Q4 2019 Earnings Call
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Now I'd like to hand Congress every speaker today Mikey life.
Treasurer, and Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thanks, Dan Good morning, and thank you for joining us today for the car Global Your end 2019 earnings conference call today, well discuss the financial performance of car global for the quarter ended December 30, Onest 2019.
After concluding our commentary we'll take questions from participants.
Jim kicks off our discussion I would like to remind you that this conference call contains forward looking statements within the meaning of the safe Harbor provision other private Securities Litigation Reform Act of 1995.
Starts 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 inner FCC violence.
Providing forward looking statements the company expressly disclaims any obligation to update these statements.
He 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 applicable GAAP financial measure can be found in the press release that we issued last night, which is also available in the Investor Relations section of our website.
Now I'd like to turn this call over the car global CEO, Jim how Jim.
Thank you my goal and good morning, ladies and gentlemen, and welcome to our call.
Let me start by stating what may be the obvious.
2019 has been a challenging year and I wonder investors. They know that we are accountable for the these results and we're also have a path forward and we will be accountable for that a path forward.
I will explain in my comments today.
Believe that car is well positioned to improve our performance in 2020 and beyond so with that let me outline my agenda for today and then we'll get to it.
First of all I want to review, our fourth quarter in our full year financial performance.
Summarizes the key items that impact the car global in 2019.
We view our guidance for 2020 and provide insights on the trends, we believe could influence our performance and last I want to walk you through our top priorities for 2020, our priorities are a combination of initiatives that directly contribute to improving our performance in 2020 and sets us up for continued growth beyond 2020.
Let me start with an overview of our financial performance.
Actually I am pleased with our fourth quarter performance, where we grew net revenue was 6% on a consolidated basis, our adjusted EBITDA increased 10% over the prior year and for the full year. We saw net revenue increased 7% and adjusted EBITDA increased 1%.
Our performance for 2019 was disappointing.
But when you look at the pieces that make up a car.
My disappointment is limited to two areas.
First we had an issue at high Tech locksmith negatively impacted our performance by more than $10 million.
We did recover just under $4 million up expenses incurred at high Tech locks that's in 2019, but the drain on our earnings were still significant.
In the second area is trade.
Our losses exceeded our expectations in the volumes fell well short of our targets.
As I will cover in a few moments we have altered our go to market strategy for our digital dealer to dealer offering.
I believe our new approach will improve our success in the dealer consignment segment and lower our cost in achieving not success.
As I look beyond these two negative items I see a lot of strength and our business that are reflected in the fourth quarter results. We had a strong performance in our physical auction business as well as through our OPENLANE platform.
Our total volume was up 9%.
Commercial volumes grew 11%.
And dealer consignment volumes grew 6%.
And we're able to triple our volume in Europe with the addition of cars on the web.
We also saw ARPU in both physical and online marketplaces girl.
Physical ARPU grew to $886 from $868.
Our pool only on and the online businesses ARPU grew from 100 grew to $155 from $122.
Hey of see continues to be a consistent performer for car revenues increased 3% in the fourth quarter and adjusted EBITDA increased 9%.
We also made some changes the car that will reduce our S. DNA going forward, we have streamlined our organizational structure to be less complicated and have eliminated a number of overhead possessions. Many of the positions eliminated were higher compensation levels, we had severance in the fourth quarter of nearly $10 million.
With that the payback for this onetime cost is less than two quarters.
As I look back and reflect on 2019. It is a combination of successes and challenges.
The spin off of insurance auto auctions has exceeded our expectations, yet becoming a smaller company has shown just to rightsize the remaining car global enterprise.
The last half of 2019 saw the used car market, both wholesale and retail have some choppiness, but the supply of vehicles remained strong and the outlook for our industry is clearly positive.
So with that I'm ready to turn to page on 2019 and focused on execution and the delivering the results that meet or exceed our expectations going forward.
Now let me provide you with an overview of our 2020 guidance. We expect adjusted EBITDA of 520 $540 million. This will result in operating adjusted net income per share $1.28 to $1.38 included in this guidance is an expectation to reduce the losses.
Incurred at trade revenue by approximately $20 million and with the combination of the sales teams in a more integrated approach to serving the dealer consignment market I have increased confidence in meeting this target.
We expect North American volume in both commercial and dealer consignment segments to grow.
Our commercial segment will be supported by lease returns and repossession activity that are expected to remain strong dealer consignment is the other segment over market remember digital and physical are not segments. We're focused on two specific goals and dealer consignment.
Grow total dealer consignment volume.
And increased our profitability for the dealer consignment segment.
As I've said, many times, we will not dictate to our customers when where how they should sell vehicle, but how we will offer solutions to meet all of their needs, we're not going to pursue growth in our digital offerings at the extensive performance. We will approach the digital marketplace with a rational business model that is.
They annabelle for the long term.
Now, let me speak to used car values in 2020, we're expecting a strong supply of used vehicles to cause used car prices to decline modestly.
This creates an opportunity for our physical auctions to continue growing ARPU to value enhancing services.
And the strength of supply from our commercial Consigners well also support our businesses that operate outside of our physical locations that being cars arrive autovin car and already in well all benefit in contribute to growing ARPU.
On the cost side, we plan to further reduce our S. DNA, we have eliminated 70 sales positions in combination of the ADESA and straight trade drab dealer consignment teams in early January.
Corporate head count reductions in 2019 will be seen in lower costs in 2020.
And we have identified non payroll costs that can be reduced in 2020.
We believe we have opportunities to reduce software licenses and maintenance cost travel and entertainment expenses and mobile device cost to name, but a few.
I continue to challenge our leadership team to reduce our SDMA as a percent of total revenue to 20%.
By the end of 2020 [noise].
We have established five specific priorities in 2020, and I want to outline those for you.
First we want to improve our overall profitability of car.
Secondly, we want to grow our dealer consignment business.
Third we want to grow our commercial business.
And fourth we want to transform our physical auctions into the digital auction of the future and finally, we want to continued to grow our international business.
These priorities focused on near term performance and setting up car global for the future.
Let me expand on those priorities. Our first priority is to improve our financial performance I've already spoken to a number of actions we've taken to improve or performance. In 2020. In addition to reducing our S. DNA, we will focus on improving the gross profit contribution of our ancillary and related businesses.
We have set specific targets for high Tech locksmith.
Par auto Ben in cars arrive gross profit percentages were also looking to improve the operations at our North American physical auctions and reduce our direct cost.
We need to expand our virtual lane offerings, and we need to rethink our traditional auction processes and look to the use of technology to reduce the number moves for a vehicle prior to the sale.
Next priority for 2020 was to grow our dealer consignment volume we have now combined the sales team of ADESA and trade route and we have clarified our go to market strategy. We have set a clear goal for dealer consignment sales team and we will grow or dealer consignment volume in January we provide.
I did a three day comprehensive training program for all of our sales team members across North America.
And then a D.A. last week, we introduced our high wages sell dealer solutions.
The solution. This so this solution sets excuse me the solutions that allows the dealer to select from three distinct service offerings when selling a vehicle.
We will allow the dealer to use Oliver capabilities of car with as much or <unk> as little involvement in the sales process is the dealer desires. We also introduced our move metal three day delivery guarantee.
Any vehicle purchases on trade rep within 500 mile radius of the buying dealer will be delivered in three days or less or the delivery is free we are resetting the bar on service levels and most importantly, I want all of our dealer consignment sales teams to understand the physical auction process we.
Sold nearly 900000 dealer consignment vehicles from our physical auction locations and the physical auction industry sold approximately 5 million dealer consignment vehicles in 2019.
I want to reinforce that physical auctions remain a viable venue to get the maximum value for wholesale transaction.
Thirdly.
I want to talk about a commercial business.
Using the OPENLANE technology, we provide the U.S. and Canadian markets with best in class private label technology for Oems a major banks.
We want to continue growing the volumes that sell on or private label sites.
And continued to increase the open sales for these consigners were also targeting the Oems in their captive finance groups to expand their market share at physical auction [noise].
We see this is an important driver for revenue growth and we not only see an increase in volume, but we have the opportunity to offer ancillary services to improve the condition of these vehicles and increase the value of these vehicles at the same time.
We're also focused on expanding the reach of our other businesses that provide transportation in the least inspections repossession services and data and analytic capabilities to our commercial customers.
[noise] fourth our priority is to transform our physical auction operations and be the leader in providing the digital auction in the future.
We are rethinking every process and every technology, we use that our physical auction locations first and foremost I want the physical auctions to be safer.
Secondly, we see how our dealers want to do business in is clear that we can help dealers make the best decisions when buying vehicles with the best information and while spending the least amount of time possible away from the retail operations.
We will continue to invest in our physical auction facilities and the technology that we used to operate these auctions not only will just help our dealers obtain inventory more efficiently, but we will also benefit by reducing the labor cost required to operate at our physical auction sites, while I expect to make significant progress on that day.
It will auction in the future in 2020, the priority has a longer roadmap and is likely to see its greatest returns beyond 2020. The good news is this priority is more about prioritizing our capital investment in technology and not about increasing our expense structure to achieve our goals.
Finally, our fifth priority in growing our international business, we operate two separate online auction platforms in the UK Anthro Continental Europe.
Each of these platforms has the opportunity to grow volumes in the grow profits.
Our cars in the web acquisition will be the primary driver of our international growth.
Were pursuing new commercial consigners for the European platform.
As well we are looking to increase our share of wholesale transactions that stay within a particular country, especially in Germany.
And we are developing additional services that we already provide in other markets.
Not only kenner international operations provide growth in 2020, but I see even greater growth in the years ahead as we develop these additional services and changed the wholesale auction experience in Europe.
In summary, we have set the priorities that will directly impact our results in 2020 and improve our cost structure into the future. We're approaching the segments of the wholesale business with a focus on providing solutions.
And just not offering different products, our priorities will shape the operating decisions that we make throughout the year into what initiatives that we allocate our capital.
So thank you again for joining us today I will now turn it over to Eric for additional commentary alright.
Thank you Jim.
Let me add some additional comments on our performance in 2019.
First I'd like to highlight a change in our income statement presentation, beginning in the fourth quarter and for the full year 2019, we are identifying purchased vehicles sales as a separate component of revenue.
This presentation allows the readers of our financial statements to better understand our gross profit performance almost 90% of our total revenue is auction fees services revenue and finance related revenue that have high gross margins. However, the revenue from sale of purchased vehicles reflects the sale price of the vehicle.
They comparable cost of services that distorts the reported gross margins in Arkansas validated financial statements and in the financials results reported for the ADESA segment.
Revenue from purchased vehicles sales has become more significant recently as we've expanded the ADESA assurance program and acquired cars on the web.
I would also like to highlight a couple of items that impacted our fourth quarter results first we incurred $9.6 million in severance in the fourth quarter as we eliminated a number of corporate positions throughout the company.
The severance costs are defined as nonrecurring expenses and are excluded from the adjusted EBITDA.
However, severance costs are not excluded from the computation of operating adjusted net income from continuing operations per share.
Fourth quarter severance costs net of income taxes reduced operating adjusted net income from continuing operations per share by five cents.
Our fourth quarter results were also negatively impacted by a higher effective income tax rate in 2019, as compared to 2018 and as compared to our expected effective income tax rate for the year.
The effective income tax rate of 38% in the fourth quarter compared to 11% for the fourth quarter of 2018.
The increase effective income tax rate reduced operating adjusted net income from continuing operations by five cents.
The impact of severance and increases in our effective income tax rate on the full year was eight cents per share and six cents per share respectively.
The severance costs were incurred as we took action to rightsize car for its operations post spin up by a.
The actions taken in 2019 will reduce our cost structure in 2020, we continue to provide support to the <unk> organization in 2020 and are working closely with the eye a team on transition plans as they stand up many corporate functions for their separate company.
We receive a transition services fee from I say that offsets our actual costs incurred during the transition period.
As Jim mentioned in his remarks, we received approximately $4 million in December 2019 that offset expenses incurred and high Tech locksmith.
Our litigation against former employees is ongoing and any recovery of losses or additional expenses incurred will be recorded when realized.
Beyond the losses incurred in 2019, the high Tech locksmith business has been performing at lower levels due to high employee turnover. We believe we have stabilized the management of this business. Although it continues to operate at lower revenue and profitability levels. Then in the first half of 2019.
Okay.
Throughout 2019, we have reported lower gross profit as a percent of that revenue in the ADESA segment.
Well the mix of ancillary and related services revenue is the primary driver of the lower gross margin. The ADESA team has been focused on how to improve gross profit in our ancillary and related services businesses.
Fourth quarter gross profit was 42.1% of auction fees and services revenue compared to 41.8% in the prior year.
Within the ADESA segment auction fees and services revenue is all revenue to accept purchased vehicles sales revenue.
Improving our gross margin on ancillary and related services is a key initiatives in our effort to improve our profitability.
As we did in the fourth quarter, we will continue to focus on these businesses and focus on improving our gross margin for ancillary and related businesses, which will impact the entire ADESA segment.
Our AMC business continues to perform well during a period of slower growth.
She has been able to increase adjusted EBITDA at a greater rate than revenue growth.
AMC has done this by reducing assessed DNA in absolute dollars dollars, therefore, driving greater profitability.
[laughter] holding company has also reduced total expenses in 2019 as compared to 2018 for the full year and in the fourth quarter.
Yes, you in a as reported in our segment financial reporting includes severance up $5.8 million for the full year and $4.4 million in the fourth quarter.
We expect to reduce.
Holding company SGN eight by over $10 million in 2020 as result of actions taken in 2019.
We also have targeted additional SGN a savings of up to $10 million that we're pursuing in 2020 that relate to non payroll costs.
Now, let me review elements of our guidance not covered by Jim.
We expect capital expenditures of $135 million in 2020 down from $162 million in 2019.
Approximately $85 million of capital expenditures is related to technology, and a proxy and approximately $50 million is related to physical assets.
We are expecting cash taxes in 2020 of approximately $65 million. This represents an increase from cash taxes of approximately $38 million in 2019.
The increase reflects the higher effective income tax rate, we anticipate for 2020.
A 30% combined with less proceeds from exercise of stock options that create income tax deductions with no corresponding expense in our financial statements.
We are expecting cash interest on corporate debt of approximately $90 million earlier. This month, we entered into an interest rate swap that fixes the interest rate on our <unk> term loan b at approximately 3.7% for five years on $500 million of the 948 million dollar.
It is outstanding at December 31, 2019.
At the time, we entered the interest rate swap the interest rate on our floating rate debt was approximately 4.1%.
This represents a reduction from cash interest on corporate debt that was $110 million in 2019.
We expect a significant increase in cash generated from operations in 2020.
Not only will we increased cash but based upon the high and low end of the range of our adjusted EBITDA guidance. We expect to increase 2020 net income from continuing operations per share by 39% to 53% over 2019.
And increase our 2020 operating adjusted net income from continuing operations per share by 23% to 33% over 2019.
Now, let me close with a couple of comments on our plans uses of capital as Jim provided insights on our top five priorities for 2020, we're planning to allocate capital to support these priorities.
This starts with our capital expenditures of $135 million for the year.
It also applies to our acquisition pipeline, while we continue to focus on improving our profitability immediately we are prepared to deploy capital to support our priorities and provide the platform for long term growth as opportunities arise.
We continue to evaluate all alternatives with strategic growth being our primary focus after providing a return to our shareholders through our quarterly dividend.
We have a share repurchase authorization in place should we determine that repurchases in car shares is the best use of capital.
We have no specific actions to discuss today, but have a pipeline of potential uses we continue to monitor.
In conclusion, we continue to believe we can meet our long term growth objectives, we're committed to growing revenue improving gross profit dollars generated in our businesses, reducing SGN, a as a percentage of revenue and growing our profitability as measured by adjusted EBITDA and operating a.
Adjusted net income from continuing operations consistent with long term targets, we have previously discussed.
And finally, we're committed to reducing the losses incurred at trade route as we pursue leadership in the dealer to dealer segment of our business with our combination of the sales teams at ADESA and trade route and further integrations of operations that are likely in the near future. It will be difficult to isolate traderev losses, consistent with how we reported when.
Trade Rev operated with complete autonomy. However, we will measure the revenue and cost from this digital channel in order to report our progress on reducing the losses as long as that is feasible overtime. The real measure of success will be the improved profitability of the total ADESA segment.
Thanks for your time today and that will now I'll turn it back to Daniel to take your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound Ji. Please stand by what we can politicking going any roster.
Our first question comes from John Murphy with Bank of America. Your line is now [laughter].
Good morning, guys.
Just a first question would you go a little sort of more strategic.
When you think about sort of the growth efforts on trade ramp cars on the web.
Hi Tech locksmith jobs second question on it seems like you had been sort of a diversion in some of the stuff is not going according to plan, but it also seems like you're now indicating in the core of the business based on the restructuring or sit head count reduction that you're going after initiate reductions that there might be something going on in need it.
The core business, where costs are a bit inflated is that something the there's just changing any core business or is this something where there's been a lot of management effort in time focused on these growth initiatives and maybe take you out to dry off the ball there and you just need to go backing Rightsizing I'm just trying to understand.
What's going on in any core business, which seems like it's a little bit of underperformance on the cost side there are performance.
Well John This is Eric let me start and then I think Jane Jim will add some things this.
Relative to cost cost structure, let's break it into the pieces you brought up when you saw the trade rather it was clearly.
Too high of a cost model with all of the incentives and things that we have cut back and so so there specifically we have slowed down in order to get the business model right size. So that we can have long term profitable growth in the dealer to dealer segment.
Cars on the web specifically has outperformed our expectations and that they're doing very well. We've only owned at 11 months now for 10 and a half months at the end of the year, but but it's done very well is exceeding our expectations and in fact is is part of <unk> is expected to grow a little bit more and I think we're fine there.
The core business ancillary service I don't think our costs were inflated what I think it's happened as we have the opportunity to use technology to have a more efficient delivery of our direct costs into that business and shorten shortening the amount of time a car is on is on the property. How many moves you make how can you deliver the services Maury.
Currently and improve our profitability that way and then lastly, I'll, let Jim speak to this.
Can we come up with an auction model that has less reliance on labor all of this comes down to reducing the labor component of the dress cost structure across all of our platforms and virtual lanes as an initiative that Jim as is very passionate about for many reasons. So Jim maybe talk about how we're going to use the technology reduce the cost structure in the.
Or business, Yeah, John I think I mentioned in summary comments, but.
Do you think about our legacy physical auction business I think we have two is I'd like to say, we have to rethink our processes and kind of re engineer that business and there's no question. My first priority is making these auction safer.
We have than the industry leader in safety and I want to continue to drive safety and be the spokesperson for safety in this industry, but second to that we really and I along with safety, we really want to limit.
The amount of times, we touch a car and move a car and how the car moves through the process and as we talk about virtual auction.
We talk about not moving the car the car can sit on its designated spot. It can dealers can walk around that if they want to come to the physical auction. They can see the car touch the car, but when they actually bid on the car they'll be sitting in a theater like.
Atmosphere, and they'll be bidding on the car without the car moving through the auction will be seen on the screen and as you do that obviously you know you're reducing your sale. They labor you, reducing your drivers you're reducing the people in the yard the people in the lanes actually right down to reducing the people that are needed and required.
In the office to handle the dealers that will be coming to the auction. So there's those reductions in labor and cost savings. There I told you last year that we're gonna have 30 of our auctions equipped with virtual Lane and we continue to have 30 auctions and now we're pushing for the rest of the auction.
Sounds to be equipped with virtual lanes to the point, where hopefully as we approach. Your end, we'll have maybe not all 75, but we'll have closer to all of our.
Oliver auctions equipped with virtual lane.
With that theater like atmosphere.
And as we do that.
I would without getting into the numbers I would report I would report to you that we had.
We had roughly 14.
Huh.
I would call commercial customers that were supporting virtual lane in 2019.
We expect that maybe we can grow that we're very pleased with the number of cars. We sold on virtual pain last year in a virtual link concept and this year. Our expectation is we will at a minimum double number of cars that were going to sell in virtual lane, so with that I'll take a pause yeah, John one last comment our fourth quarter.
Gross profit in the core ADESA business was up 40, bips year over year and Thats early in our process. We think we can continue that trend by improving gross margin in the core business going forward again, excluding purchased vehicles sales.
Sure No, which there's no margin in that.
Okay, and then maybe the second question I mean, it so it seems like the core businesses and transition you're going after these these growth initiatives, which all your makes sense I mean, there the businesses is shifting and you're you're you're shifting with it. So it's the right thing to do but if you. If you look at what's going on with trade rags.
Cars on the web it sounds like causing the web is going fairly well relative to your expectations trade read. It is underperforming is there anything else that may or may not happen when trade routes, meaning you know when do you kind of.
Sneak that you you declare success or decided to cut bait on it and also maybe very specifically on trade revs.
Is the sort of the the channel different then what you traditionally see in your auctions because it seems like dealer to dealer the way you're discussing it is much more what the wholesalers are going after as opposed to what was going on your auction. So mean as we think about trade Brad you know, whether you feel or kill I'd like to your answer on that but also mean really what is the.
Addressable market it seems like it's outside the 10 million unique auction traditional auction industry and it's more in the sort of a 45 wholesaler industry I'm just trying to understand what the channels as well.
Yeah, So John let me speak to that and I want to speak to trade bad, but first I want to start with I want you I want our investors and I want the industry, our employees want them to start thinking about total dealer consignment as a segment.
And as you think about total dealer consignment, we're going to grow total dealer consignment.
And as we think about dealer consignment, we really have to products. There we have physical auctions, where we can sell dealer consignment and we have tread drive where we can sell dealer consignment. When you add the two of those together, we're looking to grow that segment and quite frankly, I'm not concerned whereas.
Those cars so.
As long as we get the car and sell the car and one of those channels and as we reported we sold 900, approximately 900000 vehicles that physical auction last year, and we sold 158000 vehicles Entre drag last year you can do the math, we are projecting that we will grow total dealer.
Consignment.
We are in dealer consignment and.
And we're in it to win the category.
And I can tell you that we slowed down I told you last quarter, we were going to slow down to speed up.
Certainly volumes fell short and we took our expenses that we needed to take in trade route.
And we knew that were possibly going to give up some volumes to our competition, but what we did we were able to right we were able to reset.
Our go to market strategy, we have combined these two sales teams from ADESA and a trade Rob there are integrated into total dealer consignment at ADESA.
Our go to market strategy is changed.
We brought 450 sales representatives from across in from across North America into Indianapolis in January.
I was very pleased to sit through those three days the meetings so sales teams.
And I believe that we're very well positioned.
To go to the market with one point of contact.
With the dealer that can speak to all of our surface offerings, not only digital and physical but all of the other ancillary services that we put with it.
I'm very convinced that we cannot continue to chase this market with incentives.
We cut the incentives.
Are no longer providing transportation incentives.
And we have consciously decided that we made use incentives on local markets, but for the most part it's been cut.
And I believe that we've got we've we've got a when this business on service.
And we can't win it it's not a sustainable model by thrown incentives data so that deals gone and long term.
I think if you think how do we went and on service.
When it by doing what the dealer wants us to do in the channel that he wants us to do it in in providing that choice. We also support that choice, whether ancillary services things like.
Our finance company, our transportation company, our inspection business, that's how we're going to win this business long term and quite frankly, I know that 2019 doesn't reflect success, but I can tell you I don't believe I'm very confident that theres nobody else in this industry.
That has the platforms the channels.
The ancillary services in the total a collection of assets to be able to deliver what we can deliver to the dealer and again we've reset.
It's early in 2020, we've got a great plan and I can tell you a month, then I'm not discouraged with what I'm, saying.
But that's that's very helpful. Maybe package that is one quick mundane question. It seems like it conversion rate was roughly flat in the mid 58% year over year. Your expectation I think the general consensus is that used vehicle pricing will come down. So it seems like your institutional sellers are being a little more stubborn and maybe they should.
Being I kind of thought they were going to get a little bit more realistic as we're in the fourth quarter is there a backlog of institutional vehicles it needs to be clear here in the conversion rate may tick up early.
In 2022, clearly is because I mean, it just it just seems like you're being awful stubborn and you're going to pay the pricing maybe the next few quarters. They don't clearance inventory now.
Yeah, John I'll speak to that and then let Eric I had some comments as well first of all we told you on our last call that.
The supply of off lease vehicles was going to be very strong coming back in the fourth quarter. Because there was a record amount of leases written in the fourth quarter of 2016.
And we said we weren't sure that volume was going to sell in the fourth quarter.
Our would some of that volume carry over to the first quarter of 2020 in fact, I would tell you and I think Eric will speak to it here that that volume kind of got split out of the fourth quarter and some of it has carried over to the first quarter, yeah and that John I wanted to add to that we did very well on the online model.
Okay.
And that is because you only get one shot at it the cars I went to visit auction the conversion was lower because the consumer.
For the for what they believe is a higher price after year end. So it was kind of the best we had very strong online performance and I think the physical cars, probably were held off going into the first core.
And that was actually good for our business and help the ARPU. So John we probably got to move on to others to take their questions. Thank thank you.
You're welcome.
Thank you. Our next question comes from Bob Labick CJS Securities. Your line is now open.
Good morning, Thank you.
Oh, it's one point.
Hi stepped back on trade route so I think I'm third.
Quarter call you implied you were going to pull back on incentives and then reduce football. It's obviously it was a little higher have incentives been pulled back or were they I guess in Q4 is that something that's happening prospectively Q1 and going forward.
Yes, so basically a Bob we pulled back on then incentives as were getting through the fourth quarter of but they've been pulled back as we go in to Twentytwenty and then the other thing that we did is as we were resetting our plan and resetting our approach or go to market strategy for 2020.
We did take additional losses.
Uh huh.
And we got our losses behind us as we went into the new year, Eric Yeah, Bob We clearly.
Took action that probably reduced definitely reduced the volume from what we expected which reduced the revenue an increase the losses, but it was most important really as Jim mentioned to have that activity in the fourth quarter and not carry expenses and programs into the first quarter that would be a burden on earnings as we look to 2020.
Got it and then just it's probably too early given the change in incentives has been very recent but can you tell what's happening like on a same market same store basis. When you pull back incentives has there been you know much of a different conversion rates or how is that impacting you know the model so far.
Well, we're measuring one thing, although we measured in two pieces.
We're very pleased with our dealer consignment volumes.
Beginning in 2020, we are meeting our objective of growing dealer consignment in total.
And we're also pleased with.
The mix between online and physical within that.
So that will report the first quarter when we get the full quarter end, but we're very pleased with the started the year and I think our combined sales team is doing an excellent job of attracting more dealer consignment vehicles into our.
Many offerings and letting them sell wherever they get the most money right Jim absolutely we've had listen as early Bob and we don't want to get excited about the first part of the year here, but I'd, just say I'm not disappointed with the reaction.
Of our sales team I think our sales team has really come together.
Culturally.
Where we are very much aligned where we weren't a line before and I think we really understand that we have an opportunity to win this space and I think the teams are motivated by that and you know now we've we've not only done the sales training we've aligned compensation probe.
Grams, we've aligned markets.
Yeah, I think we have a very good go to market plan and that's just not optimistic Jim speak and I'm very confident with the training I've seen and with the feedback I've had directly from dealers that were on the right path here.
Okay, Great and then just last one real quick I'll I'll jump back in queue and thank you can you just highlight the changes in the differences in the new highway to sell we love the name by the way, but in the new go to market strategy Highway to sell what are the primary differences versus what you were doing before.
Well well [laughter] think of this as we're making the dealer aware of all of our capabilities across all of our platform for dealer transact dealer to dealer to dealer transactions and they still left where to step in do they want to manage the process or do they want to turn it over to us and say you take it through your process.
Like a waterfall.
Do you take it through put it on trade route.
See what the the Benjarvus not high enough you take it the physical auction you get liquidity there and then you could even take it back onto the digital channel. If you want the concept there is.
The end result is we want to get the maximum that value for your vehicle and we want to do that in the most sensible way and then we'll add to that a guarantee that have a buyer buys that vehicle.
And they are within 500 miles of the grounding location wherever it setting we will guarantee delivery within three days, which is the most important thing to the buyer is going to get the vehicle to retail Jim.
Thank you said you know a in a D.A., we rolled out our highway to sell and there's really three offerings there.
And those three offerings come at different price points and you know there's there's the manual service and there is what we call. The automatic service and then there's the cruise control service and obviously manual you're doing most of the work yourself and cruise control were taken care all that for you and I think that is really coming back to what I've always preached were given dealers Troy.
Yes, and I can tell you being a former dealer I didnt want somebody coming in and telling me how I was going to do business I wanted them to tell me what the options were and and what products were available and then a dinner day on the choose how long do business and it's not one size fits all I would come down to say I would maybe what does.
Front cars going to different channels based on the car in the price point and the condition of that car. So this is really about providing dealers with choice, but haven't that one point of contact that can represent all those choices and all those services to our customers and know the cost to the seller to get whatever service.
They are asking plus there's a fixed costs for them for the selection they make.
Perfect. Thank you very much.
You're welcome.
Thank you. Our next question comes from Ryan Brinkman with JP Morgan. Your line is now open.
Hi, Thanks, a couple of questions on trade route maybe first could you just speak to that competitive environment for the trade growth business is it just D.C.D. that you're bumping up against there or do you see other established or maybe upstart competitors in the space also.
Yeah, So right and there are other competitors in this space you know I got to tell you that.
Obviously, we recognize there's other competition.
Beyond HCV.
And thus and there will continue to be other competitors in this space, but at the end the day I think this organization.
Has really gotten focused on what we need to do a trade drive we need be aware of our competition.
But at the end of the day I'm talking about increase in dealer consignment.
In total dealer consignment and our trade Rev. Offering is just a product that helps us increased total dealer consignment.
Okay. Thanks, and then how should we think about the path to profitability at trade route or do you still expected to begin to at least break even on that business at some point during 2021, given that would now seem like a pretty material improvement versus the implied guidance of 50 million or so a loss in 2020 and to get to profitability should we be looking.
For faster growth in order to better amortized fixed technology and other overhead cost or is the path forward more about you know the disciplined growth with with left transportation subsidies marketing costs et cetera.
Yeah, So Ryan to start with Ah, Yes, we still believe that we can reach breakeven in 2021.
And we believe that with our new go to market strategy and our discipline around incentives.
We believe that is going to enable us to get there. We still believe that our breakeven is gonna be somewhere between 300, 400000 cars and where to look into accelerate that pace and let me add Ryan our integrated approach by looking at dealer consignment on it on a consolidated basis, we will.
Actually reduced the cost model for this business. So it's not just the 20 million a trade Rob. It's also taking advantage of the ADESA resources and not having incremental cost to add additional transactions as we put the combined sales teams and then ultimately combine even some operating processes together over.
Time.
So it's a little both so don't just focus on the separate trade rep component. We've isolated that for you. There is also efficiency, we're gaining out of the rest of the enterprise that'll help improve the profitability I think the moves we've made in 2019 at the end of year.
Improve the likelihood and accelerate our opportunities to have a lower cost delivery model, especially when you take those incentives away.
Great very helpful. Thank you.
You're welcome.
Thank you. Our next question comes from Daniel in Brazil, with Stephens, Inc. Your line is known.
Hey, good morning, guys Thats, taking your question.
First one on a death as kind of underlying gross margin, Eric you talked about ancillary services weighing on gross profit I think back a few years ago, you guys used to see near term headwinds, but would normally call out a gross margin benefit in subsequent quarters of you sold through those vehicles can you talk about what's changed to wear and.
Services now continue to be a headwind on gross margin and we're not kind of seeing that catch up of of the gross margin. As you felt it was higher dollar vehicles, and then I do a follow up.
Yes.
Dan. Thanks for the question you know what's interesting is is our success is influencing the change if you go back three four years ancillary services predominately onsite services improving the condition of the vehicle where now we're doing a lot of off site. We're doing a lot more transportation of vehicles that aren't at the auction. So when I talk about that I think.
The same phenomena tours relative to the auction business, but we have a much broader offering that goes beyond that auction business around our ancillary and what we call related services like inspections transportation repossession activity when those grow it now again gross profit.
Dollars.
Our going up and I'm very pleased with our progress on improving gross profit dollars for per car sold and that's what I'm focused on so so we've gotten there but that the change is growing that business focusing on growing.
Contributes dollars, but puts a little pressure on the percentages.
Okay. That's helpful and then a clarifier on the gun.
Jim you got them in a number of cost cuts than you described the business improvements you're making it the core auction, but the midpoint of EBITDA guide assumes $20 million of growth year over year and I think you said your guidance assumes 20 million an improvement of trade ribs operating losses.
So it seems like you're implying underlying EBITDA X trade ribbon flat year over year, where I mean, how can you kind of reconcile those points or kind of how should we think about those if you look at the guide.
Yeah, So let me say that.
After 2019.
Where we saw very disappointing result.
I never want to be in a position again, where I over promise and underdeliver.
And quite frankly, we are focused on our priorities. We're very confident that we can deliver on what we've told you and at the end of the year I'm going to let the results speak for themselves rather than over promising.
Got it thanks.
Youre welcome [noise].
Thank you.
Our next question comes from Derrick Glynn with consumer edge. Your line is now.
[noise] yeah. Good morning, Thanks for taking the questions just had one just a follow up on trade, whereas one response did you see from others as you increase fees and reduced incentives did you see anything to suggest competitors followed suit or make any other changes to their offering.
You know I can say that only hear an anecdotal information I don't know anything Thats factual excuse me I don't know anything that's factual in terms of how the competition is behaving we hear things.
But I don't put a lot of weight in these anecdotal comments and again not to not not to avoid commenting on it.
I really and focus on our model and winning I am going to win and this is all this is not a short term gain. This is a long term game. It's a space that we have to be in and not to use the cliches, but I've used in the past we absolutely have the right to win here we.
The collection of assets that give us that unfair advantage and the I'm focused on this team and I'm focused on driving results and I know there's competition out there, but I got to be aware of it but I don't want to leave everything I hear and Derek Let me add we surveyed our customers.
We surveyed the people using our platform and ask what was important to them.
Yes.
Obtaining inventory at the right price and getting it to their retail tail location as quickly as possible.
Incentives and us in the support we were providing was way down the list as as to what they were looking forward and transact for us.
Good point, Eric I'm on a follow up on that listen I speak as a former dealer and I can tell you I talk to dealers every single week in my life.
Dealers are focused on results and where you can provide results and service levels.
The fees become a very very small percentage of the transaction.
And quite frankly, that's where we're focused we're focused on.
Delivering the service now to Eric's point and that survey, Eric if I can add a couple of points and that survey that we did along with what Eric said there were also a couple other things that were mentioned to us that we took action.
You know they mentioned a couple of things in terms of how our process work that they'd like to see changed I don't need to get into what those two changes where but there were a couple of change that we've now made in terms of the technology delivery and the use of the technology in the use of the platform that we pick an action.
And we listen to our dealers. So the feedback that we got from the dealers was real and we've reacted to it yeah. So so to sum it all up we're not looking at our competition. We're looking at our customer to give us guidance on what's important and how our business model is put together.
Okay got it that's helpful. And then just two more items for clarification first our any share repurchases contemplated in your guidance and then secondly for Hi Tech Locksmith, I think you mentioned, a 10 million drag to results, but recovery of only 4 million is there a possibility for further.
Recovery from that issue in 2020.
So let me start with a capital allocation and and.
And the buybacks that you mentioned.
First.
I want to state that our capital allocation priorities have not changed.
We did not do any buyback in the fourth quarter.
And quite frankly, our leverage was at three times in the fourth quarter, and we did not want to exceed and the three times as our target leverage and we didnt want not one is exceed that leverage.
In buying back shares.
And going forward, we continue to evaluate all the alternatives to deploy capital.
We have our.
Our dividend a we continue to look at a pipeline of acquisitions and prioritize those and then we do have a share authorization the share buyback authorization in place that we can act on based on how we prioritize things going forward. So.
Again, we didnt buying shares back up in the fourth quarter, the first quarter, but at any point in time, we can pull the trigger on those Eric Yeah and relative to high Tech Locksmith. Let me went out two things first the litigation is ongoing any any.
Potential recovery I think would talk through litigation.
That's a long process I don't know when when we would see any outcome from that but second if there isn't recovery in litigation it would not.
Included in adjusted EBITDA that would be considered a nonoperating gain and so in adjusted EBITDA It will not be.
A positive for adjusted EBITDA. It would be included though and net income from continuing operations. So it's a little difference in that.
Because it would be earnings to the organization, but it would not be.
Additive to adjusted EBITDA Norte and accordingly.
So don't count on that as being part of our guidance.
Got it okay. Thank you.
Thank you. Our next question comes from Bret Jordan with Jefferies. Your line is now.
Hi, good morning, guys.
Thanks, Good morning, Brett.
The comment on the the target on as 20% a SGN a rate by the end of 20, just from a modeling standpoint is that a target for the full fourth quarter or to achieve that within the fourth quarter.
Yes. So you know, let me talk a little bit above that above that target Brett is.
You know.
I recognize that we we have to reduce the rest DNA in this company.
And at some point in time, you got to put a stake in the ground and you've got to put a target out there and 20% as a target or is I would say a goal that we've got to achieve if we don't have any target than we don't know where we're going and we have to have some that we focus on and I'll tell you at the very up.
That's very I've sat here this is a very aggressive target.
And it's going to be I would call as a monumental task to get the 20% and I'm not sure. If we can get there in 2020, but I want to continue to work towards that and each quarter as you see our results I want to see our S DNA coming down.
And you know there's a lot of things that we talk about there's a lot of initiatives that we haven't place, but I can tell you. There is no stone that won't be turned.
To look for opportunity and I give you. Some examples but just let me give me a few of those things that maybe we don't think about in the course of day to day business you know.
First of all there's no finish line on head count and we've got to continue to look at.
Innovating.
The use of technology, and eliminating head count wherever we can getting more people to do less work and do more through innovation.
Travel Entertainment in this company has to have the get reduced.
No you talked about mobile devices that we have within this company and then we look at the plans that we have on those mobile devices and the licenses and the software maintenance. This is like these are huge charges to the organization, which were taking a look at we've talked about what we've done on trade rather than how we reduce those losses we.
Continue to look at every aspect of every one of our businesses and Theres a focused on taking that as DNA and by putting that target of 20% out there whether I get there in 2020, I know I will be better at the end to 2020 and the metric Brett that we're using as SGN asked what percent of both.
Revenue.
Improving each quarter year over year.
That's a metric that we're measuring and being holding our team accountable for.
So it's not dollars is that okay.
Yep got that and then one question I might've missed this correction Jim Jim we want.
Fewer people doing more work I wanted to be clear and the Trey I figured I figure that yeah.
Did I guess that more people doing less work. It I thought that was an arrow [laughter] my apologies if I can't really more action. Yeah. One question on trade route I think you threw out a target for that for the smaller loss did you put a volume target out there for trade revenue 20.
You know we have we have a volume target on dealer consignment and we don't have specific numbers applied to trade drive with that said I do expect that the trade red volume will increase but I'm not putting the volume number out there it's totally dealer consignment.
Alright, thank you.
Welcome.
Thank you. Our final question comes from Stephanie Benjamin with Suntrust. Your line is now open.
Hi, Thank you on thanks for squeezing me in I'll keep it just kind of brief I. If you could bucket I know a lot Oh, there's a lot on the call and how you're gonna grow dealer consignment and 2020, if you could maybe just.
Consolidate that and to call. It maybe the two initiatives do you think are going to be the key drivers of that growth just to kind of summarize there's obviously a lot going on so maybe if you could just kind of.
Well rounded that'd be helpful. Just as we kind of some everything up thank you.
Well take first shot to that Stephanie we've got two products and dealer consignment, we've got physical auctions and we've got trade route.
And we've got a go to market strategy for both of those products with one point of contact.
And bottom line is as one dealer at a time with 450 sales reps out there that's how we're gonna grow that business. So so in summary that Stephanie we've simplified our offering.
But have the broadest offering in the industry for dealer to dealer consignment, but it's easy to understand.
The pricing is easy to understand.
Simplified the offering in total instead of segmenting the market into very confusing alternatives that you had to pick from right Jim Yes.
Got it so within that is it just isn't market share gains on expected. The I guess, what's your view on the gross the overall market.
Also to fit that ended the growth outlook.
Yeah. So you know as we look at the entire company I think we look at both the commercial segments and we look at the dealer consignment segments and we believe there is market share gains.
In both of those segments. We can we believe that we can grow our commercial business.
Through our online platforms and through our use of data and analytics.
And get more of those cars online and get and especially especially sell more of those cars in the open sale for these commercial sellers, where the economics get much much better as you know and then getting more of those cars to physical auctions. So we believe we can gain share. There. We also believe that with our better together.
Program and that one point of contact that we talked about in our go to market strategy. We believe that we can increase our overall dealer consignment and whether that comes through a physical auction or whether that comes through traderev, sorry to repeat it at the reinforce it whatever whatever the dealer once we're going to we're going to provide that.
Service and we're going to grow that share of the dealer business as well as a commercial.
And Stephanie.
These offerings, especially when we hit we offer as one of our offerings a multiple opportunities for digital opportunity. We do believe we and expand the Tam of the dealer consignment marketplace for the wholesale industry.
That 5 million units that have historically transacted outside the auction industry remains an important part of our target yeah, and I, if I could add one thing to that that might be noteworthy.
Stephanie is if you think about the dealer consignment market at physical auction today.
Our share of that market is 20%.
And to me that's a lot of gold yet there's a lot of opportunity to go get it more than 20% of that market have been being one of the.
Largest two players in the industry.
Thank you all really helpful and I'll leave it at that.
Okay. Thank you so thank you Stephanie.
Thank you ladies and gentlemen, this concludes our question and answer session.
I'll now like to turn the call back over to car CEO, Jim Hallett for any closing remarks.
Thank you Danielle and now we just want to say, thank you to our investors for being on the call today Bye.
I appreciate your continued support new continued interest in our company.
I think that I've been very very transparent that 2019.
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Certainly has difficulties and challenges.
I think we accept accountability for that.
I think we have a very good path forward.
We've defined what's really important to this company we've defined the areas that we're going to focus on.
And we're gonna stay focused on those were not going to we're not going to be chasing.
Everything that comes at US we're gonna be focused on these five priorities, we're going to allocate money that support these five areas.
And we're confident that we're going to deliver on the guidance that we've given you.
And.
We're going to take it forward and it's just not sheer optimism, but I think it's on good sound business planning and I believe that we've got ourselves on the right track and we look forward to reporting on our first quarter coming up here. Shortly so thank you for your you've been on the call today and we'll look forward.
We're talking to you on our quarterly conference call have a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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