Good afternoon ladies and gentlemen, and welcome to the Penske Automotive Group third quarter 2009 earnings conference call. (Operator Instructions) Please refer to Penske Automotive’s press release dated October 30, 2009, for specific information about how to access the replay. I would like to introduce Mr. Tony Pordon, Senior Vice President of Penske Automotive Group.

Welcome everyone. A press release detailing Penske Automotive’s third quarter results was released this morning and is posted on the company’s Web site at www.penskeautomotive.com. Participating on the call today are Roger Penske our Chairman; Robert O’Shaughnessy our Chief Financial Officer; and J.D. Carlson our Controller. Before we begin, I would like to remind you that we may make forward-looking statements relating to Penske Automotive Group on this call. We caution you that these statements are only predictions and are subject to risks and uncertainties relating to economic conditions, interest rates, consumer credit, confidence, spending, the ongoing restructuring of the U.S.-based automobile and auto parts sector, and other factors over which management has no control. Our actual results may vary materially from these predictions. Any such statements should be evaluated together with the information about Penske Automotive in our public filings, including our Annual Report on Form 10-K. During this call, we will be discussing certain non-GAAP items, such as adjusted income from continuing operations and adjusted earnings per share from continuing operations. Our adjusted third quarter 2009 earnings excluded $3.4 million, or $0.04 per share, of after-tax expenses relating to the company's terminated acquisition of the Saturn brand, our election close three franchises in the U.S., and costs associated with our interest rate hedges. Adjusted 2008 third quarter earnings exclude $2.7 million, or $0.03 per share, of after-tax expenses relating to severance, transaction termination fees and property damage deductibles. We believe that non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance. At this time, I would like to turn the call over to our chairman, Roger Penske.

Good afternoon everyone and thanks for joining us this afternoon. Our retail operations continued to improve during the third quarter, generating sequential growth compared to the second quarter. As a result, I'm pleased to report a 21% increase in adjusted EPS from continuing operations compared to last year, and a 55% increase compared to the second quarter of this year. In total, adjusted income from continuing operations in the quarter was $30.9 million, or $0.34 per share, which compares to $26.6 million, or $0.28 per share, last year. In the U.S. Cash for Clunkers provided a much-needed boost to overall vehicle sales, however, industry sales were still down approximately 10% during the quarter. For the U.K. I am pleased to report new vehicle registration has increased 8%. Despite the challenge of the difficult operating environment, our performance continues to demonstrate the resiliency of the automotive retail business model. As noted in our press release, there were three nonrecurring items in our third quarter results. As you know, we terminated our agreement to acquisition the Saturn brand on September 30. In total, we incurred $3.3 million of transaction expenses relating to Saturn, $3.0 million of which was incurred in the third quarter. We also elected to close three franchises in the U.S. during the third quarter. In total, we incurred $1.2 million of non-cash expenses in connection with these closures, including the write-off of $1.0 million of franchise value. Finally, as you know, we have $300.0 million of interest rate swaps that were used to hedge a portion of our variable rate floor plan notes payable. Given the unprecedented decrease in our inventories over last year, our outstanding floor plan dropped below the level of our hedges. As a result, we were required to record $1.1 million of expense. These items…

(Operator Instructions) Your first question comes from Richard Nelson - Stephens, Inc.

Can you talk about the ability of customers to get financing for vehicles? Are you seeing any opening up there?

I think one of the things I think we have to look on a macro basis is that the credit markets have opened up substantially and securitization is now available to most of the key finance subsidiaries for the OEM, so I would say that from that standpoint it's opened. Certainly, we read where GM is going to get another couple of billion dollars, I think, from the government to support their balance sheet. So from the OEM's perspective, and certainly from the ones that we deal with on the premium luxury side, that we see nobody backing up with us from the standpoint of availability of either lease or retail. One thing we are seeing is certainly stipulations on credit. Advance rates probably have been curtailed a certain amount, so that would reduce grosses if we could not get the banks or captives to buy. So I think leasing, we've seen that open up. Our Cadillac business had a big spurt here over the last month and a half because they're now focused on leasing and I think that's going to be important as we go forward. But if you look traditionally, at Mercedes, at Lexus, at BMW, and Audi, 60% to 65% of their business is leasing and they're still in business today, so we feel good about that. And when you think about residuals that are out there today, Toyota and Lexus has just announced that they've raised all their residuals on leases by 300 basis points and when you look at residuals in the market, you've been able to see really the ES 300 is up about 11% over the last year. You will have a 10% increase in the IS 250, and the RX is up 13%. So residual values are up, which really bodes well, obviously, for leasing. And the same thing at BMW. You've seen some increases in 328s, up about 2%. The 7 Series is up about 6%. And then you go on to Audi, they've seen a 2% to 3% increase in most of their key product lines. So with that in place, I think we're going to see the captives being more aggressive as we go forward during the balance of this year and going into next.

Can you also comment on what you're seeing here in October, both in new cars and used cars, and where your inventory sits at this point in time? And when do you think the stores get fully stocked?

I think, as I look at October, it certainly feels better than September. And I think you are going to see a forecast, most of the people are saying we will see a total forecast of about 10.0 million. I think the retail forecast is under 8 for September. I think you will approach 9 in the month of October. The month started out a little bit slower. The first of the month, I think that was due to inventory but we've seen good traction for the past three weeks. And as I look at our business, before the call, I just talked around the circuit, and it looks like used vehicles will be up about 10% versus a year ago and 10% above even the September month. And the new vehicles will be flat. And in the U.K. we're seeing both new and used up. So I would say October will be a better month than we had expected. Again, on the service side, we're seeing that in the U.K. the last three months their service hours are up over the previous year. We've been probably flat to down slightly here due to the fact that we don't have the predelivery inspections overall. But when you look at our used inventory, really on a basis of looking back at the beginning of September, and you look at our inventory now, we're down about 5% in total units. And from an over-60-day perspective we just have about 300 units. So we're in real good shape on a used inventory. And you are starting to see the growth from the standpoint of on the new vehicle side, we only had slightly above 1,200 Toyotas at the end of August and that's up about 1,000. And if you look at the high point during last year, we were as high as 7,000. So significant upward ability to add inventory in the market. And we have seen the same thing with Honda, with their inventory, and it is now back up. Vehicles like BMW, they're down, because they obviously had their summer shut-downs. So inventories are in pretty good shape and I think we're going to start to see a lot of movement from the standpoint of more production. September obviously was impacted by the lack of inventory and I see October being better.

If I could ask you about regional areas of strength and weakness. Obviously the U.K. was strong, but what's happening in the U.S. from a regional standpoint?

Just a point on the U.K. We were up 17% if you looked at this year versus our registration month in September versus March, and we're up 11% versus a year ago, so that market seems to be adjusting forward. But when we look at our business, certainly Arizona, you know, Michigan, and Rhode Island because of the high unemployment, still are tough. Florida has been the tougher spot for us. I see that from some of our peers. But again, overall, I think everywhere we're feeling a little bit better. I would hate to say one is a lot worse than the other.

Your next question comes from Matt Nemer - Wells Fargo Securities.

So you had a great performance in used vehicles. You're almost at peak grosses per unit in that business, and I'm wondering is that mainly coming from the U.K. and how should we model that going forward? Do you think that can continue to go up or do we hold grosses at $2,300 or so?

I think that there's been a market phenomenon take place because as we entered the year with used car values going down substantially and used car prices up, it drove a lot of people to buy used cars. And I think that the used cars now are drying up in certain markets and obviously residuals coming up, you start to see that the used car business will probably slow a little bit. But I see, overall, from the standpoint of our business, we continue to hold the margin. And again, as you look at it, just looking at the wholesale business as far as the marketplace, we are seeing vehicles under 30,000 still strong. We have closed-bid auctions. We have sold anywhere from 95% to 100% through those auctions over the last three weeks. We are seeing some softness in vehicles above 30,000. But again, as we de-leverage—a lot of these wholesalers and used car guys de-leverage their balance sheets during the last quarter, which I think is traditional—seasonal declines, you'll see some impact on margins because we'll want to be sure that we maintain our inventory control, which I mentioned earlier to Rick, is in good shape. So there might be some deterioration, but I don't see it being double digit.

Turning to Smart, if we take out the reserve in the quarter, it looks like your gross profit margin is around 13%. Is that a good number going forward, or do you think that distribution margins could be lower on a longer-term time period here?

I just don't know what the impact in this small car segment is. As you know, when we look at Smart and the sector itself, you know, [Yars] was down 43%, [sign] down 52%, Aveo down 32%, we were down 34%. And again, that's putting pressure on it with the lower fuel prices we're going to have some incentives, obviously, to move the market and that's what we've accrued for the fourth quarter and for the market going forward. So I think that as I look at Smart on a going-forward basis, we're looking at 15,000 to 16,000 this year and I would be happy if we can met that number next year, based on the current market.

Any new products that you can talk about there? Or for next year is it the same line up?

We have pretty much the same line up going into 2010. Obviously there are several enhancements, and that's one of the things that we're working on with Damlier, is their next product segment, so that's going to be exciting when we can announce that and we're in contact with them now. And we will have the electric vehicle coming into the market in Q4 this year, which will have a sample of those vehicles and that will be as a production vehicle for 2012. And that's a vehicle—that should be in 2011—will have over a 100-mile range. We've been running at approximately 125 of those inside the M25 in the U.K. with great success. So we expect more parts and service gross during 2010, which will help our mix.

Just your capex expectations for next year, do you think that number will be about the same? Up, down a little bit?

No, it's going to be down. You know, we had projects that we had committed to for this year. There are some Mercedes Benz autohaus numbers that we have to look at for next year but I see our capex—in fact, you know, my target and goal is that all the guys around the world that will be below our amortization, and our amortization is about $60.0 million, so we should be below that.

Your next question comes from John Murphy - Bank of America-Merrill Lynch.

As we see sales eventually recover here, obviously not actually for a forecast next year, but we think sales are going to be up a fair amount, how much leverage do you think there is on SG&A? Maybe asked a different way, how much of your cost savings do you think you will be able to maintain?

I would say this, that from a costing perspective, we have—I think we talked earlier in my script about being able to sustain the cost saves in our model. And we're going to have some increases. There will be some employee increases, based on performance. Most of our comp is variable anyhow. But we are expecting to reinstate our 401k for next year, but other than that, we have been able to operate this business, both on the fixed side and the variable side, I think pretty well from a management standpoint, I don't see a lot of adds there. The hours of operation will stay the same, they won't be increased. So I think that we should be real fortunate next year, if we can see this lift that people are predicting, our fixed costs, or structural costs, should stay if in. And I don't think we're done, by the way. We had a meeting here this past week, and George Brochick and the West, they are continuing still to go in and look at where they can take costs out. There might be some more marketing spend as volume goes up, because you want to sustain a certain amount per vehicle. But that would be relative to the volume.

The Saturn deal coming apart was tough, but you've obviously identified the potential for future distribution as part of the potential model here. Are there any other brands or manufacturers that you are exploring or that you might think of going forward, to do that same kind of agreement with?

I wish I could say I had one I could announce today; I don't, to be honest with you. We are an international automotive retailer and distributor so we have had a number of people contact us from around the world about potentially distributing their brands here in the United States. I think the first thing we had to do was get through Saturn, and then now looking at the market, as we look the future, we like distribution and would like to grow in that area, so I would say that our antennae are up for opportunities for distribution and we'll look at those as we go forward.

The four dealers you have acquired year-to-date, any comments you can make on valuation or what you've paid there and if there are other really attractive acquisitions in the market where there are distressed dealers that you might be able to buy things at a discount, or even just regular acquisitions going forward.

I can tell you that the multiple that we paid was probably about one. We paid $3.0 million Blue Sky in total for the dealerships we purchased. So we're going to be opportunistic. And especially in markets where we have contiguous operations, so we can have consolidated offices, we can move management around. It will give people an opportunity to go up in the organization. So I would say from an acquisition perspective, we're always looking for opportunities. But it's not a priority. We're not going to make the big steps that we made in the past because I think we want to see this SAR get back up to 14 to 15 so we can see the cash flow generated out of those types of years. And we want to focus, as we go forward here, at least for the next 12 to 14 months, on generating significant cash to help us pay down our convert that's due in 2011.

Your next question comes from Mark Andre for Matthew Fassler - Goldman Sachs.

First, I had a question on new car margins. Can you just talk about how we should think about new car margins going forward, just from given the building and inventory as it may be rising gas prices and the possible potential impact on mix.

Let me say this. When you have low supply and there's demand, obviously you're going to see your margins go up. We had a nice lift of margins during the third quarter, both on new and used, and when I look at the overall margin perspective, we were up 20 basis points on new and up 150 basis points on used. And I think where we really picked up the used margin was in the U.K., because we were only up 60 basis points here and they were up over 250 basis points. I think that's going to come back some. I think there was some opportunistic buying in big packages overseas that gave us that opportunity. And I think as we see this last quarter, where we really got the margin increase was due to Cash for Clunkers because if you looked at volume foreign, we were up about 100 basis points. So I think that will come back. And yet high line was down 10. So overall, the volume foreign drove that increase. So you'll see some deterioration I'm sure, as we go into the fourth quarter next year. But we're managing for margin, but believe me, we've been doing it all year and that's one of the reasons we've been profitable. And I don't expect to give that up.

Just on follow-up on FNI. What are you seeing as the main drivers of FNI going forward. We understand the credit markets are getting better, but what do we need to see here for this to really start growing?

Well, I think we have got to see the credit quality of the consumer. The consumer today is so over-leveraged and in that particular case, the home, has real collateral, has been devalued. So until we see some market pick up in valuation, I don't think that we're going to see a lot of a different pattern. I think advanced rates certainly are what has impact, because in the old days, as we note, if someone was $3,000 upside down on the value of their used car, they would just add cap to the next vehicle. That's not the case. But again, I think that the captive OEM C-1 thing, I think we maybe didn't bring this out in the call, we have got to think about what's happened here in the last 24 months. I'm talking about 2008 and 2009. It will be 8.0 million less new cars that will have been delivered into the market, so that's going to have an impact on used in the future because we will have less used available, this one- and two-year model, so those vehicles will coming in the market, we're going to see higher residuals, which is going to make it easier in some cases for finance companies to be able to do business. And I think that at the end of the day we will be in a better position to see some more FNI income. But I on the per deal basis, I think we're probably getting all the money advance we can get right now. But the good news is securitization. As these finance companies wrap their lease portfolios and their retail business, and they sell them in the marketplace, I think that's a real positive.

Your next question comes from Scott Stember - Sidoti & Company. Scott Stember - Sidoti & Company: Could you flush out the parts and service prep work, customer pay, warranty and so forth?

Yes. We are running about 70% customer pay and 30% warranty. I think that overall our absorption, if you take our business, we are running somewhere between 60% and 65% and that's pretty much on a year-to-date basis. And currently what we're seeing is that the warranty obviously is down, our PDI, which is a pre-delivery inspection, I think for year-to-date it's been down almost 40%, so those are high margin. That's because the new vehicle business is down. And then we are not doing as much from a CPO perspective because of the certified pre-owned where you have to do a lot of reconditioning, but we can't get the advance rate, so we will probably have less reconditioning revenue going through, also. But overall, from the standpoint of our business, same store service and parts, if you take out foreign exchange, we're only down 3.5%, which was, I think, pretty positive. Scott Stember - Sidoti & Company: What was the customer pay same store number? Do you have that?

No, I don't have that. I will get Tony to get that for you. I don't have the customer same store. Scott Stember - Sidoti & Company: And just in general, on the new car side. Did you give what the number was in the U.K., from a comp basis versus the U.S.?

Do you mean year-over-year on new car? Scott Stember - Sidoti & Company: Yes.

The only thing I gave was the business itself was up due to the registration month, but if you look at revenue on a comp basis, it was down 7.3%. Scott Stember - Sidoti & Company: That's in the U.S.?

No, that's internationally. Scott Stember - Sidoti & Company: Did you disclose how many cars you sold through Cash for Clunkers, and any possible bottom-line impact it had for you?

Yes. Cash for Clunkers, we did just under 6,000, and I think that, as you know, we are 65% premium luxury, so the real volume that we had was in that volume foreign which would be Honda, Toyota, and Nissan. And then what we saw there, that group, the vehicles they sold, we had 100 basis point margin increase. So it certainly had some benefit for us during the quarter. I didn't look at it in detail because of the majority of our business is in the premium luxury.

Your final question comes from Ravi Shankar - Morgan Stanley.

Can you talk about the Toyota Lexus recall and what that means for you guys?

Let me say, Lexus had a recall earlier in the year, which was I think the steering—something to do with the steering rack, etc., which was four or five hours per vehicle which provided significant gross profit on a warranty standpoint. This current recall with the floor mat, we really don't know what that impact is going to be. What we are doing, obviously it's not a difficult one, but it has to get the consumer into the dealership, and what we're doing is trying to be sure that we're ready to take on this and be able to do it effectively. But it really hasn't started yet so I can't tell you what the impact is going to be. But Toyota is really in front of it, as they were with the Lexus stuff, so we expect it to go through. It's unfortunate that they have it at this time because their product quality has been excellent over time.

Can you talk about your expectation for incentives heading into the holiday season, which typically is very strong for the luxury brands.

I think that what you've seen with Lexus is they have increased the ALG for their residuals so they are going to be more aggressive on leasing. And I think you are going to see—the premium luxury guys, it's all going to be around leasing. I'm not sure there is going to be a lot of dealer cash or consumer cash. On the other hand, when I see the Big Three and in the discussions that I've seen, I think you are going to see them trying to be more realistic on incentives. I haven't seen the numbers, unfortunately, before this call, on a month-to-date basis, but it's my thinking that most cases, they will be lower. I know that BMW is pushing its CPO right now with some special programs. Mini has had some special lease programs. But a number of these things I think are tactical and I'm not sure it's going to be systemic, hopefully, you know, as we go into next year.

Just to follow-up on a question that was asked earlier on the distribution for other brands, have you ever thought about going into distribution for some of the new electric cars that are coming out from some of the smaller, you know, like start-up companies that don't have the distribution prowess that you have?

Well, obviously this whole electric vehicle area is very interesting from the standpoint of what we might be able to do. I'm just not at a liberty today to discuss that. But we have a number of vehicle manufacturers around the world that want to enter this market. It's the biggest market. And as I say, we really had a number of calls as we got the visibility on Saturn, and what we're doing now is checking those off and seeing if there is something else we might be able to do, because we think that it makes our model different when we have the international retail, U.S. retail and distribution. It gives us a balance and helps us manage through some of these market fluctuations. But we'll certainly keep you in tune on what we're doing.

Mr. Penske, I'll turn it back to you for any closing comments.

That's all we have today. Thanks for joining us and we'll see you at the end of the year.

This concludes today’s conference call.