<ul> <li>Valuation forecasts for 2021 and beyond</li> <li>How incentives will shape residual values going forward</li> <li>Creating the right portfolio mix</li> </ul> Panelist: Larry Dixon, Senior Director of Valuation Services, J.D. Power Valuation Services Eric Ibara, Director, Residual Values & Cost to Own, Kelley Blue Book Kristen Lanzavecchia, Manager- Industry Insights, ALG Alex Yurchenko, Vice President, Data Science, Black Book Moderator: Joey Pizzolato, Deputy Editor, Auto Finance News [toggle title="TRANSCRIPT"] <div class="transcript-scroll-box"> Joey Pizzolato 01:25 Hello everyone, and welcome to our final live session of the auto finance summit, digital values post pandemic. You all probably know me by now but for those that I'm Joey Pizzolato deputy editor of auto finance news and it is my pleasure to introduce our panelists. Joining me we have Larry Dixon, senior director evaluation services and JD Power valuation services. Erica Ibara, Director of residual values and cost to own at Kelley Blue Book. Kristin Lanzavecchia, manager of industry insights at ALG and Alex Yurchenko, Vice President data science at Black Book. Thank you all for joining me. We have a lot to cover today. Before we get started, I'd like to give you all a minute to introduce yourself. So we'll go in alphabetical order for this one. So Larry, did you want to kick us off? Larry Dixon 02:21 Sure. So Larry Dixon, I've been with the JD Power Valuation Services formerly the nada used car guide for two years to count almost at this stage of the game wore many hats over over the years. This is such a such an incredible dynamic industry and it's been much more exciting over the past, you know, seven to eight months than it's been probably just about any time in my experience. Um, but you know, it gives us plenty to do is valuation providers and analysts. So thanks for having me. Eric Ibara 03:00 morning or good afternoon for some of you. My name is Eric Ibara and I'm responsible for residual values and cost to own at Kelley Blue Book. I have been with Kelley Blue Book for 14 years now. Prior to that, I was in finance with Mitsubishi Motors for 10 years. And prior to that I was with Nissan before they moved to Tennessee. So I've been in the auto industry for about 30 years now. And I think I am by far the oldest person around Joey Pizzolato 03:43 Kristin. Kristen Lanzavecchia 03:45 Hi, everyone. I'm Kristin Lanzavecchia. I've been with ALG for about five years now and I currently oversee the residual value forecasts for both the US and Canadian markets. I also work pretty closely with OEMs to provide data driven insights and recommendations to optimize you know in addition to residual value, also brand value and competitiveness in the new news markets. Prior to my time at ALG, I worked with many capital and I've also worked in automotive dealerships. Joey Pizzolato 04:17 And last but not least, Alex. Alex Yurchenko 04:20 afternoon. My name is Alex Yurchenko. I am vice president of data science at blog book and my responsibilities are basically all the modeling including residual modeling, and analytics engagements with clients. Thank you. Joey Pizzolato 04:38 Well, welcome everyone. I've had the pleasure of sharing the stage with a few of you before this, so glad to have you back. Um, let's let's jump right in. Um, you know, I'm pretty sure many people are aware of kind of the fluctuations in the residual value market since the beginning of the pandemic, but for those of us that aren't clear quite up to speed. I was hoping and I believe Larry, you volunteered? Could you give us just like a really brief Cliff Notes? synopsis of what has happened since March till till now? Larry Dixon 05:11 Sure, yeah. So, uh, prior to the onset of the pandemic, really it hit the country in earnest. early to mid March, they use vehicle prices were doing very well. I use vehicle the man with strong and had been ascending for the past couple of years. And I believe that's about everyone on the panel here expecting us the prices for the year to perform a little bit better than they did in 2019. Of course, then along comes the pandemic, widespread stay at home mandates across the country have obviously had a major impact on just about every facet of American life, including used vehicle Sales and Use vehicle prices. through April, US vehicle prices fell by 16%, relative to the end of February. So just this massive decline in pricing. But following that trough in the middle of April, prices simply took off, rising by 36%. From that trough, they eventually peak per JD powers data in mid August, up by 16%, relative to the end of February or the beginning of March. So we saw this massive increase in used vehicle prices. And that was driven by a number of factors pent up demand, lower new vehicle inventory, even a hit to use vehicle inventory, particularly later on, you had federal stimulus or pandemic related stimulus that allowed or help facilitate that pent up demand by consumers. So that's what drove prices to to that 16% increase through mid August versus the beginning of March. Since then, prices have normalized than the most of us on this panel expected over the past eight weeks, I guess. prices have fallen by about 7%. They're down about 1.5% busbar. In October, they still remain very elevated relative to last year and to the beginning of March. They're now wholesale prices to be exact. By our account, they're now up by about 8% versus the beginning of March rather than that 16% Peak that we get back in and mid August. Joey Pizzolato 07:47 Great, thank you. So I think we're just going to go right into forecast. When we originally spoke, my initial thought was to you know, talk about the forecast a year, year and a half out. But as you all pointed out, it's probably more pertinent to look three years out. So so I'm very interested from where you all sit, um, what is your forecast for the next three years for the RV market? And perhaps, Eric, you wanted to kick us off on that one? Eric Ibara 08:14 Or Thank you, Joey. Um, I think that for the immediate future, I think it could still be quite bumpy. There are still many unknowns with the pandemic. But one thing we do see, three years out, is a trough of returning off leased vehicles. That was caused by what Larry described, the slow down of new car sales earlier this year. To the extent that new car sales return to a somewhat normal level of between 16 and 17 million sales. We should be seeing a trough sometime in 2023. Of course, the other unknown is whether we ever do get back to the 16 or 17 million sales level. And I think that's something we're just going to have to keep our eye on. Joey Pizzolato 09:24 Great, Kristin, where What are you guys seeing at LG here? Thank you see, Kristen Lanzavecchia 09:29 we're seeing the same thing. You know, for the near term. We are expecting to see residuals a little bit lower than we initially expected. So vehicles that will be returning in 2021 calendar year but as Eric mentioned, when we look out into vehicles that will return in 2023. We are expecting to see some positivity, you know due to the lack of us supply that Eric mentioned but also we're expecting to see a pretty speedy economic recovery around that time. So if you look at the forecast for GDP growth and unemployment rates You know, those two factors are expected to drive a really strong economic period at that time, which would also boost us vehicle prices. Joey Pizzolato 10:10 Great. that bodes well. Alex, what about you? Alex Yurchenko 10:15 I think I think we've had a similar projections, lower supply. We a little bit less optimistic on the economy. So we are we still projecting elevated unemployment. It's not not as, as we have right now. But we don't expect to come back to sup 4% level. So we're all in three years, we expect the market to to be relatively stable, similar to what we saw before pandemic. But in the next three years, as Eric mentioned, it's probably going to be bumpy to many unknowns. We also see some shortage of supply in the second quarter of 2021, as rental returns are not coming back to the market. rental companies were not buying a lot of vehicles this year. So there there are some pockets that will have shortage in the short in a short period of time to 11:17 great, Larry, thoughts? Larry Dixon 11:19 Yeah, I think we're all more or less aligned in terms of the decline in supply. I mean, we have to be right based on new vehicle sales along, you know, if new vehicle sales expectations is your pre pandemic, we're in the 16 point 5 million unit range. Now expectations are on a full year basis, we're going to end up somewhere around 14 million units. So you're taking out 2.5 million units this year alone, relative to pretty diverse expectations. We, as I mentioned earlier, you know, my preamble use vehicle demand, those musical prices had been ascending for the last couple of years, many of the fundamentals were just about all the fundamentals that were were driving that pre pandemic remain in place. In fact, you could argue that they've even improved. You look at q2, q3, the largest publicly traded dealer groups out there, you know, they were setting records, believe it or not, in the second quarter of this year, it looks like the same thing is going to happen in the third quarter of this year, they're accelerating, accelerating their plans for us via cooperation. So it's my long winded way of saying you're going to have improvements in consumer demand, which is already strong, and you also have dealer demand, right? That that is joining the the growth or shrinking consumer demand that we expect to see moving forward over the next few years, you couple that with reduced supply. And our expectations are that three years from now, prices are going to be about 3% higher than they will be in the fourth quarter of this year. And like Alex and Eric both said, and it's going to be we're gonna see volatility, right, the road is going to be bumpy. But I think linearly, you know, prices are going to be stronger three years from now than they are today. Joey Pizzolato 13:13 Again, good news, if everything holds up. I'm wondering, and I know, like you said, the market is going to be volatile, we're gonna it's going to be bumpy. But you know, do we have any inclination at you know, at this moment, if there's any permanent changes to the auto, or I guess, to your industry as a result of COVID-19? Larry Dixon 13:35 Yeah, absolutely. And of course, it's, it's more, I think it's really more focused on digital. And that means digital retailing, purchasing, at wholesale for dealers, digitally financing, even and utilizing digital to facilitate financing more. So now, these things, these trends have been in place pre pandemic, but the pandemic has certainly accelerated the role of digital. So that's going to be very important that understanding and for for folks, listening, dealers included lenders, obviously, to have the correct data in tools to facilitate that. And I'll just give a very quick example. It's a fundamental example. Um, you know, more and more vehicles are going to be purchased, sight unseen, physically, right, and even valued, sight unseen, physically, you're going to look at the vehicle in a myriad of different ways online, right. And if you do that via Vin lookup, well frequently the historically that the thin decode process is left out on a significant amount of information relative to a given vehicle, okay, which means that if you're valuing a vehicle with traditional decoding methods, then you could miss it. important pieces of content, which can have a variety of impacts both positive and negative for lenders, dealers, everyone involved. So I think from a digital standpoint and the growth of digital from a valuation standpoint, we need to rely more on that the increased precision in data, if you will, using the whole then rather than a portion of the band overall, but that's just one of them. Hmm. Joey Pizzolato 15:28 Investment Chairman Kristen. Kristen Lanzavecchia 15:30 Yeah, I mean, we're seeing the same thing. As Larry mentioned, this trend is not something new. But consumers have really wanted to purchase their vehicles online for years. And, you know, COVID has really accelerated the process where both automakers and dealers are working to be more innovative and have more options for consumers, you know, whether that's completing the entire buying process online, doing a portion of it online, and then coming into the showroom to see the vehicle, or vice versa. You know, we're seeing a lot more of that. And we do expect that to stick around one thing that we're seeing, as we look at some initial survey data of kind of the post COVID environment is the used car buyers are much less likely to purchase a vehicle completely online, there is more likelihood of a used car buyer wanting to see that vehicle before making that purchase. But there are definitely still use car buyers who would like to, you know, just complete that entire process online. 16:32 Alex, you look like you. Alex Yurchenko 16:33 Yeah, that digital movement to to digital will will open up the gates for a lot of competition in the environment, more tech companies will get into the into this space as, as the as they've been doing it for a while, but the COVID is going to COVID accelerated that move. There's another shift that still an open question is a lot of bigger companies are offering or moving to remote work. So the question is whether we're going to see a drop in miles driven in the next, let's say, five years, it might not be a permanent shift, but at least the next five years that that's a possibility. 17:21 That's 17:24 right, right. Eric, Joey Pizzolato 17:26 before I, um, you know, see the next question that you guys didn't have anything else you wanted to add? Eric Ibara 17:32 Well, I agree with all of my colleagues regarding the shift to digital. But what I am watching is what's happening with the travel industry. In fact, the bailout for the airlines and hotels is still being debated in Washington. But it seems as though it'll be a while before people feel comfortable traveling again, I know, more passengers have returned to flying. But still traffic is way off. And that has a huge impact on the rental daily rental business. You know, you could say that that's good for used car values. It does change the sales strategy for a number of manufacturers. I think Fortunately, most manufacturers, we're moving away from rental volume anyways. So it's not likely to impact them too greatly. But still, that has a huge impact on our industry. Joey Pizzolato 18:49 Great. And we have a question from the audience. But I think fits nicely within our current conversation. And that is, how do you think about valuations considering the current state of the credit cycle, will eventual higher interest rates impede valuations perhaps at the higher end of the pricing spectrum? Larry Dixon 19:12 Yeah, I'll jump in certainly, as conditions improve. It's kind of going to be a mixed bag. Okay. So interest rates will take up although that's it's probably going to take some time for that to occur. But as that occurs, right, as the economy is getting better, then lender should be more willing to lend. Right? We know that, that right now there are a number of the cases of consumers that are in hardship are exceptionally high. You know, there's a lot of concern as to what's going to become of those from the delinquency standpoint. Um, lenders are pulling back you know, if you look at the, you know, the Fed senior loan officer survey, we know That lenders are pulling back. They're, you know, be stricter, if you will, in terms of their lending criteria, and you see the data is well, um, but as things improve, that should start to change, while at the same time rates will start to go off. Right. So you have this counterbalance, if you will. And I'm talking longer term, you know, not next year, but two, three years down the road. Alex Yurchenko 20:30 Feds stated that they're not expecting to increase rates for the next probably two years. So it's a more longer term. placidly issue, but but affordability is, is still important to consumer as prices of vehicles go up, we've seen the length of loans increase. So that so once the interest rates are going to go up, and let's say three to four years, it's interesting to see what's going to happen to the length of the loan. Because pay me if we can, if we can continue, my hope is that we can continue indefinitely, extending those loans, the credit risks are increasing. And we saw a huge jump in the length of lawn early this year when pandemic started. So we already over 70 months long on average, alone. So it's, it's a concern, but it's more of a lot longer term concern. Eric Ibara 21:31 Yeah. Hmm. I think that interest rates are one of those things that's easier to plan for, as Alex said that, you know, we've got a pretty long run runway into what's going to happen. And it's one of those things that impacts everybody equally. So when rates go up, you know, everybody is impacted the same new cars and used cars. So I think the manufacturers are probably worried about some of the other more unpredictable things like, you know, how long the economy is going to be shut down. And you know, whether consumer tastes are going to be changing. And at least that's what I would be worried about for now. Joey Pizzolato 22:25 Kristen, look like you were about to jump in there. Kristen Lanzavecchia 22:29 I just agree with what Alex was saying, you know, that the longer term loans 70 to 84 months, you know, it really is the main tool to keep those monthly payments low. And it's probably a safe bet that if we do see interest rates increase over the next few years that that trend will continue. You know, we'll see longer term loans becoming more of the norm. And when maybe we weren't expecting to see that trend continue at a lower interest rate environment. Joey Pizzolato 23:01 Makes sense? And, you know, like y'all said, the Fed has indicated that they're not going to raise interest rates probably until 2023. So again, like Eric, you put it so well, long runway for that one. Another question from the audience. That I think also fits in nicely right here is during and after the credit crisis, there was a lag in the consumers willingness to trade in their vehicles, leading to a much higher average vehicle age. So to what degree are you factoring, factoring in older vehicle models into your models? How will vehicle age mirror or defer or be different from the credit crisis error? And one of the factors to consider there? 23:47 That's a really tough one. Kristen Lanzavecchia 23:50 I mean, it this is obviously not anything like the crisis that we've seen historically. So, you know, trying to use past economic situations to model what's happening right now we've learned at ALG is not really the way to go. So, you know, we tried to do that earlier this year, and we expected us car prices to drop and then we saw them skyrocket. So we're trying our best not to do that. But I think one interesting thing that kind of goes along with, you know, vehicles age is what we were talking about earlier with that potential shift in car owners. So you know, if, if people are working from home and not driving as often and having vehicles with less mileage on them, that could also mean that they're holding on to their vehicles for longer because they're not needing to replace them because, you know, they're still working just fine. So, you know, that's more of what we're looking at on that aspect is, you know, what's really happening with car ownership are more people holding on to their vehicles for longer will they hold onto their vehicles for longer because they're not driving as much. But then on the flip side of that, you see many people moving out of cities into suburbs, suddenly needing a car for the first time. So you know, that's Something that's adding new car buyers to the market. So I think the the car ownership is something that is really tough to predict. And we're just doing our best to understand what's going on with that. And then maybe from there, we'll be able to come up with a better forecast going forward. Joey Pizzolato 25:17 Thanks, Larry, I saw you nodding in agreement. Larry Dixon 25:19 Yeah, I was gonna say that the miles driven and the ownership dynamic. It's a very interesting one for for all the points that that Kristin laid out. And you give me an example, personal example. So because of the pandemic, but many of us are working from home, obviously, for a prolonged period of time. Well, we've closed the office that I worked at permanently, you know, we've learned that it that we can work successfully from home. So I'm not driving as much for work. However, I am driving more I find for for recreational purposes. And I think we're seeing that trend across the country. So as Kristen stated, you have folks that are moving out of more urban areas into more suburban or even rural areas, therefore, they're going to drive a bit more. But even for vacation in recreation purposes, I think ownership is going to become increasingly important we're seeing with Arby's, we're seeing national parks that are overwhelmed or state parks that are overwhelmed by people that, you know, normally normally are crowds that that normally wouldn't be there in such volumes. And just one last thing, we know for a fact that they're going to be fewer newer used to be our later model used vehicles over the next several years. So if you're talking about age groupings, our age cohorts that can give you some insight into, you know, how demand and those prices will play out? Alex Yurchenko 26:51 Yeah, it looks like the mix of vehicles in the market might change you. As Larry mentioned, we're gonna have a lot less newer vehicles with high mileage coming from rentals, we'll have more older vehicles with less miles because people drive less to work. So there is a possibility that MC mix that will we see on the market will change. Eric Ibara 27:18 Yeah, and I give kudos to Larry for continuing to drive as much as as he is. But I do expect the vehicles to return to auction in the future with lower miles. I guess we'll just have to wait and see. But um, you know, just like to remind everybody that we forecast values for specific mileage assumptions. And we have forecasts for specific model years. So if there is a shift in mileage or model years, to a certain extent that is accounted for in the forecast. Of course, the mileage curves could totally change if these lower driving habits become permanent. And again, you know, we're just going to have to wait and say, Joey Pizzolato 28:16 Great, well, that's valuable insight. Thank you all. You know, last last, I believe it was last March, at the Auto Finance risk summit. I was with you, Chris. And you, Eric. And, you know, one of the one of the things that we talk about a lot is gas prices as as it relates to, you know, vehicle forecasting. So my question to you all is, do gas prices matter anymore? given everything that we just kind of talked about? Or is that still kind of a big question mark. Alex Yurchenko 28:47 I believe gas prices still matter, but it's more of a longer term and expectations, or what a consumer expect down the road. Leave, at least I had this moment. Nobody expects prices to go to $4. So that that that expectation fuel fuel sales have bigger, bigger vehicles, SUVs, pickup trucks, and it's hurting smaller cars. as cheap as gas is cheap. There's also concern that we see with hurricanes. If we keep getting those hurricanes in the Gulf golf course, where a lot of our refineries are, that may affect longer term transfer for gas prices. So it's it's I think the answer is yes, but it's more of a longer term effect than just spikes that we can see is we can see periodically in the market. Kristen Lanzavecchia 29:48 Yeah, we we still believe that gas prices matter. It's a factor in our forecasting model. However, one thing that I think is important to note is over the last decade, vehicles have become much more fuel efficient. So, you know, as we've seen the shift from cars to trucks and utility vehicles, we've also seen those trucks and utility vehicles get much better fuel economy than they had historically. So if we do see a spike for four or $5 a gallon, you know, we don't expect it to be as big of an impact as it has been in the past because of that increased efficiency. Joey Pizzolato 30:24 Fantastic. I'm shifting out there, did you have something you wanted to? Eric Ibara 30:30 Yes, I'm sorry, I'm just trimming in here. It's amazing to me, that just last year, the experts were forecasting oil prices at about $60 a barrel. And as a result of the pandemic, that forecast has shifted, and I think for the foreseeable future, they're predicting $40 a barrel, which is, you know, pretty incredibly cheap. And I think what is important is that it's also probably going to be stable, you know, unless there are natural disasters, as Alex mentioned, the fact that there is an oversupply of oil today, partly as a result of the slower economy, but also partly because of the more fuel efficient vehicles. If this stability persists, it will become less of a factor in used car values. Right. Joey Pizzolato 31:45 I'm shifting gears a little bit. Here. You know, I think we need to talk about the role of rental fleets in our current environment. Eric, you brought it up? You know, we know hertz is in bankruptcy, travel is down. You know, hertz and Avis aren't ordering cars from OEMs this year. So, you know, there there was this fear at the kind of beginning of the pandemic that there would be a massive unloading of fleets onto the US vehicle market. Now what already heard the press values? Obviously, values have since rebound, but I'm, I'm curious, you know, where, where hertz and Avis kind of fit into vehicle to the puzzle of vehicle pricing and on what timeline? Larry Dixon 32:30 Yeah, I can hear real quick. And Alex alluded to this earlier in terms of the reduction in rental coming back off rental supply coming back next year. But just to put things into context, sales and rental fleets this year through July, were down by roughly 50%. Um, when they remarket those vehicles, they're one to two years old. That means that one to two year old supply is going to be down 40 to 50 ish percent, depending on how you look at it through 2021, more toward the second half of 2021, and perhaps into 2022. And off rental supply comprises roughly 50 to 55% of wholesale supply for vehicles that are up to two years old, that's a massive, that's a massive reduction. So that's going to be very supportive of of us vehicle prices, particularly for those later model year units. Alex Yurchenko 33:36 And what we saw this summer, it was, I would believe, classic supply and demand problem where we have new new new inventory not coming to the market due to factories shut down. And that that facilitated replacement effect. So all of this newer use vehicles became very popular and at the same time, rental companies started unloading a lot of vehicles. So we saw a big influx of those newer used vehicles, but at the same time when demand was strong for them, so that that didn't hurt the prices. Now we we see the reversal of this where we have new inventories come in, I think back to normal levels, and use newer used vehicles are depreciating faster than overall market right now. Luckily, rental companies don't have a lot of inventory right now to send to the market. So they so the price that that helps prices to a letter but so there's there's a lot of I don't know if it's a lot but it's a lot of good timing through the last seven months for the rent of the companies. 34:52 It's a little lock. Joey Pizzolato 34:58 Eric, I see you nodding your head. Eric Ibara 35:00 Yes, I as I mentioned earlier, I am very concerned for the travel business. I think we all long for the day when we can continue can we can return to business and pleasure travel. And, you know, if if the shutdown remains for much longer, a lot of our favorite hotels or our frequent flyer airline may no longer be in business. And and that is true for the rental car companies too. they've served a very important purpose in the past. And we would like to see the the business pickup so things can return to normal. I think that Larry mentioned earlier that used car values are falling, but they're still higher than they were last year. And you know, as everybody knows, we're in the period now, where used car values typically dropped the most. And the fact that our values are staying higher than they were last year, and in spite of the the pandemic that we're going through, I think partly is a result of the fact that fewer rental cars returned after Labor Day. So that may be one of the benefits of the pandemic. But nonetheless, we hope that the economy returns to normal strength so that everybody can get back to business. Kristen Lanzavecchia 36:50 Yeah, and I'll just chime in on that, you know, we, it's very tough to forecast rental fleet penetration, but we try our best and going forward, we do expect to see lower rental fleet for the next few years. And that's mainly because of as Eric was mentioning, you know, there isn't expected to be as much air travel as there has been in the past. So, you know, we're looking at potential ways that rental car companies could come out of this, you know, ones that are mainly focused around airport and travel locations are probably going to suffer the most if that trend continues, where we we don't see as much travel happening in the next year or so. Um, but there is the potential for rental companies that have more diverse store locations, that could potentially see you know, more of a recovery in the next year or so. But overall, we're not expecting to see rental fleet penetration, get back to the level that we saw last year. And that should have a sustained impact on us values going forward. Alex Yurchenko 37:49 But we also need to put it in perspective. So during the last recession, it took, like five, six years for rental industry to come back to pre recession numbers. So so it's it's not uncommon, or we've seen that before, that the rental industry can take a little bit of a longer period to come back. But there's the big, big unknown right now is the travel and depending on how covid pandemic progresses, we'll see either quick recovery or rental market, or very, very slow recovery. It's there's a big unknown big, big elephant in the room. Joey Pizzolato 38:32 Just to piggyback off this discussion, you know, as we mentioned, new new 2120 excuse me, 2021 models are down in terms of delivery, vehicle sales are going to be down right now use inventory is I want to say kind of squeeze but not nearly as squeezed as the new vehicle market. I'm wondering, is there any concern you guys have to you know, really a tightened inventory in the US market, kind of based on lower sales, lower rental fleet, you know, saturation, things like that? Kristen Lanzavecchia 39:09 Yeah, so I think we kind of touched on this a little bit earlier, but we expect to see the biggest hit to use car supply for one year old or even two year old vehicles in the near term because of the rental vehicles that we've seen, you know, significantly less of this year. But then the bigger impacts the majority of the vehicles that are, you know, one to five years old are really those three year off lease vehicles. And we expect to see that impact in 2023, which I believe we all agree will have a bit of a positive impact for us car values, roughly three years from now. Great. Joey Pizzolato 39:46 Awesome. Well, I don't want to spend too much time on that. We didn't already cover it. As you mentioned. We have another question from the audience. I'm in the current pandemic situation. Do you see the leasing of used cars picking Up, similar to say what is offered by fair.com? Larry Dixon 40:09 I'll jump in. I'm not necessarily No, I think many folks know that use vehicle leasing is extremely small, less than 5%, less than 3%. I want to say it's possible, further down the line or into the future if used vehicle prices, if new and used vehicle prices continue to escalate, that used vehicle leasing becomes more of a going concern, if you will. But I, we don't expect it to really take off here for the foreseeable future. Alex Yurchenko 40:53 Yeah, I think I agree, maybe in some pockets in certain segments, but overall, we don't expect the large increases in user leasing. 41:06 All right. Joey Pizzolato 41:09 Moving on to another point of concern, and I think we need to talk about electric vehicles. Um, you know, we know OEMs are making huge investments into their Evie models and technology, even through the pandemic. We have a lot of new Evie models coming to market in 2021. And you know, while while while electric vehicles make up a sliver of market share, new models means higher market share, which could have an impact on financing percentage, especially in light of California's new emission law. So I'd love to gauge what you guys are seeing on the Eevee front and what our lender audience should be paying attention to as these models come to market as it relates to remarketing. Kristen Lanzavecchia 41:59 Yeah, so we obviously hear a lot of news about many B V's coming to market. Currently we're expecting over 80 different nameplates to be in the US market in 2026. However, we only expect those 80 nameplates to take up about 5% maybe 6% of market share. So you know there's going to be a lot of vehicles but it's not going to be a huge portion of the overall sales and not a huge portion of the portfolio's and that's really based on some major barriers that are preventing the widespread adoption of the V's right now. So right now, there's a pretty hefty price premium. You know, we've seen government rebates and even OEM incentives to try to lower the price point. But at this time, the increased in the increased benefits that someone may get from a bV are not, you know, justifying that hefty price point right now. Also, range is not something that is comparable to ice counterparts just yet. So that is limiting consumers willingness to move from a gas only vehicle into a full battery, electric vehicle. And then also with that, too, is the charging infrastructure and time it takes to charge an electric vehicle. You know, it's not as convenient as having a gas station on every corner, where you can fill up your gas tank in five minutes and be on your way. If you're doing a road trip. Like Larry was mentioning earlier, a lot of people aren't flying to take family vacations anymore, everyone's road tripping out. So you know, up at this point isn't a good alternative for an electric or for a gas vehicle as you know, your means of getting to that National Park, because you're going to have to stop and charge it on your way there. And it's going to take at least an hour, maybe more out of your drive time. So you know, those are just a few of the reasons why we aren't expecting those 80 plus vehicles to take up a bigger portion of the market share. Alex Yurchenko 43:58 Yeah, I agree with Kristen, it's we're probably a little bit more conservative, we will we believe we won't get to that 5% outside of California in probably next 10 years. And it's gonna be a slowly developing market in us and without massive investment in infrastructure. It's it's hard to see how it's going to explode in the next 10 years. But this is one of the I guess, smaller segments where use leasing might take off as, as oils want to control that vehicle from from start to finish. So so that this is one of the segments where we see that second leasing becoming more popular. Larry Dixon 44:44 Yeah, that makes a ton of sense to me in CPOE, as well, you know, I think EBS and CPU does fit logically together for a number of reasons certainly to help assuage consumer concerns about you know, unexpected repairs, although it's you should be less, or even battery degradation, even though the warranties are fairly long, but I think really did to, you know, the stepping stone to mass adoption will be some of the the hybrid technology that we're seeing on the vehicle types that people actually are demanding right now. So that would be SUVs and large pickups, you look at some of the positive press that the new f 150, the model your 21, f 150, hybrids is getting, um, you know, to convince consumers, you know, here's a hybrid, it has an electrical component to it, obviously, and here are the things that it does, you're simply not going to compromise. And then let Eevee kind of catch up to what hybrids you know, can do. So I think that that's going to be very important for this, these new hybrids coming in where you talk about a Wrangler, like I said, f 150. Or, and I'm, I don't want to mention Tesla's Eb Truck by name, or a very aggressive plans for that. But anyway, that the hybrid stepping stone if you will, to eat Matt, more mass Evie adoption is going to be very important. Eric Ibara 46:08 So Joey, I thought I would have the counter argument on this panel. But I find myself agreeing with everybody, I, I'm concluding that forecasters are just naturally more conservative. And, and it's interesting, because if you read the media, everybody's talking about how, in five years, you know, we're all going to be driving an Eevee. And yet, the numbers still do not bear that out. I think apart from Tesla, we have not seen a huge growth in the Eevee market, in spite of the new vehicles that have come onto the market. But if I were to adopt a counter argument, I would just like to remind everybody, that there are a ton of new TVs that are about to hit the market. And some of them look pretty exciting or interesting, or at least different. And, you know, I think manufacturers took their first stab at EBS by releasing basically compliance vehicles, you know, compacts the dance that had an electric motor. And there was little demand for vehicles like that, other than the fact that it was a novelty. And now we're going to be seen luxury SUVs, non luxury SUVs, electric trucks, luxury sedans, you know, so just about anything that you would want to drive will come with an electric motor. But But the big test is going to be whether there is consumer demand for an electric vehicle. It's a huge shift to change technologies. I mean, look at how diesel has even struggled, and diesel is not that different from a gas engine. So you can understand why people are reluctant to buy a vehicle that you need to plug in every night. But, you know, I I'm not a futurist. I don't know if that's going to come to pass. But if EAS don't pick up over the next three years, then I guess they are really going to have a an uphill battle. Joey Pizzolato 48:41 Right? Well, you know, it's one of those things every year, we'll probably just ask about EBS and every reply saying not yet and just keep moving along. Um, we're almost out of time. But I do have one last question for the four of you. And this kind of echoes back, Larry, you mentioned, you know, digital capabilities and everything going digital. And Alex, I believe you mentioned, you know, digital wholesale routes. So from my question is from a modeling standpoint, what technical changes have Have you all made in your respective organizations to improve your valuation models? What techniques and what technologies are you are you using for valuation now? 49:22 And has that changed? Alex Yurchenko 49:24 Well get getting more, I guess, diverse data sources is becoming more and more important. On the wholesale market as dealers diversifying the acquisition channels. We knew we need to look at more and more data sources. dealers are not only going to auctions to get their vehicles they're going, they're going to dealer to dealer platforms, they get in their vehicles directly from real marketers. So dealers now more, I'd say technologically savvy, so they're not afraid of digital. There's still a lot of ifs and barriers to go completely digital. But dealers are the pandemic push dealers into more digital worlds. So I would say, just getting diverse data sets from very different channels is becoming more and more important to for to accurately predict wholesale prices. Joey Pizzolato 50:19 Kristin. Kristen Lanzavecchia 50:21 So not to speak for our data science team, but I do know over the last few years, we've shifted towards an AWS cloud based platform. So I know that they've optimized how they're doing their modeling, in terms of what Alex was saying, you know, the more data we can get, the more accurate we can be. So not necessarily looking at data, different data points for for use vehicle prices, because we're currently forecasting and open option value. So you know, that includes both physical and online auctions. We're definitely seeing more online auctions than we had in the past. But we don't have a weighting in terms of, you know, which is more impactful into our modeling. But just always trying to understand what different factors can impact residual values. And if that impact has changed over time, you know, we talked about gas prices earlier, is gas prices, as impactful as it was, in the past, what we've seen become much more impactful than it had been historically is really incentives. And we've updated our model last year to to account for that change, where incentives are, are much more impactful. So new vehicle incentives have a much higher pass through rate on to use vehicle prices than we had seen historically. And we've updated our model to account for that. Eric, Eric Ibara 51:39 I think, I agree with what Kristin and Alex has said, you know, data is important. Technology is important. I think, in this era of work from home. It's where we're realizing how important it is to have a laptop with a good camera and a good mic. But and Larry mentioned how we're moving into more refined data by looking at build data that tell us exactly what equipment is on each vehicle. And that helps us develop a better forecast going forward. One thing I would like to mention is that in these very uncertain times, it's maybe not so much technology, that's important, but to have people that can see the trends and and respond accordingly. Some of these trends are are very temporary and will pass. And some trends may not be apparent at this moment. But may have very long lasting impacts such as the work from home. So it's really maybe more of the empirical or automotive knowledge that comes into play in times like these. Joey Pizzolato 53:22 Great, Larry, final thought. Sure. Larry Dixon 53:24 Yeah. So everything that that you know, the other panelists mentioned, advanced technology, data diversity, diversification and macroeconomic modeling are alluded to these things. So advanced tech, extremely important. Obviously, there's been an explosion in advanced tech for the past couple of years. I mean, if you just take blind spot monitor this, this fairly superfluous technology, well, it's only been super close for a couple of our ubiquitous Excuse me for a couple of years. So we need to have a better understanding more quickly in terms of the value that these new technologies add to us vehicles. And obviously OEMs are making very large investments in these in these technologies on the new side of the market, we need to have a really good understanding as best to their impact to use vehicle prices and residual values. Data diversification is extremely important. As Alex mentioned, if it weren't for different data sources or data feeds, if you will, back in March in April, it would have been very difficult to forecast or to come up with a wholesale use vehicle value because the auction workflows, so sales went to roughly 90 or 10%, rather of what they had been. So if it weren't for other data streams, that certainly makes our lives as valuation providers much more difficult. So diversifying our our sources of data. And then Kristin mentioned this earlier, you know modeling has changed quite a bit. Alex alluded This earlier as well. But if you take the Great Recession, what occurred there, and you apply those same principles to today, as Kristen said, we did the same thing. You know, we expected us nickel prices to fall off a cliff and stay there, right? Given the fact that unemployment went from whatever sub for up to even 8% where it is today, right, you would have expected this massive reduction in US vehicle prices as a result of that all else equal. So you constantly we are constantly as everyone else on this panel is, we're refining our models to address these these changes that occur consistently. So Joey Pizzolato 55:46 great. Well, thank you all for joining me. We're out of time, but it is a pleasure as always. Now I'm going to turn it over back to JJ horn blast, chairman of the auto finance summit for some closing remarks. JJ Hornblass 55:58 Okay, thank you, Joey. And thank you to these panelists. This is our last live session of the 2020 Auto Finance summit. And certainly wanted to thank these panelists start at first, but all the speakers this year, it was a, it was a great event, virtual sure, but it was a really great event. And I want to thank them. I also want to thank our sponsors and exhibitors for their support during this for at this conference. And, and and last but certainly not least, I want to thank my my teammates, for putting together this great, great conference. It was a great job by everyone on the team. And just finally, all of you who are in attendance, we are so appreciative of your participation, and being a part of the 2020 Auto Finance summit, as we like to say over here at the Auto Finance summit. We appreciate you and so thank you so much for your participation. You know, just because this session is ending doesn't mean that the auto finance summit is over. The summit's event platform is open will remain open. You can check out recordings of previously held sessions you can still network with other attendees and you can also connect with sponsors and exhibitors certainly encourage you to do so we hope you've enjoyed this auto finance side and and that you'll join us again next year. So we are slated to return to Las Vegas. That's That's right, Las Vegas for the 2021 Auto Finance summit, and it is scheduled for October 27 to 29 act to win. Let's all hope that we get there. We wish you great success and health and fortune in in 2021 and beyond. Thank you all so much for your attendance. Take care </div> [/toggle]
