central area and over the last, say 90 to 120 days we've been really focusing on, quite honestly, wholesaling less cars. In fact, our wholesale per unit went up probably, a loss for about $40 during the fourth quarter, where we're now retailing these vehicles, which is giving us more F&I and also giving us more revenue and profit on the used side. So, we see that as a real way to, to give us some ability to offset any down cycle we might be in on the new side.

Okay, and then I guess on the other side of the equation, it looks like SG&A expense held you back a little bit. Clearly there's SMART car in there and then rent and it sounds like Sirius was a headwind for you as well. Are there any other factors in SG&A that we should be aware of? Can you give us a sense of what's going on there?

I think Sirius for the year was probably $0.01 to $0.015 negative for the year. And when you look, when you look overall on SG&A, obviously the costs associated with smart, about $0.04, was a drag $0.02 in the last quarter. But I think we were flat overall. Obviously that's an area we're continuing to try and give the metrics. One thing you have got to be aware of, in a cycle where your new car business is somewhat down and the retention of people, there is some guarantees and other things that have to take place at the lower levels to keep some of your people so they don't move on and I think we probably invested in some of those dollars during the last quarter.

Okay. And then lastly, can you give us an update on trends in the UK? The January registration numbers looked very strong, but that's obviously not what we're reading in the media. So I'm just wondering what's happening on the ground in the UK?

Well, as we talk to our guys and we look at, at January, we felt we were on our plan. The big test will be, and we'll be able to give it better after the first quarter, what happens in the registration month in the month of March, which is really the entire quarter is driven by that month. We tend to make money in January, we go a little bit backwards in February, and then there's a big registration. People almost wait to take their cars in March. We see that market fairly good. The economy grew 3%, almost 3% last year and inflation's running about 2.2. We talk about housing in the UK. I think overall if you look at the total market, it's down. But inside London, inside the M 25, real estate prices are still, still strong.

And when we look at what we call the NADA, that's really in the UK, the society of motor manufacturers, they say there will be no decline in registrations in 2008. So in '07 was the sixth highest year on record and I think that overall market was up 2% and the fourth quarter was up 4.6%. We feel pretty good about the market and I think our position, with the brands that we have, we're really in good shape with execution and we've done some consolidation of our offices. I think the management team is well entrenched there and the used picture -- our F&I penetration, really the lift we got in F&I this quarter was really the fact that UK was up 2% in penetration.

Are there any large acquisition opportunities over there? We're hearing about one of your public peers in the UK, there's some activity regarding potentially a buyout by one of the other public players.

Well, Pendragon, you must be talking about, that's the big player over there. We don't -- we're not involved in any of that, to be honest with you, and at the present time, from the standpoint of acquisitions we're going to be very selective. There will be glue-ons where we have capability and brands that we think are on the upswing. So, I feel real good about the approach our guys are taking over there.

Great. Thanks, congrats again.

Thank you.

Our next question from the line of Ed Yruma with JPMorgan. Please go ahead.

How are you, Ed.

Hi, how are you, Roger. Congratulations on a good quarter.

Thank you.

Can you talk a little bit about the experience of your stores in California, some of your competitors continue to complain about weak traffic trends.

It's interesting. I knew that question would probably be one. When I look, and I'll give you some specifics, if we look at units sold year-to-date in the west, and that would include Arizona, California, we would be down 3%. But if you look specifically at Southern California, we would be down 19% on units sold. Yet when you look in the east, we're up 1% and we're up -- excuse me, up 3% in the east and in the central we're up 8%. So we're seeing some traction in certain parts of the country, but there's no question that Southern California, when we look at units sold, and that's through last weekend, we were down 19%.

Got you. And to kind of piggy back on Matt Nemer's question, can you talk a little more about the expense cuts that you potentially could do in '08 should the vehicle market soften?

Well, I think obviously expense cuts, we're going to look at advertising. There's quite a shift going to the internet. We learned a real lesson there with smart, what, how, what the power of the internet was and I think that that's going to be key. The other thing that we're going to get the benefit of certainly is the additional gross profit out of parts and service because of the penetration we have made on our new vehicle. And we have a variable cost structure.

I think we've talked about that before, that, I hope it's like an elevator, as our gross goes down we're going to see the SG&A go down because of our variable comp structure. That goes through sales. It goes through service and parts. And really when you look at it, I think that's one of the benefits of the business. Yet we continue to have the ability on the used car side and we're going to look very carefully at doing more, less wholesaling and more retailing of lower price units. We have seen the cost of sales that our friends at CarMax have and they continue to be able to do a great job in that level of customer, say the 12,000 to 14,000 to 16,000. We're talking about an average selling price I think I said earlier over 32,000. So we got some real room there, which will help us drive some of our costs down.

Great, and one final question. If smart should remain strong throughout the year, is there any opportunity to increase your allocation either at the end of this year or sometime next year? Thank you.

Well, we're limited. We had, remember, talked to you 16 to 20, I think as we talked about this and we've squeezed everything we can out of the plant. They are running full bore. This car's had great reception on a worldwide basis, so we're just hoping to get our 20,000 to 25,000, and that's a little bit of when we talk about our guidance, you could be off 2000 or 3000 and that could effect us, but so far we're going look at 5000 in the first quarter. And that would annualize it 20, so they got to kick it up for us for the rest of the year.

Great. Thanks very much.

Our next question is from the line of Joe Amaturo with Buckingham Research. Please go ahead.

Good afternoon, everyone. How are you doing? Just a quick question. Could you just discuss from a product standpoint what makes you so optimistic about your, as it relates to your 2008 guidance in the U.S. and particularly in the UK, and what's going on in the UK with respect to some pre-buy activity?

Well, let me talk about product mix. Certainly, we're excited with the one series coming with BMW. That's going to be excellent. As you know, that comes in, we'll have that this year. In the UK, we see, we see the Audi product very strong. Our penetration there has gone up significantly. You've got the Clubman, which we'll have in the U.S. That's a small mini product, which will certainly make a difference. The all new A 4, which will be launched during this year, another Audi product. And again, we see that the premium luxury -- remember, one of the aspects to our business is that leasing in the premium luxury, which is 65% of our revenue, 50% of that's lease. So interest rates going down are going to help lease payments and should and hopefully we'll see these customers coming back, because typically on a lease, you're at 36 to 42 months, where as I saw in the "Wall Street Journal" here a week or so ago they were showing 72 to 84 months on a finance contract. So, we see that being a benefit also.

Okay, and then with respect to acquisition multiples, where are they currently? Are they coming under pressure? And how do they compare to your -- to where the market is valuing your stock currently?

Well, when we look -- let me just give you the multiples that I see in the marketplace. There's certainly been a shift from the public, at least the majority of the public companies are looking at premium luxury brands, and I would say those have stayed the same. But I don't see any deterioration in the brands that we're looking at, at this particular time. I think we've said five to six to seven times in a luxury and four to six times in the volume foreign. And that's what we're experiencing. And when you look at the UK, we probably look at anywhere from maybe a 20% to 30%, maybe even 40% discount on those numbers.

Okay. Then just one last one, I think Sirius was a drag in the fourth quarter. Could you just quantify what impact that had to F&I on a per unit basis?

Well, I would have to go back. I think it was -- there was 800,000 in revenue difference between the quarter a year ago and this year. It was probably somewhere -- I'm taking a guess here, probably $5 to $7 per unit.

Okay, okay. Thank you, Roger. Take care.

Thanks a million.

And our next question from the line of Rick Nelson with Stephens. Please go ahead.

Hey, Rick.

Congrats on the quarter and the Daytona as well.

I don't know which one was better. You have to tell me.

The race was very exciting.

Thanks.

Roger, you mentioned that you're starting to see some resistance at the high end in terms of new car purchases. I'm wondering if you can provide some color there and then are you seeing any impact at all in service and parts?

Well, let me just comment on service and parts. We continued to grow. In fact, our margin went up 110 basis points during the quarter. So, we see that quite positive. When you look at overall, our service and parts revenue on a same-store basis was up 5%. And to me, that shows that we continue to have traction. That's because we've got capacity and for the year, I think we're up almost 7%. As we look at the areas that have been a little bit -- there's been a slowdown, internationally we've seen Porsche down in the UK, which would be some resistance at this point. Some of that has to do with Cayenne availability. And I think that one of the reasons is where these marks that don't have aggressive lease programs, you start to run into some of that, some of that headwind.

And you had talked about the benefit from lower rates on floor plan interest expense. Are you seeing any changes at all in terms of manufacture assistance?

We don't get a lot of manufacture assistance. We should have that number. I don't have it. I'll get Tony to get it for you, what it was for the last quarter. But it typically runs $5 million to $6 million per quarter for us. But I haven't seen any at least -- to be honest with you, I'm not close enough to each individual brand to tell you whether there's been any positive action. I don't want to give you a bad answer. Maybe someone here can give you that later on. I just don't want to give you a bad answer.

All right, thanks. And the rollout of first look, can you update us?

Well, that's going great. We think it's a terrific product and we've seen the benefits. It gives us inventory control. It gives us the right cars. We have the ability to adjust sale prices on a weekly basis and also as we do trade-ins. What's really happened, it's taken away the ability of the used car manager to bundle a good used car he would wholesale with some product that he had taken in that hasn't been on the right side of it. And I think that not only first look, it gives us the ability for us to really go forward across the entire country and to me that's important.

And the region where that's in play.

I think Whit was, Whit Ramonat was a big contributor to that, but now we have it in the southeast and we're moving it out into the west. So out into Arkansas and to me these are products which we have to have in order to be sophisticated as we go forward in order to get the maximization out of the used car business.

Got it. Thank you.

And our next question is from the line of John Murphy with Merrill Lynch. Please go ahead.

Hi. How are you, Roger?

Good.

Couple questions. First on divestitures, just wondering if you could give us your take or your philosophy on divestitures because they seem to be ramping up a little bit here. Are you cleaning out the dogs or are you just necessarily richening the mix of the dealerships that you own. I'm just wondering who you are actually selling these dealerships to.

I think what we're doing is we're selling dealerships -- we haven't taken, as you look across the last several quarters and even the last couple years, we haven't had big gains and big losses. We've been able to manage our ways out of those. And I think that as we look here in the U.S., probably between $275 million of our $370 million came out of the big three.

So you're basically clearing out of a lot of your big three or Detroit three exposure?

I wouldn't say all of them, for sure, because we have some great brands in certain places. We had one store in Florida that we didn't need. We had some opportunities to move out of South Haven, Mississippi, and these were ones that were -- in fact, we coupled, in one case, say a domestic with a foreign name plate because it was a market that we didn't have any scale. We couldn't get consolidation. We had the CapEx, we had to do it. It made a lot of sense to do it. And many cases we've had the opportunity to sell these to dealers who were in that particular area. And as we're looking at the OEMs, they are looking at some of these divestitures that they could use these potentially to help them with their minority quotas and there's no question, as the OEMs rationalize, you read the paper, Ford, GM and Chrysler are all at these points trying to divest it or even in Chrysler's case, trying to make an alpha point where they can take the Jeep brand, the Dodge brand, the Chrysler brand and put it together, so we've helped them in some of those cases.

Then if we could take a look at the parts and service. I mean your margins there continue to drift upwards and expand. Is there anything more going on than just increased capacity utilization from your service fees in your auto malls, or is there something unique there going on between mix of warranty versus customer pay? I mean I'm getting the impression you're getting economies of scale that other dealers just can't get. I'm just trying to understand what the limit is there and how far you can take this.

Well, I think -- look, number one, there's no question that there's a mix change to customer labor from warranty. Also, we have really gone into heavy Saturday, Sunday services, where we're offering the quick service and with that we get some high margin on that business, which certainly helps. And, remember, once we get scale these service writers and the people who are writing the service and the things we have were basically variable, but I see better utilization and with the facilities we have I think the productivity is much, much better.

Do we get up to a point where you see a 60 handle on this gross margin?

Get to 60, you say?

Yes, I--

I think there's some -- I think we got some stores today that are over 60. And remember, if you own a premium luxury car, you're probably not going to take it into a small shop to get work done and when you look at BMW, where they have a full circle program, we're getting those customers back in because BMW really pays for that. So that's a real benefit, too. So to me I think there's a migration in many, many cases, where, where we see the customer wanting to go back to the OEM and that's a benefit. Also with our body shops, we have, I think, 41 body shops today and we're getting in directly into the dentless repair business, which helps us in our margin. So I wouldn't say it's one specific action item. I'm sure the other, our peers are doing some of the same things, but we see it where we have a mall, we might have a major body shop. We'll also have a quick repair site where we can do dents in fenders and bumpers all in the day when the car is in for service.

Okay. Then lastly, just on credit trends. I understand that on a net basis you're not seeing any big changes, but are you seeing any changes in lenders backing away and maybe the captive is stepping in to back Phil or any change in terms that are out of the ordinary?

Well, I can tell you that today, as we look across the broad spectrum of our captive finance sources, I see strong buying. And the big thing that I'm watching is, is there any deterioration on buying used because that's so important that we have the benefit of the used car. And I think the credit worthiness of the premium luxury customer might be higher today. But we're not trying to put deals together that are with marginal credit. Again, I talk about the leasing side. We've also, what we've done, we've looked at our preferred lenders. We probably had, don't hold me to this, we could have had 120 banks that we were doing business with and Whit Ramonat and the team on the financial service areas decided that what we would do is reduce those down to under 20, so we give them more volume and based on that, we get more benefit from the standpoint of rate and also our ability to get some override here at the corporate level.

Great, thank you very much, Roger.

And our next question is from the line of Rex Henderson with Raymond James and Associates.

Good afternoon and my congratulations to Roger as well on the victory of the -- your racing team at Daytona. It was a terrific win.

I hope we can say that again next year. Thanks a million.

Couple of questions. First of all, I want to focus on the guidance. Can you give us any quantification of what the contribution of SMART car and that operation is as to your earnings guidance for next year?

We have said $0.08 to $0.10, and a lot of that has to do with us hitting the mark at the 25,000 units. And again, as we're ramping up our people and some things we have to do in the marketplace, we got smart one in our service, in our sales sight, and it's really keyed on are there any product issues. Is there any issue over in production where they can't get pieces? We read here in the automotive news where certain vendors have issues and can't produce product and that shuts the lines down. At the moment, remember, we're a distributor. We only can sell those cars when they show up at the port. So that would be one that is a variable as far as I'm concerned.

Okay. Another is can you quantify what the EPS benefit of lower rates is versus this year? How much--

I think that based on -- in our guidance we have the current interest rates and I think we said every 25 basis point reduction is about $0.01.

Okay.

So it's going forward, though. That's not -- remember, I said our guidance is based on the current, on the current rate.

Okay. So with rates down, say 200 basis points, 225 basis points, you're looking at $0.07, $0.08 in benefit year-over-year?

No, I would think it would be lower than that. I can't quantify it right now.

All right, a little lower than that, all right. Finally, I wanted to get over to a little bit about costs and the expense structure, which we've talked about some already. Have you -- do you have any idea of what your fixed coverage ratio is, that is parts and service gross profit versus fixed operating expenses in the stores, and where you are now and where you would like to be?

Well, I think if you looked at the Company on a worldwide basis at the dealership level, we're at about 63%. And if you include the corporate expenses on top of that, we would be down probably somewhere around 61% to 61.5%, but we have stores today that are over 100%. But as you add in the CI that we're mandated to do, as you look at Mercedes coming in, we've got this auto house concept is going to be a big cost to every Mercedes dealer going forward, those add to costs which, which drive, certainly drive that fixed coverage down. But every place, and you look at out in Phoenix and in San Diego, those places are running I think north of 80% now and they have had huge expenditures back three to four years ago. So we see it paying off once we get the traction.

So is it fair to say that 80% fixed coverage ratio would be a target for you longer term?

I think I got to get to a number with a seven on it first.

Okay, all right. And finally, follow-up question on credit availability. Any change in terms on the lower rated borrowers, in the used car business for lower rated borrowers, are they requiring more down payment or just making any adjustments to the kinds of offers they are making?

Again this is a question it would be hard for me to answer, how far down you go on the credit scoring, what's happened as far as that buyer is concerned. I would assume that with the volume that we do, with these captures, because we are vertically integrated, I think that less than 10% of our business is subprime. So, those would be deals that would have to have some support. But I don't think that's at the moment I haven't heard anything directly. People have said, wow, Toyota or Nissan or GM or someone is much tougher at the lower levels, because what we've tried to do, have a few select other suppliers from the standpoint of non-OEMs and then we go vertical with the OEMs and to me, it's an aggregate. I look at the loss ratios every month and all the captives on our business. And I would say at the moment, I don't see a deterioration that would think that the buying habits at the banks or the OEMs would get tougher on us, at least in the next quarter. Now, it could change as this whole market changes.

Okay, thanks. That covers my questions.

Thanks. And our next question from the line of Jonathan Steinmatz with Morgan Stanley. Please go ahead.

Good afternoon, Roger.

How are you?

Doing well. First question is on the used side. Your per vehicle retail's held up very well, they were up 25.06 versus 24.36. Can you just give a little bit of color on how that looked domestically versus internationally? And I don't know if you have this number, but what's your large pickup and large SUV exposure as a percentage of total because that's the area of Mannheim that are pretty weak.

Well, we don't have a lot, other than our domestics, we don't have a large amount of trucks from the standpoint -- obviously there's SUVs. We have seen some deterioration in SUV from the standpoint of the market. But remember, the majority of those, if you're thinking of X 5, you're thinking of the GL, you think of the Audi, the Q7, these vehicles, most of those are leased, so we don't really see the residual deterioration there. And I think that when you look at the average gross profit in the U.S. in the fourth quarter, it was down roughly $100 and it was up about $300 in the UK.

So again, we get the benefit. In fact in the first quarter this year in the UK we bought several hundred BMWs right at the end of the year because it was an opportunistic buy. And when we spread those out over the 15 locations, that will be a real opportunity as we clear the first quarter. So I think that it's inventory. I think that the mix that we have, and we have to be in the used car business. In fact, and most of the manufactures today are requiring us in many cases to take the used cars that come off lease, but they will mark them to market for us so we don't have a high risk there.

Just so I have clear what you said on the BMW side, you bought some basically nearly new stuff that you'll sell used in the first quarter and it will come through the P&L in the first quarter?

That's right, absolutely.

Okay.

Those would be factory cars, demos, et cetera. And you know what they always want to do is move those out and I think our guys did a great job over there. In the past, we would have to have preregistration cars, which would dump into this year as used cars. We didn't have that this year, we were able to buy these cars as used and give us a better pricing on them, plus you get the benefit of the full support on the finance rates because they give you those vehicles as new vehicle rates from the standpoint of financing. CPO, by the way, it continues to be strong. There's lots of advertising and in many cases they almost give you a new car warranty if you have a CPO within a certain limited mileage.

If I could switch to the service and parts side for a second, on the 5.5% comp that you posted, can you also talk about the breakout, U.S. versus international, and talk about how customer pay looked relative to warranty?

I'm only -- I don't want to guess -- I would have to guess on customer pay and warranty. I'll get Tony to give you that, but we think if you exclude the full circle programs, meaning where the customer brings his car in because he bought the maintenance, you pull that out, there's no question that we probably are 60%, 65% customer labor, maybe going to 70% from the standpoint of warranty, 65/35. And when you look at same-store, our revenue in service and parts, we were up 3.4% in the U.S. and 9.9% internationally. So again, giving us really 5%, 5.5% is very positive. And that's again because of, because of our capacity and that to me is key. Even if you exclude the foreign exchange, you're sitting 3%, 3.2%, 3.3%.

So lastly, if I were to just drill down a little further on the 3.4% U.S. comp that you gave on the parts and service side, is it the large campuses that are notably higher than that and that are what are driving that or is it very brand specific where there are a few brands that are powerful, how would that look one layer deeper?

I don't have that info. I'll get Tony Pordon to give you that back. I can't give you that detail here.

Okay, thanks, Roger.

Our next question is from the line of Scott Stember with Sidoti and Company.

Hi, Scott?

Hi, how are you doing, Roger?

Good.

Could you maybe just talk about the UK. It seems like for the most part of the last couple years you guys have been out performing the market as a whole over there. Can you talk about trends in the fourth quarter and also how you are shaping up versus the market so far this quarter?

Well, I think from a standpoint of the UK, we've got the right brand mix. There's just no question about it. We have been premium luxury. I think we're 90%, 92% or 93%. We have some Chrysler/Dodge/Jeep, which are integrated with our Mercedes stores. and the rest of it's all premium luxury and our volume foreign, we have some Toyota and I think we have one Honda store at this point, so primarily it's mix. There's no question that our ability to consolidate, just talking about this buy on used cars, when we can walk in and make a buy like that on used, that really resonates throughout the, the whole network from a standpoint of BMW.

And as far as the acquisition, the revenues of $350 million in incremental revenues, that includes incremental revenues from 2007 plus new acquisitions yet to be announced?

No. That would be what we're looking at. Obviously, with our revenue today, it's new revenue that we'd have on an annualized basis. Now, we would have 10 months of it or 8 months or 9, depending on what it is. That would be the new line. And look, that number could move up and I think we've been pretty consistent over the years. But again, we're looking at our balance sheet and, again, weighing acquisitions to stock buyback and then also I would rather be in a good credit position as we look out over the next eight to 12 months.

Okay. Just last question, housekeeping on that, the asset impairment charge in the fourth quarter. Could you elaborate a little bit?

Yes, I was waiting for that question. Basically we had $6.3 million on a pretax basis. And as you know back in 2000, we invested in Cars Direct, which is now called Internet Brands, and they had a public offering in the fourth quarter, which was fairly choppy and based on that we elected not to sell any of our stock. We had to mark it to market. We think there's a long runway with those guys and in fact, our smart one sales side, they have been the engine room for that. That was, of the charge on a pretax basis, was about $3.5 million and the balance -- we had, we had one section of stores that we had put in the DO line, discontinued, that we were going to sell. We've made some reengineering, cut some costs and other things and we decided to put them back above the line. So because of that, we had a catchup on depreciation, which was about $2.8 million. And that would be the total.

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

And we go next to the line of Matthew Fassler with Goldman Sachs. Please go ahead.

Thanks a lot. Good afternoon and congratulations once again.

Thanks.

Just a couple follow-up questions at this point in the call. First of all, if you could talk a bit about the F&I trends, perhaps what you saw in the U.S. versus the UK?

Well, of course, again, our captives have really worked well with us from an F&I perspective. We were up 2.3% on a same-store basis in the U.S., we're up 37% in the UK. We're up almost $257 a unit. That's because our penetration was up 2% over there and we're much more proactive now on the after-market products, things that we had sold over here that really are just getting into, the clear shields, the GAP, and some of the other products that we sell here and I think that that's really working well. Mike Pierce is heading that up, has made a huge impact on that. And again, we have picked selected vendors on the finance side that we can aggregate more volume for them, plus then we get better rates because of our scale.

Great, that's helpful color. Then just a couple of kind of mop-up items. Can you talk about your new and used comps ex-currency, I guess on a global basis, that would be helpful.

Well, if you looked at new vehicle, we reported 1% and if you excluded foreign exchange we would be negative 0.3%. On used vehicle we said 10% and for the quarter we would be 6.2%. And I just said service and parts, 5.5%. And after foreign exchange we had 3.2% and a F&I 10.9%, 8.8% after FX, so that should give you a pretty good indication of the impact. Again, for the quarter, though, with $66 million in revenue and less than $0.005, and I think if you looked at it over the entire year, it was about $0.04, or about $600 million, $400 million. $400 million and 4%, and $0.04.

And then my final question, obviously the tax rate looks to be a bit of a moving target, even without some of the one-off items you had this quarter. What should our thought process be for 2008?

We think it could be 100 to 150 basis points higher for next year.

Year on year?

Yes.

Of the full year. Okay. Thank you so much.

Thanks.

Bye.

And our next question from the line of [Don Metter] with Bear Stearns. Please go ahead.

Hi, Don.

Regarding SMART car, I'm happy to say, Roger and Tony, I've seen the car in Beverly Hills and west Los Angeles.

They have done a great job out there and I didn't get a chance to say it on the call, but since you brought it up, I looked at -- we're doing a callback at a CSI feedback and on a small group, we -- this is please rate your overall experience with your SMART 42 so far. On 100% we had 68% said extremely satisfied and 31% said very satisfied. So, that's pretty good, pretty good feedback. We're seeing, as I said earlier in the call, we hope to have 2000 of these vehicles on the road retail by the end of February.

This weekend there's a large charity in town and the SMART car's being put up either as a door prize or an auction item, so that will help on your exposure. My question on SMART car, though, will they end up in the rental fleets, will the rental guys have them, Roger?

Absolutely not.

Good.

We think right now there's such a demand from a retail perspective, we're going to try not to take that juice if we can help it. At this particular point, we have not designated any vehicles. There might be a company fleet or something, but they would be sold through the dealer and they would be at, hopefully, at full MSRP.

Roger, take that winning team to Fontana this weekend. We'll be you there.

Okay, great. I'll see you there, thanks.

Your next question will be from the line of [Nick Phillips] with Holden Asset Management. Please go ahead.

Hi, just a quick question on the acquisition side. I was wondering if you could just talk a little bit about the terminated rally acquisition and if there's anything we need to draw from that, whether it's Company-specific or industry-specific?

Well, Nick, obviously that was one that we had hoped to complete and really quite honestly there's even some ongoing dialogue, but we went to full contract there. We were doing our due diligence and I think at the end we had the ability to pull the plug and we did that, based on the contractive. We had not, in any case, in any OEM submitted any paperwork. So this wasn't an OEM-related situation. And as I said, there's still been some discussions on a going-forward basis. There's nothing to read out of there that would be a negative on either side.

Okay, thanks.

And our next questions, from the line of Derrick Wenger with Jefferies & Co, please go ahead.

Good afternoon, thank you and congratulations again. The CapEx, I think you gave at $195 million in '07, the gross figure. What was the gross figure you're targeting in '08?

The net figure is around $50 million and then the gross number -- I'm not sure. Let me get, let me get Tony to give you that. I'm not sure what it is, but it should be less than -- if we were at 195 last year, it would be, it would be down 15 million to 20 million this next year.

Okay. Thank you.

Thank you.

Thank you. We have no further questions. I'll turn it back to our speakers for additional comments or closing remarks.

Okay, everyone. Thanks for joining us and the comments and we look forward to talking to you after the first quarter. Thank you very much. Bye-bye.

And ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation and for using AT&T's executive teleconference, and you may now disconnect.