OPENLANE, Inc.

Good day, and welcome to OpenLane's 2023 year-end earnings 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, press star, then one on your telephone keypad. To withdraw your question, press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mike Eliasson. Please go ahead.

Thanks, Ed. Good afternoon, and thank you for joining us today for the OpenLane fourth quarter 2023 earnings conference call. Today, we'll discuss the financial performance of OpenLane for the year ended December 31st, 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. Reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued this afternoon, 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 afternoon, everybody. I'm delighted to be here today to provide you with an update on OpenLane. Joining me is OpenLane's Chief Financial Officer, Brad Lakia, who will cover the majority of our financial and operating metrics later in the call. I will begin by highlighting a few key areas of our 2023 performance, but will focus most of my remarks on the execution of our company strategy, the broader industry environment, and our positive outlook for the future. In terms of results, it's clear that our business made significant progress in 2023. We are now beginning to see the positive impacts of our strategic investments in innovation and technology, our brand simplification work, as well as our diligence around costs. I believe our solid execution in the fourth quarter and throughout 2023 delivered strong and encouraging results that position OpenLane for future growth and success. When I look at OpenLane's consolidated performance for the year, a few things stand out. We grew our volumes, revenue, and gross profits. Notably, consolidated growth profit increased by $92 million, or 13% compared to the prior year. We beat our 2023 guidance by delivering consolidated adjusted EBITDA of $272 million. That was an 18% increase from the prior year. OpenLane had another strong year of cash flow performance, generating $237 million in cash flow from operations in 2023. Our finance business, AFC, demonstrated solid performance in 2023 against a backdrop of declining vehicle values and a higher interest rate environment. With a continued focus on risk mitigation, the business grew responsibly and made a meaningful contribution to OpenLane's bottom line. Our marketplace business made significant progress in 2023 and finished the year on a strong note. We grew fourth quarter volumes by 10% to 318,000 vehicles. This is the strongest year-on-year volume growth for open lane in any single quarter for over 12 quarters. And for the full year 2023, we grew marketplace volumes by 3% to over 1.3 million vehicles sold. Looking at 2023 overall, we grew revenue, revenue excluding purchased vehicles, and gross profit in the marketplace segment. Most notably, gross profit increased by over 20% versus the prior year. The strong revenue and gross profit performance coupled with disciplined cost management drove a significant increase in adjusted EBITDA from the marketplace segment, as well as an expansion in EBITDA margin. For Q4, marketplace adjusted EBITDA was $24 million, representing a more than 200% increase over the fourth quarter of 2022. And for the full year, we expanded our marketplace adjusted EBITDA to $108 million, representing a $79 million increase over the prior year. I think these Q4 and full-year results provide compelling evidence that our digital strategy is the right strategy, that we are executing well given the realities of our environment, that we are investing in the areas that our customers value the most, and that we are delivering a better, more simplified customer experience. And because of this, I believe OpenLane is well positioned for increased competitive differentiation, continued growth, and strong performance in the years to come. So let me explain why I believe that to be the case, starting with the industry environment. First, based on what we're now seeing in the industry, I think it's increasingly evident that the industry environment that existed over the past few years, since 2020, was likely an anomaly. Many of the factors that had a negative impact on our wholesale used vehicle industry are now starting to return back to what I would describe as more normal, not yet mirroring 2019, but trending in that direction. Manufacturers are able to build new vehicles. The supply chain constraints of the past few years appear to largely have been resolved at this point. There are more and more new and used vehicles on dealers' lots. Manufacturers are once again starting to use incentives to drive new car sales and leases, all of which are good news for the wholesale market and for open lane, particularly as we look out beyond the current year. Here are some of the facts based on third-party sources. The new vehicle supply issues experienced during the pandemic and chip shortage have largely subsided. and new vehicle production increased over 10 percent in 2023. While this is still below pre-COVID levels, sales and production are expected to increase modestly again in 2024. The amount of new and used vehicle inventory on dealers' lots is also increasing. Day supply of new inventory was up approximately 30 percent in 2023 and also increased modestly for used inventory. We expect both of these to increase further in 2024 as well. Used car values remain structurally higher than pre-COVID levels last year, but have been declining steadily from their peak in mid-year 2022. Now, let me be clear. Most experts predict that wholesale supply will grow only modestly in 2024, and we know that lease returns in the back half of this year and next year will remain low due to the lower volume of leases written in 2021 and 2022. However, I'm very encouraged to see that in the 2023 year, lease originations increased by more than 20 percent versus the prior year, and they also accelerated quarter by quarter throughout the 2023 year. In fact, lease originations in the fourth quarter increased by more than 40 percent versus the fourth quarter of 2022. Increased lease originations are driven in part by OEM's use of incentives. and OEM incentives increased in 2023, with the average incentive offered increasing to close to 5% of the vehicle transaction price by year end. This was almost double what it was at the end of the prior year. Given our strong position in the off-lease segment, as the increased volume of leases written in 2023 and expected to be written in 2024 start to mature, OpenLane will be well positioned for growth in this important part of our business. Additionally, as we now look at an environment with more new car sales, but also with more new and used inventory on dealers' lots, we believe this will tend to result in a higher volume of dealer trades being offered for sale in the wholesale market versus being retained for inventory. This should positively impact dealer consigned volumes as well. So in summary, we're seeing positive signs that the industry is trending back towards a more normal environment with far less volatility and greater predictability than we've experienced over the past few years. And I believe that over time, this will be very positive for Openlink. In terms of the execution of our strategy, I believe we are successfully executing our plan and advancing our purpose, which is to make wholesale easy so our customers can be more successful. During the fourth quarter, we completed the integration of our dealer and off-lease exclusive inventory into a single open-lane branded platform in the United States. This was a significant step forward for our company. The transition was very well executed without any technology issues, customer disruption, or negative impacts to sales or customer retention. So we are entering 2024 with one brand, one marketplace, and one customer experience in our largest market, the United States, and with a marketplace offering that is highly differentiated from our competition. And the primary differentiation is inventory. OpenLane includes the majority of captive finance companies whose off-lease exclusive inventory is available first in OpenLane before it is offered in any other digital platform or physical auction. OpenLane also has a national selection of dealer inventory at every age, mileage, condition, and price point. This means that OpenLane has an inventory selection that is unique and highly attractive to both franchise dealers and independent dealers. Each week, tens of thousands of vehicles are offered for sale in our U.S. OpenLane marketplace, with a roughly even split between commercial seller volumes and dealer volumes. We believe that the network effect of combining all of our sellers, buyers, and vehicles in one place will ultimately help us generate increased demand, increased supply, a better marketplace experience, and ultimately better outcomes for our customers, commercial sellers and dealer customers alike. Just one quick example. When we did the final marketplace switchover in November, we did it after regular business hours, and the very first off-lease vehicle sold in our combined OpenLane US marketplace was sold via mobile app at 10.45 p.m. to an independent dealer. From a dealer perspective, the feedback on our new open lane marketplace has been very positive and reaffirming. Just over two weeks ago, I attended the National Auto Dealers Association Convention, and I met with many dealers ranging from large multi-store groups who are highly active on open lane to smaller single-point dealer owners. A senior manager from a large national dealer group commented to me that the results they achieve on open lane are the best of any remarketing channel that they use. Strong conversion rates, average days to sale of approximately one day, low remarketing expenses, and strong sale proceeds all help contribute to this outcome. The CEO of another medium-sized franchise dealership group described how he had been a reluctant convert to digital selling, but today has instituted OpenLane as the preferred remarketing channel across all of his stores, and that he and his general managers are very pleased with the results. Having done that, this dealership group now wants to work with us to successfully purchase more highly desirable commercial inventory going forward. Another highlight of my weekend at the convention was a brief exchange with a dealer that owns three franchise dealerships. This dealer sought me out at our booths to tell me that OpenLane has completely transformed his business in a very positive way, enabling his dealerships to monetize trade-in units in a way that was never possible before when they were selling to a wholesaler or through their local auction. In his words, creating profits where profits had never existed before. This is truly why we created OpenLane and why we are so committed to making wholesale easy for our customers. so that they can be more successful. So it's clear that our customers, commercial sellers, as well as franchise and independent buyers and sellers alike, are already experiencing the benefits of our 24-7 digital marketplace. And I believe that OpenLAN's value proposition is very straightforward. In addition to our differentiated inventory, our digital marketplace enables faster speed to sale. In fact, our average days to sell for dealer customers in the United States is approximately one day. Also, a larger, always-on buyer base can help drive more bidding and true market price discovery for all our sellers. And buying and selling digitally on OpenLane helps maximize financial outcomes while avoiding the unnecessary costs of transportation, reconditioning, and higher fees associated with physical auctions. So with OpenLane delivering fast time to sell, low cost to sell, and excellent price outcomes for their vehicles, it's not a surprise to me that our customers are excited about the launch of the new OpenLane marketplace. We're working collaboratively with many of them to help them rethink their marketing approach, increase conversion, and explore how OpenLane's data and technology offerings can help their businesses more broadly. And I'm very excited about the opportunity to extend and reinforce these already strong customer relationships. In addition to the significant United States launch, we also completed the rebrand of our European business to OpenLane in the fourth quarter. So we start 2024 with a single marketplace brand, Open Lane, in all of our principal geographies, the United States, Canada, and Europe. Shifting to innovation, one of the positive benefits of consolidating platforms is the ability to accelerate product development and more quickly deploy those innovations to our customers. We continue to deploy features and functionality aimed at making the wholesale process easier for our customers, accelerating search, reducing friction, and increasing the velocity in our marketplace. A great example of this is our January launch of Visual Boost AI. Visual Boost AI is our new AI-powered technology, and it helps dealers quickly identify and assess vehicle damage and make better-informed buying decisions. And today, it is available in all dealer inventory across the open-lane marketplace in the United States. While we are only a few weeks in, we're already seeing the impact of improved inspection quality and consistency. In fact, dealers who toggle on the Visual Boost button are more than twice as likely to make an offer on a vehicle. And those offers help lead to increased conversion over time. So as I look back on 2023, I believe we accomplished some very important and foundational work. We start 2024 in a much stronger position with a stronger offering and more differentiation in the eyes of our customers. As I look to the future, I'm very excited for the opportunities that lie ahead, and I believe that OpenLane remains very well positioned for growth. In the U.S., our unified open-line marketplace is an unmatched mix of inventory, a large and expanding base of commercial and dealer customers, and is deploying data and technology to deliver a differentiated customer experience. Our analysis suggests we are continuing to gain share, and this market will remain a key focus of our growth in 2024 and beyond. In Canada, we are a clear leader with strong volumes, profitability, and cash flows. The business we acquired from Mannheim is being integrated, and this will make a positive contribution to results in 2024. Our European business is also performing well. In fact, it had a record year in 2023. And while Europe remains a smaller contributor to our overall results, we're expanding our relationships and our offerings to capture what we believe is a larger, longer-term opportunity to serve customers across Europe. Our finance business, AFC, remains a consistent and strong performer. We will continue operating our conservative portfolio while working to increase the tax rates and identify new ways for AFC to help power the open-land marketplace. We remain disciplined around our costs. We are now more asset light and more digital than ever, and this has enabled us to expand our margins and to improve the scalability of our business. This in turn provides OpenLane with the financial headroom to increase our investments in technology and innovation. Staying on innovation, with our teams aligned and unified, we are leveraging our best talent and technologies to benefit our customers. OpenLane has been a digital leader in this industry for over 20 years, and we still consider ourselves disruptors. and we look forward to bringing our deep pipeline of innovation to market to the benefit of all our customers. We will continue to execute our plan. The results we presented today are a direct reflection of our strategy and our ability to execute that plan. We will retain the strong focus going forward, guided by our purpose, which is to make wholesale easy so our customers can be more successful. And finally, we're very optimistic for the future. With the industry fundamentals trending in a more positive direction for our business, and our 2023 performance as a solid foundation, we believe that our talent, data, technology, and the innovative spirit of the OpenLane team will enable us to deliver a compelling and highly differentiated offering to our customers, driving our growth and delivering shareholder value. So with that, I will now turn the conversation over to Brad for more detail on our 2023 results and our 2024 guidance. Brad?