Good morning. My name is Shalon, and I'll be your conference operator today. At this time, I would like to welcome everyone to the AutoNation Second Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I would now like to turn the call over to Rob Patero, Vice President of Investor Relations. You may begin your conference.
Thank you. Good morning and welcome to AutoNation's Q2 2021 conference call and webcast. Please ensure that your lines are muted until the operator announces Q2. 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.
And statements regarding our anticipated financial results and objectives constitute forward looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1990 5. 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 ks and subsequent quarterly reports on Form 10 Q and current reports on Form 8 ks. 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 quarter results with adjusted earnings per share from continuing operations of $4.83 an increase of 2 43% compared to last year. This marks AutoNation's 6th consecutive all time record quarter with Our performance is across all our business sectors. Our 2nd quarter same store revenue was an industry leading record 7,000,000,000 which was up 54% compared to the same period a year ago and up 33% compared to 2019. The COVID-nineteen 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, the 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 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 pre owned vehicles. With consumer demand high for personal transportation, we're aggressively moved to increase our availability of pre owned vehicles.
Almost 90% of our pre owned vehicles retailed in the Q2 were self sourced. Self sourcing is a core capability and a competitive advantage for AutoNation. Proven acquisition strategy, successful we'll buy your car program, digital tools and operational execution allow us source attractive inventory, drive used vehicles to air and deliver a peerless customer experience. AutoNation same store pre owned units were up 30 7% year over year and up 32% compared to 2019. Continued strength of our pre owned business was also evident in the success and profitability of our 6 AutoNation USA store.
We opened AutoNation USA San Antonio in May. The store exceeded expectations and the store was profitable in its 1st full month of operation. We're 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. Remain committed to opportunistic capital allocation and delivering value to our shareholders.
I now turn the call over to Joe Lauer, our Chief Executive Chief Financial Officer. Thank you, Mike, and good morning, everyone. Today, we reported adjusted net income from continuing operations of $385,000,000 or $4.83 per share versus 124,000,000 or $1.41 per share during the Q2 of 2020. This represents an all time high quarterly EPS and a 2 43% increase year over year. While year over year comparisons benefit From lapping the early stages of the COVID-nineteen pandemic last year, we've also demonstrated impressive growth compared to a more normal operating environment in the Q2 of 2019.
As Mike stated, 2nd quarter revenue for 2021 was $7,000,000,000 On a same store basis. Revenue increased $2,500,000,000 or 54 percent and increased 1,700,000,000 or 33% compared to the Q2 of 2019 driven by growth in both 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 PBR of $13.54 or 32%. Further highlighting our impressive performance, our same store total combined units increased 21% compared to the Q2 of 2019 with growth in new units of 12% and growth in used units of 32%.
Our customer care business continues to improve with same store customer care gross profit increasing 41% on a year over year basis and 8% compared to the Q2 of 2019. Taken together, our same store gross profit increased 68% compared to the prior year and 52% compared to the Q2 of 2019. Moving to costs, 2nd quarter SG and A as a percentage of gross profit was 56.5 percent, a 11 70 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 $7,000,000 in the Q2 of 2021 due primarily to lower average floor plan 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 $60,000,000 which combined with our additional borrowing capacity resulted in total liquidity of approximately 1.6 $1,000,000,000 We continue to deploy capital to grow our business and drive long term shareholder returns. During the Q2, we opened our 6th AutoNation USA store in San Antonio, 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 twenty twenty one and twelve 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 12,900,000 shares for an aggregate purchase price of $1,200,000,000 completing our prior authorization. Today, we announced that our board has authorized an additional $1,000,000,000 for share repurchase. As of July 15, there were approximately 72,000,000 shares outstanding.
Despite the significant investments in our business and volume of share repurchase, our covenant leverage ratio of debt to EBITDA declined to 1.2 times at the end of the second quarter, down from 1.3 times at the end of the first quarter based on strong operating performance and cash flow generation. Including cash and used floor plan availability, our net leverage ratio was 1.1 times at the end of June. Looking ahead, we will continue to leverage our strong balance sheet and robust cash 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 continue to demonstrate strong performance in the Q2. 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 customer satisfaction with over 500,005 star reviews according to reputation. AutoNation is the only automotive retailer to achieve this,
Your first question comes from the line of Rich Nielsen from Stephens.
Thanks a lot. Good morning Congratulations. I'd like to ask you about inventory. You're sitting at 14 days 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 the supply to maximize profits. When do you think things normalize?
Rick, this is Mike. So I assume you're referring to new vehicles on let's do pre owned first. As you know, a year ago, we moved very aggressive. We're very bullish on pre owned and all that's culminated in our ability to increase pre owned revenue during the Q2 by 65%, just a remarkable achievement. On the new vehicle side, first, I have to take my hat to the manufacturers.
They've done an incredible job to restart the global supply chain. Shipments for us in the Q2 were up 100% compared to a year ago, And we're only 6% down from 2019. Obviously, the chip shortage continues. The manufacturers have I've 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, we'll produce vehicles and leave out certain features to keep the supply coming and in other cases they have produced the vehicle and are awaiting arrival of chips just to But the headline is that the demand is far higher than supply and I think continues well into next year. And I really don't know if we'll obviously a crossover point back to the Home 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 prudential 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 construct Going on within the industry that there 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 ratification that drove the industry with the push system.
I think that's really being rethought. We are selling a huge percentage of 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 is A valuable lesson for the industry that this idea of having 4,000,000 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 day supply.
That's not optimal for anyone, but maybe it's 30 days, 36 days, sort of 30 to 40 somewhere like we were on pre 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.
That's great, great color. Thanks Mike. Good luck, Ken. We pushed forward. Thank you.
Thank you.
Your next question comes from the line of Stephanie Moore from Truist. Hi, good morning. Thank you for the question. I wanted to continue on the last Other 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 or real estate standpoint? Does it make sense to have such a large For 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 you saw during the quarter of just the adoption and usage of your digital efforts, that'd be helpful. Thank you.
You're actually spot on that the pandemic has also been an inflection point towards digitalization. We were ready because of the investments that we told you about. We made insurance investment in 2013, 2014 and 2015 that really gave us a capability resulting in a 65% improvement in pre owned sales, increase in premium sales here in the 2nd quarter on a revenue basis. And I don't think that's going backwards. But the USA strategy, the Owners in USA strategy exactly describes our thinking that delivery centers remain essential, points of purchase for the acquisition of pre owned 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 6th in a market where the AutoNation footprint did not exist in San Antonio, Texas and we are profitable in the 1st month. Congratulations to the entire team. We'll open to 4 additional stores and 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 center are essential and we have the capability to build out a footprint in ultimately in the entire United States of With AutoNation USA Stores
profitably. Got it. No, thank you so much. 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 view this This 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 Q2.
Yes, 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 of the new volume and used volume. We're finally seeing Collision kind of get back to its 2019 level, which has been a little waggard and then warranty probably of the 4 categories is Close 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.
Great. Well, thank you so much for the color.
Sure.
Your next question comes from the line of John Murphy from Bank of America. Your line is
open. Good morning, everybody. Mike, I just wanted to challenge you on something. We don't usually challenge you on because you usually are the challenger of the inventory, bloated 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 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 inventories to you?
Well, maybe I was expressing more 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 if 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 push system.
That's encouraging. I mean, the other question that we get often is the GPUs seem like They may be somewhat inflated in the moment because of this dislocation of supply and demand, which is a good thing. And folks are saying, hey, listen, you guys are just over earning. But if I kind of normalize grosses as best I can, I'm coming up into an SG and A gross somewhere in the low to barely 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 sticky or structural than maybe even you you were talking about before.
I mean that 68% that you were talking about SG and A and gross before is kind of a level 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 Currently just based on how it's not doing, it's just much better than people have been thinking and you were thinking before. I mean can you maybe reset the bar on that 60 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 cost. 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 and A, Well, 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 We said, 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 3 steps, which has taken us to a permanently lower basis on SG and A. Absolutely no question about. 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 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 and A.
Over 90% of that is coming through variable comp. 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. Then just lastly, I mean share repos have been massive year to date. I'm just curious to think as you think about TAP allocation. I mean, you've turned the TAP on if it makes sense doing M and A and obviously you're reinvesting cash in Automation USA. 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 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, for review 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 USA.
Joe, what would you like to add to that? I think you nailed it, Mike. I mean the M and A pipeline is robust. We're just demonstrating real discipline. And as you said, right now, if you look at a return basis, following AM 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, very sensible given where the stock is right now. Thank you very much, guys.
Your next question comes from the line of Mike Ward from Benchmark. Your line is open.
Thank you. Thank you very much for taking the question. Maybe to follow on with John's question is about the digital side of it. A couple of things. Does the digital side of it improve the F and I side.
I think you mentioned that 2 thirds of F and I is coming up in vehicle protection. Does the digital streaming that you have and people looking online for different purchasing options, does that enhance the F and I revenue stream?
So the way we think about digital is the customers want to engage in a digital process Well, they are empowered and it's a 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.
I've seen over 90% of the situation. 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 to 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 us Today, 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 as digital platform to interact with our 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 and I to continue?
I think, obviously. It's because here's why. It's not that we're raising prices on F and 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 improved the products, we improved the price value for our customers and we improved our skill at presenting them to customers. So I think that continues.
And just is there a huge difference on the F and 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 really 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. Thank you.
Thank you
very much.
Yes. The company wide platform The entire offering of the company is presented new pre owned, certified pre owned and most importantly the entire pipeline of AutoNation. So if You're looking for pink suburban for whatever reason and we have one going to the West Coast, the U. S. On the East Coast and you can see it 6 weeks out and you want it, We will redirect it to you.
And that's a tremendous competitive advantage.
Got it.
Thank you. Thank you.
Your next question comes from Rajat Gupta from JPMorgan. Your line is open.
Hi, good morning. Thanks for taking my question and congrats on the strong quarter. I just had a couple follow ups from one previous question. On parts and services, revenue is up roughly 10% versus 2Q 2019 levels. Could 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 just a couple of follow ups. Thanks.
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 pricing improvement Just 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 and 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 Your overall unit growth is now tracking roughly 20% plus versus 2Q 'nineteen levels.
So are you now where does your headcount stand versus that kind of volume growth level? Are we hiring back more people? All this is just coming through higher productivity. So just to get a sense of how this can continue going forward? Thanks.
Yes. So I'll answer the question directly and then elaborate. So headcounts around 21,600 were down about So to the point about the increase in units despite production in headcount. And this clearly touches on, I think, the power of 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 PBRs 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 provided 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 2019 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 I guess the GPU there as well, Any way to parse out the 2,200 level in 2Q, how much of that is more structural versus distemporal given like changes in newspaper pricing. Thanks.
So we run so first and foremost, we run an integrated approach on pre owned. We really view every location we have as a pre owned delivery center and pre owned opportunity. And we do acquisition and pricing centrally. So it is all behind the AutoNation brand and The USA stores are solidly profitable. Joe, you want to talk about the numbers?
Yes, 2 parts to that 2 parts to that response. So first on the used volume. To be clear, that's across the entire enterprise. I mean, we only have today 6 USA stores We sold 3,000 units in the quarter. So it's not as if it's solely incremental AN USA.
That said, it's doing extremely well. I mean the profit in the quarter is about $5,000,000 which clearly demonstrates the leverage that we're seeing there. And as we mentioned earlier, San Antonio has already achieved profitability in its 1st full month. So but it's across the entire enterprise that we're seeing the success of our sourcing. Our inventory for used actually increased from the end of Q1 to Q2 in large part by the That's about we'll buy your car and other procurement methods, which we do think is a competitive advantage.
Got it.
And on the GPU side?
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 just temporal versus just structural given like the changes in the sourcing mix that you have had? I mean, I'm uncomfortable
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. Got
it. Great. Thanks for all the color and good luck.
Your next question comes from Bret Jordan from Jefferies. Your line is Juan?
Hey, good morning guys.
Good morning. On the service business, could
you talk about the cadence of service as the quarter progressed Maybe against 2019 sort of take the volatility of 2020 out. Is this correlated to the reopening and sort 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 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 working in the one part of the business that continues to lag, but otherwise, I'd say we're cautiously optimistic We'll continue to see this level of demand through the rest of the year.
Okay, great. And you commented that the M and A pipeline was robust. What are you seeing in like seller price expectations? I mean, obviously, a wildly profitable environment. Are they expecting us 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 Mike Jackson. If I I think we've already expressed what we think on that question in the Q2. We repurchased 9 So I thought 9% of AutoNation rather than doing a lot of acquisitions that I thought were overpriced.
Okay, great. Thank you. And I guess one quick final question. In the self sourced mix, the 90% of your used, how does that shake out between we'll buy your car versus trades versus lease returns. Could you set a carve out for us?
So clearly the largest piece is trade in. I would say from a sourcing standpoint that can be 60%, we'll buy your car from a sourcing is probably 20%. So between trade and 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.
Okay, great. Thank you.
Yes.
Your next question comes from Adam Jonas from Morgan Stanley. Your line is open.
Hey, thanks everybody. Mike, I always love your opinions and wisdom 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, a connected car as a way to kind of engage directly with the consumer on say insurance like Bonestar Insurance or that kind of thing. Could that constitute a violation of dealer franchise laws? I mean, your deal You guys generate significant revenue from F and I and including the I.
And I'm just wondering if the connected car gives the OEMs a chance to 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 a strategic trend. The Complexity of the automobile is going up exponentially. And that when there are issues and there always R issues. The number of entities that actually can care for it and fix it are fewer and fewer. And the investment we look at on the electric vehicles, the investments we're having to make in specialty equipment, technical training, expertise is unbelievable.
On the connected car, whoever you're doing with whatever manufacturer, there are issues. And we have the expertise to resolve it. So I see complexity going up Financially 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
Okay, Mike. 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 separate channel at one price. More recently, I think in auto news, there was GM Brightdrop, their head of their vehicle distribution, said they were looking to have a distribution footprint that might includes 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 nuance than that?
So I'm well aware of the state franchise laws. 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 a very good one really has a direct model of any sort customer Tesla customers who are fed up with the amount of time it takes for the cars to be cared for. So that's one thing you do get with a franchise system that's extremely worthwhile to manufacturer is that you front load the customer care platform for your vehicle. So I've been listening to the challenges of the question is the viability 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.
Thanks, Mike.
Thank you.
Your next question comes from the line of David Winston from Morningstar.
Thanks. Good morning. First on vehicles coming off lease I've read that Honda and GM are saying that They want lease buyouts to 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 have this policy all the time? I think it would be good for their dealer.
I think we do that already. At least we've all we have always embraced the partnership with the OEM on all issues like this that are win win situations that we've always been a high participant in the acquisition of all fleets 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 instant gratification of consumers and I mean, it sounds like you're saying that some consumers maybe want to have that be for them and there's others that would be willing to do a build to order model. And long time ago, the U. S. Was entirely build to order.
So everything we should kind of do in the tool Or do you think there are consumers that some will wait and some will wait?
I've never been a strong proponent or advocate of the build to order model. I really can't I mean, there is a certain small percentage in the marketplace, especially in specialty vehicles that That's what they want. But here is here is there is there is there is there is there is there is really embraced is that when they're building their production schedules, they prioritize what people want to buy and you configure them very closely what people want to buy. And with a little bit of give and take, people are getting 90 98% of what they want in a relatively short period of time of 30, 45 days. And that is really working.
And going all the way back to our earlier conversations, I think it's unleashed a very healthy discussion in the industry. If you make this Nirvana, build the order. I think it's sort of you sort of lose your way. It's a bridge too You don't really need to go that far, but there is in between, build what people would like to buy and configure and very close to what they want to buy, giving 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 central, some say it's long term. My math suggests that 100 bps increase in rates is generally monthly, maybe $15 a month increase in monthly payment. And how concerned are you about inflation? And do you see any effect from this year's
time program?
I'm pretty much in agreement with the Federal Reserve that the inflation Thank you, Nishu. It's transitory and you have 2 big factors in it. One is you have the exceptional unemployment benefits, which were appropriate inflationary issues around that, but that those issues are going to be resolved before year end. And of course, the other big headline is pre owned, which of course in by going to the Q2 of 2019, pre owned 2020 pre owned, there was a liquidation of the fleets. There was pressure on pre owned value.
So you're against the downstroke to now a recovery with the unique situation of production disruption on the new vehicle side. So I agree with the Federal 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, probably for Joe. Should the Biden administration increase the federal tax rate, can you give any rough estimate of what your tax rate sensitivity for me for the 300 foot increase in the federal rate. Is it 1 for 1 or is it a little bit less?
So in general, if you look, I think the proposals 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've tried to find ways to mitigate it. But as you know, we're pretty effective if you look at our rate
conference. This concludes today's conference. You may now disconnect.