Good day and welcome to the OPENLANE Third Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Ms. Itunu Orelaru. Please go-ahead ma'am.

Thanks Chuck, good afternoon, everyone. Welcome to OPENLANE's third quarter 2024 earnings call. With me today are Peter Kelly, CEO of OPENLANE, and Brad Lakhia, CDP and CFO of OPENLANE. s 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 Etunu and good afternoon everybody. I'm pleased to be here today to share OPENLANE's strong third quarter results. I will start with some high-level details around our performance, our strategy and our outlook for the future and then I'll turn the call over to Brad Lakia to provide additional detail on our financial and operating metrics. OPENLANE had a very positive third quarter. On a consolidated basis we increased revenue and delivered $75 million in adjusted EBITDA representing a 10% increase over the prior year and year-to-date, we've generated $260 million in cash from operations similar to Q1 and Q2. I'm very pleased that these Q3 results reflect a significantly improved performance in the OPENLANE Marketplace segment on 6% volume growth. The marketplace grew revenue and gross profit while delivering $36 million in adjusted EBITDA. That was a 34% increase over the third quarter of last year and this is now the third straight quarter where our marketplace segment has contributed nearly 50% of our consolidated adjusted EBITDA and that's up from an average of around 39% for the same three quarters last year. AFC was again a strong contributor in the third quarter generating approximately $39 million of adjusted EBITDA while reducing SG&A costs and effectively managing risk across that portfolio. These third quarter results clearly demonstrate our ability to generate profitable growth and the strong scalability characteristics of our Asset Light digital model. I also believe our results reflect how customers increasingly view and value our differentiated offerings. OPENLANE is a true market leader in technology and we're seeing the positive results of the strategic investments we're making in innovation, in people and in the customer experience. All of this fuels my optimism for our long-term growth in volume, market share and profitability. So let me…

Thank you, Peter. And before I get into my remarks regarding the quarter, I just want to be very clear that the decision I made to leave OPENLANE was a difficult one and at its core a very personal one. Since I started with OPENLANE I've been commuting most weeks between Ohio and Indiana and this will allow me to spend more time with my family and be closer to home. OPENLANE is on a very positive trajectory as evidenced by the strong third quarter results we are communicating today. The investments the company is making in innovation, technology and people have positioned the company to capture the opportunities ahead, and I'm grateful for the opportunity to work with Peter and the incredibly talented management team here at OPENLANE. As Peter mentioned, I will remain at OPENLANE through the end of February and will continue to be available to investors and analysts during that time. Now let me turn to the third quarter. We delivered another strong quarter driven primarily by the strength of our marketplace segment as well as our ongoing focus on operational efficiency. As usual, certain comments that I make related to Consolidated OPENLANE and the marketplace segment are on a net revenue basis which excludes the impact of purchased vehicle sales. In addition, my comments will be on a third quarter year over year basis unless I state otherwise. Our Consolidated revenue was $448 million, up 8%, mainly driven by the 6% unit volume growth in our marketplace segment. In our results you'll see our net revenue was flat as we continue to realize the impact from the transportation accounting change we made in the fourth quarter of 2023. This change impacted net revenue by $13 million in the third quarter and since we made this…

We will now begin the question-and-answer session. [Operator Instructions]. And the first question will come from Rajat Gupta with JP Morgan. Please go ahead.

Great. Thanks for taking the questions. And Brad, just want to wish you all the best and look forward to speaking with you the next few months. Just had a couple questions here. Maybe on the D2D volumes in the US specifically, I think you mentioned that you continue to gain share versus physical. Are you able to quantify that a little more in terms of how much was that delta, maybe. How much was US Overall versus Canada? Any more color there? Or maybe to ask it another way, are you able to give us a sense of how your open marketplace did in the US Versus the industry in any way you could characterize those share gains in more granular fashion? I have a follow up. Thanks.

Yes, thanks, Rajat. I appreciate that. So I guess what I'd say, Rajat, as I mentioned in my remarks, I was pleased to see dealer volumes improve, particularly versus the first half of the year. We saw substantial, you know, positive swing versus the year-on-year trajectory. That was the case in the first half. And we saw improvement generally in all the markets that we operate, you know, including the U.S. i also, as I mentioned in my remarks, you know, we believe we're gaining share in that marketplace. If we look at our total open sale transactions versus dealer, you know, dealer transactions in AuctionNet, we believe we're growing, we're gaining share vis a vis that. The other thing I was pleased about, Rajat, was we obviously saw improving momentum over the course of the quarter. So we finished the quarter stronger than we started. And some of that I attribute to, you know, we put more go to market resources investments in the field at the start of the quarter, and it takes a while for that to sort of have an impact and start to bear fruit. So I think we're seeing positives from that. And finally, you know, increased marketplace participation. You know, we track number of sellers, number of buyers, and we're seeing growth in total marketplace participation, growth in both sellers and buyers, probably more growth on the buy side than the sell side. But we're pleased to see growth in both categories. We don't give the split on US. Canada, so I kind of leave my, I leave the specific volumes there. But we're pleased with the traction we're seeing in both Markets.

Got it. That's helpful color and maybe just on the pricing strategy, some of your peers, especially on the digital side, the timing of their price increases has continued to move up through the course of the year. Earlier it was later in the year, now it's more earlier in the year. I was curious, have you followed those price increases? How would you rate your prices versus them? Or maybe if you could give us a sense of what the difference is between yours and the physical auction providers today and how much more pricing power there is in the business. Thanks.

So, Rajat, first of all, when I think about pricing and the value proposition to our customers, I go back to our purpose statement, making wholesale easy so our customers can be more successful. And I also think about what are the attributes that differentiate us in the eyes of our customers. And I think, you know, speed to sale, the fact that we can sell cars in a day so very quickly, very efficiently, cost of sale, the fact that it costs us less to put a car through our digital marketplace than a cost to put a car through alternative remarketing channels. Let's say, you know, our process is very efficient. I see that as a structural advantage, a long-term structural advantage of our business model and obviously excellent customer service and excellent outcomes in terms of price. So those are the things we're really trying to optimize for our customer. And those points of differentiation I think resonate with our customers and that's what's going to help us grow our business. And obviously we're focused on that. Obviously pricing matters and we have to make sure we're getting appropriate reward for that. What I would say, Rajad, is I think we're well positioned vis a vis our competition. And by that I would say the prices that we charge, I would say are at or below what the customer would tend to use with alternative channels, whether physical or other digital alternatives. So I think we have some headroom there, but we're also focused on growth. So let me give you some specifics. In late in the third quarter, in the month of September, we did a price increase in Canada and that was to really reflect the impact of the digital services tax that we spoke…

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

Good afternoon or evening. Just a question in this, in the volume ramp because it seems like it's actually been improving in the past couple of quarters. But when you talk to dealers, you know, they keep talking about sort of this shortage and having a hard time finding vehicles. So I'm just curious as you think about when this actual real inflection in industry wide volume comes and some of the leverage that you're already starting to see really may really inflect and take off?

Yeah, thanks John. I guess. Listen, I'm pleased that we're continuing to deliver volume growth, the growth in the third quarter, that's six consecutive quarters of volume growth. I'm also pleased that been able to demonstrate both in volume growth in both commercial and with dealers. And if I look at each one commercial in spite of sort of the off lease headwinds, we're in that sort of shadow period or echo period of the fewer, the lower level of lease originations. But we grew our volumes in the third quarter in spite of that. So I take that as a positive. And then on the dealer side, as I mentioned, you know, a significant improvement versus the first half of the year and improving momentum over the course of the quarter. So I feel good about that. I guess if I look at some macro factors, John, inventory on dealers lots has increased certainly on the new car side. And I think that makes dealers more likely to sort of trade out of a trade in that might be a marginal unit for them, whereas two years ago they might have held onto that. So I think we're seeing that starting to positively impact dealer consignment. And I'm hopeful that will be a longer-term trend, not just a short-term phenomenon. I think most analysts, including yourself, are predicting that these inventory levels will remain somewhat elevated or back in the normal range, let's say, of what they used to be. As I mentioned in my remarks, the commercial volume, I think continues to remain challenged for the next, you know, for the next number of quarters. The end of next year. I think the real acceleration, John, is going to come in 2026. You know, at the beginning of 2026, we're going to be three years on from when we started to see a significant ramp up in lease originations that started happening in the beginning of 2023. And I think coupled with that, we're going to see those leases come back. They won't have all the positive equity that, you know, current leases have. So a higher percentage of them will get returned. There'll be a higher percentage of EVs within that. A lot of those are going to get returned. So no, that's kind of my expectation. And coincidentally we were having a dealer advisory panel here at our office this afternoon. So I got to spend time with a bunch of our great customers, frankly, dealer customers. So this was a topic of conversation. I'd say generally that's the feedback they have is that inventory, you know, the ideal inventory for them over the next few quarters is going to continue to remain a little scarcer than they'd like, particularly on the used car side. And they see that sort of changing really in a late 25 into 26 timeframe.

And second question on the financing side, there's a lot of constant rumbling about sort of the subprime consumer having a lot of trouble and defaults and delinquencies have risen to some degree. It doesn't necessarily translate into what you're doing on the financing and the floor plan financing side on AFC. But I mean, I'm just curious if there is any sort of contagion or anything you're seeing in your base of dealers on the AFC side where there's any incremental signs of trouble or they seem to be managing everything well and there's not any real step up in need for higher provisioning or anything like that there?

No, let me start and I'll hand this to Brad to go into more some of the specifics. But John, we're not seeing that. We're actually kind of seeing the opposite of that. We're seeing the risk metrics at AFC improving, frankly. You know, and I think, you know, the nature of that business is we do get a little bit of forward view into the business. So, you know, I feel, I feel good about that. AFC continues to perform well, is a strong contributor to our consolidated results, and had a good quarter. $39 million of adjusted EBITDA on the quarter was strong. It's got a strong and growing portfolio of products and services that are highly valued and highly differentiated with customers and obviously strong cash generation. And we look forward to talking more about this on the 19th, by the way. So, you know, I feel good about that. I think used vehicle values have stabilized. They're not declining like they were, you know, in that sort of period where they dropped 20% over 18 months. And I think that really helps improve our risk profile. But, Brad, do you want to add anything to or share anything beyond that?

Yes, no, John, I think I just restate what I said earlier in some of my remarks that, you know, that independent dealers are being more disciplined around the absolute number of vehicles that they're carrying on their lots. We think that's good. You know, we saw a period when vehicle values were declining where the risk profile for the business and those dealers was different, particularly in 2023. So that discipline, we think, is a good, positive thing. You know, the recent reduction in interest rates has been helpful for those independent dealers, I think, as we look forward to potential further interest rate cuts, I think that's going to make their floor plans more affordable. And so, yeah, just to kind of answer your question a little bit more directly in terms of any contagion from kind of the retail dynamic that you mentioned, subprime dynamic, not seeing that. And I will also just emphasize, as we always have been with this business, very disciplined underwriting, very, very strong risk management, close to the customer. We're out in these local markets with our branch locations. We're very close to the customer. So we're really able to stay on top of things pretty nicely in terms of looking at the risk profile of individual accounts. And so we feel really good about where this business is at.

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

Hi, this is Will on for Bob. Just one question. How is the mix of off lease auctions changing, if at all, with lower off lease volumes?

Yeah, Will, thank you. You know, it has, well, I was going to say it hasn't changed much, but let me, let me say one thing we've noticed is that as we've ramped up our go to markets efforts, we're seeing much more participation by franchise dealers as buyers in our open marketplace. I think they're finally getting to learn that, hey, open lane has a very unique and differentiated set of off lease inventory flowing through that marketplace. So we're seeing on a year, on year basis solid improvements in the number of off lease vehicles selling in that open channel in absolute numbers and also in percentage terms. And that's a real positive for us because, Will, that's our highest ARPU revenue per unit channel in the off lease waterfall. So I'm encouraged by that. We're seeing a small tick up in the blended ARPU across the off lease category. So again, that really is reflecting that the percentage of vehicles selling to the grounding dealer has declined modestly. We're seeing more vehicles flow through into those higher revenue channels. How that plays out over the next year, difficult for me to predict. We'll have to take it as it comes. It will depend on a lot of factors, but the current trajectory is quite encouraging to me at least. Great, thanks.

The next question will come from Gary Prestopino with Barrington Research. Please go ahead.

Hi, good morning. Good afternoon, Peter, Brad. Peter, would you kind of, could you kind of maybe help us out here? You're talking about increased dealer participation. Your dealer consignment vehicles sold were up for the first time this year in any quarter. Maybe give us, can you slap some metrics around dealer participation, I mean, and dealer recruitment?

Yeah, we don't, we don't disclose the exact numbers, you know, each quarter, Gary, but obviously we track, you know, the number of active buyers in our marketplace, the number of active sellers both in terms of login activity but also purchase activity and then the total number of participants in participants in total. And as I mentioned, we saw good growth over the course of the quarter, particularly on the, on the buyer side. So that's encouraging. I think, you know, the market's been maybe a little bit more robust, demand is strong. So that, that probably helps with, with buyer engagement and buyer, buyer activity as well. But we have in any given quarter tens of thousands of active dealers on a North American basis, probably in any given quarter, roughly a third on the sell side and two thirds on the buy side. And obviously a bunch of dealers are both buyers and sellers as well. So significant volume, significant Share and an opportunity for us, I think, to deepen our wallet share. Deepen our wallet share with, with those customers over time. You know, another thing that, and without going into all the details, you know, when we did the car wave migration, and this is going back a little bit, but certainly when we migrated that platform, we encountered some headwinds. This is, you know, a year, year and a half ago. We've seen really robust improvement, you know, in our California market ever since we rebranded to OPENLANE and the commercial inventory in there, that offering seems to be really, really strong. And we're seeing a lot of positive growth in that particular market as well, which is good to see.

I mean, are you being more proactive with dealer recruitment or is just the word getting out that, hey, it's getting to be an ease-of-use platform and it's generating good inventory looks, et cetera, et cetera, stuff like that?

Well, Gary, it's both. We are absolutely being more, you know, proactive. We have made increased investments in our go to market and really the idea is to get the word out about the value that our platform creates for dealers. And again, I mentioned I was out, you know, with many dealers over the course of the quarter. I heard that firsthand from those dealers. They see our platform as differentiated. They see the value we're creating and the value they're getting through our channel that they're not getting, you know, in other, in other places. So we are being more proactive. That is true. But the second thing is I think word of mouth is getting out. I think, you know, we made the open lane brand transition, happened actually just slightly less than a year ago. It was late October last year. So, you know, we started 2024 with a new brand in the marketplace. Whether we like it or not, that creates a certain amount of readjustments and customers who is this company and you know, all that kind of stuff. So I think that's now behind us. And in terms of the word getting out, I mean, there was a podcast and one of our dealer customers went on it last week. It's a well-known podcast in the industry, listened to by a lot of dealers. We had a customer on there last week and he spoke about OPENLANE, delivering prices that he was not getting in any other channel, delivering a uniform sales process, his 50 franchisees, this was a sizable dealer group and creating outcomes for his business that were really, really strong. So that was unsolicited feedback. I was obviously delighted to hear it. But that, I would say is part of word getting out in the dealer community, that this platform can offer our customers a lot of value. Oh, I'm sorry, Brad, go ahead.

No, I was just add, I mean, just to add a little bit to what Peter said, you know, not only are we making more, you know, more assertive investments and go to market, you know, resources out in the field, but how we're deploying the existing field resources that we've had, we're also optimizing that we're. There's some changes that we've made around just how we drive our sales force and our teams out there. And we're seeing some early results, positive early results from that as well.

The next question will come from Craig Kinnison with Baird. Please go ahead.

Hey, good afternoon. If I could follow up on Gary's line of questioning. I'm curious about the path dealers take to becoming one of your customers on the sell side. Do they typically start as a buyer and then migrate as a seller or are the paths more various than that?

It is more varied than that. First of all, Craig, thank you. Appreciate the questions. Good to hear from you. It is more varied. I will say a lot of dealers, their first experience with us is as a buyer and in the case of a lot of franchise dealers that might be a buyer on one of a private label, you know, marketplaces where they, you know, they may not even acknowledge that it's open lane. They're what they're buying, you know, in that sort of OEM branded marketplace that we are operating. So for a lot of dealers, that's the first experience. Obviously through our go to market efforts, we ultimately want to get to meet them and explain the full solution set that we offer and how this, we can benefit them on the sell side as well. And that, so that's kind of a path, I think, if we think of what are sort of the easy things for a franchise dealer in particular to say yes to. Well, should you be buying on your OEM branded private label site? Well, clearly, yes. Every franchise dealer should be engaged in that marketplace to get access to that high quality in brand inventory. Should you be a buyer in our open marketplace? Well, yes, there's differentiated inventory there. That's where it sort of lands first before it gets allocated to some other channel. So that's a fairly easy sell. And then, you know, does our selling solution create value for you? And again, sometimes that's a little bit of a higher hurdle because they might say, well, I'm a, I sell a physical auction. I've been doing it for 20 years and this is how I do it or I use somebody else. But as we sort…

Thanks Peter and Brad. Maybe I'll take a shot on AFC. I know you've got this call upcoming but I think internally you must have concluded the market doesn't quite value that properly at a high level. How would you characterize fair value for AFC and what really drives that thinking?

Yeah, no, Craig, I appreciate the question. Listen, I think as we've studied this a little bit more recently, you know, when we look at the financial performance and the performance metrics of this business, some of which Peter highlighted earlier return on equity, you know, just the earnings on a multiple of a kind of price to price, multiple to earnings. Listen Craig, it would be inappropriate for me to comment on whether or not it's fairly valued or not. You know, I'm going to leave that up to, to our investors and folks like you. But you know, listen, we do believe that this business is got an opportunity to be better understood by the market and that's why we're going to be doing this session on the 19. And we think by providing enhanced information, enhanced disclosures as well as metrics that there'll be an opportunity for there to be a better appreciation of the value of this business and also a strategic value to open lane more broadly. So I think that's kind of where we're at. We really like the business and quite frankly, Craig, the other thing I would say is the AFC business has become more of a bigger piece of the pie for open lane, as open lane's transformation has occurred as we got out of the salvage business and spun that out in 19, the US physical business that we sold a couple years ago. So it's just become a bigger piece of open lane. And therefore we're going to be more intentional and more deliberate around how we explain it and how we position this business with you and our investment community.

The next question will come from John Healy with NorthCoast Research. Please go ahead.

Thanks for taking my question, guys. Peter, just wanted to ask kind of a high level question. You, you mentioned it kind of Twice now that 2025 might be a tough year for the commercial side. And I think when you pencil out those month-to-month kind of fluctuations, there's some pretty steep declines that will happen on that side of the business next year. So with that said, I mean, as you look at next year, do you view it as a year where you guys can grow volume in aggregate and then secondly, if off lease volumes contract next year, does that actually create pressure on ARPU for OPENLANE on the commercial side, given that there'd be less cars at the top of the funnel? Higher end top of the funnel would absorb those cars and potentially leave a void lower down the channel where you guys typically extract higher rates on those sales. So I just, without giving guidance, I'm sure you're not ready to do that. Hoping you could kind of, you know, coach us through that thought process a bit.

Yeah, thanks, John. I appreciate the question. Obviously the situation is somewhat nuanced, somewhat complex, and none of us, I certainly can't, you know, predict the future. But here's what I'd say. What do we know? We know there's lower off lease maturities in 2025. So at the very top of the funnel there's a lower volume because of lower lease originations three years prior. So that's a fact. Offsetting that, we also expect the payoff rate, the amount of vehicles that are paid off preterm, to also decline somewhat. And we expect this because our customers expect this and they tell us this. So that can actually serve to offset lower maturities, depending on how those two sort of intersections. Right. So I can't really predict how that's going to play. All I know that is in Q3, which is in this period of time we're talking about, we were able to grow our commercial volumes. So we're off to, I think, a pretty good start. We're going to have to see how it plays out over the next few quarters. But it really is the intersection of those two things that will govern the amount of volume we get. So I kind of view it as, you know, 2025. There are some headwinds there on the commercial side that I don't necessarily conclude that we can't grow our commercial volumes. We will see, you know, we'll, we'll, we'll, we'll see how it tracks. We certainly anticipate continue to lean into dealer volumes and growing that part of our business and growing that over the longer term. And we're also looking to 2026 when we actually, again, as I've said, expect to see a significant improvement in off lease maturities as well as a continued decline in the preterm…

Yeah, John. Hey, listen, Brad here, I just add a couple things. You know, we've modelled this scenario. I know your questions around volume and ARPU, but I'm going to maybe just bring it back. At least as we look into the foreseeable future, into 20. At least we've modelled these, you know, and I would say kind of three dimensions, kind of a base case, maybe four dimensions, base you know, better invest. And then there's a worst, and at least from an overall financial, you know, performance perspective, even in a worst case, it's, it's not really a, it's not really a significant headwind to us, to our marketplace business. And from a base case and a better case, we feel like this is still going to be a pretty strong business for us as we work our way through this more difficult, challenging period of 2025.

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.

Well, thank you for your questions, everybody, and thank you also for joining the call this afternoon. You know, as I said at the beginning of the call, I believe our third quarter results clearly demonstrate the power of OPENLANE. And I'm very optimistic in terms of how OPENLANE is positioned to capture the opportunities that lie ahead. I appreciate your interest in our company and we look forward to hosting you again for AFC Investor Update on November 19 and our Q4 and year-end earnings call, which will be early next year. We look forward to both of those and wish you all a very great evening. Thank you.

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