Q4 2020 KAR Auction Services Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the key E. R auction services incorporated fourth quarter and fiscal year 2020 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question the answer.
Session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder of this conference call is being recorded I would now like the Thunder for turning the conference over to your house, Mr. Mike Eliason.
Nice precedent investor relation and Treasurer. Please go ahead.
Thanks, Jerome good morning, and thank you for joining US today, we will discuss the financial performance of car global for the quarter ended December 31, 2020, before Jim kicks off our discussion I would like to remind you that this conference call contains forward looking statements within the meaning of the safe Harbor provision of the private Securities litigation.
<unk> and Reform Act of 1995 investors are cautioned that such forward looking statements involve risks and uncertainties that may affect <unk> business prospects and results of operations and such risks are fully detailed in our 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, we will be referencing both GAAP and non-GAAP financial measures reconciliations of the non-GAAP financial measures two of 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 now I'd like to turn the.
The call over to card global CEO, Jim Hallett Jim.
Thank you, Michael and good morning, ladies and gentlemen, and welcome to our call today I plan to cover three topics I want to review Twenty-twenty provide you with an update on the integration of trade rather than backlog of cars and review our guidance for 2021, let.
Let me start with acknowledging the challenges that we faced in the most of unusual year.
Obviously, COVID-19 impacted all businesses in 2020, including car.
We remain committed to providing the safest possible working environment for our employees and our customers.
With the challenges of COVID-19 created in our work for US. We also saw challenges the directly impacted our marketplaces for wholesale used cars.
We continue to operate our auctions on our digital platforms simulcast and simulcast plus all of the lane trade Rev and theater block, but demand was very low in April as uncertainty was prevalent throughout the automotive ecosystem. We continued to offer vehicles only through our digital marketplaces for mid <unk>.
Through the remainder of 2020.
A key challenge that we faced in the second quarter was the need to accelerate the development of our digital marketplaces. This increased level of online bidding began literally over a two week period and our technology teams had to make sure. Our systems. We're always available and there were no service disruptions caused by the increased use of our networks IMAX.
<unk> proud of the collective effort of all of car employees to make this happen.
In the past many investors have asked me what keeps me awake at night in technology and digital disruption have always been at the top of the list well, while the challenges of 2020 took technology and digital disruption to a new level. We responded quickly and today, we have the best collection of didn't Joel assets in the entire industry, we were able to act.
Celebrate the transition of our legacy physical auction business two of digital operating model and the matter of weeks instead of the three to five years that we anticipated at the beginning of 2020.
Another challenge that we faced in 2020 was handling our workforce in late March we closed all of our auctions and send our employees home with pay to evaluate the impact of COVID-19 was having on the safety of our employees and our customers. We furloughed 11000 of our 15000 employees globally in April or.
The revenue had fallen to as low as 10% of the prior year revenue the low point for car global performance by May we began to see some recovery in demand or supply at the time was strong as inventory had been building up at our sites. It became obvious that our business process had changed and many of these changes.
Going to be permanent we leaned heavily into the technology for our auctions and supporting our back office functions changes in the business operations, and especially all of our support functions led us to permanently eliminate 5000 positions, reducing our annual payroll costs by over $150 million.
By fall, we had our head count and cost structure aligned with the business and our digital auction process. We saw the impact of the permanent changes in our cost structure in our third quarter results.
And expect this to contribute to an improved financial performance going forward.
And then we saw resurgence of COVID-19, with the impacts that went beyond what we had experienced in the spring.
We saw the supply of used vehicles Titan and our inventory levels continued to decline as retail demand remained strong resulting in strong conversion rates and high wholesale prices lower transaction volumes led to reduced performance in the fourth quarter. Despite all of the reductions that we've made to our cost structure.
And in the organization people out of the most valuable assets in this environment the strain and the uncertainty our people are feeling as the most challenging aspect of running the business today and it looks like it will be a while longer before we see relief from the strains of COVID-19.
Now, let me share of some of our accomplishments in 2021st we have successfully migrated all of our auction platforms to digital marketplaces. This has been of strategic direction for car for over two years, and we were able to accelerate the pace of change during 2020.
We are committed to operating of digital marketplace business supported by services and logistics capabilities that make the wholesale process easy inefficient.
Our collection of digital assets that we have strategically focused on building and acquiring over the last five years put us in the unique position to move forward with the digital business model. It is true that many of our competitors are running cars through the lane. Despite the increased coalbed numbers over the past several months, but we have not returned.
Turning to the old way of doing business and don't believe there is any evidence that running cars across the block improves the financial outcomes for our customers. We are committed to providing our auction services digitally going forward in 2020, we introduced simulcast plus to the marketplace simulcast pluses of full.
Of the automated auction that can easily sell cars for multiple locations using technology instead of people to manage and run the auction event.
Simulcast plus has proven to expand the geography represented by buyers and this improves liquidity for the sellers.
We are also not tied to a sale day event when using some cash plus we can operate simulcast plus any day of the week from one or multiple locations. These can be a delta or customer locations and the simulcast plus platform gives us additional digital capabilities that allow our sellers to men.
Each of the auction event in real time without leaving their office.
We have provided a number of demos to investors this year and if you've seen one of those virtual tours you saw that we have a significant amount of information available to both buyers and sellers the lead to strong pricing and conversion on the simulcast plus platforms, we see a number of benefits for both buyers and sellers we've seen Inc.
Greece liquidity, we're able to reach a greater number of buyers that are interested in the car of being offered we've.
We've seen lower cost to execute the transactions for all involved and it is easier to integrate data and analytics in the process.
Excuse me that is available to all parties that of information leads to better price attainment on the vehicle and realistic expectations by the sellers as to what is the current value of the vehicle and the.
The other success in 'twenty 'twenty was the improved growth and profitability for our trade Rep platform.
Our combination of dealer consignment sales teams of ADESA and trade Rev has been of success, we reduced the use of incentives and focus on service levels. We simplified our auction process in order to provide a better experience for our customers. We generated positive earnings for several months in 2020.
And have proven this business model can be profitable growth going forward and we acquired backlog cars in order to accelerate our growth in the dealer to dealer segment in the U S market and finally, let me talk about the permanent reductions in our cost structure for.
The changes we made in moving to a digital business model allowed us to make permanent reductions in our labor costs, both direct labor and SG&A.
Our SG&A was down year over year in Q4 by $25 million. This decrease was achieved despite adding $5 million of SG&A in the fourth quarter related to backlog cars.
Even though our of course, we're able to even though we were able to reduce our costs our fourth quarter performance fell below our expectations as we saw the supply of wholesale vehicles declined throughout the entire industry are volumes in Q4 reflect the slowing of the economy in response to the increased Covid cases, I do not believe.
The lower volumes reflect the seasonal impacts are the permanent disruption of our marketplaces I believe the factors that negatively impacted our supply in Q4 are transitory.
Now, let me give you of real time update on trade revenue and backlog cars first we are migrating all U S dealer to dealer transactions that previously took place on trade Rev. Two of the backlog cars platform. We ran a pilot of migration in three U S markets in January to refine our migration.
Playbook, we were pleased with the results of the migration and the acceptance of backlog cards platform by our trade rep customers. In these markets beginning February 1st we initiated the migration of all U S trade rep customers to the backlog cars platform, we expect the migration activities to be completed in March.
By moving our U S customers from the trade web application to the backlog cars, we will be moving from a timed auction format. Two of 24 seven bid ask marketplace. Our analysis of the performance on the two platforms supported this move we believe running a single dealer to dealer.
The digital marketplace will maximize the liquidity.
Utilizing the inspection process the belt by backlog cars should lower our inspection cost per vehicle and provide greater consistency in the inspection reports for cars sold on backlog cars platform and most important we believe the price realization on the backlog cars platform in the U S outperforms the comp.
Petition in the U S market. The early results on the migration of activities has been very positive. Initially there was a small reduction in volumes is former trade rep customers began using backlog cars platform.
The learning curve for our customers seems to be about five to seven days and in the second week, we began seeing our combined volumes increase in the markets that were in the first wave of migrations. We believe the backlog cars is the fastest growing dealer to dealer platform in the U S market. Our goal is simple we want backlog.
Ours to be the number one digital dealer to dealer marketplace in the U S. Just to be clear, we will continue to operate trade Rev. In Canada.
To sum it all up after 90 days of owning backlog cars. We are pleased with the performance and the fit with car. We of focus we have of focused in the energetic team leading our efforts to be the leader in the digital dealer to dealer transactions in the U S. Our customers have been receptive to change in the early days of integration activities and.
Bringing the strength of the car organization to the outstanding team at backlog cars is a winning combination that should accelerate the already fantastic pace of growth in the digital dealer to dealer space.
The last of the agenda on my the last item on my agenda and important topic for today is an update on our outlook for 2021, we are of reinstating annual guidance for 2021.
While we continue to be in the middle of the Covid crisis and all of our markets. We believe we are better positioned to analyze the impact on our business and assess the likely outcomes on various scenarios as you saw in our press release, we are providing guidance the adjusted EBITDA will be at least $475 million.
And operating adjusted net income per share will be at least 87 for 2021, we are not providing a range, but we are providing the minimum level of performance. We expect this year.
We still have significant uncertainty around the economy employment levels of the new car production the timing of repossession activities and many other factors that are still a ways from returning to normal of.
Obviously, our guidance indicates we expect to continue to be below pre COVID-19 level of transactions and this is representative of our industry outlook I.
I would like to provide some insight without specific numbers into how we see 2021 coming together first.
We expect lower supply of wholesale used vehicles to persist through the first half of the year as a result, our outlook for the first and second quarter is conservative we do not believe the second half of 'twenty 'twenty, one will improve upon the first half of 2021 and the second half of 2020.
We are seeing good progress in providing vaccinations in the first months of 2021 and expect continued progress on this front and all of the geographic markets. We serve we also see stimulus in the U S, Canada and European yet in Europe as the positive for our customers and the used car retail market if passed.
By legislators, we also believe that our financial performance may exceed 2019 levels before we achieve 2019 volume levels given the improvements that we've made in our cost structure.
Let me speak to the parts of the market that we believe will drive of returned to normal first our digital dealer to dealer platforms that lock cars in the U S and trade revenue, Canada are expected to grow substantially over 2020 levels. We expect to continue to continue gaining market share in this channel throughout the year.
Are we.
We are committed to expanding the use of simulcast plus in 2021, we are targeting an increased number of events using this technology platform. There is tremendous value to using the simulcast plus platform for a multilocation sales events targeted marketing for similar vehicles of that allow us to create events that have high buyer interest.
And expand the geographic reach of the typical physical auction and our growth internationally, especially at ADESA Europe, formerly cars on the web is very strong and we expect this to continue throughout all of the 'twenty 'twenty one we.
We have not given the range of guidance. It is difficult to set in the upper end of the range with the uncertainty on when operations will return to normal levels, we still have more questions than answers on what our markets will look like especially in the first half of the year.
But we have had have an opportunity to outperform.
The adjusted EBITDA and operating adjusted net income per share provided in our guidance once volume start improving as the team we will focus on controlling our costs, increasing our market share we expect our market share to be driven primarily by digital dealer to dealer platforms backlog cars and trade growth.
We will be disciplined around capital deployment, we think our balance sheet.
Gives me is an asset in the current economic environment and as we look to deploy capital. We expect uses of capital to have a strong connection to our strategic priorities around the digital transformation of the wholesale used car industry.
As I finish let me summarize my key messages on this call.
We are of digital marketplace business that utilizes data and analytics and value added services.
Through our network of locations throughout North America, we are leading the digital transformation of our industry.
We have reduced our cost structure permanently and we expect increased profitability going forward.
We have combined two leading digital dealer to dealer wholesale auction platforms and have the goal of being the leading provider in this segment of the market in the United States and Canada.
And finally, we believe our balance sheet is well positioned to support the growth of our business, we will deploy capital going forward on the initiatives that support our strategy. So with that thank you for your time today I will now turn it over to Eric for more details on our financial performance.
Eric.
Jim and before I get into my remarks, I would like to correct. The statement Jim made during the call.
He said that we do not believe the second half of 2021 will improve upon the first half.
He misspoke. It is we do believe the second half of 2021 will improve upon the first half of 2021 and the second half of 2020.
So now I'll get into my remarks.
Let me start with an overview of our financial performance in 2020.
To say the least it was a challenging year and our results quarter to quarter, we're like riding a roller coaster we.
We experienced both ups and downs in performance this year.
In review, we started the first quarter strong and performed very well until the middle of March uncertainties created by COVID-19 caused us to shut down our operations for the last two weeks of March we lost approximately $35 million in those two weeks as revenue was minimal and all employees were paid for two weeks, despite all locations being closed.
We lost money in the month of April we had negative adjusted EBITDA of approximately $25 million for the month.
We then saw a relatively fast rebound during may as weekly volumes rebounded to over 90% of the prior year.
The followed by June where volumes in our financial performance exceeded the prior year.
Volumes and financial performance remained strong in July.
As we saw strong used car demand low new car inventories used car values were increasing and we were selling inventory that had been on our properties through the pandemic.
While volume started to decline in August we finished the third quarter with volumes over 90% of 2019 levels for the quarter and adjusted the EBITDA that was 8% above 2019 levels.
We had gross profit of.
Over 50% of net revenue and adjusted EBITDA margin that was 23, 5% of total revenue.
We feel this performance demonstrates the performance characteristics of our business model going forward when volumes are at or near 2019 levels.
Unfortunately, the fourth quarter salt volumes dropped to 75% of the prior year, excluding acquisitions and our financial performance deteriorated due to the low revenue levels gross profit declined to 40% 46% of net revenue.
Even though we have improved our cost structure and reduced direct labor there is a fixed component to our direct costs and the volume levels experienced in the fourth quarter did not generate sufficient revenue to maintain our gross margins.
In terms of SG&A, we're able to control costs and hold SG&A below the prior year by $25 million.
This was accomplished despite recording approximately $16 million in incentive pay in the fourth quarter compared to $7 million in the prior year.
This increase in incentive pay reflects the proposal by management to adjust the threshold for payment to 50% from approximately 95% of target for 2020.
We felt the sacrifices and contributions of our employees should be recognized with the opportunity for a performance based incentive payout the.
The threshold set at the beginning of the year did not reflect the challenges we faced in 2020.
The compensation committee of the board of directors of proved the adjustments of threshold. The total payout for employees with annual incentive programs was approximately 70% of target for the year.
We also recorded an adjustment to contingent purchase price related to the acquisitions of cars on the web and <unk> that was a net increase in expense of $4 $7 million.
This represents an increase in the expected contingent purchase consideration for cars on the web best performance has exceeded the expectations set at the time of the transaction.
Offset by a reduction in contingent purchase consideration related to <unk>, where payments are expected to be less than estimated at the time of the acquisition.
Our effective tax rates for the fourth quarter and full year were unusual in 2020, the contingent purchase consideration and the write off of goodwill totaling $25 5 million for our UK operations that we recorded earlier in the year are not tax deductible and increase our effective tax rate.
As we look forward, we expect our effective tax rate to be approximately 30% unless the U S. Federal income tax rate is increased for current levels.
I know the big question on everyone's mind is what those cars performance look like post pandemic.
We believe our performance in June and through the third quarter gave us insight on what we can do going forward.
We believe when volumes get back to 90% of more of 2019 levels. Our business can generate gross profit of approximately 50% of of net revenue with adjusted EBITDA margins in the mid 20% range.
Our focus on operating of digital marketplace business and maintaining processes that leverage technology for a more efficient cost structure will allow us to perform at this level.
Now we need the markets to get back to what we would call normal. So we can prove to you. The changes we have made will generate these results.
Now, let me speak to changes in the presentation of our financial statements and segment reporting.
As you can see in the financial statements included in our press release, we are providing for revenue light items line items now, we're providing auction fees service revenue purchased vehicle revenue and finance related revenue. This will give a clear picture of the major components of revenue in our businesses.
In terms of key metrics provided in MD&A, we are now disclosing volumes for on premise and off premise vehicles sold.
The reporting auction fee per vehicles sold as a key performance metric, we will no longer be utilizing physical revenue per vehicle sold as the key metrics. While the number is easy to calculate a significant portion of services revenue is generated from off premise activity and not related to the on premise vehicles sold.
We're also computing the gross profit dollars per vehicle sold in including that in M. DNA. This is a key indicator of performance and trends in this metric will be important going forward as volumes increase.
This metric will capture both the impact of auction revenue and services revenue on our performance.
We have also simplified our segment reporting to be consistent with the simplification of the car businesses post spin of the insurance auto auctions.
All of holding company costs are reflected in the ADESA business segment other than cost specifically related to AFC.
This simplified segment reporting better reflects the car organization structure and how the businesses are being managed.
We want to maintain a cost structure that reflects the revenue and performance of the business aligning our costs.
Directly with the reportable segments simplifies, our reporting and matching the cost structure of car with the revenue produced by our businesses.
Let me close with some comments on guidance.
Not go through all of the numbers as they are included in the table in our earnings release. However.
However, one item that creates confusion is the computation of weighted average diluted shares.
Generally accepted accounting principles require us to compute per share numbers using either the two class method or the if converted method when determining the impact of the series a convertible preferred stock.
For clarity, we use both calculations and for GAAP are required to use the number that produces the lower earnings per share.
For GAAP purposes, we reduced net income by the preferred dividend and exclude the preferred shares from the calculation of fully diluted shares outstanding.
When we use the two class method.
In computing operated adjusted net income per share.
We are utilizing the if converted method.
In this method, we do not adjust for the preferred dividend, but do include the conversion of the preferred shares into common shares in the calculation.
To the extent preferred dividends are paid in kind of we include the accrued dividends in the conversion calculation.
We have provided the share count in both calculations in the guidance table in the press release in summary, the only difference between the two weighted average diluted shares numbers is the conversion of the convertible preferred stock to common shares using the conversion price of $17 75 per share.
We did buyback $10 2 million of common stock in the fourth quarter at an average price of $17 50 per share.
We acquired the shares in the open market within the parameters, we established during our open window during the quarter.
One last item that I will provide in the call because it will be included in the 10-K that will be filed later today or tomorrow is our expectation for capital expenditures for 2021, we.
We expect capital expenditures to be approximately $125 million, an increase from actual capital expenditures of $101 million in 2020.
The increase in capital expenditures expected in 2021 reflects continued investment in technology to support our strategy around digital transformation as well as the return to normal capital spending to support our physical locations are 2020 capital expenditures were reduced from our expected levels for 2000.
'twenty to conserve capital as our business was adversely impacted by the pandemic.
Thank you again for joining the call today, we will now turn it back to the operator and take your questions.
Ladies and gentlemen, if you have a question at this time. Please press star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key here first question comes from the line of <unk>.
The in Brinkman.
With Jpmorgan you May now ask your question Hi.
Thanks for taking my questions. The first of all of which is about margin. So in both the <unk> your vehicles sold and revenue were materially lower year over year, but still you managed to check out increases in both gross and EBITDA margin given a lot of cost out actions I get the volume deleverage of course in for Q, but it does seem like the revenue headwinds were maybe less.
And in the <unk> and so I'm trying to understand why the margin performance was materially softer maybe you could comment on the trend in ADESA, SG&A, which seems to increase materially from the <unk>, even if the volume and revenue sequentially decline. So maybe just talk about the layering back in of the expenses that went as planned or maybe there's just some.
Seasonal costs of <unk> that cannot be avoided.
Such as compensation I'm not sure and then just how much should we consider or what should we consider about these trends in margin should we place more emphasis on <unk> as opposed to a <unk> or <unk> et cetera, when it comes to forecasting the trend in 2021.
Thanks Ryan.
First let me just speak in fourth quarter, we do have the annual issue of the revenue mix tends to be more heavily weighted towards services and Thats every year that impacted us and that gives us a higher <unk> or higher gross.
Revenue per transaction, but some of that revenue is much lower margin second and we highlighted this relative to overall performance. We did have some expenses in the fourth quarter and there are there are some annual incentive payments that do hit direct labor that would impact margins in the fourth quarter, we made the decision.
To use discretion to change threshold for the year. So that we could compensate our people based upon the performance of the hard work. We recorded most of that expense in Q4, because we had not been occurring it against the previous threshold that we had in the first three quarters there was some but.
Onus accrual in <unk> in the third quarter, but.
Most of it was in the fourth quarter, so that changed the expense structure, a little bit and we've called that out so.
Again.
It's really just the.
The number of transactions was so low in the fourth quarter.
You actually get decremental margins on the work, we're doing and that's the impact so we.
We don't see any changes in the overall cost structure, we don't see changes in the pricing of individual transactions.
The falling to 75% of 2019 for the full quarter consistently through the quarter was the headwind we couldn't overcome.
I see thanks. So then I'll just finish by asking on volume, presumably the off lease volumes are weighing them quite a bit given the strong residuals that are out there in the marketplace are able to quantify the impact of lower off lease volume in for Q or maybe what your expectations are for 2021, and then Theres a lot going on also with regard.
For the repossession volumes, maybe you can just talk about what you're seeing there of what youre expecting and how much do you think stems of of lower repossession volume from a genuinely better economy relative to maybe any sort of ongoing forbearance in the part of lenders do you of any insight into when those forbearance activities might start to subside.
So I'm going to talk about some specific numbers and then Jim is going to talk more about the latter topic right. So.
We did see some some declines on the off lease volumes, but the biggest impact is the fact that theyre getting purchased upstream by grounding dealers. If we do get the transaction you are correct. It is a lower revenue per transaction. If it's executed at the grounding dealer level. So while it wasn't as much of a decline as you might expect.
There was a very significant decline downstream, which would have impacted both the desktop and all our competitors the process from physical locations.
Few off lease cars are getting into the auction net.
And of the physical auction network.
Relative to off lease volumes, while it's a number that we have to dissect as an industry because they don't really report that but we kind of ever the feel for it.
The off lease volume I mean, the repossession volumes I'm, sorry, repossession volumes are off at least 40 per cent for the year and continue to be off and I'll, let Jim take over talking about kind of what we see how thats why in the continuing maybe longer than we expect and how stimulus actually might be of negative for repossessions.
Yeah, So good morning Ryan.
And thanks for your question I think the as Eric mentioned the off lease volumes.
No.
With the strong pricing and just repeating here, but it.
Will it be more difficult to get those vehicles to our platforms and obviously on through the funnel down to the physical auction. So theres no question that we expect for the first half of the year of those volumes will continue to be tight we've been talking about repossessions and waiting on repossessions since the middle of 2020, we thought repossession would start the return to a more normal.
The level in the second half of 2020 and in fact, you know now I would tell you that.
With the uncertainty in the marketplace.
All of that is going on with the Coalbed in unemployment.
The market.
Just all of the noise that's out there and you know in these times of crisis, the laws of protect people from having their vehicles.
We possess excuse me.
I think that you know through the first half of the year I would say that we're not expecting to see a huge return.
Or a huge increase in the repossessions, but we do think if the market can get better in all of the things we talk about related to Covid and the vaccinations and unemployment and all we.
We do feel in the second half of the year, we should see an increase in repossessions I'm not sure they get back to a 100% of what they were in 2019, but we think that there will be an increase in the second half of the year. Okay very helpful. Thank you.
Youre welcome.
Your next question comes from the line of John Murphy with Bank of America, You May know ask a question.
Good morning, guys.
Good morning.
Follow up on on on on on Ryan's question, and maybe you think about sort of all of the sort of the the.
Panels of vehicles flowing.
Into the auction and maybe just thinking about dealer.
Dealer commercial and then sort of the major buckets in 2021, and I think the thing that we're struggling with and I think of lot of of what's running with as you're hearing from the dealers.
Being that the franchise guys Carmax for me in the business.
This is due is actually going fairly well volumes are okay, a little bit hampered by supply, but not nearly as much as sort of what youre seeing of down 23%. So it seems like at the retail level the industry of functioning fairly well, but at the wholesale level. Obviously there is this pressure. So I'm just kind of trying to understand really what <unk>.
Think of going on between the retail and the wholesale side, but then also of the channels and the flow in 2021 beyond just.
Repo, which is an important question.
Really what you think is going to happen here.
On the dealer side, it really just kind of extreme the near term flow in the so maybe the the current flow going into 2021.
Yes, John it's a good question.
I will tell you that I see a lot of similarity of what we saw in 2010 and 2011, while retail used car sales remained strong the dealers do have the opportunity the source as values are increasing they are acquiring inventory at relatively low values, whether that'd be by buying vehicles from consumers, taking trade ins et cetera.
And retailing because all of the cars are being sold at really a strong retail price and I think we're seeing all the the the.
The public retailers, having reasonably strong retail used car profit right now.
But they've all of knowledge supply is tight and the truth is at this point you don't see them running through the network and that would apply to every channel.
We do continue to see in terms of the segments, we see very strong performance in our digital dealer to dealer space.
In fact, we sold 316000 cars, if you take the backlog cars and trade revenue platforms together and I think that's an outstanding performance and we think that will be.
A source of significant growth in 2021 for us and I'll, let Jim comment on that one in a minute.
Off lease is going to be the.
Strong, but probably.
Slightly below previous levels, because again youre seeing.
Buying out of leases by the dealers early they're pulling forward and with a lack of new car production, they will likely be extending leases until they have new car inventory for the for the consumer to turn in his car and get another vehicle like we saw in the spring of this year and then and then when the repos come back.
These are big users of our networks.
That has been a low volume performer, we still have for for <unk>.
Parents of.
Being a strong emphasis by the by the captive finance companies and the lenders. We've got a number of things that are affecting the overall economy, where it's just not the right time to repossess vehicles for.
Probably from the publicity perspective, and we think over time those things will free up so Jim do you want to talk a little more about maybe the dealer consignment portion of our business. Yeah. I think the the only thing I could add to what Eric said is we do expect debt our dealer consignment business can offset some of these potential losses that were.
We're going to get on the.
The commercial side of the business, especially with the off lease and the repossessions.
As I said in my commentary.
We are very excited about the acquisition of backlog and now of taking trade Rev and transferring it to a single platform.
The receptivity by the dealers has been very good in fact, I don't know if theres any dealer that said no.
Every dealer that we've gone through so far at this point in time has migrated over to the backlog platform.
Obviously, when we're acquiring the company and during the diligence, we're very excited about the leadership of that team.
The background and their experience and their knowledge.
We like the platform, we like the bid ask platform, we liked the inspections.
We really and truly believe.
That we are going to take the leadership position in this dealer to dealer digital segment.
I think Gary mentioned the volumes the last year combined with 316000 vehicles.
I can tell you we have a big target in terms of what we think we can do with the single platform here in dealer to dealer. This year and we're excited we're not focused on the number two position we are absolutely clearly focus on the number one position.
We see that GAAP closing and we think we can have the number one position in that space and we can do it in the short term.
Okay.
The strategic question when you look at the I appreciate the reorganization around off premise and on premise to try to help.
Help us understand stuff.
But you still have simulcast on the guests plus your block openly trained rep backlog of cars.
Kind of a mouthful when you've got a lot of really good services in there in addition of other things.
Youre doing way way above and beyond just the those bigger brands.
Is there a move to maybe simplify this so your sales force can go into a deal or just be like.
We got everything you need just just call us get online just do it because it just it feels like there's a lot of moving parts here, it's kind of hard to understand how the industry of shifting and the deal and your sales force as well as the dealers themselves are kind of have to kind of go round of like well I want to do this for the car cycle of this way or if I wanted to use for cargo that way.
Is there just any way to just say hey, listen we got you gave us the car, we're going to get it sold and like.
Combined all of these brands to ADESA or one single brand interest.
Go to market with a maybe a clearer simpler message the might just so is it more business.
That's the.
Stupid question or I guess, it's for us, it's kind of a little bit harder externally.
I understand a lot of of the moving pieces here.
And John Your question is the good one.
And it's one that we're focused on as we think about how we go to market with all of these brands and all of these platforms.
Clearly.
We are now getting out there and.
We've combined the sales forces.
The combined the sales teams backlog and the.
And the Delta.
And we're going out and where we're kind of handholding and walking these dealers through how these platforms operate.
And how they perform and how to get on the platform and how to use the platform in many cases, we're staying with them so to speak until they've transacted a certain number of vehicles are either on the buy.
Side or on the sell side.
And then.
We have our commercial sales team and the commercial sales team is focused on going out and really articulating how these platforms work and how they add value and you know Eric and I of coal just for 100 years that we are we are totally focused on never telling of dealer, which channel they should use.
We wanted to provide all of those channels, we want to provide all of those platforms, but our job is to make sure that we're out there with our customers, making sure. They know how to use these platforms and you know just a little anecdote here over the course of the last year, we've signed up over 20000, new buyers that had never bought a car on.
Online and never bought a car off of our platform.
The platform and the matter of fact, the very high very high percentage of those dealers have now is transacted on the platform. So once you once you get them to the platform. That's one step getting them to use the platform is the next step and that's really that's really what we've what we're focused on now is.
Is getting them to utilize the platform get familiar with the platform and stay with them and give them that support so.
So I hope that answers your question, but yes, there are a lot more focus on handholding and really spending time to really make sure of the dealer understands what these platforms can do for them and John Let me add to that one of the strategic initiatives. We have is when when you prepare a card offered on backlog of cars in the U S. We can tell.
Debt to a simulcast and simulcast plus auction.
If you don't get the price you want and try a different market and we are working very hard to make that of seamless move to your point strategically so that we can offer a more in the end solution to the seller than any of our competitors do because we have all the solutions yeah.
And John I'll, just add I think Eric makes a very very good point here and you know we have we.
We have I would say.
Quietly done of pilot in Canada, where we've been taking cars that haven't sold on trade rather than Canada, and we've been shipping them.
Seamlessly right to the physical auction.
And.
With no marketing dollars behind it and doing it very quietly.
I would just share with you that we're very encouraged with the results that we're seeing we think we can continue on that path and we think we can bring that into the U S market and do that as well so theres a huge opportunity here is just the matter of getting through it.
Okay, and one just last real quick one with the stock where it is at 14 can change when did you consider going private.
Yes.
We run the business, we feel we have a strategy that has a lot of value.
And the current stock price it does not reflect the long term value that we see in the car opportunity and that's all I can really say to that today.
We don't we won't worry about it.
Loans us will just run the business for our owners.
Alright, I appreciate the feedback that as debt.
Helpful. Thank you. Thank you guys.
Thank you John.
Your next question comes from the line of Craig.
Kennison with Barak and then I'll ask the question.
Hey, good morning, Thanks for taking my question, Jim I know you were excited after you acquired trade Rev.
So what really where the lessons from that integration that you take to the backlog of integration, what's what's going differently. This time around.
Okay Fair Fair question I think the it was execution and go to market strategy.
I think that we missed there I think we got beat on.
Our go to market strategy.
And you know the things that the.
But I will also.
So say and this is not being defensive.
Also say, we learned a lot from trade Rev first of all.
Canadian product and it still remains to be the leading digital dealer to dealer marketplace in Canada.
And does very very well in Canada.
However, we thought we could just bring that to the United States and drop it in and that wasn't the case dealer behaviour was very very different in the U S and the backlog guys figured out what was important to dealers in the U S and it was different and they were able to the.
To develop that and I think the key was you know they come up with the bid ask marketplace.
It just really gives you up to three days to sell of the car in the platform I think the average on backlog is about 1.2 days, but you do have three days that gives the dealers more time to bid on the cars.
I think that was an important change I think the inspections on backlog cars was really key that we recognize that.
In Canada, we were able to get the dealers to do their own inspections and it was just part of the program right from the outset in the U S. We saw.
Part of doing inspections dealers want us to do inspections for all of them and I think backlog clearly had the winter here they have mechanics going out and doing these inspections net adds a lot of credibility and a lot of confidence.
In the condition report when the buyer is buying the car so I think overall.
We've learned that even though of Theres a theres the thin border that separates us from Canada. The market is a very different dealer behaviors very different the.
The go to market strategy I think we've got it right now combining the sales teams with the dessa and.
And trade Rep here in the U S listen we did get the breakeven and we were profitable in some months. So overall overall, we did stumble a little bit.
The stomach, but I think we got it right and I guess of I guess it might take.
Some satisfaction out of <unk>.
Going through the process with trade Rev is it did get us to where we are today. It did get us to recognize the need to take the look at our competitor back lot than what they were doing and did get us to the point of acquisition and now I'm very bullish on our leadership opportunity on our leadership position and I think that we can be the winner of the <unk>.
Most and Craig I'd like debt.
Not that trade rep doesn't have a lot of value of in fact, the backlog backlog.
Backlog of cars team is very excited about having our sales force represented because of that accelerates our entry into new markets without a doubt and our operation support has gone over to the backlog platform and giving them greater support and better customer service as a result of having more resources that can support the transaction once it's completed.
The online so.
You know what the combination is the value creation, it's not just one.
Taking over for the other you know I think the final point I'd make Craig and I may be repeating here, but.
You know the the leadership team backlog.
They grew up.
In the retail car business, they really understand the dealer.
And understand.
How that dealer thinks and how that dealer wants to do business and they really spent more time understanding the dealer and understanding what the dealer needed and you know the.
They grew up in the family of business, where they they owned and operated the dealerships.
They knew this business and a new well and quite frankly, I think aside from the from the execution and the go to market strategy. It was this their knowledge of the industry has really shown up here in terms of leading backlog cars.
Thanks to both of you you have a.
The big goal to expand volume significantly when you think about that what are the barriers or bottlenecks that you are concerned about is it adding dealers is it hard to add enough mechanics to provide that type of feedback to buyers. Just curious what are the kpis that you use to run that business.
And feel good that you're on track.
Yeah, you know Craig the most important metric in our business as one word it's called volume.
We need more volume and we're focused on volume and as a matter of fact I will tell you in 2021.
There is more focused on volume than there is on profitability now with that said, we wanted to make sure that we operate this business out of breakeven or better pace.
But it's really getting out there and getting the existing dealers doing more volume and getting more dealers signed up.
And it's it's it's a volume game.
And that's what we're focused on and we have our sights set on some big numbers here.
Greg very specifically.
It's probably easier to sign up for dealer than it is to get them to use the platform on the first day that he signed up so the first thing you do is you want to sign them up and then get them using the platform and having success and then once they're successful get them increasing the volume they put through it.
And getting.
Getting them to that kind of super user status, where they are selling high numbers per week and the market. These platforms out of the potential to do that that's that's actually the metric that accelerates the growth the markets well defined we know what the dealers are and it's getting them using the platform.
Thank you.
Youre welcome.
Yeah.
Our next question comes from the line of Stephanie Benjamin with service you May now ask your question.
Hi, good morning.
Hi, good morning.
Just to continue on the last question could you maybe talk how you think trade revenue and backlog cars performed in the fourth quarter of Bruce your expectations.
Without breaking out the individual volumes like you did in the past maybe you could talk directionally, how just the dealer to dealer.
Segment of the business performed how you think that compares to the overall industry you know in the fourth quarter.
You know the.
Very strong growth at backlog pars and trader of on a combined basis.
We look at both week over week.
Sequential as well as year over year, and it's been a strength of our business.
Again, when you look at the quarterly performance of dealer to dealer off premise.
It is doing very well and it is where our brokers wanted to come from Stephanie.
Im looking at some numbers it was.
Up without a doubt year.
Year over year I'm looking here, Okay, I've got to get to the right numbers.
On a combined basis.
Digital dealer to dealer was up year over year in Q4 by about 60%.
So I'm not going to give you a specific number but that is the actual growth rate I am looking at volume.
And that's in a period, where I think our markets. We're wondering what we're going to do with the combination because we closed the deal on November 12th. So so we were very pleased with that combined performance and Thats combined two platforms.
Compared to the prior year as if the two platforms were combined at that point as well that's not year over year growth with backlog of zero of the year before we use their actual numbers.
Got it that's very helpful. So I guess the.
Going off of that that means that the other component to this business would be primarily open lane, which means it must have been down pretty materially in the fourth quarter is that just.
Anything beyond the weather delays there or do you think for some of that is kind of roll off of the beginning of this year or was this just all of the dynamic of the dealers grounding dealers keeping those vehicles kind of maybe what happened with the open line between three and four of kill that openly.
The open lane had fewer listings I mean, the bottom line as fewer cars came onto the network and the conversion rate remained regions.
Reasonably strong pricing was very strong and it was just fewer listings and.
That's a function of dealer behavior of buying out leases.
Buying at the grounding dealer not all grounding dealer transactions come through to us somewhere processed on their own debt. So that can impact our numbers and we just saw lower volumes listed on the opening platform in the fourth quarter and and we somewhat expected that given the strong pricing environment, Yes, I think 70 of them.
Sure Greg mentioned, this or not but you know with the with the strength of price in the market. Many of these cars are returning off lease in what we call in the money.
You know so the.
The the cars are actually being bought below the residuals are below of the wholesale value of that is being realized in the marketplace.
So in many cases, not only of the dealers taken them, but in other cases, the consumer is buying the car knowing that they are buying the car less than market value. So I think that's been a takeaway from openly.
And just to give you an example, I happened to see.
A third party report on this very recently this week.
The current residuals on three year old vehicles are running at about 54%.
Of the MSRP at the time of three years ago.
Up from 48%.
At the beginning of this year.
That's a specific number that is provided by third parties that track residual values for the leasing industry.
Absolutely and then just a follow up to the Ryan's question at the beginning of the call I believe Eric you called out some annual incentive payments that you didn't accrue for the the mature.
Or any of the ear, but eventually you know how to pay all of that out in the fourth quarter can you give us the breakout of what was between SG&A and cost of sales I think he think of the total incentive dollars that just a rough breakout.
The percentage wise.
Yeah, it's going to be about 80% SG&A and 20%.
I'm doing that back of the envelope Stephanie.
But that's roughly the breakout 20% goes to direct.
Got it and then lastly, as you know more strategically as we move forward how would you look at your appetite for any additional acquisitions as you kind of look through 2021, and 2022, and then kind of given up on a prior question.
If you were presented with a takeout opportunity as well to go private is there anything from a tax consequence that could keep you from.
Participating are engaging in those discussions.
Well, let me talk about acquisitions that'll.
That'll be the easy part of I would say.
We're very focused on our strategy. We are of very defined strategy and we the defined strategy of continuing to build a digital company and transform this industry to fully 100% digital and continue to make that stick that's the future of and that's where we're going here.
In terms of any in terms of our capital allocation and our investments I think you should expect us to continue to invest in our strategy and supporting our digital initiatives of digital platforms and what we're doing in the area of our digital commitment.
In terms of acquisitions.
Im not suggesting that we would we would not do an acquisition, but I would suggest that that's not a priority and theres nothing on the board that I could speak of today.
But more importantly, if you see of spend the money you should see us spend the net in the area to support our strategy.
And Stephanie relative to your tax question I'm not there there is and I know, you're specifically referring to the tax free spend that occurred in June of 2019. There. There is nothing debt that would be proposed that IC would have any impact on the tax free treatments. So I see no tax issues that would be.
Our limitation on opportunities for the company.
Got it thanks, so much guys.
You're welcome.
Your next question comes from the probably.
The realm, we probably have time for just one more question.
Okay sure.
Your next question would be the of comes from the line of Daniel <unk> with Stephens incorporated your line is now open.
Yeah. Thanks, guys. Thanks for squeezing me in here of late.
I wanted to ask a broader question on competition during the for Q, Jimmy mentioned for some of your traditional competitors physical back to the auction back online and you said there is no difference in the returns in your opinion the beer customers share that view did you shouldn't see any share shift during the quarter and then Additionally, you have some online only competitors obviously the SAP.
All of the adoptions are talking more about homecare channel do you think that is posing any challenge to your volume.
And any kind of incremental pellets the competition would be great.
Yes, so Daniel anytime anybody takes the car away from either of competitor right No matter. If it's one current not listen there's no question.
Net.
You know.
That our competitors.
Our running cars and I would tell you that in some cases, our commitment to go in digital.
We probably have the bus some vehicles some people that just haven't been able to make the transition to digital.
But we don't expect that to be a long term issue we expect it to.
We expect that it's our job to get out there and to provide the evidence that.
The the digital way as the way of the future.
We can show through our data and through our analytics.
This is an anecdotal information. This is real that we are able to show that we can get a better economic outcome.
At least equal to or better.
And I think we continue to gather data with the continued sales that we're doing we continue to be able to share that information with our customers. Both on the commercial side and on the dealer side and at some point in time again I continue to say this is the way that the world is going.
We believe it's the right direction, we're committed to the strategy, we're going to stay the course we.
We don't want to go back to the old way of doing business and yes, we have competitors the.
Whether it's the salvage guys that are selling in the low end cars.
That's always been in the marketplace.
Those guys have continued to sell some of the low end cars.
We have a major competitor obviously.
On the on the dealers the dealer digital side, which we have talked at length of the boat here and we think that we're closing the gap there and we're going to be in a position to take a leadership position there. So.
Theres always going to be competition, we've always dealt with competition. Our job is to make sure that we're saying we're staying in front of the competition and our strategy is leading us in the right direction, even though we might be taken some short term pain as.
As they say for some long term gain.
Got it that's helpful and if I kind of quick follow up you added the sentence in the supplemental there's something to the extent of the vehicles onsite use services at a higher rate for the ship to oxide is hurting debt. How do you think if the business continues the shift to more off premise sales. How do you think about utilizing your physical assets given.
The scale of you guys have built over time.
Well I'll, let I'll, let Jim talk about the land lets just tell you that we think the the.
Shift is temporary because of the high values of vehicles and this happened in the previous cycle in 2009 through 2012, where you sell cars quick it's much easier not to use the services on premise and that is of course, having the.
Inability to run with groups of people I mean, nobody can run with large groups of people in their auction legally right now so.
I think it would apply to the whole industry that theres fewer cars showing up on site even for those that are running vehicles through line. Jim why don't you talk about our land utilization and focus there so I've always maintained that.
Our brick and mortar our land and the real estate is one of our critical assets and its a differentiator quite frankly the few have.
And as I say, especially you know you think about these dealers, especially in the urban areas when they've decided theyre going to wholesale the car they need that space they need the car off the property right away.
We need to get the cars to auction, we need to get at inventory, we need to get at MH in some cases, we need to get it reconditioned.
And the auction is going to continue to provide these services.
Now with all of that said I think what's really important I think is really important to have the right land in the right location and the right size right. That's not to say that we would never.
Divest of some land as matter of fact, there was a small auction I think.
I know there was a small auction that we did exit.
And the other thing is I would tell you.
We would probably rather own the land and lease it.
And I think you'll see us continue to differentiate ourselves with land because nobody else can provide this there's only one other major competitor, we're still the duopoly in a holistic sense that theres only one other competitive debt that can provide these kind of assets and I say that when you look at these digital platforms.
You have to have more than just the digital platform with the buyer base you have to be able to offer. These other services that we talk about when you think about inspections.
Think of both transportation and logistics and financing reconditioning right on down the line.
Hey, we're unmatched we're unmatched in terms of our assets and at the end of the day, that's why we're going to win.
Got it thanks best of luck.
Youre welcome Kieran.
Thank you that's the end of the Q&A session of today's call I'll now turn the call back to the key our chairman and CEO, Jim Hallett for any closing remarks.
Okay. Thank you Jerome and ladies and gentlemen, thank you for being on our call today, obviously fourth quarter was tough quarter. One that's not easy to report, but what I want to leave you with as much about.
I'm the repeat what I've said listen make no mistake, we are of digital marketplace business that utilizes data and analytics and value added services.
And we are committed to this direction, we are non incident and running cars. We are interested in moving this industry of forward and we believe we believe just like so many other businesses around this that this transformation is taking place and it's not something in the future. It's something that's happening now and we believe that we are leading that and yes, we have taken some.
Short term pain here, but we will take the leadership position as we go forward. The other thing I would tell you is I would go back to our cost structure. You heard we now right size of the company over 5000 jobs that we permanently taken out of the organization. We've got it right size, we believe that we can add volume with.
Adding cost and that is sustainable and we can continue to take it forward.
Next I would say this combination of being able to put backlog cars and trade wrapped together that truly makes us the leader it makes us the leader here in the U S. It makes us the leader in Canada with trade Rev. We feel that we're going to have huge gains on the dealer to dealer segment of our industry and with the also.
Spoke about our strong balance sheet I think we're in a very good position to have a strong balance sheet to be able to take advantage of opportunities that support our strategy. Our strategy as we go forward. So with that we're looking forward to coming back to you in next quarter and we'll have more information in the share with you.
Some of these transitions that we're making and thank you for your interest in being on the call today.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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