UPDATED: Sixth paragraph corrected for clarity. 

Jim Hallett talked about a lot more than just TradeRev during KAR Auction Services’ recent earnings call.

During the third-quarter 2018 report discussed on Nov. 7, the KAR chairman and chief executive covered the company’s 11-percent third-quarter 2018 revenue increase, the proposed spin-off of its Insurance Auto Auctions (IAA) business, the effect of hurricanes on IAA, and the strong current condition of the used-car market in North America.

But the conversation kept swinging back to TradeRev — KAR’s auction technology company — which produces a mobile app and desktop product that facilitates real-time dealer-to-dealer vehicle auctions. Hallett noted that TradeRev will lose money over the next couple of years as its parent company KAR focuses on expanding to new markets and developing existing markets.

Despite those initial losses, Hallett likes what he sees in TradeRev, which KAR acquired in October 2017.

“I'm even more confident today that TradeRev is a transformational product and is where dealer-to-dealer transactions are going,” Hallett said.

A day earlier, KAR reported the 11-percent third quarter 2018 revenue increase to $933.5 million, which includes an operating loss of $14.8 million attributed to the TradeRev rollout during the quarter.

TradeRev volumes double year-over-year in Q3

Hallett reported some positive news about TradeRev, noting that the business was achieving the goals KAR set for it in the area of volume sold and that volume year-over-year in the third quarter more than doubled.

As KAR noted last quarter, it has increased TradeRev’s expenses to accelerate the pace of its introduction into new markets. Those expenses include adding “people on the ground in local markets,” Hallett said, and inside support for field and IT staff to continue the evolution of the product and to support the operations as the business grows.

TradeRev is a strong complement to the other auction venues that KAR’s auction company ADESA offers, Hallett said, noting that KAR knows the value of keeping customers and potential investors informed on TradeRev’s progress because the business is having an impact on KAR’s profits. He added that KAR at its next earnings results call in February will provide more details on the impact of TradeRev on 2019 consolidated results.

KAR’s 11-percent growth in consolidated revenues drove 24-percent growth in net income per share. But a $15 million pre-tax loss for TradeRev in the third quarter had a negative impact on that performance, Hallett said. Adjusted earnings before tax, depreciation and amortization (EBITDA) for the third quarter was up 3-percent over the prior year. Excluding acquisitions, adjusted EBITDA was up 10 percent.

“I think this demonstrates the strength of all of our core businesses,” Hallett said.

TradeRev talk also took up a great deal of time during the question-and-answer period at the end of the earnings call, and transportation incentives were a focus of much of that discussion time. In response to a question on customer response to the incentives and whether the incentives will continue, Hallett said they have been extremely well received. The company introduced the incentives to attract new customers to the platform and to encourage customers to use it.

“In fact, we're shipping cars across the entire country, and we're reaching dealers that we probably have not reached in the past,” he said, adding that the company will continue to monitor use of the incentives. KAR might reduce the incentives at some point as the platform attracts more users and transactions, Hallett said.

Responding to another earnings call listener who asked him to comment on TradeRev’s penetration progress, Hallett noted that the product is rolled out completely across Canada and is “coast to coast in the United States,” although he stated that “we do have some holes that we’re filling in as we go forward with our 2019 plans.”

TradeRev is open to the approximately 18,000 franchise dealers that are sellers and approximately 35,000 independents that can buy.  

‘Mix shift’ means higher RPU for ADESA

“ADESA's performance in the third quarter was what I would call a mixed bag,” Hallett said, noting that its revenues increased 10 percent, but that number fell to 8 percent when excluding TradeRev numbers in 2018.

Gross margin, however, “was weighed down” by the mix of ancillary services expansion and the expansion of an ADESA insurance program, as well as the TradeRev transportation incentives. Total volume at ADESA increased 11 percent, with same-store volumes up 7 percent. Same-store volumes were driven by what Hallett refers to as a “mix shift,” which meant a 14-percent increase in commercial vehicles, offset by a 9-percent decline in dealer consignment vehicles.

“Obviously, the mix shift continues,” Hallett said. That shift is contributing to a strong revenue per unit (RPU) at physical auction, he noted, adding that the RPU of $850 per car sold was up from $781 per car a year ago. Online-only RPU also increased from $112 per car sold last year to $126 this year.

IAA ‘spin’ and hurricane updates

Hallett reported that IAA “continues its strong run” in the third quarter. Revenue was up 12 percent on volume growth of 6 percent.

He also noted that “everything is advancing as planned” on the potential spin-off of IAA. The company in February announced a plan to pursue the separation of its salvage auction business, currently operated by IAA, through a spin-off. KAR is working with the Internal Revenue Service and Revenue Canada on the review of the transaction, and “nothing has arisen that changes our expectations on the tax treatment of the spin,” Hallett said.

Moving on to discuss the hurricane season and its impact on IAA, Hallett said IAA has improved its ability to prepare for and respond to catastrophic events that result in increased total loss volumes from its insurance customers. Measures include a dedicated CAT response team that works year-round in preparation for catastrophic events, a real estate team that has secured land in high-risk areas, a team that can set up technology following an event to process and sell vehicles quickly, and a company-wide network of volunteers willing to assist local operations when a catastrophic event occurs.

That preparation helped make the impact of Hurricane Florence less than forecasted.

“To be clear, catastrophic weather events will not be moneymakers for our salvage business,” he said. “We believe our advanced planning and all of the steps that I've outlined to improve our readiness will mitigate the level of negative impact these events will have on our financial performance.”

Hallett spent some time toward the end of his remarks by commenting on the condition of the used-car market in North America, stating that used retail sales continue to be strong, wholesale used car prices have continued to increase year over year in the third quarter, and volumes, especially off-lease and repo supplies, are strong. “And new car activity remains steady at about 17 million units sold for 2018. So, this gives us confidence as we look forward beyond 2020.”