AutoNation (AN) Mike Jackson on Q4 2015 Results - Earnings Call Transcript

| About: AutoNation Inc (AN)

AutoNation Inc. (NYSE:AN)

Q4 2015 Earnings Conference Call

January 28, 2016 11:00 AM ET

Executives

Andrew Wamser - Treasurer and VP of IR

Mike Jackson - Chairman, CEO and President

Cheryl Miller - EVP and CFO

Bill Berman - COO

Jon Ferrando - EVP, General Counsel, Corporate Development and Human Resources

Analysts

Irina Hodakovsky - KeyBanc Capital Markets

Michael Montani - Evercore ISI

John J. Murphy - Bank of America Merrill Lynch

Paresh Jain - Morgan Stanley

Brian Sponheimer - Gabelli & Company

Rod Lache - Deutche Bank

Dave Tamberrino - Goldman Sachs

Operator

Welcome to AutoNation’s Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions]. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn the call over to Andrew Wamser, Treasurer and Vice President of Investor Relations for AutoNation.

Andrew Wamser

Thank you, operator, and good morning, everyone, and welcome to AutoNation’s fourth quarter and full year 2015 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, CEO and President; Cheryl Miller, our Chief Financial Officer; Bill Berman, our Chief Operating Officer; and Jon Ferrando, our EVP responsible for M&A. Following their remarks, we will open up the call for questions. Robert Quartaro and I will also be available by phone following the call to address any additional questions that you may have.

Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call may constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most-recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.

Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release and on our website located at investors.autonation.com.

And now, I’ll turn the call over to AutoNation’s Chairman, Chief Executive Officer and President, Mike Jackson.

Mike Jackson

Good morning, and thank you for joining us. Today, we reported adjusted EPS from continuing operations of $0.96, a 6% decrease as compared to EPS from continuing operations of $1.02 for the same period in the prior year. For the full year adjusted EPS from continuing operations was $3.98, up 14% over prior year.

Fourth quarter 2015 revenue totaled $5.3 billion compared to $5 billion in the year-ago period, an increase of 6%, driven by stronger performance in all of our business sectors. Total gross profit was $812 million compared to $784 million in the year-ago period, an increase of 4%. Operating income was $200 million compared to $227 million in the year-ago period, a decrease of 12%. In the fourth quarter, AutoNation’s retail new vehicle unit sales increased 4% overall or 1% on a same-store basis.

The fourth quarter industry sales environment was more push than pull resulting in significant new and used vehicle margin declines on a combined basis of $217 per vehicle retail, which is 11% lower than the fourth quarter of 2014. During the quarter we experienced particular weakness in Premium Luxury, which had a significant impact on our fourth quarter financial results. We have begun and will continue through the first quarter to take the necessary steps to align our cost, inventory and pricing strategy to the current market.

Revenue for the full year was $20.9 billion, up 9% over prior year. Total gross profit was $3.3 billion compared to $3 billion in the year ago period, an increase of 9%. Operating income for the full year was $873 million, an increase of 6% over prior year. Our primary assumption for 2016 industry new vehicle unit sales is above 17 million for the year.

I now turn over to our Chief Financial Officer, Cheryl Miller.

Cheryl Miller

Thank you, Mike, and good morning, everyone. For the fourth quarter, we reported adjusted net income from continuing operations of $107 million or $0.96 per share versus net income of $117 million or $1.02 per share during the fourth quarter of 2014, a 6% decrease on a per share basis. Our fourth quarter 2015 results exclude a non-cash impairment charge of $9.6 million after tax or $0.09 per share related to the franchise rights assets of our Volkswagen stores. There were no adjustments to net income in the fourth quarter of the prior year.

Revenues during the quarter increased $292 million or 6% compared to the prior year and gross profit improved $29 million or 4%. SG&A as a percentage of gross profit was 70% for the quarter, which represents a 210 basis point increase compared to the year-ago period. Due to the gross profit pressure in the fourth quarter SG&A as a percentage of gross profit did not benefit from the normal seasonal strength in Premium Luxury vehicle sales. As we continue to adjust our cost structure to the current environment our SG&A as a percentage of gross is expected to remain under pressure. The provision for income tax in the quarter was $61.3 million or 38.5%.

Net new vehicle floorplan was a benefit of $15.1 million, which was relatively flat compared to the fourth quarter of 2014 as the increased floorplan balances were largely offset by higher sales and increased floorplan assistance per unit. Floorplan debt increased sequentially approximately $523 million during the fourth quarter to $3.7 billion at quarter end, primarily due to increase inventory balances.

Non-vehicle interest expense increased to $26.5 million compared to $22.1 million in the fourth quarter of 2014. The $4.4 million increase in interest expense was driven by the issuance of our senior unsecured notes in September, which have higher rates in our revolving credit facility as well as higher average debt balances. The increased senior notes rates was partially offset by lower interest rate associated with our credit facility refinancing and the issuance of our commercial paper program. At the end of December, we had $2.4 billion of non-vehicle debt, an increase of $162 million compared to September 30, 2015.

Non-vehicle debt include $600 million of outstanding commercial paper borrowings. At the end of December, we had no amounts drawn under our revolving credit facility. As a consequence our non-vehicle debt fixed to floating mix was approximately 75% fixed and 25% floating. I will also note that we have no material debt maturities until late 2017. For the full year 2015, we repurchased 3.9 million shares for $235 million at an average price of $60.49 per share.

As of January 26, AutoNation had approximately $296 million of Board authorization remaining for share repurchase and there were approximately 111 million shares outstanding. This does not include the dilutive impact of stock options. Our leverage ratio increased to 2.3 times at the end of Q4 compared to 2.2 times at the end of Q3. The leverage ratio is 2.1 times on a net debt basis including used floorplan availability and our covenant limit is 3.75 times.

Capital expenditures were $75.3 million for the quarter. Capital expenditures are on an accrual basis excluding operating refiles and related asset sales. Our quarter end cash balance was $74 million, which combined with our additional borrowing capacity resulted in total liquidity of $1.7 billion at the end of December. We continue to use the revolving credit facility as a liquidity backstop for borrowings under our commercial paper program.

As I mentioned a moment ago, we have $600 million of outstanding commercial paper at quarter end which in effect reduces our available liquidity to $1.1 billion. Looking forward, we are focused on aligning our cost structure to better adjust to current market conditions and continuing to prudently allocate capital.

Now let me turn you over to our Chief Operating Officer, Bill Berman.

Bill Berman

Thanks, Cheryl and good morning. My comments today will be on a same-store basis as compared to the prior year unless noted otherwise. Gross profit for variable operations was $450 million down 4%. Variable gross was $3,350 on a per vehicle retail basis, a decrease of $125 or 4%. New and used same-store unit volume was flat compared to the fourth quarter of 2014. New vehicle revenue for the quarter was $3 billion, an increase of $61 million or 2%.

We retailed 82,900 units an increase of 1%. New vehicle gross profit was $2,018 on a per vehicle retail basis, which was down 10% compared to the same period a year ago. In the fourth quarter we experienced a push rather than a pull environment. We saw a margin compression particularly in Premium Luxury segment this offset the seasonal sequential increase in PVRs we typically expect in the fourth quarter.

Coupled with the margin pressure in the fourth quarter we also began to see a slowdown in Texas, due to collapsing energy prices which are hurting the local economy. In Texas the new and used unit sales were down compared to the fourth quarter of 2014. In Florida we continue to experience growth across the state new and used units were up for the quarter compared to the fourth quarter of 2014.

As Mike mentioned earlier, we are taking steps to align our cost, inventory and pricing strategy with the current market conditions. Used vehicle retail revenue for the quarter was $1 billion, an increase of $22 million or 2% compared to the period a year ago. Used vehicles retail were down 2% year-over-year at 52,000. Used unit gross profit was $1,436 on a per vehicle retail basis, a decrease of $246 or 15%.

As of yearend approximately 6% of our inventory was not available for sale due to open recalls. The held inventory represent less than 2% of our new vehicle inventory and approximately 16% of our used vehicle inventory. As we stated in the third quarter we did see an impact on our used vehicle sales due to our recall policy. We continue to implement systems and processes in support of our efforts to ensure no vehicle with an open recall is retailed. We continue to live in the long-term safety benefits for our customers far out way in a short-term impact to our results and further support the AutoNation brand promise.

Customer Financial Services gross profit was $1,556 on a per vehicle retail basis, an increase of $109 or 8%. Total gross profit for Customer Financial Services was $210 million was up $40 million or 7% compared to the period a year ago. In the quarter customer care revenue was $751 million an increase of $28 million or 4%, customer care gross profit was $326 million an increase of $24 million or 8%. Customer pay gross was $129 million, up 9% warranty gross was $66 million up 7%, collision gross was $31 million up 11%.

Finally, I’d like to welcome the Renault, Honda associates to the AutoNation family and thank all of our over 26,000 associates for their hard work and dedication.

I’ll now turn the call over to Jon Ferrando, Executive Vice President responsible for M&A.

Jon Ferrando

Thank you, Bill and good morning, everyone. In the fourth quarter of 2015 we completed the previously announced acquisitions of 13 stores in Georgia, Alabama and Tennessee and a Honda store in Seattle-Bellevue market. For the full year 2015 AutoNation completed the acquisition of 22 stores generating approximately $1 billion in annual revenue.

In the first quarter of 2016 we are on track to complete the previously announced acquisition of the 12 store Allen Samuels Auto Group in Texas, which generates approximately $800 million in annual revenue. As of today our store portfolio number 342 franchises and 254 stores in 15 states, representing 35 manufacturer brands. These numbers will grow to 373 franchises and 266 stores upon completion of the Allen Samuels acquisition.

Looking forward we will continue to actively pursue acquisitions and new store opportunities with a focus on enhancing brand representation within our existing markets and markets that can be supported by our existing management infrastructure. We will continue to be selective and prudent in our capital with a focus on investing to produce strong returns and long-term shareholder value.

I’ll now turn it back to Mike Jackson.

Mike Jackson

Thank you, Jon. 2015 was a historic year for AutoNation we celebrate the sale of our 10 million vehicle. We implemented our industry-leading recall policy. We acquired 51 franchises with approximately $1 billion in annual revenue and we built our brand and kicked off our drive pink campaign from coast-to-coast. We are now happy to take any of your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Brett Hoselton with KeyBanc. You may now proceed.

Irina Hodakovsky

Thank you. Good morning. This is Irina Hodakovsky on for Brett Hoselton. My question for you is on the vehicle segment it appears the underperformance is all in November and some improvement is evident in December. Wondering if you can tell us what happened in November and what did you do differently in December to get some improvement? And just coincidentally it appears that in November is when you closed this very large acquisition, did that have anything to do with it or is it something else?

Mike Jackson

This is Mike Jackson. First I think comparisons to the industry reporting calendar and our GAAP results are difficult to do. So overall on an industry calendar we were plus 3% same-store sale for the quarter and we really don’t know what the industry was in retail, but something higher than that I think is reasonable to assume. We are over weighted in Texas and in Premium Luxury compared to the industry and that would be the explanation for any gap in our performance. And as far as the acquisition being disruptive no impact whatsoever.

Irina Hodakovsky

Thank you.

Operator

Our next question is Michael Montani with Evercore ISI. You may proceed.

Michael Montani

Hey guys, good morning. Thanks for taking my question. I guess I wanted to ask about was the decline in gross profit per unit that we’ve seen is this symptomatic of a need to reset gross profit per unit from $2,000 to $1,500 or $1,600 say or is this more of an imbalance in supply and demand that can be worked through and is there anything you can point to in history Mike to just help us kind of see how this could work itself out?

Mike Jackson

Well I think any time the industry moves from a period of exceptional growth secures of it to beginning to plateau and we see significantly higher inventories year-over-year that’s going to put pressure on front end gross. So we’ve taken steps to begin to bring our inventories in line obviously there is a lot of lead time on our orders, that will see some progress in the first quarter, but it will probably take till the end of the second quarter.

But even after we do that if the industry overproduces and keeps inventory at a high level that means the overall environment is still very difficult and very competitive even though we may have our house in order within this. It certainly puts us in a better position, but it’s not a full answer. So that remains to be seen. I think if you back to the period of 2000 through 2006 the industry plateau at an average of 17 million units a year, but clearly overproduced and had high inventories, which put tremendous pressure on manufacturers, resell values and retailers’ front end gross. So I really hope we don’t repeat that history and that we go a new way this time.

Michael Montani

All right thank you. And if I could just ask a little clarity on the inventory build year-over-year in days or percentage terms and also on the gross profit pressure, could you just parse out for us a little bit how that looked by segment in terms of Premium versus Midline import in domestics just to help us quantify?

Bill Berman

Mike this is Bill Berman. So first off if you look at it for in the first quarter basis of this year we’re going to be approximately 13 days higher in our day supply inventory. When you look at our total units that was about 14,000 additional units off of which right now relatively a flat marketplace. As far as breaking it out by segments, where we’ve seen pressure primarily on our Premium Luxuries, a little bit on import and domestic for the most part is in line.

Michael Montani

Thank you.

Operator

Our next question, John Murphy with Bank of America. You may proceed.

John J. Murphy

Good morning, guys.

Mike Jackson

Good morning, John.

John J. Murphy

Just a first question kind of follow-up on the inventory, I mean, if you look at the aggregate in the industry in the D3 and even the J3 there was a small very tiny increase on absolute basis year-over-year in the fourth quarter Premium Luxury seems to be where the focus is. So I was just curious, I mean, I know you can’t necessarily get into specific companies, but as we look at this do you see the elections of 2000 and 2006 that some in the D3 were committing really reemerging year or is what we’re seeing at the end of last year and the beginning of this year more a function of what’s going on purely in the Premium Luxury and your comments to try to make sure that it doesn’t reemerge at the D3?

Mike Jackson

Yeah I think it’s more in the second, I think domestics are very well positioned to exceed in 2016 almost all the excess inventories in cars not in trucks to the stand that you have strength in trucks and can produce more trucks you want to drive in 2016. I think Sergio's decision to switch over factories from our production to truck production shows you the sense that the consumer has that they are totally committed to cheap gas and to trucks it’s really become a strategic question not a tactical question. So wherever you stand on trucks is your position of strength in the marketplace.

So that’s very different than 2000 in the domestic -- from a starting point the domestics are in a very good position. I would have hoped during this period of growth the industry could have gotten some of its benchmarks more accurate so that when we have a GAAP conversation versus an industry conversation it could be more meaningful.

Here I point to the obsolete industry calendar that moves days around willy-nilly in a -- it was originally done because we used to mail sales report in we’re in digital age, when the month ends she closed the month digitally. I also have a long standing issue with the day supply calculation in that fleet sales accounted and retail selling rates, which is a major distortion.

So pointing to industry figures and try to figure out what’s going on is not always helpful and making a comparison than to GAAP figures gets particularly difficult. So those issues are not resolved they still sit there, but I think to your principle point the industry is in much better shape today than it was in 2000 both from a structural point of view and that we’re at the beginning of this plateau and there is still time to adjust there is a particular overhang in Premium Luxury which will take some time to work through.

John J. Murphy

Okay, that’s helpful. And second question on capital allocation, I mean, obviously the biggest thing that’s changed in really that a December the current period is that your stock is down about 35%. So it’s 35% cheaper and looks fairly attractive at least from where I see it and I’m just curious as you think about cap allocation in 2016, have you seen sort of a similar adjustment in the private market on acquisitions where multiples and valuations have come down fairly significantly, or as we look at ‘16 and if your stock doesn’t recover meaningfully from here mean does this just make your stock that’s much more attractive relative to the acquisitions and we just see you buying back more of your own stock as oppose to making acquisitions?

Mike Jackson

So John our philosophy remains unchanged. We first invest in our existing stores our digital capability and our brand, that’s our first call on capital that will remain. And then we look at the opportunity to purchase our own company through share repurchase versus acquisition that fit with our long-term plan. And obviously than there is a competition between the return of buying our own stock and what we can buy in the marketplace. The marketplace as far as acquisition usually takes longer for sellers to come to any new reality so I think it’s too soon to expect any seismic shift there. So that would make the decision at the moment a bit easier or which way to go. And I will rest on our track record that we’ve done a very good job on capital allocation over the last 15 years.

John J. Murphy

Sounds good. And just lastly on SG&A flexibility I mean if we see this pressure persist for a couple of quarters I mean what kind of buckets or actions in SG&A do you think you could really sort of react reasonably quickly and maybe if it persist even longer over the longer term time frame.

Mike Jackson

So John we’re still forecasting a market over $17 million so we still need the infrastructure and the staffing to perform at that level. However, since we are not forecasting extraordinary growth in 2016, we will adjust inventories and overtime that will give us more control over the balance between -- to be able to make decision between volume and price. You’re heavy on inventory you can’t make a decision you just have to discount till you find the point that the product moves. Second, we can adjust marketing. Again, we’re spending assuming growth didn’t happened that’s fully my responsibility for the fourth quarter, but now we will adjust and that could be brought in line relatively quickly. Cheryl you want to make any other comment on cost.

Cheryl Millar

Yeah John as you know in this type of decline it’s margin compression so we watch the things where we need to be there to support volume. But of course as you know based on our track record of running lean, we’re going to evaluate everything. So I think the biggest bucket, if you look at the quarter compensation works pretty well. So I think we did a good job there, marketing as Mike mentioned we’re reassessing for Q1 in light of the current environment and then we’re picking through the different cost buckets to make sure we’re focused on pure investment and things that add value for today and for the long-term. So we’ll go through kind of the heavy grinding and all the other buckets to make sure we’re as tight as possible heading into Q2.

John J. Murphy

Great, thank you very much.

Operator

Thank you. Next question is Paresh Jain with Morgan Stanley. You may proceed.

Paresh Jain

Good morning, everyone. Just a couple of questions first, when we look at the blended GPU that is still pretty close to record levels and obviously F&I is a big piece of it now. Is that also something that is driving more aggressive behavior on new and used GPUs from dealer? And the reason I ask is -- so if you think beyond near-term makes an inventory issues and assuming those can reverse, couldn’t we see a continuation of this new and used GPUs from here on?

Bill Berman

Hi, Paresh it’s Bill. Our CFS gross profits definitely are strong and they do weigh into our decisions on how we accept deals to Mike’s point trying to find the balance between our volume and pricing. So it does play into it. But it is not a contributing factor to the compression that we are seeing on PVRs right now.

Paresh Jain

Understood. And a quick follow-up on F&I. We have the Honda dealer reserve solution last year with CFPB, has there been any impact on F&I per vehicle on those transaction and are you seeing a similar level of push for other lenders to adopt that solution?

Bill Berman

Our Honda stores are performing extremely well and like Mike said on the last call I think what Honda did was fair and balance to the marketplace and has performed well both to the consumer as well as to our stores. There has been talk of others, but nothing concrete.

Paresh Jain

Got it. Thank you, guys.

Operator

Thank you. Our next question is from Brian Sponheimer with Gabelli Company. You may begin.

Brian Sponheimer

Hi, good morning. Thank you for having me on. Just I guess to start, Mike when you called out some of the industry problems. What’s been their reaction particularly with some of the auto makers that are having some of the inventories used to what you said are they aware of it or are they buying to it is as we’ve seen 15 years ago the D3 having that issue?

Mike Jackson

It’s very interesting and I express my plateau point of view of [indiscernible] the first week of January and then got on the playing once the Detroit Motor Show. I would say the overall discussion agreed that a six years of rapid growth are over. But 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 18.5 million or something within the industry. I know there is 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 set the plans to run to go out and achieve that. So while they’re being conservative and disciplined in saying the total market is probably mid 17 million plus or minus 1,000 units we’ll take that right away, we are 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 steps targets. Also which again indicates that individually they are planning for the significant growth.

So the ball is kicked, debate is under way and hopefully the industry can manage it successfully because it’s going -- the challenge for the industry I see over the next several year is we can have multiple years above 17 million with the pent up demand that’s out there. But in a plateau new vehicle markets can we grow earnings and the quality of earnings or are we going to have a share fight that results in ruing its incentives for the manufacturers and for retailers. I think that’s sort of a line we’re trying to walk down at the moment.

Brian Sponheimer

I appreciate all that color. I guess my second question is little more short-term in nature. There is a particular OEM that three years ago went from 36 month lease to a 39 month lease. So theoretically you’re going to see more trade-ins come in and starting in February-March or March and April. How much is that needed to kind of cleanup this inventory issue on the car side?

Mike Jackson

Well I think first on the consumers’ commitment to pay for the car loans whether it’s lease to finance. It’s unwavering, I see absolutely no sign of difficulties in auto finance. I think it’s all being run very prudently in a disciplined way. So no alarm bells there. There are I think a 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.

Brian Sponheimer

I appreciate that. Thank you for having me on.

Operator

Thank you. And next question is Rod Lache with Deutsche Bank. You may begin.

Rod Lache

Good morning, everybody. I appreciate that you guys have done a phenomenal job of adjusting to all kinds of scenarios that have come at you over the past few years. But I’d love to hear how you feel from your perspectives, how consumers would be broadly affected by scenario with passenger car trading values falling. You did say obviously the market today is trucks, but passenger cars were higher percentage of the market years ago. So I would imagine that there are higher percentage of trade-ins. How does that affect them, how do you see that effecting your volumes and margins and deals that you’re putting together when you do take trades?

Mike Jackson

So 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 have to discount anything that was relatively new versus the new vehicle on the showroom floor. So it’s a double impact, it impacted our new vehicle gross margin, it impact our used vehicle gross margin.

So that’s the biggest issues and that’s my greatest concern about over production and you could say Mike would you care for the manufacturers increase their incentives significantly, you’ll just sell more new cars. Well it pulls the rug out from underneath the value of my used car inventory. And also to your point it really disappoint your existing owner base, your most loyal customer because you’ve depreciated ultimately the value of their trade-in. So it’s really a loose-loose, it’s loose in the short-term and is a loose in the long-term. And I really would not want to see incentives go beyond on the manufacture level they are about 10% suggested retail price at the moment. So we’re 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 has 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 our incentives going where our inventories production going and what will that mean to resale values is my number one concern.

Rod Lache

Okay. Just to clarify, this is a scenario that you’re sort of warning of prospectively it’s not something that you’re seeing affecting your ability to pull together deals or do volume at the moment is that correct?

Mike Jackson

Yeah, that’s correct.

Rod Lache

And lastly clearly credit availability has been very good over the past years and as you said there is no alarm bells in terms of any external data on loss frequency or anything like this that would be of concern. So it does look like it’s been somewhat disciplined, but we are starting to see some spread widening as we look at sub-prime ABS and even some CDS spreads for some of the lenders. Was wondering if you saw any evidence of that flowing through to the market or do you think that this is something that could have some impact on credit availability or the S&I business?

Mike Jackson

So first I think the widening of the spreads is unrelated to the customer’s ability to pay whether the customer is paying or not I think it’s other factor. Cheryl you want to talk about that.

Cheryl Miller

Yeah what I would say you’ve seen some ABS widening and that’s the result of just some broader widening in the bond market and certainly that’s around the phase that they play in, but I would say not everybody funds in ABS. So a lot of people balance sheet find particularly if you look at leasing not everybody funds on that basis and they have broader large balance sheet for their blended funding rate. So I would say it’s one factor, we’ve seen it more in sub-primes than in regular and I don’t think it’s going to be a material driver the rates provided to customers.

Rod Lache

So you’re not seeing any effect in the retail world from this?

Cheryl Miller

We’re 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.

Rod Lache

Yeah I mean it’s not just ABS or some like you said it’s a fixed income phenomena, high yields unsecured all kinds of things are being affected…

Cheryl Miller

And I think the percentage of -- and the OEM post -- the OEM cap is posted 2008 and ‘09 we’re very careful about diversifying the 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 have been back in 2008-2009 intentionally because they no longer wanted to be reliant on that type of funding source solely.

Rod Lache

Great, that’s helpful. Thank you.

Operator

Thank you. Our final question from Brett Hoselton with KeyBanc. You may begin.

Irina Hodakovsky

Thank you. This is Irina again on for Brett Hoselton. A follow-up question to our earlier discussion Mike, you mentioned you are overweight in Texas under was beginning -- you just saw some decline, can you tell us how much Texas declined and what is your exposure there?

Mike Jackson

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 blooming, Texas is under stress, we had a decline in Texas on same-store sales unit of 2%, but also tell you it took a lot more discount to get that done in Texas. So we had a significant impact on the bottom-line.

Irina Hodakovsky

Thank you very much. And then the last question for you a little bit on the used side and the recall initiative naturally as expected that is having some impact on your volume, wondering as you’re going through it what are you finding now? How is it tracking relative to your expectations is it better or worse, you didn’t really have a whole lot you anticipated or knew in terms of long-term cost implications. What are you learning as you go through this?

Mike Jackson

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 pre-owned. Now just it is got the issue for a moment I think the auto industry really had some credibility issues and I have to say it’s up to everything from some of the 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? So on pre-owned 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 long tire pressure sticker is on the car or some other little minor item that doesn’t have an owner’s manual, that’s on the new cars when they are first released, you get the sticker issue or the owner’s manual issue that had 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 turnaround the next day and sell it to consumer.

So we’re the only one who had done it, where we take as a brand attribute, we will work to make it a brand attribute in 2016 and we see on a 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 no recalls arriving every day, and we have to increase inventory to get to the same point and same point of front line 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 declines on a gross for the fourth quarter on used vehicle, I would put the majority of it to higher incentives on the manufacturers and higher new vehicle discounts from us, but recall disruption remains part of it and probably will continue for the first half of the year until I would get it all sorted out.

Irina Hodakovsky

Thank you, Mike. Thank you for taking the questions.

Mike Jackson

Absolutely.

Operator

And we still have two questions ma’am. Next question is Patrick Archambault with Goldman Sachs. Your line is open.

Dave Tamberrino

Yeah hi thank you it’s actually Dave Tamberrino on for Pat, couple of questions from our side and maybe following up on Rob’s line of questioning on the subprime discussion, maybe viewing it from another angle, but we’ve heard some of the auto lenders really discussing some irrational actors particularly within the subprime market have you seen any changes in credit underwriting loan standards for autos more recently?

Bill Berman

This is Bill, no we really haven’t, our subprime business for the fourth quarter was 10% for the full year we’re at 11%. So it actually dropped slightly in Q4, but there has been no material impact as far as credit availability.

Dave Tamberrino

Okay, that’s helpful. And then on the digital initiative not much in the prepared remarks, I don’t recall how is that tracking, how much spend is left, are you fully transacting online now? And then along those lines has there been any negative impact from your reduction in third party relationships throughout the year?

Mike Jackson

Yeah you didn’t hear much discussion about because it’s complete success. We made the pivot last year away from third party lead providers who required a substantial additional discount and already get the business and we’re expected to business with.

The third party lead providers who we stayed with and they are now about 8% of our business overall, we have wonderful new partnership where we’re allowed to bring our brand into their sites, which we -- and that is a condition of doing business with us. And so that is a huge step forward and as I said we’re growing from trending towards 15% of the business with third parties in a couple of more years it would have 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 site, which is a spectacular success, the customers like the ability to be able to transact on the site. We still have capabilities that we’re adding step-by-step that continue to roll out I think the most difficult piece remains the documentation that may push into 2017.

There is different pieces of it that we can get done, but we still need some regulatory change to get it completely done. So 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 probably hit peak, we’ll 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 going to tackle documentation.

Dave Tamberrino

Okay, that’s fair. And as it relates to the $100 million that you guys called out over a year ago. I mean it sounds as if you’ve maybe spend over half of that and the remainder is in 2016, is that fair?

Mike Jackson

So the $100 million was what we are going to do I forget, which year it was ‘14, ‘15, I don’t remember exactly and it was a combination what we were going to invest in the brand that we could attract traffic to our sites and the digital capability of it, [ph] so 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 sites they were happy with the experience.

So they were declaring victory and as far as exactly where we are on that $100 million I think we’re probably through that, but still continue to be investment in ‘16. We’ve already said on the marketing side we’ll 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 ‘15 without an increase.

Dave Tamberrino

Okay, that’s very helpful color. Thank you, Mike. And then just finally on the PNS same-store comp declaration that we saw as we’ve seen in the last couple of quarters. First question is do you think the underlying mid-single digit growth for that segment guidance still holds? And then secondly as it relates to elevated recalls where are we with some of those that are outstanding on the Takata side and maybe some of the GM and obviously BW I don’t think there is a fix out there yet. But how much more gas is in the tank there for recall to help push growth in PNS going forward?

Bill Berman

This is Bill. First off on parts and service, we see continued strong growth in parts and service as far as it relates to recalls Mike 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 the air bags. In addition Ford just announced a large call 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 air bag to more broad spectrum of units and manufacturers. BW corrector is no fix that's been called out right now. But that represents a very small percentage of our business less than 1%. So there will be no real impact to us on that end. But parts and service will continue to remain strong.

Dave Tamberrino

Thank you very much.

Mike Jackson

So that was our last question. Somebody said it earlier in a statement calling out our ability to adapt to circumstances, how we’ve demonstrate 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 our 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 lot of 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.

Operator

This concludes today’s conference. Thank you all for joining.

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