Penske Automotive Group Inc (PAG) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group fourth-quarter 2013 earnings conference call. Today's call is being recorded and will be available for replay approximately one hour after completion through February 20, 2014 on the Company's website under the Investor Relations tab at www.penskeautomotive.com. I will now introduce Tony Pordon, the Company's Executive Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you, Laurie, and good afternoon, everyone. A press release detailing Penske Automotive Group's fourth-quarter 2013 results was issued this morning and is posted on our website, along with a presentation designed to assist you in understanding our financial results. Joining me for today's call are Roger Penske, our Chairman; David Jones, our Chief Financial Officer and JD Carlson, our Controller.

On this call we will be discussing certain non-GAAP financial measures such as adjusted income from continuing operations and adjusted EBITDA and EBITDA. We have reconciled these items to the most recently directly comparable GAAP measures in this morning's press release, which is available on our website.

Also, we may make forward-looking statements on this call. Our actual results may vary because of risks and uncertainties outlined in today's press release which may cause the actual results to differ materially from expectations. Additional discussion and factors that could cause results to differ materially are contained in our public filings, including our Form 10-K. At this time, I will now turn the call over to Roger Penske.

Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that our business produced another outstanding quarter, completing the most successful year in the history of our Company.

For the fourth quarter, income from continuing operations increased 19.3% to $61.7 million and related earnings per share increased 19.3% to $0.68. The fourth quarter record results were driven by an 11% increase in retail unit sales and a 15% increase in total revenue to $3.9 billion, including a 12.4% increase in same-store revenue.

Before discussing the details of the fourth quarter results, I'd like to summarize the Company's full year performance. In 2013, PAG achieved new performance records for retail unit sales, revenue, SG&A to gross profit, income from continuing operations and earnings per share. Our record-breaking performance is largely attributable to the nearly 18,000 that make up the Penske Automotive Group team. Last year, six of our US dealerships were named to the Automotive News 100 Best Dealerships to Work For, while our UK business was again named one of the Best Big Companies to Work For by UK's Sunday Times. I'd like to thank each person on our team at these locations for their commitment to insuring the long-term success of our organization.

In 2013, we retailed 366,200 units, an increase of 12%. Our used to new ratio ended the year at 0.83 compared to 0.80 in 2012. Total retail unit sales increased 13% in the US and 11% in our international markets. Revenue improved 12% to $14.7 billion. On a same-store basis, retail revenue improved 11% with each area of our business achieving solid growth throughout the year. We generated 110 basis points improvement in SG&A leverage to 78% compared to 79.1% in 2012. Our gross profit flow-through was 31%. Income from continuing operations improved over 20% to $249.6 million, while related earnings per share increased over 20% to $2.76 when compared to the adjusted figures for 2012, and EBITDA increased to $485 million.

We completed acquisitions or were awarded open points representing approximately $850 million in estimated annualized revenue. Most notably, we further diversified our business with the acquisition of the commercial vehicle distribution business in Australia and New Zealand by building scale in our automotive dealership businesses with acquisitions in the US, UK and Italy. We also expanded our car rental business by entering into certain markets throughout Indiana. We now manage more than 50 on and off airport locations in Indiana and the Memphis market.

Finally, based on the strong performance, our Board of Directors raised the cash dividend each quarter and most recently to $0.18 per share, increasing our dividend payout ratio over 26%, and our dividend yield now is 1.7%.

Now, let's turn to the specifics behind our record fourth quarter performance. Starting with our automotive dealership business, fourth quarter results were driven by 11% increase in total retail units to 90,622 and a 15% increase in total revenues to $3.9 billion. On a same-store basis, retail revenue increased 12.4%, including 10.7% in the US and 15.9% internationally. The effect of foreign exchange rates increased revenue by approximately $13 million. Excluding the effect of foreign exchange, same store retail revenue increased 12%, including 14.7% in our international markets.

Our total revenue mix during Q4 was 64% in the US and our international business was 36%. 97% of our revenue was generated through our automotive dealerships, while the remaining 3% came from our commercial vehicle and car rental business. In our automotive dealership business, our brand mix was premium luxury with a 71%, volume foreign at 25% and the Big 3, 4%.

Looking at new vehicles, new units retailed increased 6.7% to 49,510 units, representing a 6.1% increase in the US and an 8.2% increase internationally. Premium luxury was up 5.9%, volume foreign was up 7.5%, Big 3 up 10.4%, and our total was up 6.7%. Same-store new units retailed increased 5.4%. In the US, we were up approximately 5% and international was up 7%. New vehicle revenue increased 10.5% to $2 billion as new vehicle averages selling prices improved 3.6%. Gross profit per new vehicle retailed improved 1.1% to $3,203 and gross margin was at 8.0% compared to 8.2% in 2012.

Our supply of new vehicles was 63 days at the end of December compared to 56 days at the end of last year. And looking at used vehicles, we retailed 41,112 units in the quarter, representing an increase of 17.8%. Premium luxury was up 17.7%, volume foreign up 19.1% and Big 3 up 0.5% for a total of 17.8%.

Our used to new ratio was 0.83 to 1 compared to 0.75 to 1 in the fourth quarter of last year. Same-store units retailed increased 15.6%. The US was up 16.8%, international was up 13.3%. Our used vehicle revenue increased 21.9% to $1.1 billion as used vehicle average transaction prices increased 3.5% to $26,474. Our gross profit for used vehicle declined 6.3% to $1,742 and a gross margin of 6.6%. Our supply of used vehicles at 46 days at the end of December compared to 48 days last year.

Turning to finance and insurance, revenue increased 17.4%, including a 15.5% on a same-store basis. F&I improved $52 per unit to $1,037. F&I per unit was $1,021 in the US and $1,076 in our international markets. In the fourth quarter, 70% of our F&I income was generated in the US and 30% was generated in our international markets. Service and parts business had another solid quarter with revenue improving 10.2%, including a 8.8% increase on a same-store basis.

Overall, our gross profit increased 14.2% to $586 million and gross margin declined 10 basis points to 15.2%. Going back to customer pay, we were up 7.9%. Our warranty was up 12.4% and our body shops up 6.7%, and PDI was 9.4%. Again, overall gross profit for the Company increased 14.2% to $586 million and gross margin declined 10 basis points to 15.2%.

We generated a 40 basis point improvement in SG&A to gross profit to 78.9%. Our operating margin improved 10 basis points to 2.8% and our effective tax rate was 32%, consistent with the fourth quarter of last year. We expect our overall tax rate to be 35% in 2014.

Turning to the UK, our business produced another strong quarter, highlighted by a 13.3% increase in total units retailed. New units up 7.9% and used units up 18.8%. Our new to used ratio in the UK was 1.09 in the fourth quarter compared to 0.99 in the same period last year. The overall UK market remains quite resilient and is the second largest car market in western Europe.

For the year, market registrations in the UK increased 10.8% to nearly 2.3 million units, the highest registration total since 2007 while December marked the 22nd consecutive month of growth in new car registrations. We expect the new vehicle registration market to remain resilient in 2014 buoyed by new product introductions and attractive financing.

Turning to Penske commercial vehicles, the fourth quarter reflected our first full quarter of operations for the commercial vehicle business, and we continue to be very pleased with the initial results. For the fourth quarter, the commercial vehicle business generated approximately $100 million in revenue. The heavy duty truck market sold 11,000 units in Australia last year, and our brands represented 11.7% market share. We also have a 10.3% market share in the Australian bus market. We believe this business is a tremendous opportunity for the Company to grow revenue, profitability by further diversifying the overall footprint of our business.

Moving to the balance sheet, at the end of December total non-vehicle debt was approximately $1.1 billion, up $145 million from the end of last year, largely due to the commercial vehicle group acquisition we completed in August. Our total debt to capitalization ratio was 42%, and our debt leverage was 2.2 times EBITDA. Excluding approximately $87 million in Penske car rental line of credit, total non-vehicle debt would have been approximately $996 million, and our debt to capitalization ratio would have been 40%. Our liquidity was approximately $386 million at the end of the year.

Our vehicle inventory was $2.4 billion and increased $527 million when compared to December of last year. New was up $415 million, used was up $112 million. On same-store basis, vehicle inventory increased $373 million when compared to the end of December last year. Our new was up $273 million and used was up $100 million.

Capital expenditures for corporate ID facilities was $138 million in 2013. We estimate total CapEx for these initiatives to be similar in 2014. Additionally, we spent $32 million for acquisitions of real estate and land during the year and $86 million on the procurement of vehicles for our car rental businesses. For the full year, EBITDA improved to $485 million.

In closing, I'm very pleased with our performance. I believe our results continue to demonstrate the strength, the diversity and the resilience of the PAG business model. With a strong balance sheet and a positive outlook across our automotive dealership, our car rental and commercial vehicle businesses, we are poised for continued growth.

We will continue to evaluate our market position, we remain to committed to pursuing strategic and opportunistic acquisitions to help the Company achieve long-term success and prosperity. Thanks for joining us today and for your continued confidence in our business. At this time, I would like to open it up for questions.

(Operator Instructions)

Our first question from the line of John Murphy with Bank of America Merrill Lynch. Please go ahead.

Good afternoon, Roger. How are you?

All right, John.

A first question on the average side price for new. You alluded to it being up a little bit better that 6%. I think it was 6.3%. But you also said the D3 grew faster, the Detroit three brands grew faster than did your luxury or buying import brands.

I was just curious, are you seeing a list across the board in mix that everybody is buying in all different brands? Because looking at D3 growing faster, I would have assumed that there might have been a degradation in the average selling price for new vehicles.

You really -- our volume in D3 is very small, and I think that the transaction price overall, it was up 3.6%. In the US it was up 0.7% and really, the international really drove that. It was up 11.2%. That would probably be the difference that drove that price.

Okay. That's very helpful. Then just a second question is, when we looked at the used vehicle business, which is outperforming, at least on a percentage basis, the new vehicle. What is driving that? Is it really the retail first strategy, or are there other big opportunities in the used vehicle market that you are taking advantage of?

Well, I think retail first. We've talked about that before. We've got a metric we used to use -- wholesale to used retail, which we try to keep below 20%. That means if you do 100 retail used, you don't want to do more than 20 used wholesale, and that drives some -- at least some attention to the used cars.

I think the other area that's been positive for us is our internet, our penskecars.com website has been keen. We had about 60% of the cars that came out of the rental car business that were sold this year were given -- went to our dealerships, was also was positive. But to me, the key point is that we are retailing cars which have higher mileage. We put a warrantee on those, maybe three to six months on the power train for the customer, in most cases. And with that, we've seen quite an increase. But the internet probably has really given us a real lift.

In the off-lease opportunity, when you think about, in our business, because primarily we have a big lease portfolio, that lease -- off-lease group of cars that comes to us has been very profitable for us also and gives us some more vehicles. Also, when you are looking at our loaner cars, we have a big focus on the loaner cars, turning those loaner cars, probably not waiting for a year. We move those in six to nine months. Again, I think that's key.

Okay, and then you led me into my next question just so far as your strategy of penskecars.com, and really how that's working out. And then also e-commerce in general, if you are getting leads from a lot of other internet sites. Just trying to understand how penskecars.com is impacting the business first. And then also secondarily, how third party site and lead generators are impacting your business more in general?

Well, I think -- let me just say first, from a digital standpoint, we refreshed all of our websites now. Larger vehicle displays, more pictures, quicker inventory access, which has been key. We put in collision centers; now we have websites. We've seen a significant rise in website traffic, probably up 20% from last year.

And we have got a mobile app now which we rolled out for penskecars.com with I-tunes and Google. Basically, I can be sitting with you anywhere and we can bring up Penske cars and it shows our entire new and used car inventory. To me, that's a real step forward, and people are using that. To me, we have cars under $15,000 on that site. That's some of the quick hits we've have had. We also, from a reputational management standpoint and social media, we have really started to focus on that with Yelp and Google and some of the other areas, and our fan count is up about 93% from last year.

When you look at e-marketing and from an e-commerce perspective, one thing that our folks did, we send out different communications to the customers when they are buying a car or they are in for service. What we have done now, with all the communication now is call to action, and to me, rather than just a Plain Jane letter with a logo on it. I think some of that has created more action in the service side and also on the sales side. Our CRM consolidation with DealerSocket and some of the things we are doing across our network. We have one DMS system, as you know Reynolds and Reynolds, we have had that a number of years. We are tying into many of their products.

I think overall, penskecars has been a plus. We have had that now for about three years, and we continue to enhance that. And it gives us the availability to put all of the cars across our business. Also on the UK side, we have Sytnernet, which gives the opportunity. We have an auction site there actually that we can put our used cars on. It is a live auction going on all the time. To me, I think that's key.

On an IT perspective, we have enhanced our intelligence systems. We have got a good mobile payments that have come forward now that we can actually pay our service bills on a mobile site. We are trying to stay up. I guess the market gets faster and faster, but to me, we want to make it easier for the customer to do business.

It is a fun site to browse. Maybe just one last question on parts and service. The 8.8% increase in same store sales there was another big print that you guys put up. Are we seeing finally the increase in UIOs as the one- to five-year-old and one- to six-year-old cars that are in the sweet spot for parts and service really kicking in, or was there any warrantee work in here that might not repeat going forward? I'm just trying to understand the trajectory. There's this expectation that we'll see a big increase in 2014. What's your view on that, and are we seeing it already?

Number one, we looked at one to five year repair orders, and 50% of our -- in customer pay,. When we look at warrantee one to five is about 70%. To me, we are capturing that customer. And I think you have better customer loyalty. When you look at premium luxury, the complexity of the cars, I think people are not comfortable to taking those to some of the outside shops, so that's been a benefit to us.

When you look at warrantee, the warrantee number was up on a same-store basis double-digit. I think some of that's been driven by the Full Circle program that BMW has, and also, you have got ToyotaCare where the first two years are free maintenance. Those are things that are key.

When we look at the business overall, it is hard to predict just what's going to be recalled. We saw a Prius recall here I think just lately. We had a seat recall with Toyota. To me, those are things that obviously generate more revenue for us. But overall, customer pay was up almost 8% for the year.

We've talked about double-digit, 12% on warrantee. Our PDI, get ready, it was up almost 10% and our body shops were up 7% Overall, we had great strength. I know there was some concern last quarter about our parts and service increase.

And when we got into it, it was really -- it recalled in the UK on solenoids on the fuel system. On Mercedes Benz, it was a big campaign, and when that went away, that was part of our reason we had a major drop. I think, as I said earlier, we have got to be watching one of these campaigns, and that will drive our parts of service margin. That's' something we have got to look out for.

Great. Thank you. That's very helpful.

Thanks, John.

We'll go to Rick Nelson with Stephens incorporated. Please go ahead.

New car gross per unit, looks like we are starting to see stabilization there and some pressures from the midline import category. But do you think we've reached bottom here and we can maintain these kind of margins on a going-forward basis?

When you look at our margin, we went from 8.2% to 8% with an increase obviously in the MSRP. But I went back with Tony and we looked at, where were we back in 2006? We were at $3,200. And we're in 2011, we are at $32. And in 2013, we are at $32 on new in the fourth quarter. So, to me, that shows that we have got some consistency.

There is compression -- pressure down on some of the volume foreign, but to me, that's one of the things that we are managing, I think, pretty well. When you look at it overall, our 0.2% decline could be a little bit of mixed volume because we had more volume foreign which would drive some of that down.

And your flow-through on the incremental gross profit, I'm calculating 24%, including rent in the fourth quarter. Is that a level that you are happy with? Or do you think there is some opportunity there for better flow-through?

I would say that the flow-through -- I'm never happy. Let's put it that way. But I think 31% to 35% is where we try to focus on. We had some higher costs in the UK.

Remember, when you look at our SG&A to gross benefit, we are up 40 points better last year in the fourth quarter and 50 this year. Because we have such a strong third quarter in the UK where they have the registration months, and our gross profit in the UK was $15 million more in the third quarter this year than it was last quarter. You still have the fixed costs, so that has some reason to drive it down. Overall, we were at 31% for the year, and I think that's in line with our targets.

Thank you for that. Also, there is a lot of well publicized weather challenges, and you've got a lot of exposure to those markets. If you can comment on how you see the weather impacting your early 2014 sales.

Well, we certainly know that the east coast -- in fact, today, I got a note earlier this morning that Washington's closed, the impact in Atlanta, all the way up to east coast, and we had that also in January. I would say we have seen probably double-digit decreases in business on the east coast so far this year, but we have seen a strong increase double-digit in the west.

Overall, we'll see how it balances out. Hopefully we'll get those people to come back in. But there is no question on the retail side that we have seen -- our service department is a little bit lighter. Obviously, we get some body shop business out of this. But I think we have got to stay tuned on that.

Thanks a lot, and good luck.

Thanks, Rick.

Our next question from James Albertine with Stifel Nicolas. Please go ahead.

Good afternoon, gentlemen. I want to touch on, over the last four or five years you have shown some pretty significant SG&A to gross leverage, and in that time, not coincidentally, you've driven a lot of growth in the M&A. So, I wanted to get an idea for how you were thinking about the M&A trajectory looking forward.

And then as a related question, where are the biggest opportunities still internally where you may be focusing some of your investments in terms of driving efficiency and growth? Thanks.

If you go back to 2009, we were at 83%. We are at 78% now, so we have had 500 basis points of benefit. I think overall, that's developed and driven a margin from for us from 2.3 to 3.0, which obviously, we should see that continued benefit.

I think our target, as we go into 2014 would be another 50 basis points. Stretch would be 100. We want to be careful we don't get ahead of our skis on something like this. But from an M&A perspective, we look at businesses based on profitability where we can get scale.

Hopefully, the consolidated offices that we have been able to do and over the last 12 months has been a real benefit to us and we'll continue to do that. Sometimes on new acquisitions we can't, overnight, consolidate offices. It takes us time to do that, so we don't get the benefit right away.

We think in the UK and the international markets that's something that's a priority for us and our business plans as we've talked about, we went through those at the end of the year. I think in the US we have got significant opportunities in the pipeline and also overall, because there is only about 10% of the market is consolidated today either with publics or some of the bigger -- the private groups. To me, it gives us an opportunity.

I think we remain opportunistic in the US. We look at brands and where we have scale. As we have been in Australia, we were there last week, there is lots of interests coming to us on the automotive side. I think we'll run the play with a commercial vehicle here for a while before we jump into retail auto, but there is a lot of opportunity there. It seems that some of the old families there that have owned businesses want to move on.

We had relationships with the OEMs, not only in the US, but on a global basis. That's driven us into some of the acquisitions we've made in the international markets, specifically in Italy, and we are looking today at potentially doing a joint venture in Spain. These are markets that have been down and they are starting to turn. You can even see their bonds are being sold at much lower rates now. So, we see somewhat of a turn there, and the investment is significant less.

On the commercial vehicle side, when you look at that, those investments seem to be quite productive when you think about over 100% coverage of your expenses. And you don't have the CI required in that business, you do on the retail auto side. We see putting all those together, we can really come up with a strategic plan that shows commercial vehicle growth and also both international and domestic on the automotive side. We have an opportunity to go into another market potentially on the rent a car side.

To me, the diversification of our business gives us a number of levers, and we'll look at where we can get in with the right costs and the right base of operations. And to me, that's why we are seeing the growth we had, not only from the standpoint of same-store, but from an acquisition standpoint.

I appreciate the detail as always. Congratulations on a great quarter. Good luck in the first quarter.

Thank you.

We have a question from Brett Hoselton with Keybanc. Please go ahead.

Couple of questions here. As I think about -- first of all, can you just kind of outline, we had talked a little bit about this earlier, I think. But can you talk about some of your target expectations for revenue growth? And in the sense of what portion of that is same-store versus what portion of that might be acquisitions in your mind?

I think that as we target next year, we'd look for double-digits. Some say use 10%, I would say half of that would be organic and half would be on acquisition, would be a good target.

And then can you talk a little bit about -- we've heard quite a bit about inventory levels, but I think most of it is focused on the domestic side. Can you talk about your inventory levels, and broadly speaking, where do you see your inventory levels at?

Are they potentially constrained? Do you think they might be too high? And how that might that affect your business going forward?

When we looked at our business and our inventories at the end of the year, we felt 63 days was certainly not excessive. Our mix is so much skewed to volume foreign and premium luxury, we don't have the impact of the 100 plus days with a number of our domestics.

When you look at an Audi, we really have softness in inventory and Q5, Q7, Porsche's been in real tight supply. And when you look at Mercedes new CLA and the new S class in GL, I think that we are in a real tight position there. Overall, X5 is -- I think someone said we had 35 in stock around the whole country. To me, we are going to be at a lower inventory.

Sometimes it's new models coming out, so you really roll down the old model. It takes time for them to get through the pipeline filled with new models. We're going to manage at this level, I think somewhere in the $2.3 billion to $2.5 billion. Maybe $2.6 billion is realistic as we roll into the summer months.

Obviously, as we get into March, we'll see the UK inventory probably come down, because we'll have the registration months in March and also September. I think we are at a pretty decent level. I will tell you this, we are not going to be afraid to say no to the manufacturers if we get too much.

And then just switching gears, used vehicle gross profit per unit. What's your sense on where we go from here? Is there, in your mind, the potential to see it continue to decline a little bit as you try to push for a greater volume in that segment? Or do you think we are where we are at and flatten the outlook at this point?

Well, remember, we have got a different dynamic, which is taking place with our international business. In this country, when we sell a demonstrator, it's sold as a new car, and we don't have a lot of demos. But internationally, as part of the dealer contract, you have to carry demonstrators.

I would say that a typical BMW store or a Mercedes stores in the UK would have 20 to 25 demos. When those are sold, they are sold as used cars. And obviously they are slightly new, so they would go at a much lower margin, and that has some reason. As we have grown that volume of businesses over there, I think it had some impact on our used car gross number.

But to me, we are trying to get to one to one, and by doing that, obviously we are selling cars at maybe less margin. What that does, I think I said earlier, it gives us the gross on the front end. It gives us the added F&I and then, let's not forget the PDI benefit we get from the internal growth profit. To me, I think that's key.

When you look at our business for the fourth quarter, we were up almost $7 million plus in gross. The unit volume not only was up, but it also increased more gross profit and then more customers. I think the model is right.

Whether it is going to go up from here, I can't say that. I would say we are going to try to drive it. And at the end of the year, also, I think when you look at the end of the year, there are -- values do go down on used cars. In many cases, from a wholesale standpoint, it would have some impact on our overall gross.

Thank you very much, Roger.

Thanks.

We'll go next to Brian Sponheimer with Gabelli & Co.

Just want to spend a minute here going back over the margin compression on volume foreign and whether we may see that becoming problematic as the year progresses, given the rise in the yen relative to other currencies.

When I look at margins, and quite honestly, just looking, taking a snapshot of January, I see our Toyota business is flat year-over-year. I just picked one before the call, just to take a look at it. I think we can manage that. We have not seen a deterioration.

We look at January of 2013 versus January of 2014 we are flat, meaning we haven't had any reduction, actually. In volume foreign, obviously, when we looked at new for the year or for the quarter, it was down about 40 basis points or 50 basis points. So, it had some deterioration, but I think we can manage that.

Okay, and just to go back over acquisitions. Would you be able to disclose if you've signed any NDAs that are current for deals that may be coming in the next three to six months?

Any NDAs we sign would probably have a clause in it that we could not really make it official until it is done. And also, we have that condition imposed on us with the OEMs also, so we would not disclose that at this point. But I would say this, we have a pipeline, both in the US and also internationally.

What's the difference in seller sentiment maybe in the US versus some of your international targets?

We see internationally that people have really been beaten down, their businesses have been way down. There was no capital to grow in many cases. They are interested in really running the facilities. In Italy, we have had some great opportunities. They are minimal good will to pay, good businesses.

We come in with fresh capital and want do some maybe investment in facilities and we are able to attract some good people. I would say the international businesses, at least in Western Europe, are very good. And the big thing is getting the right people, obviously, and partnerships, which we have been able to do. And over here, obviously it is very competitive because of the volume foreign and the, what I would say premium luxury, are really attracting higher pricing right now.

All right. Thank you very much. Great quarter.

Thanks.

We have a question from Ravi Shankar with Morgan Stanley. Please go ahead.

This is EJ in for Ravi. First a clarification on fourth quarter used results. Your reduced revenue per unit was up quite a bit during the fourth quarter, but gross premium had declined about 6%. Could you help us understand a bit better what was going on with that divergence?

I'm going to have to get Tony to come back to you. I really can't answer that right now, so why don't we come back to you on that, okay?

Okay, sure. So, maybe a bit of a broader question on S&I, but unrelated to the CSCB. You continue to see healthy growth in that business. But I wanted to get a sense of how you think about that in a rising interest rate environment and if we can continue the expect the growth you have been seeing recently, or if there might be some pull back as interest rates go up?

Let's position it overall, both domestically and internationally. 70% of our F&I income comes from the US and 30% internationally. And when you look at that, 60% is product and 40% is reserves. You will see, obviously, some -- probably some pressure as interest rates would go up.

But today, when you think about 40% of 70%, about 30% of it is really F&I reserved. We have been operating in an environment with leases and quite honestly, in leases, margins and interest rates really don't come into play because you are really talking about a lease payment. And that's, 55% of our premium luxury business would be leased.

Okay. Well, that's all I had. Thanks so much.

Thanks.

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

Can you quantify some of the head winds that you might have faced with the fourth quarter of last year with a lot of replacement demand after the hurricane in the northeast? And maybe talk about whether we should see some of that in the first quarter, as well.

There is no question, we had the benefit of Sandy in the first quarter last year. So, some of those popped will be difficult as we go forward. I can't tell you with the weather what we have now, it is going to be interesting to see what's been held back on the east coast as we go forward. But overall, if we look at our business, we had a good east coast business from the standpoint overall, and in Connecticut, probably we had lower increase from the standpoint of new vehicles.

But on a New Jersey standpoint, we look at north Jersey, we were up about 2% over last year. To me, you have to go to each individual market. But used car business was up everywhere, and of course, we had decent growth on new.

Okay. And you alluded to the fact that obviously the, at least sequentially in the UK, that the parts and service was a lot better. Now that you had that comparison in the third quarter, that disappeared. Can you just talk about what the UK did, as far as a comp basis in parts and service?

I don't think we have that really here. Overall, we were up 8.8% from a same-store basis. To me, I would have to get that for you. I don't have that here.

Okay. And just lastly on the equity in affiliates, it was nice 30%-plus increase. Was that all Penske truck leasing?

Oh no. Penske truck leasing had an excellent quarter. Obviously, they were up significantly. But our joint ventures in Germany with Jacobs and Nicks were up.

Our business at ATC, we have a 27% interest in a heavy duty truck operation in Phoenix -- excuse me, in Tulsa, Oklahoma City, Dallas and Fort Worth, and they had a nice increase. It was to me, starts to show this the strength of some of these JVs we have and outside investments would help us overall.

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

Thank you.

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

Hello, Matt.

Good afternoon. Congratulations on a great quarter and great year.

Thank you.

Couple of follow ups. I guess the first thing I wanted to ask is in the new car business, were there any special programs on the luxury side that you think really added materially to the gross profit and might not repeat? Or is it sort of more of the same that we usually see at the end of the year?

Let me say this. I'm going to go to the UK. We didn't see the money that usually -- I think everyone backed off in Europe about who was going to be the leader, Audi, BMW or Mercedes.

We actually saw less incentive and less money at the end of the year than we have seen in the past. Over here, there was a significant dollars available. But what you saw was that Mercedes has a new leadership bonus and a performance bonus which they gave the dealers, and you picked some of that in quarter -- in the fourth quarter.

To me, I don't think overall, and I'd have to go back out to the field, but I don't think overall that there was as much push as there has been in the past. And quite honestly, in the US, I don't think there was much more than we had a year ago. It was pretty much consistent.

The only thing we had was there was some bonuses on at CSI, both service and parts, that you can take at the end of the year that probably helped us on the premium side. That was specifically Mercedes Benz.

Got it, okay. And then I just wanted to double check something that you said on customer pay. Did you say that was up 8% in the quarter or for the full year? Because I have got the first nine months up between 2% and 4%, and that would be a big acceleration if that were for a full year.

That was a quarter.

That was a quarter. And then just, can you give a little more detail on what drove that change in trend up, 3% or 4% to up 8%?

Well, I think number one, we have taken some aggressive pricing. If you looked at our margin in customer pay, in the US we were down from 49% to 48%, because what we are doing, we've got some menu pricing now on older vehicles. Those are the customer pay.

We want to be competitive and not see those people go out the door, so we've maybe had some impact there. And we've had the same -- the UK has been really not growing as fast on a service level as we have in the US. They have done some discounting on customer pay, too, and I think that's given us the ability to attract some business we didn't have in the past.

Okay. And then just lastly, you gave some guidance on your corporate ID CapEx this year, and I'm wondering if you have a sense for what the total number will come in at for the year with the other -- with either rental car expense or IT and other?

It is going to be hard to give that today, because we are looking at our rent-a-car plan at this point. To me, if we were in the $120 million to $130 million from the standpoint of the car side, we have got to look at the rent-a- car. That's without rent-a-car. And today, we will be turning during that fleet.

We'd have probably maybe $10 million, $15 million more in rent a car after depreciation on new vehicles. That is going to turn. We don't double that up obviously each year. But there is an opportunity for us to go to another city. And if we did that, that would probably add another $30 or $40 million.

We look at that almost like floor plan. We get financing on those through our traditional finance sources, and we typically, our amortization of that is 1.5% per month. So, as I already said, values on those are good, and we keep those vehicles anywhere from 12 to 14 months.

Right. It is an extraneous CapEx number. Okay, that's very helpful. Thanks so much.

Okay, great.

We have a follow up question from Brian Sponheimer with Gabelli & Co. Please go ahead.

Hello, Brian.

Brian, we have your line open. Please go ahead.

Okay, thanks. Sorry, I was muted by myself. The last time, Roger, that you went through a winter that was this severe, did you get any business on parking service that picked up throughout the year, given the stress on cars that you had sold in the winter, say, four or five years ago, that was coming back based on failure, given the stress of the prior six months or so?

I think in these types of storms, the thing which you see most is body shop where people maybe get some transmission work. But we saw a much bigger pickup in Sandy where we had cars flooded and things like that. I think this is a time period that we'll see some body shop, but I don't see anything that will drive the business to something where it would be significant.

Okay. That was the follow up. Thank you.

Thank you.

Your last question is from the line of David Whiston with Morningstar. Please go ahead.

Good afternoon, guys.

Hello.

First question. Do you happen to know how much was available for buybacks at year end?

About $70 million.

$70? Okay. And Roger, given your expertise and focus in the luxury industry, with Mercedes moving down in segment with a really desirable product, like the CLA and BMW going that route too, what's your opinion on what this means for the future for brands such as Acura, Buick and Lincoln?

Well, I think you have got to look at the whole market. They are coming down, CLA's 29.9 is the MSRP. However, the transaction price might be 32 or 33. You are really sitting right on top of Avalon and even in Toyota and Honda. I think the impact with the Germans coming down and you see BMW and you have got this A3 coming in from Audi, this is just going to be a very competitive segment.

But I think it is going to be image that will drive some of that. And obviously, the Toyota and Honda people earn their business on quality, so I think it is going to be interesting. I don't know how it is going to impact Lincoln. I think Lincoln is trying to compete at a little higher level.

It's a very interesting question. I think there is just going to be with the Germans, and you think about it, it was S class and now it is down to a GL or an ML and even smaller. And you've got Macan coming in on Porsche, entering the X3 market. It is a crowded area. But the good news is, we are sitting with 66% of our business being premium luxury, so I'm clapping to see them move in those directions.

Remember, leasing is so strong. One of the things that probably will drive the competition to Lincoln or Acura is the residual values of some of these German makes. When they compete in the market and you look at the payment differences, it will make a big difference, unless Acura or Lincoln decides to support residuals heavily. That's always a decision the OEM has to make when they see the market conditions in the competitive environment.

Okay. And with the commercial business in Australia, do you guys have any indication how much of that truck volume down there is tied to the Australian auto manufacturing industry?

I would say very little. When you think about today, you've got Ford pulling out of Australia. Holden has announced coming out and Toyota is just a cost of labor there.

To me, it's -- the country is as big as the US and there's really -- you don't have rail, you don't have some of the other types of transportation. And I think if we have to rely on mining, forestry and agriculture obviously in New Zealand. To me, those are things that will drive that market rather than automotive.

I don't think that's been the big driver there at all. I think quite honestly, with those manufacturers pulling out, and I know for a fact that the government has subsidized them, it's one of the reasons they're taking those subsidies away, and that's really driving these guys off shore. They can actually import cars at less cost than building them in country.

That's helpful. And just last question, what is your position on NADA's dealer reserve proposal?

You mean from the standpoint of the consumer finance?

Yes.

At this particular time, they haven't -- today, CFPP has not approved the NADA plan. We like the move that NADA is getting out in front of the dealers. Obviously, it is going to be regulatory. We continue to review their plan, but as I said earlier, at this particular time, it is a small portion of overall income is finance reserve. It is probably, when you -- down, it's probably about 30% versus what you might see other places due to the international versus domestic versus the products, as we said earlier.

I just think we have to wait and see. Obviously, I'm not real enthused about having, if we change the rate or something, have to come up with four or five reasons on each transaction. That would encumber the transaction. One of the benefits that we have as dealers is the electronic e-contracting with the banks. It is quicker for the customer, and it is certainly more efficient for the banks and the dealers. I think we have got -- I think we are in the first inning here. It will be interesting to see what guidance we get as we go forward.

Okay. Thanks very much.

I'll turn it back to our speakers for closing remarks.

That ends up the call. Thanks. We'll see you after the first quarter. Thanks for your support.

Thank you, ladies and gentlemen. This will conclude our conference call for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.