KAR Auction Services, Inc (KAR) Q4 2020 Earnings Call Transcript

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KAR Auction Services, Inc (KAR 0.23%)
Q4 2020 Earnings Call
Feb 17, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the KAR Auction Services Incorporated Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. Mike Eliason, Vice President, Investor Relations and Treasurer. Please go ahead.

Mike Eliason -- Vice President of Investor Relations and Treasurer

Thanks, Jerome. Good morning and thank you for joining us. Today, we will discuss the financial performance of KAR Global for the quarter ended December 31st 2020. Before Jim kicks off our discussion, I would 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 will 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 Global CEO, Jim Hallett. Jim?

James P. Hallett -- Chairman and Chief Executive Officer

Thank you, Michael, and good morning, ladies and gentlemen, and welcome to our call. Today, I plan to cover three topics, I want to review 2020, provide you with an update on the integration of TradeRev and BacklotCars and review our guidance for 2021. Let me start with acknowledging the challenges that we faced in the most unusual year. Obviously, COVID-19 impacted all businesses in 2020, including KAR. We remain committed to providing the safest possible working environment for our employees and our customers. With the challenges COVID-19 created in our workforce, we also saw challenges that directly impacted our marketplaces for wholesale used cars. We continue to operate our auctions on our digital platforms, Simulcast, Simulcast+, OPENLANE, TradeRev and DealerBlock, but demand was very low in April as uncertainty was prevalent throughout the automotive ecosystem.

We continue to offer vehicles only through our digital marketplaces from mid-March through the remainder of 2020. A key challenge that we faced in the second quarter was the need to accelerate the development of our digital marketplaces. This increased level of online bidding began literally over a two-week period and our technology teams had to make sure our systems were always available and there were no service disruptions caused by the increased use of our networks. I'm extremely proud of the collective effort of all KAR employees to make this happen. In the past, many investors have asked me what keeps me awake at night, and technology and digital disruption have always been at the top of the list. Well, while the challenges of 2020 took technology and digital disruption to a new level, we responded quickly, and today we have the best collection of digital assets in the entire industry. We were able to accelerate the transition of our legacy physical auction business to a digital operating model in the matter of weeks instead of the three years to five years that we anticipated at the beginning of 2020.

Another challenge that we faced in 2020 was handling our workforce. In late March, we closed all of our auctions and sent our employees home with pay to evaluate the impact of COVID-19 was having on the safety of our employees and our customers. We furloughed 11,000 of our 15,000 employees globally. In April, our weekly revenue had fallen to as low as 10% of the prior year revenue, the low point for KAR Global performance. By May, we began to see some recovery in demand. Our supply at the time was strong as inventory had been building up at our sites. It became obvious that our business process had changed and many of these changes were going to be permanent. We leaned heavily into technology for our auctions and supporting our back-office functions. Changes in the business operations and especially, all of our support functions led us to permanently eliminate 5,000 positions, reducing our annual payroll costs by over $150 million.

By fall, we had our headcount and cost structure aligned with the business and our digital auction process. We saw the impact of the permanent changes in our cost structure in our third quarter results and expect this to contribute to an improved financial performance going forward. And then we saw a resurgence of COVID-19 with the impacts that went beyond what we had experienced in the spring. We saw the supply of used vehicles tighten and our inventory levels continue to decline as retail demand remains strong, resulting in strong conversion rates and high wholesale prices. Lower transaction volumes led to reduce performance in the fourth quarter despite all the reductions that we'd made to our cost structure. In any organization, people are the most valuable asset. In this environment, the strain and the uncertainty, our people are feeling is the most challenging aspect of running the business today, and it looks like it will be a while longer before we see relief from the strain of COVID-19.

Now, let me share some of our accomplishments in 2020. First, we have successfully migrated all of our auction platforms to digital marketplaces. This has been a strategic direction for KAR for over two years, and we were able to accelerate the pace of change during 2020. We are committed to operating a digital marketplace business supported by services and logistics capabilities that make the wholesale process easy and efficient. Our collection of digital assets that we have strategically focused on building and acquiring over the last five years put us in the unique position to move forward with a digital business model.

It is true that many of our competitors are running cars through the lane despite the increased COVID numbers over the past several months. But we have not returned to the old way of doing business and don't believe there is any evidence that running cars across the block improves the financial outcomes for our customers. We are committed to providing our auction services digitally going forward. In 2020, we introduced Simulcast+ to the marketplace. Simulcast+ is a fully automated auction that can easily sell cars from multiple locations using technology instead of people to manage and run the auction event. Simulcast+ has proven to expand the geography represented by buyers and this improves liquidity for the sellers. We are also not tied to a sale day event when using Simulcast+. We can operate Simulcast+ any day of the week from one or multiple locations. These can be ADESA or customer locations. And the Simulcast+ platform gives us additional digital capabilities that allow our sellers to manage the auction event in real time without leaving their office. We have provided a number of demos to investors this year. And if you have seen one of those virtual tours, you saw that we have a significant amount of information available to both buyers and sellers that lead to strong pricing and conversion on the Simulcast+ platforms.

We see a number of benefits for both buyers and sellers. We've seen increased liquidity. We're able to reach a greater number of buyers that are interested in the car being offered. We've seen lower costs to execute the transactions for all involved, and it is easier to integrate data and analytics in the process, excuse me, that is available to all parties. Better information leads to better price attainment on the vehicle and realistic expectations by the sellers as to what is the current value of the vehicle.

Another success in 2020 was the improved growth and profitability for our TradeRev platform. Our combination of dealer consignment sales teams of ADESA and TradeRev has been a success. We reduced the use of incentives and focused on service levels. We simplified our auction process in order to provide a better experience for our customers. We generated positive earnings for several months in 2020 and have proven this business model can be profitable growth going forward. And we acquired BacklotCars in order to accelerate our growth in the dealer-to-dealer segment in the U.S. market.

And finally, let me talk about the permanent reductions in our cost structure. First, the changes we made in moving to a digital business model allowed us to make permanent reductions in our labor costs, both direct labor and SG&A. Our SG&A was down year-over-year in Q4 by $25 million. This decrease was achieved despite adding $5 million of SG&A in the fourth quarter related to BacklotCars. Even though our costs, we're able to -- even though we were able to reduce our costs, our fourth quarter performance fell below our expectations as we saw the supply of wholesale vehicles decline throughout the entire industry. Our volumes in Q4 reflect the slowing of the economy in response to the increased COVID cases. I do not believe the lower volumes reflect the seasonal impacts or the permanent disruption of our marketplaces. I believe the factors that negatively impacted our supply in Q4 are transitory.

Now, let me give you a real-time update on TradeRev and BacklotCars. First, we are migrating all U.S. dealer-to-dealer transactions that previously took place on TradeRev to the BacklotCars platform. We ran a pilot migration in three U.S. markets in January to refine our migration playbook. We were pleased with the results of the migration and the acceptance of BacklotCars platform by our TradeRev customers in these markets. Beginning February 1st, we initiated the migration of all U.S. TradeRev customers to the BacklotCars platform. We expect the migration activities to be completed in March. By moving our U.S. customers from the TradeRev application to the BacklotCars, we will be moving from a timed auction format to a 24/7 bid-ask marketplace. Our analysis of the performance on the two platforms supported this move.

We believe running a single dealer-to-dealer digital marketplace will maximize liquidity. Utilizing the inspection process developed by BacklotCars should lower our inspection cost per vehicle and provide greater consistency in the inspection reports for cars sold on BacklotCars platform. And most important, we believe the price realization on the BacklotCars platform in the U.S. outperforms the competition in the U.S. market. The early results on the migration activities has been very positive. Initially, there was a small reduction in volumes as former TradeRev customers began using BacklotCars platform. The learning curve for our customers seems to be about five days to seven days and in the second week, we began seeing our combined volumes increase in the markets that we are in the first wave of migrations. We believe the BacklotCars is the fastest growing dealer-to-dealer platform in the U.S. market.

Our goal is simple. We want BacklotCars to be the number one digital dealer-to-dealer marketplace in the U.S. Just to be clear, we will continue to operate TradeRev in Canada. To sum it all up, after 90 days of owning BacklotCars, we are pleased with the performance and the fit with KAR. We have focused -- we have a focused and energetic team leading our efforts to be the leader in the digital dealer-to-dealer transactions in the U.S. Our customers have been receptive to change in the early days of integration activities and bringing the strength of the KAR organization to the outstanding team at BacklotCars is a winning combination that should accelerate the already fantastic pace of growth in the digital dealer-to-dealer space.

The last agenda on my -- the last item on my agenda and an important topic for today is an update on our outlook for 2021. We are reinstating annual guidance for 2021. While we continue to be in the middle of the COVID crisis in all of our markets, we believe we are better positioned to analyze the impacts on our business and assess the likely outcomes on various scenarios. As you saw in our press release, we are providing guidance, the adjusted EBITDA will be at least $475 million, and operating adjusted net income per share will be at least $0.87 for 2021. We are not providing a range, but we are providing the minimum level of performance we expect this year. We still have significant uncertainty around the economy, employment, levels of new car production, the timing of repossession activities and many other factors that are still a ways from returning to normal.

Obviously, our guidance indicates we expect to continue to be below pre-COVID level of transactions and this is representative of our industry outlook. I would like to provide some insight without specific numbers into how we see 2021 coming together. First, we expect lower supply of wholesale used vehicles to persist through the first half of the year. As a result, our outlook for the first and second quarter is conservative. We do not believe the second half of 2021 will improve upon the first half of 2021 and the second half of 2020. We have seen good progress in providing vaccinations in the first months of 2021 and expect continued progress on this front in all of the geographic markets we serve. We also see stimulus in the U.S., Canada, and European -- and Europe as a positive for our customers in the used car retail market if passed by legislators. We also believe that our financial performance may exceed 2019 levels before we achieve 2019 volume levels given the improvements that we have made in our cost structure.

Let me speak to the parts of the market that we believe will drive a return to normal. First, our digital dealer-to-dealer platforms, BacklotCars in the U.S. and TradeRev in Canada are expected to grow substantially over 2020 levels. We expect to continue -- to continue gaining market share in this channel throughout the year. We are committed to expanding the use of Simulcast+ in 2021. We are targeting an increased number of events using this technology platform. There is tremendous value to using the Simulcast+ platform for multi-location sales events, targeted marketing for similar vehicles that allow us to create events that have high buyer interest and expand the geographic reach of the typical physical auction. And our growth internationally, especially at ADESA Europe, formerly, CarsOnTheWeb is very strong and we expect this to continue throughout all of 2021.

We have not given a range of guidance, it is difficult to set an upper end of the range with the uncertainty on when operations will return to normal levels. We still have more questions and answers on what our markets will look like, especially in the first half of the year. But we have had -- have an opportunity to outperform above the adjusted EBITDA and operating adjusted net income per share provided in our guidance once volumes start improving. As a team, we will focus on controlling our costs, increasing our market share, we expect our market share to be driven primarily by digital dealer-to-dealer platforms, BacklotCars and TradeRev, and we will be disciplined around capital deployment. We think our balance sheet, excuse me, is an asset in the current economic environment. And as we look to deploy capital, we expect uses of capital to have a strong connection to our strategic priorities around the digital transformation of the wholesale used car industry. As I finish, let me summarize my key messages on this call. We are a digital marketplace business that utilizes data and analytics and value-added services through a network of locations throughout North America. We are leading the digital transformation of our industry. We have reduced our cost structure permanently and we expect increased profitability going forward. We have combined two leading digital dealer-to-dealer wholesale auction platforms and have the goal of being the leading provider in this segment of the market in the United States and Canada. And finally, we believe our balance sheet is well positioned to support the growth of our business. We will deploy capital going forward on the initiatives that support our strategy.

So with that, thank you for your time today. I will now turn it over to Eric for more details on our financial performance. Eric?

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

Thank you, Jim. And before I get into my remarks, I'd like to correct the statement Jim made during the call. He said that we do not believe the second half of 2021 will improve upon the first half, he misspoke, it is, we do believe the second half of 2021 will improve upon the first half of 2021 and the second half of 2020.

So now I'll get into my remarks. Let me start with an overview of our financial performance in 2020. To say the least, it was a challenging year and our results quarter-to-quarter were like riding a roller coaster. We experienced both ups and downs in performance this year. In review, we started the first quarter strong and performed very well until the middle of March. Uncertainties created by COVID-19 caused us to shut down our operations for the last two weeks of March.

We lost approximately $35 million in those two weeks as revenue was minimal and all employees were paid for two weeks despite all locations being closed. We lost money in the month of April. We had negative adjusted EBITDA of approximately $25 million for the month. We then saw a relatively fast rebound during May as weekly volumes rebounded to over 90% of the prior year, followed by June, where volumes and our financial performance exceeded the prior year. Volumes and financial performance remained strong in July, as we saw strong used car demand, low new car inventories, used car values were increasing and we were selling inventory that had been on our properties through the pandemic. While volume started to decline in August, we finished the third quarter with volumes over 90% of 2019 levels for the quarter and adjusted EBITDA that was 8% above 2019 levels.

We had gross profit of over 50% of net revenue and adjusted EBITDA margin that was 23.5% of total revenue. We feel this performance demonstrates the performance characteristics of our business model going forward when volumes are at or near 2019 levels. Unfortunately, the fourth quarter saw volumes dropped to 75% of the prior year, excluding acquisitions. And our financial performance deteriorated due to the low revenue levels. Gross profit declined to 40% -- 46% of net revenue. Even though we have improved our cost structure and reduced direct labor, there is a fixed component to our direct cost and the volume levels experienced in the fourth quarter did not generate sufficient revenue to maintain our gross margins.

In terms of SG&A, we're able to control cost and hold the SG&A below the prior year by $25 million. This was accomplished despite recording approximately $16 million in incentive pay in the fourth quarter compared to $7 million in the prior year. This increase in incentive pay reflects the proposal by management to adjust the threshold for payment to 50% from approximately 95% of target for 2020. We felt the sacrifices and contributions of our employees should be recognized with the opportunity for a performance-based incentive payout. The threshold set at the beginning of the year did not reflect the challenges we faced in 2020.

The Compensation Committee of the Board of Directors approved the adjustments of threshold. The total payout for employees with annual incentive programs was approximately 70% of target for the year. We also recorded an adjustment to contingent purchase price related to the acquisitions of CarsOnTheWeb and Dent-ology, that was a net increase in expense of $4.7 million. This represents an increase in the expected contingent purchase consideration for CarsOnTheWeb as performance has exceeded the expectations set at the time of the transaction, offset by a reduction in contingent purchase consideration related to Dent-ology, where payments are expected to be less than estimated at the time of the acquisition.

Our effective tax rates for the fourth quarter and full-year were unusual in 2020. The contingent purchase consideration and the write-off of goodwill totaling $25.5 million for our U.K. operations that we recorded earlier in the year are not tax deductible and increased our effective tax rate. As we look forward, we expect our effective tax rate to be approximately 30%, unless, the U.S. federal income tax rate is increased from current levels. I know the big question in everyone's mind is what does KAR's performance look like post-pandemic? We believe our performance in June and through the third quarter gave us insight on what we can do going forward. We believe when volumes get back to 90% or more of 2019 levels, our business can generate gross profit of approximately 50% of net revenue with adjusted EBITDA margins in the mid 20% range.

Our focus on operating a digital marketplace business and maintaining processes that leverage technology for a more efficient cost structure will allow us to perform at this level. Now we need the markets to get back to what we would call normal, so we can prove to you the changes we have made will generate these results. Now, let me speak to changes in the presentation of our financial statements and segment reporting. As you can see in the financial statements included in our press release, we are providing four revenue line items now. We are providing auction fees, service revenue, purchased vehicle revenue and finance-related revenue. This will give a clear picture of the major components of revenue in our businesses.

In terms of key metrics provided in MD&A, we're now disclosing volumes for on-premise and off-premise vehicles sold. We are reporting auction fee per vehicle sold as a key performance metric. We will no longer be utilizing physical revenue per vehicle sold as a key metric. While the number is easy to calculate, a significant portion of services revenue is generated from off-premise activity and not related to the on-premise vehicles sold. We are also computing the gross profit dollars per vehicle sold and including that in MD&A. This is a key indicator of performance and trends in this metric will be important going forward as volumes increase. This metric will capture both the impact of auction revenue and services revenue on our performance. We have also simplified our segment reporting to be consistent with the simplification of the KAR businesses post spin of Insurance Auto Auctions.

All holding company costs are reflected in the ADESA business segment other than costs specifically related to AFC. This simplified segment reporting better reflects the KAR organization structure and how the businesses are being managed. We want to maintain a cost structure that reflects the revenue and performance of the business. Aligning our costs directly with the reportable segments simplifies our reporting and matches the cost structure of KAR with the revenue produced by our businesses.

Let me close with some comments on guidance. I will not go through all the numbers as they are included in the table in our earnings release. However, one item that creates confusion is the computation of weighted average diluted shares. Generally Accepted Accounting Principles require us to compute per share numbers using either the two-class method or the if-converted method when determining the impact of the Series A convertible preferred stock. For clarity, we use both calculations and for GAAP, are required to use the number that produces the lower earnings per share.

For GAAP purposes, we reduced net income by the preferred dividend and exclude the preferred shares from the calculation of fully diluted shares outstanding when we used the two-class method. In computing operated adjusted net income per share, we are utilizing the if-converted method. In this method, we do not adjust for the preferred dividend, but do include the conversion of the preferred shares into common shares in the calculation. To the extent, preferred dividends are paid in kind, we include the accrued dividends in the conversion calculation. We have provided the share count in both calculations in the guidance table in the press release.

In summary, the only difference between the two weighted average diluted shares numbers is the conversion of the convertible preferred stock to common shares using the conversion price of $17.75 per share. We did buy back $10.2 million of common stock in the fourth quarter at an average price of $17.50 per share. We acquired the shares in the open market within the parameters we established during our open window during the quarter. One last item that I will provide in the call, because it will be included in the 10-K that will be filed later today or tomorrow, is our expectation for capital expenditures for 2021.

We expect capital expenditures to be approximately $125 million, an increase from actual capital expenditures of $101 million in 2020. The increase in capital expenditures expected in 2021 reflects continued investment in technology to support our strategy around digital transformation, as well as a return to normal capital spending to support our physical locations. Our 2020 capital expenditures were reduced from our expected levels for 2020 to conserve capital as our business was adversely impacted by the pandemic.

Thank you, again, for joining the call today. We'll now turn it back to the operator and take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Ryan Brinkman with JPMorgan. You may now ask your question.

Ryan Brinkman -- JPMorgan -- Analyst

Hi, thanks for taking my questions, the first of which is about margin. So in both 2Q and 3Q, your vehicles sold and revenue were materially lower year-over-year, but still you managed to eke out increases in both gross and EBITDA margin given a lot of cost-out actions. I get the volume deleverage of course in 4Q, but it does seem like the revenue headwinds were maybe less than in 2Q, and so I'm trying to understand why the margin performance was materially softer?

Maybe you could comment on the trend in ADESA SG&A, which seems to increase materially from 3Q to 4Q even as volume and revenue sequentially declined? So maybe just talk about the layering back in of the expenses, if that went as planned or maybe there's just some seasonal costs in 4Q that cannot be avoided such as compensation, I'm not sure? And then just how much should we consider or what should we consider about these trends in margin? Should we place more emphasis on 4Q as opposed to 2Q or 3Q, etc., when it comes to forecasting the trend in 2021?

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

Thanks, Ryan. First, let me just speak. In fourth quarter, we do have the annual issue of the revenue mix tends to be more heavily weighted toward services and that's every year, that impacted us and that gives us a higher ARPU or higher gross revenue per transaction, but some of that revenue is much lower margin. Second, and we highlighted this relative to overall performance, we did have some expenses in the fourth quarter and there are -- there are some annual incentive payments that do get direct labor that would impact margins in the fourth quarter.

We made the decision to use discretion to change threshold for the year, so that we get -- we compensate our people based upon the performance and the hard work. We recorded most of that expense in Q4, because we had not been accruing it against the previous threshold that we had in the first three quarters. There was some bonus accrual in 2 -- in the third quarter, but most of it was in the fourth quarter. So that changed the expense structure a little bit and we've called that out. So again, it's really just the number of transactions was so low in the fourth quarter, you actually get decremental margins on the work we're doing and that's the impact. So we don't see any changes in the overall cost structure. We don't see changes in the pricing of individual transactions, and falling to 75% of 2019 for the full quarter consistently through the quarter was a headwind we couldn't overcome.

Ryan Brinkman -- JPMorgan -- Analyst

I see, thanks. So then I'll just finish by asking on volume, presumably the off-lease volumes are weighing quite a bit given the strong residuals that are out there in the marketplace. Are you able to quantify the impact of lower off-lease volume in 4Q or maybe what your expectations are for 2021? And then there's a lot going on also with regard to the repossession volumes, maybe if you can just talk about what you're seeing there, what you're expecting, and how much do you think stems of lower repossession volume from a genuinely better economy relative to maybe any sort of ongoing forbearance in the part of lenders, do you have any insight into when those forbearance activities might start to subside?

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

So I'm going to talk about some specific numbers and then Jim is going to talk more about the latter topic, Ryan. So we did see some declines on the off-lease volumes, but the biggest impact is the fact that they're getting purchased upstream by grounding dealers. If we do get the transaction, you are correct, it's a lower revenue per transaction if it's executed at the grounding dealer level. So while it wasn't as much of a decline as you might expect, there was a very significant decline downstream, which would have impacted both ADESA and all our competitors that process from physical locations, very few off-lease cars are getting into the auction now, into the physical auction network.

As relative to off-lease volumes, while it's a number that we have to dissect as an industry because they don't really report that, but we kind of have a good feel for it. Though off-lease volume, I mean, repossession volumes, I'm sorry, repossession volumes are off at least 40% for the year and continue to be off. And I'll let Jim take over talking about kind of what we see and how that's going to continue maybe longer than we expect and how stimulus actually might be a negative for repossessions.

James P. Hallett -- Chairman and Chief Executive Officer

Yeah, so, good morning, Ryan, and thanks for your question. I think the -- as Eric mentioned, the off-lease volumes, it's with the strong pricing, I'm just repeating here, but it will be more difficult to get those vehicles to our platforms and obviously on through the funnel down to the physical auction. So there is no question that we expect for the first half of the year those volumes will continue to be tight.

We've been talking about repossessions and waiting on repossessions since the middle of 2020, we thought repossession will start to return to a more normal level in the second half of 2020. And in fact, now I would tell you that with the uncertainty in the marketplace and all that's going on with COVID and unemployment and the market, just all the noises out there and in these times of crisis, there are laws that protect people from having their vehicles repossessed, excuse me.

I think that through the first half of the year, I would say that we're not expecting to see a huge return or a huge increase in the repossessions, but we do think, if the market can get better and all the things we talk about related to COVID and vaccinations and unemployments and on, we do feel in the second half of the year, we should see an increase in repossessions. I'm not sure they get back to 100% of what they were in 2019, but we think that there will be an increase in the second half of the year.

Ryan Brinkman -- JPMorgan -- Analyst

Okay, very helpful. Thank you.

James P. Hallett -- Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question comes from the line of John Murphy with Bank of America. You may now ask your question.

John Murphy -- Bank of America -- Analyst

Good morning, guys.

James P. Hallett -- Chairman and Chief Executive Officer

Good morning.

John Murphy -- Bank of America -- Analyst

I just want to follow up on Ryan's question and maybe think about sort of all the sort of the channels of vehicles flowing into the auction, and maybe just thinking about dealer commercial and then sort of the major buckets in 2021. And I think the thing that we're struggling with and I think a lot of people are struggling with is, you're hearing from the dealers being that the franchise guys, CarMax, Carvana, the business is doing -- is actually going fairly well, volumes are OK, a little bit hampered by supply, but not nearly as much as sort of what you're seeing of down 23%.

So it seems like at the retail level, the industry is functioning fairly well, but at the wholesale level, obviously, there is this pressure. So I'm just kind of trying to understand really what you think is going on between the retail and the wholesale side, but then also the channels and the flow in 2021 beyond just repo, which is an important question, really what you think is going to happen here on the dealer side? I'm really just trying to understand the near-term flow and also maybe the -- the current flow going into 2021?

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

Yeah, John, it's a good question. And I will tell you that I see a lot of similarity of what we saw in 2010 and 2011. While retail used car sales remain strong, the dealers do have the opportunity to source. As values are increasing, they are acquiring inventory at relatively low values, whether that'd be by buying vehicles from consumers taking trade-ins, etc., and retailing because all the cars are being sold at really a strong retail price. And I think we're seeing all the public retailers having reasonably strong retail used car profits right now. But they've all acknowledged supply is tight, and the truth is, at this point, you don't see them running through the network and that would apply to every channel. We do continue to see in terms of the segments, we see very strong performance in our digital dealer-to-dealer space. In fact, we sold 316,000 cars if you take the BacklotCars and TradeRev platforms together. And I think that's an outstanding performance and we think that will be a source of significant growth in 2021 for us. And I'll let Jim comment on that one in a minute.

Off-lease is going to be strong, but probably slightly below previous levels, because again, you're seeing buying out of leases by the dealers early, they're pulling forward, and with the lack of new car production, they will likely be extending leases until they have new car inventory for the consumer to turn in his car and get another vehicle like we saw in the spring of this year. And then when the repos come back, those are big users of our networks, that has been a low volume performer. We still have forbearance being a strong emphasis by the captive finance companies and the lenders. We've got a number of things that are affecting the overall economy, where it's just not the right time to repossess vehicles probably from a publicity perspective, and we think over time, those things will free up. So Jim, do you want to talk a little more about maybe the dealer consignment portion of our business?

James P. Hallett -- Chairman and Chief Executive Officer

Yeah, I think the only thing I could add to what Eric said is, we do expect that our dealer consignment business can offset some of these potential losses that we're going to get on the commercial side of the business, especially with the off-lease and the repossessions. As I said in my commentary, we are very excited about the acquisition of Backlot and now taking TradeRev and transferring it to a single platform. The receptivity by the dealers has been very good. In fact, I don't know if there is any dealer that said no. Every dealer that we've gone through so far at this point in time has migrated over to the Backlot platform. Obviously, when we are acquiring the company and doing our diligence, we're very excited about the leadership of that team, their background and their experience and their knowledge.

We like the platform, we like the bid-ask platform, we like the inspections. We really and truly believe that we are going to take the leadership position in this dealer-to-dealer digital segment. And I think Eric mentioned that volumes last year combined were 316,000 vehicles. I can tell you, we have a big target in terms of what we think we can do with -- with this single platform here in dealer-to-dealer this year and we're excited. We're not focused on the number two position. We are absolutely clearly focused on the number one position and we see that gap closing, and we think that we can have the number one position in that space and we can do it in the short-term.

John Murphy -- Bank of America -- Analyst

Okay. And then, Jim, maybe just a strategic question. When we look at the -- I appreciate the reorganization around off-premise and on-premise to try to help us understand stuff, but you still have Simulcast, Simulcast+, DealerBlock, OPENLANE, TradeRev, BacklotCars, it's kind of a mouthful and you've got a lot of really good services in there in addition to other things that you're doing way above and beyond just those bigger brands.

I mean, is there a move to maybe simplify this, so your sales force can go into a dealer just be like, we got everything you need, just call us, get online, just do it, because it just -- it feels like there's a lot of moving parts here, it's kind of hard to understand how the industry is shifting and the deal -- and your sales force, as well as the dealers themselves kind of have to kind of go around like, well, I want to do this with KAR, so I go this way or if I want to do this with KAR, I go that way. Is there any way to just say, hey listen, we got you, give us the car, we're going to get it sold and like just combine all these brands into ADESA or one single brand that just go to market with a maybe a clearer, simpler message that might just solicit more business? I don't know if that's just a stupid question or I'm just -- it's -- for us, it's kind of a little bit hard externally to understand a lot of the moving pieces here.

James P. Hallett -- Chairman and Chief Executive Officer

John, your question is a good one, and as one that we're focused on is we think about how we go to market with all of these brands and all of these platforms. Clearly, we are now getting out there and we've combined the sales forces, we've combined the sales teams, Backlot and ADESA, and we're going out and we're kind of handholding and walking these dealers through how these platforms operate and how they perform and how to get on the platform and how to use the platform.

In many cases, we're staying with them, so to speak, until they've transacted certain number of vehicles either on the buy side or on the sell side. And then we have our commercial sales team and that commercial sales team is focused on going out and really articulating how these platforms work and how they add value. And Eric and I have told you for 100 years that we are totally focused on never telling a dealer which channel they should use. We want to provide all those channels. We want to provide all those platforms. But our job is to make sure that we're out there with our customers making sure they know how to use these platforms.

And just a little anecdote here. Over the course of the last year, we've signed up over 20,000 new buyers that had never bought a car online and never bought a car off of a platform. And as a matter of fact, a very high -- a very high percentage of those dealers have now transacted on the platform. So once you get them to the platform, that's one step, getting them to use the platform is the next step, and that's really -- that's really what we -- what we're focused on now is getting them to utilize the platform, get familiar with the platform and stay with them and give them that support. So I hope that answers your question, but yes, so a lot more focus on handholding and really spending time to really make sure the dealer understands what these platforms can do for them.

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

And, John, let me add to that, one of the strategic initiatives we have is when you prepare a car offered on BacklotCars in the U.S., we can take that to a Simulcast or Simulcast+ auction if you don't get the price you want and try a different market. And we are working very hard to make that a seamless move to your point strategically, so that we can offer a more end-to-end solution to the seller than any of our competitors do, because we have all the solutions.

James P. Hallett -- Chairman and Chief Executive Officer

Yeah. And John, I'll just add, I think Eric makes a very, very good point here. And we have, I would say, quietly done a pilot in Canada, where we've been taking cars that haven't sold on TradeRev in Canada and we've been shipping them seamlessly right to the physical auction. And with no marketing dollars behind it and doing it very quietly, I would just share with you that we're very encouraged with the results that we're seeing. We think we can continue on that path and we think we can bring that into the U.S. market and do that as well. So there is a huge opportunity here. It's just a matter of getting to it.

John Murphy -- Bank of America -- Analyst

Okay, and one just last real quick one with the stock where it is at 14 [Phonetic] can change, when you consider going private?

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

We run the business. We feel we have a strategy that has a lot of value, and the current stock price, it does not reflect the long-term value that we see in the KAR opportunity, and that's all I can really say to that today. We don't -- we won't worry about who owns us, we'll just run the business for our owners.

John Murphy -- Bank of America -- Analyst

Right, I appreciate the feedback. That's -- that is -- that's helpful. Thank you. Thank you, guys.

James P. Hallett -- Chairman and Chief Executive Officer

Thank you, John.

Operator

Your next question comes from the line of Craig Kennison with Baird. You may now ask your question.

Craig Kennison -- Robert W. Baird -- Analyst

Hey, good morning, thanks for taking my question. Jim, I know you were excited after you acquired TradeRev. And so what really were the lessons from that integration that you take to the Backlot integration, what's going differently this time around?

James P. Hallett -- Chairman and Chief Executive Officer

You know, Craig, that's a fair question. I think that it was execution and go-to-market strategy, I think that we missed there. I think we got beat on our go-to-market strategy. And the things that -- but I will also say and this is not being defensive, I will also say, we learned a lot from TradeRev. First of all, it's a Canadian product and it still remains to be the leading digital dealer-to-dealer marketplace in Canada and does very, very well in Canada. However, we thought we could just bring that to United States and drop it in and that wasn't the case. Dealer behavior was very, very different in the U.S. And the Backlot guys figured out what was important to dealers in the U.S., and it was different, and they were able to develop that. And I think the key was, they come up with the bid-ask marketplace, which is really gives you up to three days to sell the car in the platform. I think the average on Backlot is about 1.2 days, but you do have three days that gives the dealers more time to bid on the cars, I think that was an important change. I think the inspections on BacklotCars was really key, that we recognize that in Canada, we were able to get the dealers to do their own inspections, and it was just part of the program right from the outset.

In the U.S., we started doing inspections, dealers want us do inspections for them and I think Backlot clearly had the winner here. They have mechanics going out and doing these inspections and that adds a lot of credibility and a lot of confidence in the condition report when the buyer is buying the car. So I think overall, we've learned that even though there is a thin border that separates us from Canada, the markets are very different, dealer behavior is very different, the go-to-market strategy, I think we've got it right now, combining the sales teams with ADESA and TradeRev here in the U.S., listen, we did get to breakeven and we were profitable in some months.

So overall, we did stumble a little bit, we stumbled, but I think we've got it right. And I guess if I -- I guess if I take some satisfaction out of going through the process with TradeRev is, it did get us to where we are today. It did get us to recognize the need to take a look at our competitor, Backlot and what they were doing and did get us to the point of acquisition, and now I'm very bullish on our leadership opportunity, on our leadership position and I think that we can be the winner that takes most.

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

And Craig, I'd like to add, it's not that TradeRev doesn't have a lot of value, in fact, the Backlot team, BacklotCars team is very excited about having our sales force represented because that accelerates their entry into new markets without a doubt. And our operation support has gone over to the Backlot platform and giving them greater support and better customer service as a result of having more resources that can support the transaction once it's completed online. So, you know what, the combination is the value creation. It's not just one taking over for the other.

James P. Hallett -- Chairman and Chief Executive Officer

Yeah, I think the final point I'd make, Craig and I may be repeating here, but the leadership team at Backlot, they grew up in the retail car business. They really understand the dealer and understand what -- how that dealer thinks and how that dealer wants to do business and they really spent more time understanding the dealer and understanding what the dealer needed. And they grew up in a family business where they owned and operated dealerships. They knew this business and knew it well. And quite frankly, I think aside from the execution and the go-to-market strategy, it was this -- their knowledge of the industry has really shown up here in terms of leading BacklotCars.

Craig Kennison -- Robert W. Baird -- Analyst

Thanks to both of you. You have a, I guess a big goal to expand volumes significantly. When you think about that, what are the barriers or bottlenecks that you are concerned about? Is it adding dealers? Is it hard to add enough mechanics to provide that type of feedback to buyers? Just curious, what are the KPIs that you use to run that business and feel good that you're on track?

James P. Hallett -- Chairman and Chief Executive Officer

Yeah, Craig, the most important metric in our business is one word, it's called volume. We need more volume and we're focused on volume. As a matter of fact, I will tell you in 2021, there is more focus on volume than there is on profitability. Now with that said, we want to make sure that we operate this business at a breakeven or better pace, but it's really getting out there and getting the existing dealers doing more volume and getting more dealers signed up. And it's a volume game and that's what we're focused on, and we have our sights set on some big numbers here.

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

You know, Craig, very specifically, it's probably easier to sign up a dealer than it is to get him to use the platform on the first day that he signs up. So the first thing you do is you want to sign them up and then get them using the platform and having success, and then once they're successful, get them increasing the volume they put through it and getting them to that kind of super user status, where they're selling high numbers per week. And the market -- these platforms have the potential to do that, that's actually the metric that accelerates the growth. The market is well defined. We know who the dealers are and it's getting them using the platform.

Craig Kennison -- Robert W. Baird -- Analyst

Thank you.

James P. Hallett -- Chairman and Chief Executive Officer

You're welcome.

Operator

Our next question comes from the line of Stephanie Benjamin with Truist. You may now ask your question.

Stephanie Benjamin -- Truist -- Analyst

Hi, good morning.

James P. Hallett -- Chairman and Chief Executive Officer

Hi, good morning.

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

Hi, Stephanie.

Stephanie Benjamin -- Truist -- Analyst

Just to continue on the last question, could you maybe talk how you think TradeRev and BacklotCars performed in the fourth quarter versus your expectations? Without breaking out the individual volumes like you did in the past, maybe you could talk directionally how just the dealer-to-dealer segment of your business performed, how you think that compares to the overall industry in the fourth quarter?

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

The -- very strong growth at BacklotCars and TradeRev on a combined basis. We look at both week-over-week and sequential, as well as year-over-year, and it's been a strength of our business. Again, when you look at the quarterly performance of dealer-to-dealer off-premise, it is doing very well and it is where our growth is going to come from, Stephanie. I'm looking at some numbers, it was up, without a doubt, year-over-year. I'm looking here, OK, I got to get to the right numbers. On a combined basis, digital dealer-to-dealer was up year-over-year in Q4 by about 60%.

So I'm not going to give you a specific number, but that is the actual growth rate. I'm looking at volume, and that's in a period where I think our markets were wondering what we were going to do with the combination because we closed the deal on November 12th. So we were very pleased with that combined performance, and that's combined two platforms compared to the prior year as if the two platforms were combined at that point as well. That's not year-over-year growth with Backlot zero [Phonetic] the year before, we used their actual numbers.

Stephanie Benjamin -- Truist -- Analyst

Got it, that's really helpful. So, I guess the -- going off of that, that means that the other component to this business would be primarily OPENLANE, which means it must have been down pretty materially in the fourth quarter. Is that just anything beyond either are there delays there or you think there some of that's going to roll off in the beginning of this year or was this just all the dynamic of the dealers, grounding dealers keeping those vehicles, kind of maybe what happened with OPENLANE between 3Q and 4Q then?

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

Yeah, OPENLANE had fewer listings. I mean, the bottom line is fewer cars came on to the network, and the conversion rate remained reasonably strong, pricing was very strong, and it was just fewer listings. And that's a function of dealer behavior buying out leases, buying at the grounding dealer, not all grounding dealer transactions come through to us, some are processed on their own, that -- so that can impact our numbers. And we just saw lower volumes listed on the OPENLANE platform in the fourth quarter, and we somewhat expected that given the strong pricing environment.

James P. Hallett -- Chairman and Chief Executive Officer

Yeah, yeah, I think Stephanie, and I'm not sure if Eric mentioned this or not, but with the strength of price in the market, many of these cars are returning off-lease in what we call, In the Money. So the cars are actually being bought below the residuals or below the wholesale value that's being realized in the marketplace. So in many cases, not only are the dealers taking them, but in other cases, the consumers buying the car knowing that they're buying the car at less than market value. So I think that's been a takeaway from OPENLANE.

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

And just to give you an example, I happen to see a third-party report on this very recently this week. Current residuals on three-year-old vehicles are running at about 54% of MSRP at the time three years ago, up from 48% at the beginning of this year. That's a specific number that is provided by third-parties that track residual values for the leasing industry.

Stephanie Benjamin -- Truist -- Analyst

Absolutely. And then just a follow-up to the Ryan's question at the beginning of the call, I believe, Eric, you called out some annual incentive payments that you didn't accrue for the majority of the year, but eventually, you had to pay all of that out in the fourth quarter. Can you give us the breakout of what was between SG&A and cost of sales? I think you gave the total incentive dollars, but just a rough breakout either dollar or percentage wise?

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

Yeah, it's going to be about 80% SG&A and 20%. I'm doing that back of the envelope, Stephanie, but that's roughly the breakout, 20% goes to direct.

Stephanie Benjamin -- Truist -- Analyst

Got it. And then lastly, more strategically, as we move forward, how would you look at your appetite for any additional acquisitions as you kind of look through 2021 and 2022? And then kind of even off on a prior question, if you were presented with a takeout opportunity as well to go private, is there anything from a tax consequence that could keep you from participating or engaging in those discussions?

James P. Hallett -- Chairman and Chief Executive Officer

Well, let me talk about acquisitions, that will be the easy part. I would say, we're very focused on our strategy. We have a very defined strategy. And we have a defined strategy of continuing to build a digital company and transform this industry to fully 100% digital and continue to make that stick, that's the future and that's where we're going here. In terms of any -- in terms of our capital allocation and our investments, I think you should expect us to continue to invest in our strategy and supporting our digital initiatives, our digital platforms, and what we're doing in the area of our digital commitment. In terms of acquisitions, I'm not suggesting that we would not do an acquisition, but I would suggest that that's not a priority and there's nothing on the board that I could speak of today. But more importantly, if you see us spending money, you should see a spend in that -- in the area to support our strategy.

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

And, Stephanie, relative to your tax question, I'm not -- there is -- and I know you're specifically referring to the tax-free spin that occurred in June of 2019, there is nothing that, that would be proposed that I see would have any impact on the tax-free treatments. So I see no tax issues that would be a limitation on opportunities for the Company.

Stephanie Benjamin -- Truist -- Analyst

Got it. Thanks so much, guys.

James P. Hallett -- Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question comes from the line...

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

We probably -- Jerome, we probably have time for just one more question.

Operator

Okay, sure. Your next question will be -- comes from the line of Daniel Imbro with Stephens Incorporated. Your line is open.

Daniel Imbro -- Stephens Incorporated -- Analyst

Yeah, thanks, thanks for squeezing me in here late. I wanted to ask a broader question on competition. During 4Q, Jim you mentioned some of your traditional competitors brought physical auctions back online, and you said there is no difference in the returns in your opinion. But do your customers share that view? Do you see any share shift during the quarter? And then additionally, you have some online-only competitors, obviously, the salvage auctions are talking more about whole car channels. Do you think that is posing any challenge to your volume? And any kind of incremental thoughts on competition would be great?

James P. Hallett -- Chairman and Chief Executive Officer

Yeah, so, Daniel, anytime anybody takes a car away from me, they're a competitor, right, no matter if it's one car or not. Listen, there's no question that our competitors are running cars. And I would tell you that in some cases, our commitment to going digital, we probably have lost some vehicles, some people that just haven't been able to make the transition to digital, but we don't expect that to be a long-term issue. We expect it to -- we expect that it's our job to get out there and to provide the evidence that, that the digital way is the way of the future.

We can show through our data and through our analytics that this is an anecdotal information, this is real that we are able to show that we can get a better economic outcome at least equal to or better, and I think we continue to gather data with the continued sales that we're doing. We continue to be able to share that information with our customers both on the commercial side and on the dealer side. And at some point in time, again, I continue to say this is the way that the world is going.

We believe it's the right direction. We're committed to the strategy. We're going to stay the course. We don't want to go back to the old way of doing business. And yes, we have competitors, whether it's the salvage guys that are selling the low-end cars, that's always been in the marketplace. I think those guys have continued to sell some of the low-end cars. We have a major competitor obviously, on the dealer-to-dealer digital side, which we have talked at length about here, and we think that we're closing the gap there and we're going to be in a position to take a leadership position there. So there's always going to be competition. We've always dealt with competition. Our job is to make sure that we're staying in front of the competition, and our strategy is leading us in the right direction even though we might be taking some short-term pain, as they say, for some long-term gain.

Daniel Imbro -- Stephens Incorporated -- Analyst

Got it, that's helpful. And if I could ask a quick follow-up. You added a sentence in the supplemental that says something to the extent of vehicles on-site use services at a higher rate, so the shift to off-site is hurting that. How do you think if the business continues to shift to more off-premise sales, how do you think about utilizing your physical assets given the scale you guys have built over time?

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

Well, I'll let Jim talk about the land. Let's just tell you that we think the shift is temporary because of the high values of vehicles, and this happened in the previous cycle in 2009 through 2012, where you sell cars quick, it's much easier not to use the services on-premise, and that is of course having the inability to run with groups of people. I mean, nobody can run with large groups of people in their auctions legally right now. So I think it would apply to the whole industry that there's fewer cars showing up on-site even for those that are running vehicles through the lane. Jim, why don't you talk about our land utilization and focus there?

James P. Hallett -- Chairman and Chief Executive Officer

So I've always maintained that our brick-and-mortar, our land and real estate is one of our critical assets. It's a differentiator quite frankly that few have. And as I say, especially, you think about these dealers, especially in the urban areas when they've decided they're going to wholesale a car, they need that space, they need the car off their property right away. We need to get the car to auction. We need to get it, inventory. We need to get it imaged. In some cases, we need to get it reconditioned, and the auction is going to continue to provide these services.

Now, with all that said, I think what's really important, I think it's really important to have the right land in the right location in the right size, right, that's not to say that we would never divest some land. And as a matter of fact, there was a small auction, I think we -- I know there was a small auction that we did exit. And the other thing is, I would tell you, we would probably rather own the land and lease it. And I think you'll see us continue to differentiate ourselves with land because nobody else can provide this.

There's only one other major competitor. We're still a duopoly in a holistic sense that there's only one other competitor that, that can provide these kind of assets. And I say that when you look at these digital platforms, you have to have more than just a digital platform with a buyer base. You have to be able to offer these other services that we talk about. When you think about inspections and you think about transportation and logistics and finance and reconditioning right on down the line, as I say we're unmatched. We're unmatched in terms of our assets, and at the end of the day, that's why we're going to win.

Daniel Imbro -- Stephens Incorporated -- Analyst

Got it, thanks. Best of luck.

James P. Hallett -- Chairman and Chief Executive Officer

You're welcome.

Operator

Great, thank you. That's -- thank you. That's the end of the Q&A session of today's call. I'll now turn the call back to KAR Chairman and CEO, Jim Hallett for any closing remarks.

James P. Hallett -- Chairman and Chief Executive Officer

Okay, thank you, Jerome, and ladies and gentlemen, thank you for being on our call today. Obviously, fourth quarter was a tough quarter, one that's not easy to report. But what I want to leave you with as much about a repeat of [Phonetic] what I've said. Listen, make no mistake, we are a digital marketplace business that utilizes data and analytics and value-added services. And we are committed to this direction.

We are not interested in running cars. We are interested in moving this industry forward. And we believe just like so many other businesses around us that this transformation is taking place. And it's not something in the future, it's something that's happening now and we believe that we're leading that. And yes, we have taken some short-term pain here, but we will take the leadership position as we go forward.

The other thing I would tell you is, I will go back to our cost structure. You heard, we've now rightsized the Company, over 5,000 jobs that we've permanently taken out of the organization, we've got it rightsized. We believe that we can add volume without adding costs, and that is sustainable and we can continue to take it forward. Next, I would say this combination of being able to put BacklotCars and TradeRev together, that truly makes us the leader. It makes us the leader here in the U.S., it makes us the leader in Canada with TradeRev. We feel that we're going to have huge gains on the dealer-to-dealer segment of our industry.

And with that, we also spoke about our strong balance sheet. I think we're in a very good position to have a strong balance sheet to be able to take advantage of opportunities that support our -- our strategy as we go forward. So with that, we're looking forward to coming back to you next quarter. And we'll have more information to share with you on some of these transitions that we're making. And thank you for your interest and being on our call today.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Mike Eliason -- Vice President of Investor Relations and Treasurer

James P. Hallett -- Chairman and Chief Executive Officer

Eric Loughmiller -- Executive Vice President and Chief Financial Officer

Ryan Brinkman -- JPMorgan -- Analyst

John Murphy -- Bank of America -- Analyst

Craig Kennison -- Robert W. Baird -- Analyst

Stephanie Benjamin -- Truist -- Analyst

Daniel Imbro -- Stephens Incorporated -- Analyst

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