AutoNation, Inc.

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 Slozek, our Chief Financial Officer. Following the 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. 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 automation. 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 alternation 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 SAR 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 powertrains. We felt these impacts across most brands were the biggest impact on 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 a same store basis, with growth in units higher in the $40,000 price point, more than offset by declines in lower price due. Used unit sales increased by 1%. Used selling prices held up well in 2025 across all price bands. 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 continued to demonstrate strong performance in acquiring vehicles through trade-ins and directly from the consumer through our We Buy Your Car efforts, more than 90 percent 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 ended december with 25 700 used vehicles in inventory and expect this number to increase as we progress towards the 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 automation. 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 a 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-bought basis. The strong momentum at AM 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's 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% from 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 automation team. Now, Tom, I'm going to hand the call over to you to take everyone's visit results in more detail.

Thanks, Mike. I'm turning to slide four 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 a 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 retailed increased modestly year over year for both new and used. Fourth quarter gross profit of $1.2 billion decreased by 2% from a year ago for the quarter, so only half of the rate declined in revenue. The positive outcome reflects declines in new vehicle gross profit being significantly offset by 6% growth and 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 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, the fourth quarter floor plan 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, floor plan 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 refinancing in 2025. As a reminder, we reflect floor plan 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 floor plan expense for the fourth quarter totaled $13 million, down from $18 million a year ago. For the full year, new vehicle floor plan expense totaled $46 million, down from $74 million in 2024. In 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 $707 million. I'll get into the details in a bit, but adjusted pre-cash flow for the year was outstanding, as Mike mentioned. and enable 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 five 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 declined sequentially internal combustion engines were up eight percent 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 two percent as i mentioned average sales prices were stable for the quarter and the year new vehicle unit profitability averaged approximately twenty four hundred dollars for the quarter increasing more than one hundred dollars or five percent 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 six, used vehicle fourth quarter retail unit sales decreased by 5% on a same store basis and 3% on a total store basis. Robert Marlayson, average retail prices were up about 3% for the quarter and 1% for the year and for the full year use unit sales increased by 1%. Robert Marlayson, Overall used vehicle profit was down 6% for the quarter but up 5% for the year, reflecting increases in use retail and use wholesale. Robert Marlayson, Q4 used vehicle profit per unit of 1438 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. Let me move to slide seven 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 $28.91 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 A& Finance, our captive finance company, and its excellent performance. As expected, the profitability of A& 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 quarter. The AIN 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, the only 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 the Lincoln Slee rates to continue to normalize as the portfolio continues toward full maturity, with the Lincoln Slee rates migrating to the three 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 A&Finance for just under $750 million at a blended interest rate of 4.25%, with an advance 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 A&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 nine, after sales, represents nearly one-half of our gross profits, continued its impressive revenue and gross profit momentum. Gross profit for the quarter of close to $600 million was an auto donation 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 quarter, reflecting lower used vehicle sales, as we've discussed. Our fourth quarter gross margin was stable versus 2024 at 48.3%. 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 increased 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 and 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, to provide maximum capital deployment capacity. Turn to slide 11. For the full year, we deployed over $1.5 billion in capital, with half of it being reinvested into 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 totaled $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 repurchased $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 count reduction. at an average price of $170 a share. In our capital allocation 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 a 2.45 times EBITDA at the end of last year, and well within our two to three 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.

Yeah, thanks Tom. So in summary, 2025 was a year of growth for Old Nation. Organic growth with 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 that 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 expectations 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 being 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 AM 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 James Gunnery, believers and we certainly putting the resource in place to help facilitate that I think all of that will enable us to continue to deliver strong cash flow. James Gunnery, and obviously be able to deploy significant capital we've got a strong financial position, I mentioned our investment grade balance sheet. James Gunnery, I think our operations are disciplined, I think we can continue to do that 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.

Of course. If you'd like to ask a question today, please press star followed by one on your telephone keypad. If you find your question has been answered or you'd like to withdraw, please press star followed by two. Our first question today comes from Rajat Gupta from J.P. Morgan. Rajat, your line is open. Please go ahead.

Great. Thanks for taking the question. This has a couple, you know, just first on the new car business, the unit numbers seem a little weaker, you know, than than some of the peers, you know, some of the industry metrics, although the profitability was 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. Thanks.

Yeah, 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 and, in fact, quarter-over-quarter, a reduction in OEM dealer-facing incentives. We offset some of that with margin because, obviously, it impacts their transaction price. But particularly year-over-year, that reduction in dealer-facing incentives, 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 support for hybrid and battery electric vehicles, as you can imagine. So that was 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. an 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

of the things we were trying to do in the business and it was those two things really that resulted in our in in the position that we ended up with understood honestly that's helpful and then just you know maybe for tom you know on on automation finance uh really really quick and you know good progress there in terms of the maturity uh of that portfolio i'm curious you know how should we think about you know the cadence of profitability here over the next Yeah, or maybe, you know, the year beyond. I mean, are we at a point in your trade-off between penetration pace versus portfolio maturity that it's safe to expect a continued inflection in the profitability here? I'm curious, like, how you plan to balance that? You know, any guardrails you can give us, you know, 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, 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 6M dollars, we achieved in the 4th quarter. Um, and I think that's probably a decent starting point as you look, you know, on a quarterly basis through 2000. At 26, so that that, you know, we'll give you some. A nice starting point for, um, what the, uh, what the will look like for. 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 your delinquencies as it matures, but we've got that factored in. So I believe that our performance trajectory and the income improvement will continue and be in a good position throughout 2026.

Do you expect to maintain these? What's the upper end you have in mind on penetration for the portfolio?

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 continue to grow our used business, we do see opportunity to drive further penetration. We've got great partnerships. some great programs with our lending partners outside of ANF. I think we're going to help continue this trajectory.

Let me just add just some color to it, if I may, Tom. I think Tom's 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, was well balanced between Jeff Butler, who's 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. 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, my 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.

The next question comes from John Babcock at Barclays. John, please go ahead. Your line is open.

John Babcock at Barclays. Hey, Cornyn, and thanks for taking my questions. 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 out with share buybacks in the overhead, that would be great.

Yeah, thanks, John. Thanks for the question. From a CapEx perspective, 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 keeping up with OEM requirements on the latest models of the stores. Um, we've got some service growth as well that we're supporting, but. I think I think the levels that we spent at in in 25 are sustainable for 2026. Um, in terms of and Mike is involved in this as I am. So it'd be good to hear his commentary as well, but. You know, we, we had had a really strong year. We saw a number of opportunities across. you know, all four quarters in 2025 in terms of, you know, opportunities. I think we were selective. I think you saw where we spent our money in terms of regions and brands. And as Mike said, you know, we've got, we ended up with some very high quality brands and, you know, in territories where we have density and where we think we can create operating synergies. And I'm confident that, you know, 2026, there'll be, you know, continued opportunities for us in the dealership space. And we'll remain disciplined. I mean, we'll go for the ones that, you know, pencil out for us and then allow us to take advantage of, you know, where we're present and where we can drive operating synergies.

I think it's pretty complete answer, but just 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 share 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 but 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, Carl. 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.

Yeah. Well, as I already mentioned on 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 clear. be completely accurate with you. So from overall GPUs on hybrids reduced on battery electric vehicles in Q4 and were largely flat. Tom checked my numbers on that on HEVs. But we obviously benefited from a very significant mix change in the quarter from a stabilization of 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 sequentials, you know, we've been very stable in terms of hybrid electrics as a relative to total revenues or total unit sales on a new roughly 20% a quarter and that has remained very stable. We have seen a decline in in BEVs themselves in favor of ICE engines, probably to the extent of 5% to 6% from first quarter to fourth quarter.

OK, thanks. I'll get back to you. The next question comes from Jeff Lick at Stevens. Jeff, please go ahead. Your line is open.

Good morning. Thanks for taking my question. Mike, as you point out in your several times in the prepared remarks, obviously, there's a lot of extraordinary items this year in terms of pull forwards and obviously to compare from last year after the election. I was just wondering if you could just break down the year, you know, thinking of 2025 is 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 hey, things get a little easier here or there. Just wondering, you know, your perspective there, just kind of thinking of, you know, an extraordinary year of 2025 is not what you're comparing against.

Yeah, I think it's a great question. You know, we obviously saw the dynamics of various different announcements impacting March, April, for example, when tariffs really became very much front of mind. And then as we approached for those electrified power trains, the end of incentives, there's the two key points where I think when we think about comps, we just need to be mindful. 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 Gareth J. 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. Gareth J. As as effectively as you can to continue the performance and the momentum in the business, and I think. Gareth J. The demonstration from us and our results over the full year showed that even in a turbulent year we can continue to perform a reasonable level and deliver the results to our shareholders and i'm pleased about that because. You know, 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 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. think this year we're going to be as we have always done focused on affordability frankly you know we we all know what's happened with net transaction prices over the last few years and 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 um as as really an indicator of whatever strength is in the new retail market and news market as well. So that's kind of my top of mind thoughts and response to your question.

And then just a quick follow up, I was wondering, maybe you could put your OEM hat back on. You know, 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 James Meeker- What that how that might impact you know 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 the that dynamic of how the OEMs will handle that and how that will affect the franchise business.

James Meeker- Well, I would imagine every single OEM is already provided for that. James Meeker- Frankly, because I don't think it's. You know, 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 liability that may be there in terms of actual residual values onto the dealers and ultimately to some extent onto 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.

Thank you very much for the answers and best of luck on 2026.

The next question comes from Daniela Hagian from Book and Stanley. Daniela, please go ahead. Your line is open.

Thank you. Good morning, everyone. 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 to pre-pandemic. But we've seen significant compound growth in monthly payments that have basically been driven by a combination of average transaction price but also some differences in charged APR. I think there will be some relief in charged 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 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 at 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 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, 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.

um 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 mixed shifts or do you expect to see your strategy evolve in in terms of older or newer within that that segment Romy Ellis- 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, thank you.

Romy Ellis- yeah so firstly. Romy Ellis- If you just take our results, I think we performed really well in $40,000 plus vehicles, but we saw growth in that segment and it's 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 I use vehicles, which would naturally mean stocking vehicles of a lower price 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 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 WaterNation, 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 strengths to be more successful at acquiring inventory in that area. And that's what Chris and team is focused on.

Thank you.

The next question comes from John Sager at Evercore ISI. John, please go ahead. Your line is open.

Hey, guys. Thanks for taking my call. Good morning. I was hoping you could discuss 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 1600 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, you want to answer this, and then I'll add some color, or would you like me to answer it?

No, happy to do it. I'll build off of what you said earlier. I mean, you know, you're right, John. The fourth quarter was a low mark for the year in terms of used GPU. We were disappointed. We know that some actions that we can take will get us back to the norms that we had in the first and second quarters. 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, you know, when we're doing acquisitions. But we do have opportunity. I mean, 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, you know, 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 that, too. That's an investment we want to make. 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 trading. We buy your car, obviously auction. That's going to continue. We've been able to offset some of that cost pressure through mixed 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'll be more competition. And I think 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 um i think tom answered the rest really really incredible really well thanks okay great thanks for that really uh good answer um and then on on new gpus can you give us a sense of what you're seeing in the marketplace uh you mentioned that you're seeing sort of continued stabilization and uh i think the market's gonna be very encouraged if we see that continue

Yeah, thanks, John. I mean, I mean, the third quarter, fourth quarter might talk through the, you know, the improvement in the overall, the way to GPU, notwithstanding the, you know, the pressure we've got on OEM dealer incentives. We're encouraged as we build our plan for the 2026 that there are actions that we can take to continue that stabilization.

So far, so good. We haven't closed for January, but I do expect to see stable December to January. So off to a good start, I'd say, you know, on that front. It takes discipline. To do this with industry inventory levels also.

My 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. Good. 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's 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 as 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. Yep.

Thanks so much.

Next question comes from Colin Langan from Wells Fargo. Colin, please go ahead. Your line is open.

Oh, great. Thanks for taking my questions. Just want to ask on after sales, growth was 6% on a same store basis, which I think historically You know, go back many years, it was 3% or 4%. I mean, should we think of that staying at the higher end of sort of mid-single? Or do you think there's just some, you know, 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, you know, much higher than they were five years ago. Is that sustainable or does that moderate a little bit into 2016?

So I'll give you 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 park of three-year-old vehicles. I think what that means is that our hourly rate obviously needs to be competitive. So that, by its very nature, says that 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 bake into our plans is more sustainable growth, not margin growth.

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

Yeah, I think the other thing that you mentioned earlier in your commentary that we should just remind Colin of, between Christian and Jan-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 diluted. So, I think that that is a, 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, you know, 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 mixed driven thing. It may not be margin per se through our workshop. 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 sort of a long-term target and any sort of actions that might help, you know, reduce costs into next year? get you closer to 66?

Yeah, good question, Colin. Yeah, first of all, I'll 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 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 incremental investment here. And we also talked about our loaner pool. We've made some conscious investments in. It helps you on the used vehicle side when they come out of the when they come out of the pool. So 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 to drive productivity in comp and benefits. I talked about advertising. The other big category is just other SG&A who'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 hopefully that helps Colin.

Yeah, that's super helpful. Thank you very much for taking my question.

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

Yeah, thanks, Alan. 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 ordination team. for what we delivered. And as usual, and you all know this, that's behind us now. We've got 26 ahead 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.