Autonation, Inc. Q4 FY2020 Earnings Call

Good morning. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the AutoNation Fourth Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. 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 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. Now, I will 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, a solid growth in new, used, and customer financial services revenue was partially offset by declining Customer Care, which has experienced a slower recovery correlated with lower miles driven. New vehicle inventory levels remain constrained and we expect demand to exceed supply for an extended period. Given these dynamics, we remain focused on optimizing our business in the current operating environment. We expect industry sales to approach $16 million in 2021 with strong retail sales growth compared to last year. We have seen solid growth in '21, with January trends in line with our annual forecast. For the quarter, change to our total variable gross profit for retail increased $765 or 21%, compared to the prior year. Thanks to our new vehicle gross profit per vehicle retail increased $919 or 50% and same-store used vehicle gross profit per vehicle retail 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 percentage of gross profit on a long-term basis. We are continuing our opportunistic capital allocation strategy that balances investing in our business and returning capital to shareholders. We expect to allocate capital towards the AutoNation USA expansion, share repurchase, and franchise acquisition. Today, we announced our Board authorized an additional $1 billion of share repurchase from October 22nd through February 12th. We bought back 6 million shares or 7% of our outstanding shares. We are on track to open five new AutoNation USA stores by the end of this year. The stores will be located in Austin, Phoenix, and San Antonio, and two stores in Denver. We are also entering 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 will now turn the call over to Joe.

Thank you, Mike, and good morning, everyone. As Mike has 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 will Buy Your Car program supported our used vehicle inventories. Fourth quarter 2020 adjusted results exclude a non-cash accounting loss of $62 million after-tax 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. In January of this year, we paid the maturity of our $300 million 3.35% Senior Notes from available cash on our balance sheet. Our covenant leverage of debt-to-EBITDA declined to 1.8 times at the end of the fourth quarter, down from 2.0 times at the end of the third quarter; including cash and used floor plan availability, our net leverage ratio was 1.3 times at year end. During the fourth quarter, we sold 3.1 million shares of our equity 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 five new AutoNation USA stores in 2021, and an additional 10 in 2022, as Mike addressed earlier. During the fourth quarter, we repurchased 4.7 million shares of common stock for an aggregate price of $302 million. Year-to-date in 2021, through February 12th, we repurchased an additional 1.3 million shares for an aggregate purchase price of $95 million. Today, as Mike mentioned, we also announced that our Board has increased our share repurchase authorization by an additional $1 billion. With the increased authorization, the company has approximately $1.1 billion available for additional share repurchase, and as of February 12th, there were approximately 82 million shares outstanding excluding the dilutive impacts of certain stock awards. Looking ahead, we will continue to balance investing in our business with opportunistic share repurchase and acquisitions.

Thank you, Joe. 2020 was an unimaginable year, but our associates came together and delivered record results. We sold over 13 million vehicles in December, the only automotive retailer in history to do so. We 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 number one reputation score for public auto retailers. In 2021, we are celebrating 25 years of leadership, innovation, excellence, and recognition, as one of the most admired companies in the world by Fortune Magazine. AutoNation was the highest ranked automotive retailer on the list. Congratulations to all 21,000 AutoNation associates for achieving such tremendous success. We will now take your questions.

Your first question comes from John Murphy from Bank of America. Your line is open.

Good morning and congratulations on a successful quarter. Mike, my first question is about capital allocation. It seems like you've resumed share buybacks, which makes sense given your strong track record with capital management. However, I'm curious about your strategy with AutoNation Express. Do you believe it has reached its potential, or is additional investment needed to enhance its advertising and visibility? How do you balance the decision between capital investment, advertising, and share buybacks versus acquisitions?

Excellent question. I'll start and then hand it over to Joe. The top priority for investment is the company, and we have made a significant investment in digital that is truly impressive. We have developed a platform capable of operating efficiently for the entire enterprise day after day, and thankfully, that surge investment phase is behind us. We now have the performance we need and desire. Moving forward, we will continue to invest in digital sustainably, but the peak investment period is over. We are also investing in our USA stores, and we feel confident and optimistic about that. You are absolutely right, John. In 2022, we plan to open 10 new stores in markets where we are not currently present, and we have allocated additional resources for communication, as we will require more marketing dollars for these areas where the AutoNation brand is not well established. Additionally, we anticipate making some acquisitions in new vehicle franchises that align with our strategy and footprint. We expect this to happen, and now I will hand it over to Joe, as we are in a strong position to do it all with very low leverage on the company. Joe, please take it from here.

Thanks Mike. To reinforce, you take the extremely strong cash flow and an underleveraged balance sheet, we really do have a way with all and especially 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 that, 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 will maintain discipline. And then we continue to believe there is tremendous value in our stock. We have obviously been active in that historically, including recently, and we will continue to do that going forward.

And just a follow-up to that. It seems like the attitude of the automakers towards yourselves and the larger groups as far as approvals on franchise acquisitions. It 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 one-day, two-day 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 have looked at opportunities, we are very mindful of location relationships and we do believe there are very viable opportunities for us to acquire within the constraints they are offered in those. 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, some of us may be... a lot of us would like to stick around forever, but there is this big surge going on. I am just curious if you could give us an update on how that’s progressing, the timing, how we should think about that stuff?

Yeah. Absolutely, John.

If you could address the Chairman, would you going to be to remain on the Board.

We are taking an important step today regarding succession. As we announced in 2019, I will be stepping down and we will be separating the roles of Chairman and CEO. We have made progress in this area by appointing Rick Burdick, a long-serving Director with over 30 years at the company and two years as lead Director, as the new Chairman. This decision should instill confidence and trust in our direction moving forward, as we have someone from within the company taking on this role. Rick will also spearhead the search for a new CEO starting in the spring, but with his appointment as Chairman, a significant part of the transition is already addressed.

Got it. Okay. Thank you very much guys.

Your next question comes from Bret Jordan from Jefferies. Your line is open.

Hey. Good morning guys.

Good morning.

When you are sourcing used inventory, obviously, you are talking about We will 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 have been very successful in our pre-owned business. As you see, we have outperformed the marketplace in the fourth quarter, with an increase in revenue in the fourth quarter of 12%, which is quite impressive, and all of those vehicles, we have retailed fully 85% came from internal efforts of AutoNation. We either took them as in trade or We will Buy Your Car or we took them in for off lease. So it’s the machine that we have 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 frontline 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 are investing in U.S.A. So five more stores this year, 10 more stores next year.

Okay. And then a follow-up on Customer Care, you sort of called out and obviously vehicles 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, negative comp should be run about now. 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 quarters down 4% or 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 the shutdown and shelter-in-place. Joe, why don’t you talk about how you think Customer Care will unfold this year?

Thanks, Mike. I will reiterate again as we look at kind of business recovering. If you think about bracket customer pay, warranty of all recovered internally, obviously, was the volume of business we are doing has actually recovered quite nicely. It’s collision that has lagged, as Mike indicated, really driven by the miles. As you look at through the year, and you are correct, it’s really going to be starting in April that we saw the significant decline associated with COVID, April and May in particular being the two months that were dramatically impacted, as you recall us talking about last year. But really, I think you are going to see throughout Q2, Q3, and even in the 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 the continued reopening of the country.

Okay. Great. Thank you.

Sure.

Your next question comes from Rajat Gupta from JPMorgan. Your line is open.

Hi. Good morning. Thanks for taking my question. You provided some color on the new vehicle business in January. I was tracking in line with the forecast. Any color on how the used vehicle business is performing, you talked about inventory levels and the sourcing, but any color on how the unit comps have been tracking so far year-to-date in January or early part of February here? And you talked about the parts and services business also more on the miles driven side and customer pay and warranty work started to come back pretty quickly. I am assuming there is some pent-up demand there that should continue to flow through. Just give us here your thoughts there and I have a follow up. Thanks.

Sure. 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 them. But it’s a very opaque, uncertain, disrupted situation on the production side where you now have this combination impact of the pandemic with the shortages of the chips to produce vehicles. One of the things we went through, when production was resumed after the shutdowns was manufacturers made vehicles without even having all the parts and then parked them for completions that turned out to be a fiasco, and we literally had vehicles that we were told were ours and we are on the way that didn’t show up for six months, seven months, eight months. And so the manufacturers have stopped that practice and really don’t produce unless they have a sideline to all the parts. And when this combination of the pandemic and the chip shortages 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, you sort of smooth that out, I think it’s fairly safe statement to say that new volume will be up 7% this year. The demand is there, and January tracked along that line. I think the pre-owned business for the industry is probably relatively stable. But I think we will outperform as we did in the fourth quarter. That’s our goal. Availability, as I said, we look to generate as much on our own means and terms as we can. We have been very successful with that. We will 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 discuss a couple of points. First, regarding the used inventory, as Mike mentioned, one of our advantages is sourcing. We have 85% of our inventory sourced directly from customers, while many competitors source 50% or less. This clearly positions us well for 2021. Now, turning to Customer Care, you specifically asked about customer pay and warranty. In the fourth quarter, the entire Customer Care business experienced a decline of about 3%. Customer pay was down slightly more, while warranty was in a similar range. Internal areas have seen positive growth due to increased unit volumes. However, collision has been a drag on performance. With miles driven down by 10% and collision rates down even further, we anticipate improvement as miles recover. Overall, we remain optimistic about the Customer Care segment as we progress through 2021.

Got it. That’s helpful. And the customer pay and warranty, is it down slightly in the fourth quarter? Did it exit at a positive rate in December or 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. Thanks for the color. And then just on AutoNation USA, any metrics you can share so far, about the five stores? What the profitability was in the quarter? Like what the units are looking like there today and just the economics of those as they continue to mature over the last couple of years?

Joe, you take that please.

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

Got it. Great. That super helpful. Thanks for all the color. I will get back in queue.

Thank you.

Your next question comes from Stephanie Benjamin from Truist. Your line is open.

Hi. Good morning.

Good morning.

Good morning.

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

Excellent question. I am glad you asked. So, look, we are not an investment enterprise. When we made the partnership with Vroom, it was with the hope that we will find synergetic common grounds to work together whether that was in our expertise, reconditioning digital whatever. We just thought there could be some mutual benefit for the two companies and that we could do something together. Well, none of that worked out. And so then it became purely an investment, which is really not what we intended, and you know once it was clear this was just an investment that the companies would not be doing business together. We decided to declare victory and move on. And I think we originally reinvested $50 million and finished receiving, Joe, was it $215 million, we got back something like that.

Yeah. $215 million in total.

$215 million in total, so an excellent investment. But with the two companies on an operating basis, we are doing nothing together, nothing. So the correct decision was to exit the position. Now the other investments we have is Vimeo and I can tell 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 are optimistic and hopeful that all that works out. But I want to be clear we only took these two steps because we thought the companies could do business together that was win-win from both companies. When we were 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 two quarters or how would you kind of chalk up your outlook going forward just given the performance you have seen in the last two quarters? Thank you.

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

Yeah. Thanks Mike. So Mike is absolutely correct. We have clearly realized the benefits of prior investments and I think a better discipline in running the business. So, as you look at SG&A, I mean, the growth was up $88 million, and SG&A was down $17 million. That’s remarkable leverage obviously. But when it comes across really all three categories of SG&A, compensation again make some difficult decisions through the pandemic, operating with fewer people. I think Lauren had to do that very effectively leveraging technology both in the store and in the back office. So, we had a compensation despite, obviously, a significant portion of the compensation being variable down 380 basis points year-over-year. Clearly an area we are seeing benefit in digital is an advertising bought that down 80 basis points year-over-year and while we still advertise I think to a greater degree than many of our peers, I think, the results in the success in the business are reflective of that, so I think we have been very prudent in finding the right level, albeit a reduced level in leveraging our capabilities. And then finally, overhead, again, difficult decisions in people and then the discipline and within the overhead driving that down 350 basis points, so from my perspective driving it down over 800 basis points really across all three categories is a commitment we have made and the change in operating, and as Mike said we are committed to continue to operate at or below 68%.

Great. Thank you guys so much.

You bet.

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

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

Yeah. We definitely have a lot of conversations going on a lot of negotiations and I fully expect we will have some new vehicle franchise acquisitions this year. But I am not going to put a specific number on it. We are very happy with the footprint we have in new vehicle and we spent a lot of time, Rick, as you know, optimizing that, and one of the reasons for our success today is that we have really took the time to go through every store we had in and decided if they fit or not. I would say the number one issue when we look at an acquisition is whether it will be a cultural fit with 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 are very comfortable adding within our existing infrastructure with new vehicle franchises. I don’t expect much outside that, but we would be open to doing it, and of course, we are very disciplined on the cost side.

Thanks for that color. Someone here one of your peers talked about the potential for public company consolidation. I’d like to get your view on that and whether you think the OEMs would be supportive of something like that?

I’d like to share my perspective. From my experience, as a company grows larger and looks to acquire another brand, the negotiations with manufacturers become more complex. For instance, if we already own 25 stores of a brand and want to acquire the 26th and 27th, the manufacturer may condition their approval on upgrades to the existing 25 stores. This added requirement can significantly alter the return on investment, making it increasingly challenging as the company scales. Currently, we are the only company with over 20 million in revenue, so I speak from a unique vantage point. This situation contributed to our decision to develop AutoNation USA stores, allowing us to steer our own course. We can build our stores for around $9 to $10 million each without needing manufacturer approval. Instead, we focus on delivering a strong brand, an excellent customer experience, and the digital capability to expand in a much larger market. I'm in control of my fate and don’t require approval from manufacturers, which has always been the case. Our focus is on execution, and we have successfully navigated the challenges of building our brand and enhancing customer experience alongside our digital capabilities. The return on invested capital is a significant consideration here, and as you've pointed out, it’s indeed a nuanced negotiation once you surpass the 20 billion mark and increase the number of stores.

Okay. That makes a lot of sense. Thanks and good luck.

Thank you.

Your next question comes from Adam Jonas from Morgan Stanley. Your line is open.

Hey, Mike. First, best of luck...

Hi, Adam. Good morning.

Hey. Good morning. Best of luck with the new chapter. Sure, we are not going to see last due. So best of luck.

Thank you.

Yeah.

Thank you. Thank you. Thank you.

I'm curious, why are so many startups and electric vehicle manufacturers choosing to go direct-to-consumer? When we ask them why they don't partner with established franchises like AutoNation to better leverage their market timing, what do they say? Why do they prefer to go it alone? Do you think that's a wise decision?

I believe they are making a mistake and the verdict on this will soon become clear. The approach we are taking avoids the significant costs associated with building a Customer Care infrastructure for a highly sophisticated and complex product. It's a misconception to think that electric vehicles won’t require care; in fact, caring for complex internal combustion vehicles demands more expertise and equipment. We are heavily investing with manufacturers to ensure we can support electric vehicles. If others want to skip the necessary infrastructure to support their customers, they can, following the paths that Tesla and some others have taken. However, we are continually accepting Teslas in trade, and one of the primary complaints from customers trading them in is their frustration with the lack of a satisfying customer care experience when problems arise. They are trying to avoid this issue, but I believe it's a mistake that will be proven wrong. The equation of the new vehicle franchise is beneficial for consumers, manufacturers, and can also provide value for dealers and publicly traded investment groups, demonstrating its sustainability and viability in the market. You can visit our website today, autonation.com, where you will find a prominent focus on electrification and the various vehicles we offer from different manufacturers. We are fully engaged in this market, and I am confident that our model will succeed while others will eventually need to address how they will support their customers.

Got it Mike. Thanks. Thanks for your thoughts.

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

Thanks. Good morning. I wanted to revisit the earlier comments about consolidation and mention that I've been hearing some speculation regarding whether consolidations among the larger public companies could potentially inhibit digital startups in the used vehicle market, particularly for late model used cars. I'm interested in knowing if you agree or disagree with that.

The whole issue of consolidation, whether two smaller publicly traded companies could merge, is not something I can comment on because I don’t have one of those smaller companies. However, regarding our potential acquisition of one, I don’t believe that's likely to happen since we would immediately encounter the problem of excessive density in a particular market. This would require us to divest a substantial portion of what we might acquire, at least in our case. Overlapping operations and high density in the market present significant challenges for us, so we will not be pursuing the acquisition of any other publicly traded company. I don't see that as a path to success. Can you repeat your other question?

That was basically, I was thought, sorry. They see even customers going on late model used inventory and block out the current owners and other digital searches in getting vehicle inventory.

I couldn't really hear the answer because of the sound issues. However, I believe that companies with a strong brand, excellent customer experience, and digital capabilities will capture market share in the pre-owned marketplace. This is already happening. We also need to consider whether our model is profitable. We have demonstrated that our model is profitable, as is CarMax’s. Therefore, I think having a strong brand, great experience, and digital capabilities will be key to succeeding in the pre-owned marketplace.

Thank you for that information. Could you discuss the demand for electric vehicles, particularly in states like Texas and Florida, as well as in the California market? Outside of Tesla, how much is the demand for EVs increasing? Have you observed significant growth in the past year or two, considering that it still trails behind Tesla?

No. We have definitely reached a turning point in our move towards electrification, and there's no going back. The change will be gradual. By 2030, I believe 20% of all new vehicles sold will be fully electric. However, this isn't the same as the transition from flip phones to smartphones, where old devices are discarded overnight. I estimate that by 2030, around 6% of vehicles on the roads in America will be electric, while internal combustion engines will still be in use for 20 to 25 years. They won't become obsolete instantly. A significant segment of consumers will continue to rely on affordable transportation from existing internal combustion engines for many years. Therefore, the transition of operational units will take about a decade. Regarding our electric vehicle customers, they appreciate several features, especially not needing to stop at gas stations anymore. As long as the vehicle has a range of over 250 miles, they typically use it for daily purposes, plugging it in at home, whether in a garage or parking space at a condo. Each morning, they find their vehicle fully charged and never visit a gas station, which delights them. Most of our electric vehicle customers own another internal combustion engine vehicle, such as a suburban, for longer trips. The journey toward electrification is underway, and we are committed to being part of it. We are excited about what manufacturers have in store, from the Hummer to the Mustang Mark and the Volkswagen Taycan, which has generated a lot of interest. It's an exhilarating field to be in.

Yeah. I agree. There is a lot of full change coming and I am hearing great things from you, the one you just mentioned. Staying on EV, though, in your opinion the change for demand from leasing perhaps in a negative way, because there is more residual value risk for the capital finance arm and maybe they don’t want to pull back on these things?

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

Okay. Well, thanks for the color. I appreciate it.

Absolutely.

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 are 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.