KAR Auction Services : BofA Securities 2021 Global Automotive Summit KAR Transcript

Corrected Transcript

30-Mar-2021

KAR Auction Services, Inc. (KAR)

Bank of America Global Automotive Summit

	Total Pages: 12
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KAR Auction Services, Inc. (KAR)	Corrected Transcript
Bank of America Global Automotive Summit	30-Mar-2021

CORPORATE PARTICIPANTS

James P. Hallett

Chairman & Chief Executive Officer, KAR Auction Services, Inc.

Eric Loughmiller

Executive Vice President & Chief Financial Officer, KAR Auction Services, Inc.

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OTHER PARTICIPANTS

John Murphy

Analyst, BofA Securities, Inc.

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MANAGEMENT DISCUSSION SECTION

John Murphy

Analyst, BofA Securities, Inc.

Great. [indiscernible] (00:00:04) for joining us again for our next session where we have KAR Global, a leading wholesaler of used vehicles and is at the nexus of the digital remarketing revolution. There are a lot of questions about how the industry of KAR will transform over time. But we're very happy to have Jim Hallett, Chairman and CEO and Eric Loughmiller, Executive VP and CFO.

The elephant in the room is [ph] our rating. We have an underperformer (00:00:30) on the stock. But to be fair the stock [indiscernible] (00:00:34) had tremendous respect for both Jim and Eric who I have known for almost two decades. Our rating is relative [indiscernible] (00:00:40) sell. So, people should understand it's an [indiscernible] (00:00:43), there's always a question of timing in our coverage of the [indiscernible] (00:00:47) value chain. Used car wholesaling is inherently a very good business. So, we look forward to the right timing on the company at the stock as the transformation of the business progresses. As a result, obviously with all of that we have actually a lot of questions today and we really appreciate both Jim and Eric joining us. Thank you so much guys.

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James P. Hallett

Chairman & Chief Executive Officer, KAR Auction Services, Inc.

Thank you, John. It's [ph] got to be with you (00:01:08).

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KAR Auction Services, Inc. (KAR)	Corrected Transcript
Bank of America Global Automotive Summit	30-Mar-2021

QUESTION AND ANSWER SECTION

John Murphy

Analyst, BofA Securities, Inc.

Q

So, we had a lot of specific questions but maybe to start, Jim, there's been recent volatility [ph] to your (00:01:17) business. So, I'm just curious as you think about responding to that on the positive and the negative in the short run but maybe more importantly [indiscernible] (00:01:28) structurally over time. [ph] Is this (00:01:32) volatility and your response going to be structural, transitory [ph] or really (00:01:38) how do you think about strategy going forward [indiscernible] (00:01:41) really what's going on between the [indiscernible] (00:01:46).

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James P. Hallett

Chairman & Chief Executive Officer, KAR Auction Services, Inc.

A

Yeah. So, let me maybe back up a just a little bit, John, and say that what's really changed is we looked at our business a few years ago, we decided that we wanted to be a digital company. And then first of all, we want to [ph] stop (00:02:06) running cars. And we want to stop running cars for a couple of reasons. Number one, we want to provide a lot safer environment but then also just the efficiencies and the opportunities, the options that would be available to our dealers, both buyers and sellers, were just so much better in a digital format. And so, we actually started the digital journey, I would say, two, three years back. And then a year ago, the pandemic hit, everybody knows. And about a year ago this week or in the last few weeks, we completely shut down our operations and we shut down for two weeks. And in that two-week period, we transitioned our [ph] auctions (00:02:54), then we reopened 100% digital. And we have not run a single car through an auction block in that period of time.

We're 100% digital and really what we had planned on accomplishing over the course of the next two or three years, we basically accomplished over a period of two or three weeks. So, this was very much accelerated. I guess the silver lining with COVID for us was really the acceleration of the digital - of going 100% digital. So with that, a couple of things happened. We totally transformed our business model. We continued to serve our customers in a digital format.

The other thing that went with that is we permanently reduced our [ph] cost structure (00:03:43) in the entire organization. We went from just a little over 15,000 employees to somewhere under 10,000 employees in the period of a few weeks. So, that's kind of what's changed. And as you think about it currently today temporarily, there's a tremendous amount of shortage of vehicles in the marketplace and we've seen this before. We've seen it during the Great Recession where there was a tightness of supply. And we know that we're going to need to work through the next several quarters and look for this supply to return. I know that you're going to have a lot of questions around some of the segments but maybe I'll just run through those in advance because I think it ties into my conversation here.

First of all, the retail business is very, very strong. People are interested in having a private ownership and owning their own vehicle. I think I've said so many times that people, the second safest place the person feels today is in their own car. People don't want to rely on public transportation. They don't want to rely on ride sharing. They want to have their own car. And we've seen record sales. Right now, we're seeing record conversion rates with a tight supply basically selling everything that we can get our hands on. And especially in our digital format, which we'll talk more about as well, our digital platforms. We've seen a very strong improvement in the dealer-to-dealer business. I'm going to say that we acquired BacklotCars during this period of time. And we can talk a little bit more about the impact the BacklotCars has had. But our dealer-to-dealer business has been very, very strong.

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KAR Auction Services, Inc. (KAR)	Corrected Transcript
Bank of America Global Automotive Summit	30-Mar-2021

On the other hand, our commercial business has gotten a little tighter [ph] in terms (00:05:34) of the off-lease vehicles which we have a very strong share of that market. The off-lease vehicles are in the money as we said and they're being - their values are well above the residual values that they can buy them for. So, we're seeing a lot of consumers buying out their leases at the end of term or we see the grounding dealer buying those vehicles because it's such a good deal for them right now rather than buying them at auctions where we're seeing record prices.

So with that, we're also seeing on the repossession side of the business, that has slowed. I think [ph] this has slowed (00:06:13) to a couple of areas I'd point to is, number one, I think the stimulus checks that people have been receiving, have allowed people to continue to make their [ph] KAR (00:06:25) payments. And I also understand and you would understand that there are certain laws that prohibit financial institutions from repossessing somebody's vehicle in a time of crisis. So, repossessions have slowed. They're not coming as fast as we'd like to see them coming. But we do expect in the second half of the year as things moderate, we expect to see that repos will come back.

And then the other segment that we talk a little bit, the small segment [ph] for us (00:06:51) is the rental car business. The rental cars have downsized their fleets. As we know, travel and entertainment, that's pretty much come to a standstill for much of the last year, although we are getting back to some of that. Those fleets are much, much smaller and there's not as much demand for rental cars. And I don't see that business coming back anytime soon. Although it's a small segment, I think it'll be slower coming back.

So, those are the things that I would point to in terms of what's going on in the business and how the business has changed and [ph] why we're so good (00:07:26) on this journey. But we've made the commitment to be 100% digital. We've stayed the course and we have no plans on changing.

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John Murphy

Analyst, BofA Securities, Inc.

Q

You're making the announcement that Kelly is going to take over for you as CEO. Both professionally and personally, I really don't want to see you go. I mean, we've enjoyed working with you and I think you understand the business as well if not better than anybody out there. So, I'm just curious as you're making this change at CEO what in the context of the business changing as well, why you think it's necessary to make that change or is it something where you're just at a point in your career where you're taking a little bit of a step back from the business?

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James P. Hallett

Chairman & Chief Executive Officer, KAR Auction Services, Inc.

A

Yeah, John. That's a great question and I appreciate it. One of the things that I was very focused on was my own succession and a couple of years ago having conversations with Peter, Peter made the commitment to move his family to Indianapolis from San Francisco. And as Peter moved here, I was able to allow Peter to take on more and more responsibilities and he was really overseeing a lot of the day-to-day operations of the company. I would tell you that Peter Kelly is the best digital mind that we have in our company. I think many people know Peter was the Co-Founder of OPENLANE which now sells about 1.3 million vehicles a year on that platform. He's got a lot of experience with digital. He's got a lot of experience through building OPENLANE and building that network. And Peter has been very involved along with [ph] others (00:09:08). But Peter has been very involved with the transformational journey, with the commitment that we made to go digital.

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KAR Auction Services, Inc. (KAR)	Corrected Transcript
Bank of America Global Automotive Summit	30-Mar-2021

And quite frankly, as we continue through this digital journey, I think Peter has the best skillsets to continue to lead that journey going forward and more experience. And I think it's time that we put Peter in a leadership position. And I made the recommendations to the board that I should take the Executive Chairman's role. I'm planning on staying around for the next few years and I plan on being there to work with Peter. We work closely together. I have tremendous respect for him. Not only is Peter the best digital mind in our company, I think he's probably the best digital mind in our entire industry.

I'll continue to work on strategy with Peter, continue to maintain some of my strong relationships that I've had for the last 20, 25 years with many of our most senior customers, continue to do things like this as long as [indiscernible] (00:10:12) with investor relations, work on some M&A activity and just be around to be a liaison with Peter and the management team and do whatever I can to help the company. And we felt that we're at that point in our journey that we want to make this announcement and put it in place now. So, nothing more than that. And I'm excited that Peter is here. And I'm excited with the road ahead. I've got a little bit more insight into some of the things that [ph] we're - got coming (00:10:51). And it's going to be an exciting and fast ride.

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John Murphy

Analyst, BofA Securities, Inc.

Q

That's incredibly helpful, and we appreciate it. Don't want you going anywhere, so hopefully we can still talk to you as that Executive Chairman role for a long time. So, Jim, also on the digital front, it originally appeared that some of the new competitors like [ph] ACV, TradeRev (00:11:15), your in-house online business and you've [ph] got (00:11:22) other channels. But we're really going to be focused more on the dealer-to-dealer and the wholesale side, so [indiscernible] (00:11:27) 5 million units [indiscernible] (00:11:29) the 10 million that you usually do in the physical auctions. But it seems like some of the - the lines are blurring a bit. Can you talk about what we traditionally would think of as 10 million units in the whole car auction site that might be going more online, and the 5 million units that serve dealer-to-dealer vehicles, which seem like the best opportunity for [ph] ACV and TradeRev (00:11:56) originally? And now it seems like - what was that, 10-million-unit market and a 5-million-unit market next to each other may actually be sort of a contiguous 15-million-unit market.

I mean, how do you - I mean - and you uniquely have - and this is where I kind of often give you a hard time [indiscernible] (00:12:12) on Q&A. You have the unique ability to say hey to the dealer, I've got you on the 10 million unit side, I got you on the 5 million side, [indiscernible] (00:12:22) I can do. I mean how do you kind of go after that and use that as competitive advantage, and how much do you think those two markets kind of come - become conjoined or contiguous.

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James P. Hallett

Chairman & Chief Executive Officer, KAR Auction Services, Inc.

A

Yeah. So, John it was interesting and Eric and I have always said that we never dictate to a customer whether you should buy or sell a car. Our job is to provide the best channel, the best platform, and I think the platform buys - assigns - the platform gets the cars, they find the cars and then they find the buyers and it's not one size fits all. And the bottom line is we want every car, we want to go after every car. We weren't particularly focused on the segment that was going to physical auctions or segments that were going online or going to this platform or going to that platform. We were focused on getting as much activity and gaining as much share as we could possibly gain. And therefore we had physical auctions. We had OPENLANE as a strong platform. Now that was primarily selling off-lease cars and it didn't necessarily sell dealer cars. And seven years ago before ACV, I think really came into the marketplace, we identified TradeRev as a Canadian company which was the dealer-to-dealer space and we acquired that company. And then when we saw that we weren't able to migrate TradeRev model into the US like we did in Canada, TradeRev was a Canadian product, then we knew we had to double down and we identified BacklotCars which had a different business model again. Instead of being a timed auction, it was a

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