Open Lending Corporation

Good afternoon and welcome to Open Lending's second quarter 2022 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1, followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, today's conference call is being recorded. On the call today are John Flynn, Chairman and CEO, Ross Jessup, President and COO, and Chuck Jell, CFO. Earlier today, the company posted its second quarter 2022 earnings release to its investor relations website. In the release, you will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call. Before we begin, I'd like to remind you that this call may contain estimates and other forward-looking statements that represent the company's view as of today, August 4, 2022. Open Lending disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to today's earnings release and our filings with the SEC for more information concerning factors that could cause actual results to differ materially from those expressed or implied with such statements. And now, I'll pass the call over to Mr. Flynn. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thanks again for joining us today for Open Lending's second quarter 2022 earnings conference call. I will briefly discuss the highlights of our results for the quarter and how we are performing given the current industry and economic conditions. Ross will then discuss current auto industry trends and Open Lending's relative performance in prior cycles. And then lastly, Chuck will go over the financials and thoughts for the remainder of the year. For the second quarter, our results were in line with our expectations, despite continued challenging economic and industry headwinds to our business, with our results modestly growing quarter over quarter. The industry is still facing low levels of dealer inventory due to the continued global semiconductor chip shortages and the supply chain challenges. In addition, an equally significant our inflated used car values impact on affordability to the near and non-prime consumers. When we began the second quarter of 2022, there were indications that fundamentals were beginning to stabilize and an expectation that the second half of the year would lead to higher auto transaction volume compared to the first half of the year. Instead, continued lockdowns in Asia and the effects of Russia's invasion of Ukraine collectively dampened the supply to fuel a recovery. Even more notable has been the impact of 40-year high-record inflationary conditions and the impact on consumers' budgets and the Federal Reserve's monetary tightening response of 75 basis point hikes in both June and July. The results of high inflation and higher borrowing costs have pushed consumer sentiment to the lowest level seen in our company's history. Despite these industry headwinds, our business has performed well. Our current expectations for full year 2022 auto originations at open lending are projected to be in line with full year 2021, while the current run rates at many of the universal banks implies auto lending originations will be down over 20% year over year. So we remain focused on what we can control, including investing in our go-to-market sales strategy to capture more of our significant and growing TAM. In the first half of the year, we increased our sales and account management teams by 23%. The individuals we've hired have deep experience in the auto loan origination space, in particular with credit unions and banks. While some players in our ecosystem are holding flat or even reducing their employee base during this period of economic uncertainty, we are actively hiring high-quality talent and positioning ourselves to take market share. Although early, we have seen good tractions on these investments. It is worth noting that during the second quarter, our non-OEM business, primarily credit unions, grew certified loans 27% year over year. During the quarter, we signed 18 new customers and had 10 lenders certify their first loan in the quarter. We also further grew our existing customer base with our top 10 non-OEM customers increasing their certification volume by 33% in the second quarter of 22 as compared to Q2 21. Another area of focus has been on enhancing lenders' protection by continuing to invest in the platform and the infrastructure to support our growth, as well as improving lender onboarding, reporting, and claims administration capabilities, and investing in development resources. Early indications support improved onboarding and cycle times from contract signing to our first certified loan and revenues. These initiatives and associated investments are all to support our large growing TAM, which according to a recent assessment prepared for us by a third party, now totals approximately $270 billion for auto loan origination, which is up 8% from the study prepared prior to our public listing. In addition, there is approximately $40 billion in TAMs related to the auto refinance opportunity, which represents 32% of our search this quarter and is expected to continue to perform well, even with the current macroeconomic backdrop. Based on the recent TAM analysis, we have penetrated less than 2% market share, leaving a significant room for growth. As you know, we bring together the various players in the auto retail ecosystem, offering a very compelling value proposition to each. We enable lenders to make loans to consumers they would otherwise not make, deepening their relationships with other existing customers and helping forge relationships with new customers. The loans made through our Lenders Protection Program provide yields that often exceed that of our customers' prime portfolio with lower risk to the lender. The ultimate beneficiary is the underserved near and non-prime consumer who receives access to credit from a larger range of lenders with higher loan amounts, better rates and appropriate down payments, which is even more important in today's environment where consumers affordability is being squeezed. The benefits we offer are needed now more than ever. In addition to the massive underserved and growing TAM, and our mission to help both lenders and consumers, we have considerable moat around our business with over 20 years of proprietary data, a five-second underwriting decision, and our exclusive relationships with four A-rate of insurance partners. This moat continues to widen as we make strategic investments in new data, technology, and talents. We believe our value proposition to the various players in the auto retail ecosystem supports our confidence in the resiliency of our business through any cycle and gets us even more excited about our long-term opportunities. A few reminders about our business as we head into potentially slower economic growth. First and foremost, we will maintain our discipline and rigor at all times in our underwriting process during this economic contraction, and in the second quarter, we adjusted our underwriting models to optimize for the health of our portfolio from a risk perspective. As you are all aware, we do not take balance sheet risk, and we will continue to prudently manage our balance sheet to ensure we maintain financial flexibility. In the end, we will continue to target growth rates in excess of industry growth rates. but never at the expense of our commitment to managing risk. Our business fundamentals and our long-term outlook are strong. I would now like to turn the call over to Ross, who will provide more details on what we are currently seeing in the auto lending industry, as well as a comparison to how the industry performed during the recession of 2008 to 2009. Ross? Thanks, John. As John stated,

I would like to focus on two topics today. First, let me turn to auto industry trends. Mannheim used vehicle value index prices in June decreased 1.3% from May 2022, but we're still noticeably up 9.7% compared to June 2021, and for the year remain at historical 25-year highs. Wholesale use prices Vehicle prices continue to increase in the first half of the year. Average used car price is now 28,000 versus 19,000 pre-pandemic, an increase of 47%. New vehicle inventory is building at a more measured rate compared to expectations we began this year. The 2022 new vehicle SAR industry estimates have been revised downward three times and by 1.6 million units this year. clearly an indication of continued supply side challenges. Average incentive dollars per vehicle, a leading indicator of inventory availability, are noticeably below historical levels. In June 2021, OEMs were offering $2,700 per vehicle in incentives as compared to approximately $1,200 per vehicle in June of 2022. While these are headwinds currently facing our industry, The number of new vehicle sales is forecasted to grow 5.2% per annum over the next five years, but could clearly grow more quickly considering the new vehicle SAR has been running at two to three million units below historical levels. And finally, the average age of a vehicle on the road is as high as it's ever been at over 12 years old, further adding to the number of units of pent-up demand and the opportunity for us ahead. Now to move on to my second topic, we continue to compare and contrast current economic conditions against prior recessions, specifically 2008 and 2009. During that time, credit unions grew deposits and loan volumes each year in the last recession, suggesting that volumes can continue to grow through a downturn. And while the value of used vehicles declined and used auto sales decreased in the last recession, both returned to pre-crisis levels within a year. Given the tight supply, our current belief is that price levels will not decline as precipitously as it did during the great financial crisis. 90% of the lenders using Lenders Protection reached their targeted goals. The lessons learned from the remaining 10% have enabled the company to improve its risk-based pricing model, thick versus thin versus normal, and LP score. Some prime customers will fall into the near prime market due to the economic conditions creating growth in our total addressable market. We expect the carrier appetite and capacity will not be an issue as defaults need to increase two times the levels in the great financial crisis to create an economic loss for our insurers. Auto lending has typically performed better than other consumer asset classes, as cars and car payments are prioritized over other consumer discretionary spending. There's an industry adage that you can sleep in your car, but you can't drive your house to work. Accordingly, we are optimistic about our core competencies in the auto lending space. With that, I would like to turn the call over to Chuck to review Q2 in further detail, as well as to provide updated thoughts on the full year 2022 outlook. Chuck?