Q2 2021 KAR Auction Services Inc Earnings Call

Okay.

Ladies and gentlemen, thank you for standing by today's conference will begin and approximately 1 minute.

Again, thank you for standing by today's conference will begin and approximately 1 minute and until that time. Your lines will again be placed on music hold thank you for your patience.

[music].

Good day, and thank you for standing by and welcome to the car auction Services, Inc. Q2, 2021earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone.

If you require further assistance press Star Zero I would now like to hand, the conference over to your Speaker today, Mike Ellison, Treasurer, and Vice President of Investor Relations. Thank you. Please go ahead.

Thanks, Stephanie and good morning, and thank you for joining us today and for the our global second quarter of 2021 earnings conference call sales.

For now.

Our global for the quarter ended June 30 of 2021.

After concluding our commentary we will take questions from participants before Peter kicked off our inspection and 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 Act. The format of 1985 investors are cautioned that such forward looking statements involve risks and and.

Certainties that may affect our business prospects and results of operations and such.

All the detail in our SEC filings and providing.

The forward looking statements the company expressly disclaims any obligation to update these statements and let.

Let me also mentioned that whilst this conference call, we will be referencing both GAAP and non-GAAP financial measures reconciliations of the non-GAAP financial measures to the.

The GAAP financial measure can be found in the press release issued yesterday, which is also available in the Investor Relations section of the website now I'd like to turn the call over to our global CEO Peter Kelly Peter.

Thank you, Mike and good morning, everybody I'm delighted to be here. This morning, with all of you to provide and update on our performance of our global.

And this morning's call and I plan to speak about our second quarter results.

I will also go into some detail vehicle supply dynamics and our industry and what we can expect to see over the rest of this year and into 2022 of them.

And also provide updates on the continued growth of our dealer to dealer platforms backlog cars and trade routes.

The solid performance of of finance business, AFC, and our continued diligent diligence and management of the cars overall cost structure.

So I'll start with the second quarter.

I was pleased with our second quarter performance, particularly given the supply headwinds and our industry.

Despite operating in an environment of very constrained vehicle supply, especially especially from commercial centers, we achieved the following results for.

For car overall, we generated $585 million and revenue and increase of 40% from Q2 of last year.

We generated total gross profit of $252 million, which represents 51, 7% of revenue excluding purchased vehicles.

We generated $116.5 billion of adjusted EBITDA, which was of 46% increase compared to Q2 of last year.

We had another strong quarter of cash generation of cash flow from operations for the quarter was $131 million.

Yes.

Within the ADESA segment, we facilitated the sale of 711000 vehicles, representing over $11 billion and gross auction proceeds.

53% of our Q2 sales were from off premise locations that was similar to our experience during Q1.

We sold 119000 vehicles on the trade Rev and backlog current platforms on the combined basis.

This represents our strongest performance to date and our digital dealer to dealer market places and represents growth of 65% compared to Q2 of last year and sequential growth of 19% versus Q1.

I continue to be encouraged by performance of this part of the of the business.

We generated $277 and gross profit per vehicle sold in the ADESA segment.

And that represented an increase from the $264 and Q1.

SG&A per car overall was $140 million for the quarter SG&A for the ADESA segment was $131 million, which was down $9 million from Q1, resulting in SG&A of $185 per vehicle soaps.

I will speak to the key metrics for you of C. A little later in my remarks, and Eric will provide more detail around the financial and operating results later in this call.

So I'd now like to speak about the supply dynamics of used vehicles within our marketplaces.

The headwinds that we faced in Q2 and why.

And why I believe the medium and longer term outlook is much more encouraging.

And our last earnings call I mentioned, the car was operating in an environment of constrained vehicle supply across the wholesale used vehicle market, particularly in regard to volume is being offered by commercial centers.

<unk> said that the root causes varies but the all originated with the Covid pandemic.

The oil supply constraints worse and during Q2 and the represented a significant headwind to our performance during the quarter.

That's why I'm encouraged by our performance in spite of those headwinds I.

And I also believe there is increasing evidence that we're now at the bottom of the cycle and we should expect to see some recovery of those commercial volumes and when that happens it should be a very positive thing for current.

To help explain all of this I would like to look back to Q2 of 2019.

And so part of more normal supply dynamic looks like for our company and our industry pre COVID-19.

So in Q2 of 2019 current facilities and the sale of 994000 vehicles.

Over 70% of those approximately 700000 vehicles were sold by commercial sellers.

The remainder which was approximately 275000 vehicles were sold by dealer centers.

So from that statistic alone we can see the historically commercial sellers have represented the majority of cars used vehicle supply over 70%.

This is more so than our industry overall, which is more like 50.50.

1 challenge the car has faced over the past few quarters is that those commercial center volumes have been under much greater pressure and the dealer volumes for reasons I will discuss here and a moment.

And I believe the pressure is cyclical in nature and I believe that we are now at the bottom of that cycle.

During Q2 of this year, the volume sold and behalf of commercial sellers and approximately 420000.

Vehicles of decline of over 40% versus Q2 of 2019.

So that's of significant and painful decline.

However, a key question is how does that compare to the market overall.

A good basis for comparison is to look at the total volume of vehicles sold by commercial sellers at all U S auctions.

That is at ADESA and at the competitors.

This data is published by auction net.

In Q2 of 2021 and the volume of vehicles sold by commercial sellers of all U S auctions.

Was down by 48% versus Q2 of 2019 in our industry According to auction.

Based on that statistics cars decline and total commercial volume across all channels was less and the industry wide decline in commercial vehicles of U S auctions.

So that tells me that we did not lose share with these commercial sellers.

Our performance in Q2 should be judged against what I would consider to be historically low industry volumes of vehicle supply from commercial centers and viewed through that lens I am pleased with the performance.

I also mentioned that there was evidence that we're currently of the bottom of the cycle.

The dynamics relating to off lease vehicles, repossessed vehicles, and rental vehicles, all point to and improving commercial supply picture over time.

I believe that when this happens it will be very positive for car given our digital shifts our streamlined operations and a resulting lower cost structure.

And I'd like to go through that and the little bit more detail.

I'm going to start with off lease vehicles.

Car sales significant volumes of off lease vehicles through open lane and also at ADESA.

The volume of off lease vehicles flowing through both of these marketplaces has been severely impacted by the disruption to new car production and brought on by the shortage and semiconductors.

And the face of this supply shortage of new vehicles market values for used off lease vehicles have increased by as much as 40% versus 1 year ago.

This means the consumers now have considerably more equity and their off lease vehicles and at any point in history.

Based on our internal analysis, the average equity and and off lease vehicles increased to an all time high of close to $8000 per vehicle in Q2.

And that was up from an average of less than zero 2 years ago.

This makes lessees much less likely to return the vehicle from the <unk> and that's the lessee does returned the vehicle. It makes it much more likely that the grounding dealer with purchase the vehicle since many grounding dealers of a contractual option to purchase the vehicle residual value.

We saw both of these trends in Q2.

The positive equity situation for lessees resulted has resulted in a reduction of over 50% and off lease vehicles being returns versus what we would normally expect.

For those vehicles that were returned we saw upstream conversion reached an all time high of approximately 80% and Q2.

So while we enjoy nearly 80% market share and the upstream off the segments North America, a record number of vehicles were kept the by consumers, where we received no fees or by the grounding dealers, where we generate lower revenue.

The result of both of these changes was the considerably fewer vehicles flow deeper into the marketing process where the.

He was of generated stronger economics.

So as we look ahead, we believe that the semiconductor production issues are now being addressed and we expect production of new vehicles to start to improve starting in the second half of this year.

While we believe and will take time ultimately this increased production will drive a normalization and supply and demand and a moderation and used vehicle values.

This should in turn result, and increased volumes of off lease vehicles being returned and processed through our private label platforms and flowing into a higher margin channels like ADESA dot com and our on premise sales.

But clearly this will take time.

In the meantime, we also know that lease originations continued to be strong meaning of the off lease vehicles will continue to be of strong source of supply for industry well into the future.

The second category of vehicles is repossessed vehicles.

We sell significant volumes of repossessed vehicles at ADESA, given the large number of banks and lenders and our commercial center portfolio.

And just about every prior economic dislocation event, our industry has experienced an increase and repossession volume.

For this did not happen during the Covid pandemic and I believe that the unprecedented level of governance government stimulus served 2 of virtuous.

Government stimulus coupled with other consumer protections has meant the consumers could continue to make their monthly payments and avoid repossession.

In Q2 based on our data repossession and volume across our industry continued to be about 35% below what we would consider to be normal levels.

Looking ahead after the current wave of government stimulus and I think it's reasonable to expect that the repossession volumes will trend back towards normal levels over time.

And that our volumes in that segment should correspondingly improve.

And finally, the rental vehicles, we have less exposure to this category, but but we still have a meaningful customer base and the segment and this segment offers us an opportunity for volume and profit from the rental market strengthens.

Rental supply within our wholesale marketplaces was very close to zero during Q2.

And facts a number of rent of companies, we're actively buying used vehicles within our marketplaces, because they were unable to source new vehicles for motor manufacturers, owing to the semiconductor shortage.

The post Covid increase and travel has caused rental car companies to start rebuilding their fleets.

I take this as a positive signal for industry and our company since of points to return towards normal at some point in the future.

So as we look to all of these 3 segments off lease repo and rental I believe that the fundamentals lead us to conclude the compared to our Q2 experience, we should expect to see considerably increased volumes over time.

The key question is when will this happen and to what extent.

My Best assessment is that it will take time, but there are some key factors that we're watching that may be projected.

The most significant factor in my mind is new vehicle production.

Seeing motor manufacturers getting their factories back producing will be key to driving the trends that I've talked about here. This morning.

We're also monitoring used vehicle values and seeing the unprecedented high prices starting to moderate and even decline a little.

Lower used vehicle prices will help drive more off lease supply into our market places.

Finally, we're monitoring for any further government stimulus and its impact on the repossession market.

So now I'd like to provide and update on our progress and the dealer vehicle category.

We sold 292000 and be a dealer vehicles and Q2 of this year that was an increase of 6% versus the 270.16 of our own vehicles that we sold in Q2 of 2019.

Even if we were to include backlog cars in the 2019 number our total dealer volumes of increased versus Q2 of that year.

So our total dealer volumes of now recovered back to what we would consider normal and I'm pleased that we're showing modest growth.

If we look at the digital dealer category only Q2 represented our strongest performance yet with 119000 vehicles sold representing year over year growth of 65% and by the way that includes backlog cars' volumes and in the prior year number.

I was pleased with this performance Q2 represented our first full quarter and the U S where we had migrated to the backlog caused platform. We saw record numbers of participating sellers and buyers and increased volumes of vehicles posted for sale. Although these higher volumes of vehicles posted were offset by a slightly weakening conversion of the quarter progressed.

Due to the high used vehicle value trends that I talked about earlier.

And Canada, our trader of business performed very well and Q2.

The delivered strong volumes and strong profitability the fee.

The trade Rep has delivered profitability in Canada, which is of more mature digital dealer to dealer market.

Makes me encouraged for our prospects and the U S market and.

And at an even greater scale.

Our own analysis of the trends in both the U S and Canadian markets also demonstrates that our offerings are helping us address the segment of vehicles and was not coming to our auctions and the past.

We are attracting new sellers and new buyers on a daily basis and this reinforces our belief that the digital solution expands the total addressable market available for business.

I'd like to spend a few moments talking about our cost structure.

Over the last several calls we have discussed our strategic focus on reducing our cost structure to reflect our transition to a digital marketplace company.

The lower volumes in Q2, coupled with the high percentage of off site sales continued to reinforce the need for car to be very focused on the operating model and cost structure.

Based on the information that I've already shared on this call. Our Q2 performance was delivered against the close to 50% reduction in supply and a category. The historically represented over 70% of our business.

So delivering that level of performance in that environment reflects our focus on operations and costs.

I believe that this focus is reflected and our strong gross profit performance and the quarter, both as a percentage of net revenue and also in terms of the gross profit per vehicle sold.

Our cost focus has also been reflected and the close management of our SG&A.

This management of costs has enabled the business deliver of stronger operating performance off of lower volumes.

Over the course of the quarter. We've also identified further savings opportunities principally relating to SG&A.

These have now been acted on our are and the process of being addressed.

I also believe that as we look for the future there will be opportunities to further refine our processes, increasing our efficiency, improving the customer experience and reducing our costs.

Going forward and this will continue to be of focus.

I want to stress however that these reductions have not come and will not come at the cost of strategic investments are of our customer commitments, we continue to invest and the technology the people and infrastructure necessary to extend our lead and the digital transformation and position our company for long term growth.

Finally, I'd like to provide some updates related to our finance business AFC.

I've been pleased with the of CS performance in the present quarter, but also over the past 18 months since the onset of the pandemic.

F. C continues to have healthy margins with gross profit for the quarter right at 80% and with SG&A of under 13% of revenue.

In terms of its key metrics AFC had 356000 and bond transactions in the quarter. This was in line with the levels that we had expected.

The revenue per loan transaction was strong at $193 for the quarter key drivers of this for higher vehicle values and lower risk levels.

And finally speaking of risk we continue to experience lower than expected risk driven by current market conditions combined with strong operating processes at AFC.

So to summarize my key messages for today I am pleased with our performance for the quarter.

Specifically I am pleased that we were able to deliver this level of performance. Despite historically low levels of commercial seller vehicles, which has always been our core business segments.

I believe we are now likely at the bottom of the curve in terms of commercial vehicle supply.

I believe that the outlook for off lease repossessed and rental vehicles will be 1 of increasing volume over time.

And similarly, returning towards historical levels.

This recovery will take time, but it's clear to me that we should be of strong beneficiary of this when it happens and I think that we're now starting to see the very first signs that that recovery is nearing.

When I look of dealer consignment, we sold more dealer consigned vehicles, and and the same quarter pre COVID-19 and we delivered our best quarter, yet in terms of volumes and our digital channels.

Our trade wars business had a strong profitable quarter and Canada.

And our data suggests that our digital model is expanding our addressable market across North America.

I also believe that our Q2 results and strong unit economics demonstrate the car has the ability to be more profitable at lower volumes and was the case historically.

What is most important about this is that it also means that as we see the cyclical return of these commercial seller volumes, we have the opportunity to be more profitable and the future than we have been in the past.

And finally, notwithstanding the growth levers that exist for us we continue to be very focused on costs finding opportunities and Q2 to further improve our operating model. We intend to meet maintained the focus and discipline going forward also.

With that I will hand over to Eric for a more detailed review of the financial results for the quarter Eric.

Thank you Peter let me start by highlighting a few items of standout this quarter adjusted EBITDA of $116.5 million represents approximately 20% of operating revenue given the volume and related revenue headwinds. This was a solid performance for the quarter.

Gross profit for the quarter was 51, 7% of revenue net of purchased vehicles.

The primary drivers drivers of this strong performance gross profit per unit of the vessel was $277 up from $224 and the prior year and $264 in the first quarter.

AFC revenue per loan transaction was $193 up from $115 and the prior year and $177 and the first quarter and this more than offset a decline and the number of loan transactions compared to the prior year and the first quarter.

Peter mentioned, the sequential decline and SG&A. However, SG&A was up from the prior year as we had a substantial number of our employees on furlough for all or part of the second quarter of 2020, and many employees had temporary reductions in compensation last year as well.

Operating adjusted net income per share of <unk> 15 cents was negatively impacted by a reduction in net unrealized gains on publicly traded securities and an increase and our effective tax rate to 44%, primarily driven by non deductible expenses related to the increased contingent.

<unk> recorded for the cars on the web acquisition.

And last the working capital generated of car continues to be of strength of our operating model, we have generated $296 million of cash from operating activities and the first 6 months of 2021 of which of $131 million was generated in the second quarter. The free cash flow conversion of our business is worth pointing out.

As our markets returned to normal in the near future I am confident we have sufficient capital available to support our business and its growth for the foreseeable future.

Now, let me give some color on the highlights of our performance first our total volume sold at ADESA was up 10% over the prior year, while we may all think of the second quarter of 2020 is the height of pandemic impacted results I would like to remind you that our second quarter and 2020 included a record low month April and a record.

Hi month June given.

Given the industry headwinds, particularly around the commercial vehicles as Peter mentioned, we are pleased with 10% year over year growth.

I am not providing a same store growth rate because we have integrated all of our U S digital dealer to dealer business on the backlog cars platform. If I include the backlog of cars volume for the second quarter of 2020, and our denominator our growth and volume is 4%.

I think most impressive and our performance is the 65% growth rate and digital dealer to dealer for the U S and Canada Ah ha.

Have included the backlog cars volume in both years. So this is an organic growth rate for the business.

And we benefited from strong auction fees and the ADESA segment auction fees per vehicle sold of $333 was up 21 and 5% from the prior year.

We benefited from strong used car pricing and our marketplaces average selling price for all vehicles and the second quarter was 16000 and $400 compared to $14800.1 year ago.

As I dug into the details of our auction day I found that increased average selling prices was not the biggest impact on average auction fees per vehicle sold average auction fees on off premise transactions increased from $119 and 2020 to $153 for 2020.1.

This increase was accomplished even though average selling prices for total off premise transactions declined slightly as we grew the digital dealer to dealer channel, 65%, while the off premise commercial volumes declined 15% and the second quarter.

The average auction fees for the digital dealer to dealer marketplace, our fastest growing marketplace was $268 per vehicle sold and increase of only $1 from the prior year I point. This out as some may believe or increased auction fees is completely driven by record high used car values, while increased used car values is.

A factor it is not the most significant contributor as some of our digital marketplaces do not have auction fee structures that are highly correlated to used car values.

Our services revenue has also rebounded even though it is not near fully recovered due to the limited supply of commercial vehicles and the mix of revenues is.

And is contributing to our improved gross profit our services revenue mix is less concentrated on the low margin transportation revenue and more concentrated in non value added ancillary service. We have all seen the strong used car performance of public retailers in some ways. This is confusing when you look at the wholesale markets and we discuss a lack of supply.

However, this situation is creating an opportunity for ADESA a number of used car retailers have called upon us to provide retail ready levels of reconditioning to help them meet consumer demand based on our early successes with various retailers, we expect to grow revenue from the service offering.

AFC strong performance was driven by tremendous growth and revenue per loan transaction.

And as the provision for credit losses is a contra revenue account for a finance entity the significant reduction and the provision for credit losses was a key factor to improved revenue. However, another key contributor was interest and fee income per loan transaction that increased to $191 per loan transaction from 150.

The $5 per loan transaction last year.

This demonstrates the impact of having over 50% of the revenue for AFC from fees and creating less dependence on interest rates to drive revenue.

Lower interest rates on Floorplan loans were offset by higher average loan balances due to the record high used car values also contributing to the strong second quarter results for AFC was lower direct cost and disciplined control over SG&A.

Now, let me speak to the items that impacted the operating adjusted net income per share. We currently hold the common stock of car lots of publicly traded company that requires us to mark to market. Our investment car lots of went public through a spec transaction in late January and this resulted in us recording our investment at market instead of costs and.

The stock price of Carlos has declined since March 31, we have reduced the unrealized gain on investments by $11.9 million. This required adjustment of the carrying value resulted in a reduction of net operating.

Adjusted net.

Net income per share of <unk> net of income taxes.

We also recorded $4.5 million of accrued contingent consideration related to the cars on the web transaction as the performance of ADESA Europe, formerly cars and the web web has exceeded the amounts recorded using a Monte Carlo simulation of possible outcomes at the time of purchase and our performance in Europe.

To be strong despite the lack of supply and I expect we will.

The record additional contingent consideration through the end of this year when the earn out period ends the.

The earn out is capped and we are recognizing the increase to the maximum earn out out of payment amount ratably over the year. So the quarterly expense should not increase from $4.5 million. This is purchase price and will be page of the previous owners. The GAAP requires the adjustment to contingent consideration the rich.

Courted as other expense.

It is not included in SG&A and our financial statements.

Let me close with comments on our capital situation. We continue to have a strong balance sheet with our focus on controlling costs and managing the business through a low point and supply and our industry, we deployed $100 million to purchase car stock and the open market at an average purchase price of $17.77 in the second quarter year to day.

<unk>, we have repurchased $188 million of car stock and the open market and an average purchase price of $16.66. We of just under $110 million left on our share repurchase authorization, we have sufficient working capital available to support the business through the current economic cycle and also invest.

And strategic growth as opportunities arise through the first half of 2021 and our capital expenditures totaling $57 million had been focused primarily on our digital marketplaces and preparing our platforms for growth, we expect to be driven by a cyclical recovery over the next several years, we will continue to and.

And best responsibly, and the future of our business through capital projects and maintain or improve our leadership position and the wholesale used car digital marketplaces.

Although the root cause and duration of the current environment and our industry is much different than 2009 and the period that followed I also see many similarities and the impact on volumes trains and used car pricing and the prospects for recovery of following a period, where we were at the bottom of the down cycle and our industry and continue to see.

Great opportunity per car and its investors once the cyclical recovery begins in the near future.

Thanks for your time today, and we will now take your questions. Stephanie you can open the line.

At this time, if you would like to ask a question. Please press Star then the number 1 and your telephone keypad that star 1 of your first question comes from the line of John Murphy with Bank of America.

Good morning, everyone. This is P T Fletcher on for John Murphy, Thanks for taking the questions.

I guess to start kind of the follow up on the question I think Mark asked last quarter. When we think about the portfolio of services and channel through which of your dealers can buy and sell vehicles. It's a pretty long list of names like killer block backlog cars openly and et cetera, and you've already taken steps to start consolidating with trade rock mining over to migrating over to backup cars, but have you.

Undergone or would you consider undergoing a more extensive review and channel checks for their dealers as you, perhaps and I'm trying to figure out the customer education process of all of these platforms and how you may be able to better leverage economies of scale or at the very least theater for the brand through the additional consolidation.

Thank you T D. That's the very good question and it is something that is on my mind on something that we are.

Working on looking at and working on.

I think on the last call I spoke I spoke about 1 of the priorities being to simplify the business make it easier for our customers to understand and do business with us and.

And also make it easier for investors to understand the.

Because as you mentioned the you know.

Of our businesses is quite complex and I think there are opportunities there.

And I also think those opportunities do play into our cost structure and I mentioned the importance of that.

As the long term focus focus point as well and that goes to the platforms. We operate the brands we support but also the way we do.

Business activities, particularly things like back office functions title processing funds processing and <unk>.

<unk> customer support and so on so I guess, what I'd say T T without going into all of the details that is an area of focus.

We have plans in.

And development and in implementation on many fronts and.

And I do look forward to talking with our customers and our investors about the specifics of those and in the not too distant future.

But your comment of the good 1 and it's something that we recognize and are focused on and and I do appreciate your comments on trader and backlog I think he made a big step forward with the consolidation of our U S digital Dieter marketplace onto backlog so to be very clear in the U S. Digital dealer market. There is 1 brand and its backlog cars and and candidates trade, where we do not have.

The 2 brands in either market, it's 1 brand and each market.

Okay. That's great. Thank you and then I guess, just 1 more follow up and as.

And as we head into 2020, 2 and see a stabilization in terms of production and restocking of inventory and more of a return to normal in terms of the vehicle churn and the secondary market can you maybe remind us how you think about what may be and more sustainable mix of vehicles sold.

And on Prem next first of off premise. So directionally is it possible the on premise could potentially outperform off premise next year the vehicles from channel like retail and rental car company. The cap once again or are the secular tailwind behind the off premise business is strong and it should.

And just generally outperform on premise.

And what's a good question T J, thanks for that as well and as you know the last 2 quarters off premise sales have been slightly greater than our total on premise sales.

I would say that as I look to the future of the good news for our business as I think there will be dynamics that drive increased volumes and both of those channels are our off premise sales in the frankly and the last 2 quarters have been negatively impacted by the decline in off lease volumes, we sell a lot of all of off lease cars through and off premise model on openly.

And we've had negative supply dynamics on the off lease side that I just talked about so I think as that.

A set of factors reverts closer to normal we will see a strong positive driver of volume within the openly and channel coupled with hopefully strong continued growth with backlog and trade Rev. So I think in absolute volume terms, we should see growth and off premise sales.

But also we should see growth and on premise sales with return of repo volumes increase off lease volumes at auctions and so on and so forth. So.

My.

My gut feel out of it that off premise sales will continue to have the edge, but that we will see good growth in both categories.

That's all very helpful. Thank you so much for taking the question.

Youre very welcome. Thank you.

Your next question is from Brian Brinkman with J P. Morgan.

Hi, Thanks for taking my question I wanted to start with a couple of on the digital dealer to dealer business from <unk> your career of units year over year significantly faster than the competition up 81% versus the ACB, 55% now you've grown 65% and the <unk>.

Second quarter could you speak of the drivers of that growth and you know what the traction has been with dealers and the quarter with regards to the 24, 7 and bid ask approach or other aspects of the backlog platform and while the ACB has yet to report do you have any early sense for whether you may have again grown more quickly than the competition and the second quarter and just with regard to the <unk>.

And 19% sequential growth and digital TDD units are you able to say whether this was in line with or maybe exceeded your expectations are and what kind of sequential growth do you think might be achievable going forward.

Thank you Ryan and I appreciate that you packed a lot into that question. So let me, let me try and unpack that a little bit first with respect to of competition I really don't have insight to their volume so I can't comment on that.

With regard to our own growth I would just say both year over year of comps.

Whether it's the 80% and Q1 of 65% and Q2, obviously, the recall that impacts in the quarters last year that debt.

You know of relevant to those comps that debt.

Contempt to distort those numbers and those kind of fill differently and both quarters, but I was pleased very pleased with the performance and the channel.

And I think fundamentally it's driven by strong growth and all of the supporting metrics.

Number of dealers participating on the sell side volume of vehicles posted number of dealers participating on the buy side of those marketplaces. So all of those trends sort of run.

In line with volume growth overall.

So I'm pleased about that I also mentioned in my remarks that we did see a slightly weakening conversion rate certainty and the later part of the quarter.

The mid to late quarter.

I think as used car prices got to such a strong level, we saw them sort of stabilize and even start to fall back and that had a negative impact on conversion and so.

You know, perhaps some of the growth and metrics on vehicles posted might have even been stronger than the sequential growth and volume sold.

Beyond that you know some of the other positives that that I'm very pleased about.

<unk>, what I would say is evidence of growth and the Tam overall.

The increased volumes, both U S and Canada of.

Of dealer vehicles being transacted through what I'll call it formal channels did.

Digital and physical versus similar of quarter 2 years ago and.

And I think profitability and Canada on a trader of platform and.

And not marginal profitability with strong profitability and so I feel really good about the quarter, we had and obviously, we're continuing to execute and continue to try and drive growth and both of those marketplaces as we look for the future.

Okay and thanks for all of the color on the factors impacting the industry off lease volumes, including as it relates to as you mentioned the increase of equity that consumers have in their vehicles are you able to give us the sort of similar rundown on what are the factors impacting repossession volumes I realize whether your vehicles repossessed or not it might.

The come down for most consumers to more of a cash flow consideration as opposed to other you know of balance sheet..1 but also you know some repos are voluntary right or perhaps if he's got a lot of equity and vehicle, maybe prioritize paying that bill over others or something so and then you've got all the cash being mailed out right with the monthly child tax prepayments so what all.

And is rolling up into the repo volume environment, and how does this headwind compare and materiality for you guys relative to the off lease headwind and then how should we think about like the timing.

Of maybe why and it might reverse from.

Headwind to a tailwind.

Yes, Thank you Brian.

You know you mentioned some of the input factors I think they're all absolutely relevant to the to the situation of affecting repos the exactly how the connection to the volumes I think theres, a little bit more opaque right, but but clearly I would say of government stimulus and associated consumer protections moratoriums on evictions and I.

Say some hesitation among the.

You know a lot of the lender community some of those large retail brands to be to be repossessing vehicles, and the pandemic situation of all contributed to below normal repossessions.

So again I expect that to moderate over time I think the key factor among all of the ones. You mentioned is probably government stimulus because of that I think that effects.

Cash flow.

And you know day to day week to week month to month budgeting for.

And people, who might otherwise be and difficulty of not making the car payment. So we're monitoring it closely we do.

1 of the businesses, we own and as a.

The SaaS platform that manages repossession activity across this industry. So we have pretty good visibility into that we're seeing a fairly stable environment.

Say very slightly increasing but but but still below normal and to the tune of about 30, 35% as I mentioned.

And again over time I expect it to return towards normal I do not expect the glut of repos that it's going to sort of suddenly.

Had above normal and there's a large blood coming through but I do expect it to return towards normal over time.

Very helpful. Thank you.

Your next question is from Craig Kennison with Baird.

Hey, good morning, Thanks for taking my question I'm curious.

And.

And you know carmax and others have really bolstered their ability to purchase cars directly from consumers by developing online valuation tools.

And you enter even a few other bits of information and they make a hard offer.

<unk> always sourced directly.

But I'm wondering if you think that online tool could be disruptive for your business and then I'm also wondering whether you could take your assets and create a similar tool for dealers.

To to compete with that emerging.

Way of liquidating.

And <unk>.

Greg and thank you very much and again another very good question and the.

All very relevant to some of the discussions and product development ideas that we have going on your car.

So first of all if I if I look at.

Companies like you mentioned, the Carmax and the independent used vehicle retailers online and Omnichannel retailers are clearly those businesses have seen a lot of growth I think they've been helped by the used vehicle values situations for the positive.

<unk>.

And clearly purchasing cars for consumers and this market has been something and all very focused on them and doing that online.

You know those entities are very important customers of ours and have been over time and as Eric mentioned in his remarks, I think increasingly important as we look for the future and I think we have very good relationship with those types of entities and and.

And continue to see growth opportunities there.

I will say that we're also seeing I'll call some of our more traditional business partners of franchise dealers dealer groups motor manufacturers also adapting to that changing.

You know more digital used vehicle retail market and I think as you mentioned Craig there are things, we can do to help those customers too and we're focused on that.

I'd also say you know in an environment, where used car prices were up 30% to 40% of I'd be careful extrapolating too much out of the current quarter and saying that's the hard predictions of the future because I think we should expect some.

Some reversion towards normal, but but but bottom line is we believe there is a more digital market for reach it for retail used vehicles and the future. That's 1 of the reasons, we believe that we need to be more digital market for wholesale used vehicles, because we think that enables us to serve those customers better.

I think Craig Youre hitting on some good points some of the assets we have in terms of our digital marketplaces and the liquidity and the data that we have can enable all of our customers to better address a more digital retail market and were focused on that and I see opportunities there going forward and I look forward to talking about that at some point and as Eric mentioned, we're also seeing a strong demand.

For retail reconditioning services, and that's something that's relatively new and our business.

But the the you know we in the past we were accustomed to having to get cars.

Cold we conditions to of wholesale standard.

For now being asked to get some recondition true retail standard, which has a higher standard it involves more expenditure.

And we're seeing strong growth and those volumes and we're seeing us a good ability to execute that business.

Effectively and profitably so we see that as an opportunity going forward as well.

Great. Thank you.

Your next question is from Daniel <unk> with Stephens Bank.

Hey, Good morning, guys. This is Andrew on for Daniel.

So and the rising of the vehicle backdrop, and do you guys see a positive impact to ADESA assurance from prices going up sequentially and then I guess the follow up on that with things slowing down would you see.

And another impact of things moderate.

So.

Thank you Andrew of preceded that call that the question.

And I guess and a short answer I'd say, yes, a rising used vehicle market has sort of reduced the risk of round ADESA assurance and.

And we saw some positive.

And that's the assurance has been a positive unprofitable product for us we saw that maybe enhanced a little bit and the first half of this year I wouldn't say it's materials for numbers.

And Eric the weighted here in the second as well.

And I would say that as you enter a declining used vehicle value market. That's something you need to be very mindful of and we have demonstrated the ability to do that and execute that and the past so I'm not and not enormously concerned about that but it is a factor Eric.

Andrew I was going to point out with high used car values dealers are very nervous about making a mistake. Therefore, theyre very interested and having assurance type products across all our platforms. So we have a higher take rate and lower losses because of course the values have been maintained so.

The model, perhaps is a little more profitable than the long term model should be.

Relative to how we underwrite those losses, but at the same time, it really builds confidence in the digital marketplaces, where you arent really touching the car before you buy it so it's been a real positive for us.

Thanks, that's helpful and flat, there and I guess like a follow up.

So what the growth levers do you guys see and the dealer to dealer channel and you know have you seen competitors leaning in the price.

So growth levers again, we are very focused on you know growing I'd say in particular of digital offerings. We think that's the new offering the seems to be high.

I will say of newer offerings.

There seems to be a strong level of customer receptivity and interest and that product. We think we're well positioned and that market with the strong product and the strong offerings associated with that and.

And hence the deposit numbers that we're seeing.

So we're certainly focused on that.

Some of the things that Ryan mentioned, the Craig mentioned earlier on on the.

You know the ability to help dealers with a more retail used vehicle trade and experience is of sort of and it and adjacent area well relationship that.

Business as well.

Okay. Thank you.

Your next question is from the line of Bret Jordan with Jefferies.

Hey, good morning, guys.

And Brett.

And the digital dealer to dealer do you guys of any I guess anecdotal or I or Corp, Inc.

Formation as far as how much of this is incremental you talked about cars that maybe maybe didn't go and a formal channel previously now going.

Through may be of backlog type platform, but maybe I guess either looking at like average value how do these compare to what you traditionally sold or.

Maybe.

How much of this volume might have been and informal channel and that 65% growth.

Yeah. Good question. Thanks, Brett.

I guess I mentioned in my remarks, we do see evidence, but let me share I guess qualitatively the sort of data. We're looking at so I look first of Canada, Canada is maybe a more mature market from a digital dealer to dealer standpoint. It's also a market for we have strong market share both physically and digitally with ADESA and trade revenue.

And what we've been seeing in Canada, and we've been seeing this for.

A number of quarters now let me say.

We're seeing that the aggregate volume of dealer vehicles sold in that market is growing and is increased versus any prior quarter sort of pre digital okay. So it does appear that the trade Rev offering is bringing and vehicles into the marketplace that didnt previously come for physical auctions.

And again and Canada, we are the largest operator of physical auctions with with more than 50% share. So.

We don't have full industry data there but.

Wrong trend evidenced in our business of increasing volumes at.

And at the aggregate level, obviously, the mix shift towards digital okay, but the aggregate. The total of bolt is also increasing and has been doing silicon and system.

We also saw some evidence in the United States and it's more of an industry wide evidence in Q2.

So in Q2 based on again my review of auction of data is the total volume of dealer vehicles sold at U S. Physical auction was about the same as Q2 of 2019.

Okay. So Q2 of 2020, 1 roughly the same as Q2.

Of 2019, and that was physical auctions, but on top of that the digital providers such as backlog cars grew substantially so the aggregate of physical plus digital.

Increased significantly from Q2 of 2019 to Q2 of 2021. So I think that's the first quarter that trend was evident but I.

I don't think it'll be the last quarter and I do think there's evidence that these digital platforms. Yes. There is some cannibalization don't get me wrong, but they are also bringing and vehicles that were not coming to physical auction for but we're transacting through what we've called more informal channels from the past.

Okay, Great and I guess could you give us maybe of probe I think back of the spin we were talking about the average transaction value being something like $8000 is that still the case or is that migrating up just as valuable and migrating up it's been migrating up.

Some of that is driven by.

You know just the increase and used vehicle values overall.

But some of that is also driven by just you know.

A slightly newer and lower mileage car being offered and these marketplaces. So we're seeing the value of migrating up and we saw it migrate up substantially again in Canada.

Whereas it tends to be higher than the U S. But it's it's migrating up and both market business.

And Brad just to put some numbers behind the dealer off premise across all our marketplaces you remember the number of 8000 and back from 2019 is now over 10000 and $500 for dealer off premise alone an average sale price.

And the only other.

The segment of our business that has a much higher increase would be our international average sales prices up even more than that so the all the others. This is kind of leading the or near the top of all of the increases and.

Gross auction proceeds per vehicle sold.

Thank you.

Your next question is from the line of Bob and Lubbock with C. J S Securities.

Good morning.

Wanted to follow up on that last question make sure.

Understood that the share of gas and in terms of dealer cars, including.

As well I think Youre of course were up 6%, including backlog of 4% versus 2019, and I think you just said that essentially the market at auction was flat versus 2019. So first is did.

And I hear that correctly and if so then.

Obviously, you're gaining share which was fantastic where do you think the share's coming from and what are the impediments to.

Faster growth going forward, if your account relationships isn't your inspectors.

What are you doing true further gained share.

Bob Thank you for that.

I didn't comment specifically on share and the dealer segments purely our digital platforms of growing we're pleased about that 65% and the quarter.

And I mentioned that there's evidence of physical auctions.

Over the 2 year period from Q2 to Q2 were essentially flat and the U S. But.

You know you can do your own maths, obviously based on that in terms of what are we doing to further increase our volume.

You mentioned inspections.

That hasn't really been the constraint for us.

It can be tactically and issue we have to look at and certain markets from time to time, but generally we've been able to scale at the appropriate level and we've seen continue to see strong growth and postings and very pleased about that.

I'd say the account relationships is an important 1.

It's really a matter of.

Getting trial and getting us.

By customers and getting them introduced to the platform both on the seller side and on the buyer side.

Getting the to try the platform getting them to have early success.

So we're focused on the funnel of bringing new customers for the platform activating them retaining them growing.

Growing the volumes over time, and and it's very sort of disciplined.

Approach to that and I am pleased as I mentioned in my remarks, we did in the quarter and addition to.

Best of our volumes, we also had best ever.

<unk> of sellers participating buyers participating and and.

And obviously volumes posted so I think the account relationships and the activation and ensuring the customers have a great early experience for the most critical factors.

And Bob I want to clarify the 4%, including backlog of course was of total volume not specifically dealer consignment. So that's the net of a decrease and commercial and an increase and and dealer consignment and total volume and the quarter just to make that clear.

Okay. Thank you great and then just for my follow up from you also gave some really nice debt as it relates to the commercial side I think he said that.

Consumers of about $8000 equity and cars in Q2 versus zero 2 years ago, what's the kind of.

You know of long term average level and what does it take to get those off lease cars flowing back through auctions, what you know what level of equity what would get you.

Moving positive and getting those volumes back to the auctions the bump.

Bob Thank you.

And that number I just want to clarify that as an internal metric it's.

It's a net it's and effort by us to get to the number and it may not be as precise so I gave it as the sort of a general.

Approximate numbers, so I just want to characterize it as such and I.

I would say the long term average tends to be below zero most.

Oems when the right leases they have they're trying to quit of situations create a long term customer relationship and.

And the.

They're ideal is that the customer will return the lease at the end of the 3 years and drive away and the new vehicle of the same branch.

The the structure of the leases.

And 2 obviously not put too much risk not take on too much risk and the finance product, but achieve that outcome. So I would say on the long term average the equity situation and the average consumers leased vehicle tends to be slightly negative.

And so this is sort of.

And at $8000 that is historically unprecedented we have never seen anything even close to that level and any prior period at least for any period that I've looked at the data.

And I would say, we typically see it and a range of may be.

Plus 1 thousands to negative 3 thousands in our industry, depending on market and other factors.

And while the calculation may not be identical back in 2011, and 2012 positive equity, especially on the luxury brands.

And that 4 to 5000 range. It never got the Si just as a matter of comparing to another period and Peter that was your open lane days, but yes, but it was it was substantially less and what we're seeing now however, still was the same outcome positive equity of 3 to 5000 might've been the range. So the.

So Bob to what's going to take to drive the rich.

Turning off lease volume.

Ultimately new car production.

More new cars on dealers' lots.

And that's ultimately will I think take some of the air out of the used car price bubble and we'll see.

The moderation of used vehicle values and that will sort of start to change the dynamic around the equity position of these lease vehicles and that that's the set of facts that I think the set of facts that we need to see play out and our industry for that to happen.

But but but I think it will happen and we're seeing evidence of that and we're also seeing evidence of used vehicle values and our industry moderating and starting to fall back.

And the past for.

For the 6 weeks.

Thank you Bob Thank you very much.

We have we have 2 more people and the queue for questions, we're going to try to get through them quickly and Peter has a closing comment. So if we could do the next 2.

Questions very quickly.

Your next question is from the line of Stephanie more with truest.

Hi, good morning.

Good morning, Stephanie morning, Stephanie.

I was wondering if I could just touch on maybe what you guys are seeing quarter to date and and 3 Q here and if you're seeing any evidence that volume could increase quarter over quarter of and the commercial side. Just wanted to kind of think true maybe some of your comments Peter that you know of kiichi volume have trough dark with star.

And to turn the corner here for any color you can provide the would be helpful. Thanks.

And Stephanie Thank you Stephanie for that I don't want of a common too much on the current quarter, but you know the supply constraints I talked about didn't and on June 30th we're in a situation and are in the in our industry, where we're just in a period of tight supply I think we're seeing some evidence as I mentioned of moderating used car values.

We've got stuff going on with Oems trying to increase production and we've got stuff going on in Washington around <unk>.

Stimulus and moratoriums and whatnot, so we watch it carefully but I think we're at the bottom.

In terms of volume I don't think the situation worsens, but I also think the recovery will take time.

Got it and now that's very helpful and I'll pass it on from there.

Thanks, Stephanie.

Your last question comes from the lineup Ali <unk> with Guggenheim.

Good morning, Peter and Eric Thanks for squeezing me in here just a quick clarification questions because I think it's super helpful. You're giving the the auction that industry data all figures. So and you said commercial volumes were down 48% versus 2019 and dealer volumes were flat for the industries. So how does that compare with your commercial on premise.

And dealer on premise versus our 2019, just so I make sure I of the right numbers.

And our dealer on per our commercial on premise was very similar to auction that we were slightly positive.

And so the auction at number alley.

In the dealer category, we have lost volume in the physical dealer category buyer decision not to run cars that was the known risk of the strategy and the lean into digital so that's a non factor so our volume and the dealer category underperformed. So I guess, what I would say is we did better.

In terms of our commercial performance physically relative to the industry and we did worse on the dealer side and that was the known the dealer side was really driven by the day.

And the move to a digital model, which was the conscious decision on of known risk.

Okay got it that's helpful. And then just quickly on digital dealer to dealer can you disclose what percentage of those volumes are coming from the U S. Specifically through the backlog cars platform and maybe help us understand how much the U S grew for backlog cars and the second quarter.

We do not give that level of granularity Ali however, the U S growth was substantially higher than the Canadian growth, it's a much bigger market and as Peter mentioned, Canada is a more mature digital marketplace.

It was very substantial growth and the U S dealer to dealer digital marketplace.

Got it is it fair to say that a meaningful portion of the the 120000 volumes are from Canada for the digital deal with the dealers or is that non staff.

No. It's just it's a meaningful portion, but but becoming less and less and I say meaningful it's not a it's not of a small number however is becoming less and less of a percentage of the total because the growth rate in the U S and so much higher.

Got it okay, great. Thanks for squeezing me in and that's it for me.

Thanks Ali and I appreciate that so okay.

With that I think we've moved to close okay. So again. Thank you all for your time this morning and for the questions I just want to close out of the few remarks.

Reinforcing what myself and the team here of car focused on going forward.

Again, we are of digital marketplace business, we have industry, leading digital platforms supported by a nationwide infrastructure facilities. The helped prepare vehicles for sale.

Our focus is building out those platforms of our capabilities and our skill sets to be of true digital marketplace leader when it comes to wholesale used vehicles.

Second I believe we have a significant opportunity in front of us with the growth of our off premise volumes and the expanded addressable market for <unk> for our services and we're kind of continue to seek to build on the strong volumes and growth rates that we have demonstration of the set in the segments.

As I mentioned on this call and focus on simplifying our business, making it easier for customers to understand and to do business with us, making it easier for investors to understand.

And also matching our costs, where volumes and the mix shifts and making sure. We continue to demonstrate strong unit economics and strong overall performance going forward.

And finally, I believe that our performance and the most recent quarter, which again was delivered in spite of historically low volumes of vehicles from commercial sellers across our industry speaks to the strong margin characteristics of a more digital model and ought to be viewed as a predictor of even stronger performance as the volumes return.

So on our last earnings call, Eric mentioned, our intention to hold an analyst day and the fall.

So I'm very pleased to let you know we've decided to hold that event on Tuesday September 21 at 11, a M eastern time.

The event will be virtual and we're looking forward to be able to present at a greater level of detail. The opportunity that lies ahead of us your car we.

We will be sending out of save the date notification and I'm very much looking forward to what I hope will be a well attended and informative of bench for everybody.

And with that we'll end this morning's call. Thank you all very much.

Thank you. This concludes today's conference call you may now disconnect.

Okay.

Yes.

Okay.

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