Wesley sets sights high with Turners' foray

By Duncan Bridgeman

Friday 10th September 2004

Jeff Wesley might drive a lease car but the Turners Auctions managing director would far prefer his very own Audi RS6 twin turbo.

Unfortunately, he said, his pay package doesn't quite go far enough to cover the $230,000 price tag.

But Wesley's taste in cars is somewhat similar to his approach to business.

He sets his sights high - as evidenced by Turners' foray into North America - and yet he is cautious the company doesn't get too far ahead of itself.

"I'm just not a big bang type of guy," he said, when asked about the company's relatively low profile and tentative dealings overseas.

Turners Auctions entered the North American market last year when it set up a "pilot" joint venture vehicle operation in Vancouver with expatriate Kiwi Alan Mackenzie.

It then took a 25% stake in Ehli Auctions in Seattle, where it hopes to strike a deal this week with the federal government to auction off state vehicles.

It is likely Turners will end up buying out Ehli and perhaps its Vancouver-based Able Auctions joint venture as well.

The company decided to build the offshore business solely from profits, rather than to fund the expansion from debt or new equity.

The move sent shivers down the spines of Kiwi investors, gun shy from the experiences of some other local companies particularly across the Tasman.

But the plan appears to be a good one.

Certainly, there were losses to begin with, dragging Turners' overall results down 5% in the second half last year, but the Seattle-based Ehli and Vancouver operations are now in the black.

Wesley is exceedingly bullish on the future in North America and confident that profits from those operations will exceed those in New Zealand in five years.

The company is looking at setting up in Oregon and northern California and has further tricks left up its sleeve, he says.

"We're going to be a new breed in that market and I would think the rate of expansion will grow as we get more confidence and the profits come out of our current operations."

Mention "car auctions" and the words usually conjure an ugly image - boosted by outdated television stereotypes about the motor trade - of an automotive hell.

The reality is actually quite different.

Gone are the days when auctions were the domain of rust-buckets and old dungers. The majority of the vehicles coming before the hammer these days are good-quality used cars.

It's something that Wesley cannot talk about enough.

He believes the North American auction companies are unsophisticated in that they are basically still liquidation auctioneers hocking off all manner of grubby vehicles.

He said Turners brought a unique business model by essentially converting these businesses into vehicle re-marketing auctions.

"Last auction we decided to groom or valet 60% of the cars and we had a much higher sell rate.

"Beforehand, if someone went to buy a car it wouldn't be presented and was generally covered in dust and dirt. That's not a particularly clever way to sell a car."

The company has gone a step further in New Zealand by rolling out Turners Used Certified Vehicles where all cars are mechanically inspected, given a warranty and can be test-driven.

"So people don't have to worry about the engine falling to bits as soon as they drive out the door."

The company will introduce the concept to North America once the local rollout is complete.

"From what we've seen in Seattle and Vancouver, we know the public attend those auctions in big numbers and we know we can convert them quite easily ... doing the things we do here."

Since divesting from Turners & Growers and listing on the NZX in October 2002, Turners Auctions has been a top small-cap performer, growing at between 8-10% a year.

Turners is the country's biggest vehicle auction company.

It sold 73,000 vehicles through its 14 branches last year, obtaining its vehicles from dealers, private sellers and government. Some were ex-lease vehicles.

About 15% of the vehicles are imported, mostly from Japan.

Analysts like what they see on the local front and now see significant future growth from North America.

ABN Amro is forecasting earnings before interest, tax and amortisation to jump to $20.8 million in 2006, almost double last year's $10.6 million.

The key risks, the broker notes, are continuing consumer acceptance of the car auction concept and that the North American operations are now sustainable.

The company is also bedding down its finance arm, which it expects to book between $8-10 million by the end of this year.

"It all comes down to what the strike rate in terms of the number of buyers we can convert," Wesley said.

Most conventional dealers sold half of their vehicles to the public on finance. Turners was at about 5% and needed to change the perception that auctions were only for cash buyers, he says.

Actual profit per deal at half year was about $900.

While there is plenty of work to do at home, Turners will keep sniffing around for opportunities to expand and is not ruling out raising money if necessary.

There had already been some interest from Chinese government departments, Wesley said, and "that's bubbling away in the background."

It's this slowly but surely approach that might just lead to that Audi RS6 after all.

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