Q1 2020 Earnings Call
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Ladies and gentlemen, this is the operator today's teleconference is scheduled to begin momentarily until that time your lines will again be placed them using cold. Thank you for your patience.
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Ladies and gentlemen, Disti operator, today's teleconference is scheduled to begin momentarily until that time. Your nice will again be placed a music called thank you for your patience.
Bilings in 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 gap and non gap for natural measures reconciliations of the non gap for natural measures to the clickable.
Financial measure can be found in the press release that we issued this morning.
Which is also available in the Investor Relations section of our website now I'd like to turn this call over two car global C.E.O., Jim Hell It Jim.
Great. Thank you might go on the morning, ladies and gentlemen, welcome to our call.
This is certainly a unique call in that we're hosting this call while many of US are working on their stay at home orders in many other restrictions on their normal business in our personal lives as well.
But I want to cover today is I want to review key items impacting our first quarter performance.
I want to talk about our top priorities that top four priorities that I'm focused on right now.
And even though we're unable to provide guidance on are expected results for 2020.
Would like to comment on what I see is the major influences on a performance for the remainder of the year and beyond.
[noise] first let me speak to the first order as we report. It. This morning are operating results were well below the prior year. However, this does not tell the complete story on how we were performing throughout much of the quarter.
Starting with ADESA North American volumes were 7% ahead of 2000 in 19 through the end of February the strong performance in the first two months was driven by our digital platforms OPENLANE and trade that physical action volumes were up 1% through the first two months.
We're also making good progress against our strategic priorities discuss on our priorities calls.
Starting in the second week of March we saw a rapid deterioration in volumes as people began to shelter in place and retail activity slowed at an amazing pace, we saw volumes the client across all of our sales platforms physical.
And platforms being opened lane and trade routes for the month of March compared to the prior year.
In fact.
North American volume, excluding trade read was down 45% the week, beginning might 16 and down 87% the week of March 23rd.
I will say the primary driver of these reductions was reduced retail activity in the used car marketplace. However, our decision to move to Simulcasts only auctions. The week of my 16, and no physical or Simulcasts auctions. The weeks March 23rd and March 30th.
Also had an impact on our performance.
When we decided to shut down all 74 of our North American <unk> auction locations with only a few days notice.
We were committed to paying all of our employees through April 3rd.
Reduction in revenue combined with the decision to pay both salary and hourly employees during that period of shuts down, whereas a hit two addresses performance in march of over $35 million.
Impact on H.T. was not as pronouncing Q1 is it was for ADESA, we saw a loan originations decline, but this will have a bigger in impact on two two performance. We continue to earn income on the portfolio, we reduce the credit available to all A.F.C. customers similar to what we did in 2008 when.
We saw disruption the retail used car market, we recognized about $5 million and losses in Q1 after identifying issues with certain dealers early in Q. too is we learned in the great recession them 2008.
Need to recognize the lots as early and keep the portfolio as clean as we can and it will service better in the up coming quarters.
One thing that as miss into one because of all the unusual activity in March is our success than controlling our corporate costs.
We may controlling our corporate overhead a priority for 2020, and we were showing promising results in to reduce S.G.N.A.
To summarize what started out as a good quarter was derailed by a pandemic that none of us are coming on our last earnings call less than three months ago.
And I'm confident that we will get through this and I know that we have the right strategy in place for businesses and we can navigate the uncertainty that we're bound to face over the next few quarters.
Now I want to speak to my I call My top four priorities for car global.
First we must ensure we have capital to work through the pandemic. Accordingly, we have taken aggressive actions to reduce our costs, while all of our markets are opening well below normal levels of activity.
We have furloughed approximately 11000 employees in April and we will call them back only as a volume begins to increase we reduced to pay of all of our leaders in anyone making over $80000 per year.
Or directors volunteered to forego the cash portion of their director fees for the second quarter.
And we have extended terms on trade payables, we have negotiated deferrals of a portion of our rent on many of our locations for the month of May and June.
Our first step and conserving a cash which to reduce our cost structure. So that we could break even that low volume levels for an extended period of time.
We still have about $100 million of available cash as of today and we have not drawn down on our revolving credit facility.
As we focus on conserving cash and continue to be uncertain on the timing in the pace of recovery of our business, we have temporarily suspended our dividend for the second quarter.
And equally important priority is the safety and wellbeing of our employees. We are committed to operating our business in a safe manner. We're following all federal state provincial and local guidelines and these very throughout our businesses. It is important that we have a safe working environment and will continue to respect social doesn't.
Provide face masks, where and when required and put the health and safety of our employees first when making decisions on bringing employs back to work.
[noise] next I'm committed to the digital transformation of the auction industry I believe that this is an opportunity to accelerate some of those transformations. As you know we have been leading a transformation of the way, we do business with platforms like OPENLANE trade drab simulcasts.
Cars arrive and already and over the past two months, we have demonstrated that we can provide our services to digital platforms and give our customers both sellers and buyers a great outcome integrate experience.
This pandemic has forced us to move faster in migrating our business to a fully digital marketplace. Today all of our sales are online sales. Our competitors have had to go digital as well I am sure that we will have customers that will want to return to the physical format. When it's safe to do so but.
I want to continue to demonstrate to all of our customers.
That we can provide a more efficient process with the same or better results without running vehicles across the block. It will take some time before we get some of our customers to embrace not running cars across the block, but I see this is the <unk> as a possibility and the way of the future.
Our teams deserve a lot of credit a lot of recognition for moving from our traditional lied physical action process to fully simulcasts auctions in only seven days.
We have signed up thousands of dealers to buy online that have never participated in any online buying in the past.
The end of our two weeks shut down in North America, we had our first ever fully digital auction that was operate it remotely with an automated auctioneer and all buyers and sellers interacting through our Simulcasts platform. We have name this simulcasts plus.
Simulcasts plus has allowed us to sell vehicles from locations that were shut down.
Car global is the first mover in they use or this technology, where there's an automated auctioneer and we're very encourage with the initial results. We have proven that we can operate in any conditions, even the most challenging conditions of this pandemic without the need for people to congregate in our locations and.
Moving cars across the block the opportunities in the benefits for Simulcasts and summer cash plus auctions is tremendous.
Combined simulcasts in Simulcasts, plus with our digital platforms of OPENLANE trade <unk> in cars arrive and we can improve the cost structure, while delivering the same exceptional service that our customers have come to know from us.
And my final priority is to come out of this pandemic with a lower cost structure for our business as you know we've been forced [noise].
On reducing R.S.G.N.A. for several years. We've also had a number of initiatives tied to improving or gross profit by reducing the cost to deliver services that the auction or off premise services.
The pandemic has forced us to reduce our staff and other costs to a bare minimum to survive while our physical operations around the world are shut down.
This gives us a chance to start over.
We can re imagine how to serve our customers, we can reengineer processes to better match the way.
People are doing business today, including the use of technology throughout all of our businesses.
When we get passed this pandemic, we can and will have a lower cost structure going forward. We can operate with less S.G.N.A.. We can take advantages of deficiencies in the use of technology to reduce our cost of services and improve gross profit as a present a revenue.
We will need to see volumes increase from what we're seeing now and we will have to offer are full suite of services before we will see improve cost structure in a results, but I am confident that we can get there.
Now let me provide some color on what we see going forward [noise].
We are not providing guidance at this time due to the uncertainty we face in all of our businesses.
We continue to wait on the relaxing of restrictions <unk>, North America, and Europe and cannot predict how soon we will see retail used car activity return to normal levels or when we will be allowed to bring our employees back to work to provide the mini ancillary and related services, we provide on premise.
As well as off premises.
[noise], what I will tell you is that I am confident our whole selling marketplace is resilient and we'll return to the lot to the levels of activity that we were enjoying prior to the pandemic I just don't know they exact timing as.
As far as retail sales at both new N. news I'm expecting a recovery too in both the wholesale and retail sales. Once we are all back to work, we're already seeing evidence of that.
We have a strong supply of commercial vehicles already parked at or auction locations.
Repossession activity has being put on hold and is expected to wreak commence very shortly this will add to the supply of wholesale vehicles that we'll need to be processed through the auction industry.
And the return of our police vehicles will be an important contributor to the wholesale auction industry. We not only have a backlog of least returns from the last couple of months, but we have strong least returns schedule for the next two and a half years. We also know that the production them new cars will restart and that nuke.
Sales will drive will be driven by people leasing a new car when they're currently six buyers.
One segment that is likely to remain challenge dwell into the future is rental vehicles. However, this as a relatively small segment for ADESA.
I believe outlook is positive and it's a matter of when not if things get back to a new normal however, the strong supply of vehicles waiting to be sold at auction.
Combined with low retail used car sales will drive used car prices lower.
We are likely to have an imbalance of supply and demand for the remainder of 2020.
This will put pressure on our consigners as they adjust to reduce values for their vehicles by will be a positive for the number of wholesale transactions as we look forward to the easing of restrictions over the next few months.
I am concerned the unemployment will be ahead when to a new and used automobiles sales for the remainder of 2020 unlikely into 2021, the shut down over <unk> of our economy has certainly put a strain on many households.
I am concerned that we will not see an immediate rebound when we start easing restrictions and people return to work.
This could clearly stretch out the recovery period for the used car marketplace, we'll just have to wait and see how it plays that.
I do want you to know that I want to be prepared to get through the next day 18 months no matter what economic conditions, we face I continue to worry that we may see improvement over the summer and then face a second wave of co bed 19 cases, this fall and winter.
Upsetting this perhaps there's some evidence that one of the impacts of the buyers is that people are much more comfortable traveling in their own vehicle than in a ride share or public transportation. This may be a positive trend for private vehicle ownership.
Clearly, there's a lot that still needs to be learn about what all these impacts will be as the expression goes all I can do is prepare for the worse and hope for the best.
In conclusion, I am confident that we've taken the steps to manage your cash resources through an extended period of disruption for this pandemic, we will not get overconfident at the first sign of improvement this may be a long road back.
We are focused on our net cash position on a daily basis, and we will continue to conserve capital to ensure that we have the resources to get to the other side of this pandemic.
We will take advantage of the opportunity provided to us by this pandemic to accelerate the digital transformation of the auction industry and quite frankly I find this very exciting.
And we are committing to having a lower cost structure for a business as we returned to normal over whatever period. It takes.
So with that let me turn it over the area for more details on our financial performance.
Alright.
Thank you Jim let me start by providing more details on our past burn during the period of our auction shut down and where our cash for it is today.
Late March when they closed all 74 auction locations and did not run our simulcasts sales during this period.
We were burning over $25 million up cash for a week.
We took a number of actions to reduce our cash burn as we sell our business activity reduced to minimal levels.
Our first move wants to for low employees beginning April 3rd.
We also reduced pay for a large portion of our remaining employees, we were able to reduce our weekly payroll and related costs by about $20 million per two we pay cycle beginning with the April 17th payroll.
We also discontinued use a third party vendors throughout the organization and this includes outsourced services at the auctions in the recon in bike shops.
Being provided weekly by temporary labor firms.
Independent contractors, unless they were entitled to kind of like see projects and we cancelled regulates all capital expenditure projects at our physical auction locations.
These actions allowed us to lower our cash break even point substantially.
We eat report that we get a major milestones lastly.
We were able to have our first hash break evenly since mid March.
To give you some context around what we've accomplished outbreak even volume levels prior to our moves and late March in early April was about 45000 vehicles sold for a week in the U.S. in Canada.
This time of the year, we would expect to sell 65000 is 75000 vehicles for a week in those regions.
These numbers include vehicles sold on all of our wholesale auction platforms. We have now reduced our break even point.
Well about 20000 vehicles in the U.S. in Canada for a week.
Obviously as we call employees that work our break even point will increase but we are focused on improving revenue ahead of increasing costs as we move forward.
Operationally I revenue is pretty limited.
We are earning the east on the sale of vehicles are digital platforms, you continue to seat demand for transportation services.
And our subscription rather neutral products like auto neat, arguing and clear plan have held in there.
All those in our inspection company is generating revenue markets, where inspectors are able to perform their duties, but since it's been at a very reduced levels since mid March.
Various states and provinces he stayed home restrictions.
We'll see revenue increase.
There is clearly a backlog of work to be done for our customers.
And finally, let me speak to inventory of vehicles on the ground I use the term inventory, but once you make it clear when you're not owned the vehicles will have risk of loss based on the value to be.
You have seen the number of cars on our property increase since mid market.
This is a time of the year, we typically see inventory levels decline.
We have seen substantial growth over the past six weeks.
This is good news in the future as these vehicles will some day sell on one of our platforms.
Now let me give you an update on they have seat first we acknowledge that while our businesses disrupted by corporate 19 independent used car retailers, so and immediate reduction in traffic on their life.
In late March we introduced.
Program that permitted R.M.C. customers to curtail loans as they came do without making the required principal interest in fee payments at the time of curtailment.
In our language curtailment is the extension of alone in good standing.
The dealer relief program provides this really through the end up may.
We obtained an amendment from our securitization bankrupt that allowed loans extended under this program to remain eligible for funding in the securitization.
On April 30th we completed an additional amendment that made adjustments to the financial covenants in our securitization.
We amended the financial components for April May and June to reflect the performance in our portfolio during reduced operations throughout the U.S. in Canada.
Our financial covenants are driven by cash collections. So our dealer relief program, where we receive no cash collections went loans work retail at a major impact on our cash revenue collected over this period.
We've also seen payoffs, though exceed floorings throughout the month and they fall.
In fact, we have seen are totally I've seen receivables reduced by about $180 million in April.
Through pay offs of loans.
I would like to point out that the allows for losses in the A.M.C. portfolio increased from $15 million that you ran $25 million at March 31.
And accounting change due to new accounting pronouncements was implemented in the first quarter that requires the recognition of expected losses over the light of the loan to be recorded upon origination of each month.
Previously the allowance reflected expected losses at the balance sheet date based on the information at that balance sheet date and did not require the forecasting the future losses.
The accounting change, resulting in an increase in the lounge from $15 million at December 31st.
$20 million.
That same day.
Well 5 million dollar adjustments to the allowance as at the beginning of the first quarter is reflected as a reduction in retained earnings net of tasks.
In addition to this change in accounting, we increase the allowance by an additional $5 million in the first quarter to reflect specific losses identified in early April.
The historical loss rage use to determine the allowance at the time loans or originated will be adjusted when factors like the impact of cold in 19 on retail operations materially alter.
You expected losses at any point in time.
Obviously, a pro long period of reduced retail activity for E.F.C. com customers May result in future losses exceeding the amount estimate and then the allowance at March 31 2020.
I will report, though at this time, we have not seen increased delinquencies or to false throughout the portfolio.
Are effective tax rate was also unusual for the first quarter at 41.7%.
This reflect the impact that international and variance state income tax expense being a higher percentage of pre tax account your income.
To the last two weeks of March really in passing are pretax income.
Let me finish with an update on the status of our capital.
We have as Jim mentioned, approximately $100 million in available cash as of today.
And an additional $140 million in cash that is not included in this number that is temporarily held in bank accounts as excess collateral for M.F.C. securitization.
The cash balance required to be held in normal situations as excess collateral.
Is about $50 million and we would expect returns and this level of requirements as as business returns to normal.
I would expect this difference.
In excess collateral.
Freed up and made available to us before the end of the year.
In addition to our cash balances, we have not drawn on or 325 million dollar revolving credit for selling.
Or no financial covenants on our term loan or unsecured notes there isn't financial maintenance Covenant you know revolving credit facility. If any amounts are outstanding at any quarter in.
This spring and Covenant requires next senior secured leverage to be below 3.5 times.
Gently our senior secured net leverage is 1.8 times.
I know I've not spent much time talking about our first quarter.
Formants, but I will let you ask questions as we reported it this morning, and that'll allow us to be a to your questions and allow plenty of time.
Viable now turn bad for R., operator, Cheryl and we can take your questions. Thank you for 20 minutes today.
Lady said can't Timidity would like to ask a question. Please pass start then the number one I get telephone keypad, well parts to just a moment to <unk>.
Your first question stuff online.
<unk>.
Guarantees.
Good morning, Thanks for taking the questions.
<unk> yeah. Thank you very much for a lot of a great detailing and information as well.
He talked about fiscal off from changes coming out of this and streamlining operations wondering if you could give us a sense of you.
The biggest change is that you you see and how long it will take to implement them because obviously as you mentioned this could help.
You know reduced cost in a new business knowledge you emerge.
Yeah, a bottom great question, you know first of all let me say that.
This whole digital transformation is something that I personally been very focused on for a long time I'm on the record and with the auction Association as saying the first of all we have to do is we have to make our options a safer environment. We've had you know over the years, we've had unfortunately casualties.
In our business and I've been become increasingly concerned about that and car ADESA has always been the leader and safety and I want to continue to promote safety, but aside from.
Aside from the safety aspect of it there are significant advantages I think to both ourselves into our buyers a couple of things I'd mentioned to you is on a strictly simulcasts bases were dealers are coming to the auction, they're not congregating out the auction, we're not running cars too.
Auction lanes.
It's great. It creates a lot of efficiencies for both the buyer in the cellar the buyer can buy from anywhere remotely and quite frankly, the seller can represent their cars remotely as well and make decisions that to sell the car from a remote location I think it creates a lot of transparency or dealers really liked.
Transparency of being able to see where the bids are out and see where the beds are coming from and actually who the bidding against and they can see this type of thing.
We're able to incorporate better data and analytics into what we do an on line format.
And I think it's just a more efficient better outcome.
And as you know and as I mentioned, then my comments, we were forced to go to 100% Simulcasts all those and we started running our actions brought them back up about five weeks ago. This is our fifth week.
And every week. We've seen continued he can continue to increase isn't the number of vehicles offered and the number of cars soul and with that I think we've learned a lot and the thing. We've learned is that you know more and more dealers are signing up to buy cars digitally the never bought cars like that before.
We can.
And [noise].
<unk>.
And certainly demonstrate the value to our customers. However.
However, the thing that I would you know you ask about the timeframe I would caution you on is not everybody is comfortable with going online and simulcasts.
We've got a lot of new dealers coming as I said, but I think there are a number of customers who support our safety initiative safety is important everyone. I think there's a number of the customers that support simulcasts and see the benefits to simulcasts, but I also think there's customers that as we say old <unk> old habits die hard there's a number.
Customers that will still want to see their cars go through an auction lane in front of alive auctioneer and do the same old thing and I think we just have to be conscious of our constituents, we need to be able to serve all and we need to be able to be really thoughtful about how we.
Definitely can move towards Simulcasts, but we don't.
We don't alienate those buyers is still want to use the physical.
So with.
Yeah.
I think I got I gotta, there someone else to say something.
Oh I think it's still you you start before.
Okay, I'm, sorry, and then just finally, you know Eric and I, both spoke to our cost structure.
Digital transformation definitely allows us to reduce the delivery costs to our customers and then the other opportunities that I didn't talk about is is the opportunity to consolidate a lot of these S.G.N.A. and back office functions as you know or May know today, we basically have all these.
Activities, taking place of 74 different auction locations around North America, we believe there's an opportunity to consolidate some of these functions not into maybe a single location, but into a small number of locations, which is going to create efficiencies through the use of technologies and a couple of examples I would give you it just payment and type.
<unk> processing.
Huh.
Got it okay. Thank you great and then just as it relates to Traderev, just a tradeoff model yeah potentially change as a result of cope it is there an opportunity perhaps I have dealers you know take pictures and run the options like you already do in Canada or is there any other you know potential changes or outcomes to trader up from the pandemic.
Yeah, Let me tell I again, where we see an opportunity for trade drew up here and if I can just give you a.
A little bit history here not too far back you know when we think a trade we think of his dealer consignment and we think a dealer consignment as a segment and that combines both the other cars sold at the physical action as well as dealer cars sold on trade route is the other consignment segment.
In January we're in January and February or were seem very good results. The auction actually are give a consignment segment was up 6% and both trade rap and physical dealer <unk> a dealer business was both showing an increase.
And throw this pandemic.
We've seen trained red continue to be increasingly use by dealers to transaction.
We're seeing more dealer sign up we're seeing a more buyer sign up more seller sign up and I think on a week over a week basis, we're seeing increase increases on trade <unk>, especially in the U.S., we're seeing more growth in the U.S. right now than what we're seeing in Canada and in some cases.
More recently here, we're seeing stronger results year over year than we saw last year and I think a lot of this goes back to the better together program that we talk to you about where we put the ADESA sales team together with the trade Rep sales team.
And we basically cut those numbers and have we're doing the same or more amount of work right now and getting the same or better results right now with about 50% of the stuff that we had previously so there is an opportunity for trade for trade wrap here and we see it as an alternate platform. We also say the opportunity to enter.
Great the buyer basis of all these platforms. So you take the trade route platform. The OPENLANE platform. The ADESA Dot com platform in the summer cast platform you take all those platforms and we consolidate I that that buyer base. So that that by air gets to go through as we say go through the front door and be able to view all.
Of R.M. that boy on all very different platforms.
Okay terrific I will <unk>. Thank you very much.
Very well.
Yeah next question crossing the line of John Murphy with Bank of America.
The morning, guys. Good you hear from you just the eight eight first question on on the I think junior seems sort of the ultimate Simulcasts, where everything was.
You know or automated and you'd have a lot auctioneers I'm just curious you know.
How much is that necessitate still are still required I should say in physical presence, meaning you know all your physical auctions and the processing. They provide stranded assets are they still assets. If we go in that direction will still be necessary and leveraged not to run the business.
[noise] actually you know, we referred we refer to it as Simulcasts plus.
I'll tie a wave use simulcasts plus directly I would tell you would run over 20 options.
On Simulcasts, plus and quite frankly, it's been.
It's been very successful I would say Gee is quite frankly, it's exceeded my expectations as you think about it where a same results now it depends on the mixed the vehicles.
And it depends maybe the location, but for the most part we're not seeing that <unk> a big difference in terms of the results in in the returns between what we are getting at a physical action with a physical auctioneer versus the summer cast plus auction, where there's an automated auction.
<unk>, where we're not seeing a big difference off we need more data and we need to prove that more but the early indication is that these results are very attractive.
<unk>.
Let me at all.
All of these cars are being sold off of our physical location.
They're wholesale ready meeting they've been reconditioned.
And inspection report has been prepared this is not all remotes sale for example from a dealer lot like you might have on trade route.
So so this is that this is a physical auction location selling without the use of the labor for the auctioneer and running the partially the block so I wanted to clarify that.
<unk>.
You can.
Oh.
Oh, sorry, John one other thing that I was going to add.
That I think is really important here is the simulcasts plus.
It allows you to sell any day of the week you know traditionally you have your one sale day Indianapolis sells on Wednesday in New Jersey sells on Thursday in Boston on Friday, whatever the case might be well. This simulcasts plus auction customers can sell every single day of the week. We got have an auction every single day a week not only can you have an auction every single day a week.
You can have an option that sell there could be selling cars at three or four or five different locations around the country that all these cars are <unk> and available for sale. So these are really some of the benefits that we have to be able to demonstrate to our customers.
I'm, so I, just Wanna Fuck declare though <unk> as you're you're kind of carpeting things is is like you still are utilizing your physical land and buildings for marshaling. The vehicle reconditioning the vehicle and processing you know through pictures and getting frontline ready for Simulcasts <unk> that a fair statement that that land is still valuable to you in the process.
Extremely valuable and they provide your central location or the pickup of the vehicle by the buyers, which is a critical value proposition you know the buyers don't want to be running around.
Pick up 10 cars from 10 different locations is any patient.
Okay. Great. <unk> then it's the second question I mean, there's a backlog of vehicles at your auctions, obviously, you've been shut down by requirement is not a lot of buyers at the moment, but as things start to open up and the skies queer a bit here I'm just curious as you think about your major showers like you know automakers.
People's coming off at least with a cap if any chose other fleas dealers you know rental car companies <unk>.
You kind of take out the major sellers, yeah, how much realization you'd there that the market is no different prices are lower and they're going to have to reset expectations and kind of how fluid you think that's going to be or do you think there's going to be some hesitance as prices maybe drop in the initial phases here and maybe you have beyond the initial phases of opening up I mean, he's trying to understand how.
<unk> and reluctance to raise a monk sellers two you know get realistic about market pricing and how much problems that may create an actual conversion rates.
Yeah, So John.
First of all these guys continue command, we've got the cars and as I say these vehicles on a one way tickets, they're not going anywhere else. We know we're gonna sell these cars without said, we did see reluctance initially.
Where some sellers weren't ready to take to take price reductions and they said that they wait for a little bit more clarity in the market and how the market was going to rebound as I mentioned, we'd shut down for two weeks and we open up our options a few weeks ago incense opening up our options I meant.
And that we've continued to sell to sell more cars. Each week. We can help you to see conversion rates go up I think in some cases.
That are larger sellers are starting to accept price reductions to get these vehicles sold at some point in time, we have to move through this backlog of cars huh.
They're going to continue to calm.
And I think with with what we're seeing now even as we head into April we're seeing some pretty positive signs in terms of what's going on in the retail world.
You know, we're seeing cars are starting to sell at retail.
We've talked with the folks that N.A.D.A. and people throughout the industry and there's a couple there's a couple of points I mentioned to you is that dealers are actually.
Selling somewhere between 50 and 75% of their normal volumes that they would have sold.
And we're seeing a couple things both both ends of the scales on the bottom end of the scale, whereas in the five and 6000 dollar car become very very attractive and this is the case I think where people are going back to private ownership. They want basic transportation they don't want to.
Getting public transport in public transportation or and ride sharing they don't feel safe, but they do feel safe in their own car. So there is more of a tendency to private ownership and those low in cars are selling that's good for us for a couple reasons number one those cars are stone a good prices number two is this is the sweet spot.
And this is the cause they really focused on and number three it also say, it's a sweet spot for trade rough. So that's a good thing at the high end of the scale and this is what in a day reported to us.
Being very strong results and some of the some of the higher end product, especially pickup trucks and luxury S.U.V.s.
And there's a couple of reasons for that number one gas prices them never been lower and it makes it very affordable to drive those vehicles plus the fact on those higher end vehicles. Those are more cash buyers and they they tend to be able to buy those cars without financing so.
What we're saying is.
The last five weeks continues to increase retail continues to get better.
We expect that it will only get better from here and we expect all sellers large and small will continue to <unk>.
The other thing I would mess.
Is vehicles that are being acquired in this market place.
Can be sold in this marketplace in other words are being a part of today's prices then it's easier for them to be sold at today's prices as well. So it was a bit of a when the answer but we're feeling puzzles.
And John and I like that I'd like to add one thing for you in 2008 weeks variance something similar.
Value proposition to Arkansas minors, we will all those cars for them and so they can release into the market without putting additional downward pressure on pricing maybe down but if they want the market and this is the supply imbalance that we're gonna have we have more supply then maybe demand in the short term.
We are there to help our customers managed through that without having to take unnecessary financial burden on the stand with the vehicle.
That's very helpful. Thank you very much guys.
You're welcome.
Mm.
The next question, it's been done line right joining with you can't free.
Hey come on guys.
<unk>.
I question on trade Rem I guess, what do you think about it it's volume growth prior to the second half a march when everything shut down could you talked about sort of how that was ramping and you know I guess from up competitive landscape. You know how do you think that volume compares to the appears in the space May get Mannheim Express rate when <unk>.
Doing you know as far as jockeying for for units.
Yeah. So all I can tell you about is I can't really speak to what the competition was doing you know, we certainly hear lots of lots of anecdotes, but I don't focus on that and really focused on trade rub and what what I can tell ya is that they increases that were.
Seeing on trade rub without getting into specific numbers, we're very pleased with the gross that we've seen through January and February and we're very pleased what we're seeing here to the pandemic in terms of dealers signing up to use the product.
<unk>.
Yeah Brett.
When we combine the sales force, that's and trade route to have a dealer consignment in Michigan.
Beyond training that we were seeing actually strong growth even at the physical auction in the dealer consignment business as well as trade that and we think.
To be honest, we had a very successful.
Marketing plan and it was being well received by the customers and then as we entered into late March that one.
Somewhat bright spot is we've seen trade grab do very well and really be resilient through that.
The customers clearly are using it when they can't get to the physical auction. So it's serving our customers very well as an alternative if they if they can't get <unk> or if that's a better way to sell the vehicle I think it's reinforce our strategy on trade rather there's the right strategy and our strategy on dinner consignment is the right strategy.
Okay, and then a quick follow up I I guess is you have the success would simulcasts plus is there the possibility to shrink some of the physical footprint in 74 locations do you need them, just because you need the proximity or you can you can consolidate some of your options in to see where footprints and lower fix overhead.
You know I think breads, Eric mentioned earlier.
Land is really critical and having these locations is really critical is you know we have them enjoy vehicles, we have to image than we have the reconditioning, we get to do the ancillary services, we've talked about about the revenue opportunities there.
And we need a place for dealers to be able to have a central plane of the receiving these cars and dropping these cars off so I'd say land is lands continues to be very very very critical 'cause dealers need to be able to get these retail ready cars and that's what happens that these physical locations now with.
That said you know was 74 options is there an auction or two that we could take a look at and really consider whether we whether we need that.
Pickler action that particular location is there an overlap is or duplication some of that nature, there's always a chance that there's the ones he tuesday, but for the most park we need land.
And and <unk>. Thank you.
One thing the technology might permit overtime.
We'll need the locations, but perhaps.
The land footprint could compress a little bit as we can move the cars rather than one day a week multiple days a week you could turn them over faster, Jim and we could maybe have a less need for it they m- onto bland and a location, but that's a longer term viewpoint.
Alright, great. Thank you.
<unk>.
Your next question is from the line of Ryan point.
T marking.
Hi, Thanks for taking my questions. Firstly, just wanting to follow up around the discussion on used car prices by maybe if you can remind us of the impact of lower prices on your business specifically for addressing you know how important is the gross transaction price to the option fees are able to generate on the by side and the cell side and you know in comparison to the other elements of your revenue which aren't.
Likely to move with transaction prices such as you know the different ancillary services, you provide et cetera.
Yeah, Ryan you know I'll remind you that where a transaction company and we're focused on the transaction now listen we want to get the best economic outcome weekend for our customers, but at the end of the day the selling price of the vehicle is not nearly as significant as as the as the trends.
Action itself as you know our fees are not on a percentage bases are on a stair step basis, and they and they they they stair step and small increments. They grew up in price. So a car has to change pretty significantly in value afraid to have any meaningful impact on our prices.
The other thing I would tell you you know during the pandemic here on average is shifts around a little bit by location them product, but on average we've seen a price reduction of somewhere in the neighborhood of 10, 10, or 15% and we think that may even adjusts itself here as we go for it to to the public.
Okay, and Ryan let me add one thing in in past when prices drop because of supply versus the man, we have seen our customers typically spend more money on the reconditioning the vehicle.
Now we're in an odd time, where reconditioning services are not open in most of our locations, but as it comes battle back opening I think you will see a very positive impact on revenue per unit as as they are unlikely to spend a little more money in that car retail ready because the retailer will want to buy a car and he can sell.
Immediately when it hits this lot is that right Jim and he has a dealer you would agree with that typically.
Yes there.
Very helpful. Thank you and then and then just finally, you know I know you sort of specialize in the the big institutional sellers, but also that a lot of your buyers and sellers are are these small privately held businesses you know like biker pay here dealers non franchise colors without the support of Oh, yams and everything coast, just perhaps you know many of them have applied for.
You know probably the P.P.P. program you know how do you think that these smaller businesses are likely holding up during the Lockdowns you know new vehicle dealers seem to have made a a pretty impressive pivot toward these touchless online sales with Jim calls shop, click drive et cetera, but I'm guessing not as many of your independent you know car dealer you know customers were able to me.
That sort of a shift so just curious how you're thinking about the health of those businesses as might impact A.F.C. or demand at your auctions et cetera.
Yeah, right I'm going to start that and then I'm a that Eric way in with some comments, specifically about and stay in in the L.C. months AD, but I would tell you that right now.
We think the health of the independent dealer is good in terms of what we're saying first of all I want to say that when you say we specialize in these larger institutional sellers, let me tell Ya, we specialize in every cellar and we specialize in every buyer and everyone on that was important to us and we don't discount any of them we need them. All you know some we just get more volume from then.
Others, but at that with that that think independent dealers are doing well I think we're hitting a good price point for them. These Lord dollar cars as I mentioned earlier are really attractive visit an ultimatum alternate means to transportation and private ownership and I think some of the things that we're seeing through A.F.C. would indicate.
That the independent as doing doing well, Eric do I take that.
Yeah, why in one of the things that we look at on a weekly basis is the default.
Fault rate within the agency portfolios and it's actually below normal right now, meaning the dealers are getting through it now let's not.
Let's not get fooled by that we would typically see the health of that dealer show up probably as things start to recovery and you know they kind of get through the toughest part and then they they get behind the curve a little bit and maybe not get out of it but but we're expecting the dealer group to be healthy over all those that have taken the most <unk>.
Probably run into some difficulty more than likely through the summer months Oh, that's in our competitors are provided some relief to them on cash payment until they sell the car.
That is help them and we are hoping that bridges them back to retail activity and they'll make it but I think the dealers as a whole are healthier than they were in a way when we had a disruption just across the platform. They have less inventory they turn the parts faster and that will give them a higher likelihood of surviving the situation.
We're in today.
Very helpful. Thank you.
<unk>.
Yeah next question constant in line.
Crank kind of thing <unk>.
Good morning, fake Hey, good morning, Thanks for taking my question in for the the call here very helpful. I'm curious, what you are seeing and various markets given that the impacted environments.
Areas by state and I stayed home owners and I'd be particularly interested in trends in markets. Then have open soon or just to get a feel for what the world could look like in a few months.
Yeah, well yeah, Okay. Good point and that's what we're dealing with thoroughly it's.
You know if I go back, but I go back six six weeks or so it was a very different it was very different and I would say is was different by state. It was different by city. It was different by county with different by Province, Canada was different than the U.S. There was just say.
There was just different different ordinances in place.
As what was it central and what was non essential and what you could operate in which couldn't operate in which businesses and I think it you know it was just a mish mash of a number of variations a state by state and what we had to do is you know as I said, we were we were focused on being.
Safe and we're focused on being legal and we're focused on listening to our customers and so what we did is we paid very close attention to where we're allowed to operate and what were allowed to off the top race and as we've opened backup we've opened back up with those three things in mind and.
The most part we're seeing business continue to move forward in terms of the volumes and the sales I've talked about Eric on that so yeah.
I see your point and and the types of companies that you follow as well the middle of the country seems to laugh.
Not being hit as hard.
And is opening up maybe a little center on the retail side and I think if you go east coast West coast or the extremes. Because those are also been hot spots for public 19 were stayed home orders are affecting a greater portion of the population in the middle of the country and the middle of country and there's exceptions when you get to Detroit Chicago.
But overall, it's more rural environment, and we've seen less impact on retail and wholesale activity.
In the middle of the country versus the eastern West Coast, and Canada is lagging and Europe is now coming back we're very excited about what's happening in Europe, because we have what we believe would be one of the leading online platforms to serve the European customer, which has been heavily dependent on physical options, which still have.
Significant restrictions, while it's just opening up we're seeing some promising early numbers over there in the online sales and who's interested in using our platform. So again I think we're well positioned in each region is definitely Islam.
Yeah [noise] show I think we can take one more question then we all need to wrap it up.
Yeah next question crossing the line of Daniel and well.
Let's see that's incorporated.
Yeah, Hey, thanks, Thanks for screening man on your <unk>, Jim I want to start on the physical revenue per unit trends you know of over $900 impressive growth. Despite the Edwin I think air just mentioned most of the reconditioning services are close right now so maybe talk about the different factors that drove that and then longer term.
<unk>.
An upper bound on our poor working pricing and services keep moving higher overtime.
Yeah, So I'm <unk> start that and then I'll jump in Eric.
Daniel I think I think years I think.
The offer my services in particular were not shut down as quickly as the auctions I think that number for the first quarter is a bit I <unk>, it's an actual facile number but when I had virtually no physical auction sales last two weeks my revenue didn't stop as quickly, especially in the off from this area.
So it's inflated over what it then what it would've been had we continued operating all of our options for the end of the month.
I, so I I I would tell you.
It's actually higher than it should have been had we continued the auction operations.
Is there an upper bound I'm sure there is but I don't think we're near it it's really a function of taking that numerate or which is total revenue other than online sales and dividing by the denominator and I think our potential for expanding the revenue is tremendous and.
<unk> will grow faster than the volume will grow over time as as really the value added services or highlight for us and will continue to be transportation doesn't require us to move apart. It's an option we move a lot of cars that aren't at auction. So you know it it it's an opportunity for that to grow Jim do you have anything that.
Yeah, Eric and Dan I would add that you know when you think about the tremendous backlog of cars that we have.
And these are cars that.
That used a lot of our ancillary services a lot of our reconditioning they off leasing the repossess vehicles, we're going to get to do the Chancellor's services and drive they are pool on those cars and as you you'd think about it.
What dealers one by today is they want to buy those retail ready cars that I spoke about cars that they can basically by the auction and take home and putting the front row and sell today without having to do reconditioning for themselves and I think you're gonna and then the other thing just from a competitive standpoint.
They want.
They want bidders more attracted to their cars and the more work. They do these cars that are they reconditioning them the more than to get them frontline ready the more attractive they're going to be so I'm optimistic above the opportunity, France blurry services as we go through selling these cars over the course of.
Next two or three four months.
It's really helpful. In just a real quick follow up on the balance sheet. Eric you know total not leverage up here almost at four times.
How comfortable are you guys I guess today with your leverage is we think <unk> pandemic shall we think about your target leverage are you still comfortable running the business like you used to or have you learned anything during that that would make you think that your capital structure be different in the whenever new normal looked like <unk>.
You know band that's a great question, we're very comfortable with our capital structured in fact, I think it's been a real asset as we face because I'm certain times at having the terminal and be and the Unsecure notes is the right structure for us and three times as the right level, although that we may look at that over time as we grow.
I think you're scheme, we're <unk>, we're avoiding the use of our revolver as long as we can because we think adding leverage in a period of uncertainty, including leverage available to us <unk> <unk> imposes rest on on the balance sheet that we don't need to take so managing our cash. So we're comfortable and we think we have the right capital structure.
And we can operate for an extended period of time witness capital structure and I'm sure glad I yeah. The the pieces in place that we have that we we put in place with our most recent transaction being last fall. So I don't see any change there and I and I see as being comfortable in the recovery with this capital structure.
Really helpful come up and everything.
Thanks Daniel.
Oh now like to try to call Oh, but you can't have it C.E.O. of car hits closing remarks.
Yeah. Thank you Sharon Thank you, ladies and gentleman for being on our call today. We truly appreciate your continued interested in supporting our company. Let me close with reminding you of what I'm talking we're really focused on the four things I talked about is we're focused on preserving capital.
We're focused on the safety not only our customers butter employees and number two focused on the digital transformation of this business and how we can continue to move forward in that direction and then at the end. The day is we committed. This endemic we know we have to come out a bit with a different and lower cost structure.
And we're very focused on that cost structure I would just remind you that I feel very good about the businesses unfortunate times that we never seen coming but I can tell you. This is a good business and I think we're going to be better and we're gonna be stronger, but also tell you were going to do things differently as we commit.
This pandemic, we're gonna be a data technology driven company.
And we're gonna certainly be in many cases, we may be a smaller company in terms of overhead and headcount and people, but we're going to be a more profitable company with a higher margin business as we move forward adults chip that we'll look forward to getting through this pandemic and.
Talking to your next quarter. Thank you for being on today I appreciate it.
And they didn't that's not thank you for participating in today's teleconference. You may now disconnect.
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