AutoNation Inc (AN) 2020 Q4 法說會逐字稿

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's Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions)

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

Thank you. Good morning, and welcome to AutoNation's Fourth Quarter and Full Year 2020 Conference Call and Webcast.

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 EPS from continuing operations of $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, used and Customer Financial Services revenue was partially offset by a decline in 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-store used vehicle gross profit per vehicle retailed increased $127 or 9% 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 continue -- 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 acquisitions. Today, we announced our Board authorized an additional $1 billion of share repurchase from October 22 through February 12. We bought back 6 million shares or 7% of our outstanding shares.

We remain on track to open 5 new AutoNation USA stores by the end of this year. The stores will be located in Austin, Phoenix and San Antonio and 2 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 omnichannel 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.

Thank you, Mike, and good morning, everyone. As Mike 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 offset by a decline in Customer Care. During the quarter, new vehicle demand continued to exceed supply while our We'll Buy Your Car program supported our used vehicle inventories. Fourth quarter 2020 adjusted results exclude a noncash accounting loss of $62 million after-tax or $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 1.8x at the end of the fourth quarter, down from 2.0x at the end of the third quarter. Including cash and used floorplan availability, our net leverage ratio was 1.3x at year-end.

During the fourth quarter, we sold 3.1 million shares of our equity invested in Vroom for proceeds of $105 million. Early in 2021, we sold the remaining shares of Vroom 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 5 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 12, 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 12, 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.

Thank you, Joe. 2020 was an unimaginable year, but our associates came together and delivered record results. We sold our 13 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 acknowledgment and brand awareness continued when AutoNation was recognized for the third year in a row according to Reputation.com as having the #1 reputation score for public auto retailers.

In '21, we're celebrating 25 years of leadership, innovation, excellence and recognition as the most -- 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.

Operator?

(Operator Instructions) Your first question comes from John Murphy from Bank of America.

Congrats on a great quarter and execution here. Mike, 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, you guys have been good stewards of capital over time. But when you juxtapose that versus the opportunity on AutoNation Express and what you can do with this omnichannel 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 we're seeing on some other names, to put it politely? I'm just curious, what you think you need to do there, is it question of capital or advertising or emphasis? And how do you juxtapose that versus buybacks and acquisitions?

Excellent question. 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 continuing to invest in our USA stores. We're very confident and optimistic about it. And here, you're absolutely right, John. We intend in '22 with some of our 10 new stores to move into new markets where we are 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?

Thanks, Mike. To reinforce, you take the extremely strong cash flow and an underleveraged 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 continue to do that going forward.

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

Joe, could you take that, please?

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.

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

Yes, absolutely, John...

(inaudible) Rick took around as Chairman, would you -- are you going to remain on the Board?

So we're actually taking a step today because, 2 things. As I look at the succession, as we previously announced in 2019, we will split the role of Chairman and CEO with my departure. And 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, 2 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 gives a lot -- should give everyone a lot of confidence and trust that we have the right way forward. We have someone from within the company assuming this responsibility. Rick will also lead the search for the new CEO, which will kick off in the spring. And -- but half the equation is already answered with Rick becoming Chairman.

Your next question comes from Bret Jordan from Jefferies.

When you're sourcing used inventory, I mean, 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? Just sort of landscape on used inventory.

Yes. We've been very successful in our preowned 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 it's the machine that we've created is quite impressive.

And I view it as an arbitrage business that our ability to acquire inventory at the right price and pay a fair price to our customers and then recondition it at speed and get it on the front line and present it in a one price environment to our customer. It's 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 5 more stores this year, 10 more stores next year.

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 comp should be right about now and 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?

It is. We -- obviously, from the dramatic lows, we are past that. We estimate at the moment that miles driven are down about 10%. Our actual Customer Care business in the fourth quarter is down 4%, 5%, something like that. And so 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 shut down and shelter in place. Joe, why don't you talk about how you think Customer Care will unfold this year?

Thanks, Mike. Yes. And I'll just reiterate. So again, as you've looked at kind of the business recovering, if you think about the brackets, customer pay, warranty have all recovered internal, obviously, with the volume of business we're doing, it has actually recovered quite nicely. And 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 2 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 into Q4, favorable comps 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.

Your next question comes from Rajat Gupta from JPMorgan.

You provided some color on the new vehicle business in January, I was tracking in line with the forecast. Any color on how like the used vehicle business is performing? You talked about the inventory levels and the sourcing, but any color on how the unit comps have been tracking so far year-to-date, January, early part of February here. And you talked about the parts and services business also more on the miles driven side. Has the customer pay and warranty work started to come back pretty quickly. I'm assuming there's some pent-up demand there that should continue to flow through. So just curious on your thoughts there. And I have a follow-up.

So our view is that the new vehicle business will improve by about 7% 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 to 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 shutdown was manufacturers made vehicles without even having all the parts and then parked them to 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 6, 7, 8 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 a 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 preowned 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 with that. We'll continue working at that. And Customer Care, 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?

Let me touch a couple of 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 you saw positive growth again associated with the volumes of units. And as I 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. That's helpful. And the customer pay and warranty 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 a year-over-year perspective here recently?

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

Got it. That's super helpful. And then just in AutoNation USA, any metrics you can share so far for the 5 stores? What the profitability was in the quarter? Like, what the units are looking like there today and just the economics of those, as you know, they continue to mature over the last couple of years?

Joe, you take that, please.

Sure. So the 5 existing stores continue to operate successfully. And as you know, those were kind of 5 sample stores, if you will. We indicated the pretax slightly below $2 million kind of run rate. Again, continue to be very positive with what we're seeing. And as we roll out the 5 new locations set to open this year, increasingly optimistic. The forecast that we provided previously about units about the monthly pretax, we feel very good about. And so we continue to believe that the monthly pretax when it gets to a full run rate is in the $200,000 a month area and very positive about the economics and very encouraged by -- from a real estate and build standpoint, the progress we're making.

Your next question comes from Stephanie Benjamin from Truist.

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

Excellent question. Glad you asked. So look, we are not an investment enterprise. When we made the partnership with the Vroom, 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 2 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 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 5-0, $50 million and finished receiving, Joe, was it $215 million we got back? Something like that.

Yes, $215 million in total.

$215 million in total. So an excellent investment. But the 2 companies on an operating basis, we're 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 we only took these 2 steps because we thought the companies could do business together. That was a win-win from both companies. When it was clear with Vroom that was not the case, we exited the position.

Got it. No, that's very helpful. And then just my second question on your SG&A performance on an adjusted level, another record quarter and certainly well below your target or kind of that sub-68%. Is there any desire to now lower your own long-term target, just given your performance the last 2 quarters? Or how would you kind of chock up your outlook going forward, just given the performance you've seen in the last few quarters?

Yes. 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 2 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. As far as moving the goalpost today on the 68%, we're not doing that. Joe, what would you like to add?

Yes. 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, gross was up $88 million, and SG&A was down $17 million. That's remarkable leverage, obviously. But it comes across really all 3 categories of SG&A. Compensation, again, made some difficult decisions through the pandemic operating with fewer people. I think learned 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. Brought 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 results 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 and leveraging our capabilities. And then finally, overhead, again, difficult decisions in people and then discipline in -- within the overhead, driving that down 350 basis points. So from my perspective, driving it down over 800 basis points really across all 3 categories is a commitment we've made into a -- and a change in operating. And as Mike said, we are committed to continue to operate at or below 68%.

Your next question comes from Rick Nelson from Stephens.

I 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.

Yes. 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 spend 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 #1 issue when we look at an acquisition is whether it will be a cultural fit with AutoNation 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.

Some of the (inaudible) peers talked about the potential for public company consolidation. I look to get your view on that and whether you think the OEMs would be supportive of something like that?

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 #26 and 27. In the negotiation with the manufacturer, they will ask, okay, we'll improve #26 to #27, but let me tell you what you have to do from Store 1 through 25 in order to get approval for the next increment. And if you really add that demand on to 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 already 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, having gone 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 million, $10 million each. We do not need manufacturer approval. All we need is a brand, a great customer experience and additional 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 manufacturing 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 the 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 saying you can't get manufactured, but -- you can, but it's quite a negotiation.

Your next question comes from Adam Jonas from Morgan Stanley.

Mike, first, best of luck with the new chapter. I'm sure we're not going to see the last of you. So best of luck.

Thank you, thank you, thank you.

You got a lot more to share. Mike, I'm curious, why are so many start-up EV OEMs going -- 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 some of the best-of-breed existing franchises to really get the leverage and time to market and stuff, why are you going B2C by yourself?" Why do you think that is? Are they foolish?

Yes. So I think they're making a mistake. 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 will not need care is also folly. As a matter of fact, they are more complex than internal 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 #1 issues we hear when they traded in is they're just frustrated at the lack of an 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 will be proven wrong. And I think the strength of the win-win-win equation of the new vehicle franchise or win for consumers or win for the manufacturers, and it can be a good investment for dealers and publicly traded investment group 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 will 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 will -- is viable, we'll win and others will ultimately have to deal with this issue of how are they going to care for their customers.

Your next question comes from David Whiston from Morningstar.

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 that those larger players could effectively block out the digital start-ups on used vehicle limits or at least on late-model used. I'm just curious, do you agree or disagree with that.

So the whole issue of consolidation, whether too small or public traded companies could come together, 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 is 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 and 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?

That was basically -- I was talking about the -- basically (technical difficulty) market on late-model used inventory and block out the Carvanas and other digital (technical difficulty) vehicle inventory.

The phone broke up, so I didn't really hit the -- hear the answer, but I can tell you, who do I think wins in this huge preowned marketplace. I think companies that have a brand with a great customer experience and digital capability will take share in this huge preowned 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. So -- but I think brand, great experience and digital capability is a winning combination in the preowned marketplace.

All right. That's helpful. And then on electric vehicles, can you just talk a little bit about -- especially given your (inaudible) places like Texas and Florida, in addition to the friendly California market, just 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 2? Or is it still really trailing Tesla?

No. 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 from 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 engine is going to have a lifespan of 20, 25 years. It's not obsolete from 1 day to the next. There is a huge segment of consumers that the affordable transportation that will come with the existing internal combustion engines will go on for years and years and years. So the transition for units in operations 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 long as -- 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, what they -- 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 at their -- either in their garage or their parking unit or their condo. And every morning, they come out and they 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 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, list goes on and on. It's a very exciting business to be in.

Yes. I agree. There's a lot of full change coming. I'm hearing great things about some of these, ones you just mentioned. Staying on EVs though, in your opinion, does it change the demand [because we see graphs] in a negative way because there's more residual value risk for the captive finance arm and maybe they'll want to pull back on leasing?

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

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

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.

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