Q2 2020 KAR Auction Services Inc Earnings Call
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the KAR auction services Inc. Q2, 2020 earnings conference call at this time, a participant lines in listen only mode. After the speakers presentation. There will be a question and answer session to ask the question during this.
Yes, and you'll need to press star one on your telephone.
Please be advised that today's conference is being recorded if youve acquire any further assistance. Please press star Zero I would now like Dan The conference over to your Speaker today, Mike Eliason, Treasurer, and Vice President of Investor Relations. Thank you and please go ahead Sir.
Thanks, Justin Good morning, and thank you for joining us today for the car Global second quarter 2020 earnings Conference call today will discuss the financial performance of car global for the quarter ended June Thirtyth 2020.
Her concluding our commentary we will take questions from participants before Jim kicks off for a discussion I'd like to remind you that this conference call contains forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 90 95.
There's a caution that such forward looking statements involve risks and uncertainties that may affect cars business prospects and results of operations and such risks are fully detailed interest SEC filings 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 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.
Our website.
Now I'd like to turn this call over to car Global CEO, Jim Hallett Jim.
Thank you Michael good morning, ladies and gentleman and welcome to our call.
The last time that we spoke I was concerned about what changes would be needed for us to go forward today I can tell you that I'm genuinely excited to share with you what we have accomplished and how we have used this period of challenge to accelerate the transformation of our business.
My agenda for today includes an update on how cool that 19 is impacting our operations throughout the world.
Want to provide you with a review of our performance in the second quarter, including an overview of our monthly cadence within the quarter.
Provide an update on the performance of trade Rob.
I will walk you through the actions that we have taken with our workforce.
And I want to close with an update on our progress in the digital transformation of our business and how I see this impacting our financial future for future performance.
Let me start with the status of our operations third world.
In North America, Oliver auction locations are open for business the access to our physical auction site varies by location.
Were permitted we are allowing our customers onsite for previewing vehicles and in some cases bidding from inside the building.
However, all of our vehicles are being sold through our digital platforms OPENLANE Simulcasts.
Some accounts plus and trade right.
Over the last few months, we have signed up thousands of dealers on our digital platforms and tens of thousands of dealers have bought cars digitally that have never use our technology previously.
This is probably one of our biggest accomplishments during the second quarter.
We're not running any vehicles across the block at any of our physical auctions, we are providing ancillary services that all of our physical locations and restrictions on end of lease inspections and lot audits are minimal and our inspection business the are back to full strength.
The one area that continues to lag is our repo business and that is handled by our power North American the vision, our customers are not yet processing repossessions consistently in most areas.
We expect the number of repos to begin returning to normal levels as we go into the third quarter.
In Europe, our operations are up and running our European businesses are all digital auction platforms.
I would say the returned to normal levels of activity has been a little bit slower in Europe has been in North America, and I would expect that our operations in Europe to be back to the prior year levels sometime in the third quarter.
Our corporate offices continued to be open free central activities.
Were strongly encouraging our corporate employees to work from home as much as possible.
I've been pleased with our ability to support the field, while our corporate office personnel are working remotely.
Well nobody anticipated that we would need to move many functions to a remote workforce. We were prepared when it was required and have met the needs of the organization without significant disruption at any level.
Now, let me review, our second quarter performance.
First I will say it seems very odd for me to say that a 41% decline in adjusted EBITDA compared to last year was better than I expected.
Vehicles sold in the Adesto segment declined 35% and the number of loan transactions that AMC declined 4% in the quarter.
We also experienced declines in revenue per unit at physical auctions due to limitations on the services that we were permitted to offer from our physical locations and restrictions on our off premise activities.
Online only revenue per vehicle increased slightly we also saw declines in loan transaction units and revenue per unit at AMC. This all led to a 42% reduction in our revenue.
With all that said, let me explain why the results were better than I expected.
We started the quarter with all of our businesses shutdown.
We continued to have a small number of trends.
Volume was minimal at the beginning of April.
Obviously, we were prepared for the disruption in our markets to continue and expected the recovery to be gradual and perhaps take through the remainder of the year.
What actually happened was volumes picked up week over week consistently beginning in mid April and we saw this improved to where June volume was 8% above the prior year.
And the values of used vehicles have continued to be strong in fact values are generally higher than we expected and this has supported the sellers using our auction platforms to move vehicles quickly. This is evident in the high conversion rates across all of our digital platforms.
We were cautious in calling employees.
Back from furlough, and we generated higher gross profit per transaction increased adjusted EBITDA per vehicle sold in May and June.
We progressed from losing money in April to seeing our performance in may improve but still below prior year levels and then we had a significant increase year over year in adjusted EBITDA in June.
Encouraged by our performance late in the second quarter and heading into the third quarter.
While we continue to see positive trends for the wholesale industry. It is too early to predict with any level of confidence how things will look a few months from now.
What I can say is we accelerated the digital transformation of our business.
We are selling 100% of our vehicles online we have accelerated the pace of introducing new products features and functions to support the digital marketplace and we have made permanent changes to our cost structure that should lead to improved gross profit and adjusted EBITDA margins going forward.
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Now, let me speak to trade that.
Although the trade route network was able to operate when our physical auctions were shut down in early April.
[noise] trade Repsol volumes decline in April as retail activity was minimal.
Like the rest of our business, we adjusted our workforce through furloughs to bring the head count in line with the sales activity as the markets began to rebound in late April in early May we found trade rep can meet the needs of the market with fewer people we maintained a disciplined approach during this recovery.
We adjusted our processes improve the leverage of our people and completing the imaging and the inspecting of vehicles and focused on assisting our customers with setting realistic pricing expectations.
Our total trade route volume for the second quarter was down year over year, but this was primarily due to the extended shutdown in Canada.
The recovery and Canada lagged the U.S. by about a month and in June we saw our Canadian volumes grow year over year.
The bottom line is trade drug was able to achieve better than breakeven results for each of May and June and this includes the allocation of the combined sales team cost to trade rep.
We achieved 60% gross profit on revenue per unit that was approximately $350 our conversion rate at trade drug was well above 50% and our incentive costs were low.
Now that we've proven that the trade route mile what can be profitable and that can grow without heavy incentives I want to focus on winning the digital dealer to dealer market.
Before I wrap up my comments I want to give you a summary of the actions that we've taken with our workforce and where our head count stands right now.
As we entered the quarter, we had a little more than 15000 employees. This includes both full time and part-time.
In early April we furloughed about 11000 employees worldwide.
Every geography, we served was impacted.
At the time most of the business activities were limited by stayed home orders and restrictions on business activities that were deemed non essential.
As all of US began to adjust to the new reality of a world experiencing had pandemic, we began to reopen our auction locations for limited activities and began recalling furloughed employees as needed.
During the shutdown of our operations. We spent considerable time determining how we could adjust their process to meet the needs of our customers and maintain appropriate social distancing to protect our employees and our customers and we have made many of these changes permanent in our operations by the end of the quarter, we'd call back up.
5000 employees and we identified 3000 positions that are permanently eliminated.
As of today, we still have about 2000 employees on furlough.
We have notified these employees that while they remain on furlough. If they are not call back to work by October their positions will be eliminated.
The bottom line is we have adjusted our cost structure to be much more lead.
This is both direct cost of services NSG M&A.
We expect our business should generate higher gross profit margins and higher adjusted EBITDA margins going forward.
While cobot 19 provided an unfortunate catalyst to make this change in a very compressed timeframe. Our changes are consistent with cars strategic objectives that we reviewed with you at the beginning of the year.
Let me conclude my commentary around the digital transformation of the industry. First this has been a strategic vision for car that I have outlined over the past couple of years are focused on digital transformation of the wholesale auction industry preparedness to respond to cope at 19 situation aggressively.
And with a group of offerings that can meet the needs of both buyers and sellers in any market conditions.
Two years ago, we migrated from our old technology Simulcasts in order to have a digital platform for selling vehicles from our physical locations. This investment was critical to us being able to move 100 percentage will in less than a week back in late March.
We've been working on some accounts plus for over a year and we had planned to pilot. This platform by the end of 2020, we were able to accelerate this timing and we now have simulcast plus in production.
And you may have seen our recent announcements for hurts sale, where we sold vehicles from 22, ADESA and hurts locations all within the same sale.
With simulcast plus we can have multilocation sales that bring buyers from multiple geographies that have a specific interest in the vehicles that are being offered.
This is a completely automated auction that uses a computerized auctioneer instead of a live auction here.
We are able to provide additional functionality and flexibility while operating the most efficient platform in the industry.
And the results speak for themselves are conversion rate is above 60% ensemble cast plus platform and we can offer up to 120 cars per hour and the prices have been strong.
We now have a digital platform that can serve every segment of the wholesale market.
OPENLANE for the off lease vehicle and other high value used cars.
Trade revenue for the dealer to dealer transaction simulcast for transactions from our physical auction properties and Simulcasts plus for on premise or off premise auctions that can meet the needs of any seller commercial or dealer.
In addition to having the platforms to meet the customer needs. We have also developed a lower cost operating model that has less labor costs. The lower labor cost is realized in reduced sale day costs.
We have also streamlined our field SGN, a and then streamline their field support organization at ADESA.
And we have reduced our corporate overhead costs by driving efficiencies into our process for the back office functions that support all of our businesses.
Cobot 19 caused us to take Swift and drastic actions that accelerated the pace that we did drive change to the organization. We have made great progress and permanently eliminating significant people costs from the organization.
And we have other opportunities as well we're looking at further centralization of functions throughout our business to drive even more efficiency.
Examples of the areas that we're focusing on our vehicle inspections title processing and checkout processes.
We will continue to look for technology to improve everything from customer interfaces to the back office support I.
Im excited about the progress that we have made over the past three months and I'm, even more excited about the opportunities I see in the future.
Although the second quarter results did not paint a clearer picture of where we are today due to the impact of coal bed 19 on our business, especially at the beginning of the quarter the progression of our performance month to month through the quarter gives me confidence that the benefits of lower direct labor costs and reduced overhead.
Ed are expected to be evident in our results immediately beginning with the third quarter.
Thank you again for your support of car through the most challenging periods any of us have seen in a professional careers. Our balance sheet is strong and we are properly positioned to support our growth initiatives going forward.
The entire car global team is focused on delivering exceptional results now and beyond in the post coal bed period, and finally, let me say thank you to every employee within the car organization that has made personal and financial sacrifices. So the car could be in a position to be a leader in technology.
Great and innovation in the wholesale auction industry.
With that I will now turn it over to Eric for additional commentary before we take your questions.
Thank you Jim as Jim just pointed out in his remarks, the second quarter has been an unusual three month period [noise].
Let me start by confirming that car is not providing guidance for 2020 or any future periods at this time.
Retail used car sales have been strong even above prior year levels recently, there or any number of things that could impact our industry through the remainder of the year. There is uncertainty around how the spread of coated 19 will impact businesses in the U.S., Canada and Europe. It is clear that opening up for business as usual is not eminent.
Throughout the geographic regions, where we operate.
Unemployment continues to be high in the U.S. and many businesses, including the used car retail industry are somewhat dependent on government support to maintain their current operations.
We also believe the government stimulus packages in the United States have helped the consumer and enhanced used car activity without continued government stimulus in the United States. It is possible to current level of used car activity would slow significantly.
I will say, we are set up well for the third and fourth quarter to be much better than the second quarter, while the recovery from coded 19 shutdowns in Canada and Europe have lagged the recovery in the U.S.. We are seeing significant increases in activity in Canada and Europe very recently activity in Canada has reached pre cobot levels engine.
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Europe is still lagging the recovery in North America, but we are seeing results that are approaching 75% of the prior year early in the third quarter and there are signs that the recovery will continue in the second half of the year.
We do expect significantly reduce cash taxes as a result in 2020, we also have delayed or canceled a number of capital projects that will will result in lower capital expenditures than we expected at the beginning of the year.
With that said the recovery in our business has given us confidence and moving forward on some projects in the second half of the here that we had put on hold in the second quarter.
The one thing that is evident from our performance late in the second quarter. We believe we will have higher gross profit margins operating margins and adjusted EBITDA margins going forward and as Jim mentioned, we believe the changes in our cut cost structure, our permanent and will continue in a post cobot 19 business environment.
Jim provided you with a summary of changes in our headcount, let me put some numbers behind those facts.
The elimination of 3000 physicians will reduce our total compensation expense on an annual basis by approximately $90 million.
This is a combination of direct labor and SGN a.
Please keep in mind that the job eliminations include both full and part time positions.
Our total severance for these job eliminations is approximately $6 million.
Now let me cover a couple of topics that impacted our financial results in the second quarter first we recorded the write off of goodwill and other intangibles totaling $29.8 million.
Annually, we review the carrying value of goodwill and other intangible assets throughout all car business units. This year. This evaluation coincided with the time period, we were reacting to the impact of coated 19 on our operations.
We completed this evaluation and determined that there were no impairments of intangible assets in any of our business units, except for ADESA UK.
In ADESA UK.
We have seen changes in the UK dealer network that changes the outlook for the UK business in the near term.
As a result, we have written up all of the goodwill and a portion of intangible assets in the second quarter for ADESA UK.
Another item of note in our second quarter performance is the level of loan losses at AMC.
Our provision for loan losses increased to 4.3% of average managed receivables for the quarter.
We have continued to see strong credit performance throughout our portfolio. Our current credit statistics cause me to believe we will lower provisions for credit losses in the second half of 2020.
The portfolio is down almost 600 million dollar since year end delinquencies are relatively low and absent an adverse change in the used car retail industry, we expect loan losses could be lower for the remainder of the year.
One major change in our operations since our last earnings call that is worth highlighting is the cash we were able to generate in the business. Following the negative cash flow in April.
For the quarter, we were able to generate positive cash from operating activities. You may recall from our May earnings call that we had used $150 million available cash in the month of April.
We were able to increase our available cash balance by $50 million in the month of May and an additional $150 million in June.
Excluding the capital raised in the pipe transaction.
At June 30 are available cash balance was approximately $875 million, we closed July with over $1 billion in available cash.
We have strengthened the company's capital structure, and we believe we are well positioned to get through any future issues, we may face.
Obviously, our improved capital position is in part due to the 550 million dollar private investment completed in June.
Our new investors Apax partners and paraphrased capital have closed on the issuance of $550 million of convertible preferred stock.
The preferred stock is convertible into common at $17.75 per share.
The terms were disclosed in form 8-K that we filed in May and June and will be included in our form 10-Q that will be filed today.
At the time, we were evaluating private investments in car, we were concerned about having adequate capital to navigate the uncertainty created by the cobot 19 pandemic that materially impacted our business.
While we have seen improved results since the completion of this transaction.
We are in a much better positioned to accelerate the digital transformation of our business with the balance sheet strength that we have today.
In terms of capital allocation, we have some limitations in the near term created by the amendment of our revolving credit facility.
This amendment puts restrictions on acquisitions payments of dividends and share repurchases, we plan to use our capital to fuel future growth and create shareholder value. We continue to focus on our current operations and the continued digital transformation of our business.
As the outlook for used vehicle retail and wholesale markets become clearer over the next few quarters, we will be setting our priorities for capital allocation going forward at this time, maintaining a strong balance sheet is our priority.
That concludes my commentary I will turn it back to Justin So we can take your questions and thank you for joining us today and thank you as a reminder of asked a question you'll need to press star one on your telephone. So withdraw your question press the pound Keith Please standby lovely compiles acuity roster and once again that is star one if you like.
Asked a question and our first question comes from Ryan Brinkman from JP Morgan. Your line is now open.
Thanks for taking my question.
No. It thanks for the additional disclosure on the intra quarter trend in volume to which was helpful. This quarter.
Are you able to comment on the trend subsequent to the quarter in July our volume set too.
Seed the 8% year over year growth in June.
Yes, Brian and good morning, welcome and thank you for your question.
Listen, we're obviously very very pleased with the results that we saw in June.
I would tell you as we go through July prices remained strong conversion rates, we remain strong and we expect the business to continue to do well in as we go into the third quarter.
And as I mentioned Ryan.
We're starting to see a pickup in Europe, which is also going to add that volume number in June was a consolidated worldwide number so Canada and Europe are really picking up and that will trigger some more growth as well.
Okay, Thanks, and I know, you're not providing guidance, but are able to discuss some of the puts and takes on volume in the back half specifically relative to rental car dispositions and also I think theres. Some sense of maybe some of the lease returns were deferred and could be coming back and curious to your outlook for repossessions.
Runs on the GM and Ford calls they talked about delinquencies being really very low almost record lows, which is surprising but may be supported by some of that government cash payments, which could be expiring or subsiding do you think that there'll be an uptick there how does that all sort of net out to volume in the back half do you think.
Yes, So Ryan I think your assessment there is probably in line with what we would say on repossessions.
Repossessions really haven't started to show up yet and we think is as a result of you know certain restrictions that were put on financial companies from being able to going repossess cars, especially in this.
Climate that we're dealing with right now so.
I think there's a good opportunity that the repossessions.
We'll start flowing here.
As we enter into the third quarter and it will certainly have an impact on our volumes throughout the balance of this year.
You know rental car is very very interesting.
Rental has always been our smallest segment in terms of.
The commercial cars, we sell and I mentioned in my commentary the hurts situation.
And that's been a win for us, especially using our somewhat cash plus product that I talked about as well, we're seeing a little bit more rental business from some of the other rental car companies. So so I I would say there would be a small uptick there.
And.
You know, we're seeing very good success.
Traderev continues to grow.
And cars being sold the physical auctions continue to be positive as well. So overall I would say that as we look as Oliver volume and the different segments and where it comes from.
I feel good about.
The balance of the year as we go into the second half year.
And I think.
Barring something unforeseen that Eric spoke about in his comments, we would expect to see a good finished to the year.
Okay and then just quick question, Brian if I, if I could at least because a lot of investors ask us. This we expect very strong off lease returns.
Whether it be through deferrals, but there's also a large number of lease maturities in the second half going back and looking at 2017 lease originations.
We expect rental car to be a contributor to our industry.
We are doing very well on repossessions, but it will grow because they've been lighter.
Dealer consignment.
While July was very good for us and Thats consolidated dealer consignment was up quite a bit year over year, that's the area with the retailers being so light on the inventory that retailing more trades.
That could be tight, but we think it will grow year over year for us. So that I just wanted to give a summary of walking through the different segments.
I do think though the next six months have more visibility, it's still pretty murky looking into 2021 beyond the off lease area, where we know theres a lot of lease returns how that will do is highly dependent on unemployment figures in the economy.
Okay. That's very helpful. Thank you if I could just slip in one lastly on liquidity I mean, it really is quite plentiful now I wonder if it's even reasonable to ask if maybe you are overcapitalize, particularly given that the better than expected improvement in the end market and in your own execution.
With some of the capital raise maybe motivated by anything other than conservatism such as desire for strategic acquisition et cetera, how should we think about that now large cash pile.
Well right again, having $1.9 billion of debt and now a billion dollars of cash I would not described as Overcapitalized I might described as generalist generously capitalized and when we raised the might we be honest, we did not expect the quick recovery that we had especially in June and.
The good news as we're in a period of transformation, where that capital increases our confidence in aggressively pursuing the digital transformation or industry. Jim did you want to add anything to that yeah. I'll just say in Orion as we've said many times none of US saw this coming and.
We saw 90% of our business disappear overnight.
And I referred to it.
In terms of this was shocking all right and we were quite concerned about just the financial.
Stability of the company and it was it was I guess as I looked at it was like taking an insurance policy to make sure that we had the liquidity and we had this financial strength to get through whatever we're going to have to deal with not knowing how long this was going to last so obviously.
We we we went out and we had a very strong interest in the company.
And I think you asked a little bit about something to the effective though what else kind of where are we thinking about with that I think we're thinking about you know.
Number one we wanted to get the best economic outcome that we could for our investors. We had put a limit of a maximum of 20% dilution on that.
But we were also looking for an investor who understood our strategy and Investor, who we felt and believed would support our strategy.
And then also we wanted to take a look at who had experience in this digital space, who had taken digital product, who had taken brick and mortar products into a digital transformation and at the end the day along with the money I think we checked all those boxes and we feel very very good about the investment that we've.
Look in the partners that we got and I'll close grind with one thing that capital was raised with our long term future in mind. It was not a short term band it did give us confidence, but we never intended for the capital we raise to be use for operations. In 2020. It was was the long term.
You will how we can create shareholder value over a period of time.
Very helpful. Thank you.
And thank you.
And our next question comes from John Murphy from Bank of America. Your line is now open.
Good morning, guys. This year denim selling on for John.
Thank you I guess.
First question in terms of your independent dealer buyers, we saw retail demand for used vehicles improved significantly quite the quarter, but there was still some pressure.
Great performance fee. So can you discuss a state of your small dealer buyers.
And to what extent, you think potential Los Angeles assay can continue.
Yes.
That's a good question, we're actually seeing very strong performance in the AMC portfolio, which is predominantly independent used car dealers that are smaller in size and art credit statistics are looking quite good we did recognize loan losses in the first and second quarter given given the pandemic.
And.
I would hope that as the year plays out you will find that we were conservative in our approach in the first half of the year, but at this point in time, what we've done is taken very careful look at the portfolio that potential losses recognized them. Early however, the delinquencies and the performance of the portfolio I would argue.
Is stronger than the picture painted by the credit losses recognized in the first half and we'll see how that plays out the rest of the year.
Okay.
I am concerned about government stimulus, providing the strength to keep these dealers in business and if that slows or if we reduced the amount of stimulus I do think you would probably see more pressure on the small independent dealer and we're prepared for that.
Okay. Thank you.
I guess my second question can you talk about the trend with online only revenue per vehicle in the quarter and your expectations for the rest of the year. I mean, do you think I pool on a consolidated vacate Ken we'd like to remain at current levels acquitted actually trend positively I guess with the second half 2020.
You know, we're seeing a trend positively month to month right now and it's primarily because of ancillary services are continuing to grow at those were ancillary services, where the deepest cut in our business, we couldn't do anything to a car other than sell it early in the quarter and that's coming back and I think one of the misconceptions.
I hear from investors is as it goes online you're going to reduce the transaction revenue from selling the vehicle well, let's just isn't true our simulcast and final class cash plus products are able to maintain the same auction revenue per transaction that we're getting when we had the physical auction there.
There's no.
Reductions in the fees and the the mix is right and the other thing that's really powerful the conversion rates were getting because of the all digital flat platforms is actually driving higher gross profit. That's what's doing it high conversion rates are really good because we're getting great leverage off of the FIS fixed cost infrastructure.
In the technology, Jim do you have anything you want to ahead I think you got it Eric Okay.
I guess relate that to me if prices remain strong with the end of the I do expect.
Conversion rates can actually improve in conducting to inform Q.
Yeah, you know.
Conversion rates are well above historic norms and you know.
I would be excited just to maintain those conversion rates as we get through the fourth quarter.
When we take an increase in lead we would.
But I'm not sure how much higher conversion rates can go than where they are right now, but you are correct strong pricing supports the sellers selling the cars quickly and that's high conversion rate. They don't want it twice because they know they got a great price.
And that looks like a trend that is continuing right now.
Okay. Thank you for hotspots decline.
And thank you and our next question comes from Craig Kennison from Baird. Your line is now open.
Thanks for taking my questions as well, Jim you mentioned, you're 100% digital now in terms of auctions is the traditional in person auction dead and if so how does that change your real estate needs.
You know Craig Great question, and one that has a lot of conversation going around that.
I would say the.
Since your question now right the traditional brick and mortar auction is not dead.
It continues but I would tell you from the car standpoint, we're very focused on digital transformation, we're very focused on all of our platforms and being able to serve all of our customers from a digital standpoint, as I said in my commentary.
We have sold.
1.5 million cars in the first half of the year.
Right and the last quarter I think we sold 600000 and quite frankly in the last quarter, none of those vehicles ran through a physical auction.
None of those vehicles went through Elaine.
And I think we've demonstrated to our customers the real value proposition here not only is it efficient.
And certainly saves time saves money in expense.
It also.
He is getting them more access to more vehicles theres a much broader reach with these platforms as I think I may have mentioned the hurts sale, although that sale was kind of from one location. There was 22 locations and we sold those vehicles in the 19 different states that doesn't happen at and then as an independent auction.
Our one auction site that you get that kind of reach so from my standpoint.
I would hope that we've demonstrated to our customers. This is the way the future. This is what we're seeing in other businesses. This was something that has always been within my vision something that I always believe.
Would take place at some point in time and if we can create the outcome that our customers are looking for I.
I don't believe there's any reason for car to go back to running cars to the lane with that you asked about real estate.
I would tell you a real estate is one of the most important assets that we have.
Real estate is still important.
We still need to inventory these cars, we need to inspect them and image them, we need to get them launched onto our platforms. Those the ancillary services I already talked about those still need to be done.
I, just think that real estate in the traditional brick and mortar auction within the car organization is going to play a different role.
Thanks in the second question has to do with Traderev. You said you are focused on winning in the dealer to dealer channel not let you.
Proven the traderev could be profitable.
I'm curious I guess does that mean, you're prepared to go back to subsidies to drive market share and trade rags or do you think you can both win market share and a.
Forgo any subsidies.
Yes, so we have noticed desire to go back to the incentives that you speak up from the past we're going to continue to run this business I think we've demonstrated the discipline in running the business.
And on sound footing in running the business on the value that you delivering to your customer and getting paid for that is critical we've demonstrated that we can make money I mentioned, we had record months in May and June.
Now that's not to say that we won't ramp up our marketing spend over time, but the way we might ramp up our marketing spend will not be through incentive it'll be LTB through through more sales and marketing and promoting the platform itself and the value of the platform. So we're feeling very good about our.
Position.
No I, just expand a little bit Craig and say I.
I think thing that we need to understand here. If you take all the competitors in this space is probably still sell in less than million cars. We're in the very very early innings of this space.
We know that we are not the leader in this space.
But I can tell you. We also know that we're now profitable and we have a collection of assets like nobody else unmatched in industry and I am absolutely certain that we can focus on that leadership position and with.
As we go forward, we will close that gap.
My eyes are on the price.
And Craig I'll, just add one thing.
We aren't competing for the dealer to dealer transaction with regret we're competing with car [noise].
Jim mentioned the collection of assets is unmatched it's everything we do the capabilities from all of our platforms are available to that dealer.
Well, thank you very much.
Welcome.
And thank you and our next question comes from Stephanie Benjamin from just your line is now open.
Hi, good morning.
Good morning, 70, Stephanie.
I didn't want to follow up on that last question on trade rags that you mentioned in your prepared remarks about the I guess discrepancy in recovery between Canada and the you asked can you maybe talk about what you saw in Canada started to.
True for maybe break out when you know trades in the U.S. turned really to pick up just some more intra quarter detail would be helpful. As we kind of can menus back to look at performance in the back half.
Yes, Stephanie.
Canada basically kept a near complete shutdown almost a month longer than most of the U.S. and so.
But I will say that can Canadian recovery was much quicker once it started I mean, they recently came out of the gate fast and that's because traderev is the leading dealer to dealer platform in Canada without without question without question and so when the dealers were still lie on on call. It in person activity.
They were using that platform. So what was great that we had it and it really picked up.
Late last week of mates of early June.
But the pace of which it recovered was much quicker where the U.S. started picking up in mid April.
And was it more gradual steady increase in terms of activity if that describes it.
In Europe, Europe was very similar to Canada, what might have even than a couple of weeks behind Canada as well.
Thank you and then the ancillary services.
Can you just kind of walk us through where we stand now in the third quarter of having does services back on line art and similarly, we are there any services that you.
Valuated throughout this process unrealized maybe it's not worth I mean, our marginal profitability standpoint to continue going forward just an update on where we stand on the services would be helpful. Thank you.
So 70, I'll start and I'll, let Eric weigh in here as well too to answer your last part of your question No. All services were deemed necessary and important part of our offering and that collection of assets I talk about and we we did not.
We did not.
Using any of those services, nor did we plan to.
You know when you're in a hot market.
Prices are strong conversion rates are strong as well as we've talked about.
Often times and we saw this back in the recession in 2009, oftentimes sellers do not stop and do some of the detailed reconditioning that they would do under normal circumstances now some of our ancillary services continued to perform obviously you know we were still doing inspections were still.
No financing cars.
We're still doing transportation right. Those services were still intact and there were still operating and continue to operate and have done quite well some of the more on site ancillary services the.
Paint and body work.
Some of the heavy pain body work some of the reconditioning and mechanical work some of that work Didnt get done and as a result, our revenues are back to what we would call near a 100% were lagging a little bit there and there maybe this pickled that more of that yeah, and I think the primary issue. There is if we are doing the work it's too.
Taking longer because we have restrictions on how many people in an area so and if it takes longer the seller wants to get the parcel. So quickly are saying, okay ill go without that work being done right now in the hot market that Jim mentioned, but we're able to do all the work.
But we are probably taking a little longer to do some of that due to restrictions on proximity people can be to each other how fast we can process. The vehicles, we would expect that to return to normal over time and again, if the if prices were to soften at any point in time.
Sellers would take would allow more time for us to get the work done in that number would start to come back up.
Even with that said looking at the second quarter ARPU from our physical locations was quite strong I mean.
We were down 5% year over year most of that is related to April because remember I'm, giving you a quarterly number it's not related to the average ticket. We saw in May and June it's mostly related to the shutdowns in April because we were still selling vehicles with no services available at all.
No. Thank there that's that's very helpful. And then lastly, you spoke a little bit specifically when it comes to capital allocation just some additional digital transformation initiative you plan going forward you highlight what some of those additional initiatives IP Inc.
Well ill.
As I mentioned in my remarks, we pulled back a little bit on capital expenditures are number one capital expenditure is the technology investments, we're making to continue advancing these platforms.
You'll probably see as pick up on that in the second half a year and especially going into 21. The other though is really nothing specific to talk about but we are looking we are looking with an eye on are there other businesses that would add to the offerings of car overtime and our partners Apacs and purpose.
Our people that are helping us the focused on what what do we need to add to the technologies to be the digital leader in a marketplace in our case. The wholesale is far marketplace. I think just to recap is you know this year it was.
Strengthening the balance sheet stabilizing the company, making all the moves that we talked about in their commentary and continuing to drive this digital transformation.
In 2020 and at some point in time will be coming to you with some ideas on what our capital allocation plan looks like as we go forward into 2021 and beyond but other than that right. Now is let's take care of our let's take care business at hand and that's.
Continue to focus on this digital transformation for the balance of 2020.
Hi, Thanks, so much.
Welcome.
And thank you and our next question comes from Bob Labick from CJS Securities. Your line is now open.
Good morning Almond. Thanks.
So I wanted to follow Hi, I wanted to follow up just on ARPU discussion from a minute ago I think.
You said most of the ARPU decline was April so was May and June.
Back to normal levels is that how we're trending going forward I'm just curious as to how how ARPU was so strong given the lack of ancillary services.
Yeah, Bob that's a good question, it's probably very close to year over year being comparable at physical the mix is changing so remember I'm, giving you a ARPU from our physical locations and that would exclude the online only portion of the business. So the denominator in the numerator are really under.
Same basis, and we're seeing it recover slightly slower, but much closer to normal and I will tell you.
I'm pretty sure that that we have the ability going forward for that revenue per unit to continue growing even year over year. The high valued service is probably the biggest pressure I did miss out how quick they're looking to sell the car because used car pricing is so strong not the cost of services or the value proposition on the services speed is.
He is the name of the game for these sellers, especially the commercial sellers right now.
Got it and that's always a good thing that's always a good thing for our performance.
And always high conversion rate will really lead to strong performance.
Right.
And then likewise, you gave us the trends throughout the quarter, which were quite dramatic.
Some of the volume recovery in June perhaps from unsold inventory from April and May and how is like the overall market trending right now given dealers are holding on a little bit more just trying to get a sense of how July look there.
June was kind of a catch up from the lack of.
Sales from closures earlier in the quarter or where inventory stands now and were just as I said, what kind of the overall normalized level is not the super lower or snack.
Yes. So your point is there was some backup and inventory.
As we go back to March April.
We had a lot of off lease cars coming as that we're coming off lease.
And their vehicles that were inventory you might affect you may have heard us talk.
About acquiring additional land, we weren't sure that we had enough capacity to handle the cars that were coming in.
And quite frankly.
As we start to sell cars week over week.
We created capacity.
With the high conversion rate and as a result, we didnt have to acquire any additional land and we have no capacity constraints and then you know we thought our volume was going to kind of hit record levels and as we start selling week over week, our volume has actually been kind about the low point.
Yes, the inventory is down Bob and we can tell you what what segment is causing it. It's repo wait we had a lot of repos backed up in.
In March and April those did work through and the repo activity has still been delayed in many states, where there's moratoriums on repossessing vehicles when that picks up there is a backlog of repurposed to be process. Notwithstanding delinquency statistics that we've talked about in an earlier question and when those come in I think we feel the market is.
In a good spot healthy it is not overstock like it was in April and early May I'd say, we're back to more normal levels and the one area, where we're a little light right now would be repo inventory network. We think that's picking up here in the fall we expect it.
And we have insights into that through our R&D end platform, which shows us what the backlog of potential repossessions is and what normal activity as and they're just they're hung up at the finance companies right now waiting for execution.
Got it okay. Thank you. Thank you very much.
Bob.
Thank you and our next question comes from Gary Prestopino from Barrington Research. Your line is now open.
Hey, good morning, Jim and Eric.
Morning, Medicare and questions here.
First of all Eric you said, you've got about 90 million a permanent cost reductions from eliminating some position, but overall with what you've done in there in the pandemic can you put a number on what the total.
<unk> cost reductions are across the company.
You know Gary that's the number that's the that's the tangible number I'm going to give you because it's the head count number and we've done other things, but but at this point in time Im hesitant to quantify because some of it just could be temporary until we reopened I don't know what the long term cost structure when I say reopened start.
Offering all of our services.
We do we do in addition to the 90 million, we probably have had several hundred employees who were on for low who took other jobs that are not coming back so thats going to be the 2000 names that remain on furlough, how much will that be that will be tens of millions of dollars of additional.
That was not in that number but I'm not giving you that until we know what the impact is as we get towards October when we decide how many come back and how many positions will ultimately be eliminated based upon the business performance at that time, but that's another 2000, the average salary on that compared to the 90 mill.
In dollars might be it might be even more heavily weighted towards part time, so it could be a little lower but it would be a comparable relationship in my view.
And then and then the non labor headcount.
They also I'll say is that's in the numbers and if its eliminated it's in the numbers in the quarter and our other SGN eight was down a little bit in other areas.
Okay, then two more quick questions here.
You said trade Rab, you're getting a 60% gross profit on the 350.
Ticket per car.
On.
What is that is traderev profitable in of itself when you back out your your sales marketing expenses.
Or is that gross profit include sales and marketing sponsors.
Gross profit does not include sales and marketing, but our mobile performance. We were as we said above breakeven. We were just above breakeven in may and we were well above breakeven in June on an EBITDA basis.
So positive EBITDA over that two month period and that that by the way as quite an accomplishment.
And that was driven by the fact that we were able to get 60% gross profit of the 350 about to 70 is auction fees. The remainder is transportation revenue and try as you know that 60% includes the transportation revenue that is outstanding performance.
Gary as you can imagine I mean, I've been waiting a long time to tell you that were above right above breakeven on traderev.
Got Ya, we've been waiting too so.
And then lastly, just just.
Thought process here, given the fact that new vehicle sales look like they're going to be down fairly dramatically. This year are we kind of looking at maybe a mini repeat of what happened in 2009 say 2011, where there was actually a.
Pretty.
Big impact to the supply of vehicles coming back to auction.
Just because of the whole phenomenon with new car sales going down.
Yeah, you know Gary we maintain the.
The position that we don't think there's a direct correlation between Saar in between.
Used car sales you know there's got to be a significant impact to the sorry to really havent effect have a material effect on us.
A couple of things that I would mention is.
And the number that we focused on as we focus on the vehicle churn is you look at the car Park, how many vehicles change hands on an annual basis and that number has always been somewhere between the high 30, 38 39 million to 45 million, it's kind of been in that is that vehicle turn that we focus on.
There's no question, there's no question that in.
With less supply the dealers may hold on to more trade ins.
And they may try to retail cars that they wouldn't normally try to retail, but if you think about it.
I always use. The example that desire dropped by 1 million right and 50% of those vehicles have a trade that takes it down to 500000.
Right and.
And the dealer keeps the cars that he wants to retail and we get 20% of that overall market. It becomes a becomes a rather small number doesn't have a material impact on us and Gary if I could add theres, a big difference between what happened and own nine and what's happening in 2020 and own nine Saar dropped to about 10 million and of that.
Retail Saar dropped to about seven and fleet was a big supporter in 2020 Theres No fleet sales were going to be it a 13 million Saar with almost all of that consumer purchases. So I will tell you.
The reduced Saar in 2020 is much more conducive to the used car marketplace. Then the reduced star in 2009. So there is a difference lease penetration has been down like it.
Back in 2009 lease penetration dropped to near 10% of all transactions on a lower number we're seeing very high lease penetration. So I I would tell you. This is a little bit healthier situation than the last recession, where Saar dropped.
Okay. Thank you very much. Thanks, Justin just adjusted we wanted to let you know we started a little late we could probably take one or two more questions. If they're in the queue understood. Sir Our next question comes from Bret Jordan from Jefferies. Your line is now open.
Good morning, guys.
Morning, referencing Brett.
Think about the profile of the of the auction bidder, obviously a lot of large public now used car stories out there needing inventory do you see the more volume going to the the Carvana those are rooms of the world versus small independent and I guess, if there is a market share shift to larger use dealer.
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He is the population that haven't used car.
Retail going.
Yes, so as you mentioned those companies like Vrooman, Carvana Carmax and the like this and these are these are very good customers are very good buyers.
There are top buyers and Pat.
But they also by a very what I would call high end vehicle.
Hi end vehicle with low Myles.
You know probably not much older than five years.
And vehicles I can be that can be recondition to very very high standards.
There is you've got the independent dealer at the other into the scale by in the lower end car in many cases.
In fact, I would tell you that the.
The real sweet spot right now for a lot of people is the by that five and $6000 car. If you think about it people want private transportation. They don't want to be on public transportation, especially those cobot thing going on and that five or $6000 car has become a very popular car and that's kind of the car that the independent.
Focuses on so.
You are still you still kind of each each dealer.
Kind of has its market and focuses on that market and as we look across our dealer network.
They're all doing well.
And I think that Theyre, all healthy now based on what's going on in the marketplace.
We've seen no reduction and the number of independent dealers customers at AMC.
No nine we saw.
The reduction in the short term they came back to the market fairly quickly, but we saw probably as many as 5000 independent dealers bought a business in a very short period of time, we've not seen that in this cycle Brett.
Okay. Thanks, and then one quick question, but changes on the dealer network in the UK that you noted that drove the charge what happened over there.
Well you know I was very small business breadth that we invested in.
And quite frankly, the dealers weren't really.
I would say supporting.
A digital platform they were more focused on brick and mortar auction and as a result, it's really an accounting issue that Eric can speak to on terms of what we wrote down there, but from a from an opportunity standpoint now what we're seeing in the UK is we're seeing a number of sellers coming back to our people and so.
Same tell us more about your digital platforms and tell us more but what the opportunities are so we think theres an opportunity in the UK.
And in Central Europe in Europe, It's it's continue to as Eric said were 75%, we'll be back to 100% and maybe beyond by the end of year.
There's a huge opportunity there, especially with the coal bed situation going on we believe that we'll continue to sell more and more cars, but in the UK in a nutshell I would say it was just the resistance to technology and specifically, Brett what I'm, referring to there has been the complete shutdown so right hand drives.
The cars, they don't have a market broader than the islands and.
The number of dealers that are actively in business right. Now is declined and that was one of the major inputs into our analysis of the intangibles. So again I don't think its long term, but but we wrote it off based upon the near term performance, we expect in the UK with fewer dealers fewer transactions in the short term.
Great. Thank you.
And thank you and now I would buy I would like to turn the call back over to CEO, Jim Hallett for closing remarks.
Great. Thank you Justin Thank you, ladies and gentlemen for being on our call. Today. We appreciate your continued support and your interest in our company you know I'll just close by saying you know.
I've been I've been in this business for over 40 years and throw my entire career I've dealt with a lot of change and I've dealt with crisis throughout that period of time and I really believe that that experience over 40 years is really prepared me to deal with this cobot crisis I can't tell you I think our team our management team was.
Really well prepared.
I was really pleased and really proud of the team and how quickly we act that and how courageously, we acted in making our decisions and making our decisions our decisions early and making them quick and staying with them.
I think we're now in a position where we really rightsize the company.
We're in a position to really grow the company through this digital transformation, we have adequate liquidity.
That we've talked about.
We like the performance, we're seeing on digital and the path forward.
And you know.
For.
Might not 10 15 years.
Our investors have always asked Eric and I do you see a day.
Some cars will all sell on digital channels are in a digital format and I can tell you that we sold 100% of our vehicles in a digital format in the second quarter. This year. So someday is today and I believe.
We have a value proposition here that will continue to more than satisfying our customers and be the choice going forward and that's the position and that's the focus that have so as we go forward. We'll keep you up to date on how we're doing but we're excited about what happened in the second quarter and more excited but what we're looking for.
For two here in the second half year, we're feeling pretty good about things. So thank you for being on we appreciate it have a great that.
Ladies and gentlemen, this concludes today's conference call. Thank you participating you may now disconnect.
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