OPENLANE, Inc.

Good morning and welcome to the Open Lane second quarter 2023 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 a telephone keypad. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Michael Iason, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Thanks, Rocco. Good morning, and thank you for joining us today for the OpenLane second quarter 2023 earnings conference call. Today, we'll discuss the financial performance of OpenLane for the quarter ended June 30th, 2023. 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 Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect OpenLane'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. The 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 Openlane 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 Openlane. Joining me on today's call is our Chief Financial Officer, Brad Lakia. I'm going to begin with Openlane's second quarter performance. And as usual, I will speak about our business in two segments, a marketplace segment and a finance segment. I'm very pleased with our solid performance in the second quarter. particularly given an industry environment where volumes remain tight. Compared to the second quarter of 2022, we increased volumes in our marketplace and finance segments, growing our consolidated revenue and total gross profit. We reduced SG&A to our cost management efforts and delivered strong growth in adjusted EBITDA compared to one year ago. It was also another strong quarter in terms of cash flow generation by the business. To summarize some of our key results for the second quarter, Volumes in our marketplace business increased to $344,000 for the quarter, a total gross merchandise value of approximately $6.4 billion. This represented the first year-on-year volume growth since early 2021. Volumes also increased 4% over the first quarter of 2023, making this the first sequential Q1 to Q2 volume increase in any year since before the pandemic. We believe that Q2 volume performance supports our view that volumes have bottomed out and are beginning to grow. We generated approximately $417 million in revenue, a 9% increase versus Q2 of last year. We delivered revenue growth in both marketplace and finance segments. We generated a total growth profit of $194 million, an increase of 13% from Q2 of last year. Growth profit represented 55% of revenue, excluding purchased vehicles. Marketplace growth profit performance was particularly strong, increasing 17% year-on-year and representing almost 44% of revenue, excluding purchased vehicles. And we generated adjusted EBITDA of $84 million in Q2, $44 million from our marketplace segment, and $40 million from our finance segment. It is important to note that the $84 million in adjusted EBITDA included a $20 million one-time benefit associated with the termination of a contractual agreement. Excluding this one-time benefit, consolidated adjusted EBIT would have been $64 million, and that would have been an increase of 14% versus Q2 of last year. Excluding the one-time benefit, marketplace adjusted EBIT would have been $24 million. That's a $19 million improvement compared to Q2 of last year. So when viewed together with our first quarter performance this year, marketplace adjusted EBIT has improved by $45 million in the first six months of 2023 versus the same period last year. and that is excluding both the $20 million benefit this quarter and the $11 million one-time charge that was incurred in Q1. I am very encouraged that net of those two items, our marketplace business is currently operating at an adjusted EBITDA run rate of approximately $100 million per year, despite the industry volume challenges. Given the scalability of our asset-light digital model, I believe that OpenLane is now very well positioned to grow our business and build on that positive operational and financial performance. Brad will discuss cash flow generation and capital allocation later in this call, but I do want to highlight the strong cash flow characteristics of our business that were again evident in Q2. OpenLane generated cash flows of $47 million from operating activities in Q2. The company has a strong balance sheet, a low leverage ratio, and ample liquidity to invest in innovation and growth while still delivering profits and strong cash flows. In addition to achieving these positive financial results, we also made progress advancing a number of our key strategic initiatives during the quarter. Initiatives that I believe will help position OpenLane for sustained longer-term growth. As I've outlined on previous calls, we are highly focused on simplifying our business, making it easier for customers to do business with us, and enabling our organization to move faster in terms of innovation and growth. We made significant progress in the second quarter, starting with the successful rebranding of the company to OpenLane. As we discussed when we announced the brand change, we believe that consolidating our marketplaces under a single brand will improve outcomes for our customers. With all of the buyers, all of the sellers, and all of the vehicles all in one place, our marketplace will offer a highly differentiated mix of inventory from off-lease sellers, from off-lease vehicles that are not available in any other digital platform, older, higher-market vehicles, and all-type vehicles in between. I want to thank our team for the creativity and effort they put into executing a near-flawless brand launch. The response from our customers has been very positive, perhaps even more positive than I had expected. And our employees are rallying around our new brand and our new one company culture. I'm very excited for the future of this company under the Open Lane brand. Following our corporate announcement, we successfully launched our Open Lane branded marketplace in Canada in late June. We migrated customers from the ADESA and TradeRev marketplaces over a four-week period, and we plan to retire those legacy marketplaces within the coming weeks. We saw strong customer engagement leading up to the launch, with thousands of dealers attending our educational webinars. And while still early, we've seen sustained levels of buying and selling, with some cohorts increasing purchases over their pre-migration volumes. So to be clear on what this means, we now have one combined digital marketplace in Canada where all of our open sale vehicles from commercial sellers and all of the vehicles offered for sale by dealers are available, and where all of our customers can interact and do business with each other. Looking ahead and consistent with the vision that I outlined on the last earnings call, we have finalized our plans to integrate our commercial and dealer open sale inventory into a single open-landed branded marketplace in the United States, our largest market, during the fourth quarter of this year. We also intend to rebrand our European marketplace before year-end. So we intend to start 2024 with all of our marketplace platforms operating under a single unified open-land brand and all of our marketplaces having fully integrated commercial and dealer inventory. In addition to providing a better marketplace experience for our customers, consolidating our marketplaces will also allow us to get greater leverage from our engineering resources and accelerate innovation. So I'd like to highlight a few examples of innovations that we delivered in the second quarter. We introduced an automated AI-driven negotiation tool that eliminates the need for human intervention to close deals where sellers and buyers are within some threshold percentage on price. Instead of facilitating multiple phone calls between sellers and buyers and our representatives, our system can digitally interact with both parties to help achieve a mutually acceptable outcome more often and more quickly. We believe this technology will lead to higher conversion rates and ultimately higher levels of customer satisfaction. Over time, it also has the potential to help reduce our costs as well. We also continue to invest in our leading vehicle history inspection capabilities to ensure that our marketplace remains fast, transparent, and efficient. In the second quarter, we further enhanced our inspection process in the United States to provide vehicle-specific guidance to the inspector during the inspection process based on our historical experience with similar makes and models. The enhancement also automatically supplements inspection disclosures on known high failure rate items, and strategically selects the most risk-prone vehicles for an independent review part of posting to the marketplace. The objective here is to continue to increase buyer and seller confidence in the inspections themselves, while also improving our gross margins by lowering arbitration expenses and other direct costs. And finally, when we launched our new Open Lane branded marketplace in Canada, we also deployed new and enhanced market and pricing insights that will help dealers make more informed buying and selling decisions. and we have automated the registration and checkout processes, giving new dealers almost instant access to Canadian inventory and helping buyers take delivery of their vehicles more quickly after their purchase. Advancements and the pipeline of innovative products and features still to come are all aimed at accelerating growth and advancing our purpose, which is to make wholesale easy so our customers can be more successful. I also want to highlight our continued focus on cost management. Our diligence in this area is positively impacting our growth profit margins by reducing our direct costs. It is also helping reduce our SG&A expenses. In the second quarter, total SG&A declined $13 million or 10% compared to Q2 of last year. We continue to advance our global shared services model and have expanded the effort to include additional areas across our organization. Additionally, our technology teams recently completed the migration of our remaining technology infrastructure across the organization to a common cloud provider. This was a significant undertaking and was accomplished with zero disruption to our customers. The completion of this migration, coupled with the marketplace consolidations associated with our rebrand, are important catalysts that will enable us to eliminate duplicative systems within our existing technology infrastructure. This will be an important area of focus going forward. Over time, we will continue to make progress towards a single remarketing platform, which will increase the efficiency of our technology development and business processes. Doing so will enable us to get greater leverage from our technology investments, reducing the spend required to maintain a fragmented set of technologies, while increasing our ability to make focused investments that drive innovation and improve the customer experience. I've always believed that digital models are inherently more scalable, and I believe this is becoming increasingly evident in OpenLane's current results. As we focus on the items that I've just described and as we grow our attention volumes, I believe we'll see more evidence of this in the years to come. I'd now like to provide some updates on the macro environment and our perspectives on the remainder of this year and into 2024 and beyond. And I'll begin by saying that we believe there's increasing evidence that industry volumes have bottomed out and are now beginning to rebound, particularly as it relates to commercial seller volumes. I believe this is supported by the following factors. First, new vehicle production, new vehicle sales, and new vehicle inventory on dealership lots continue to grow. As I've said before, these are necessary ingredients to balancing supply and demand in the used vehicle market. As new vehicle inventory increases on dealership lots, we are starting to see evidence of increased incentive spending by OEMs, and this is now once again driving increased volumes of new lease originations. In fact, based on third-party data, lease penetration rates in the second quarter were materially higher than in the second quarter of last year. This is a very positive indicator for commercial seller volumes. As I've said on prior calls, I believe leasing will remain a very important part of the way new vehicles are brought to market in North America, and I think the Q2 trends around leasing origination support this point of view. Shifting to used vehicle values, the surprisingly strong run-up in used vehicle prices that we saw in the first quarter has ended, and prices declined during most of the second quarter. I expect continued downward price pressure for the balance of 2023. While downward pressure on used vehicle values can put downward pressure on conversion rates in our markets, I am pleased with the strong conversion rate performance that our marketplace segment demonstrated in Q2. I believe it speaks to the resiliency of our asset model. And while used vehicle values are declining again, the majority of off-lease vehicles still remain in a strong equity position versus their residual values. So while we did not see any meaningful increase in off-lease volume supply in the second quarter, we do expect that the combination of lower used vehicle values but also higher residual values for the cohorts of vehicles that were leased in 2021 and 2022 will cause the equity position to narrow and more off-lease volumes to start to flow over time. I believe that all of these factors point to a steady improvement in total wholesale volumes in 2024 and beyond. Taking all of this into account, I believe that the two primary pieces of our growth equation remain intact. First, we believe that digital channels will continue to gain share and that we are very well positioned to gain more of that additional share over time. We also believe there will be a recovery in commercial volume, which given our existing market share and deep commercial relationships, will result in increased off-lease commercial vehicles in our marketplaces. So in terms of our performance outlook for the remainder of this year, In our marketplace segment, I expect open lanes volumes in the second half of 2023 to increase compared to the second half of 2022. This year-on-year volume growth, coupled with the strong unit economics that are currently being demonstrated by our marketplace business, should drive improved financial performance in this segment in the second half of 2023 when compared with the same period last year. In the finance segment, we expect continued strong volumes in revenues. We believe the current market conditions point to a more normalized risk environment, not dissimilar to the industry benchmarks that we experienced pre-pandemic. Our second quarter losses at AFC were at the higher end of what we believe to be the normal range of 1.5% to 2% of the portfolio. We believe that this is still the appropriate range for the business as we look to the future. So overall, we expect a solid performance from AFC in the second half of this year, although a full year result that will be below last year's record performance. Brad will provide a more detailed update on how these factors impact various aspects of our guidance for the remainder of 2023. As we look beyond 2023, we believe that our strategy and our outlook on the market conditions can support the 15% to 20% annual growth in adjusted EBITDA off of our 2023 guidance range over the next several years. While we believe that the majority of this growth will be driven by our marketplace segment, The finance segment will also grow over 2023 levels and will remain a strong contributor to our overall results. So in summary, as I've said on prior calls, I believe that OpenLane has a unique and differentiated offering for the market, a compelling business model and a sound strategy for growth. We're a pure play digital marketplace leader with deep and growing strength in both commercial sellers and in the dealer-to-dealer business. We have access to a large addressable market in North America and in Europe, and we intend to grow our share while unlocking new opportunities in those markets. We have a robust pipeline of innovation that supports our growth strategy. By consolidating platforms, we will get greater from our technology and product investments, and we will focus our energy resources and investments on building the greatest digital marketplace for our customers. We are profitable and deliver strong, positive cash flows. This was clearly evident again in the second quarter. we can invest in our business while generating additional cash that can be used to pay down debt, return capital to shareholders, and make strategic investments. So with that, I will now turn the call over to Brad, who will provide a more in-depth update on our second quarter financial performance. Brad?

Thank you, Peter, and good morning, everyone. Before I comment on our operating and financial results, I'd like to take a moment to briefly share a couple reflections based on my first 100 days with OpenLane. First, I share Peter's optimism for the future. Not only do we have significant opportunities to create and capture value, we have an impressive, dedicated, and industry-leading management team. For me, professionally and personally, I feel very fortunate to have assumed my position at a very unique time in the history of the company and our industry. OpenLane has undergone a tremendous transformation, one that created a highly valuable asset-light, digitally-focused business model. This, along with the opportunity to work alongside our leading management team, is what attracted me to the organization. And my experience the first few months has only reinforced my confidence that Open Lane will be well-positioned to grow and succeed. And our second quarter and year-to-date results are the best evidence of this reflection. And with that, I'll provide more detail in our segment results. Compared to last year, although volumes were relatively flat in the second quarter, marketplace revenues excluding purchased vehicle sales increased 5% to $259 million and generated 73% of our consolidated net revenues. Auction fees per year increased 4%, driven by select fee increases, and marketplace service revenues were up 6%, driven by select fee increases and higher volumes in our repossession revenues. in technology-related service businesses. As we've mentioned previously, these service-related businesses provide highly complementary, critical solutions to our customers and allow OpenLane to capture a higher share of wallet. Excluding purchase vehicle revenue, the improvement in marketplace revenue resulted in a 17% increase in gross profit, or a 250 basis point improvement compared to the second quarter of last year. This also represented 120 basis point improvement sequentially when compared to the first quarter of this year. Gross profit benefit by improvements in our service-related businesses and our cost savings initiatives. Marketplace adjusted EBITDA for the quarter was $44 million, inclusive of the one-time $20 million benefit related to the early termination of a contractual remit. Marketplace adjusted EBITDA was $24 million, excluding this item, representing a $19 million increase compared with the second quarter of last year. This was driven by the improvement in revenues and gross profit highlighted earlier, and also a reduction in SG&A reflecting the successful execution of our cost management initiatives. Looking at the first half of 2023, and when excluding the $20 million one-time benefit this quarter, and the $11 million one-time charge in the first quarter, our marketplace adjusted EBITDA was $49 million in the first half, representing an improvement of $45 million compared to the first half of last year. This first half result and the improvement supports the $100 million adjusted EBITDA run rate that Peter highlighted earlier. It also demonstrates the potential benefits related to volume scalability, further structural cost reductions, and provides a window into future margin improvements. Turning to our finance segment, revenues in the quarter were $98 million, a 6% increase over prior year and accounted for approximately 27% of our consolidated net revenues, excluding purchased vehicles. Finance revenues increased despite overall flat loan transaction units compared to last year. Revenue per loan transaction was $243 per unit, an increase of $14 per unit, or 6%, and was driven by increased fee income and interest rate yields. These increases were partially offset by increased credit losses and a decline in loan values. Finance segment adjusted EBITDA in the quarter was $40 million compared to $51 million last year. This $11 million decrease is more than explained by a $12 million increase in our provision for credit loss. I'd like to emphasize a few things we have noted in prior earnings calls and disclosures. First, our finance business has a very strong service offering, which leverages a high-touch customer relationship model to manage risk while enabling growth. Second, as we move through the remainder of the year and are faced with changing and sometimes volatile used car fundamentals, we will continue to manage a conservative portfolio. Our provision for credit loss was 2% for the quarter, and as mentioned last quarter, this represents a more normalized rate when compared to the favorable fundamentals that enabled a much lower loss rate over the last two years. Long-term, The provision for credit losses is expected to be 2% or lower annually. However, actual losses in any particular period could deviate from this expectation. Turning to SG&A, as Peter mentioned earlier, consolidated SG&A declined $13 million compared to the second quarter of last year and is largely reflected in our marketplace segment results. Overall compensation cost and professional fees declined, driven by our cost savings initiatives. In addition, noncash stock compensation expense comprised $9 million of the $13 million decrease. Noncash stock compensation expense was elevated in the second quarter of last year due to the gain on the sale of the U.S. physical auction business. That said, our first half SG&A is representative of our expectations for our near-term run rate. We also had a number of nonrecurring items reflected in income and expense during the quarter. First, as mentioned earlier, we agreed to accelerate the termination of a contractual agreement, which resulted in a cash gain of $20 million. This is included in the company's reported adjusted EBITDA of $84 million. And for modeling purposes, please note, in the third quarter of last year, we recognized approximately $5 million of income related to this agreement. Therefore, this will not reoccur in the third quarter of this year or in future years. Second, as a direct result of our open lane rebranding and the implementation of our one marketplace strategy, we assessed the intangible carrying value of our adjusted trade name. This resulted in a non-cash impairment charge of $26 million before tax in the quarter. In addition, this trade name now has a defined life. which will result in approximately $16 million of additional annual amortization expense over the next six years and will begin in the second half of this year. Finally, consistent with our second quarter annual requirement, we formally evaluated our reporting units to test the carrying value of our goodwill. This evaluation resulted in a non-cash charge of $225 million before tax and was primarily driven by lower estimated fair value of our U.S. dealer-to-dealer reporting unit. The combined trade name and goodwill impairment charges generated the net tax benefit of $29 million, which included a $30 million tax valuation allowance. Therefore, the after-tax related charge inclusive of the trade name and goodwill impairment charge was approximately $221 million and a quarter. The net impact of the trade name and goodwill impairments are excluded from our adjusted EBITDA and our operating adjusted net income per share. Turning to the balance sheet and capital allocation, first I would like to highlight our strong cash flow. Cash flows from operating activities in the quarter were 47 million and stand at 143 million year to date. This level of cash generation validates the fact that our asset light digitally focused strategy and business model are delivering meaningful results. In addition, during the quarter, we repaid 140 million in senior notes and executed a new 325 million revolving credit agreement that will now mature in 2028. Our operating cash flow performance, our debt repayment, and our revolver maturity extension, when taken together, notably improved our overall liquidity position and further strengthened our balance sheet. This is evidenced by a first-half net reduction of approximately $118 million and a meaningful improvement in our consolidated net leverage ratio, which now stands below one times adjusted EBITDA. Continued improvement in our marketplace business, coupled with a strengthened capital structure, provides enhanced flexibility to fund our organic growth plan and improves our ability to deliver shareholder returns. As highlighted in our disclosures, we have 127 remaining on our share repurchase authorization. I'll wrap up by addressing a few annual guidance items. We're confirming our previously stated adjusted EBITDA guidance of $250 to $270 million and believe we are trending to the upper end of that range. We have lowered our estimated 2023 capital expenditures from $65 million to $60 million and consistent with recent performance and when normalizing for seasonal changes to working capital, we expect to continue to generate positive cash flow from operations over time. Finally, we are increasing our per share operating adjusted net income to a range of 60 to 70 cents per share, and this compares to a range of 37 cents to 47 cents provided earlier this year. With that, I'll turn the call back over to our operator for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press Start and 2. Today's first question comes from Rajat Gupta with J.P. Morgan. Please go ahead.

Great. Good morning, and thanks for taking the question. Just kind of first one related to the marketplace business, you know, if we look at, if you look at, you know, the second quarter trajectory relative to the first quarter, volumes were up sequentially roughly 5%, but the adjusted EBITDA, you know, excluding the one-timers was flat to down slightly. You know, how should we think about, you know, that cadence? And the reason I ask that is, you know, with, with volumes expected to recover here in the second half and into 2024, what sort of rule of thumb should we apply in terms of incremental EBITDA per unit as those volumes recover? So getting any helpful clarity on the second quarter versus the first quarter can really help us understand how we should think about modeling the EBITDA going forward and have a follow-up.

Thanks, Rajat. I appreciate that. This is Peter here. Listen, I guess I'm certainly pleased with the performance of the marketplace business over the entire first half of the year. You know, 45 million EBITDA improvement versus the same period last year. And, you know, approximately 25 million adjusted EBITDA in both quarters. So I think we're seeing... Some of the things actually your question gets to, which is what is the scalability of this model? You know, that improvement was delivered with, I would say, flattish volumes relative to prior years. So it's really a focus on how do we optimize the gross profit structure, direct cost, SG&A, et cetera. I think the digital business model is inherently more scalable. That's been my experience since, you know, I got in this industry with a digital model at Openlane. These businesses are extraordinarily scalable, and I'm seeing that in our results. I'd say one of the differences between Q1 and Q2 is, you know, conversion rates were in general lower in Q2. That's not unusual. We have a, you know, as we've said on prior calls, a spring market in this industry. Conversion rates tend to be their strongest in Q1. So high conversion rates also translate into higher gross profits and overall improvement in results. But I think notwithstanding that, I think the Q2 results are very strong. and give me increased confidence in the scalability of this model. Confidence I already had, but they sort of reinforced that. So the other thing I'd say, Rajat, is while we've spoken about our cost efforts, Some of those costs will not be fully realized and evident until 2024. So, for example, the cloud migration of remaining infrastructure to the cloud, that actually cost us additional money in the first half of the year because not only were we maintaining our infrastructure in one location, we had contractors and employees focused on a big migration effort. Now that that's done, those costs can be reduced. And that's just one example of a number that I could make. I guess, Rajat, I'm confident that in the quarters and years to come, this business will demonstrate excellent scalability. I think digital business models operate on a more fixed cost kind of basis, and that the marginal cost per incremental car sold is actually relatively small. Now, it varies a little bit depending on if it's a dealer car, a commercial car, et cetera, but I'm confident we'll have great scalability here.

Got it. Got it. That's helpful, Connor. And then maybe as a follow-up, you know, just in terms of, you know, the price increases or, you know, the ARPU trajectory going forward, you know, particularly as new stock prices, you know, start to move lower here in the second half, you know, how should we think about the ARPU or, you know, the auction ARPU? Any way to think about modeling that, you know, maybe layering in the, the, the commercial mix coming in as well. Do you think the industry can still have the ability to drive, you know, fee increases like every year due to offset some of, you know, just the headline decline in used car prices? You know, how should we be, you know, thinking about that going forward?

Yeah. You know, some fraction of the ARPU is tied to vehicle values because the higher value the vehicle, you know, as you know, Rajat, the buy fees are often sort of stair-stepped in value bands. So, you know, if used vehicle prices decline, there could be some downward pressure on that. Prices on the sell side of the marketplace are more fixed, less dependent upon vehicle value. I guess we're seeing competitors increase their prices in this industry, so we think we have room if we needed to. I think we're being cautious about that, but we have certainly tried to optimize pricing in various parts of the business over the last 12 months, and that's been reflected in the numbers. They should increase at a minimum at the rate of inflation. And then, Rajat, as you know, there is a mixed component. To the extent off-lease volumes do come back in considerably greater numbers and sell in that upstream channel, those have a lower ARPU, but obviously a higher gross profit percentage than other types of transactions in our marketplaces.

So from a gross profit per unit perspective, like should we expect any meaningful change here with that next shift? Or, you know, is that, you would think that remains consistent, you know, with the lossy mix coming in?

I've been very pleased with how that metric has trended. I mean, we've done a really good job of gross profit per unit. But, Rajat, I will say that we do generate gross profits that are not directly tied to transaction volumes. So as transaction volumes increase, not all those components will increase at the same rate. The number I focus on more, candidly, is gross profit as a percent of net revenue in the marketplace. I think that's really... sort of insulates the risk, not the risk, the mix shift. So there is a mixed aspect to this, but from a management perspective, can we optimize and maximize gross profit as a percent of net revenue? That, to me, is the key sort of KPI that I look at each month. Got it. Got it. And I think we've been doing a good job with that. Thanks, Rajan. Thank you. Thank you. Thank you.

And our next question today comes from John Murphy at Bank of America. Please go ahead.

Good morning, guys. Peter, just three quick ones. You know, first you mentioned the migration of customers to a single platform and you were doing some training for those customers. I'm just curious if you could talk about that process a little bit more and if there's any sort of leakage you think as you're kind of transitioning customers to this single platform or actually you potentially making some gains of new customers as you consolidate?

Great. Well, so I was speaking specifically, John, to our Canadian migration and the launch of OpenLane Canada, which really happened at the very end of the quarter. So it was the last, I think, two weeks of June. But there obviously was a lot of planning work and execution work done in the earlier part of the quarter. Listen, I think it went really well. We were delivering a brand-new marketplace in terms of feature and function to market, so we put a lot of effort into training, webinars, all sorts of – Activities to help our customers sort of understand how the new site works. We try to make it as simple as we could as well We migrated the customers in cohorts. We actually started with the trade rev Dealers first because we felt those were probably the more digitally adept, you know And then once that was done and we then focused on migrating the Adessa customers, but John it went really well It went really well No No measurable leakage. I think that was the phrase you used. Our Canadian roads remain strong throughout, and customers are getting the benefit of all the vehicles in one place. So we've had dealers that in the past just weren't trade rev buyers and now they're looking at those cars and saying hey i can buy that car and you'll deliver it to me and that's great you know um so uh we're very excited about that uh excited about what it does for market position in in that market um you know what we've planned in the us is a little bit different john it's really going to be a rebranding of the backlot cars marketplace to an open lane brand and then the integration of the commercial inventory into that marketplace so I think that actually de-risks their U.S. migration a lot because from a user experience perspective, the thousands of dealers that are logging on to that marketplace every day, the feature function is not going to change. All that's going to change is the logo on the top left is going to change, some of the color palette is going to change, but the technology itself, the business process will be the same. But in addition, they'll now have access to all these, what we believe will be a growing volume of off-lease vehicles that are going to start to flow through that marketplace in 2024 and beyond. So I think that sort of de-risks that one. But obviously, we still have a lot of execution between now and the end of Q4 when we plan to get that done.

And that flows to my second question. Your expectation is that BIMES are bottoming out here and will recover, it sounds like, somewhat meaningfully in 2024 and beyond. What are the key channels that you're expecting to recover? It sounds like repo is actually recovering right now. Is there kind of a tape delay on lease and other dealer lease returns and then ultimately dealer side? I mean, how do you kind of see the progression of this bottoming out and recovering by segment or by channel coming back?

Yeah, I guess, John, thank you. Specifically, you know, what I feel confident of is the volumes in the second half of this year will be higher than the volumes in the second half of last year. And then as we look to 2025, 2024 and 2025, we expect further volume growth, you know, perhaps accelerating over time as we get into the sort of 25, 26 timeframe would be my view. But to go sort of segment by segment, let me start with you there. You know, with more cars on dealers' lots, dealers are, you know, more likely to put a car into wholesale than they were, say, a year ago. Because a year ago, they had empty lots. They'd get these cars on trade-in, and they'd say, you know what, maybe I'll retail this car. So what we're seeing is we're seeing actually growth in the volume being posted by dealers. We're seeing, you know, cars posted per dealer starting to increase exponentially. fairly meaningfully in the second quarter, I'd say, and that's consistent with more new cars on their lot, greater inventory on their lot, et cetera. So I think we see a positive driver in the D2D space, but that segment was never too badly impacted by the compression, but still positive. Repo obviously has been up. Now, our business services the repo segment, that benefits us, but we don't sell repos in our marketplaces for the most part. because they typically sell in a physical model. Now, that may have changed over time, but today, John, in the United States, most people sell it physical. We're seeing more sales from rental sellers, and I spoke at some length about lease. We didn't see an increase in lease returns, if you like, in the second quarter. Some of our customers are telling us that their models show lease volumes increasing later this year and into next year. But what I pointed out is what I thought very positive news in the second quarter was just to see an increase in lease originations. You know, lease originations have been down, but we're seeing that start to increase again in a meaningful way. I think that reinforces, John, my view that leasing is going to be an important part of our industry, an important part of the way vehicles are brought to market. We obviously have a very strong position there. I recognize it's going to take some time for those vehicles to reach maturity, but It passes quickly, and I'm excited to see leasing on a rebound in the retail environment.

And then just one last housekeeping, the $20 million early termination payment. Can you guys just tell us exactly what that's for in the quarter, and is it kind of one time or is it something that should be spread over periods that we shouldn't be backing out? I just want to understand what's going on there.

Yeah, a little bit of nuance on that. You know, John, it's a one-time early termination of a contract associated with a 2019 transaction. And over the past number of years, that contract has generated, I would say, about $5 million a year, all paid the third quarter of the year. So, you know, that was a fact, and that contract was going to continue through, say, you know, the third quarter of next year. So, you know, there's a If you like, we're trading a $20 million one-time payment for two $5-ish million payments Q3 of this year, Q3 of next year. That's how I would think about that. Obviously, that was done through mutual agreement, and both parties happy with that outcome. Okay, very helpful. Thank you very much.

Thank you, John. Thank you, John.

And our next question today comes from Bob Lovick with CJS Securities. Please go ahead.

Good morning, and thanks for all the comprehensive answers. I just have a couple of nuanced questions here, too. Now, obviously, you're making great progress with the platform consolidation, and that's very exciting. But given the kind of weak industry volumes, how are you going to gauge success? Are there new metrics you can share with us, traffic on the new site, or how are you internally gauging the success of the platform consolidation? given, as we said, the bottom and the bottom of a cycle?

Thank you, Bob. Good question. Obviously, you know, one of the things I like about a digital business, in addition to being very scalable, is you get tremendous data because every customer action leaves a recordable footprint. So we look at a tremendous amount of data across this company. I would say the five metrics I look at the most in terms of a marketplace would be volume sold, volume posted. From that, obviously, you derive conversion rate, participating sellers, participating buyers, and then retention rates of your customer base. And so those are the metrics we look at. Obviously, our results correlate the closest with volume sold in any given period of time because that's what drives revenue. But the other ones are all inputs into that. So we look at all of those. Listen, I'm pleased with a lot of the metrics we're seeing. We're seeing increased customer participation. As I mentioned earlier, we're seeing increased volume of vehicles posted per selling dealer. That's starting to trend up again. Conversion rates have been strong. Used vehicle prices have been under pressure in Q2. They declined pretty much for the entire quarter. We did see conversion rates drop a bit relative to Q1, but they were quite resilient. I take some comfort from that. The retention rates of customers within our platforms is very strong. These are platforms that build a habit with customers who come in daily, weekly. Smaller customers might come in monthly. Sometimes a customer might skip a month, not buy any cars. Maybe they've got too much inventory or maybe not sell cars because they've got too little inventory, but typically... They're back a month later. So, you know, there's a lot of good fundamentals in these marketplaces, a great customer, and a repeat, a very repeatable customer interaction, which I think is a strength of the business.

Okay, great. Thank you. That's very helpful and appreciated. And then just real quick, I think in the auction fee section of one of the releases, you mentioned a slight increase in auction fees from a smaller mix of you know, lower-fee commercial off-premise vehicles. And, you know, I think that's probably either grounding dealer buying it or whatnot. Can you just give us a sense of kind of what drives that and how that trend, you know, may change over the next several quarters?

Yeah, good question, Bob. Listen, I'm very much looking forward to an improvement in off-lease maturity volume because, again, What we've really sort of had to sort of work our way through over the last couple of years is not just reduced volume at the top of the funnel, reduced number of cars sort of flowing in, and that was a substantial reduction, down 50-plus percent, but also essentially the transactions all kind of migrating up into that top of the funnel, grounding dealer transactions, which is our lowest revenue transaction in this entire business, right? So we had volume compression. With revenue compression, you multiply those together and you got severe compression on that business. And as I look to the future, I see both of those things starting to unwind and reverse. Now, I'm not promising that it's going to happen immediately. I think it's going to play out over time, but I'm confident it will happen. And I think that would be, you know, a double positive as we see not only volumes increase, but the mix shift. And I will say, you know, we started to see a mix shift in you know, reversed in Q1, used vehicle prices appreciated, right? And it was a little unexpected how strong used vehicle pricing was in Q1. I wouldn't say in the last month or two we're starting to see the mix shift more positively again. It was not material in the second quarter, but we're starting to see a more favorable mix in that upstream channel for us as well, which drives Orpoo. Super.

All right. Thanks very much.

Thank you. And our next question today comes from Brett Jordan at Jefferies. Please go ahead.

Hey, good morning, guys. Good morning, Brett. Could you give us maybe, as we look forward two or three years, how you see lease returns? Obviously, what's going to get bought out, you can't predict. But I guess leasing probably troughed in the second quarter of 20 when dealerships were closed. But how do you sort of see on an annual volume the cadence of lease returns in 24, 25? You know, when is the cyclical growth year?

Thanks, Brett. You know, if you look at lease originations, the lease origination percentage declined from 2020 to 2022. And what that means is there are fewer off-lease vehicles in those portfolios. And you can, again, think of a lease, rule of thumb, three-year maturity. So, leased in 2022, maturing in 2025. That's the very, very top of the funnel. How many vehicles are in the portfolio? I think what we're going to see there is that number reduces through 2025 and then increases post 2025, would be my view. The second question, which is probably more important right now, is of those leases, what percentage actually get returned? That's driven by the equity position of the vehicle. you know, for the last 18 months, the equity position of off-lease vehicles has been extremely strong, so consumers have been hanging on to them and not returning them. And then if they return, the grounding dealer buys them. So I think over the next two years, you're going to see the intersection of two kind of contradictory forces. On the one hand, there's fewer off-lease vehicles at the top of the funnel, but on the other hand, consumers are going to buy a declining percentage of those and an increasing percentage are going to be returned. And the reason I think that is we're going to see Under pressure on used vehicle values, but also the residual values of those leases was written at higher levels because they were sold at higher MSRP. So I guess in that, I'm expecting a small increase in lease volume in the coming two years, but a more favorable mix within our market, and then an accelerating increase. accelerating volume and mixed picture kicking in towards the end of 2025 and beyond. And I guess I'd say long-term, I believe leasing will be a very important part of the way vehicles are brought to market. I think it'll be back in the three to four million units a year leased. We'll see high consumer return rates, and we'll have a very, very good business in the off-lease space, I believe.

Okay. And then a quick question. On the dealer-to-dealer impairment charge. I think you noted lower long-term revenue growth associated with the cycle. Is the size of that market different than you were projecting back in 19 when the business was, when IAEA was spun out and trade rev was sort of a focus? Or is it really just the lack of dealer consignment cars that's impacting that longer-term view?

I don't think the size of the market is different on any long-term view. I think in the last couple of years, it's been a little compressed for some of the factors I mentioned. You know, industry data sources have that dealer-to-dealer market at, you know, at a low end, 6 million units, but that does not include vehicles that are transacted sort of informally between dealers. So high-end estimates run, you know, 10 or above 10 million units in that market. So it's a big segment, a big opportunity for us. I like how we're positioned in the market. I think we're on the right side of a physical to digital secular shift, which I think will be positive long-term for the company. I can also say that, you know, I spoke about our improved EBITDA performance in the first half of this year. Without question, our digital D2D model was a strong contributor to that improvement, and we had our best ever sort of financial performance from that segment in the second quarter. So I'm really pleased about that. seeing strong customer adoption, strong numbers around volumes posted, et cetera, strong conversion rates. So, you know, I kind of look at the goodwill thing as somewhat a technical accounting driven and does not in any way impact my view of the long-term opportunity in this space.

Okay, great. Thank you.

I think we have time for one more question, Rocco.

Yes, sir. And our final question today comes from Daniel Embro with Stevens. Please go ahead.

Thanks. Appreciate you guys squeezing me in here at the end. Just a couple questions. Maybe one, Brad, on the SG&A side. To follow up on Margaret's question earlier, marketplace SG&A has been pretty consistent, kind of low 30%. But as we add back volume, would you expect to have to add back expenses to handle that volume? Peter said it's scalable. So should we expect further SG&A leverage into the high 20s? How would you think about SG&A marketplace margin going forward?

Yeah, I think, but thanks for the question. And I think the way to think about it is essentially what Peter referred to earlier. I mean, we see, you know, the marketplace business as being very, very scalable, very fixed cost base in terms of its structure. So in terms of the incremental SG&A dollars that we need to support incremental volume, fairly modest.

Got it. And then a quick follow-up on AFC. Peter, last two quarters, loan origination outpaced marketplace volume growth. This quarter, they were closer to parity. How do you feel about the loan origination outlook for AFC? Any change in the health of your core independent used auto dealer? And how do you feel about the 2% charge-off going forward as you project more used price pressure, maybe more pressure on the independent used dealer out there?

Good question. First of all, listen, I think independent dealers are an important part of this retail ecosystem and will be. as far as the future as I can see. They provide a unique offering in the market, and I think there's a strong demand for that offering. So they'll be in business and we'll be in business to serve them. You know, in the first and second quarter, loan loss ratio was at the high end, the 2% end of our 1% to 1.5% to 2% range. So I guess given that fact, we've just been a little bit more focused on managing risk and running the more conservative business that we've talked about on these calls. Obviously, signing up new customers and generating new loans is important, too, so we're focused on that. But in this business, it is a balancing act, and we've just been focused on making sure we've got a good handle on the risk environment. We believe we do. I think it was clear in my remarks we expect solid performance from AFC. But there's no question, with the benefit of hindsight, last year and probably the prior year, AFC was a beneficiary of historically low risk loss ratios that we should not expect to recur in the foreseeable future.

And anything on the loan origination outlook part of that?

Oh, you know, we expect to continue to grow the business, and we expect AFC to continue to be a contributor, but we expect most of the growth in the performer to come from the marketplace side of the business. Again, we love the AFC business. But we take a conservative view on the market, and we're growing it. We want to keep growing it, but we also want to make sure we have the right sort of portfolio that we like having in this business. Great. I appreciate all the color. Thank you.

Thank you. And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thank you, Rocco. I appreciate that. And to the participants, thank you all for your time today, for your questions. Before we close, I'd just like to leave you with four takeaways from the quarter. I believe our Q2 results demonstrate a significant improvement in the business, and I believe they provide me and hopefully all of us with increased confidence in our digital asset-light model as we look to the future. Again, I'd like to highlight our company has strong cash flow characteristics. It has improved its overall liquidity position in the quarter and now has increased flexibility in terms of capital deployment. I believe our one brand, one marketplace strategy will increase our differentiation in the marketplace and will also enable us to continue to increase our efficiency and reduce our costs. Finally, the macro factors that I see point to an improving outlook for commercial off-lease volumes. I believe that the headwinds of the last three years look set to become tailwinds in the years to come. So thank you all for joining today's call. I look forward to updating you on our progress in our next call three months from now. Thank you very much.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.