Penske Automotive Group, Inc. (PAG) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Fourth Quarter 2011 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through February 22nd, 2012. Please refer to the company's press release dated January 27, 2012, for specific information about how to access the replay. And audio file of today's call will be available on the company's website under the Investor Relations tabs at www.penskeautomotive.com. I would now like to introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you Laurie, good afternoon everybody. A press release detailing Penske Automotive Group’s fourth quarter and full-year 2011 results was issued this morning and is posted on the company’s website. Joining me for today’s call are Roger Penske, our Chairman; Dave Jones, our Chief Financial Officer; and J.D. Carlson our Controller. Following today’s call I will be available by phone to address any additional questions that you may have. Before we begin, I would like to remind you that we will be discussing certain non-GAAP financial measures such as EBITDA and adjusted income from operations and related earnings per share on our call today. We have reconciled these items to the most directly comparable GAAP measures in our press release dated February 15th, 2012. I refer you to that press release for additional information. We believe these non-GAAP financial measures will help in understanding the comparability of our reported results from period to period. Also we may make forward looking statements on this call. Our actual results may vary because of risks and uncertainties, including external factors such as consumer confidence; consumer credit conditions; vehicle availability relating to OEM; and supplier operational issues; interest rate fluctuation; changes in consumer spending; macroeconomic factors; and other factors over which the company has no control. Any such forward-looking statements should be evaluated together with the information in our public filings including our Form 10-K. At this time I would like to turn the call over to Roger Penske who will take you through our fourth quarter results.

Thank you, Tony. Good afternoon, everyone and thank you for joining us today. Today, Penske Automotive reported another outstanding quarter of profitability marking our 10th consecutive period quarter-over-quarter growth in income from continuing operations and earnings per share. We also reported the most profitable year in the history of our company. For the fourth quarter, we reported double-digit increases in total retail units sold, revenue, operating income, net income and earnings per share. For the fourth quarter, income from continuing operations attributable to common shareholders increased 22% to $42.5 million and related earnings per share increased 24% to $0.47. Our performance in the quarter continues to exhibit the strength and diversification of our business model and the benefits of our largely premium and luxury brand mix. Before reviewing the specifics of the fourth quarter, I would like to provide a few highlights from the recently completed year in 2011. Total retail units increased 9% to 284,500 units. Our new-to-used ratio increased to 8.84 from 0.73. Total revenue increased 11.9% to $11.6 billion and our same-store retail revenue increased to 8.2%. On a GAAP basis, income from continuing operations increased 42% to $175.1 million and related earnings per share increased 43% to a $1.92 the most profitable year in the history of our company. Our business generated $344 million of EBITDA, we repurchased 2.4 million shares at an average price of $18.07. We resumed our dividends and recently increased the payout for the third time to $0.10 per share yielding 1.7%. Also we increased our total credit facilities capacity by $87 million and extended the term of our U.K. credit facility by 2 years. We completed acquisitions who expect to generate approximately $1 billion in annualized revenue. This includes $500 million from the Agnew Group acquisition we completed in January of 2012 in the U.K.. We discontinued non-strategic dealerships with estimated annualized revenues of $300 million. Now let’s take a look at the specifics of the fourth quarter results. Total revenue increased 11%, at a same-store basis, retail revenues increased 5.9%. Same-store retail revenues increased 5.3% for our premium luxury brands, 8.7% for our volume foreign brand and 5.1% for our domestic brands. Excluding the effect of the foreign exchange rates, the total same-store retail revenue increased 6.1% versus 5.9%. Our total revenue mix during the quarter was 67% in the U.S. and 33% internationally. And breaking down the brands, premium luxury was 70% for the quarter, volume foreign 26% and the big 3, 4%. Looking at new vehicles, we retailed 39,270 units in the quarter representing an increase of 4% compared to last year. Total same-store new retail units were flat in Q4 representing a 3.2% increase in the United States and declined to 9.3% internationally. Our new unit year performance was impacted by several items. A decline in sales of Honda and Lexus units in the U.S. and a decline in sales of [indiscernible] of new units at our 8 stores in the U.K.. A strong Q4 2010 in the U.K. as customers anticipated the increase in our VAT tax in January of 2011 mainly affecting our BMW and Mercedes brands. And third, a shortage of BMW 3 Series product in Q4 as the run-out of the old model was taking place. The good news here is that last weekend we held launch events for the new BMW 3 Series in the U.K. and the response was extremely strong. Although January market registrations in the U.K. were flat, our business in the U.K. outperformed the market with a 9% increase. Average transaction prices of our new units increased $1621 or 4.4% at an average gross profit per unit increased $89 or 2.8%. Gross margins on new vehicles was 8.4%. Looking at used vehicles I am pleased to report another quarter of double-digit increases in both units sold and revenue growth. Total same-store used units retailed increased 18.1% for the United States and 12.2% in our international markets for a combined increase of 16% as our retailed first initiative continues to drive unit and revenue growth. The used-to-new ratio was 0.81:1 which compares to 0.71:1 in the quarter last year. The international used-to-new ratio was 1.21:1. Average transaction price on used declined $355 or 1.3% and the average growth profit per unit declined $50 or 2.6%. Gross margin on used vehicles was 7.1%. Finance and insurance increased $35 per unit to $965 or 3.8%. The U.S. increased 4.4% and the U.K. increased 3.4. Service and parts revenue increased 5.4% during the quarter including, a 0.7% on a same-store basis. Our customer pay on a same-store basis is up 3.4%; warranty was down 7.7%; our body shop business was down 5.2%; and our pre-delivery inspection was up 16.1%. The decline in warranty is directly related to the Toyota, Lexus and BMW brands in 2010 recall campaigns. The good news is gross profit margin for services and parts is 57.3% representing an increase of 120 basis points from last year. Overall gross profit increased to $456 million or 9.3% and a gross margin of 15.4% compared to 15.6% last year. In the fourth quarter SG&A expenses as a percentage of gross profit improved by 100 basis points to 80.4. Our tax rate for the quarter was 34.2% compared to 32.6% in the same period last year. The rate increase is due to higher EBT in our U.S. operations this year when compared to the fourth quarter last year. Looking at the balance sheet at the end of December, vehicle inventory was $1.5 billion. It was up $155 million when compared to December of last year, new vehicle inventory up $64 million, used vehicle inventory up $91 million. On a same-store basis vehicle inventory increased to $88 million from the end of December last year to $1.45 million. New vehicle same-store increased $15 million, used vehicle same-store increased $73 million. December 31 our worldwide days supply of inventory was new 49 days in comparison to 53 days last year, used was 53 days flat with last year. At the end of December our total debt was $2.6 billion, non-vehicle debt was $850 million, an increase of $17 million from December last year. Our capital expenditures were $133 million this year including $53 million in the fourth quarter. Approximately $12 million of CapEx was use to repurchase a dealership facility which was previously leased. We estimate our net CapEx at approximately $120 million in 2012. Debt to capitalization was 42.7%, flat with last year. We had $318 million available under our worldwide credit facility at December 31. We remain well within the limits of our financial covenants at the end of 2011. Turning to acquisitions, as we noted on previous calls our intention was to grow our business organically and through acquisition, acting opportunistically on acquisition candidates. In 2011, we completed the acquisition of 7 franchises that are expected to generate approximately $525 million in annual revenues. In January 2012, we acquired the Agnew Group of dealerships in the United Kingdom which are expected to generate $500 million in annualized revenue. This group was listed as the #22 largest group in the U.K. according to Motor Trader, consisting of 13 dealerships with a largely premium luxury brand mix. This obviously complements our existing footprint in the U.K. Further, we discontinued our non-strategic dealership with annualized revenues of approximately $300 million. We also remain on track with 3 new dealership points this year. Our new mini dealerships in Northern California will open in March, and then the Nissan and Infiniti location in downtown San Francisco will celebrate its grant opening at the beginning of May. In closing, our results in 2011 continue to demonstrate the strength of our model. We continue to grow the business organically and have added significant new top line growth to the business through our acquisitions. I remain optimistic about our business and improving economy, pent-up demand, strong credit availability and the new product launches coming into the market to continue to accelerate demand. I expect new retail automotive sales to improve at least by 10% in 2012. I'd now like to open the call up for questions. Thank you.

[Operator Instructions] And our first question from the line of John Murphy with Bank of America/Merrill Lynch.

Just a first question on acquisitions in general. I mean we spent some time out in NADA conventions in the past 2 weeks and it sounds like the logjam is sort of breaking between buyers and sellers and there is a lot of transactions that may be coming to the market. Obviously you are getting a little bit more aggressive. I am just curious what you are seeing out there, if there are a lot more opportunities for larger groups, for smaller groups, whether it’s the U.S. there or the U.K., that is your focus. Just trying to understand if we are going to really see a lot of ramp-up in your acquisitions going forward?

Well, I think as I said in my remarks. We obviously feel that acquisitions are part of our strategy on a long-term basis. We are seeing both internationally and domestically, probably more interest in selling businesses. I think some of this is driven because of the corporate ID and capital expenditures you have to make on your dealerships today to meet the OEMs request is driving some of that. We’re not seeing any big groups. I think Agnew was an opportunity for us in Northern Ireland, but what we’re going to look at are individual locations which are contiguous to our existing platforms, so we can glue them on, use our back office. We want scale in these markets so we can then take our key management and have them help deliver the results, lowering our SG&A. So, they will be opportunistic. Obviously, we’re not limiting just to premium luxury. We think there could be some strong, big 3 opportunities out there. We’re excited about our Nissan, Infinity location in a 200,000 square foot building in San Francisco. So we continue to look for open points if necessary, if they are available throughout the country. We don’t see a lot of that. In Europe we looked at businesses, in Italy, we looked in Spain. We’ve also looked in Germany and Austria where there are some larger groups available. But at this point, I think that we made a big purchase at the beginning of the year and I would expect maybe a 100 million or 200 million as we would go through the balance of the year.

Then just a follow up on that. I mean, the Agnew Group, specifically, I mean, was that really to balance out your portfolio between the U.S. and Europe or was that really an opportunistic transaction to just really, get the bulk in? I am just trying to understand the total rationale for the Agnew acquisition?

Well, John, I think, it certainly was opportunistic, because our strength in the premium, luxury side in the U.K., Agnew was always at the top of the league table to any 1 of the brands that we represented. And the family had been in the business in Northern Ireland for many decades and because of an illness, the business became available and because of our relationship with the family, we were given an opportunity to negotiate a sale. And the good news there is the facilities were in great shape releasing those. we just brought 1 facility which is a Volkswagen store and we’ll rebuild that and I think that it is a campus setting like we have in many places in the U.S. where you have got the brands all side-by-side. So it really fed our model and again from an annualized revenue basis it was $500 million. So to me the managers of those are in place. In fact all the key managers had double-digit experience at those at the Agnew Company. So that gave us a lot of confidence and able to deliver the results going forward.

And just another question. I mean, you sort of are operating with more favored nation status it seems as far as acquisitions and open points with a lot of auto makers. I was just curious with that relative level of goodwill with the automakers and if that carries on to any other parts of the business, whether it is beyond on allocations or stair step programs or other incentives or other help that can get you on just the general business. Just trying to understand that most favored nation, really carries over to operations as well as acquisitions?

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

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

I think, 1 of the things is the warranty now is obviously gone down, when you look at the mix, warranty was 20% for us in the quarter and customer pay was almost 75% and the balance basically is PDI and body shop and what’s happening is that we were holding our margin at the customer pay level, we are getting into rapid repair dents and things like that, wheel repairs, window tinning and glass which we've obviously outsourced before and sublet, we’re bringing that in and I think that's made a big difference. There is a tremendous amount of margin in those particular areas and quite honestly from a parts perspective, on a retail repair order you typically get 40% margin or you get 30% on warranty. So I think the mentality now is oil changes -- I would say that in Toyota they have a full service program today where we get 8-tenths if an hour for an oil change on labor and we get the balance on profit on the oil and its probably 3x we would normally get if we were just a pep boys or quick lube around the corner. So they are really helping us drive that customer back. And I think the pricing matrix that we use, we’re also looking at older vehicles which probably are going down the street to a smaller repair shop. We are actually trying to get those people to come in the dealerships with menu pricing on older units which has made a difference. And again, the increased used car reconditioning, is driving internal gross profit along with the PDI on the new car. So when you put it all together, I think that it’s driving the margin. And then we’ve got our customer management, the CRM systems, we are very active with emails with customers from a service perspective and that’s driving a lot of opportunities in dealer stock and a number of these products which help us. So, I don’t think it’s one particular thing, but as we were able to prove during the downturn that the service in parts probably cover 50% to 60% to 70% some dealerships cases, the fixed cost some 100% and I think what we’re trying to do is grow that backend we’ve certainly invested we have in our facilities and I think we’ve got to keep in full. And the body shop business obviously was down a little bit in November-December because of the weather pretty much around the country. So we saw some dip in that, but that’s again a good parts business, we’re at direct repair shop, promotion of major manufacturers and when you look at these shops that are doing $800,000 to $1 million a month in body shop work it really drives the margins.

And we have a question from Rick Nelson with Stephens.

In terms of how you see 2012 shipping up in the U.K., there is a lot of investor concerns out there by Europe and that doesn’t seem to be materializing at least in your brand mix, but any commentary there would be helpful?

Well, let’s just go back, we should really go back 3 years and look at the premium brand market share, it was running about 18% and that’s grown to 22% over the last 3 years. So BMW, Porsche, Audi, Mercedes-Benz, those brands have all had great growth during that period of time and that’s our sweet spot obviously today. I think if you looked at the number for last year, 92% of all of our business was premium luxury. When we look at the market in January, the market was flat versus 2011, but retail was up 2%. Our market share was sitting around -- or we were up 9% in units for the month of January. So we see the market very good. I feel just from the conversations from our key managers that the new car business is better than it was. It feels better. It is better from the results than it was at the beginning of last year. We obviously are interested in the used car business. We’ve had the opportunity to make some large purchases at the end of 2010 from some of the manufacturers. So those are out at the stores. We’re getting the benefit of those. And obviously, 1 thing we have to realize that all these finance companies are looking for outstandings and I think that we’re seeing not only domestically, but internationally, them really going after the different products that they offer, lease, personal contracts other things that are available in the marketplace. So we don’t see this contagion at least at this point falling into the U.K. and knocking us out. We saw the same benefit in Northern Ireland in January. So overall I think that the premium market when you look at last year was up 8% and the good news with our company is that used are 1.2:1 the new. So I think new to use is better. The premium luxury markets been up for the last 3 years and we’ve been able to out drive that. And again, 1 of the things where we have opportunity is really in the parts and service, because we never had to scale over there and I think that with the used car reconditioning and selling these older cars, the retail person will drive some more profitability on the parts and service side. So, overall, we think we’re strategically right where we want to be.

Also the big acquisitions that you done, Greenwich, Santa Ana, if you could comment even Agnew, I realize you only have as a short time, but how are those performing relative to your expectations?

Crevier is toll-free property in the BMW business. In fact, when you look at the numbers, basically some of the people, we’re #5 in the country, but 2 of the stores are ahead of us, really have 2 points. So they were right at the top. The integration has gone well. The management team there is, again, like Agnew, double-digit years of experience, wanting to take advantage of our scale. Some of the things we’re able to do at that mall, putting together a PDI center for not only BMW but Mini and also VW and Audi. I think that the marketplace out there is 1 of the best in the U.S. and overall, we feel good about it. We have a Mini facility that we’ll open up across the street giving us some more capability for parts and service. And when you think about a typical store here in the U.S., parts and service growth, if you are redoing 300,000, it would be a very good store. Crevier does 6 times that every month, 1.8 million. So, that just puts it into perspective, the size and the customer base that they have. So, I put a check in the box that the revenue, the profitability is what we expected in our model and Crevier sold 373 new BMWs in December and 122 Mini, so I think they were in the top 3 in the country. So it’s pretty strong. Greenwich is obviously been a little different picture. We are operating out of a temporary facility, we just opened up into our new sales facility this last week and quite honestly, the interest in Greenwich and in that brand is tremendous, it looks like the ML or GL or other company cars in Greenwich are excited about that market. We have some insight on it, because we are in Fairfield. But overall, we’ll have new service space available mid year and a complete auto house redo will be done at the same time. So overall I think we have a real opportunity there and service will continue to grow because we’ll now have the facility to take care of the customer base. So to me Greenwich, Crevier, Agnew group obviously the 30 days under my belt only I can say, I was there last week, I like the people and I think the people are going to make the difference and we’ve got the best brands.

And as you look at your pipeline and the dealers that you are talking to, the go forward acquisition paves [ph] is going to be more focused on the U.K. or the U.S.?

No, I think that -- the good news is everyone has contacts, everyone gets contacted, there are 3 executives Whit Ramonat, Bernie Wolfe and certainly George Brochick and Gerard and the team in the U.K. They are consistently being contacted about potential sales and basically we are going to look at once that basically we can glue on to what we already have, where we have platform to go into markets without some scale, I don’t think it works. We would end up Austin, Texas initially with BMW, because it was a great location. We now added Toyota, we’ve Honda, we've added Hyundai and have an open port for Hyundai. So are the markets that we would like to grow in and we can grow in Houston obviously. But again getting the right dealership at the right price obviously is always the challenge, but there is business out there and that's the 1 thing great about the auto model retail and for all the peers that are involved like I am. Their people out there that see us is the place to talk first because we've got the capital, we've got the expertise and I think today the OEMs in most cases, I would say in all cases, feel that the public operators are doing a pretty good job when you look at all the metrics. I know there was a lot of concern about trying to strong arm the OEMs early on, but to me I think that's gone there. I see a very good operators, very good management and to me that makes a difference, so I think we are at the right place.

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

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

Well there's no question with the growth that we've had we are going to have some tough comps, but I would say if you looked at the business here in the U.S., you would have to say the central region with Ramonat and his guys really got on this program early. And we will take the 2 BMW stores in Atlanta that do a 100 used or new each, they probably do a 160 or 170 used. So it’s a matter of availability, it’s a matter of the management team at that place and the great news is that the bedroom now or the platform is the internet. And when we start to see growth in Memphis of 24%, Minneapolis of 30%, Arkansas 30%, you really see South Jersey at 28%, Florida at 38%. These are the numbers that we’re seeing, in markets like Arizona was up 6%. So there is some that, Indianapolis was up 6. So we have some that are not quite as strong, but I think it’s a matter of the product, it’s getting vehicles up on the internet. It’s pricing every week to get prices right because to me the internet is such a strong tool and I think we’re getting the benefit of that. The other day someone said we sold a car that had a bad engine and meaning that they put it on the internet, people come in with a hook and bring it out there. So in the old days we wouldn’t even be caught selling anything that wasn’t brand new and in many cases we will tell the customer, here is what needs to be done to the car. If you want us to do it, we’ll have more internal work. So I think it’s a process. We look at our wholesale, it’s down 12% in units on a same store basis and when we look at the future instead of looking at, it’s a 1.1:1 new-to-use, we are looking at what’s the wholesale as a percentage of the used retailed and we want that to be 20% or below. That means that you are getting everything you can to the market 1 way or the other, so we are not counting on wholesalers coming around buying the cars. Penskecars.com has been a powerful tool for us too because we have all of our inventory aggregated, both new and used across the country at 1 site, so that’s been a great tool for us also.

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

Well, I think when you look at our gross profit, it went from 8.5% to 8.4% and we went from 7.2% to 7.1% on used. So there was some loss on margin. I think with the new products coming out, you’ve got the new Lexus GS, you've got BMW 3 Series, this Land Rover Evoque is over the moon from the standpoint, not everybody, we don't have a lot of them, but Mercedes ML. And I think that, today I think the OEMs are finding out that when you look at incentives, incentives were down I think a $100 in January versus December. So maybe there is some sanity in the market at the moment. But we see typically in the premium luxury side, when you look at inter-brand competition, the way the markets are set up with Audi and BMW, Lexus, Mercedes et cetera, we don't have that inter-brand competition. At the premium level, now obviously, when you look at the domestics and you look at the volume foreign, it's a little different and I think that you will have some pressure coming out of Toyota or Honda who want to get market share back, but quite honestly when I look at the January numbers, from the standpoint of margins in Toyota and in Honda, they are still strong. In fact they are a little better than they were in December and we're still running at about a 60% inventory. If you go back and look at -- we averaged about 4500 units and the good times on Honda and 5000 Toyotas. We're running right now with an inventory to the say last week of 60% of that. So we're at up to speed. So maybe when we get full inventory, we'll start to see some decline, but overall I think it's up to us to manage it. I wouldn't say they're going to go up. So I think you will see some downward pressure. But I don't think it will be dramatic.

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

Well, our personnel cost as a percentage of gross went down about 60 basis points which is key. And what we’ve done as we go forward into 2012, as we set our targets, on compensation, we’re setting our sales managers on the same basis because we’ve got to tie them to performance and when you do that, we’re being sure of this. We don’t get the gross, we don’t get the profitability, we start to see deterioration at a higher SG&A. Also in our marketing because of the internet we’re getting a much more efficient contact with the consumer and we saw a 3% to 4%, Matt, reduction in advertising per unit from the standpoint of advertising in the fourth quarter. And also, I think some of our CRM tools that we’re using now are more efficient than what we’ve done in the past. So, to me, we’ve eliminated some SG&A expense because we purchased some real estate that we’ve been leasing before. I think if you look at us, we’ve got 4 or 5 large pieces of property, which we have sale leased backed in the past, we’re in negotiations as some of the other peers have done. We see those as opportunities because obviously as we were growing, we didn’t have the capital and did not mortgage those because of the higher rates, but with our freight environment today, I think that gives us just another area to work in, but we are looking at marketing, we are looking at personnel costs. We are looking at interest and we are into our loaner car expense and some of the other peers don’t have, we have 6,000 loaner cars in service, it cost us last year $35 million. So when you come in with your Mercedes you expect to drive out with your Mercedes loaner car. So we are looking at that very carefully to be sure that we are getting the proper utilization of those, and that can drive some SG&A down. So I guess we are looking at areas we hadn’t in the past. Again the most important thing is grow the gross, so you got to work on both ends, but I think there is no stealth move here that I have in my pocket, I want you to leave the call with that.

And there is a question from the line of Patrick Archambault with Goldman Sachs.

A couple of quick ones. Just 1 clarification on, you talked quite a bit about new margins there and thinking about the trajectory of used, it seems you outlined 2 factors. One is the retail first strategy or your retailing things that were previously wholesaled and I guess the other 1 is the inventory acquisition costs which are high, how do we think about that on a go-forward basis, is there an opportunity to bring that up over the next couple of quarters or is it kind of in a holding pattern for a while until we get more leasing and more supply?

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

Well I am talking about margin and I guess my question to you would be given how tight supply is what's the trajectory of margin?

Let me say this, obviously our wholesale was down 12%. So that means that we sold more new cars and sold more used cars. So we are keeping more vehicles which obviously will drive availability for us at the stores now. As we go down the cost of sale line meaning for instead of selling 30,000 used cars, we are down in the say 18 to 20, we are going to get less margin just because it’s a lower priced car. Also what we are doing is we are not [indiscernible] the old perspective, we are looking very carefully at what we see there and what we don't because we could still sell these cars, mainly the high mileage cars without CPO we give them a longer warranty and that will help us drive margins. One of the things we don't have is the offer of cars coming back. on the premium luxury side because when you look at Audi, BMW, Mercedes and Lexus, just as an example that maybe didn't get everybody 55% of their sales are leased and we get those vehicles back. And I think it’s important that we see that grow and I see the OEMs being more aggressive in the fourth quarter. So that will drive some availability, but again we are all looking for used cars and the best used car is the 1 that you can trade because you can get 2 transactions and we are buying cars. I know in the U.K. we have 20 buyers and they are specifically assigned to brands, a specific brand, so they are buying off the curve there and they're in the newspaper and they are buying from the OEMs. We don't have that luxury here where we can just go to the OEMs and negotiate a big package, but we can in the U.K. So I think that our margin is impacted, it’s lower than our peers on used cars because in the U.K. you have to have demonstrators to meet your requirements for all your bonuses and those demonstrators when they are sold or not sold as new like they are here in the U.S., they are sold as used cars. So that has some impact on our margin but our CPO business is probably down 300 basis points from 40% around 35% to 37% from last year. So there is a number of leverage here but I think our margin will hold and at the end of the day this used car, I think as the new car business accelerates we’ll see some of these older vehicles and that will give us an opportunity to continue have a full pipeline.

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

Well, obviously I think it’s strategic, we divested of a Toyota store at Long Island where we only had 1 store there. The matter is that with the scale of some of the other operators there or plus it CapEx required. So was it was the right move because we bought Greenwich, Mercedes we had framework agreement that doesn’t allow more than 2 stores in the market and Manuet [ph] was obviously in that market we owned at Fairfield. We had a Toyota store here in the Michigan area which we realized at being a nameplate guy here in Michigan, might not be strategic. So we had Jag Land Rover store over in the U.K. which was -- again felt to be not where we wanted to be and we divested that. I think smart stores that we had in the U.S. that were not associated with Mercedes Benz stores, were divested during the year, too. So that’s kind of a laundry list of what we did.

Okay. That’s helpful and last 1 if I may, can you tell us what the impact was of, your SG&A leverage was obviously extremely strong. You said a little piece of that was due to some property that was leased before which was purchased now. Can you give us a sense of what that ratio, what that improvement might have been, just adjusting for that change in financing?

I would say it was a property that we had leased and there was -- it was 12 million purchases of Honda store. India is the number 1 in that region and I think that from overall, it’s a minor. We are really, at this point, it’s part of our we showed in our CapEx and we start getting that benefit. We started getting it in the last 2 months of the year and we will see that throughout 2012. But at the moment it’s a small number but there is big opportunity out there. I think there is hundreds and thousands of dollars and million dollars of cash flow in some of these bigger properties like when you look at some of the Phoenix properties and some of the other or some of the New Jersey properties that we did sell lease packs on as they come up on 10 years and we have an opportunity to buy some of those. We are taking a good look at them because today with interest rates in. Some people want to experiment and take their cash and move on. So we are looking at them opportunistically and I think we have seen some of that benefit in Atlanta on another 1, and 1 also in Indianapolis. So those have made some impact. I can’t say that was 20 basis points but it was probably less than 10 but it will be a factor in the future.

And opportunity ahead, okay, interesting.

I think it’s, I am not saying we are behind but I know that there has been a lot of movement, by the peer group buying some of the leases out because, again as we think about the OEM captives, they need outstandings and what's better than a Honda store or Mercedes store to have financial mortgage and they’re very competitive. They understand the business. Even though, their single purpose facilities, it certainly gives them a chance to have site control, quite honestly, if the dealer would move on. So, because of the franchise loss, I think, it’s strategically pretty smart. I think we’ll see a lot more of that. So, we’re looking at those opportunities and Aaron Michael [ph], our treasurer is hard at it, looking at those across the whole portfolio.

We have a question from Simeon Gutman with Credit Suisse.

Roger, you mentioned looking out for some open points and I guess 1 of the strengths of being in the premium, luxury space, it tends not to be over stored, over dealer relative to some of the other spots. So as you’re seeing some of them, you are getting some open points. I feel like there is probably some decent growth in some of the premium luxury brands. How do you see that landscape changing much in terms of the dealer profile and the brand’s commitment to managing the markets?

Well, let’s look at from the standpoint of what we’ve got. On the premium side, you really have to say that the Audi and Mercedes businesses in Chantili [ph] were key. Now, those were really contiguous markets. You can almost call them companion points such as Lexus has done in the past. Many of the open points we’ve gotten, obviously, were MINI. We were the first to roll a MINI in the U.S. I think we demonstrated the commitment to the brand and again when you talk about facilities if you are going to be a MINI dealer today you are going to have to spend $5 or $6 million to build a world class facility and I think that we saw the brand move and we made the same commitment at Audi with our terminal design now. And I think that overall there has been a contraction on the big 3 based on bankruptcy at least with Chrysler and General Motors, Ford has obviously taken dealership south because of the inter brand competition. I think that still more has to be done. So selectively we will see venture to in new markets, or adding some in the markets but MINI is continuing to grow because the brand is growing Hyundai is growing because they have some great success key. So you are seeing some of the Korean brands, I will say that they probably have added more dealerships, when you look at it overall. I think that there is not going to be a huge scene change of all of a sudden of the open points available. I think in many cases 1 of the benefits are that we can get the margins we need to handle the owner cars and other things. It’s not to have so much inner brand competition. I think we need to drive that and on the other hand we have to be sure we have the customer satisfaction in each of our locations. But I think its brand by brand and its performance in particular areas where people need you, but you look at our growth, it has been organic and certainly we through acquisitions and lately we have been fortunate on some open points. But I am not seeing many stores being added by Toyota and Honda, BMW and Lexus and certainly in the U.K. We will probably see over there and in Europe you are seeing just the opposite where they are trying to close down some of the operations of BMW business. In Augsburg, Germany had 5 locations we are down to 3 because we just didn't need 5. So you see some contraction over there.

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

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

Okay and then last question on the parts and service business, I think the customer pay was up 3/4 if I had that number right. Can you talk about how broad-based or how that layered out across your brands or are your segments?

Well, that would be difficult for me to say across. I would say all of the larger, the premium luxury side, because the complexity of the vehicles today and then many that -- where you got the full circle program, where you got maintenance as part of the purchase in Lexus at BMW. We’re selling extended warranty. So in cases those customers are coming back. So I would say that we’ve got a pretty stream and you can see the margin on that business also and our parts and services continues to grow. Toyota and Lexus would be down if you just looked at by brand I am not talking about geographically, but by brand because we had to acceleration problem with Toyota, we had valve drain problem with Lexus, which were big recalls. Those are obviously behind us. So we’re filling that back in with a normal more share of the wallet and some of the other things that we can do for the customers. When we look at 2011 we sold almost 18,000 prepaid maintenance contracts, which was basically flat with the year ago but again that doesn’t counts the ones that come in automatically when you buy a BMW or you buy a Lexus now with the full circle programs.

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

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

From the stand point of just overall for the year.

Yes. Actually for the quarter specifically for the U.S. talking about some of the premium brands, how they did in the quarter?

Well, our premium brands, obviously when you look at overall, on the premium side the market was up about 6% as I remember, and we were up almost 9% and on the volume foreign we were flat. I think I said it before, because obviously we were down on inventory and we have what 20, 27 or 28 Toyota Acura -- Honda Acura stores and we have 25 Toyota stores. So that was flat and obviously our domestic business was up about 3% which only represents about 4% of our overall revenue. So I think that we outperformed the market in our sweet spot, the premium luxury.

Well, specifically BMW, how did they perform for you?

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

And on the used side, did you talk about the comps U.K. versus U.S.?

On the used side on the comps for used units we were up 18% in the U.S. and internationally we were up 12%.

Great.

I think it was a strong -- the only thing that we were, well I mentioned, I think in the comments I made at the beginning was on the used side in the U.K., BMW was because of 3 Series, is the #1 -- that’s a real volume car. We didn’t have that in the fourth quarter, but then we had this VAT, value added tax which was started in January of ’11 and that obviously had some pull ahead in December of ’10. So that had an impact on us over there and to me, when you look at those specific areas probably impacted our new side internationally, but otherwise it was business as usual. And of course, we’re trying to get a lot of the units there, some MLs, GLs, you’ve got certain, we talked about Land Rover product, which would premium that are short supply and obviously we brand, too, a lot of that inventory in November and December because of there was a tremendous amount of impact with the market -- with what they were doing marketing wise and incentives to the consumer in the last 2 months. So we got the benefit of that.

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

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

We have a question from the line of James Albertine with Stifel, Nicolaus.

Very quickly, just a housekeeping item; I was looking for some guidance on what you thought the maintenance CapEx level was relative to your aggregate. I think you said $120 million guidance for FY12? And then separately, you’ve alluded to a number of times throughout this call the importance of technology from sales and servicing cars. Is there any sort of data that you’ve gathered or can you sort of point to at this stage or if you look at your comp stores, you can tell that perhaps like customer acquisition cost basis you are drawing in customers from farther distances or perhaps you are taking share away from smaller to the less capitalized competitors. Any details you can provide there on the upside that you are seeing from the technological enhancements more to social media investments and so on?

First, I would say our maintenance CapEx is around $25 million would be pretty realistic as we go forward. And when you think about what’s going in with technology, obviously internet is key and our presence on penskecars.com where we have all of our inventory available for display in pricing the both new and used, we’ve also put some partner programs together where certain big companies like Verizon and Shell and Cintas and AAA and people like that have the opportunity to go on the website because it’s a partner program and access our inventory, so that’s technology really that’s key. And I think when you look at our mobile site usage continues to grow at triple digit. I think that’s key to you and we had 415,000 visits on penskecars.com in the last 90 days. So we are seeing real action from that. I think when you look at Google, you look at Yelp!, we're looking at that. I think on the internet in the U.K. we put all of our managers names on the internet and their contacts and so from CR, CSI or CRM perspective, we’ve got comments on the web about what experience has been with the dealership and we have obviously Facebook and Twitter and we have people here that are following that. So I think the CRM products are available today. The equity calculators that we have with the cars coming into service driver, we can actually understand by VIN number what’s the equity in these vehicles. These are giving us tools that we never had before. So if you’re a good salesman we can just give you that information. The lease returns, being able to pull some of these ahead and doing this were some of the keys that we have on the internet. I also would say that a lot of the traffic that we are getting is from our call center [ph]. So the internet is also helping us build our human capital, which probably is an asset that we didn't realize early on. So to me we are looking at -- in the CRM systems interesting in Northern Ireland, when you walk in the door how they put you in the system and how they take you out when you leave, I mean there are some very specific things that we are using. Also up-selling in the -- we are now going to where we just don’t have service writers, we have a BD center, so in the U.K. all of our BMW service for 15 dealerships come into 1 site and we’re able to have staffed that properly in high volume times and these people are typically, not typically, they are trained for that particular brand and they can up-sell. So those are the types of things with technology, you think about it all throughout the U.K. and yet 1 location is taking all the service costs, making all the appointments doing the sales side calls and up-selling. So we are using those types of capabilities to drive our business when you have the scale in a particular area.

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

Your used-to-new ratio has improved quite nicely over the past several years, do you have a specific target in mind, in other words maybe 1:1 in the next 2 years or something along those lines or is there something that you are targeting there?

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

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

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

And then finally, your F&I in past couple of years, you’ve seen some improvement in your F&I, is that generally improving trend. I mean, do you expect it to continue to improve or do you think that thousand dollars of vehicle is kind of about where you are going to end up?

Well, I think what people have to understand when you have the mix like we do in the premium luxury side and the bigger percentage of the cars that we sell or leased, we don’t have the financial revenue stream in each transaction that you do if it’s primarily an APR sale. So I don’t know what the optimum is. I am not a big fan of loading the consumer up with all sorts of soft adds and then you get a re-power comes back and you potentially have a chargeback. So, I think that we are making our money in the front end and you look at our grosses from an overall standpoint and I think we’re in a pretty good shape here. But obviously, can get more? If we can get more on the right basis, we will.

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

Fine. Thank you everybody for joining us today. A great year, appreciate the support and we’ll see you next quarter. Thank you.

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