NEW YORK -

At the recent Stephens Spring Investment Conference, the leadership of KAR Auction Services spoke on the expected influx of off-lease vehicles and how this trend will impact the company's businesses, as well as where these off-lease vehicles will end up in the remarketing process.

The Wall Street Webcasting website provided a webcast of their presentation made by KAR chief executive officer Jim Hallet and chief financial officer Eric Loughmiller, at the New York event.

Management explained they are keeping an eye out on trends regarding where off-lease vehicles will be heading in the remarketing sales “funnel,” as Loughmiller put it.

Questions such as these are becoming increasingly important as the industry prepares for considerable growth in available off-lease inventory — and an overall recovery in the used-car business.

“We are in the early stages of a cyclical recovery in the used-car business, it is heavily driven by the events of a few years ago. It started several years ago, when we ended up with some interruption in the financial and used-vehicle space, which all trickled through, and now we are actually coming off of the bottom where SAAR is growing, leasing is growing, and repossessions are looking like they are growing because of subprime lending,” Loughmiller said, opening the presentation.

What is primarily driving this cyclical recovery in the pre-owned business? Growth in the amount of available off-lease cars, says Hallett.

“In 2008 and 2009, leasing came to a standstill, and consumer credit froze. And the two big drivers of our business is off-lease returns and repossessions. So what happened is we ran those portfolios off … but then leasing got rebooted in 2010 and consumer credit started to loosen up, so what we are seeing is the third anniversary of leases that were written in 2010,” Hallett explained, going through the company’s experience during the recent economic downturn.

The two executives said the industry expects to see an additional 300,000 off-lease vehicles return to the market this year, with that number expecting to increase by another 700,000 vehicles in 2015.

Add another incremental 500,000 vehicles to the mix, expected to hit in 2016 — “and you can see we have got some pretty heavy tailwinds behind us here,” said Hallett.

The company’s volume was up 7 percent in Q1, management pointed out, growth that was primarily driven by off-lease returns.

Hallett said the company expects its volumes to increase throughout the rest of this year, as well.

Where KAR’s Off-Lease Vehicles Are Headed

And as these off-lease vehicles enter the remarketing stream, they have a variety of places they could end up in the KAR pipeline.

The first stop in the sales “funnel,” as company management coined the remarketing process for these vehicles, is its OPENLANE private label sites for automakers.

Loughmiller explained, “Of all the off-lease vehicles that come onto the market, 90 percent of those private label sites are coming to us to sell them.

“We get the first opportunity at the car,” he said.

Not surprisingly, as inventory began expanding last year for the first time since before the 2008 recession, franchised dealers were eager to expand their inventory, buying up the majority of off-lease vehicles before they made it off the automaker’s closed sale sites.

Dealers are also becoming more and more comfortable purchasing vehicles online — in the first quarter, 37 percent of KAR’s vehicles were sold online; in 2009, that number came in at about 18 percent.

“Dealers have been starved for inventory through 2011 and 2012. We really hit that trough, and when these cars are coming into the funnel again, dealers were aggressively buying these care and continue to do so, with some focused on getting dedicated used-car lots. We think that pace is going to slow down, and ultimately help our economics and continue to grow the business,” Hallett said.

If the off-lease vehicles aren’t sold at the closed online sales, they will then trickle down to open online sales, and ultimately, end up at the physical auction — where the vehicles will make significantly more revenue for KAR.

“When the vehicles make it to the physical auction, we have the opportunity to increase our revenues by providing ancillary services. We operate reconditioning shops, paint and body shops, mechanical shops — we do a number of services which drives our revenue,” said Hallett.

Loughmiller chimed in, noting, “I think what our investors are betting for and management is we are hoping more of these cars make it to the physical auction."

“We feel like these franchised dealers can only absorb so many of these cars,” he added, at which point in time these vehicles will be passing further through the sales funnel.

“We are expecting that in the second quarter, more and more of these cars will get to a physical auction,” Loughmiller said.  

Another reason franchised dealers might back off from purchasing so many of these vehicles on the closed sale sites in the coming months has to do with the industry returning to some of the “bad habits” that spurned the leasing shut down in 2008 and 2009.

“When leasing stopped and got restarted, one of these things that got these leasing companies in a bad way is they were setting their residuals too high … and many consumers were upside down on these cars when they went to return them,” explained Loughmiller. “When they  got back into the game, they right-sized residuals. But those residuals have crept back up again to where those cars aren’t that attractive to dealers when they first come back, so we think the franchises will pass to buy them on a lower residual in open sale.”

When asked whether it will be a regional shift, Hallett said he thinks these vehicles will move farther down the sales pipeline on a national scale.

“I don’t think it is a regional thing. I think it is more of a national scale, we have contracts in place with almost every one of the manufacturers. We have greater market share depending on the customer and market, but as we go into the funnel, it is a question of demand,” he concluded.