AN
#Our CFS gross profits definitely are strong and they do weigh into our decisions on how we accept deals.
To <UNK>'s point, trying to find the balance between our volume and pricing.
So does play into it.
But it is not a contributing factor to the compression that we are seeing on PVRs right now.
Our Honda stores are performing extremely well.
And like <UNK> said on the last call, I think what Honda did was fair and balanced to the market place and has performed well, both to the consumer as well as to our stores.
There's been talk of others, but nothing concrete.
It's very interesting.
I expressed my plateau point of view on CNBC the first week of January and then got on a plane and went to the Detroit Motor Show.
I would say the overall discussion agreed that the six years of rapid growth are over, that the industry is plateauing at a very high, very acceptable level.
And no one is really saying this thing is going to blow by 18 million through 18.5 million or something within the industry.
I know there's some others out there that have a point of view that that's going to happen.
If that were to happen, I can tell you this.
It would take significant price action that would be pulling forward future business from my point of view.
Now, unfortunately, every executive is very confident and optimistic about their position in the marketplace.
And they have plans for growth in 2016.
So if you add up everyone's individual plan, you have this classic situation, that everyone is going to take share, but that means they've set the plants to run to go out and achieve that.
So while they're being conservative and disciplined in saying the total market is probably mid-2017 plus or minus 100,000 units, we will take that right away, we're going to take a bigger piece of the pie.
So I think that's then going to be incumbent upon retailers to really push back where appropriate and say that's more than this marketplace is going to take, particularly on the car side.
To the extent you can increase production on trucks, that's fine, but it's got to be substitution for cars.
It's not incremental business.
I think that's a solid plan.
I think if retailers push back on very aggressive production plans ---+ and by the way, we are being given very aggressive stair-step targets also, which again indicate that individually they are planning for significant growth.
So the ball is kicked, debate is underway, and hopefully the industry can manage it successfully.
Because it's going ---+ the challenge for the industry I see over the next several years is we can have multiple years above 17 with the pent-up demand that's out there.
But in a plateau new vehicle market, can we grow earnings and the quality of earnings, or are we going to have a share fight that results in ruinous incentives for the manufacturers and for retailers.
I think that's sort of a line we are trying to walk down at the moment.
I think first on the consumers' commitment to pay for their car loans, whether it's leased or financed, it's unwavering.
I see absolutely no sign of difficulties in auto finance.
I think it's all being run very prudently in disciplined way.
So no alarm bells there.
There are I think 1 million more vehicles coming off of lease this year than the prior year.
That doesn't necessarily mean all those individuals are going to go into new cars.
They could go into CPO or something else.
So you can't just add that to the top line, in my opinion.
No, I think the biggest threat to used car values are additional incentives from the manufacturers or additional discounts from us.
That's the big picture issue.
So it's very interesting our fourth-quarter performance, where by manufacturers increasing incentives by $250 a car, us increasing our discount by $220 a car, that had an immediate impact on our used car values.
And then we had to discount anything that was relatively new versus the new vehicle on the showroom floor.
It's a double impact; it impacted our new vehicle gross margin.
It impacted our used vehicle gross margin.
So that is the biggest issue, and that's my greatest concern about overproduction.
And you could say, <UNK>, what do you care if the manufacturers increase their incentive significantly.
You'll just sell more new cars.
It pulls the rug out from underneath the value of my used car inventory.
And also to your point, it really disappoints your existing owner base, your most loyal customers, because you have depreciated ultimately the value of their trade in.
So it's really a lose-lose.
It's a lose in the short term and it's a lose in the long term.
And I really would not want to see incentives go beyond on the manufacturer level.
They are about 10% of suggested retail price at the moment.
So we are approaching double digits, and I really hope we don't go beyond that.
Now to your point of mix, this mix adjustment, cars versus trucks, has been going on, so it's not a shock.
It's been ---+ we've gone from 45% trucks a few years ago to 60% trucks in the month of December.
It's been a journey, there's been adjustments along the way, so I think that's more baked in the cake at the moment than a new development.
So it's more where are incentives going, where are inventories production going, and what will that mean to resale values is my number one concern.
That's correct.
First, I think the widening of the spreads is unrelated to the customer's ability to pay or whether the customer is staying or not.
I think it's other factors.
<UNK>, you want to talk about that.
Yes, I would say you assume some ABS widening and that's a result of just some broader widening in the bond market.
And certainly that's around the space that they play in.
But I would say not everybody funds in ABS, so a lot of people balance sheet fund, particularly if you look at leasing.
Not everybody funds on that basis, and they have broader large balance sheets for their blended funding rate.
So I would say it's one factor.
You've seen it more in sub-prime than in regular, and I don't think it's going to be a material driver their rates provided to customers.
We are not seeing a particular increase in rates related to the ABS phenomena, keeping in mind that post-2008, 2009, the ABS market is a smaller market than it was at that time, particularly in auto.
And I think that the percentage ---+ and the OEMs post ---+ the OEM captives post 2008 and 2009 were very careful about diversifying their funding sources away from that one particular phenomena.
So I would say that type of widening today that you see in certain tranches in sub-prime ABS is much less impactful than it would've been back in 2008, 2009 intentionally because they no longer wanted to be reliant on that type of funding source solely.
I think Texas is about 24%, 25% of our business for 2016.
So that's a significant overweight.
As you know, our three big states are California, Texas, and Florida.
Florida is absolutely booming; Texas is under stress.
We had a decline in Texas: same-store sales units of 2%.
But I will also tell you, it took a lot more discount to get that done in Texas, so it had a significant impact on the bottom line.
So on our recall policy, you see it's relatively ---+ I would say no impact on new vehicles, and we were already repairing new vehicles.
So that's not an issue.
It's a significant impact on preowneds.
Now just to discuss the issue for a moment, I think the auto industry really has some credibility issues it has to face up to, everything from some of these horrific recalls we've had with significant loss of life, to credibility issues around the Volkswagen situation.
So we sit there and say what can we do on our part to make it better.
On preowned, it's a significant issue: on any given day, 15% of our inventory has open recalls.
Now let me be clear: these are not that the wrong tire pressure sticker isn't on the car or some other little minor item; it doesn't have an owners' manual.
That's all new cars when they're first released; you get the sticker issue or the owners' manual issue.
It has one page missing.
These are significant safety recalls, and we feel the time has passed that it's appropriate to take a vehicle in trade with a significant safety recall and turn around the next day and sell it to consumer.
So we are the only one that's done it, we think it's a brand attribute, we will work to make it a brand attribute in 2016, and we feel in the long term it will be a tremendous advantage to us.
In the meantime, it is very disruptive to our used car business.
Because we see no way to get it below 15%; there's new recalls arriving every day.
We have to increase inventory to get to the same point.
And a same point of frontline availability, and at the same time, we have to then work very hard to get the vehicles repaired as promptly as possible.
So it remains a disruptive issue.
I would say if I looked at our decline in front-end gross for the fourth quarter on used vehicle, I would put the majority of it to higher incentives from the manufacturers and higher new vehicle discounts from us.
But recall disruption remains part of it.
And probably will continue for the first half the year until we get it all sorted out.
No, we really haven't.
Our premium ---+ our subprime business for the fourth quarter was 10%.
For the full year, we are at 11%, so it actually dropped slightly in Q4.
But there's been no material impact as far as credit availability.
You didn't hear much discussion about it because it's a complete success.
We made the pivot last year away from third-party lead providers who required a substantial additional discount in order to get the business.
And were expensive to do business with.
The third-party lead providers who we stayed with ---+ and they are now about 8% of our business overall ---+ we have a wonderful new partnership where we are allowed to bring our brand into their sites, which ---+ and that is a condition of doing business with us.
And so that is a huge step forward.
And as I said, we've gone from trending towards 15% of the business with third parties; in a couple more years, it would've been 20%.
Now it's going in the other direction and that gives us more resources to go into our brand.
We now generate fully 25% of our business from AutoNation sites, which is a spectacular success.
The customers like the ability to be able to transact on the site.
We still have capabilities that we are adding step-by-step that continue to roll out.
I think the most difficult piece remains the documentation.
That may push into 2017.
There's different pieces of it that we can get done, but we need some regulatory change to get it completely done.
That's probably rolling into 2017.
Everything else we talked about, we expect to have operational in 2016.
There is a cost to just continue with this level of digital intensity.
I have no issue with that.
But I don't see ---+ I think I said this already in the fourth quarter: as far as investment in digital, we've probably hit peak.
We will run at that in 2016, and after that be able to go down to more of a maintenance level.
But you can check with me a year from now on that when we get the final plan on how we're going to tackle documentation.
The $100 million was what we're going to do ---+ I forget which year it was, 2014, 2015.
I don't remember exactly.
And it was a combination of what we were going to invest in the brand that we could attract traffic to our sites, and the digital capability (inaudible).
So it was a combination.
So I'm saying in 2015 the brand was strong enough that we could walk away from third-party lead providers and have the traffic come to our sites.
And then the other piece of the puzzle was to invest in our digital capability, that once they came to our site, they were happy with the experience.
So there we are declaring victory.
And as far as exactly where we are on that $100 million, I think we are probably through that.
But there will continue to be investments in 2016.
We've already said on the marketing side we will adjust our spend this year versus last year.
So that's part of it.
And on digital, we'll probably run at the same level as 2015 without an increase.
First of all, on parts and service, we see continued strong growth in parts and service.
As far as it relates to recalls, <UNK> talked about it earlier.
Every day we get additional recalls that are coming in.
You just heard that Takata added 5 million additional cars to the recalls for their airbags.
In addition, Ford just announced a large recall on Ranger trucks.
So we see no slowdown in the amount of cars being recalled.
It's just moving away from the ignition switches and the initial Takata airbag to a more broad spectrum of units and manufacturers.
VW ---+ correct; there is no fixed that's been called out right now, but that represents a very small percentage of our business, less than 1%.
There will be no real impact to us on that end, but parts and service will continue to remain strong.
That was our last question.
Somebody said it earlier in a statement calling out our ability to adapt to circumstances, how we've demonstrated that in the past.
We will do that again; can't tell you exactly how long it will take, but it's underway.
We still totally believe in the validity of our diversified model.
We are one-third domestic, one-third Asian, and one-third premium luxury.
Obviously the domestic business with trucks is as strong as you can imagine, and Asian is challenged because fuel economy, which is their strength, is not valued by the marketplace at the moment.
And we have a surprising challenge with premium luxury here in the fourth quarter.
We are diversified by business type, we went through all that, and we are diversified geographically.
Yes, we have a storm in Texas at the moment that will take some time to blow through.
But in total, it's an adaptable model and we will do that once again.
So thank you for your patience today, thank you for your very constructive questions, and we will look forward to talking to you again in the future.
Thank you very much for joining us today.
