Good day and thank you for standing by. Welcome to the KAR Auction Services, Inc. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Michael Eliason, Treasurer and Vice President of Investor Relations. Please go ahead.

Thanks, Norma. Good morning and thank you for joining us today for the KAR Global fourth quarter 2021 earnings conference call. Today, we'll discuss the financial performance of KAR Global for the quarter ended December 31, 2021. After concluding our commentary, we will 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 KAR'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 yesterday, which is also available in the Investor Relations' section of our website. Now, I'd like to turn this call over to KAR Global's CEO, Peter Kelly. Peter?

Thank you, Mike, and good morning, ladies and gentlemen. I'm delighted to be here this morning with all of you to provide an update on our performance at KAR Global. So on this morning's call, I plan to speak about our fourth quarter results. I will provide an update on volume trends in our industry, particularly volumes from commercial sellers. I'll provide updates on the continued growth of our dealer-to-dealer business and specifically our record quarter in the dealer off-premise volumes sold, a record quarter in dealer off-premise volumes sold in our digital platforms. I will also provide an update on our acquisition of CARWAVE and the solid performance of our finance business, AFC. I will close out with some updates on our cost structure. So I'll start with an update on our fourth quarter performance. While commercial seller volumes remained a challenge in Q4, I was pleased with our performance in the face of that challenge. We achieved the following results in the quarter. For KAR overall, we generated $5 49 million in revenue. That was an increase of 4% from Q4 of 2020. We generated a total gross profit of $226 million, an increase of 11% from Q4 of the prior year. And this gross profit represented 49.7% of revenue, excluding purchased vehicles or net revenue. We generated $97.9 million of adjusted EBITDA. That was an increase of 45% from the same quarter of prior year. Cash generated from operations for the quarter was $61 million. And for the full year, cash generated from operations was $413 million. Within the ADESA segment, we facilitated the sale of 543,000 vehicles, representing over $9 billion in gross auction proceeds. Those volumes were down 20% versus Q4 of the prior year, and this was driven mainly by the continued strain on…

Thank you, Peter. As Peter has already commented on many of our financial metrics and performance in the fourth quarter, I have only a couple of additional areas to review. Let me start by recapping our full year performance for 2021. As we have discussed all year, supply constraints have limited volumes for us and all others in the wholesale remarketing industry. For KAR, we sold 2.6 million vehicles in our various marketplaces. Off-premise transactions represented 53% of all transactions executed by KAR through its ADESA entities. Strong used car pricing led to a 10% increase in average transaction value for the year. Increased vehicle values combined with targeted fee increases during the year led to a 17% increase in average auction fees per transaction. This increase in auction fees per transaction is net of a decline in this metric for the commercial off-premise segment of our business. While increased used car values contribute to higher auction fees on a majority of our platforms, the one exception is the private label transactions for our commercial sellers where the fees are generally fixed and used car values do not impact the these schedules. Because of the volume challenges, our 2021 performance was also challenging. Total revenue, excluding 2021 acquired businesses, was down 3.5%. Control of expenses did allow us to generate improved gross profit, increasing our gross profit as a percent of net revenue to 50.8% on a consolidated basis. This drove an increase in our adjusted EBITDA for 2021 to $434 million, up from $375 million in the prior year. To be clear, adjusted EBITDA for 2021 includes $32 million of realized gains on the sale of our stock held as part of strategic relationships with certain customers. As a reminder, we have invested in a small number of private…

Thank you. [Operator Instructions] Our first question comes from John Murphy with Bank of America. Your line is now open.

I just wanted to touch on the cost and execution in the quarter as well as sort of juxtapose that versus the dealer and commercial mix. I'm just curious, as you think about what happened here, there was a very significant shift in mix with dealer up 34% and commercial down 44%. I mean how much of that impact margins and your ability to go after cost and how much of your cost cutting was net of that? I mean it's just kind of all intertwined there. So I'm just trying to understand what mix meant to the business because there's pretty significant shift along with the cost cutting.

Yes. Thank you, John. I'll take a first attempt of that. You're right. There was a lot of different moving pieces. I would say the cost was generally independent of that phenomenon that you described. Again, if I just think about our business and a commercial seller vehicle, particularly an on-premise commercial vehicle, will tend to have a higher attach rate of services and ultimately a higher gross profit per vehicle sold. -- relative to a dealer car that in the physical channel, the on-premise channel doesn't tend to have those services attached to anything like the same rate. So I'd say the relative decline in commercial seller volume relative to dealer would have put downward pressure on that metric. But obviously, the metric was still strong in spite of that. So I think our cost actions were generally independent of that. There was a little bit of -- we did adjust some fees in the fourth quarter. So, there was some monetization as well reflected in the higher number of 297. But Eric, I don't know if you want to add to that, I'm not...

No, there was an offset to the decline in commercial volumes, and that is the retail reconditioning did grow in the fourth quarter and it is contributing gross profit, but not as much as we would have had in a normal wholesale environment doing reconditioning for the seller. It's still a growing part of our business. And then the other element, John, is the SG& A. Again, most of the direct costs movement we made began in 2020 with the workforce reductions, the fact that we weren't running vehicles through the length. What we did most recently is really focused more on the SG&A. There was very little cost action, though, supporting the dealer-to-dealer that we maintained our cost structure and any changes we anticipate in the future are yet to be realized in our numbers.

Okay. That's helpful. I mean, I guess, just to follow up, I mean my understanding is, I mean, commercial, you get higher dollars in gross but lower percent margins. And then on the dealer side, you get lower grosses, but higher because it's mostly buy/sell fees, you get higher margin. So that's why it's a little bit confusing because it's I mean, you certainly argue that the mix shift should have helped your percentage margin but hurt your total dollar margin. So, it's just -- that's why -- that's kind of why I was asking. And it seems like you probably outperformed that pretty significantly. I'm just trying to get -- it seems like the underlying operations did even better than what you're talking about just based on this mix. And I was just trying to figure that out. We can maybe follow up on that dig into it a little bit deeper later. On the used...

And John, let me clarify one thing. If you look at the numbers, and you can get this in the supplement, the decline in services revenue in the ADESA segment is far less than the impact of commercial volume would normally indicate. That's where -- and that is the lower margin services revenue, and what drove that in part was increases in retail reconditioning.

That would add incremental dollars, but that would be at a lower margin than the 49%, 50% that we have in the business overall, okay?

Okay. Got you. And then just second on the pricing dynamics. I mean what is your gauge on used to new pricing right now? Because it just seems like that's -- I mean, Peter as kind of you alluded to, I mean, that's really a lot -- I mean, there's a lot of -- there's a desert of actual supply, but then also this jam-up of used to new pricing is creating problems in somewhat in the retail market. I mean what's your relative gauge of used to new pricing at the moment?

Yes. Well, that is a good -- we do look at that index. What percent of a typical new vehicle to used vehicle prices represent. And frankly, in the latter part of last year, that percentage was at its all-time high level of, I think, close to 70%. And that is an unsustainable level of used vehicle pricing relative to new. I think a more typical situation is something closer to 60 and sometimes it's below 60%. And again, Tom Kontos run that analysis for us. But listen, there is different opinions out there on what the trend line on used vehicle pricing is I think most analysts are expecting used vehicle values to decline as new vehicles are produced in greater numbers. There's probably different opinions on the rate of decline, some predicting a more steady decline. And I guess I lean a little more towards perhaps a more rapid decline. And I think we're actually starting to see certainly a noticeably weaker pricing environment, as I mentioned in my remarks, this year relative to a typical sort of spring market with declining used vehicle values, lower conversion rates generally in various marketplaces. Not just us, but in the industry. And honestly, I think that's a good thing for our business. I think that's something we want to happen. We want these prices to normalize. Getting there, the quicker we can get there, the better in my opinion. But obviously, I don't have a perfect view of the future, so different people have different opinions on the pace of that change.

Okay. And then just one last one. You mentioned service evolution as part of the second point in your fourth quarter review. I'm just curious exactly what you meant by that because we're coming across is a lot of smaller AV and even non-AV fleet managers that are not so sophisticated that really probably could use some help on the service and maybe local logistics that you guys are very good at it. I'm just curious if that's part of the equation or what you really mean by that service evolution and development.

Well, Eric, do you want to take that?

Yes. I mean, John, you are right. But when you're talking about actually the bigger players in the industry also have a shortage of service capacity, given the used car marketplace today. So I would tell you that this has been a plus for ADESA and that we have a lot of demand for us to provide services that have always been available, but we're providing it to call it the buyer of the wholesale transaction or the retailer as opposed to the seller who was the consignor. And I would agree with you, although, again, our capacity seems to be consumed by the larger used car retailers versus the smaller ones right now.

Thank you. Our next question comes from Ryan Brickman with JPMorgan. Your line is open.

I realize you're not guiding to '22 given the industry uncertainty, but still wanted to check in on some of the big picture puts and takes with regard to the current year, including, if possible, what maybe a range of outcomes might be reasonable to assume from a unit volume perspective? And what factors could cause volumes to maybe be higher or lower, for example, is it really the level of used car prices and new car sales, that will be the driver, how you're thinking about how those metrics could track? Or if there may be some other metrics worth monitoring independent of volume on the top line, such as, I don't know, conversion of -- the conversion rate of EBITDA and the free cash flow, et cetera. And then what are the factors that you would need to see? For example, stabilization in one sales channel or another, like off-lease or repo or the healing of the automotive supply chain, providing better visibility into new car sales or pricing? What factors would you need to see in order to feel comfortable reinstating guidance?

Thanks, Ryan. I appreciate that, and I was expecting we'd get questions on guidance. I guess there's one principal factor that causes me to be cautious about providing guidance. And it's volume, specifically volume in the commercial seller channel. And I think there are two principal inputs to that. One is, what is the timing on new vehicle production and how quickly can we see more new vehicles showing up at franchise dealers loss. And I think we're seeing different sort of statements from different OEMs. But I think generally, most are predicting that their production will increase this year and more, more vehicles will be delivered to dealers. So that's one factor. And then the second factor related to that is, what does this do to used vehicle pricing? Because if I look at the volume constraints in particularly our off-lease segment, which is our biggest commercial segment, it really is tied to used vehicle values and the equity that a lessee has at the end of their lease right now, again, lessees right now have, we believe average equity value of over $10,000 at the end of every lease. So the simple fact is they're not returning those leases. They're rather keeping it or if they do happen to return at that dealer to whom it's return by us, and it doesn't enter panel around simply because there's $10,000 to be gained by just purchasing at a residual. And as that market price adjusts, that's what's going to open up the supply dynamic, particularly in our largest commercial segment. And then related to sort of new vehicle production, rental companies, if they get more vehicles allocated from the manufacturers, which they're expecting to get based on my discussions. They recognize they've got leases that are older and higher miles than they typically would like to have, so that will induce them to remarket more cars. And then on the repossession segment, it's tied to things like automotive defaults, but also has a liver tied to used vehicle value. So I think, Ryan, those are the two factors. It's production of new vehicles and it's used vehicle values. And I think we've all got a good understanding of directionally which way those trends are going. They're going in a way that's favorable for our business. What remains to be debated is the speed of that and the extent of that. And the conclusion that we came to is that if we were to provide guidance right now, the range would be too wide to be meaningful. But we hope to be able to reinstate guidance once we've got better visibility or as soon as we've got better visibility into those dynamics that I just talked about.

Okay. That's very helpful. And then just lastly for me. I saw in the press release that you are talking about maintaining or maybe even gaining market share with commercial consignors. It would be great if you could maybe comment on the competitive dynamics there? And also whether you see the potential for digital dealer-to-dealer peers to penetrate the commercial market or what the barriers to entry there might be?

Yes. Again, if I could look at our Analyst Day framework, the thesis on the commercial seller side was one of maintaining our current share. And I believe we're doing that. I would say that generally, both in the on-premise and off-premise categories, commercial seller market shares were very stable in 2021 overall. But we did have some modest share gains with a small number of customers, so we felt good about that. To the second part of your question, hard for me to comment on that, I think obviously, we've got a strong market share in commercial off-premise with OPENLANE. I think that's a very strong sort of differentiated offering that's hard to duplicate. And obviously, in our physical on-premise volume channels, there's a relatively limited number of competitors that have those assets and have that market share. And again, those market shares have tended to be pretty stable over time.

Thank you. Our next question comes from Gary Prestopino with Barrington Research. Your line is open.

Peter, I'd like you to, if possible, to maybe comment on some of the new entrants into this dealer-to-dealer space, particularly CarBravo with GM and then another one of my coverage company, CDK is putting out a system where to do dealer to dealer trades. So as you see it, what are your competitive advantages there versus some of these newer platforms that are coming out? How do you keep gaining share? It's just becoming a very crowded field.

Yes. Well, thank you, Gary. I appreciate the question. Let me take it in two parts. First, I'll talk about just competition and then I'll talk a little bit about CarBravo, which I don't actually see as competition, but I explain myself there. So I guess I'd say on competition. First of all, I think our industry has always been competitive and continues to be competitive. And I think our customers have always had choice and options as to where to send their vehicles and where to buy their vehicles. And frankly, the strong cash flow characteristics of our business also attracts competitors as they see opportunity to go in and compete there. I guess as I view it, at the end of the day, our customers want access to marketplaces that can sell vehicles quickly, for full value and at reasonable cost. And fundamentally, we're focused on delivering that. And I think we've got a lot of advantages in terms of expertise, scale, customer relationships, technology platforms and so forth, that enabled us to do that very, very well. I also, I'd say, I believe our digital strategy enables us to improve our ability to deliver on those outcomes. And I believe that will be increasingly evident over time as we move forward. So I guess, I kind, of focus on our business and what we are doing and how we're taking care of our customers. And I believe that if we continue to do that, we can execute well, we can deal with any competition that exists. I don't really want to comment on any one individual brand or customer, I recognize some new entrants. I will say, generally, my opinion is this industry tends to be a lot more complex than people often think of at initial…

Thank you. Our next question comes from Stephanie Moore with Truist. Your line is open.

I wanted to take a step back and maybe ask a bigger picture, longer-term oriented question. A lot of work has, obviously, been done over the last couple of years from the digital transformation, obviously cost cutting, but a lot of actions behind the investments between dealer to dealer. So as you look to the years ahead, let's assume the recovery or some recovery in volumes occur. How should we think about the integration of all of the KAR platforms because in this instance, it's a very large inventory car kind of has under its umbrella? So maybe just talk through about the seamlessness that if you kind of can envision how each platform works together is integrated together seamlessly. So you're not really jumping back and forth. I'd love to get a big picture thought of how just the really the umbrella of cars offering looks like.

Stephanie, thank you. That's a good question. And I think you're hitting on an important point in our business and one that's on my mind. Listen, our business, as I've said before, one of the things we want to do is simplify it, both from our customer standpoint, also an investor standpoint, when I'm principally focused on the customer. And part of that is trying to get to fewer brands, fewer platforms and greater sort of consolidation. And frankly, I think that is a whole host of benefits for us in the long run. It's obviously got cost type benefits of focusing our investments in a fewer number of platforms and brands. So there are benefits there on the cost side of our business. But I also think it's got customer benefits through scale, network effects, liquidity and simplicity and things like that. So we are working on that. Obviously, in 2021, we integrated CARWAVE and TradeRev into marketplace in the U.S. We accomplished that quickly/

BacklotCars.

Sorry, BacklotCars and TradeRev, I should say. And in the current year, it's -- we're integrating CARWAVE and Backlot into one marketplace. But we're actually going beyond that, and I wasn't necessarily planning to talk about it, but we have an initiative underway looking how we integrate into a one marketplace format in Canada. And subject to that being successful, how we might do that in the U.S. after we complete Canada. Ultimately, I do want to get to one -- the quicker we can get to one venue for all our vehicles and all our sellers and all our buyers can participate. I think that's going to be a benefit for them and also for our business. But obviously, there's a complexity there, Stephanie, and it will take some time, but it's something we're actively working.

Absolutely. And just a follow-up. What has to be done from a reconditioning or -- I'm sorry, from an inspection report standpoint to have call it a full integration across the platforms. Is it a lot of work? Or is there a best practice for the one? So how should we think about just the work going forward? What's behind infection port?

Yes. And I mentioned that in context of BacklotCars and CARWAVE. I wouldn't characterize it as a lot of work, Stephanie, if I look at that particular solution. The simple fact is, both companies had a smartphone app-based inspection format that an inspector would use, a guided format to inspected vehicle. They were quite similar, but they also were different because they've been developed by different groups. So what we have done in that case is try to pick the best of both add some new features and deliver that. So it's one unified inspection platform for all our inspections in that channel in the U.S. So now expanding that to ADESA and, more broadly, obviously, that takes more work. But the integration I spoke to in the context of BacklotCars and CARWAVE is relatively simple and will be done, I believe, within the next 90 days.

Thank you. Our next question comes from Bob Labick with CJS Securities. Your line is open.

You outlined -- or you discussed some very attractive cost savings initiatives of $120 million or so. I wanted to kind of ask if you could dig into that a little bit. And with the context of how much of the kind of cost of service and of the SG&A lines right now are fixed versus variable. What are the primary fixed costs? And is that where the $120 million is coming out of?

Yes. Good question, Bob. You're right. Based on the math, I said, approximately 60% of that is cost and SG&A is a significant component of that. I guess one view I have is that in the long run, no cost is entirely fixed, but in the short term, obviously, costs are fixed. And we have elements of fixed costs in our business, which tend to be, I'd say, deeper on the sort of on-premise side of our business with facilities and leases and the management structure that you would need to operate a facility, those tend to be fixed at least in the short and medium term. And a lot of the cost in tied to sort of the operation of the shops and the back office and stuff like that tend to be a little bit more variable, I would say, given the low volumes in the fourth quarter, we started the low commercial seller volumes started to bump up against some of that sort of fixed cost elements of our business, but still managed to deliver, I think, a good strong gross profit per car sold performance on that. In terms of the sort of things we're looking at that make up some of the cost initiatives we're talking about, let me just explain some of the things we're looking at. I'm looking at spans and layers of the Company. I'm trying to have fewer layers between myself and the frontline workers in this company and trying to have appropriate sort of spans at all levels of management in this company. So addressing that to Stephanie's question, as we address technology platforms, if we can start to consolidate our focus our investments on fewer platforms, that creates cost savings opportunities as well, and that's an inherent part of our modeling. And then I'd say doing things differently, trying to automate certain processes, trying to centralize certain processes, more digitization and less paper. Those are sort of savings that, obviously, take time to execute, but can sort of change by changing the way you do business, reduce your costs over the longer term. So those are the things that comprise the types of initiatives we're going after.

And Bob, on the SG&A front, I did a little quick math here. About 15% of SG& A is incentive pay commissions for salespeople what I call truly variable. It doesn't mean you can't reduce the workforce if volumes go down. But I'm saying at the current workforce, it's about 15% of SG&A is actually tied to performance and 85% is more of a structural SG& A.

Thank you. Our next question comes from Bret Jordan with Jefferies. Your line is open.

Some overlapping calls this morning, so I don't want to ask about stuff you've already discussed. But could you talk a bit about the fee environment, whether or not with more competitive players in the space? I know a few years ago with dealer-to-dealer shipping costs were getting promotional. But can you talk about the ability to either take fees up in the current scenario where supply is short or anything that might be changing around that.

What I'd say is I think the competitive dynamic seems to be, I would say, fairly rational. We're not doing, and we're not seeing those types of incentives that you referenced, which were featured of the business maybe two-plus years ago. We've seen some competitors raise some prices. I think that creates us room for us to look at that as an opportunity as well. We did a small level of fee adjustments in the fourth quarter. Principally, those related more to our on-premise than off-premise channels, but we expect to see benefits from that over the -- and I referenced that as part of the initiatives we had executed on $30 million of initiatives we'll execute on some level of fee increase is part of that. So I guess, I see some opportunity, and I see the competitors behaving in a rational way and focused on -- obviously, everybody wants to grow, but we're also focused on being profitable and delivering profitable growth. So I think that's -- that's a good dynamic for -- and a healthy dynamic for our business.

Thank you. Our next question comes from Daniel Imbro with Stephens. Your line is open.

I don't want to belabor a point, but just to clarify, Peter. So if we look at the GPU, I think you said about 30% at ADESA. Are you able to parse out on that metric? How much would they be driven just by the favorable increase in year-over-year revenue per unit or used vehicle prices versus how much of that 30% was specific cost removal that we can underwrite into next year, if prices roll over because you've talked about prices moderating being a tailwind to volume, trying to understand if there's going to be an offsetting headwind to GPU at ADESA?

Daniel, that's a good question. Well, I don't have a precise number to give you, but I'll answer directionally and then Eric can weigh in as well with his point of view. I would say higher used vehicle values does create a support to that number because if vehicles are up in value, maybe we move into the next tier of fees, maybe the but is $25 higher than it would have been if the car was sold for $1,000 less or something like that. So there is an element of that, but it's not sort of proportional to the value. If the vehicle value was up 20%, our fees do not go up 20%. And frankly, those fees are only the buy fees, right the cell fees don't tend to reflect that. And as Eric mentioned, the sell fees and our commercial off-premise channel don't reflect that either. So there is a component of that. I would say it's relatively small. It's certainly, I would say, less than half of the increase, for sure. And then the other thing that runs the other way is just the volume. In any business, when you have less volume, your gross profit margin and your gross profit in absolute terms is under pressure. So because of every business has some element of fixed costs as well within its direct cost structure and our business for sure has. So I actually think when I sort of weigh a declining used vehicle value equation versus increased supply. I think the increased supply will be more positive to that metric than the declining used value will be negative. Now that would be my view, but I will let Eric comment on that.

Yes. And Daniel, this is really good. On gross profit dollars per transaction, the one thing that won't be linear is the off-premise or the services related to not the car sold. So when my volume goes up by denominator increases, probably greater than my gross profit dollars in total, unless I can grow some of my, what we call, off-premise services like the repossession activity, like our inspection business, like our transportation business. So in the Analyst Day, we even commented that we were targeting something that would be more in, I would call it, the $2.60 to $2.75 range long term, but that's because the denominator gets better on dividing that gross profit by what we believe will be a growing volume of transactions. Keep in mind, about 1/3 of our transactions are off-premise with no ancillary services. If that grows on the commercial side -- I'm sorry, 1/3 are commercial. And of those, a large number off-premise, that would probably put pressure on the absolute number. But my gross profit would actually increase in total.

Okay. And then I wanted to ask one on the viewer dealer business, Peter, you guys have spent, call it, $1 billion over the last couple of years to fuel growth. With the balance sheet, I think a total net debt is around 4x levered. Are there other M&A opportunities? Or could you do other M&A opportunities given the leverage right here? And then that's kind of a lot of capital you've spent to fuel this growth on the digital side. I know it's maybe not CapEx heavy, but it's a pretty high growth cost. How capital-intensive should this business be longer term as you look at the next few years or next longer term around the dealer-to-dealer business?

Yes. Thanks, Daniel. Obviously, we have done some significant acquisitions. That is correct. I'm pleased with those acquisitions. I think to get us, as I mentioned, we're at 0.5 million vehicles sold in that dealer off-premise channel and growing -- and seeing profitability evidence in TradeRev, strong profitability, I would say. So I feel good about that business. There are no other acquisitions currently contemplated. I think we have a good position in the market, and we're pleased with the assets we have. I'm focused more on integrating those platforms and continuing to deliver that organic growth. And your comments on leverage, obviously, I'm aware of that as well. My current focus is on growing the Company, increasing our earnings and ultimately reducing that net leverage number. And I believe that is absolutely possible. I believe our business will deliver on that, and we'll get that back closer to our target of three.

Thank you. Next question comes from Ali Faghri with Guggenheim. Your line is open.

I just have a question, I guess, on your outlook for wholesale volume recovery starting in the second half and then into 2023. While I recognize it's a tough environment to predict, your primary physical auction competitors predicting industry wholesale volumes up 2% in 2022 and then actually declining in 2023, back to 2021 levels again, primarily due to a reduction in overall vehicles coming off lease in 2023 as a result of lower new car sales and lease penetration rates during the pandemic. And then on top of that, isn't that dynamic of off-lease vehicles being in the money, so to speak, likely to continue through at least the end of next year since I think even the most bearish used car pricing forecast expect values to remain above pre-pandemic levels over the next few years. So that would suggest that it will continue to be advantageous for dealers and consumers to keep their off-lease cars for the foreseeable future. So, I'm wondering at a high level, what gives you confidence in a volume acceleration into 2023? Because it seems like there could be a scenario where commercial volumes and off-lease, in particular, remain cyclically depressed through the end of next year.

Yes. Ali, I'll appreciate the question. Let me attempt to answer. So first of all, within the commercial category, let me just comment on rental. We're expecting to see volume increases repo. We're expecting to see volume increases for the reasons I talked about. But let's spend some time on off-lease as well. I think the big question is not the total number of leases written or the total number of leases reaching maturity. It's really that equity value question. I know that was inherent in the question you asked. It's really what is the economic equation that the lessee or dealer had when that lease is ending, okay? And -- just to kind of give you context on that right now, the situation we have right now is because of this sort of $10,000 equity situation, essentially almost no off-lease vehicles are reaching the physical channel. I don't think that needs to go back to zero for a substantial number of leased vehicles to start to reach the physical channel. Because we saw sort of earlier last year that when those numbers were more in the $3,000, $4,000 or $5,000 level of equity, there still was a not the normal volume reaching the physical channel, but a substantial number. So I don't think it needs to revert the whole way. And I guess just from conversations with customers, just asking them about their portfolio and what they expect, I would say my expectations very much reflect the feedback I'm getting from customers as well. That their expectation in terms of their risk management and their residual management and their assessment of marketing volumes. What they're telling me is they don't believe that new vehicle production needs to be all the way back to normal or that used vehicle values need to be back to pre-pandemic levels for there to be a significant increase in off-lease volume relative to the current level. And I'm not predicting that they get back to 2019 though. That's not a part of the model or a part of the plan anytime soon. But we are predicting that we will increase versus the current levels. And again, the current levels are very close to zero. So I guess time will tell. We will have to see how this plays out, but my expectation is consistent with what I said, I expect to see an increase in these volumes in the second half of this year and accelerating in 2023.

And Norma, we are out of time. So we'd like to go to Peter's closing remarks.

All right. Back over you an over to Mr. Peter.

Thank you, Norma, and thank you, ladies and gentlemen, for your time this morning and for your questions. I recognize in today's call, we closed out our reporting on 2021 and year overall. And clearly, it was a year that brought some challenges, but I'm pleased with the way that our team here at KAR rallied to meet that challenge and deliver the results that we did. So I don't want to leave today's call without saying a sincere thank you to all of our employees across the Company to help make that a reality. We appreciate it. Thank you so much for that great efforts in 2021. So I'd like to close out my remarks today by reinforcing what I and the team are most focused on in 2022. While we expect to see some relief in the commercial seller volumes in the second half of this year, we are focused on getting through the current supply challenges and controlling what we can control. And I think our Q4 results demonstrate that we are able to do that in this business. We continue to use this as an opportunity to reengineer our business, lowering our cost of service. Our goal is that as the volumes return, we can support those increased volumes with a lower cost delivery model than we've had in the past and be more profitable at lower volumes than we've been in the past, and I believe we will be able to do that. In dealer-to-dealer, we are focused on continuing to grow our digital off-premise volumes towards our goal of 1.2 million vehicles sold by 2025. This, in turn, will drive a significant increase in our overall profitability. To help drive this, we are focused on increasing our marketplace participation by sellers and buyers in the U.S. and Canada as well as ensuring a successful integration of CARWAVE and BacklotCars. And finally and most importantly, we remain very focused on our customers. As I said on prior calls, our purpose is to make wholesale easy so our customers can be more successful. And I believe that if we do that well, our customers will award us with more of their business, and our company will have a bright future. So with that, we'll end today's call. I look forward to we connected in the three months to give you an update on the current quarter. Thank you all very much.

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone have a wonderful day.