Q4 2021 KAR Auction Services Inc Earnings Call
Speaker 1: Ladies and gentlemen, your conference is scheduled to begin momentarily. Please continue to stand by and thank you for your patience.
Ladies and gentlemen, your conference is scheduled to begin momentarily. Please continue to standby and thank you for your patience.
[music].
Speaker 2: ["Pomp and Circumstance"] ["Pomp and Circumstance"]
Speaker 2: The.
Speaker 1: Good day, and thank you for standing by. Welcome to the Car Auction Services Incorporated fourth quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
Good day, and thank you for standing by walking through the car auction services incorporated fourth quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
Speaker 1: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you would.
Speaker 1: If you require any further assistance, please press star zero.
Require any further assistance. Please press star zero I would now like to hand, the conference over to Mike Eliason, Treasurer, and Vice President of Investor Relations. Please go ahead.
Speaker 1: I would now like to hand the conference over to Mike Eliason, Treasurer and Vice President of Investor Relations. Please go ahead.
Speaker 3: Thanks, Norma. Good morning, and thank you for joining us today for the CAR Global fourth quarter 2021 earnings conference call. Today, we'll discuss the financial performance of CAR Global for the quarter ended December 31st, 2021. After concluding our commentary, we will take questions from participants.
Thanks, Nova.
Morning, and thank you for joining us today for the car Global fourth quarter 2021 earnings Conference call today, we'll discuss the financial performance of Carb Global for the quarter ended December 31 2021.
Including our commentary we will take questions from participants before peer 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 Reform Act of 1995 investors.
Speaker 3: Before Pierre 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 are cautioned that such forward-looking statements involve risks and uncertainties that may affect CARA's business, prospects, and results of operations. And such risks are fully detailed in our SAC filing.
Investors are cautioned that such forward looking statements involve risks and uncertainties that may affect kars business prospects and results of operations and such risks are fully detailed in our SEC filings.
Speaker 3: In providing forward-looking statements, the company expressly disclaims any obligation to update these statements.
Providing forward looking statements the company expressly disclaims any obligation to update these statements.
Speaker 3: Let me also mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial accounts.
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.
Speaker 3: reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued yesterday, which is also available in the investor relations section of our website.
For 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.
Speaker 3: Now I'd like to turn this car over to CAR Global CEO Peter Kelly. Hi, Peter.
Now I'd like to turn this car over two car global CEO , Peter Kelly Peter.
Speaker 4: Thank you, Mike. And good morning, ladies and gentlemen, I'm delighted to be here this morning with all of you to provide an update on our performance at car global. So, this morning's call, I plan to speak about our.
You, Mike and good morning, ladies and gentlemen, I'm delighted to be here. This morning, with all of you to provide an update on our performance of car globally.
So on this morning's call I plan to speak about our fourth quarter results.
Speaker 4: I will provide an update on volume trends in our industry, particularly volumes from commercial sellers.
We'll provide an update on volume trends in our industry, particularly volumes from commercial sellers will.
Speaker 4: or provide updates on the continued growth of our Dieter-to-Dieter business, and specifically, our record quarter in the Dieter off-premise volume sold. Our record quarter in Dieter off-premise volume sold on our digital platform.
I will provide updates on the continued growth of our dealer to dealer business and specifically our record quarter in the dealer off premise volumes. So a record quarter in dealer off premise volumes sold on our digital platforms.
Speaker 4: I will also provide an update on our acquisition of CarWave and the solid performance of our finance business, AFC. I will close out with some updates on our cost structure.
I will also provide an update on our acquisition of Kerr ways and the solid performance of our finance business AFC.
I'll close out with some updates on our cost structure.
So I'll start with an update on our fourth quarter performance.
While commercial center volumes remained a challenge in Q4 I was pleased with our performance in the face of that challenge.
Speaker 4: While commercial seller volumes remained a challenge in Q4, I was pleased with our performance in the face of that challenge. We achieved the following.
We achieved the following results in the quarter.
Speaker 4: For car overall, we generated $549 million in revenue. That was an increase of 4% from Q4 of 2020.
Overall, we generated $549 million in revenue that was an increase of 4% from Q4 of 2020.
Speaker 4: We generate a total growth profit of 226M dollars, an increase of 11% from Q4 of the prior year, and this growth profit represented 49.7% of revenue, excluding purchase vehicles or net revenue.
We generated a total gross profit of $226 million, an increase of 11% from Q4 of the prior year.
And this gross profit represented 49, 7% of revenue excluding purchased vehicles, our net revenue.
Speaker 4: We generated $97.9 million of adjusted EBITDA. That was an increase of 45% from the same quarter prior year.
We generated $97 9 million of adjusted EBITDA that was an increase of 45% from the same quarter prior year.
Speaker 4: Cash generated from operations for the quarter was $61 million, and for the full year, cash generated from operations was $413 million.
Cash generated from operations for the quarter was $61 million.
For the full year cash generated from operations was 400 $413 million.
Speaker 4: Within the ADESA segment, we facilitated the sale of 543,000 vehicles, representing over $9 billion in gross auction proceeds.
Within the ADESA segment, we facilitated the sale of 543000 vehicles, representing over $9 billion in gross auction proceeds.
Those volumes were down 20% versus Q4 of the prior year.
Speaker 4: Those volumes were down 20% versus Q4 of the prior year, and this was driven mainly by the continued strain on commercial seller volumes, which were down 44% versus Q4 of the prior year.
This was driven mainly by the continued strain on commercial center volumes, which were down 44% versus Q4 of the prior year.
Speaker 4: In our dealer-consigned business, however, volumes increased by 34% versus Q4 of the prior year, driven by strong double-digit growth in our digital dealer-to-dealer platform.
And our dealer consigned business, however volumes increased by 34% versus Q4 of the prior year.
Driven by strong double digit growth in our digital dealer to dealer platforms.
Speaker 4: 53% of our total sales in Q4 were from off-premise locations.
53% of our total sales in Q4 were from off premise locations.
We sold 141000.
Speaker 4: We sold 141,000 off-premise feeder vehicles in our digital channels. This is our highest single quarter to date for this measure.
Off premise dealer vehicles in our digital channels.
This is our highest single quarter to date for this metric.
Speaker 4: In fact, off-premise dealer transactions represented over 50% of our total dealer compliance transactions for the first time ever.
In fact off premise dealer transactions represented over 50% of our total dealer consignment transactions for the first time ever.
Speaker 4: And that is an important milestone in our ongoing digital transformation here at CARB.
And that is an important milestone in our ongoing digital transformation of your car.
Speaker 4: Across the Odessa segments, we generated $297 in gross profit per vehicle sold.
Across the ADESA segment, we generated $297 and gross profit per vehicle sold.
Speaker 4: This is also our best results with that metric in any quarter to date.
This is also our best results with that metric in any quarter to date.
This was higher than our gross profit per vehicle generated in the first half of 2021 and nearly 30% greater than the same quarter Q4 of 2020.
Speaker 4: This was higher than our gross profit per vehicle generated in the first half of 2021 and nearly 30% greater than the same quarter Q4 of 2020.
I continue to be pleased with the performance and continued growth of our AFC business segments.
Speaker 4: I continue to be pleased with the performance and continued growth of our AFC business segment.
Speaker 4: AFC had 342,000 loan transactions in the fourth quarter. That was a 5% increase versus the same quarter per year. And that was also in line with levels that we had expected.
AFC had 342000 loan transactions in the fourth quarter that was a 5% increase versus same quarter prior year.
And that was also in line with levels that we had expected.
Revenue per loan transaction was 25% higher than Q4 of prior year at $232 for the quarter.
Speaker 4: Revenue per loan transaction was 25% higher than Q4 of prior year at $232 for the quarter.
Key drivers of this were higher vehicle values and solid management of credit risk.
Speaker 4: Key drivers of this were higher vehicle values and solid management of credit risk.
So I'd like to turn to speak to the supply dynamics of used vehicles within our marketplaces, particularly those from commercial service.
Speaker 4: So I'd like to turn and speak to the supply dynamics of used vehicles within our marketplaces, particularly those from commercial sellers.
So as with the prior quarter, our volume challenge in Q4.
Speaker 4: So as with the prior quarter, our volume challenge in Q4 was principally tied to the lack of commercial seller volumes across our various markets.
Was principally tied to the lack of commercial center volumes across the various marketplaces.
Speaker 4: I believe that we're still at the bottom in terms of the disruption with supply of all these vehicles and rental vehicles at physical options across our industry at all time, low levels in both categories.
I believe that we're still at the bottom in terms of the disruption with supply of off lease vehicles and rental vehicles at physical auction across our industry at all time low levels in both categories.
Speaker 4: Most meaningful to CAR is the disruption in all police volumes, which historically have represented approximately 60% of our total commercial center volume.
Meaningful to car has the disruption in off lease volumes, which historically have represented approximately 60% of our total commercial center volumes.
Speaker 4: Volume of repossessed vehicles also remained below normal, but have remained relatively stable at about 60 to 70 percent of normal levels.
Volume of repossessed vehicles also remain below normal.
But have remained relatively stable at about 60% to 70% of normal levels.
Although volumes remain under pressure our analysts our analysis of the quarter's result indicates that we've maintained our market share with commercial sellers and in fact, we have slightly increased share with some customers.
Speaker 4: Although volumes remain under pressure, our analysis of the quarter's results indicates that we've maintained our market share with commercial sellers, and in fact, we have slightly increased share with some companies.
Speaker 4: I believe that we're now starting to see the 1st evidence of the ingredients that are necessary for an improvement in volume in the commercial center category.
I believe that we're now starting to see the first evidence of the ingredients that are necessary for an improvement in volume from the commercial center category.
To start with we are beginning to see a modest increase in new vehicle production with an 11% increase in new vehicle production during Q4 within the NAFTA region versus Q3.
Speaker 4: To start with, we're beginning to see a modest increase in new vehicle production with an 11% increase in new vehicle production during Q4 within the NAFTA region versus Q3.
I take that as a positive sign.
This increased production is being reflected in a modest increase in new vehicle inventory at automotive dealerships.
Speaker 4: This increased production is being reflected in a modest increase in new vehicle inventory at automotive dealerships.
Speaker 4: And while it's still well below historical levels, new vehicle inventory at dealerships increased by a little over 22% from the end of September to the end of January per industry reports. And again, I think that is a positive sign.
And while it's still well below historical levels, new vehicle inventory of dealerships increased by a little over 22% from the end of September to the end of January per industry reports and again I think that is a positive sign.
Speaker 4: We believe that this increased supply of new vehicles will ultimately drive a decline in the price of used vehicles, which, as you all know, have been very elevated over the past nine months.
We believe that this increased supply of new vehicles will ultimately drive a decline in the price of used vehicles, which as you all know have been very elevated over the past nine months.
Speaker 4: We are starting to see some evidence of this happening, and the start of 2022 has been characterized by a weaker pricing environment than we've seen in prior years.
We're starting to see some evidence of this happening and the start of 2022 has been characterized by a weaker pricing environment than we've seen in prior years and.
Speaker 4: In fact, per the Black Book report, used vehicle values have weakened for the past seven consecutive weeks, and yesterday's report indicated that the downward trend has accelerated over the past week, and I would just say that this is quite unusual for this time of year in our industry.
In fact per the Black book reports used vehicle values have weakened for the past seven consecutive weeks and yesterday's report indicated that the downward trend has accelerated over the past week and I would just say that this is quite unusual for this time of year in our industry.
Given the high valuation levels of used vehicles right now I expect values to continue to weaken over time, although I expect it may take some time for those prices to revert to what we would consider to be more normal levels.
Speaker 4: Given the high valuation levels of used vehicles right now, I expect values to continue to weaken over time, although I expect it may take some time for those prices to revert to what we would consider to be more normal levels.
A declining pricing environment is often characterized by lower conversion rates as buyers refused to step up and pay the higher prices et cetera have become accustomed together.
Speaker 4: A declining pricing environment is often characterised by lower conversion rates as buyers refuse to step up and pay the higher prices that sellers have become accustomed to getting.
Speaker 4: And while lower conversion rates can cause some short-term pressure on gross profit, the long-term gain for car, in terms of increased volume sold from commercial sellers within our marketplaces, is very significant.
And while lower conversion rates can cause some short term pressure on gross profit the long term gain for car in terms of increased volumes sold from commercial sellers within our marketplaces is very significant.
From various discussions with our customers in the off lease repossession and rental segment's most have signaled that they expect to re market more vehicles in the second half of 2022 and it did in the second half of 2021.
Speaker 4: From various discussions with our customers in the off-lease, repossession and rental segments, most have signaled that they expect to remarket more vehicles in the second half of 2022 than they did in the second half of 2021.
So in summary, we expect for the current commercial center volume constraints will continue through much of the first half of this year, we expect to see a modest improvement in the second half.
Speaker 4: So in summary, we expect that the current commercial seller volume constraints will continue to much of the first half of this year, but we expect to see a modest improvement in the second half. We expect to see an acceleration in that volume recovery in 2023 and beyond.
We expect to see an acceleration of that volume recovery in 2023 and beyond <unk> and.
Speaker 4: And again, as I said on prior calls, this would be very positive for CAR given our higher market share with commercial sellers.
And again as I've said on prior calls this will be very positive for car given our higher market share with commercial sellers.
Speaker 4: And supporting this thesis, you know, I read another report yesterday that stated that automotive loan defaults have now increased for seven consecutive months in a row, which is the longest consecutive streak in more than a decade.
And supporting this thesis I read another report yesterday that stated that automotive loan defaults have now increased for seven consecutive months in a row.
Which is the longest consecutive streak in more than a decade.
Speaker 4: If this trend continues, that would also point to an increased supply of repossessed vehicles later this year.
If this trend continues I would also point to an increased supply of repossessed vehicles later this year.
Speaker 4: So I'd like to turn now to provide an update on our progress in the dealer-to-dealer vehicle category.
So I'd like to turn now to provide an update on our progress in the dealer to dealer vehicle category.
Speaker 4: First, if we look at our total dealer, consignment volumes of car, both on premise and off premise combined, we sold 277,000 vehicles in the 4th quarter.
First if we look at our total dealer consignment volumes of car both on premise and off premise combined we sold 277000 vehicles in the fourth quarter.
Speaker 4: That represents an increase of 34% compared to CAR's total liter volume in Q4 of the prior year.
That represents an increase of 34% compared a car's total unit volume in Q4 of the prior year.
Some of that increase is driven by the acquisition of Kerr weight, but I'm pleased that we were able to deliver a meaningful increase even without the <unk> acquisition.
Speaker 4: Some of that increase is driven by the acquisition of Carways, but I'm pleased that we were able to deliver a meaningful increase even without the Carways acquisition, particularly in the light of volume.
Particularly in the light of volume constraints across the industry.
If we look at the theater off premise category only our Q4 volume was 141000 vehicles sold.
Speaker 4: If we look at the dealer off-premise category only, our Q4 volume is 141,000 vehicles sold.
Speaker 4: That's our highest ever quarter total. The comparable metric for Q4 of 2020 was $82,000.
Our highest ever quarter, it's totally the.
Comparable metrics for Q4 of 2020 was 82 paths.
Speaker 4: So we grew our total dealer off-premise volume by 72%, or 20% organic growth if you include backlog cars and car waves within both periods.
So we grew our total dealer off premise volume by 72% or.
20% organic growth. If you include backlog cars and car within both periods.
Speaker 4: If we look at our total dealer off-premise volumes for the year for 2021 overall, we sold 507,000 vehicles. That was an increase of 110% compared to the 241,000 we sold in the prior year. And again, adjusting for acquisitions, the pro forma annual growth rate was 34%.
If we look at our total dealer off premise volumes for the year for 2021 overall, we sold 507000 vehicles that was an increase of 110% compared to the 241000, we sold in the prior year.
And again adjusting for acquisitions, the pro forma annual growth rate was 34%.
Speaker 4: As I mentioned earlier, more than 50% of our total dealer consignment sales in the quarter were represented by off-premise transactions. We expect this percentage to increase.
As I mentioned earlier more than 50% of our total dealer consignment sales in the quarter were represented by off premise transactions.
We expect this percentage to increase further over time.
Speaker 4: In Canada, our trade route business continues to perform very well, delivering strong volumes in a second consecutive quarter of solid profitability.
In Canada, our trade Rep business continued to perform very well delivering strong volumes and a second consecutive quarter of solid profitability.
Speaker 4: with EBITDA per vehicle sold in excess of $100 for the quarter on that platform.
With EBITDA per vehicle sold in excess of $100 for the quarter on that platform.
Speaker 4: This gives me increased confidence in the long-term profitability of the digital off-premise model.
This gives me increased confidence in the long term profitability of the digital off premise model.
Speaker 4: And finally, while my remarks above have been principally focused on our dealer off-premise category, I would also highlight that our dealer on-premise volumes for Q4 increased by 9% versus the same quarter prior year, and increased by 5% for 2021 overall relative to 2020.
And finally, my remarks above have been principally focused on our dealer of off premise category. I would also highlight that our dealer on premise volumes for Q4 increased by 9% versus the same quarter prior year and increased by 5% for 2021 overall relative to 2020.
So I'd like to spend a few moments on the acquisition of <unk>.
We closed on our acquisition in early October we've made good progress with the integration.
Speaker 4: We closed our acquisition in early October . We've made good progress with the integration. Our initial focus has been on harmonizing our buyer and seller policy.
Our initial focus has been on harmonizing, our buyer and seller policies and that will be completed within this quarter.
Speaker 4: And that will be completed within this quarter. We've also been focusing on developing a new enhanced vehicle condition report that combines the best of the carways and backlot inspection reports into one unified format.
We've also been focusing on developing a new enhanced vehicle condition reports that combines the best of the car waves backlog inspection reports into one unified format.
Once those are complete we will then move forward with the platform integration that will leverage the features and functionality from both offerings to provide our sellers and buyers with the best experience possible.
Speaker 4: Once those are complete, we will then move forward with a platform integration that will leverage the features and functionality from both offerings to provide our sellers and buyers with the best experience possible.
Speaker 4: Our teams are currently working on this. It's a high priority initiative for CAHR and we expect to have it complete by the end of the third quarter.
Our teams are currently working on this it is a high priority initiative for car and we expect to have it complete by the end of the third quarter.
I'd like to spend a few moments on AFC.
As I mentioned earlier AFC performed well in Q4 and in 2021 overall.
Speaker 4: As I mentioned earlier, AFC performed well in Q4 and in 2021 overall.
Speaker 4: AFC has been able to grow its business in a disciplined way, and also re-engineers business processes to have a more efficient service delivery for its customers. This has also helped to improve
AFC has been able to grow its business in a disciplined way and also reengineering business processes to have a more efficient service delivery for its customers.
This has also helped to improve margins and profitability.
Speaker 4: AFC continues to experience lower than normal levels of risk driven by current market conditions combined with strong operations.
AFC continues to experience lower than normal levels of risk driven by current market conditions combined with strong operations.
Speaker 4: I expect to see continued strong and steady performance in AFC, given the current environment. Eric will provide further updates on AFC in his remarks.
I expect to see continued strong and steady performance May FC given the current environment.
Rick will provide further updates on AFC in his remarks.
I'd now like to spend a few moments talking about our cost structure.
Speaker 4: On recent earnings calls, and again in our Analyst Day event, we have discussed our strategic focus on reducing our cost structure to reflect our transition to a more digital marketplace business. We continue to make meaningful.
On recent earnings calls and again at our Analyst day event, we have discussed our strategic focus on reducing our cost structure to reflect our transition to a more digital marketplace business we.
We continue to make meaningful progress on that front.
In Q4, we completed our assessment of costs and revenue opportunities relating to four distinct aspects of our business.
Speaker 4: In Q4, we completed our assessment of cost and revenue opportunities relating to four distinct aspects of our business.
Speaker 4: First, accelerating our sales and our go-to-market opportunities. Second, evolving our service operations. Third, focusing our technology.
First accelerating our sales and our go to market opportunities.
Second evolving our service operations.
Third focusing our technology investments.
And finally for managing our SG&A.
So our analysis indicates an opportunity in excess of $200 million 90 life benefits, which is a mix of revenue and monetization, which we believe represents approximately 40% of that total.
Speaker 4: So our analysis indicates an opportunity in excess of $200 million in annualized benefits, which is a mix of revenue and monetization, which we believe represents approximately 40% of that total, and cost side opportunities representing the remaining 60% of that total.
Cost side opportunities, representing the remaining 60% of that total.
Over $100 million of this opportunity would be incremental to the analysis that we presented at our analyst day.
Speaker 4: Over $100 million of this opportunity would be incremental to the analysis that we presented to our analysts.
We have started that implementation process and in Q4 alone we address cost and revenue opportunities that we believe will represents an annualized improvement of approximately $30 million.
Speaker 4: We have started that implementation process, and in Q4 alone, we addressed cost and revenue opportunities that we believe will represent an annualized improvement of approximately $30 million.
Speaker 4: We have many additional initiatives in planning and early execution phases, and we expect to substantially execute these initiatives in 2022 and 2020.
We have many additional initiatives in planning and early execution phases, and we expect to substantially execute these initiatives in 2022 and 2023.
I would say that these initiatives represent a key priority for our business and I will continue to report on our progress in future earnings calls.
Speaker 4: I would say that these initiatives represent a key priority for our business, and I will continue to report on our progress in the future.
Speaker 4: I also want to highlight some of the operational progress we made during the quarter that will continue to contribute to our future performance.
I also want to highlight some of the operational progress we made during the quarter and will continue to contribute to our future performance.
Speaker 4: We continue to focus our technology roadmap on the platforms that are the most strategic to our customers and also represent our highest opportunity for long term growth.
We continue to focus our technology roadmap on the platforms that are the most strategic to our customers and also represents our highest opportunity for long term growth.
Speaker 4: And we're taking active steps to better integrate and increase the attach rates of our supporting services, like financing and transportation with every vehicle transaction.
And we're taking active steps to better integrate and increase increase the attach rates of our supporting services like financing and in transportation with every vehicle transaction.
From discussions with various customers. We also know that some of our customers looking to create more continuity between the retail and wholesale operations.
Speaker 4: From discussions with various customers, we also know that some of our customers are looking to create more continuity between the retail and hotel operation.
Speaker 4: We are well-placed to support our customers in this, and we view these as opportunities to expand and grow our business over time.
We are well placed to support our customers in this and we view these as opportunities to expand and grow our business over time.
Speaker 4: My last point this morning is to speak about 2022 and beyond.
My last point. This morning is to speak about 2022 and beyond.
Speaker 4: As discussed on our last call, it is difficult to predict the supply of vehicles in the wholesale market at this time. We would draw guidance in September , and I believe that we should not provide further guidance until our visibility into those volumes approved.
As discussed on our last call it is difficult to predict the supply of vehicles in the wholesale market at this time we.
We withdrew our guidance in September and I believe that we should not provide further guidance until our visibility into those volumes approves.
Speaker 4: I'm very encouraged by our performance in Q4. I believe that our Q4 results demonstrated that our business was able to deliver a significantly improved operating performance despite the historically low volume.
I am very encouraged by our performance in Q4, I believe that our Q4 results demonstrated their business was able to liberate deliver a significantly improved operating performance. Despite the historically low volumes.
Speaker 4: At the same time, I have to acknowledge that we and our industry are both starting 2022 with lower commercial volume supply than we started 2021.
At the same time I have to acknowledge that we and our industry are both starting 2022 with lower commercial volume supply than we started 2021.
Speaker 4: So those volume headwinds that we saw on Q4 didn't end on December 31st.
So those volume headwinds that we saw in Q4 didn't end on September on December 31.
I wanted to assure our shareholders that we're not just waiting for volume to return we are highly focused on controlling what we can control and delivering strong performance across our business.
Speaker 4: We're highly focused on controlling what we can control and delivering strong performance across our business.
Speaker 4: focusing on maintaining and growing our market share, accelerating our higher growth segments, and transforming our cost structure for a digital future.
Focusing on maintaining and growing our market share accelerating our higher growth segments and transforming our cost structure for a digital future.
The goal is to transform this business in this time of lower volumes. So there's volumes increase it will slow to a more digital and more efficient model and I believe we're making good progress in that.
Speaker 4: The goal is to transform this business in this time of lower volume, so that as volumes increase, they will flow through a more digital and more efficient model, and I believe we're making good progress in that.
Speaker 4: While we're not providing annual guidance on today's call, I believe that the framework for growth, as we presented on our analyst day in September , remains intact.
While we're not providing annual guidance on today's call I believe that the framework for growth as we presented on our analyst day in September remains intact.
Speaker 4: and to repeat some of the key components of what that model represented.
To repeat some of the key components of what that model represented.
Speaker 4: We believe that this business can deliver the following compound annual growth rates viewed over the period 2020 to 2025.
We believe that this business can deliver the following compound annual growth rates viewed over the period 2020 to 2025.
Speaker 4: 7% growth in net revenue, 15% growth in adjusted EBITDA, and over 20% growth in operating adjusted net income per share.
7% growth in net revenue, 16% growth in adjusted EBITDA and over 20% growth in operating adjusted net income per share.
Speaker 4: In addition, we believe that this business can deliver consolidated gross margins of more than 50%, and again, that's it. That's based on a percentage of net revenue. And finally, we expect that this business will continue to deliver strong cash flows, something that has always been a strength of the business.
In addition, we believe that this business can deliver consolidated gross margins of more than 50% and again, that's based on a percentage of net revenue.
And finally, we expect that this business will continue to deliver strong cash flows something that has always been a strength of the business.
So I believe that our analyst day framework for 2025 remains intact and is achievable and it is supported by the following factors.
Speaker 4: So, I believe that our analyst a framework for 2025 remains intact and is achievable and it is supported by the following.
Speaker 4: Firstly, I believe that we're on track to see a recovery in commercial center volumes between now and 2025, consistent with what we presented.
Firstly I believe the foreign track to see a recovery in commercial center volumes between them between now and 2025 consistent with public presented.
Secondly, our volume expectation in the dealer off premise category is to achieve $1 2 million vehicles sold by 2025.
Speaker 4: Secondly, our volume expectation in the dealer off-premise category is to achieve 1.2 million vehicles sold by 2025.
Speaker 4: That is approximately double our Q4 volume on an annualized
That is approximately double our Q4 volume on an annualized basis.
Speaker 4: This part of our business is a strong forward momentum and growth rate, and I believe that doubling that business over the next four years is achievable.
This part of our business is a strong forward momentum and growth rate and I believe the doubling that business over the next four years is achievable.
Speaker 4: Third, our gross profit per vehicle sold, which was $297 in the fourth quarter, was maturely higher than the 272 that we modeled into our 2025 and Analyst Day framework.
Third our gross profit per vehicle sold which was $297 in the fourth quarter was materially higher than the $2 72 that we modeled into our 2025 and analyst day framework.
So it may be possible that because of some long term upside on this important metric that will drive performance.
Speaker 4: So it may be possible that we could have some long-term upside on this important metric that will drive performance.
And finally as I mentioned on this call are opportunity for cost and efficiency improvements exceeds the amount that we had modeled into our analyst day models.
Speaker 4: And finally, as I mentioned on this call, our opportunity for cost and efficiency improvements exceeds the amount that we had modelled into our analyst day model.
So to summarize my key messages for today I was pleased with our Q4 results, which were delivered in the face of an unprecedented challenge with commercial center volumes.
Speaker 4: So to summarise my key messages for today, I was pleased with our 2-4 results which were delivered in the face of an unprecedented challenge with commercial seller volume.
Speaker 4: We delivered our best ever quarterly performance in terms of gross profit per vehicle sold.
We delivered our best ever quarterly performance in terms of gross profit per vehicle sold.
Speaker 4: We increased our adjusted EBITDA by 45% versus 2.4% of the prior year, despite 20% lower volume.
We increased our adjusted EBITDA by 45% versus Q4 of the prior year, despite 20% lower volume.
Speaker 4: We had our best quarter yet in dealer off-premise transactions, and for the year, we sold over half a million dealer-confined vehicles in our dealer off-premise channels.
We had our best quarter, yet and Dieter off premise transactions and for the year, we sold over half a million dollar combined vehicles in our dealer off premise channels.
Our AFC business continued to perform at a very high level.
Speaker 4: Our assessment of the cost opportunities exceeds that which we previously communicated. We have started to take action on those opportunities and there is more to come.
Our assessment of the cost opportunities exceeds that which we've previously communicated we have started to take action on those opportunities and there is more to come.
Speaker 4: And finally, we're one quarter closer to the volume recovery that we know will come and we're starting to see the first evidence of the ingredients that are necessary for that volume recovery.
And finally, we are one quarter closer to the volume recovery that we know will come and we're starting to see the first evidence of the ingredients that are necessary for that volume recovery.
Such as increases in new vehicle production increases in dealer inventory and declines in used vehicle pricing.
Speaker 4: such as increases in new vehicle production, increases in dealer inventory, and declines in used vehicle production.
Speaker 4: When those volumes do return, we will be better positioned than we have ever been to support our customers and deliver a strong operating and financial performance at Cargoble.
When those volumes do return, we will be better positioned than we have ever been to support our customers and deliver a strong operating and financial performance of our global.
Speaker 4: With that, Eric will now provide a more detailed review of the financial results for the quarter and 2021 overall. Eric.
With that Eric will now provide a more detailed review of the financial results for the quarter and 2021 overall Eric.
Thank you Peter.
Speaker 3: As Peter has already commented on many of our financial metrics and performance in the fourth quarter, I have only a couple of additional areas to review.
As Peter has already commented on many of our financial metrics and performance in the fourth quarter I have only a couple of additional areas to review.
Speaker 3: Let me start by recapping our full year performance for 2021.
Let me start by recapping, our full year performance for 2021.
Speaker 3: As we have discussed all year, supply constraints have limited volumes for us and all others in the wholesale remarketing industry. For car, we sold 2.6 million vehicles in our various marketplaces.
As we have discussed all year supply constraints have limited volumes for us and all others in the wholesale remarketing industry for car, we sold $2 6 million vehicles in our various marketplaces.
Speaker 3: Off-premise transactions represented 53% of all transactions executed by CAR through its ADESA entity.
Premise transactions represented 53% of all transactions executed by car through its ADESA entities.
Speaker 3: Strong used car pricing led to a 10% increase in average transaction value for the year. Increased vehicle values combined with targeted fee increases during the year led to a 17% increase in average auction fees per transaction.
Strong used car pricing led to a 10% increase in average transaction value for the year any.
Increased vehicle values combined with targeted fee increases during the year led to a 17% increase in average auction fees per transaction.
Speaker 3: This increase in auction fees per transaction is net of a decline in this metric for the commercial off-premise segment of our business.
This increase in auction based or transaction is net of a decline in this metric for the commercial off premise segment of our business.
While increased used car values contribute to higher occupancies on the majority of our platforms. The one exception is the private label transactions for our commercial sellers, where the fees are generally fixed and used car values did not impact that these schedules.
Speaker 3: While increased used car values contribute to higher auction fees on a majority of our platforms, the one exception is the private label transactions for our commercial sellers, where the fees are generally fixed and used car values do not impact the fee schedule.
Speaker 3: Because of the volume challenges, our 2021 performance was also challenging. Total revenue excluding 2021 acquired businesses was down 3.5%.
Because of the volume challenges. Our 2021 performance was also challenging total revenue excluding 2021 acquired businesses was down three 5%.
Speaker 3: Control of expenses did allow us to generate improved gross profit, increasing our gross profit as a percent of net revenue to 50.8% on a consolidated basis.
Control of expenses did allow us to generate improved gross profit increasing our gross profit as a percent of net revenue to 58% on a consolidated basis.
Speaker 3: This drove an increase in our adjusted EBITDA for 2021 to $434 million, up from $375 million in the prior year.
This drove an increase in our adjusted EBITDA for 2000 $21 million to $434 million.
Up from $375 million in the prior year to.
Speaker 3: To be clear, adjusted EBITDA for 2021 includes $32 million of realized gains on the sale of our stock held as part of strategic relationships with certain customers.
To be clear adjusted EBITDA for 2021 includes $32 million of realized gains on the sale of our stock held as part of our strategic relationships with certain customers.
Speaker 3: As a reminder, we have invested in a small number of private auto-related enterprises. When these enterprises go public, it is our practice to monetize our investment.
As a reminder, we have invested in a small number of private auto related enterprises. When these enterprises go public it is our practice to monetize our investments.
In summary, 2021 was an interesting year.
Speaker 3: In summary, 2021 was an interesting year. Early in 2021, we provided an outlook for the year that contemplated the beginning of a recovery of the wholesale marketplaces in the second half of the year. What actually happened is the conditions in the wholesale marketplace worsened in the second half of the year.
Early in 2021, we provided an outlook for the year that contemplated at the beginning of a recovery of the wholesale marketplaces in the second half of the year, what actually happened is the conditions in the wholesale marketplace worsen in the second half of the year.
Speaker 3: We identified this change in expectations in the third quarter and withdrew guidance in September . Given the hand we were dealt, I am pleased.
We identified this change in expectations in the third quarter and withdrew guidance in September .
Given the hand, we were dealt I am pleased with our performance we increased gross profit per vehicle sold to $2 77 from $2 33 in the prior year, we decreased SG&A of 11% year over year, excluding the $77 million of SG&A added from acquired businesses and.
Speaker 3: We increased gross profit for vehicles sold to $277 from $233 in the prior year. We decreased SG&A 11% year-over-year, excluding the $77 million of SG&A added from acquired business.
Speaker 3: And our company generated 413 million of cash from operations in 2021, an increase of 7.5% from the prior year.
And our company generated $413 million of cash from operations in 2021, an increase of seven 5% from the prior year.
Speaker 3: In terms of capital allocation activities in 2021, let me summarize the significant items.
In terms of capital allocation activities in 2021, let me summarize the significant items, we allocated $522 million to business acquisitions. This includes car ways and auction frontier.
Speaker 3: We allocated $522 million to business acquisitions. This includes CarWave and Auction Frontier. We also repurchased $181 million in car stock during the first half of the year.
We also repurchased $181 million in car stock during the first half of the year.
Speaker 3: Our capital expenditures aggregated $109 million for the year. And in working capital, we used $194 million of cash generated from operations to invest in the growth of the AFC portfolio. This is the increase in equity in our four-plan loan.
Our capital expenditures aggregated $109 million for the year.
And in working capital, we used $194 million of cash generated from operations to invest in the growth of the AFC portfolio.
This is the increase in equity in our floor plan loans.
Our senior secured leverage ratio is at 176 times and our total net leverage ratio is 396 times adjusted EBITDA.
Speaker 3: Our senior secured leverage ratio is at 1.76 times, and our total net leverage ratio is 3.96 times adjusted EBITDA.
Our leverage target continues to be total net leverage of three times or less.
Speaker 3: Our leverage target continues to be total net leverage of three times or less.
Speaker 3: Our leverage increased when we used available cash to complete the acquisition of CarWave in the fourth quarter. We have a $325 million revolving line of credit available for any short-term cash needs that arise during the year. Before I finish, I want to
Our leverage increased when we used available cash to complete the acquisition of Kerr wave in the fourth quarter, we have a $325 million revolving line of credit available for any short term cash needs that arise during the year.
Before I finish I want to comment further on AFC performance.
Speaker 3: We are clearly benefiting from strong retail use car demand, strong used car pricing, and a low risk credit environment.
We're clearly benefiting from strong retail used car demand strong used car pricing and a low risk credit environment.
Speaker 3: AFC's performance exceeded our expectations for the year. We had net bad debt expense of $3.5 million for the year. This was $16 million in provision for losses, offset by $12.5 million of recoveries of previously written off receivables.
AFC performance exceeded our expectations for the year, we had net bad debt expense of $3 $5 million for the year This was $16 million and provision for losses.
Offset by $12 $5 million of recoveries of previously written off receivables.
Speaker 3: As a reminder, we obtain personal guarantees from substantially all of our borrowers at AFC. When a loss is incurred and the full loan balance is not repaid, we enter judgments against the principles of the dealership to document our rights to personal assets.
As a reminder, we obtain personal guarantees from substantially all of our borrowers at AFC when our losses incurred in the full loan balances not repaid we entered judgment against the principles of the dealership to document our rights to personal assets.
Speaker 3: In many cases, we recover all or a portion of these judgments at a later date.
In many cases, we recover all or a portion of these judgments at a later date.
These recoveries are routine for this business, even though they are unpredictable.
Speaker 3: These recoveries are routine for this business, even though they are unpredictable.
As I look forward to a recovery in volumes in future years, I believe AFC will contribute a lower percent of cars total adjusted EBITDA than it did in 2021, I expect used car values to gradually decline interest rates to increase and as a result of the current operating environment, we will have fewer bad debts to recover in the future. This.
Speaker 3: As I look forward to a recovery in volumes in future years, I believe AFC will contribute a lower percent of cars' total adjusted EBITDA than it did in 2021. I expect used car values to gradually decline, interest rates to increase, and as a result of the current operating environment, we will have fewer bad deaths to recover in the future. This could contribute to lower growth in adjusted EBITDA at AFC when compared to the growth rate we expect at a deficit.
Contribute to lower growth in adjusted EBITDA at AFC, when compared to the growth rate, we expect that of desktop.
Speaker 3: In conclusion, our cost structure has improved over the last two years and we are well positioned for the future. I must admit I am looking forward to the recovery of the used car marketplace to begin. I continue to be confident we can achieve the goals we have set for 2025. While we would prefer to see some signs of recovery earlier than is happening, nothing has changed in our outlook at this time.
In conclusion, our cost structure has improved over the last few years and we are well positioned for the future I must admit I am looking forward to the recovery of the used car marketplace to begin I continue to be covenant, we can achieve the goals we have set for 2025.
While we would prefer to see some signs of recovery earlier than its happening nothing has changed in our outlook at this time.
Speaker 3: I have one housekeeping item before we go to Q&A. I expect to file our 10K early next week. Because Monday is a holiday, I wanted to give you a heads up so you don't think there was some unexpected delay.
I have one housekeeping item before we go to Q&A.
I expect to file our 10-K early next week, because Monday is a holiday I wanted to give you a heads up. So you don't think there was some unexpected delays.
Speaker 3: So that concludes my remarks, and I'll turn it back to our operator, Norma, to begin Q and A. Thank you.
So that concludes my remarks, and I'll turn it back to our operator Norma to begin Q&A. Thank you.
Speaker 1: As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, please press the pound key.
Thank you as a reminder to ask a question will need to press star wondering your telephone to withdraw.
Your question. Please press the pound key please standby, while we compile the Q&A roster.
Speaker 1: Your first question comes from John Murphy with Bank of America. Your line is now open.
Our first question comes from John Murphy with Bank of America. Your line is now open.
Hi, good morning, guys.
Speaker 5: Good morning, guys. I just wanted to touch on the cost and execution in the quarter as well as, you know, sort of juxtapose that versus, you know, the dealer and commercial mix. I'm just curious, you know, as you think about, you know, what happened here, there was a very significant, you know, shift in mix with dealer up 34 and commercial down 44. I mean, how much did that impact?
I just wanted to touch on on the cost and execution in the quarter as well as.
So juxtapose that versus the dealer and commercial mix I'm just curious as you think about what.
What happened here there was a very significant shift in mix of dealer up 34 in commercial down down down 44, I mean, how much did that impact.
Speaker 3: margins and your ability to go after cost and how much of your cost cutting was net of that. I mean, it's just kind of all intertwined there, so I'm just trying to understand what mix meant to the business because it's a pretty significant shift along with the cost cutting.
Margins and your ability to go after cost.
Yes.
How much of your cost cutting was net of that is just kind of all intertwined there. So I'm just trying understand what mix meant to the business because it's a pretty significant shift along with the cost cutting.
Speaker 4: Yeah, thank you, John . I'll take a first attempt at that. You're right. There was a lot of different moving pieces. I would say the cost.
Yes. Thank you John I'll take a first attempt at that.
Youre right there was a lot of different moving pieces I would say the cost.
Speaker 4: was generally independent of that phenomenon that you described. Again, if I just think about our business and a commercial seller vehicle, particularly an on-premise commercial vehicle, will tend to have a higher attached rate of services and ultimately, a higher gross profit per vehicle sold relative to a dealer car that in the physical channel, the on-premise channel, doesn't tend to have those services attached to anything like the same rate.
Was generally independent of that.
I'm Gonna that you described.
Again, if I, just think about our business and the commercial seller vehicle, particularly in on premise commercial vehicle will tend to have.
A higher attach rate of services and ultimately a higher gross profit per vehicle sold relative to a dealer car.
In the physical channel the on premise channel it doesn't tend to have those services attached to anything like the same rate. So.
Speaker 4: You know, I'd say the relative decline in commercial seller volume relative to dealer would have put downward pressure on that metric, but obviously the metric was still strong in spite of that. So I think our cost actions were generally independent of that. There was a little bit of, we did adjust some fees in the fourth quarter, so there was some monetization as well reflected in that higher number of 297.
I'd say the the.
Relative decline in commercial seller volume relative to dealer would've put downward pressure on that metric, but obviously the metric was still strong in spite of that so.
So I think our cost actions.
Generally independent of that there was a little bit of we.
Did adjust some fees in the fourth quarter. So there was some monetization of well reflected in that and the higher number of 297.
Speaker 4: But Eric, unless you want to add to that, I'm not.
But Eric unless you want to add to that I'm not.
Speaker 3: No, there was an offset to the decline in commercial volumes and that is the retail reconditioning did grow.
No there wasn't offset to the decline in commercial volumes and that is the retail reconditioning did grow.
Speaker 3: in the fourth quarter and is contributing gross profit but not as much as we would have had in a normal wholesale environment doing reconditioning for the seller. It's still a growing part of our business. And then the other element, John , is the SG&A. Again, most of the direct cost movement we made began in 2020 with the workforce reductions, the fact that we weren't running vehicles through the lane. What we did most recently is really focused more on the SG&A.
In the fourth quarter and is contributing gross profit, but not as much as we would have had in a normal wholesale environment doing reconditioning for the seller, it's still a growing part of our business and then the other element John is the SG&A.
Again, most of the direct cost.
We made began in 2020 with the workforce reductions the fact that we werent running vehicles to one.
What we did most recently is really focus more on the SG&A.
Speaker 3: There was very little cost action, though, supporting the dealer-to-dealer VAT. We maintained our cost structure, and any changes we anticipate in the future are yet to be realized.
There was very little cost action those supporting the dealer to dealer that we maintained our cost structure and any changes we anticipate in the future are yet to be realized in our numbers.
Speaker 5: Okay, that's helpful. I mean, I guess just to follow up, I mean, yeah, my understanding is, I mean, commercially you get higher dollars in gross but lower percent margins, and then on the dealer side you get lower grosses but higher, because it's mostly buy-sell fee, you get higher margins. So that's why it's a little bit confusing, because it's, you know, I mean, you know, you certainly argue that the, you know, the makeshift should have helped your percentage margin but hurt your total, you know, dollar margin. So it just...
Okay. That's helpful. I mean, I guess, just a follow up I mean, I understand I mean, commercial you get higher dollars and gross but lower <unk>.
Margins and then on the dealer side, you get lower grosses, but by higher because it's mostly by selfie you get higher margins. So that's why it's a little bit confusing because it's.
You can certainly argue that.
Mix shift should've helped your percentage margin that hurt you or told total dollar margin. So it just.
Speaker 5: That's kind of why I was asking. And it seems like you probably outperformed that pretty significantly. It just, I'm just trying to get, it seems like the underlying operations did even better than what you're talking about, just based on this mix. And I was just trying to figure that out. We could maybe follow up on that, you know, dig into it a little bit deeper later. On the U.S. And, John , let me clarify one thing. If you look at the numbers, and you can get this in the supplement.
That's why if you guys wanted that's kind of why I was asking it seems like you probably outperformed that pretty significantly.
Im just trying to get at it seems like the underlying operations did even better than what you are talking about just based on this mix and I was just trying to figure that out if we could maybe follow up on that dig into a little bit deeper later.
On the <unk>.
And John Let me clarify one thing if you look at the numbers and you can get this in the supplement.
Speaker 3: the decline in services revenue in the Odessa segment is far less than the impact of commercial volume would normally indicate. That's where and that is the lower margin services revenue and what drove that in part was increases in retail reconditioning.
The decline in services revenue in the ADESA segment is far less than the impact of commercial volume would normally indicate that's where that is the lower margin services revenue and what drove that in part was increases in retail reconditioning.
Speaker 4: Okay, that would add incremental dollars, but that would be at a lower margin.
Yes, okay.
That would add incremental dollars, but that would be at a lower margin than the $49, 50% that we have in the business overall, okay. Okay got you.
Speaker 4: than the 49, 50% that we have in the business overall. Okay? Okay, gotcha. And then just a second on the pricing dynamics. I mean, what is your gauge on used to new pricing right now? Because it just seems like that's, I mean, Peter, it's kind of you alluded to, I mean, that's really a lot. I mean, there's a lot of, you know, there's a desert of actual supply, but then also this jam up of used to new pricing, you know, is creating problems in somewhat in the retail market. And what's
Just checking on.
On the pricing dynamics I mean, what is your gauge on used to new pricing right now because it just seems like that's I mean, you can Peter's kind of you alluded to I mean, thats really a lot I mean, there is a.
Lot of.
Desert of actual supply, but then also theres jam up of used to new pricing.
Is creating problems in somewhat in the retail market I mean, what's what's your relative gauge of used to new pricing at the moment.
Speaker 5: What's your relative gauge of used to new pricing at the moment?
Speaker 4: Well, you know, that is a good, we do look at that index, what percent of.
Well that is a good we do look at that index what percent of.
Speaker 4: a typical new vehicle to use vehicle prices represent and and frankly in the latter part
A typical new vehicle used vehicle prices represent and frankly in the latter part of.
Speaker 4: last year, that percentage was at its all-time high level of, I think, close to 70%. And that is an unsustainable level of used vehicle pricing.
Last year that percentage was at its all time high level of close to 70% and that is an unsustainable level of used vehicle pricing relative to new I think a more typical situations something closer to 60, and sometimes it's below 60% and again, Tom countless once that analysis for us.
Speaker 4: I think a more typical situation is something closer to 60, and sometimes it's below 60. And again, Tom Contos runs that analysis for us.
Speaker 4: Listen, there's different opinions out there on what the trend line on used vehicle pricing is.
Listen there is different opinions out there on what the trend line on used vehicle pricing is.
Speaker 4: I think most analysts are expecting used vehicle values to decline as new vehicles are produced in greater numbers. There's probably different opinions on the rate of decline, some predicting a more steady decline and I guess I lean a little more towards perhaps a more rapid decline and I think we're actually starting to see, you know, certainly a noticeably weaker pricing environment as I mentioned in my remarks this year relative to a typical sort of spring market with, you know, declining used vehicle values.
I think most analysts are expecting used vehicle values to decline as new vehicles are produced in greater numbers.
There is probably different opinions on the rate of decline.
Some some predicting a more steady decline in <unk>.
Yes, hi, lean a little more towards perhaps a more rapid decline on I think we're actually starting to see.
Certainly a noticeably weaker pricing environment as I mentioned in my remarks, this year relative to a typical sort of spring market.
With declining used vehicle values.
Speaker 4: lower conversion rates generally in various marketplaces, not just us but in the industry.
Lower conversion rates generally in various marketplaces, not just us but in the industry.
Speaker 4: Honestly, I think that's a good thing for our business. I think that's something we want to happen. We want these prices to normalize. Getting there, the quicker we can get there, the better in my opinion. But obviously I don't have a perfect view of the future. So, you know, different people have different opinions on the pace of that change.
Honestly I think that's a good thing for our business.
That's something we want to happen we want these prices to normalize.
Getting there the quicker we can get there the better in my opinion.
But obviously I don't have a perfect view of the future so different.
Different people have different opinions on the pace of that change. Okay. And then just one last one you mentioned service evolution as part of the second point in your fourth quarter review I'm, just curious exactly what you meant by that because were coming across as a lot of <unk>.
Speaker 5: One last one, you mentioned service evolution as part of the second point in your fourth quarter review. I'm just curious exactly what you meant by that because what we're coming across is a lot of smaller AV and even non-AV fleet managers that are not so sophisticated that really probably could use some help on the service and maybe local logistics that you guys are very good at. I'm just curious if that's part of the equation or what you really mean by that service evolution and development.
Smaller.
It even non AAV fleet managers that are not so sophisticated that really probably could use some help on the servicing and maybe local logistics that you guys are.
Very good and I'm just curious if that's part of the equation of what you really mean by that service evolution and development.
Speaker 4: Well, Eric, do you want to take that? Yeah. I mean, John , you're right. But when you're talking about actually the bigger players in the industry also have a shortage of service capacity.
Well, Eric you want to take that yes, I mean, John you're right, but when you are talking about actually the bigger players in the industry also have a shortage of service capacity given the used car marketplace. Today. So I would tell you that this has been a plus for ADESA.
Speaker 3: given the used car marketplace today. So I would tell you that this has been a plus for Odessa, in that we have a lot of demand for us to provide services that have always been available, but we're providing it to call it the buyer of the wholesale transaction or the retailer, as opposed to the seller who was the consigner. And I would agree with you, although, again, our capacity seems to be consumed by the larger used car retailers versus the smaller ones right now. Okay, that's all.
And that we have a lot of demand for us to provide services that have always been available, but we're providing it to call. It the buyer of the wholesale transaction or the retailer as opposed to seller, but was the consignor.
I would agree with you, although again, our capacity seems to be consumed by the larger used car retailers versus the smaller ones right now.
Okay. That's helpful. Thank you very much guys.
Thank you John .
Speaker 1: Thank you. Our next question comes from Ryan Brickman with J.P. Morgan.
Thank you. Our next question comes from Ryan Brinkman with Jpmorgan. Your line is open.
Speaker 6: Hi, great, thanks. And I realize you're not guiding to 22 given the industry uncertainty, but still wanted to check in on some of that.
Great, Thanks, and I realize youre not guiding to 'twenty two given the industry uncertainty, but still wanted to check in on some of that big picture puts and takes with regard to the current year, including if possible what maybe a range of outcomes might be reasonable to assume from a unit volume perspective, and what factors could cause volumes to maybe be higher or lower.
Speaker 6: big picture puts and takes with regard to the current year, including if possible, you know, what maybe range of outcomes might be reasonable to assume from a unit volume perspective and, you know, what factors could cause volumes to maybe be higher or lower. For example, is it really the level of, you know, used car price and new car sales? That'll be the driver, how you're thinking about.
Example is it really the level of <unk>.
Used car price on new car sales that will be the driver of how youre thinking about.
Hi, Matt.
Metrics could track her or if there may be some other metrics worth monitoring independent of <unk>.
Volume on the top line such as I don't know conversion of the.
The conversion rate of EBITDA into free cash flow et cetera, and then what are the factors that you would need to see for example, stabilization in one channel or another like off lease or repo or the healing of the automotive supply chain, providing better visibility of the new car sales or pricing what factors would you need to see in order to.
Speaker 6: You know, what factors would you need to see in order to feel comfortable reinstating guidance? Thanks, Ryan. I appreciate that. And I was expecting we'd get questions on guidance. I guess there's one principle factor that causes me to be cautious about providing guidance. And it's volume, specifically volume in the commercial seller channel. And I think there are two principle inputs to that. One is what is the timing in new vehicle production and how quickly can we see more new vehicles showing up at franchise dealers' lots. And I think, you know, we're seeing different sort of statements.
Comfortable reinstating guidance.
Thanks, Ron I appreciate that and I was expecting with good questions on guidance I guess Theres, one principle factor that causes me to be cautious about providing guidance.
Speaker 4: Thanks, Ryan. I appreciate that. And I was expecting we'd get questions on guidance. I guess there's one principle factor that causes me to be cautious about providing guidance, and it's volume, specifically volume in the commercial seller channel. And I think there are two principle inputs to that. One is, what is the timing in new vehicle production, and how quickly can we see more new vehicles showing up at franchise dealers' lots?
If volume specifically volume in the commercial center channel and I think there are two principal inputs to that one is what does the timing of new vehicle production and how quickly can we see more new vehicles showing up at franchise dealers lots.
Speaker 4: And I think we're seeing different sort of statements from different OEMs, but I think generally most are predicting that their production will increase this year and more vehicles will be delivered to dealers. So that's one factor. And then the second factor related to that is
And I think we're seeing different sort of statements from different Oems, but I think generally most are predicting that there are production will increase this year.
And more.
More vehicles will be delivered to dealers. So that's that's one factor and then the second factor related to that is.
Speaker 4: What does this do to used vehicle pricing? Because if I look at the volume constraint in particularly our off-lease segment, which is our biggest commercial segment, it really is tied to used vehicle values and the equity that a lessee has at the end of their lease right now. Again, lessees right now have, we believe, average equity value of over $10,000 at the end of every lease. So the simple fact is they're not returning those leases. They're either keeping it, or if they do happen to return it, that dealer to whom it's returned buys it, and it doesn't enter the channel, simply because there's $10,000 to be gained by just.
What does this do to used vehicle pricing because if I look at the volume constraints in particular off lease segments, which is our biggest commercial segment. It really is tied to used vehicle values and the equity that a lessee has at the end of their lease right. Now again lessees right now have we believe average equity value of over $10000 at the end of our release.
So the simple fact is theyre not returning those leases.
Rather keeping it or if they do happen to return of that dealer to whom it's returned by this doesn't enter the channel simply because.
It was $10000 to be gains, but just purchasing and a residual.
Speaker 4: And at that mark.
And.
As that market price adjust.
Speaker 4: that's what's going to open up the supply dynamic, particularly in our largest commercial.
Thats whats going to open up the supply dynamic, particularly in our largest commercial segment.
Speaker 4: And then related to sort of new vehicle production, you know, rental companies, if they get more vehicles allocated from the manufacturers, which they're expecting to get based on my discussions, they recognize they've got, you know, fleets that are older and higher mileage than they typically would like to have. So that will induce them to re-market more cars.
And then related related to sort of new vehicle production rental companies, if they get more vehicles allocated from the manufacturers, which they are expecting to get based on my discussions.
They recognize they have got fleets that are older and higher mileage than they typically would like to have so that will induce them to re market more cards.
Speaker 4: And then in the repossession segment, it's tied to things like automotive default, but it also has a lever tied to used vehicle value. So I think, you know, Ryan, those are the two factors. It's production of new vehicles and it's used vehicle values. And I think we've all got a good understanding of directionally which way those trends are going. They're going in a way that's favorable for a business. What remains to be debated is the speed of that and the extent of that.
And then on the Repossession segment, it's tied to things like automotive default, but it also has it also has a lever tied to used vehicle values. So I think.
Ryan those are the two factors its production of new vehicles, and it's used vehicle values and I think we've all got a good understanding of Directionally, which way those trends are going they are going in a way that's favorable for our business, but remains to be debated as the speed of that and the extent of that.
Speaker 4: And the conclusion that we came to is that if we were to provide guidance right now, the range would be too wide to be meaningful. But we hope to be able to reinstate guidance once we've got better visibility, or as soon as we've got better visibility into those dynamics that I just talked about.
And the conclusion that we came to is that if we will provide guidance right now the range would be too wide to be meaningful.
But we hope to be able to reinstate guidance once we've got better visibility or as soon as we've got better visibility into those dynamics that I just talked about.
Speaker 6: Okay. That's very helpful. Thank you. And then just lastly for me, I saw in the press release that you are talking about maintaining or maybe even gaining market share with commercial consignors. It would be great if you could maybe comment on the competitive dynamics there and also whether you see the potential for digital dealer-to-dealer peers to penetrate the commercial market or what the barriers to entry there might be.
Okay. That's very helpful. Thank you and then just lastly for me I saw in the press release that you are.
Talking about maintaining or maybe even gaining market share with commercial containers. It would be great. If you could maybe comment on the competitive dynamics, there and also whether you see the potential for digital dealer to dealer peers too.
Penetrate the commercial market or what the barriers to entry there might be.
Yes.
Speaker 4: Yeah, I, you know, again, if I could look at our analyst, the thesis on the commercial center side was one of maintaining our current share.
If I could look at our analyst day polymer the thesis on the commercial centre side was one of maintaining our current share.
Speaker 4: and I believe we're doing that. I would say that generally both in the on-premise and off-premise categories, commercial seller market shares were very stable in 2021 overall. But we did have some modest share gains with a small number of customers, so we felt good about that.
And I believe we're doing that.
I would say that generally both in the on premise and off premise categories commercial center market shares were very stable.
In 2021 overall.
But we did have some modest share gains with a small number of customers. So we felt good about that.
To the second part of your question.
Speaker 4: You know, hard for me to comment on that. I think obviously we've got a strong market share in commercial off-premise with Open Lane. I think that's a very strong sort of differentiated offering that's hard to duplicate and replicate. And obviously in our physical on-premise volume channels, there's a, you know,
Hard for me to comment on that I think obviously, we've got a strong market share in commercial off premise with open Lane I think thats.
Very strong sort of differentiated offering that's hard to duplicate.
And obviously in our physical on premise volume.
Channels.
There is a.
Yes.
Speaker 4: a relatively limited number of competitors that have those assets and have that market share. And again, those market shares have tended to be pretty stable over time. Okay. Great. Thanks. Very helpful. Thank you.
A relatively limited number of competitors that have those assets and have that market share and again those market shares have tended to be pretty stable over time.
Okay, great. Thanks very helpful.
Thank you. Thank you Rod next question.
Our next question comes from Gary <unk> with Barrington Research. Your line is open.
Speaker 6: Hey, good morning, everyone. Hey, Peter.
Hey, good morning, everyone Hey, Peter.
I'd like if you possible to maybe comment on.
Speaker 6: I'd like you, if possible, to maybe comment on.
Speaker 6: some of the new entrance into this dealer-to-dealer space, particularly CarBravo with GM. And then another one of my coverage companies, CDK, is putting out a system where to do dealer-to-dealer trades.
Some of the new entrants into this dealer to dealer space, particularly call car Bravo with GM and then another one of my coverage company's CDK is putting out a system where to do dealer to dealer trades. So.
Speaker 6: So, you know, as you see it, you know, what are your competitive advantages there versus some of these newer platforms that are coming out? You know, how do you keep gaining share? It's just becoming a very crowded field.
As you see it what are your competitive advantages there versus some of these newer platforms that are coming out how.
How do you keep gaining share its just becoming a very crowded field.
Speaker 4: Yeah, well, thank you, Gary. I appreciate the question. Let me, let me take it in two parts. First, I'll talk about just competition and then I'll.
Yeah, well. Thank you Gary I. Appreciate the question, let me let me take it in two parts first I'll talk about just competition and then ill.
Speaker 4: I'll talk a little bit about CarBravo, which I don't actually see as competition, but I'll explain myself there. So I guess I'd say on competition, first of all, I think our industry has always been competitive and continues to be competitive. And I think our customers have always had choice and options as to where to send their vehicles and where to buy their vehicles.
Talk a little bit about car Bravo, which I don't actually see as competition.
But I explained myself there.
So I guess I'd say on competition first of all I think our industry has always been competitive and continues to be competitive and I think our customers have always had choice and options as to where.
If we were to send their vehicles and where to buy their vehicles.
Speaker 4: And, you know, frankly, the strong cash flow characteristics of our business also attract competitors that they see, you know, opportunity to go in and compete there.
And frankly, the strong cash flow characteristics of our business also affect competitors as they see opportunity to go in and compete there.
Speaker 4: I guess, as I view it, at the end of the day, our customers want access to marketplaces that can sell vehicles quickly, for full value, and at reasonable cost. And fundamentally, we're focused on delivering that. I think we've got a lot of advantages in terms of expertise, scale, customer relationships, technology platforms, and so forth, that enable us to do that very, very well. I also, I'd say, I believe our digital strategy enables us to, you know,
I guess as I view it at the end of the day, our customers want access to marketplaces that can sell vehicles quickly for full value and at reasonable cost and fundamentally we're focused on delivering that and I think we've got a lot of advantages in terms of expertise scale customer relationships technology platforms, and so forth that enable us to do that very very well.
I also would say I believe our digital strategy enables us to.
Improve our ability to deliver on those outcomes.
Speaker 4: And I believe that that will be increasingly evidence over time as we move forward. So, I guess I kind of focus on our business and what we are doing and how we're taking care of our customers. And I believe that if we continue to do that, we can execute well, we can deal with any competition that exists. I don't really want to comment on any one individual.
And I believe that that will be increasingly evident over time as we move forward. So.
I kind of focus on our business and what we are doing and how we're taking care of our customers and I believe that if we continue to do that we can execute well.
Well, we can deal with any competition that exists.
Don't really want to comment on any one individual.
Speaker 4: you know, brand or customer, I recognize some new entrants. I will say generally my opinion is that this industry tends to be a lot more complex than people often think of at initial glance. So I'm.
Brand or customer I recognized some new entrants I will I will say generally my opinion is this industry tends to be a lot more complex.
Then people often think of initial glance so.
Speaker 4: You know, I don't want to be dismissive of any competitor, but I, I also think.
I don't want to be dismissive of any competitor, but I also think.
Some of those entities will find it has struggled to really achieve.
Speaker 4: some of those entities will find it a struggle to really achieve their objectives there. If I go to CarBravo, you know, I actually see the CarBravo program and programs like that as potential opportunities for car. You know, if I think of the customer there, you know, they're an important customer of ours. We're deeply integrated into their all-fleece process. It's a very positive and strong relationship in our business.
<unk> achieved the objectives there if.
If I go to car Bravo.
I actually see the car Bravo program and programs like that as potential opportunities for car.
If I think of.
The customer there.
They're an important customer of ours, we are deeply integrated into their off lease process. It's a very positive and strong relationship in our business.
Speaker 4: you know, there is inherent in that program the possibility of selling some off-lease vehicles, for example, or company vehicles direct to consumer. But to do that, those vehicles have gotten to have to be sort of got in a fully sort of retail ready condition. And that's an opportunity for for us at our facilities. So that's a revenue and profit opportunity for us. The cars are still facilitated through dealers. Okay, so there's the dealer has to ultimately still buy the vehicle, and there's a transaction fee there for us.
There is inherent in that program.
The possibility of selling some off lease vehicles for example, or company vehicles direct to consumer but to do that those vehicles have gotten to have to be sort of got in a fully sort of retail ready condition.
And Thats an opportunity for us at our facilities. So that's a revenue and profit opportunity for us. The cars are still facilitated through dealers. Okay. So there is the dealer has to ultimately still buy the vehicles. There is a transaction fee there for us.
Speaker 4: And then there's other opportunities to integrate our digital platforms into that experience to create other wins for both.
And then there is other opportunities to integrate our digital platforms.
Into that experience to create other wins for both.
Speaker 4: Carbravo and for the retail customer and the dealer. So there's a whole host of opportunities there. And I, again, I see that as, you know, I see it as a change, but I don't see it as a threat. I see it as an opportunity for our business.
Bravo and for the retail customer and the dealer so there's a whole host of opportunities there and again I see that is.
It is a change, but I don't see it as a threat I see it as an opportunity for our business.
Thank you.
Speaker 1: Thank you. Our next question comes from Stephanie Moore with Truist. Your line is open.
Thank you. Our next question comes from Stephanie Miller with <unk>. Your line is open.
Hi, good morning.
Good morning, Stephanie.
Speaker 1: I wanted to take a step back and maybe ask a bigger picture, longer-term oriented question. A lot of work has obviously been done over the last couple of years from the digital transformation, obviously cost-cutting, but a lot of actions behind the investments between dealer to dealer. As you look to the years ahead, let's assume some recovery volumes occur,
I wanted to take a step back and maybe ask a bigger picture or longer term oriented question.
A lot of work has obviously been done over the last couple of years from a digital transformation, obviously cost cutting but a lot of actions behind the investments between dealer to dealer. So as you look to the years ahead, but the same.
The recovery of some recovering volumes occur.
Speaker 1: How should we think about the integration of all of the CAR platforms? Because in this instance, it's a very large inventory that CAR kind of has under its umbrella. So maybe just talk through about the seamlessness that if you kind of could envision how each platform works together, is integrated together seamlessly, so you're not really jumping back and forth. I'd love to get a big picture thought of how.
Should we think about the integration of all of the car platform because.
It's a very large inventory at car has under its umbrella. So maybe just talk through about the seamlessness that if you kind of envision how each platform works together is integrated together seamlessly youre not really jumping back and forth.
Would love to get a big picture thought of Pao.
Speaker 1: the umbrella of SCAR's offering looks like.
Just the.
But really the umbrella.
Cars offering looks like.
Stephanie. Thank you that's a good question.
Speaker 4: And I think you're hitting on an important point in our business and one that's on my mind.
And I think you're hitting on an important point in our business and one that's one that's on my mind.
Speaker 4: Listen, our business, as I've said before, one of the things we want to do is simplify it, both from our customer standpoint, also an investor standpoint, but I'm principally focused on the customer. And part of that is trying to get to fewer brands, fewer platforms, and greater sort of consolidation. And frankly, I think that has a whole host of benefits for us in the long run.
Listen.
Our business as I've said before one of the things you want to do is simplify it both from our customer standpoint, also an investor standpoint, but im principally focused on the customer and part of that is trying to get to fewer brands through our platforms and greater sort of consolidations and frankly I think that is a whole host of benefits for us in the long run it's obviously got.
Speaker 4: You know, cost type benefits of focusing our investments in a fewer number of platforms and brands. So there are benefits there on the cost side of our business.
Cost.
Cost type benefits of focusing our investments in a fewer number of platforms and brands. So there are benefits there on the cost side of our business.
Speaker 4: But I also think it's got customer benefits through scale, network effects, liquidity, simplicity, and things like that. So we are working on that. Obviously, in 2021, we integrated CarWave and TradeRev into one marketplace in the US. We accomplished that quickly. Sorry, Backlot Cars and TradeRev, I should say. And in the current year, we're integrating CarWave and Backlot into one marketplace.
But I also think it's got customer benefits to scale network effects liquidity simplicity and <unk>.
Things like that so we are working on that.
Obviously in 2021, we integrated car wave and trade revenue one marketplace in the U S. We accomplish that quickly.
Backlog cars on trade, Rob I should say.
In the current year is we're integrating.
Car wave and backlog into one marketplace, but we're actually going beyond that and I wasn't necessarily plenty to talk about it but we have an initiative underway looking how we integrate into a one marketplace format in Canada.
Speaker 4: But we're actually going beyond that, and I wasn't necessarily planning to talk about it, but we have an initiative underway looking at how we integrate into a one marketplace format in Canada. And subject to that being successful, how we might do that in the U.S. after we complete Canada. Ultimately, I do want to get to one.
And subject to that being successful how we might do that in the U S.
After we complete candidate ultimately I do want to get to one.
Speaker 4: You know, the quicker we can get to one venue where all our vehicles and all our sellers and all our buyers can participate, I think that's going to be a benefit for them and also for our business.
The quicker we can get to one venue, where all of our vehicles and all our sellers in all our buyers can participate I think that's going to be a benefit for them and also for our business.
Speaker 4: But obviously, there's a complexity there, Stephanie, and it will take some time, but it's something we're actively working on.
But obviously there is a complexity there Stephanie and it will take some time, but it's something we're actively working.
Absolutely and just a follow up what has to be done from a reconditioning or infection.
Speaker 1: Absolutely. And just a follow-up, what has to be done from a reconditioning or inspection, I'm sorry, from an inspection report standpoint to have, you know, call it a full integration across platforms? Is it a lot of work or is there a best practice for the one? So, how should we think about just the work going forward with behind inspection reports?
An inspection report standpoint to have call. It a full integration and cross platform is that a lot of work or is there a best practice from one so how should we think about this work going forward, but behind them that category.
Speaker 4: Yeah, and I mentioned that in context of backlot cars and carways. I wouldn't characterize it as a lot of work, Stephanie, if I look at that particular solution. The simple fact is both companies had a.
Yeah, and I mentioned that in context of <unk>.
Backlog cars and car ways.
I wouldn't characterize it as a lot of work Stephanie if I look at that that particular solution.
The simple fact is both companies had a.
Speaker 4: you know, a smartphone app-based inspection format that an inspector would use, a guided format to inspect a vehicle.
Smartphone App based inspection formats and spectrum would use the guidance format to inspect the vehicle.
Speaker 4: They were quite similar, but they also were different because they've been developed, you know, by different groups. So what we have done in that case is, you know, try to...
They were quite similar but they also were different because they have been developed.
By different groups.
So what we have done in that cases try to.
Speaker 4: pick the best of both, add some new features, and deliver that so it's one unified inspection platform for all our inspections in that channel in the US. So now, expanding that to Odessa and more broadly, obviously, that takes more work, but the integration I spoke to in the context of backlog cars and CarWave is...
Pick the best of both.
Some new features and deliver that so it's one unified inspection platform.
All our inspections in that channel in the U S. So so now expanding that to ADESA and more broadly obviously that takes more work but.
The integration I spoke to in the context of backlog cars a car with us.
Speaker 4: Relatively simple and will be done, I believe, within the next 90 days.
Relatively simple and we will be done I believe within the next 90 days.
Great well thank you so much.
Speaker 7: Thank you, Stephanie. Thank you. Our next question comes from Bob Labick with Jason.
Thank you Steffen.
Thank you. Our next question comes from Bob <unk> with Janney.
CJS Securities Your line is open.
Good morning, Thanks for taking my questions.
Speaker 8: Good morning. Thanks for taking my questions. You outlined or you discussed some very attractive cost savings initiatives of $120 million or so. I wanted to kind of ask if you could dig into that a little bit. And with the context of how much of the kind of cost of service and of the SG&A lines right now are fixed versus variable? What are the primary fixed costs, and is that where the $120 is coming out of?
Yes outlined are you discussed some.
It's a very attractive cost savings initiatives of $120 million or so I wanted to kind of ask if you could dig into that a little bit.
And with the context of how much of the kind of cost of service and have the SG&A lines right now are fixed versus variable and what are the primary fixed cost and is that.
Where the 120 is coming out of.
Yeah. Good question Bob.
Speaker 9: Yeah, good question, Bob. You're right. Based on the math, I said approximately 60% of that is cost, and SG&A is a significant component of that. You know, I.
Youre right based on the math I said, approximately 60% of that is cost and SG&A a significant component of that.
<unk>.
I guess.
One do you have is that in the long run.
Speaker 4: No cost is entirely fixed, but in the short term, obviously, costs are fixed and we have we have elements of fixed costs in our business, which tend to be, I'd say, deeper on the sort of on premise side of our business, you know, with facilities and leases and, and, you know, the, the.
No cost is entirely fixed but in the short term obviously costs are fixed and we have.
We have elements of fixed costs in our business, which tend to be.
Deeper on these sort of on premise side of our business with facilities and leases and.
The.
Speaker 4: The management structure that you would need to operate a facility, those tend to be fixed at least in the short and medium term.
The management structure that you would need to operate a facility those tend to be fixed at least at least in the short and medium term.
Speaker 4: And a lot of the cost then tied to sort of the operation of the shops and the back office and stuff like that tend to be a little bit more variable.
And.
A lot of the cost and tied to sort of the operation of the shops.
And the back office and stuff like that tend to be a little bit more variable.
Speaker 4: I would say given the low volumes in the fourth quarter, we started to bump up against some of that fixed cost element of our business.
I would say given the low volumes in the fourth quarter. We started to we started the low commercial set our volume start to bump up against some of that sort of fixed cost elements of our business.
Speaker 4: but still managed to deliver, I think, a good, strong gross profit per car sold performance on that. In terms of the sort of things we're looking at that make up some of the cost initiatives we're talking about, let me just explain some of the things we're looking at. I'm looking at spans and layers of the company, and trying to have fewer layers between myself and the front-line workers in this.
But still managed to deliver I think a good strong gross profit per car sold performance on that.
In terms of those sorts of things, we're looking at that to make up some of the cost initiatives. We're talking about let me just explain some of the things. We're looking at I'm looking at spans and layers of the company and trying to have fewer layers between myself and the frontline workers in this company.
Speaker 4: and trying to have appropriate sort of spans at all levels of management in this company, you know, so.
Trying to have appropriate sort of.
Spends at all levels of management in this company.
So.
Addressing that.
Speaker 4: To Stephanie's question, as we address technology platforms, if we can start to consolidate our focus, our investment on fewer platforms, that creates cost savings opportunities as well. And that's an inherent part of our modeling.
So stephanie's question as we address technology platforms. If we can start to consolidate arent focus our investments on fewer platforms that creates cost savings opportunities as well and thats, an inherent part of our modeling.
Speaker 4: And then I'd say doing things differently, trying to automate certain processes, trying to centralize.
And then I'd say doing things differently trying to automate.
<unk>.
Certain processes trying to centralize certain processes.
Speaker 4: you know, more digitization and less paper, those are sort of savings that
More digital more digitization and less paper.
Those are sort of savings that.
Speaker 4: you know, obviously take time to execute, but can sort of change by changing the way you do business, reduce your costs over the longer term. So those are the things that comprise the types of initiatives we're going on.
Obviously take time to execute but can sort of changed by changing the way you do business reduce your costs over the longer term. So those are the things that comprise the types of initiatives are going out there.
Speaker 3: And Bob, on the SG&A front, I did a little quick math here. About 15% of SG&A is incentive pay, commissions for salespeople, what I call truly variable.
And Bob on the SG&A front of dental quick math here.
15% of SG&A is incentive pay commissions for salespeople.
What I call truly variable.
Speaker 3: It doesn't mean you can't reduce the workforce if volumes go down. But I'm saying at the current workforce, it's about 15% of SG&A is actually tied to performance. And 85% is more of a structural SG&A.
It doesn't mean, you can't reduce the workforce if volumes go down, but I'm, saying at the current workforce. It's about 15% of SG&A is actually tied to performance.
5% is more of a structural SG&A.
Super very helpful. Thank you.
Thank you.
Speaker 7: Our next question comes from Brett Jordan with Jeffries. Your line is open.
Our next question comes from Bret Jordan with Jefferies. Your line is open hey.
Good morning, guys.
Speaker 3: Some overlapping calls this morning so I don't want to ask about stuff you've already discussed, but could you talk a bit about the fee environment, you know, whether or not with more competitive players in the space? I know a few years ago with, you know, dealer-to-dealer shipping costs were getting promotional, but could you talk about the ability to either take fees up in the current scenario where supply is short or anything that might be changing around that?
Brian <unk> from <unk>.
Overlapping calls this morning, so I don't want to ask about stuff, you've already discussed, but could you talk a bit about the fee environment.
Whether or not with.
More competitive players in the space I know a few years ago with <unk>.
The dealer shipping costs were forgetting promotional but could you talk about the ability to either take these up in the current scenario where supply is short.
Or anything that might be changing around that.
Speaker 9: Brett, thank you. You know, what I'd say is I think.
Great. Thank you.
What I'd say is I think.
Yes.
Speaker 4: The competitive dynamic seems to be, I would say, fairly rational. We're not doing and we're not seeing those types of incentives that you referenced, which were a feature of the business maybe two plus years ago. We've seen some competitors raise some price.
The.
The competitive dynamic seems to be I would say fairly rational.
We're not we're not doing and we're not seeing those types of incentives that you referenced which were a feature of the business, maybe two two plus years ago.
We've seen some competitors raised some prices.
Speaker 4: Um, I think that creates room for us to look at that as an opportunity as well.
I think that creates us room for us to look at that as an opportunity as well.
We did a small.
Level of fee adjustments in the fourth quarter.
Speaker 4: level of fee adjustments in the fourth quarter, principally those related more to our on-premise than off-premise channels.
Principally those related more towards on premise and off premise channels.
Speaker 4: But we expect to see benefits from that, and I referenced that as part of the initiatives we had executed on, $30 million of initiatives we've executed on. Some level of fee increase is part of that.
But we expect to see benefits from that over and I referenced that as part of the initiatives. We had executed on $70 million of initiatives with execute on some some level of fee increases part of that.
Speaker 9: So I guess I see some opportunity and I see the competitors behaving in a rational way and focused on, you know, obviously, everybody wants growth, but we're all we're also focused on being profitable and delivering profitable growth. So I think that's that's a good dynamic for a healthy dynamic for a business.
So I guess I see some opportunity and I see the competitors behaving in our international way and focused on.
Obviously, everybody wants growth, but we're also focused on being profitable and delivering profitable growth. So I think that's that's a good dynamic for a healthy dynamic for our business.
Okay, great. Thank you.
Thank you. Our next question comes from Daniel <unk> with Stephens. Your line is open.
Speaker 7: Thank you. Our next question comes from Daniel Ambrose with...
Speaker 10: if they could work at the table questions i don't belabor a point but it's a clarifier peter to so if we look at the gpu i think you could have about thirty percent added at that are you able to part out on that metric how much would they be driven just by the favorable increase in year-over-year revenue per unit or use vehicle prices virtues how much of that thirty percent was specific cost removal that we can underwrite you know into next year if
Hey, good morning, guys. Thanks for taking my question.
I don't want to belabor, a point, but just to clarify are Peter So if we look at the GPU I think you'd said at about 30% at ADESA are you able to parse out on that metric of how much we're going to be driven just by the favorable increase in year over year revenue per unit or used vehicle prices.
How much of that 30%.
Specific cost removal that we can underwrite into.
Into next year.
Speaker 10: prices roll over, because you've talked about prices moderating being a tailwind to volume, trying to understand if there's going to be an offsetting headwind.
Prices rollover, because you've talked about pricing moderating being a tailwind to volume trying to understand if theres going to be an offsetting headwind to.
Two GPU at ADESA.
Speaker 9: Yeah, Daniel, that's a good question as well. I don't have a precise number to give you, but I'll answer directionally and then Eric can weigh in as well with his point of view.
Yes.
Daniel that's a good question as well I don't have a precise number to give you, but I'll answer Directionally and then Eric can weigh in as well with his point of view.
Speaker 4: I would say, you know, higher used vehicle values does create a support to that number because if vehicles are up in value, maybe we move into the next tier of buy fees. Maybe the buy fee is $25 higher than it would have been if the car was sold for, you know, $1,000 less or something like that. So there is an element of that, but it's not sort of proportional to the value. If the vehicle value goes up 20%, our fees do not go up.
I would say higher used vehicle values does create a support so that number because the vehicles are up in value, maybe we move into the next tier of biases, maybe the biases to $25 higher than it would have been if the car was sold for.
Less or something like that so there is an element of that.
But it's not sort of proportional to the value of the vehicle value was up 20% of our fees do not go up 20% and frankly those fees are only the <unk> by the <unk> don't tend to reflect that and as Eric mentioned the sell fees in our commercial off premise channel don't reflect that either so.
Speaker 4: And frankly, those fees are only the buy fees, right? The sell fees don't tend to reflect that. And as Eric mentioned, the sell fees in our commercial off-premise channel don't reflect that either. So, there is a complete.
There is a component of that.
Speaker 4: I would say it's relatively small. It's certainly, I would say, less than half of the increase for sure and then.
I would say, it's relatively small it's certainly I would say less than half of the increase for sure.
And then.
The other.
Speaker 9: The other thing that runs the other way is just the volume. You know, in any business, when you have less volume, your growth profit margin and your growth profit in absolute terms is under pressure.
The other thing that runs the other way is just the volume.
Any business when you have less volume your gross profit margin and your gross profit in absolute terms is under pressure.
Speaker 9: So because every business has some element of fixed cost as well within its direct cost structure and our business for sure has.
So because of every business has some element of fixed cost as well within its direct cost structure in our business for sure has so.
Speaker 9: I actually think when I sort of weigh a declining used vehicle value equation versus increased supply.
I actually think when I sort of way of declining used vehicle value equation versus increased supply.
Speaker 4: I think the increased supply will be more positive to that metric than the declining use value will be negative.
The increased supply will be more positive to that metric than the declining use value will be negative.
Speaker 4: Now, that would be my view, but I will let Eric comment on that. Yeah, and Daniel, this is really good. On gross profit dollars per transaction, the one thing that won't be...
That would be my view.
But I will let Eric comment on that yes.
Daniel This is really good on gross profit dollars per transaction.
One thing that won't be linear is the.
Speaker 3: The off premise are the services related to not the car sold. So when my volume goes up by denominator increases, probably greater than my gross profit dollars in total, unless I can grow some of my what we call off premise services, like the repossession activity, like our inspection business, like our transportation business.
The off premise or the services related to not the car sold so when my volume goes up by denominator increases probably greater than my gross profit dollars in total unless I can grow some of my what we call off premise services like the repossession activity like our inspection.
Like our transportation business.
Speaker 3: So in the analyst day, we even commented that we were targeting something that would be more in, I would call it the 260 to 275 range, long-term. But that's because the denominator gets bigger. I'm dividing that gross profit by what we believe will be a growing volume of transactions.
In the analyst day, we even commented that.
That we were targeting something that would be more in I will call. It the $2 60 to $2 75 range.
Long term, but thats, because the denominator gets bigger and the buying that gross profit by what we believe will be a growing volume of transactions.
Speaker 3: Keep in mind, about a third of our transactions are off premise with no ancillary services.
Keep in mind about a third of our transactions are off premise with no.
Ancillary services if that grows.
Speaker 3: On the commercial side, I'm sorry, a third are commercial. And of those, a large number off-premises.
On the commercial side I'm, sorry, a third of our commercial and of those a large number off premise.
Speaker 3: that would probably put pressure on the absolute number, but my gross profit would actually increase in total.
That will probably put pressure on the absolute number but my gross profit would actually increase in total.
Okay. Thanks, Thank you both color.
Speaker 10: Thanks, thank you both for that color. And then I wanted to ask one on the dealer to dealer business, Peter, you guys have spent, you know, quite a billion dollars over the last couple years to fuel growth.
And then I wanted to ask one on the dealer to dealer business. Peter you guys have spent call. It one.
$1 billion over the last couple of years.
Fuel growth.
Speaker 10: With the balance sheet, I think a total net debt is around four times levered.
With the balance sheet I think it totaled net debt is about four times Levered are there are there M&A opportunities or could you do other M&A opportunities given the leverage right here.
Speaker 10: Are there other M&A opportunities, or could you do other M&A opportunities given the leverage right here? And then, you know, that's kind of a lot of capital you've spent to fuel this growth on the digital side.
And then.
A lot of capital you've spent to fuel this growth on the digital side I know, it's maybe not capex heavy but pretty high growth cost how capital intensive should this business be longer term, but as you look at the next few years or next longer term around the dealer to dealer business. Thanks.
Speaker 10: Maybe not CapEx heavy, but you know, pretty high growth costs.
Speaker 10: how capital intensive should this business be longer term it as you look at the next few years or next longer term around the dealer dealer business
Speaker 9: Yeah, thanks, Daniel. Obviously, we've done some significant acquisitions. That is correct. I'm pleased with those acquisitions. I think to get us, as I mentioned, we're at a half a million vehicles sold in that theater off-premise channel and growing and seeing profitability evidence in trade grabs. Strong profitability, I would say. So I feel good about that business.
Yes. Thanks, So obviously, we've done some significant acquisitions, but that is correct I am pleased with those acquisitions I think to get us as I mentioned, we're at a half a million vehicles sold in the theater off premise channel and growing.
And seeing profitability evidenced in trade Rev strong profitability I would say so.
So I feel good about that business.
Speaker 4: There are no other acquisitions currently contemplated. You know, I think we have a good position in the market and we're pleased with the assets we have. I'm focused more on integrating those platforms and continuing to deliver that organic growth. And your comments on leverage, you know, obviously, I'm aware of that as well. You know, my current focus is on growing the company.
There are no other acquisitions currently contemplated.
I think we have a good position in the market.
And we're pleased with the assets, we have I'm focused more on integrating those platforms and continuing to deliver that organic growth and your comments on leverage.
Obviously, I'm aware of that as well.
My current focus is on growing the company.
Speaker 4: increasing our earnings, and ultimately reducing that net leverage number. And I believe that is absolutely possible. I believe our business will deliver on that, and we'll get that back closer to our target of three. Great.
Increasing our earnings and ultimately reducing that net net.
Net leverage number and I believe that is absolutely possible I believe our business will deliver on that.
And we'll get that back closer to our target of <unk> III.
Great. Thanks, so much guys.
Thanks, Ed Thank you.
Speaker 7: Our next question comes from Ali Fareed with Guggenheim. Your line is open.
Next question comes from Amit <unk> with Guggenheim Your line is open.
Speaker 5: Good morning, thanks for taking my questions. I just have a question, I guess, on your outlook for a wholesale volume recovery, starting in the second half and then into 2023. While I recognize it's a tough environment to predict.
Good morning, Thanks for taking my question I just have a question I guess on your outlook for a wholesale volume recovery starting in the second half and then into 2023, while I recognize it's a tough environment to predict.
Speaker 5: Your primary physical auction competitors predicting industry wholesale volumes up 2% in 2022, and then actually declining in 2023 back to 2021 levels again, primarily due to a reduction in overall vehicles coming off lease in 2023 as a result of lower due car sales and lease penetration rates during the pandemic.
Primary physical auction competitors predicting industry wholesale volumes up 2% in 2022 and that actually declining in 2023 back to 2021 levels again, primarily due to a reduction in overall vehicles coming off lease in 2023, as a result of lower new car sales and lease penetration rates during the pandemic and then ill hop.
Speaker 5: And then on top of that, isn't that dynamic of off-lease vehicles being in the money, so to speak, likely to continue through at least the end of next year since I think even the most bearish used car pricing forecast
That isn't that dynamic of off lease vehicles being in the money so to speak likely to continue through at least the end of next year since I think even the most bearish used car pricing forecast expect values to remain above pre pandemic levels over the next few years. So that would suggest that it will continue to be advantageous for dealers and consumers to keep their off lease cars.
Speaker 5: Expect values to remain above pre-pandemic levels over the next few years. So, that would suggest that it will continue to be advantageous for dealers and consumers to keep their off-lease cars for the foreseeable future. So, I'm wondering at a high level, what gives you confidence in a volume acceleration into 2023? It seems like there could be a scenario where commercial volumes and off-lease in particular remain cyclically depressed through the end of next year. Thank you.
For the foreseeable future. So I'm wondering at a high level, what gives you confidence in a volume acceleration into 2023, but it seems like there could be a scenario where commercial volumes in off lease in particular remain cyclically depressed through the end of next year. Thank you.
Speaker 9: Yeah, Ali, I appreciate the question. Let me attempt to answer. So first of all, within the commercial category, let me just comment on, you know, rental. We're expecting to see volume increases. Repo, we're expecting to see volume increases for the reasons I talked about. But let's spend some time on off-lease as well. I think the big question is not the total number of leases written or the total number of leases reaching maturity. It's really that equity value question. I know that was inherent in the question you asked.
Yes.
I appreciate the question, let me attempt to answer so first of all within the commercial category. Let me just comment on rental we're expecting to see volume increases repo, we're expecting to see volume increases for the reasons I talked about but let's let's spend some time on off lease as well.
I think the big question is not the total number of leases written or the total number of leases reading, reaching maturity. It's really that equity value question I know that was inherent in the question U S. It's really what is the economic equation that the lessee or the dealer has.
Speaker 4: It's really what is the economic equation that the lessee or the dealer has when that lease is ending, okay? And just to kind of give you context on...
When that lease is ending okay.
And.
Just to kind of give you context on that right now.
Speaker 4: The situation we have right now is because of this sort of $10,000-ish equity situation, essentially almost no off-lease vehicles are reaching the physics channel. I don't think that needs to go back to zero for a substantial number of lease vehicles to start to reach the physics channel.
The situation, we have right now is because of this sort of $10000 raise equity situation.
Essentially almost no off lease vehicles or bleaching the physical channel.
I don't think that needs to go back to zero for a substantial number of lease vehicles to start to reach the visits.
Speaker 4: Because, you know, we saw sort of earlier last year when those numbers were more in the $3,000, $4,000, $5,000 level of equity, there still was not the normal volume reaching the physical channel, but a substantial number.
Because.
We saw a sort of earlier last year when those numbers were more in the $345 level of equity there still was not the normal volume reaching.
The physical channel, but a substantial number so I don't think it needs to revert the hallway.
Speaker 4: So I don't think it needs to revert the whole way. And I guess just from conversations with customers.
I guess just from conversations with customers.
Speaker 4: Just asking them about their portfolio and what they expect, I would say my expectations very much reflect the feedback I'm getting from customers as well.
Just asking them about their portfolio and what they expect I would say my expectations very much reflect the feedback im getting from customers as well.
Speaker 4: Their expectation in terms of their risk management and their residual management and their and their assessment of remarketing volumes what they're telling me is they don't believe that new vehicle production needs to be all the way back to normal or that used vehicle values need to be back to pre pandemic levels.
Their expectation in terms of their risk management of their residual management and they are in their assessment of remarketing volumes, but they're telling me is they don't believe that new vehicle production needs to be all the way back to normal or that used vehicle values need to be back to pre pandemic levels.
Speaker 4: for there to be a significant increase in off-lease volume relative to the current levels. And I'm not predicting that they get back to 2019 levels. That's not a part of the model or a part of the plan anytime soon. But we are predicting that we'll increase versus the current levels. And again, the current levels are very close to zero.
For there to be a significant increase in off lease volume.
<unk> to the current levels.
I'm not predicting that to get back to 2019 levels Thats not a part of the model where a part of the plan anytime soon but we are predicting that will increase versus the current levels and again. The current levels are very close to zero. So.
Speaker 9: I guess time will tell, we will have to see how this plays out, but my expectation is consistent with what I said, that I expect to see an increase in these volumes in the second half of this year and accelerating in 2023.
I guess time will tell we'll have to see how this plays out but my expectation is consistent with what I said that I expect to see an increase in the volumes in the second half of this year and accelerating in 2023.
Great. Thank you Peter.
Speaker 3: And Norma, we are out of time, so we'd like to go to Peter's closing remarks. Okay. Thank you.
And normally we are out of time, so we'd like to go to Peter's closing remarks.
Okay. Thank you back over to Mr. <unk>.
Speaker 4: Thank you, Norma, and thank you, ladies and gentlemen, for your time this morning and for your questions. You know, I recognize that in today's call, we closed out a reporting on 2021 year overall, and clearly it was a year that brought some challenges, but I'm pleased with the way that our team here at Carr rallied to meet that challenge and deliver the results that we did. So, I don't want to leave today's call without saying a sincere thank you to all of our employees across the company who helped make that a reality. We appreciate it. Thank you so much for that.
Okay.
Thank you Norma and thank you, ladies and gentlemen for your time this morning and for your questions.
I recognize on today's call, we closed out our reporting on 2021 year.
Year overall and.
Clearly it was a year that brought some challenges, but I am pleased with the way that our team here at car.
Sally to meet that challenge and deliver the results that we did so I don't want to leave this call without saying a sincere. Thank you to all of our employees across the company, who helped make that a reality. We appreciate it. Thank you so much for that.
Speaker 4: Great effort in 2021, so I'd like to close out my remarks today by reinforcing what I am the team are most focused on in 2022.
Great efforts in 2021.
So I'd like to close out my remarks today by reinforcing what I and the team are most focused on in 2022.
Speaker 4: While we expect to see some relief in the commercial seller volumes in the second half of this year, we are focused on getting through the current supply challenges and controlling what we can control. And I think our Q4 results demonstrate that we are able to do that in this.
While we expect to see some relief in the commercial center volumes in the second half of this year. We are focused on getting to the current supply challenges of controlling what we can control and I think our Q4 results demonstrate that we are able to do that in this business.
Speaker 4: We continue to use this as an opportunity to reengineer our business, lowering our cost of service. Our goal is that as the volumes return, we can support those increased volumes with a lower cost delivery model than we've had in the past and be more profitable at lower volumes than we've been in the past. And I believe we will be able to do that.
We continue to use this as an opportunity to reengineer, our business lowering our cost of service or.
Our goal is that as the volumes return we can support those increased volumes with a lower cost delivery model than we've had in the past and be more profitable at lower volumes than we've been in the past and I believe we will be able to do that.
Speaker 4: In dealer-to-dealer, we are focused on continuing to grow our digital off-premise volumes towards our goal of 1.2 million vehicles sold by 2025.
And dealer to dealer, we are focused on continuing to grow our digital off premise volumes towards our goal of $1 2 million vehicles sold by 2025.
Speaker 4: This in turn will drive a significant increase in our overall profitability.
This in turn will drive a significant increase in our overall profitability.
Speaker 4: To help drive this, we are focused on increasing our marketplace participation by sellers and buyers in the US and Canada, as well as ensuring a successful integration of CarWave and BlackLock.
To help drive this we are focused on increasing our marketplace participation by sellers and buyers in the U S and Canada as well as ensuring a successful integration of car wave in blackstock cars.
Speaker 4: And finally, and most importantly, we remain very focused on our customers. As I said on prior calls, our purpose is to make wholesale easy so our customers can be more successful. And I believe that if we do that well, our customers will reward us with more of their business and our company will have a bright future.
And finally, and most importantly, we remain very focused on our customers as I've said on prior calls our purpose is to make wholesale easy so our customers can be more successful and I believe that if we do that well our customers reward us with more of their business on our company will have a bright future.
Speaker 4: So with that, we'll end today's call. I look forward to reconnecting in three months to give you an update on the current quarter. Thank you all very much.
So with that we'll end today's call I look forward to reconnecting in three months to give you an update on the current quarter.
Thank you all very much.
Speaker 7: So ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect.
Ladies and gentlemen, thank you for your participation in today's conference you May now disconnect everyone have a wonderful day.
Yes.
[music].
No.
[music].
Yes.
Yes.
[music].
Yes.
Okay.
Thank you.
Yes.
[music].
Okay.
[music].
Yes.
[music].
Okay.
[music].
Okay.
[music].
Okay.
Okay.
No.
[music].
Yes.
Thank you.
Yes.
[music].
Okay.
Okay.
This as well.
[music].
Okay.
Yes.
Yeah.
[music].
Speaker 2: I.
[music].
Speaker 2: You
[music].
Speaker 2: I.