Penske Automotive Group Inc (PAG) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Penske Automotive Group first quarter 2009 earnings conference call. The call today is being recorded, and will be available for replay approximately one hour after completion through May 12, 2009. Please refer to Penske Automotive's press release dated April 22, 2009 for specific information about how to access the replay.

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

Thank you, John, and welcome, everyone. A press release detailing Penske Automotive's first quarter results was released this morning and is posted on the Company's website at www. Penske Automotive.com. Participating on the call today are Roger Penske, our Chairman; Bob O'Shaughnessy, our Chief Financial Officer; and J.D. Carlson, our Controller.

Before we begin, I would like to remind you that we may make forward-looking statements regarding Penske Automotive on this call. We caution you that these statements are only predictions and are subject to risks and uncertainties relating to economic conditions, interest rates, consumer credit, confidence, and spending, potential restructuring of the US automotive sector, and other factors over which management has no control. Our actual results may vary materially from these predictions. Any such statements should be evaluated together with the information about Penske Automotive in our public filings, including our annual report on Form 10-K.

During this call, we may discuss certain non-GAAP items, including adjusted income from continuing operations and adjusted earnings per share from continuing operations. As outlined in our press release today, our first quarter 2009 results include a $6.5 million, or $0.07 per share gain relating to our repurchase of $69 million of our 3.5% convertible notes. We believe addressing adjusted earnings improves the comparability of our financial results, and will be useful to you when evaluating our financial performance.

We would also like to point out a couple of changes in the financial statements accompanying our press release. We have adopted new accounting standards relating to our convertible notes and minority interest. Our prior year financial information has been restated, so the financial statements are comparable for all periods presented. If you have any questions about these items, please call me or Bob O'Shaughnessy for further clarification.

And at this time, I would like to introduce our Chairman, Roger Penske.

Thank you, Tony, and good afternoon, everyone, and thanks for joining us today. Today, we reported income from continuing operations of $16.2 million, or $0.18 per share for the first quarter. This includes the after-tax gain Tony mentioned earlier. The Company's performance in the first quarter represents an improvement over the fourth quarter of 2008. The improved performance is due in large part to the efforts of our entire team, particularly through their efforts to reduce costs and inventory levels.

As you all know, the first quarter was extremely difficult in the US and the UK, and our revenues declined 32%. Excluding the effect of foreign exchange rates, the decline was 23%. We experienced a significant decline in traffic and vehicle sales compared to the first quarter of last year, due to the continued weakness of the economy, lower consumer confidence, and rising unemployment. In fact, during the first quarter, US new vehicle industry unit sales declined 30% and market registrations in the UK declined 30%, including the March registration period. Our business experienced similar declines.

While the new vehicle market was difficult, it was a very different story for us in used vehicles. Our used vehicle business performed well, as total unit sales increased almost 2%, and were up 24% sequentially over the fourth quarter of 2008. And compared to Q1 last year, same-store used vehicle sales in the UK increased 3%. In addition, total gross profit margin on used vehicle sales increased 80 basis points to 9.1%, as consumers move down the value chain in response to the difficult economic times.

Let me update you on our cost actions. As mentioned on our last call, we initiated actions that we expect to provide approximately $100 million in annualized cost savings, excluding interest expense. Our cost curtailment efforts appear to be yielding positive results to date. Total SG&A declined $81 million compared to Q1 last year, including a $91 million decline on a same-store basis. The same-store decline includes a reduction in variable compensation due to the decrease in gross profit compared to last year. However, if you compare our SG&A as a percent of gross profit to Q4 last year, the ratio improved from 89.4% on an adjusted basis to 85% in the first quarter, and that's an improvement of approximately 440 basis points. Based on our projection of current SG&A costs, we think we're on track to achieve the $100 million annualized cost reduction we outlined to you previously.

I'm also pleased to note that despite the challenging market conditions, we are in compliance with all of our financial covenants included in our credit agreements, and this was included in our information we provided in our press release this morning.

Now, let's take some time to walk through the performance of the business in the first quarter. Total new and used unit sales decreased 19.7% to 57,500 units versus Q1 of 2008. New was down 32.1%, but the good news is used unit sales increased 1.5%. And Q1 total retail units increased 8.4% compared to the fourth quarter of last year. Compared to the fourth quarter of last year, new units declined 2.3%, but used was strong, increasing 24%. Total revenue was $2.2 billion compared to $3.2 billion last year, but was consistent with Q4 of 2008. When you exclude foreign exchange, total retail revenues declined 21.5% versus Q1 of 2008, but were up 4.3% compared to the fourth quarter of 2008.

Let's talk about same-store results for a minute. On a same-store basis, retail revenues decreased 34.5% versus Q1 of 2008. Excluding foreign exchange, same-store retail revenue declined 25.6%. The good news here is that same-store retail revenue was up 3% versus Q4 2008 excluding foreign exchange. It is also important to note that our service and parts business remained resilient, despite the difficult new vehicle market. Although same-store service and parts declined 12.2%, when you exclude foreign exchange, same-store service and parts revenue declined only 2.6%, and actually increased 2.3% in the UK.

Our service and parts business continues to be impacted by 23% reduction in predelivery and inspection due to the decline in new unit sales volumes versus last year.

Let me also provide the detail of our same-store numbers for Q1 this year compared to the fourth quarter of last year. New vehicle was down 5.9%. Used vehicle, up 19.4%. F and I of 16.7%. And service and parts, up 3%. This is versus Q4 2008.

Our revenue mix for the quarter was 64% US revenue versus 36% internationally. A year ago, it was 61% in the US and 39% international. Our brand mix was 5% Big Three. Foreign volume at 30%. And premium luxury at 65%. And that was consistent with the numbers we ended the year at the end of December in 2008. And our mix of adjusted operating income was United States was 40% and international was 60%.

Let me move to gross margin for a minute. Our 17.1% gross margin in the quarter was 168 basis points higher than Q1 2008 and 94 basis points higher than the fourth quarter of 2008. This was really driven by a mix shift to a higher service and parts revenue as a percent of total revenue. New margins declined 106 basis points to 7.3% due to inventory pressure and, I think, overall slowing selling environment during the first quarter. However, as noted, used vehicle margins increased to 9.1% of the overall strength of the used vehicle market. As expected, F and I expense had declined, consistent with the overall market decline. Our F and I decreased to $190 per unit compared to Q1 2008, but was only down $57 per unit when you exclude foreign exchange. It's also important to note that F and I was up $94 per unit from the fourth quarter of 2008.

Moving on to the balance sheet, we took significant steps to reduce our new vehicle inventories compared to the end of last year. As a result, I think our inventory is in great shape today. Total vehicle inventory was $1.3 billion, which is down $233 million compared to December of 2008, and on a same-store basis, it was down $245 million. If you go back to the first quarter of 2008, our inventory is down $438 million.

At the end of the quarter, our worldwide days supply of inventory improved compared to the end of the year. We were at 69 days at the end of March this year compared to 105 at the end of December, and our used was at 32 days as compared to 42 days at the end of the year.

Moving on to CapEx in the first quarter, our gross CapEx was $27 million and we did not execute any sale leaseback transactions in the quarter. We continue to expect net CapEx in 2009 to be approximately $40 million, which represents a 70% reduction from 2008.

Turning to our liquidity and debt, we have $1.2 billion in floor plan notes outstanding, representing a $243 million decrease during the first quarter. Substantially, all our floor plan is with captive finance companies, not banks, and our relationships remain very strong. Of the $1.2 billion in total floor plan, approximately $1 billion is with Toyota, Honda, BMW, Daimler and Audi.

Looking at our non-vehicle debt, we also have our credit facility in the US that matures no earlier than 2011 in September. Our credit facility in the UK matures in August of 2011, and our 7.75% subordinated notes mature in 2016, and our 3.5% convertible notes mature in 2026. In total, we had $1 billion of non-vehicle debt at the end of March, approximately $295 million was available under all of our credit facilities, both in the US and internationally.

Turning to our repurchase authority, as you know, we repurchased $69 million of our 3.5% convertible notes for $52 million during quarter 1. As a result, we now have $306 million face value of these notes outstanding, which are recorded on our books for $280 million after the adoption of the new convertible note accounting standard that Tony mentioned earlier. After these transactions, we have an additional $44 million of authorized availability remaining under our program to repurchase outstanding stock, debt, or convertible debt.

Looking at acquisitions in the first quarter, we completed one acquisition in the UK, which we expect to generate on an annualized basis, approximately $75 million in annualized revenue. This represented an opportunistic purchase, as largely a result of the current economic conditions in the UK and was completed at an attractive multiple that included less than $2 million of goodwill. Smart USA during the quarter, we wholesaled 5,700 Smart Fortwos, representing a 16% increase compared to the first quarter of last year. For the year, we expect to wholesale approximately 20,000 Smart Fortwos. During the first quarter, NADA issued its franchise index rating, and I'm pleased to report that the Smart franchise ranked fourth in the United States behind Lexus, Subaru, and Toyota. I think this ranking validates the approach we took in building a Smart dealership network, and recognizes the outstanding Smart retail partners and our entire Smart USA team.

Before I open it up for questions, I want to comment briefly on the situation with Chrysler. We do not expect this situation to have any significant impact on our liquidity. We currently operate three Chrysler businesses in the US and five in the UK, and we have sufficient liquidity to ensure we'll meet our inventory and other operating cash requirements at these stores. Obviously, we'll continue to monitor this situation closely.

Another comment I want to make is on Saturn. Obviously, there's been a lot of comments in the press this morning regarding our involvement with Saturn. While I confirm that we have an interest in looking at the future opportunities with the Saturn brand, Penske Automotive has not made a proposal to General Motors for this business, and the timeframe involved is extremely tight. As you know, we buy and sell dealerships as part of our normal operations. We have the experience in the distribution business and are constantly looking for opportunities to grow our business and further diversify the overall operation of Penske Automotive Group. At this point, I will not be making any other comments on Saturn.

Again, thanks for your attention. We'll open it up for questions.

(Operator Instructions). We'll go to the line of Matt Nemer with Thomas Weisel. Please go ahead.

Good morning, Matt.

Good morning, Roger. Just a couple of questions. On the service business, is there a way to quantify the impact of the change in BMW warranty rates and then the Lexus recall? Do either of those have a significant impact one way or the other?

I think number one, one might offset the other. Obviously there's been a big recall with Lexus throughout the country. I think it's seven hours per car, so we've had the benefit of that in the first quarter. Then as you know, BMW reduced their warranty support on labor about 20%. So one offsets the other, but I think the good news is when we track our BMW stores, we've been upselling more hours per RO on the retail side, so at this point, I think it was probably not either a positive or a negative for the quarter.

Okay, and then secondly, if you look at the used profit per vehicle, obviously had a very big move sequentially. How much of that do you attribute to the change in vehicle prices during that period? Obviously used prices have been quite strong, and I guess how sustainable do you think the current margin profit is per unit?

Well, I think there was somewhat of an arbitrage when you think about it. Low used car prices, and we had high margins that we could generate on those while the supply was high. As the supply has tightened up both in the US and the UK, I think there will be some downward pressure on used. But I think today when you look at the retail business model, and I'll take a minute here, we really have three levers. We have new, we have used, and we have parts and service. And the continuing stream of recurring revenue in the service and parts has given us good support over the last quarter.

But on the used side, I think we're seeing the customer really moving down because the new car price, there was such a difference. And with residuals down on used, it was a better value for the used car customer. I think we're going to see that probably decline as we go into Q2. And I think we won't be able to sustain our 9.1% margin. And I think that we have the cost of our used was going to go up, so that's going to have some impact on our margins as we go forward.

Okay, and then turning to SG&A, do you have any sense for how much cost actually came out during the quarter? In other words, did we see the full impact, or is there maybe a larger impact of SG&A reductions going forward in the second quarter?

Well, I think I reported that we had a $91 million SG&A reduction on a same-store basis, and $81 million overall. But I think the key thing here is, when you think about SG&A, you have your variable SG&A, which obviously are your commissions that are paid on the new/used and also in your parts and service. Then have you your controllable expenses. And I would say 40% of the reduction that we had was variable and 60% is controllable. And I think with our continued diligence on these areas, we're going to see that continue to grow.

But you don't expect to see the same save and additive quarter to quarter. You're going to see Q1, Q2 with big saves, and this is without any interest save obviously. But we've cut our advertising and marketing. We've had corporate costs going down. We suspended our 401(k). We've had reductions in demonstrator costs and also service loaner costs have come down. We cut our directors fees.

Senior staff took reduced and waived their bonuses, so we've had a number of things that we've been able to do. Overtime is down significantly, and I think when you look at the number of employees, we talked about 1500 coming out at the end of the year, I think we're over 2000 now. So we see those continuing. There's some office consolidations we're looking at, and we're really looking at every single variable area we have. I would call these controllable versus variable, and I think we're in good shape. And I would expect that we'll maintain this level and at the end of the year, we'll be able to demonstrate we took $100 million out.

Okay, great. That's all I've got. Thank you.

Yes.

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

Hi, Rick.

Good afternoon, Roger. Can you talk about the trends, the pace of the business during the quarter, and we're hearing about a pickup in March and any comments about April would be helpful.

I would say we started out January, it was kind of a pokey bunch. We had a short month in February. Then March picked up. We had the benefit in the UK of, certainly, the registration month. We had much stronger used car business than we thought. And our parts and service picked up in March. So to me, that was a positive. As you look at April, there's really -- it's hard for me to give you any guidance on April because at this particular point, we have tax time and we don't have a feel of our numbers at this point.

Got you. The margin pressures and new cars, I'm wondering if that is driven by any specific brands or geographic regions, and what's the outlook there now that you've reduced inventory?

Well, let me say this. I think there's pressure on all new, because what happens, is our new car sales guys are -- they see this business much slower, so if commissions are flat, they are trying to sell anything they can. So unless you've got good discipline at the desk, you're going to see a reduction in new car margins.

The other thing is, it was so easy to put someone in a slightly used car, some of these, what we call brass hat or factory cars, there was an easier ability to sell a used. And I think that put pressure on new margin, yet we got the benefit on the used car margin. So to me, it's going to be important to see what happens to the leasing. With residuals really tanking in the fourth quarter and the major leasing OEMs took big write-offs, so obviously they adjusted residuals going into Q1. So the leasing rates were way off the map and I think we saw a reduction in leasing. So now people have to look at financing these vehicles. So that's had an impact I think also on the margin.

Also, it's interesting that the vehicles that were selling, and you start to look at what is your overage inventory, it's mainly vehicles that are loaded and higher priced vehicles. So the mix is changed, and that doesn't give us the chance for as high a margin also.

Got you. Wondering also if you can shed some light on your discontinued operations. It looks like it's not very big.

We have only -- we have nothing in the US that's discontinued and we have four small businesses in the UK. So there's -- I think on an overall basis between assets and liabilities, we have, we have some small amount. But really, really nothing of any substantial amount.

Differentiating compared to your peers. Thank you very much, and good luck.

Thanks, Rick.

And we'll go to the line of Matt Fassler with Goldman Sachs. Please go ahead.

Hey, Matt.

Hello.

Hey, Matt, how are you?

Good afternoon. Sorry about that, guys.

That's all right.

Few questions. First, a couple on the strategic front. What role do you think, Roger, Big Three rationalization will have in the new car margin trajectory? Do you think that we're going to be in a period of some of these dealerships ultimately have to go away, where you could see some sustained pressure on the market. Or do you think that that will not be felt by, particularly by you guys?

Well, number one, I hope that the current situation that Chrysler's in moves quickly because that will set the stage, hopefully, for GM. I see the Big Three. Ford, obviously, is in a different neighborhood right now, but I see a smaller organization, smaller companies. They will rationalize the dealer force. They won't have the debt that they are carrying, and in all cases, they have got some good products.

I think specifically at Chrysler, they have got a great truck line. Minivan, they have been leader in the industry, and with the Fiat expertise on powertrain, and also alternate fuel vehicles, I think you're going to see Chrysler come out a stronger company. And quite honestly, as you look at us strategically, we're going to take a good look at some of these markets where there might be opportunistic Big Three dealerships available.

So to me, I think that at the end of the day, we really see this as an opportunity. But to me, it's going to be timing. The longer this thing hangs around, I think the consumer confidence regarding Big Three purchases will be debted. That will hurt us and that gives maybe the foreign name plates the chance to get more market share. Obviously, they have picked it up in the first quarter.

Got you. Secondly, any insight into the performance of PKL during the quarter, particularly given the challenging credit environment?

Yes, we recorded a $200,000 loss in Q1. Since we made our investment in PTL in the second quarter, we've contributed about $10.6 million in equity earnings and we received about $23 million in distribution. So, obviously it's been a great investment for us. This first quarter is seasonal, so we don't see the strong earnings in Q1 typically.

And when you look at the business,the transportation business is really the leading indicator of an economic slowdown or recovery. And total freight transported across the US in the fourth quarter was down 25%, and it's down another 11% in Q1. And I think that as I said our revenues are somewhat seasonal, but our contract revenues, which is our leasing business, is approximately 75% of our revenue, was only down 4%, and that was really lower mileage run by customers. It wasn't the fixed side of our business.

But consumer, which is the one-way business, it's ironic, we have more transactions but the revenue per transaction is down as people are moving less than 500 miles. It's a data point that we picked up. But commercial rental is definitely down because the extra trucks, which are typically, many of them run by our lease customer, they just don't have this spike in business.

What we've done is reduced our rental tractor fleet from about 14,000 down to 9,500 to get the utilization requirements that we need. And certainly when you think of the other piece of our business, which is logistics, it's been impacted because some of that's automotive and that obviously has been down because many of the plant closings. But overall, we feel good about the business.

We get tax benefits from the business, and I think that we're in the process today of ordering -- offering some shorter-term leases, two and three years, which have been quite attractive to customers. We've got cost reductions going on that we're benefiting between PAG and PTL, where we're aggregating our purchases and we think that's also going to help us drive some more SG&A down. So overall I would say we're right in line with our expectations.

Finally, two cleanup questions on the financial side. Tony, you had given us guidance as to the impact of the converted accounting change, but your convertible issue is bigger prior to conducting the buyback. So what is your current estimate of what the impact of that change will be on 2009 earnings, please?

Bob, do you want to answer that?

Yes, we'll probably see $14 million on an annualized basis in -- for the balance of 2009, 2010, until the put date in 2011.

So $14 million annualized, and that includes the first quarter run rate?

Correct.

That will be about $0.10.

So $0.10 per share, that's great. And then finally, you gave us the geographic mix of profits. I believe -- I think you said 60% of operating profits came from overseas and 40% from the US. And correct me if I'm wrong on that. I'm just curious what that number was a year ago, if you can remind us.

I'm not sure what it was, Bob. Do you have that? Why don't we -- we'll call you with that number. We don't have it here right now. Maybe we can get it before we're done.

61% -- I'm sorry. It was 44% US -- 60% US -- sorry. 54%, 46%.

54% US last year?

46% US, 54% international last year.

Got you. So it sounds like the US has taken a somewhat bigger profit hit year on year than the international business.

Well, I think the other thing is, when you think about the UK, we're in such a strong marketing position there in the way the geographic dealerships are set up in market areas, we don't have the inter brand competition. So we were able to get some margin.

And the used car business, I think if you looked at the two factors, new versus used, we were 1.25 used for every new vehicle sold in the UK, which is probably the highest it's ever been and with a high margin, that gave us nice profit for the quarter.

And that profit mix includes the impact of currency?

Yes, sir.

Okay. Thank you so much.

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

Rich, how are you?

Good afternoon, Roger. Could you discuss on a regional basis what you're seeing? I know Phoenix has been under pressure for some time. Some of your peers have talked about California potentially stabilizing over the last one to two quarters. Just want to get your thoughts on the western half. And then also the northeast, what you're seeing there right now.

Well, that's a great question. I would say this, that as you looked at the quarter, the West Coast was on budget. We saw Northern California came back a little earlier. We're not in Los Angeles, but our businesses in San Diego performed well. So I would say California was decent.

We're still being challenged in Phoenix. It's a big market for us. It's over $1 billion in revenues, it has been in the past. And again, it's still challenged. Moving into Texas, Texas was decent. But as you start to move to the Midwest, I would say we were down for the quarter. The East probably was hardest hit ,and I would say it was the northeast up in Rhode Island with 12% unemployment.

Then you go all the way down to Florida and we see a big impact in Florida from the standpoint of the Florida area. So, again, New Jersey, New York, because of the financial meltdown there, we've seen some of our customers that are buying some of the higher priced vehicles. We haven't seen them come into show rooms.

Right, right. Would you say Florida is getting less worse, or are you still kind of on--

Listen, I had a review with Bernie Wolf yesterday. We talked about it, and we don't see anything happening in Florida right now. At least we don't. And I understand our peers are in the same situation. We're in Orlando and Palm Beach and we don't see any break there at the moment.

So it's cost reduction. It's facility, where we're trying to consolidate. On the other hand, the UK, I would say, the business has been decent and at least the forward look that we have at this point is decent as we go into the second quarter.

Do you expect much improvement, much benefit from the UK scrappage program?

Well, scrappage program, it's interesting you ask. In Germany, I know we had -- there was 600,000 cars earmarked. They raised that, and that was a real boon for us in our joint ventures, where we have Volkswagen and Toyota. But not a real benefit for the premium luxury. But in the UK, you have to have a 10-year-old vehicle. And the average age of vehicles are six to seven, and you have to have the OEM partner with the dealer and it's about $1500 for the OEM and $1500 for the dealer.

And I think that's going to be problematic because we don't have that many older cars. And we won't see any benefit of that at all, I don't think, or very, very minimal, because 95% of our business is premium luxury.

Right, right. Okay. And then on the certified preowned, what was the mix there this quarter? That? Then what are the trends there over the last 60 days or so?

I would say it's about 40% would be certified. One thing that we're finding out, because the finance companies are getting much tougher on stipulations in advance, we've got to be careful we don't spend too much money on reconditioning because that raises the cost of sale. We just can't get the customer financed.

I think you're going to see the certified preowned maybe level off here. And on the other hand, obviously we get some benefits on the financing through the OEMs on certified. But talking with Audi yesterday, they said that their full service program has been outstanding, that 80% of the cars that are coming off lease, that dealers are buying. So those programs are working well, and I think that gives the benefit of raising residuals, which just helps us give the customer a lower payment ultimately.

Right, great. Thank you so much.

And we'll next go to the line of Joe Amaturo with Buckingham Research.

Hi, Joe.

Could you just give us a sense of what the used margins were the US versus UK?

I think I mentioned earlier that the margins were significantly higher in the UK. We were up in the UK 160 basis points, and we were down 40 basis points from 9.8 to 9.4. So as you know, in the past we've really lagged the UK and they picked up. So when you look at it on an overall basis, we were at 9.1 versus 8.3, and there was some benefit we get in the UK because we have Sytner Net. And this is a case for anything we don't retail, we put on an auction, which it's a 24-hour, seven-day a week auction and that produced some good results this quarter, which also helped us on our used margin.

Right. Would you say there's more -- you mentioned that the first quarter trend shouldn't continue into the second quarter. Do you think there's more vulnerability in the UK with respect to the used business or in the US?

I would say the UK, because, we moved up -- that 160 basis points is significant and I think that right now, with used cars tougher to buy because there's probably a shortage, we're going to see that that margin, we'll have to pay more for the cars, either trading them in. And also if we buy them out one at a time and the buyers aren't only going to be able to stand so much in price, and also the advanced rate from the finance companies.

So I think you'll see -- there was over -- just looking at Q1 versus a year ago, we were down $2700 per used car transaction from a sale price. And I think that's just proving that the consumer just is going to pay --spend less. And some of that's driven because of the advance rates from the finance company. But that's where we are.

All right. Do you have any -- maybe I could get this from Tony later, but I'll ask anyhow. Is there a split between UK versus US with respect to the percentage of gross profit in the used business?

Let me -- I'll have Tony follow up on that. We don't have that here with us. I don't want to give you a bad answer. I'm sorry.

Right, and I guess the next one, you mentioned three Chrysler dealerships. Could you quantify the receivables exposure and the inventory values?

Well, we looked at our total exposure. Accounts receivable is probably $1 million from Chrysler in the US. And, remember, because of the Daimler relationship and the sales companies around the world that Daimler had, they were the ones that managed the Chrysler business. And we had five stores, one exclusive, and I think four that are integrated inside our Mercedes stores. So those businesses continue to do okay. It's good parts and service business. And the international part of Chrysler is not in Chapter 11. So we have minimal exposure.

Our floor plan line is with Chrysler Financial. We're paying those cars down. We're looking at the GMAC opportunity. GMAC during bankruptcy will charge dealers who go on from Chrysler at 6%. Then after bankruptcy, they will probably come back to more of a market rate. We've decided to use our cash and pay down the cars, or buy the cars as they come in so we can mitigate the higher interest costs on a temporary basis.

That being said, you probably don't have that much of an issue with trying to find a new use for the real estate.

Well, we would have from the standpoint if we got out of the business, we would have some exposure on the real estate.

Okay, and then one last one for maybe Bob. If you could just give us a sense of what the free cash flow generation was in the quarter.

Can I get back to you with that?

Yes. Thank you.

And next is John Murphy with Merrill Lynch. Please go ahead.

Good afternoon.

Hey, John.

I've got three questions for you. First, Roger, when we think of this, of the model and take a step back and talk about the cost cutting that you're doing, along with potential market share gains and the brands that you represent in your dealerships, what kind of leverage do you see in the model as we step forward into 2010 and 2011 when sales recover, maybe to levels similar to what we saw in 2008, back to $13 million, $14 million, $15 million. Are we going to see a lot more earnings power at similar demand levels than we have in the past?

Well, I think a couple things are going to happen. We'll have a smaller dealer network, obviously, at least what we're hearing. So there will be less retail competitors. Now, I don't know whether the car guys will ever get rational and try to hold for margin, but that's yet to be seen.

I think what you have to do, though, is look at what kind of a profit level we generated during the times when we had those types of volumes. And then I think you've got to take the savings that we have and look at that, on a per share basis.

Obviously we're probably all spending less in marketing today than we might have spent in the past. I think there's been a major mix change from traditional electronic and newspaper to internet. And it's been -- we see it being very efficient. So I think we're going to have costs out. And we're hoping that we get some wind in our sail in the market and that we'll see a nice increase in profitability.

And our goal, obviously, as we go forward, we have to get a better return on sales. Because what's happened, we've grown this business since 1999 from $1.2 billion to over $11 billion, but a lot of that's been through acquisitions, same-store growth. But we've also invested $1.7 billion or $1.8 billion in facilities.

And so we need the volume because at the present time we see, as you look at rent, all related rent, that means your rent, taxes, insurance, your guard service, cleaning, et cetera, it's probably up 1.2 percentage points because of the volume drops. So we have to be sure we fill these stores in order to maintain more profitability as we go forward.

Second question, on inventory, you did a good job of cutting your units in the quarter year-over-year certainly, but also sequentially. Do you see the potential to run in a lower inventory level than you have in the past and just run the business much more efficiently and really not play this big buffer that the automakers have been trying to push on dealers for a very long time?

Well, I think the key thing, is when you start -- I want to talk about the US now because that's where the majority of the inventory is. We've taken 50 million out of our Honda inventory. We lived with Honda, 35, 40, 50 days, was pretty much traditional. And then the same thing when you look at Toyota, these inventories have gone up, but talking to the senior management in both companies, they are committed to drop inventory.

Now, to me, I don't think we'll get to any better position with Toyota and certainly Honda. They are our big volume stores. But what's happened is some of the premium luxury, I know we've gone up because they have added models, the complexity of models, equipment, et cetera, and there's a longer lead time on those in many cases when they are built overseas. There's going to have to be more discipline in some of the premium luxury nameplates.

But I think sales fell so fast in Q4, they really had to get into Q1 to make the changes. And I think we're going to see this inventory come down. In fact, we're probably going to be short certain models as we go into the next quarter. The Q5, for example, at Audi already is short. We'll see -- some of the C and E class will see this done.

I think we just have to be sure that the manufacturers rationalize their productions. We've been high on the Big Three, obviously, with the plant shutdowns over the next 30 to 60 days, we're going to see that come way down because we're going to be selling only out of inventory. I'm sure there's some vehicles in the pipeline coming to dealers.

And then just lastly, sounds like you made a very opportunistic acquisition in the UK, very low cost, $75 million transaction. I was wondering if you could shed some light on details there, and potential other opportunities to make what sounded like a very, very opportunistic acquisitions.

Well, I think what's happening, we haven't maybe seen it yet here in the US. But around the world we're seeing people who didn't put the proper amount of capital into their businesses, and as the business went away so quickly, they were really under water and couldn't get financing. So what's happened with the OEM relationships we have and the fact that we do have capital availability, they tap us on the shoulder and we're able to go out and negotiate certain of these purchases.

And that was exactly the case in the UK. We picked up two Porsche and one Ferrari dealership right in our heartland there. And again, where it gives us leadership in those brands throughout the UK.

I would say in the US, I really haven't seen a lot of things. This hasn't come by our door where people are knocking with lower multiples, but I can tell you this, that the days of the 4, 5, 6 multiples, I think they are gone.

Thank you very much.

Next we go to Scott Stember with Sidoti and Company.

Can you go over the customer pay side of parts and service, what was that in the quarter versus warranty?

65%, 35%. 65% customer pay and 35% warranty.

On a comp basis?

I would say we're down probably between 5% and 10% on customer pay and we were up about 1% overall in warranty.

Okay. Going over to Smart for a minute, I think in April, we saw a pretty sharp decline in Smart car sales. Have you factored that into your guidance that you gave in the press release of 20,000 units?

Yes, we have. We saw this coming and when you look at -- the peer group that we're in, they were all off. And they've been off and I think that we saw this coming earlier in the quarter. And the good news is we have a 90-day forecasting process with our friends in Germany and we have slowed the pipeline down. And we expect to have inventory in line as we go into the 2010 model year.

Could you speak to the decline, any initial insight into it?

I think that as we saw fuel prices drop the way they have, we saw the same thing, you see Yaris, you see vehicles like that are off in similar amounts, so I don't think there's anything, one thing we can say. We're getting some aggressive lease programs putting together now that we've seen how high the residuals are. And hopefully, that's going to drive some business as we go forward.

But we're -- remember, we started out this business, said we would sell 16,000 the first year and 20,000 the second. And we're on track to meet the target for the first five years. But, again, it's something our team is working on for sure.

And lastly, talking about the scrappage plan in the UK, I know there's talk about one here in the US. Would you expect to have the same limited amount of benefit here in the US, given that you sell -- I mean, obviously, you don't sell as many premium cars in the US as the UK, but it would be a minimal impact to you guys?

Well, I think if it's targeted to fuel efficient programs, there might be a benefit. But this is a pull-ahead program and in the US specifically, we have more of these. And I think that you end up pulling business forward and obviously, you lose it later on. So I'm, I'm not expecting this to be a homerun unless there's some real tax benefit to the consumer on every car you buy. I just don't know that.

But there's been a lot of dialogue on it, but I haven't seen anything concrete at the moment. But any stimulus will help us. So I would say we'll all get some benefit on the retail side.

And just one last question, just a really quick comment on retail trends. It's still a factor. If you want to compare how much is due to financing, again, and how much is just due to the economy, are we still talking the majority of the decline in sales is just due to the economy?

I think it's consumer confidence, there's no question about it. And people just are not buying today. The traffic is down and I think that people are concerned. All they do, read in the paper about this financial meltdown. Now, to me, we have to turn that around and hopefully the government, the Obama stimulus package will create some support.

I saw Bernanke said yesterday in his comments that they felt that in some cases we were close to the bottom. If that's the case, home prices now are starting to go up in some places, so maybe we're going to get the benefit of that. But the financing piece of this, obviously, we're seeing because the used car market just dumped on us in the fourth quarter that residuals went way down.

And when you have to take big write-offs, as these OEM finance subsidiaries with leasing, they are much more conservative going into Q1, but as the used car prices have come back up, I think that's going to really right size itself and that won't be a critical issue. Again, advance rates are making a big difference. People just can't come in with a car that they have a debt on that's over residual value and add it on what we call the advance rate. There's some, some curtailment at that level, so we have -- fortunately the OEMs that we're dealing with have strong finance subsidiaries and they are more and more getting tied with the sales side. And I think that we're in pretty good shape there. So it's traffic and I think it's consumer confidence.

Great. That's all I have. Thank you.

And we have a question from Jonathan Chan with Private Management Group. Please go ahead.

Hi, Roger.

Hi, Jonathan.

I was curious if you ever broke out in parts and service internal.

Yes, we know the number. If you looked at internal, as far as we were down about 24%. I don't know the exact dollars, but we know because of the new car business is down and we get the benefit of the PDI delivery there. Then you have as your used car reconditioning, we're probably spending less on reconditioning, so there's less internal gross profit. But that's been the only negative that we've had on the parts and service side in the US.

Okay, and out of that internal, do you guys ever break out like dealer prep on the new cars?

No, we have never done that, but that's the PDI we talked about. We get one hour, or 1.2 hour, depending on the manufacturer. Now, southeast Toyota, they do the PDI themselves so we don't have that benefit. But across the business, it's always been a nice gross profit generator for us.

Sure, sure, sure. That's all I got. Thanks.

Thanks, Jonathan.

And with no further questions, I'll turn it back to you, Mr. Penske.

Fine, thanks, everybody, for joining us and we'll talk to you next quarter. Thank you very much. Thanks, John.

You're welcome.

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