CARMEL, Ind. -

Along with discussing two elements impacting the revenue stream at Insurance Auto Auctions as well as more auction locations that might become part of the company, KAR Auction Services chief executive officer Jim Hallett said the company is seeing volume growth both in the physical lanes as well as its online-only channels.

What especially impressed investment analysts was how ADESA reported a 14-percent volume in the second quarter as Wall Street observers noticed the industry-wide improvement came in at about 9 percent.

“I’d say that we look at those numbers with a little bit of caution. We were at 14 percent and the industry did report 9 percent,” Hallett said when KAR hosted a conference call to discuss its Q2 performance.

“But we really don't put a lot of credence in those numbers until we get a year-end result and we get a full report,” he continued. “But with that said, our commercial business is very strong. And all segments are doing well. And that’s right in our kitchen.”

Also cooking nicely in KAR’s wholesale kitchen is dealer consignment. Hallett described it as a “phenomenal job” that the company as a whole generated a 7-percent lift in dealer consignment in Q2.

“Many of you go back in history with me to where in 2009 our dealer consignment business was at 25 percent of our total business,” Hallett said. “And we knew with the headwinds that we were going to face on the commercial side that we had to get a lot better with dealer consignment.

“This is probably one of the initiatives that I’m most proud of is the fact that we’ve been able to take that dealer consignment up to 50 percent of our business and not just take it up, but to hold it there,” he continued.

Not only is KAR seeing a steady flow of dealer consignment volume, the company is also witnessing its lanes filling with units from other segments of the wholesale market, too, trends that Hallett is expecting to see continuing for the foreseeable future.

“Our customers have told us that off-lease supplies in the second half of 2015 will be stronger than what they were in the first half of the year,” Hallett said. “And the number of cars selling online only is growing, but not as fast as the supply of off-lease vehicles. The good news is this is driving strong physical auction volumes.

“We knew that volume was going to increase, but I think the pleasant surprise was all segments were really improving,” he continued. “When you think about, we often just focus on the fleet, lease and repo, obviously this is heavily driven by the fleet lease and repo segments. But you know what, we’ve seen a large increase in factory cars. We’ve seen an increase in daily rental cars.”

Expanding footprint

KAR is still on the hunt for more locations even though another site near Pittsburgh is already in its portfolio and a green field is coming together in the Chicago market.

“We’re still very much a believer in brick-and-mortar auctions,” Hallett said. “We believe that not only does it give you a physical site that allows you to also grow your ancillary services and your revenues, but it also gives you another customer base that grows the customer base, and contributes to the online customer buying base as well.”

Hallett then reiterated that KAR remains interested in acquiring more independent auctions and bring them into the company umbrella.

“We did identify there’s probably five to 10 of them, as you mentioned, in the country. I didn't say we're going to get all five or 10 of them done anytime soon,” Hallett said. “But we are always in communication with the independents. We have good relationships with the independents, and I think you'll see us complete Chicago, and I think you can expect that we would be opportunistic as more of these opportunities become available.

“You would see us act on specific ones if they contribute to the geography and the customer mix and the strategy that we're looking to build on overall,” he went on to say.

KAR chief financial officer executive vice president Eric Loughmiller then interjected that the company would “be disciplined on how we value the businesses as well.

“That’s part of what drags these things out is we're very disciplined on how we value the physical auction businesses,” Loughmiller added.

Factors influencing IAA’s revenue

Insurance Auto Auctions generated an 11-percent revenue increase during the second quarter. Perhaps the jump might have been higher, but Hallett indicated that “commodity prices have continued to be depressed, impacting the lowest value vehicles sold there, and therefore affecting our buy fees.”

Loughmiller explained how the company examined the situation further to prepare for its Q2 report. He examined selling prices for salvaged vehicles in the second quarter and compared them to a year earlier.

“I found it interesting that we sold more than two times the number of cars in Q2 2015 than Q2 2014 at a value of $300 or less,” Loughmiller said. “This clearly demonstrates the impact commodity prices are having on the value of salvaged vehicles, especially the lowest value vehicles.”

Beyond commodity prices, another investment analyst wondered if IAA is seeing insurers put additional pressure on the company to keep costs low as vehicle accidents rise, perhaps impacting KAR’s ability to generate more profit by this division.

“Really the pressure comes from service-level agreements that are embedded in these insurance contracts,” Loughmiller said. “The pressure I would describe as we're expected to pick up the cars faster. It helps to reduce the cost of storage and things that the insurance company might be incurring prior to it getting to the salvage yard. Again, the model works very well for us and I'd say the pressure is really focused on the tow cost.”