OPENLANE, Inc.

Ladies and gentlemen, thank you for standing by. The conference will begin shortly. Please continue to hold and thank you for your patience. So, Thank you. Good day and welcome to the Car Auction Services Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Mike Eliasson, Treasurer and Vice President, Investor Relations. Please go ahead, sir.

Thanks, Matt. Good morning, and thank you for joining us today for the CAR Global Third Quarter 2022 Earnings Conference Call. Today, we'll discuss the financial performance of CAR Global for the quarter ended September 30th, 2022. After concluding our commentary, we'll take questions from participants. Before Peter kicks off our discussion, I'd 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 Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect CARA's business prospects and results of operations. And such risks are fully detailed in our SEC filings. 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 to the applicable GAAP financial measure can be found in the press release that we issued last night, 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 to provide you with an update on Carglobal. During today's call, I will provide you with additional information and detail relating to the following. Our third quarter performance, our view of the current market factors that continue to impact the automotive industry, and a summary of our capital allocation activities. I'm going to speak about our business in two segments, a marketplace segment, which we formally call the ADESA segment, and a finance segment, which we formally call the AFC segment. To begin, Q3 was an important quarter in the history of our company. It was our first full quarter since we completed the divestiture of the ADESA U.S. physical auction business in May, and it marks the true beginning of what I believe will be a bright future for CAR as a more asset-light digital marketplace company. I am pleased with the results that we've produced across the organization. especially given what continues to be a very challenging industry and economic environment. During the quarter, we increased revenue, total growth profit, and adjusted EBITDA. We met our cost production targets, and we reinvested in the platforms and technologies that will accelerate CAR and our customers into the future. And while these results do not reach the level of performance that we anticipate delivering in a more normalized industry environment, I do believe that they clearly demonstrate the strengths of our business and our ability to execute a highly focused strategy. So let me touch on some of the specific highlights in our third quarter results. For car overall, we generated $393 million in revenue. That was a 13% increase versus the same quarter of the prior year. Revenue excluding purchased vehicles increased 18% versus the same quarter prior year. We generated total gross profit of $183 million. This was an increase of 14% from Q3 of last year. And this growth profit represented 52.8% of revenue, excluding purchased vehicles. This resulted in Q3 adjusted EBITDA of $69.5 million. That was an increase of 4% from Q3 of last year. However, I would note that Q3 of last year included $10 million in realized gains from the sale of securities. If we were to adjust for this, the adjusted EBITDA increase would have been $12.9 million for the quarter, or 23% over the third quarter of last year. Q3 also represented sequential improvement in adjusted EBITDA compared to Q1 and Q2 of the current year. Specific to our marketplace segment, we sold approximately 314,000 vehicles in the quarter. Top of funnel supply remained relatively strong versus our expectations, with the number of vehicles offered by sellers in the quarter exceeding 2021 levels. However, conversion rates were lower than a year ago. This reflected the fact that used vehicle values were in decline for most of the quarter, and buyers were less willing to pay the higher prices sought by many sellers. Now, withstanding these dynamics, we were able to increase auction fee revenue per unit sold by 12% to $283, and we also increased gross profit per vehicle to $320. This was an increase of 14% over the third quarter of last year. In our finance segment, we experienced another solid quarter of performance as AFC continues to grow its floor plan finance business. Our finance segment generated revenue of $99 million in the quarter, an increase of 31% over Q3 of last year. This was driven by 13% growth in the number of transactions and 16% increase in revenue per transaction, which increased to $250 for the quarter. Interest income represented 54% of AFC revenue for the quarter, That is 700 basis points of an increase from Q3 of last year and is consistent with the higher interest rate environment that we see today. This also demonstrates that a higher interest rate environment can be positive for AFC. So overall, I think there's a lot to be pleased about in the third quarter performance, particularly in light of what has continued to be a challenging environment. The proactive steps that we have taken to transform our operating model, reduce our cost structure, and advance our digital vision are beginning to take shape within our results. To be absolutely clear, I do not believe that our third quarter results reflect the high level of performance that I'm confident this company is capable of delivering in the future. However, I do believe we're demonstrating our ability to execute on the fundamentals of our business. And as a whole, I believe our results provide an outline of even stronger performance as the industry turbulence settles and as we continue to advance our digital strategy. So now I'd like to highlight a few areas of progress from the quarter where we are advancing that strategy and that I believe will benefit our performance in the future. The first is platform consolidation. One of our primary objectives is to simplify the customer experience and increase engagement across our marketplaces. In the United States, we have now successfully combined the backlot cars and car wave marketplaces into one digital venue. In October, we deployed a new auction format within the Backlot Cars platform, which builds upon the previous CarWave format and complements the existing Marketplace format within Backlot Cars. So we now offer our sellers and buyers the choice and flexibility of two distinct formats, a Marketplace format where vehicles can be offered and purchased throughout the day, immediately as they're loaded, and an auction format where groups of vehicles are set for time sales, which are currently scheduled for twice every week. We are focused first on deploying the auction format in the markets where CarWave already existed. Once this is complete, we expect to begin a national rollout of this format to all remaining markets in the United States. In Canada, we've also made significant progress on our effort to consolidate the TradeRev and ADASA marketplaces. We launched a beta version of that combined marketplace in July to a limited number of customers, and the feedback has been positive. In October, we began expanding that data to a broader base of dealers with additional new features and capabilities added. As these consolidation efforts progress, we expect increased engagement from our dealers, increased efficiency within our technology development and operations, and improved results across our marketplace business. The second strategic focus area I'd like to cover is pricing. We continue to make some adjustments to pricing in the third quarter, and we were successful in getting a number of fee increases and new revenue streams put in place in both our dealer and commercial business. Some of these had a positive impact in Q3 and are reflected in our unit economics. We expect others to become effective in Q4. To be clear, regular price increases are not a key component of our strategy for growth. However, the fact that we've been able to make these price increases demonstrates the strength of our offerings and the strength of our longstanding customer relationships. The last focus area I'd like to speak to is cost management. The ADESA transaction created a catalyst to restructure our business to reflect a more asset-light digital operating model and to help respond to the current realities of our market. We made a commitment to reduce our annual SG&A run rate by $30 million, and we are on track to achieve that goal ahead of schedule. This positions us to exit the year below $400 million in terms of an annual SG&A run rate. We do expect some quarter over quarter fluctuation as certain cost reduction initiatives may require short-term cost increases to help achieve sustained savings thereafter. It's also important to note that achieving our 2022 cost savings target was only a starting point. Discipline cost management and a focused investment strategy will remain a priority for this business going forward. We have a roadmap in place for continued improvements in our efficiency and effectiveness. and these will deliver first further cost reductions in Q4 and into 2023. Those savings should help us continue to focus our investments into the technology, talents, and resources necessary to power cars' long-term vision and strategy. I'd like now to look towards the future and provide some details around the industry outlook, the macro environment, particularly in the areas of new vehicle production, used vehicle pricing, wholesale used vehicle supply, as well as the outlook for commercial volumes. And my comments are based on our assessment of publicly reported data, as well as recent discussions with some of our largest customers. New vehicle production and supply continues to be a challenge, and it's taking OEMs longer than expected to solve their supply chain issues. In Q3, some OEMs did show increased production and new vehicle sales, but a significant number of them still had fewer sales than a year ago. My assessment remains that the supply side issues appear to have bottomed out when viewed on an industry-wide basis. However, I also think the recovery in production will be more gradual than most experts have predicted. Increased new vehicle production, coupled with a higher interest rate environment and a weakening economy, will likely put downward pressure on new and used vehicle pricing. Over the course of Q3, we observed a steady decline in used vehicle values in the industry, and at a rate that is above normal for this time of year. We expect this decline in used vehicle values to continue through at least year-end. Ultimately, I believe that a decline in used vehicle pricing will be a long-term positive for a business, as I believe it will allow more vehicles to flow into the wholesale channel. In the near term, however, a declining market is often characterized by lower conversion rates, and this can be a near-term headwind to the business. An industry-wide lack of wholesale used vehicle supply also remained evident in Q3. For example, physical auction volumes, which remain a good proxy for industry volumes, were down 8% below the third quarter of last year, and we're 37% below the pre-COVID levels of Q3 2019. In fact, Q3 of 2022 was the second lowest quarter for physical auction volume since the pandemic began. So I'm very encouraged by the fact that we can deliver a strong performance in this environment where industry volumes are still well below normal levels. I do expect those volumes to increase over time, although I think it's prudent to expect that this will be a gradual increase and not a step function. And I believe that our focus on being a digital marketplace will enable us to grow faster in the longer term as volumes recover in our industry. A key driver of the anticipated volume increase will be the supply situation relating to the volume of vehicles being offered by commercial sellers, particularly in the off-lease segment. We continue to see fewer off-lease vehicles being returned compared to one year ago, but the level of that decline has lessened. From our own analysis, the equity gap which is the difference between the market value of maturing lease and the residual value in the lease contract, has declined meaningfully in the third quarter. However, a further decline is likely needed in order for more of those vehicles to start to flow into the wholesale channel. I'm confident that leasing will remain an important element of OEM and dealer sales strategies, and that our strong footprint with off-lease vehicles will be a significant positive for this company in the years to come. Through my ongoing discussions with our customers, I believe that in the future, our customers will seek to sell an even larger percentage of their portfolios digitally than they did pre-pandemic. I also want to comment on how the current environment impacts AFC. As used vehicle prices continue to decline and as interest rates increase, this may tend to increase risk within our finance business. However, AFC has best-in-class safeguards and processes in place that utilize all of the data that we capture to flag dealers that may be under stress within their business. So while we do anticipate some level of increased risk as we enter 2023, we do not expect it to return to pre-COVID levels. And we believe that AFC will continue to produce strong results through year end and into next year. I'd now like to provide some insight on my expectations for the fourth quarter relative to Q3. On the positive side, we expect to benefit from the full quarter impact of our cost and pricing actions that we took in Q3. We also have additional cost and pricing actions that will become effective in Q4. On the negative side, Q4 industry volumes have historically been weaker than Q3 volumes. Also, foreign currency was a negative in Q3, and that is expected to be even more evident in Q4. Irrespective of the Q4 outcome, I am highly focused on executing our strategy, building on the positive momentum of the third quarter, and positioning the company for growth in 2023 and beyond. I'd now like to provide a recap of our capital allocation activities. As I mentioned on the last call, the ADESA transaction itself generated approximately $1.7 billion of cash, net of taxes and fees. In the second quarter, we utilized over $900 million to repair term loan B, as well as amounts outstanding on our revolver at that time. During the third quarter, we repurchased, through a tender offer, 600 million of our senior notes. This leaves us with $350 million in senior notes that are still outstanding. Also, since the closing of the ADESA transaction, we have repurchased approximately 12.6 million shares of car stock at a total price of $182 million. I want to emphasize that our projections show that CAR will continue to generate cash going forward, With an asset-like model and considerably lower debt, we have less need to use our cash for capex that is tied to physical facilities or for servicing our debt. This should be a positive for us given the current macro environment. So to summarize my key messages for today, in Q3, we delivered an improved performance compared to a year ago and also compared to Q1 and Q2 of this year. I was generally pleased with this performance, and I believe that it begins to outline what this company is capable of delivering as volumes recover. In our marketplace segment, we increased revenue and gross profit compared to one year ago. We also increased our revenue per unit and our gross profit per unit sold. We experienced another solid quarter of performance in our finance segment, with AFC meaningfully growing revenue and revenue per unit. In addition to the financial results, we made significant progress in areas of platform consolidation, pricing, and addressing our cost structure. Volumes continue to be a challenge in our industry. However, as we look to the future, we expect new vehicle production to increase, used vehicle pricing to decline, and a gradual increase in wholesale used vehicle volume over time. I believe that our digital focus will enable faster growth in that type of environment. I'm excited and energized by the many opportunities ahead, and I believe that we have a significant opportunity for long-term growth. We have a differentiated offering, a diverse and expanding customer base, and a large addressable market in which to innovate and invest. So with that, Eric will now provide you with a more detailed review of the financial results for the third quarter. Eric? Thank you, Peter.