Penske Automotive Group Inc (PAG) 2010 Q4 法說會逐字稿

Good afternoon and welcome to the Penske Automotive fourth quarter 2010 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through February 23, 2011.

Please refer to Penske Automotive's press release dated January 25, 2011, 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, sir.

Thank you, John. Good afternoon and welcome, everyone. A press release detailing Penske Automotive's fourth quarter 2010 results was released this morning and is posted on our website at www.penskeautomotive.com. With me 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 some forward-looking statements relating to Penske Automotive on this call. Our actual results may vary because of risks and uncertainties, including external factors such as consumer credit conditions, interest rate fluctuations, changes in consumer spending, macro-economic factors, and other factors over which the Company has no control. Any such statement should be evaluated together with the information in our public filing, including our annual report on Form 10-K.

During this call, we will be discussing certain non-GAAP items. Adjusted fourth-quarter items exclude a net after-tax gain of $0.8 million or $0.01 per share, the details of which are shown in the reconciliations included within the selected data tables to the earnings press release we issued this morning. We believe such non-GAAP items improve the comparability of our financial results from period to period.

Roger will now take you through our results.

Thank you, Tony. Good afternoon everyone, and thanks for joining us today.

During the fourth quarter, an improving retail sales environment in the US led to a retail SAAR of $10.4 million, which represents the strongest fourth-quarter industry sales in three years. And in the UK, our businesses out-performed the market and contributed strongly to the bottom line, despite difficult comparisons due to government incentive programs in place last year. On a same-store basis we were down in units 1.8%, but the market was down 17.3%.

We also realized improved results from our portfolio of investment, particularly from Penske Truck Leasing. As a result, we reported fourth-quarter adjusted income from operations and related earnings per share that increased 52% to $29.5 million and $0.32 per share, respectively.

Looking at some of the specifics of our performance in the quarter, we retailed 66,700 units, up 13.9%. New was up 11%, used was up 18.4%. On a same-store basis, our retail unit sales increased 9.4%. New was up 6.3, and used was up 14%. Geographically, our Q4 new and used unit sales were up 18.9% in the US, and 3.7% internationally.

Contributing to the volume increases in the US were strong performances in Arizona, California, and Connecticut. And our (technical difficulty) in many of our midwestern markets were all very positive. As a result, total revenue increased 13.5% to $2.8 billion, and same-store retail revenue increased 9.1%, including growth of 13.5% in the US, and 2% internationally.

Looking at our brand mix, same-store retail revenue increased 8.8% at our premium luxury franchises, 7.7% at our volume foreign franchises, and 23.7% at our domestic franchises. Same-store service and parts revenue increased 2.5% in the quarter, including a 7% increase in the US.

Our customer pay was up 2.5%, warranty was up 2.7% and our body shops were up 1%. Excluding the effect of changes in foreign exchange rates, our same-store retail revenue increased 10.5%. Our international was 5.7% versus reported 2%.

The revenue mix in the fourth quarter was United States at 65% of revenue -- and that's up from 62% in the fourth quarter of 2009 -- and 35% internationally. Our brand mix -- Big Three domestic 5%, our volume foreign at 27%, and our premium luxury at 68%.

During the quarter, average selling prices increased 4.3% on new, and declined 5% on used. Our new margin was 8.5%, up 60 basis points versus Q3, and our gross profit from new retail unit increased 5.2%, to $3,150. Our used margin was 7.2%, down 20 basis points versus Q3, and gross profit per used retail unit decreased 10.1% to $1,891. Our service and parts margin was 56.2%, up 20 basis points compared to the fourth quarter of last year. In total gross profit increased 9.6% to 431 million, our gross margin in the quarter was 15.6%.

Looking at expenses, there are a couple of items I'd like to point out this afternoon. As outlined in our press release, we recorded an $800,000 net after tax gain. The net gain has two components, both which are reflected in our SG&A. The first relates to an investment in an automotive auction company that we originally acquired in August of 2006 for $5.5 million. We sold our interest for $14.8 million in cash, which represents a three-time cash-on-cash return, which resulted in a $5.3 million pre-tax gain. The second item is a $4.1 million pre-tax expense relating to the accrual and future rents and the write-off of leaseholds in a number of locations we no longer occupy.

It's worth noting here that our SG&A expense included $3.9 million of pre-tax costs related to our previous smart vehicle development project that we canceled earlier this week. If you adjust our SG&A to exclude the gain, the property costs and the development costs, SG&A to gross improves from 83.8% to 82.9% compared to 83.3% in the fourth quarter last year, an improvement of approximately 40 basis points.

Talk about our balance sheet. Our inventory remains in great shape. As of December 31, our vehicle inventory was 1.4 billion, up 85 million since last September, and on a same-store basis up 78 million since September. New was up 70 million, used was up 8 million.

At the end of the quarter, our worldwide day supply of inventory was 55 days, compared to 52 at the end of '09. Our used was 43 days, compared to 41 days at the end of '09.

Moving on to CapEx, our CapEx in 2010 was $80.9 million, including $60.4 million in the US and $20.5 million overseas. We currently expect CapEx spending in 2011 to be approximately $100 million, split 50/50 between the US and international.

Turning to our liquidity and debt, we remain well within our financial covenants of our credit agreements. We had $780 million of long-term debt outstanding as of December 31, a $167 million decrease since the beginning of the year. Over the last two years, we've utilized cash flows from operations on existing working capital to reduce long-term debt by $283 million. As a result, our debt-to-capital ratio improved to 43% at the end of the year, compared to 57% at the beginning of 2009.

As you likely know, we expect to be required to repurchase $150 million outstanding principal amount of our 3-1/2 convertible notes in April. Our intent remains to use cash flow from operations, existing working capital, and availability under a US credit facility to repurchase any notes put to us at that time. As of December 31, we had $300 million of availability under our US revolving credit agreements and $100 million under our UK revolving credit facilities.

Looking at acquisitions and investments, in 2010 we acquired four businesses that operate eight franchises, and we developed 16 open points awarded by manufacturers. On an annualized basis we estimate these franchises will generate revenues of approximately $400 million. In total we spent $12 million on goodwill and working capital for the acquired franchises, and at the open points we spent $20 million on facilities plus normal working capital.

I'm also pleased to announce that in the first quarter of 2011 we acquired a BMW and Mini business in the UK, which we expect to generate annual revenues of $50 million. We will continue to pursue opportunities to generate incremental revenue while maintaining a strict financial discipline.

I'd like to take a moment to update you on a number of our initiatives that focus on driving productivity improvements and enhancing our scale. We were focusing on the customer experience. Every field-level pay plan is tied in some way to customer satisfaction metrics.

We continue to drive down our employee turnover. Employee turnover in 2010 was 21%, the lowest since we began tracking it.

We continue to implement customer relationship management systems that utilize our customer data base in an effort to improve customer pay and drive repeat and referral business.

We continue to drive our retail first efforts to increase used vehicle sales through limiting the number of vehicles we wholesale.

We are also improving dealer websites and the virtual lot, and using software like V-Auto and First Look to value vehicles. We launched penskecars.com in October to begin marketing our company on a national basis, while levering our significant scale and vehicle inventories.

As I look at 2011, I see an improving marketplace, and I expect that improvements to continue at a gradual pace throughout the year. We expect retail new unit sales to increase approximately 10% in the US. Inventory remains tight also for many of the more popular models, but I see several new products announced by the OEMs will provide a catalyst to the recovering market. Residual values remain very strong and leasing is improving. In fact, according to CNW market research, leasing improved to 25.6% in 2010 compared to 22% in 2009. These factors obviously should help the new vehicle market.

We also expect another solid year from our UK business. Even though the UK market is expected to contract 2% to 3% in 2011, as the first half of the year anniversaries against the scrappage program, the UK registered 2 million vehicles in 2010.

And we expect the premium luxury business, which we represent in the UK, to improve in 2011. Our four largest OEM partners Audi, BMW, Mercedes and Land Rover, are all planning for volume increases in 2011, principally due to new incremental models. Overall, I feel good about the recovery that's underway.

Before I open it up for questions, let me give you a little insight on smart. On Monday, together with Mercedes-Benz USA, we announced we have entered into discussions relating to the transition of the smart distribution to MBUSA. You might be asking why this is happening now. Many of you might not know that smart is managed as part of the Mercedes-Benz network in every country where it's sold around the world, except in the United States.

Also in September last year, smart was reorganized as a separate, but fully integrated, brand of Mercedes-Benz cars. As fuel economy standards and emission requirements get tougher in the future, the CO2 credits and CAFE are very important to Mercedes-Benz. Given these facts, and the lower unit volumes for smart over the last two years combined, with a marketing spend required to continue to build the brand and support future product, the transition to MBUSA was the next logical step for the smart brand.

We currently estimate this transition will occur by the end of the second quarter of this year. It's important to note that it will be business as usual for smart USA and its dealers during this transition. During the transition phase, we will continue to support the brand as we do today.

Logistically, the transition to MBUSA will cause our distribution agreement with Daimler to be canceled. Roughly two-thirds of the existing smart dealers in the US are affiliated with Mercedes-Benz, and will have the opportunity to enter into a new smart franchise agreement with MBUSA. In fact, we expect to retain our six smart dealerships.

In light of the transition to MBUSA, we canceled the development project relating to the five-door vehicle we were designing for distribution through the smart retail network. When we canceled the project, all spending was halted. During 2010 we incurred $7.5 million cash cost related to this project, and we expect $3 million of incremental expenses during the first quarter, as we wind down the project.

I know you may have questions about other potential costs associated with the transition. we are not yet in a position to provide an exact estimate of these costs at this time. Obviously the costs will be in discontinued operations in future quarters.

Having said that, our franchise agreement contains contractual terms that address terminations, including the repurchase of vehicle inventories, dealer parts inventory, signage and any special tooling. There are approximately 1,000 vehicles today at port, representing $16 million in value and $3.5 million in our parts inventory and our parts distribution warehouse.

We expect the majority of these dealerships and specific items to be utilized by MBUSA after the transition. We also have 22 employees at smart USA. MBUSA may retain some of the people. If they do not, we will attempt to place them at a Penske company, or seek to offer them a fair severance package. I'm confident that the smart brand will benefit from the involvement with Mercedes and I look forward to being a smart dealer in the future.

I appreciate your attention today, and now would like to open it for questions.

(Operator Instructions)

John Murphy, Bank of America Merrill Lynch.

Hi, John.

Good afternoon, Roger. You've had incredible resilience in the parts and service business over the last couple of quarters and the 7% increase in the fourth quarter in the US was a pretty big increase, better than what we were expecting. I was just wondering if you could give us some color as to why that has been so resilient and has remained so profitable at a period of time where it seems like there should be a tail and some weakness in that business.

Well, I think that as we saw warranty start to decline because of the quality of vehicles, we got on offense early, and I think that we have a number of initiatives to obviously -- we are looking at retention after the warranty period, which where we start -- so we're starting to mine those customers that have older vehicles. We have rapid repair now, which is fixing dents and scratches and vehicles. We can sell that on the drive-through. A lot of wheel repair. We're using One Command in auto revenue to get us more action with our customers. And I think -- we've installed dealer socket as a CRM tool, which has worked out quite well for us.

I think at the present time, I think our body shops, which today did over $100 million in 2010, give us good gross margins in growth. And to me, I think the premium luxury customer is probably a little more loyal when we look at loyalty both on new, used and service, we see the premium luxury customer a little more loyal. So again we are trying to tie that customer back to service. We've had some increases in internal, obviously, because of the new and used car business, which also pays off as we are going more into Retail First on our used car side.

Okay, thank you. And then, second question, just on the acquisitions or the new franchises that you developed in 2010, I mean, 24 is a pretty hot pace for new franchises, eight and 16 on the acquisition. And the new vehicle franchises. I was just wondering how much more of that we should expect in 2011. if there are a lot of opportunities out there. It sounds like you are off to a good start in early 2011. I was just wondering what you are seeing as far as the availability of acquisitions and potential new points for 2011.

Well we -- I guess a lot of these hit just at the right time. We had a number of Mini points. We had Mercedes and Audi in Chantilly. We the Chrysler Jeep in Jersey City. We had five sprinter franchises, and of course, at this time, at the end of the day, when you look at the investment that we made, it was minimal, to build these stores. I say that we're looking for acquisitions. We are going to be opportunistic.

But again, I can't say that we're going to have this level of revenue at $400 million. But we did have $50 million when we announced

Great. Thank you very much.

Thanks, John.

Rick Nelson, Stephens, Inc.

Thank you. Good afternoon and congratulations.

Thank you, Rick.

We are trying to build our models for 2011 ex-smart. The SG&A, I guess, is one item that I sort of have to back into, we're calculating at $31 million in SG&A that will not continue. We've got the sales, we've got the gross profit, we have the EPS --

I think when you look at smart for the year, we had $0.17, and approximately $0.11 was involved in the smart business. What I'll do, I'll get Tony or Bob O'Shaughnessy to give you a detail on that separately, okay?

Sure. You reported adjusted EPS for the year of $1.19, $0.17 loss from smart. That gets us to $1.36. Is that the base line we should be thinking about without any improvement in the operating environment?

Well I think your addition is correct to $1.36. Obviously, we're all looking at the market. We're not going to give any guidance on the phone today, but we obviously see the market getting better as we go into 2011.

Right. Any comments on what's happening here early in the first quarter -- the US and UK? I know there has been some weather issues in a lot of parts of the country.

We got socked in the northeast. Bernie Wolfe's group -- I mean, they were under snow for four or five days and did no business. On a traffic standpoint, when we look at -- on a year-to-date basis through last weekend, our traffic's up about 11%. So, that's positive. I think the UK obviously was down from an overall market standpoint for January due to the scrappage a year ago. But when we looked at BMW was up 64%, I think in the UK Mercedes was up 24%, and Audi was up 5%. So, I think the brands that we're associated with seem to have some value from the standpoint of new product.

I think that we're kicking off to a good start. I just don't know the financial impact yet of the snow. When we get all of the bills in -- and actually had to melt the snow with a melter in Jersey City. They wouldn't let us push it in the streets or in the river. So we've got some extraordinary expenses which will flow through. Again, I don't want to give you a weather report.

That quarter tends to be back-end loaded, particularly with the UK registration and --?

Yes, we'll have a -- we're expecting the typical registration month in March. So we think that those orders are coming in. We never see all of the incentives until we get into early part of March that the OEMs put into those programs. It's like what happened in December here in the US.

Finally, the other dealers had reported that to date have shown lower gross margins in new cars. Your margin was up in new cars. Wondering if you can comment there why you think your performance was so much different?

I like to say it was good management. But I think, on the -- bottom line is, our mix is higher percentage, 65% is premium luxury, and we didn't have a lot of the stair-step programs in those brands. I think what's happened is, you chase volume and don't focus on gross retention, you end up -- your margin gets -- it goes down as we've seen. I think we got good focus on it, and we just didn't step up in some of those retro programs. I think it paid off for us.

Great. Thanks a lot.

Thanks, Rick.

Matt Nemer, Wells Fargo.

Hi, Matt.

Good afternoon. Just a follow-up on Rick's question. Are you anticipating, or have you received, any kind of special bonus payments from Mercedes on the Auto Haus program, or have all your stores -- I'm assuming your stores were already completed, but I just wanted to check?

We have -- all of our stores are completed. We had one store that we received payment during the fourth quarter, and it was about one penny benefit for the quarter.

Got it. And then just turning to the UK, what -- has there been any impact on the VAT increase? I know -- I think there was an increase last year, and another one this year, and the people were speculating there might be a hangover related to that. So, curious on that, and then also just your general outlook for the UK? It looks like it's -- other retailers are reporting some choppy trends. But just kind of wondering what you're seeing, what you're thinking for this year?

Number one, on the VAT, there was a 2.5% percent increase going into 2011. And we, again, in the premium luxury side, we didn't see a lot of pull-ahead. And I guess to compound that answer would be, BMW was up 64% in January, Mercedes up 25% and Audi up 5%. So initially, we don't see that. Now whether we've taken some people out of the market that we don't know, I think that there is no question that we need to look at it. There was also an increase between '09 and '10, and it had no really huge impact at all.

So, I think that we get one benefit we didn't talk about, in the tax rate in the UK will go down -- what we would call a federal tax here -- and go down 1% per year. I think it's at 25%, it will go down 27 and it will go down four points over the next three years. So we will have a benefit of roughly 300 basis points on our tax rate.

As far as the market is concerned, we're against some anniversary, some of the scrappage. But the theme's that the corporate buyers are back out now. As you know, in the UK, they have the ability to provide automobiles for their employees, something we don't do over here and we see that market pretty good. I think the -- we were able to buy a big load of BMW pre-owned vehicles at the beginning of the year, which should help our used sales, but we've got a tough comp as we go into the first quarter and going on into the second quarter. But, we've got to manage through it.

There is always some economic situation, some world chatter that affects us. But from our perspective, we've got the right brands and the right markets. As you know, we are 95% premium luxury, 15% Mercedes. 15% BMWs, 11% Audi, just to make a couple of points here. And these stores are in markets where we don't have a lot of inter-brand competition. So, overall, we can maintain our margins.

And then just turning to F&I, your PDRs were down a little bit. You had a very tough compare, I think, from last year. But just wondering as leasing starts to pick up again, is that something that should help your F&I PDRs? And if so, do you think we can get back over $1,000 per unit?

Let's put it in perspective. We ran almost $900 last year in the US. We were down $14 this year, so there wasn't a big change. In the UK we were $1,250, and we were down $160 in the fourth quarter. I think the key thing in the UK, the decline -- because they had a number of low-cost finance programs in the UK for Audi, VW and Toyota that limited our reserve. And because of the increase in leasing, we don't have the ability to track or, I guess generate, the large income from finance reserves on leases that we have on a retail paper. And as you know, most of our key brands -- we're doing leasing. We had extended service coverage, some LoJack.

Extended service coverage gets tougher now because most of the manufacturers are providing the customers with longer warranties. And these full service warranties that are coming out now at Toyota and Lexus and BMW has it -- you don't see the ability to sell there. I think that we're going to settle in on a worldwide average somewhere between $950 and $1,000.

So we're going to continue to sell extended service contracts. We were down slightly in penetration. But our prepaid maintenance was up, and I think that we're driven by our financing and leasing with CapDivs, and we don't have a big mix of banks, so we have some preferred lenders. There might be a little more reserve available if you were doing more of your mix with banks versus CapDivs.

Okay. And then just one housekeeping question to finish up, which is -- on the convert redemption, can you give us any flavor for what the mix might be of cash versus the credit line? And to the extent that you use the credit line, is the goal to keep it on there or essentially pay that down with cash flow from operations?

I mean, our goal is that we'll generate -- we think we'll generate somewhere between $50 million and $60 million of cash between now and April. So we would have roughly $80 million to $90 million that we would use our credit line, and then what we'll do is retire that as we had -- we had nothing out on our US credit line at the end of the year, and then we'll use our cash flow over the next several months to pay that down.

Great, very helpful. Thanks, Roger, congrats.

Simon Goodman, Credit Suisse.

Hi, Roger.

How are you?

Good, thanks. Couple questions first on the cost structure SG&A. Can you talk about Company efforts that may be new in 2011 that can help increase efficiencies? Any areas or functions you may be looking to centralize?

One of the things that we are doing is we're looking at all of our marketing activities. We really have divided the country up into three regions, plus we have the international, and what we're trying to do is in each one of those regions is look, and we aggregate our marketing and advertising spend under one umbrella. Typically the same message is that we can do so -- we can cut some cost down.

We're aggregating with Auto Trader and people like that to get -- scale our buys with Comcast and some of the networks, so I see that as one of the key areas. And we've looked at all of our compensation, and what we're trying to do is have our compensation be related to gross. So as the gross goes up, the comp goes up. If it goes down, it goes down. And at the end of the day we've got to be aggressive with our vendors. We've aggregated a lot of the costs associated with uniforms.

And now we are on a program that we've been able to utilize from PTL where we're going out to all of our properties and we have a regular program to go back and reappraise all of our locations in order to reduce taxes. And I think that's key.

Also retention. We think with less turnover that'll drive less cost from the standpoint of acquisition of our employees. There is a number of areas there. We obviously have a little higher SG&A because of the sale lease-backs we have done over the last eight or nine years, and that drives a little more SG&A from a total standpoint.

But again, we've made progress. If you look at it without any of the specials, we probably picked up 60 or 70 basis points. But I think that's one of the areas that we have to look at a metric. We see some of the other players in our space that have done a very good job. But you've got to look at mix of the business, too.

All right. Okay, a separate question, another follow-up to Rick's earlier question. Your margin on new vehicles is held in better because of the mix, but can you comment -- I guess it's a small exposure, but on the dealerships that are selling some of the volume import brands -- how have those new vehicle margins -- how have those trended, and whether you're holding the line on margin and what's happening to volume?

Our volume, if you look by each one of our OEMs, our volume for the year was up. I think that we saw margin pressure because of a lot of these stair-step programs that we had during the later part of 2010. I'm not, obviously, a big fan of those, and I know other people aren't either. And that tends to drive margin down, because I would say a number of our regional guys and area managers said -- look, we're not going to chase those. We're going to try to get margin. I think it paid off. At the end of the day, our margin from the standpoint overall in the volume probably went down 30 or 40 basis points, year-over-year, on the volume foreign.

Thank you.

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

Hi, Scott.

Hi, Roger, how are you?

Good.

Can you drill a little deeper into the parts and service business here in the US? Can you give us a flavor how the customer pay business did over here.

When you look at the customer pay, we were up 5.5% and warranty was up 12%. Now the warranty is up, because I think we've got a lot of these full-service program for the OEMs, so when you record that, it's an OEM reimbursement -- it becomes warranty. But our customer pay was up 5.5%. It was down about 4% in the UK.

Got you. And over to PTL, Penske truck Leasing, can you just talk about -- I mean, you had a very strong quarter compared to a year ago. What was going on there, PTL, and what we can expect for 2011?

Well, I think one of the good things there is if you read indicators, ton miles have really started to move up from the standpoint of truck leasing. And when that happens, our lease customers start getting 100% utilization of their lease fleets and then they come to us for rental. And 75% of our revenue is on contracts. We saw even the variable mileage deteriorate in '08 and '09 and early part of '10, but with the ton miles going up, we are now seeing a demand for our rental vehicles, because 50% of our rental revenue comes from our lease customers. We saw strong rental demand in the fourth quarter.

We -- our maintenance numbers have crept up a little bit, because we kept some vehicles longer. But that's played into our hand because used vehicle prices have gone up significantly. In fact, we've doubled the gain on sale on vehicles in the last probably the last six months. And we'll sell 22,000 vehicles, or estimated we'll sell, during 2011. So it's a -- we've got a hot used car -- or used truck market, as we saw in the used cars. We also are getting strong utilization of our rental fleet, and again we have -- our logistics business has picked up, because we handle all of the inbound raw material for Ford in the US to their plant, and obviously with their increase in business it certainly helped us. We had 5,000 units out on rent to FedEx and UPS in the last quarter, too.

So, those are the things that are driving it. We see that business very positive in 2000. We're coming out of the down cycle in the heavy duty truck area. It takes about 220,000 trucks per year -- big tractors -- to purchase, to maintain a fleet average of about 6.1 years. Today, we're at about 6.8 years. There is a big pent-up demand with a volume picking up -- we're going to see our utilization of our rental fleets be quite strong because you just -- the OEMs just can't build enough trucks to meet that demand very quickly. We think we're positioned quite well.

And just last question, just going over to your domestic stores. I think you said those stores were up over 20% on a new basis. Can you just talk about which brands are doing well, and does this change your thought processes going forward, as to if you were making acquisitions, whether you would look at domestic stores?

Let's me say this, I'm having discussions today with two of the domestic manufacturers on potential acquisitions. So we never close the door. I would say that all three were strong for us. I can't say one was much better than the other. We were just -- we were in very good shape. We have businesses in the UK with Chrysler, Jeep and Dodge that are integrated with our Mercedes stores. And we say that business is quite profitable for us because we have not a lot of facility requirements, but we get the benefit of the parts and service. I would say it was very good for us in -- last year.

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

Yes.

Carl Dorf, Dorf Asset Management

How are you, Carl?

Good, Roger. Nice quarter. Looking at your cash flow, Roger, could we possibly -- give me your thinking -- be looking at resumption of the cash dividend maybe in the third quarter?

Well, that's always a question that our -- we talk at our directors meeting. I think what we've said, that we need to focus on getting -- utilizing all our cash, that we need to focus for the redemption of our convert, and then what we would do is that would be a discussion item as we went into the second quarter. But -- and obviously, that's something that we have taken off the -- out of the equation here for the last, say, 24 months. We would expect to put it back, but I can't say specifically when that will be. We had a meeting this week. We talked about it and said -- let's, before we would reinstate it, let's be sure we have all of our convert taken care of.

Thank you, Roger.

Yes.

Aditya Oberoi, Goldman Sachs.

Hi, thanks a lot. I had a broader question related to the market. I wanted to get your opinion on how is the incentive activity trending? We heard that Toyota was pressing the pedal on incentives this month and also last month where GM had pretty big incentives. So how are the OEMs doing in terms of incentives?

There is a big pull-ahead that Toyota put in here in the last, I think, 48 hours. They are pulling back, or pulling forward, six months. So, I think we are seeing a little more action on it. I saw where GM was the highest, I think, in the fourth quarter. But these stair-step programs, depending on how they work out, really are incentive programs, and it's difficult for me to say how many incentives are going to be, as we look at Q1 and Q2. There were lots of incentives in Q4. In the UK, we have targets that they give us, that we can hit to get extra money. But they're not quite as aggressive as what we see here in the US.

So, I guess I'm not a good benchmark to say that we're going to see a lot of that increasing. I think everybody is getting the benefit of the higher residuals, so that's making the transaction price for the consumer be pretty realistic. We're able to get more margin. The only place we're limited on margin would be is we go lower in our used car retail first. There is some ceilings on advance rates with the finance company. So higher residuals, and we have advanced rates capped at kind of -- it probably hurts our margin a little bit. I think you're going to see incentives up and down throughout the year, Adi, and I just can't give you something maybe you'll hang your hat on. I'm sorry.

No worries. And on the used-to-new ratio, you guys are tracking at a pretty healthy point -- rate of 0.7%, 0.72%. Going forward do you think you will be able to maintain these kind of ratios for new used-to-new, or do you think they will go back to historical levels?

I think if we look at the fourth quarter, we had some of our stores that were better than one-to-one and we were close to one-to-one in the UK. And I think that's -- one of the incentives that we have for our guys is to look at the ratio of wholesale to used retail, and it's amazing where we see that metric, and it'll help us -- for retail sale on used. Overall from a used perspective, I think the market's very good for us, and I think retail first will help us drive down wholesale.

Okay. And finally on tax. You tax rate came out a little lower than the standard 34%, 35% that most of us had in our models. Going forward, do you have guidance for how the tax rate is going to trend? Or was this quarter -- had some won-off issues?

I think the tax rate in the UK will be going down 1% a year now for the next three years. And I think that we should be in the 35% to 36% range for the overall mix rate for the Company.

Great. Thanks a lot.

Atiba Edwards, Nomura.

Hi.

Two quick questions. The first one, can you talk a little bit about what you see in terms of credit availability, especially as you guys represent more of the higher-end luxury and import mix? So what are you seeing in the credit availability of the industry?

Well, number one, from our perspective we have from the very beginning -- all of our floor plan is with the CapDivs. We've not used banks. We've been vertically integrated with the individual finance subsidiaries. And quite honestly, I think they're being aggressive. They are out now with new lease programs with higher residuals. And I think that 75% of our business, we do with the CapDivs There is even, as you've seen -- some of them are now moving into the sub-prime, which will help some of the volume brands. But there is no issue from the standpoint of credit availability, at least through our stores where the CapDiv is, because we give them all the business.

And then the second question around the -- looking at your leverage, after you say you addressed the convertible, and then also take down any revolver borrowing. What are your thoughts, and what kind of thinking you're having around your 7-3/4 notes out there, and just continuously improving your cap structure?

I think when you look at -- we have gone from 57% to 43% on a debt to capital ratio, which I think is significant. We've always said we wanted to be in the 45% to 50% -- was the range we would probably operate in. The goal is to take out the convert. As I said, we have $300 million available in the US. We had nothing out on that at the end of the year. We'll use a portion of that to clean up the convert. Probably somewhere between, as I said earlier, $80 million and $90 million. The balance that we would have on our balance sheet.

Going forward, I think that the rate at 7 -- I think it's 7.75%. On the other piece of paper, we would leave that out and start looking at it maybe a few years from now. But there is no incentive for us to take that out. I think it's good money, subordinated. And we would use our capital for probably acquisitions and other activities in the business.

All right. Thank you.

Mr. Penske, no further questions in queue.

All right. Well, thank you, John. Thanks everyone for being on the call today. We will talk to you next quarter. Thanks.

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