Penske Automotive Group Inc (PAG) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group fourth-quarter 2012 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through February 13, 2013. 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 Mr. Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you, John. Good afternoon, everyone. Our press release detailing Penske Automotive Group's fourth-quarter and 12-month results ended December 31, 2012 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 J.D. Carlson, our Controller. Following today's call, I will be available by phone to address any additional questions that you may have. We have also posted a presentation to the Company's website designed to assist you in understanding our financial results. We urge you to refer to this presentation during our call today at www.penskeautomotive.com.

Before we begin, I would like to remind you that we will be discussing certain non-GAAP financial measures such as adjusted income from continuing operations attributable to common shareholders, adjusted income per share from continuing operations attributed to common shareholders and adjusted EBITDA on our call today. We have reconciled these items to the most directly comparable GAAP measures in our press release dated today. I refer you to that press release for additional information.

The Company believes these widely accepted measures of operating profitability improve the transparency of the Company's disclosures and provide a meaningful presentation of the Company's results from its core business operations, excluding the impact of items not related to the Company's ongoing core business operations and improve the period-to-period comparability of the Company's results from its core business.

Adjusted income from continuing operations and related earnings per share to common shareholders for 2012 excludes after-tax costs of $13 million, or approximately $0.14 per share, associated with the redemption of the Company's $375 million of 7.75% senior subordinated notes. Adjusted income for continuing operations and related earnings per share attributable to common shareholders for 2011 excludes $11 million, or $0.12 per share of net income tax benefits as noted in our press release.

Additionally, today, we may make forward-looking statements on this call. Our actual results may vary because of risk and uncertainty, 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-Q.

At this time, I would like to turn the call over to Roger Penske who will take you through our fourth-quarter and full-year 2012 performance.

Thank you, Tony. Good afternoon, everyone and thank you for joining us today. I am pleased to announce that Penske Automotive reported record fourth-quarter results this morning from income from continuing operations and earnings per share. The record results were driven by a 19% increase in total new and used retail unit sales and an 18% increase in total revenue to $3.4 billion.

For the fourth quarter, income from continuing operations attributable to common shareholders increased 20% to $51 million and related earnings per share increased 21% to $0.57. Our results include approximately $1.7 million in expenses or $0.01 per share for insurance deductibles and cleanup costs associated with Superstorm Sandy.

Before discussing the details of the fourth quarter, I would like to summarize the Company's full-year performance. In 2012, PAG achieved new performance records for retail unit sales, revenue, adjusted income from continuing operations and adjusted earnings per share. Total retail unit sales increased 20.6% to 326,000. Our new-to-used ratio ended the year at 0.81 to 1. Total retail unit sales increased 17% in the US and 29% in our international markets.

Revenue improved $2 billion, or 18%, to $13.2 billion. Approximately $1.1 billion of the increase was attributed to the same store, which grew by 10% last year, while the balance of the increase, or about $900 million, is attributed to acquisitions. We generated 130 basis points improvement in SG&A leverage, improving to 79.2%. On a same-store basis, SG&A gross profit was 79.1% and SG&A leverage improved by 150 basis points. Adjusted income from continuing operations increased 26% to $206 million while related earnings per share improved 27% to $2.28. We generated $407.6 million in adjusted EBITDA.

During 2012, we strengthened our balance sheet by issuing $550 million of 10-year senior subordinated notes at 5.75% and used a portion of the proceeds to refinance our existing $375 million in senior subordinated notes. In doing so, we reduced our interest rate by approximately 200 basis points while extending our long-term maturities from 2016 to 2022.

We also redeemed all the remaining senior subordinated convertible notes outstanding in cash and we extended our existing US-based $375 million credit facility for an additional 12 months. We expanded our international presence to new markets by entering northern Ireland, Italy, while, in the US, we expanded into Madison, Wisconsin and further solidified our presence in southern California.

And finally, our Board of Directors raised the cash dividend each quarter and most recently to $0.14 per share representing a 1.7% yield and approximately a 25% payout.

Now let's turn to the specifics behind the fourth quarter. Total retail unit sales increased 19% to 81,400 units and revenues increased 18% to $3.4 billion. On a same-store, retail revenues increased 11%, including a 13% increase in the US and a 9% increase internationally. Excluding the effect of foreign exchange rates, total same-store retail revenue increased 10.8%.

Our total revenue mix during the quarter was consistent with last year. The US was 67% and international was 33%. Our brand revenue mix was also consistent with 2012. Premium luxury in the quarter, 72%; volume foreign, 24%; and Big 3, 4%.

Looking at new vehicles only, we retailed 46,400 units in the quarter representing a 22% increase when compared to last year. Our premium luxury was up 24.6%, volume foreign up 17.2%, and the Big 3 up 17.5%. Total same-store new retail units increased 15% as they outperformed the US and international markets in the fourth quarter, again, demonstrating the strength of our brand mix. We were up 15% in the US. The market was up 10.2%. In the UK, we were up 13.8% and the market was up 9.2%.

New vehicle gross profit per unit was $3197 and our margin was 8.2% compared to 8.3% last year. Looking at our used vehicles, we retailed 35,000 in the quarter, an increase of 16% and our used-to-new ratio was 0.75. Total same-store used units retail increased 7%. US was up 10% and international was up 2%. Used vehicle gross profit per unit was $1857 and our margin was 7.2% compared to 7.3% last year.

Our finance and insurance revenue increased 19%, including 13% on a same-store basis and our F&I was $986 per unit and that was pretty much flat with last year. Service and parts revenue increased 9.2% during the quarter, including 3.2% on a same-store basis. Our customer pay was up almost 7%, warranty up 17%, bodyshop up 8% and PDI up 15%. Our gross margin for service and parts improved 110 basis points to 58.8%. Overall gross profit increased 17% to $515 million and gross margin was 15.3% compared to 15.4% in 2011.

Same-store SG&A as a percentage of gross was 78.5% compared to 79.7%, an improvement of 120 basis points. Our effective tax rate for the quarter was 32.4%. EBITDA improved 14% to $102 million compared to $89 million in the fourth quarter of 2011.

Moving onto the balance sheet, total non-vehicle debt was $938 million, up $88 million, or 10%, from last year -- from the end of last year. Our total debt-to-capitalization ratio improved to 42% and our debt leverage was 2.3 times adjusted EBITDA. We also remain well within the limits of all of our financial covenants.

Vehicle inventory is $1.9 billion, an increase of $448 million when compared to December of last year. New was up $392 million and used was up $56 million. On a same-store basis, our inventory increased approximately $300 million, new up $276 million and used plus $23 million compared to December of last year. Approximately $130 million was same-store that relates to the Japanese brands.

Our inventory days supply was 57 days versus 48 last year. Used was 48 versus 44 last year. Capital expenditures were $116 million under our corporate identity and renovation programs. In addition, we spent $32 million to purchase buildings and real estate we had previously leased and $10 million for rental vehicles. We estimate our CapEx to be $115 million to $120 million in 2013, excluding rental vehicles or any other real estate we might purchase during the year.

During the fourth quarter, we completed the purchase of a BMW and MINI dealership in Ontario, California adding scale to our market presence in southern California. We also completed the acquisition of Toyota and Lexus dealerships in Madison, Wisconsin, a new market for our Company. We expect these dealerships to contribute approximately $255 million in annualized revenue in 2013.

I'd like to make a few comments about the UK market. The UK market sold 2,045,000 units in 2012, up 5.3% and ranks the second-largest car market in western Europe. The retail market was up 12.9%, highlighting the strong demand for new vehicles in the UK.

Additionally, the top personal income tax rate in the UK will be reduced from 50% to 45% beginning in April for individuals earning more than GBP150,000. We view this as a positive development for vehicle sales in our premium luxury category. We are the leading premium luxury retailer in the UK and ranked number one in brand mix with Audi, BMW, Ferrari/Maserati, Mercedes-Benz and Porsche. In fact, according to Motor Trader, our UK platform is the second-largest in the UK based on revenue.

The premium luxury market continues to improve. In 2012, unit sales increased 7.4% and its marketshare improved 50 basis points to 25.2% of the market -- that's the premium luxury market. We outperformed the premium luxury market by generating an 8.2% increase on a same-store basis. Additionally, our used-to-new ratio in the UK market remains at a ratio of 1 to 1.

Before I open the call for questions, I wanted to provide a few comments about some of the key initiatives we have in place for 2013. First is our growth. We are targeting revenue growth of more than 10% in 2013 through a combination of same-store and acquisitions that complement our brand mix and geographic strategies as we look to build scale in our areas of concentration.

Second is SG&A leverage. We are targeting a 100 basis point improvement in SG&A to gross profit during 2013.

Third is F&I. We are targeting an improvement in our performance through a combination of efforts, which includes adding resources to drive additional training, higher product penetration rates and targeting our underperforming locations.

And fourth is our virtual showroom through our dealer websites and penskecars.com. We will be rolling out website enhancements aimed at improving overall design, performance and effectiveness of all of our websites brand by brand. We will also improve navigation and system functionality, including inventory images, pricing, descriptions. This will drive improved online performance. We will also improve our customer relationship management programs through enhanced communications and data warehouses to drive consistency in our customer communication processes.

In closing, I believe our results continue to demonstrate the strength, the diversity and the resilience of the PAG business model. I remain optimistic about our business and we continue to see the strength in our markets and are pleased with the pace of our new and used vehicle sales.

Our inventory is in good shape. Our balance sheet is healthy and we continue to grow the business generating a 21% increase in retail unit sales in 2012, increasing revenue by $2 billion, or 18% and driving a 26% increase in adjusted income from continuing operations and a 27% increase in adjusted earnings per share. We continue to believe the pent-up demand, the strong credit availability and the many new product launches we see coming to the market should continue to keep the demand strong.

I appreciate everyone joining us today. I appreciate your confidence in our model. Let's open it up for questions. Thank you.

(Operator Instructions). Matt Nemer, Wells Fargo.

Good morning, Roger. So a couple of questions. First, on service. Your same-store warranty business was up about 10% and obviously, units in operation should start to improve and maybe have already started to improve and will continue to improve. What is a good run rate for service comps for this year? Do you think in total we can see that go even higher as the units improve?

I think -- we were up 3.2% overall. I think the dynamics -- obviously, customer pay is a big part of that and I think what we are trying to do is get more share of wallet from the customer. We have added certain things such as windshields, window tinting. We have a rapid repair alignment program that we have added in the service lane, which have been driving that customer pay and I think the one good thing we saw was an increase of 70 basis points in our margin during the quarter.

We had a little bit of a spike in warranty. Some of that has to do with our international business where I know Mercedes had an injector program and their parts business was up about 85% for the quarter and also their labor was up about 30%, so there was some impact there probably on the positive side. But, overall, I see probably a 3% to 5% increase on parts and service as we go through 2013.

Okay. And then, secondly, you mentioned that one of your plans this year is to do more training in the F&I area. You are running at about a $1000 per unit right now. What kind of a goal should we think about for that number on a one or two-year basis? Can that get up to $1100 or $1200 per unit?

It's interesting. When I look at our peers in the business, some of them are higher. We have a higher rate in the UK at this time probably running around $1200 in the UK. And in the US, obviously, we are lower when you look at it, somewhere around $900. I think what we are doing -- we have left this process for the last 10 years really based down at the dealership level and we have found that consistency is probably most important. So we have added specific people that will drive the F&I product on a day-to-day basis, not just relying on our local management. I think that is going to make a difference.

Obviously, being in the premium luxury side, there is lots of leasing, so we don't have some of the benefits of extended service contracts on a leased product. But, again, we have some wraparound service that we can provide that customer. So to me, it is a simplified menu. Obviously, it is better training and again, consistency. So to me, these are things that will help drive that. I would hope that we could see a $50 increase in that throughout the year.

And then, lastly, a lot of your stores are premium luxury, so the name of the store has the brand and the local market. So you are not able to necessarily do a mass renaming of all your stores. But as you look at changes that you are doing, making to the websites, how do you tie the Penske name into your marketing across all of your stores, particularly these premium luxury stores that have the name of the brand and the market?

Well, I think you have first got to talk about -- we have established the Penske brand through truck leasing, so that has been pretty consistent across our 700 locations, which obviously is a single product. When you look at this from our perspective, with 41 brands, we don't have the benefit -- because we have 72% of our revenue being premium luxury, maybe [to] name each store, as AutoNation has done.

I take my hat off to those guys. They are always breaking new ground for us from a public retailer perspective. But we are doing -- we are tying together penskecars.com we think is key. We have a consistent approach locally and I think, today, I look at this business as a local business. Again, when you look at a Penske company, you'll see most of our advertising and most of the communication that we send out to the customers relate to a Penske dealership.

So we have been doing that now for a number of years, so there is some -- I think some halo effect there. But because of our framework agreements, we would not be branding all the non-luxury stores with the same name. I think it is just a situation that we have looked at. I think that some of our peers are in a little different position because of mix and they have done that with other brand names in the past. So to me, we will stay on the track that we are.

Okay, that is all I have got. Congratulations. Thanks.

Rick Nelson, Stephens.

Good afternoon, Roger. Can you talk about inventory of your largest brand, BMW? We know you had some shortages in the summer months and then things seemed to get better in the fourth quarter. In fact, they had weak sales here in January. Just curious about the outlook there.

Well, from an inventory standpoint, we talked about it during the third quarter that we were really -- we were down and they doubled the -- I think there was some 34,000 vehicles coming in as we looked at -- in the last -- in December and November. And to me, we utilized those because we had such a strong finish for the year and I think we have a little bit of a hangover from the standpoint when you look at the numbers as we went into January.

But, overall, our inventory is in good shape. We are still tight on X3, X5 and obviously looking at some of the vehicles from an Audi perspective, Q5, Q7, all the GL inventory is tight. So, to me, it is a good news problem because what it does is it helps us drive our grosses as you saw during the quarter. But we don't have an inventory out of balance right now and hopefully BMW will give us a more smoother inventory rate as we look through the balance of 2013.

You bring up a good point on the margin. At $3200, it looks like things have stabilized and wondering your expectations there on the new car margin side?

Well, I think when you look and you break it down, really, in the fourth quarter, we were at almost $3200. But when you look at premium luxury, we were at $4252 and volume foreign was approximately $1800 and our domestic was around $2400. So obviously, the premium luxury carried the day and that is one of the benefits -- you almost can sell one of those premium luxury cars for twice the volume foreign and get the same margin. So we thought that was good.

One thing that we have really focused on was sequential. When you look at Q3 to Q4, we had a nice increase on new of over $300 per unit and on used, we were up $33. So typically, at the end, you would see those ratios go down, but that, to me, showed we had some traction. And I think that is just the way we are managing it. Obviously, the training is important and the fact that the premium was so strong and there had been, as we saw in some cases, in the Japanese three when we had the tsunami with inventory being a little bit tighter on some of these brands, it demanded a higher margin and I think our guys executed during the quarter.

But I would hope -- it would be our goal to maintain these grosses going forward. I think they have kind of settled in on the volume foreign because of the availability and hopefully we will be able to still get the higher margins on some of the unique models within the premium luxury brands during the balance of the year.

And if I could ask you kindly, the SG&A to gross profit, 79.1% stands higher than others in the peer group. I know you are targeting 100 basis points [narrowing] this year, but a long-term opportunity, do you think you can get that ratio down to the low 70%s or is there something structural about your business that --?

I think as we were growing this business the early five or six years, we did a lot of sale-leasebacks. So obviously, both the interest and depreciation are above the line. If you look at our business -- if you eliminate rent expense, we are down close to 70%, which I think is key as we look at that number. But we need to drive it down. I don't think I'm going to get to the numbers I have seen by some of the peers the way we are structured in some of the areas.

But also from a compensation basis, when you look at comp, that's up in SG&A. We might have a little bit higher compensation on premium luxury than you do in volume foreign and I think that might have -- so we have less turnover of our sales associates, which might be driven by a little bit more compensation. So that could be a factor also. But it is top of -- believe me -- top of voice when we are talking to our teams from the standpoint of driving SG&A. You folks have focused on it and certainly we are focusing on it as we go forward.

As I said I think in my remarks, we are looking at driving 100 basis points out. We have done that now and I think, on a same-store basis, we were 150 basis points last year. So again, that is going to take some work, but I think that that can be achieved.

Thanks for the color and good luck.

Thanks, Rick.

John Murphy, Bank of America-Merrill Lynch.

A question and following up on your SG&A comments, just curious, as you look at that 100 basis points, what are the biggest buckets of potential savings you see in 2013? Is it advertising or personnel or blocking and tackling? Just trying to understand what the big buckets are.

Well, I think when you look at advertising, or let's just call it marketing, there will be some additional spend in digital, but what we are trying to do is be consistent with our marketing. We need to have security, we need to have consistency. We have got to have quality. So what we can't do is all of a sudden run all over the map and I think that is one of the things we are doing and with this consistency, and providing in our data warehouses where we have data available for each brand that we have driven by brand, it gives some consistency and also that takes some costs out. So I think you will see it there.

We have also driven our pay plans as we go forward based on growth and these are bearable. So we have got to see that growth in order to drive a higher personnel cost. But I think those would be key.

Also, we have looked, as we did at the end of last year, we purchased two dealerships, which we had been leasing, which are going to give us some benefit from an SG&A perspective. And this will be part of our strategy based on availability as we go forward.

That's helpful. And then a second question, as you look at your representation of the Japanese brands, I guess particularly Toyota and Honda, which are reasonably large for you, and the current swings or the recent swings, I should say, in the yen, do you see them getting more aggressive on pricing or incentive activity or is it steady as you go and based on your past experience, would you expect them to get more aggressive given the swings in the yen?

Well, I have had conversations with both or all three manufacturers, specifically one and they say the sweet spot for them is between 95 and 100 for the yen and I think that both of them see a gradual growth in marketshare, but I think they want to keep their eye on incentives and right now, the best incentive is low rate financing. They've got good balance sheets and I think, right now, you're going to see a lot of that marketshare will be done with low rate financing and leases when it comes to the premium side of Lexus.

So we have never seen it affect us. Remember, we borrow in pounds in the UK. We borrow in Italy and certainly Germany in euros. So we are not affected from the standpoint of our business significantly. There is no foreign exchange really impact on our earnings and we sell in local currency. So, to me, right now, the OEMs, it is really up to them and I think that you have seen, as Toyota and Honda have come back, they've slowed down Hyundai, they have taken some share in the market and I think that is just the loyal customer base.

Toyota has introduced the Toyota Care, which gives everybody that buys a new Toyota free oil changes for the first two years. They are taking on that type of a route for owner loyalty for the future and I think those will be done without huge incentive at least as I understand it more tactical types of approach rather than just throwing money at it right now. That would be at least what I see at least in the first quarter.

Yes, very helpful. And then just a last question on your two major markets, just curious what your sales forecast is for the US for 2013 or your basic ranges that you would be thinking about. And then also really importantly what you are thinking about for the UK in Germany -- German markets for those businesses.

Well, I look at the retail market and 11.9% was the SAAR in retail in the US and I would expect that -- our plan is to see that drive at about 10%. I don't know what the fleet business will be. Obviously, that is individual rental car companies, etc., what they are expecting. So I see, as I said earlier, the credit is available, the pent-up demand, the older car park is key. Residuals are starting to slide a little bit because of new car availability. But, from my perspective, I expect the SAAR would be up 10% on the retail side. In the UK, when you look at the luxury side of the business, I would expect that to go up maybe 1% to 2% in 2013.

Great, that's very helpful. Thank you, Roger.

Brett Hoselton, KeyBanc.

Roger, how are you?

Great.

Tony, how are you? As we think about your target for a 13% revenue growth in 2013, in answer to John's question, you have kind of given us a sense of where you think new vehicle sales are going to go. But my question is how do you think about the breakdown between acquisitions versus same-store sales growth as you derive that 13% revenue growth?

Well, I think -- I said, I think, earlier that we are looking at a 10% gross, not 13%. It would be $1.3 billion, I guess, if you took the $13.2 billion. So maybe that is where the number you got. We are looking -- as a combination of same-store and acquisition would drive that number. When you look at it this year, we were $750 million was our acquisition growth and on a same-store basis, we grew over 10%.

I think that we have had a little bit of a holiday. All of the auto dealers, including the publics, over the last three years, the metrics -- the comps have been a little easier. So I think as we start to look at '13 and '14 and '15, then we are going to have some tougher numbers. So I don't want to go way out on a limb with a projection that we can't try to achieve. So I think our 10% will be a mix of both same-store and acquisitions. In the fourth quarter, we had $250 million of acquisitions I think that we announced.

And then the SG&A target of 100 basis points, is that overall Company or is that same-store?

Overall.

Okay. And then as we think about 2012 versus 2013 and maybe some of the potential easier comparisons, it seems like there should be at least an easier comparison with your BMW sales because of maybe a shortage of 3 Series inventory through the first part of 2012. Is that a fair statement or do you think that is probably not that --?

Well, there is no question we were tight in product. You've got a couple dynamics now. I think with western Europe slowing down, some of that production that was going to be in Germany and Italy and France and Spain, that will be targeted to come to the US. But we have certain business plan objectives and certain numbers that we have to achieve. And I don't think that BMW is driving us to unrealistic targets as we go forward.

I think we want to see -- I do want to see the inventory one too short rather than one too long if that helps us from a margin perspective, but we have -- I haven't seen specifically the volumes for the next quarter, but I think that, with the new 3 Series, we had to sell down the older model here. In Q1, we have got some new product coming out that will help drive some more volume in BMW and it is, on a worldwide basis, 26% of our total revenue. So it has a big impact on our same-store. But, again, I think the targets have been pretty realistic from the OEMs. And they probably -- I think they'd probably range in the 5% to 6%.

Thank you very much, Roger.

James Albertine, Stifel.

Good afternoon, Roger and Tony and thanks for taking my question. I wanted to focus, just if I may, on your CapEx guidance. I think if I heard you correctly, you said $115 million to $120 million for next year. Just looking at what you've spent on in the past several years, you have made some pretty big investments throughout your portfolio and I just wanted to get a sense for what is the maintenance sort of run rate within that number and really any kind of granularity you can break down within that guidance.

Well, some of the maintenance we drive through the P&L, the smaller maintenance goes through the P&L. These would be major projects, which would be larger facilities, CI improvements, obviously, which would be CapEx. We have made a big commitment to facilities starting back seven or eight years ago and I think that is paying off now because we have gone from a spend, a gross spend of over $200 million now down where we are spending on construction and CI of about -- we said $115 million to $120 million.

Now on top of that, we have got to add in if we buy land or we buy out a lease, that would be added on. We do have some rental car costs, which are also in our CapEx number. So I think that we should look on what I would call standard CapEx will be between $115 million and $120 million. And I think there is probably -- when you look at maintenance CapEx, it could be 10% of that.

Very helpful. And then I just wanted to dig in a little bit. As the markets for M&A evolve, you are looking now a little bit -- cast a little bit of a wider net. We have seen Italy and northern Ireland and still some opportunities in the US. So with respect to your capital allocation plans, maybe could you update us now on some of the priorities, assuming M&A is pretty close to the top, but other priorities you may have in terms of the use of cash in the year ahead?

Well, I would think -- we talked $115 million to $120 million in CapEx. We still have $100 million roughly for stock buyback and any debt reductions that we would have. In our dividends, we are paying about 25% on our dividends, so they would be -- that would be key and then, obviously, the remaining we would use for acquisitions.

Okay. And then one last housekeeping item. If I missed it, I apologize. Could you just tell us what your advertising expense per unit was and then remind us the percentage within your portfolio of the stores you own versus lease? Thanks.

I didn't understand the last question.

The percentage of stores in your portfolio that you own outright versus lease.

Okay, I think our rent is about $174 million on an annualized basis and we own less than 10%. I think in the UK, we have $150 million of property. Probably a preponderance of the ownership would be in the UK versus the US. We've just obviously made a couple acquisitions here in the US in the last 12 months and from an advertising on a per-unit basis, we were down about 11% per unit. We were $238 million this year versus $268 million last year from the standpoint of our advertising.

Excellent. Thanks and good luck.

Simeon Gutman, Credit Suisse.

Hey, Roger. Good afternoon. A follow-up on credit. You mentioned in the prepared remarks that you expect credit availability to stay strong. I think about a year ago, the credit market was really inflecting positively. It still seems to be getting better. Is there any reason to see that it is getting incrementally even better beyond that or are we just going to continue along the same pace that we have been?

Well, I would say that when you look at the captives who have a vertically integrated captive finance company, or the OEMs that have a vertically integrated captive finance company, they have been very strong. I mean they are buying used car paper, which I think is very helpful to us in growing our business. They had to get into that business when new car business went down and they have continued to buy used along with new. So I see them very active.

Now the banks have money at low cost and we have seen a little deterioration. Probably about 6% or 7% percentage points in total financing has moved over to what we would call our key lenders from a banking perspective. So I see it being strong.

The interest in financing real estate now is all the manufacturers, captives are wanting to be in that business. And I think that that is key. Leasing, as you saw in December and the fourth quarter when we look at Audi, Lexus, BMW and Mercedes, I don't know this is the number for sure, but I bet you if you add them all together, they are north of 60% with lease versus a cash buyer and financing.

So I would say they are in the game, they are very important to us. Most -- we are primarily vertically integrated on our floorplanning. They are very competitive on floorplan rates, which is obviously key for us. In many cases, you get some benefits when you floorplan along with handling retail and lease contracts with the same entity. So banks are aggressive at pushing the captives, but, overall, I would say that they are good.

And the CPO activity, one thing we can't forget is a certified preowned, the benefit of getting new car finance rates in some of the CPO activity is very powerful in the market from the standpoint of conquesting customers to the brand.

Okay. And if you look at the complexion of credit scores in the portfolio, where do we stand today versus say a few years ago or before the downturn? Are we far back or we are still far away?

I think we have read both in the UK and also in the US that housing prices have increased. So I would say that, today, just overall, if we have had our assets appreciate some percentage is going to give us higher credit scores because of marking to market the assets you have. I think that bodes well for us.

I know, in the UK, they talked about that. In the last couple days, we thought that was -- we don't do much subprime, so our business is primarily in the premium luxury and then with the captives. But I can't tell you whether it is 600 or 650 or 700. All I know is that the captives are very receptive to financing both new and used and in fact, some captives were running as high as 80% both on new and used, which is very powerful.

Okay. And then on parts and service, the gross margin looked like the improvement was pretty good. Can you talk about the drivers of that and then I will just sneak my last one in on this question? Any initial observations of the rental car business and how that is going? Thanks.

First, on our customer pay, we had about 70 basis points leverage and about 40 on warranty and I think that is, on the customer side, I think that really you start to see the customer pay because we are asking for more share of wallet. We have more offerings than we did -- just basic maintenance and I think that is key. With the complexity of the cars now, it is very difficult for the guy with the local shop to work on some of these cars now that are older, and we have got the benefit of an additional car park with the vehicles now adding into the total units outstanding. That is helping us drive more business and we are getting more hours per RO, which is key on the customer side.

And on the warranty side, some of the programs where the manufacturers are offering a full service, those programs come through warranty. So it shows warranty being up a little bit, but I think we have a higher margin when you look at -- and our warranty business typically carries 130 basis points higher margin than the customer labor.

So to me, a little bit of a mix shift and some of that is due to OEM programs. So to me, there have been some recalls. Mercedes, Toyota has announced a big recall. Those are key for us. We get very efficient on those from the standpoint of our technicians and we drive those. In many cases, we will work extra shifts to get that business through the shops. To get more utilization, might run a 10-hour shift rather than an eight hour shift to be able to accommodate the customer.

Thanks.

Ravi Shanker, Morgan Stanley.

Good afternoon, Roger. So thank you for this guidance, if you will, on the 10% revenue growth and the 100 basis point of share improvement. A couple questions on those. Do you need further acquisitions to get to the 10% or are already announced acquisitions going to get you there?

I think we need some more acquisitions and we would expect to have obviously -- we are not ready to announce any right now, but I think there is a number of opportunities out there, both domestically and internationally, that we are looking at and we would expect that to be the case. It has been that way really from the beginning. We started with $900 million of revenues back 10 plus years ago. So we would expect more acquisition revenue during 2013.

All right. And can you also comment on 2013 with regards to BTL and where do you see the outlook there, especially with macro (inaudible) improvement, potentially a housing recover as well?

When you look at BTL for the year, we grew the top line approximately 2%. Our rental was up 10%. Our logistics was down 5%, but I think we had good productivity. Our earnings before taxes were up 14% from $246 million to $279 million, which certainly was a great year for us. And what has happened, we have seen truck tonnage go up about 2.3%. Truck utilization is in the mid-80%s, which is very high. And that is driving a rental business.

One dynamic that we are seeing is people are a little bit more cautious on making a commitment to lease a truck for over a longer period of time and would rather pay a higher rental rate because, if business goes down, they don't have the consumer confidence they can turn that truck in. So we are managing our fleet -- our fleet is about 220,000 units now, about 65,000 tractors. So we have a real good understanding of what the utilization is. Our rental fleet tractor utilization has been excellent for the last 12 months.

Another dynamic, just like we have seen it on the car side, we have got an older truck park now getting into seven years and we are seeing used truck prices going up, which obviously is driving gain on sale for us, which has been good. So I see the future very good because people are going to have to replace and to me, we see the new technology -- in fact, will, in some cases, create 5% to 7% better fuel economy, so that will drive a fleet to make these changes even though the cost of the lease would be higher than it has been in the past.

But overall, a strong demand on rental, a little cautious on the top line, but yet our ability -- logistics is a little bit longer sell because many times it takes you six to eight months to wrap up a deal because of the complexity, but we feel good about our offense there. And again, the one-way business, the rent it here/rent it there, was up this year. Revenue per transaction was up and length of rental was up. That's showing people are moving a little bit further from their core home or business, which provides us more revenue.

Very helpful. And lastly, on the tax rate, are you looking at the 35% rate, which you have been fairly steady at or more like the second half of 2012 where you earned a significant level lower than that?

Well, I think the 33% to 35% is the range you've got to look at. Remember, we continue to get a 2% reduction in the tax rate in the UK. It has come down now I think about 6% as we go forward and that will help drive our overall tax rate down. But I think 35% is probably good for any model you use at this point.

Great. Thanks very much.

Patrick Archambault, Goldman Sachs.

Yes, thank you. Good afternoon, Tony and Roger. I wanted to follow up on a question that was asked earlier. Just on the digital strategy, I mean penskecars.com, you have a pretty good portal already set up there. Can you give us a sense of how many sales kind of go through that portal at present and maybe a little bit more on what kind of changes you aim to make and sort of how you see its importance growing over the next year or two?

Well, I think that we obviously get way over a million visits per month to our website and I think that it continues to grow quarter after quarter. But I think the most important thing, when you look at the Internet, is are we able to dissect the traffic, are we able to understand what gets us the clicks and quite honestly, we have been analyzing different -- our peer group is one obviously. It's always good to know what they are doing. We have reviewed the OEMs from the standpoint of websites. We have looked at the best performing non-automotive websites to try to understand the design trends from both automotive and non-automotive.

And I think that we are looking at user experience trends from both non and automotive and I think that, as we do this, we are able to look at click tracking data to be able to give us some direction as we go forward using analytics and also the redesign. And what we have to do is look at this -- it is 41 different businesses because each individual brand has its own personality. And I think from that perspective, we need to drive from the corporate OEM website down to the local market. So we have got to look at that because I would say a website for Mercedes-Benz is going to be different for Kia and I think we have to look at that.

So we are looking -- we need to be secure, we need to have a quality website, and we have also got to be able to -- the functionality of that has to be good. And I would say that all of us in the peer group are working on that and certainly from our perspective, we think that we are really on track. We have got a great group working on that. Our people in the field have bought in and I think they understand that. That has got to be one of the areas that we look at from an SG&A perspective, just how much is going to be traditional advertising and how much is going to be with the use of the Internet.

And some of it is this direct mail that we will use or through e-mail that will make a big difference too and just how robust that is and does that call for action. Because many things that we have been involved with in the past really don't call for action. I think that is one of the things that we are trying to develop.

And consistency and the quality of what we are doing is key and I think that is one of the things that I think drove AutoNation to their decision to get consistency around the brand look across the country, which obviously makes a lot of sense. We have been trying to drive that already with Penske cars, but also brand by brand.

Okay, understood. Very helpful. One other one, if I may. On the used side, you cited your used-to-new ratio going down to 75 -- 0.75, which is I think a bit lower than over the last two years on a quarterly basis. I think you've typically been in the 80s. It is something we have seen with other -- a couple of other dealers as well, I think. Is that a cyclical effect? Just the change of sales, share gains by new versus used or how do we think about that and how do we think about modeling that on a go-forward basis?

Well, remember, new has moved up, so, obviously, our new business is growing really at a faster rate where it was the inverse of that probably for the last 24 months. And I think, in the fourth quarter, with the impact that we had on premium luxury increases certainly drove some of that difference. But we still say 1 to 1 in the UK and quite honestly, when you look at -- when you look at our business, we have grown used tremendously and we think that is -- a byproduct of that is obviously the parts and service business.

So at 0.8 to 1 we think is where we want to be. 0.75 I think you will see that -- we have yet to achieve our goals in some parts of the US where we know we have a better opportunity to get more used car business. And it's a mentality, it's demonstrating it by showing what other peers are doing with the same brands, other parts of the country. This was really started in the Central by one of our guys and it has now taken hold and I think we will see that number. Our goal is to get to 1 to 1 and I think when you look at the number of vehicles that we sell and we are at 0.81, on a worldwide basis, I don't think we should get a pretty good grade for that.

Okay, terrific. Thank you very much.

Scott Stember, Sidoti & Company.

Good afternoon, Roger. Could you maybe talk about where you expect the margins in the used business to go, particularly with all those cars that were sold three years ago, new cars really starting to come off of lease, the supply at auction? How would that whole scenario work out for you guys?

Well, I think that it depends on CPO, there is a certain amount of advanced rates that the captives will give us on certified preowned and also used. And as long as they are aggressive, that will give us a chance to get more margin. It is not like a new car. Used car is specific by itself. Depending on the age and the condition, that car will drive value. It just depends on how much you can get from an advanced (inaudible) if you are financing it or leasing it. So that is going to be one factor.

From our perspective, we are moving down from a cost of sale. When you look at CarMax, they are in the $16,000 to $17,000. We are in the $26,000 to $28,000 from a cost of sale. So we are seeing that coming down and I think that, overall -- we will see, as we move down the chain, we will see some deterioration in our margin. We are at 7.2% now and I would hope we would sustain -- that number would be over 7% as we go forward. On a yearly basis, we were at about 7.6%.

So there is little downward pressure in Q4 and some of that has to do also with probably trying to be sure we get the new car deal. We might be putting more money in used and that giving us not quite the margin spread that we need for a higher margin. So I think it is a good area to look at. We have got to manage it. I want the volume because I want the parts and service business and I think it is the finance and more important is typically on used it is a new customer.

Got you. And just last question, can you maybe just touch on the acquisition pipeline, how things look right now? Is it better than it was a couple of quarters ago?

Yes, I would say that there is probably more people out there that are looking at potentially selling their business. And I think if you ask any of the public retailers -- remember, the one data point that I think the market has to understand is that only 10% of the market today is owned by the public retailers. And the good news is I think the general perception of an automotive retailer that is public is much better than it was in the past.

I think AutoNation broke the glass, started this route with us back 12 or 13, 14 years ago and the quality of the management, the capital that is available for CapEx when you hear -- we spent over $2 billion, AutoNation spent $3.5 billion and I know Group 1 and the rest of them are spending a lot of money and I think it is exactly what the brands need in this time period. And I think that is a big factor as we go forward.

So I think all the phones are ringing. It's just decide -- you have to decide strategically do you want to be international, do you want to be domestic, do you have certain markets where you have scale? All of us want to glue on stores where we have -- already have scale. We can have centralized offices. It makes it much easier. You can plug in your backplane from an [MIS] perspective.

So to me, this gives us a real competitive advantage and I would see the growth continuing both domestically, and we see a wide open market in Europe where capital is short, but there is all sorts of consolidation going on and I think there is an opportunity.

Okay. And just one last follow-up about the types of brands that you would be looking at. Are you more open to looking at the domestic brands, particularly with some of the gross per units that you mentioned?

Well, I would say this that we certainly have our eye on domestics. To me, we want a certain type domestic, meaning one where we can have volume in markets where we already have scale and they are certainly on the list where, probably 10 years ago, we were focusing primarily on volume foreign and premium luxury. Today, we will see that grow, I'm sure.

Great, that is all I have. Thank you.

Brian Sponheimer, Gabelli & Co.

Thank you for squeezing me in here. A couple real quick ones. Your average per vehicle was down only $20 in the quarter, which was clearly generated by mix on premium luxury. I guess I am curious, what was the average sale price per vehicle in the premium luxury side?

In the premium luxury side, overall, that number runs probably somewhere around $38,000, I think. I don't have it.

Okay. I guess what we have been hearing, at least what I have been hearing, is that there's more penetration on the entry side of the luxury market with the BMW 1 Series, the new CLA obviously being introduced by Mercedes later in the year. What are your thoughts on the OEMs, the luxury OEMs trying to get into this $30,000 vehicle area?

We love it because it gives us broader product to offer the customers. Think about Porsche. It was a sports car company, then they brought in Cayenne, then they brought in Panamera. Now they are going to bring in another smaller SUV, the same thing. BMW and Mercedes have gone from S Class and 7 Series, all the way down into A and B and 1 Series. We are attracting another customer and I think that is why they are gaining penetration, there is no question.

Just use the UK as an example. From the overall standpoint, you have seen premium luxury take 25% of the market and that has gone up 6 percentage points since I think five or six years ago. So we see it as a positive and the good news is they are building plants in the US here, so they can be competitive from the standpoint of those smaller vehicles because there is obviously less margin, but it is an entry level, which is really key.

Okay, that's very helpful. Thank you. And just one other, just on the effect from Superstorm Sandy, can you talk about what effect it had on new sales throughout the quarter, whether you think you still lost some sales in the November and December timeframe that you would've otherwise sold because of Sandy and any benefit on the parts and service side from vehicles that needed to be repaired?

Let me answer it this way. We definitely got a pickup from Sandy from the standpoint of new volume. Our used cars where we were -- we lost 1000 vehicles. A lot of those were used, so it probably took us a month to get any used inventory back up. But the new volume was up, the margins were a little bit better than they were the previous year.

We were probably out of business, if you just looked on an aggregate basis, on the parts and service side in Jersey City and also in Gateway, we probably lost probably five or six days. So do you get that back? Probably you do at some point, but there is no question that we were shut down and we are still operating -- in some cases, we had a generator running here a week ago at one of the locations because of power. Most of the facilities, when you look at Jersey City, all the sheet rock, all the walls, all the furniture has to be replaced. So we are operating with trailers, operating in temporary headquarters -- sales sites in order to be able to meet the customers.

But the good news is that we are efficient, our shops are back in business and we are moving on from Sandy. Obviously a lot of people are devastated there, which many of our employees we have to deal with. But from a business standpoint, it has been a plus on the sales side. I think it was a negative on the service side.

Okay, thank you very much and very nice execution.

Thank you.

And Mr. Penske, no further questions in queue.

All right, thank you and thanks to everyone for joining us. See you next quarter.

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