Good day, and welcome to the OPENLANE Second Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Itunu Orelaru, Head of Investor Relations. Please go ahead, ma'am.

Good afternoon everyone. Welcome to OPENLANE's second quarter 2024 earnings call. With me today are Peter Kelly, CEO of OPENLANE; and Brad Lakhia, EVP and CFO of OPENLANE. Our remarks today include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties that may cause our actual results or performance to differ materially from such statements. Factors that could cause such differences include those discussed in our press release issued today and in our SEC filings. Certain non-GAAP financial measures as defined under the SEC rules will be discussed on our call. Reconciliations of GAAP to non-GAAP measures are provided in our earnings materials and available in the Investor Relations section of our website. With that, I'll turn the call over to Peter. Peter?

Thank you, Itunu, and good afternoon everyone. Before I get started, I just wanted to formally welcome Itunu to the role of Head of Investor Relations for OPENLANE. We're delighted to have Itunu and her deep financial expertise on the team and I know she is looking forward to working with all of you as we communicate our results, our strategy and the OPENLANE story. Turning to our results, OPENLANE's continued focus on execution and profitable growth led to positive results in the second quarter. We grew our volumes and on a consolidated basis we grew revenue and delivered $71 million of adjusted EBITDA, which was negatively impacted by a $2 million charge for the newly enacted Canada Digital Services Tax, or DST, which Brad will discuss in more detail later. Year-to-date we have also generated $138 million in cash flow from operations. Similar to Q1, I'm very pleased that these results reflect a significantly improved performance in the OPENLANE marketplace. On 7% volume growth the marketplace business contributed $33 million in adjusted EBITDA, which includes the $2 million DST charge and represents 46% of OPENLANE's total adjusted EBITDA. AFC was again a strong contributor, growing loan unit volumes and generating approximately $39 million of adjusted EBITDA in the second quarter. I believe the consistent track record of performance we delivered in the first half of 2024 clearly demonstrates the power of our differentiated offering and the strong scalability characteristics of our company. We are accelerating innovation, improving the customer experience and making wholesale easy for our customers. The combination of these factors positions us very well to continue gaining share and deliver even stronger financial results in the future. So let me turn to our strategy and how we plan to build on this positive momentum. OPENLANE remains highly…

Thank you, Peter. We are certainly very pleased with our second quarter results, especially the continued improvement in our Marketplace segment. As usual, certain comments I make related to consolidated OPENLANE and the Marketplace segment are on a net revenue basis, which excludes the impact of purchased vehicles. In addition, my comments will be on a second quarter year-over-year basis unless I state otherwise. Our consolidated revenue was $432 million, up 4%, mainly driven by the 7% unit volume growth in our Marketplace segment. In our results, you will see our net revenue was down 1%. As we continue to realize the impact from the transportation accounting change we made in the fourth quarter of last year. This change impacted net revenue by $21 million in the quarter. Total cost of services was $246 million, up 10%. And gross profit was 186 million, down 4%. Higher auction and service volumes as well as higher pricing were more than offset by a charge of $12 million related to the newly enacted Canadian digital services tax. Excluding this tax, gross profit would have been up approximately 2%. As further background, at the end of the quarter, the Canadian Government implemented a 3% DST which applies to digital based revenues. This became effective at the end of the second quarter and is applied retroactively to January 1, 2022. As a result of this new tax, we recorded a charge of $12 million in the quarter. Of this $12 million, approximately $10 million relates to 2022 and 2023, and approximately $2 million relates to 2024. Assuming no changes to this legislation, including the scope of its application, we estimate the ongoing annual cost related to this tax will be $5 million per year. However, we are planning to implement actions to mitigate this impact…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Craig Kennison with Baird. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. I wanted to start with the dealer volume. If I add the CDK volume that you mentioned, 6,000 units, it looks like that business would have been closer to flat. Is that keeping pace with your digital competitors in that market and the broader wholesale dealer channel?

Yes. Thanks, Craig. Appreciate the question. So as I mentioned, dealer volumes were down in the quarter, but most of that was Canada. So if you – first of all, I’d say the 6,000 units wasn’t all dealer, was a mix of commercial and dealer. So I would assume a similar mix to our sales overall because volumes on the commercial side were also impacted by dealers that couldn’t turn in cars and couldn’t purchase cars. So maybe a 50/50 split on that volume. If we look at the decline, the decline was principally in Canada. We obviously check other sources to see what volumes are. Our understanding based on the data I’m looking at is that dealer volumes at physical auction in the United States were down in the first and second quarters of the year, and that in comparison, our volumes slightly outperformed the physical auction volumes. So I don’t think it’s a loss of share. I think we had a slight gain of share even though our volumes in the quarter were down. But you’re right, Craig, CDK had an impact, a small impact. And then I mentioned in the quarter, we saw an improving trend as the quarter went on. So I feel more optimistic about the trend line in the second half of the year that this will be back in sort of year-over-year growth territory. So anyway, we will watch and see that. I guess beyond that, Craig, I’ll say, we obviously spend a lot of time talking to our dealer customers. I’m very pleased by the feedback we’re getting from our customers about the strength of our offering. Selling their cars quickly, selling their cars at excellent price outcomes. You’ll see our GMV in the quarter was up 6%. So values are strong in our marketplaces as well, and obviously, having a strong differentiated offering in the marketplace. So I’m very pleased by the feedback we’re getting from our customers. And this is an area we’re very focused on investing into. And again, I mentioned in my remarks how we have put some increased go-to-market resources in the field late in the second quarter, feeling good about that. We’re already seeing some traction there, too.

Thanks Peter. And then you have a good message with some of the technology innovations. I’m curious if you feel like you’re getting that message out to dealers or if you need to target more marketing dollars to that effort, so they see what you’re doing with Visual Boost or Code Boost [ph].

Yes. Good question. I think, Craig, I think there is – sometimes, I think we’re sort of misunderstood in terms of the strength of our technology, that there’s a gap there between what we offer and what say analysts or investors or sometimes customers might understand. So that is something we are investing in. When we roll out these launches, we’re training our sales team. We’re obviously preparing the go-to-market materials to support this. And if you spend any time on openlane.com, you’ll see a bunch of dealer testimonials that speak to the power of these offerings and what they do for those dealers. So it’s an area we’re focused on. You may have seen we ran a dealer appreciation event in the month of July, DealerFest. And again, that was kind of our way of saying thank you to our customers, appreciation of their business, but also educate them on some of the great new things that we’ve brought to market over the last six months. And we plan to bring the market between now and the end of the year. So it’s an area we’re very focused on. And I think it’s going to be an area of increasing strength for our business, Craig, as we consolidate platforms, speed innovation, et cetera. I think you’ll see more to come from us in this dimension.

Great. Thank you.

Thanks, Craig.

The next question will come from Bob Labick with CJS Securities. Please go ahead.

Good afternoon. Thanks for taking our questions.

Hey, Bob.

Hey, Bob.

Hi, I wanted to start on the off-lease side. And Peter, you alluded in your remarks, but maybe, I was hoping you could go a little deeper. Could you give us a sense of the mix of off-lease right now in terms of where it’s going, in terms of owner retained, dealer retained, closed, open auction, and really just where are we in the kind of normalization process, and how do you see it progressing?

Yes, great. Good question, Bob. Thanks. Thank you for that. First of all, I’m very pleased with commercial volume growth. I don’t know if I spoke to it directly, but our commercial volumes were up 21% in the quarter on a year-on-year basis. So again, I think that’s very strong volume trends there on commercial. I feel good about that. I believe that’s now five consecutive quarters of commercial volume growth. So I think clearly indicates we’ve come off the bottom and commercial volume growth have been a source of strength here over the past five quarters or more. So in terms of what we’re seeing, we’re seeing a higher percentage of off-lease vehicles, a higher percentage of the portfolio that’s maturing being returned. So a lower percentage being purchased by the consumer, okay? So that, that equity gap, the extent to these – the extent to which these off-lease vehicles are in equity at the end of the lease that is declining, although it’s been a slow decline, Bob, but it’s a continued erosion of that. And as that erodes, I think two things happen. One, the consumer – fewer consumers buy out their lease, so more of them get returned. That’s positive for us. And secondly, fewer grounding dealers purchase the vehicles because a lot of these grounding dealers have the same sort of equity opportunity that the consumer has. So that percentage declines and these cars then flow deeper into our funnel. So we’re seeing that continue to play out. It’s been fairly gradual, I’d say, over the last few quarters, but it continues. A number of customers are predicting that it could accelerate in the coming quarters based on residual values in their portfolio, et cetera. But I think I’m taking a wait and see approach to see how that trends. But it’s something that gives me confidence that even though there’s fewer off-lease maturities at the top of the funnel, our commercial volumes will – that decline will be offset by an increased percentage of those vehicles that get returned. And I think our business will continue to perform through the period. So that’s the expectation we obviously have to take each month as it comes. But so far, we’re now in that period where there’s lower off-lease maturities, but we’re still seeing year-on-year commercial volume growth. So I feel good about that.

Okay, super. Very helpful color. And then just, I mean, you talked about the Canadian dealer market a little bit before, I think is it back in December, you made an acquisition of Manheim Canada. Can you talk about the progress on that integration? I thought there was potentially an opportunity for sale of a facility or something like that. I don’t know if that’s still in the works or how that integrations progressing.

Yes, of course. Before I go there, let me just add one more comment on your last question, which I think is really important. We’re also seeing significant increases in new vehicle lease originations. I know I’ve talked about that on prior calls, but lease originations dropped in 2021 and 2022, but they've been increasing in 2023 and 2024. I think five consecutive quarters of lease origination increases. That, again, is very positive. Again, we're going to have to look out maybe another 18 months till that starts to really flow through our business, but that will be very positive for us and very confident of that. So, going to Canada, very pleased with the acquisition. So we've made the acquisition. We've consolidated the operations in all five metro areas. So in the city of Toronto, for example, there had been two auction properties, one owned by us, one owned by our competitor. Now that volume is consolidated into one, so we're getting greater scalability, greater leverage out of these facilities. We're still running the auctions digitally, for the most part in Canada. Customer retention has been strong, particularly strong on the commercial side. So we have very good customer attention through the acquisition. And we're seeing, obviously, in addition to that sort of retention of acquired customers, we're seeing some organic growth in commercial volumes in Canada as well. So overall, it's, I think, a good story. We've had some challenges, as I've mentioned, on the dealer side in Canada, again, that improved over the course of the second quarter. I feel like we're entering the second half of the year much better position than we were in January. So I'm optimistic for a more positive trend line on the dealer side in Canada as well in the second half.

Yes. And, Bob, this is Brad here. Just to address the second part of your question regarding the real estate, we do continue to have an opportunity there to monetize some real estate that we acquired, as part of the transaction. It's really harmonizing our real estate play in a key market, and we have an active project underway to do that. Difficult for me to be able to provide any specifics on the timing and the amount of that, just given the process and where we're at in it, but it is an active project for us.

Okay, super. Thanks so much.

Thank you, Bob.

The next question will come from John Murphy with Bank of America. Please go ahead.

Good afternoon, guys. This is Billy Healey for John.

Hey, Billy.

So thanks for taking the questions. Just wanted to ask again a little bit more on the supply dynamic in the market right now. At least dealers we talked to are still calling out a challenge sourcing environment for used vehicles. And you guys were doing well in volumes, up 7%; another large player is up 33% year-over-year. So would you chalk this up to market share gains or you see more vehicles flowing into the auction channel or how do you think about that?

Well, Billy, good question. Even though volumes have been strong, I do agree that volumes in the industry are still below pre-pandemic levels. They're below what I would consider to be normal for our industry. And I think that's part of our growth equation, as those volumes return towards normal. I guess, when I look at that – divide the industry roughly into dealer and commercial, from a supply standpoint, dealer volumes, I'd say, are still below normal, but not massively below normal, maybe 15%, 20% below normal would be how I'd characterize it. I think those volumes will improve, to the extent, dealers have more vehicles on their lot more new and used vehicle inventory. We've seen those trends generally heading upwards over the last 12 months. To the extent, the consumer affordability problem improves, I think that will increase vehicle trade-ins and wholesale volumes on the dealer side as well. So there's some positive opportunities there. I would expect them to sort of readjust gradually, Billy, be my view on that. On the commercial side, it's a bit of a mixed bag. Repo volumes are quite strong relative to pre-pandemic. That's not a huge segment for us. What is a big segment for us is off lease. And as I've said on prior calls, off lease volumes are still about 50% below pre-pandemic levels. So I do see significant opportunity for commercial volume growth on the off lease segment. I do think we'll be really well positioned there. But again, Billy, as I've been very clear about in prior calls, we should be modest in our expectations over the next 18 months for – when we look at the cycle, the three year cycle of a leased vehicle, I think I've been very open on that. But I do then see – again, I think those volumes will be quite strong for us. And then I see acceleration coming after the end of 2025 and in the years to follow after that.

Okay, super helpful. And just one more on the margins for the marketplace segment in the quarter. I mean, I know there's a lot of noise going on with the accounting change and tax in Canada and maybe some impact from CDK. But can you just talk to maybe your expectations on the trend going to the back half of the year? I mean, if just looking at the numbers down a bit sequentially and year-over-year on the gross margin, next purchase vehicles. So I want to get your thoughts on the back half of the year.

Yes. Billy, Brad here. Thanks for the question. I think just to provide some added clarity on our margins in the quarter, certainly when you look at the gross profit margin in the quarter, that reflects the full impact of the $12 million charge that I highlighted in our early remarks. So would want to just highlight that to you. I think if you normalize for that, we would see fairly consistent margin performance, especially in the marketplace business sequentially and really kind of looking back over the last few quarters. So highlight that, on an adjusted EBITDA margin basis, you'll see in our adjusted EBITDA reconciliation that we did adjust out the out of period component of the $12 million charge, which was $10 million. So if you look at our adjusted EBITDA margins and then adjust for that smaller amount of $2 million in the current period, you would see that our margins, again on an adjusted EBITDA basis are fairly consistent sequentially. And then, as you know, you highlighted yourself, we had this impact to transportation revenue. And so the comparability there, that item in particular does give us a little bit of favorability in terms of our margin, but it’s not a significant driver of the ongoing improvements that we're delivering.

Great, thanks. Super helpful.

Thank you, Billy.

[Operator Instructions] Our next question will come from Bret Jordan with Jefferies. Please go ahead.

Hey, good morning. Good afternoon, guys.

Hey, Bret. Good afternoon.

On the market share question, I think you said you're outperforming the physical auction volume. I guess, if you looked at all auction channels and looked at market share, are you and obviously, there's lots of cars traded in various places. Are you outperforming the broader market or are you more or less right now performing the physical?

I would say, our market share, Bret, over the past period has been fairly steady. There's a little bit of ebb and flow in some quarters. We've seen strong growth on commercial or dealer volumes have been more flattish over the past say 12-month period. So – but again, I think that's against the backdrop of a commercial off lease volume environment that has been challenged and I think that's particularly impactful on us. So I feel good about our market share. We have – you have to kind of look at it in the dealer category and then in the commercial category and then in aggregate because the mix shift can flex from one quarter to another, one period to another. So I think we're – I would say, we've held our market share. It might be slightly up over the period, if we look at it in aggregate and then we look at it in commercial and dealer. I also feel pretty good about where we stand.

Okay. And then within AFC, is your borrow – is your customer base changed at all? Are you taking out some of the lower credit customers? And I guess, if you sort of thought about the number of active clients at AFC right now. Does that change much year-over-year?

Yes. Hey Bret, Brad here. Thanks for the question. So I would say, just a couple things here. We have been intentional around our risk management processes here and been pretty diligent, particularly over the last 12 to 18 months around the customer portfolio. So there's been some proactive takeout of customers that were flagging risk for us, and that's ordinary. But I would say, certainly in the last 12 to 18 months, it's been more of a priority for us. In this business, in the independent floor planning financing business, there is some normal churn. So there are normal churn. But as we've demonstrated historically, we're able to maintain a pretty consistent base of customers with that churn. So as we lose some, we gain some and on the net, we're able to grow unit volumes over time. So that's just my comments there. But I would say, this business continues to perform very, very well. Obviously, our credit loss rates have been a little bit higher than where we would like them to be on a target basis. But we feel our relative performance there, based on what we know of some of our peers in this space and their performance, our relative performance there is very strong, the margin structure of this business not only from a fee basis but also from a net interest margin perspective and the returns that yields is very, very attractive and like this business.

Great. A quick housekeeping question. You also commented you increased your go-to-market resources late in the second quarter. Is that something that is, obviously you maintained your guide. Is there any timing that that expense is going to generate a return later in the year or is it just not that significant?

Yes. I guess, Bret, I'd say first of all it's not that significant in the context of overall SG&A structure. So I'd say it's more on the margin. But obviously the business case associated with these investments is, yes, you increase some staffing and you expect to see volume impacts to happen in fairly near-term, but not immediately. So yes, we've got a business case that envisions some incremental volume here in the second half of the year and continuing into 2025. Some of the investments also are in technology and product development. Those probably have a little bit of a longer lead time, but not massively. And again, I would characterize that as we feel really good about the offering we have. We feel really good about the feedback we're getting from our dealers, many of whom are very sophisticated, do a lot of analysis on how we're performing versus other channels. And there's an opportunity here to sort of increase share in certain markets where frankly we don't have a presence in terms of a salesperson or in certain markets where we've got more opportunity than the person on the ground can reasonably handle. So it's a situation like that.

Great. Thank you.

The next question will come from Rajat Gupta with JPMorgan. Please go ahead.

Great. Thanks for taking the questions. Apologies, I joined the call a little late. I was curious like if you commented around your U.S. D2D growth and what your share gains were in the quarter? And I have a couple very quick follow-ups. Thanks.

Yes. Rajat, well we commented that the story was similar to Q1 insofar as there were some declines in total dealer volume, but most of those were located in our Canadian business. Our U.S. volumes were stronger in relative terms based on the information we have. Our U.S. volume growth in dealer was stronger than U.S. volume growth at physical auction. Actually, it was a decline at physical auction, I believe, over the first half of the year. So yes, so I think our U.S. dealer to dealer trends are stronger than the overall aggregate trend that we talked about. A couple of other things worth mentioning. Commercial volume growth of 21% in the quarter, similar to Q1, when you have strong commercial volume growth, there is a little bit of, I suppose cannibalization on the buy side where a buyer might, who previously might have bought dealer cars, switches over and buys a commercial vehicle. And that's just part of the normal network effect in our business. So I think that's – that's to be understood. I guess the other thing I said, Rajat, is we saw an improving trend over the course of the quarter, both in U.S. and Canada. So to the extent there were declines, we saw those declines sort of diminish as the quarter went on, and I feel good about the trend line that set up for the second half of the year.

Got it. And we saw – we noticed, like one of our competitors, like, raised prices on the digital side in the month of June. I was curious, did you follow through with that or you're going to be a little more cautious about that and maybe use that as an opportunity to take some share? Just curious around the thought process around that? Thanks.

Yes. Thanks, Rajat. We noticed the same thing. Obviously, pricing is something we keep under review just at all times in our business, in all the marketplaces, commercial end dealers. So that's something we observed and something we will react to appropriately. I guess what I'd say to this, first of all, listen our dealer-to-dealer business is an important part of our offering. It is profitable, significantly more profitable than it was two years ago. So I feel really good about that. I believe we've got a very efficient marketplace, by which I mean the cost to put a vehicle through our marketplace, I believe is lower than the cost to put a vehicle through a physical auction, and probably lower than the cost to put it through some competing channels. So I think we've got a very efficient marketplace and that has enabled us to have attractive pricing in the market, a growing business and a profitable business. So, listen, we're going to keep that under review. It's something we're actively looking at. We also had in Canada, the digital services tax that Brad alluded to, Brad spoke about. So that's a function in Canada that we obviously need to find a way to address as well. So looking at pricing in that regard as well. So, Rajat, I don't have anything to say on this particular call in terms of timing, but these are things we look at all the time.

Understood. Just one last one on the CDK outreach and the experience that the dealers went through with this. You're obviously very much integrated with your dealer network. Their systems in a way getting deeper and deeper in terms of partnerships. I was curious, does this experience open up an opportunity for you to maybe participate more in those kind of systems and products, given you already have a platform and you're already like, well connected? So I was just curious how you think about that opportunity? Thanks.

Yes. Thanks, Rajat. First of all, I want to be very clear. Our information systems were not in any way compromised in the quarter. The volume impact was sort of a knock on impact our dealers operations were impacted by the outage. That meant they couldn't take trade ins and they couldn't wholesale cars. And that sort of by implication impacted our volumes late in the second quarter. But our systems are robust and were unaffected through the whole process. Listen Rajat, it brings it home that information security is really important. I feel really good about what we've got. Our systems are a little different. We're don't – we're not as sort of tied into the core operations of the dealership like a dealer management system is. But we have opportunities as part of our product innovation is to make the wholesale process easy for dealers. So part of that we are expanding our product offering beyond just the purchase and sale of a vehicle, but helping dealers with pricing guidance and vehicle stocking decisions and things like that both in U.S. and Canada. So we've got some exciting initiatives in the works. I think we'll have more to talk about in future calls as we bring these products to market.

Understood. Great. Thanks for all the color.

You're welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Peter Kelly for any closing remarks. Please go ahead.

Thank you very much. Listen, I'd just like to reinforce a few key themes that support my optimism for OPENLANE's future. As I mentioned earlier, our performance in the first half of this year clearly demonstrates the power of our offering and the strong scalability characteristics of our company. We're leaning into that strategy and our investments to further accelerate the growth that we're already seeing. AFC continues to be a strategic asset, delivering meaningful adjusted EBITDA and enabling the OPENLANE marketplace more than ever before. Our marketplace business is profitable and growing and are well positioned to capture the opportunities inherent in the improving industry fundamentals. We remain the clear leader commercial off lease remarketing and are best positioned to benefit from the current leasing recovery. And we're investing in our dealer business to accelerate our innovation pipeline, grow our volumes and our market share, and continue delivering the profitable growth that you're seeing. When viewed together, I think the combination of these factors provides a very compelling vision for OPENLANE's future. Thank you all for joining us on today's call. I look forward to speaking to you all again soon.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.