2/16/2021

speaker
Operator

Good morning. My name is Jacqueline and I will be your conference operator today. At this time, I would like to welcome everyone to the AutoNation fourth quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Rob Cortero, Vice President of Investor Relations. You may begin your conference.

speaker
Jacqueline

Thank you. Good morning. Welcome to AutoNation's fourth quarter and full year 2020 conference call and webcast. Meeting our call today will be Mike Jackson, our Chief Executive Officer, and Joe Lauer, our Chief Financial Officer. Following your remarks, we will open up the call for questions. I will 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, 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 our container of press release issued earlier today, and in 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. And now I'll turn the call over to AutoNation's Chief Executive Officer, Mike Jackson.

speaker
Mike Jackson

Good morning, and thank you for joining us. Today we reported all-time record quarterly results with adjusted EPS from continuing operations at $2.43. an increase of 94% compared to last year. During the fourth quarter, same-store revenue increased $265 million, or 5%, compared to the prior year, as solid growth in new use and customer financial services revenue was partially offset by declining customer care, which has experienced a slower recovery correlated with lower miles driven. New vehicle inventory levels remain constrained, and we expect demand to exceed supply for an extended period. Given these dynamics, we remain focused on optimizing our business in the current operating environment. We expect industry sales to approach 16 million in 2021, with strong retail sales growth compared to last year. We've seen a solid growth in 21, with January trends in line with our annual forecast. For the quarter, same-store total variable gross profit per vehicle retailed increased $765, or 21%, compared to the prior year. Same-store new vehicle gross profit per vehicle retailed increased $919, or 50%, And same story, used vehicle gross profit per vehicle retail increased $127.09% compared to the prior year. We drove significant SG&A leverage in the quarter. Adjusted SG&A as a percentage of gross profit was 63.8% for the quarter, representing an 820 basis point improvement compared to the fourth quarter of 2020. We remain committed to operating below 68% SG&A as a percent of gross profit on a long-term basis. We are continuing our opportunistic capital allocation strategy that balances investing in our business and returning capital to shareholders. We expect to allocate capital towards the AutoNation USA expansion, share repurchase, and franchise expansion. acquisitions. Today, we announced our board authorized an additional $1 billion of share repurchase from October 22nd through February 12th. We brought back 6 million shares or 7% of our outstanding shares. We remain on track to open five new AutoNation USA stores by the end of this year. The stores will be located in Austin, Phoenix, and San Antonio, and two stores in Denver. We also entered the planning phase to open an additional 10 AutoNation USA stores in 2022. These stores will benefit from the AutoNation brand and its proven customer-friendly processes. We have set the long-term goal of selling over 1 million combined new and used retail units per year. We recently announced that we have enhanced AutoNation Express, our integrated retailing solution that provides customers with a seamless and intuitive omni-channel shopping and purchase experience. AutoNation Express is powered by real-time customer insights that provide a highly personalized, mobile, optimized, step-by-step digital experience. I'll now turn the call over to Joe.

speaker
Joe

Thank you, Mike, and good morning, everyone. As Micah highlighted, today we reported adjusted net income from continuing operations of $213 million, or $2.43 per share, versus $113 million, or $1.25 per share, during the fourth quarter of 2019. This represents an all-time high quarterly EPS and a 94% increase year-over-year. Results were driven by solid growth in new, used, Customer financial services profitability partially upset by a decline in customer care. During the quarter, new vehicle demand continued to exceed supply while our Will Buy Your Car program supported our used vehicle inventories. Fourth quarter 2020 adjusted results exclude a non-cash accounting loss of $62 million after tax for $0.70 per share associated with our equity investment in Vroom. Moving to the balance sheet and liquidity, our cash balance at quarter end was $570 million, which combined with our additional borrowing capacity resulted in total liquidity of approximately $2.3 billion at the end of December. Note, in January of this year, we paid the maturity of our $300 million 3.35% senior notes from available cash on our balance sheet. Our covenant leverage of debt to EBITDA declined to 1.8 times at the end of the fourth quarter, down from 2.0 times at the end of the third quarter. Including cash and youth plan availability, our net leverage ratio was 1.3 times at year end. During the fourth quarter, we sold 3.1 million shares of our equity investment in room for proceeds of $105 million. Early in 2021, we sold the remaining shares of Broome for proceeds of $109 million. So in total, we realized a cash gain of $165 million on our investment. AutoNation remains committed to delivering shareholder value through capital allocation, which includes attractive organic growth opportunities, a disciplined acquisition strategy, and opportunistic share repurchase. Our AutoNation USA expansion provides an attractive growth opportunity, and we remain on track to open five new AutoNation USA stores in 2021, an additional 10 in 2022, as Mike addressed earlier. During the fourth quarter, we repurchased 4.7 million shares of common stock for an aggregate price of $302 million. Year-to-date in 2021 through February 12th, we repurchased an additional 1.3 million shares for an aggregate purchase price of $95 million. Today, as Mike mentioned, we also announced that our board has increased our share repurchase authorization by an additional $1 billion. With the increased authorization, the company has approximately $1.1 billion available for additional share repurchase. And as of February 12th, there were approximately 82 million shares outstanding, excluding the dilutive impact of certain stock awards. Looking ahead, we will continue to balance investing in our business with opportunistic share repurchase and acquisitions. With that, I will turn the call back over to Mike.

speaker
Mike Jackson

Thank you, Joe. 2020 was an unimaginable year, but our associates came together and delivered record results. We sold our 13th millionth vehicle in December, the only automotive retail in history to do so. We have raised over $25 million in the fight against cancer. We created the largest and most recognized automotive retail brand, and we did it one sale, one service, one vehicle at a time. The acknowledgement and brand awareness continued when AutoNation was recognized for the third year in a row, according to reputation.com, as having the number one reputation score for public auto retailers. In 21, we're celebrating 25 years of leadership, innovation, excellence, and recognition as one of the most admired companies in the world by Fortune magazine. AutoNation was the highest ranked automotive retailer on the list. Congratulations to all 21,000 AutoNation associates for achieving such tremendous success. We'll now take your questions.

speaker
Joe

Operator?

speaker
Operator

I would now I'd like to remind you that if you'd like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. Your first question comes from John Murphy from Bank of America. Your line is open.

speaker
John Murphy

Good morning, guys, and congrats on a great quarter and execution here. Michael, it's just a first question on the cap allocation because it seems like you turned on the spigot again on share buybacks, which seems like it makes sense. So, I mean, that's a good, you know, stewards of capital over time. But, you know, when you juxtapose that versus the opportunity on automation, you know, express and what you can do with this omni-channel approach, I'm just curious if you think – that Express is where it needs to be, or if a lot more capital needs to be put there to really ramp it up and advertise it to get some of the hot sauce routine or some other names to put it politely. I'm just curious what you think you need to do there. If it's a question of capital or advertising or emphasis, and how do you judge suppose that versus buybacks and acquisitions? Excellent question.

speaker
Mike Jackson

John, I'll go first, and then I'll turn it over to Joe. So, look, the first priority on investment is the company, and we're making a significant and have made a significant investment in digital that is remarkable. The capabilities, we've built a platform that has the capability to perform for the entire enterprise day in, day out. And that surge investment period is thankfully behind us, and we have the performance that we need and we want. We, of course, will on a sustainability basis continue to invest in digital, but the surge investment period is behind us. We're continually investing in our USA stores. We're very confident and optimistic about it. And here you're absolutely right, John. We intend in 2022 with some of our 10 new stores to move into new markets where we're not today. And we have budgeted additional communication that as we don't rely on markets where the AutoNation brand is strong and established that we will need incremental marketing dollars for that. But investment in USA. We will also do, I expect, some acquisitions in new vehicle franchises that fit our strategy and our footprint, and we expect that to happen. And now I'll turn it over to Joe, because we are in the position that we can do it all with very low leverage on the company. And, Joe, why don't you take it from there?

speaker
Joe

Thanks, Mike. To reinforce... You know, you take the extremely strong cash flow and an under-leveraged balance sheet, we really do have the wherewithal, and frankly, there are very attractive opportunities in front of us. As Mike said, the first priority is always going to be to reinvest in the business, which we have been doing and will continue to do. As Mike said, the significant investment in digital is behind us, and in front of us is the opportunity on AutoNation USA, which we see very attractive returns. Beyond that, as Mike said, we are going to continue to be opportunistic in M&A. We do have a pipeline, but we'll maintain discipline and then continue to believe there's tremendous value in our stock. We have obviously been active in that historically, including recently, and we'll continue to do that going forward.

speaker
John Murphy

And just a follow-up to that, it seems like the attitude of the automakers towards yourselves and the larger groups as far as approvals on franchise acquisitions seem to be either loosening up or moving more towards collaboration, if you will. Are you seeing that? And could we see automation, as you said, utilize your underlevered balance sheet to make bigger and maybe more robust as opposed to 1Z and 2Z acquisitions?

speaker
Mike Jackson

Joe, could you take that, please?

speaker
Joe

Sure. So I think it's hard to say across the entire spectrum how the OEMs are feeling. I can tell you as we've looked at opportunities, we're very mindful of location, relationship, and we do believe there are very viable opportunities for us to acquire within the constraints that are often imposed. So we don't see that as an inhibitor to our strategy. albeit one that's very focused and disciplined.

speaker
John Murphy

Okay, that's helpful. And then just lastly, Mike, I think some of us, or maybe a lot of us, would love you to stick around forever, but there's this search going on, and I'm just curious if you can give us an update on how that's progressing, timing, how we should think about that stuff.

speaker
Mike Jackson

Yes, absolutely, John.

speaker
John Murphy

If you're still around as chairman, are you going to remain on the board?

speaker
Mike Jackson

So we're actually taking a step today, you know, because two things. As I look at succession, as we previously announced in 2019, we will split the role of chairman and CEO with my departure. And, you know, We've taken the step of going ahead and doing that because... We have a long-serving director, Rick Burdick, who's 30 years plus with the company, two years as lead director, very successful. So the board met yesterday and selected and elected Rick Burdick as the chairman of the company. So this should give everyone a lot of confidence and trust that we have the right way forward. We have someone in the company assuming this responsibility. Rick will also lead the search process. or the new CEO, which will kick off in the spring. But half the equation is already answered with Rick becoming chairman.

speaker
John Murphy

Got it. Okay. Thank you very much, guys.

speaker
Operator

Your next question comes from Brett Jordan from Jeffries. Your line is open.

speaker
spk04

Hey, good morning, guys. Good morning. When you're sourcing used inventory, and obviously you're talking about we'll buy your car, are you seeing any recent changes in the competitive landscape, obviously others trying to execute that strategy or possibly some of the competitors being more aggressive with maybe negative equity financing to attract trades away from you, you know, to sort of landscape on used inventory?

speaker
Mike Jackson

Yes, we've been very successful in our pre-owned business. As you see, we've outperformed the marketplace in the fourth quarter with an increase in revenue in the fourth quarter of 12%, which is quite impressive. And of those vehicles we retailed, fully 85% came from internal efforts of AutoNation. We either took them as in trade or we'll buy your car, or we took them in from off-lease. So, the machine that we've created is quite impressive. you know i view it as an arbitrage business that our ability to acquire inventory at uh the right price and pay a fair price to our uh uh customers and then recondition it at speed and get it uh on the front line and present it in a one price environment to our customer is obviously a winning formula of this combination of brand customer experience and digital capability We think it's sustainable. It's one of the reasons we're investing in USA. So five more stores this year, 10 more stores next year.

speaker
spk04

Okay, great. And then a follow-up on customer care. You sort of called out that, and obviously vehicle miles traveled being down is impacting service demand. But have you seen any cadence of improvement as VMT has come back? And I guess in that theory, we should be lapping, the last of the negative comps should be right about now when we start going against the real declines in VMT in March and April of last year. Is that a fair way to think about it?

speaker
Mike Jackson

It is. We obviously, from the dramatic lows, we are past that. We estimate at the moment that miles driven are down about 10 percent. Our actual customer care business in the fourth quarter is down four or five percent, something like that. And so I We view it as a gradual recovery, and obviously we have opportunity against the extreme situation that existed when the first pandemic broke out and the shutdown and shelter in place. Joe, why don't you talk about how you think customer care will unfold this year?

speaker
Joe

Thanks, Blake. Yeah, and I'll just reiterate. Again, as you look at kind of the business recovering situation, If you think about the brackets, customer pay, warranty have all recovered. Internal, obviously, with the volume of business we're doing, it's actually recovered quite nicely. It's collision that has lagged, as Mike indicated, really driven by the miles. As you look out through the year and you're correct, it's really going to be starting in April. that we saw the significant decline associated with COVID, April, May in particular, being two months that were dramatically impacted, as you recall us talking about last year. But really, I think you're going to see throughout Q2, Q3, and even in the Q4, favorable comp year over year in the customer care business, in particular as collision, I think, will recover as miles driven recover through the course of the year. with the benefit of the vaccine and, if you will, the continued reopening of the country.

speaker
Blake

Great. Thank you. Sure.

speaker
Operator

Your next question comes from Rajat Gupta from J.T. Morgan. Your line is open.

speaker
Rajat Gupta

Hi. Good morning. Thanks for taking my question. You provided some color on the new vehicle business in January, how it's tracking in line with the forecast. Any color on how the used vehicle business is performing. You talked about the inventory levels and the sourcing, but any color on how the unit comms have been tracking so far year-to-date, January, early part of February. And you talked about the parts and services business also, more on the buyer-driven side. Has the customer pay and warranty work started, too?

speaker
Mike Jackson

come back pretty quickly i'm assuming there's some kind of demand there that should that should continue to flow through so do you discuss your thoughts there and i have a follow-up so our our view is that the new vehicle business will improve by about seven percent uh this year approaching 16 million units there is demand for higher volume than that but i don't see a path on the production side two there. But it's a very opaque, uncertain, disrupted situation on the production side, where you now have this combination impact of the pandemic with the shortages of the chips to produce vehicles. One of the things we went through when production was resumed after the shutdowns was manufacturers made vehicles without even having all the parts and then parked them for completion. That turned out to be a fiasco, and we literally had vehicles that we were told were ours and were on the way that didn't show up for six, seven, eight months. And so the manufacturers have stopped that practice and really don't produce unless they have a sight line to all the parts. And when this combination of the pandemic and the chip shortage is going to clear, I don't think anyone really knows. So I think the demand is there. Clearly, I think if you look at the extremes of last year and you sort of smooth that out, I think it's – fairly safe statement to say that new volume will be up 7% this year. The demand is there. And January tracked along that line. I think the pre-owned business for the industry is probably relatively stable, but I think we will outperform as we did in the fourth quarter. That's our goal. Availability, as I said, we look to generate as much on our own means and terms as we can. We've been very successful at that. We'll continue working at that. And customer care, you know, again, it's a situation of miles driven. And when do people fully resume the behavior? that existed pre-pandemic? That could take a while. I don't know exactly. Joe, what would you like to add to that?

speaker
Joe

Let me touch a couple things. One, going to the used, as Mike indicated, I think one of the benefits we really do have is the sourcing. So used is a lot about having the inventory. With 85% of our inventory being sourced directly from customers versus many of the peers are 50% or less, I think that clearly does serve us well and positions us well for 2021. And on the – let me dissect a little bit customer care. I think you asked specifically about customer pay and warranty. So if you look in the fourth quarter, the entire customer care business was down about 3%. Customer pay in that same general directions down a little bit more, but not much. Warranty similar, kind of in the same zip code, if you will. Internal, again, being the area that actually saw positive growth, again, associated with the volumes of units. And as indicated, collision really is the area that has dragged, if you will, the slowest to recover. with miles down 10%, collision down a little bit greater than that. Again, I think as the miles recover, we'll see that portion of the business in particular improve and are very optimistic about customer care as we go through 2021. Got it.

speaker
Rajat Gupta

That's helpful. And the customer pay and warranty, you know, just down slightly in the fourth quarter. Did it exit at positive rates in December and into January here, or is that still comping down from your perspective here recently?

speaker
Joe

It's still slightly comping down, but the trend continues to be a positive one.

speaker
Rajat Gupta

Got it. That's super helpful. Thanks for the call. And then just in Automation USA, any metrics you can share so far? for the five stores, you know, what the profitability was in the quarter, you know, like what the units are looking like there today and, you know, just the economics of those, as you know, they continue to mature over the last couple of years.

speaker
Mike Jackson

Gary, you take that, please.

speaker
Joe

Sure. So the five existing stores continue to operate successfully. And as you know, those were kind of a Five sample stores, if you will. We indicated the pre-tax slightly below 2 million, kind of run rate. Again, continues to be very positive what we're seeing. And as we roll out the five new locations set to open this year, increasingly optimistic. The forecast that we provided previously about units, about the monthly pre-tax, we feel very good about. And so we continue to believe that the monthly pre-tax, when it gets to a full run rate, is in the $200,000 a month area. And I'm very positive about the economics and very encouraged by, from a real estate and build standpoint, the progress we're making.

speaker
Rajat Gupta

Got it. Great. That's super helpful. Thanks for all the color out there back in here. Thank you.

speaker
Operator

Your next question comes from Stephanie Benjamin from Truist. Your line is open. Hi, good morning.

speaker
John Murphy

Good morning. Good morning.

speaker
Varum

I wanted to touch a little bit on your decision to exit your Vroom investment. Just curious, you know, from the timing of that or, you know, if that played out, you know, based on your expectations and how we should think about, you know, what this means for our future investments going forward.

speaker
Mike Jackson

Excellent question. Glad you asked. So, look, we are not an investment enterprise. When we made the partnership with Varum, it was with the hope that we would find synergetic common grounds to work together, whether that was in our expertise, reconditioning, digital, whatever. We just thought there could be some mutual benefit for the two companies and that we could do something together. Well, none of that worked out. And so then it became purely an investment, which is really not what we intended. And, you know, once it was clear this was just an investment that the companies would not be doing business together, we decided to declare victory and move on. And I think we originally invested $50 million and and finished receiving, Joe, was it $215 million we got back? Something like that. $215 million in total. $215 million in total. So an excellent investment, but... The two companies on an operating basis were doing nothing together. Nothing. So the correct decision was to exit the position. Now, the other investment we have is Waymo. And I can tell you on an operating basis, we are doing things together. That is interesting and can lead to something. So we stay on that journey. And we're optimistic and hopeful that all that works out. But I want to be clear that We only took these two steps because we thought the companies could do business together. That was win-win from both companies. When it was clear with Maroon that was not the case, we exited the position.

speaker
Varum

Got it. That's very helpful. question on your SG&A performance, you know, on an adjusted level, another record quarter and certainly well below your target or, you know, kind of that sub 68%. Is there any, you know, desire to now lower your own long-term target just given your performance the last two quarters or how would you kind of chalk up your outlook going forward just given the performance you've seen the last two quarters? Thank you.

speaker
Mike Jackson

The performance is outstanding, but that doesn't mean today we're going to lower the target from 68. We'll be at 68 or below. That's our commitment, and so far we're doing pretty good on our commitment. I can tell you that we feel the steps we've taken over the last two years have dramatically improved the cost efficiency and effectiveness of AutoNation on a sustainable basis. And we'll see how the actual numbers come in, but we really like our position. But as far as moving the goalposts today on the 68, we're not doing that. Joe, what would you like to add?

speaker
Joe

Yeah, thanks, Mike. So Mike is absolutely correct. We have clearly realized the benefits of prior investments and I think a better discipline in running the business. So as you look at SG&A, I mean, growth was up $88 million and SG&A was down 17. That's remarkable leverage, obviously. But it comes across really all three categories of SG&A. Compensation, again, made some difficult decisions through the pandemic operating with fewer people. I think learning how to do that very effectively leveraging technology both in the store and in the back office. So we had compensation despite obviously a significant portion of the compensation being variable down 380 basis points year over year. Clearly an area we're seeing benefit in digital is in advertising. BOUGHT THAT DOWN 80 BASIS POINTS YEAR-OVER-YEAR, AND WHILE WE STILL ADVERTISE, I THINK, TO A GREATER DEGREE THAN MANY OF OUR PEERS, I THINK THE RESULT AND THE SUCCESS IN THE BUSINESS IS REFLECTIVE OF THAT. SO I THINK WE'VE BEEN VERY PRUDENT IN FINDING THE RIGHT LEVEL, ALBEIT A REDUCED LEVEL IN LEVERAGING OUR CAPABILITIES. AND THEN FINALLY OVERHEAD, AGAIN, DIFFICULT DECISIONS IN PEOPLE, AND THEN A DISCIPLINE WITHIN THE OVERHEAD. driving that down 350 basis points. So from my perspective, driving it down over 800 basis points really across all three categories is a commitment we've made and a change in operating. And as Mike said, we are committed to continue to operate at or below 68%. Great.

speaker
Operator

Thank you guys so much.

speaker
Blake

You bet.

speaker
Operator

Your next question comes from Rick Nelson from Stevens. Your line is open.

speaker
Blake

Thanks a lot. Good morning, guys. I'd like to ask you about the acquisition environment, what you're seeing there in terms of opportunities, what kind of brands, geographies you're looking at, and multiples that you're seeing.

speaker
Mike Jackson

Yeah. We definitely have A lot of conversations going on, a lot of negotiations, and I fully expect we'll have some new vehicle franchise acquisitions this year. But I'm not going to put a specific number on it. We're very happy with the footprint we have in new vehicles, and we spent a lot of time, Rick, as you know, optimizing that. And one of the reasons for our success today is, that we really took the time to go through every store we had and decided if they fit or not. I would say the number one issue when we look at an acquisition is whether it will be a cultural fit with automation or is it a complete reinvention of the dealership in order to meet our operating standards and how we do business. I would say that's most important. And then, of course, We're very comfortable adding within our existing infrastructure with new vehicle franchises. I don't expect much outside that, but we'd be open to doing it. And, of course, we're very disciplined on the cost side. And you have to be careful around multiples because 2020 is a very odd year to base anything off of. You sort of have to go back. and look at 18 and 19 and what the world was like. So that's our approach. And so I think we can do all of the above, build the USA stores, invest in our digital capabilities, keep all our existing stores fresh, do some new vehicle acquisitions, and repurchase our stock, which we think is very attractive.

speaker
Blake

Thanks for that, Keller. One of your peers talked about the potential for public company consolidation. I'd like to get your view on that and whether you think the OEMs would be supportive of something like that.

speaker
Mike Jackson

So I'll give you my view. What I've experienced is that when you become as large as we are and you make an acquisition, pick, say, brand Z, and you already own 25 brand Z stores and you want to buy number 26 and 27, in the negotiation with the manufacturer, they will ask, okay, we'll improve number 26 and number 27, but let me tell you what you have to do from store one through 25 in order to get approval for the next increment. And if you really add that demand onto what you're acquiring, it really changes the return on investment. And so the higher you climb the mountain, the more difficult it becomes to keep climbing. Now, we're the only one over $20 billion revenue, so I'm talking from a point of view that no one else has experienced yet. That's our experience. It's one of the reasons for us going to the AutoNation USA stores is because now we are in charge of our own destiny. We're able to build these stores for $9, $10 million each. We do not need manufacturer approval. All we need is a brand, a great customer experience, and the digital ability to penetrate a market. And the size of the market is much larger. So I'm in charge of my own fate, my own destiny. I don't need manufacturer approval that goes all the way back to the beginning of time. And all I need is the capability to execute. And we've gone through the most difficult period, which is building the brand, perfecting the customer experience, having a digital capability. So that on an invested capital return, return on invested capital is a very winning equation. And one of the reasons for it, is spot on rick what you just called out our experience is when you get over 20 billion and the number of stores you have not in the thing you can't get manufactured but you can but um it's it's quite a negotiation that makes a lot of sense uh thanks and good luck thank you your next question comes from adam jonas from morgan stanley your line is open

speaker
Adam

Hey, Mike, first best of luck. Hey, Adam, good morning. Hey, good morning. Best of luck with the new chapter. I'm sure we're not going to see the last of you. Thank you. Best of luck. Thank you, thank you, thank you. You've got a lot more to share. Mike, I'm curious, why are so many startup EV OEMs going down? either going direct-to-consumer or planning to go direct-to-consumer. And when we put them on the spot at least saying, hey, why don't you use an AutoNation or, you know, some of the best-of-breed existing franchises to really get the leverage and time to market and stuff, you know, why are you going B2C by yourself? Why do you think that is? Are they foolish?

speaker
Mike Jackson

Yeah. So I think they're making a mistake. And, you know, And I think the verdict is close to coming in, Adam, quite frankly. So what you avoid by going the route you're going is the massive cost of investing in a customer care infrastructure for a very sophisticated, technically complex product. And by the way, this thought that electric vehicles exist will not need care is also folly. As a matter of fact, they are more complex than any kind of combustion vehicle I've seen as far as the expertise and the equipment you need, because we're investing heavily with all the manufacturers to be able to care for electric vehicles. So if you want to skip that whole infrastructure footprint to care for your customers, you can do that. by the route that Tesla has gone and some others have gone. But listen, we're taking Teslas in trade all the time. And one of the number one issues we hear when they trade it in is that they're just frustrated at the lack of a enjoyable customer care experience for when something does go wrong. And so I think that's what they're trying to bypass. But I think it's a mistake, and I think it'll be proven wrong. And I think the strength of the win-win-win equation of the new vehicle franchise, a win for consumers, a win for the manufacturers, and it can be a good investment for dealers and publicly traded investment groups, has been proven as far as our sustainability, viability, and value in the marketplace. So you can go to our website today, AutoNation.com. You'll see a huge flag for electrification, all the vehicles we offer from all the various manufacturers. We're in the game, and I think this model is viable, will win, and others will ultimately have to deal with this issue of how are they going to care for their customers?

speaker
Adam

Got it, Mike. Thanks. Thanks for your thoughts.

speaker
Operator

Great. Your next question comes from David Whiston from Morningstar. Your line is open.

speaker
John Murphy

Thanks. Good morning. I guess I wanted to go back to the earlier comment on consolidation and just another thing I've been hearing some chatter about would be if there were consolidation amongst the public's that those larger players could effectively block out the digital startups on used vehicle limits or at least on late model use. And I'm just curious, do you agree or disagree with that?

speaker
Mike Jackson

So the whole issue of consolidation and whether two smaller public traded companies could come together, you know, I can't say because I don't have one of the smaller ones. But I can tell you as far as us acquiring one, I don't see that it's going to happen because you immediately run into a problem of too much density in a given market that you're going to have to divest a significant part of what you just bought. At least that would be for us. So overlap, too much density in a given market, is a real genuine issue for us, and so we will not be acquiring another public-traded company. I don't see a path to the finish line. And your other point was what? Question?

speaker
John Murphy

Well, that was basically – well, I was talking about the – basically you could form the market on late-model use inventory and block out the Carbonas and other digital websites from getting to the level of inventory.

speaker
Mike Jackson

The phone broke up, so I didn't really hear the answer. But I can tell you, who do I think wins in this huge pre-owned marketplace? I think companies that have a brand with a great customer experience and digital capability will take share in this huge pre-owned marketplace from everyone else. I think that's what's happening. And then you have to say, well, does my model make money or not? So we've already proven our model makes money, CarMax's model makes money. But I think brand, great experience, and digital capability is a winning combination in the pre-owned marketplace.

speaker
John Murphy

I think that's helpful. And then on electric vehicles, can you just talk a little bit about, especially given you're in places like Texas and Florida, In addition to the EV-friendly California market, outside of the Tesla demand, how much demand is there for EVs? Is it really ramping up, you've seen in the past year or two, or is it still really trailing Tesla?

speaker
Mike Jackson

Now, we're definitely past an inflection point on the journey to electrification, and there's no turning back. But it is gradual. If you want some numbers for me, I think if you go to 2030, 20% of all new vehicles sold will be fully electric. However, this is not like going from the flip phone to the smartphone where you throw away all the flip phones. I think then 6% of the units in operation on the roads of America are all electric by 2030. Internal combustion engines are going to have a lifespan of 20, 25 years. It's not obsolete from one day to the next. There is a huge segment of consumers that the affordable transportation that will come with existing internal combustion engines will go on for years and years and years. So the transition for units in operations is a is a decade-long process. The other insight I can give you as far as our customers who are buying electric vehicles, what they like about it, as well as all the obvious things, is they like not going to the gas station anymore. And as long as you have a range of 250 miles plus, how they use the vehicle is they use it for daily use, and when they get home at the end of the day, they plug it in. either in their garage or their parking unit in the condo. And every morning they come out and they've got a fully charged vehicle and they never go to a gas station. They're just delighted. And all our customers who do buy electric and use it that way have another vehicle. They'll have a Suburban or some other vehicle with an internal combustion engine and use that for long trips and going around. So I think the – Journey to Electrification is here. We embrace it. We're going to be part of it. We're excited with what the manufacturers have in the pipeline, everything from the Hummer to the Mustang, Mach, and Volkswagen. Taycan is a sensation. The list goes on and on. It's a very exciting business to be in.

speaker
John Murphy

Yeah, I agree. There's a lot of cool change coming, and I'm hearing great things about some of these ones you just mentioned. Staying on EVs, in your opinion, change the demand for leasing perhaps in a negative way because there's more residual value risk for the capital finance arm, and maybe they'll want to pull back on leasing?

speaker
Mike Jackson

We haven't seen that yet. So, so far, the residual values on electric vehicles are fine. I see no yellow flags or red flags.

speaker
John Murphy

Okay, well thanks for the call. I appreciate it. Absolutely.

speaker
Operator

There are no further questions at this time. I would like to turn the call over to management for closing remarks.

speaker
Mike Jackson

Well, we have no closing remarks other than we're delighted you joined us today. Thank you very much for your questions. All the best. Thank you.

speaker
Operator

This concludes today's conference call. You may now

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q4AN 2020

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