Profits Accelerate for Auto Auctions Inc. : Salvage: The North Hollywood business is a hit with insurers saddled with total-loss and recovered-theft vehicles that they need to sell.
Auto salvage yards are no pretty sight--except to Bradley S. Scott, who has made a fortune buying and selling junk cars.
Scott is the founder, president and chief executive of Insurance Auto Auctions Inc., a North Hollywood company that buys totaled and recovered-theft vehicles from insurance companies and auctions them to rebuilders, used-car dealers, dismantlers and amateur car buffs. The company’s operating profits have jumped more than fivefold since 1986 on a quadrupling of sales to $35.8 million in 1990, and it expects 1991 sales to reach $50 million.
“We see a good opportunity to be the Waste Management of the salvage industry,” IAA Chairman Robert H. Kenmore said, referring to the Oak Brook, Ill.-based waste disposal giant.
About 90% of vehicles bought by IAA are so-called total-loss vehicles, meaning that it would cost insurers more to repair them than to sell them for salvage. The remainder are vehicles that were stolen but recovered after the insurer had settled the claim.
Most insurers dispose of wrecks by paying a fee, say $100 per car, to so-called salvage pools that auction cars or put them up for sealed bid. Insurers retain title to the vehicle until it’s sold and they get the money from the sale--but that can take 10 days or more.
However, IAA buys the vehicles immediately from insurance companies for 20% to 25% of a car’s replacement value (what the car would be worth if it were sold undamaged)--and then IAA sells them at auction for what it hopes is a profit. IAA, Kenmore said, spares insurance companies the administrative headaches and extra costs of waiting for their cars to be bought.
IAA’s system is a hit among big insurers, primarily 20th Century Industries, Allstate Co. and State Farm Insurance Co., which together supply more than 80% of IAA’s vehicles. “They can take care of all the paperwork and all the red tape that goes with disposing of the vehicle,” said Tom Muraski, regional property claims manager for Allstate, which has been selling cars to IAA for six years.
20th Century, which does most of its business in Southern California, sells 95% of its total-loss and recovered-theft vehicles to IAA, said Ron Brown, assistant vice president of claims. “We come out much better selling to them and letting them auction it off” as opposed to selling through a salvage pool, he said.
IAA holds auctions once a week at each of its storage yards in North Hollywood, Gardena, Colton and San Diego. The events typically draw about 400 to 500 people and are advertised through flyers listing vehicles to be auctioned and their conditions.
IAA’s yards include total-loss cars that are undrivable heaps, as well as vehicles that just need some minor bodywork. At a recent auction in North Hollywood, IAA sold a 1979 Honda Accord for $175, Kenmore said. The car’s right front side had been heavily damaged in an accident, he said. But at another recent auction in Gardena, a 1990 Mercedes-Benz 300E that had some damage to its left rear fetched $18,200, Kenmore said.
Although IAA’s car auction business has been growing, the company faced some financial roadblocks because of the heavy debts that the company held after an $8.5-million leveraged buyout by an investor group headed by Kenmore, who at the time was also chairman of Krause’s Sofa Factory, based in San Jose. So in November, IAA raised $13.2 million in an initial offering of stock.
IAA has used the stock offering proceeds to pay off the $7.7 million in debt remaining from the buyout, and now the company plans to open at least two new auction sites each year in Northern California, Oregon, Washington, Texas and Nevada, among other states, Kenmore said.
Investors have bid up the stock since it was offered six weeks ago at $11 a share--and it closed Monday at $19.75.
Kenmore has profited too. He invested about $750,000 in the 1990 buyout but now his 21% stake in the company is worth almost $25 million.
Kenmore said IAA expects to post a profit in the fourth quarter after it lost $11.7 million in the three quarters ended Sept. 30 due to onetime charges, including $9.4 million to convert founder Scott’s 21% stake to 1.25 million shares of IAA common stock.
Indeed, the LBO and now the stock offering have also made Scott, 42, rich.
Scott, a longtime car enthusiast who was a former national sales manager for Technicolor Audio Visual Systems Inc., started his company in 1982 after he tried unsuccessfully to buy a wrecked Chevrolet Corvette from a body shop. The shop was working on behalf of an insurer and didn’t sell to the general public, Kenmore said.
Eventually Scott bought the car from a wrecker but it cost him about $1,000 more than if he had bought it directly from the insurance company, Kenmore said. “He said, ‘There’s something wrong with this system’ . . . and sort of took advantage of the inefficiencies of the market and developed this business,” Kenmore said.
In 1990, Kenmore’s investment group paid Scott $7 million for a non-compete agreement and ownership of the company, which was then called Los Angeles Auto Salvage Inc. In addition, in 1990 Scott was paid a $750,000 bonus on top of his $150,000 salary as the company’s president and chief executive.
Now, under a new four-year employment agreement, Scott is entitled to an annual salary of $400,000, plus the 1.25 million shares of stock. At IAA’s current trading price, that stake is now worth nearly $25 million. On top of that, IAA has agreed to pay Scott $1 million by mid-March for bonuses that he would have been paid under his old employment agreement.
Already IAA is one of California’s largest sellers of automotive salvage. It sold 25,000 cars in 1990, which was about 15% of the 156,000 automotive salvage certificates issued by the California Department of Motor Vehicles in 1990.
IAA isn’t the only contract-purchaser in the salvage industry, but Muraski said most other companies are smaller, family-owned operations. Still, salvage pool operators insist that they offer insurance companies higher returns than do contract-purchasers such as IAA.
“The insurance companies don’t think about salvage as well as they should--as a profit-making thing,” said Norman L. Grunstad, executive director of the Phoenix-based American Salvage Pool Assn., which represents 184 of the estimated 250 to 300 salvage pools in the United States. “For them it’s something to get rid of.”
Other potential competitors for IAA, he said, are the insurers themselves, some of whom--such as State Farm and Allstate--have begun their own salvage operations to bypass middlemen such as IAA. But Grunstad said those efforts so far have not been very successful because insurers lack the necessary experience.
“Sure, there could be competition,” Kenmore said, “but I would think . . . it’s unlikely the competition would come head-on to us. They would probably try it in some other market.”
Plus, auto salvage is one of the few bright spots in the recession-ravaged auto industry. In tough times people forgo buying new cars and turn to places such as IAA for parts to keep their old cars running, or they buy relatively inexpensive, damaged cars and fix them up, Kenmore said. Indeed, 56% of cars sold by IAA in 1990 were sold to the general public as opposed to professional dismantlers and rebuilders, he said.
Insurance Auto Auctions at a Glance Insurance Auto Auctions in North Hollywood buys damaged and recovered-theft vehicles from insurance companies and auctions the vehicles at its four Southern California storage facilities. The company, founded in 1982, was acquired by an investor group in 1990 in an $8.5-million leveraged buyout. It recently raised $13.2 million to pay off the remainingbuyout debt and expand operations. REVENUES NET INCOME: ‘91*: -11.7 *Nine months ended Sept. 30. Net loss includes $13.1-million in non-recurring, non-cash charges related to the November public offering of stock.
