AutoNation Inc (AN) 2021 Q2 法說會逐字稿

Good morning. My name is Shelan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the AutoNation's Second Quarter 2021 Earnings Conference Call. (Operator Instructions)

Thank you. I would now like to turn the call over to Rob Quartaro, Vice President, Investor Relations. You may begin your conference.

Thank you. Good morning, and welcome to AutoNation's Second Quarter 2021 Conference Call and Webcast. (Operator Instructions) Leading our call today will be Mike Jackson, our Chief Executive Officer; and Joe Lower, our Chief Financial Officer. Following their 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 are contained in our 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.

Good morning, and thank you for joining us. Today, we reported all-time record quarterly results with adjusted earnings per share from continuing operations of $4.83, an increase of 243% compared to last year. This marks AutoNation's fifth consecutive all-time record quarter with stellar performances across all our business sectors. Our second quarter same-store revenue was an industry-leading record $7 billion, which was up 54% compared to the same period a year ago and up 33% compared to 2019.

The COVID-19 pandemic caused a dramatic shift in consumer spending priorities. They want bigger homes and the safety and convenience of personal transportation. Combined with low interest rates, this strong vehicle demand has led to faster inventory turnover and consumers are buying vehicles before they even arrive at our stores. We expect the current environment of demand exceeding supply to continue into 2022.

New vehicle shipments for the quarter were up 100% compared to last year and only down 6% compared to 2019. With demand outpacing supply, manufacturers are unable to increase their available inventory and with a limited supply of new vehicles, many consumers are opting for preowned vehicles. With consumer demand high for personal transportation, we're aggressively moved to increase our availability of preowned vehicles. Almost 90% of our pre-owned vehicles retailed in the second quarter were self-sourced. Self-sourcing is a core capability and a competitive advantage for AutoNation. Our proven acquisition strategy, successful We'll Buy Your Car program, digital tools and operational execution allow us to source attractive inventory, drive used vehicle shares and deliver a peerless customer experience.

AutoNation same-store preowned units were up 37% year-over-year and up 32% compared to 2019. The continued strength of our preowned business was also evident in the success and profitability of our 6 AutoNation USA stores. We opened AutoNation USA San Antonio in May. The store exceeded expectations and the store was profitable in its first full month of operation. We are on track to open 4 additional stores in the second half of this year.

Turning to capital allocation, from January 1 to July 15, we repurchased 15% of our shares outstanding. We remain committed to opportunistic capital allocation and delivering value to our shareholders.

I'll now turn the call over to Joe Lower, our Chief Executive -- Chief Financial Officer.

Thank you, Mike, and good morning, everyone. Today, we reported adjusted net income from continuing operations of $385 million or $4.83 per share versus $124 million or $1.41 per share during the second quarter of 2020. This represents an all-time high quarterly EPS and a 243% increase year-over-year.

While year-over-year comparisons benefit from lapping the early stages of the COVID-19 pandemic last year, we've also demonstrated impressive growth compared to a more normal operating environment in the second quarter of 2019. As Mike stated, second quarter revenue for 2021 was $7 billion. On a same-store basis, revenue increased $2.5 billion or 54% and increased $1.7 billion or 33% compared to the second quarter of 2019, driven by growth in both the variable and fixed operations.

The current environment of demand exceeding supply continues to support strong vehicle sales and margins. For the quarter, same-store variable gross profit increased 85% year-over-year, driven by an increase in total combined units of 39% and an increase in total variable PVR of $1,354 or 32%. Further highlighting our impressive performance, our same-store total combined units increased 21% compared to the second quarter of 2019, with growth in new units of 12% and growth in used units of 32%.

Our customer care business continued to improve, with same-store customer care gross profit increasing 41% on a year-over-year basis and 8% compared to the second quarter of 2019. Taken together, our same-store gross profit increased 68% compared to the prior year and 52% compared to the second quarter of 2019.

Moving to costs, second quarter SG&A as a percentage of gross profit was 6 -- 56.5%, a 1,170 basis point improvement compared to the year ago period on an adjusted basis. Our strong performance continues to be driven by strict cost discipline, leverage of our digital capabilities and robust vehicle margins. As measured against gross profit, on an adjusted basis, overhead decreased 760 basis points; compensation decreased 380 basis points; and advertising decreased 30 basis points on a year-over-year basis. Floorplan interest expense decreased to $7 million in the second quarter of 2021 due primarily to lower average floorplan balances. This, combined with lower non-vehicle interest expense, a lower effective tax rate and fewer shares outstanding generated record adjusted EPS.

Turning to the balance sheet and liquidity, our cash balance at quarter end was $60 million, which combined with our additional borrowing capacity, resulted in total liquidity of approximately $1.6 billion. We continue to deploy capital to grow our business and drive long-term shareholder returns. During the second quarter, we opened our sixth AutoNation USA store in San Antonio, in Texas. As Mike mentioned, our newest store reached profitability in its first full month of operations. We remain on track to open 4 additional stores in the second half of 2021 and 12 more in 2022. Longer term, we continue to target over 130 stores by the end of 2026.

Year-to-date, through July 15, we repurchased 12.9 million shares for an aggregate purchase price of $1.2 billion, completing our prior authorization. Today, we announced that our Board has authorized an additional $1 billion for share repurchase. As of July 15, there were approximately 72 million shares outstanding. Despite the significant investments in our business and volume of share repurchase, our covenant leverage ratio of debt-to-EBITDA declined to 1.2x at the end of the second quarter, down from 1.3x at the end of the first quarter, based upon strong operating performance and cash flow generation. Including cash and used floorplan availability, our net leverage ratio was 1.1x at the end of June.

Looking ahead, we will continue to leverage our strong balance sheet and robust cash flow to invest in AutoNation USA expansion as well as opportunistic acquisitions and share repurchases.

With that, I will turn the call back over to Mike.

Thank you, Joe. We continued to demonstrate strong performance in the second quarter. Looking ahead, we remain committed to driving value through solid execution with industry-leading digital capabilities and continuing to deliver an exceptional experience for our customers. AutoNation remains an industry leader in customer satisfaction, with over 500,000 5-star reviews according to Reputation. AutoNation is the only automotive retailer to achieve this and an outstanding job by all our 21,000 AutoNation associates.

With that, we'll now take your questions.

(Operator Instructions) Your first question comes from the line of Richard Nelson from Stephens.

Congratulations. I'd like to ask about inventory. You're sitting at 14 days of supply, you're more profitable than you've ever been. I guess, where do you see days' supply going from here? What do you think is the optimal level of days' supply to maximize profits? When do you think things normalize?

Rick, yes, this is Mike. So I assume you're referring to new vehicles on. We do preowned first. As you know, a year ago, we moved very aggressive. We're very bullish on preowned and all that's culminated in our ability to increase preowned revenue during the second quarter by 65%, just a remarkable achievement.

On the new vehicle side, first I have to tip my hat to the manufacturers. They've done an incredible job to restart the global supply chain. Shipments for us in the second quarter were up 100% compared to a year ago, and we're only 6% down from 2019. Obviously, the chip shortage continues. The manufacturers have been very enlightened about how to meet the challenges of this. I really admire the way that they're producing what -- they're using the chips that they do have to produce vehicles that consumers want to buy. And in some cases, they'll produce vehicles and leave out certain features to keep the supply coming. And in other cases, they have produced the vehicles and are awaiting arrival of chips, just to plug them in and then they can ship them.

But the headline is that the demand is far higher than supply, and I think that continues well into next year. And I really don't know if we'll ever see a crossover point back to the old push system. There is a very healthy discussion going on within the industry of the shortcomings of the push system and that while the current situation is extreme, no doubt about it, maybe the best path is somewhere in between. You're not even going to get to the fork in that road until sometime into next year.

I guess, was my follow-up, do you think there is a potential paradigm shift here with the OEMs where they learn to live with less inventory, everybody seems to be more profitable in that environment? Or do we go back to the old bad habits?

As I told you, there is a very healthy discussion. Listen, this pandemic has been absolutely God-awful. It's just been unimaginable, shelter-in-place in America is unimaginable. However, there is a very healthy constructive debate going on within the industry that is a better way than the old push system. And this whole idea that you couldn't sell -- this obsession with immediacy on delivery and immediate self-gratification that drove the industry with the push system, I think that's really being rethought.

We are selling a huge percentage of our pipeline, which we make visible on autonation.com. And you can see what's incoming and you can -- we can match up vehicles with consumers in the pipeline and they come in and go out and take delivery. And a valuable lesson for the industry that this idea of having 4 million vehicles sitting on lots across America is the way to run an industry, I think is genuinely being rethought. And I'm optimistic. I'm optimistic.

Now the truth is somewhere in between, it's not 14 days supply. That's not optimal for anyone, but maybe it's 30 days, 36 days, sort of 30 to 40, somewhere like we run preowned, that's probably where the truth is. But the headline is demand is strong, the strong demand will continue, and this chip disruption is not coming to an end quickly, but let's not lose sight of the fact that shipments doubled from a year ago and are only 6%, 7% behind where they were in 2019.

Your next question comes from the line of Stephanie Moore from Truist.

I kind of -- I wanted to continue on the last set of questions there. And I think, Mike, you brought up an interesting point about just maybe the day supply isn't what it was kind of the pre-COVID levels but certainly higher than it is today. What does this mean from anything from maybe a footprint, a real estate standpoint? Does it make sense to have such a large footprint if we're holding less inventory or on the same level? What does it mean from your digital capabilities? And with that, I'd love to get an update on what you're seeing or what you saw during the quarter of just the adoption and usage of your digital efforts, that would be helpful.

You're actually spot on that this pandemic has also been an inflection point towards digitalization. We were ready because of the investments that we told you about. We made a surge investment in '13, '14 and '15, that really gave us a capability, resulting in a 65% improvement in pre-owned sales -- increase in pre-owned sales here in the second quarter on a revenue basis. And I don't think that's going backwards. But the U.S.A. strategy, the AutoNation USA strategy exactly describes our thinking that delivery centers remain essential points of purchase for the acquisition of preowned inventory remain central; speed to market and reconditioning centers remain essential; and that's basically what a USA store is, and we expect to build an additional 125 over the next several years.

We opened our sixth in a market where the automation footprint did not exist in San Antonio, Texas, and we are profitable in the first month. Congratulations to the entire team. We'll open the 4 additional stores in the remainder of the year and accelerate the build-out in future years. But speed to market, reconditioning costs, acquisition point and a delivery sense are essential, and we have the capability to build out a footprint in, ultimately, in the entire United States of America with AutoNation USA stores, profitably.

Got it. And then switching gears a little bit. I'd love to hear just what you're seeing, from a customer care standpoint, is very strong growth for the quarter. Do you see this as pent-up demand just as we kind of move through the pandemic and the country continues to open up? Or what can you say in terms of driving such a nice clip here in the second quarter?

Yes. So I think it's a combination of things. I don't think it's solely attributable to pent-up demand. If you kind of go through the categories, customer pay, the portion of it has rebounded most quickly as well as, obviously, the internal reconditioning is obviously tracking with the impact to the new volume and used volume. We're finally seeing collision kind of get back to its '19 level, which has been a little laggard and then warranty, probably of the 4 categories, is the slowest to recover. But as we track it on a monthly basis, we continue to see continued recovery and anticipate that will continue through the rest of the year.

Your next question comes from the line of John Murphy from Bank of America.

Mike, I just wanted to challenge you on something -- I don't usually challenge you on because usually, the challenger of the inventory, floated inventory. How do you define optimal inventory? Because with these very low inventories, you're generating record profits. So I mean I would define optimal inventory as the level that generates the highest profits, and that's what's occurring right now. And I think it's a little interesting to hear you say and other folks in the industry that usually are the more disciplined folks say, "Hey, we need a little bit more inventory." I mean, if you're putting up record profits, this tightness is really healthy for profitability. What is the optimal inventory to you?

Well, maybe I was expressing more a hope of where the industry would see as a new goal and not be going back to 70, 75, 80, 90 days' worth of inventory. There are issues today with the extremity of some of the shortages. And I don't see it remaining at this extreme level of this situation that we have right now. But I don't see it going back to the old way either. And I guess that's a big headline, John, which you discussed this a year ago, no one would be saying that. I mean, I said it 10 years ago, but I now think it's a very realistic goal.

Would I like it the way it is right now, forever? Happily ever after, Camelot? Absolutely. Absolutely. This situation, we can manage. I'm not sure that's where it's going to be a year from now, but I don't think it's going back -- the headline is I don't think it's going back to the old ways of a massive overproduction core system.

That's encouraging. I mean the other question that we get often is the GPU seem like they may be somewhat inflated at the moment because of this dislocation of supply and demand, which is a good thing. And folks are saying, you guys are just over-earning. But if I kind of normalize grosses as best I can, I'm coming up to an SG&A to gross somewhere in the low to fairly mid-60s, right? So meaning that you are -- half of this beat, at least, is coming from pure execution on your side, which means that the costs you've taken out are a lot more stickier structural than maybe you talked about before. I mean that 68% that you're talking about SG&A and gross before is kind of a level.

It seems like it's ticked down by 300 to 500 basis points. How do you think about that, going forward? Is that 68% still relevant? Or is your execution, which apparently, just based on [the calls] I'm doing, it's just much better than people have been thinking and you were thinking before? I mean, can you maybe reset the borrowing at 58%? Or how are you thinking about that right now?

So John, directionally, you are correct. And particularly, I'm going to talk about AutoNation. We had a surge investment in digital, '13, '14, '15, which took up our costs. We were very transparent about them, then called it out and are delighted with the digital platform and the digital capability and tools that we created today that are unique and proprietary to AutoNation.

So if you look at AutoNation's SG&A, while the surge period is over and we said at the time, these digital capabilities would bring us to a lower cost, which it has. And then when the pandemic hit, we said, well, okay, we're going to do everything we plan to do over the next several years. Now, so that accelerated additional cost savings. So it's really crude steps which has taken us to a permanently lower basis on SG&A. Absolutely no question about it. Now am I going to give you a number today? Probably not. But I would say, Joe, can you give us a number for the rest of this year? Where will we enter the year?

I think for this year, we'll be in around the 60% range. As you just alluded, Mike, there clearly are some permanent changes. If you look at the increase in SG&A, over 90% of that is coming through variable cost. We are doing a very good job of keeping the fixed costs fixed, with strict discipline and leveraging the digital tools we have. So we clearly are on a different trajectory than we thought even a year ago.

That's very helpful. And then just lastly, I mean, share repos have been massive year-to-date. I'm just curious to think if you think about cap allocation, I mean, you turned the tap on, if it makes sense to doing M&A and, obviously, you're reinvesting cash in AutoNation U.S.A. But as you look at this, I mean the investment opportunities on the acquisition side, I guess you're viewing those as really not that attractive at current levels and your stock is much more attractive, and that's why you're making that decision. Is that a correct interpretation of how capital is being reallocated at the moment?

That's a very fair statement. So we invest in our existing stores. No question, we keep our existing stores top-notch. Strategically, we're investing in USA, have a very ambitious rollout plan, culminating in having 130 of these built out in the next several years. And then we -- we'll see where it goes from there.

But also, John, and you know me, when I feel that AutoNation is an attractive price, we have not hesitated to buy aggressively. And we keep a strong balance sheet. We're investment-grade. But clearly, we're optimistic about the future, see things about as you described them, and therefore we view purchasing our own company, relative to the pricing we see as other choices, as the best use of that capital after having taken care of investing in our existing stores and building out USA. Joe, what would you like to add to that?

I think you nailed it, Mike. I mean the M&A pipeline is robust, which is demonstrating real discipline. And as you said, right now, if you look on a return basis, following AN USA and our existing stores, share repurchase has been the most attractive return. So we're going to continue a balanced disciplined approach. All the while, we're at very low leverage levels. So we have tremendous capacity to be opportunistic.

Seems very, very sensible given where your stock is right now.

Your next question comes from the line of Mike Ward from Benchmark.

Maybe to follow on with John's questioning about the digital side of it, a couple of things. Does the digital side of it improve the F&I side? I think you mentioned that 2/3 of F&I is coming in from vehicle protection. Does the digital streaming that you have and people looking online for different purchasing options, does that enhance the F&I revenue stream?

So the way we think about digital is the customers want to engage in a digital process, where they are empowered and it's of high value. However, they still want to come to a store for final delivery and final decision. And you might say, well, how can that be? What is the answer there? Well, they actually feel more empowered coming into the store than they do having the car show up in their driveway. That's in over 90% of the situations. I'm not saying there aren't exceptions to that.

Now our in-store process is all integrated and seamless with our digital process, and this includes the presentation and offering of AutoNation products. So if I look at the numbers right now, 55% of our customers, of our business, engage with us digitally first. They go through different levels of engagement depending on their preference, and we can go as far and deep into it as they want. Then they engage with a specific store, and our store process is very much in the Express lane. We love the adoption rate of our AutoNation customer care products, because it does benefit not only -- to us today, but we are building a repeat referral customer care business for the future, that has tremendous power and tremendous momentum.

So I think we found just the right line. And I've already said in the past, I think who wins in the marketplace of the future are companies that have a brand, a customer-friendly experience, a digital platform to interact with their customers and the operating ability to be very profitable. That's the combination that wins in the marketplace.

And is there any reason not to expect the elevated levels of F&I to continue?

I see no reason. It's -- 'cause here's why. Where -- it's not that we're raising prices on F&I, it's that the adoption rate of our products is going up and up, per transaction. And every year, it goes up because we improve the products, we improve the price value for customers, and we improve our skill at presenting them to customers. So I think that continues.

And just -- is there a huge difference on the F&I side between new and used? Or are they pretty comparable?

I think there's a slight difference. Joe, please?

Slight difference. Generally, the CFS is slightly higher on new vehicles than used, but we've seen increases really across all categories, both new and used and nearly all segments: domestic, import and luxury.

And all stores, both new and used, including AutoNation USA, have full digital capabilities, correct?

That is correct.

Correct.

Yes. It's a company-wide platform, that the entire offering of the company has presented new, preowned, certified preowned and most importantly, the entire pipeline of AutoNation. So if you're looking for a pink Suburban for whatever reason, and we have one going to the West Coast but you live on the East Coast, and you can see it's 6 weeks out, and you want it, we will redirect it to you. And that's a tremendous competitive advantage.

Yes, that's huge.

Your next question comes from Rajat Gupta from JPMorgan.

Congrats on the strong quarter. I just had a couple of follow-ups from previous questions. On parts and services, revenue is up roughly 10% versus 2Q '19 levels. Can you give us a sense of how much of that 10% is higher transaction volumes, more transactions versus pricing? Like any way to parse that out on a like-for-like basis? And I just have a couple of follow-ups.

Yes. I can't give you specifics. I would say the price has improved, and so it's not solely volume. It's the total return, if you will, is a combination of both. So we have seen recovery in absolute volume, but there also has been a pricing improvement that's complemented that.

Got it. Would you say like the one is higher or greater contributor than the other? Or is it pretty similar?

I would say it's generally pretty similar.

Got it. Got it. And on the SG&A side, you mentioned earlier, to John's question, that 90% of the uptick was more variable. Can you give us a sense of where your headcount stands today? In the past you talked about the 3,000 to 3,500 permanent employee reduction on a like-for-like basis, if you were back to pre-pandemic volumes. But your overall unit growth is now tracking roughly 20% plus versus 2Q '19 levels. So are you now -- where does your headcount stand versus that kind of volume growth level? Are you hiring back more people? Or all this is just coming through higher productivity? Just to get a sense of how this can continue going forward.

Yes. So I'll answer the question directly and then elaborate. So headcount is around 21,600. We're down about 14%. So to the point about the increase in units despite reduction in headcount, this clearly touches on, I think, the power of the digital tools and how our folks are much more effective. And we talk about digital. Digital is simply not what the customer sees, it's also the tools we provide to our sales and service representatives and we clearly are seeing more effective close rates, almost double the close rates with our digital tools and, clearly, higher PVRs with the tools being used. So when you look at our ability to manage the volumes on lower headcount, it clearly is in part by the tools that we have put in our sales and service associates. It's also enhanced by the tools that we put into our shared service center, all of which provide us greater leverage, if you will, given the volumes of vehicles that we're selling.

Got it. Got it. Yes, that's clearly extremely impressive. Just one last question on the used vehicle side of the business. The 32% growth versus 2Q '19 levels, any sense of how much of that is coming from franchise versus the U.S.A. stores? Just so we can get a sense of the contribution within double buckets. And just the GPU there as well, any way to parse out if the 2,200 level in 2Q, I mean how much of that is more structural versus just temporal, given like the changes in used vehicle pricing?

So we were -- so first and foremost, we run an integrated approach on preowned. We really view every location we have as a preowned delivery center, a preowned opportunity. And we do acquisition and pricing centrally. So it is all behind the AutoNation brand, and the USA stores are solidly profitable. Joe, do you want to talk about the numbers? And...

Yes, 2 parts of that -- 2 parts, I'll respond. So first, on the used volume, to be clear, that's across the entire enterprise. I mean we only have today, 6 USA stores, which sold 3,000 units in the quarter. So it's not as if it's solely incremental in USA. That said, it's doing extremely well. and the profit in the quarter is about $5 million, which clearly demonstrates the leverage that we're seeing there. And as we mentioned earlier, San Antonio has already achieved profitability in its first 4 months. So -- but it's across the entire enterprise that we're seeing the success of our sourcing and our inventory for use actually increased from the end of Q1 to Q2, in large part by the success of our We'll Buy Your Car and other procurement methods, which we do think is a competitive advantage.

Got it. And on the GPU side? The 2,200?

It's not materially different between our various stores from a used perspective.

But just the 2,200 level versus what you've historically done, any sense of like how much of that is temporal versus just structural, given like the changes in the sourcing mix that you have had?

It's -- I mean I'm comfortable saying right now how much -- what the timing is going to be. Clearly, we have seen the benefits from our sourcing decisions and being well positioned. But ultimately, there may be some pressure in that area, but we don't see it in the current environment.

And your next question comes from Bret Jordan from Jefferies.

On the service business, could you talk about the cadence of service as the quarter progressed, maybe against '19, sort of take the volatility of pointing out? Is this correlated to the reopening and sort of return to work? Or is this sort of just pent-up demand, given the time that's passed since we've really seen the COVID shutdown?

We've commented kind of throughout that we saw, on a month-to-month basis, continued improvement. What I would tell you from my perspective is we're starting to see a bit of a stabilization. I wouldn't say it's just been each month better and better. I think we're starting to see a level of stability across the business, with really the warranty work being the one part of the business that continues to lag. But otherwise, I said we're cautiously optimistic that we'll continue to see this level of demand through the rest of the year.

Okay, great. And you commented that the M&A pipeline was robust. What are you seeing in like seller price expectations? I mean, obviously, a wildly profitable environment. Are they expecting to sell off these very high profit levels? Or are they sort of expecting -- I guess is pricing rational, is the short question?

So it's -- this is Mike Jackson. If I will -- I think we've already expressed what we think on that question in the second quarter. We repurchased 9% of AutoNation. So I bought 9% of AutoNation rather than doing a lot of acquisitions that I thought were overpriced.

Okay. Great. And I guess, one quick final question. In the self-source mix, the 90% of your used, how does that shake out between We'll Buy Your Car versus trades versus lease returns? Could you sort of carve that out for us?

So clearly, the largest piece is trade-in. I would say, from a sourcing standpoint, that's -- that can be 60%. We'll Buy Your Car, from a sourcing, is probably 20%. So between trade and then We'll Buy Your Car, you're talking about 80%, and then you have lease return and service loaner, that gets you to 90% of our sourcing in the quarter right there.

Your next question comes from Adam Jonas from Morgan Stanley.

Mike, I always love your opinions and wisdom around industry moves, especially from OEMs, where we're seeing some auto companies looking to go direct-to-consumer for things like vehicle maintenance or service through OTA and then a bit more visibly, insurance and related financial services. So Mike, in your opinion, could an OEM using the car, connected car as a way to kind of engage directly with the consumer on, say, insurance, like OnStar Insurance or that kind of thing, could that constitute a violation of dealer franchise laws? I mean your dealers, you guys generate significant revenue from F&I, including the I. And I'm just wondering if that connected car gives the OEMs a chance to kind of circumnavigate that. Do you have a right to get access to that data? Are they allowed to do it? I'm just curious if you see that being an emerging problem if you take it to its logical conclusion.

Here's what I see as the strategic trend. The complexity of the automobile is going up exponentially. And that when there are issues -- and there always are issues -- the number of entity that actually can care for it and fix it are fewer and fewer. And in the event we look at only the electrical vehicles, the investments we're having to make in specialty equipment and technical training, expertise, is unbelievable. On the connected car, whoever you're dealing with, whatever manufacturer, there are issues, and we have the expertise to resolve it. So I see complexity going up exponentially as far as the eye can see. As far as a company like AutoNation is concerned, we love complexity because it's what we do. And the barriers to entry on complexity are very high.

Okay, Mike, I appreciate that. Just one follow-up. I think last quarter, I asked you about Volvo looking to do some things, selling electric vehicles online through a separate channel at one price. More recently, I think in Auto News, there was GM BrightDrop, the head of their vehicle distribution said they are looking to have a distribution footprint that might include sites outside of GM's current dealer network. Just curious, again, if you had -- wanted to share thoughts on whether that is something that gets close to the state franchise law issue, or whether it's kind of more nuanced than that.

So I'm well aware of the state franchise laws, but I don't obsess over them. I really look at the equation of what works for consumers, what works for manufacturers and so far, from what I've seen on these attempts by OEMs, with the reservation systems they really haven't had much added value for consumers. And at the end of the day, everything gets transferred over to us, and you can't even specify your vehicle in this reservation.

Just [clearly, the only one that] really has a direct model of any sort that is viable at the moment is Tesla. Now Tesla skipped a step and didn't build the customer care network to take care of that. So we hear it every day from Tesla customers who are fed up with the amount of time it takes for their cars to be cared for. So that's something you do get with a franchise system that's extremely worthwhile to a manufacturer, is that you front-load the customer care platform for your vehicles. So I've been listening to the challenges of the -- or the question of liability of the auto franchise system in America for over a decade. And I think we're resilient, adaptable and viable as far as the eye can see.

Your next question comes from the line of David Whiston from Morningstar.

First on vehicles coming off, I've read that Honda and GM are saying that they want lease buyouts to only be done by their own dealers for their respective franchise dealers. And does that slow down your ability to do deals from Conquest customers? And why don't the factories do this policy all the time if they could be good for their dealer?

I think we do that already. Or at least we have always embraced the partnership with the OEMs on all issues like this that are a win-win situation. So we have always been a high participant in the acquisition of off-lease vehicles. And the manufacturers know that and respect that about us. We'll buy almost everything they have.

Okay. And going back to the conversation at the beginning, with the cost benefits and the instant gratification of consumers, I mean it sounds like you're saying that some consumers maybe want to have that [needle] for them, and there are others that would be willing to do a build-to-order model. And a long time ago, the U.S. was entirely build-to-order. So do you think we should kind of [be doing it]? Or do you think there are consumers that some will wait and some won't wait?

So I've never been a strong proponent or advocate of the build-to-order model. I really think -- I mean, there is a certain small percentage in the marketplace, especially on the specialty vehicles, that that's what they want. But here's an epiphany that the industry has really embraced, is that when they're building their production schedules, they prioritize what people want to buy, and you configure them very close to what people want to buy. And with a little bit of give and take, people are getting 95%, 98% of what they want in a relatively short period of time of 30 to 45 days. And that is really working; and going all the way back to our early conversations, I think it's unleashed a very healthy discussion in the industry.

If you make this nirvana of build-to-order, I think it's sort of -- you sort of lose your way. It's a bridge too far. You don't really need to go that far. But there is in-between: build what people would like to buy and configure them very close to what they want to buy, give them visibility into the pipeline, and they will buy it and they'll wait a little bit and then take delivery. That's working very well.

Okay. And inflation, there's a lot of inflation chatter right now. Some say it's temporary, say it's long term. My math suggests a 100 bps increase in rates is generally roughly maybe $15 a month increase in monthly payments. And how concerned are you about inflation? And do you see any effect from this year as temporary?

I'm pretty much in agreement with the Federal Reserve that the inflation discussion, this inflation issue is transitory and you have 2 big factors in it. One is you have the exceptional unemployment benefits, which were appropriate considering the circumstances of the pandemic and the shelter-in-place, but we're -- and there has been inflationary issues around that, but those issues are going to be resolved before year-end.

And of course, the other big headline is preowned, which, of course, in -- by going to second quarter of 2019, pre-owned -- of 2020, preowned, be another liquidation of the fleets, there was pressure on preowned value. So you're comping against the downslope through, now, a recovery with the unique situation of production disruption on the new vehicle side. So I agree with the Fed Reserve. I think inflation is, in principle -- we have a transitory situation here, and things will look different by the end of the year.

Okay. And finally, a topic for Joe. Should the Biden administration increase the federal tax rate, could you give any estimate of what your own tax rate sensitivity could be? Could it be 100 bps increase on the federal rate? Is it one for one? Or is it a little bit less? Or...

So in general, if you look, I think the proposal out there have been about a 400 basis point increase. So effectively, if those were approved, we'd see about that through our tax rate. We're trying to find ways to mitigate it. But as you know, today, we're pretty effective. If you look at our rate and state taxes, there's not a whole lot more room there.

All right. Thank you, everyone, for joining us today. Thank you for your questions, very grateful. All the best.

This concludes today's conference. You may now disconnect.