OPENLANE, Inc. (OPLN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the KAR Global Business Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Eric Loughmiller, Chief Financial Officer. Thank you. Please go ahead, sir.

Thanks, Daniel. Before Jim kicks off our discussion, I would like to remind you that this conference call contains forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed and/or implied by our comments. Forward-looking statements in the press release that we issued yesterday, along with our comments on this call, are effective only at the time they are made and will not be updated as actual events unfold. Now I would like to turn this call over to KAR Global's CEO, Jim Hallett.

Thank you, Eric, and good morning, ladies and gentlemen, and thank you for joining our call. It goes without saying that we're facing an unprecedented situation throughout the world. We see all kinds of comparisons around previous economic crisis, the Great Depression, the financial distress that we experienced following 9/11, or our most recent crisis called the Great Recession of 2008 and 2009. What we're experiencing today is like no other event in history. We have a worldwide health crisis, and it's done the unthinkable. It's taken people off of our streets and closed retail operations. It's even down to now moving to food services being pick-up and delivery only. And certainly, it's utilized over 100% of our health care services. I don't need to say a lot more about that. I think we're all hearing pretty much the same news. And what I want to spend my time discussing today is talking about what we've seen in the first 3 months of 2020. Talk about the actions we've taken, what actions we have planned for getting back to work and how strong our balance sheet is as we deal with this crisis. Let me start with some highlights from the first 3 months of the year. Our year got off to a good start. Our performance exceeded our expectations through February, and we are on track through the middle of March to continue this trend. We are not going to provide any specific financial results in Q1, but I can let you know that our volumes were pacing ahead of the prior year and in line with our expectations. Commercial and dealer volumes were up across all of our channels. The other consignment volumes increased at both physical auctions and in our online venues. I feel our strategy to combine the ADESA and TradeRev sales team was and is working. Commercial volumes were also up over the prior year, with the strength being in our online venues. We also improved gross profit margins in our ancillary businesses in the first 2 months of the year, and we have made progress in reducing our SG&A. Unfortunately, our business took a sudden turn beginning the week of March 16. In fact, we saw a modest decline in volumes the week of March 9 after our strongest week in a long time that we thought it was just timing-related but may actually have been the beginning of the market demand declining due to the low retail activity. We held all sales the week of March 16 in a simulcast-only format. All vehicles were offered online, cars did not run across the block, and we limited access to our locations to minimize the risk of too many people aggregating in a single location. The sudden decline in the week of March 16 was actually day-to-day. We saw activity levels decline each day of the week in comparison to the previous day. It was obvious that demand for wholesale vehicles was declining as people were reacting by choice or directive to the coronavirus. On March 20, we announced the halt of physical sale operations across North America. Our focus was on the health and safety of our employees, our customers and the communities in which we live and work. We maintain minimum essential operations as permitted at each location. At that time, we were acting proactively and not as a result of any specific local state or provincial directives. Over the past week, we've seen many recommendations and directives clarifying permitted activities for most of our auction locations. We've had some positive news as a result of the disruption to our marketplaces. We have enrolled thousands of dealers who had previously bought in-lane only onto our simulcast network. We had a record number of dealers participate in our simulcast auctions. The number of simulcast bids the week of March 16 were more than double any previous week in history. These results give me confidence that we will be ready to get back to work more quickly through our simulcast and other online tools. That summarizes what we've seen so far in the first quarter. Now let me speak to the actions that we're taking to protect our business. First, leadership of KAR has agreed to reduce our compensation while we work through the coronavirus pandemic. Peter Kelly, President; Eric Loughmiller, CFO; and myself, CEO and Chairman, have agreed to work without pay through the second quarter or longer if the situation persists. The remainder of the KAR Global executive leadership team has agreed to reduce their pay to 50% of their current salaries through the second quarter. And our Board of Directors have agreed to forgo their cash compensation for their Board duties for the second quarter of 2020. We have also developed plans to reduce our cost while our businesses is negatively impacted. We are going to furlough a significant portion of our workforce temporarily while our business activities are materially reduced. We do intend to bring these employees back as we see our business recovering. We are prohibiting business travel for any reason through April 17, and we will extend this date as needed. We have terminated nonessential services provided by third parties at our locations, and we have delayed or canceled all capital projects at our physical auction locations. These actions are expected to reduce our weekly cash outflows by $10 million. That's $10 million per week. We also have some areas that we must continue to invest in, in these uncertain times. First, we need real estate. We are already experiencing unusually high levels of vehicles on our auction properties, and we need to add temporary storage space to accommodate the cars that will be coming to our sites. We expect lease returns to continue to be strong even if temporary lease extensions are offered to our customers, and we need to store these vehicles until demand returns. We also know that many finance companies are deferring repossessions of vehicles temporarily, and at some point, we will likely see an influx of repossessions. It is very important that I remind you that the off-lease and the repossessed cars come to us on what I call a one-way ticket. We will definitely sell these cars. It's just a matter of when. We also recognize the importance of our technology investments and maintaining the platforms we provide to the auto industry. We will continue to invest in our technology. All projects that can be productive while working from home will continue. We do not expect our capital investment in technology to decrease significantly. We may delay some projects that have not yet started. And we'll likely see reduced spending in the area in the near term, but we'll likely accelerate where we can. And communication with our customers is critical even if the wholesale activity has slowed. We are asking members of our commercial sales team to stay close to our customers. The KAR Global dealer consignment team is actively signing up dealers on all of our technology platforms. We are also offering the dealers the opportunity to self-inspect their vehicles and launch auctions on the TradeRev network without bringing TradeRev representatives onto their sites. If there are cars to be sold and demand for those vehicles, we have the tools and the platforms for transactions to continue. It is obvious that we're taking action on items within our control, but there are many items that are unpredictable at this time. As a result, we are withdrawing our guidance for 2020. We believe that our balance sheet, including our cash position is strong. We also believe that we have the resources to get through the temporary disruption and return to business as quickly as possible. With that, I will now turn it over to Eric to provide some updates on our capital structure before we take your questions.

Thank you, Jim. I will be brief and give you an update on our cash position in terms of our credit agreements. Our cash position, as Jim mentioned, is strong. We currently have over $350 million in available cash. We have not drawn on our revolver, and at this time, do not plan to draw on the revolver. Our debt structure is 50% unsecured bonds due in 2025 and 50% Term Loan B. We do not have any financial covenants in either of these agreements. Our revolver, if drawn at the end of any quarter, does contain limitations on total indebtedness. And we have only minimal payments required for the remainder of this year under our Term Loan B. We do not anticipate any issues on our securitization facility. We introduced a program to assist customers of AFC extend loans in the AFC portfolio without cash payments at the time of the extension. Prior to offering this program, we amended the terms of the securitization to permit this amendment in existing terms of customers, and the loans will remain eligible in our securitization facility while we extend these terms. We also confirmed with our rating agency, Moody's, that this amendment in terms would not impact the credit rating of the securitization. Overall, we believe our capital resources are adequate for the foreseeable future. We will update you again on our earnings call scheduled in early May. Let me turn it back to Jim now for one final comment before we take your questions.

Thanks, Eric. Listen, I know that we're facing challenging times here. Our management team is experienced, and we're absolutely up to the task of getting through this. In many ways, this is more daunting situation than what we experienced in 2008. However, our financial markets are much stronger today, and we have much greater confidence that when the world returns to normal and business recovers, the financial resources will be available to support the economic recovery. In the meantime, my most important responsibility is to protect KAR. We realized that company must come first in all of our decisions. A healthy company will allow us to be there for our employees and our customers and our communities when all of us get back to our normal lives. So with that, I say thank you. And now we'll turn it over to Daniel to take your questions.

[Operator Instructions] Our first question comes from John Murphy with Bank of America.

Three quick ones. First, you mentioned that you were holding all physical auctions, but it seems like you might be doing some actual -- you might have some action on TradeRev and maybe other online sources. Is there anybody going on right now on online?

Yes. Currently -- I wasn't sure if you're going to ask 3 or 1. So John, we'll take them one at a time. Yes. We continue to sell on all of our private label platforms. Our private label platforms continue to sell, and TradeRev continues to function as well. I don't think I said it in my comments, but I'll say it now. We are -- we do have markets where we are restricted from operating, but we also have markets where there is an opportunity to operate. And in those markets where it's permitted and is safe, we could see ourselves opening some of our physical sales sometime in early April and then growing it from there. So yes, there are a number of venues that are operating, John.

Okay. Second question on the pricing, where it's settling. I mean buyers and sellers both are probably a little agitated and on edge here. I mean, how is used vehicle pricing settling? And how are these deals or these auctions clearing at this point?

Up to this point in time, we've seen customers pretty much trying to protect price, especially on the private labels. Now we've also had 1 or 2 customers that have just said that they're going to basically stop selling until we see more of a recovery coming. So there hasn't been a great price adjustment up to this point in time.

Okay. And lastly, real quick on AFC. I mean, you're there in the good times and the bad despite some of other folks pulling out of the business. How much of an opportunity does a tough environment like this present for AFC?

Yes. I'll turn that one to Eric.

Yes. John, that's a good question. There's always opportunity, but right now, the activity levels are low with the independent dealers. Those are really the hardest hit as that market -- we talked about the private label still having activity. That's predominantly franchise dealers and the largest retailers of used cars. So if there is opportunity, we'll be there for the dealers while we'll be also a bit conservative on the risk profile that we're willing to take in these uncertain times.

Our next question comes from Stephanie Benjamin with SunTrust.

I wanted to talk a little bit in terms of maybe you could speak to -- you commented that the beginning of the quarter performed in line or even in line with expectations. So maybe if you wanted to speak on some of the demand drivers and if you want to elaborate a little bit more why it was performing so well and kind of your thoughts on a recovery time frame and if you believe that you should be able to get back to some of those levels and kind of what you're hearing right now. Is this largely temporary as everyone's kind of hunkered down? Or are you hearing just what your -- on both the buyer side and the seller side, maybe a darker picture? Just any color there would be helpful.

Yes. And I'll ask Eric to join in here as well. But at the very outset, we're going through, I'd say, uncharted waters here. And people don't make large buying decisions in uncertain times. And we are in very uncertain times, and the retail activity has shut down in many, many cases. In some of these states, the restrictions that were put in place is dealerships are not able to operate their sales operations. They've only got their service facilities open, and there just isn't a lot of demand for retail cars. And when there's no demand for retail, then obviously, buyer -- dealers aren't going through the auction or onto our platform to buy vehicles. Now to your earlier point, the year got off to a very good start. There was strong demand for used cars. Where we're selling very strong conversion rates, we were certainly exceeding our expectations well ahead of last year, year-over-year. And it came to a sudden stop, as I said, in the middle of March. But up to that point in time, the market had been very strong. So with that, it wasn't the economy that took us into this environment. And as a result of that, I think that we can recover here. I don't -- I don't know. I can't predict what time frame it's going to be, but I think things can come back to normal. Once we get to that point where we're able to get people out of their houses and back to work and back on the streets, I think recovery can be fairly quick. Eric, do you want to add?

Yes. The only thing I'd like to add for Stephanie is the financial metrics that we laid out at the beginning, we were pursuing, growth in our volumes, both dealer and commercial, improved margins in ancillary services. Jim gave you updates, we were achieving those goals, which was very positive. And I will say one thing, at the beginning of March, we saw what's known as the tax season in used cars being very robust in the retail markets. And then all of the stuff changes. Our supply of vehicles remains quite strong, and demand is not there. So even when we're running our technology platforms, we're seeing good numbers on cars listed, but low conversion rate because the retail demand isn't allowing the dealers to buy and speculate. I mean, they're protecting capital like everybody else's. So that was my comment. I really believe that it's demand-oriented. Supply is strong and will remain strong, and we'll be piling up cars until then. And then when the demand comes back, we will get those transactions.

Our next question comes from Bob Labick with CJS Securities.

Two quick ones. You touched on the first one a little. I was hoping you could elaborate. How will you make the decision to restart your auctions? And approximately, when have you -- do you think this might happen?

Yes. So I would say it's based on 2 things. Number one, we have to be legal. We have to follow the local directives, so local ordinances that have been put in place that legally allow us to operate in that market. And there are a strong number of markets where we can operate legally. Secondly, there has to be demand. Number one, we have to have sellers that are willing to sell vehicles. And on the other side of that equation, we have to have buyers that are willing to buy vehicles. And so if we can open up some of these markets and find that we can have some degree of success in servicing our customers and that we can convert and we can sell cars, then we'll continue to do that. We would expect that we could be operating initially some auctions in early April.

Got it. Okay. And then just in general, can you talk about -- I think, Eric, you mentioned the independence and such, just the competitive response out there from independence, Manheim, other platforms where they stand and how the rest of the industry is kind of progressing at this time?

I think -- first of all, I don't know, right? I'm kind of focused on what we've got going on here and try and take care of our own house. But anecdotally, I think things are very much the same across the industry, whether it be us or our major competitor or other competitors and other digital and online venues. I think that lack of retail drives everything across the entire nation. If you're not selling -- if you're not selling new cars, if you're not selling used cars, people are not able to go out of their house. They're not able to go to a dealership. Even if they do need a car, they're not able to buy a car, and dealerships aren't open in many cases. So again, I think it's pretty consistent across the nation. Eric?

Jim, I might add, I do think that we may have moved faster or ahead of some of the rest of the industry in closing our physical auction operations. But that was because we were very focused on the safety of the people that do business, our employees and our customers that come in. And the industry has followed. I mean, it wasn't that we care more than anybody else, but we did act as a result of getting ahead of this. And I think we will equally act getting back to work as soon as we can because that will help all the communities in which we operate.

Our next question comes from Derek Glynn with Consumer Edge Research.

Just on some of the impacts by channel. We've been hearing the rentals have been aggressively de-fleeting. Wondering to what extent those volumes may be offsetting pressures from other channels.

Well, let me start, Jim, if you don't mind. They may be de-fleeting, but where is the demand for their vehicles? How many of the large -- as you know, these are used cars, large used car retailers that you read about that are not operating in certain markets. So the de-fleeting also comes with the fact that they're not going to have a fire sale and sell these cars at unusually low prices. So to the extent there's demand, we would be serving that market through our online opportunities and selling as many cars as we can. And Jim, why don't you add some more comment about the rental industry and how that behaves normally.

Well, under normal conditions, the rental segment is our lowest volume commercial segment as a percentage of our commercial cars sold. But on the other hand, we do see the rental companies making more use of the physical auctions during these times. But again, back to Eric's point, it's -- it only works if you're prepared to -- if, number one, if you're prepared to accept price. And if you have a buyer on the other side -- I guess, if you have a buyer on the other side and you're prepared to accept price in that order.

The one thing I might add, Jim, is when the rental car companies de-fleet in large numbers, it is very difficult for them to move large numbers of vehicles through their alternative networks, and they tend to rely a little bit more on the auctions, which is good for us and our industry.

Yes. As we like to say, it's pretty instant liquidity. But with that, you got to be willing to accept price.

Okay, great. And then can you guys just confirm something? So there's some auto companies who've been lobbying Congress to get financial relief. How are you guys positioned as it relates to the fiscal stimulus package? Is that something you're exploring or an option that's available to you?

Let me speak to that. In the early days of reading the document that we're a large company, there are some limiting things. However, we are aware there are some tax credits in our move 2 -- 1.5 weeks ago to shut down the physical auction locations and pay people through April 3, as we announced. It looks like now that may be eligible for a tax credit, and we can recover some of that which will help us along the way in this period of time of low activity. So it's too early for me to get through all the details. The loan provisions do not appear to apply to us, but our capital is in solid position. We have a great capital structure to withstand this for some period of time. So I'm comfortable we're well positioned.

Our next question comes from Daniel Imbro with Stephens Inc.

Wanted to start quickly on some of your online omnichannels. You mentioned and on the website last week, those are still open. But historically, one of the uses of the physical auction has been providing reconditioning services for those -- that segment of vehicle that needs it. So if we're in an online-only environment for longer, how do you plan to cater to that segment of vehicle population that needs repair work in order to be sold?

Well, if we -- I'll start, Dan, and then let Eric weigh in. If we take the OPENLANE private label network, which is where all of these -- all -- where the majority of these leased vehicles are sold in the open and closed sales, there is no ancillary services and no additional reconditioning being done to those cars. Those cars are being sold right from where they're turned in. And they're inspected and imaged right there and then posted on to the private label sites. So there isn't any reconditioning that's been taking place there. Now as they end up at auctions, in the optimist that I am, I believe that we're going to have them -- we're going to have them, and I believe that we may have more opportunity to do more work on more of these cars before they do get sold. Eric?

Yes. The only thing I'd add, Daniel, is, is there are a number of locations that are restricting our ability to reopen our body shops and our mechanic shops, so until those are there. But we do have a large inventory of sale-ready vehicles that our consignors would like us to move as quickly as possible. So we can move quickly and then the reconditioning will start up. We're permitted as quickly as we can following our -- again, our closure through April 3.

Got it. Eric, that's really helpful. And then just a quick one on the cost side, if I could squeeze it in. You talked about high inventory and low demand and you're piling up cars with temporary leases. Can you talk about what kind of incremental cash cost that could add? Or maybe more granularly, could you just help us think about what a weekly cash burn is today? And what that could look like over the few months?

Well, again, let me speak to the cash burn, and I'm going to ask Jim to speak to a topic relative to what we do for our customers in these trying times. The cash burn, again, we have a cost structure. We're taking action that can reduce that cash burn by $10 million per week. I don't have a specific number to disclose today because the operations are in such flux, tremendous uncertainty, but that's a sizable number. And we have $350 million, and we believe that will carry us, Daniel, for an extended period of time should the disruption continue multiple weeks. So -- and we can go months in my opinion on that -- on the cash that we have available. The incremental lease cost for these properties is really an investment we make in the future activity that comes to our auction as a result of having those vehicles. Jim, might you talk about 2008 and what our experience was there and how we benefited over time?

Yes. Listen, our customers are going to have cars that are going to get backlogged. And obviously, these cars need to be secured and they need to be parked, and we need to be good shepherds of this inventory. In 2008, we went out and we got additional land. And we took care of our customers, and we did the right thing. We didn't have any contracts. We just had an agreement that we would service our customers in return. I think we got rewarded for it. As a matter of fact, when business came back, not only did we have a lot of vehicles in our inventory, but I think our customers that we took care of and provided more space to rewarded us with even greater market share. I see the same thing here. We don't have time to stop and try to renegotiate contracts in a time of crisis. We just need to take care of our customers. We need to service them. We need to do the right thing by our customer. And I believe the customers will give it back to us many times over. So I know it sounds pretty unstructured, but it's really one at a time. Just let's -- just take care of our customer.

Daniel, we only have time for one more question, if there is one in queue.

Our last question comes from Craig Kennison with Baird.

Eric, you mentioned your burn rate and your confidence you could withstand a few months of this, perhaps. Why not just draw on the revolver just in case? The way Jim framed it, it looks like quite a dire scenario. So why not just draw on that revolver?

Craig, that's a good question. One of the strengths of our capital structure is the flexibility it gives us without any financial covenants. If we draw on the revolver, it would institute a maximum total credit limitation. And in a period of uncertain adjusted EBITDA performance over the next, call it, the next quarter realistically, I think that's a risk we should not take until we have greater visibility on the financial resources we will need in the period of recovery. That revolver is there when we needed to operate the business, and I need to protect that at all, at all costs, if I can. And we have such a strong balance that just add cash to the balance sheet and impose risk on the company, to me, for our situation, does not seem like the responsible move. I may need that revolver as we start to see the activity pick up, and we've got these huge inventories, a lot of work going on, and that's when I would plan to use the revolver.

Could you add color on how those negative covenants would kick in if you were to exercise the revolver, and then because of your EBITDA for a period of time, perhaps violate those covenants?

Well, it's not a violation. It puts limits on how we can operate the business, the capital we can deploy even within the business. And again, it's a total leverage. And they are -- those covenants apply across our capital structure is the problem. It's not just the revolver that I could easily deal with. It then creates covenants through the Term Loan B, and all of these will create situations where we exceeded some financial parameter due to a very short period of low EBITDA generation. It's an LTM calculation. So that's the uncertainty you have. We sure don't want to create a situation where you lose the flexibility of your capital structure because of a short-term situation, a short-term decision that was perhaps even unnecessary at the time that has unintended consequences as you get to the recovery. Now again, if I didn't have such a strong cash balance, I might have a different view of -- in the defense of the company, help. But I feel we can survive for a much longer period of time. I'm in regular contact with my bank group, multiple times a week. There is no issue with liquidity and availability of resources and our banking system is extremely strong right now. So I do not lack confidence in that money being there if we were to need it.

Go ahead, Eric.

I said, Jim, back to you for final comments.

Okay. I think I pretty much said what I needed to say. Listen, I know there's a lot of people on this call today, and I really appreciate you taking the time beyond your interest. Listen, we've been through difficult times before. And we've gotten through it and we've come out of it better. And it's not just my optimism. We were in a very, very good spot here through the middle of March. We talked about that earlier. The KAR business has been -- had been strong through that period of time. I think this can be a quick rebound just because of the nature of what caused this situation and I think how we can get out of it. We can get people back to work. We got this financial stimulus packages that have been put in place. I think we can get the economy rolling again. As we talked about, the financial markets are going to be there. I'm very confident that we'll begin selling cars. And we've got a lot of cars to sell. The one thing that hasn't stopped, these cars have not stopped returning. We're seeing lease returns at similar levels. They haven't dropped off -- they maybe dropped off a little bit, but they haven't dropped off much. Repossessions haven't -- maybe dropped off a little bit, but even if, they've been extended. We know we're going to get the cars. We know we're going to sell them. Perhaps we're not going to sell them in the next 2 to 3, 4 weeks. But we know at some period of time, this thing is going to loosen up and we're going to have lots of cars to sell and lots of work to do. And I think we can get back to business as normal pretty quickly. So with that, I'm confident, I like our business. I like our opportunities, and I'm confident that we can get this thing going in a hurry. So I'll leave it there. Thank you for being on, and we look forward to catching up on our quarterly call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.