Penske Automotive Group Inc (PAG) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group fourth quarter 2011 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through February 22, 2012. Please refer to the Company's press release dated January 27, 2012, for specific information about how to access the replay. An audio file of today's call will be available on the Company's website under the Investor Relations tab at www.PenskeAutomotive.com.

I would now like to introduce Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you, Lori. Good afternoon, everybody. A press release detailing Penske Automotive Group's fourth quarter and full-year 2011 results was issued this morning and is posted on the Company's website. Joining me for today's call are Roger Penske, our Chairman; Dave Jones, our Chief Financial Officer; and JD Carlson, our Controller. Following today's call, I will be available by phone to address any additional questions that you may have.

Before we begin, I would like to remind you that we will be discussing certain non-GAAP financial measures such as EBITDA and adjusted income from operations and related earnings per share on our call today. We have reconciled these items to the most directly comparable GAAP measures in our press release dated February 15, 2012. I refer you to that press release for additional information. We believe these non-GAAP financial measures will help in understanding the comparability of our reported results from period to period.

Also, we may make forward-looking statements on this call. Our actual results may vary because of risks and uncertainties, including external factors such as consumer confidence, consumer credit conditions, vehicle availability relating to OEM and supplier operational issues, interest rate fluctuations, changes in consumer spending, macroeconomic factors, and other factors over which the Company has no control. Any such forward-looking statements should be evaluated together with the information in our public filings, including our Form 10-K.

At this time, I would like to turn the call over to Roger Penske, who will take you through our fourth quarter results.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. Today, Penske Automotive reported another outstanding quarter of profitability, marking our 10th consecutive period quarter-over-quarter growth in income from continuing operations and earnings per share. We also reported the most profitable year in the history of our Company. For the fourth quarter, we reported double-digit increases in total retail units sold, revenue, operating income, net income, and earnings per share. For the fourth quarter, income from continuing operations attributable to common shareholders increased 22% to $42.5 million, and related earnings per share increased 24% to $0.47.

Our performance in the quarter continues to exhibit the strength and diversification of our business model, and the benefits of our largely premium and luxury brand mix. Before reviewing the specifics of the fourth quarter, I'd like to provide you a few highlights from the recently completed year in 2011. Total retail units increased 9% to 284,500 units. Our new-to-used ratio increased to 8.84, from 0.73. Total revenue increased 11.9% to $11.6 billion, and our same store retail revenue increased 8.2%. On a GAAP basis, income from continuing operations increased 42% to $175.1 million, and related earnings per share increased 43% to $1.92, the most profitable year in the history of our company.

Our business generated $344 million of EBITDA. We repurchased 2.4 million shares at an average price of $18.07. We resumed our dividend and recently increased the payout for the third time to $0.10 per share, yielding 1.7%. Also, we increased our total credit facilities capacity by $87 million and extended the term of our UK credit facility by two years. We completed acquisitions expected to generate approximately $1 billion in annualized revenue. This includes $500 million from the Agnew Group acquisition we completed in January of 2012 in the UK. We discontinued non-strategic dealerships with estimated annualized revenues of $300 million.

Now, let's take a look at the specifics for the fourth quarter results. Total revenue increased 11%. On a same store basis, retail revenues increased 5.9%. Same store retail revenues increased 5.3% for our premium luxury brands, 8.7% for our volume foreign brands, and 5.1% for our domestic brands. Excluding the effect of the foreign exchange rates, the total same store retail revenue increased 6.1% versus 5.9%. Our total revenue mix during the quarter was 67% in the US and 33% internationally. And breaking down the brands, premium luxury was 70% for the quarter, volume foreign 26%, and the Big Three 4%.

Looking at new vehicles, we retailed 39,270 units in the quarter, representing an increase of 4% compared to last year. Total same store new retail units were flat in Q4, representing a 3.2% increase in the United States, and a decline of 9.3% internationally. Our new unit performance was impacted by several items, a decline in sales of Honda and Lexus units in the US and a decline in sales of Toyota new units in our eight stores in the UK, a strong Q4 2010 in the UK as customers anticipated the increase in a VAT tax in January of 2011, mainly affecting our BMW and Mercedes brands.

Third, a shortage of BMW 3 Series products in Q4 as a run-out of the old model was taking place. The good news here is that last weekend, we held launch events for the new BMW 3 Series in the UK, and the response was extremely strong. Although January market registrations in the UK were flat, our business in the UK outperformed the market with a 9% increase. Average transaction prices on new units increased $1,621 or 4.4%, at an average gross profit per unit increased $89, or 2.8%. Gross margin on new vehicles was 8.4%.

Looking at used vehicle, I'm pleased to report another quarter of double-digit increases in both units sold and revenue growth. Total same store used units retailed increased 18.1% in the United States, and 12.2% in our international markets, for a combined increase of 16%, as our retail first initiative continues to drive unit and revenue growth. The used-to-new ratio was 0.81 to 1, which compares to 0.71 to 1 in the quarter last year. International used-to-new ratio was 1.21 to 1. Average transaction price on used declined $355 or 1.3%, and the average gross profit per unit declined $50 or 2.6%. Gross margin on used vehicles was 7.1%. Finance and insurance increased $35 per unit to $965, or 3.8%. The US increased 4.4% and the UK increased 3.4%.

Service and parts revenue increased 5.4% during the quarter, including a 0.7% on a same store basis. Our customer pay on a same store basis is up 3.4%. Warranty was down 7.7%. Our body shop business was down 5.2% and our pre-delivery inspection was up 16.1%. The decline in warranties directly related to the Toyota, Lexus, and BMW brands in 2010 recall campaigns. The good news is, gross profit margin for service and parts is 57.3%, representing an increase of 120 basis points from last year. Overall gross profit increased to $456 million, or 9.3%, and a gross margin of 15.4% compared to 15.6% last year. In the fourth quarter, SG&A expenses as a percent of gross profit improved by 100 basis points to 80.4%. Our tax rate for the quarter was 34.2%, compared to 32.6% in the same period last year. The rate increase is due to higher EBT in our US operations this year when compared to the fourth quarter last year.

Looking at the balance sheet at the end of December, vehicle inventory was $1.5 billion, which was up $155 million when compared to December of last year, new vehicle inventory up $64 million, used vehicle inventory up $91 million. On a same store basis, vehicle inventory increased $88 million, from the end of December last year, to $1.45 [billion]. New vehicle same store increased $15 million. Used vehicle same store increased $73 million. December 31, our worldwide day supply of inventory was new, 49 days, in comparison to 53 days last year. Used was 52 days, flat with last year. At the end of December, our total debt was $2.6 billion. Non-vehicle debt was $850 million, an increase of $70 million from December last year.

Our capital expenditures were $133 million this year, including $53 million in the fourth quarter. Approximately is $12 million of CapEx was used to repurchase the dealership facility which was previously leased. We estimate our net CapEx at approximately $120 million in 2012. Debt-to-capitalization was 42.7%, flat with last year. We had $318 million available under our worldwide credit facilities at December 31. We remained well within the limits of our financial covenants at the end of 2011.

Turning to acquisitions, as we've noted on previous calls, our intention was to grow our business organically, and through acquisition acting opportunistically on acquisition candidates. In 2011, we completed the acquisition of seven franchises that are expected to generate approximately $525 million in annual revenues. In January, 2012, we acquired the Agnew Group of dealerships in the United Kingdom which are expected to generate $500 million in annualized revenues. This group is listed as the number 22 largest group in the UK, according to Motor Trader, consisting of 13 dealerships, with a largely premium luxury brand mix and this obviously complements our exists footprint in the UK. Further, we discontinued our non-strategic dealerships with annualized revenues of approximately $300 million. We also remain on track with three new dealership points this year. Our new Mini dealership in Northern California will open in March and the Nissan and Infinity location in downtown San Francisco will celebrate its grand opening at the beginning of May.

In closing, our results in 2011 continue to demonstrate the strength of our model. We continue to grow the business organically and have added significant new top line growth to the business through our acquisitions. I remain optimistic about our business and improving economy, pent-up demand, strong credit availability, and the new product launches coming into the market should continue to accelerate demand. I expect new retail automotive sales to improve at least by 10% in 2012.

I'd now like to open the call up for questions. Thank you.

(Operator Instructions) The first question from the line of John Murphy with Bank of America Merrill Lynch. Please go ahead.

Good afternoon, Roger.

Hi, John.

Just a first question on acquisitions in general. We spent some time out at the Natick Convention in the past 2 weeks and it sounds like the log jam is breaking between buyers and sellers there's a lot of transactions that may be coming to the market. Obviously, you're getting a little bit more aggressive. I was just curious what you're seeing out there, if there are a lot more opportunities for larger groups, for smaller groups, and whether it is the US, or the UK that is your focus. Just trying to understand if we're going to really see a lot of ramp-up in your acquisitions going forward.

I think as I said in my remarks, we obviously feel that acquisitions are a part of our strategy on a long-term basis. We're seeing both internationally and domestically probably more interest in selling businesses. I think some of this is driven because of the corporate ID and capital expenditures you have to make on your dealerships today to meet the OEM's request is driving some of that. We're not seeing any big groups. I think Agnew was an opportunity for us in Northern Ireland. But what we're going to look at are individual locations which are contiguous to our existing platforms so we can glue them on, use our back office. We want scale in these markets so we can then take our key management and have them help deliver the results lowering our SG&A. So they'll be opportunistic.

Obviously, we're not limiting just to premium luxury. We think that there could be some strong Big Three opportunities out there. We are excited about our Nissan Infinity location in a 200,000-square foot building in San Francisco. So we continue to look for open points if necessary, or if they're available, throughout the country. We don't see a lot of that in Europe. We've looked at businesses in Italy. We've looked in Spain. We've also looked in Germany and Austria where there are some larger groups available. But at this point, I think that we've made a big purchase at the beginning of the year, and I would expect maybe $100 million to $200 million more as we would go through the balance of the year.

Thanks. Just to follow up on that. The Agnew Group specifically, was that really to balance out your portfolio between the US and Europe? Or is that really an opportunistic transaction that just really is a bolt-on? I'm just trying to understand the total rationale for the Agnew acquisition.

John, it certainly was opportunistic because of our strength in the premium luxury side in the UK. Agnew was always at the top of the league tables in any one of the brands that we represented. And the family had been in business in Northern Ireland for many decades and because of an illness, the business became available. And because of our relationship with the family, we were given an opportunity to negotiate a sale and the good news there is the facilities were in great shape. We're leasing those. We just bought one facility which is a Volkswagen store, and we'll rebuild that. And I think that it's a campus setting, like we have in many places in the US where you've got the brands all side by side so it really fed our model. And again, from an annualized revenue basis it was $500 million. So to me, a management's in place. In fact, all of the key managers had double-digit experience at the Agnew company, so that gave us a lot of confidence that enabled to deliver the results going forward.

Thanks. And then just another question. You are operating with most favored nation status with it seems, as far as acquisitions and open points with a lot of auto makers. I was just curious, with that relative level of goodwill with the auto makers, if that carries on to any other part of the business, whether it be on allocations, or stair-step program, or other incentives, or other help they're giving you on just the general business. Just trying to understand if that most favored nation really carries over to operations as well as acquisitions.

John, I would say that the doors I knock on are available to everybody else. I don't think there is any favorite nations. We've been aggressive on acquisitions. I think there's a lot of noise out there from the standpoint of facilities and we have, in every single case, stepped up and met the requirements. But we're looking at it where we think we can make a difference and I think you have to deliver the results. And I think CSI is a big factor with the OEMs. And without that, you're not going to get the chance to make a bid and I think that is important. And obviously, the open points are not automatic from the standpoint of revenue and profitability. Because you don't have typically the units in operation. So, even though they sound like it's a great opportunity, you still have to build the business and also build a group of key managers that can help you develop the business profitably.

And just last thing on the parts and service gross margin, 57.3%. It looks like at least a recent near-term high. What is driving that? Do you think that, that could potentially even go higher if there is any opportunity for you to maybe push that higher, or if you would see any mix of business change that? Because that seems like a pretty high number at this point.

I think one of the things is, the warranty now is obviously gone down. When you look at the mix warranty was 20% for us, in the quarter, and customer pay was almost 75% and the balance basically is PDI and body shop. And what's happening is that we were holding our margin at the customer pay level, we're getting into rapid repair dents and things like that, wheel repairs, window tinting, and glass, which we'd obviously outsourced before in sublet, we're bringing that in. And I think that's making a big difference. There is a tremendous amount of margin in those particular areas. And quite honestly from a parts perspective, on a retail repair order, you typically get 40% margin where you get 30% on warranty. So I think the mentality now is oil changes.

I would say that in Toyota, they have a full service program today where we get 8/10 of an hour for an oil change on labor and we get the balance of the profit on the oil and it's probably three times what we would normally get if we were just a Pep Boys or a Quick Lube around the corner. So they're really helping us to drive that customer back. I think the pricing matrixes we use, we're also looking at older vehicles which probably were going down the street to a smaller repair shop. We're actually trying to get those people to come in to the dealerships with menu pricing on older units, which has made a difference. And again, the increased used car reconditioning is driving internal gross profit, along with the PDI on the new cars. So when you put it all together, I think that it's driving the margin.

Then we've got our customer management, our CRM systems. We're very active with e-mails with customers from a service perspective, and that's driving a lot of our opportunities with dealer socket and a number of these products which help us. So I don't think it is one particular thing. But as we were able to prove, during the downturn, that the service and parts, probably cover 50% to 60% to 70% in some dealerships' cases. The fixed costs, some 100% and I think what we're trying to do is grow that back in. We've certainly invested. We have in our facilities. And I think we've got to keep them full. And the body shop business obviously was down a little bit in November, December because of the weather, pretty much around the country. So we saw some dip in that. But that's, again, a good parts business. We're a direct repair shop for most of the major manufacturers. And when you look at these shops that are doing $800,000 to $1 million a month in body shop work, it really drives the margins.

Great. Thank you very much. Keep it up.

We have a question from Rick Nelson with Stephens. Please go ahead.

Hi, Rick.

Hey, Roger. Thank you. Good morning. And nice quarter.

Thank you.

Curious how you see 2012 shaping up in the UK. There's a lot of investor concerns out there by Europe, and that doesn't seem to be materializing, at least in your brand mix. But any commentary there would be helpful.

Well, let's go back. We should really go back 3 years and look at the premium brand market share. It was running about 18%. And that's grown to 22% over the last 3 years. So BMW, Porsche, Audi, Mercedes-Benz, those brands have all had great growth during that period of time and that's our sweet spot obviously today. I think if you looked at the number for last year, 92% of all of our business was premium luxury. When we look at the market, in January, the market was flat, versus 2011, but retail was up 2%. Our market share was -- or we were up 9% in units for the month of January. So we'd see the market very good.

I feel just from the conversations, from our key managers, that the new car business is better than it was. It feels better, it is better from the results, than it was the beginning of last year. We obviously are interested in the used car business. We've had the opportunity to make some large purchases at the end of 2010 from some of the manufacturers. Those are out at the stores. We're getting the benefit of those. And obviously, one thing we have to realize, that all of these finance companies are looking for out standings. And I think that we're seeing not only domestically, but internationally, them really going after the different products that they offer, lease, personal contracts, other things that are available, in the marketplace.

So we don't see this contagion, at least at this point falling into the UK, and knock can us out. We saw the same benefit in Northern Ireland in January. So overall, I think that the premium market, when you look at last year, was up 8%, and the good news with our company is that used are 1.2 to 1 to new. So I think new-to-used is better. The premium luxury market has been up for the last three years and we've been able to out drive that. And again, one of the things where we have opportunity is really in the parts and service because we never had the scale over there. And I think that with the used car reconditioning and selling these older cars and retail first will drive some more profitability on the parts and service side. So overall, we think we're strategically right where we want to be.

That's great color. Thank you. Also, the big acquisitions that you've done, Greenwich, Santa Ana, if you could comment there, even Agnew. I realize you have only had it a short time, but how are those performing relative to your expectations?

Well, Crevier is trophy property in the BMW business. In fact, when you look at the numbers, basically some of the people that were number 5 in the country but two of the stores ahead of us really have 2 points. So we're right at the top. The integration has gone well. The management team there is again, like Agnew, double-digit years of experience, wanting to take advantage of our scale. Some of the things we're able to do at that mall, putting together a PDI center for not only BMW but Mini and also VW and Audi. I think the marketplace out there is one of the best in the US. And overall, we feel good about it.

We have a Mini facility that will open up across the street, giving us some more capability for parts and service. And when you think about a typical store here in the US, parts and service growth, if you were doing $300,000, it would be a very good store. Crevier does 6 times that every month, at $1.8 million. So that just puts it in perspective, the size, and the customer base that they have. So I put a check in the box that the revenue, the profitability, is what we expected in our model. And Crevier sold 373 new BMWs in December, and 122 Minis. So I think they were in the top three in the country, so pretty strong.

Greenwich has obviously been a little different picture. We're operating out of a temporary facility. We just opened up into our new sales facility this last week. And quite honestly, the interest in Greenwich in that brand is tremendous. It looks like the ML and the GL are the company cars in Greenwich. They're excited about that market. We have some insight on it because we're in Fairfield. But overall, we'll have new service bays available mid-year and a complete auto house redo will be done at the same time. So overall, I think we have a real opportunity there, and service will continue to grow because we'll now have the facility to take care of the customer base. So to me, Greenwich, Crevier, the Agnew Group, obviously with 30 days under my belt, the only thing I can say -- I was there last week -- I like the people and I think the people are going to make the difference, and we got the best brands.

And as you look at your pipeline and the dealers you're talking to, the a go-forward acquisition pace is going to be more focused on the UK or the US?

No, I think that the good news is, everyone has contacts, everyone gets contacted. There are three executives here with Ramonat, Bernie Wolfe, and certainly George Brochick and Gerard and the team in the UK. They're consistently being contacted about potential sales. And basically, we're going to look at ones that basically we can glue on to what we already have, where we have a platform. You go into markets without some scale, I don't think it works. We went into Austin, Texas, initially with BMW because it was a great location. We now added Toyota. We've added Honda. We've added Hyundai and have an open port for Hyundai so those are the markets we'd like to grow in. We can grow in Houston obviously. But again, getting the right dealerships at the right price obviously is always the challenge.

But there is business out there. And that's the one thing great about the auto model retail, for all of the peers that are involved like I am, there are people out there that see us as the place to talk first because we've got the capital. We've got the expertise. And I think today, the OEMs in most cases, I would say in all cases, feel that the public operators are doing a pretty good job when you look at all of the metrics. I know there was a lot of concern about trying to strong arm the OEMs early on. But to me, I think that is gone. I see very good operators, very good management, and to me, that makes a difference. So I think we're at the right place.

Thank you for that and good luck.

Thanks a million, Rick.

We have a question from Matt Nemer with Wells Fargo Securities. Please go ahead.

Good afternoon, Roger.

Hi. How are you?

Good. So my first question was on the used business. It was very strong from a unit standpoint and you've talked about retail first and some other process changes. But can you share any more detail on maybe what brands or what markets were driving that strength? And is there a point where we comp -- we have tough compares and that slows down, when do you think we see that?

Well, there's no question with the growth that we've had, we're going to have some tough comp. But I would say, if you looked at the business here in the US, you'd have to say the central region, with Ramonat and his guys really got on this program early and we'll take the 2 BMW stores in Atlanta that do 100 new each, and they probably do 160, 170 used. So it is a matter of availability. It is a matter of the management team at that place. And the great news is, that the bedroom now at the platform is the Internet. And when we start to see growth in Memphis of 24%, Minneapolis, 30%, Arkansas, 30%. You really see South Jersey at 28%, Florida at 38%. These are the numbers that we're seeing. And yet markets like Arizona was up 6%. Indianapolis was up 6%.

So we have some that are not quite as strong but I think it is a matter of the product. It's getting vehicles up on the internet. It's pricing every week, to get prices right, because to me, the internet's such a strong tool. And I think we're getting the benefit of that. The other day someone said we sold a car that had a bad engine in it, meaning they put it on the internet and people came in with a hook and bring it out of there. In the old days, we wouldn't even be caught selling anything that wasn't brand new. In many cases, we'll tell the customer, here's what needs to be done to the car. If you want us to do it, we will have more internal work.

I think it is a process. We look at -- with our wholesale, it's down 12% in units. That's on a same store basis. And when we look at the future, instead of looking at 1.1 to 1 new-to-used, we're looking at what's the wholesale as a percentage of the used retail? We want that to be 20% or below. That means you know that you're getting everything you can to the market one way or the other. So we're not counting on wholesalers coming around buying the cars. PenskeCars.com has been a powerful tool for us too because we have all of our inventory aggregated, both new and used, across the country at one site. So that has been a great tool for us also.

And then as you look at unit margins, for new and used, as you look at grosses, how much pressure do you think you can see from an overall PAG standpoint when the Toyota and Honda inventories is really back, and the volume in those brands is higher? Is there sort of a negative mix effect that you see hitting the overall gross profit per unit?

Well, I think when you look at our gross profit, it went from 8.5% to 8.4%. And we went from 7.2% to 7.1% on used. So there was some loss of margin. I think that with the new products coming out, you've got the new Lexus GS, you've got the BMW 3 Series. Land Rover Evoque is over the moon from the standpoint. We don't have a lot of them, but Mercedes ML. And I think that today, I think the OEMs are finding out when you look at incentives, incentives were down I think $100 in January versus December, so maybe there's some [sanity] in the market at the moment.

But we see typically in the premium luxury side that when you look at inter-brand competition, the way the markets are set up, with Audi and BMW, Lexus, Mercedes, et cetera, we don't have that inter-brand competition. It is a premium level. Now, obviously, when you look at the domestic's, and you look at the volume foreign, it's a little different. And I think you will have a some pressure coming out of Toyota and Honda, who want to get market share back. But quite honestly when I look at the January numbers, from the standpoint of margins in Toyota and Honda, they're still strong. In fact, they're a little better than they were in December, and we're still running at about a 60% inventory. If you go back and look at -- we averaged about 4,500 units in the good times on Honda and 5,000 Toyota's. We're running right now with an inventory through the, say, last week of 60% of that. So we're not up to speed. So maybe when we get full inventory, we'll start to see some decline but overall, I think it's up to us to manage it. I wouldn't say they're going to go up. So I think you will see some downward pressure but I don't think it'll be dramatic.

And then lastly, you did a great job on the expense side in terms of retaining your gross profit. Is there anything in there that is -- can you point to any of the bigger item in there that may have moved that number, in terms of personnel or advertising or anything else?

Our personnel costs, as a percentage of gross, went down about 60 basis points, which is key. And what we've done as we go forward into 2012, is we set our targets on compensation. We're setting our sales managers on the same basis because we've got to tie them to performance, and when you do that, we're being assured that we don't get the gross, we don't get the profitability. We start to see deterioration at a higher SG&A. Also, in our the marketing, because of the internet, we're getting a more efficient contact with the consumer. And we saw 3% to 4%, Matt, reduction in advertising per unit from the standpoint of advertising in the fourth quarter. And also, I think some of our CRM tools that we're using now are more efficient than what we've done in the past.

So to me, we've eliminated some SG&A expense because we purchased some real estate that we've been leasing before. I think if you look at us, we've got 4 or 5 large pieces of property which we have sale leased back in the past. We're in negotiations, as some of our other peers have done. We see those as opportunities because obviously as we were growing, we didn't have the capital and didn't mortgage those, because of higher rates. But with the rate environment today, I think that gives us just another area to work in. But we're looking at marketing, we're looking at personnel costs. We're looking at interesting -- we're into our loaner car expense, and some of the other peers don't have. We have 6,000 loaner cars in service, which cost us last year $35 million. So when you come in with your Mercedes, you expect to drive out with a Mercedes loaner car. So we're looking at that very carefully, to be sure that we're getting the proper utilization of those, and that can drive some SG&A down.

So I guess we're looking at areas we hadn't in the past. Again, the most important thing is grow the gross. So you got to work on it on both ends but I think there is no stealth move here that I have in my pocket. I don't want you to leave the call with that.

Excellent. Well, great job. Great quarter.

Thanks.

There's a question from the line of Patrick Archambault with Goldman Sachs. Please go ahead.

Hi, Patrick.

Hi, good afternoon and good job on the quarter.

Thank you.

A couple of quick ones. Just one clarification on -- you talked quite a bit about new margins there. Thinking about the trajectory of used, it seems you outlined two factors, one is the retail first strategy, where you're retailing things that were previously wholesaled. And I guess the other one is, the inventory acquisition cost, which are high. How do we think about that on a go-forward basis? Is there an opportunity to bring that up over the next couple of quarters? Or is it in a holding pattern for a while, until we get more leasing and more supply?

Are you talking about supply, or are you talking about margin?

I'm talking about margin. And I guess my question to you would be, given how tight supply is, what's the trajectory of margin?

Well, let me say this. Obviously, our wholesale is down 12%. So that means that we sold more new cars and sold more used cars so we're keeping more vehicles, which obviously will drive availability for us at the stores. Now, as we go down the cost of sale line, meaning instead of selling a $30,000 used car, we're down in $18,000 to $20,000, we're going to get less margin, just because it's a lower priced car. Also, what we're doing is we're not (technical difficulties) [looking at] the old perspective. We're looking very carefully at what we CPO and what we don't, because we can still sell these cars, maybe the high mileage cars without CPO, we give them a [smaller] warranty and that will help us drive margin.

One of the things we don't have is the [offered] cars coming back on the premium luxury side because when you look at Audi, BMW, Mercedes, and Lexus, just as examples, that maybe didn't get everybody, 55% of their sales are leased and we get those vehicles back and I think it is important that we see that grow and I see the OEMs being more aggressive in the fourth quarter. So that'll drive some availability. But again, we're all looking for used cars. And the best used cars are the one you can trade, because you get two transaction, and we're buying cars. I know in the UK, we have 20 buyers and they're specifically assigned to brands, a specific brand, so they're buying off the curb there, in the newspaper, and they're buying from the OEMs. We don't have that luxury here where we can just go to the OEMs and negotiate a big package, where we can in the UK.

So I think that our margin is impacted. It's lower than our peers on used cars because in the UK, you have to have demonstrators to meet your requirements for all your bonuses and those demonstrators when they're sold are not sold as new like they are here in the US. They're sold as used cars, so that has some impact on our margin. But our CPO business is probably down 300 basis points from say 40% to around 35% to 37% from last year, so there's a number of levers here. But I think our margin will hold. And at the end of the day, this used cars, I think as this new car business accelerates, we'll see some of these older vehicles, and that'll give us an opportunity to continue to have a full pipeline.

Okay. Very helpful. And a couple maybe just a bit more housekeeping ones. Can you remind me the disposition that you've done, that you highlighted I think $300 million of revenue that is effectively leaving because of dispositions. Is that an ongoing pruning that you're doing of your portfolio, over a period of time? Or is that related to some of the acquisitions that you've made which have forced you to divest certain things? How should we think about the rationale there and how that moves going forward?

Well, obviously, I think it is strategic. We divested of a Toyota store in Long Island, where we only had one store there, and to manage that with a scale of some of the other operators there, plus it had CapEx required. So it was the right move. Because we bought Greenwich, Mercedes, we had framework agreement that doesn't allow more than two stores in the market, and Nanuet was obviously in that market. We owned Fairfield. We had a Toyota store here in the Michigan area which we realized that being a foreign nameplate guy here in Michigan might not be strategic. So we had a Jag Land Rover store over in the UK, which was again felt to be not where we wanted to be, and we divested of that. And I think the smart stores that we had in the US that were not associated with Mercedes-Benz stores were divested during the year, too. So that is a laundry list of what we did.

Okay. That's helpful. And last one, if I may. Can you tell us what the impact was of -- your SG&A leverage was obviously extremely strong. You said a little piece of that was due to some property that was leased before, which was purchased now. Can you give us a sense of what that ratio or what that improvement might have been, just adjusting for that change in financing?

Well, let's say it was a property that we had leased, and there was -- there was $12 million purchases. It was a Honda, a big Honda store [in India]. It's number 1 in that region. And I think overall, it is minor. At this point, it's part of where we showed in our CapEx. And we'll start getting that benefit. We started getting it in the last 2 months of the year and we will see that throughout 2012. But at the moment, it is a small number. But there is big opportunity out there.

I think there is hundreds of thousands of dollars and millions of dollars of cash flow in some of these bigger properties like, when you look at some of the Phoenix properties, and some of the other area, some of the New Jersey properties that we did sale lease-backs on, as they come up on 10 years and we have an opportunity to buy some of those, we're taking a good look at them because today with interest rates. And some people want to exit them and take their cash and move on. So we're looking at them opportunistically and I think we've seen some of that benefit in Atlanta, on another one and also in Indianapolis. So those have made some impact. I can't say that was 20 basis points, but it was probably less than 10, but it will be a factor in the future.

An opportunity ahead. Okay. Interesting. Thank you very much.

I think it is a -- we might -- I'm not saying that we're behind, but I know that there's been a lot of movement by the peer group buying some of these leases out because, again, as we think about the OEM captives, they need out-standings. And what's better than a Honda store or a Mercedes store to finance a mortgage. And they're very competitive. They understand the business even though they're single purpose facilities. It certainly gives them a chance to have site control, quite honestly, if the dealer would move on. Because of the franchise laws, I think it's strategically pretty smart and I think we will see a lot more of that. So we're looking at those opportunities. And Aaron Michael, our treasurer, is hard at it, looking at those across the whole portfolio.

Very good. Thank you very much.

Thanks. We have a question from Simeon Gutman with Credit Suisse. Please go ahead.

Hi, Simeon.

Hey, thanks, good afternoon. Roger, you mentioned looking out for some open points. And I guess one of the strengths of being in the premium luxury space, it tends not to be over-stored or over-dealered relative to some of the other spots. So as you're seeing you're getting open points and I feel like there's probably decent growth in some of the premium luxury brands. How do you see that landscape changing much in terms of the dealer profile and the brands commitments to managing the markets?

Well, let's look at, from the standpoint of what we've got, on the premium side, you really have to say that the Audi and Mercedes businesses in Chantilly were key. Now, those were really contiguous markets. You can almost call them companion points, such as Lexus has done in the past. Many of the open points we've gotten obviously were Mini. We were the first roll of Mini in the US. I think we demonstrated the commitment to the brand. And again, when you talk about facilities, if you're going to be a Mini dealer today, you're going to have to spend $5 million or $6 million to build a world class facility. And I think that we saw the brand move and we made the same commitments at Audi with their terminal design now.

And I think that overall, there has been a contraction on the Big Three, based on bankruptcy, or at least with Chrysler and General Motors. Ford has obviously taken dealerships out because of the inter-brand competition. I think there's still more has to be done so selectively, you'll see them in new markets, or adding some in the markets. But Mini is continuing to grow, because the brand is growing. Hyundai is growing because they've had some great success, Kia. So you're seeing some of the Korean brands, I would say today probably have added more dealerships when you look at it overall. I think that there's not going to be a huge sea change of all of a sudden the open points available. I think in many cases, one of the benefits are that -- so we can get the margins we need to handle the loaner cars and other things is not to have so much inter-brand competition. I think we need to drive them. On the other hand, we have to be sure we have the customer satisfaction on each of our locations.

But I think it's brand by brand. It is performance in particular areas, where people need you but you look at our growth, it's been organic and certainly through acquisitions. And lately, we've been fortunate on some open points but I'm not seeing many stores being added by -- when you think about Toyota and Honda, BMW, and Lexus, and certainly in the UK, we'll probably see over there in Europe, you're seeing just the opposite where they're trying to close down some of the operations. Our BMW business in Augsburg, Germany had five locations. We're down to three, because we just didn't need five. So you'll see some contraction over there.

And then piggybacking on this SG&A question and specifically on the rent expense, it looks like it barely increased this quarter, versus some of the I guess previous quarters were in the mid-single digit range. And what you spoke about ties into that. But curious how some of these other facilities that you say may come up, is there a pipeline for next year? And on a same store basis, should that rent move a lot or should it be more consistent with --

I would hope it would be consistent. Now, we had some 10-year bumps on some of these sale lease-backs. Obviously, we did early on. But when you look overall on a same store basis, we were only up $700,000 in the quarter on rent across the Company. So we'll get some CPI would be all I would expect. And then we hope to demonstrate our benefits in purchasing some of this property, and when you own it at the lower interest rates, we think there's some impact from a book profit perspective and also from a cash flow over time.

And then last question, on the parts and service business. I think the customer pay was up [three - four], if I had that number right. Can you talk about how broad-based or how that layered out across your brands or across your segments and geographies?

Boy, that would be difficult for me to say across. I would say all of the larger, the premium luxury side, because of the complexity of the vehicles today and the Mini, where you got the full circle programs, where you got maintenance as part of the purchase at Lexus, at BMW, and we're selling extended warranties. So in many cases, those customers are coming back, so I would say that we've had a pretty good stream. And you can see the margin on that business also. And our parts and service continues to grow.

Toyota and Lexus would be down, if you just looked at by brand. I'm not talking about geographically, but by brand, because we had the acceleration problem with Toyota. We had the valve train problem with Lexus, which were big, big recalls. Those are obviously behind us. So we're filling that back in with normal more share of the wallet on some of the other things that we can do for the customers. So to me, when we look at 2011, we sold almost 18,000 pre-paid maintenance contracts which is basically flat, with the year ago. But again, that doesn't count the ones that come in automatically when you buy a BMW, or you buy a Lexus now with the full circle programs.

Okay. Thanks. That's helpful.

Thank you.

We have a question from the line of Scott Stember with Sidoti & Company. Please go ahead.

Thank you, Scott.

Hey, how are you, Roger?

Good.

Could you maybe talk about how some of the individual brands performed, maybe starting with some of the premium names such as BMW and Mercedes?

What, from the standpoint of just overall, for the year?

Actually, for the quarter, specifically for the US, talking about some of the premium brands, how they did in the quarter.

Well our premium brands, obviously, when you look at overall, on the premium side the market was up about 6% as I remember. And we were up almost 9%. And on the volume foreign, we were flat. I think I said it before, because obviously we were down on inventory, and we have what, 27 or 28 Honda Acura stores and we have 25 Toyota stores, so that was flat. And obviously, our domestic business was up about 3%, which only represents about 4% of our overall revenue. So I think that we outperformed the market in our sweet spot, the premium luxury.

But specifically BMW, how did they perform for you?

Well, BMW obviously was strong for us. When you look at BMW, it was up 13% from the standpoint of our business overall and Mercedes was up 32% in the quarter. So we can't -- and the UK, obviously, we had some shortages with BMW, so we were down. And that was mainly due to the 3 Series.

Okay. Great. And on the used side, could you talk about the comps, the UK versus the US?

On the used side, on the comps, for used units, we were up 18% in the US. And internationally, we were up 12%.

Great.

But again, it was -- I think it was a strong quarter. I mentioned I think in the comments I made at the beginning, was on the new side, in the UK BMW was, because of the 3 Series is the number 1. That's a real volume car. We didn't have that in the fourth quarter. And then we had this VAT, value-added tax, which was started in January of '11, and that obviously had some pull-aheads in December of '10. So that had an impact on us over there. And to me, when you look at those specific areas, they probably impacted our new side internationally. But otherwise it was business as usual.

And of course, we're trying to get a lot of the units. There's some MLs, GLs, you've got certain -- we talked about Land Rover product, which would be premium, that are short supply. And obviously, we ran through a lot of that inventory in November and December, because there was a tremendous amount of impact with what they were doing marketing-wise, an incentives to the consumer in the last two months, so we got the benefit of that.

Okay. And the last question, it goes back to the point about purchasing facilities off of lease. How much of your real estate do you currently own right now and where would you see that going over time?

I will get Tony to come back on. I don't have that number. We don't have that number right here. We want to give you the right number. But it is not a lot. We basically have preferred to lease our properties. I think we have, if you look at what we have on our balance sheet, we probably have got $150 million. If you looked at it on a worldwide basis, maybe about $200 million of properties that we own. So it's a significant number, but it is small when you think about 350 franchises around the world. So we'll get that number for you.

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

We have a question from the line of James Albertine with Stifel Nicolaus & Company. Please go ahead.

James, how are you?

Great. Hi, and thanks so much for taking my question here at the end of the call.

No problem.

Very quickly, just a housekeeping item. I was looking for some guidance on what you thought the maintenance CapEx level was relative to your aggregate. I think you said $120 million guidance for FY '12. And then separately, you've alluded to a number of times throughout this call the importance of technology, from sales and servicing cars. Is there any data that you've gathered or can point to at this stage, or if you look at your comp stores, you can tell that perhaps on a customer acquisition cost basis, that you're drawing in customers from farther distances, or perhaps you're taking share away from smaller, less well capitalized competitors? Any details you can provide there on the upside on the technological enhancements, more of the social media investment, and so on. Thanks.

First, I would say our maintenance CapEx is around $25 million, would be pretty realistic, as we go forward. And when you think about what is going on with technology, obviously internet is key. Our presence on PenskeCars.com, where we have all of our inventory available for display and pricing, both new and used. We've also put some partner programs together where certain big companies like Verizon and Shell and Cintas and AAA and people like that have the opportunity to go on the website, because it is a partner program, and access our inventory. So that's technology really that's key. And I think when you look at our mobile site usage continues to grow at triple digits and I think that's key to you. We had 415,000 visits on PenskeCars.com in the last 90 days. So we're seeing real action from that.

I think when you look at Google, you look at Yelp, we're looking at that. I think on the internet, in the UK, we put all of our managers' names on the internet, and their contacts, so from a CR, CSI, or CRM perspective, you've got comments on the web about what experience has been with the dealership. We have obviously Facebook and Twitter and we have people here that are following that. So I think the CRM products that are available today, the equity calculators that we have with the cars coming in the service drive, where we can actually understand by VIN number what's the equity in these vehicles, these are giving us tools that we never had before. So if you're a good salesman, we can just give you that information, the lease returns, being able to pull some of these ahead, and doing this with some of the keys we have in the internet.

I also would say a lot of the traffic that we're getting is going to our career center. So the internet is also helping us build our human capital, which probably an asset that we didn't realize early on. So to me, we're looking at in the CRM systems, interesting, in Northern Ireland, when you walk in the door, how they put you in the system, and how they take you out when you leave. There are some very specific things that we're using. Also, up-selling, we're now going to where we just don't have service writers. We have a BD center. So in the UK, all of our BMW service for 15 dealerships come into one site, and we're able to staff it properly in the high volume times, and these people are typically, not typically, they are trained for that particular brand, and they can up-sell.

So those are the types of things, with technology, you think about it, all throughout the UK, and yet one location is taking all of the service calls, making all of the appointments, doing the CSI calls, and up-selling. So we're using those types of capabilities to drive our business, when you have the scale in a particular area.

Very helpful. Thanks again for fitting me in. And congratulations on a great quarter.

Great. Thank you.

And a question from the line of Brett Hoselton with KeyBanc. Please go ahead.

Hey, Brett.

Roger, good afternoon. Thank you very much for taking my call.

No problem.

Your used-to-new ratios has improved quite nicely over the past several years. Do you have a specific target in mind, in other words, maybe 1 to 1 in the next 2 years, or something along those lines? Is there something that you're targeting there?

I think in the past it's been difficult in the premium luxury side to get high volume used but I think we've found the answer selling everything we trade. And we're 1.2 to 1 in the quarter in the UK, and they're running typically over 1 to 1. I would say that our goal, we went from 0.7 to 0.8, that our goal should be to get another turn on that, as we go forward and the continued reducing of the wholesale will help drive that. And when there's more used cars available, too, we're not able to buy as many used cars at the auction, the ones that we would want, because the rental cars and some of the commercial companies have kept their vehicles longer. We've seen that even in our trucks where we're running them a little bit longer, but those vehicles will ultimately come into the marketplace so that will drive a higher used vehicles. And what we've done in most cases in the larger facilities, we're splitting the new and used operations so we've got people fully committed to the used car business and not trying to sell both and I think that makes a difference, too, from the standpoint of focus.

And you said earlier that you thought that you might see another $100 million or $200 million of acquisition in 2012, if I heard you correctly. My question is, is that just a general target, and if an opportunity comes along, you could see significantly more than that?

Well, you never know. I think that we've got to look at our capital base and the allocation of our capital. And we've got dividends. We've dividends. We've got CapEx. We've got acquisitions and we also have stock buy-back's and debt. So I think that it's opportunistic, but it's early in the year. And there are some -- we're having discussions with some sellers at this particular time, but I don't see anything at the moment of any magnitude. And they're going to have to be ones that fit right into where we are. We're probably not going to go into any new markets without having some scale when we do it.

And then finally, your F&I, in the past couple of years, you've seen some improvement in your F&I. Is that a generally improving trend? I mean, do you expect it to continue to improve? Or do you think that $1,000 a vehicle is about where you're going to end up?

I think what people have to understand, when you have the mix like we do, in the premium luxury side, and the bigger percentage of the cars that we sell are leased, we don't have the finance revenue stream and each transaction should do it, but if it is primarily an APR sale. I don't know what the optimum is. I'm not a big fan of loading the consumer up with all sorts of soft ads and then you get a repo, it comes back and you potentially have a charge back. So I think we're making our money on the front end. You look at grosses from an overall standpoint, and I think we're in pretty good shape here. Obviously, can we get more? If we can get more on the right basis, we will.

Excellent. Roger, thank you very much for taking my questions.

Okay, great. Thank you.

Thank you. And I'll turn it back to Mr. Penske for closing remarks.

Fine, thank you, everybody, for joining us today. Great year. Appreciate the support. And we will see you next quarter. Thank you.

Thank you, ladies and gentlemen, this concludes our conference call for today. We thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.