CARMEL, Ind. -

Dealer consignment conversion rates shared by KAR Auction Services chief executive officer Jim Hallett Wednesday reinforced likely dealer observations — how units in these ADESA lanes are going to store inventory and not head back to the auction’s storage facility.

In years past, dealer consignment units might have converted at 40 to 45 percent; however, Hallett indicated these vehicles converted at 60 percent or higher during the first quarter. 

That performance came during a quarter when ADESA found that its volume slipped a little less than 6 percent, a figure Hallett pointed out was better than what the National Auto Auction Association recently reported for the industry as whole.

While ADESA’s overall whole-car volume dipped, the company said its first-quarter dealer-consignment volume shot up 18 percent year-over-year. The spike propelled the segment to make up 38 percent of ADESA’s total first-quarter volume — a level Hallett indicated was the highest since 2007.

Hallett again credited the concerted dealer consignment initiative KAR and ADESA have rolled out for more than year, a program geared to cater to dealers more closely in hopes of overcoming wholesale tightness from softening off-lease and off-rental volume.

“We’re pleased with where we are, but there is no finish line,” Hallett told investors during a conference call when KAR also shared its first-quarter financial statement.

“We continue to focus on this area of our business and add more resources as we go along. And we’re not done yet. We think there’s more opportunity on the dealer consignment side of the business, especially during these next 12 to 18 months,” he continued.

“Even as the lease cars return and that market comes back, we will never take our focus off of dealer consignment because we recognize in the past we probably neglected dealer consignment to some point. We realized what a significant opportunity this was,” Hallett went on to say.

Before delving into a deeper discussion specifically about dealer consignment, Hallett touched on some broad industry trends, such as how KAR is expecting the Seasonally Adjusted Annual Rate for new-vehicle sales to stay between 12.5 and 13 million this year.

“There is some talk that the recent events in Japan will take that number back toward the 12.5-million mark. We don’t necessarily see that. This is really a supply issue and not a demand issue,” Hallett surmised.

The CEO also touched on how analysts from J.D. Power, ALG and CNW Research are seeing leasing activity climb in recent months. Hallett also highlighted how “significant” the leasing activity is that Ally Bank reported during the first quarter was. Ally reported that leasing reached 16 percent in the quarter (according to an article released by Auto Remarketing’s sister site SubPrime Auto Finance News on Tuesday).

And when those off-lease units eventually hit the lanes, “I’m very much looking forward to the homecoming party,” Hallett declared.

Nonetheless, KAR and ADESA don’t appear to slowing their dealer-consignment programs, especially since they expect wholesale supply to remain tight for at least another year.

“No question these are replacements for a lot of the off-lease, off-rental, repo or factory cars. I believe dealer-consignment conversions will increase,” Hallett projected.

First-Quarter Financial Performance

As forecasted a few days ago, KAR revealed its first-quarter revenue climbed by 5 percent to $482.7 million, up from $458.4 million in the same period last year.

That amount pushed the company’s adjusted EBITDA 5 percent higher to $127.3 million from $120.1 million. KAR also calculated its first-quarter net income settled at $39.8 million, or 29 cents per diluted share, as compared with net income of $8.1 million, or 6 cents per diluted share, in the first quarter of 2010.

The two company segments that boosted KAR’s overall first-quarter performance the most were Insurance Auto Auctions and Automotive Finance Corp.

Thanks to 4-percent volume growth, executives determined IAA’s revenue ticked up 11 percent year-over year. They also credited their ongoing synergetic project to boost efficiencies as a revenue-growth spark.

Meanwhile over at AFC, the company reported a 50-percent revenue climb and a 48-percent jump in adjusted EBITDA, stemming from higher loan transactions. The company also pointed out the growth has been disciplined as 99 percent of AFC’s portfolio remains current.

“I’m very pleased with how KAR continues to perform on a consolidated basis,” Hallett offered.

Hallett Assesses KAR’s Technology Standing

Before beginning an extended discussion about what KAR has done with its technology, Hallett first mentioned that online sales constitute 24 percent of the total performance at ADESA and Insurance Auto Auctions. The company finished last year with an online sales level at 22 percent.

“Oftentimes when I’m on the road or with investors I get asked what keeps me awake at night. Quite frankly in the past, I’ve struggled trying to answer that question,” Hallett acknowledged.

“But I can tell you since I became the CEO of KAR, there’s no question that technology is on my mind on a very regular basis,” he stressed.

“As I said to the group here, I go to sleep thinking about technology and I wake up thinking about technology,” Hallett went on to share. “I want to assure you that I do not fear technology. Quite the opposite, I embrace technology and I think I have a belief, a vision and an understanding of how technology will differentiate our businesses going forward.”

Hallett noted that he’s spent a significant amount of time doing technology research, not only about what KAR is implementing, but also what its competitors and companies unrelated to the remarketing business are using.

“I’m very focused on driving innovation and making KAR a technology leader in all of our businesses,” Hallett emphasized.

To reinforce the claim, Hallett didn’t mention the specific customer, but he talked about how ADESA recently completed the roll out of a new Internet selling platform for one of its largest clients.

“This was really a true sense of partnership,” Hallett recalled. “We worked very closely with the customer. They spent a considerable amount of time in our building here in Carmel, Ind. We spent a considerable amount of time in their headquarters.

“Our two groups worked together to develop the content and specs, the timeline and roll out. It was very, very successful,” he continued.

“This is just one indication of how we’re now cooperating with our customers on a one-on-one basis to develop customized solutions for their remarketing needs,” Hallett went on to say.

Hallett also shared where he gets most of his inspiration and motivation for KAR’s technological development and investment. Turns out, much of the decisions the company has made during the past couple of years were sparked by processes at Insurance Auto Auctions.

“I’ve had to the opportunity to be involved with Insurance Auto Auctions since 2007, but even prior to that I’ve watched how technology has really led the way on the salvage side of the business,” Hallett indicated. “I believe there’s no question that the salvage side of the business is ahead of the whole-car business when it comes to technology, innovation and what they’ve been able to do.

“I also believe Insurance Auto Auctions has clearly become a leader in terms of technology they provide not only to their employees but to their customers around the globe,” he added.

With IAA possibly ahead of the curve, Hallett wants all segments of KAR’s operation to be technologically sound.

“I again tell you as CEO of KAR, I can promise you that I’m very focused on how we continue to use advanced technology, and I believe you will see as we go forward, we’ll continue to roll out new technologies and enhancements that make it easier and more efficient for our customers to do business with us,” Hallett pledged.

So is KAR’s entire business going online? Not so fast, Hallett says.

“I don’t have a preference if that car sells electronically or physically. But I do have a preference that we sell 100 percent of everything we get no matter the channel,” Hallett asserted.

“Brick and mortar is not going way,” he continued. "You still have to transport these cars. You still have to inspect the cars. You have to take pictures. You have to do certain reconditioning or mechanical work or body work. There’s marshalling and storage that takes place. There’s very much a need to have a physical presence. We don’t see the brick and mortar going away.”

Client Meeting, Las Vegas Opening & Gas Prices

Hallett also touched on a trio of other noteworthy items:

—About ADESA’s upcoming client advisory meeting: “It’s an opportunity for ADESA to kind of give the state of the nation and tell our customers what we’ve got in the works, some of the products and enhancements we’re rolling out,” Hallett stated. “It also gives our customers a chance to voice their concerns and how their remarketing needs are being serviced.

—About ADESA Las Vegas opening the second week of June: “We’re extremely excited about Las Vegas,” Hallett insisted. “It’s been a hole in our footprint and a market we’ve wanted to be in for some period of time. Even more than our excitement is the excitement of our customers. There has been no competitive alternative in Las Vegas, and customers have lined up and I believe are ready to support us and support ADESA Las Vegas in becoming a success right out of the gate.”

—About climbing fuel prices: “I would say that generally speaking the public is getting fairly comfortable with $4 per gallon gasoline,” Hallett offered. “We certainly don’t see the impact that we were seeing when it first hit in 2008 and 2009 when we saw large SUVs drop 30 or 40 percent overnight. We’re not seeing that kind of reaction.

“On the whole car side, there’s no question that compacts and subcompacts, are still going to be the most popular vehicles in the lanes. People are still gas conscious, but not to the point where they were when it first hit,” he concluded.