Each time a fender scratch is buffed out or a new set of tires is installed, KAR Auction Services chairman and chief executive officer Jim Hallett sees those reconditioning activities as wins for two of the company’s most important customer bases — dealerships and commercial consignors.
And the victories appear to be increasing, significantly boosting KAR’s recent performance as well as its outlook to compete successfully for the remainder of 2017 and as long as three years into the future.
During an exclusive, wide-ranging conversation with AuSM, Hallett described how the company’s reconditioning business is making significant strides.
That trend helped ADESA’s incremental operating profit jump by 32 percent during the second quarter.
“Being a former dealer, I’ll put my dealer hat on and tell you that the back from dealers has been very positive, because No. 1, there is a fluctuation in prices. Prices can change from week to week throughout the course of a month,” Hallett said. “They don’t want to get caught holding a lot of inventory in case there is a downturn in pricing that they have to take back and wholesale. They want to avoid losses.
“What they want is just in time inventory as we call it. They can drive that car right from the auction and park right in the front row, put a for sale sign on it, get it sold today and take the money and go back tomorrow and buy another one,” he continued.
“Rather than going to the auction and speculating on additional volumes, they’re more going to auctions specifically buying inventory that they need just to fill their inventory requirements. From that standpoint, it’s very attractive for dealers and efficient as well as profitable because it takes a lot of days out of their turn cycle not having to do the work themselves,” Hallett went on to say.
KAR executive vice president and chief financial officer Eric Loughmiller joined the conversation, too, reflecting back on 2011 when wholesale volume was at a low point and reconditioning services at the auction weren’t being leveraged like nowadays.
“They were taking that car directly to the lane because there was such a shortage that the dealer would pay top dollar no matter what the condition of the car, within reason,” Loughmiller said. “Today, there’s such a supply that they know there are more cars coming. They’re willing to take the time with the reason being they can create more value using the services Jim described than they’re going to touch in depreciation by taking an extra week or two.
“The truth is there is a lot of choice for the dealers. You’ve got to work hard to be the one they choose. That’s what great for our business model is we have the ability to provide those high-value services at a lower cost and faster than any other source they have because of the nature of our facilities,” Loughmiller continued.
ADESA auctions sold 830,000 vehicles during Q2, up from 750,000 in the year-ago quarter. The conversion rate also improved year-over-year, rising to 61.1 percent from 59.1 percent. Hallett touched on the possible reason.
“You’ve got a dealer standing in the lanes or buying online and they’re looking at a car. If it’s not completely retail ready and it’s going to take time to turn that car, they just turn to the right or left and look at the other lane and there is a car coming through that’s fully reconditioned. It just might be a different brand. For the most part, it’s really giving them choice,” Hallett said.
And as a result, commercial consignors are using KAR’s services so dealers trigger the hammer coming down instead of the vehicle circling back for another sale day.
“The commercial sellers recognize there’s a lot of cars in the marketplace and they recognize that for them to get the top dollar for their car, they have to do more to enhance the car,” Hallett said. “What we’re seeing is them use a lot more of our ancillary services.
“You think about the reconditioning, you think about the mechanical, you think about the paint and body work, you think about all of those ancillary services that we call end-to-end remarketing, our commercial customers are basically saying, ‘Hey, we’re going to fix whatever that car needs.’ Maybe in the past where they might not have changed the tires, they might now. Or they might not have fixed the little scratch here, or little dent here, they’re doing all of that work,” he continued.
“It’s good for our sellers. It’s good for our buyers. And it’s very good for KAR because it’s driving our revenue and margins,” Hallett went on to say.
View of KAR Remarketing Services
AuSM also asked Hallett and Loughmiller about the recently launched KAR Remarketing Services, which is designed to align the company’s AutoVIN, Dent Demon, High Tech Locksmiths and PAR North America businesses.
Hallett explained much of the action’s premise stemmed from the idea of streamlining KAR’s internal workings to improve on being an “end-to-end remarketing services provider.” He reviewed the basics of what happens throughout the wholesale market, including:
— Condition reports
— Putting the vehicle through the sales lane
— Getting the vehicle sold
— Post-sale inspection
— Transferring funds and titles
“One phone call, you get all of that taken care of,” Hallett said of what happens when a current or potential customer s KAR.
“Over the years, we’ve acquired a number of smaller companies that really complement our core businesses, which if you think of it is whole car, salvage and finance,” he continued. “They tend to be smaller in nature, but in total they’re important services our customers need in this end-to-end cycle. There’s an opportunity to grow by offering these services.
Picked to serve as president of KAR Remarketing Services was David Vignes.
“David actually was involved with the entities that were acquired. He has great knowledge of those businesses. He’s just a natural person to coordinate the efforts amongst those services,” Loughmiller said.
Salvage on the rise
Over at Insurance Auto Auctions, revenue rose 13 percent year-over-year in the second quarter as gross profit climbed to $117.2 million. IAA sold 580,000 units in Q2, representing an 11-percent volume lift year-over-year.
Hallett explained insurance companies are declaring more units as total losses in part because of the complexity of vehicles nowadays as well as the cost to have them repaired. Furthermore, IAA enjoys what Hallett deems a “strong” international buyer market.
“All of the drivers we look at with IAA are all tailwinds. They’re all in our favor right now,” Hallett said. “We don’t see this changing any time soon.”
The combination of growing business opportunities along with people and technology in place to handle the work, Hallett is quite bullish about KAR’s future fortunes.
“Our outlook for the balance of the year is extremely positive. We think the market is going to be really good not only for the rest of 2017 but we think we have very clear visibility into the next three years in terms of how our businesses are going to perform,” he told AuSM.
“I know there has been a lot of conversation in the industry that I would call ‘noise’ in terms of some of our competitors making major changes to the way they’re going about managing their business,” Hallett continued. “I would say to you that we’re very focused on continuing to add the resources, continuing to add the people, and continuing to acquire the things that we need to be able to support this business because we feel the visibility that we have we feel these volumes are going to be continuing to come as far as we can see for the next three years.”