KAR Global shares slide 11% as auction giant cuts costs to weather COVID crisis

Carmel-based KAR Global’s stock tumbled 11.2% on Thursday after the company announced first quarter results that fell short of analysts’ expectations and said it was suspending its 19-cents-per-share quarterly dividend.

The company, which operates auto auctions and provides additional services to auto dealers, reported first quarter revenue of $645.5 million, down 6% from the same period a year earlier.

The company earned $2.8 million, or 2 cents per share. Adjusted to exclude nonrecurring items, KAR’s per-share earnings were 9 cents, short of the Zacks Consensus Estimate of 17 cents.

KAR’s mid-March decision to combat the spread of COVID-19 by phasing-out virtual and physical auctions while continuing to pay employees through April 3 caused a $35 million financial hit.

The company’s Automotive Finance Corp. unit, which provides floor-plan financing to dealers, recognized a $5 million loss.

“As we learned in the great recession of 2008, we need to recognize the losses early and keep the portfolio as clean as we can and it will serve us better in the upcoming quarters,” Jim Hallett, KAR’s chairman and CEO, said on a conference call with analysts.

KAR furloughed about 11,000 of its 15,300 employees in April, and Hallett said those employees will be called back as volumes increase. The company resumed its virtual auctions on April 6, but physical auctions at KAR’s 74 North American locations have not resumed.

“I’m confident our wholesale marketplace is resilient and will return to the levels of activity that we were enjoying prior to the pandemic. I just don’t know the exact timing,” Hallett said.

Hallett, CFO Eric Loughmiller and President Peter Kelly each has waived 100% of his base salary for April 5 to June 27. The remainder of the company’s executive officers are taking a 50% pay cut for that period.

Additionally, KAR has reduced pay for all employees making more than $80,000 per year.

Loughmiller said that since April 17 those reductions have helped KAR recover about $20 million per two-week pay cycle. The company also has negotiated rent deferrals through May and June.

In a normal year, Loughmiller said the company’s North American operations would need to sell 65,000 to 75,000 vehicles per week in the United States and Canada to break even.

Now, the company has made enough changes to reduce that break-even point to about 20,000 vehicles per week.

“I am pleased to report that we had a major milestone last week,” he said. “We were able to have our first cash break-even week since mid-March.”