OPENLANE, Inc.

Ladies and gentlemen, thank you for standing by. Today's conference will begin in approximately one minute. Again, thank you for standing by. Today's conference will begin in approximately one minute. Until that time, your lines will again be placed on music hold. Thank you for your patience. Music THE END Good day, and thank you for standing by. Welcome to the Car Auction Services, Inc. Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require further assistance, press star 0. I would now like to hand the conference over to your speaker today, Mike Ellison, Treasurer and Vice President of Investor Relations. Thank you. Please go ahead.

Thanks, Stephanie. Good morning and thank you for joining us today for the CAR Global second quarter 2021 earnings conference call. Today we'll discuss the financial performance of CAR Global for the quarter ended June 30th, 2021. After concluding our commentary, we'll take questions from participants. Before Peter kicks off our discussion, I would like to remind you that this conference call contains forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Act, Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect CAR's business, prospects, and results of operations. And such risks are fully detailed in our SAC violence. In providing forward-looking statements, the company expressly disclaims any obligation to update these statements. Let me also mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures. Reconciliations of the non-GAAP financial measures the applicable gap financial measure can be found in the press release that we issued yesterday which is also available in the investor relations section of our website now i'd like to turn this call over to carglobal ceo peter kelly peter thank you mike and good morning everybody i'm delighted to be here this morning with all of you to provide an update on our performance at carglobal on this morning's call i plan to speak about our second quarter results

I will also go into some detailed vehicle supply dynamics in our industry and what we can expect to see over the rest of this year and into 2022. I will also provide updates on the continued growth of our dealer-to-dealer platforms, backlot cars and trade rev, the solid performance of our finance business, AFC, and our continued diligence and management of a car's overall cost structure. So I'll start with the second quarter. I was pleased with our second quarter performance, particularly giving the supply headwinds in our industry. Despite operating in an environment of very constrained vehicle supply, especially from commercial sellers, we achieved the following results. For car overall, we generated $585 million in revenue, an increase of 40% from Q2 of last year. We generated total gross profit of $252 million, which represents 51.7% of revenue, excluding purchased vehicles. We generated $116.5 million of adjusted EBITDA, which was a 46% increase compared to Q2 of last year. We had another strong quarter of cash generation. Cash flow from operations for the quarter was $131 million. Within the ADESA segment, we facilitated the sale of 711,000 vehicles, representing $11 billion in gross auction proceeds. 53% of our Q2 sales were from off-premise locations. That was similar to our experience during Q1. We sold 119,000 vehicles on the TradeRev and Backlot Cars platforms on a combined basis. This represents our strongest performance to date in our digital dealer-to-dealer marketplaces. It represents growth of 65% compared to Q2 of last year and sequential growth of 19% versus Q1. I continue to be encouraged by our performance in this part of the business. We generated $277 in gross profit per vehicle sold in the Odessa segment. That represented an increase from the $264 in Q1. SG&A for car overall was $140 million for the quarter. SG&A for the Odessa segment was $131 million, which was down $9 million from Q1, resulting in SG&A of $185 per vehicle sold. I will speak to the key metrics for AFC a little later in my remarks, and Eric will provide more detail around our financial and operating results later in this call. So I'd now like to speak about the supply dynamics of used vehicles within our marketplaces, the headwinds that we faced in Q2, and why I believe the medium and longer-term outlook is much more encouraging. In our last earnings call, I mentioned that CAR was operating in an environment of constrained vehicle supply across the wholesale used vehicle market, particularly in regard to volumes being offered by commercial sellers. I said that the root causes varied, but they all originated with the COVID pandemic. Those supply constraints worsened during Q2, and they represented a significant headwind to our performance during the quarter. That's why I'm encouraged by our performance in spite of those headwinds. I also believe there's increasing evidence that we're now at the bottom of the cycle and that we should expect to see some recovery in those commercial volumes. And when that happens, it should be a very positive thing for CAR. To help explain all of this, I'd like to look back to Q2 of 2019. and to what a more normal supply dynamic looked like for our company and our industry pre-COVID. So in Q2 of 2019, CAR facilitated the sale of 994,000 vehicles. Over 70% of those, approximately 700,000 vehicles, were sold by commercial sellers. The remainder, which was approximately 275,000 vehicles, were sold by dealer sellers. So from that statistic alone, we can see that historically, commercial sellers have represented the majority of cars used vehicle supply, over 70%. This is more so than our industry overall, which is more like 50-50. One challenge that car has faced over the past few quarters is that those commercial seller volumes have been under much greater pressure than the dealer volumes for reasons I will discuss here in a moment. I believe that pressure is cyclical in nature, and I believe that we are now at the bottom of that cycle. During Q2 of this year, the volume sold on behalf of commercial sellers was approximately 420,000 vehicles, a decline of over 40% versus Q2 of 2019. So that's a significant and painful decline. However, a key question is, how does that compare to the market overall? A good basis for comparison is to look at the total volume of vehicles sold by commercial sellers at all U.S. auctions, that is, at Odessa and its competitors. This data is published by AuctionNet. In Q2 of 2021, the volume of vehicles sold by commercial sellers at all U.S. auctions was down by 48% versus Q2 of 2019 in our industry, according to AuctionNet. Based on that statistic, cars decline in total commercial volume across all channels was less than the industry-wide decline in commercial vehicles at U.S. auctions. So that tells me that we did not lose share with these commercial sellers. Our performance in Q2 should be judged against what I would consider to be historically low industry volumes of vehicle supply from commercial sellers. And viewed through that lens, I am pleased with the performance. I also mentioned that there is evidence that we're currently at the bottom of the cycle. The dynamics relating to off-lease vehicles, repossessed vehicles, and rental vehicles all point to an improving commercial supply picture over time. I believe that when this happens, it will be very positive for CAR given our digital shift our streamlined operations, and our resulting lowered cost structure. And I'd like to go through that in a little bit more detail. I'm going to start with off-lease vehicles. CAR sells significant volumes of off-lease vehicles through open lane and also at ADESA. The volume of off-lease vehicles flowing through both of these marketplaces has been severely impacted by the disruption to new car production brought on by the shortage in semiconductors. In the face of this supply shortage of new vehicles, market values for used off-lease vehicles have increased by as much as 40% versus one year ago. This means that consumers now have considerably more equity in their off-lease vehicles than at any point in history. Based on our internal analysis, the average equity in an off-lease vehicle increased to an all-time high of close to $8,000 per vehicle in Q2. And that was up from an average of less than zero two years ago. This makes lessees much less likely to return the vehicle when the lease ends. And if the lessee does return the vehicle, it makes it much more likely that the grounding dealer will purchase the vehicle, since many grounding dealers have a contractual option to purchase the vehicle at residual value. We saw both of these trends in Q2. The positive equity situation for lessees resulted in a reduction of over 50% in off-lease vehicles being returned versus what we would normally expect. For those vehicles that were returned, we saw upstream conversion reach an all-time high of approximately 80% in Q2. So while we enjoy nearly 80% market share in the upstream off-lease segment in North America, a record number of vehicles were kept cut by consumers, where we receive no fees, or by the grounding dealers, where we generate lower revenue. The result of both of these changes was that considerably fewer vehicles flowed deeper into the remarketing process, where they would have generated stronger economics. So as we look ahead, we believe that the semiconductor production issues are now being addressed, and we expect production of new vehicles to start to improve starting in the second half of this year. While we believe it will take time, ultimately this increased production will drive a normalization in supply and demand and a moderation in used vehicle values. This should in turn result in increased volumes of off-lease vehicles being returned and processed through our private label platforms and flowing into our higher margin channels like adesa.com and our on-premise sales. But clearly this will take time. In the meantime, we also know that lease originations continue to be strong, meaning that off-lease vehicles will continue to be a strong source of supply for our industry well into the future. The second category of vehicles is repossessed vehicles. We sell significant volumes of repossessed vehicles at Adesa, given the large number of banks and lenders in our commercial seller portfolio. In just about every prior economic dislocation event, our industry has experienced an increase in repossession volume. However, this did not happen during the COVID pandemic, and I believe that the unprecedented level of government stimulus served to avert it. Government stimulus, coupled with other consumer protections, has meant that consumers could continue to make their monthly payments and avoid repossession. In Q2, based on our data, repossession volume across our industry continued to be about 35% below what we would consider to be normal levels. Looking ahead, after the current wave of government stimulus ends, I think it's reasonable to expect that repossession volumes will trend back towards normal levels over time, and that our volumes in that segment should correspondingly improve. And finally, there are rental vehicles. We have less exposure to this category, but we still have a meaningful customer base in the segment, and this segment offers us an opportunity for volume and profit when the rental market strengthens. Rental supply within our wholesale marketplaces was very close to zero during Q2. In fact, a number of rental companies were actively buying used vehicles within our marketplaces because they were unable to source new vehicles from motor manufacturers owing to the semiconductor shortage. The post-COVID increase in travel has caused rental car companies to start rebuilding their fleets. I take this as a positive signal for industry and our company since it points to return towards normal at some point in the future. So as we look to all of these three segments, off-lease, repo, and rental, I believe that the fundamentals lead us to conclude that compared to our Q2 experience, we should expect to see considerably increased volumes over time. The key question is when will this happen and to what extent? My best assessment is that it will take time, but there are some key factors that we're watching that may be predictive. The most significant factor in my mind is new vehicle production. Seeing motor manufacturers getting their factories back producing will be key to driving the trends that I've talked about here this morning. We're also monitoring used vehicle values and seeing the unprecedented high prices starting to moderate and even decline a little. Lower used vehicle prices will help drive more off-lease supply into our marketplaces. Finally, we're monitoring for any further government stimulus and its impact on the repossession market. So now I'd like to provide an update on our progress in the dealer vehicle category. We sold 292,000 dealer vehicles in Q2 of this year. That was an increase of 6% versus the 276 dealer-owned vehicles that we sold in Q2 of 2019. Even if we were to include backlog cars in the 2019 number, our total dealer volumes have increased versus Q2 of that year. So our total dealer volumes have now recovered back to what we would consider normal, and I am pleased that we're showing modest growth. If we look at the digital dealer category only, Q2 represented our strongest performance yet, with 119,000 vehicles sold, representing year-over-year growth of 65%. And by the way, that includes backlot cars volumes in the prior year number. I was pleased with this performance. Q2 represented our first full quarter in the U.S. where we had migrated to the backlot cars platform. We saw record numbers of participating sellers and buyers and increased volumes of vehicles posted for sale. Although these higher volumes of vehicles posted were offset by a slightly weakening conversion as the quarter progressed due to the high used vehicle value trends that I talked about earlier. In Canada, our trade rev business performed very well in Q2. It delivered strong volumes and strong profitability. The fact that TradeRev has delivered profitability in Canada, which is a more mature digital dealership market, makes me encouraged for our prospects in the U.S. market and at an even greater scale. Our own analysis of the trends in both the U.S. and Canadian markets also demonstrates that our offerings are helping us address a segment of vehicles that was not coming to our auctions in the past. We are attracting new sellers and new buyers on a daily basis, and this reinforces our belief that the digital solution expands the total addressable market available to our business. I'd like to spend a few moments talking about our cost structure. Over the last several calls, we have discussed our strategic focus on reducing our cost structure to reflect our transition to a digital marketplace company. The lower volumes in Q2, coupled with the high percentage of off-site sales, continue to reinforce the need for CAR to be very focused on its operating model and its cost structure. Based on the information that I've already shared on this call, our Q2 performance was delivered against a close to 50% reduction in supply in a category that historically represented over 70% of our business. So delivering that level of performance in that environment reflects our focus on operations and costs. I believe that this focus is reflected in our strong gross profit performance in the quarter, both as a percentage of net revenue and also in terms of the gross profit per vehicle sold. Our cost focus has also been reflected in the close management of our SG&A. This management of cost has enabled the business to deliver a stronger operating performance off of lower volumes. Over the course of the quarter, we've also identified further savings opportunities, principally relating to SG&A. These have now been acted on or are in the process of being addressed. I also believe that as we look to the future, there will be opportunities to further refine our processes, increasing our efficiency, improving the customer experience, and reducing our costs going forward. And this will continue to be a focus. I want to stress, however, that these reductions have not come and will not come at the cost of strategic investments or of our customer commitments. We continue to invest in the technology, the people, and infrastructure necessary to extend our lead in the digital transformation and position our company for long-term growth. Finally, I'd like to provide some updates relating to our finance business, AFC. I've been pleased with AFC's performance in the present quarter, but also over the past 18 months since the onset of the pandemic. AFC continues to have healthy margins with gross profit for the quarter right at 80% and with SG&A of under 13% of revenue. In terms of its key metrics, AFC had 356,000 loan transactions in the quarter. This was in line with the levels that we had expected. Revenue per loan transaction was strong at $193 for the quarter. Key drivers of this were higher vehicle values and lower risk levels. And finally, speaking of risk, we continue to experience lower than expected risk, driven by current market conditions combined with strong operating processes at AFC. So to summarize my key messages for today, I am pleased with our performance for the quarter. Specifically, I am pleased that we were able to deliver this level of performance despite historically low levels of commercial seller vehicles, which has always been our core business segment. I believe we are now likely at the bottom of the curve in terms of commercial vehicle supply. I believe that the outlook for off-lease, repossessed, and rental vehicles will be one of increasing volume over time, ultimately returning towards historical levels. This recovery will take time, but it's clear to me that we should be a strong beneficiary of this when it happens, and I think that we're now starting to see the very first signs that that recovery is nearing. When I look at dealer consignment, we sold more dealer-consigned vehicles than in the same quarter pre-COVID, And we delivered our best quarter yet in terms of volumes in our digital channels. Our trade route business had a strong, profitable quarter in Canada. And our data suggests that our digital model is expanding our addressable market across North America. I also believe that our Q2 results and strong unit economics demonstrate that CAR has the ability to be more profitable at lower volumes than was the case historically. What is most important about this is that it also means that as we see the cyclical return of these commercial seller volumes, we have the opportunity to be more profitable in the future than we have been in the past. Finally, notwithstanding the growth levers that exist for us, we continue to be very focused on costs, finding opportunities in Q2 to further improve our operating model. We intend to maintain that focus and discipline going forward also. With that, I will hand over to Eric for a more detailed review of the financial results for the quarter. Eric?

Thank you, Peter. Let me start by highlighting a few items that stand out this quarter. Adjusted EBITDA of $116.5 million represents approximately 20% of operating revenue. Given the volume and related revenue headwinds, this was a solid performance for the quarter. Gross profit for the quarter was 51.7% of revenue net of purchased vehicles. The primary drivers of this strong performance Gross profit per unit at Edessa was $277, up from $224 in the prior year and $264 in the first quarter. AFC revenue per loan transaction was $193, up from $115 in the prior year and $177 in the first quarter. And this more than offset a decline in the number of loan transactions compared to the prior year and the first quarter. Peter mentioned the sequential decline in SG&A. However, SG&A was up from the prior year as we had a substantial number of our employees on furlough for all or part of the second quarter of 2020. And many employees had temporary reductions in compensation last year as well. Operating adjusted net income per share of 15 cents was negatively impacted by a reduction in net unrealized gains on publicly traded securities. and an increase in our effective tax rate to 44%, primarily driven by non-deductible expenses related to the increased contingent consideration recorded for the cars on the web acquisition. And last, the working capital generated a car continues to be a strength of our operating model. We have generated $296 million of cash from operating activities in the first six months of 2021, of which $131 million was generated in the second quarter. The free cash flow conversion of our business is worth pointing out. As our markets return to normal in the near future, I am confident we have sufficient capital available to support our business and its growth for the foreseeable future. Now let me give some color on the highlights of our performance. First, our total volume sold at Edessa was up 10% over the prior year. While we may all think of the second quarter of 2020 as the height of pandemic impacted results, I would like to remind you that our second quarter in 2020 included a record low month, April, and a record high month, June. Given the industry headwinds, particularly around the commercial vehicles, as Peter mentioned, we are pleased with 10% year over year growth. I am not providing a same store growth rate because we have integrated all of our US digital dealer to dealer business on the Backlot Cars platform. If I include the Backlot Cars volume for the second quarter of 2020 in our denominator, Our growth in volume is 4%. I think most impressive in our performance is the 65% growth rate in digital dealer-to-dealer for the U.S. and Canada. I have included the backlot cars volume in both years, so this is an organic growth rate for the business. We've benefited from strong auction fees in the Odessa segment. Auction fees for vehicles sold of $333 was up 21.5% from the prior year. we've benefited from strong used car pricing in our marketplaces. Average selling price for all vehicles in the second quarter was $16,400 compared to $14,800 one year ago. As I dug into the details of our auction fees, I found that increased average selling prices was not the biggest impact on average auction fees for vehicles sold. Average auction fees on off-premise transactions increased from $119 in 2020 to $153 for 2021. This increase was accomplished even though average selling prices for total off-premise transactions declined slightly as we grew the digital dealer-to-dealer channel 65% while the off-premise commercial volumes declined 15% in the second quarter. The average auction fees for the digital dealer-to-dealer marketplace, our fastest growing marketplace, was $268 per vehicle sold an increase of only $1 from the prior year. I point this out as some may believe our increased auction fees is completely driven by record high used car values. While increased used car values is a factor, it is not the most significant contributor as some of our digital marketplaces do not have auction fee structures that are highly correlated to used car values. Our services revenue has also rebounded even though it is not near fully recovered due to the limited supply of commercial vehicles. The mix of revenues is contributing to our improved gross profit. Our services revenue mix is less concentrated on the low margin transportation revenue and more concentrated on value-added ancillary service. We have all seen the strong used car performance of public retailers. In some ways, this is confusing when you look at the wholesale markets and we discuss a lack of supply. However, this situation is creating an opportunity for Odessa. A number of used car retailers have called upon us to provide retail-ready levels of reconditioning to help them meet consumer demand. Based on our early successes with various retailers, we expect to grow revenue from this service offering. AFC's strong performance was driven by tremendous growth in revenue per loan transaction. As the provision for credit losses is a contra-revenue account for a finance entity, the significant reduction in the provision for credit losses was a key factor to improved revenue. However, another key contributor was interest and fee income per loan transaction that increased to $191 per loan transaction from $155 per loan transaction last year. This demonstrates the impact of having over 50% of the revenue for AFC from fees creating less dependence on interest rates to drive revenue. Lower interest rates on floor plan loans were offset by higher average loan balances due to the record high used car values. Also contributing to the strong second quarter results for ASC was lower direct cost and discipline control over SG&A. Now let me speak to the items that impacted operating adjusted net income per share. We currently hold the common stock of CarLots, a publicly traded company that requires us to mark to market our investment. CarLots went public through a SPAC transaction in late January and this resulted in us recording our investment at market instead of cost. As the stock price of car lots has declined since March 31, we have reduced the unrealized gain on investments by $11.9 million. This required adjustment to the carrying value resulted in a reduction of net operating adjusted net income per share of 4 cents net of income taxes. We also recorded $4.5 million of accrued contingent consideration related to the cars-on-the-web transaction as the performance of Odessa Europe, formerly cars-on-the-web, has exceeded the amounts recorded using a Monte Carlo simulation of possible outcomes at the time of purchase. Our performance in Europe continues to be strong despite the lack of supply, and I expect we will record additional contingent consideration through the end of this year when the earn-out period ends. The earn-out is capped and we are recognizing the increase to the maximum out-of-payment amount ratably over the year, so the quarterly expense should not increase from $4.5 million. This is purchase price and will be paid to the previous owners, but GAAP requires the adjustment to contingent consideration be recorded as other expense. It is not included in SG&A in our financial statements. Let me close with comments on our capital situation. We continue to have a strong balance sheet with our focus on controlling costs and managing the business through a low point in supply in our industry. We deployed $100 million to purchase car stock in the open market at an average purchase price of $17.77 in the second quarter. Year to date, we have repurchased $180.8 million of car stock in the open market at an average purchase price of $16.66. We have just under $110 million left on our share repurchase authorization. We have sufficient working capital available to support the business through the current economic cycle and also invest in strategic growth as opportunities arise. Through the first half of 2021, our capital expenditures totaling $50.7 million have been focused primarily on our digital marketplaces and preparing our platforms for growth we expect to be driven by a cyclical recovery over the next several years. We will continue to invest responsibly in the future of our business through capital projects and maintain or improve our leadership position in the wholesale used car digital marketplaces. Although the root cause and duration of the current environment in our industry is much different than 2009 and the period that followed, I also see many similarities in the impact on volumes, trends in used car pricing, and the prospects for recovery following a period where we are at the bottom of the down cycle in our industry. I continue to see great opportunity for Carr and its investors once the cyclical recovery begins in the near future. Thanks for your time today, and we will now take your questions. Stephanie, you can open the line.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. That's star one. Your first question comes from the line of John Murphy with Bank of America.

Good morning, everyone. This is T.T. Fletcher on for John Murphy. Thanks for taking the questions. I guess to start kind of to follow up on a question I think Murph asked last quarter, when we think about the portfolio of services and channels through which your dealers can buy and sell vehicles, it's a pretty long list of names like dealer blogs, back lot cars, open lane, et cetera. And you've already taken steps to start consolidating with TradeRev, migrating over to back lot cars. But have you undergone or would you consider undergoing a more extensive review and channel check with your dealers as you perhaps you know, try to figure out the customer education process of all these platforms and how you may be able to better leverage economies of scale or at the very least the Adessa brand through additional consolidation? Thanks.

Thank you, Titi. That's a very good question, and it is something that is on my mind and something that we are looking at and working on. You know, I think on the last call I spoke about one of the priorities being to simplify the business make it easier for our customers to understand and do business with us, and also make it easier for investors to understand. Because as you mentioned, our business is quite complex. And I think there are opportunities there. I also think those opportunities do play into our cost structure. And I mentioned the importance of that as a long-term focus point as well. And that goes to the platforms we operate, the brands we support, but also the way we do business activities, particularly things like back office functions, title processing, funds processing, arbitrations, customer support, and so on. So I guess what I'd say, TT, without going into all of the details, that is an area of focus. We have plans in development and in implementation on many fronts. And I do look forward to talking with our customers and our investors about the specifics of those in the not too distant future. but your comment is a good one, and it's something that we recognize and are focused on. And I do appreciate your comment on trade rep and backlot. I think we made a big step forward with the consolidation of our U.S. digital dealer marketplace onto backlot. So to be very clear, in the U.S. digital dealer market, there is one brand. It's backlot cars. And in Canada's trade rep, we do not have two brands in either market. It's one brand in each market.

That's great. Thank you. And then I guess just one more follow-up. As we head into 2022 and see a stabilization in terms of production, restocking inventory, and more of a return to normal in terms of vehicle churn in the secondary market, can you maybe remind us how you think about what may be a more sustainable mix of vehicles sold like in on-premise versus off-premise? So directionally, is it possible that on-premise could potentially outperform off-premise next year with vehicles from channels like repos and rental car companies picking up once again? Or are the secular tailwinds behind the off-premise business so strong that it should consistently outperform on-premise?

You know, it's a good question, Titi. Thanks for that as well. And as you know, the last two quarters, off-premise sales have been slightly greater than our total on-premise sales. I would say that as I look to the future, the good news for our business is I think there will be dynamics that drive increased volumes in both of those channels. Our off-premise sales, frankly, in the last two quarters, have been negatively impacted by the decline in off-lease volumes. We sell a lot of off-lease cars through an off-premise model on open lane, and we've had negative supply dynamics on the off-lease side that I just talked about. So I think as that set of factors reverts closer to normal, we will see a strong positive driver of volumes within the open lane channel, coupled with hopefully strong continued growth with backlot and trade revs. So I think in absolute volume terms, we should see growth in off-premise sales, but also we should see growth in on-premise sales with return of repo volumes, increased off-lease volumes at auctions, and so on and so forth. So my gut feel on it is that off-premise sales will continue to have the edge, but that we will see good growth in both categories.

That's all very helpful. Thank you so much for taking the questions.

You're very welcome. Thank you.

Your next question is from Brian Brinkman with JP Morgan.

Hi. Thanks for taking my question. I wanted to start with a couple on the digital dealer business. So in 1Q, you grew units year over year significantly faster than the competition, up 81% versus ACV, 55%. Now you've grown 65% in the second quarter. Could you speak to the drivers of that growth and what the traction has been with dealers in the quarter with regards to the 24-7 bid-ask approach or other aspects of the backlot platform? And while ACB has yet to report, do you have any early sense for whether you may have, again, grown more quickly than the competition in the second quarter? And just with regard to the 19% sequential growth in digital D2D units, are you able to say whether this was in line with or maybe exceeded your expectations, or what kind of sequential growth do you think might be achievable going forward?

Thank you, Ryan. I appreciate that. You packed a lot into that question, so let me try and unpack it a little bit. First, with respect to our competition, I really don't have insight into their volume, so I can't comment on that. With regard to our own growth, I would just say both year-over-year comps, whether it's the 80% in Q1 or 65% in Q2. Obviously, there were COVID impacts in the quarters last year that are relevant to those comps that can tend to distort those numbers. And those kind of fell differently in both quarters. But I was very pleased with the performance in the channel. And I think fundamentally it's driven by strong growth in all of the supporting metrics, number of dealers participating on the sell side, volume of vehicles posted, number of dealers participating on the buy side of those marketplaces. So all those trends sort of run in line with volume growth overall. So I'm pleased about that. I also mentioned in my remarks that that we did see a slightly weakening conversion rate, certainly in the later part of the quarter, mid to late quarter. I think as used car prices got to such a strong level, we saw them sort of stabilize and even start to fall back, and that had a negative impact on conversion. So, you know, perhaps some of the growth in metrics on vehicles posted might have even been stronger than the sequential growth in volume sold. Beyond that, you know, some of the other positives that I'm very pleased about, you know, seeing what I would say is evidence of growth in the TAM overall, increased volumes, both US and Canada, of dealer vehicles being transacted through what I'll call formal channels, digital and physical, versus, you know, similar quarter two years ago. And I think profitability in Canada on a trade rev platform, and not marginal profitability, but strong profitability. So I feel really good about the quarter we had. Obviously, we're continuing to execute and continue to try and drive growth in both of those marketplaces as we look to the future.

Okay. Thanks for all the color on the factors impacting industry off-lease volumes, including as relates to, as you mentioned, the increased equity that consumers have in their vehicles. Are you able to give us a similar rundown on what are the factors impacting repossession volumes? I realize whether your vehicle is repossessed or not, it might mostly come down for most consumers to more of a cash flow consideration as opposed to a balance sheet one. But also, some repos are voluntary, right? Or perhaps if you've got a lot of equity in your vehicle, maybe you prioritize paying that bill over... others or something. And then you got all the cash being mailed out with the monthly child tax prepayment. So what all is rolling up into the repo volume environment and how does this headwind compare in materiality for you guys relative to the off-lease headwind? And then how should we think about the timing of maybe when it might reverse from headwind to tailwind?

Yeah, thank you, Ryan. You know, you mentioned some of the input factors. I think they're all absolutely relevant to the situation affecting repos. Exactly how they connect into the volumes, I think, is a little bit more opaque, right? But clearly, I'd say government stimulus and associated consumer protections, moratoriums on evictions, and I'd say some hesitation among the you know, a lot of the lender community, some of those large retail brands to be out repossessing vehicles in a pandemic situation have all contributed to below normal repossessions. So, again, I expect that to moderate over time. I think the key factor among all the ones you mentioned is probably government stimulus, because I think that affects cash flow and day-to-day, week-to-week, month-to-month budgeting for people who might otherwise be in difficulty of not making their car payment. So we're monitoring it closely. One of the businesses we own is a a SaaS platform that manages repossession activity across this industry, so we have pretty good visibility into that. We're seeing a fairly stable environment. I'd say very slightly increasing, but still below normal to the tune of about 30-35%, as I mentioned. Again, over time, I expect it to return towards normal. I do not expect a glut of repos that is going to sort of suddenly head above normal and there's a large glut coming through, but I do expect it to return towards normal over time.

Very helpful. Thank you.

Your next question is from Craig Kinison with Baird.

Hey, good morning. Thanks for taking my question. I'm curious. We know CarMax and others have really bolstered their ability to purchase cars directly from consumers by developing online valuation tools. You enter a VIN, a few other bits of information, and they make a hard offer. They've always sourced directly, but I'm wondering if you think that online tool could be disruptive for your business. And then I'm also wondering whether you could take your assets and create a similar tool for dealers to compete with that emerging way of liquidating vehicles.

Greg, thank you very much. And again, another very good question. And all very relevant to some of the discussions and product development ideas that we have going on here at CAR. So first of all, if I look at companies like you mentioned, the CARMAX and the independent used vehicle retailers online and omnichannel retailers, Clearly those businesses have seen a lot of growth. I think they've been helped by the used vehicle value situation. I think it's been a positive. And clearly purchasing cars for consumers in this market has been something that all very focused on and doing that online. You know, those entities are very important customers of ours and have been, you know, over time. And as Eric mentioned in his remarks, I think increasingly important as we look to the future. And I think we, we have a very good relationship with, with, with those types of entities and, and continuously growth opportunities there. I will say that we're also seeing, I'll call, some of our more traditional business partners, franchise dealers, dealer groups, motor manufacturers, also adapting to that changing, you know, more digital used vehicle retail market. And I think, as you mentioned, Craig, there are things we can do to help those customers too, and we're focused on that. I'd also say, you know, in an environment where used car prices are up 30% to 40%, I'd be careful extrapolating too much out of the current quarter and saying that's a hard prediction of the future because I think we should expect some, you know, some reversion towards normal. But bottom line is we believe there is a more digital market for retail used vehicles in the future. That's one of the reasons we believe that we need to be a more digital market for wholesale used vehicles because we think that enables us to serve those customers better. I think, Craig, you're hitting on some good points. Some of the assets we have in terms of our digital marketplaces and the liquidity and the data that we have can enable all of our customers to better address a more digital retail market. And we're focused on that. And I see opportunities there going forward. I look forward to talking about that at some point. And as Eric mentioned, we're also seeing a strong demand for retail reconditioning services. And that's something that's relatively new in our business. But in the past, we were accustomed to having to get cars refurbished. I'll call it reconditioned to a wholesale standard. We're now being asked to get them reconditioned to a retail standard, which is a higher standard. It involves more expenditure, and we're seeing strong growth in those volumes, and we're seeing a good ability to execute that business effectively and profitably. So we see that as an opportunity going forward as well.

Great. Thank you.

Your next question is from Daniel Embro with Stevens Bank.

Andrew Ryan on for Daniel. So in the rising vehicle backdrop, did you guys see a positive impact to Odessa assurance from prices going up sequentially? And then I guess to follow up on that, you know, with things slowing down, would you see another impact as things moderate?

Thank you, Andrew. I appreciate that question. I guess in a short answer, I'd say yes. A rising used vehicle market has sort of reduced the risk around Odessa Assurance. And we saw some positive, you know, Odessa Assurance has been a positive and profitable product for us. We saw that maybe enhanced a little bit in the first half of this year. I wouldn't say it's material to our numbers. Eric will weigh in here in a second as well. And I would say that as you enter a declining used vehicle value market, that's something you need to be very mindful of. And we have demonstrated the ability to do that and execute that in the past. So I'm not enormously concerned about that, but it is a factor. Eric?

Yeah, Andrew, I was going to point out with high used car values, dealers are very nervous about making a mistake. Therefore, they're very interested in having assurance-type products across all our platforms. So we have a higher take rate and lower losses because, of course, the values have been maintained. So the model perhaps is a little more profitable than the long-term model should be relative to how we underwrite those losses. But at the same time, it really builds confidence in the digital marketplaces where you aren't really touching the car before you buy it. So it's been a real positive for us.

Thanks. That's some helpful insight there. And I guess like a follow-up. So what growth levers do you guys see in the dealer to dealer channel? And, you know, have you seen competitors leaning in the price?

So growth levers, again, we are very focused on, you know, growing, I'd say in particular, our digital offerings. We think that's a new offering. There seems to be high, I'll say a newer offering. There seems to be a strong level of customer receptivity and interest in that product. We think we're well positioned in that market with a strong product and a strong offering associated with that, and hence the deposit numbers that we're seeing. So we're certainly focused on that. Some of the things that Craig mentioned earlier on the ability to help dealers with you know, a more retail used vehicle trading experience is a sort of an adjacent area, you know, related to that business as well.

Okay. Thank you.

Your next question is from the line of Brett Jordan with Jefferies.

Hey, good morning, guys.

Morning, Brett.

On the digital dealer to dealer, do you guys have any, I guess, anecdotal or, or, or, real information as far as how much of this is incremental. You talked about cars that maybe didn't go in a formal channel previously now going through maybe a backlot type platform, but maybe I guess either looking at like average value, how do these compare to what you traditionally sold or maybe how much of this volume might have been in an informal channel and that 65% growth?

Yeah, good question. Thanks, Brent. I guess I mentioned in my remarks, we do see evidence. Let me share, I guess, qualitatively the sort of data we're looking at. So I look first at Canada. Canada is maybe a more mature market from a digital dealer to dealer standpoint. It's also a market where we have strong market share both physically and digitally with Odessa and TradeRev. And what we've been seeing in Canada, we've been seeing this for a number of quarters now, let me say. We're seeing that the aggregate volume of dealer vehicles sold in that market is growing and is increased versus any prior quarter sort of pre-digital. So it does appear that the trade drive offering is bringing in vehicles into the marketplace that didn't previously come to our physical auctions. And again, in Canada, we are the largest operator of physical auctions with more than 50% share. So, you know, we don't have full industry data there, but a strong trend evident in our business of increasing volumes at the aggregate level. Obviously, there's a mixed shift towards digital, okay? But the aggregate, the total of both is also increasing and has been doing so consistently. We also saw some evidence in the United States, and it's more of an industry-wide evidence in Q2. So in Q2, based on, again, my review of AuctionNet data, is the total volume of dealer vehicles sold at U.S. physical auctions was about the same as Q2 of 2019. Okay, so Q2 of 2021, roughly the same as Q2 of 2019, and that was physical auctions. But on top of that, the digital providers, such as backlot cars, grew substantially. So the aggregate of physical plus digital increased significantly from Q2 of 2019 to Q2 of 2021. So I think that's the first quarter that trend was evident, but I don't think it'll be the last quarter. And I do think there's evidence that these digital platforms, yes, there is some cannibalization, don't get me wrong, but they are also bringing in vehicles that we're not coming to physical auction for, but we're transacting through what we've called more informal channels in the past.

Okay, great. I guess, could you give us maybe a profile? I think back in the spin, we were talking about the average transaction value being something like $8,000. Is that still the case, or is that migrating up just as value?

It's been migrating up. Some of that is driven by just the increase in used vehicle values overall, but some of that is also driven by just a slightly newer, lower mileage car being offered in these marketplaces. So we're seeing the value migrating up, and we saw it migrate up substantially again in Canada, where it tends to be higher than in the U.S., but it's migrating up in both marketplaces.

And, Brad, just to put some numbers behind it, dealer off-premise across all our marketplaces, you remember the number of 8,000 back from 2019 is now over $10,500 for dealer off-premise alone on average sale price. And the only other segment of our business that has a much higher increase would be our international average sale price is up even more than that. So all the others, this is kind of leading or near the top of all the increases in gross auction proceeds per vehicle sold.

Great. Thank you.

Your next question is from the line of Bob Levick with CJS Securities.

Good morning. I just wanted to follow up on that last question, make sure I understood the share, I guess. In terms of dealer cars, including digital as well, I think your cars were up 6%, including backlot 4% versus 2019. And I think you just said that essentially the market at auction was flat versus 2019. So first, did I hear that correctly? And if so, then obviously you're gaining share, which is fantastic. Where do you think the share is coming from? And what are the impediments to faster growth going forward? Is it your account relationships? Is it your inspectors? What are you doing to further gain share?

Bob, thank you for that. I didn't comment specifically on share in the dealer segment. Clearly, our digital platforms are growing. We're pleased about that, 65% in the quarter. And I mentioned that there's evidence that physical auctions are Over the two-year period from Q2 to Q2, we're essentially flat in the U.S., but you can do your own math, obviously, based on that. In terms of what are we doing to further increase our volume, you mentioned inspections. That hasn't really been a constraint for us. It can be tactically an issue we have to look at in certain markets from time to time, but generally we've been able to scale at the appropriate level, and we've seen continuously strong growth in postings. I'm very pleased about that. I'd say the account relationships is an important one. You know, it's really a matter of getting trial and getting use by customers, getting them introduced to the platform, both on the seller side and on the buyer side, getting them to try the platform, getting them to have early success. So we're focused on, you know, the funnel of bringing new customers to the platform, activating them, retaining them, growing their volumes over time. And it's very sort of disciplined process. approach to that and you know I'm pleased as I mentioned in my remarks we did in the quarter in addition to best ever volumes we also had best ever numbers of sellers participating buyers participating and obviously volumes posted so I think the account relationships and the activation and ensuring the customers have a great early experience are the most critical factors and Bob I want to clarify the 4%

including backlog cards, was of total volume, not specifically dealer consignment. So that's the net of a decrease in commercial and an increase in dealer consignment in total volume in the quarter, just to make that clear.

Okay, thank you. Great. And then just for my follow-up, you also gave some really nice stats as it relates to the commercial side. I think you said that consumers have about $8,000 in equity in cars in Q2 versus zero two years ago. What's the kind of, you know, long-term average level, and what does it take to get those off-lease cars flowing back through auctions? You know, what level of equity would get you moving positive and getting those volumes back to the auctions?

Yeah, Bob, thank you. And, you know, that number, I just want to clarify, that is an internal metric. It's It's an effort by us to get to the number, and it may not be as precise, so I gave it as a sort of a general approximate number, so I just want to characterize it as such. I would say the long-term average tends to be below zero. Most OEMs, when they write leases, they're trying to create a situation to create a long-term customer relationship. And their ideal is that the customer will return the lease at the end of the three years and drive away in a new vehicle of the same brand. So they structure the leases to obviously not put too much risk, not take on too much risk in the finance product, but achieve that outcome. So I would say as a long term average, the equity situation in the average consumer's lease vehicle tends to be slightly negative. So this is sort of, at $8,000, that is historically unprecedented. We have never seen anything even close to that level in any prior period, at least any period that I've looked at the data. And I would say we typically see it in a range of maybe plus $1,000 to negative $3,000 in our industry, depending on market and other factors.

And while the calculation may not be identical, back in 2011 and 2012, positive equity was especially on luxury brands gotten that four to 5,000 range. It never got this high just as a matter of comparing to another period. And Peter, that was your open lane days, but, but it was, it was substantially less than what we're seeing now. However, it still was the same outcome, positive equity of three to 5,000 might've been the range.

So, so Bob, what's going to take to drive a return and off lease volume, ultimately new car production, more new cars on dealers' lots. That ultimately will, I think, take some of the air out of the used car price bubble and we'll see a moderation of used vehicle values and that'll sort of start to change the dynamic around the equity position in these leased vehicles. And that's the set of facts that I think the set of facts that we need to see play out in our industry for that to happen. But I think it will happen and we're seeing evidence of that and we're also seeing evidence of used vehicle values in our industry moderating and starting to fall back you know, in the past, you know, four to six weeks.

Thank you, Bob. Thank you very much. We have two more people in the queue for questions. We're going to try to get through them quickly, and Peter has a closing comment. So if we could do the next two questions very quickly.

Your next question is from the line of Stephanie Moore with Truist.

Hi, good morning.

Good morning, Stephanie. Good morning, Stephanie. Good morning.

I was wondering if I could just touch on maybe what you guys are seeing quarter to date in 3Q here. And if you're seeing any evidence that volumes, you know, could increase quarter over quarter on the commercial side, just wanted to kind of think through maybe some of your comments, Peter, that, you know, Q2 volumes have troughed or if we're starting to turn the corner here. So any color you can provide would be helpful. Thanks.

Stephanie, thank you, Stephanie, for that. I don't want to comment too much on the current quarter, but the supply constraints I talked about didn't end on June 30th. We're in a situation in our industry where we're just in a period of tight supply. I think we're seeing some evidence, as I mentioned, of moderating used car values. We've got stuff going on with OEMs trying to increase production, and we've got stuff going on in Washington around stimulus and moratoriums and whatnot. So we watch it carefully, but I think we're at the bottom. In terms of volume, I don't think the situation worsens, but I also think the recovery will take time.

Got it. No, that's very helpful, and I'll pass it on from there.

Thanks, Stephanie.

Your last question comes from the line of Ali Fagri with Guggenheim.

Good morning, Peter and Eric. Thanks for squeezing me in here. Just a quick clarification question, since I think it's super helpful you're giving the auction that industry data figures. So you said commercial volumes were down 48% versus 2019, and dealer volumes were flat for the industries. So how does that compare with your commercial on-premise and dealer on-premise versus 2019, just so I make sure I have the right numbers?

Our commercial on premise was very similar to AuctionNet. We were slightly positive to the AuctionNet number, Ali. In the dealer category, we have lost volume in the physical dealer category by our decision not to run cars. That was a known risk of the strategy and the lean into digital. So that's a known factor. So our volume in the dealer category underperformed. So I guess what I would say is we did better. in terms of our commercial performance physically relative to the industry, and we did worse on the dealer side, and that was a known – the dealer side was really driven by the move to a digital model, which was a conscious decision and a known risk.

Okay, got it. That's helpful. And then just quickly, on digital dealer-to-dealer, can you disclose what percentage of those volumes are coming from the U.S. specifically through the Backlog Cars platform and maybe help us understand how much the U.S. grew for Backlog Cars in the second quarter?

We do not give that level of granularity, Ali. However, the U.S. growth was substantially higher than the Canadian growth. It's a much bigger market, and as Peter mentioned, Canada is a more mature digital marketplace. It was very substantial growth in the U.S. dealer-to-dealer digital marketplace.

Got it. Is it fair to say that a meaningful portion of the 120,000 volumes are from Canada for the digital dealer-to-dealer, or is that not fair?

No, no, it's a meaningful portion, but becoming less and less. When I say meaningful, it's not a small number. However, it's becoming less and less a percentage of the total because the growth rate in the U.S. is so much higher.

Got it. Okay, great. Thanks for squeezing me in. That's it for me.

Thanks, Ali. I appreciate that. So with that, I think we've moved to close. Okay. So again, thank you all for your time this morning and for the questions. I just want to close out with a few remarks, you know, reinforcing what myself and the team here at CAR focused on going forward. Again, we are a digital marketplace business. We have industry-leading digital platforms supported by a nationwide infrastructure facilities that help prepare vehicles for sale. Our focus is building out those platforms, our capabilities, and our skill sets to be a true digital marketplace leader when it comes to wholesale use vehicles. Second, I believe we have a significant opportunity in front of us with the growth of our off-premise volumes and the expanded addressable market for our services, and we're going to continue to seek to build on the strong volumes and growth rate that we have demonstrated in this segment. As I mentioned on this call, I'm focused on simplifying our business. making it easier for our customers to understand and to do business with us, making it easier for investors to understand. Also matching our costs to our volumes and the mix shifts and making sure we continue to demonstrate strong unit economics and strong overall performance going forward. And finally, I believe that our performance in the most recent quarter, which again was delivered in spite of historically low volumes of vehicles from commercial sellers across our industry, speaks to the strong margin characteristics of our more digital model and ought to be viewed as a predictor of even stronger performance as the volumes return. So on our last earnings call, Eric mentioned our intention to hold an analyst day in the fall. So I'm very pleased to let you know we've decided to hold that event on Tuesday, September 21st at 11 a.m. Eastern time. The event will be virtual and we're looking forward to be able to present at a greater level of detail the opportunity that lies ahead of us here at CAR. We will be sending out a save the date notification And I'm very much looking forward to what I hope will be a well-attended and informative event for everybody. And with that, we'll end this morning's call. Thank you all very much.

Thank you. This concludes today's conference call. You may now disconnect.