KAR Auction Services Inc

NYSE:KAR

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the KAR Quarter 3 2019 Earnings Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference to your speaker today, Mike Eliason, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

[Mike Eliason, executive]

Thanks, Victor. Good morning and thank you for joining us today for the KAR Auction Services Third Quarter 2019 Earnings Conference Call. Today, we'll discuss the financial performance of KAR Auction Services for the quarter ended September 30, 2019. After concluding our commentary, we'll take questions from participants.

Before Jim kicks off our discussion, I'd like to remind you that this conference call contains forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect KAR's business, prospects and results of operations, and such risks are fully detailed in our SEC filings. In providing forward-looking statements, the company expressly disclaims any obligation to update these statements.

Let me also mention that throughout this conference call, we'll be referencing both GAAP and non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued yesterday, which is also available in the Investor Relations section of our website.

Now I'd like to turn this call over to KAR Auction Services CEO, Jim Hallett. Jim?

[James Hallett, executive]

Thank you, Michael, and good morning, ladies and gentlemen, and welcome to our call. The topics that I want to discuss with you today are our third quarter results, provide you with an update on TradeRev, speak to our revised guidance for 2019 and then review the actions that we're taking to improve our performance going forward.

First, let me cover our third quarter results. Our results in the third quarter fell short of our expectations, and there are 2 primary factors that impacted our performance in the third quarter. First, volumes were softer than expected. We experienced double-digit growth in commercial volume and 7% growth in dealer consignment volume. While volumes grew in each of our channels, we clearly saw slower growth than expected. We have spoken with many of our customers, and this trend is throughout the industry. And we believe that it is a timing issue, and it is not a secular change in the market.

The second factor impacting our results in the third quarter is the revenue mix out of ADESA that led to a decline in gross profit margin and adjusted EBITDA margin. We decreased SG&A across the businesses other than the increases at TradeRev and the SG&A from acquired businesses. Unfortunately, this wasn't enough to offset the lower gross profit realization per dollar of revenue. Volume grew 9% at ADESA excluding acquisitions. Organic volumes grew 7% driven by lower-revenue online transactions at OPENLANE and TradeRev. We also experienced slower growth in the OPENLANE channel in the third quarter. Forward growth was expected based on the lease originations in the third quarter of 2016.

AFC performed in line with our expectations. We had modest growth in both the number of loan transactions and revenue per loan transaction, and we're also seeing decreases in interest rates lower our cost of our securitization facility.

Overall, while we controlled SG&A throughout KAR, it was not enough to offset the impact of slower growth and a revenue mix that provided lower gross profit margin.

Now let me provide some insights on what is happening at TradeRev. First, our effort to combine the dealer consignment sales efforts of TradeRev and ADESA is going to help us accelerate the introduction of TradeRev throughout the United States. Dealers have different challenges in their business that make having multiple offerings to meet their needs a necessity. Some dealers need cars immediately swept off their lots, and moving the vehicle to a physical auction allows them to seek the highest value by using all digital and physical channels to maximize the value of the vehicle. Other dealers are not space constrained, and they may be looking for the lowest-cost transaction while pursuing the highest proceeds possible. Having one dealer consignment sales rep calling on each dealership and introducing all of our dealer consignment capabilities, whether digital or physical, is what our customers have been asking us for.

We are focused on getting our go-to-market strategy right and take advantage of the power of a joint sales effort. We're also focused on creating a business model that has economics that can generate profits in the future. We do not believe revenue per transaction significantly below $300 is a sustainable model.

We have been increasing our fees for the transaction and reducing the level of incentives. We do not believe that we should pursue growth with an economic model that cannot be profitable and sustainable in the long run. With that said, we have chosen to operate within the financial parameters set at the beginning of the year and limit operating losses to approximately $60 million. To accomplish this, we intentionally pulled back on incentives, and this is contributing to lower volumes than we targeted for 2019.

We will not hit our target of 200,000 cars on TradeRev this year. To hit this target, we would have to lose more money, enter more new markets and take on greater risk in the business. We believe it is a better strategy to execute our better together combination of TradeRev and ADESA sales teams and more carefully utilize incentives to build the local buyer base even if this slows down the volume growth in the near term.

I believe there are times when you must slowdown in order to go faster. I do not believe the slower -- with the slower growth we are experiencing while we tweak the business model will delay our plan to achieve breakeven in 2021.

TradeRev is not just a volume game. We also need to develop an economic model that makes sense to us and to our customers. I'm committed to the success of TradeRev, and I believe our customers want a digital solution that is complementary to the physical auction solution.

The goal is to provide the best service and to achieve the best outcome for each wholesale transaction. To provide the best outcome, we must be prepared to offer the car in multiple channels until full value is paid for the vehicle. It is unrealistic to think that every car will receive top dollar if all we offer is a digital solution. It is equally unrealistic to think that the physical auction is the only way to get the maximum value for each vehicle.

As I've said many times in the past, it is not our job to dictate where our customers should sell their vehicles in this wholesale marketplace. It is our job to have a diverse set of offerings so whatever the decision the dealer makes, we have every channel in the offering that is being considered.

With that, let me turn to our guidance. As we disclosed last night in our earnings release, we are reducing our guidance for 2019. We expect adjusted EBITDA of $510 million to $530 million for 2019. I recognize that this is a wide range with only 1 quarter left in 2019. We have the potential to recover all or a portion of the losses related to High Tech Locksmiths' situation prior to year-end. We also have a significant increase in the number of off-lease vehicles that will be returned in the fourth quarter. We saw the highest number of lease originations in history written in December 2016. This should increase volume in the fourth quarter or it may roll over into 2020. We are doing everything we can to finish the year strong.

Let me close with some comments on specific actions that we're taking to improve our earnings in the future, including the upcoming quarters. First, I recognize that our company is smaller, and we must adjust our corporate cost structure accordingly. We reduced corporate head count in March 2019, eliminating over 100 positions. We have continued analyzing every position and have eliminated a number of positions recently that will reduce our costs in the first quarter of 2020. We plan to reduce our overhead cost by over $10 million in 2020 as compared to 2019. We are challenging all of our legacy operating processes, especially in the ADESA physical auctions.

As we see our businesses transform into physical auctions with the adoption of VirtuaLane, greater use of digital auction offerings and the need to reduce cycle times to meet the goals of our commercial customers, we must adjust our processes in order to capture the efficiencies created by improved digital and physical auction methodologies. We need to reduce our direct cost of delivering these services.

We must also address the SG&A outside the holding company segment. Our revenue mix is shifting as we continue to see ARPU grow through our ancillary and off-premise services. This growth is extremely valuable to us and is essential to meeting the needs of our customers. However, it also has lower gross profit margins. This requires us to manage our field overhead costs so that we continue to grow our operating profit and adjusted EBITDA at acceptable levels.

In the third quarter, consolidated SG&A was 22.6% of the total operating revenue. This is too high. I have set 2 specific goals for our leadership team. First, we must immediately reduce the percent of revenue spent on SG&A. I want this to begin immediately. And second, I want us to reduce SG&A and achieve a target of less than 20% of total revenue in 2020. And last, I don't believe that getting SG&A to less than 20% is good enough. This is just the first milestone that I want this team to achieve.

Most importantly, the challenges that we're facing today are consistent with challenges that we've faced in the past. In other words, we've seen this before. When we went public in 2009, we expected more transactions to be completed online over time and recognized the need to reduce our cost structure. From 2007 to 2009, I was personally charged with eliminating corporate overhead at KAR in order to increase earnings and cash flows to provide the capital to repay debt. While the circumstances may be different today, the task at hand is very similar. We need to reduce overhead, need to find efficiencies in our core auction businesses to improve our margins and we need to focus on profitable growth in all of our businesses.

I know I usually spend time on our long-term outlook and what we see over the next 5 years. While I don't believe anything has changed in our overall outlook, I want to focus on the near term right here, right now.

We will continue to develop products and services to meet the needs of our customers in the future, but we must improve our results quarter-to-quarter first. We will share with you our targets for 2020 and the initiatives we will execute to achieve those targets at our next earnings call in February. In the meantime, we will focus on now and prove to you that we can get our expenses in line with revenue mix, stabilized gross profit and continue to grow revenue per unit and total revenue.

Thanks for joining us today and for listening to our plans and our priorities. I will now turn it to Eric, who will share more information on our financials before we take your questions. Eric?

[Eric Loughmiller, executive]

Thank you, Jim. I would like to provide some more color on our performance. Let me start with some comments around revenue and ARPU at ADESA.

Our same-store net revenue, or revenue excluding purchased vehicles and revenue from acquired businesses, grew 4% in the third quarter. This was driven by a 7% increase in same-store volume, offset by a 2% decline in ARPU. The 2% decline in ARPU reflects that our growth came from our online auction channels that have lower revenue and gross profit dollars per car sold. In the third quarter, 45% of our transactions were completed in our online-only channels compared to 40% in the prior year. This creates lower gross profit dollars per car sold.

At physical auction, ARPU increased 5% to $893 per car sold. However, physical auction volumes grew only 1%, and auction revenue per vehicle sold was consistent with the prior year. Our lower-margin ancillary and off-premise services drove this [ hope ] but only at gross profit margins in the low 20s. The mix of revenue led to a 170 basis point decrease in gross profit margin on net revenue.

As Jim mentioned, we believe we can address this changing revenue and profit mix by reducing cost of services through improved processes that result in lower cost per transaction and reducing SG&A on a consolidated basis. While the gross profit margin pressure is within the ADESA segment, the SG&A adjustments we need to make to offset this pressure are in ADESA and holding company segments combined.

We do have visibility into a strong supply of vehicles as we end 2019 and into 2020. Lease returns will continue to be a positive influence on our online-only channels as well as a driver of ARPU at physical auction. We expect commercial volumes to begin leveling off but not decreasing. Our fourth quarter is always a strong quarter for ancillary services, and this year should be no exception.

CarsOnTheWeb is performing as expected. Europe is just under 4% of our total volume in Q3. This is a real opportunity for us as we expand our digital offerings in Europe. The revenue, net of purchased vehicles, and operating profit in Europe have met our expectations through 3 quarters.

TradeRev operating losses were $51.6 million through 9 months. We expect operating losses for the year to be approximately $60 million. To achieve this goal, we must reduce the incremental cost at TradeRev and better utilize the existing resources at ADESA. We must also reduce the incentives being offered to launch new markets. We have a plan in place to keep operating losses at TradeRev at approximately $60 million. To be clear, we are not allocating any ADESA costs to TradeRev as part of our better together initiative. These will stay within the ADESA physical business.

At AFC, we had solid performance in Q3. Revenue and loan transaction units grew low single digits, and loan losses were up slightly from the prior year but came in at 1.7% of average loan balances. Most impressive in the AFC performance is the reduction in SG&A. The team at AFC has been focused on using technology, improving back-office processes and growing without increases to head count to support their business growth.

Now let me speak to our guidance. Jim discussed our expectations for adjusted EBITDA, so let me go through the other guidance items we have updated.

First, the items impacting our expectations for adjusted EBITDA flow through our GAAP net income from continuing operations per share and operating adjusted net income per share. We expect net income from continuing operations per share to be $0.77 to $0.87 per share. Operating adjusted net income per share is expected to be $1.12 to $1.22.

As disclosed in our press release yesterday, we have reduced our guidance for interest expense to reflect a lower interest rate on Term Loan B. We have also reduced the expected appreciation and amortization as we have better visibility on the timing of projects being placed in service and the impact on 2019 depreciation.

Our effective tax rate is expected to be 28% for 2019, which is slightly better than previous guidance.

We also updated our guidance on capital expenditures and cash taxes. We expect capital expenditures for 2019 to total about $160 million. The increase in capital expenditures from previous guidance is related to investments in technology that are in direct response to customer needs. We have lowered our expectations for cash taxes to reflect lower operating profit and also analyze -- an analysis of professional fees associated with the reorganization of KAR legal entities and other activities prior to the spin. While costs directly related to the completion of the spin are not tax deductible, certain activities and related costs that were necessary to prepare for the spin are tax deductible and reduce our cash taxes in 2019.

We have also reduced the weighted average number of shares for the year to reflect our repurchase of approximately 4.8 million shares for $119.7 million in the third quarter. This utilized the remaining share repurchase authorization that expired in October this year. Our Board of Directors has authorized the repurchase of an additional 300 million of our common stock over the next 2 years. This share repurchase authorization expires in October 2021.

In terms of additional capital allocation priorities, we continue to evaluate opportunities to grow our business through acquisition. However, given our results in the third quarter not meeting our expectations, we are going to focus on our existing businesses for the next couple of quarters. We do not want to miss any opportunities that make sense for our business, so we will continue to work on our current pipeline. But our primary focus will be finding opportunities for efficiencies in our existing businesses and continuing to reduce our overhead expenses to be in line with the gross profit generated from ADESA and AFC. This is not a change in our strategy or long-term priorities but just a pause so that everyone can focus on what is most important today: Improving our adjusted EBITDA margins.

Last, let me update you on the opportunity to recover previously recorded losses at High Tech Locksmiths. We are in the early stages of litigation with a number of former employees, and I do not expect any resolution of this litigation prior to year-end. This means that any recovery through litigation will be after 2019 and not impact our results for this year. However, we have submitted claims with our insurance company for inventory losses and certain vendor payments we believe were fraudulent. We have a long-term relationship with our insurer and have submitted substantial support for the claim that is being processed as we speak. We are working with our insurer to satisfy all of their needs to process this claim in 2019.

The timing of resolution of this claim will impact our 2019 results materially and is the biggest contributor to the wide range of our updated guidance with 1 quarter to go this year. I am personally involved in the discussions with our insurance carrier, and they understand the importance of this matter to KAR and are working diligently to resolve this claim prior to year-end.

While the circumstances that lead to the insurance claim are unfortunate, our long-term relationship with our insurance carrier has helped us accelerate the claims process and allow us to work as partners in determining the cause of loss and available coverage to mitigate this loss.

That concludes my remarks, so I will now turn it back to the operator for questions. Thank you.

[Operator]

[Operator Instructions] And our first question will come from the line of John Murphy from Bank of America.

[Aileen Smith, analyst]

This is Aileen Smith on for John. Following up on your commentary around TradeRev and pulling back on incentives in the quarter, can you elaborate on what other programs and strategies, if any, you're pursuing to drive volume growth across your dealers? And other than profits, how do you define success at TradeRev? And what metrics are you looking for in the early rollout phase to gauge whether you're on track to hit your break-even targets?

[James Hallett, executive]

Yes. This is Jim, so let me take that. Our losses were growing faster than our volumes, and we really made a management change. This business now reports to Peter Kelly. I think most people know that Peter Kelly was the founder of OPENLANE and is a very strong digital mind within the leadership team. And we got focused on this better together strategy of combining the TradeRev team with the ADESA team and really using the strength of ADESA, and not only the sales team but all the resources that are at ADESA as well.

And then we relied less on incentives. I don't believe that these incentives were sticky, and I don't believe they were creating any long-term relationships. Transporting a car and providing incentives to transport that car 500, 600, 700 miles across the country really, I don't think, develops a longer-term relationship with that dealer.

And then we really believe that there's a need to increase the revenue per loan transaction. This is a long game. I'm not interested in a short-term volume gain. I'm interested in what this business looks like in 5 and 10 years down the road.

And I don't believe that you can chase volume without working towards profitability. And the technology offerings require capital to keep it current, and the technology solutions must ultimately generate the profits that we need to support the technology. What we're doing here as we speak, and this isn't something that's going to happen, this is something that is in motion now, we are going to cross-train those 2 teams at TradeRev and at ADESA, as we spoke about, and we're going to have one point of contact for the dealer. The dealers have been telling us for some time that they prefer to have one point of contact, one person that can come in to the store and represent all of our products, whether they be physical or digital.

And I think that what we will do is this better together approach, we're going to slow it down a little bit. We're going to continue to increase fees. And we believe that having multiple offerings, not just one digital offering but having the physical offering as well, gives the dealer a choice. And we've always maintained that, that the dealers do want choice. It's not one size fits all. And at the end of the day, we look to finish the year as strong as we possibly can but, more importantly, look to be ready to really go hard at the market in 2020.

[Eric Loughmiller, executive]

And Aileen, this is Eric. Let me add. Look, one measure of success that we've defined for the team is grow dealer consignment volume. Not grow TradeRev volume, not grow ADESA physical volume, focus on the marketplace and grow total dealer consignment volume.

[James Hallett, executive]

And to Eric's point, and I said it in my commentary, dealer consignment was actually up 7% in the quarter between TradeRev and between physical again. So we're seeing signs that this better together, we have confidence that this can work.

[Aileen Smith, analyst]

Great. That's very helpful commentary. And as a follow-up to that question, the institutional mix continued to increase in the quarter versus dealer consignment, yet total conversion declined slightly year-over-year. Did something change in this quarter with respect to institutional behavior at auctions? Are they getting more selective on price at all? Or was there something going on with conversion across dealer consignment that may have dragged that metric down?

[James Hallett, executive]

Yes. So a couple of points I would make there is, first of all, the third quarter was soft. It was soft in retail. And when retail is soft, that ultimately has an effect on the dealers and what they buy and what they're willing to stock and what they're willing to pay. And it also has an impact on what the sellers are willing to accept. So there's no question that the quarter was soft, and it was much softer than what we anticipated.

The other thing I will tell you is the good news on dealer -- on the commercial side of the business. We continue to win share. And if you've listened to me over the years, I've always maintained we don't talk about our wins and our losses on an individual basis. But I will tell you overall, we are winning share. And the reason that we're winning share is because of the investments we made in technology, the investments we made in the platforms and the investments we made in data and analytics is now paying off. And the way we're winning with that -- with those investments is we're winning through getting more share.

[Operator]

And our next question will come from the line of Chris Bottiglieri from Wolfe Research.

[Chris Bottiglieri, analyst]

So 2 questions. I guess like the first one more theoretically, is there anything you're seeing today like at local market level that gives you the confidence that you'll be able to raise fees and hold volumes when you have competitors that are presumably being -- have the willingness and the ability to [ flow ] in the capital markets to burn money for 10 years probably? Like -- so do you think it's feasible to head on if they don't care about profits and you do? I just want to get your sense there.

[James Hallett, executive]

Yes. Yes, absolutely. I believe -- first of all, I believe that we need to focus on what we're doing. But I think that -- again, anecdotally, I think that we believe that they're probably taking a close look at their fees as well. And so it's not a case of following them, it's a case of doing what we believe we need to do in creating a profitable model, as I said, going forward here.

With that said, they have one offering. Our competitors have one offering, and it's a digital offering only. And we have both offerings, as I am repeating here. But I think that is really the long-term win here. I don't believe that single-technology offering -- a single digital offering can win the long game here. I believe it's going to be those physical assets we have. And so yes, we have a platform, TradeRev, and we have the technology. We have the combined better together approach. But we also have a transportation company, we have a finance company, we have an inspection company. We have a number of other services that make this a much more holistic offering that dealers get to choose from. And as I say, it's not one size fits all. So I believe dealers will pay for those services, and they'll pay for those services all provided by one provider.

And at the end of the day, we are raising our fees. We have raised their fees, and we continue to raise our fees, and we're not really looking at what the other guy is doing.

[Chris Bottiglieri, analyst]

Got you. That's helpful. And then kind of just want to think about the implied Q4 guidance. I get the whole insurance recovery thing. But if we put that aside for a second, is there any way to simplify what you're assuming in guidance relative to like year-to-date? And then maybe just give us a framework for understanding off-lease growth and that's impact because I think those are both your most profitable vehicles and your least profitable vehicles. Just kind of get a sense for like what you're expecting there in terms of Q4.

[James Hallett, executive]

Yes. So thank you, Chris. There was really 3 or 4 things I'd point to as we thought about our guidance, is, first of all, it was certainly the lower gross profit as a result of the soft market at physical auction. Really had an impact at the physical auction. And if you take a look at our growth in the quarter, most of that growth came through our ancillary services.

The second was our costs. And we knew -- coming out of the spin, we knew we were going to have to adjust our costs and, as I say, rightsize the company. And in many cases, I would be complimentary of our leadership team. I think we've done a good job. I would say my criticism would be we didn't move fast enough, and we need to continue to move faster.

And the third, which gets to your question on lease volumes, is we also know that these volumes were written in 2016. We said the highest month in the history of all leases was written in December 2016. Will we capture those cars in the fourth quarter? Or will some of those cars roll over into the -- into 2020? Some of my thoughts are that I don't really see the sellers being able to hold these cars because even though off-lease plateaus, it peaks, as we say. It peaks in 2019. It really plateaus. We have great visibility into what happens in terms of off-lease returns over the next 2 or 3 years, and it's pretty level as we go forward. So we see lease returns continuing to be a big driver of our volume and our profitability as we go forward. So Chris, did I answer your question?

[Chris Bottiglieri, analyst]

Yes. I think you did.

[Operator]

And our next question will come from the line of Ryan Brinkman from JPMorgan.

[Ryan Brinkman, analyst]

Could you please comment on the softer industry volume trends that you'd earlier attributed to the timing issues? What are those timing issues exactly? And how long do you expect that they will persist?

[James Hallett, executive]

Well, I got out of the predicting business a long time ago, Ryan. But listen, we didn't anticipate the quarter being as soft as it was. We didn't anticipate the lack of retail and retail going as soft as it did. And there's a lot of things going on around the world that you could speculate on as to what caused that, right, outside of the car industry itself.

But with that said, I'm hopeful that it was a blip and that we'll get back to normal retail here as we continue to move forward towards the end of the year.

[Eric Loughmiller, executive]

And Ryan, this is Eric. Let me add. Even at the lease volumes, to -- while we talk about December being a big month in 2016, September, October that year was very soft. So the end of the quarter was soft.

I know we look at retail from the perspective of the public companies that have used car retail operations. That's only a subset. That's the late-model car. It was very soft when you get into the subprime and some of the other markets that are big supporters of the physical auction.

That earlier question about conversion rate. We had the supply of inventory. The buyers just weren't willing to pay the value at which the seller would transact. That will correct itself. Either the seller will reduce expectations or the buyer will raise the price. But we know from history, I mean, this corrects over a relatively short period of time, of weeks, not months. The volume is coming and it will move.

[Ryan Brinkman, analyst]

That's helpful. And I heard you mention that the issue at High Tech Locksmiths could have a material impact on the fourth quarter. Can you just confirm that this potential impact would only be neutral to positive given you'd already taken the inventory loss in 2Q? And then is the magnitude still roughly the $5 million?

[Eric Loughmiller, executive]

Ryan, you're right. There's no downside. This is just the recovery, the offset to earlier losses. And the magnitude, while we haven't given a specific number, would be at least mid-single digits and could be greater. We'll see where it ends up with the insurance claim.

[Ryan Brinkman, analyst]

Okay. Got it. And then just finally, is there any update you could provide on the New Wave initiative that was outlined a couple of years ago? I ask in part because I want to learn how the benefits might have tracked relative to your expectation, but also because I was under the impression the plan might have added a fair bit of costs. You had talked about hiring a slew of PhDs, data scientists, technologists, et cetera. Is that an area that's being targeted maybe for the SG&A reduction? Or is it still such an important initiative that, I don't know, maybe you're looking to protect it?

[James Hallett, executive]

Yes. So a number of parts to that question, Ryan. But first and foremost, our SG&A reduction is across all of our businesses. There isn't a business that we're not going to scrutinize and take a look at every job and what that job does and what it creates and the responsibility and do we need it. So that goes across all. But what we've really seen with New Wave is we've seen a new, enhanced system with features and benefits to, again, make it easier for our customers to do business with us. And we've seen market share gains. And all those market share gains, I can tell you, I would attribute much of that to the New Wave product and what we've done with New Wave.

And the other area that I would contribute (sic) [ attribute ] it to is there's -- is this data analytics area. There's absolutely no question that we've taken a leadership position with data and analytics. And the way -- and I've said in my commentary, I'll repeat it again, the way that we get rewarded with data and analytics is not necessarily by monetizing and getting paid for the data, it's by getting more share. And so with that, we've continued to grow share on the commercial side. And I would tell you that, without getting in specifics, we have won some major business.

[Operator]

And our next question will come from the line of Stephanie Benjamin from SunTrust.

[Stephanie Benjamin, analyst]

I wanted to follow up a little bit on the question before me and just some of the softer industry volume trends and the timing of these and, I guess the lack of retail volumes during the quarter. I know you said that this was -- you've seen this before and it can be timing, but maybe just so we can kind of learn a little bit more about that historical trend, where you did, in fact, see this, what was the driver of the slowdown historically and why it improved. So maybe just a little bit more context there so we can kind of wrap our heads around that. And then I just have a follow-up on TradeRev.

[Eric Loughmiller, executive]

All right, Stephanie. This is Eric. I'll take the first shot at this. What we see is when we say slowdown, it's not a lack of supply, it's a disconnect between expectations of the seller on pricing and what the buyer is willing to pay. If a buyer has got a lot full of inventory and feels they have sufficient inventory, they're going to be less aggressive on the bidding on the car because they don't need it today. They're always looking for inventory, and that shows up in conversion rate. And ironically, while we don't disclose this specifically, we even saw declining conversion rates on the OPENLANE platform. Cars coming back, we're selling at a slightly slower pace in the third quarter than what we've been experiencing, and that is because the dealers have sufficient inventory, and the sellers have not adjusted their price expectations to what the dealer will pay to add one more car to their lot. Does that make sense to you?

And again, in the past, we've seen this. We saw it in '08, '09. We've seen it as -- there's different periods when you go back, even to '13, '14, where you did see it. These adjustments occur over a few weeks because the consigners need to move these cars.

[Stephanie Benjamin, analyst]

No. No, that's helpful. Is there any concern that maybe the dealers are sourcing some of their vehicles in-house, so basically taking trade -- traded at -- trade and lease vehicles or just overall trade-ins and supplementing their own inventory that way versus going through the auction?

[James Hallett, executive]

Yes. Dealers have always sourced their own vehicles. I mean they always source on trade-ins. Listen, being a former dealer, I can tell you my first choice was to always source my cars through trade-ins as much as I possibly could. That way, I was selling 2 cars. I was selling the new car and I was getting the trade-in, and I was selling it. So they've always sourced their own vehicles. They'll always keep the best vehicles that they can. But what OPENLANE and those private-label programs provide is they provide those young, off-lease cars, 3 years old, 30,000, 40,000, 50,000 miles on them, good condition, right, don't need a lot of reconditioning. You can basically take the vehicle, as we say, retail ready, get it back to your lot and put it in the front row and sell it today. And I think that's the attraction of those off-lease cars than the private labels.

[Stephanie Benjamin, analyst]

Got it. No, that's helpful. And then just quickly on TradeRev. And I -- this is more of a clarification. So I think I understand the not necessarily chasing volumes at any cost strategy, but does this affect the actual rollout of the platform to dealerships across the U.S.? So my question is just -- I think the beauty of TradeRev is kind of building that network effect, creating that dealer-to-dealer marketplace, which builds on itself. So maybe if you can just comment a little bit about just the rollout, again not necessarily to target the volumes at any expense but just to make sure that dealers have access to that platform.

[James Hallett, executive]

Yes. I'm going to take first part of that, and then I'm going to let Eric weigh in as well. So the bottom line is we haven't postponed the rollout. We continue to do the rollout, but we've slowed the pace of that rollout, including the pace of the incentives that we added to that. And I think, Eric, you want to add something?

[Eric Loughmiller, executive]

Yes. But by the better together strategy, if there's a dealer in any market that has a contact with ADESA, that platform is immediately available to them to transact as opposed to us having to hire a new rep at TradeRev, train them on what the used car business is all about, which is what we do. We have people that already know that customer, already know that business. And so as Jim said, I like what he said, sometimes you slow down to go faster. By pulling back on hiring these independent but using the resources that already know the dealer, I think you'll see us accelerate the pace of entering markets on TradeRev over the next several quarters.

[Operator]

And our next question will come from the line of Gary Prestopino from Barrington Research.

[Gary Prestopino, analyst]

I wanted to just talk about -- Eric, you mentioned that you want to keep the losses of $60 million at TradeRev going forward. And it looks like you've lost $51 million the first 3 quarters, so you're running at a loss rate of about $17 million a quarter. And yet you're going to lose about $8 million in Q4. Is that a direct result of what you're doing with the better together strategy, knocking back incentives and actually reducing personnel that are going after these accounts, combining sales forces? And then would that portend that in 2020, we could see a step-down in the losses of TradeRev just because of what you're doing internally?

[Eric Loughmiller, executive]

Gary, you've summed it up very well. Thank you for that. Yes, we are making these changes to have less incremental cost per transaction, which is going to possibly reduce volume but over time take better advantage of our breadth of coverage of the dealers. We are going to hire less in the fourth quarter. We -- I mean, what I pointed out in my commentary, I am not allocating ADESA cost to TradeRev if they're selling a TradeRev vehicle. We're not changing the cost structure of ADESA. And some of their activity may result in a TradeRev sale and the cost will stay at ADESA. That will be, in part, how we are able to reduce the losses that are directly attributable to TradeRev in the fourth quarter and hopefully, over time, accelerate the pace of growth on volume.

[Gary Prestopino, analyst]

Okay. And then a lot of talk about what volumes and demand and supply and all that, but you also mentioned that you're going to take a long, hard look at your COGS and your SG&A out in the field. So could you maybe talk a little bit about what you could do better on the COGS side, what you could do better on the SG&A side in the field? Because obviously, any ancillary services that you book, it diminishes margins. So that would be a place to attack. So give us some idea of what you're looking to do.

[James Hallett, executive]

Yes. Gary, I think that's a great question and one that we are thinking a lot about, and I'll share some thoughts with you here.

First of all, we need to understand that as you look at our business, 60% of our costs are labor related. So we absolutely have to be able to address the labor, especially at the legacy physical auction business. And as you think about that, you've heard us talk about VirtuaLane in the past where the car can still come in and still go get reconditioning and get parked on the spot, but it doesn't necessarily have to drive through the lane anymore. And they -- basically, the dealers sit in the lanes comfortably, and they buy it off a screen where they can see pictures of the cars. And they can see a condition report in the car, and they can also go out and walk around the car in advance if they want -- the car is still sitting there, if they really want to come to the physical auction. We now have about 30 of our auctions equipped with VirtuaLane, and we continue to equip the balance of our auctions with VirtuaLane as we go forward. And a couple of points I would make on that is our major competitor in this business is doing the same thing, which has been very encouraging. In fact, they announced that they're doing one auction that is 100% virtual. No car goes through the lane -- through any lanes. And just recently, in the last week, they've announced they're about to move to their second 100% all-digital auction. So there's no question that this is the way the industry is moving and must move. We have to reimagine how we do things at the physical auction.

Let me also give you one -- I mean, I could go on with lots of examples but just to give you an idea about what we're thinking about. Think of an auction that has 10 lanes today, and you've been at auctions. A 10-lane auction. Could we reduce that auction and operate only 9 lanes? And could we do that across 75 auctions? And you could do the math to know what that would mean in terms of savings. And would our dealers really be upset that the auction ran an extra 20 minutes longer because we took it from 10 lanes down to 9 lanes? Those are the types of things we're thinking about, even right down to is the work week a 5-day workweek? Is it a 4.5-day workweek? There's a number of things, and the list is long. But it's going through that list, and it's targeting the things that we're going to focus on that can really eliminate some of these costs.

And then the other thing that I'll just mention is just recently here in October, the National Auto Auction Association held its annual meeting of all auctions and all auction remarketers here in Indianapolis, and I was humbled to be the keynote speaker. And what I spent my time talking about is I spent my time talking about the transformation of the physical auction and that we're going to have to stop running cars. And first of all, we're going to have to do it for -- from a safety standpoint; but second of all, this is reimagining the way that physical auctions will operate in the future. So a lot of focus on it. We've got a lot of brain trust working on it, but we think there is some significant gain that I'm not going to quantify today, but I think there's big opportunity there.

[Gary Prestopino, analyst]

And just lastly is, is this -- what you're doing out in the field, is this something that you can accomplish over a year? Is it a 2-year program? Or is it just a continual program?

[James Hallett, executive]

I think it's continuous improvement. I believe that we can -- certainly, it's being launched as we speak. Many of these things, I think we can get it launched now, and we can work at it auction by auction. And certainly, I don't think there's any finish line.

I'll tell you the other thing that's important, too, that it's not just always what we want to do. We have to bring our customers with us. You just can't go out and shove it down their throat and force-feed it. You have to ask your customers to come with you, and they have to understand what the value proposition is and why they should support it. And I can tell you right now we're getting tremendous support from the OEMs on the VirtuaLane and not running cars. It's a little bit harder with the dealers because the dealers have an older car in most cases. And there are still some of them hanging on to the way that they've been doing it for the last 2 or 3 generations. But my point was the speed -- we want to go fast, but we've got to make sure that we're not going faster than our customers are prepared to go with us.

[Operator]

And our next question will come from the line of Craig Kennison from Baird.

[Craig Kennison, analyst]

Jim, I wanted to get to your goal of achieving SG&A as a percentage of sales below 20% of revenue in 2020. I wanted to clarify, is that the full year goal? And then is that something that will unfold throughout 2020 such that you're well below that in Q4 of next year? Or is it something you can address quickly so the cadence is more immediate?

[James Hallett, executive]

Yes. So I've set the goal. We're working on it as we speak. I told you about the cost reductions that we did in March, and I've told you that we've done some recent cost reductions here. It's in motion. And throughout the course of the year, the goal is to be under -- at or under 20%.

[Craig Kennison, analyst]

And then I wanted to give you a chance to comment on Europe. You said it was in line with your goals. It feels like volume's ahead of what you had committed to earlier in the year. Could you just address what's working in Europe? And maybe clarify the profit profile of that volume as I know you're still in a hyper-growth phase.

[James Hallett, executive]

Yes. Thank you for asking. CarsOnTheWeb is absolutely performing to our expectations. The thing that we've been able to do -- first of all, we've got a very good management team there. And what we've been able to do, we've been able to introduce them to some relationships that they weren't able to get to, and that has allowed us to increase our volumes.

The other thing that -- as you think about the opportunity, if you think about the carpark in Europe, the carpark in Europe is equal to the size of the carpark here in North America. And CarsOnTheWeb, there aren't any other companies that do exactly what CarsOnTheWeb does. And so we think there's a real opportunity, and we think CarsOnTheWeb will be a big contributor to our growth going forward.

[Craig Kennison, analyst]

And then finally, around the spin. You talked about some long-term growth targets, 6% to 9% revenue growth and 25% EBITDA margins. Are those still reasonable goals in the time frame you described?

[James Hallett, executive]

Yes.

[Operator]

And our next question will come from the line of Derek Glynn from Consumer Edge Research.

[Derek Glynn, analyst]

Just 2 questions on TradeRev. First, can you just elaborate more on the recent changes to the sales team to better align business across both ADESA and TradeRev? What impact did that have on the quarter? Were there any hiccups with respect to those incentive changes? And then secondly, just hoping to get more color on the competitive environment for TradeRev in the dealer-to-dealer space. Obviously, a private competitor has been able to raise some capital. Wondering if you've seen any significant changes in the competitive dynamic from them or Manheim over the last quarter or 2 that would perhaps lead you to this pivot in strategy for TradeRev?

[James Hallett, executive]

So let me start. There's multiple parts there. I think I got most of them. Let me start with saying the teams are very excited with this merger of the 2 teams, and that's a great starting point. We -- through our own fault, I'll say, I'll take it, is we created a competitor. It was almost like we had 2 companies. We had a TradeRev company, and we had an ADESA company and they were competing. And it was really our employees who were saying, "This needs to change." And it was our employees that were encouraging the change as much as it was management. And so I think our employees are pleased that we listened to them and that we brought this together under single leadership.

I mentioned there's a lot of cross-training going on. That cross-training continues. We also looked at compensation programs. We looked at the way somebody got paid at TradeRev and somebody got paid at ADESA. And now we've aligned those compensation programs, so it's not, I get more money or I make more money if I sell this car or that car. It's just get car, sell car. If it's a dealer car, you're getting paid. So I think aligning those compensation programs were good.

And then from a competitive standpoint, again, I'm not a big fan of anecdotal information. I tend to like more factual information. I hear about a lot of things that are going on in the industry and what people are doing. I don't have anything factual to tell you about my competitors. And I also don't know how they count cars. Quite frankly, I hear that cars get counted differently with different organizations. I know how we count cars. One car, one sale is a car sold. If the car is arbitrated and it comes back, it's not another car sold. It's still one car sold.

So I think it is competitive. There's no question that we run into our competitors when we're out there in the field. But on the other hand, I'll go back to what I originally said: There's competition in the space, but nobody has the offering that we have. And I believe it wins long term.

[Operator]

And the next question will come from Bret Jordan from Jefferies.

[Bret Jordan, analyst]

I have sort of a follow-up on that last competitive landscape question. But do you see Manheim Express or ACV backing off some of the incentive spend as well? I think there's been a lot of free transportation being thrown into deals, but do you see that cadence slowing with them also?

[James Hallett, executive]

At this point, we wouldn't know what they're doing because they don't disclose any information publicly. But I would expect the market doesn't see the value in all these incentives creating temporary transactions that aren't sustainable over time. We'll see how they respond.

[Bret Jordan, analyst]

Will you build your sales force?

[Eric Loughmiller, executive]

Bret, we were probably the driver initially of heavy incentives to build a market. We were the first to do it, and we're the first to stop doing it at the same level.

[James Hallett, executive]

Yes. Bret, I was just going to add to that is we talk about breakeven, and that's a milestone. And we're still on track, we believe, to break even in 2021. But let me tell you, at breakeven, that's not where we want to be long term. We need to -- we need this business to stand on its own and start making money. And so this is not about how much money we can throw at the market, how much -- how we can throw incentives at the market and do some of the things that we're doing. As a matter of fact, I think we kind of did it to ourselves by throwing those incentives out there. And now we realize it's not incentives that's going to win this game.

[Operator]

And I'm not showing any further question at this time. I'd like to turn the call back over to Jim Hallett for any closing remarks.

[James Hallett, executive]

All right. Thank you, and I appreciate you being on today. Obviously, we've got some things that we're dealing with. But as I mentioned in my commentary, it's nothing that we haven't seen before, and I have full confidence that the team is ready to execute on the things that we talked to you about. And we're ready to demonstrate to you that we can rightsize this company by doing the things we talked about, and we can continue to grow our business in all areas. And we appreciate your continued support and look forward to talking to you in February to tell you how we're going to execute on the things that we're going to execute on.

So with that, have a great day. I appreciate you being on.

[Operator]

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