Q1 2023 KAR Auction Services Inc. Earnings Call
Good morning, and welcome to the car auction services, Inc. 2023 first quarter earnings call.
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I'd now like to turn the conference over to Mike Eliason, Treasurer, and Vice President Investor Relations. Please go ahead.
Thanks, Andrew.
Morning, and thank you for joining us today for our global first quarter 2023 earnings conference call today, I will discuss our financials.
The performance of our global for the quarter ended March 31, 2023, after concluding our commentary we will take questions from participants before Peter kicks off our discussion I'd like to remind you that this conference call contains forward looking statements within the meaning of the safe Harbor provision of the private Securities litigation format.
Of 1995.
Investors are cautioned that such forward looking statements.
Involve risks and uncertainties that may affect our business prospects and results of operations and such risks are fully detailed in our SEC filings and.
In providing forward looking statements the company expressly disclaims any obligation to update these statements.
And that's what this conference call, we'll be referencing both GAAP and non-GAAP financial measures reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued yesterday, which is also available in the Investor Relations section.
Oh I'd like to turn this call over to car Global CEO , Peter Kelly Peter.
Thank you, Mike and good morning, everybody I'm delighted to be this morning to provide you with an update on car global which as we announced in our press release last night will soon be known as open Lane Inc.
Given that announcement with restructuring today's call a little differently than usual I will begin by providing additional information relating to our first quarter performance and the current market factors impacting the automotive industry.
He will then turn to a more in depth discussion of our financial performance in the quarter.
And then before we move to Q&A I will walk through a few slides detailing our open Lynn branch transformation and platform consolidation strategy.
But before I get started I want to welcome our new Chief Financial Officer, Brad Lochia to the call and to our company.
As we detailed in our announcement a few weeks ago, Brad brings a lot of great experience to our management team.
And I'm very much looking forward to working with him to help grow this company deliver excellent stockholder value.
So Brad welcome to openly.
Brad is only two weeks on the job So Scott Anderson, who served as our interim CFO for the past quarter will deliver the remarks for the financial portion of the call that just a few minutes.
So let me turn to our first quarter performance and as usual I'm going to speak about our business in two segments, our marketplace segment and our finance segments.
I'm very pleased with our solid performance in the first quarter and the improvement we achieved over the prior year, including double digit growth in revenue gross profit adjusted EBITDA and operating adjusted earnings per share.
These results are consistent with the expectation that we discussed on last quarter's call.
15% to 20% growth in adjusted EBITDA over the next several years.
And I'm, particularly pleased that we achieved these first quarter results, despite an industry environment, where volumes remained tight.
During the quarter. We also continued to make solid progress on our strategic initiatives managing our costs integrating our platforms and simplifying our business.
Brand change that we just announced will help further align and unify these initiatives and I'll discuss that in more detail later on this call.
So to summarize our key results for the first quarter.
We generated approximately $421 million in revenue.
14% increase versus Q1 of last year.
Purchased vehicle revenue represented 13% of total revenue in the quarter.
We generated total gross profit of 196 million, an increase of 24% from Q1 of the prior year.
Gross profit represented 54% of revenue excluding purchased vehicles.
And we generated adjusted EBITDA of $59 million in the first quarter.
This represented an increase of 20% versus Q1 of last year.
However, this included an 11 million one time charge related to an investment in early stage automotive company.
Excluding this one time charge adjusted EBITDA would've been $70 million in the quarter and that would've been an increase of 42% versus Q1 of last year.
This led to operating adjusted earnings per share of <unk> 12.
More than double our operating adjusted EPS performance in the same quarter of last year.
I was also very encouraged to see that the marketplace segments of our business contributed meaningfully to our Q1 consolidated results and led our improved performance compared to Q1 of last year.
From a volume standpoint, we sold 330000 vehicles in the first quarter.
Approximately 51% of this was from commercial sellers of 49% of it from dealers.
This volume represents a decline of 6% versus Q1 of last year I would point out that this decline was the lowest in percentage terms in well over a year sequentially.
Sequentially. It was a volume increase of 14% compared to Q4 of last year and that was also the best sequential volume performance for well over a year.
Okay.
The marketplace segments delivered strong revenue growth, 13% in the first quarter.
The revenue growth was driven by strong auction fees per vehicle sold and solid attach rate and solid growth in services revenue, which was driven by service attach rates and growth in services revenues that were not directly tied to vehicle sales.
Market growth marketplace gross profit performance was also strong increasing 27% year on year and representing 35% of revenue.
That was a 400 basis point increase compared to Q1 of last year.
<unk> revenue from purchase vehicles gross margin in the marketplace segments was 43% of revenue.
Our cost management efforts are also reflected in the fact that marketplace segment SG&A declined year on year.
So taking all those factors into account the marketplace segment delivered adjusted EBITDA of $14 million in the quarter. However, I would point out again that this is inclusive of the $11 million one time charge that I mentioned earlier.
Excluding that one time charge the marketplace adjusted EBITDA would have been $25 million in the quarter.
So I believe that these results provide some solid evidence that the volume challenges are bottoming out and also purity demonstrate our efforts to operate a more efficient and effective marketplace businesses are bearing fruit.
Both of those are very positive for our company.
In the finance segment of our business Q1 revenue was $100 million that was an increase of 18% over Q1 of last year.
This was driven by a 13% growth in transaction volume and a 5% increase in revenue per transaction to $237.
Adjusted EBITDA was $45 million.
This was down alright, adjusted EBITA in the finance segment was $45 million. This was down $5 million versus Q1 of last year and reflected credit losses, returning to a more normalized range compared to the below normal levels that we experienced in 2021 and the early part of last year.
As I mentioned before cost management remains an important part of our focus here at car and I believe that our cost management work is showing up in improved gross profit margins and reduced SG&A expenses.
In Q1, we made meaningful progress on a number of areas, including the acceleration of our global shared services model.
In Q1, total SG&A declined $11 million or 9% compared to Q1 of last year.
And we still have a pipeline of initiatives, we're working on to further streamline our business.
I'd now like to provide a few brief updates on the macro environment.
First new vehicle production was up in the first quarter of 2023. Additionally.
Additionally, recent reports suggest that new vehicle inventory on dealer lots increased during the quarter and this was coupled with increased new increased new vehicle sales.
These factors are necessary ingredients to the balancing of supply and demand in the used vehicle market over time.
Shifting to used vehicle values as expected and as we discussed on our last call. The used vehicle price declines that we witnessed in the second half of last year reverted to used vehicle price appreciation in the so called spring market.
The level of first quarter price appreciation was quite strong, but the week on week increases in used vehicle values appear to have plateaued and I think we may start to see some downward pressure on used vehicle values as the year progresses.
We're not yet seeing any meaningful increase in off lease volume supply.
Some customers have communicated optimism that we'll begin to see some increases as we head towards the second half of this year.
We also had feedback from customers that they expect to see increased incentives on new vehicle sales.
And this could lead to increased volumes of leasing originations compared to last year as the year progresses. So we will continue to watch that carefully also.
With all that said I believe that the two primary pieces of our growth equation remain intact first.
First we believe the digital channels will continue to gain share and we're very well positioned to gain more of that additional share over time.
We also believe that over time, there will be a recovery in commercial volume, which will result in increased volume in our marketplaces.
And then finally in the mountain the finance segments, we believe that current conditions point to what we would describe as a more normalized risk environments not that dissimilar to what we experienced pre pandemic and.
And we believe we can continue to manage the conservative portfolio and generate positive results in this environment.
In terms of capital allocation, we will discuss this further during the financial portion of this call.
No longer be providing separate digital do you live to dealer vehicles.
So volumes for our marketplace segment.
Since we are now 100 per cent digital sales and we are moving to consolidated platforms. We believe the separate volume measure is no longer a key indicator of the success of our marketplace business.
However, we will continue to provide total dealer volume in total commercial fine.
And the first quarter marketplace revenues, excluding purchase vehicle sales increased 11%.
Two $266 million and.
And generated approximately 73% of our consolidated revenues excluding purchase triple sales.
Auction fees declined by 1%.
Largely due to a 6% decline in total vehicle soul due to the market conditions pier highlighted.
Offsetting volume declines auction fees per unit increased approximately 5% to $303.
Due to select fee increases.
And a lower mix of commercial off premise vehicles, which.
Which January earn lower fees compared to other channels.
Marketplace service revenue was up 20% due to increases in repossession remarketing transportation and technology services provided.
Strong marketplace revenue growth resulted in 27% increase in gross profit versus the first quarter of 2022.
And.
100, <unk> 100 and.
520 basis point improvement and gross margins, excluding purchase vehicle revenues.
The business also benefited from M proved transportation margins and the execution of cost control initiatives.
Moving onto the finance segment.
Revenues grew 18% over the prior year and accounted for 27% of consolidated revenues excluding purchase.
<unk> <unk>.
Strong revenue growth was due to loan transaction unit increases as well as fee and interest income growth.
As we move through the year, we expect to manage a conservative portfolio.
A strong service offerings and high touch model helps mitigate risks and identified growth opportunities.
Afc's provision for credit losses increased to 2% of average manage receivables for the quarter.
You too prior year used vehicle value declines.
This represents a more normalized loss rate versus the low risk environment experienced in the last two years.
Longterm.
Provision for credit losses is expected to be 2% or under annually.
However, the actual losses in any particular quarter could deviate from that range.
Next.
Let me provide some additional color on SG&A.
First quarter consolidated SG&A was $108 million.
Which was $11 million lower than the first quarter 2022.
That's primarily due to decreases in professional fees of about $7 million in costs of about $4 million.
As Peter highlighted we have ongoing cost reduction initiatives to further offset inflationary increases.
But some of the effects will not be realized until 2024.
One additional item that did affect the first quarter performance was the 11 million dollar charge related to an investment in an early stage automotive company.
As a reminder, we occasionally invest in certain early stage auto related enterprises.
I have reported several instances of games from those investments in prior years.
In late March 2023, one of those companies filed to reorganize this operation bankruptcy process.
The 11 million dollar impact of this impairment was recorded in other income and expense in the income statement.
And this non-operating item was included as a reduction and adjusted EBITDA.
To clarify if we exclude the nine operating impairment from our results.
Justin EBITDA would've been $11 million higher or approximately 70 million for the quarter.
Next I will highlight.
Are strong capital structure and cash generated generation.
We ended the quarter with over $400 million and liquidity.
Composed of $193 million and available cash.
And $241 million of available revolving line of credit.
Cash flow from operating activities in the quarter word $96 million.
Which highlights the strong cash flow conversion characteristics of our business model.
In terms of capital allocation activities today, we announced an offer to purchase up to $140 million over outstanding senior notes.
At a purchase price of 100 per cent of the principal amount plus accrued and unpaid interest.
The detailed terms of the offer are included in a separate press release issued this morning.
As I mentioned, we have sufficient available liquidity to fund the repurchase.
As a reminder, we are required to make this asset disposition offer under the terms of our senior notes indenture due to last year's ADESA U S physical option business sale.
Therefore at quarter and $140 million of the outstanding Senior notes are classified as current debt.
We also continue to look for windows of opportunity in the debt markets to extend our revolving revolver maturity date and put in place.
More permanent that structure.
Finally, let me close on some comments on annual guidance.
We have not changed our previously stated guidance of adjusted EBITDA, some $250 million to $270 million.
We believe this earnings level will generate operating adjusted earnings per diluted share a 37 to 47.
As discussed on our last call at this guidance range, we expect cash generated by our business after taking into account estimated capital expenditures interest payments on corporate debt taxes and preferred dividend could result in a reduction.
Net debt by approximately $80 million to $85 million.
Assuming no other capital allocation activity and working capital changes.
That concludes my remarks, and I will now turn the call back over to Peter.
So thank you Scott before the Q&A I'd like to provide some additional context in detail around yesterday evening announcements on a rebrand from car global to openly and.
During this section I will be referencing slides that we will show as part of today's webcast.
At the conclusion of this call. We will also post the slides to the investors section of our website.
First we're very excited to advance the next year of our company and our industry under the open Lane Brat.
I believe that this change is much more than just a new name and logo is a change in how we think about our business. How we operate how we interact with our customers and how we invest for the future.
In many ways. It represents the culmination of the transformation that has already taken place at our company shifting.
Shifting from a legacy physical auction business to a more acid like digital marketplace that we believe will offer our customers. The fastest easiest most advanced and most trusted channel available to sell and source used vehicles.
But before I talk about changing let me cover a few things that will not change.
First this rebrand will not apply to a floor plan business AFC.
And as mentioned in our press release, we will continue to trade under the ticker symbol K a R.
So there'll be no confusion to our investor base.
There is also no change to our purpose, which is to make wholesale easy so that our customers can be more successful.
Our customers will be at the centre of everything we do it openly we want to make working with us interacting on our marketplace, that's easy as possible.
And is open Lane will also continue pursuing our vision, which is to build the world's greatest digital marketplace for used vehicles.
This vision is about creating the most data driven technologically technologically advanced platform for buying or selling used vehicles.
And at the same time, it's about a single simplified experience with all of the buyers all of us sellers and all of the vehicles all in one place.
By doing this open main will give buyers access to the largest selection of inventory available and give sellers confidence that they can achieve the best possible market price for their vehicles.
And I think when you have your company to this plan is you completely see that open lane is far greater far more powerful and far more compelling as an integrated whole and as a series of disconnected parts.
First we're a pure play digital marketplace leader with deep strengths in both the commercial and dealer segments of our industry and this is an important differentiator.
We are the clear industry leader in commercial off lease in North America supporting a significant majority of North America's all six vehicles on our platforms.
And we continue to grow volume on our share in the dealer to dealer market.
Combining all of this under open lane will provide the only pure play digital marketplace, where customers can buy and sell anything from frontline ready CPL eligible offense vehicles to older higher mileage vehicles and everything in between.
From a numbers perspective, here's how openly and stacks up.
We sold one 3 million vehicles last year that's.
That's a significant number but it's also one we intend to grill going forward.
About half of that volume was from commercial sellers and the other half was from dealers.
We also know that the commercial center volume was well below its historical normal boiling to the ongoing pricing and supply challenges that we've discussed an umpire calls.
Across merchandise value was $23 billion <unk>.
<unk> is commonly used to measure the health of digital marketplaces, and other industries and we will continue to report on this operational metrics going forward.
On average OPENLANE has more than 50000 active participants each year most of them dealers.
It's important to stress here. These are unique sellers and buyers who have logged into list big purchase and sell vehicles in our marketplace.
And one of the primary reasons you see this level of activities because of breath of it is because of the breadth of ended up inventory available <unk>.
During any given month or sellers trust, our market place to offer more than 200000 of their vehicles for sale.
So how do we believe these statistics already <unk> represent a strong leadership position in our industry. It's important to note. There are still a large address the market opportunity out there for a company.
According to our analysis, there more than $60 million retail and wholesale used vehicle transactions each year.
And that's just in North America.
Additionally, there are more than 100000 sellers and buyers out there looking for the best solutions to help them bad by himself.
So we have a large addressable market a market that we believe will be increasingly digital overtime.
Where we are well positioned to gain shares this happens.
So with that as background, let me answer the questions on why we're making this change telephone lane and further by now.
First the transition don't blame will simplify the experience for our customers, having one brand one marketplace one sign in and one user experience will simplify the way our customers interact with a company and with each other.
It will haunt enhanced marketplace efficiency and improve network effects.
It will also streamlined thanks for employees I think it will create an even more aligned and unified team.
Accelerating our purpose and vision.
To help us accomplish this we're consolidating much of our technology we.
We will leverage the best features and functionality from across all of our platforms.
We will sunset older platforms. This will also help us control costs as we shed the maintenance costs and other expenses associated with those legacy platforms.
These efficiencies in our marketplace focus will free up financial and engineering resource that we can reinvest into the core platforms and services that our customers value the most.
And that's how we will advance our strategy.
One Cor brand will also help focus our sales and marketing efforts in the field.
And with all of our employees of lines and focused on her open line, we can accelerate innovation across this entire business.
We have a great team here at this company and I'm confident in their entrepreneurial nature and the desire to grill feels great products and great value for our customers.
I believe focusing the energy and creativity of our team under one brand would be very possible for this company for our customers and our stockholders.
Ultimately if we do all of these things right and I'm confident that we will we will expand our share on the scope of services, we provide to our customers and a lower cost of operation.
And I believe this will be a solid formula for growth and one that can deliver meaningful stockholder value.
So just to give you an idea of what this brand consolidation and marketplace consolidation looks like let me share. The example of the U S market and to work that is already well under way to create a simplified openly marketplace in customer experience.
This time last year, we essentially have four different platforms running in the U S.
Backlog cars car wave open lane, like which I mean, the open sale for awfully vehicles, and then our private label sites that are running on what we call. The open Lane I Q technology.
And the fourth quarter as you know, we completed the consolidation of backlog cars and car wave into a single market place.
<unk> has now been retired and the national rule out of the backlog cars live auction format is well underway.
In parallel with that rule out we're not working on combining our dealer inventory with the off lease mental and other commercial inventory into a single OPENLANE branded marketplace experienced in the U S.
We plan to deliver this integrated open marketplace before the end of this year.
And while there is no change to a private label business, we do believe that the flexibility of formats and a critical mass of buyers on this.
Integrated openly marketplace would provide additional opportunities to sell inventory digitally versus sending it to a physical action.
And of course, the strong position to be awfully space will continue to be a differentiator for overall business.
The brand change to open Lane is not limited to the United States. In fact, the first commercial application of the brand will be in Canada wherever the next few months, we intend to combine the trade rather than a desk, Canada marketplaces into a single openly branded marketplace.
Moving to the right side of side of this slide we've recently consolidated are addressing U K and a desk to Europe offerings in Europe onto a single technology platform.
We're now focused on executing our go to market strategy and launching a true single market place in Europe , which again will be branded openly.
So as we look to the future of open Lane I believe we have a unique and different is offering for the marketplace a compelling financial profile on a sound strategy for growth.
We're a pure play digital marketplace leader with deep and growing strength in both the commercial and dealer to do your business.
We have access to a large vegetable market in North America, and in Europe , and we intend to grow our share when I'm logging you digital opportunities in the market.
We have a robust pipeline innovation of innovation that supports our growth strategy by.
Consolidated platform is the focus our energy resources and investments on building the greatest digital marketplace for our customers.
We are profitable and deliver strong cash strong positive cash flows again. This was clearly evident in the first quarter, we have the ability to invest in our business, while generating additional cash that can be used to pay down debt returned happened to shareholders and make strategic investments.
And then finally as we've discussed previously we still believe that our strategy our business and the open land brand are capable of delivering the 15% to 20% <unk> and adjusted EBITDA over the next several years and we spoke about on the last call.
So with that I will now turn the call over to Andrew to take your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you're using a speaker phone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you'd like to withdraw. Your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Brian Brinkman with J P. Morgan.
Please go ahead.
Alright, great. This is roderick on for Ryan and thanks for taking the questions.
First question just on the rebranding exercise.
You know what why do we go through this transition through the course of the year.
Should we be accounting for any maybe one diamond backs or transitory impact on the Walgreen's and are you able to lay out or give us any sense of any other like one time cash cost.
Related to the transition get that and you should be keeping in mind and have a follow up.
Thanks for a job you know the brand change does not impact our guidance.
And does not impact our projections.
We <unk>.
I you know, there's two elements to of theirs platform consolidation work, which is part of the ongoing work we've been doing a spoken about that umpire calls.
And the additional branding costs Kennedy, a relatively modest and do not impact guidance.
<unk> on the call here this morning.
And I don't expect some material impacts volume either.
From this transition.
Got it got it and they made me just want the guidance itself medium, excluding a one time charge.
EBITDA was close to 70 Marianne.
<unk> depressed level of volumes from an industrial perspective evidently higher prices.
Going from $70 million in one to two you know more like 260 million at the midpoint I mean that seems like that.
That seems much more than the quarterly run right you started with added depressed level of volume. So so curious.
If you could give us any sense of the EBITDA trajectory to the course of the are you know what's driving that comes over to them now is it giving you my prices are or is it that's more normal seasonality that you think might come into play again in the second half right. Now if you could just help a bridge that and also if you could throw in like anything with AFC.
Within the Guy, who was well that might be impacting it X.
Richard good questions again.
Listen Q1, with a strong quarter I think $70 million you know adjusted EBITDA, excluding the one time charge I feel I feel very good about I also feel good about the fact that we're starting to see the marketplace segments make a contribution once again I mean it it is our core business it has been under pressure.
But I think in Q1 that positive impact of changes been working on is starting to show up so I feel really good about that you know, we're still taking a fairly conservative view on the year.
You know how some customers have signaled there may be increased off lease vehicles in the second half of the year.
It's been so difficult to predict over the last two years, we're just taking a cautious view on that we're not projecting that and if if if that don't show up that will be positive to our projections.
I'd.
I'd also say, where you know continue to be cautious about AFC I I could comment more on that I I think we actually expect losses too.
You know credit risk losses to decline slightly here, a little bit as we move into the euro, but we did see higher losses, certainly the last year. So.
So I think it's reasonable to expect Afc's total performance for this year might be a little bit below what we saw for the full year last year.
And that and that plays into our thinking as well as we think about the guidance.
I understood that that covers it maybe just like one clarification. So I think last last quarter. You mentioned that you expect marketplace volumes to be faddish for the for your.
It's still the expectation that the mid one of the guys right.
Yes, that's still the expectation marketplace volumes flattish.
And I guess implied in that <unk> as we do expect to start seeing some year on year year on year increases in volume before the end of this year, you know to get us to a flash for the year overall, so I think that's a reasonable expectation, but there's some there's been a lot of flux center industry. It's been a couple of years, where predictions have been difficult. So again.
I think we've taken what I would characterize as I'm more cautious outlook around around around projections.
Got it great. Thanks for all the caller I'm gonna jump back in here.
Thank you for <unk>.
The next question comes from Craig <unk> with Bird. Please go ahead.
Hey, good morning, Thanks for taking my question and for what it's worth I think my brain appreciates the simplicity of one platform under open late so.
That's my two cents so.
So there's a lot you don't control about the market.
A volume and whatnot, but you can still impact the number of dealers selling on your platform and.
And the share of that volume I'm, just wondering what you can tell us about any success, you've had with dealer recruitment efforts and to what extent it in any way geographically based given.
The history of.
Backlot cars or the history of open lane on the West Coast.
Yeah, where Ryan we did the change or sorry.
Sorry.
Craig's sorry, Craig we did we did the change with you in mind [laughter], we're very trying to simplify our business for investors as well as well as our customers and as well as for US I appreciate the comments.
You're right. There's a lot we don't control I think it is important to focus on what are those things, we can control and I I think that we are doing that and again I think that's showing up in our performance.
You know, obviously customer I spoke in broad terms about the number of active customers are marketplace 50000 active participants on an annual basis. That's a number we're proud of that note that number has been I'd say stable.
Over time.
Certainly you know as volumes and volumes come back we expect it to increase as well I'd say, what we saw in the first quarter. We saw strong buyer activity. We saw buyer growth in absolute terms and I think that was also consistent with just.
You know limited supply strong demand improved.
Improved conversion rates conversion rates improved materially versus Q4 into Q1.
So it was a strong spring market and that was reflected by by you know a lot of fire activity. It was a quarter I'd say, we're sellers were.
You know Ah holding on to get the best possible price for their vehicles. They recognize the market with strong and they wanted to take advantage of that but we saw a good <unk> good seller activity as well I'd say as we look into Q2, we're seeing those things kind of normalize a little bit I'd say some of the demand is weakening a little bit prices are <unk>.
And buyer and seller girls that Sarah more equally balanced at this point.
I guess in terms of buyer recruitment, obviously, we have a sales and marketing efforts that go with that one of the things we have been focused on as I mentioned on par calls as a rule out of options.
The auction format now on the backlog cars platform Uhm.
This was the former sort of car waved model an auction format operating an unlimited number of markets. So in Q1, we started rolling that out I believe we rolled it out now to 10 or 12 states all I think west of the Mississippi. So at this point, but that rule out and I was well underway and we're signing up.
More and more dealers to participate in that.
More and more buyers to participate in that with with I'd say generally good results there too.
Got it thank you.
Thanks, Craig.
The next question comes from Gary Press, the piano with Barrington Research. Please go ahead.
Okay. Good morning, Peter.
I know you just you just mentioned that conversion rates improved materially but could you you put some numbers on that for US. Please what what the conversion rates. It. We're in this quarter versus maybe Q1 last year in queue for all of.
Last year.
We don't provide the precise conversion rates and they do very bye bye <unk>.
Different channels when we've had these sort of different marketplaces. So that's something that's going to evolve over time, I guess, what I'd say sort of qualitatively or descriptive Lee Gary would be we saw mature improvement versus Q4 and conversion rates I would say.
Consistent.
With Q1 of last year, maybe in a couple of areas a little higher.
You know depending on the marketplace.
Yeah, probably if anything a little higher than Q1 of last year and materially higher than Q4 of last year, and then I'd say over the course of the quarter.
We probably saw that sort of level of intensity peak you know early March and we've seen a kind of plateau. Since then and that that's an artist kind of continued.
It's still a strong market, but no longer a mark of her pricing is increasing.
Would you would you say that you know.
For the spring selling season conversion rates, usually improve pretty dramatically but.
It always is a function of cars actually entering the auction was it.
Mmm <unk>.
<unk>, you know improve or where there is actually the conversion ratios were off just because there's a lower amount of cars coming through the pipe.
You know I'd say, it's a little bit of both a little bit of both.
<unk>.
As you know Gary there's typically a spring market, perhaps one of the reasons. It was more more evident. This year is the latter part of last year was particularly weeks. So maybe the comparison from you know November December two of January February was just more it was more separation on there then we might typically see.
I think some of that was a function of supply awfully spot volumes continue to remain very very scarce. You know so we didn't see <unk>, we didn't see a material uptick in an awfully saw him in the first quarter, so scarcity probably contributed to that.
And then you know we do look at market share some of the some of our you know some.
Some of the data doesn't get reported until after hours, but.
Based on.
Based on the data that we have of the industry and various data sources that we looked at we think it was a positive quarter for us in terms of market share Ah one of our market share increased overall.
Okay. Thank you very much.
You're welcome Gary.
The next question comes from Bob <unk> with C. J S security please.
Please go ahead.
Okay.
Hi, Good morning, it's Pete Lucas for Bob.
Just going back to open lane part of the home run potential for the one platform one brand strategy in our mind does the opportunity to sell off lease cars and quote open online auctions meeting not just that franchise is brand.
I'm wondering if you could tell us what percentage of sales pre COVID-19 work.
<unk> open for open Lane, where is it now and where do you see it going in the next three to five years.
<unk>, that's a great question and I think you've hit on I think it's very important you know strategic either we have.
Over the longer term here with this business.
You know as I mentioned of our marks we've got deep strength and commercial and particularly in the also these segments are kind of characterize that as you know that's the musical instrument that just isn't playing right now in this industry cause. It just so few also these cars as a function of this market.
Do with the pricing and the market value versus a residual.
I'm confident that over time, all that gets worked out all of that normalizes I'm confident that leasing is going to remain a big part of the waiting cars, a retail, particularly in the United States and Canada North America.
If anything as the industry transition C. V's, maybe we'll see even more Lisa certainly some of our commercial our customers tell us back.
So I think leasing is gonna be a big part of this industry and I think ultimately just.
Vehicle value versus residual value equations hold on a normalized but it's gonna take some time.
So to get to the specifics of your question pre Covid.
Typically what would happen is we would sell about 50% of the <unk> cars in the private label environment.
And then we'd maybe sell another 10 per cent sure. So in the open and that would mean that the overall conversion rate was about 60%.
And 40 per cent of the vehicles to go to physical lock.
Those are sort of rough numbers, but directionally indicative of what that channel looked like.
Today, it's quite different because there are so few awfully vehicles 80, plus percent of them are selling them to private label.
So the grounding dealers the first theater that gets the chance to buy that car right, we make a little bit of money, but that's it. It's it's it's it's not a strong revenue drive in our business. So we have a situation today, where there's not a lot of all fees cause getting returned and more than 80% of them are getting purchase. So very few of them are flung deeper into the marketplace.
Again, I think over time will will play out his office volumes will increase.
That's 80% number will decline, which means more of the cars fluency open and then the opportunity you've talked about is where I think our business with a real power the ability to put these off these vehicles into a truly national digital marketplace with all types of buyers from all franchise Cedar networks, all independent dealers.
Large used car retailers and so forth.
Frankly, it's one of the reasons the rollout of the auction format is really important to us putting those into a true digital option.
I think will be important and I think this is something that certainly we're excited about but I think our customers are excited about too.
Because they've gotten used to selling really all these cars without sending.
Hardly any of them to physical options for the last few years. So I think they're very motivated to find a way to maximize the digital selling percentage of these portfolios.
<unk>.
Well into the future so big opportunity for US one that will play out over time.
Very helpful. Thank you.
Thanks Peter.
The next question comes from Brett Jordan with Jeffries.
Please go ahead.
Hey, good morning, guys.
<unk> service and I think repo within service as a contributor in the corner or could you kind of bucket. The the contributors to service or maybe the cadence of what you're seeing and repo and the current environment.
Yeah. Thanks, Brett you know under services the way I.
Think about services, we've got certain services are attached to the <unk> the vehicles that we sell.
You know <unk>.
Examples of the easiest example, that'd be logistics, we sell a vehicle.
We give the D or the opportunity to have us delivered the vehicle for them and if they choose us as we often we generally hope they will.
That's an opportunity for service revenue and profit.
So that's what we call it like an attached service certain reconditioning activities would be a test services as well.
And then there are sort of services that are sort of separate from.
Vehicles that we sell you know we would have an inspection business and inspects vehicles, we have a key business and obviously with repossessions servicing businesses.
Just to give a few examples so those businesses I'm happy to say are all performing better than a year ago.
Some of them are under volume pressure and and profitability was challenged addressed a lot of that and that's showing up in our results.
If we look at specifically the repo segments, we have two businesses that serve the repo segments. We've got a digital platform already and and we've got Ah Ah repossession servicing provider <unk>.
Both of those have seen significant volume growth because there is more repossession activity in the industry today.
So those businesses are driving some growth in revenue in Bolton profit for a business.
But I will say that today.
Pretty much all and I've said this on prior called pretty much all of those repossessed vehicles <unk>. It's really the one segment of our industry that has not yet been disrupted by a digital only model.
So although repo volumes are up those volumes continue to Florida to physical.
We've got some initiatives to start to sell some of those vehicles.
And a more digital format and are marketplaces, we're working on that currently.
It's two really early to talk about that is certainly not meaningful in any way to our business at this point, but it is an area of opportunity that was focused on for the future.
I guess that leads to my second question your comment that free Covid 40 per cent of off lease volumes went to physical and we have not I think he had a normal off lease environment. Since you divest of your physical assets, but.
Is there I guess it is there are some require a requirement from some commercial salaries that you have availability of physical or will they just put it all the digital cause digital's all that is available.
I don't think there's any requirement from sellers no I think our sellers C O says digital marketplace business.
A leader in the space of leader with awfully vehicles.
And I think our sellers are very you know we'd had a chance to speak in detail about our strategy I think they're very lined with it I've had a chance to preview our our market place consolidation strategy with I would say at this point most of our our large sellers and <unk> you.
You know very very supportive of the strategy.
Frankly, I think in most cases can't wait to see it happen to become a reality. So I think it'll be very very positive <unk> for the outcome, we can deliver on their vehicles and very positive for our business.
Okay, great. Thank you.
Thank you.
The next question comes from Daniel and wrote with Stephens, Inc. Please.
Please go ahead.
<unk> good morning got tired or questions.
<unk> I wanted to start actually had to follow up on an earlier comment or around commercial market share I guess I'm curious hasn't been headlines around the industry last couple of years. You guys noted commercial volume was still think down four per cent Manhattan and their slide that kind of noted off lease was up something like 88, 1% year to date.
Oh I'm just curious can you can you talk about within the three main commercial segments of rental and off lease and repo kind of where your market share stands today first pre COVID-19 and how your conversations with those tellers have progressed as you've made the strategic changes to the dinner.
Yeah. Thanks, Daniel you know I don't want to comment on that data point, because I'm not familiar with it but but I.
I I guess, what I say is we we operate.
Off lease remarketing programs for the vast majority of captive finance companies in North America.
So we see all their volume pulling through us it's not up 80 per cent [laughter] I can be very clear about that it's.
Broadly in line slightly download Q1 of last year, the volume of often used vehicles points of physical action is.
You know in the same vein at 80 plus percent of these vehicles are selling upstream before they go to the physical so no I think it's absolutely possible that commercial volume a physical action was up because repossession volumes have been up as I just mentioned over the last question.
All of the repo volume today, so the physical act.
So.
It's also possible that that number for Mannheim is is a conquest number I know a number of kept us as companies move volume.
From Augusta to Mannheim after the divestiture, so it's possible some of that but.
We also used volume selling us as a collection is well below its historical norm, let's just say that.
Great and.
Interpreter.
Sorry, I was finished I was gonna ask about just to follow up on the market share by maybe by a segment. If you had any doubt whether I'd be helpful.
In terms of the commercials you know our relationships.
I think strong positive you know I mentioned, we have.
The majority of Williams in our system on platforms.
Customer names or the Saturday were pre COVID-19.
So.
I think those relationships with a place that we continue to stay very close with those customers.
So sorry that I Don does that address your question. Please.
Fine and then maybe a follow up it was crashes or a broader risk appetite you know we've seen some regional banks and others talk about pulling back on for a plan for the worst.
You know I'm just curious how does that impact your strategy at at a a fee are you stepping in and using that as an opportunity for growth to provide more floor plan lending to your dealer customer that <unk> would you also look to step back to control losses, just maybe it seemed like a pretty high R. O Y given given the profitability at AFC. So I'm kind of curious how your viewing that as a as a growth youth.
Capital almost in this environment, if other for plan providers pullback.
Yeah. Thanks, Daniel you know I I think first of all as I mentioned, we're seeing a little bit of a different risk environment that we saw last year I began characterize it as normal consistent while we experienced pre COVID-19.
No we're watching it carefully we're managing a risk I'd say conservative conservatively compared to more competition.
You're right, though you know a number of banks you know sort of looked at the space number of years ago and said Hey. This is an interesting opportunity got into the space I think they'd probably there and just in this requires a lot of sort of.
Deep deep deep expertise specific to this space that may not be a core competency up <unk> you know our banks. So we've seen one or two pull out.
You know that does create some opportunity for us because.
You know in a in a number of cases those those entities conquest at some customers away from US and then some of those were our largest and probably best credit quality customers. Because they were you know the bank felt they could offer them a better deal more akin to a banking line. So I'd say it does create opportunity for us.
We're looking at it but we also look at it to us at a cost.
Cautious and conservative lens, we're focused on having an AFC business that will continue to be a strong contributor to the business we.
We do expect it to grow but it'll be a modest row, they sort of single digit level of girls from the F C business.
The larger growth that that's going to drive the 15 to 20 per cent Taggard I've talked about has to come from a marketing business.
Alright, I appreciate all the color in basketball going forward.
Should we take one more question are we're done okay, well. Thanks, I appreciate that and thank you everybody for your time today and your questions.
Before we close I'd, just like to summarize my key messages for today.
First of all in Q1, we performed well against the backdrop of quite a still a challenging industry environment.
We delivered double digit growth in revenue gross profit adjusted EBITDA and operating a T S.
Importantly, our marketplace business demonstrated a strong improvement versus last year, and we also delivered another solid quarter performance or finance.
Our cost management work is showing up in our performance or cost initiatives remain on track.
We are consolidating our platforms and executing on our plan to simplify our business going forward. We will we will have one marketplace brand which is openly.
And as I think about the future of open land I believe that our strong differentiation will help drive our future growth.
We are a digital marketplace pure play Peter were strong and technology strong and industry knowledge and strong and data.
We have scale with 1.3 million Kostal last year and this is the number that we intend to grow over time.
We have deep strengths with both commercial sellers and the theaters and our volume divided roughly 50 50 between both categories. We.
We believe we will do our volume in both categories at the industry continues to shift the digital.
We also believe that volumes will grow with the commercial seller volumes recover from their current historical lows.
We are profitable with strong cash flow characteristics again evident in Q1, we.
We have a strong balance sheet low debt and ample liquidity.
We generate sufficient capital to support our investments further reduce our debt in return of capital for stockholders.
And finally, we have a large addressable markets and which to innovate and invest.
In summary, we are very excited about the future of openly.
So thank you for joining us today's call I look forward to update he went up to your progress on the next call in early August .
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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