OPENLANE, Inc.

Good morning and welcome to the Car Auction Services, Inc. 2022 Year-End Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mike Ariason, Treasurer and Vice President, Investor Relations. Please go ahead.

Thanks, Kate. Good morning, and thank you for joining us today for the CAR Global Fourth Quarter 2022 Earnings Conference Call. Today, we discuss the financial performance of CAR Global for the quarter ended December 31st, 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 CAR'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'll 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 yesterday, which is also available in the investor relations section of our website. Now I would like to turn this call over to CAR Global 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 CAR Global. During today's call, I will provide additional information and detail relating to the following items. Our fourth quarter and full year 2022 performance, our view of the current market factors impacting our industry, our outlook for 2023 and beyond, 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, Q4 was our second full quarter as a more asset-light digital marketplace company. Against the backdrop of an unusual and still very volume-constrained industry environment, we increased revenue and total gross profit while reducing our overall cost structure. We made significant progress to position our company for improved performance in 2023, by simplifying our business and consolidating a number of our platforms and operations. And we positioned our company for growth in 2023 and beyond. So let me touch on some of the specific highlights of our fourth quarter and full year performance. For the fourth quarter, we generated $373 million in revenue, a 4% increase versus the same quarter of the prior year. Purchased vehicle revenue represented 12% of total revenue in the quarter. We generated total gross profit of $171 million, an increase of 4% from Q4 of the prior year. Gross profit represented 52.1% of revenue, excluding purchased vehicles. This resulted in adjusted EBITDA of $56.5 million in Q4. For the full year 2022, CAR generated over $1.5 billion in revenue. That was a 5% increase compared to 2021. purchased vehicle revenue represented approximately 12% of total revenue for the year. The company generated total growth profit of $685 million, an increase of 4% over the prior year. Growth profit represented 51.3% of revenue, excluding purchased vehicles. And that resulted in 2022 adjusted EBITDA of $231 million, which was below the lower end of our guidance range at 245. Specific to our marketplace segment, we sold approximately 289,000 vehicles in the quarter and 1.3 million for the full year. We again saw solid marketplace participation from both buyers and sellers, but used vehicle values declined throughout the quarter and conversion rates remained lower than the prior year. As a result, revenue in the marketplace segment decreased 2% compared to Q4 of 2021 and also 2% compared to the full year of 2021. In our finance segment, we experienced another strong quarter performance as AFC closed out a successful 2022. Q4 revenue in the finance segment was $101 million. That was an increase of 27% over Q4 of the prior year, driven by a 15% growth in transactions and an 11% increase in revenue per transaction. For the full year 2022, the finance segment generated $376 million in revenue. That was a 30% increase versus 2021. And that was driven by a 10% growth in transactions and an 18% increase in revenue per transaction to $241. I'd now like to highlight a number of areas where we made important progress in the quarter, progress that I believe will benefit our performance in 2023 and beyond. The first of these is platform consolidation. As I mentioned on prior calls, one of our primary objectives here at Carr is to simplify our business and the customer experience. We have now completed the integration of Backlot Cars and CarWave and have retired the CarWave platform and brand. The new auction format within Backlot Cars has been successfully rolled out in CarWave's core markets, and we're now focused on the national rollout of this auction format across the United States over the course of 2023. In Canada, we also continue to make progress consolidating the TradeRev and Adesa marketplaces. Using feedback and input from our pilot customers, we're finalizing the development work to connect all of our Canadian sellers, buyers, and vehicles into a single digital marketplace. By mid-2023, we expect to have one Canadian platform and one simplified customer experience. To support this change, we've also consolidated the leadership of our Canadian operations to better align our growth strategy, product roadmap, as well as our sales and marketing and customer support functions. And in our European business, we've successfully migrated the standalone ADESA UK technology and our dealer-to-dealer platform in Germany onto our ADESA Europe platform. This consolidates our technology processes and customers onto a single platform in that market, and the early feedback has been very positive there also. Now we anticipate making additional progress on these consolidation and simplification efforts in 2023. We will also be extending this work across our other brands, products, and services to better align them with our marketplace strategy. Ultimately, we believe that simplification will improve the customer experience and generate higher levels of customer engagement. Internally, it would also help reduce our IT maintenance costs, better focus our sales and marketing efforts, and accelerate new products and feature development. This brings me to a secondary strategic focus that I'd like to cover, and that is cost management. Last year, we committed to reducing our costs by $30 million by the end of 2022. I'm pleased that we achieved that goal, but our work in this area is not complete. Cost management remains a key part of our agenda, and cost consciousness will be a key part of our culture here at CAR. The savings that we achieved in 2022 are part of an ongoing initiative that will continue through all of this year. We have a detailed roadmap in place that we believe will deliver impact of a similar scale to what we achieved in 2022. One of the primary levers that will help us achieve these additional savings is the expansion of our global shared services model and leveraging it to improve the efficiency, consistency and cost structure in our technology and business operations. This initiative is already well underway with partners and locations selected in India and the Philippines, and we will continue building this out through the remainder of 2023 and into 2024. The nature of this work involves ramping up resources in one area while other resources are still in place, so while we do expect to see some in-year benefits during 2023, we will also see some overlapping costs, and the full impact may not be apparent until next year. What excites me more than our cost management activities, however, are the many opportunities that CAR has for growth. First, I believe that there is a secular shift towards digital underway in our industry, affecting both commercial and dealer-owned inventory. Digital channels have gained share in the past number of years. We are positioned on the right side of that shift, and we will continue to benefit from that. We are also highly focused on growing our market share within our current offerings. We have a strong differentiation as a digital leader with uniquely strong position with both commercial sellers and dealers, also with the scale, profitability, and strong cash flows to support our investments. We have mapped out several priority areas for innovation that will deepen our product portfolio, expand our customer relationships, and unlock new revenue streams for our company. To give you a few examples of these. First, we plan to roll out the auction format on backlot cars to all US markets within the current year. We see this as a lever to drive further customer adoption and additional volume in that channel. Second, we plan to integrate our commercial vehicles mainly off-lease vehicles and rental vehicles with our dealer-owned vehicles into one digital marketplace venue before the end of this year. This will increase the scale and breadth of our offering. It will increase the selection for buyers and also improve network effects. One marketplace for all of our open sale vehicles and for all of our sellers and buyers will be very powerful indeed. Third, AFC has gained share over the past number of years and we see further opportunity for AFC to grow its customer base and its portfolio particularly as dealers have more inventory on their lots and more inventory to finance. And finally, also in relation to AFC, we plan to increase the attach rate of AFC financing within our marketplaces through a combination of cross-channel sales and marketing efforts and also a simplified customer experience at the checkout. We have teams working on all of these initiatives and on many others, and I look forward to updating you on our progress on future calls. I'd now like to look towards the future and provide some details around the industry outlook and macro environment. From a macro environment perspective, we are beginning to see some positive signals of improvement. First, many of our commercial customers have indicated an expectation of increased new vehicle production in 2023. Also, we are now seeing new vehicle inventory on dealer lots is starting to increase with increased day supply. These two factors are the necessary ingredients to balancing supply and demand in the used vehicle market. Shifting to used vehicle values, we expect the significant price declines that we witnessed in the second half of 2022 to abate in the spring market conditions that typically prevail from January through May. However, we expect some downward pressure on used vehicle values will become evident again in the second half of this year. This may cause short term pressure on conversion rates, but I believe that in the long run, it will ultimately lead to greater transaction volume in the wholesale marketplace. Looking at the dealer to dealer space, According to industry data, in Q4, physical auction dealer volumes fell to the lowest quarterly level since the onset of the pandemic. And while volumes were also down in our digital channels, I was encouraged that we continue to grow new dealer registrations and increase our buyer and seller participation. It's also worth commenting that our car wave migration likely cost us some volume in Q4, as some dealers had to learn a new platform. But we believe these effects were limited to Q4. Currently, adoption continues to improve, and dealers have been positive about the increased choice and flexibility that our platform now provides. I'm excited about the opportunities ahead as we introduce this format to more dealers in new markets. In terms of the off-lease segment, in recent discussions with commercial customers, a number of them have signaled that we should expect a meaningful increase in off-lease volumes later in 2023. While that would undoubtedly be a positive for our business, we are being conservative for now and not modeling in any significant increase since we've had signals before that proved incorrect. A key question will be, how many of the off-lease vehicles that are scheduled to mature later this year will enter the remarketing channel when those leases end? According to our data, the average amount of equity value, that is the difference between the market value of maturing lease and the residual value of the lease contract, has declined by approximately 50% since it peaked in April of last year, This decline should help increase the volume of vehicles flowing into the hotel marketplace over time. I would point out that we are now, in these first weeks of this year, starting to see the first evidence of this happening in some, but not in all, of our customers' portfolios. And then finally, though our footprint is smaller in the rental and repossession categories, we are also starting to see some positive signs. And this, I believe, is a positive signal for our business also. Rental customers are beginning to take delivery of more new vehicles, and this should generate increased sales of older vehicles in their fleets. Repossession activity is increasing nationally, which many view as a leading indicator for the return of a more normalized industry environment. Looking at our finance segment, we see an opportunity to continue to expand our customer base and our book of business. AFC has gained share over the past number of years, but has done so in a disciplined way, enabling AFC to manage risk and limit losses. We plan to continue in this vein. We anticipate an increased risk environment in 2023 due to the combination of used vehicle price declines and also a higher interest rate environment. AFC actively monitors that risk through a combination of technology, data, and feed on the street, and works directly with dealers to mitigate the impact of these business pressures. The bottom line here is that we believe AFC will continue to make a meaningful and positive contribution to CAR's overall performance. So I'd like to provide some insight on my expectations for 2023. First, as we enter 2023, I believe that CAR is positioned very differently than we were at the beginning of last year. We have a clear digital focus. We have paid down the majority of our debt. We have meaningfully reduced our cost structure. We are consolidating our platforms and simplifying our business. We're beginning to see the first signs of a commercial volume recovery. We have a broad pipeline of innovation and growth initiatives. And we're able to support these investments through the cash flows and profits that this business generates. While these are all positive, at the same time, some of the market challenges that existed in 2022 are still present today to varying degrees. New vehicle production remains below normal, with modest increases expected this year. Volumes in the wholesale marketplace are expected to remain below normal in 2023. And while we believe that lower used vehicle values will help drive more volume and will be a long-term positive, for us, an environment where used vehicle values are declining may put short-term pressure on conversion rates before those longer-term benefits are realized. And lastly, those price declines coupled with a high interest rate may create higher risk environments in our finance business, as I've already mentioned. Based on all of these factors and our internal analysis, we believe that for the full year of 2023, CAR can deliver just a EBITDA in the range of $250 to $270 million. The management team and I are committed to delivering this result. This level of performance will also enable us to invest in the people, platforms and technology necessary to support our customers and our strategy for growth. Our guidance is based on similar marketplace volumes to last year. Upside scenarios to arrange would include a faster than expected commercial volume recovery and an acceleration in dealer to dealer volumes. Downside scenarios include a further contraction in wholesale supply below last year's levels and or an increased risk beyond our expectations at AFC. As we look beyond 2023, we recognize that the commercial volume recovery has been more delayed than we anticipated. For example, lower lease originations during 2022 will present a headwind to off-lease volumes in 2025. This leads me to conclude that our previous estimate of 500 million in adjusted EBITDA in 2025 is likely unachievable. However, I do believe that we can grow our consolidated adjusted EBITDA by a compound annual growth rate of between 15% to 20% over the next several years. I believe that we can achieve this through a combination of organic growth in our volume and share, continued cost management, and the strategic expansion of our product and services offerings. As I stated earlier, there are a lot of new opportunities available to CAR, and I believe that our strategy and capabilities position as well to capture those. I'd now like to provide a brief recap on our capital allocation activities. During 2022, we made no material acquisitions. And our primary focus was on integrating the platforms, teams, and technologies acquired in prior years. Also in 2022, we completed a major divestiture that greatly simplified our business. This allowed us to reduce our cost structure while utilizing the proceeds to pay off debt, invest in the business, and repurchase car shares at an attractive price. Scott will provide more specifics around these activities in the next portion of this call. Looking to 2023, we expect our business will continue to deliver strong, positive cash flows. At the guidance range that I've stated, we expect that the cash generated by our business after allowances for capex, interest payments, taxes and preferred dividends could reduce our company's net debt by another approximately 80 to 85 million dollars over the course of this year. Scott will provide more details. Any excess cash flow would follow our stated capital allocation priorities, which include paying off debt, repurchasing car shares, and exploring strategic acquisitions should they arise. So to summarize my key messages for today, in Q4, we performed well against a backdrop of a still challenging economic and industry environment, and we experienced another solid quarter of performance in our finance business. We are consolidating our platforms and executing on a multi-year plan to simplify our business. We achieved our 2022 cost savings targets, and we have a clear roadmap to realize significant additional savings in 2023 and beyond. We are highly focused on long-term growth. We have a differentiated offering, a diverse and expanding customer base that includes commercial and dealer, with strength and scale in both. We have a large addressable market in which to innovate and invest, and we have several exciting initiatives on our growth agenda for 2023, and I will update you on their progress in future calls. So overall, I'm energized by the progress we made in 2022 to transform our company into a position car for future success. I believe that this will translate into improved performance in 2023 and for many years to come. So that concludes my prepared remarks. As I mentioned in our last call, we are currently conducting a national search for a new chief financial officer. Joining me today is our interim chief financial officer, Scott Anderson. Scott will provide further detail on our financial results. Scott.