AutoNation Inc (AN) 2025 Q4 法說會逐字稿

Good morning, everyone. Welcome to AutoNation's fourth-quarter 2025 conference call. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we will open the call to questions. And I'll now hand the call over to Derek Liebig, Vice President of Investor Relations, to begin.

Thanks, Adam, and good morning, everyone. Welcome to AutoNation's fourth-quarter conference call. Before we begin, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC.

Certain non-GAAP financial measures, as defined under SEC rules, will be discussed on this call. Reconciliation (technical difficulty) and on the website located at investors.autonation.com. With that, I'll turn the call over to Mike.

Yeah. Thank you, Derek. Good morning, everybody, and thank you for joining us today. I'm on the third slide. We're pleased to report a solid fourth-quarter and full-year results for AutoNation. During a turbulent year, we delivered 3% revenue growth and 8% adjusted net income growth, and four consecutive quarters of year-over-year EPS growth, ultimately leading to an increase in adjusted earnings per share of 16%.

Adjusted free cash flow exceeded $1 billion, up approximately 39% from 2025, and we deployed over $1.5 billion in capital, half of which went to share repurchases, which resulted in a 10% reduction of the shares in circulation, with the remainder invested in the business, including $460 million in M&A to acquire some strong brand assets. Our balance sheet remains extremely healthy with year-end leverage largely unchanged from the prior year.

2025 was the first year that AutoNation delivered earnings and EPS growth since 2022. And as I said, it was a solid year of growth and performance by the group. Relative to the fourth quarter, the industry faced tougher sales comparisons to last year when post-election sales surged, driving a Q4 2024 light vehicle SAAR of $16.7 million.

Also, sales in this year's fourth quarter were negatively impacted by the strong pull ahead earlier in the year as consumers reacted to the tariff announcements and purchased vehicles prior to the expiration of government incentives for electric-related power trains. We felt these impacts across most brands with the biggest impact in Premium Luxury.

In the fourth quarter, our same store unit sales of new vehicles decreased by 10%, including declines of 60% in battery electric vehicles and 10% in hybrid powertrain vehicles. For the year, however, our new unit growth was 2%, largely in line with the overall industry.

With regard to new unit profitability, we delivered a sequential increase from Q3 to Q4 and ended up approximately $2,400 per unit. In the fourth quarter, we improved our used-to-new ratio from a year ago as used sales tracked more favorably than new. Although used unit sales decreased 5% from 2024 on the same store basis, with growth in units higher in the $40,000 price point, more than offset by declines in the lower price due (technical difficulty) to the used unit sales increased by 1%.

Used selling prices held up well in 2025 across all price spans. For the full year, our used vehicle gross profit increased 5%, reflecting improved gross profit on the retail side and strong results in used vehicle wholesale. Retail profitability per unit for the year was in line with 2024, but modestly lower in the fourth quarter, reflecting a tightening supply market.

Notwithstanding this, our team continues to demonstrate strong performance in acquiring vehicles through trade-ins and directly from the consumer through our We'll Buy Your Car efforts, with more than 90% of our sourcing of vehicles through internal channels. And naturally, we're focused on continuing this discipline, but also improving our purchase and sales unit pricing discipline and cycle times. We end of December with 25,700 used vehicles and inventory and expect this number to increase as we progress towards a stronger March and summer selling periods.

Customer financial services had an excellent quarter, growing unit profitability by 8% from the prior year and 4% sequentially. Fourth-quarter and full-year gross profit per unit for CFS were the highest we have had in the history of AutoNation. Our customers continue to purchase more than two products per vehicle with extended service contracts continuing to be the top offering, which is, of course, fantastic for our future After-Sales revenue and customer retention. Our finance penetration continues to grow, with around three-quarters of units being sold with financing.

The momentum in After-Sales maintained and we delivered record fourth-quarter and full-year revenue and gross profit. For the quarter, total gross profit increased by 6% or 4% on a same store basis. Our growth was led by customer pay, which increased 8% on a same store basis; and warranty, which increased 6% on the same store basis.

Improvements in our after-sales performance were not restricted to just revenue. We also improved our total gross margin for the year by 80 basis points to 48.7%. We continue to focus on our technician workforce by recruiting, retaining, and developing our technicians, and I think the efforts are certainly paying off.

Turnover has decreased. Franchise technician headcount increased more than 3% from a year ago on a same store basis, and is up more than 5% on a total store basis. The strong momentum at (technical difficulty) AN Finance was maintained, including a $19 million year-over-year swing in profitability to $10 million.

Originations for the year increased by $700 million from 2024, with the portfolio now exceeding $2.2 billion. The portfolio continues to perform in line with our expectations from a delinquency and a loss perspective, and the business' base costs have remained stable, enabling attractive profit scaling from portfolio growth. As I mentioned earlier, this was the fourth consecutive quarter of year-over-year increases in adjusted EPS with our full-year adjusted EPS growing by 16% from 2024.

Cash flow for the quarter and the full year was also strong. Fully adjusted free cash flow was up 39% in 2024, and our investment grade credit rating and balance sheet, anchored on a low net capital, high free cash flow model, enabled us to once again deploy significant capital for CapEx, M&A, and share repurchases.

During 2025 we expanded our presence in three key markets including acquisition of a Ford and Mazda store in Denver, as well as an Audi and Mercedes store in Chicago, and a Toyota store in Baltimore. All in all, great results. I think good progress, and a solid performance by the AutoNation team.

Now Tom, I'm going to hand the call over to you to take everyone through the results in more detail.

Thanks, Mike. I'm turning to slide forward to discuss our third quarter P&L. Mike explained the factors that impacted our fourth-quarter vehicle unit sales and revenues. Total revenue for the quarter was $6.9 billion compared to $7.2 billion a year ago, driven by a decline in revenues from new vehicle sales of approximately 9%.

New revenue per unit retail was stable year over year. As Mike mentioned, our CFS and After-Sales businesses delivered strong top-line results with the highlight being the 6% growth in After-Sales. Fourth-quarter revenues from sales of used vehicles were essentially flat year-over-year.

For the full year, revenue increased 3% to $27.6 billion, including our CFS and After-Sales, which were up 8% and 5%, respectively, from 2024. Revenue for new vehicles was up approximately 3% and for used vehicles 1%. Revenue per unit retail increased modestly year-over-year for both new and used.

Fourth-quarter gross profit of $1.2 billion increased by -- decreased by 2% from a from a year ago for the quarter, so only half of the rate (technical difficulty) decline in revenue. The positive outcome reflects declines in new vehicle gross profit being significantly offset by 6% growth in After-Sales. For the year, gross profit was up 3% led by our CFS and After-Sales, which were up 8% and 7% respectively from 2024.

Our adjusted SG&A expenses were flat in the quarter and 68% of gross profit. During the quarter, we increased our advertising expenditures, specifically targeting upper funnel demand creation activities, and had higher expenses for our service loaner fleet to support the growth in our After-Sales business.

This also will help bolster used inventory levels. Full-year SG&A was 67.3% of gross profit. Absent the fourth-quarter investments I just mentioned, our SG&A as a percentage of gross profit would have been in line with our targeted range for both the quarter and the full year.

Adjusted operating income, which decreased 7% from the fourth quarter last year, increased 3% for the full year. Below the operating line of the fourth-quarter floorplan, interest expense decreased by $6 million or 10% from a year ago, as our disciplines around inventory continued and average interest rates moderated, reflecting the movement in short-term interest rates in 2025.

For the full year, floorplan interest expense decreased by $30 million or 14%, reflecting the same factors. Fourth-quarter non-vehicle interest expense increased $3 million or 7% from a year ago, reflecting higher average balances and slightly higher blended interest rates stemming from our debt refinancings in 2025.

Now as a reminder, we reflect floorplan assistance received from OEMs in gross margin. This assistance totaled $35 million in line with a year ago. Net of these OEM incentives, the net new vehicle floorplan expense for the fourth quarter totaled $13 million, down from $18 million, a year ago.

For the full year, new vehicle floorplan expense totaled $46 million down from $74 million in 2024. And all this resulted in fourth-quarter adjusted net income of $186 million, compared to $199 million a year ago. For the full year, adjusted net income increased 8% to [$7 million].

I'll get into the details a bit, but adjusted free cash flow for the year was outstanding, as Mike mentioned, and enabled share repurchases that reduce share count by 10% year over year. Adjusted EPS was $5.08 for the quarter, an increase of 2% from a year ago, and was $20.22 for the full year, an increase of 16% from 2024.

Adjusted earnings per share excludes the business interruption insurance recoveries related to the second-quarter 2024 CDK business incident. This amounted to $40 million on a pre-tax basis for the quarter and $80 million for the full year. Adjusted earnings per share also excludes charges for severance expenses and asset impairments.

Slide 5 provides some color for vehicle performance. We've covered the market conditions leading to the fourth quarter's new unit sales decline of 9% or 10% on the same store basis for the quarter. The decline in sales of electric vehicles contributed half of the unit sales decline. Sequentially, internal combustion engines were up 8% from the third quarter, which is in line with historical norms. Our market share also improved from the third quarter.

For the year, unit sales were up 2%, as I mentioned, average sales prices were stable for the quarter and the year. New vehicle unit profitability averaged approximately $2,400 for the quarter, increasing more than $100 or 5% from the third quarter. This sequential increase was consistent with prior years and reflects strong commercial performance in the face of declining OEM dealer incentives.

New vehicle inventory amounted to 45 days of supply, up six days from the fourth quarter of last year and down from two days at the end of September.

Turning to slide 6. Used vehicle fourth-quarter retail unit sales decreased by 5% on the same store basis and 3% on a total store basis. Average retail prices were up about 3% for the quarter and 1% for the year. And for the full year, used unit sales increased by 1%. Overall, used vehicle profit was down 6% for the quarter, but up 5% for the year, reflecting increases in used retail and used wholesale.

Q4 used vehicle profit per unit of $1,438 was lower than a year ago, reflecting higher acquisition costs as Mike mentioned. For the full-year, used profit per unit of $1,555 was flat from a year ago. We remain focused on optimizing vehicle acquisition, reconditioning inventory velocity, and acquisition pricing, and we're also investing in creating a better customer experience.

Overall, industry supply of used vehicles remains tight. We continue to be competitive in securing used vehicles from our own retail operations, including trade-ins, We'll Buy Your Car, services loaner conversions, and lease returns, and we continue to source more than 90% of our vehicles through these internal sources.

Then move to slide 7 on customer financial services. The momentum in CFS performance continues. Unit profitability was up 8% in the fourth quarter and 6% for the full year, reflecting improved margins on vehicle service contracts, consistent product attachment, and higher penetration of finance products.

The continued strong unit profitability performance at CFS is even more impressive considering the growth of AN Finance, which while superior, in long-term profitability diluted our CFS PBR unit profitability in the fourth quarter by approximately $130 per unit. Absent this impact, our CFS unit profitability of $2,891 that you see on the slide for the fourth quarter would have been greater than $3,000. CFS total profit grew at a rate lower than our historical norms in the fourth quarter, given the new and used volumes, but we're still up 8% for the full year.

Slide 8 provides an update on AN Finance, our captive finance company, and its excellent performance. As expected, the profitability of AN Finance is gaining meaningful traction as the portfolio matures, and we get leverage of the fixed cost structure from the outstanding growth. For the full year, we improved from $9 million operating loss in 2024 to a $10 million operating profit, including $6 million profit in the fourth quarter.

During the quarter, we originated $400 million in loans bringing the full-year originations to $1.76 billion up from $1.06 billion in 2024. We had approximately $170 million in customer repayments in the corner. The AN finance portfolio ended the year at $2.2 billion and has more than doubled since last year.

The quality of the portfolio continues to improve. Our credit and performance metrics are improving, with average FICO scores on originations of 696 for the full year of 2025 compared to 678 a year ago and 623 in 2023. 30 days delinquency at the year end of 2.7% were largely stable as a percentage of the portfolio and in line with our expectations.

And as we've discussed in the past, we do expect delinquency rates to continue to normalize as the portfolio continues toward full maturity with delinquency rates migrating to the 3 percentage range. Our loss preserving methodology incorporates this expectation.

The non-recourse debt funded status of the portfolio also continued to improve as we have improved advance rates for our warehouse facilities and are benefiting from higher non-recourse debt funding levels from our $700 million ABS issuance completed during the second quarter. Our debt funded status at December was 88% compared to 75% a year ago, and 59% in 2023. And this improved funding has freed up over $140 million of equity funding that we have used for other capital allocation opportunities.

In January of this year, we completed our second ABS offering for AN Finance for just under $750 million at a blended interest rate of 4.25% with an advanced rate of 98.7%, both improvements from our second quarter 2025 ABS offer. On a pro forma basis, this new offer will increase the funded status of the portfolio to more than 90%.

Closing off on AN Finance, the business's attractive offerings are driving strong customer take up, and we continue to expect attractive ROEs in the business driven by profitability growth and moderating equity requirements.

Moving to slide 9. After sales represents nearly one-half of our gross profits, continued its impressive revenue in growth profit momentum. Gross profit for the quarter of close to $600 million was an AutoNation record. Our results reflect higher repair order count, higher value repair order, and improved labor productivity.

For the quarter, same store revenue increased 5% and gross profit was up 4%. And for the full year, same store revenue increased 6% and gross profit increased 7%. The improvement in fourth quarter's gross profit was led by Customer Pay, which increased by 8%, and warranty, which increased 6%. Internal reconditioning was modestly lower in the corridor, reflecting lower used vehicle sales as we've discussed.

Our fourth quarter gross margin was stable versus 2024 at 48.3%. Now this reflects higher growth in the wholesale parts business, which has more modest margins than the rest of the After-Sales business, but it was offset by improvements in growth rates and customer pay which were up 70 basis points.

We remain focused on deploying technology to drive additional volume and productivity -- and on hiring, developing, and retaining our technicians. As Mike mentioned, these efforts have helped to increase our franchise technician headcount by more than 3% from a year ago on the same store basis, reflecting better, technician retention. The increase technician workforce is key to consistently delivering mid-single-digit growth and After-Sales gross profit.

To slide 10, adjusted free cash flow for the year was $1.05 billion or 125% of our adjusted net income. Adjusted free cash flow increased by nearly $300 million a year ago, and free cash flow conversion improved by 20 basis points. The increased cash flow represents stronger operational performance, including our continued focus on working capital and cycle times, CapEx management and prioritization, resulting in $20 million less CapEx in 2025 and the recovery from the CDK outage, including the $80 million in business interruption related insurance receipts I mentioned earlier. We excluded the CDK recovery from the 125% free cash flow conversion calculation. Our capital expenditures depreciation ratio was 1.25 compared to 1.4 a year ago. We continue to focus on driving free cash flow to improve-- or to provide maximum capital deployment capacity.

Turning to slide 11, for the full year, we deployed over $1.5 billion in capital, with half of it being reinvested in the business in the form of CapEx and M&A, and half returned to our shareholders. We remain prudent in our CapEx methodology, which is mostly maintenance-related compulsory spending and total $309 million for 2025.

We continue to actively explore M&A opportunities to add scale and density to our existing markets. In 2025, we invested $460 million closing on transactions in Baltimore, Denver, and Chicago, as Mike discussed. Share repurchases are an important part of our playbook. For the full-year, we repurchase $785 million or 10% of shares at the beginning of the year at an average price of $193 per share.

In the last three years, we've repurchased a total of $2.1 billion, representing 36% share account reduction. At an average price of $170 a share. In our capital allocation to decisioning, we also consider our investment grade balance sheet and the associated leverage levels.

At quarter end, our leverage was 2.44 times EBITDA , almost identical with the 2.45 times EBITDA at the end of last year and well within our 2 to 3 times long-term target, giving us additional dry powder for capital allocation going forward.

Now let me turn the call back to Mike before we go into question-and-answer.

Thanks, Tom. So in summary, 2025 was a year of growth for AutoNation. Organic growth was volume up, revenue up and After-Sales margin up. Acquisition growth with the addition of five dealerships with great brands.

Cash flow growth, as Tom mentioned, with adjusted free cash flow over $1 billion, up 39%. Capital allocation, I think, in the year was very balanced and disciplined. And all of this in combination resulted in the increase in adjusted net income and improvements in adjusted EPS of over 16% that both Tom and I have been talking about and I think capped off a very solid year of growth for AutoNation. And I'd like to thank all of our colleagues and associates in the business for everything that they did.

So just briefly turning and looking ahead to 2026 and just some of the commentary that we have. We obviously expect to move in line with the market, and we think the market will be slightly down in 2026 compared to 2025. But there could be some benefits from known tailwinds around withholding tax rates, refunds, and bonus depreciation. But that's our expectation as we sit here today.

From a new unit profitability, we think it will remain fairly stable with the second half of 2025 levels. That's our expectation, at least for the coming few months. And we believe that the used vehicle market is going to still remain constrained, to some extent, but we think it will show improvements year over year.

From our CFS business, we spent some time talking about that on the call. What's important for us is to maintain the performance that we have and that's a big, big focus for all of us, but then very aware of customer sensitivity to monthly payments, which clearly, is a key topic for the business and for us going forward.

We're going to continue to expand AN Finance portfolio and grow its profitability. That will drive more SG&A leverage that Tom mentioned in his commentary. And then just finally turning to After-Sales. I'd like to thank our After-Sales colleagues across the entire business for the record that they delivered in Q4.

We think we're well positioned, frankly, to continue that growth in mid-single-digit growth numbers. And I think we have the levers, and we're certainly putting the resources in place to help facilitate that. I think all of that will enable us to continue to deliver strong cash flow and, obviously, be able to deploy significant capital.

We've got a strong financial position. Tom mentioned our investment-grade balance sheet. I think our operations are disciplined. I think we can continue to do that and continue to improve productivity. Ultimately, the aim is to continue the growth that I mentioned before.

So with that, I'm going to open it up for questions, if I may.

Yeah. Adam, if you could please remind the audience how to get in queue?

(Operator Instructions) Rajat Gupta, JPMorgan.

Great. I just had a couple. Just first on the new car business. The unit numbers seem a little weaker than some of the peers, some of the industry metrics, although the profitability was better. I'm curious was there a temporary trade-off decision that you made in the quarter around profitability versus sales? Or was it just a function of comparisons and just your regional and brand mix that might have driven that 10% same-store decline? And I have a quick follow-up.

Hi, Rajat. This is Mike. I think there are a number of things that we were taking into consideration. Firstly, we mentioned that we saw year-over-year ramp, in fact, quarter-over-quarter, a reduction in OEM dealer-facing incentives. We offset some of that with margin because, obviously, it impacts net transaction price.

But particularly year-over-year, that reduction in dealer price spend, we had to be very careful in our consideration and balance between volume and margin. In fact, the largest drop, by the way, was OEM dealer's support for hybrid and battery electric vehicles, as you can imagine. So that was the one dynamic that we saw in the quarter.

The second one was, if you think about where the key reduction came from us, EVs and BEVs represented about 30% of our mix Q4 2024. That dropped to 20% in Q4 2025. That's a 60% reduction in EV volume. So the biggest impact on that 10% that you referenced by far came from electrified powertrains.

And I think the combination of those things and the way that we were trying to make sure we had a good balance between our market share performance, but also margin, led to what we delivered, which was, I think, a good sequential improvement in new vehicle margin and also reflective of some of the things we were trying to do in the business. And it was those two things really that resulted in the position that we ended up with.

Understood. That's helpful. And then just maybe for Tom, on AutoNation Finance, really, really quick and good progress there in terms of the maturity of that portfolio. I'm curious, how should we think about the cadence of profitability here over the next year or maybe the year beyond?

I mean, are we at a point in your trade-off between penetration base versus portfolio maturity that it's safe to expect a continued inflection in the profitability here? I'm curious like how you balance that? Any guardrails you can give us maybe even around net interest margin or loss ratios also would be helpful.

Thanks, Rajat. Yeah, we're really happy with the growth that we're seeing in the portfolio. I mean the growth rates -- I mean, let's put it this way, the doubling of the portfolio is a real harbinger for the future. And we don't realize all those benefits in the year it doubles as you realize, because of the charges -- the upfront charges for CECL and so forth.

As we mentioned, $6 million we achieved in the fourth quarter. And I think that's probably a decent starting point as you look on a quarterly basis through 2026. So that will give you some -- a nice starting point for what the P&L will look like for ANF. .I think we're reasonably confident on net interest margin. The portfolio from a delinquency perspective and risk perspective is well managed by the team.

The delinquency, as I said, will grow as it's mostly a brand-new portfolio. So you start to see delinquencies as it matures, but we've got that factored in. So I believe that our performance trajectory and the income improvement will continue. We'll get a good position throughout 2026.

Got it. Do you expect to maintain these? What's the upper end you have in mind on penetration for the portfolio or in medium term --?

I think, I mean it's really strong on the used side, as you know. I mean on the new side, we're partnering with our OEMs as well, from a financing perspective. So as we grow -- continue to grow our used business, we do see opportunity to drive further penetration. We've got great partnerships. It's been great programs with our lending partners outside of ANF that I think are going to help continue the trajectory.

And let me just add just some color to it, Tom. I think Tom is exactly right. There are a few things that are important to us. One is, we work in partnership with all of our OEM captives, which means we're very, very clear with our teams about that relationship. And frankly, we cannot compete with an OEM captive because of the way that they subsidize either their leases, obviously, or their finance rates. And that is not our job to do.

We've improved our penetration in what we call the market that is open for us to be competitive in, and that is those new vehicles, those few new vehicles that don't qualify wouldn't benefit -- our customers wouldn't benefit from subsidized finance. And obviously, all of our used vehicle volume that falls within the buy box that we've established for the company.

We're very, very disciplined in that buy box and our penetration has improved over the years, but we still have headroom to improve even further. The constraint really on our growth, even though it was very good, it was well balanced within Jeff Butler, who is our CEO of that business, and Tom to make sure that in terms of the way we're thinking about allocation of resources in the business, we had balance, but it could have grown faster than it did. But I was very pleased with the discipline that they said.

So I do think that there is opportunity from a penetration point of view. And as we mentioned earlier, our penetration mainly is coming from the used car market. And as I said, we think there will be some stability in volumes in that area.

Understood. Great. Thanks for all the color and good luck.

John Babcock, Barclays.

I guess just quickly, just on capital spending. Is there any reason to think that '26 would be any different from '25? And then also, if you could just talk about the M&A market, how that looks right now and how you plan to balance? How do share buybacks in the area, that would be great.

Yeah. Thanks, John. Thanks for the question. From a CapEx perspective, I think we're -- I think 2025 levels are a reasonable starting point for 2026. I mean, it's pretty locked down in terms of the spending that we do. As you know, it's mostly maintaining our properties and then keeping up with OEM requirements on the latest models to the stores. We've got some service growth as well that we're supporting. But I think the levels that we spent at in '25 are sustainable for 2026.

In terms of M&A and Mike is involved in this as I am. So it'd be good to hear his commentary as well. But we had a really strong year. We saw a number of opportunities across all four quarters in 2025 in terms of opportunities. I think we were selective. I think you saw where we spend our money in terms of regions and brands.

And as Mike said, we've got -- we ended up with some very high-quality brands in territories where we have density, where we think we can create operating synergies. And I'm confident that 2026, there will be continued opportunities for us in the dealership space. And we'll remain disciplined. I mean, we'll go for the ones that pencil out for us and then allow us to take advantage of where we're present and where we can drive operating synergies.

Well, I think it's a pretty complete answer but just to add some color on the process that we have. Like all organizations, when we think about the capital deployed, we have a number of hurdle rates, but the key one for us is on a per shareholder basis. And what are we able to return thinking about it from individual shareholder perspective? Which, to a large extent, can be an interesting hurdle to have when you think about M&A.

The good news is there are opportunities where not only does the business that we're interested in deliver reasonably that we can bring significant synergies to it. And obviously, that's not something that is usually or very easily apparent when you first think about purchase prices of some of these assets.

But it is clearly a big consideration for us because we have significant invested resources and capabilities that we obviously get leverage in the businesses that we're adding so long as we're adding them into geographies and densities that make sense. And that is a big part of the calculation.

We're also thinking about the incremental EBITDA that is delivered from these acquisitions and how we can leverage that in the business for further return to our shareholders, whether it is through revenue or net income growth or whether it is in terms of share repurchases. So I think there are opportunities that are coming to the market. It is reasonably buoyant in my view. We are, like everybody would tell you, very selective and very clear on the hurdles of what makes an attractive target or not. I think that's the best I can add to what Tom said.

Thanks for that color. And then just one follow-on. I am just kind of curious, how did hybrid GPUs trend in the quarter? And then also, what are your expectations on when electric vehicle GPUs might start to normalize with typical combustion engine vehicles? Any color on that would be helpful.

Yes. Well, as I already mentioned on (technical difficulty) comments. We saw quite a significant pullback in terms of incentive contribution from our OEMs in terms of dealer support incentives. So let me get the exact numbers for you so that I can be completely accurate with you.

So from overall GPUs on hybrids reduced on battery electric vehicles in Q4 and were largely flat, Tom check our numbers on AGVs. But we obviously benefited from a very significant mix change in the quarter. From a stabilization of [margins], I think if the industry stabilizes around 2% to 3% penetration, that will be based upon a proper demand and supply balance, then I think you will begin to see some improvement in margins, both on battery electric vehicles, in particular.

But that, in my view, is not going to happen in 2026. I think it will take longer for that. But I do think you will see improvement in hybrid margins throughout 2026 with a better balance because many people find that a much more attractive powertrain combination than just battery electric vehicles. Tom, just --

Yeah. On the sequential, we've been very stable in terms of hybrid electrics as -- relative to total revenues or total unit sales on new roughly 20% a quarter. And that has remained very stable. We have seen a decline in BEVs themselves in favor of ICE engines probably to the extent of 5% to 6% from first quarter to fourth quarter.

Jeff Lick, Stephens.

Mike, as you pointed out in your -- several times in the prepared remarks, obviously, there was a lot of extraordinary items this year in terms of pull forwards and obviously, the compare from last year after the election. I was just wondering if you could just break down the year, thinking of 2025 as the base and now you're -- as you go in, is there any particular call-outs in terms of parts of the year or items that you would kind of call it, hey, this is going to be a particularly more challenging compare or how things get a little easier here or there. Just wondering your perspective there just thinking of an extraordinary year of 2025 is not what you're comparing against?

Yeah, I think it's a great question. We obviously saw the dynamics of various different announcements impact in March, April. For example, when the tariffs really became very much front of mind. And then as we approached for those electrified powertrains, the end of incentives, the two key points where I think when we think about comps, we just need to be mindful of that.

I do think that -- when I review the year, what I feel we did well was really to navigate those events. Obviously, you feel good when you're in a period of pullback. But when that goes away, you try and make sure that you fill that vacuum as effectively as you can to continue the performance and the momentum in the business.

And I think the demonstration from us and our results over the full year showed that even in a turbulent year, we can continue to perform at a reasonable level and deliver the results to our shareholders. And I'm pleased about that because as we came into 2025, I think none of us had the expectations of how it would actually play out.

We obviously think 2026 will be more stable, but I'm -- there's no way I can call that. What I can tell you is that we have a business model that I think is robust, a business model that is disciplined. And what gets thrown at us, we'll not only navigate, but we'll try and find those areas where we can maximize the opportunities that come.

I think this year, we're going to be, as we have always done, focused on affordability, frankly. We all know what's happened with net transaction prices over the last few years and how that's impacted monthly payments. And it's been a topic of discussion both on our calls, but with other people's calls as well.

And I think we're going to be -- everybody will be very mindful of that and seeing how that may move through the year as really an indicator of whatever strength is in the new retail market and used market as well. So that's my top of mind thoughts in response to your question.

And then just a quick follow-up. I was wondering maybe you could put your OEM hat back on. As we get into the second half of this year, there's going to be a sizable year-over-year increase in lease returns. Just thinking about what that -- how that might impact the dealership business, but also some of these lease returns are going to be deeply underwater, specifically the EV ones. Just wondering how you see that dynamic of how the OEMs will handle that and how that will affect the franchise business?

Well, I would imagine every single OEM has already provided for that, frankly, because I don't think it's -- we don't need to get there and it suddenly be a surprise. I think it is very well forecasted, and I think it's very evident from some of the early signs that we are seeing and any OEM should have assessed that in their portfolio and should have provided for it. There have been a number of very large provisions that have been announced. And I'm sure it also would cover forward-looking liabilities such as residual values.

I think increased lease returns into the business is a very, very good thing. I think the important part of that is that they return to market at a correct market price and that the OEMs work with the dealers to try and make sure that that is a stable price in the marketplace and not transfer some of the liabilities that may be there in terms of actual residual values on to the dealers and ultimately, to some extent, on to consumers.

So firstly, in summary, it's well known that there are certain models, certain powertrains where the original residual value estimates are incorrect. I think they're well known. They should be provided for. And I think the dealers will benefit from those lease returns and work with their OEMs to try and get a reasonable fair price for those vehicles in the marketplace. We're certainly looking forward to the benefits that come from improved lease returns in our business.

Daniela Haigian, Morgan Stanley.

So you touched on this a little bit in the prior question. But how are you viewing affordability pressures as it relates to consumer credit availability as we enter this new year? You also mentioned consumer sensitivity to monthly payments. Have you seen any change in consumer behavior in the After-Sales business, whether it's willingness to pay for certain repair orders or otherwise?

Yeah. As I said earlier, obviously, it depends how far you want to go back, but people still referring back six years now it's a pre-pandemic, but we've seen significant compound growth in monthly payments that we basically been driven by a combination of average transaction price, but also some differences in charge APR.

I think there will be some relief in charge APR as we get into this year, further into this year, particularly towards the back end. But there's no doubt that affordability is front of mind. I think the OEMs are going to look at how they can provide more affordable models in the marketplace, either through decontenting because they are also absorbing, as you know, whatever the residual tariff impact will be on their cost of goods sold as well. So I think that they're going to try and manage that without significantly impacting net transaction price and maybe with some -- maybe with some repackaging.

I think as a result of that, that's one of the reasons why we think the new car market, in particular, will probably be down somewhere between 2% and 5% for the year. We anticipate that that's in our view. We think that we will perform a minimum in line with that, maybe slightly better, but we think that there is pent-up demand that will hold the used car market relatively stable, albeit there may well be some shifting down to slightly lower prices in there.

In terms of consumer behavior, we haven't really seen much behavior in the After-Sales business. It's very competitive. We have seen over the last few years, and Christian tracks this religiously with his team, we have seen much, much more attention to the cost and pricing of service and parts within the business. And we know we compete with non-franchise providers of service and parts because our growth really is targeted on improving our penetration in the three-year-old plus After-Sales market.

And to do that, you obviously have to provide great convenience, great service, but you've got to be very competitive on price. So (technical difficulty) where we can achieve that without an impact on our margin. And the After-Sales team, I think, did a good job. We talked about the improvement in After-Sales margin.

We just got to keep doing that. There is no right to that business. We have to conquest it and to do that, it's the combination of price and service. So they're much, much more price sensitive, particularly as the vehicle gets a bit older, and you just have to be aware of it and respond accordingly.

That's helpful. And then digging more into the used market, have you seen any mix shift? Or do you expect to see your strategy evolve in terms of older or newer within that segment especially as off-lease volumes begin to return later this year? And then you also spoke to an opportunity to acquire more competitively in that market. So any commentary or color there would be helpful.

Yeah. So firstly, if you just take our results, I think we performed really well in $40,000-plus vehicles. We saw growth in that segment. And it's a segment that I think we're very strong in. Where we did not perform really to market was in that -- particularly that sub-$20,000 price range.

And some of that is because when we think about vehicles we want to sell to our customers, many of those vehicles don't fit the profile that we want to put in the marketplace. And I think chasing volume of a poor used car is not what we want to do for the brand.

But notwithstanding that, we are looking very, very carefully at how we can achieve a slightly different balance in terms of price segments if our used vehicles, which would naturally mean stocking vehicles of a lower-priced band, say, sub for the purpose of this discussion, $30,000. But how do we do that and get the right inventory?

That is a very, very competitive at a very, very competitive marketplace, as you can imagine, and this is where we've got to leverage our scale and our reach. And the way we would do that is our ability to respond to customers very quickly when they're looking for values, our ability to be flexible in terms of how we can go and get those vehicles or have those vehicles dropped off the speed of our payment and the fact that when you sell a vehicle to AutoNation, you're selling it to an investment-grade company, and you get certainty with that.

So I think we've got to leverage the infrastructure and the teams we have. So in summary, I think there is mix shifting that we should be aware of, and we should also make sure that we are playing in that, which is, say, sub-$30,000 vehicles, and we've got to leverage our strength to be more successful at acquiring inventory in that area. And that's what Christian's team is focused on.

John Saager, Evercore ISI.

I was hoping you could just answer some of the dig deeper into the used market. The GPUs in the second half were down versus the previous six quarters, more at the $1,600 level. Do you think this is more of a demand or a supply issue? And how should we think about that heading into 2026?

So Tom, do you want to answer this, and then I'll add some color or would you like me to answer it?

No, I'm happy to do it. I'll build off of what you said earlier. I mean, you're right, John. The fourth quarter was the low mark for the year in terms of used GPU. We were disappointed. We know that some actions that we can take, and we'll get us back to the norms that we had in first and second quarters. We -- eventually, we expect to be in target on a longer-term basis, $2,000 per unit.

Some of it is the basics Mike mentioned, acquiring at the right price, reconditioning properly, not excessively, and getting the day one pricing, correct. The market is tighter. So it's important to move with speed when we're doing acquisitions.

But we do have opportunity. I mean, in the short term, getting the right mix, as Mike mentioned, calibrating brands, price points, and the like, aging, managing our funnel, our commercial funnel of opportunities all the way through to closure, the second shorter-term opportunity we have. And as we said, doing reconditioning efficiently and quickly and getting the vehicles out to the floor.

Longer term, we're really encouraged by the business. We'll be making some investments in it. We do want to improve the customer journey, as you know. It's become much more virtual and digital, and we're putting that capability in place. And we'll continue to work on what we're going to do, that's an investment we want to make. So in summary, we're paying a lot of attention to the business and know that we'll be driving unit profitability and overall profitability higher.

I think that was a really comprehensive answer. There's not much that I can add. But one thing I think that is going to show us the strength of being a new car retailer. And that is, if you look at sourcing channels, there has been increased competition really across all sourcing channels, not just tradings, We'll Buy Your Car, obvious the auction, and that's going to continue.

We've been able to offset some of that cost pressure through mix changes as well in terms of how we source vehicles. And I think that's something that we have the ability to do because we operate a very, very sizable new car sales organization. And that is a great and, often, undervalued channel because it is still the best channel to source excellent used car vehicles.

And I think it will play -- I think there will be more competition, and I think that will be part -- that channel will partially offset that, partially, not completely because you also get price pressure in that channel, which is knock on price pressure for more visible channels. But it will partially offset some of that price pressure. And I think Tom answered the rest really well.

Okay. Great. That's a really good answer. And then on new GPUs, can you give us a sense of what you're seeing in the marketplace? You mentioned that you're seeing continued stabilization and I think the market is really very encouraged if we see that continue.

Yeah. Thanks, John. I mean the third quarter to fourth quarter, Mike talked through the improvement in the overall weighted GPU, notwithstanding the pressure we've got on OEM dealer incentives. We're encouraged as we built our plan for 2026 that the reactions that we can take to continue that stabilization, so far so good. (technical difficulty) So certainly, we haven't closed to January we expect to see stable December to January (technical difficulty) So off to a good start, I'd say on that front, it takes discipline.

Apologies. Please stand by.

Adam, can you hear us now?

We can hear you loud and clear.

Are we live with all of our guests?

Yeah. We're good.

We are.

Sorry about that guys. I don't know what happened from a technology point of view, but I will just repeat what I said. I was referencing Rajat question, right, at the very beginning about the balances of puts and takes in our business. And I think that's an important one to know as we get into this year.

I think what we're trying to build is obviously, a growing After-Sales base, a pool of customers that we can continue to serve and drive up our loyalty. And that means that we want to make sure that we don't lose pace with the marketplace. And to do that, we obviously have to be competitive to make sure that we stay at a minimum in line with market.

And we do try and balance it where we can balance it. So as that market develops and we see what happens, there may well be more or less pressure on margins. But as Tom said, we have seen stability from third quarter to fourth quarter. And our expectation, particularly in H1 is that we think, to a large extent, that will continue in '26.

Colin Langan, Wells Fargo.

Just want to ask on After-Sales growth was 6% on a same-store basis, which I think historically, it's -- go back many years, it was 3% or 4%. I mean should we think about staying at the higher end of mid-single? Or do you think there's just some maybe good news this year, some catch-up this year from some of the issues last year? And then also on the margin there, margins also have been actually quite strong, much higher than they were five years ago. Is that sustainable or does that moderate a little bit into '26?

So my view on that, we talked about the competitive nature of After-Sales and the fact that what we want to do is to conquest, in particular, vehicle parking for three-year-old vehicles. I think what that means is that hourly rate, obviously, needs to be competitive. So the fact that, by its very nature, says that we -- the margins that we delivered are going to be constrained to some extent, albeit still incredibly healthy, and we're very pleased with them.

We do think that there's opportunity for us with different products that we can offer and different ways of communicating with the customer that we can provide more work on a per RO basis. That doesn't necessarily drive up margin per se, but it does help us a lot with regard to the productivity that we have in our business. So there may be some incremental opportunity on the margin side, but that's not what we bake into our plans. What we baked into our plans is more sustainable growth, not margin growth per se. Tom?

Yeah. I guess the other thing is we have plenty of capacity to support more repair orders, physical capacity. And as Mike said, our -- we've been able to grow our technician workforce. But if we can continue that with minimal additional investment and we have the plan in place to support more business, which itself will drive higher margin rates as well, better absorption. So I think we're positioned with -- to sustain the trends we've had. And we'll continue to -- Christian and the team to continue to manage this very closely.

Yeah. I think the other thing that you mentioned earlier in your commentary that you just remind calling of between Christian and John Luca, we have, I think, been successful at growing our wholesale business. And wholesale, as we know, is much, much more competitive and the margin is dilutive. So I think that is, for us, a big area, again, of opportunity of growth, and that will have, from a headline perspective, downward pressure on the margin.

So when we talk about After-Sales margin, I think we need to be clear that you may see a moderation in the margin that we report and that may well be a mix-driven thing. It may not be margin per se through our workshops. So Colin, please just bear that in mind when you're thinking about the future and what Tom and I just said.

Got it. And just secondly, any thoughts on SG&A? I think in the past, you've talked about 66% to 67% being the right target. Is that still a long-term target and any actions that might help reduce costs into next year that gets you closer to 66%?

Good question, Colin. Yeah, first of all, reaffirm 66% to 67% is our intended target. We were a bit higher in the fourth quarter and probably will be a little bit higher as we go forward here at least in the early part of the year. We've made some upfront investments on advertising.

And it's really to -- in the upper funnel, which for us means creating demand as opposed to lower funnel where you're actually trying to capitalize on known demand. And we feel like we've got some opportunity to drive better upper funnel activity. So that's requiring a little bit of a incremental investment here.

And we also talked about our lower pool, we made some conscious investments in. It helps you on the used vehicle side when they come out of the pool. So -- and we've talked about a tight market, but that gives us a little bit of a relief valve in terms of supply. But importantly, it's also helping us support the service business in its totality.

So apart from those two incremental things, I expect us to continue to drive towards the lower end of that range we talked about over the long term. And we've got a number of different initiatives in place. As you know, the biggest component of SG&A is compensation. And it's important for us to have good productivity when it comes to both sales and service. We feel like we've got excellent training programs and standard procedures that we've got in the cycle thanks to drive productivity and comp and benefits.

And then I talked about advertising and the other big category is just other SG&A. We've got a number of good initiatives to manage through some of these inflationary things that we're seeing like energy costs as an example. We're trying to standardize our usage model around the utilities to offset some of that. So it's an effort that we're heavily focused on and just reiterating where we are in terms of the range. Hopefully, that helps, Colin.

We'll now hand back to the management team for any closing comments.

Yeah. Thanks, Adam. Again, thank you very much for joining the call today and all of your questions. And just finally, as I mentioned earlier, I just want to thank the AutoNation team for what we delivered. And as usual, then you all know this, that's behind us now. We've got '26 out of us, so let's get to it.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.