Q2 2022 KAR Auction Services Inc Earnings Call
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The conference Miranda.
Connected to car auction services, Inc Conference call. He's taken it gets the calls or the biggest shock.
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Good morning, and welcome to the Q2 FY 'twenty two earnings conference call.
Akshay Services, Inc.
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Please note. This event has been recorded.
I would now like to turn the conference over to Mr. Mike license. Thank you I know what to use them.
Yeah.
Investors are.
And uncertainties that may affect our business prospects and results of operations and such risks are fully detailed in our SEC filings.
In providing forward looking statements the company roughly disclaim any obligation to update these statements.
Let me also mentioned that throughout this conference call, we'll be referencing both GAAP and non-GAAP financial measures reckon.
Reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued yesterday, which is also available in the Investor Relations section of our website.
Now I'd like to turn this over to our global CEO , Peter Kelly Peter.
Thank you, Mike and good morning, everybody.
Delighted to be here. This morning to provide you with an update on card globally.
During today's call I'll provide you with additional information and detail in three areas.
First our capital allocation strategy following the completion of our recent divestiture adjusted U S physical auction business.
Second our view of the current market factors that continue to impact the automotive industry.
And third our second quarter performance and outlook for the remainder of this year.
Consistent with our earnings release last night, the results that Eric and I will discuss here. This morning generally exclude the divested adjusted U S physical auction business, which.
Which is treated as a discontinued operation in our financial reports.
And as I did on our last call I'm going to speak about our business in two segments, our market place segment, which we formerly called the ADESA segment, and our finance segments, which we formerly called the AFC segment.
To begin Q2 was an important quarter in the history of our company as we completed the divestiture of the adjusted U S physical auction business.
This was a significant historic milestone the card history, and a transaction that would be transformative for our company our customers our employees and our stockholders.
Q2 was also a transitional quarter the transaction closed on May nine. So we only operated as a company that we know are for approximately half of the quarter.
This is actually a self generated approximately $1.65 billion of cash net of taxes and fees.
Over $900 million has already been used to repay our term loan b and amounts outstanding on our revolver.
As we announced their earnings release last night, we will also be conducting a tender offer to buy back up to $600 million of our senior notes during the month of August using available cash.
I want to emphasize a car continues to generate cash remains in a very strong cash position with over $800 million in available cash at the end of the second quarter.
Our strong cash position and our ability to generate cash from our business allows us to do two things.
First it allows us the flexibility to invest into our digital marketplace businesses are.
Our objectives here are to expand our market share enhance our product portfolio and improve the customer experience.
We believe that these organic investments will position us to extend our lead in the digital marketplace business.
As for accelerated growth when industry volumes normalize.
Secondly, we continue to believe our stock is undervalued, we repurchased approximately $82 million in powershares during the second quarter.
And have approximately $227 million remaining on our authorization from the car board of directors.
We intend to continue buying back shares opportunistically going forward.
Since the close of the transaction that's been quite a bit of time with our customers and in particular with our commercial sellers.
Our customers are supportive of our strategy and share our enthusiasm or more digital future.
Also I'm also interested always interested to hear our customers perspective on the near term supply side challenges that have impacted the automotive industry over the past year and a half as well as getting their thoughts on the timing and pace of that recovery.
I would summarize the recent feedback as follows.
The supply side issues affecting new vehicle production appear to have bottomed out production.
Production has been relatively stable over the last six months, although at lower than normal levels.
And several large Oems recently reported that they expect to produce more new vehicles in the second half of this year than they did in the first half.
Our customers expect the recovery in production to be gradual leading to a gradual increase in the amount of new vehicle inventory on dealers lot and also a gradual increase in the number of vehicles entering the wholesale market.
Increased retail sales of new vehicles would also result in increased volume of trade in vehicles flowing into wholesale channel.
And finally increased new vehicle production, coupled with higher interest rate environment will tend to put downward pressure on new and used vehicle prices.
So to summarize I think it's fair to say that while the supply side equation remained very challenged during Q2, it didn't materially worsened versus Q1.
And there is still widespread consensus amongst our commercial sellers in our dealer customers that these market factors that we've experienced over the past year and a half are temporary and that the supply returns prices will tend to rationalize returning us to a more normal wholesale environment over time.
No one can predict exactly when that will happen.
But through our customer conversations I'm hopeful that we may start to see the first signs of a year on year improvement starting later this year and into 2023 and <unk>.
Hopefully accelerating over time.
So with that as backdrop, let me cover some of the highlights of our second quarter results.
Paccar overall, we generated $384 million in revenue.
It was a 2% increase versus the same quarter of last year.
We generated total gross profit of $172 million, an increase of 3% from Q2 of last year.
This gross profit represented 59% of revenue excluding purchased vehicles.
This resulted in Q2 adjusted EBITDA of $56 1 million that was a decrease of 10% from Q2 of last year, but it was a sequential increase of 14% over the amount generated in the first quarter of this year.
Specific to our marketplace segments.
We sold approximately 343000 vehicles in the second quarter.
While the top of funnel supply remains relatively strong versus our expectations. We did see a decline in conversion rates across our marketplaces relative to Q1 and relative to the same quarter of last year.
This decline reflected weaker buyer demand.
As sellers continue to hold out for higher vehicle prices that they have been accustomed to getting over recent quarters.
The misalignment between buyer sentiment that seller expectations resulted in reduced conversion rates and lower volumes sold.
Notwithstanding those challenges in supply and conversion, we were able to increase our auction fee revenue per unit sold by 20% to $289 per vehicle sold. We also increased gross profit per vehicle sold to $282 an increase of 11% over the same quarter last year.
And our finance segments, we experienced another solid quarter performance as AFC continues to expand its store plant finance business.
Our finance segment generated revenue of $92 million in the quarter that was an increase of 34% over the same quarter last year.
And revenue per transaction increased 19% to $229 versus same quarter last year.
AFC continues to generate a significant percentage of its revenue from noninterest fee based services and offerings.
The second quarter ebay.
E based revenue increased by 22% over same quarter last year.
So overall, we were relatively pleased with our performance given the market conditions.
But I want to be clear, we do not believe that these results are indicative paccar indicative of what car is capable of achieving.
And we are taking significant steps to navigate the current environment, but positioning par to capture share in external accelerate our growth via the many opportunities that lie ahead for us.
I'd like to highlight a few areas of progress in the second quarter, where we're advancing the strategy and that I believe will benefit our performance in the second half of this year and beyond.
The first is our focus on cost management we.
We've been diligent adjusting our cost and operating structure to reflect the current realities of the market.
But more importantly, the divestiture of the ADESA U S business creates an opportunity to restructure car global towards a more asset light digital model with lower overhead.
And we have made meaningful progress towards that goal.
Specific to 2022 on our last earnings call I spoke of our intention to reduce our SG&A run rate by $30 million annually by the end of this year.
That work is now well underway and our intent is not to achieve this goal by October ahead of schedule. This should contribute an additional full quarter of savings towards 2022 performance.
Another priority in the second quarter has been a focus on pricing.
First we have increased fees and introduce new revenue streams across our digital dealer theater business that contributed to our second quarter order performance and should continue to do so through year end.
In our commercial business, we have been negotiating with our customers to revise our pricing plans to reflect the current market environment as well as our shift to a digital marketplace business.
In many cases the fee structures were set years ago and contemplated materially different volumes versus those that currently exists.
<unk> been working collaboratively with customers to institute fee structure changes that should help bridge the short term challenges and ultimately mutually benefit both parties with volumes of chart.
And lastly, we're simplifying the customer experience and increasing engagement across our marketplaces to platform consolidations.
The United States, we are finalizing the integration of backlog cars car with <unk>.
I'm pleased to report that we have now successfully hosted our first combined sale.
For car wave on the backlog cars platform during the month of July .
So we are now well on our way to completing that integration.
In Canada, we have launched a beta version of our single marketplace that will combine the totality of the death of Canada and trade buyers sellers and inventory on a single digit marketplace.
Okay.
So given the market conditions and the actions we are taking to control what we can control I'd now like to speak to our outlook for the remainder of the current year.
Generally I expect our company to perform better in the second half of this year than we did in the first six months.
This expectation is based on a number of key assumptions.
First.
A couple of assumptions related to revenue.
Q1, and Q2 were impacted by the transaction, but they also reflect less than two months of revenue associated with the commercial partnership with Carvana.
We expect to have the benefits of six months of that revenue in the second half of the year.
Also helping to increase revenue, we expect to see some Q3 and Q4 benefit from the customer pricing improvements that I just mentioned.
The go live dates for those changes vary by customer a handful started in June others in July August and September , but we will have the benefit of those increases in the latter part of this year.
The second assumption is the impact of our cost management actions.
Many of those actions were initiated during the second quarter and we anticipate that the remainder will go into the sector in the backup of this year. This will also increase our.
Second half performance.
I have confidence in those revenue and cost actions and I expect them to contribute towards improved performance in the second half of 2020 to these.
These items are generally within our control and we are working hard to advance these efforts.
The third factor impacting our result is conversion rate.
As I mentioned, our Q2 volumes were impacted by a tight supply situation, coupled with conversion rates that were weaker than normal and weaker than what we had expected.
While we still have a path to achieving 265 million if the conversion pressures that we experienced in the second quarter do not improve we would expect full year 2022 adjusted EBITDA, maybe as low as $245 million.
Accordingly, we are updating our previous guidance for adjusted EBITDA to a range of $2 $45 billion to $265 billion.
So to summarize my key messages for today are ADESA U S. Physical auction transactions now closed we have paid down a meaningful portion of our debt and we are now fully committed to our digital marketplace strategy.
The production issues affecting new vehicle supply appear to have bottomed out and we expect to see a gradual recovery in new vehicle production starting in the second half of 2022.
We believe that this will result overtime in a corresponding recovery in wholesale vehicle volumes.
In our market place segment, despite challenges in the broader used vehicle marketplace that negatively impacted our Q2 volumes, we increased our revenue and gross profit compared to one year ago. We also increased our revenue per unit and a gross profit per unit sold in our marketplace segment.
We experienced another solid quarter performance of our fan segments with ASC meaningfully growing revenue and revenue per unit.
Adjusted EBITDA of $56 1 million represented a sequential increase of 7 million compared to Q1, despite weaker conversion rates.
Flight volumes being slightly lower than Q1.
And as we look to the future, we're excited and energized by the many opportunities ahead.
We outlined at our Investor update in June we believe we have a significant opportunity for growth we.
We have differentiated platforms are diverse and expanding customer base and a large addressable market space in which to innovate and invest.
With that Eric will now provide a more detailed review of the financial results for the quarter Eric.
Thank you Peter.
I want to spend most of my time talking about our actions around managing capital.
Separating cars continuing operations from the recently discontinued operations and provide a viewpoint on where opportunities exist to improve our cost structure going forward.
I believe our financial results that were released last night do not need a lot of additional commentary.
Let me start by pointing out information, we are providing this quarter to assist with the analysis of our business first we have provided annual results of continuing operations for 2020.
It is extremely complex and costly to restate the individual orders for 2020, so we will not be providing quarterly information for that year.
We have provided the quarterly results for each quarter of 2021 in our earnings materials. This will will allow you to make comparisons of our results for the remainder of the year for our continuing operations. We have updated our data sheet for the marketplace business to present key metrics for the continuing operations of car globe.
There were no changes to the previously reported metrics for the finance segment data sheet.
We also have provided line items in our segment reporting for the finance business that separate fee revenue and interest revenue.
We believe this additional disclosure will allow the analysis of changes in revenue as interest rates are increasing.
We have provided this additional information in our data schedule for the finance segment for all previous quarters.
Now I would like to cover more specifics on our capital transactions. Following the close of the sale of the U S physical auction business on May nine.
We received $2.186 billion in cash at closing.
We have $14 million of expected proceeds that will be received after receiving consent for two remaining property leases.
As part of the transaction, we transferred approximately $70 million of cash to the U S. Physical auction business to provide adequate working capital for the business to continue operating.
As required by the purchase agreement, we have reconciled working capital as of the close date and $13 9 million of this cash has been remitted back to car following our quarter end.
We have paid approximately $40 million in fees and expenses directly related to the transaction.
We expect cash income taxes of approximately 430 million to be paid with our 2020 to federal and state income tax returns.
We have already room added approximately half of these taxes prior to June 32022, and expect the remainder to be remitted in the second half of the year.
We are required to use a portion of the net proceeds of the transaction to repay the senior notes due 2025.
We have 365 days from the date of the close of the transaction to redeem the senior notes yesterday, we announced a tender offer to redeem up to $600 million of senior notes at a redemption price of 100 spot 75.
This offer to redeem the senior notes earlier than the date required will be completed in the month of August the detailed terms of the tender offer are included in our press release issued by the company yesterday.
We have sufficient available cash to fund the redemption later this month upon completion of the tender offer we will reduce our available cash balance by approximately $600 million.
Included in income from discontinued operations is the gain from the sale transaction of approximately $534 million before taxes.
The reason for the significant difference from the net proceeds from the sale of the U S physical auction business.
And what the book gain is is because we were able to allocate significant goodwill and other assets to the discontinued business that reduces that book day.
The assets that reduced the book gain generally relate to the purchase accounting for the LBO transaction in 2007 when car global was formed.
Another item in our financial statements that need some explanation is the increase in total SG&A in the second quarter as compared to the prior year.
The items accounting for the increase or $10 3 million in noncash stock based compensation.
$4 million in SG&A per car way an acquisition that occurred after the second quarter of 2021, and 1.4 million and nonrecurring severance as we exited head count following the close of the sale of the U S physical auction business.
One last housekeeping item that I would like to address is the dividend on the convertible preferred stock.
To date this dividend has been paid in kind as required by terms the preferred stock.
The requirement to pay this dividend in kind was for the first eight quarters following the investment.
The third quarter 2022, this dividend will be paid in cash all future preferred dividends may be paid in cash stock or any combination of the two at the discretion of the company.
Now, let me comment on some of the ongoing transition activities for shepherding the U S physical auction business from the continuing operations of car global.
We have a significant number of contracts that are in the name of car global that provides services to both the discontinued and continuing operations of car.
We are working urgently with the parties to these contracts to separate certain of these agreements.
And allow each entity to go forward independently.
This is proving to be time consuming and we are prioritizing the most significant contracts until we are able to separate the contracts car global remains a party to the contract and required to provide the benefits of the arrangements to the discontinued operations.
As we separate the parties to these contracts we continue to look for opportunities to reduce the costs incurred by car with many of these vendors.
Another area, we are addressing is our corporate office space.
The transaction, we have determined that we can reduce our corporate office footprint in several locations, including our corporate headquarters.
We are currently looking for an appropriate sublet opportunity for each of our corporate locations, where we no longer need the existing space. We have early interest in our Carmel, Indiana and Toronto offices that would provide a significant reduction in our current cost structure going forward.
At this time, we are looking for opportunities to be more efficient in our cost structure without impacting our core businesses.
In summary, we are moving with a sense of urgency to address as many areas of cost as we can.
With inflation, increasing interest rates deteriorating consumer confidence and uncertainty around retail demand for used vehicles in the near term. It is important to run our business for their circumstances of today.
We have taken the opportunity to eliminate substantially all of our debt, reducing future cash interest payments by approximately $75 million per year. Once we complete the redemption of the senior notes.
We are streamlining our SG&A to have a lower fixed cost structure as we move forward with an asset light digital marketplace business model and as Peter mentioned, we are using this unique opportunity to reposition car global with our longtime customers who have knowledge, who have acknowledged that the business of car global as evolved.
Things are very uncertain for a lot of businesses and we are not immune from this type of uncertainty.
The good news is the cash generating characteristics of our business remains strong.
And could in fact be improved following the sale of the U S physical auction business.
And I know for sure we have reduced our cash interest payments per car and will continue to significantly reduce future interest obligations as we repay additional debt.
And last we believe we have sufficient capital to invest in the organic growth of our digital marketplaces. Our customers are excited about the opportunity. We have described for them and this is an exciting time for car global to accelerate the pace of transformation of the wholesale used car industry.
That concludes my remarks, so I'll turn it back to Jacob and we will now take your questions.
Okay.
Jacob you can open the line for questions.
Thank you.
We will now begin the question and answer session.
To ask a question you May press Star then one on the telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then.
Thank you.
At this time, we will pause momentarily to assemble our roster.
The first question comes from John Murphy.
With Bank of America. Please go ahead.
Hi, Good morning, guys and thanks for all the Restatements and info here I had two.
Two questions first Peter as you look at what's going on right now you alluded to the market being sort of in a disequilibrium.
At the moment and we certainly would agree and there is a huge issue on the on the supply side. It may not get worked out for another year or two to somewhat normal levels.
As you're transitioning the business.
Amidst this mayhem, it's really kind of tough to gauge your progress.
And how successful you are being in transitioning the.
The business to pure digital are almost pure digital.
Ex Canada, I mean, what are the key metrics.
Youre looking at and how are you thinking about understanding progress.
On Kpis or which direction you you should drive into.
There's a lot of moving pieces here. So it's a very difficult time to manage the business just curious how youre thinking about kpis and how to how to manage the volatility in the near term.
Yes. Thank you John good question.
Youre right first of all it is it is.
Time of a lot continues to be a time of a lot of change I do feel.
That's as I mentioned I think the supply side issues are kind of bottomed out that doesn't mean I expect a recovery in Q3, but I think I'm starting to see a little light at the end of the tunnel, which I do feel encouraged about.
But you're right we have with the transition of the business an opportunity to think about our kpis, obviously at a high level. We focus on total volumes sold revenue generated some of the metrics we've talked about here gross profit.
As a percentage of revenues are sold et cetera.
When we look a little deeper obviously conversion rate is.
An important metric in the health of any marketplace.
And our conversion rates differ by market Places open lane.
As perhaps our highest converting marketplace certainly right now you know.
And given the very great scarcity scarcity of off lease vehicles. The conversion rates are important metrics customer participation both on the sell and buy side.
Are we growing our customer base customer levels of participation et cetera are important metrics around the health business.
So we certainly measure and focus on that and then obviously we measure the.
The progress against our initiatives.
As I spoke about on this call and other calls we're focused on consolidating platforms. We're focused on migrating to fewer sort of technology stacks stacks to addressing our cost structure.
So progress on all of those metrics.
It's something we're very focused on as well and I think you know, while it's not perhaps yet fully apparent in our metrics I think a lot of these.
The work we've done around the cost structure that I think will become more apparent to you in coming quarters.
The work around the.
Consolidation increased creating an ultimately creating greater efficiency business.
<unk> will be very very powerful for us as volume start to recover because again you know this business like like.
Like most businesses has a scale effects I think the scale effect is even more magnified in a digital model <unk>.
Physical or a hybrid model.
So I'm very encouraged that the work, we're doing and the metrics I'm seeing and the progress we're making.
This is going to really be very very positive for us as we start to see volumes increase and obviously, we're going to have to prove that out I recognize that but ultimately we're trying to lay a foundation for future success.
Okay. That's helpful. And then just a second question on pricing.
It sounds like you're adjusting from.
Right now our June to August pricing more.
Through September .
For all your customers I'm, just curious what the receptivity is division and what you mean I mean is it just simply.
Higher auction fees.
Or are you going about this and it sounds like youre, not having any real pushback or the way you talked about it. So just trying to understand that that's pretty unique.
Yes, well a couple of things in in late Q1, actually we increased some pricing and our dealer to dealer market places. So I think we're seeing some of the impact on that in Q2 results.
Mentioned, how though volumes where were.
Relatively flat actually slightly down versus Q1.
National metrics.
Somewhat improved so I think we see that showing up there and that will have the benefit of that over the rest of the year added what I referenced in more depth on this call was more on the commercial side of our business.
What I would say John is.
And it's actually less related to.
Auction fees, if you want to call them that Ics in southeast it's more related to the services, we're providing around inspection and some cases logistics and other types of services for our commercial sellers.
Frankly, as you can imagine we've had a situation here over the last 12 months were.
Our volumes.
Some cases have been down like 90% is in certain areas of the services, but it has not been possible to take our costs down to that degree we need to continue to provide services on a national basis.
And we've addressed the costs, where we can so I think what we've really tried to do is.
More of those services.
Ill speak to our customers about just the current reality around volumes and how the unit economics don't support is very very low volumes and the customers have been very understanding of that and essentially what we've put in place are instead of a sort of a fixed price structure.
At all levels of volume, we converted to a tiered price structure, which has higher pricing of current volumes and then as volumes increase overtime returns returns generally towards.
You know the preexisting price if volumes get all the way back. So if you can imagine that type of scenario.
They've been very supportive.
I take from that that they value us as a business partner.
They value the services, we provide and they completely understand.
The volume picture that affects their business and ours. So I'm encouraged by that and these are so I would say John these are meaningful changes our current volumes, but I'm actually.
That's even more encouraged about is that the volume sort of increase.
The impact of these changes may actually be more meaningful as volumes start to trend back up.
Towards normal and as you mentioned, that's probably going to take time. So we may get that benefit over a considerable period of time.
Yes, no it seems like from a revenue side on the cost side youre setting up well as volumes recover it there'll be a lot of a tremendous amount operating leverage so it seems like youre doing all the right stuff. So we appreciate it thanks, so much guys.
Thank you John .
Okay.
Thank you.
The next question is from the line of Bob Ludwig.
C. J S guarantees. Please go ahead.
Good morning, Thanks for taking my questions.
Thanks, Bob Good morning, Bob.
I wanted to start with conversion rate you gave us some interesting statistics on that and I'm, assuming the lower conversion rate relates to the softening of used car prices and you know it's kind of thing.
More broadly then just you guys that could last a while if prices continue to soften. So my question is a is that right and b. What are you doing to encourage the selling dealers kind of to lower their limit price or to get more in line with reality and how data driven as this decision on that limit price and how long is it.
To normalize to get back to regular conversion rates.
Well. Thank you good question.
So first if I can comment on.
Just the metrics themselves and then what are we doing about it.
So first.
I played the decline in conversion rate, if we think about it relative to a year ago. There is there is there are two factors. One one factor is just a straight mix shift the percentage of vehicles sold from commercial sellers a year ago was higher relative to Q2 of this year and again as I mentioned the conversion rates on.
For example, the openly and platform are our highest of our marketplaces right. Now so just a straight mix shift less openly more dealer to dealer in relative terms will tend to reduce conversion rates. So there is that impact which is not a market factor. It's just it's more of a mix factor and then and then.
I'd say that has had some impacts but I'd say most of the impacts we've seen has been more of the market factor.
The relative seller and buyer sentiment and again, if I was to contrasted with Q2, a year ago I would say Q2, a year ago was unusually strong.
Because if you recall, we were in a sort of an environment where prices were running up.
Demand was very strong and buyer buyer appetite with sort of higher with increasing every month right and we've kind of had the opposite.
Set of facts here over the last three months or so.
<unk>.
Where sellers are kind of holding on for high prices and buyers are recognizing that the consumer demand is weakening in it for that reason there appetizers weakness.
So that's that's the set of facts I think you are correct that if we're anticipating an extended period of steadily declining prices conversion rates could remain under pressure.
None of us can predict precisely right, but I think that's one of our reasons for being cautious in terms of our <unk>.
We're revising our guidance assumes these look weaker conversion rates persist.
Then that will show up in our numbers.
So what are we doing about it.
Obviously trying to get sellers and buyers of line of what the true value of the vehicle is.
<unk> is a key factor.
And we can we can.
You know candidly, Bob we don't have perfect control over that but we do have some ability to influence that to.
Through data.
You know offering the cellar typically to seller a guide on the fact that these offers that they have with these bids that they have are strong.
Much market in our opinion.
We've also launched some technologies around.
And in certain of our marketplaces, requiring the seller to put a definitive.
Price on the vehicle before its launch so in trade Rev. In Canada. For example centers can launch vehicles with no floor price that they want and see how the market performs and what we find is those cars typically convert at less.
At a lower rate so we're trying to get more of our sellers too.
Have to put a floor pricing. We're also frankly limiting the number of reruns that they can run the same vince with the marketplace because.
They run the vehicle two or three times.
And then we believe they've got the benefit of what the current market sentiment is and running at a fourth or fifth time isn't a great value. So these are things, we're looking at but I'd say that those impacted sort of on the margin.
The principal driver of it is is the market I was encouraged by a number of factors Bob just to say.
We haven't seen any worsening of the conversion rates.
In July relative to June .
So that's encouraging and I just see a market report actually yesterday.
From from Black book that said by their metrics you know sellers are.
Finally, starting to respond and northern prices and there was a significant sort of down step in used vehicle prices last week.
Sellers to to sort of.
Release, more vehicles, and hence you get higher conversion, so I think ultimately.
Buyers and sellers learned pretty quickly.
And these phenomenon these phenomena tends to be temporary because ultimately the cars have to sell and it's in everybody's interest has moved to the market place pretty quickly.
Okay, Great. That's super helpful color on that very much appreciated.
And then just one other one I'll get back in queue. You know obviously the shift to digital began before COVID-19 and was accelerated by need during COVID-19.
Given the lack of I guess.
Physical auctions out there right now my question is how is it settling out since we can't really see these volumes is there been a partial switch back to physical.
Just by virtue of everything opening up or where are we up on what we all believe to be this long journey towards digital and Howard.
Sure going in and worst volume right now.
Yes, good question and again I don't have perfect data, but I do have I do have some data I think we're still on that journey, maybe the rate of the pace of that journey may have moderated a little bit.
But you know through our analysis of.
Some data that's available to us.
I believe the theater consigned volumes.
Physical auctions also declined in the second quarter.
I think on a year to date basis have.
I still see evidence of a share shift sort of away from physical and towards digital generally in the industry, but the data sources are imperfect.
There is other companies have yet to report so we'll have to see what the totality of that data looks like but I think that that shift continues, albeit the pace of the shift has moderated a little.
Got it okay. Thank you very much.
You're welcome Bob Thank you.
Yes.
Thank you.
Next question is from the line of Bret Jordan with Jefferies. Please go ahead.
Hey, guys good.
On the pricing initiatives sort of offsetting the lower volumes what are you seeing sort of in the competitive landscape. Our peers basically following the same trend just given their volumes are down as well I think you commented that you had slightly lower volumes in Q2 from Q1 is that a competitive issue or just a market issue.
Yeah.
I think the volume issue is a market issue.
Brett My assessments again based on just seeing the volume of physical we're down I don't have all the competitive data.
But I think there's no question, but volumes have just been under pressure industry wide would be my assessment.
On the pricing I mentioned, our digital dealer to dealer channels, we do benchmark pricing versus competition, we think we're.
Well positioned there.
I think where we're competitive.
Maybe slightly.
Very comparable maybe slightly less on some prices than others. So I feel good about our pricing structure there.
And then in terms of what I spoke about on the commercial side of the business I don't have perfect visibility, but I know the volume challenges aren't unique to us so I wouldn't be surprised if others are having similar discussions with customers.
But I can't comment from a position of knowledge.
Okay, Great and then obviously big success with AFC. When you look at the conversion of the other issues you face this year in the second half and relative to your guide.
And the $2 45 to 65 to <unk> 65 up what do you see the credit contribution to that versus the auction operations contribution.
Well, obviously AFC has been a significant contributor to the overall profit performance of the business here over the last period of time.
And we expect continued strong performance from AFC.
But but we also expect that in <unk>.
I guess similar to the messages on the Investor day, we expect over time, the marketplace segments to drive.
You know the majority of the growth as we look to the future.
But I guess, we are very encouraged by the performance of ESC we.
Continue we expect to see continued strong performance. We you know the environment changing little bit interest rates are going up that actually has some benefits CFC the.
The risk environment may be.
We need to just stay focused on that we've had a very low risk experience over the last.
Period, a period of time.
But AFC is a strong business and will continue to be a strong contributor we believe.
Great. Thank you.
Thanks, Brett.
Okay.
Thank you.
The next question is from the line of Danielle Brill with Stephens. Please go ahead.
Yeah. Good morning, guys. Thanks for taking my questions.
Good morning, Dino Hunter.
Late so apologize if you discussed this but I wanted to start on the SG&A side. When we look at <unk>, Eric I appreciate the color on kind of a noncash in the car wave numbers, but one well that noncash number. The 10 three is that one time or is that going to continue that part of the run rate cost basis here and then I think at the analyst day, you guys talked about $30 million of run rate cost.
Savings that you were targeting this year, how many of those were captured in the second quarter and how many of those are still on the come.
And you'll let me take the first part of that question. The $10 3 million in stock based compensation is a catch up as a result of the gain on the sale transaction.
Our long term incentive plan, which is tied to P. R issues.
Add operating adjusted EPS.
Cumulative get to a point, where we have to we are accruing a cost it had been below thresholds for the night for the 2020 grant ear and the 2021, great year, and we're now accruing as as our gain is reflected in our EPS realm.
Relative to the other things.
As the business has transformed its very difficult to see even for me as to what's the impact that we have made a number of actions that reduce our costs.
But at the same time, we've had a transition of a major part of our business, whether it's cost that's temporarily associated with the activity of breaking things apart. So I don't think it's shown up yet in the cost structure and as I look forward I think and Peter mentioned this youll see it in the second half of the year Daniel.
Peter Peter.
Peter and I have been talking about is I'll, let Peter analyzed how do we look at the $30 million, how do we plan to see evidence of that.
As we go into this year, where we were and where we think we'll end the year. Peter why don't you share that with all comments as well here, but generally agree with Eric's comments I don't think its shown up yet.
And frankly.
We had a sort of a cost agenda, taking shape, but then we entered a negotiation around this transaction and I felt it was.
It would we have to sort of get through the transaction because that was going to dictate the shape of cost actions that we could take we couldnt I didnt want to take cost actions within the business we were selling.
And I also felt we needed the transaction to be closed before we could fully address.
Our own our own operations. So in reality most of this work sort of started after the deal closed so mid may and onwards and that these actions have continued since then and will continue so I expect them to be more visible in the second half.
You know I guess, what I'd say is I'm expecting us to end the year with an SG&A run rate something around $400 million give or take I don't want to give a precise number but I think something around that and that that will be obviously.
Down on what we've seen certainly in a number of prior quarters. So.
That's that's my expectation and we are very focused on that work.
Alright. Thank you guys for that color and then Peter I wanted to ask one on the integration of car wave again at the analyst day. It sounded like you were making progress.
Curious how the integration is going and I know volume is pressured on the dealer to dealer side right now, but have the price increases allowed that portion of the business to remain EBITDA positive in this environment or did anything change in your outlook. There I think when you bought car wave you had said that business is now profitable, but things have changed and then I was wondering any update there.
Yeah. Thanks, Thanks, Danielle the integral first of all well first of all the car we have continued to be profitable.
So that is that is positive.
Youre right volumes in the channel in DDD generally have been under pressure and that's true of car wave as well.
But but the business continues to be profitable and the integration plan is progressing well.
We felt.
We thought it was important given the power of the <unk> platform and the feedback from customers we wanted to.
Replicate that experience within the backlog cars marketplace never part of building out new technology and functionality within the system.
So theres been a lot of focus on that.
That is now that now exists.
Phil and I call it an advanced beta, but we held our first sale in the month of July .
We migrated cars over we brought over some buyers and sellers that we have.
And auction to pressure test the system to get customer feedback and so forth. So again that was positive that was a key milestone along the way and I'd say, we're now in the in the.
The latter stages of that migration and certainly we expect to completed this year. So I feel good about that I feel good about getting to one marketplace getting all of our sellers and buyers into one digital venue you know leveraging the network effect, so on and so forth. So.
Well on track and feel good about that.
Again feel good about the long term prospects for the digital digital dealers dealer marketplace.
And Peter if I could add some 30, Daniel the combination of our digital to digital DDD marketplaces would be car wave backlog cards and trade rep in aggregate. Those three businesses are also profitable in aggregate.
That's all right.
Well you mentioned car wave I just wanted to be clear to everybody also the total totality of DVD is profitable in aggregate.
Great.
Any color in basketball going forward.
Thank you Dan.
So I believe that concludes the questions.
So thank you Jay.
Jacob do we have any more questions in the queue.
No no sorry.
To ask a question and answer session I would like to turn the conference back over to Peter Kelly for any closing remarks.
Thank you Jacob.
Thank you again for your questions and for your interest in car Global I'm encouraged by our second quarter results in light of the current market challenges and I believe that we are executing well against the levers that we control.
To summarize once again, we completed the transaction and are fully committed to our digital marketplace strategy with.
We've paid down a meaningful portion of our debt continued to generate positive cash flows.
We have increased revenue and gross profits despite weaker seller supply and despite marketplace conversion and I believe we have a sound strategy in place to reach our 2022 bowls and beyond.
As I look beyond 2022, I'm also very encouraged by our longer term prospects for growth.
As we outlined at our Investor Day update in June I believe our growth will be driven by a number of important factors.
First the ongoing secular shift towards digital marketplaces across our entire industry. This will drive increased volume in both the dealer and commercial parts of our business.
Second a broader recovery in commercial volumes across our industry.
Third the continued strong performance by businesses like AFC in the desk to Canada, where we have differentiated offerings and our strong market position.
And finally, our continuous focus on cost efficiency and being an asset light digital company.
Together I believe that these factors will help help us navigate any short term challenges while positioning us for accelerated growth in the future I look forward to sharing our progress towards these goals on our next call.
You, everybody and have a great day.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.