The industrywide drop in the number of commercially owned vehicles returning to the wholesale market created a "challenging" second quarter for ADESA Auctions Inc., the CEO of its parent company said.
Jim Hallett, CEO of KAR Auction Services Inc., said the number of vehicles sold through ADESA, which includes business generated by its online platform Openlane Inc., was up 11 percent in the quarter that ended June 30 from a year earlier. But when Openlane is excluded, volume for the traditional auction company was off 6 percent, he said.
Industrywide sales of off-lease, retired rental and repossessed vehicles have been depressed over the last few years, in part reflecting lower new-vehicle sales and leases during the recession. ADESA and other auction companies, which traditionally saw most of their business coming from those sources of used cars and trucks, have had to rely increasingly on vehicles consigned to the auctions by dealers.
Rebound at year-end
But Hallett said the supply of vehicles from the auction industry's traditional sources is expected to rebound at the end of 2012 and into 2013. He expects auction industry sales volume in 2012 to be similar to last year, but believes volume will increase to 8.4 million in 2013 and 9 million by 2015.
The National Auto Auction Association, in its 2011 Auction Industry Survey, reports that almost 7.7 million units were sold at its member auctions in 2011.
ADESA is poised to take advantage of the volume increases, Hallett said.
"ADESA is nationally weighted on the institutional side of the business and we have good long-term visibility with our leading commercial consigners," Hallett told analysts today, during KAR Auction's quarterly earnings conference call. "In fact we know what their volumes look like two and three years out, and what their returns are going to be."
Revenue, profit up
ADESA's second-quarter revenues increased 2 percent from the year-earlier period to $263.8 million. Gross profit increased 2 percent to $116.4 million. The gains in revenue and gross profit were primarily the result of the 11 percent increase in the number of vehicle sold, partially offset by an 8 percent decrease in revenue per vehicle sold, according to SEC filings.
KAR Auction Services' revenues increased 3 percent to $487.9 million in the second quarter. Net income in the quarter was $23.9 million, vs. a net loss of $14.3 million in the second quarter of 2011.
Hallett said he is pleased with how ADESA has grown its sales of dealer-owned vehicles to about 40 percent of its sales. Dealer-owned business made up 32 percent of ADESA's volume as recently as 2009, Hallet had said in a 2010 conference call.
Conversion rate disparity
Eric Loughmiller, KAR Auctions CFO, noted that the conversion rate of dealer-owned vehicles of 50 percent or less is lower than the rate of vehicles owned by other commercial customers. For example, NAAA reports that the conversion rate of factory-owned vehicles at its member auctions in 2011 was 71 percent.
ADESA's increase in sales of dealer-owned vehicles is the result of the decline in commercially owned vehicles and not a shift in dealers' buying patterns, Loughmiller said.
Hallett and Loughmiller dismissed a question from one analyst which implied that the auction business has been hurt by a growing trend among large publicly owned dealers to retail more of the used vehicles they receive as trade-ins, rather than sending them to auctions.
That has been a long-term trend among both dealers and the rental companies, they said, but ADESA hasn't been materially impacted by the change.
