Q3 2020 KAR Auction Services Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the call auction services Q.
Q3, 2020, <unk> earnings conference call.
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Thanks, Wanda good morning, and thank you for joining us today for the car Global's third quarter 2020 earnings conference call. Today, we will discuss the financial performance of KAR Global for the quarter ended September 30 is 2020, concluding our commentary we will take questions from participants before Jim kicks off our 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 95 best.
Investors are cautioned that such forward looking statements that 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.
He also mentioned that throughout this conference call, we 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 yesterday, which is also available in the Investor Relations section of our website.
I would like to turn this call over to KAR Global CEO, Jim Hallett Jim.
Thank you, Michael and good morning, ladies and gentlemen, and welcome to our call.
Oh, sorry, just reflecting a little bit on what we're dealing with with the cobot crisis or the the cobot crisis has really created a unique opportunity for us to rapidly accelerate the transformation of our business and our industry.
This transformation that we've been this is a transformation that we've been leading over the last couple of years and we decided to embrace this opportunity and we took swift action to move our business into a fully digital direction and I believe that we're now seeing the positive results of those.
Decisions that we took we had a very good third quarter, although revenue was down from the prior year, we were able to take advantage of selling 100% of our volume through our digital marketplaces.
And I believe the changes in our business model over the past six months and transforming to a digital operating model provide a permanent reduction in our cost structure. It is clear to me that we are a very different business today than we were one year ago and I am encouraged by the future prospects of our business before.
Before I get into the detail, let me review the topics I plan to cover this morning first I want to review some highlights of our performance in the third quarter, including addressing how permanent the changes in our cost structure are expected to be.
I want to give you an update on the growth in the dealer to dealer digital marketplace being trade rep.
He will also provide some color around backlog cars and why we believe this acquisition will accelerate our growth in this channel.
I want to give you an idea of the size of the dealer to dealer space and quantify the incremental impact. We believe this acquisition could have on our results over the next few years.
As well I want to provide a review of the supply situation for the wholesale marketplace and what we see and dealer behavior that is impacting the industry volumes.
And lastly, I want to talk about our strong balance sheet position and our plans for deploying capital in the near term.
After I'm done with my remarks, I've asked Eric to provide information on our divestiture of PWI and our investment in backlog car our in car lots excuse me.
So let me start by reviewing our third quarter performance as you saw in our release yesterday afternoon revenue was down 15% as we saw 9% less volume sold than the prior year.
We saw declines in the volumes sold from our 74, North American facilities and in our international operations, we saw growth in volumes sold at OPENLANE and trade Rob.
Although volumes decline, we experienced increases an auction fee revenue per unit in every one of our digital marketplaces, except OPENLANE.
We did see services revenue both on premise ancillary services and off premise services decline year over year.
The changes that we've made in our cost structure can be seen in the third quarter financial results first were able to increase gross profit as a percentage of revenue to 44.5% of gross revenue. That's up 300 basis points from last year. This is a direct result of reducing the labor cost to exit.
Two transactions.
Most importantly, we are committed to a digital marketplace model, we believe the changes in our processes and the reduction in direct costs experienced in the third quarter. Our says are sustainable going forward.
As we discussed previously we manage the business using net revenue is our key topline measure gross profit and.
Gross profit was 52% of net revenue compared to 47% the prior year.
In addition to the reduction in direct labor, we also have reduced teresina in absolute dollars and as a percent of revenue.
As a management team we are focused on Rightsizing, our organization to match our business model in the digital marketplaces we.
We recognize the challenges not just reducing cost right now when the volumes in the revenues are lower due to the unique operating conditions, we faced during this pandemic.
But to sustain this lower cost structure when volumes and revenues return to normal levels.
We are fully committed to making these savings stick as we look to the future I see us committing more of our financial resources to the technology needed to operate digital marketplaces, while offsetting these expenses by reducing costs to support other parts of our business, including the legacy physical auction.
Our third quarter results were strong recognizing that through most of the third quarter, we experienced lower supply the normal despite a relatively strong retail environment.
We saw our strongest volumes for the quarter in July and then saw activity gradually and steadily decline.
So let me go into more detail on our efforts in the digital dealer to dealer space first we've seen trade red volume grow.
And sorry to accelerate trade route volumes were up 22% in the third quarter with each month, showing an improved growth rate our September growth rate on trade Rep was just over 30% I like the traction that we're seeing in this space and we are getting this done without incurring losses in the business and do what do I attribute.
The improved performance that trade, but first we have simplified the platform in the U.S., we've listened to our customers and we've made changes to make the trade rep app easier to use and we've eliminated the cage match, making it easier for buyers to know quickly when they have won the car secondly, we continue to build our buyer.
We believe that this is the key to winning the dealer to dealer space in the long run and lastly, we have made strides in bringing the ADESA customers into the trade route marketplace by enhancing the visibility to inventory on all of our platforms when logging into the ADESA Dot com site.
There is no doubt that this pandemic has accelerated the pace at which dealers are buying vehicles online. We are seeing this in our numbers as well as the volumes our competitors are publishing as well.
Without a doubt we need to accelerate our efforts to win this space.
So this is the reason that we are acquiring backlog cars, we plan to close the transaction in the next week or so.
Maybe no excuse me many of our investors have question the purchase price of $425 million well, let me size the opportunity for you as we analyze the digital dealer to dealer marketplace. We believe that over the next several years, we may see our addressable market grow from the typical 5 million.
The other is a dealer transactions served by the wholesale auction industry historically to as much as 15 million vehicles going forward.
As we size the opportunity for car, we believe the acquisition of backlog cars could increase our annual adjusted EBITDA by over $100 million per year within the next four years. This will be in addition to the contribution that we expect from trade drugs over the same period.
We believe that the ultimate opportunity in the dealer to dealer space is even greater than that over the next 10 years with that said it is critical that we closed the gap on the competition in this space.
Looking at backlog cars and trade Rep, we see the opportunity to expand their presence in markets that they currently serve.
In many cases each of these companies have strength and adjoining markets I see a real opportunity to take advantage of the combined buyer bases of each platform. We also expect to have a number of synergies that should reduce the cost structure of the combined businesses going forward and we have begun working on a detailed integration plan.
And we plan to move quickly in putting these businesses together.
What we know today is the combination of trade rep and backlog cars more than doubles, our volume in the U.S. and creates the fastest growing digital dealer to dealer marketplace in the industry.
We are committed to being profitable and cash flow positive once we integrate backlog cars and trade up.
And we will not be satisfied with anything short of being the leader in the digital dealer to dealer marketplace in the U.S.
We have already established trade Rev is the leading platform in Canada. In fact trade Rep is now selling more dealer to dealer vehicles, then ADESA in Canada, where cars businesses account for over 70% of all wholesale transactions.
The ROI on this investment will come from the increased profits in the digital dealer to dealer marketplace.
We are all signed up for this challenge, including the backlog cars leadership team that will be instrumental to our success in the U.S.
Now, let me talk a little bit about the overall supply and demand situation for used vehicles. Following April shut down of the economy. We've seen very robust retail used car activity. The build up of inventory we experienced in March April and early May gave us the opportunity to see pre co.
Bed levels of wholesale transactions in June and July.
However, since June our since July I should say, we have been faced with the shortage of used car supply in the wholesale marketplace. Let me cover this segment by segment first the off lease vehicles have returned to normal levels, but the shortage of inventory has led to many of these transactions taking place between the grounding dealer.
And the less source no question, we get our fair share of grounding dealer transactions on the OPENLANE platform.
However, the revenue per transaction is very low and this is limiting the number of vehicles working their way through the funnel to our physical locations, where we can provide value added services to enhance the wholesale value of the vehicles. This.
The strong demand in the shortage of off lease vehicles has led to record high prices in the wholesale marketplace that motivates dealers to disintermediate the wholesale channel.
We have great visibility into the off lease channel and we expect a strong supply of vehicles for the next three years.
Turning to repossessions repo volumes have made up as much of our industry volumes as off lease vehicles in some years that will not be the case in 2020, our strong inventory levels in March that led to the pre called that level volumes in June and July include a large number of repos that got held up.
At our facilities due to cold that.
We have sold off those vehicles and have not seen a recovery in reports supply yet this year.
I recently met with several of our largest commercial consigners and they have acknowledged that they have not begun repossessing vehicles at normal levels, yet they expect repo activity to return to normal in 2021.
They have seen delinquencies and defaults increased on auto loans and leases, but have not been able to resist repossessed vehicles in many states.
We expect repo volumes in our industry to be off 30% to 40% in 2020.
Our customers are preparing to catch up in 2021 and that could lead to a very high number of repo related wholesale transactions in 2021.
Rental car fleets are another source of wholesale supply that has received a lot of attention recently. This is our smallest segment of supply at car, but also a great opportunity for us.
We have seen the de fleeting of rental car companies contributed additional volume in the second half of 2020, we.
We do not expect this segment to grow in 2021 and beyond as the rental car companies are likely to have smaller fleets.
The car companies are taking advantage of the high wholesale prices for used vehicles and moving aggressively where they can reduce the size of the fleet right now.
Some accounts plus is our digital marketplace that allows consigners to sell vehicles from multiple locations across a broad geography of buyers and rental car companies are really seeing the value of this platform.
Simulcast platform allows us not to be tied to a specific sale day and we can market. These vehicles to a large number of buyers that are interested in the type of vehicle that is being sold.
We are excited about the success the simulcast plus and our customers see the value in the features and functions offered on this all digital platform that are not available from any other competitor in the wholesale industry.
This platform will give car the opportunity to grow its share in the rental car segment.
Now, let me wrap up my discussion of supply vehicles with the dealer segment, there's clearly a shortage of wholesale dealer to dealer transactions over the last eight months.
The disruption of the economy, followed by the strong retail used car demand and record high used car pricing has cause dealers to utilize the wholesale marketplaces differently than in recent years. This.
This is not the first time that we've experienced this reduced supply.
10 years ago. Following the great recession, we saw the same situation a major difference from 10 years ago to today is the health of the new car production in new car sales.
[music] car production plummeted in 2009 in did not recover until after 2013 because of the disruption to our new car markets was limited to months instead of years, we expect to return to normal in the dealer trade segment to be much quicker, we expect the dealer segment to be a source.
The growth over the next three years.
Now, let me speak to our balance sheet position and priorities for capital allocation.
First is obvious our balance sheet and cash position is materially improve from earlier. This year, we have over $1.2 billion in cash our net leverage is down to 1.6 times, we have made our businesses more efficient during the pandemic and demonstrate the strong cash flow characteristics.
The car businesses continue even during a pandemic.
I've been asked many times, if we really need to raise the capital through the pipe transaction earlier this year well. The answer is yes, when we announced the pipe transaction. We told you that we wanted a balance sheet that could get us through 2020 and 2021 under any circumstances.
As I look at what is happening today with the growing number of cobot cases and related deaths. The continued impact of our on our economy and the likelihood of returning to normal being further in the future than any of us would like and the possibility of further restrictions on the business in the near future I'm very happy with.
Decisions that we made.
Now with the balance sheet as it is we have the confidence and aggressively pursuing the digital dealer to dealer space, including acquiring backlog cars we.
We have stabilized our leverage position and expect to repurchase KAR stock under our existing $300 million share repurchase authorization.
The amount we commit to repurchasing shares will be determined by market conditions. We expect these purchases will partially offset the future dilution from our issuance of preferred stock earlier this year.
And finally, we do expect that working capital will be needed as our markets return to normal likely sometime in 2021.
We will continue to focus on efficient generation of cash during this time, a disruption to ensure we have adequate capital to support the growth of the business as things return to normal in the future. We're committed to having a higher gross margin business and lower SGN a cost structure than we have had in previous years.
Yes.
Yeah, I look forward to a return to a normal market conditions hopefully in 2021, when we will focus on growing our volumes in the marketplace. We have the right strategy and the focus to support growth in the future I know that I've had a lot to talk about today. So I will now take a break and turn it over to Eric for some more comments.
And then we'll get to your questions Eric.
Thank you Jim let me start by updating you on PW.
We have reached agreement to divest a preferred warranty inc. to Kingsway financial.
We were approached by Kingsway financial earlier this year with the proposal to acquire PWI Kings Kings way, we'll add PWI to its existing auto warranty business.
The expectation that they could accelerate growth that PWI.
As we looked at the PWI platform that is a consumer focused product and the fact that during the initial Cobra disruption, we pulled back on the sales and marketing of this line of business. It became clear to us that Kingsway was a better home for PWI. The PWI offering was not core to either ADESA or FC and we had not.
Integrated PWI into any of our core businesses.
We are awaiting regulatory approval for the transaction and expect to close the transaction before year end.
The cash purchase price is less than $30 million. The PWI business was not material to our financial results and has been reported within the HFC segment of car.
Investors have also asked us to provide more information on our investment in car lots, which was recently announced as part of their spec transaction.
Car lots has been a customer of ADESA and they have seen for the past five years car lots came to us about five years ago with an opportunity to have a strategic relationship. We have supported their growth with loans from AMC and a strong relationship with ADESA as they have acquired inventory over the years CCAR.
Car lots continues to utilize HFC is there floorplan lender and ADESA as us as a source of used car inventory to supplement their consignment to retail sourcing model as part of our relationship we have accumulated a minority ownership position in car lots.
With the recent announcement of their Spac transaction, we had the opportunity to make an investment in their business as part of our strategic partnership we will be receiving proceeds from the spec investment and we'll be reinvesting a portion of our proceeds back into car lots. We are continuing our relationship with car lots as we see the opportunity.
To serve their b to C model through our strategic relationship.
We will remain I may know a minority investor following the completion of the proposed transactions.
Now, let me turn to our plans for reporting cars financial results, beginning with our year end financial statements.
Over the past 10 plus years the reporting of cars results has become increasingly complex and we have provided a myriad of metrics to assist investors understanding the various components of our business.
While the information we provide is very detailed it is not consistent with how we are managing the business through the digital transformation.
Also following the spinoff of I'd say, we have simplified our management structure and believe our performance should be much easier to explain and the relevant metric should reflect the key indicators of our performance begin.
Beginning at year end, we will be simplifying the volume metrics. We disclose we are now selling all vehicles through our digital marketplaces, there is no longer relevant to online only and physical auction volumes.
We will be disclosing total vehicles sold and provide details on the split between commercial consigners and dealer to dealer transactions.
We expect this will be sufficient information on the trends in the business for investors to understand our performance.
For revenue per unit metrics, we will also simplify our disclosures we intend to provide auction the revenue per unit with a level of detail that will explain the major differences in the various marketplaces.
We will not be including ancillary and related services revenue in our ARPU metric.
This will allow investors to understand the trends in auction revenue without the confusion of which services attached to the vehicle in our current disclosure of physical ARPU.
Our income statement will provide similar information, including separately presenting auction fee revenue in services revenue. We believe this will be a simpler presentation and allow investors to understand the trends in the various income streams for ADESA.
In terms of our segment reporting we expect to report two segments of our business ADESA and AMC are.
Our holding company costs have been reported separately as a segment in all past filings, we expect to combine the holding company costs into the segment reporting for ADESA NFC. There are no meaningful operating expenses that are not related to the operating segments, we will disclose the basis of allocation for expenses like.
Interest corporate depreciation and other corporate expenses to the reported segments.
We will look at SGN, a in the segments and not have the separation of expenses that are currently reported in the holding company segment.
I believe the simplification of our reporting structure and the streamlining of key metrics reported will make the car performance easier to understand and more practical to develop models on how our business should perform in the future.
And finally, let me speak to guidance, we continue to operate with a high level of uncertainty in the near term, but believe the markets have stabilized and are not likely to be completely shut down across major portions of the geographies we serve.
We're not giving guidance for the remainder of 2020, but we are intending to reinstate guidance in February when we announce earnings for 2020, we will provide our guidance with insights into the key assumptions used to formulate our guidance.
I am sharing high level insights into our plans for reporting our performance with the intent to prepare investors for these changes we are committed to continuing to provide detailed disclosure that provide a clear picture of our performance. This disclosure will match, our current business model of operating digital marketplaces across all channels and segments of our business.
I know my comments are only providing an overview of how we plan to report going forward.
I thought it was important to start this dialogue now so you understand the reasons for changes and what to expect.
We provided details in our press release earnings supplement and earnings slides yesterday afternoon. I believe this gives you a clearer picture on a strong performance in Q3, including the strong free cash flow generation of the business, we have been able to reverse the negative cash flow experienced in March April and May within improved cash flow performance in Q3.
It is important that we continue to have sufficient cash on our balance sheet to support growth once the markets returned to normal.
After funding the backlog cars transaction in the next couple of weeks, we will still have about $800 million of available cash and an undrawn revolver.
We've shared quite a bit of information with you today. So why don't we get to your your questions now and I. Thank you for your time listening to us as we give you our remarks.
Thank you.
Ladies and gentlemen, as a reminder to ask the question you will need to press Star then one on your telephone to withdraw your question first about Keith.
Again, Thats star one to ask the question. Please stand by while we compile the culinary roster.
Our first question comes from the line of John Murphy with Bank of America. Your line is open.
Hi, Good morning, guys Jorge John Paul.
Got a bunch of questions I'll try to keep it as brief as I can here on first Jim you mentioned back what cars, you potentially contributing $100 million of EBITDA as you as you ramp it up I'm. Just curious if you can give us some basic operating metrics on where it is right now for sales and.
EBITDA then you also mentioned that backlog cars, plus trade Rav could potentially ultimately double.
Your total corporate volume, including ADESA overtime, So I am just curious.
How that happens.
Without sort of some kind of cannibalization because that would be.
A very significant jump obviously.
So John let me start with your second question and then I'll get the 100 million is burst.
Clarify that.
What I believe but then when the news that is with the addition of bad luck cars.
And putting it would trade read it doubles, our volume in the dealer to dealer digital space.
Okay.
Okay for clarity.
And now it's big until the $100 million really you know as we look at putting these two businesses together.
We believe that over the period of four years, we can get to $100 million and I can tell you. The one metric is it's going to be volume.
I'm not going to be since it's not going to be synergies.
It's going to be driven by volume and as we get the volume.
That will determine how quickly get to the $100 million and John Let me summarize we talk incremental volume occur.
Across the dealer to dealer segment, which nets out any cannibalization.
Backlot cars is on a run rate that David they've announced locally so I'll give you that they were selling on a run rate that for the year of about a 160000 vehicles.
We could estimate that that puts their their revenue in the $50 million to $70 million a year range.
And they've been operating at a very modest loss.
So we're really excited about putting these companies together, creating scale crew.
Creating some synergies and moving forward, having a profitable dealer to dealer digital marketplace that contributes to the cars overall performance.
Okay. That's helpful. And then the second question is it appears everything is going to be sold online maybe not online only but certainly online.
You have 74 facilities I think right now in the US how many are going to need in the future as you make this transition and how should we think about your potential sales or monetization there.
Yeah, So John listen.
We continue to believe that one of the most critical assets. We have is still our physical locations.
For a digital company real estate is still a very critical asset and I think it differentiates us from many other platforms in the industry. So number one.
We'll still need these facilities to check in cars to inspect cars to image cars and to provide ancillary services to vehicles as well listen there will still be some dealers that want to run cars in a in a physical auction environment and were not necessarily running cars, but we're certainly still prepared to.
Sell those.
To sell those cars out of at a physical auction site.
If that's what the dealer wants you know we've been saying for years and years news, it's not up to us to dictate to the dealer where they should sell their vehicle and again is providing all channels, making all channels available and letting the dealer.
Eventually decide what channel works best and as you know we're committed to the digital channel. That's the way, we're going and we'll bring the dealers along at the speed that they're comfortable with.
Okay and then just one last question you know John if I could add one thing in it we've been adding with the digital transformation over the last six to eight months.
We have been adding property in Los Angeles Man.
Mannville, New Jersey outside of New York City, and Chicago, and that's in the middle of the transformation to a digital framework. So I think thats evidenced that the the land becomes an integral part of the offering and I wanted to share that major metropolitan markets that land is extremely valuable in particular.
That's very helpful. And then just last one on ancillary services as we see that the business.
Transformers overtime.
Is there a greater or less opportunity on ancillary services and how do you kind of communicate that with the backlog current trade revs transactions or customers.
Actually get them on board with doing more just trying to understand because obviously, that's a great margin business for you and a great incremental business. So just curious how you think about that going forward.
Yeah. So you know I think theres still is going to be that opportunity, especially as you think about the off lease cars than the off lease cars returning.
And then repossessions again heavy users of ancillary services, we think there's an opportunity there and if you do take a look at our revenue per unit.
You know, even though it was down a little bit in the quarter. It has been strong Eric has been strong over the last few quarters. In fact, a revenue per unit physical which is a metric I plan to phase out was $904. It $905 in Q3, the strongest we've had in history. So John I mean.
When the cars do get to the property there is a strong interest in increasing the value of the vehicle and that will continue and we're also expanding the off premise services like transportation and inspections and ultimately this is without a lot of contribution from the repo activity that will probably be a bigger contributor in 2021, So I.
Actually very optimistic about strong ancillary and related services revenue going forward.
Great. Thank you very much guys.
You're welcome Thanks, John.
Q.
Our next question comes from the line of Ryan Brinkman with JP Morgan Your line is open.
Hi, Good morning. This is Roger good on for Ryan.
Thanks for taking my Roger.
Hi.
So.
At the end of second quarter, you had mentioned that there were still 2000 employees on for now.
And if they were not going to be called back by October you know those submissions have been admitted.
Does it looked like volumes have recovered much you know from the June exit rate.
But the security that's a degree of any further cost saves that you're anticipating now versus the 90 million had indicated.
Oh.
I had a follow up thanks.
Yeah. So.
We did.
We did have a couple of thousand employees that were still on furlough.
And those employees have either now been able to return to work or they been permanently laid off.
As we go forward so that activity was.
Was was planned.
And was accounted for and at this time, we don't anticipate any.
Any major.
Layoffs or furloughs.
At this time and Raj at our head count has been stable at about 9700.
Over the last couple of months, so where we have pulled back employees run for a low it was to fill open positions that were open due to attrition.
Got it got it systems like in totality like for like 5000 employees that were.
You are running at 5000 fewer employees versus you free.
Right, Yeah, three call, but our last number was 15400 and we are now at 9700 and change so that's and we've been holding steady there.
Got it got it that's helpful. And then just on the gross margin uptick here.
Twoq to Threeq, your where you know you can because of year over year or could it could be just held back the components of that how much was that just like talk.
Cost saves versus you know just a mix impact you know like how much of trade drove influenced that you know just curious and.
The reason I ask is like any any visibility on how that could that should progress here and there.
Fourth quarter on you know.
Especially in the context of no backlog coming in as well.
Well again, we're very comfortable with the gross profit of all of our business units trade Rep. Gross profit is continuing to be above the 50% level like that Jim 52% that Jim talked about on a net basis. So we're very pleased with that all of our businesses are performing well and I would tell you.
Right now Raj out.
Yes, the volumes are not as strong as they were a year ago and ancillary services down but this I would tell you I think the mix will improve with our higher margin auction business over time, becoming a bigger percentage, so im not going to promise higher gross profit, but I think we can sustain these gross profit the one element that makes it confusing on a GAAP basis.
This is purchased vehicles were down to 44.5% last quarter, we had months at 47, even 50 on gross but that was because of very light purchased vehicles. So that's the one thing that could influence the number but on a net basis, we've been very consistent above 50%.
Gross profit and I think we'll stay there.
'cause export used vehicles.
And you're comfortable with the 50% level.
Yes, that's that's where we're performing right now and if the ancillary service started influence this we'd we'd be very happy with it and we would tell you when to expect that but right now that looks like a good target for us it's something in the high fortys to low fiftys sustainable.
Got it great that's super helpful I'll get back in queue. Thank you.
Thank you.
Our next question comes from the line of Craig Kennison with Baird. Your line is open.
Hey, good morning, Thanks for taking my question. So Eric I was close to getting my Phd in your metrics, but I appreciate it.
Your decision to simplify that that's going to help a lot.
My question had to do with the the dealer to dealer channel you've talked about Jim going from 5 million units to 15 million units I just want to understand where those are coming from is an incremental 10 million units coming from volume that never would have used the wholesale channel in the physical world.
Yeah. So there's a couple of things there Craig that I mentioned is number one is you know we've that we've expanded our reach to now.
To now be able to attract dealers, who typically never used a wholesale auction. So that's part of it and then it's really the wholesalers have been buying a lot of these cars.
From the franchises.
And we've been obviously able to attract that marketplace as well. So we're just we're all those cars that weren't coming the auction now becomes part of that addressable market and our number of up to 15 million is not exaggerated we think the number could be even larger than that but we're positioning it somewhere in the neighborhood of 15.
And Craig another element the consumer to consumer transaction is increasingly going consumer to dealer as you're seeing all this car buying activity of the retailers were previously the consumer might have tried to sell directly to consumer many of them are going into the dealer and that's providing an increased opportunity for us as well with the.
Likes of Carmax, Carvana Broom, Shep and other dealer groups that are starting to buy cars.
Got it. Thank you and then going back to the comment on the $100 million of potential EBITDA from backlog cars could you just give us a feel for the underlying assumptions there whether it's your.
Your volume or your revenue per transaction, there and I'm, particularly curious whether that includes like ancillary services transportation or finance benefits or if thats, just a transaction EBITDA number.
Yeah, So so Craig.
The number one metric that we're looking at here is volume volume.
Volume is going to is going to drive it and it's how quickly we can win the market share that we think we can when you're not expand on that a little bit too is when you think about what's important on these platforms I think the platform that has the most participants is the winner and when you take the backlot cars.
Buyer base add to that the Traderev buyer base and add to that the ADESA buyer base I believe that the buyer base, that's unmatched anywhere in the industry and really this is about this is not about being number two this is about being number one and taking that leadership position and we're clearly.
Clearly focused on winning that number one position and we think that we'll have the platform. We think we'll have the buyer base.
And we think we'll have the team that can go and clearly when that position Eric do you want to add to the end.
Relative to whats included it would be auction fees.
In transportation.
And to the extent there was any inspections, we do we in our analysis. There is a small amount of call. It finance income in the backlog cars business. What we have left that to our AMC models. So we aren't really including the finance element in that 100 million.
One dollar increase and that's incremental to what we would've expected over that same period under the current platforms, including trade rep.
Got it thank you.
You're welcome.
Thank you.
Next question comes from the line of Stephanie mentioned Benjamin with Truest. Your line is open.
Hi, Stephanie.
Good morning morning, Stephanie.
I was hoping you could maybe talk a little bit about what you've seen thus far in October trends.
Supply its come back a little bit or even demand from dealers.
Some pricing has come down a little bit sequentially, but but any color you can give on recent trends would be helpful.
Yeah. So suddenly we did see a little bit of softening in the third quarter in terms of price and conversion.
And we pretty much expect what what we've seen in the third quarter is what will continue through the fourth quarter you.
You know really as I say to the team here, we got to focus on the things we can control, we can't necessarily control the volume, but what we can control is we can control our costs and we can control our margins and we can control and stay focused on being a digital company and that's where my head is that.
Got it really helpful. And then just jump back on the backlight card transaction at your commentary that.
You expect it to tick to profitability. Once integration is complete I know you just now started that process, but do you have a general timeline on when you think the integration will be complete do you all over the next year or 18 months.
70, the answer is as fast as we can.
I would tell you that you know we expect that we'll have full approval here and will close in the next week or so as I mentioned in my commentary.
Obviously, we haven't been able to communicate with the backlog car team as a as we went through the <unk> the regulatory process.
Now, we'll be able to win when we finally get this approval will be able to bring the two teams together.
We've thought a lot about in the integration, we certainly want the backlog cars team to weigh in on and we're going to move as quickly as we can and it would be it would be irresponsible for me to put a timeframe on that but we know this but this business is moving quick and we want to move quick with it.
Got it fair and then just lastly on that and could we assume that just given what you've done to integrate the trade rags and address the inventories that are accessible on one site be analogous to what you would likely gain with backlot cars.
Yes, thanks for mentioning that as we do have you know we do have single sign on now with all of our platforms and all of our inventory to our buyers and you know I would.
Look to be able to now.
Integrate all of those all.
All those vehicles being posted on backlog.
Into that same network, where they can come in and see those cars as well.
Got it thank you so much.
Youre welcome.
Thank you.
Our next question comes from the line of Daniel Embroil, which Steven your line.
Okay.
Hey, good morning, guys. Thanks for taking our questions.
Thanks, Daniel Jim I wanted to start on the expense cuts and the on the.
Supplemental you noted you eliminated 5000 job.
Looking on the website. It does look like Samir ADESA locations have what you're calling limited in person buying can you maybe just help us understand what are the process changes you've made and when we see that somebody yards are critical reopening physically or are they still online only selling process is or how do we reconcile the decrease headcount with what looks like.
<unk> increased physical activity. Thanks, yes, so danielle starting off air to weigh in as well, but.
First of all one of the things that our dealers did request, we're not running vehicles that's.
That's a 100% okay, we're not running vehicles, but dealers did want the opportunity to be able to come in preview cars, they able to come and walked inventory start the vehicle.
No.
Open it up and have a look at it.
And then we gave them the option of being able to come and be socially distance in the auction lane and they could sit in the auction lane or sending the auction laying on the x.'s, where we socially dozens and they could bid and look on the screen and bid on the vehicle or they could return to their office are there.
Place of business and they could bid from there. So we have basically provided them the opportunity to preview these cars and bid on these cars to the auction, but there are no cars that are running across the block. So weve eliminated all the drivers and all the yard personnel and the personnel associated with raw.
Owning cars through the lanes.
Yeah, and Daniel I think of this pre call that we had initiated a project called flow My car and what we're looking at is how we can more efficiently move cars throughout the process of the various reconditioning, whether that be mechanical body work detailing the vehicle whatever so that was unrelated to cope with covered though we stop.
The sale they activity, which made it much easier to make those changes and have a more efficient flow what that does it reduce the cycle times selling online allows us to get the car sold faster because we're not waiting for a physical event, we can get that car posted so we see a lot of opportunity here for efficiency it's around.
Labor and what Weve eliminated to date is predominately sale day label and we're working on other aspects of the efficiency to continue this process.
Really helpful color and then a quick follow up on that one Eric I think you noted last quarter. The 2000 employees on for low we're mostly part time sort of less average salary than the initial 3000 laid off can you help us quantify at all what the incremental savings are going to be 2000 jobs that have been eliminated last quarter.
So so I want to clarify they included many part time I don't know that they were mostly part time, but they were primarily hourly employees with a lot of high concentration of sale day labor that.
That weve eliminated we averaged if you saw the numbers, we announced last quarter. An average salary was about $30000 per employee that is not annual that is there actual compensation and on the remaining 2000 that were talking about the average would be very similar to that so it would be in the same range because again, it's a fee.
Similar.
Shall we say composition of the of the group of employees.
Great and last one for me if I can squeeze it in I think Jim you mentioned, you're expecting repossession volumes to be up 30% to 40% next year for the industry.
As we think about capacity you know what are the physical restraint on you guys handling that and I think in the past you've noted you're overweight repo versus the industry. So should we expect you guys to see strong growth and since you guys are more exposed there than some of your peers or how should we think about that flowing through your piano. Thanks.
Yeah. So Daniel first of I believe what I said is that reasonable volumes will be 30% to 40% less in 2020.
So that's one point of clarification in terms of capacity bring them on we have the capacity and.
And we have the ability to process as many repurposes that will come our way we do expect the volumes will increase significantly in 2021, and yes. We are over weighted on volume on volumes and it's a segment that we're very much looking forward to serving and Daniel we are uncertain as to when it will start.
We are concerned it may not be in the first quarter, but it's definitely looking like a tailwind later in the year, especially the second half of the year.
Thanks, guys best of luck.
Okay. Thank you.
Thank you.
Our next question comes from the line of Bob Labick CJS Securities. Your line is open.
Good morning, Bob Marley good morning. Thanks.
A quick one on the digital dealer platform can you give us a sense of.
Your go to market strategy, you are going to stick with three brands I imagine just how will this ultimately play out who's leading it will you have three sales teams multiple brands, what's the kind of consolidated strategy there.
Bob here about a week 10 days ahead of me I think.
We are Oh, we are working on that integration plan at this point in time it would be unfair for me to comment on what those plans are because we really need to get the backlog car guys involved in this conversation.
Listen we know one thing we've got two great platforms, and we know that they're doing very well today and they're serving our customers very well, but how we go forward with those platforms and how we go forward with the sales teams and things of that nature that all needs to be determined here over the course of the next few weeks as we mentioned the one.
Thing I will mention to you is I'm very very pleased with what we've been able to do with trade rebel speak to that.
You know over the last I guess over the last year, we've really made some major moves with trade route that has really accelerate the growth that trade revenue continues to grow traffic number. One is we made some changes to the technology to make it friendlier and easier for customers to use.
Number two we did put the sales team together you heard about the better together sales strategy, we put that together and that seems to have worked very well for trade drugs being able to represent both those products with one sales team and then the third thing is we went to a different fee structure and that fee structure has certainly attracted.
More business and has certainly shown up in our in our in our growth rate. So trade drug we're very pleased with the strides we've made and we want to make sure that we don't lose track of what we've been able to.
What we've been able to accomplish with trade Rob as we make these decisions with backlog cars, Jim I think the one thing we can comment we've found it successful to have a single sales team on the dealer to dealer space. The car sales team we.
We do not plan to change that decision there will be one sales team representing all product so far.
Okay, great and look forward to more and I understand why the answers are you know.
<unk>.
Well, there, but that was great very helpful.
And then also Eric looking very much forward to ancillary service revenue being broken out in the future, but given what we have right now just looking at ARPU less purchased cars in the quarter rebounded nicely from Q2, but still down 9% at around 500 to 510.
Dollars, you know versus a year ago 550, 560, I know, there's lots of moving parts, but can you give us a sense of how you're thinking about you know.
ARPU now as you know is it down because of mix and moving to all digital is it lack of kind of.
Repo cars flowing through right now or how should we think about that RPU less you know.
Purchase cars trend Yep Yep, Bob real quick the biggest pressure is coming from the OPENLANE platform, that's where we saw absolute ARPU down because of the grounding dealer taking at a large number of those transactions and that that is a very large number of transactions for us I'm looking here at.
What I've got as known as online only.
Yes.
Well 400 online only volume in North America was 437000.
Nichols, what you'll get out of our details. So that's a big impact second the decline in ancillary and related services when I apply that to all the denominator being all units sold that would be the second biggest negative while while I'm up on a physical basis for those transactions.
Spreading that over a much bigger denominator now with all the transactions in the total volume sold so those are the two things I do not think there is a secular shift in either I think those are market conditions. Today, you know the fact that we have such a high wholesale pricing environment, we experienced us back in.
2010 to 2012 were where they want to sell the car as fast I can't because they're getting they're getting a wholesale gross profit, they're not making a profit on the wholesale transaction in many cases, so they don't want to wait to get a few more dollars by doing ancillary services and then that grounding dealer buying before the car is marketed on our platform.
While we get a transaction fee, it's a very low transaction fee not secular I think those are temporary situations as the market stabilizes you will see those two elements rebound in my opinion.
Okay Thats, great Super helpful. And then last one just to sneak one more big picture given the massive shift in the marketplace over a long period of time, but really fast over the last six months is b to C business to consumer and option for car in the future and what are the pros and cons for that approach.
Yeah, So Bob.
Okay.
I think that our focus is clearly.
On this dealer to dealer wholesale digital space and we need to stay laser focused on what we have at hand, and I think getting backlog cars and getting traderev.
Getting it right and getting our go to market strategy right and all the things that we plan in the integration plan is our focus and I would tell you that b to C is not something that's on our radar at this point in time.
Okay Super Thank you very much.
We've only got a few more minutes. So we try to get as many as we can but be quick.
Thank you our next.
Question comes from the line of Bret Jordan with Jefferies.
Your line is open.
Hey, good morning, guys.
Brett Good morning, Brett looking at back lots and trade route did you give us a feeling for dealer overlap are there guys using both platforms now are they largely separate.
You know I would think you would describe the dealer base is using air any and all platforms across the entire marketplace wherever they can get a car Brett there is some overlap like always it probably is more coincident with geography, if the geography is overlap where the geography is don't overlap we will be adding to the buyer base.
The overlap the overlap would be less than that in my opinion, the less than 50%, but but that that's more an anecdotal review not not a scientific review.
But thats because of the markets were serving not because we don't know if you. If you go to ADESA, it's probably close to 100% overlap in all.
The dealers all transact wherever they can.
Okay, and then I guess the question as you look at a $100 million of EBITDA and knowing what you know of unit margins. How many units does that back into that money. So we can sort of benchmark the progress.
You know, we're not going to get into that level of forward looking statements. It would be it would be a level of contribution consistent with what we're seeing in the combined backlog and trade Rep performance today, we're not looking for that to grow.
But we are looking to get the scale you know I would probably look at the business models that we had with trade route. That's what we've spoken about where you are probably looking at a fee structure that provides the leverage to get.
And.
Gross profit dollar per transaction. That's that's you know 50% to 60% of the revenue and then with that smaller SG in a very high EBITDA dollars.
Again without quantifying it in a specific number I'm guiding you to how we view that at scale.
Okay, great. Thank you.
Welcome.
Thank you. Our next question comes from the line of Gary Prestopino with Barrington Research. Your line is open.
Hey, good morning, everyone I'll be I'll be real quick I just want to clarify you are now 100% digital youre not going back to any kind of physical auction activities is that correct Jim.
So Gary we are a 100% digital and we have no plans to return to running cars.
Okay, Great and then Eric did you give the cat the free cash flow number for the quarter.
I Oh, yes.
Yes. It was very positive cash flow from operations year to date is a positive 400 million I have that that in the financials I'd have to go back and look but it was a very strong performance because I think we were neutral to negative. So it was quite a bit of cash generated in the quarter, Gary I don't have that right in front of me.
But it.
It was a very strong contribution to the quarter.
Okay and then just a quick question I don't know if you're going to answer this or not but you know as as this this trade revenue backlog cars.
Starts to gets combined integrated and starts to mature.
You know it looks like you're generating about 160 to $160 of adjusted EBITDA per vehicle would you expect that contribution from the combined entities to be somewhere lower than that higher than that somewhere in the middle.
You know Gary lets not get too specific but that seems like a reasonable target for that type of business. We're not looking we think we have the leverage in the marketplace that we could achieve numbers in that ballpark I'll just leave it at that the ballpark of about 160 or EBITDA for let's just put it.
Somewhere in the middle between 102 hundred is a reasonable target. Okay. Thanks, a lot guys.
You're welcome thank you.
No further questions in the queue I will now turn the call back over to Mr., Jim Hallett for closing remark.
Great well, thank you for being on this morning again, we can if we continue to appreciate your appreciate your interest and support in our company.
I can tell you that we feel very good about how were positioned here.
I think the team is really you know you can look at coal bed and you can look at all the happen and you go and look at the challenges.
But the other side of that coin and it's also been very energizing I think its energize the team as to how we can really manage this business and how we can take an industry like this and transformed to digital.
I think that the team is energized I think we're excited about going forward not only with digital but excited with the cost structure that we put in place and focused on maintaining the margins that Eric and I have spoken about today. So.
We're looking forward to 2021, we think there is ample opportunity looking forward to the markets returning and the volumes coming.
And we'll have more to share with you at our year end call coming up in February. So thank you for being on we appreciate it.
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