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Penske Automotive Group, Inc. (NYSE:PAG)

Q4 2012 Results Earnings Call

February 6, 2013 2:00 PM ET

Executives

Tony Pordon - EVP, IR and Corporate Development

Roger Penske - Chairman and CEO

David Jones - Executive Vice President and CFO

Analysts

Matt Nemer - Wells Fargo Securities

Rick Nelson - Stephens

John Murphy - Bank of America/Merrill Lynch

Brett Hoselton -KeyBanc

James Albertine - Stifel Nicolaus

Simeon Gutman - Credit Suisse

Ravi Shanker - Morgan Stanley

Patrick Archambault - Goldman Sachs

Scott Stember - Sidoti & Company

Brian Sponheimer - Gabelli & Co.

Operator

Good afternoon, ladies and gentlemen. Welcome to the Penske Automotive Group Fourth Quarter 2012 Earnings conference call. Today's call is being recorded and will be available for replay, approximately, one hour after completion through February 13, 2013. And audio file of today's call will be available on the company's website under the Investor Relations tab at www.penskeautomotive.com.

I would now like to introduce Mr. Tony Pordon, the company's Execute Vice President of Investor Relations and Corporate Development. Please go ahead.

Tony Pordon

Thank you, John. Good afternoon, everyone. Our press release detailing Penske Automotive Group's fourth quarter and 12 months result ended December 31st, 2012 was issued this morning and is posted on the company's Web site.

Joining me for today's call are Roger Penske, David Jones our Chief Financial Officer and J.D. Carlson, our Controller. Following today's call, I will be available by phone to address any additional questions that you may have. We have also posted the presentation to the company's website designed to assist you in understanding our financial results. We urge you to refer this presentation during our call today at www.penskeautomotive.com.

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

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

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

Additionally today, we may make forward looking statements on this call. Our actual results may vary because of risks and uncertainties including external factors such as consumer confidence, consumer credit conditions, vehicle availability relating to OEM and supplier operational issues, interest rates fluctuations, changes in consumer spending, macro economic 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 filing including our Form 10Q.

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

Roger Penske

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

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

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

Revenue improved $2 billion or 18% to $13.2 billion, approximately $1.1 billion of the increase was attributed to the same store which grew by 10% last year while the balance of the increase or about $900 million was attributed to acquisitions.

We generated 130 basis points improvement in SG&A leverage improving to 79.2. On a same store basis SG&A gross profit was 79.1 and SG&A leverage improved by 150 basis points. Adjusted income from continuing operations increased 26% to $206 million our related earnings per share improve 27% to $2.28. We generated $407.6 million in adjusted EBITDA.

During 2012 we strengthened our balance sheet by issuing $550 million of ten year senior subordinated notes at 5.75% and used a portion of the proceeds to refinance our existing $375 million in senior subordinated notes.

In doing so we reduced our interest rate by approximately 200 basis points while extending our long-term maturities from 2016 to 2022. We also redeemed all remaining senior subordinated convertible notes outstanding in cash and we extended our existing U.S. based $375 million credit facility for additional 12 months.

We expanded our international presence to new markets by entering Northern Ireland, Italy while in the U.S. we expanded in Madison Wisconsin and further solidified our presence in Southern California.

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

Now let's turn to specifics behind the fourth quarter. Total retail unit sales increased 19% to 81,400 units and revenues increased 18% to $3.4 billion. On a same store, retail revenues increased 11% including a 13% increased in the U.S. and a 9% increased internationally.

Excluding the effect of foreign exchange rates total same store retail revenue increased 10.8%. Our total revenue mix during the quarter was consistent with last year, the U.S. was 67% and international was 33%. Our brand revenue mixed was also consistent with 2012 premium luxury in the quarter 72% volume foreign 24% and big --4%. Looking at new vehicles only we retailed 46, 400 units in the quarter, representing a 22% increased when compared to last year. Our premium luxury was up 24.6% volume foreign up 17.2% and the big three of 17.5.

Total same store new retail units increased 15% as we outperformed the U.S. and international markets in the fourth quarter again demonstrating the strength of our brand mixed. We were up 15% in the US while market was up 10.2, in the UK we're up 13.8% and the market was up 9.2.

New vehicle gross profit per year it was $3197 and our margin was 8.2% compared to 8.3% last year. Looking at our used vehicles our retail 35000 in the quarter an increase of 16% and our used to new ratio was 0.75 total same store used units retail increased 7%, the U.S. was up 10% and international was up 2%.

Used vehicle gross profit per unit was $1857 and our margin was 7.2% compared to 7.3 last year. Our financial and insurance revenue increased 19% including 13% on a same store basis and our F&I was $986 per unit and that was pretty much flat with last year. Service and parts revenues increased 9.2% during the quarter including 3.2% on a same store basis. Our customer pay was up almost 7%, already up 17, -- up 8 and PDI up 15.

Our gross margin for service and parts improved 110 basis points to 58.8% overall gross profit increased 17% to $515 million and gross margin was 15.3% compared to 15.4% in 2011. Same store SG&A as a percent to gross was 78.5% compared to 79.7%, an improvement of 120 basis points. Our effective tax rate for the quarter was 32.4%. EBITDA improved 14% to $102 million compared to $89 million in the fourth quarter of 2011.

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

Vehicle inventory $1.9 billion, an increase of $448 million when compared to December of last year. New was up $392 million and used was up $56 million, on a same-store basis our inventory increased approximately $300 million, new up $276 million and used was up $23 million compared to December of last year.

Approximately $130 million of the same-store relates to the Japanese brands. Our inventory days supply was 57 days versus 48 last year. Used were 48 versus 44 last year.

Capital expenditures were $116 million under our corporate identity and renovation programs. In addition we spent $32 million to purchase buildings and real estate we had previously leased and $ 10 million for rental vehicles. We estimate our CapEx to be $115 million to $120 million in 2013 excluding rental vehicles or any other real estate we might purchased during the year.

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

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

Additionally, the top [partial] income tax rate in the UK will be reduced from 50% to 45% beginning in April for individuals earnings more than £150,000, we view this is the positive development for vehicle sale in a premium luxury category. We're the leading premium luxury retailer in the UK and ranked number one in brand mix with Audi, BMW, Ferrari/Maserati, Mercedes Benz, and Porsche. In fact according to Motor Trader our UK platform the second largest in the UK based on revenue.

The premium luxury market continues to improve in 2012 unit sales increased 7.4% and this market share improve 50 basis point 25.2% of the market. That's the premium luxury market. We are performed the premium luxury market by generating an 8.2% increased on a same-store basis.

Additionally our used to new ratio in the UK market remains at a ratio of 1:1.

Before I open the call for questions I want to provide a few comments about some of the key initiatives we have in place for 2013. First is our growth we're targeting revenue growth of more than 10% in 2013 to a combination of same store and acquisition the compliment of brand mix and geographic strategies as we look to build scale in our areas of concentration.

Second as SG&A leverage we're targeting 100 basis point improvement, an SG&A to gross profit during 2013. Third is F&I, we're targeting an improvement in our performance through a combination of efforts which including includes adding resources to drive additional training, higher product penetration rate, and targeting our end performing locations.

And fourth is our virtual showroom through our dealer websites in penskecars.com. We will be rolling our website enhancement aimed and improving overall design, performance, and effectiveness on all of our website brand by brand.

We'll also improved navigation and system functionality including inventory images, pricing, descriptions this is will drive improve our line performance. We'll also improve our customer relationship management programs to enhance communications and data warehouses to drive consistency in our customer communication processes.

In closing, I believe our results continue to demonstrate the strength, the diversity and the resilience of the PAG business model. I remain optimistic about our business and we continue to see the strength in our markets and I'm pleased with the pace of our new and used vehicle sales. Our inventories are in good shape, our balance sheet is healthy and we continue to grow the business generating a 21% increase in retail unit sales in 2012 increasing revenues by $2 billion or 18% and driving a 26% increase in adjusted income from continuing operations and a 27% increase in adjusted earnings per share.

We continue to believe the pent-up demand, the strong credit availability and the many new product launches we see coming to the market should continue to keep demand strong. I appreciate everyone joining us today, appreciate your confidence and moderator let's open it up to questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And first in line Matt Nemer with Wells Fargo.

Matt Nemer - Wells Fargo Securities

Good morning Roger.

Roger Penske

Morning.

Matt Nemer - Wells Fargo Securities

So, a couple of questions first on service, your same-store warranty business was up about 10% and obviously units and operations should start to improve maybe have already started to improve and will continue to improve. What's a good run rate for service comps for this year, do you think in total we can see you know go even higher as the units improve?

Roger Penske

Well I think we were up 3.2 overall, I think the dynamics you know obviously you know customer pay is a very big part of that. And I think what we are trying to do is get more share of wallet there from the customers. We've added that certain things such as wind shields, window [tanning], we have a rapid repair alignment programs that we've added in the service line which have been driving that customer pay. And I think the one good thing we saw was increase of 70 basis points from our margin during the quarter.

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

Matt Nemer - Wells Fargo Securities

Okay. And then secondly you mentioned that one of your plans this year is to do more training in F&I area you're running at about 1000 per unit right now. What kind of a goal should we think about for that number on a 1 to 2 year basis? Can that get up to 11 or $1200 per unit?

Roger Penske

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

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

Matt Nemer - Wells Fargo Securities

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

Roger Penske

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

I take my head off those guys there always breaking new ground for us from a public retailer perspective, but we're doing we're tying together penskecars.com, we think take its key, we have a consistent approach locally and I think today, I look at this business as a local business. Again when you look at a Penske Company you'll see most of our advertising and most of the communication that we send out to the customers relate to a Penske Dealership.

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

Matt Nemer - Wells Fargo Securities

Okay, that's all I've got congratulations. Thanks.

Roger Penske

Thank you.

Operator

Our next question is form Rick Nelson with Stephens, please go ahead.

Roger Penske

Hi, Rick.

Rick Nelson - Stephens

Good afternoon, Roger.

Hi.

Rick Nelson - Stephens

Talk about inventory of your largest brand BMW, we know we had some shortages in the summer months and until things seem to get better in the fourth quarter, but they had weak sales here in January, just curious about the outlooks there?

Roger Penske

Well, from an inventory standpoint we talked about it during the third quarter that we were really -- we were down on a double digit at there is some 34000 vehicles coming in as we've look at it in the last in December and November and to me we utilized those because we had such a strong finish for the year and I think with little bit of hangover from a standpoint when you look at a numbers as we went into January, but overall our inventory is in a shape we're tight on a X3, X5 and obviously you're looking at some of the vehicles from a Audi perspective Q5, Q7 all the GL inventory is tight, so. So to me it's a good news problem because what it does it helps us drive our gross as it you saw during the quarter.

But we don't have an inventory out of balance right now but hopefully BMW will give us some more smoother inventory radius we look through the balance of 2013.

Rick Nelson - Stephens

You bring up a good point on the margin, you know $3200 sale list (Inaudible) things have and stabilized and from your expectations there on the new car margins.

Roger Penske

I think when you look at and you break it down really in the fourth quarter, we were almost $3200 but when you look at premium luxury we were at $4252 in volume 4 was approximately $1800 and our domestic was around $2400, so obviously the premium luxury carried the day and that's one of the benefits almost can sell one of those premium luxury cars for twice the volume for and you get the same margin, so we talked that was good.

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

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

Rick Nelson - Stephens

If I could ask you finally the SG&A, the gross profit 79.1% stands higher than others in the peer group, I know you're targeting a 100 basis points nearly this year but a longer-term opportunity, do you think you can get that ratio down to the low-70s or is there something structural about your business?

Roger Penske

Well, I think, as we're growing this business in the early 5 or 6 years, we did lot of sale leasebacks. So obviously, both the interest and depreciation are above the line. If you look at our business and you eliminate rent expense, we're down close to 70% which I think is key. And we look at that number, but we need to drive it down, I don't think I'm going to get to the numbers that I've seen by some of the peers the way were structured in some of the areas.

But also from a compensation basis, when you look at comp, that's up in SG&A, we might have a little bit higher compensation on premium luxury than you do in volume form. And I think that might have so we have less turnover of our sales associates which might be driven by little bit more compensation. So that could be a factor also, but it's top of, believe me top of voice when we're talking to our teams from the standpoint of driving SG&A. I mean you folks have focused on and certainly we're focusing on it there as we go forward. As I said I think in my remark we're looking at driving a 100 basis points that we've done that now and I think on a same store basis, we were 150 basis points last year. So again, that's going to take somewhat, but I think that can be achieved.

Rick Nelson - Stephens

Thanks for the color and good luck.

Roger Penske

Thanks, Rick.

Operator

And next, we go to John Murphy with Bank of America/Merrill Lynch. Please go ahead.

John Murphy - Bank of America/Merrill Lynch

Good afternoon, Roger.

Roger Penske

Hey, John.

John Murphy - Bank of America/Merrill Lynch

Question following up on your SG&A comment, just curious as you look at that 100 basis points, what are the biggest buckets of potential savings you've seen in 2013, is it advertising or personnel or blocking and tackling, just kind of understand what the big buckets are?

Roger Penske

Well, I think when you look at an advertising or let's just call it marketing, there'll be some additional spend in digital, but what we're trying to do is be consistent with our marketing. We need to have security, we need to have consistency and we got to have quality. So we can do is all of a sudden run all over the map and I think that's one of the things we're doing and with this consistency and providing our data warehouses where we have data available for each brand that we've driven by brand it gives some consistency and also that takes some cash out.

So I think you'll see it there. We've also driven our pay plans as we go forward based on growth and then these are variables. So we've got to see that growth or to drive a higher personnel costs, but I think those would be key. Also we've looked as we did at the end of last year, we purchased two dealerships which we had been leasing which are going to give us some benefit from SG&A perspective and this will be part of our strategy based on availability as we go forward.

John Murphy - Bank of America/Merrill Lynch

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

Roger Penske

Well, I have had conversations with both all three manufacturers and specifically one and they say that sweets spot for them is between 95 and 100 Yen and I think that both of them a gradual growth in market share, but I think they want to keep their eye on incentives. And right now the best incentive is world rate financing, they've good balance sheets. I think right now you're going to see lot of that market share will be done with low rate financing on leases when it comes to the premium side of Lexus. So, we've never seen it affect us. We borrow in pounds in the UK and we borrow in Italy and certainly Germany in the Euros, so we're not affected from the standpoint of our business significantly it hasn't been our. There was no foreign exchange really impact on our earnings and we sell in local currency.

So to me right now the OEMs, it's really up to them and I think that you've seen is Toyota and Honda have comeback. They have slowed own Hyundai and they have taken some share in the market. And I think that's just the loyal customer base. Toyota has introduced Toyota Care which gives everybody that buzz a new Toyota free oil changes for the first two years. They are taking on that type of a rout for owner royalty for their future. And I think those will be done without huge incentives at least as I understand it more tactical types approach rather than just showing money at it right now that would be at least what I see at least in the first quarter.

John Murphy - Bank of America/Merrill Lynch

Yeah, that's very helpful. And then just a last question on your two major markets, just curious what your sales forecast is for the US for 2013 or your basic ranges that you'd be thinking about? And then also really importantly, what you're thinking about for the UK and German markets for those businesses?

Roger Penske

Well, I look at the retail market and those 11.9 was the SAS in retail in the US, and I would expect that our plan is to see that drive ahead about 10%. I don't know what the fleet business would be, obviously that's individual, Railcard comes et cetera what they are expecting. So I see it as -- as I said earlier, the credits is available, the pent-up demand, the older car park is key. Residuals, they are starting to slide a little bit because of new car availability, but from my -- I expect the SAR would be up 10% on the retail side. In the UK, when you look at, there is a luxury side of the business, I would expect that to go up maybe 1% to 2% in 2013.

John Murphy - Bank of America/Merrill Lynch

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

Roger Penske

Thanks.

Operator

Our next question is from Brett Hoselton with KeyBanc. Please go ahead.

Roger Penske

Hey, Brett.

Brett Hoselton -KeyBanc

Roger, how are you?

Roger Penske

Great.

Brett Hoselton -KeyBanc

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

Roger Penske

Well, I think, I said, I think earlier that we're looking at a 10% growth, not 13%. It would be 1.3 billion I guess if you took the 13.2, so maybe that's where the number you have got. We're looking as a combination of same-store and acquisition would drive that number. When you look at the picture, we were 750 million was our acquisition growth. And on the same-store basis we grew over 10%. I think we've had a little bit of a holiday, all of the auto dealers including the [Publics] over the last three years the metrics, the comps have been leisure.

So I think as we start to look at '13 and '14 and '15, we're going to have some tougher numbers. So I don't want to go way out on to the limb whether projection that we can't try to achieve. So I think our 10% that will be a mix of both same-store and acquisitions. In the fourth quarter, we had $250 million of acquisitions I think that we announced.

Brett Hoselton -KeyBanc

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

Roger Penske

Overall.

Brett Hoselton -KeyBanc

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

Roger Penske

There is no question we were trying product. We've got couple of dynamics now. I think with the Western Europe slowing down some of that production that was going to be in Germany, in Italy, in France and Spain, that will be targeted to come to the US. But we have certain business plan objectives and certain numbers that we have to achieve and I don't think that BMW is driving us to unrealistic targets as we go forward. I think we want to see, even I do want to see the inventory one to short rather one to long if that helps us from a margin perspective. But I haven't seen specifically you know the volumes for the next quarter, but I think that with the new 3 Series we had to shell down the older model here in Q1. We've got some new product coming out will help drive some more volume in BMW. And it is on a worldwide basis 26% of our total revenues. So it has a big impact in our same-store, but again you know I think the targets have been pretty realistic you know from the OEMs and they probably I think they probably range in a 5% to 6%.

Brett Hoselton - Keybanc

Thank you very much, Roger.

Roger Penske

Thank you.

Operator

We will next go to James Albertine with Stifel. Please go ahead.

Roger Penske

Jamie, how are you?

James Albertine - Stifel Nicolaus

Hey, good afternoon Roger and Tony, and thanks for taking my question. I want to focus just if I may on your CapEx guidance. I think if I heard you correctly you said $115 million to $120 million for next year. I mean just looking at what you spend on in the past several years and you've made some pretty big investments throughout your portfolio. And I just want to get a sense for you know what's the maintenance sort of run rate within that number and really any kind of granularity you can breakdown within that guidelines?

Roger Penske

Well, some of the maintenance we drive through the P&L, the smaller maintenance goes through the P&L. These would be major products, projects which would be you know larger facilities, CI improvements obviously which would be CapEx. We have made a big commitment to facility starting back several years ago and I think that's paying off now because we've gone from spend a -- gross spend of over $200 million now down where we're spending you know on construction and CI of about we said $115 million to $120 million. Now on top of that, we've got add and we buy land but we buy out of at least that would be around added on. We do have some rental car costs which are also in our CapEx numbers. So I think that we should look on what I would call standard CapEx will be $115 million to $120 million. And I think there is probably when you look at maintenance CapEx, it could be 10% of that.

James Albertine - Stifel Nicolaus

Very helpful. And then just wanted to dig in a little bit as the markets for M&A evolve, you're looking now a little bit cash to little bit of a wider net using Italy and Northern Ireland and still some opportunities in the U.S. So with respect to your capital allocation plans, could you update us now on so the priorities and assuming M&A is pretty close to the top but sort of other priorities you may have in terms of the use of cash in the year-end?

Roger Penske

Well, I will thank, we talked $115 million to $120 million in CapEx, we still have a $100 million roughly for stock buyback and any reductions that we would have. Our dividends are paying out about 25% on our dividends. So they would be -- that would be a key and then obviously we would be -- remaining we would use for acquisitions.

James Albertine - Stifel Nicolaus

Okay. And then one last housekeeping item. If I missed that I apologies, could you just tell us what your advertising expense per unit was and then remind us the percentage within your portfolio of the stores you owned versus leased? Thanks.

Roger Penske

I didn't understand the last question.

James Albertine - Stifel Nicolaus

The percentage of stores in your portfolio that you owned outright versus leased?

Roger Penske

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

James Albertine - Stifel Nicolaus

Excellent. Thanks and good luck.

Roger Penske

Thank you.

Operator

Our next question is from Simeon Gutman with Credit Suisse. Please go ahead.

Roger Penske

Hi, Simeon.

Simeon Gutman - Credit Suisse

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

Roger Penske

Well, I would say that when you look at the captives you'll have a vertically integrated captive finance company or the OEMs they have a vertically integrated captive finance company. They've been very strong. I mean they are buying used car paper which I think is very helpful to us in growing our business. They had to get into that business when new car business went down and they've continued to buy, they buy used along with new. So I see them very active. Now, the banks have money at low cost and we've seen a little deterioration probably about 6 or 7 percentage points and total financing has moved over to what we would call our key lenders from a banking perspective.

So I see it being strong, the interest in financing real estate now is all the manufacturers captives wanting to be in that business. And I think that's key. Leasing, as you saw, in December in the fourth quarter when we look at Audi, Lexus, BMW and Mercedes, I don't know this is a number for sure, but I bet you if you add them altogether, they are north of 60% with lease versus cash buyers and financing. So I'd say they are in the game. They are very important to us. Most we are primarily vertically integrated on our floor planning, they are very competitive of floor plan rates, which is obviously key for us.

In many cases you get some benefits when you floor plan along with handling retail and lease contracts with the same entity. So banks are aggressive as pushing the captives, but overall I would say that they are good. In the CPO activity, one thing we can't forget is a certified pre-owned. The benefit of getting new car finance rates on some of the CPO activity is very powerful in the market from the standpoint of conquesting customers to the brand.

Simeon Gutman - Credit Suisse

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

Roger Penske

Well, I think we've read both in the UK and also in the U.S. that housing prices have increased. So I would say that today just overall if we've had our assets appreciate some percent, this is going to give us higher credit scores because of marking to market the assets you have. I think that bodes well for us. I know in the UK they talked about that. In the last couple of days we thought that was and we don't do much subprime. So our business is primarily in the premium luxury and then where the captive is, but I can't tell you whether it's 600 or 650 or 700, all I know is that captives are very receptive to financing both new and used and in fact some captives are running as high as 80% both on new and used which is very powerful.

Simeon Gutman - Credit Suisse

Okay. And then on cars and services gross margin look like the improvement was pretty good. Can you talk about the drivers of that? And then, I'll just take my last one and next question, any initially observation for the rental car business and how that's going? Thanks.

Roger Penske

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

And on the warranty side some of the programs where the manufacturers are offering full service, those programs comes through warranty. So it shows warranty being up a little bit. But I think, we have a higher margin when you look at our warranty business typically carries 130 basis points higher margin than the customer labor. So to me little bit of a mix shift and some of that's due to OEM program. So to me been some recalls, Mercedes, Toyota's announced a big recall. Those are key for us. We get very efficient on those from the standpoint of our technicians and we drive those. In many cases we will work extra shifts to get that business through the shops and getting -- to get more utilization we might run a 10-hour shift rather than 8-hour shift to be able to accommodate the customer.

Operator

Thanks. Our next question is from Ravi Shanker with Morgan Stanley. Please go ahead.

Ravi Shanker - Morgan Stanley

Thanks. Good afternoon, Roger. Thank you for this guidance if you will on the 10% revenue growth on the (Inaudible) share improvement. A couple of questions on those, do you need further acquisitions to get to the 10% or already announced acquisitions going to get you there?

Roger Penske

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

Ravi Shanker - Morgan Stanley

All right. And can you also comment on 2013 with regards to PTL and what you see outlook there especially with micro going to improve and potentially a housing recovery as well?

Roger Penske

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

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

Another dynamic just like we've seen it on the car side that we've got an older truck part now getting into seven years and we're seeing used truck prices going up which obviously is driving gain on sale for us which has been good. So I see the future very good because people going to have to replace and to me we see the new technology in fact will in some cases create 5% to 7% better fuel economy. So that'll drive a fleet to make these changes even though the cost of the lease would be higher than we spent in the past. But overall strong demand on rental, a little cautious on the top line but yet our ability, logistics is a little bit longer a sell because it's -- many ties it takes you 6 to 8 months to wrap up a deal because of the complexity, but we feel good about our friends there.

And again the one way business, the rent at here, the rent at there was up this year. Revenue per transaction was up and length of rental was up. That's showing people are moving little further from their core home or business which provides us more revenue.

Ravi Shanker - Morgan Stanley

Very helpful. And lastly on the tax rate, are you looking at some of that 35% rate which you've been fairly steady at or more like this second half of 2012 where you are significant level on that?

Roger Penske

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

Ravi Shanker - Morgan Stanley

Very good, thanks very much.

Roger Penske

Thank you.

Operator

Our next question is from Patrick Archambault with Goldman Sachs. Please go ahead.

Patrick Archambault - Goldman Sachs

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

Roger Penske

Well I think that we obviously get way over a million visitors per month to our website, and I think that it continues to grow quarter-after-quarter. But I think the most important thing when you look at the internet is are we able to dissect the traffic, are we able to understand what gets us the clicks. Quite honestly you know we’ve been analyzing different peer group as one obviously. It’s always good to know what they are doing.

We’ve reviewed the OEMs from the standpoint of websites. We’ve looked at the best performing non-automotive websites to try to understand the design trends from both automotive and non-automotive. And I think that we are looking at user experienced trends from both non and automotive and I think that as we do this we’re able to look at click tracking data to be able to give us some direction as we go forward using analytics and also the redesign. And what we have to do is look at this, as 41 different businesses, because each individual brand you know has its own personality and I think from that perspective we need to drive from the corporate OEM website down to the local market. So we’ve got to look at that because I would say a website for Mercedes Benz is going to be different for KEA, and I think we have to look at that.

So, we’re looking, we need to be secure, we need to have a quality website and we also got to be able to the functionality that has to be good. I would say that all of us in the peer group are working on that and certainly from our perspective we think that we’re already on track, we’ve got a great group working on that, our people in the field are bought in and I think they understand and that’s going to be one of the areas that we look at from an SG&A prospective. You know just how much is going to be traditional advertising and how is much going to be you know with the use of the internet and some of it is just direct mail that we will use or through email that will make a big difference to adjust.

How robust that is and does that call for action, because many things that we’ve been involved with in the past really don’t call for action. I think that’s one of the things that that we’re trying to develop. And consistency and the quality of what we’re doing is key and I think that it's one of the things I’m sure that drove automation to their decision to get consistency around the brand look across the country, which obviously makes a lot of sense. We’ve been trying to drive that already with Penske cars, but also brand by brand.

Patrick Archambault - Goldman Sachs

Okay understood, very helpful. One other one if I may. On the use side, used side is your use to new ratio going down to 75.75 which is I think a bit lower than you know over the last two years on a quarterly basis. I think you’ve typically been in the 80s, it's something we’ve seen you know with other couple of other dealers as well. I think is that a cyclical effects, just the change of sales, you know share gains by new versus used. How do you we think about that and how do we think about modeling that on a go forward basis?

Roger Penske

Well, remember new has moved up, so obviously our new business is growing really at a faster rate where it was inverse to that you know probably for the last 24 months and I think in the fourth quarter you know with the impact that we had on premium luxury increases certainly drove some of that differences. But we still stayed at one-to-one in the U.K. Quite honestly when you look at our business we’ve grown used tremendously, and we think that’s the byproduct, because that is obviously a parts and service business.

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

Patrick Archambault - Goldman Sachs

Okay terrific thank you very much.

Operator

We’ll go to Scott Stember with Sidoti & Company. Please go ahead.

Scott Stember - Sidoti & Company

Good afternoon Roger.

Roger Penske

Hey Scott

Scott Stember - Sidoti & Company

Could you maybe talk about where you expect the margins in the used business to go particularly with all those cars that were sold three years ago, new cars really starting to come up at least the supplier auction? How would that whole scenario workout for you guys?

Roger Penske

Well I think that it depends on CPO. There is a certain amount of advance rates that the [captains] will give us on certified, pre-owned and also used. And as long as they are aggressive that will give us a chance to get more margins. It’s not like a new car, used cars specific by itself depending on the age and the condition that car would drive, would drive value it just depends on how much you can get from an advance rate if you’re financing it or leasing it. So that’s going to be one factor.

From our perspective we’re moving down from a cost to sale, when you look at CarMax they’re in the 16,000 to 17,000, we are in the 26,000 to 28,000 from a cost of sale. We’re seeing that coming down and I think that overall we’ll see as we move down the chain we’ll see some deterioration in our margin. We’re at 7.2% now and I’d hope we’d sustain there. That number would be over seven as we go forward. On a yearly basis now we are about 7.6.

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

Scott Stember - Sidoti & Company

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

Roger Penske

I would say that there is probably more people out there that are looking at potentially selling their business and I think if you ask any of the public retail, remember the one data point that I think the market has to understand that only 10% of the market today is owned by the public retailers. And the good news is I think the general perception of automotive retailer that’s public is much better than it was in the past I think AutoNation broke the glass, started this route with us back 12 or 13, 14 years ago, and the quality of the management, the capital that’s available for CapEx when you hear where we spend over $2 billion, AutoNation spent $3.5 billion. I know Group 1 and the rest of them are spending a lot of money and I think it’s exactly what the brands need in this time period.

And I think that’s a big factor as we go forward. So I think all the phones are ringing it just the side that’s to decide strategically, you want to be international, you want to be domestic, do you have certain markets where you have scale all of us want to glue on stores where we have already have scale. We can have in the centralized offices, it makes it much easier, you can plug in your [back plane] from an MIS perspective. So to me this gives us a real competitive advantage and I would see the growth continuing both domestically and we see a wide open market in Europe where capital is short, but there is all sorts of consolidation going on and I think there is an opportunity.

Scott Stember - Sidoti & Company

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

Roger Penske

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

Scott Stember - Sidoti & Company

Great, that’s all I have. Thank you.

Roger Penske

Thank you very much.

Operator

And we go to Brian Sponheimer, Gabelli & Co. Please go ahead.

Roger Penske

Hey Brian.

Brian Sponheimer - Gabelli & Co.

Hi, thank you for squeezing me in here.

Roger Penske

No problem.

Brian Sponheimer - Gabelli & Co.

Couple of real quick ones, your average per vehicle is down only 20 bucks in the quarter, which was clearly generated by mix on premium luxury. I guess I am curious what was the average sale price per vehicle in the premium luxury side?

Roger Penske

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

Brian Sponheimer - Gabelli & Co.

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

Roger Penske

We love it, because it gives us broader product to offer the customers. Think about Porsche, it was a sport car company, then they brought in Cayenne, then they brought in Panamera and now they are going bring another smaller SUV. The same thing, you know, BMW and Mercedes have gone for S Class and 7 Series all the way down into A and B in 1 Series, you know we are attracting another customer and I think that’s why they are gaining penetration. There is no question. Just use the U.K. as an example. From the overall standpoint you have seen the premium luxury take 25% of the market and that’s gone up 6 percentage points since I think five or six years ago. So we see it as a positive and the good news is they are building plants in the U.S. here so they can be competitive from the standpoint of those smaller vehicles, because there is obviously less margin, but it’s an entry level which is really key.

Brian Sponheimer - Gabelli & Co.

Okay, that’s very helpful, thank you. And just one other, just on the effect from super storm Sandy. Can you talk about what affect it had on new sales throughout the quarter, whether you think you still lost some sales in the November and December timeframe that you would have otherwise still because of Sandy and any benefit on the parts and service side from vehicles that needed to be repaired?

Roger Penske

Well let me answer it this way. We definitely got pickup from Sandy from the standpoint of new volume. Our used cars where we were we lost a thousand vehicles, lot of those were used. So it probably took us a month to get any used inventory backup, but new volume was up and margins were a little bit better than they were the previous year. We were probably out of business if you just look at on an aggregate basis, on the parts and service side in Jersey city and also in [Gateway].

We probably lost probably five or six days so do you get that back probably you do at some point, but there is no question that we were shutdown and we are still operating. In some case we had a generator running here a week ago in one of the locations, because of power you know most of the sale deals when you look at New Jersey City all the sheet rock, all the walls, all the furniture has to be replaced.

So we are operating with trailers, operating in temporary headquarter or sales sites in order to be able to meet the customers, but the good news is that we are efficient, our shops are back in business and we are moving on from Sandy. Obviously a lot of people are devastated there which many of our employees that we have to deal with. But from a business standpoint it’s been a plus on sales side. I think it was negative on the service side.

Brian Sponheimer - Gabelli & Co.

Okay. Thank you very much and very nice execution.

Roger Penske

Thank you.

Operator

Mr. Penske no further questions in queue.

Roger Penske

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

Operator

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

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