2. Used Vehicle Guidebooks and Valuation Insights
Anil Goyal
SVP, Vehicle Valuation and Analytics
Prepared for:
APRIL 2017

3. About Black Book Founded in 1955. Parent company: Hearst Corporation
Our Brand Promise: Timely, Independent and Accurate
Our data and analytics products include:
Current and Historical Values
Residual Value Projections
Insights and Analysis
New Vehicle Attributes
Auto Markets:
Auto and Light Truck
Medium & Heavy Duty Trucks and Commercial Trailers
Recreational Vehicles
Motorcycles and Powersports
CPI: Collectible and Exotic Cars

4. How much would you bid for this car?
1971 Plymouth Barracuda Hemi 426 convertible MSRP: $4,296
Current Value: $2.5 million

5. Guidebooks – history and evolution

6. “Guidebooks have been a fixture at auctions seemingly forever…”
Dec 2012 NIADA Used Car Dealer Magazine

7. From Printed Guide Values to Insights

8. Starting Points for Valuation Insights Usage
Dealership
Fleet
Lending
Manufacturer
Marketing
Insurance
Government
Shipping
Legal
Over 50 touchpoints…

9. Lending Underwriting Portfolio Analysis Residual Setting
Loan Pricing
Verification at booking
Depreciation analysis
Loan structure
Portfolio Analysis
Setting reserve for loan losses
Mix optimization
Residual Setting
Lease Payment
Lease end strategies
Off Lease and CPO
Residual gain/loss calculations
Organic Growth
Lenders mining their own portfolio
Remarketing
Repo prioritization
Repo pricing

10. Lending (continued) Floor planning Dealer financing Audit Compliance
Making inventory readily available
Dealer financing
Based on performance
Audit
Compliance
Collections
Strategy based on equity value
Securitizations
Risk assessment
Quarterly update
Ratings agencies
Independent rating

11. Origin Manufacturer Marketing Shipping
Historical performance indicates future
Residual value projections and impact from incentives and fleet penetration
Brand loyalty measured through value retention
Options selection and packaging through retention
Marketing
Setting consumer expectation on retention
Mailers to consumers generate desire
Equity calculations
Marketing to service consumers
Lead generation with trade-in evaluator
Shipping
Inventory shipped must be insured
Premium calculation

12. Dealership and Fleet Dealership Fleet Purchase at Auction Floor plan
Evaluate trade in
Inventory management
LIFO calculations for taxes
Retail pricing
Acquisitions planning
Fleet
Benchmarking
Pricing
Cents per mile
Cost of ownership
Optimal time to sell
New vehicle acquisition

13. The Back End Government Legal Insurance Taxation Ad valorem
Benefit calculation
Legal
Litigation
Fraud detection
Insurance
Underwriting to the proper level
Pricing
Claims
GAP settlements
Rental Policies
Global policies
Residual Value Insurance

14. Automotive Solutions OEM’s Dealers Auctions Rental Car Companies
Fleet Management Companies
Marketing and Data Companies
Insurance Companies
State & Federal Governments
Software Providers
VAR’s

15. Lender Solutions
37 of the top 40 auto finance providers (Captives, Banks & Finance Companies) use Black Book
Partnerships with Credit Bureaus, Analytics Companies, LOS Providers, Servicing Companies, Data Aggregators and other 3rd Party Resellers to provide more in-depth solutions

16. Current Value Insights
Black Book develops its values by incorporating both subject matter experts and data scientists aided by powerful machine learning techniques and fueled by data.
Daily Updates and Insights
Data Collection
In the lanes
Analytics and Insights
Editorial expertise

17. Residual Value Process
Optimal combination of Art and Science!
Historical Black Book wholesale prices
Long term typical depreciation curves
Model level seasonalized depreciation curves
Refresh / redesign / lifecycle analysis
Competitive analysis
Hands-on vehicle valuation
Lifecycle analysis
Trim relationships
Editorial reviews
Auction data on options / packages
Trims and options depreciation curves
Used vehicle supply
Forecasted demand (macroeconomic factors, OEM strategies, etc)
Supply / demand

18. Residual Value Example

19. Used vehicle market has had a great run in recent years. But…

20. Historical Depreciation
The depreciation rates on used vehicle values have been lower in the 5-year period following the Great Recession in comparison to the pre-recession “normal”. However, the depreciation rate in 2016 on used vehicle values increased by 4 points to pre-recession levels.
Growing demand as economy improved
Gas prices dropped sharply in 4th quarter
Strong SUVs and trucks demand kept values high

21. Market Strength Trends
Market correction in progress?
The purpose of Black Book Wholesale Used Vehicle Retention Index is to provide an accurate and unbiased view of the strength of used vehicle wholesale market values. The index is calculated using Black Book’s published Wholesale Average value on 2- to 6- year old used vehicles, as percent of original typically-equipped MSRP. Black Book’s Wholesale Average is a benchmark value for used vehicles selling in the wholesale auctions with the vehicle quality in Average condition. The index is weighted based on registration volume and adjusted for seasonality, vehicle age, mileage, condition, segment mix and inflation (MSRP).

22. Why is this happening? We have reached a plateau on several positive trends that have now started to turn!

23. Vehicle Demand
Job growth has been the key economic driving factor behind increase in demand for vehicles. However, pent-up demand has been spent and unemployment rate is below the target 5%. There is more uncertainty in demand growth going forward.

24. New Vehicle Sales
New vehicle sales have crested and are expected to slow down to 17.0 million in 2017 from the record of 17.5 million in 2016; still very good from historical perspective.
Forecast

25. Potential Increase in APR
Historically low APR has enabled low monthly payment. Rising interest rates will put more burden on the consumer.

26. Auto Loan Delinquencies
Delinquencies remain low on prime portfolios but have increased consistently in recent months for sub-prime portfolios leading to higher down payment and/or tightening of criteria.

27. Subprime Vintage Loss Curves

28. Credit Availability
Auto loan criteria has been relaxed for several years among consumer auto loans after the severe tightening in timeframe. The third quarter in 2016 shows a trend reversal towards tightening.

29. Auto Loan growth
Low interest rates, easy credit availability and the strengthening economy have helped fuel robust growth in auto borrowing in recent years. The growth is slowing down.

30. Used Supply
Late model used supply from off-lease vehicles will continue to increase in the coming years.

31. Gas Prices
Gas prices have been historically low. They are expected to remain low but not go any lower.

32. Structural Trends to Monitor

33. Price Index – Purchase vs Lease
Monthly lease payments driven very low compared to owning a vehicle after the sudden increase in 2009 – primary reason for leasing growth. Lease penetration has grown to nearly 30% of retail sales but further growth is unlikely.

34. Residual Values Losses
Lease returns on average resulted in a gain post-2009 due to high vehicle values. However, the Fitch RV loss index turned negative in 2017.

35. Percent of Typically-Equipped MSRP
Incentive Levels
Incentive levels shot up above 11% of MSRP due to slower demand in New vehicle sales are more reliant on incentives, driving used values lower.
Average Incentive
Percent of Typically-Equipped MSRP
Source: Black Book Visual Analytics

36. Loan Terms
Longer term loans have increased significantly. Greater exposure to long-term loans elevates loss severity risks, since the amortization of extended-term loans tends to trail vehicle depreciation.
source: Experian

37. Certified Pre-Owned
CPO volume has continued to help in retention as more lease returns entered the market. However, the growth is slowing substantially and CPO will compete more with new vehicle sales due to incentive growth.

38. Depreciation and Segment Drilldown Not all vehicles depreciate alike!

39. Quarterly Depreciation in 2016
Larger 12-month depreciation driven by the higher declines in Q3 and Q4 of last year. Clear seasonality patterns: Q1 performance slightly worse than usual but better than last year.
Weighted Average, Model Year

40. Cars versus Trucks
Trucks have continued to perform much better supported by lower gas prices, growth in construction and consumer preferences towards SUVs although the gap between car and truck depreciation has reduced from 7 to 4 percentage points.
Latest 12 Months
2- to 6-Year Old Vehicles
One Year Ago
2- to 6-Year Old Vehicles
Weighted Average, Model Year
Weighted Average, Model Year

41. Segment Comparisons – 12 month change
Full-size crossover/SUV and Pickup segments performed the best in the truck categories. Besides sub-compact cars, luxury car segments also experienced depreciation levels higher than 20%.

42. A Tale of Two Segments

43. Trucks Imported from Canada!

44. Canadian Exchange Rate

45. Where are we headed?

46. Eventually, it Boils Down to Demand and Supply!
Used Supply
Demand
Macroeconomic factors
OEM’s pricing strategy
Consumer behavior
Gas prices
Rentals
Lease
Other

47. Demand vs Supply: Sub-Compact Car
The demand of sub-compact cars has dropped; however used supply of late model years continues to increase.
Source: Black Book Visual Analytics

48. Demand vs Supply: Full-Size Pickup
The demand of full-size pickups has steadily increased while used supply has been decreasing. Used supply trend is expected to reverse in 2017 and beyond.
Source: Black Book Visual Analytics

49. Depreciation Forecast
Annual depreciation for 2017 is expected to remain at high levels.

50. Three-Year Retention: Forecast
Our forecast shows overall retention rates dropping close to pre-recession numbers in next 3 years.

51. Thoughts and Questions?
Thank you for your time and participation!
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Contact: Anil Goyal
SVP, Automotive Valuation and Analytics Black Book Office: Mobile: