Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly once again please continue.
Thank you for patients.
Ladies and gentlemen, thank you for standing by welcome to the car quarter, three 2019 earnings conference call.
At this time, all participants' lines listen only mode. After the speaker presentation, there will be a question answer session.
The question during especially when you press star one on your telephone. Please be advised that today's conference is being recorded if you're part of any further since please press star zero.
I'd now like to have the conference to your speaker today, Michael <unk> Treasurer, and Vice President of Investor Relations. Please go ahead Sir.
Thanks, Victor Good morning, and thank you for joining us today for the KAR auction Services' third quarter 2019 earnings conference call today will discuss the financial performance of KAR auction services for that quarter ended Septemberthirty 2019, after concluding our commentary well take questions from participants.
Before Jim kicks off for a discussion I like to remind you that this conference call contains forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act up 1995.
Investors are cautioned that such forward looking statements involve risks and uncertainties that may affect cars business prospects and results of operations and such risks are fully detailed interest SEC filings.
Providing forward looking statements the company expressly disclaims any obligation to update these statements.
Let me also mentioned that throughout this conference call will be referencing both GAAP and non-GAAP financial measures reconciliations of the non-GAAP financial measures to the uptick coal GAAP financial measure can be found in the press release that we issued yesterday, which is also available in the Investor Relations section.
The web site.
I would like to turn this call over to KAR auction Services' see all Jim Hallett Jim.
Thank you, Michael and good morning, ladies and gentlemen, walking to our call.
The topics that I want to discuss with you today, our third quarter results provide you with an update on trade route.
Speak to our revised guidance for 2019, and then review the actions that we're taking to improve our performance going forward.
First let me cover third quarter results our results in the third quarter fell short of expectations.
And there are two primary factors that impacted our performance in the third quarter first volumes were softer than expected.
We experienced double digit growth in commercial volume.
And 7% growth and dealer consignment volumes.
Well volumes grew in each of our channels, we clearly saw slower growth than expected.
I've spoken with many of our customers.
And this trend is throughout the industry and we believe that it is a timing issue and it is not a secular change in the market.
The second factor impacting our results in the third quarter is the revenue mix out a data that led to a decline in gross profit margin and adjusted EBITDA margin.
We decreased does gionee across the businesses other than the increases that trade route and the S.J. from acquired businesses.
Unfortunately, this wasn't enough to offset the lower gross profit realization per dollar of revenue.
Volume grew 9% ADESA, excluding acquisitions organic volumes grew 7% driven by lower revenue online transaction that OPENLANE and trade route. We also experienced slower growth in the OPENLANE channel in the third quarter.
For growth was expected based on the lease originations in the third quarter of 2016.
AMC performed inline with our expectations, we had modest growth in both the number of loan transactions and revenue per loan transaction.
And we're also seeing decreases and interest rates lower our cost of our securitization facility.
Overall, while we control that's CNH rail car it was not enough to offset the impact of slower.
In a revenue mix that provide a lower gross profit margin.
Now let me provide some insights on what is happening a tradeoff.
First our effort to combine the dealer consignment sales efforts of trade, Rob and ADESA is going to help us accelerate the introduction of trade we have throughout the United States.
Dealers have different challenges in their businesses that make having multiple offerings to meet their needs and necessity.
Some dealers need cars immediately swept off there are lots and moving the vehicle to a physical auction allows them to seek the highest value by using all digital and physical channels to maximize the value of the vehicle.
Other dealers are not space constrained and they may be looking for the lowest cost transaction, while pursuing the highest proceeds possible.
Having one dealer consignment sales rep, calling on each dealership and introducing Oliver dealer.
Consignment capabilities, whether digital or physical is what our customers have been asking us for.
We're focused on getting our go to market strategy right and take advantage of the power of a joint sales effort.
We're also focused on creating a business model that has economics that can generate profits in the future.
We do not blade revenue per transaction significantly below $300 is this sustainable model.
We have been increasing our fees for the transaction and reducing the level of incentives. We do not believe that we should pursue growth with an economic model that cannot be profitable and sustainable in the long run.
With that said, we have chosen to operate within the financial parameters set at the beginning of the year and limit operating losses to approximately $60 million.
To accomplish this we intentionally pulled back on incentives and this is contributing to lower volumes then we targeted for 2019.
We will not hit our target of 200000 cars on trade up this year to hit this target we would have to lose more money in or more new markets and take on greater risk in the business.
We believe it is a better strategy to execute our better together combination of trade red and ADESA sales teams and more carefully utilize incentives to build the local buyer base.
Even if this slows down the volume growth in the near term.
I believe there are times when you must slowdown in order to go faster I do not believe the slower with what the slower growth were experiencing well, we tweak the business model will delay our plan to achieve breakeven in 2021.
Trade that does not just the volume gains we also need to develop an economic model that makes sense to us and to our customers.
I'm committed to the success of trade, Rob and I believe our customers want a digital solution that is complementary to the physical auction solution.
The goal is to provide the best service and achieved the best outcome for each wholesale transaction to provide the best outcome, we must be prepared to offer the car in multiple channels until full value is paid for the vehicle.
It is unrealistic to think that every car well received top dollar if all we offer is the digital solution. It is equally unrealistic to think that the physical auction is the only way to get the maximum value for each vehicle.
As I've said many times in the past it is not our job to dictate where customers should sell their vehicles and this wholesale marketplace. It's our job to have a diverse set of offerings. So whatever the decision. The dealer makes we have every channel and the offering that is being considered.
With that let me turn into our guidance.
As we disclosed last night in our earnings release, we're reducing our guidance for 2019, we expect adjusted EBITDA of 510, the $530 million for 2019.
I recognize that this is a wide range with only one quarter left in 2019.
We have the potential to recover all or a portion of the losses related to high Tech locksmith situation prior to year end.
We also have a significant increase in the number of off lease vehicles that will be return in the fourth quarter.
We saw the highest number of lease originations in history written in December of 2016. This should increase volume in the fourth quarter or it may roll over into 2020.
We're doing everything we can to finish the year strong.
Let me close with some comments on specific actions that we're taking to improve earnings in the future, including the upcoming quarters.
First I recognize that our company is smaller and we must adjust their corporate cost structure accordingly.
We reduced corporate head count in March 2019, eliminating over 100 positions.
We have continued analyzing every position and have eliminated a number of positions recently that will reduce our costs in the first quarter of 2020.
We plan to reduce our overhead costs by over $10 million in 2020 as compared to 2019.
We are challenging Oliver legacy operating processes, especially in the ADESA physical auctions.
As we see our business is transforming the physical auctions with the adoption of virtual lane greater use of digital auction offerings and the need to reduce cycle times to meet the goals of our commercial customers, we must adjust our <unk> our processes in order to capture the efficiencies created by improved digital and.
Physical auction methodologies, we need to reduce our direct cost of delivering these services.
We must also address the S DNA outside the holding company segment.
Our revenue mix is shifting as we continue to see ARPU growth through our ancillary and off premise services.
This growth is extremely valuable to us in as the central to meeting the needs of our customers. However, it also has lower gross profit margins. This requires us to manage our field overhead costs. So that we continue to grow our operating profit and adjusted EBITDA at acceptable levels.
In the third quarter consolidated SGN day was 22.6% <unk> of the total operating revenue.
This is too high.
I have set to specific goals for our leadership team.
First we must immediately reduce the percent of revenue spend on SGN a.
I want this to begin immediately and second I want us to reduce SGN, a and achieve a target of less than 20% of total revenue in 2020.
And lastly, I don't believe that getting SGN aid to less than 20% is good enough. This is just the first milestone that I want this team to achieve.
Most importantly, the challenge is that we're facing today are consistent with challenges that weve faced in the past.
In other words, we've seen this before.
When we went public in 2009, we expect that more transactions to be completed online overtime and recognize the need to reduce our cost structure.
From 2007 to 2009 I was personally charged with eliminating corporate overhead at car in order to increase earnings and cash flows to provide the capital to repay debt while the circumstances may be different today. The task at hand is very similar we need to reduce overhead.
Need to find efficiencies in our core auction business is to improve our margins and we need the focused on profitable growth in all of our businesses.
I know I, usually spend time on our long term outlook and what we see over the next five years, while I don't believe anything has changed in our overall outlook I want to focused on the near term right here right now.
We will continue to develop products and services to meet the needs of our customers in the future, but we must improve our results quarter to quarter first we won't we will share with you our targets for 2020 in the initiatives, we will execute to achieve those targets at our next earnings call in February in.
The meantime, we will focus on now improved to you that we can get our expenses in line with revenue mix stabilize gross profit and continue to grow revenue per unit and total revenue.
Thanks for joining us today and for listening to our plans in our priorities I will now turn to Eric who will share more information on our financials before we take your questions.
Mark.
Thank you Jim.
I would like to provide some more color on our performance, let me start with some comments around revenue in ARPU at ADESA.
Our same store net revenue or revenue, excluding purchased vehicles and revenue from acquired businesses grew 4% in the third quarter.
This was driven by a 7% increase in same store volume offset by a 2% decline in ARPU.
The 2% decline in ARPU reflects that our growth came from our online auction channels that have lower revenue and gross profit dollars per car sold.
In the third quarter, 45% of our transactions were completed in our online only channels compared to 40% the prior year.
This creates lower gross profit dollars per car sold.
At physical auction ARPU increased 5% to $893 per car sold.
However, physical auction volumes grew only 1% an auction revenue per vehicle sold was consistent with the prior year.
Our lower margin ancillary and off premise services drove this growth, but only at gross par profit margins in the low twentys.
The mix of revenue led to a 170 basis point decrease in gross profit margin on net revenue.
As Jim mentioned, we believe we can address this changing revenue and profit mix by reducing cost of services through improved processes that result in lower cost per transaction and reducing SGN a on a consolidated basis, while the gross profit margin pressure is within the ADESA segment, the SGN any adjustments.
We need to make to offset this pressure are in ADESA and holding company segments combined.
We do have visibility into a strong supply of vehicles as we in 2019 and into 2020.
These returns will continue to be a positive influence on our online only channels as well as a driver ARPU at physical auction.
We expect commercial volumes to begin leveling off but not decreasing.
Our fourth quarter is always a strong quarter for ancillary services and this year should be no exception.
Cars on the web is performing as expected Europe is just under 4% of our total volume in Q3. This is a real opportunity for us as we expand our digital offerings in Europe . The revenue net of purchased vehicles and operating profit in Europe have met our expectations through three quarters.
Trade Rev operating losses were $51.6 million through nine months.
We expect operating losses for the year to be approximately $60 million to achieve this goal, we must reduce the incremental costs at trade route and better utilize the existing resources at ADESA.
We must also reduce incentives being offered to launch new markets. We have a plan in place to keep operating losses at trade rather at approximately $60 million to be clear, we are not allocating any ADESA costs to trade Rab as part of our better together initiative.
These will stay within the the ADESA physical business.
At AMC, we had a solid performance in Q3 revenue in loan transaction units grew low single digits and loan losses were up slightly from the prior year, but came in at 1.7% of average loan balances most impressive in the AMC performance is the reduction in SGN today. The team at AMC has been focused on.
Using technology, improving back office processes, and growing without increases to headcount to support their business growth.
Now, let me speak to our guidance Jim discussed our expectations for adjusted EBITDA. So let me go through the other guidance items, we have updated first the items impacting our expectations for adjusted EBITDA flow through our GAAP net income from continuing operations per share in operating adjusted net income per share.
We expect net income from continuing operations per share to be 77 cents to 87 cents per share operating adjusted net income per share is expected to be a $1.12 to $1.22 as disclosed in our press release yesterday, we have reduced our guidance for interest expense to reflect a lower interest rate on top.
Term loan B, we've also reduced the expected depreciation and amortization amortization as we have better visibility on the timing of projects being placed in service and the impact on 2019 depreciation.
Our effective tax rate is expected to be 28% for 2019, which is slightly better than previous guidance.
We also updated our guidance on capital expenditures in cash taxes, we expect capital expenditures for 2019 to total about $160 million the increase in capital expenditures from previous guidance is related to investments in technology that are in direct response to customer needs we have lowered our.
Spectators for cash taxes to reflect lower operating profit and also analyzed.
Analysis of professional fees associated with the reorganization of card legal entities and other activities prior to the spend.
While costs directly directly related to the completion of the spent are not tax deductible certain activities and related costs that were necessary to prepare for the spin our tax deductible and reduce our our cash taxes in 2019.
We have also reduced the weighted average number of shares for the year to reflect our repurchase of approximately 4.8 million shares for $119.7 million in third quarter.
This utilized the remaining share repurchase authorization that expired in October of this year.
Our board of directors has authorized.
The repurchase of an additional 300 million of our common stock over the next two years this share repurchase authorization expires in October 2021.
In terms of additional capital allocation priorities, we continue to evaluate opportunities to grow our business through acquisition. However, given our results in the third quarter not meeting our expectations, we're going to focus on our existing businesses for the next couple of quarters, we do not want to miss any opportunities that make sense for our business. So we will continue to.
Work on our current pipeline, but our primary focus will be finding opportunities for efficiencies in our existing businesses and continuing to reduce our overhead expenses to be in line with the gross profit generated from ADESA NFC.
This is not a change in our strategy or long term priorities, but just a pause so that everyone can focus on what is most important today, improving our adjusted EBITDA margins.
Lastly, let me update you on the opportunity to recover previously recorded losses at high Tech locksmith.
We are in the early stages of litigation with a number of former employees that I do not expect any resolution of this litigation prior to year end.
This means that any recovery through litigation will be after 2019 and not impact our results for this year. However, we have submitted claims with our insurance company for inventory losses, and certain vendor payments, we believe were fraudulent.
We have a long term relationship with our insurer and if submitted substantial support for the claim that is being processed as we speak we're working with our insurer to satisfy all of their needs to process. This claim in 2019, the timing of resolution of this claim will impact our 2019 results materially and is the biggest contributor to the.
Wide range of our updated guidance with one quarter to build this year.
I am personally involved in the discussions with our insurance carrier and they understand the importance of this matter to car and are working diligently to resolve this claim prior to year end, while their circumstances that leads to the insurance claim our unfortunate our long term relationship with our insurance carrier has helped us accelerate the claims process and allowed us to work as partner.
As in determining the cause of loss and available coverage to mitigate this loss.
That concludes my remarks, so I will now turn it back to the operator for questions. Thank you.
As a reminder to ask a question you need to press star one on your telephone.
To address your question press the pound Kim please stand by only compared to Q and a roster.
And our first question will come from the line of John Murphy from Bank of America, you may begin.
Good morning, guys. This is Alan Smith on for John on following up on your commentary around trade, rather and pulling back on incentives in the quarter can you elaborate on what other programs and strategies, if any you're pursuing to drive volume growth across your dealers and other than profits. How do you see how do you find success at trade route and what metrics are you looking.
For any early rollout phase to gauge whether you're on track to hit your breakeven targets.
Yes. This is Jim So let me take that you know our losses were growing faster than our volumes and we really made a management change. This business now reports to Peter Kelly I think most people know that Peter Kelly was the founder of OPENLANE and is a very strong digital mine within the leadership.
Team.
And we got focused on this better together strategy.
Of combining the trade rep team with the ADESA team and really using the strength of ADESA and not only the sales team, but all the resources that are at ADESA as well.
And then we rely less on incentives.
I don't believe that these incentives were sticky and I don't believe they were creating any long term relationships transporting a car and providing incentives the transport that car 506 700 miles across the country.
Really I don't think develops a longer term relationship with that dealer and then we really believe that theres a need to increase the revenue per loan transaction.
This is a long game I'm not interested in short term volume gain I'm interested in what this business looks like and five and 10 years down the road and I don't believe that you can chase volume, where they're working towards profitability and the technology offerings require capital to keep the current and the technology solutions and must ultimately generate.
The profits that we need to support the technology.
What we're doing here as we speak and this isn't something is going to App and this is something that is in motion now we are going to cross train those two teams trade route and.
At ADESA as we spoke about.
And we're going to have one point of contact for the dealer the dealers have been telling us for some time that they prefer to have one point of contact one person that can come into the store and represent all of our products, whether they'd be physical or digital.
And I think that.
What we will do is better together approach.
On a slow it down a little bit.
We're going to continue to increase fees.
And we believe that having multiple offerings.
Not just one digital offering, but having the physical offering as well.
Given the dealer choice and we've always maintained that that the dealers do want choice is not one size fits all.
And that during the day, we look to finish the year strong as we possibly can.
But more importantly look to be ready to really go hard at the market in 2012 and Alan This is Eric Let me add the one measure of success that we've defined for the team is grow dealer consignment volumes.
Not role trade reveling, not grow ADESA physical volume focus on the marketplace and growth total dealer consignment volume and to Eric's point and I said in my commentary dealer consignment was actually up 7% or between Traderev in between physical.
Again, so we're seeing signs that that this better together.
We have.
We have confidence that this can work.
Great. That's very helpful commentary on us as a follow up to that question on the institutional next continued to increase in the quarter versus dealer consignment on yet total conversion declined slightly year over year did something change in this quarter with respect to institutional behavior at auctions are they getting more selective on price at all on or was there something going on.
On the conversion across dealer consignment that may have tried that metric down.
Yes, so a couple of points I would make there is first of all the third quarter was off it was soft in retail and retail soft ultimately has the effect on the dealers and what they buy and what they're willing to stock.
And what they're willing to pay and it also has an impact on what the sellers are willing to accept so theres no question that the quarter was off and it was much softer than what we anticipated.
The other thing I will tell you is the good news on diligence on on the commercial side of the business. We continue to win share and you know if you listen to me over the years I've always maintain we don't talk about our wins in our losses on individual basis.
But I will tell you overall, we are winning share and the reason that we're winning share is because of the investments. We made in technology investments. We made in the platforms and then investments we made in data and analytics is now paying off and the way, we're winning with that with those investments is we're winning.
True getting more share.
Great Thats all my questions. Thanks.
Thank you.
Thank you and our next question will come the frontline, Chris Buddy Buddy Cleary from Wolfe Research you may begin.
Hey, Thanks for taking the question.
So two questions I guess like the first one more theoretically.
Was there anything you've seen today I'd like to local market level that gives you the confidence that you'll be able to raise fees and hold volumes.
What do you have a competitors that are presumably being you know how the willingness and the ability to falls in the capital markets to earn money for 10 years probably.
Like so do you think it's feasible go head on if they don't care about profits and you do.
Your sense there.
Yeah, absolutely no I.
First of all avenues that we need to focus on what we're doing.
But I think that.
Again, anecdotally I think that.
We believe that they're probably taking a closer look at their fees as well.
And so it's not case the following them as a case of doing what we believe we need to do and creating a profitable level of profitable model as I said going forward here.
With that said.
You know they have one offering or our competitors have one offering is a digital offering only and we have both offerings is like I'm repeating here, but I think that is really the long term win here I don't believe that as single technology offering a single digital offering can win the long game here.
I believe it's going to be those physical assets, we have and so yes, we have a platform trade route.
We have the technology, we have the combined better together approach, but we also have transportation company. We have a finance company. We have an inspection company. We have a number of other services that make this a much more holistic offering that dealers get to choose from and as I say is not one size fits all so I believe.
Dealers will pay for those services.
And they'll pay for those services all provided by one provider.
And at the end the day, we are raising our fees, we have raised their fees and we continue to raise our fees and we're not really looking at what the other guys doing.
Got you that's helpful.
And then just wanted to think about the implied Q4 guidance I get the whole insurance recovery thing, but if we put that aside for a second is there anything to simplify.
What you're assuming in guidance relative to like year to date, and then maybe just give us a framework for understanding off lease growth and that's it back because I think those are both your most profitable vehicles and your lease profitable vehicles, just kind of get a sense front like you know what you're expecting there in terms of Q4. Thank you.
So.
Thank you Chris there was really.
The three or four things I'd point to as we thought about our guidance is you know first of all.
You know.
It was certainly the lower gross profit as a result of the soft market at physical auction really had an impact that the physical auction. If you take a look at our growth in the quarter most of that growth came through our ancillary services.
The second was our costs and you know we knew.
Coming out of the spin we knew we were gonna have to address our costs and as I say rightsize the company.
And in many cases I would be complementary of our leadership team I think we've done a good job I would say my criticism would be we didnt move fast enough and we need to continue to move faster in the third which gets to your question. On these volumes is we also know that these volumes were written in 2000.
16, we said the highest month in the history of all leases was written in December 2016.
Well, we capture those cars in the fourth quarter or will some of those cars rollover into the into 2020. Some of my thoughts are that.
I don't really see the sellers being able to hold these cars, because even though off lease plateaus. It peaks as we say it picks it peaks in 2019, it really plateaus, we have great visibility into what happens in terms of off lease returns over the next two or three years.
And it's pretty level.
As we go forward. So we see lease returns continuing to be a big driver of our volume than our profitability as we go forward. So Chris did I answer your question.
Yeah, I think you did thank you appreciate.
Okay. Thank you.
Thank you and I question I'm confident line of Ryan Brinkman from JP Morgan you may begin.
Alright, great. Thanks for taking my question time could you. Please comment on the softer industry volume trend that you'd earlier attributed to the timing issues what are those timing issues exactly and how long do expect that they will persist.
Well I get other predicting business is a long time ago, Ryan, but you know listen we didn't anticipate the quarter being soft as it was we didn't anticipate the.
The the.
The lack of retail and retail going and sauces. It doesn't there's lot of things going on around the world that Youve that you could speculate on as to what caused that right outside of the car industry itself.
But with that said I'm hopeful that it was a blip and that will get back to normal.
To normal retail here as we continue to move forward towards into there and Ryan. This is Eric let me add even even at least volumes.
While we talk about December being a big month in 2016 September October .
Very soft so until the end of the quarter was soft.
I know, we look at at retail from that perspective of of the public companies that have used car retail operations.
That's only a subset that's the the late model car. It was very soft when you get into the subprime and some of the other markets that are big supporters of the physical auction that earlier question about converged right. We had the supply of inventory the buyers just weren't willing to pay the value of which the seller would transact that.
Correct itself, either the seller will reduce expectations for the buyer or raise the price, but but we know from history. In this this perhaps over a relatively short period of time of weeks not months.
The volume is coming and it will move.
That's helpful. Thanks, and I heard you mentioned that the issue at high Tech locksmith could have a material impact on the fourth quarter can you just confirmed that this potential impact would only be neutral to positive given you'd already taken the inventory loss into Q1, and then at the magnitude still roughly $5 million.
Uh huh.
Ryan never right. There's no downside. This is just the recovery the offset earlier losses and and the magnitude while we haven't given a specific number would would be at least mid single digits and could be greater we'll see where it ends up with the insurance claim.
Okay got it and then just finally is there any update you could provide on the new wave initiative that was outlined a couple of years ago African part.
Because I want to learn how to benefits might have tracked relative to your expectation, but also because I was under the impression the plan might have added up a fair bit of cost you talked about hiring a fluid Phd data scientist technologists et cetera is that an area that's being targeted maybe for the afternoon, a reduction or is it still such an important initiative that I don't know.
Maybe you're looking to protect.
Yeah. So.
Number of parts that question, Ryan, but the first and foremost Rs in a reduction is across all of our businesses. There wasn't a business that we're not going to scrutinize and.
Take a look at.
Every every job and.
What that job does and what it creates in the responsibility and do we need it. So so that goes across all but what we've really seen with new wave as we've seen a new enhanced.
[noise] system.
With features and benefits.
Two.
Again make it easier for customers to do business with us.
And we've seen market share gains.
And all those market share gains.
I can tell you I would attribute much of that to the new wave product and what we've done with new wave and the other area that I would contributed too is there is is this data analytics area. There's absolutely no question that we've taken a leadership position with data analytics and the way.
And I said in my commentary I'll repeat again, the way that we get rewarded with data and analytics is not necessarily by monetizing getting paid for the data it's by getting more share and so with that we've continue to grow share on the commercial side and I would tell you that without.
Getting specifics we have won some major business.
Very helpful. Thank you.
You're welcome.
Thank you and on a core sales line of Stephanie Benjamin from Suntrust You may begin.
Hi, good afternoon.
Hi, Thanks I.
I wanted to follow up little bit on the other question before me and just some of the softer industry volume trends and the timing of these then I guess Dan.
Lack of retail volumes during the quarter I know you said that this was you've seen us before and it can be timing, but maybe just so we can kind of learn a little bit more about that historical trend where you did in fact see this you know what was the driver of the slow down historically aneel why it improves so maybe just a little bit more context there.
We can kind of wrap our heads around that and then I just a follow up on trade routes.
Alright, Stephanie this is Eric I'll take the first shot at this what we see is is when we say slowdown is not a lack of supply. It's a disconnect between expectations of the seller on pricing and what the buyers willing to pay and if a buyers, but a lot full of inventory and feels they have sufficient inventory they're going to be.
Less aggressive on the bidding on the car.
Because they don't need it today, thank the always looking for inventory and that shows up in conversion rate.
And ironically, while we don't disclose this specifically, we even saw declining conversion rates on the open learning platform cars coming back we're selling at a slightly lower slower pace. It in the third quarter than what we've been experiencing and that is because the dealers have sufficient inventory and the sellers have not adjusted the price.
Expectations to what the dealer will pay to add one more car to their life that makes sense to you and again in the past we've seen this we sought in a way of nine we've seen it as theres different periods. When you go back even the 13 14, where you'd see it these adjustments occur over a few weeks.
Because the consigners need to move these cars.
No no that that's helpful. I is there any concern that maybe the dealers are sourcing some of their vehicles in house, So basically taking trade traded at trade in lease vehicles, or just overall trade ins and supplementing their own inventory.
That way versus going to the auction.
Yes dealers have always source their own vehicles I mean, they always source on trade ins listen being a former dealer I can tell you My first choice was always.
Always source my cars through trade ins as much as I, possibly could that way I would sell into cars I was selling the new car and I was getting the trade in I was on that so so theyve always source our own vehicles are always keep the best vehicles that they can but what OPENLANE and those private label programs provide as they provide those young off lease.
Cars three years old 30, 40, 50000 miles on good condition right don't need a lot of reconditioning you can basically take the vehicle as we say retail ready get it back to your lot and put it in the front row and sell it today.
And I think that the attraction of those off lease cars in the private labels.
Got it now that that's helpful. And then just quickly on trade routes and I. Just this is more of a clarification. So I think I understand that not necessarily chasing volume that at any cost strategy, but does this affect the actual rollout of the platform to dealerships across the U.S. because my question is Justin.
Thank you know the beauty of trade rabbits kind of building that network effect, creating that dealer to dealer marketplace, which builds on itself. So maybe if you guys called comment a little bit about just the rollout again not necessarily target the volumes at any expense, but just to make sure that dealers have access to that platform.
Yeah, I'm, a take first part of that and I'm going to let Eric weigh in as well.
So the bottom line is.
No we haven't postponing the rollout we continue to do the rollout, but we've slowed the pace of that rollout.
Including the pace of the incentives that we added to that and I think are you want that some yeah, but by the better together strategy. If there's a dealer in any market that has a contact with ADESA that platform is immediately available to them to transact as opposed to what's happening to hire.
A new rapid trade route.
Train them on what the used car business is all about which is what we do.
We have people that already know that customer already know that business and so as Jim said I like what he said, sometimes just slowdown to go faster.
But pulling back on on hiring these independent but using the resources that already know the dealer I think you'll see us accelerate the pace of entering markets on trade Rev. Over the next several quarters.
No really helpful. Thanks, so much.
Youre welcome.
Thank you and our next question will outline a Gary Prestopino from Barrington Research you may begin.
Hey, Gary Hi, how are you doing.
Okay.
Yeah, Great wanted just talk about.
You mentioned that you want to keep the losses 60 million a trade Rev going forward.
And it looks like you've was 51 million the first three quarters, so you're running at a loss rate of about 17 million a quarter.
And yet you're you're going to lose about 8 million. In Q4 is is that a direct result of what you're doing with a better together strategy knocking back incentives and.
Actually reducing personnel that are going after these accounts.
Binding salesforces and would that portend that in 2020, we could see stepdown losses of trade Rev. Just because what you're doing internally.
Gary you summed it up very well. Thank you for that yes, we're making these changes have less incremental cost per transaction with which is going to possibly reduce volume, but over time take better advantage of our breadth of coverage of the dealers.
Uh huh.
We're going to higher last quarter, we I mean, what I, what I pointed out in my commentary.
I am not allocating ADESA costs to trade route if they're selling a trade revenue.
We're not changing the cost structure of ADESA and some of their activity May result in the trade rough sale and the Costco state stay at ADESA that will be in part how we are able to reduce the losses.
That are directly attributable to trade than fourth quarter.
Hopefully overtime accelerate the pace of growth on volume.
Okay, and then a lot of talk about what volume demand supply and all that but you also mentioned that you're going to take a long hard look at your.
Paul Cogs and Uris DNA out in the field. So could you maybe talk a little bit about.
What you could do better on the cog side, what you could do better on the DNA side.
In the field because that obviously.
Any ancillary services that you book it diminishes margins, so that would be a place to attack so give us some idea what you're looking to do.
Yeah, Gary I think that's a great question and one that we are thinking a lot of no shame on us where the here first of all.
We need to understand that as you look at our business, 60% of our costs our labor related so we absolutely have to be able to address the labor.
Especially at the legacy physical auction business.
And as you think about that you know you've heard us talk about virtual lane in the past.
Where the car can they will come in and still get us reconditioning and get parked on the spot, but it doesn't necessarily have to drive through the lane anymore and and they basically the dealer sit in the lanes comfortably and they buy it office screen, where they can see pictures of the cars.
They can see a condition report in the car and they can also go out walk around the current events. If they want the car still sitting there they really want to come to the physical auction. We now have about 30 of our auctions equipped with.
Virtual lane.
And we continue to.
Equip the balance of our auctions.
With virtual lanes, we go forward.
And a couple of points I would make on that is our major competitor in this business is doing the thing thing, which has been very encouraging in fact, they announced that they're doing one auction that is 100%.
Virtual no car goes through the lane through any lanes and just recently in the last week, they have announced they're about to move to their second.
100% all digital auction. So there's no question that the way the industry's moving and must move we have to reignite, how we do things at the physical auction let me.
Let me also.
Give you one I mean I could one with lots of examples but just to give you an ideal but what we're thinking about think of.
Think about an auction that has an lanes today and you've been at auctions 10 Lane auction could we reduced that auction and operate only nine lanes and could we could we do that across 75 auctions and you could do the math to know what that would mean in terms of savings and what our dealers really be of be upset.
That the auction ran an extra 20 minutes longer because we took it from 10 lanes down to nine lanes. Those are the types of things we're thinking about even write down too is you know is the workweek a five day workweek is that a four and a half day work week.
Theres, a number of things and the list as long, but it's going through that list and is it's targeting the things that we're going to focus on that can really eliminate some of these cost and then the other thing that I'll just mentioned.
It is.
Just recently here in October the National Auto auction Association held its annual meeting of all auction all auctions in all auction, we re marketers here in Indianapolis and I was humbled to be the keynote speaker and what I spent my time talking about.
Spend my time talking about the transformation of the physical auction and that we're gonna have to stop running cars and first of all we're gonna have to do it for from a safety standpoint, but second of all this is re imagining the way that physical auctions will operate in the future. So lot of focused on it we've got a lot of brain trust working on it but we.
I think there's some significant gain.
That I'm not going to quantify today, but I think theres big opportunity there.
Just just lastly is is this what you're doing out in the field is this something that you can accomplish over a year or is that a two year program or is it just a continual program.
I think it's continuous improvement a you know I believe that we can certainly give away it's being launched as we speak many of these things I think we can get at lunch now and we can work out it.
Auction by auction.
And certainly I don't think Theres any finish line I'll tell you that the other thing that's important to.
That.
It's not just always what we want to do.
We have to bring our customers with us.
You just can't well and shut down the throat enforced fee that you have to ask your customers that come with you and they have to understand what the value proposition is and why they should support it and I can tell you right now we're getting tremendous support from the Oems on the virtual lane and not running cars, it's a little bit.
Harder with the dealers.
Has the dealers have an older car in most cases.
And you know there's still some of them hanging onto the way that they've been doing that for the last two or three generations.
But.
My point was.
You know the speed, we want to go fast, but we've got to make sure that we're not going faster than their customers are prepared to go with us.
Okay. Thank you so much.
Welcome Gary.
Thank you and our next question will come from line of Craig Kennison from Baird you may begin.
Hi, Greg Good morning, Thank you for taking my questions.
Jim I wanted to get to your goal of.
Moving SDMA as a percentage of sales below 20%.
Revenue in 2020, I wanted to clarify is that the full year goal and then is that something that will unfold throughout 2020 .
Such that you are well below that in Q4 of next year or is it something you can address quickly. The cadence is is more immediate.
Yeah. So.
I've got the goal as.
We're working on as we speak I told you about the cost reductions that we did in March and I told you that we've done some recent cost reductions here.
It's in motion ER and through the course of the year. The goal is to be on that are at or under 20%.
Thank you and then wanted to give you a chance to comment on Europe . You said it was in line with your goals. It feels like volumes ahead of what you had committed to earlier in the year could you just address what's working in Europe , and maybe clarify that profit profile of that.
Volume as I know, you're still in a hyper growth phase.
Yes, thank you for asking.
[noise] cars on the web is.
Absolutely performing to our next to our expectations.
The thing that we've been able to first of all we got very good management team there.
And what we've been able to do we've been able to introduce them to some relationships they weren't able to get too and that has allowed us to increase our volumes.
The other thing you know as you think about the opportunity you think about the car Park in Europe . The car Park in Europe as it is equal to the size of the car Park here in North America.
In cars on the web.
There aren't any other companies that do exactly what cars on the web does and so we think there's a real opportunity and we think cars. The web will be a big contributor to our growth going forward.
And then finally.
Accordingly around the spin you talked about some long term growth targets, 6% to 9% revenue growth and.
25% EBITDA margins.
Though still reasonable goals in that timeframe you described.
Yes.
Great. Thank you.
You're welcome Sir.
Thank you and our next question will come from the line of debit Glynn from consumer Edge Research you may begin.
Hey, guys good afternoon.
There.
Just two questions on trade Raz first can you just elaborate more on the recent changes to the sales team to better align business across both ADESA and Traderev.
What impacted to have in the quarter were there any hiccups with respect to those incentive changes.
Then secondly, just hoping to get more color on the competitive environment for trade rather than the dealer to dealer space. Obviously your private competitors. Many blurry some capital wondering if you've seen any significant changes in the competitive dynamic from them or manheim over the last quarter or two that would perhaps lead you to this pivot in strategy for trade routes.
So let me start there's multiple parts. So I think I got most of them, let me start with sand [noise].
The teams are very excited with this merger of the two teams and that's a great starting point.
No we.
Through through or through our own our own fault I'll say I'll take it is we created a competitor. It was almost like we had two companies we had Traderev company and we had ADESA company and they were competing.
And it was really are in place we're saying.
You know.
This needs to change and it was our employees that were were encouraging the change as much as it was management and so I think our employees are pleased that we listen to them and that we brought this together under under single leadership.
The I'd mentioned those a lot of cross training going on that cross training continues. We also looked a compensation programs. We looked at the way somebody got paid to trade rather than somebody got trade pay that ADESA and now we've aligned those compensation programs. So it's not I get more money or I make more money if I sell this car or that cars just.
Get car sell car of the dealer car, you're getting paid so I think aligning those.
Those compensation programs were good and then from a competitive standpoint.
No again.
I'm not a big fan of anecdotal information I tend to like more factual information I hear about a lot of things that are going on industry and what people are doing I don't have anything factual to tell you, but my competitors.
And you know and I also don't know how they count carts.
Quite frankly, I hear that cars get counted differently with different organizations I know, how we count cars one car one sale.
Is the car so if the cars arbitrator then comes back it's not another car sold is still one car sold so I think you know I think it is competitive theres no question that we run into our competitors when we're out there in the field.
On the other hand, a I'll go back to what I originally said.
Theres competitions base, but nobody nobody has the offering that we have.
And I believe it winds long term.
Got it thanks guys.
You're welcome.
Thank you and our next question will come from Bret Jordan from Jefferies. Sir you may begin.
Hi, good morning, guys.
Hey, Brett sort of a follow up on that last competitive landscape question, but do you see Mannheim Expresser HCV backing off some of the southern spend as well.
But a lot of free transportation being brought into deals, but you'll see that cadence flying with them also.
You know at this point, we wouldn't know what they're doing because they don't disclose and giving information publicly what I would expect the market.
Doesn't do the value when all these incentives, creating temporary transactions that are sustainable over time, we'll see how they respond.
Robert your sales price.
Brett we were probably the driver initially of heavy incentives to build a market. We were the first to do it and where the first to stop doing at some level.
You know great. Thank you.
Yeah, Brett I was just going to add to that is you know we talk about breakeven.
And that's a milestone.
And we're still on track we believed to break even 2021, but let me tell ya at breakeven [laughter], that's not where we where we want to be at long term, we need to we need this business to stand on its own and start making money.
And so this is not about how much money, we can throw at the market how much how how we can throw incentives that the market and do some of the things that we're doing.
As a matter of fact, I think we we kinda did it to ourselves by throwing thrown those incentives out there and now we realize it's not in sensors is going to win this game.
Okay. Thank you.
You're welcome.
Thank you and I'm not showing any further questions at this time I like to turn the call back over to Jim Hallett for any closing remarks.
Alright, thank you.
And I appreciate you being on today, obviously, we've got some things that we're dealing with but as I mentioned in my commentary. It's nothing that we haven't seen before and I have full confidence that the team is ready to execute on the things that we talk to you about and we're ready to demonstrate to you that we can rightsizes.
Company by doing the things, we talked about and we can continue grow our business in all areas.
And we appreciate your continued support and look forward to talking to you in February to tell you, how we're going to execute in the things that we're going to execute on so with that have a great day I appreciate you being on.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.