KAR leaders talk hurricanes, acquisition strategy & more

CARMEL, Ind.  - 

It was quite the quarter and it has been quite the year for KAR Auction Services.

The multi-pronged impact from two hurricanes that bear some influence on KAR’s whole-car and salvage auction businesses.

Purchasing DRIVIN and Dependable Auto Shippers, and buying the remaining interest in TradeRev.

All while keeping pace with a dynamic wholesale marketplace that is going increasingly digital, as business unit ADESA’s latest gain in online sales would indicate.

Shortly after KAR released its quarterly earnings, chief executive officer Jim Hallett and chief financial officer Eric Loughmiller talked with Auto Remarketing by phone about some of these matters and more.

Salvage impact from hurricanes

In terms of how it affected the company’s operations, Hurricane Harvey’s wrath in Houston — with its extreme flooding — outweighed the impact from Hurricane Irma in Florida.

“For Insurance Auto Auctions, it means getting into the market. It means acquiring additional land, getting the equipment,” Hallet said, including items like loaders, IT equipment, mobilizing the “ground force” and having the tow-truck driver network en route quickly.

“That all takes a lot of effort and a lot of focus, and the IAA team has really done a good job,” Hallett said. “We’ve learned from past experiences and we’ve put together what we call a CAT team. And the CAT team is ready to respond at any given event.

“But then, we’re also able to add resources from across the entire KAR network, where we had a number of employees volunteer to go and work with the IAA team,” he said, saying it was a nice boost for the company.

However, he emphasized that the “the real work starts happening long after the music stops, after the press stops writing about it.”

IAA is beginning to process those storm-impacted vehicles. It had sold less than 1,000 flood vehicles in the third quarter, Hallett said, but more of those cars are going to be sold over next two quarters.

“It sounds like it’s great, we get all this volume. But in order for us to be efficient, process as quickly as possible — which meets the demands of the insurance companies — we incur a lot of costs, so we don’t make any money,” Loughmiller, the KAR CFO, said of the IAA impact.

“It’s not like our normal business. So it’s volume that doesn’t produce profits. In every other major storm, though, the period that follows is typically very good for the industry,” he said. “Because while those cars are being sold, we find that cycle times slow down on collisions and things like that. So it’s historically been good for our business following the period in which we sell those vehicles.

“It will not be a long-term negative in the case of Harvey and Irma, but it will be revenue that won’t generate a lot of bottom-line profit,” Loughmiller said.

Online ADESA volume spikes

Turning to the ADESA whole-car auction side of the business, Hallett said the impact of the storms largely had a boost: “There was some slight shutdowns and slowdowns at ADESA physical auctions, just because the storms kind of brought things to a halt in that area. But overall, there were a lot of cars lost in that Houston market. And again, nobody knows for sure how many cars have been lost. We’ve heard all kinds of numbers.”

Suffice to say, it’s in the hundreds of thousands, Hallett said. “All those cars need to be replaced.”

There are 13 ADESA auctions that are within a couple of hours of Houston, Hallett said, and those were “very active” in the storms’ aftermath.  

“But maybe more active was our OPENLANE technology platform,” he said.

“Because that platform reaches across the entire nation,” Hallett said, “and you don’t have to wait until sale day to buy a car. You can buy a car 24/7, any day of the week. So, those sites were very, very active. They sold a lot of vehicles online. Our online sales were up 34 percent in the quarter, and our physical sales were down 1 percent.”

The 34-percent spike in online volume was “not totally, but heavily impacted” by the storms, Hallett said.

It also was the highest growth rate they had experienced since the first half of 2014, which was early stages of the cyclical recovery, Loughmiller said.

And not only does this illustrate just how much online buying there was, it also speaks to KAR’s strategy of offering “all the venues” wherever dealers want to buy the vehicles, Loughmiller said.

So what else drove such a massive spike?  Loughmiller points out, “that’s where the supply starts (at) what we call the top of the funnel … I don’t know that it was demand-driven.

“If you read what the dealers are saying, they’re actually selling the cars now,” Loughmiller said. “Those dealers in Texas knew they had to start accumulating inventory for when the buyer came to their lot.”

Since the inventory was showing up online first, dealers thought it prudent to buy there because there was a “good chance” it would have been sold before the dealer could have bought it in his or her market.

Loughmiller later added, “And we experienced this when there was a shortage of vehicles; you get the inventory when you can.”

The boost in online sales also as a trickle-down impact in the sense that when online sales go up, so does the need for transportation, Hallett said, which KAR provides in the form of CarsArrive. It also leads to a greater need for additional financing from AFC.

“Even though our cars financed weren’t up, it was still more active than it would have normally been, I believe,” Hallett said.

Hallett went on to note that the storms tend to have far-reaching impacts into other ancillary services of ADESA, including the key-related services of subsidiary HighTech Locksmiths.

Acquisition strategy

In a quarterly and year-to-date earnings slide deck, KAR includes a year-by-by breakout of its strategic investments.

After two years that included, among other investments, a heavy assortment of brick-and-mortar auction purchases, the 2017 acquisitions have included DRIVIN, Dependable Auto Shippers and the remaining interest in TradeRev.

Does that indicate a shift in the strategy?

No, Hallett says.

“I would tell you that I don’t think the strategy has shifted. I think that we’ve identified some new opportunities,” Hallett said. “I would tell you I don’t believe that brick-and-mortar is done, and there’s probably some brick-and-mortar auctions that we would still be interested in if they become available. And we think there’s a balance there.”

He added: “Brick-and-mortar doesn’t just give you the opportunity to sell cars in the physical environment, but it adds to your buyer base, it adds to you online buyer base, it adds to your ancillary services. It’s that network effect, again; it really allows you to build your business in all your different revenue streams.

“Now, with that said, we also recognize that it’s a world that is focused on data and transformation. And our customers were asking us for better information. They wanted us to be able to take our data, along with their data, and as we’ve talked (about) before, turn that into actionable intelligence or predictive analytics to help them make better buying and selling decisions,” Hallett said.

“And I can tell you that’s not a hard product to sell. The customers are lined up. We’re currently in pilot with several major customers who are using our data and our pricing,” he said. “So that was a real need that the customers had. If you think about it, a customer has data on their own vehicles. We have data on millions of vehicles.”

And again, a big piece of that overall strategy includes TradeRev. As Hallett said during the preceding conference call with the investment community, “Clearly, the industry is going more digital and TradeRev creates a digital wholesale venue. I also see the opportunity to expand their total addressable market by getting a piece of the dealer-to-dealer market that has never used auctions.

“And as you know, TradeRev is a tool that allows franchise dealers to sell more new cars, take more trade-ins with real-time money and bottom line, and allows the dealers to make more money overall. This is just another channel for cars to change hands, and I'm truly excited about the opportunities TradeRev provides for KAR, and it's now time to put the full force of all the resources behind the efforts that are going on at TradeRev.” 

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