Q4 2023 Earnings Summary
- Strong Financial Performance in 2023 and Positive Outlook for 2024: KAR delivered volume growth, revenue growth, $272 million of consolidated adjusted EBITDA, and more than $237 million in cash flow from operations in 2023. The Marketplace business increased adjusted EBITDA contribution by $79 million last year to $108 million for the full year. The company intends to build on this strong Marketplace performance in 2024, expecting continued growth and a meaningful contribution from the Finance business.
- Competitive Advantage through Digital Marketplace Transition: KAR's shift to a fully digital marketplace allows for faster sales (within a day or two), lower costs (no transportation or reconditioning fees), and higher proceeds per vehicle compared to physical auctions. This positions KAR as a strong performer on the key metrics that customers care about, providing a competitive advantage and potential for market share gains.
- Integration of Commercial and Dealer Volumes Enhances Buyer Base and Profitability: By integrating commercial and dealer volumes into one marketplace, KAR is expanding its buyer base, particularly among franchise dealers. This has led to higher average revenue per unit (ARPU), higher gross profit margins, and increased profitability. The company is selling more high-value vehicles (around $25,000 to $30,000), contributing to higher auction fees and transportation revenue.
- Higher credit losses in the Finance segment: The company experienced an increase in credit losses, with credit loss rates rising to 2.1% for the full year and 2.5% in Q4 2023. These higher loss rates are due to declining used vehicle values, higher interest rates, and tightening retail credit availability, impacting used vehicle retail sales. Management expects similar loss rates to persist in the first half of 2024, which could negatively affect profitability.
- Volume challenges in the Canadian dealer segment: Dealer consignment volumes in Canada declined due to dealers being "upside down" on their inventory, making them hesitant to wholesale vehicles at a loss. This challenge has negatively impacted dealer volumes, and it's uncertain how long these issues will persist.
- Potential headwinds in off-lease volumes in the second half of 2024: Due to low lease originations in late 2021 and into 2022, off-lease volumes are expected to be under pressure in the second half of 2024. While increased lease returns might partially offset this, the net impact remains difficult to predict, posing a risk to growth in the commercial segment.
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AFC Credit Losses and Outlook
Q: How will AFC credit losses impact 2024 earnings?
A: Management expects the Automotive Finance Corporation (AFC) to grow modestly in 2024. Credit losses reached 2.5% in Q4 and are projected to remain at similar levels in the first half of 2024. They anticipate loss rates will moderate in the second half, positively impacting earnings . -
Off-Lease Vehicle Trends
Q: How will off-lease trends affect volumes and revenues?
A: The decline in the equity gap on off-lease vehicles is leading to increased returns and consignment volumes. Lease originations grew over 20% last year and over 40% in Q4, indicating future volume growth. Management expects more off-lease vehicles entering remarketing, positively impacting volumes and revenues . -
Dealer Volumes and Fees
Q: Are dealer volumes and auction fees improving?
A: Dealer volumes in the U.S. grew in Q4, and the company believes it gained market share. Management sees upside in auction fees, noting they are competitively priced and that physical auction buy fees have increased materially in recent years. -
AFC Net Interest Income
Q: How will AFC yields trend in 2024?
A: AFC continues to perform strongly, with yields remaining consistent over recent years. Management expects yields to remain stable into 2024, with no material changes anticipated. -
Canadian Volume Challenges
Q: How long will volume issues in Canada persist?
A: Dealer consignment volumes in Canada have faced challenges due to dealers being "upside down" on inventory. Management has observed slight improvements recently but will monitor trends into the spring. -
Repossession Volume Growth
Q: Are repossession volumes increasing?
A: Yes, repossession volumes are increasing industry-wide. While most repossessions are sold at physical auctions, the company is piloting digital sales, though volumes are currently small. -
Credit Losses Canada vs. US
Q: Are credit losses higher in Canada than the US?
A: Management stated there is nothing unique or systemic about credit losses in Canada compared to the US. Losses are managed similarly across both markets. -
Physical Reconditioning Needs
Q: Do off-lease sellers require physical reconditioning?
A: While some remarketers may prefer physical reconditioning, management believes the digital marketplace offers faster sales, lower costs, and competitive proceeds without the need for physical recon. -
Enhanced Risk Management
Q: Has AFC increased lot checks to manage risk?
A: AFC has increased lot check activities and advanced analytics to mitigate losses effectively. These measures help identify higher-risk accounts earlier.