Q1 2021 KAR Auction Services Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the KAR auction services quarter, one 2021 earnings conference call.
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I'd now like you had the conference over to your Speaker for today, you start Mike Eliason, Treasurer, Vice President Investor Relations, Mike the floor is yours.
Thanks, James Good morning, and thank you for joining us today for the car Global first quarter 2021 earnings Conference call today, we'll discuss the financial performance of car global for the quarter ended March 31, 2021, after 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 1995 investors.
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 and 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 to of the applicable GAAP financial measure can be found in the press release that we issued last night, which is also available in the Investor Relations section of.
The web site.
Day on the call we have Jim Hallett Executive Chairman, Peter Kelly, CEO, and Eric Lockmiller CFO now I would like to turn this call over to power Global Executive Chairman, Jim Hallett Jim.
Great. Thank you Michael and good morning, everyone and thank you for joining today's call consistent with our announcement earlier this year, Peter Kelly has transitioned into the role of CEO of car Global beginning April 1st.
So in a few moments I will be handing the remainder of this call over to Peter and the Eric locked Miller our CFO.
As executive Chairman, However, I wanted to take the opportunity to thank all of you for your support over the years, it's been my pleasure getting to know so many of you and sharing car story with you.
I also want to congratulate Peter Kelly and all of the car on what I would call the seamless leadership transition.
Peter has been an inspirational leader in our company for over a decade and is the true industry pioneer. He has been the architect of our digital transformation and has the clear bold vision for cars future, which I know he will begin sharing with you today.
This is the right time for this transition and Peter is the right leader for our customers for our investors and for our employees. So with that I'm very pleased and very proud to pass this call the car global CEO Peter Kelly.
Well. Thank you Jim I appreciate that Tim. Thank you very much and good morning, everybody I'm delighted to be here. This morning with all of you for my first earnings call as CEO of car global.
Today's call I plan to speak to our first quarter results I will then provide some insights on the dynamics in the industry and what I believe we can expect to see over the rest of this year.
But I plan to spend most of my time focused on my vision for the future of car global.
I'm going to start with the first quarter.
I was pleased with our first quarter performance. Despite operating in an environment of the constrained supply across our industry. We achieved the following results.
We facilitated the sale of 753000 vehicles, representing gross auction proceeds of $11.4 billion.
We generated $582 million in total revenue and $489 million in net revenue.
We generated a total gross profit of $251 million, representing 51% of net revenue and.
And we generated adjusted EBITDA of $123 million, an increase of 39% versus Q1 of last year.
Perhaps even more importantly, we saw our strongest performance to date by far in our digital dealer to dealer market places backlog cars on trade route.
We completed the migration from trade Rep. The backlog cars in the U S. In the first quarter ahead of our schedule.
On a combined basis, we facilitated the sale of over 100000 vehicles on these marketplaces within Q1.
Representing growth of 81% compared to Q1 of 2020.
It is very encouraging.
Eric will provide more detail around these and other financial and operating results later on the call.
Yeah.
I would now like to speak to what we can expect over the rest of this year.
I mentioned that in Q1, we were operating in an environment of constrained vehicle supply across the wholesale used vehicle market.
This is particularly the case when it comes to the commercial vehicle category affecting repossessed vehicles off lease vehicles and rental vehicles.
The root causes vary but the all originates in the COVID-19 pandemic.
The supply side dynamics for commercial vehicles are industry wide and they're not in our control. However, there is a silver lining.
First I believe that these dynamics are temporary and volumes will return to normal over time.
When that happens I believe car will be of strong beneficiary, given our market position, our technology platforms, and our strong relationships with commercial consignor.
Until that happens we will continue to run the business prudently recognizing and adjusting to the volumes that are available to us.
The dealer consignment category has been less impacted by these dynamics, although many dealers are more likely to keep their trade in vehicles, given the current high demand and prices on used vehicles.
So given that fact, I am even more encouraged by our strong performance on dealer consignment in the first quarter.
The second piece of good news is that even with the shortfalls and supply our business continues to perform well.
We have meaningfully and permanently adjusted our cost structure and streamlined our operations in every corner of our organization.
This has enabled us to react to downward changes in the market, while the remaining well prepared for when supply increases of Kent.
Our focus on cost management as part of our corporate culture and it is important for us to continue to demonstrate strong unit economics. During this period of supply constraints.
So with that I'd like to spend the balance of my time sharing some perspectives on the business and what I believe is the significant opportunity that exists for car as we looked for the future.
Car operates leading used car digital marketplaces, serving business to business customers in North America and Europe we.
We do this to an off premise model, which means cars are launched for sale that are not physically at our sites.
As well as to an on premise model, which means cars are physically on our sites to efficiently enable our business to business customers to sell by service transport and finance used vehicles.
We provide these services using our digital platforms, our proprietary data developed from tens of millions of transactions are unique inspection tools and capabilities, our transport and logistics expertise our ability to value on finance vehicles, and our ability to store and service cars from the North American footprint of over 70 locations.
The core of this business are a strong long standing long standing relationships with dealers motor manufacturers finance companies fleet operators on rental car companies.
And as you know we report our business in two segments ADESA and AFC.
As I see of the ADESA segment has two components. The first component of our North American used vehicle market places.
There were close to 20 million of wholesale used vehicle transactions on the U S and Canada in 2020.
And our market places open lane backlog cars, ADESA dot com and trade Rev facilitated approximately $3 million of those the.
The marketplace gross auction proceeds of those transactions was approximately $44 billion.
And we served over 30000 unique sellers on over 60000 unique buyers in 2020.
While we are number two in terms of our overall market share. We are number one in a number of important categories such as our open lane powered private label marketplaces that support over 80% of North America is off lease inventory.
The second component within the ADESA is our international used vehicle marketplace, we entered the European market some years ago through cars on the web and via deaths in the U K.
We continue to pursue opportunities to serve our global customers on took lower grower of international presence and market share.
And within our AFC business segments. We are the number two by volume of loan transactions with total outstandings of $1 9 billion.
We provided one on a half million loans to over 14000 dealer customers in 2020.
Yeah.
With that of the backdrop I'd like to comment on our strategy.
And I'm going to focus the remainder of my remarks today on the North American marketplaces, and I'll cover AFC in international in future calls.
So the market for buying and selling used vehicles is undergoing significant change our customers are evolving.
Some are eager to embrace the power of digital technology and the shift to digital marketplaces. The COVID-19 has accelerated.
Other customers are adapting to the transition to off premise sales more slowly.
Our goal is to provide all customers buyers and sellers with the full range of capabilities to meet their needs and to help them to be more successful.
Today, we are no longer running vehicles and lean and we have no plans to do so.
However, we have the ability to inspect on launched for sale vehicles from any location or alternately to bring them to any of our 70 plus sites the store inspect and if need be serviced them before selling them.
As a result of this 100 per cent of the cars. We sold in Q1 were sold digitally and 54% of the more sold off premise compared to 46% sold off premise of year ago.
I know that some investors are concerned that this shift to digital could erode our profit margins.
I'd point out that we were able to increase our gross profit per vehicle sold in the ADESA segment to $264 in Q1.
This year versus $228 in Q1 of last year and $242 in Q1 of 2019.
I believe digital marketplaces are the future of the business to business vehicle marketing industry and that the offer superior outcomes for customers.
From competing auctions are running cars en ling appealing to what was familiar to buyers and sellers pre pandemic. However.
However, this gives us an opportunity to run realized experiments to demonstrate the buyers and sellers that are digital marketplaces offer superior outcomes for both sides.
The benefits of our digital marketplace model include for buyers greater convenience greater choice and selection and lower costs.
For sellers increased buyer participation with more buyers viewing and bidding on your vehicles greater geographical reach reduced stays for sale reduce time to cash and improve proceeds.
While the off premise sales are likely to continue to increase and we are well positioned for this there is still a role for bringing vehicles on premise tour of facilities and for providing related services.
This is particularly true for commercial sellers, who have the greater need for these services and who has typically been the principal customers for these services in the past.
So this leads me to our overall competitive position on our points of differentiation.
Uh huh.
The wholesale automotive industry remains of network effect business for like any other marketplace businesses scale and breadth of capabilities beget success.
In this context my belief is car is better positioned than anybody else.
We offer buyers and sellers of broader set of marketplace offerings tailored to their specific needs.
For example, the open Lane platform provides our OEM and kept the finance customers with the highly customizable platform for the remarketing of the off lease vehicles.
Our backlog cars on trader of marketplaces are also strongly differentiate of platforms for the off premise dealer segment and their respective geographies.
Yes.
We believe that our physical infrastructure is a strong differentiator and will remain one even in the more digital world of the future.
We offer the ability to sell cars either on premise or off premise and we have the capability to deliver value enhancing services, such as detailing reconditioning and vehicle repair for those vehicles at our facilities.
We also offer our customers the larger base of market participants on counterparties, meaning more buyers on more sellers on a broader suite of ancillary services, such as transportation financing buyback guarantee products et cetera.
Finally, the data from our entire digital marketplace with over 3 million vehicle sales transactions annually creates unique opportunities for our business.
So when I think about our competitive position I think we have a strong positive differentiation of the eyes of our customers.
Versus our physical auction competitors car offer superior digital capabilities with best in class offerings, such as backlog cars trade Rev openly simulcast plus.
We strengthened these digital capabilities further this week with the acquisition of auction frontier.
Finally, we also have considerably broader reach than any standalone independent auction.
For the versus newer vendors, who offer point solutions for the digital off premise dealer segment.
Just looking at the off premise dealer segment by itself, we have a similar scale for allegiant leading competitor.
But taking the market of the hole, we have considerably more scale.
We also offer of buyers et cetera on a broader set of marketplace offerings of choice of on premise or off premise.
Larger base of Counterparties, a broader suite of ancillary services.
Such as reconditioning transportation land data financing etcetera.
So I'd like to speak to where we're going toward the company and to our key initiatives.
In the simplest form we intend to grow our volumes on grow our share.
The automotive market place is large and relatively stable.
Total new and used vehicle retail transactions in the United States alone amount of 50 to 60 million vehicles transactions in most years.
We estimate well over 20 million retail used vehicle trade in transactions per year as well on.
And also another $20 million of wholesale used vehicle transactions.
We believe that of more digital models significantly expands our addressable market to include all of the approximately 20 million wholesale used vehicles of transactions currently taking place each year and potentially vehicles on some of the other marketplace categories.
So we will be focused on growing our volumes and increasing our share in this larger addressable market that now exists for our services.
Okay.
We also aim to achieve a tighter integration of services across our marketplace platforms will create a one of the kind of value proposition for buyers and sellers.
Today, we have a number of best in class technology and data capabilities and other service offerings that may be only available on select platforms that we offer.
We are working to integrate those across all of our platforms. So that all of our customers can benefit from that.
Yeah.
Digital will also allow for a more streamlined cost structure for operations, we will preserve the digital sales model that we have transitioned to during COVID-19 and I believe this will allow us to sustain the cost reductions that we have already achieved however.
However, we will also continue to adjust our fixed cost structure to reflect the fact that as we grow our business and increasing percentage of our sales will likely be off premise.
We will constantly evaluate where we have had the opportunity to become the efficiency and where we need to invest to accelerate our growth.
Our physical auctions of the past will evolve into a vehicle logistics centers of the future.
Yeah.
We also intend to grow our ancillary services businesses, including AFC by increasing the cross selling and increasing the attach rate for the services on the vehicles sold within our marketplaces.
Greater use of our services by existing customers provide the meaningful opportunity for financial growth and I believe the digital will help raise awareness interest engagement and of the attach rate of these offerings by our customers.
We intend to measure and report on our progress using our fresh set of key metrics that reflect our transition to a digital marketplace company.
There are five key metrics that we will use for the ADESA segment.
The first metric is total vehicles sold in total gross auction proceeds.
In Q1, we sold 753000 vehicles, representing 11 1 billion in proceeds.
Notwithstanding the near term supply constraints that I discussed earlier, our intention is to grow our volume of vehicles transacted over time.
We will measure of performance based on growing the volume of cars sold in the aggregate across all of our marketplaces.
Second metric is the percentage of vehicles sold off premise and in Q1 this was 54%.
We believe this metric gives investors the opportunity to understand how our customers are evolving and as an indicator of our transition to a more asset light model.
The third metric is the number of vehicles sold on the trade revenue backlog backlog of cars platforms on a combined basis.
Again in Q1, this was 100000 vehicles, representing 81% growth versus Q1 of last year.
This metric will provide insight.
On this important and growing segment in our business it will make it easier for investors to compare of volumes with those of competitors.
The fourth key metric gross margin per vehicle sold within the ADESA segment.
In Q1, this metric was $264.
This is a key metric that will help investors understand how we're navigating the mix shift from on premise to off premise.
The on premise on off premise models of different fee structures, but they also have different cost structures and ultimately those get reflected in an overall gross profit per vehicle sold.
And the fifth metric SG&A per vehicle sold within the ADESA segment in Q1 this was $186.
We believe this metric provides investors with an understanding of how we are transitioning our fixed cost base to align with our transition to a digital marketplace driven business one that is more appetite.
In addition to those metrics within the ADESA segment. We will also be focused on the following key metrics at AFC.
The number of loan transactions in Q1 372000 loan transactions.
On the revenue per loan transaction, which in Q1 was $177.
Finally, two key metrics relating to car overall.
Adjusted EBITDA Q1, $123 million I believe that adjusted EBITDA remains the most relevant metric of cars and earnings performance and will continue to be of key metrics for myself on the management team.
Finally cash flow from operations in Q1 $165 million.
We will continue to highlight the strong cash generation power of the car business model and we'll continue to view this as a key performance metric.
So to conclude my remarks here this morning.
I'm pleased with our performance in the first quarter.
More importantly, I am pleased with our progress of our digital transformation, our successful integration of trade revenue backlog car platforms and the continued growth in our off site our off premise sales mix.
As we look to the rest of 2021 we should expect the continuation of the supply constraints that I described.
When it comes to our future vision on our performance I believe we have a significant opportunity to grow this business and substantially increase the value of this company for all of the reasons that I've mentioned earlier I.
I will be excited to deliver on that in the months and years to come on.
Our growth will be propelled by a relentless focus on our customers consistent with our stated purpose, which is to make wholesale easy so that our customers can be more successful.
And finally I want to be very clear, we have crossed the digital chasm and we are operating as a digital marketplace business with industry, leading platforms solutions and infrastructure. The clearly differentiates us from our competitors, we will build on our strong position and we intend to extend our lead in operating the most active technologically advanced and data driven.
Market places within our industry consistent with our vision of building the world's greatest digital marketplaces for used vehicles.
With that I will hand over to Eric for a more detailed review of the financial results. The results from the first quarter Eric.
Thank you Peter and let me start by stating our results for the first quarter were much improved over the fourth quarter. Despite continued supply constraints. The results were driven by our focus on controlling costs, both direct and SG&A and taking advantage of the full suite of car global offerings to optimize performance across all of our digital marketplaces.
In addition, we realized the benefit from minority investments in early stage auto retail businesses I will talk more about the strategy behind these investments in a few moments.
We are pleased with the increase in auction fees per vehicles sold increasing 6% to $313 from $296 last year.
This metric was also up sequentially from $304 in Q for the auction fees per vehicles sold reflect the increase in the average selling price for vehicles across all of our platforms.
I consider this quite an accomplishment given the strong performance in our private label platforms that have the lowest auction fees for burkhart sold.
Another positive that I don't believe is obvious is the sequential improvement in services revenue. Despite the continued shortage of supply on our on premise marketplaces.
Not surprising services services revenue was down 21% from the prior year, but on premise volume was down 25 per cent for that same period.
I will admit that high wholesale used car prices and low supply do put a premium on time to market, which often results in lower attachment rates for ancillary services. However, we have offset some of the negative impact of these factors by increasing our revenue and services provided to buyers of wholesale used vehicles many retailer.
Our using our reconditioning services to prep cars for retail sales or delivery as our capacity and service capabilities provide a faster more cost effective reconditioning capability than the alternatives retailers may have available internally or in their local market.
We consider this a growth opportunity for ADESA going forward.
Peter has covered some of the key metrics that demonstrate the strength of our performance, including gross profit as a percent of net revenue and gross profit per vehicle sold for the ADESA segment the.
The strong gross profit performance reflects our ongoing focus on managing costs in line with the volume sold and services delivered we did benefit from the strength in used car pricing confirming our view that the losses on sale of ADESA assurance and inherited vehicles in North America that we experienced in Q4 for were transitory.
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Despite a 23% year over year increase in revenue from purchase vehicles, we experienced a 100 basis point improvement in gross profit due the decreased losses on purchased vehicles to be clear, we incurred a loss reflected in our gross profit for the quarter from the sale of these vehicles, but these losses were in line with the normal trends would typically.
The experience net losses on the sale of vehicles returned under the ADESA Assurance program were approximately 33% of the premiums earned in the first quarter.
We have recently expanded the reach of our ADESA assurance offering and see this as a growing contributor to our performance.
Staying on the ADESA segment I am often asked about the run rate of SG&A I consider the first quarter of fairly clean quarter within SG&A at ADESA.
SG&A includes 25 per cent of our full year bonus and a full quarter of backlog cars expenses we.
We did complete the migration of the trade Rab of U S platform to backlog cars and may have the opportunity to realize additional synergies in future quarters that may offset additional costs as we enter new markets.
The AFC segment also performed well in the first quarter operating profit was essentially flat with the prior year adjusted EBITDA for the first quarter was up 10% year over year.
We saw our loan portfolio declined through most of the 2020 and are now seeing the portfolio grow of strong wholesale prices result in higher average loan balances per vehicle, Florida.
While lower transaction volumes in all auction channels were clearly a headwind for AFC. We saw strong unit economics with revenue per loan transaction up to 177 from $1 55, a year ago. We also have reduced total SG&A in the apps the AFC segment by 12% compared to the first quarter of 2020.
We had a significant decline in the provision for credit losses in the first quarter as compared to the prior year as well. This decline reflects the strength in the wholesale used car market. Despite the constraints on supply.
I will also point out that the allowance for credit losses was increased $3 $5 million over the year end balance in this allowance.
We recognized in the allowance of the expected losses for loans originated I consider this a conservative position given the strong credit performance, we are seeing in the market today.
The strength of the car business model is the cash generating characteristics of the business.
As you can see in our statement of cash flows we generated $165 million in cash from operations typically we see the first quarter as a consumer of working capital through most of the quarter, but of characteristic of a tight supply environment is faster turn times for services and reduced cycle times for the sale of vehicles. This creates a very.
The positive situation for our cash position.
As Peter mentioned previously the outlook for the remainder of the year is likely to be constrained supply of vehicles, one of the positives and the supply environment is it will be very good for generating cash from operations.
With our strong cash position and our outlook to continue generating strong free cash flows. It is important that we continue to have a balanced prioritization of capital allocation.
In the first quarter, we purchased $80 million of car stock in the open market at an average price of $15.47 per share.
Our open window was very limited in the first quarter and this represented the maximum number of shares we could purchase during the open window.
To the extent, we acquire shares in the open market at attractive prices, we can offset the dilution created by our issuance of the preferred stock last year, we are being disciplined on our share repurchase program and have approximately $210 million remaining on our share repurchase authorization.
We also utilized $80 million of cash for the purchase of auction frontier of this week.
This acquisition is clearly aligned with our strategy as the auction frontier technology is an integral part of the digital market places, we operate as well as others operated in our industry in.
In addition to the cash paid at closing the transaction includes $15 million in contingent consideration tied to customer retention.
The contingent consideration is payable in two years, if the terms of the contingency are met.
We still want to be conservative as it relates to our cash balances and deploying capital we think of it as a real asset right now to have a strong cash balance with that said, we will continue to generate strong cash flows in our businesses, while investing in growth, especially in the digital dealer to dealer marketplace.
Now, let me speak to the gains on investments we had in the first quarter over the past several years, we have taken the opportunity to develop strategic relationships with certain early stage retail used car businesses. The strategic relationships were centered around providing our services to support the development and growth of these businesses in some cases.
We have taken the opportunity to participate in investing and capital raises by these businesses to demonstrate our commitment to supporting them.
These investments have all been minority positions two of these investments that have been publicly disclosed our car lots and most recently a raven AI.
We have made other investments that have not been publicly disclosed and those investments were all less than $5 million each of.
The primary goal when making investments in these enterprises is to establish a strong strategic relationship and we feel this goal has been achieved in each situation. We have deployed capital and now we are seeing the recognition of the value of the business is created by these early stage enterprises in significant appreciation of our investments.
All of these investments are carried at cost until the underlying securities become quoted on an established stock market or the investment is monetizing cash through an alternative transaction.
In the first quarter, we realized approximately $17 million in realized gains from proceeds from the sale of equity Securities. We have an additional $43 million in unrealized gains on equity securities that are now publicly traded were currently restricted on the sale of these equity securities and those restrictions lapse.
Later this year for.
For clarity, both realized and unrealized gains are including.
Included in operating adjusted net income.
As adjusted EBITDA excludes noncash items, we have excluded the unrealized gains in the computation of adjusted EBITDA.
We will continue to periodically invest in early stage businesses that we see operating in our marketplace.
However, we do not expect these situations to be common and are not expected to be of material use of capital.
My last piece of business today is to give you on early heads up on our plans to host an analyst day, following our second quarter earnings release.
At that time, Peter will provide a detailed review of our strategy and what the future of car holds for our investors.
We will get a save the date out as soon as the details are finalized, but we continued to we wanted to give you early notice of this event. This will get Peter of the opportunity to go into much more detail on our strategy, what our business model will look like in a fully digital world and highlight the many competitive advantages car global has as we look forward.
You for your time. This morning, we will now take your questions Jay I'll turn it back to you.
Thank you at this time, if you would like ask the question. Please press Star then the number one on your telephone keypad. Once again, that's the power one on your telephone keypad. If you would like to withdraw your question. Please press the pound key.
<unk>.
Our first question comes from the line of Ryan Brinkman of Jpmorgan. Your line is open hi.
Hi, great. Thanks for taking my questions, maybe starting with you know last quarter. There was some discussion that maybe some of the smaller independent auctions, we're moving more toward reopening to physical in person bidding are you able to comment on how that trend may have tracked in the first quarter do you suspect that it may be that the independents are doing this more because.
They do not have as established online capabilities and then I think there was some observation to that manheim was looking to maybe respond more in kind and some speculation that that could.
Necessitate.
The response on on your end and just wanted to check in again on what might be happening on the ground competitive wise and how that plays into the sustainability of some of the margin benefits that you've been enjoying.
Yes. Thank you Ryan I appreciate the question.
At this point I would say most independent auctions have returned to the traditional format of running cars and lane.
And I did speak a little to that in my remarks, but.
And I do think perhaps there relative the relative lack of digital capabilities relative to somebody like us might be a key factor in that decision.
And as regards Manheim Manheim I believe has returned to running some cars at most of its sites.
But book, but by no means all of the vehicles. So manheim is probably more akin to us although I would I would argue we have superior digital capabilities in many key areas but.
In terms of our approach as I said in my remarks, Ryan we do not plan to return to running cars on line. We obviously are in close dialogue with our customers. We are closely analyze our performance on a relative performance and we believe that of digital model and the model. We have can generate very strong outcomes for customers of our.
Strong conversion rates.
And the represents also the of the model for the future and true to the model of customers of transitioning to overtime.
Okay. Thanks, and then just my last question is.
Very strong quarter volume wise that backlog of cars and I understand youre not wanting to call out.
The profitability, specifically each quarter, but are able to comment on anything are generally on.
On a relative to the cost savings of post integration or maybe on the gross profit per card relative to some of your targets and then just more generally.
Thinking about the offering relative to HCV I think with that from now being public and communicating with investors. How they think that they're offering compares to yours I don't know if theres anything you want to say relative to the customer feedback that you received.
Different aspects of your offering that you think might be more appealing than <unk> or alternatively areas where.
You expect to maybe become more competitive on overtime.
Thanks, Brian.
Well, yes.
You I was very pleased with our performance in Q1 with the integration on the volume growth that we saw in the digital dealer platform and the migration from trade rep to backlog in the U S.
80% volume growth the integration completed ahead of schedule, but maybe even more importantly, just very very strong feedback from our customers.
We introduced the concept for our customers early in Q1, I would say we've migrated essentially all of those customers with no loss.
We had a record performance in the first month post migration.
And as Eric alluded to we really didn't get the benefit of any cost synergies within Q1, because it's.
It really was the end of February when the migration was actually completed so.
Very positive feedback and we liked the backlog model pre acquisition and I would say it has lived up to our expectations.
Every month since.
The customers really like the simplicity of the platform the user friendliness of the platform. We see an increased level of engagement from the customers in the platform directly without us having to be in the middle of the facilitating the transaction so to speak.
So just a lot of a lot of.
Strong points and I would say a lot of positive differentiation versus the alternative platform that you mentioned I think frankly, I think we've got the best platform in the industry.
The focus is on growth.
And market share as I mentioned.
Particularly in that category, a bunch of the unit economics within the platform, even though we're not going into detail on this call as to what those specifically are are strong and I think one of the attributes of backlogs.
Pre acquisition was you know.
Its relative capital efficiency it had it to achieve substantial scale and a substantial growth rate with limited capital investors and I think that aspect of the platform continues post the acquisition as well so we're very excited.
And very focused on really taking that to our customers. So they can all benefit from that very very strong platform.
And Peter Let me add Brian you asked specifically about performance in the first quarter. It was a modest loss less than $10 million in total and that includes the full allocation of our global sales cost to that unit and also I'd like to highlight the gross profit there we've.
<unk> talked about at maturity.
<unk> something near 60% were already very close to 50% just under 50% gross profit on that channel and I'm very pleased with that result, because that's including all costs and that's before any synergies or realize going forward. So that's a very strong performance in my opinion.
Yes very helpful detail. Thank you.
Thank you next question comes from the line of John Murphy of Bank of America. Your line is open.
Good morning, everybody and congratulations Jim and congratulations Peter.
I just wanted to get into Peter as Youre thinking about the the business here I mean, there's two competing forces theres the the short term.
Disruption here in supply and at the same time, there was the secular changes that are occurring both of which seem to be creating some disruption in your business from pressure.
You don't.
Which one do you think is ease of greater force at the moment I mean, an optimistic you'd argue hey, the supply constraint will ease as we get into next year and you'll handle the digital transformation I'm very well and it might not be growing as fast as people are thinking and the passengers.
This might say hey, listen the supply is is what it is and and this disruption on the secular.
Digital transformation of something that you're not handling that well and there might be increased competition I mean, how do you parse those out and thinking about the strategy going forward.
Thanks, John I appreciate the good wishes the first of all and to your question.
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Obviously, there has to be of focus on near term considerations and clearly there is the supply constraints, particularly in commercial vehicles that that is industry wide.
But it affects us as well as our competitors and that's just the reality we have to deal with.
It is temporary in nature and I think the timeline you've talked about is probably a reasonable assessment.
So we've got to manage through that.
And I think we're doing a good job of managing through that and I think for Q1 is of good a good good evidence of that and as I said in my remarks, I believe when that volume starts to return to normal we will be of very strong beneficiary for that because as you know we tend to lean more heavily into the commercial segment in our business overall.
But I'd say the bigger focus is on the longer the longer.
The secular trend that you mentioned, which is taking place over time.
And has obviously been accelerated through COVID-19 and to be honest I suppose that's something I've been.
Really part of now for all of my career in this kind of in this industry.
And are the digital disruptor in some respects with openly.
But theres been a secular change it has accelerated through COVID-19.
I like to think of it as an opportunity.
I think you know, we've just seen a quarter where more than half of the vehicles, we sold where off premise that speaks to an opportunity. We have built for car, where historically all of those vehicles had to come to our auctions for us to sell the that's no longer the case, we now can address vehicles anywhere anytime.
For any customer so I think theres, a tremendous opportunity and we talked about the increase the addressable market on the chance to grow into that so I think we have to stay focused on the the longer lasting secular trend.
And on the opportunities that that provides our company.
Which I think of really really substantial.
And John if I can.
Good day add you were around back then you and I have been working on our business for quite a while in 2011. When we acquired open Lane volumes were down we were we were in a in a position where they were the secular shift in supply to our marketplace that lasted in the commercial space until about 2015.
And yet at the time, we said this when it comes back they will be used to the digital transactions and we have never looked back on that as you know John on.
On the success of open Lane.
I'm expecting something similar here.
Good habits are formed and difficult times and the good habit of spending less time at the physical location more time transacting online I expect to continue.
Okay, and maybe just the second question a follow up to that I mean, you know traditionally.
You know on the very simple been way you kind of always think about 10 million units give or take is the the physical auction you know opportunity set the Peter as you kind of alluded, there's 20 million when you throw in the.
The dealer dealer and what's going on with wholesalers and some of the consumer stuff you know.
As you look at that doubling of the potential market that you're going after.
What's your right to play in that second half on that incremental 10 million for the competition. How fragmented is it and you know as long as you go in there and operate well in the kind of just like taking candy from of baby because it's such a fragment the market that's disorganized not well run that you have a huge opportunity I'm just trying to understand it it seem.
Like there's there is if you can break into it you're going to break into it pretty hard.
Well, John I think first of all I always tend to have a healthy respect from the competition I never take anything for granted I would say historically, you're right. It has been fragmented and on low tech a lot of relationship selling.
That.
The segments of the marketplace, but obviously the competition you know who some of the competitors are on the likely competitors for the future.
There is a substantial opportunity for growth I would argue frankly in Canada, where our business has been a little bit more established in the digital floating for longer we've seen us continue to grow and frankly the growth accelerate into that segment and grow our total volume of dealer consignment and now I see the same trend starting to become evident in the U S. So.
You know theres, a theres a lot of opportunities for growth, but I would not characterize it as taking candy from the baby. It's a it's a competitive environment, but within that we have a very compelling offering and at some level.
What those car have here as these marketplaces.
Mature and I think we're on the cusp of that right now we've got an engine.
For any vehicle in any location into cash in the shortest amount of time possible with a full set of services wrapped around the transaction for any customer and that's a really powerful engine that can be brought to any wholesale vehicle. It can be brought to enabling of retail trade and transaction on behalf of our customer.
There's a lot of potential advantages of that brings to bear. So that's the part of the opportunity that I see for the future of car.
Sure.
And I'm, sorry, and then just one last one Peter on I'm not sure. It's a fair question right now and we might need to get into it at the analyst day, but I mean, if you look at the physical locations is of an opportunity to pare back there and then also you know if you think about the international operations what are truly the synergies back to North America I mean, it seems like a hawk.
The other vertical or sleeve, even though you might argue with the similar business.
Is the opportunity set so great in North America the.
Building Europe might not necessarily the necessary at the moment might be more of the capital and human capital distraction.
So on the first question the footprint, obviously, we continue to evaluate that and I talked on my remarks about how we see I'll call. It of vehicle Logistics Center model in the future I think the physical assets as I said at a rate of positive differentiator for our company they provide necessary service.
<unk> to many customers.
Historically on and mainly to our commercial seller segment, but bulk of its the tremendous value there and underpin some of the key with key relationships, we have with that segment and as Eric alluded to in his remarks increasingly we are using.
Are being asked to provide reconditioning services for companies that are then retailing those cars direct to consumers. So dealers franchise dealers independent dealers and large used car.
Used vehicle retail operations, so the facilities of real value.
But the activities that take place at those facilities change. So again, the most obviously, we're not running cars today, but with the more digital model. There's a different set of activities that will take place in the locations versus will be sort of centralize the handled through.
The centralized service provision and through technology. So that's an evolving picture we've the team evaluating that.
The day in day out on our business and we'll continue to manage that.
As regards the international business.
You know what I like about one of the thing for lack of an international business is it is a asset light digital only model that we have in Europe. It is demonstrating very strong performance as I mentioned in terms of gross profit per car sold.
You know.
Your observation is correct that the synergies between North America and Europe. They are fairly limited right. It's not the vehicles are really transacting across that across that ocean in our segments. Because there just isn't the economic driver for that but there are some synergies on the technology and in terms of some of the customer relationships, but it's a business.
I like and for sure it's the growth opportunity and I do think that the.
The more digital our business becomes.
The greater has potential to be of globally extendable business you don't have to go in and build the physical assets globally. You can go in with technology. So that is an opportunity for our company.
<unk>.
But I would say that my personal focus has for sure been more on our North American operations here on my first month on the job.
And Peter I received a couple of questions overnight on email when we talk international I'd like to turn John two of subject. That's confused at least a couple of people are contingent consideration recorded as an add back in the first quarter, a big portion of that relates to our international acquisition of cars on the web.
As a result of their performance when we did the purchase accounting you use the moneycard Carlo simulation model to calculate the ultimate contingent of price and added that in our performance has exceeded what.
What the probability was and so we have had the record that those are payments to the former owners, they're not related to compensation to employees. We also had the same thing happening with our trade rep platform. Our contingent consideration is going to exceed what we originally calculated demonstrating the strength of the digital marketplaces.
Robley in part by COVID-19, There was a minor offset we acquired <unk>, where we're going to pay less than we anticipated and all of those were netted and recognized in Q1 and the $11 million add back I added that you didn't ask but I had several questions last night and thought this would be a good time to explain it.
That's incredibly helpful or what's the tail on that on the on the contingencies. Just so we can think about that going forward.
Those are the ones.
Ironically all of them run out in 2021. So we're at the end of the cycle, which is why you have these adjustments you've got great visibility into what the ultimate payment is going to be.
Okay. Thank you very much guys I appreciate it.
Thank you John.
Thank you next question comes from the line of Craig Kennison of Baird. Your line is open.
Hey, good morning, and congratulations Jim Peter on your prepared remarks, I think were really helpful. So thanks for that I'm not sure that we have all of those metrics on a quarterly basis going backwards. So I would make that request as well.
I'm wondering if you could shed a little bit more light on the cyclical pressure your more cyclical businesses are facing.
You know share with us the metrics such as you're off lease business and what kind of residual values, you're seeing in that channel and what will it take.
For those cyclical pressures to become.
More of a tailwind.
Thank you Craig.
Good question.
So I guess in terms of.
You know some of the cyclical pressures I mentioned, how the originated on the independent make if I look at say the off lease segment, which there's still at least on the books a large supply of maturing off lease vehicles. This year.
But what has transpired with I'd say, the lack of new car supply from the chip shortage and high retail demand driven in part by economic stimulus, there's been a sort of a mismatch between consumer demand in our new car supply, which has led to a very very significant depreciation of the used car.
<unk>.
And what that is training.
The led to is.
You know a lot of vehicles and equity, which means less he is less likely to return them.
When they are returned very very high conversions on the upstream platform. So for example, open lane and again, we've got a lot of share here had its all time record high quarterly conversion of off lease vehicles within the Q1 and if anything it has strengthened since then so conversion rates upstream very very high their stores counters transactions for us, but they're not you know.
They're not as lucrative let's say of downstream transactions in that segment.
<unk>.
Craig I think the first thing that needs to happen is we need to see some return to more normal on the new car production site.
And you guys have probably as much of data around that as I have but it's something we continue to watch closely and talk to our customers about so returned to more normal new car production and probably a return to some of the stimulus having made its way through the economy and a return to more normal.
Economic environment as well it would probably be of positive in my view for our business. So the timeline on that I'm, not making firm predictions, but I do think these are temporary phenomena.
There still are a lot of off lease vehicles on our captive finance companies books, which now extends out another three years into the future we have visibility into that so those vehicles are there we expect to see repossessions returned to normal overtime. They are still below normal and we've got high market share on the repossession category and.
And rental cars, I think will take a little longer.
It'll take time for US I think people are starting to travel I I've heard rental companies are back.
The fleeting buying into fleets again, but it'll take a period of time for those vehicles twinge of remarketing space.
So anyway, that's for all of those reasons as I said, we're continuing to be prudent about our expectations of managing our costs in all of the things I talked about in my remarks.
That's great and Eric if I could follow up with you from a capital allocation standpoint could you put brackets around the amount of capital you'd be willing to deploy for share repurchase.
Well, Greg the the bracket I'll put around it as we have of $210 million authorization by our board of directors. So that frames, what we would be authorized to do.
But that's over a period of time.
Great. Thank you.
Thank you Craig.
Thank you next.
The next question comes from the line of Daniel in Peru.
Fencing cooperation your line is open.
Yeah, Hey, good morning, guys. Thanks for taking my question and Peter I'll add my congratulations on the new role.
I wanted to start on the guidance.
Just to clarify so did the original guidance include the $17 million gain on investment you called out in the quarter and if not I think Peter on your prepared remarks, you mentioned a few times you expect supply will remain constrained for the rest of the year. So if we back out the 17 million can you maybe talk about what's going to drive the implied.
To get to the full year of $475 million and adjusted EBITDA.
Daniel.
We were we were aware of the gains we had on these transactions and we did expect to realize some gain in the current year that would become adjusted EBITDA in the form of cash.
Which is in part why we said at least $475 million, we don't know how much it will be how much we will realize in cash throughout the year of that 43 million that remains.
Unrealized so so again the nature of our guidance, we did not give on upper end of this but there was a contemplation there would be some gains and net number.
Relative to the ramp again.
We don't give quarterly guidance I would suggest that we continue to believe we can run of very profitable business with strong unit economics, the current supply environment.
If it were to continue through the end of the year, Peter and I've talked about this at length would permit us to achieve.
$475 million or better adjusted EBITDA without without seeing a recovery in supply back to two improved levels over what we see today.
It will be a tough road for anybody in this environment, but we're up to it.
Got it and then just to clarify on that the last year were there any gains on investment in that EBITDA number or not.
No if they were they would've been less than $1 million or something.
Okay.
You know you know Daniel I'll, just comment the recent activity with Ipos in Spacs has caused some some of our.
Small investments to become public enterprises, that's what's causing this not.
Anything else.
Okay got it that's helpful. On the guide and then just on the backlog card you touched on the earlier, Peter but I'd be curious how our dealers responding to your change in the auction format. You went from a timed auction or 24, seven kind of three day bid platform can you maybe talk about the the dealer reception to that whether it's driving more bids per car of kind of what you're getting.
The net proceeds and then have you seen any competitive response to your removal of the seller fee I think trade rate of removed the seller being late last year. Obviously backlog of course has no stellar free can you maybe talk about any competitive response to that.
Yeah. Good question Daniel Thank you.
I guess first of all I'll say you know we saw extremely strong performance in both the trade Rep in Canada in backlog in the U S. In Q1, both in terms of the total volumes on growth.
So pleased pleased with both.
On.
You know, yes, the backlog of cars format is different and you mentioned the three day cycle. It is in theory, a three day cycle plus vehicles typically sell in of about 24 hours. Okay. So it's a really of one day to convert the cars into the vehicles into cash.
The backlog started I would say in the lower value of segments of the market, which I actually think of the good place to start as of the digital disruptor.
So has our analyst analysis of the data says backlog delivers extremely strong performance on that lower value sub 7500 dollar of vehicle, let's say.
But we're also seeing with the integration of trade Rev. The average price.
Sale price of cars on the backlog has now started to go upmarket to the.
On materially higher number while maintaining really really strong conversion rates I think that is another feature of backlog. The conversion rate is absolutely higher materially higher than it was on trade Rev. So I really look at the conversion rate of the key success factor for both the buyer on the seller. If you think about what those customers want both of them on very very strong conversion.
The rates and we're delivering that.
And I think that feeds into the customer feedback being very very strong and I mentioned that I mentioned that earlier in terms of competitive response to the pricing model.
Aye.
You know I haven't seen a sort of of direct response I know our competitors are in market with their own offers on their own programs and that's kind of their business, we're kind of focused on our business.
But we have again as I said, we feel good about the model we have we feel great about the customer feedback, we're getting and we're excited to continue the to continue to grow this business going forward.
Great. Thanks, guys best of luck.
And Jay we have time for one more question and then Unfortunately, we ran long day, but but we'll take one more question and follow up with anybody who is on the call who doesn't get their question.
Thank you for our last question comes from the line of Bob <unk> of CJS Securities. Your line is open.
Good morning, and thanks for getting to my question I'll try to be quick.
The.
Gross profit dollar per unit of $2 60 for you quoted as a record as far as we can tell looking back quarterly for seven or more years.
But there obviously, it's been significant volatility in the metric and Eric you pointed out Q4 versus Q1, I was hoping you could kind of go back and clarify.
Some of the volatility and then the question is is the $2 60 for $2 60 to $2 70, or whatever that a reasonable number going forward to expect for gross profit dollars per unit.
Good question, Bob and you've gone further back in your analysis and I have but it is a strong number even though on the shorter timeframe that I've looked at so so yes. Good observation. It is a strong number it was helped by strong conversion rates in Q1 tight supply environment strong conversion rates helps gross profit cost even with that I think there is a focus on gross.
The focus on managing direct cost and <unk>.
You know I would.
I would like us to try to seek to maintain and maybe ultimately grow but I'd say something in the $2 50 to $2 65 range is a good range of good performing range for our business.
On.
And I do think some of the volatility.
Of prior quarters.
Obviously, some one off situations in various quarters, but I think we've got maybe greater opportunity looking ahead to manage this number more closely I think of digital model gives us maybe a greater opportunity to scale our cost of.
Up or down more quickly with volume and manage the gross profit more effectively so we're focused on doing that and that's one of the reasons I view it as a key metric for the business.
And Bob if I could add a little flavor the third quarter of last year. I think we were at $2 49 is the number I recall that was also much higher than we normally have we're sustaining that mix does impact the number of little bit which is why of $2 55 may be just a stronger performance as of 269 or $2 60.
For another quarter as it relates to the number of cars sold when that denominator gets bigger it will change it but the mixture will be strong and we expect it to be stronger than what you saw over the seven year period prior to the third quarter of last year.
Okay, Great and then just looking forward on a long term basis the last one promise.
How should gross profit per dollar per per.
Cool.
Change as the mix goes to more off premise for some kind of sand in the short term on it in the long term how does that impact how does the mix shift impact gross profit per vehicle.
Yes.
Bob as I mentioned, you know the revenue structure is different in both of those but also the cost structure. So I think managing the gross profit per car sold an important metric for us and the kind of speaks to a whole bunch of of factors. How we're managing the revenue profile on both sides of that mix on how we're managing the cost structure on both sides of that mix and I think.
I think we will be able to do that I would say that when I think of the digital off premise model.
Scale becomes really important and I think of scale you get on a number of as we see this in digital marketplaces across multiple industries.
When you get to scale you get improved.
Economics improved unit economics, increasing returns to scale, both on the revenue side and on the the direct cost side of that so I don't think that our current gross profit per car in the.
Digital off premise model, even though it is strong I don't think that is where it'll be in the long term assuming we can continue to gain scale and have a strong market position I think we'll be able to improve that number over time and that'll be favorable.
To the statistics and Peter I'll add the commented there's a real focus on attachment rates of all of our services. That's what's going to help drive that number up we do not include the AFC gross profit in that number I want to be clear and that's one of the things. We think we're going on but all of the other services do end up.
And as they generate gross profit whether it would be for the buyer who acquires of car online and has us recondition. It transportation all creates opportunities for us to continue growing profit and not adding on additional car sold so that's how the attach rate will be a key contributor of this right. Peter that's a very good point, Eric that's a very good point.
So.
Well. Thank you Bob for that so I think we're at closing remarks, So Jay will take will have to not take any more questions.
Okay St. So.
Thank you Jay on thank you, ladies and gentlemen for your time this morning of for your questions.
On a personal note it is a real privilege to takeover from Jim of CEO of car global and to have the opportunity. The lead what is of Great company I'm excited about the opportunity ahead for our company for our shareholders and for our employees.
I am looking forward to get to know you better and hopefully getting to meet many of you at some point on Eric mentioned drop coming analyst day that would be a good opportunity to start to do that.
Just want to close out of my remarks. This morning on just reinforce what I am going to be focused on.
On the coming months here.
The first of all for a digital marketplace business.
I'm going to be focused on building out our platforms our capabilities on our skill sets to be of true digital marketplace leader when it comes to the wholesale used vehicle category.
Secondly, we have a significant opportunity in front of us with the growth on or off premise volumes, we will seek to build on the strong volume and growth rate that we demonstrated in the first quarter.
And third on focused on simplifying our business, making it easier for investors to understand making it easier for our customers to understand and engage with and also of matching our cost to of volumes and the mix shifts and making sure. We continue to demonstrate strong unit economics and strong overall performance going forward.
So with that we'll end this morning's call. Thank you all very much.
And again, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a great day.
Okay.
[music].
Yes.