Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by your car Services' conference call should begin momentarily again. Thank you for standing by the conference call should begin momentarily. Thank you.
Good day, ladies and gentlemen, and welcome to the KAR auction services Inc. Q2, 2019 earnings conference call at this time, all participants on the phone him out.
Later, we'll conduct a question answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
As reminder, this call is being recorded.
I would now turn the call us up to your host Mr., Mike Eliason, Treasurer, and Vice President Investor Relations, Sir you may begin.
Thank you Valerie good morning, and thank you for joining us today for the KAR auction Services' second quarter 2019 earnings conference call.
Today, we will discuss the financial performance of KAR auction services for the quarter ended June Thirtyth 2019, after concluding our commentary we will take questions from participants before Jim kicks off our discussion I would like to remind you that this conference call contains forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward looking statements involve risks and uncertainties that may affect cars business prospects and results of operations and such risks are fully detailed in resi SEC filings in providing forward looking statements. The company expressly disclaims any obligation to update these statements.
Lastly, let me mention that throughout this conference call.
We will be referencing both GAAP and non-GAAP financial measures reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued last night.
Which is also available in the Investor Relations section of our website now I'd like to turn this call over to KAR auction Services' CEO , Jim Hallett Jim.
Thank you Michael and good morning, ladies and gentlemen, welcome to our call and I'll say welcome to our first call with that new car.
I want to start by outlining my agenda for today, what I plan to cover I want to review the results of the spinoff of insurance auto auctions update our outlook for 2019.
Highlights the strategic focus of car as a smaller and more focused the enterprise.
Review, how we plan to deploy capital in the near term and our capital allocation priorities for the future.
And I will spend a few minutes discussing my priorities for M&A targets as well.
As you know we successfully completed the spin off of insurance auto auctions on June 28.
A primary motivations for completing the spin was to unlock shareholder value that we felt was not being recognized within CCAR.
And after one month I believe it's clear that we have accomplished our objective of unlocking shareholder value.
As we have previously discussed the separation of car insurance auto auctions will allow each enterprise to focus its attention on its respective core business.
In the case of car were focused on remarketing used vehicles and I believe that we are world class in the remarketing of vehicles and everything that we do in our business should contribute to remarketing vehicles, we expect our operating decisions or allocation of the capital and our M&A targets to align with our focus on remarketing used cars.
Eric and I have had very positive feedback on the execution of the spin investors have expressed support for a more focused in somewhat simpler business model for car.
Now I believe we need to demonstrate the strength of car to our shareholders as we'd like to grow earnings consistently generate strong free cash flows and provide performance that will cause our investors to recognize the value of our business in the higher multiple that we believe our business deserves.
We knew it took a little longer to complete the spin than what we originally anticipated and we appreciate your support and your patience through the process and now it is behind us.
Let me start by providing an update on our guidance first we have not changed our guidance from what we discussed in June prior to the spin.
We expect adjusted EBITDA of $530 million to $550 million for 2019.
I'm confirming our guidance, but I also want to acknowledge that our second quarter performance did not meet our expectations.
We grew revenues excluding purchased vehicles, 7% in the second quarter and this was in line with our expectations.
We fell short of our operating profit and adjusted EBITDA expectations for the quarter.
The primary contributor to this shortfall was lower profitability in some of our ancillary and other related businesses.
As we discussed in our financial supplement yesterday high Tech Locksmiths, a subsidiary of ADESA incurred an inventory loss of over $5 million.
This loss was discovered as the result of an internal investigation, which is still ongoing.
We are in litigation with certain former employees and we are pursuing all avenues to recover this loss.
If we are not able to recover this lost in the current year, we are likely to be at the low end of our ride.
The low end of our range of our guidance.
With the second quarter in the books in the spin completed we are focused on our strategic priorities.
During our visits with investors throughout the spin process, we outlined five strategic priorities digital data and analytics.
International mobility, and seamless integration of all of our business businesses in order to improve our customer experience.
Today I want to focus on three of these strategic priorities. The most important initiative is our digital efforts and making trade rep leader in the dealer to dealer space.
We continue to make progress, including hitting new milestones for cars sold.
We had our first 1200 transaction day in July and we also sold 3000 cars over a consecutive three day period. These are milestones that are evidence of our success in the marketplace.
To date, we have pursued the dealer to dealer space with multiple offerings at ADESA and now the trade Rep platform.
Beginning August 1st we changed the organization is priorities to align ADESA around the goal of being the leader in the U.S. and Canada in the digital dealer to dealer wholesale transactions.
We have adjusted our incentive pay to recognize the importance of trade rep, winning in each of the markets where it's offered.
We recognized that the revenue per transaction that trade Rev is below what is learned at the physical auction.
But at scale, we can reduce or eliminate the difference in EBITDA dollars per car sold.
We are pushing to grow even more aggressively in the last half of the year. We are still in the early innings of the transformation of the dealer to dealer space. So rapid growth is possible.
I am confident in our ability to bring a comprehensive end to end solution to dealers and provide the solution of choice for their wholesale transactions.
And the data and analytics space, we have seen early success in assisting the captive finance companies and major banks with the pricing of vehicles and targeting specific dealers to purchase their off lease supply.
We will continue to look for ways to link our data to our customers decision, making clearly this capability creates stickiness with our customers and I believe that we are the clear leader when it comes to data and analytics.
Our international strategy is a combination of combining our identifying and entering new markets outside North America and introducing our many digital offerings in these markets our cars on the web acquisition earlier this year is performing very well.
I expect to grow this business in Europe by taking advantage of their specialized capability and processing cross border transactions between western and Eastern Europe . We're also planning to introduce additional car services into the European market.
Perhaps more important than any of the strategic strategic initiatives are is our focus on rightsizing car as a smaller and more focused business. We have set a goal to get to 25% adjusted EBITDA margin in the next five years. This will require us to manage our corporate overhead effectively.
Continue to use innovation to deliver services to our customers more cost effectively.
And to manage our costs in the field to match how customers choose to do business.
I am confident that we are up to this challenge and we will embrace the opportunity to transform our industry, while maintaining the exceptional cash generating characteristics that we've been known for.
Now, let me turn to capital deployment.
First we continue to return capital to our shareholders in the form of a dividend we have declared a dividend of 19 cents per share. This level of dividend represents about 40% of the free cash flow, we expect to generate in 2019 on the remaining car businesses.
At a stock price of about $26 per share. This represents just under a 3% dividend yield.
We also see cars dock at the current valuation as an excellent investment of capital.
We expect to repurchase we expect car.
To be in the open market during the third quarter.
We have $119.7 million remaining on our authorization that expires in October .
I expect us to repurchase all of the $119.7 million in stock during the third quarter.
Our acquisition pipeline remains robust.
Our current focus is on businesses that allow us to expand our customer base our entry into new markets.
We have both north American and outside of North America opportunities to evaluate.
We are focused on businesses that are directly related to remarketing used vehicles or provide services that contribute to the remarketing of used vehicles in order to have the right capital structure and resources to meet our needs for the foreseeable future.
Eric will be leading an effort to refinance our existing term loans, we expect to pursue a refinancing of the existing term loans in Reeves and the revolving credit facility and extend their respective maturities.
We will also increase the amount of term loan outstanding using the proceeds for general corporate purposes, including future acquisitions.
I will let Eric provide more color on these plans in a few moments.
In conclusion.
I recognize there is a lot going on in the financial statements of car.
We have the allocation of certain cost to insurance auto auctions.
We have interest expense on corporate debt for car pre spend for the first six months of the year and none of this is allocated to ita.
We also have the impact of the transition services agreement that will result in a reduction in corporate costs in the last six months of 2019 for the new car.
The second half of 2019 will be much cleaner and will allow us to focus on the strength of our business model and its ability to generate strong cash flows I'm confident in our ability to deliver results and execute on our strategy for growth.
So with that I'll say, thank you again for your support through the spin process I will now turn it over to Eric for some additional color on our second quarter performance Eric.
Thank you Jim let me start by highlighting some performance metrics consolidated revenue was up 19%. However, this includes purchased vehicles, where we recognize the sale price of the vehicle as revenue with the corresponding cost of services for the purchase price of the vehicle. If we eliminate the purchase vehicle transaction. Our revenue increased 7% in terms of volume we had a 10% increase in total volume an 8% increase in same store volume.
Physical auction volume was up 1% and online only volume was up 20%.
We saw a 15% growth on our OPENLANE platforms.
37% growth at trade route and we more than doubled our volume in Europe with the addition of cars on the web.
We also had improved ARPU in each of our channels physical ARPU increased 5% to $882 per car sold and online only ARPU increased 27% to $150 per car sold in the second quarter.
Within the online only ARPU, we had ARPU of $105 on the OPENLANE platform and $271 on the trade Rep platform.
The mix of vehicles continued to be favorable for revenue growth.
Commercial volumes increased 13%, 11% on a same store basis. The increased revenue reflects the strong growth in online only volumes and the ARPU growth at physical auction.
Off lease volumes have begun to plateau, we do not anticipate any significant declines in supply of off lease vehicles, though for the next three years.
We also see declines in dealer consignment volumes, excluding trade route moderating physical auction dealer consignment volume was down 5% in the second quarter, representing 41% of our physical auction volume in the quarter.
Our gross profit at ADESA declined in Q2 as compared to the prior year, excluding purchase vehicles gross profit of 43.2% compared to 45.2% in 2018.
The decline in gross profit is attributable to growth lower gross profit in our ancillary and other related businesses, including the impact of the inventory loss at high Tech Locksmiths and increased costs in Autovin. Our vehicle inspection company that resulted from a change in certain systems that reduce the efficiency of field personnel temporarily.
We have taken action to correct, both the high Tech and Autovin situations and do not expect them to occur in future quarters.
As Jim mentioned, we are vigorously pursuing recovery of the inventory loss and high Tech Locksmith Smith.
This loss may be offset in a later quarter, if we recover all or a portion of this loss prior to year end.
We have recorded the entire inventory loss as of June 30, and will not record any potential recovery until realized.
The AMC business performed in line with our expectations.
Loan transaction units were flat year over year and modest revenue growth was offset by a small increase in the provision for loan losses.
Net loan losses in the second quarter were less than 2% and we expect net loan losses to remain below 2% for the remainder of the year.
In summary cars financial performance in the second quarter was below our expectations due to lower gross profit in our ancillary and other related businesses, primarily high tech locksmith and Autovin.
We do not expect the situations that caused lower gross profit in the second quarter to continue for the remainder of 2019.
Now, let me briefly discuss the impact of the completed spin on our financial statements.
First effective June 28 insurance auto auctions became a discontinued operation.
We are presenting the impact of insurance auto auctions in our financial statements in a single line item net of income taxes for all periods presented.
This includes all direct cost and expenses incurred on behalf of Ita, but does not include corporate allocations of costs in historical periods.
This will result in a difference between what we report as discontinued operations and what I am.
Reports as their historical financial statements in the form 10.
Beginning July one IEI will reimburse car for any transition services in accordance with the transition services agreement.
This reimbursement will be at cost.
In our balance sheets for the periods. Prior to June 32019, we have aggregated the current and non current assets and liabilities by a into a single line items in each area of the balance sheet.
We have also provided a single line item for each of net cash provided by operating activities net cash used by investing activities and net cash provided by financing activities of the discontinued operations in our cash flow statement.
This allows our investors to see the balance sheet and cash flow information of cars continuing operations. This is not presented on a pro forma basis as if the spin had occurred as of the beginning of the year.
One item worth noting in our financial statements is the treatment of debt and related interest expense.
The car financial statements for the first six months of the year reflect all of the interest on corporate indebtedness.
As car interest expense.
Our corporate debt was an obligation of car and not any individual subsidiary.
We do not allocate corporate interest expense to our subsidiaries on June 28, a dividend of $1.278 billion was received from EA and used to retire a significant portion of term loans before and B five.
This will result in a reduction in interest expense at car in the second half of 2019.
In terms of our capital structure, we now have less than one turn of senior leverage at car as we look forward, we expect to use leverage on our balance sheet.
To fund the execution of our strategy.
Especially any future acquisitions.
With terminals before and B five maturing in 2021 and 2023.
And our revolving credit facility maturing in 2021, we intend to amend and extend our credit facilities in early September .
Pardon me I took on micro subject to acceptable market conditions.
We are expecting to increase our term loan borrowings with the proceeds being used.
For general corporate purposes, including future acquisitions.
We expect any proceeds received from the refinancing to increase our cash balances upon closing.
We expect to complete the refinancing of our debt.
Prior to September 32019.
We will continue to have a target net leverage of three times adjusted EBITDA.
That concludes my remarks, and so I'll turn it back to Valerie to take your questions.
Thank you.
Ladies and gentlemen, sorry to ask a question. Please press Star then one on your Touchstone telephone.
Again, if you would like to ask a question. Please press Star then one.
One moment for our first question.
Our first question comes from John Murphy of Bank of America. Your line is open.
Good morning, guys Dan on for John .
So my first question is on the guidance and I know you mentioned, some inventory losses and related expenses, a negative factor, but even at the low end between 19 outlook still implies somewhat of an acceleration in the back half of the year.
Is this driven by a continued integration and I guess you wrap up your acquired businesses or maybe some normalization of costs that you don't expect short peak in the second half Im just curious to hear your thoughts about the different drivers there and whether there is anything unique you expect will happening to be careful Q.
Yes, So I think a couple things number one is.
Quite frankly business is.
Good we're seeing revenues up we're seeing volumes up.
And this is much better than what we've seen in the first half of the year. I also believe that we're going to get the benefit of some of the costs that we took out in the first quarter of the year, we'll start to see some of those benefits realized here as we go into the second half of the year, Eric would you add to that and then you are correct. Some of these events in the ancillary services affected the first half we've made changes in our gross profit will be stronger in the second half than it was in the first half and then lastly, we will be receiving.
Payment from Ita for a portion of the transition services, which is in our cross structure in the first half. So the net will be a reduced corporate overhead in the second half of the year as well from from that.
Okay. That's very helpful. Thank you.
And my next question.
On trade Dragon I know, it's early days, but is there a set of metrics of data points that you guys are looking at both in the near term near term and longer term to determine success I'm just trying to understand how do you think about future investment then what level of spend it makes sense.
Event going forward given the current performance that you're seeing.
Well the primary metric we're looking at his car sold.
And we do have parameters under which how much money, we are willing to invest and losses in that business of course that we laid out at the beginning of the year, but it's really pursuing market share. Jim do you want to talk more about that and how you are pursuing market share.
Yes, I think one of the things I mentioned in my commentary is I mentioned that.
We.
Made a change on August 1st where we have aligned the sales team.
That tradeweb and the sales team at ADESA physical auctions and if I can expand on that for just a moment.
And give you a little bit of background and how we plan to go forward here I think is really critical to how we see success in the back half of the year.
Up till now I would tell you that ADESA and Traderev have for the most part operated as.
Independent offerings, almost independent companies and you could say in fact, they were actually competing with each other to some to us to some extent in some cases you had two different sales people on two different days, calling on the same dealer offering a different value proposition one on trade rather than perhaps one on physical auctions effective August 1st we have a line those two sales teams.
And the real goal here is to focus on dealer consignment.
And we wanted when dealer consignment, regardless of what channel. It comes in we want to be able to offer the dealer at digital offering on try drive, but we also know that not every dealer is going to take that offering we want to be able to offer that dealer the opportunity to sell the car in a physical auction.
And allow the dealer to make the choice of use one one channel use the other channel or perhaps use both channels and may be one challenge for certain cars than another channel for other cars I'm sure you get that picture, but.
As we see that one of the most critical things for dealers, especially in the urban areas is to get these vehicles off of their lot as quickly as they can.
Real estate is at a premium and these trades that they're not going to be keeping for retail they need to be off their lot and one thing that we have that our major competitors in this space don't have as we have a lot of real estate.
And our plan is to.
Capture that car sweep that car off their lots and get it to our lot as quickly as we possibly can once we get an inside our compound once we get it inside.
Our security, it's going to be much easier to mpcs cars and the launch these cars in a much more effective and efficient manner.
In fact, if I could describe to you what our plan would be as we get the car were immediately going to ask the dealer to.
Lots that car on Traderev not wait for the sale to come up on sale day at the physical auction immediately launch that car on trade Rev.
If it doesn't sell on Traderev, then we're going to have that cargo into the physical auction and hopefully sell that car in the physical auction.
If perhaps it doesn't sell in the physical auction.
Then before it leaves our premises we're going to re launch it on Traderev, maybe ask the dealer for a price adjustment, but relaunch. The car again. So you can see there is kind of a waterfall event here of Traderev physical back to try to drive and we believe that this gives us a much better opportunity to get this vehicles sold.
At one of these stages the other thing that we've done.
As weve aligned our fee structure.
Between ADESA and trade drive the fees are similar in terms of what it cost you to sell a dealer consignment vehicles and then I mentioned in my remarks, we've also aligns incentive pay so what we have is we have the traderev team and we have the dealer can dealer consignment team at ADESA physical auctions, we have them working towards one number on dealer consignment.
There is one compensation program and this closely aligns these teams to work much better together and I think that.
This combination can really accelerate what we're going to be able to accomplish here in the second half of the year in hitting our goals.
Just to add a couple more comments.
I think one of the things I hear a lot from investors is they talk about how much are we cannibalizing the ADESA physical auctions and.
There is no question there is some cannibalization thats going to take place, but let me paint this picture for you.
Overall ADESA has about a 20% share of the dealer consignment market in North America.
I'm not concerned about cannibalizing some of that 20% at ADESA physical auction and quite frankly, that's what I'm trying to drive towards what I'm really focused on is I'm focused on the 80%.
How do I go after my competitors, whether it be independent auctions are the major groups that we compete with how to go after them.
And take share in the dealer consignment and then how do I go after the adjustable market, which is nine we estimate at nine to 10 million units, how do I go out so that addressable market, where no cars or even come into an auction today and how do I get a larger share of that market. So I believe that between what we've done with the sales team what we've done with the fee structure, what we've done on incentive pay and now what we're done on approaching the total addressable market that there is a real opportunity for us to see a quick acceleration here through the back half of the year and I mentioned some numbers that we pointed to.
We had a record day here in July of over 1200 vehicles and one single day, a record three days, where we sold over 3000 cars.
I believe this is a good indication of what can happen. So I know that was a long winded explanation, but.
I'll stop there.
Thank you. Thank you for the kind of its really helpful.
I guess my last question.
The conversion rate at ADESA improve materially from last year can you maybe discuss some of the drivers is there and what do you think it's sustainable.
The primary driver that is the mix of vehicles were sick with a high commercial mix. The conversion rate will always be higher thats. The nature of our business. Those commercial vehicles are more likely to sell because that's their avenue for monetizing those assets, whether they be captive finance companies banks fleet operators et cetera. So it's really the mix and that converting your conversion rate is consistent with what we've seen in previous years, where that we had very high commercial mix as well.
And I believe it will be sustainable as long as the mix stays heavily commercial.
Okay. Thank you for taking my questions.
You're welcome.
Thank you. Our next question comes from Stephanie Benjamin of Suntrust. Your line is open.
Hi, good afternoon.
Hi, Stephanie so I wanted to touch back a little bit on ADESA gross margin for the quarter.
So Mike.
Kind of a two part question, but the first part of the question.
Looking at what you reported for ADESA and then adjusting it for the purchase the vehicle. It does look like that just from a sequential basis the impact of purchase vehicles did accelerate a bit I think it was call. It 400 to 500 basis point, though is that what we should expect kind of going forward in the back half just looking at the impact of purchase vehicles.
Versus last year.
And then the second part of that is taking okay. The adjusted.
Adjusting out for the purchase stable taking that aside and then even adjusting for the inventory loss you called out it looks like margins were still down call. It 100, bips year over year. So maybe if you could speak to the reason for that.
Barry adjusted still margin decline and kind of expectations of what of that was really only specific to the quarter and what we can expect going forward.
Hi, Thanks, Good afternoon, Mike Okay.
I think I have Stephanie this is Eric So I'll respond first you are right.
With the launch of the ADESA assurance program across all of our marketplaces. We have more purchase vehicles are result of of that.
Program offered to our buyers and we expected to continue in the Q that we will file most likely tonight and in the supplement we're giving you the actual revenue related to purchased vehicles. So you can begin to parse out these pieces in our financial statements and it was.
That 500 Bip difference in margins it was only 300 a year ago.
If I net out vehicles. The difference this year compared to last year was 200 basis points at ADESA, 45.2% last year to 43.2%.
While most ball about half of that was the inventory loss there was more than the inventory loss and reduced gross margin performance in the ADESA business from ancillary and related services and those are additional costs and other items at high Tech locksmith.
That had significantly reduced profitability and margin and also the autovin situation that we mentioned that reduced margins those two items, which I believe were temporary and will not be repeated.
If they had not occurred if we had had our normal margin profile actually margins would've been flat year over year, excluding the impact of purchase vehicles and I did that calculation not not making at approximately flat. We took out the specific items that we know of and we would have been flat on percent margin that gives us confidence that we can perform at a higher level in the second half than what you saw in the first half.
Okay. So got it so just really as we look through this year the kind of the transition as we start to model. If the death assurance means that margins will be down year over year and based on what you reported last year, but if you net out the past two years.
Of these purchased vehicle.
It's more of those temporary so is that the right way to think about it.
Right, Stephanie we're netting it out of both years, though it's just when we're giving you both years data so in each quarter. So that you can calculate we look at the business on a net not a gross basis relative the purchased vehicles. That's that's you have it correct. They should not have an impact and I will be giving that information going forward and then separately I would just weigh in here.
For purposes. The ADESA assurance program is a very good very good program as a profitable it's a profitable program and I believe it's helping us grow our business.
Got it.
And then lastly, this is also just I wanted.
But in terms of.
You mentioned with trade rather than just kind of adjusting the fee structure to make it more attractive or kind of similar between physical and trade route when did that begin or can you kind of talk about what you are seeing this early results. There and then that's it for me. Thanks, so much.
Well and Stephanie as many people know our by fee structure can be market by market in the United States and Canada in particular, and what we're doing is in markets trying to eliminate major differences in salvesen by fees.
Relative to selling a dealer consignment car in any given market.
So.
Where we're seeing differences, we are aligning them weather and it will depend which one's adjusted we have opportunities perhaps for more fees on the trade Rev side and it may put some reductions on the ADESA side.
In certain markets, but we don't think notably material either way.
Great. Thanks, so much.
Thanks, Stephanie.
Thank you.
Our next question comes from Chris Bottiglieri with Wolfe Research Your line is open.
Hey, guys. Thanks for taking the question.
Correct.
I was doing some math theres make sure the autovin it sounded like it was roughly equal to.
The headwind for the inventories and 5.4 is that is that a good calculation I just did.
That's the it would not have been that big.
There's there's a there's there's more high tech than just inventory, Chris you're probably right on the headwind relative to margins year. It just wasn't all autovin. It was both additional cost issues at high Tech locksmith, and a portion that autovin.
Got you. Okay. So, let's just say we give you credit for all that this goes away kind of back to normal Q Q3 started Q3.
I, probably have you up about 4% then on kind of like let's just call clean EBITDA.
Versus back half 10 imply 10% growth at the low end.
Pretty attractive used car environment in Q2, I don't know whether it gets better.
Anything else you could point to that's discrete that would cut.
Give more credibility to the back half guide anything you could point to would be helpful. There.
Yes, you'll have the offset of corporate expenses with the reimbursement for my a that will be direct in the second half.
Keep in mind that discontinued operations as very specific rules and what you see in the financial statements is not how I record them in the first half of the year my cost or my cost and I don't get to allocate out the same way that they have to pickup allocations to shoulder business as it exists so they're more call. It on a pro forma basis and I'm on an actual so Chris that is going to be a component that is very specific.
Where we will have a recovery of costs in the second half that was not not present in the first half.
And I think the other thing I would add Chris and I mentioned it earlier, but.
We did take out cost in the first quarter of the year and I believe that we will get the benefit of those costs in the latter in the latter half of the year.
Got you, Okay, and then Traderev switching gears to Traderev.
A couple of comments, there going I want to dig a little deeper on.
So what I think you talked about aligning the fee structure and it doesnt versus traderev.
Does this implicitly me that you've raised fees at three drive or cut fees that kind of with the ADESA branch level, just wanted to get a sense for what you mean by aligning the fee structure there.
Before I, let Jim talk about.
Generalities.
We were to 71 in the current quarter versus about 250 private so there you see that the impact of that Chris I think.
And we think theres room for that to get even higher.
So the fee structure is really to make again, there's a value proposition to remarketing of vehicle and there is no difference if it's on trade driver or ADESA physical it's worth a certain value.
Got you that's really helpful and then.
Big Picture I think you made some comments about.
EBITDA.
Being a different between trade revenue physical I know, it's a somewhat illustrative, it's a brand new concept.
Now that youve any markets that have scaled yet.
But to the best of your ability. If you were to look at like a market level contribution analysis is there going to frame for us what the Traderev profit contribution is per unit relative to legacy physical. So we can think about as some of the Steelers migrates the trader and how that impacts the penalty to model going forward would be helpful.
Well, while this is very difficult to do on a market I would not extrapolate individual markets. We are mature in the Toronto market for example, in Canada, where the company was founded and the profitability. There is very comparable to what we would get in the in the individual dealer consignment vehicle at ADESA Toronto, So again.
The unfortunate part is in both of those analysis, you're not fully loading it with corporate expenses that gets tough, but relative to contribution it's very comparable in a mature market, which I think thats something that we can point out. We are we are the number one player in physical auctions in Canada. We are the number one player in digital auctions in Canada.
And were finding it to be a market that they can coexist without diminishing our profits in those markets.
Got you, Okay and then one for this really quick one how many days a week is traderev open when you cite these thousand per day figures are trying to get a sense for how many days you're actually operate any given week.
Yes, so the trade Rev is open seven days a week.
The fact, the matter is as we receive a car and we image the car and launch the car.
As they as the car comes to us so.
Basically.
That's one of the big benefits of trade revenues, you don't have to wait for the sale day to come up you can sell the car immediately and as you may know that so all said and done 45 minutes.
Got you okay.
The only reason I can't take your thousand per day and multiply It times 90, then.
Yes, there there is a pattern to retail activity.
Monday would be the biggest day of the week every week and.
You'd probably see less activity towards the end of the week in the weekend when they're focused on the retail transaction and they don't wholesale as many cars, so you'd see a lot of activity.
Post Saturday as their loading cars and getting ready and Monday is the biggest day of the week.
For digital.
Not unlike Super Monday, and the holidays and people get back and that's when you get online and start selling your with your.
Your goods and services.
Got it Okay I will take this tough question. So thanks for that detail appreciate it.
Thank you.
Our next question comes from Bret Jordan of Jefferies. Your line is open.
Hey, good morning, guys.
Hey, Brett Hi, Brett.
You guys have any feeling for I guess market share trends with trade route versus Mannheim, Expresser HCV I mean, I guess I mean, when you think about the dealers that you're you're pitching trade rep to are they in many cases already using another app.
No.
First first of all I think that HCV is.
Probably closer to what Traderev.
To the Traderev offering in terms of the of the transaction and how the transaction takes place I think Mannheim expresses is different from trade revenues TV.
But.
Yes, I believe that.
Last part of your question there from it so Brett the market share of all of those products is really small relative to the dealer consignment market.
I think I think trying to compare trade Rev. JCB as if that market is stand alone is a mistake. They are they are both last year sold around 100000 vehicles in total.
Thats it out of an industry our industry sold over 5 million dealer consignment vehicles. So it's a new product launch relative to each other though.
You know again.
There is not a meaningful difference until they start talking about each other as if they are separate from our industry right. Now they are a small part of the industry group that we think can grow very fast.
Generally I only know when when they think about when you think about it if you take all of these different.
Different competitors, we're looking at about a half million cars, a year of a total addressable market of somewhere in the order of $9 million to $10 million. So we're still in the very very early stages of this.
We will acknowledge that we believe in the United States that HCV has more volume than trade growth.
But in Canada trade Rev is the clear leader against all products.
Okay, and I guess.
Let's try to gauge an inflection point I think Jim mentioned went at scale. The EBITDA contribution from trade route would be I guess comparable to the business today to that.
Legacy business, what kind of scale are we talking about I mean, how many units would we need to really started to get to a tipping point.
Ill.
Our model is looking at the last digital net network that we saw grow rapidly and that was the OPENLANE environment and to be honest. It look similar it's in that 350 to 400000 unit it looks like thats sufficient scale to absorb all of the infrastructure around.
And again I.
We aren't there yet so what will happen, but that it looks like the inflection point to me Bret.
And we talked about that on our road show as well.
All right. Thank you.
Thank you.
Our next question comes from.
Ryan Brinkman of Jpmorgan Your line is open.
Hi, Thanks for taking my question.
Clearly you were correct in your observation that you have unlock shareholder value by the spin of Ita I Wonder, though did the value that the market assigned to tie a relative to CCAR and we're seeing another step down in the car insurance today of course that track differently than you might have supposed and does that enter it all into how you view the opportunity for dividend versus repurchase.
So I'll answer the first part of that and maybe Eric can pick up some of that as well.
Ryan.
There's no question that.
To your point.
We actually Overachieved our expectation.
On insurance auto auctions, so on a large picture.
You know I think overachieved.
But there is no question that we do we do feel that ADESA is undervalued and and that dropped to a level lower than what we expected.
And relative to share buybacks, yes, we are expecting to fully utilize the remaining authorization.
And take advantage of the fact that we think our stock is undervalued versus what the long term value should be.
Okay. Thanks, and then finally from me, but still on capital allocation.
Recently, Carter's Dot Com completed a review that some speculated could have ended in a sale can you talk about what you look for in an acquisition candidate I think investors have so far had an expectation that acquisitions would mostly be sort of.
Asset light software system type purchases in Europe like cars on the web with the U.S. physical business pretty much in place is that still the right thinking our Europe et cetera, or are there yard opportunity still in the U.S. or would you even maybe consider acquisitions that are a little bit more outside of the box.
Yeah, So Ryan I think first and foremost we believe.
In digital and we believe the world is going digital and we will continue to invest in this asset light manner wherever we can and the with the plant with the platforms that we have.
Whether it be the OPENLANE platforms of the trade Red platform. The current cars and the web platform to Drs platform, we have in the UK.
So anytime that we can invest in technology that will enhance our opportunity to service our dealers.
That's always top of mind.
But thats not to say that we wouldnt look at other opportunities people asked me from time to time would you ever consider buying a physical auction and you know, although we say its going its going.
It's gone digital we know that transformation is not going to happen overnight and there's going to be some time and if there was an opportunity to buy a physical auction or by physical auctions in a market that we are underserved where there's a buyer base that we don't currently have or there's a customer mix that we didnt have we we kind of take a look at that sort of thing and and there might be.
Some physical auctions that we still feel we could buy and have enough runway that we get our AR.
Our investment back many times over before this transformation is fully completed.
We said in the commentary.
You know what do we really do well and we believe that world class, we re market cars at the very very core that's what we do best so anything that we should be doing that we should be investing in should be helping us remarket cars and if you look at our strategy you look at the investments we make that's where we should be investing.
So.
So I hope that gives you a little bit more flavor for how we think about the mark.
Yes. Thank you.
Youre welcome. Thank you.
Our next question comes from Gary Prestopino of Barrington Research. Your line is open.
Hi, Good morning, Hey, Eric could you you mentioned you had some issues that auto van and I didn't quite capture that could you just very briefly say what was going on there that.
Some of the.
Issues on the gross margin.
Yes, so Gary this is Jim I'll take that.
At Autovin, we were installing a new technology that was being put in place to enhance the efficiency of our inspectors daily routes that they take.
In terms of how they how they get assigned and quite frankly, what happened as a technology was being installed.
We actually ended up doing less inspector less inspections per inspector per day.
And.
We caught the glitch, we adjust the technology and we're back to normal operating at this point in time. So it was just kind of about it was kind of a 30 day blip, where we've seen and we've seen this take this take place and has since been corrected so Gary the net effect that is revenue went down and costs was flat for what it would have been because we were having less inspections completed.
Yes.
Okay.
And then.
Just a couple other ones as most questions have been answered can you.
And no treatment of is an early stage, but isn't working out where it's like an 80 20 rule, where there's 20% of the dealers that have gone to use and 80% of the doing 80% of the transactions and just trying to get an idea of what what the the actual uptake among the.
Dealer would be in terms of usage and doing transactions.
Yes, Gary I don't know if I could put percentage numbers on it all I can say to you that is very spread out is very different market by market.
And obviously is very different in Canada than the United States and you just can't take what we Didnt, Canada embraced in United States. The market has nuances and has differences it's market by market dealer by dealer and its really boots on the ground and its going out and presenting the value proposition and and really now presenting the choice you know.
And you can't go out and tell a dealer that he's a dinosaur and he has got to come to this new technology overnight. I think you have to go out and demonstrate to the dealer what the benefits are of each product what the economics are beats product and then let the dealer basically decide the same way, we let the commercial customers decide whether they want to sell and the physical environment or on an online platform. So I hope that makes sense here.
Yes.
And then lastly, I'd just on in terms of the bars on the web with the tech platform that you have there.
What what would be your annual capacity of vehicles that you could use you could sell through that tech platform now or is it just on limited because its a type platform.
You know Gary though.
Then as you said is an unlimited opportunity if you think the cars and the web today cars in the web as a small company I mean, we're going to sell somewhere in the order of 70000 cars. This year. When you think of the of the car Park in Europe . It's.
It's compared to the car park here in North America.
So it is a huge opportunity there we think we have.
The best platform.
And we think we're positioning ourselves with our relationships around the world to really be the winner in this space. So again, it's going to take some time, but the opportunity is huge.
Thank you.
You're welcome.
Thank you.
Our next question comes from Daniel Ambrose Stephens. Your line is open.
Yes, Hey, good morning, guys. Thanks for taking my questions.
Good morning.
First just a broader question on the wholesale channel as it relates to used vehicle prices.
A few years ago, you vehicle brands were following the more off lease units kind of went down the funnel towards the physical auction.
As we've seen used vehicle prices increasing are you starting to see any signs that dealers are grounding more units or the return rate of unit, making at the auction changing at all.
So.
Are we speaking of dealer vehicles here are we speaking of of the off the off lease vehicles I am sure and to make sure I understand your question.
The off lease units.
Or the grounding dealer, taking down more of those as we've seen used vehicle prices.
Improve year over year.
No actually we kind of give that you have been giving that number the grounding dealer.
Number is leveling off its not grow initially we saw it growing and now it's flattened out and and were seeing a similar we're seeing the most significant growth being in the private label channel and in the physical auction channel men again, we're at 2 million units being sold at physical auction that are off across the industry that are off lease that's a very significant increase in and continues to grow.
Got it and then just a question on if the revenue growth did moderate there you said it was in line with your expectations, but can you talk about how that segment exposed to interest rate I think I remember over the last few years, a rising rate environment supported growth at AMC.
Can you talk about how the exposure of that segment would be in a falling rate environment.
It's actually a theme of fee based business with an interest rates better spread on top of it we reprice daily on new loans. So it's not as interest rate sensitive and the average term is about 65 days. So it's not as interest rate sensitive as most loan portfolios.
I would tell you its activity is probably more in line with what's happening on the consumer loan side, which we don't participant, but as retail activity and they're flat in a market, where we told you. The physical auction volumes were up 1% that is their primary customer while they pick up some trade route the OPENLANE customer is not likely to be using NFC, because that's a franchise dealer buying and we don't finance the franchise dealer through AMC that they use the captive finance. So so that's why it's in line is flat was relatively close to the toll.
Change in physical auction volume for us and Thats kind of how I measure it Dan.
And I would say interest rates aren't a big impact and declining interest rates will probably be good for retail use retail car sales, which will be good for their portfolio that it has nothing to do with cost of funds got it and then just one last quick clarifier, if I could Jim apologies, if I missed it but did you update at all your full year trade growth either unit or operating loss target or did you reiterate that 200000 and $60 million.
No I did not but.
Based on what your what you say here I will I'm you know we had set out the first of the year that we stated our goal was to hit 200000 cars.
Trey drugs.
And we have not taken our eye off that goal, we've got the accelerator to the floor and I think with the with the.
With the.
Changes that we made here August 1st I'm looking for acceleration and a continued push to that 200000. We've also announced that we were going to have $60 million in operating losses and that number has not changed.
Great. Thanks, so much guys.
You're welcome. Thank you. Thank you.
Our next question comes from Bob Labick CJ Securities. Your line is open.
Good afternoon and thanks.
Just about.
To help help us quantify it was helpful to note the change in the corporate expense can you quantify the difference or I guess, what they'll pay you in the second half of the corporate will be down acts in the second half based on the recruitment for my.
Well it will be based upon the services they utilize Bob so at this point I'd rather not it's.
Meaningful number, but it wouldn't be material to the overall financials.
It's millions of dollars, but not tens of millions of dollars.
That'll size.
Got it great Thats helpful and then.
I, just I guess bigger picture question in terms of the.
You're talking a purchase cars the ADESA assurance it seems like.
Revenues, they're up close to 200% close to $80 million. This quarter can you talk about the drivers behind that is that.
From openly that now from freed route or what's causing the material increase at ADESA assurance year over year.
Well first of all I think I would say, it's a product that has created a lot of confidence with dealers buying cars anytime that you can create more confidence for the dealer to buy that vehicle.
And to have some kind of assurance around around price on that vehicle.
Then he is more likely is more likely to buy more vehicles, whether it be an online vehicle or whether it be at the physical auction or whether it be on trade routes any of those venues and so what what we're doing is we're offering a product where they buy ADESA assurance upfront and if they havent sold that car in a specified period of time and under certain conditions. They can return that car and we will repurchase that car and then we will go on and result in the marketplace.
We put an increased focus on the product and the product is doing exceptionally well is creating the behavior that we anticipated is driving sales I mentioned earlier, it's it's profitable.
And we're seeing we're seeing real real real success.
Okay, but to be clear. That's also part of our Traderev is on that on it its insurance as well in addition to OPENLANE and then obviously the regular off.
No traderev.
Is not on ADESA assurance.
Traderev has different arbitration policies.
So.
There are pockets of purchased vehicles at Traderev, we do not count them in our car count.
If the car is returned and basically you reverse the transaction. We do not include those as a second sale.
And it's a very small number.
Okay. So it's not in the 41000, but it isn't the ADESA assurance <unk> revenue no no. They are not buying adesso. It's there in the 41000, there are no resales of vehicles.
And they are not using the ADESA assurance program independently at trade Rep.
Okay got it so that interest.
It's a physical auction.
Analog openly.
It's easy it's basically our private label platforms and ADESA auctions, Okay and then.
So what's the material change year over year, I mean, it's such a big number.
We've we've made it available on more transactions.
It used to be very limited and we're saying no. This is a good program and as bear and is profitable for us when you net out the sale price and purchase price of the vehicle and the fees, we collect its a profitable offerings.
We also have more cars. We also have purchased about 20% now this is unique about 20% of the transactions at cars on the web are reflected as purchased vehicles also as a result of the nature of title transfer in different European countries.
So that is probably also a meaningful contributor to the increase.
Got it okay and that is not addressed I start and so those are just called purchased vehicles. We don't really purchase said, but were at risk. So it's recorded in the same way.
Okay understood.
Figure that part out the model it.
Great I think thats all I have thanks.
Thanks, Bob Valerie we'll take one last question and then we're out of time. Thank you.
We have a question from Allison when of Baird. Your line is open.
Yes, guys. Thanks for taking my question helpful commentary on the changes in your sales team approach with trade round.
But apologies if I missed that I'm wondering about your customer facing incentives this quarter, how many I'm sure those of change and then what impact have you seen.
Yes, so as we think about that.
We continue to monitor.
Transportation.
Transportation is probably the number one incentives that we use for our buyers.
And at one point in time, we were transporting cars different distances and we're providing different incentives.
We continue to tweak that.
And we tweak done on a market by market basis, and I think that's probably the biggest.
The biggest motivator for buyers to want to buy more cars on trade rep and analysts for magnitude, we expect those types of incentives to represent roughly.
One third of the operating loss for the year.
Great. Thank you that's helpful. And then just one quick follow up clarification on the share repurchase if you don't mind is that contemplated in your current guidance.
Well, we we have not as you saw in the guidance. We give you the 134 million shares which is roughly what's out there we have not adjusted that for what potentially could be the share repurchases completed this quarter.
Okay, we did not intend on circle.
Thanks Alan.
Thank you.
As we have no further questions at this time I like to turn the conference back over CEO , Jim Hallett for any closing remarks.
Thank you Valerie and.
Thank you to everybody has been on today I really appreciate your interest and your continued support here.
I'll tell you frankly, I'm feeling very very optimistic about what's going to take place in the second half of the year here.
You know, we got a little bit of a struggle in January and February of the first half for the year.
We've done a number of things that I won't repeat that.
We've done a number of things we've taken numbers steps a number of actions.
We're committed to our guidance of $530 million to $550 million.
I believe if we can execute on the things that we've said we're going to execute on I believe we will deliver on that guidance and I'm committed to hitting those numbers.
I'm excited about the.
Changes that we've made and trade rep I really believe that there can be quick acceleration here and I believe that we can drive those volumes with new go to market strategy that we have.
I think as we continue to rightsize this company and to do the things that we're talking about here make the right acquisitions and the right allocation of capital.
I believe this is a great business and I believe that we have great opportunities in front of us and now it's time for us to demonstrate that we can get out there and execute on the things that Weve told you about.
With this spend being behind us notice Jackson's let's get to work. So I appreciate you being on on thank you and.
Well look forward talking to you next quarter.
Thank you.
Ladies and gentlemen, this does conclude today's conference. Thank you for your participation have a wonderful day you may all disconnect.