Q2 2023 OPENLANE Inc Earnings Call
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I would now like to turn the conference over to Mike Eliason, Treasurer, and Vice President of Investor Relations. Please go ahead Sir.
Thanks, Rocco good morning, and thank you for joining us today for the open line second quarter 2023 earnings Conference call.
Today, I will discuss the financial performance of opening for the quarter ended June 32023, after concluding our commentary we will take questions from participants.
Before peer kicks off our discussion I would 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 Reform Act of 1995 investors are cautioned that such forward looking statements involve risks and uncertainties that may affect <unk> business prospects.
And results of operations and such risks are fully detailed in our SEC filings.
Providing forward looking statements the company expressly disclaims any obligation to update these statements let.
Let me also mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures. The reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued last night, which is also available in the Investor Relations section of our website.
Now I'd like to turn this call over to openly and CEO Peter Kelly Peter.
You, Mike and good morning, everybody I'm delighted to be here. This morning to provide you with an update on open late.
Joining me on today's call is our Chief Financial Officer, Brad Luckier.
I'm going to begin with open lane second quarter performance and as usual I will speak about our business in two segments, our marketplace segment and our finance segment.
I'm very pleased with our solid performance in the second quarter, particularly given an industry environment for volumes remained tight compared to the second.
Second quarter of 2022, we increased volumes in our marketplace and finance segments growing our consolidated revenue and total gross profit.
We reduced SG&A through our cost management efforts and delivered strong growth in adjusted EBITDA compared to one year ago.
It was also another strong quarter in terms of cash flow generation by the business.
The summer summarize some of our key results for the second quarter.
Volumes in our marketplace business increased to 344000 for the quarter.
Total gross merchandise value of approximately $6 $4 billion.
This represented the first year on year volume growth since early 2021.
Volumes also increased 4% over the first quarter of 2023, making this the first sequential Q1 to Q2 volume increase in any year since before the pandemic.
We believe that Q2 volume performance supports our view that volumes have bottomed out and are beginning to grow.
We generated approximately $417 million in revenue, a 9% increase versus Q2 of last year.
We delivered revenue growth in both marketplace and finance segments.
Generated a total gross profit of about $94 million, an increase of 13% from Q2 of last year.
It is important to note that the 84 million and adjusted EBITDA included a 20 million onetime benefit associated with the termination of a contractual agreement.
Excluding this onetime benefit consolidated adjusted EBITDA would have been $64 million and that would have been an increase of 14% versus Q2 of last year.
Excluding the onetime benefit marketplace adjusted EBITDA would have been $24 million, that's a $19 million improvement compared to Q2 of last year.
So when viewed together with our first quarter performance. This year marketplace. Adjusted EBITDA has improved by $45 million in the first six months of 2023 versus the same period last year and.
And that is excluding both the $20 million benefit this quarter and the $11 million one time charge that was incurred in Q1.
I am very encouraged that net of those two items our marketplace business is currently operating at an adjusted EBITDA run rate of approximately $100 million per year, despite the industry volume challenges.
Given the scalability of our asset light digital model I believe that open lane is now very well positioned to grow our business and build on that positive operational and financial performance.
Yeah.
Brad will discuss cash flow generation and capital allocation later in this call, but I do want to highlight the strong cash flow characteristics of our business that we're again evidenced in Q2.
Open Lane generated cash flows of $47 million from operating activities in Q2.
The company has a strong balance sheet low leverage ratio and ample liquidity to invest in innovation and growth, while still delivering profits and strong cash flows.
Yeah.
In addition to achieving these positive financial results. We also made progress advancing a number of our key strategic initiatives during the quarter.
Initiatives that I believe will help position open lane for sustained longer term growth.
As I've outlined on previous calls we are highly focused on simplifying our business, making it easier for customers to do business with us and enabling our organization to move faster in terms of innovation and growth.
We made significant progress in the second quarter, starting with the successful rebranding of the company to openly.
As we discussed when we announced the brand change we believe that consolidated our market places under a single brand will improve outcomes for our customers.
With all of the buyers all of the sellers and all of the vehicles all in one place our marketplace will offer a highly differentiated mix of inventory from awfully sellers.
From off lease vehicles that are not available in any other digital platform older higher mileage vehicles and all type vehicles in between.
I want to thank our team for their creativity and effort they've put into executing our near flawless and launch.
The response from our customers has been very positive, perhaps even more positive than I than I had expected.
And our employees are rallying around our new brand or a new one company culture.
I'm very excited for the future of this company under the open Lane Bryant.
Following our corporate announcement, we successfully launched our open lane branded marketplace in Canada in late June we.
We migrated customers from the ADESA and trade Rev marketplaces over a four week period, and we plan to retire those legacy marketplaces within the coming weeks.
We saw strong customer engagement, leading up to the launch with thousands of dealers attending our educational webinars.
And while still early we've seen sustained levels of buying and selling with some cohorts increasing purchases over their pre migration volumes.
So to be clear on what this means we now have one combined digital marketplace in Canada, where all of our open sale vehicles from commercial sellers and all of the vehicles offered for sale by dealers are available and where all of our customers can interact and do business with each other.
Looking ahead and consistent with the vision that I outlined on the last earnings call. We have finalized our plans to integrate our commercial and dealer open sale inventory into a single open landed branded marketplace in the United States, our largest market during the fourth quarter of this year.
We also intend to rebrand our European marketplace before year end.
So we intend to start 2024 with all of our marketplace platforms operating under a single unified Open Lane brand and all of our marketplaces, having fully integrated commercial and dealer inventory.
In addition to providing a better marketplace experience for our customers consolidated our market places will also allow us to get greater leverage from our engineering resources and accelerate innovation.
So I'd like to highlight a few examples of innovations that we delivered in the second quarter.
We arent, we introduced an automated AI driven negotiation tool that eliminates the need for human intervention to close deals where sellers and buyers are within some threshold percentage on price.
Instead of facilitating multiple phone calls between sellers and buyers and our representatives our system can digitally interact with both parties to help achieve a mutually acceptable outcome more often and more quickly.
We believe this technology will lead to higher conversion rates and ultimately higher levels of customer satisfaction.
Over time. It also has the potential to help reduce our costs as well.
We also continue to invest in our leading vehicle history inspection capabilities to ensure that our marketplace remains fast transparent and efficient.
In the second quarter, we further enhanced our inspection process, the United States to provide vehicle specific guidance to the inspector during the inspection process based on our historical experience with similar makes and models.
The enhancement auto also automatically supplements inspection disclosures unknown high failure rate items.
Strategically selects the most risk prone vehicles for an independent review part of posting for the marketplace.
The objective here is to continue to increase Byron center competence in the inspections themselves, while also improving our gross margins by lowering arbitration expenses and other direct costs.
And finally, when we launched our new open lane branded marketplace in Canada, We also deployed new and enhanced market and pricing insights that will help dealers make more informed buying and selling decisions.
And we have automated the registration and checkout processes, giving new dealers almost instant access to Canadian inventory and helping buyers take delivery of their vehicles more quickly after their purchase.
Incidents and the pipeline of innovative products and features still to come are all aimed at accelerating growth and advancing our purpose, which is to make wholesale easy so our customers can be more successful.
I also want to highlight our continued focus on cost management.
Our diligence in this area is positively impacting our gross profit margins by reducing our direct costs.
It is also helping reduce our SG&A expenses in.
In the second quarter total SG&A declined $13 million or 10% compared to Q2 of last year.
We continue to advance our global shared services model and have expanded the effort to include additional areas across our organization.
Additionally, our technology teams recently completed the migration of the remaining technology of our remaining technology and structure across the organization to a common cloud provider.
This was a significant undertaking that was accomplished with zero disruption to our customers.
The completion of this migration coupled with the marketplace consolidations associated with our rebrand are important catalysts that will enable us to eliminate duplicative systems within our existing technology infrastructure.
This will be an important area of focus going going forward.
Over time, we will continue to make progress towards a single remarketing platform, which will increase the efficiency of our technology development and business processes.
Doing so will enable us to get greater leverage from our technology investments, reducing the spend required to maintain a fragmented set of technologies, while increasing our ability to make focused investments to drive innovation and improve the customer experience.
I've always believed the digital models are inherently more scalable and I believe this is becoming increasingly evident and openly in current results.
As we focus on the items that I've, just described and as we grow our attention volumes I believe we will see more evidence of this in the years to come.
I'd now like to provide some updates on the macro environment and our perspectives on the remainder of this year and into 2024 and beyond.
And I'll begin by saying that we believe there is increasing evidence that industry volumes have bottomed out and are now beginning to rebound, particularly as it relates to commercial center volumes.
I believe this is supported by the following factors.
First new vehicle production, new vehicle sales in new vehicle inventory on dealership lots continue to grow.
As I've said before these are necessary ingredients to balancing supply and demand in the used vehicle market.
As new vehicle inventory increases on dealership lots, we're starting to see evidence of increased incentive spending by Oems and this is now once again driving increased volumes of new lease originations.
In fact based on third party data at lease penetration rates in the second quarter were materially higher than in the second quarter of ladder.
This is a very positive indicator for a commercial center volumes as I've said on prior calls I believe leasing will remain a very important part of the win new vehicles are brought to market in North America, and I think the Q2 trends around leasing origination support this point of view.
Shifting to used vehicle values. The surprisingly strong run up in used vehicle prices that we saw in the first quarter has ended and prices declined during most of the second quarter.
I expect continued downward price pressure for the balance of 2023.
The owner pressure on used vehicle values can put downward pressure on conversion rates in our markets I am pleased with the strong conversion rate performance that our marketplace segment demonstrated in Q2.
I believe it speaks to the resiliency of our asset light model.
And while used vehicle values are declining again, the majority of off lease vehicles still remain in a strong equity position versus their residual values.
So while we did not see any meaningful increase in off lease volume supply in the second quarter. We do expect that the combination of lower used vehicle values, but also higher residual values for the cohorts of vehicles that were leased in 2021 and 2022 will cause the equity position to narrow and more off lease volumes to start to flow over time.
I believe that all of these factors point to a steady improvements in total wholesale volumes in 2024 and beyond.
Taking all of this into account I believe that the two primary pieces of our growth equation remain intact.
First we believe the digital channels will continue to gain share and we are very well very well positioned to gain more of that additional share over time.
Also believes there will be a recovery in commercial volume, which given our existing market share in deep commercial relationships will result in increased off lease commercial vehicles in our marketplaces.
So in terms of our performance outlook for the remainder of this year in.
In our market place segment I expect open lanes volumes in the second half of 2023 to increase compared to the second half of 2022.
This year on year volume growth, coupled with the strong unit economics that are currently being demonstrated by our marketplace business should drive improved financial performance of this segment in the second half of 2023, when compared with the same period last year.
In the finance segment, we expect continued strong volumes and revenue we believe the current market conditions point to a more normalized risk environment not dissimilar to the industry benchmarks that we experienced pre pandemic.
Our second quarter losses at AFC, we're at the higher end of what we believe to be the normal range of 1.5% to 2% of the portfolio.
We believe that this is still the appropriate range for the business as we look to the future.
So overall, we expect a solid performance for me or see in the second half of this year, although our full year results that will be below last year's record performance.
Brad will provide a more detailed update on how these factors impact various aspects of our guidance for the remainder of 2023.
As we look beyond 2023, we believe that our strategy and our outlook on the market conditions can support the 20 to 15% to 20% annual growth in adjusted EBITDA off of our 2020 through 2023 guidance range over the next several years.
While we believe that the majority of this growth will be different driven by our marketplace segment. The finance segment will also grow over 2023 levels and will remain a strong contributor to our overall results.
So in summary, as I've said on prior calls I believe that open lane has a unique and differentiated offering for the market.
<unk> business model and a sound strategy for growth.
We're a pure play digital marketplace leader with deep and growing strength in both commercial sellers and in the theatres Theatre business.
We have access to a large addressable market in North America, and in Europe , and we intend to grow our share while unlocking new opportunities in those markets.
We have a robust pipeline of innovation that supports our growth strategy by consolidating platforms, we will get greater lift from our technology and product investments and we will focus our energy resources and investments on building the greatest digital marketplace for our customers.
We are profitable and deliver strong positive cash flows. This was clearly evidenced again in the second quarter, we can invest in our business, while generating additional cash that can be used to pay down debt return capital to shareholders and make strategic investments.
So with that I will now turn the call over to Brad who will provide a more in depth update on our second quarter financial performance Brad.
Thank you Peter and good morning, everyone.
Before I comment on our operating and financial results I'd like to take a moment to briefly share a couple of reflections based on my first 100 days.
Open Lane.
First I share Peters optimism for the future.
Not only do we have significant opportunities to create and capture value. We have an impressive dedicated and industry leading management team.
For me professionally and personally I feel very fortunate to have assumed my position at a very unique time in the history of the company and our industry.
<unk> has undergone a tremendous transformation one that created a highly valuable asset light digitally focused business model.
This along with the opportunity to work alongside our leading management team.
Is what attracted me to the organization in my experience. The first few months has only reinforced my confidence that open Wayne will be well positioned to grow and succeed.
And our second quarter and year to date results are the best evidence of this reflection and with that I will provide more detail on our segment results.
Compared to last year, although volumes were relatively flat in the second quarter marketplace revenues, excluding purchased vehicles sales increased 5% to $259 million and generated 73% of our consolidated net revenues.
Our <unk> per unit increased 4% driven by increases in marketplace service revenues were up 6% driven by select fee increases and higher volumes in our repossession and technology related service businesses.
As we've mentioned previously these service related businesses provide highly complementary critical solutions to our customers and allow open lane to capture higher share of wallet.
Excluding purchased vehicle revenue the improvement in marketplace revenue resulted in a 17% increase in gross profit or a 250 basis point improvement compared to the second quarter of last year.
This also represented a 120 basis point improvement sequentially when compared to the first quarter of this year.
Gross gross profit benefited by improvements in our service related businesses and our cost savings initiatives.
Marketplace adjusted EBITDA for the quarter was $44 million inclusive of the one time $20 million benefit related to the early termination of a contract surety Matt.
Marketplace adjusted EBITDA was $24 million, excluding this item, representing a $19 million increase compared with the second quarter of last year.
This was driven by the improvement in revenues and gross profit highlighted earlier and also a reduction in SG&A, reflecting the successful execution of our cost management initiatives.
Looking at the first half of 2023, and when excluding the $20 million one time benefit this quarter.
And the $11 million, one time charge in the first quarter, our marketplace. Adjusted EBITDA was $49 million in the first half representing an improvement of $45 million compared to the first half of last year.
It also demonstrates that the potential benefits related to volume scalability further structural cost reductions and provides a window into future margin improvements.
Turning to our finance segment revenues in the quarter with $98 million, a 6% increase over prior year and accounted for approximately 27% of our consolidated net revenues excluding purchased vehicles.
Finance revenues increased despite overall flat loan transaction units compared to last year revenue per loan transaction was $243 per unit, an increase of $14 per unit or 6%.
And was driven by increased fee income and interest and interest rate yields. These increases were partially offset by increased credit losses, and a decline in loan values.
Finance segment adjusted EBITDA in the quarter was $40 million compared to $51 million last year.
This $11 million decrease is more than explained by a $12 million increase in our provision for credit losses.
Okay.
I'd like to emphasize a few things we have noted in prior earnings calls and disclosures.
First our finance business has very strong service offering, which leverages a high touch customer relationship model to manage risk while enabling growth.
Of our expectations for our near term run right.
We also had a number of non-recurring items reflected in income and expense during the quarter.
First as mentioned earlier, we agreed to accelerate the termination of a contractual agreement.
Which resulted in a cash gain of $20 million.
This is included in the company's reported adjusted EBITDA $84 million.
And for modeling purposes. Please note in the third quarter of last year, we recognized approximately $5 million of income related to this agreement therefore.
This will not reoccur in the third quarter of this year or in future years.
Second as a direct result of our open open lane rebranding and the implementation of our one marketplace strategy, we assessed intangible carrying value of our ADESA trade name.
This resulted in a non-cash impairment charge of $26 million before tax in the quarter.
In addition, this trade named now has a defined life, which which will result in approximately $16 million of additional annual amortization expense over the next six years and will begin in the second half of this year.
Finally inconsistent with our second quarter annual requirement, we formally evaluated reporting units to test the carrying value of our goodwill.
This evaluation resulted in a non-cash charge of $225 million before tax and was primarily driven by lower estimated fair value of our U S dealer to dealer reporting unit.
The combined trade name and goodwill impairment charges generated a net tax benefit of $29 million, which included a 30 million dollar tax valuation allowance.
Therefore, the after tax related related charge inclusive of the trade name and good goodwill impairment charge was approximately $221 million in the quarter.
The net impact of the trade name and goodwill impairments are excluded from our adjusted EBITDA and are operating adjusted net income per share.
Turning to the balance sheet and capital allocation first I would like to highlight are strong cash flow cash flows from operating activities in the quarter were $47 million and standard of $143 million a year to date.
This level of cash generation validates the fact that our asset light digitally focused strategy and business model are delivering meaningful results.
In addition, during the quarter, we repaid $140 million in senior notes and executed a new $325 million revolving credit agreement that will now mature in 2028.
Our appro operating cash flow performance are debt repayment and revolver maturity extension when taken together, notably improved our overall liquidity position and further strengthen our balance sheet.
This is evidenced by first half net reduction of approximately $118 million in a meaningful improvement in our consolidated net leverage ratio, which now stands below one times adjusted EBITDA.
Continued improvement in our marketplace business, coupled with the strengthened capital structure provides enhanced flexibility to fund our iguaran organic growth plan and improves our ability to deliver shareholder returns.
As highlighted in our disclosures, we have 127 remaining on our share repurchase authorization.
I'll wrap up by addressing a few annual guidance items were confirming our previously stated adjusted EBITDA guidance of $250 million to $270 million.
And believe we are trending to the upper range upper end of that range.
We have lowered our estimated of 2023 capital expenditures from 65 million to $60 million.
And consistent with recent performance and when normalizing for seasonal changes to working capital. We expect to continue to generate positive cash flow from operations over time.
Finally, we are increasing our per share operating adjusted net income.
To a range of 60% to 70 cents per share and this compares to a range of 37 to 47.
Provided earlier this year.
With that I'll turn the call back over to our operator for questions.
Thank you we will now begin the question and answer session.
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Today's first question comes from Rajat Gupta with J P. Morgan. Please go ahead.
Alright, great. Good morning, and thanks for taking the question just kind of forced wanted to need to do their marketing music business.
You look at.
If you look at you know the second quarter trajectory relative to the first quarter Williams were up to.
Sequentially roughly 5%.
The adjusted EBITDA, excluding the one timers.
What was flat to down slightly.
How should we think about you know that cadence and the reason why I ask that is.
With all your expected can recover hearing the second half an inch of 2024.
What sort of rule of thumb should we apply in terms of incremental EBITDA for you and that you know it goes logins you cover.
Getting any helpful tragedy on the second quarter, which was the first one you know it can maybe help us like understand like how we should think about that.
Going forward and I have a formal.
Thanks I appreciate that this is Peter here.
Listen I guess I'm I'm, certainly pleased with the performance of the marketplace business over the entire first half of the year 45 million EBITDA improvement versus the same period last year.
And you know.
Approximately $25 million adjusted EBITDA in both quarters.
So I think we're seeing.
Some of the things actually your question gets too which is what is the scale ability of this model that improvement was delivered with I would say flattish volumes relative to prior years. So it's really a focus on how do we optimize the gross profit structure direct cost SG&A et cetera.
I think the digital business model is inherently more scalable that's been my experience since I got in this industry with a digital model it openly and these visitors extraordinarily scalable and I'm seeing I'm seeing that in our results.
I'd say one of the differences between Q1 and Q2 is.
Conversion rates were.
In general lower in Q2, that's not unusual we'd have Ah.
As we said in prior calls the spring market in this industry conversion rates tend to be the strongest in Q1.
So high conversion rates also translate into higher gross profits and overall improvements in results, but I think.
Withstanding that I think the queue to results are very strong.
And give me increased confidence in the scalability of this model confidence I already had but they sort of reinforced that so.
The other thing I'd say Rashad is.
While we've spoken about our cost efforts.
No.
Some of those costs will not fully realized in evidence of 2024. So for example.
Migration of remaining infrastructure to the cloud.
Actually cost us additional money in the first half of the year because not only were we maintaining.
Infrastructure in one location, we had contractors in employees focused on a big migration effort now that that's done those costs can can can be reduced so and that's just one example of a number that I could make so.
I guess I am.
Confident that in the quarters in years to come this business will demonstrate excellent scalability.
I think a digital business models operate on a more fixed.
Cost basis, and that the marginal cost per incremental car sold is actually relatively small now it varies a little bit depending on if it's a dealer car commercial car et cetera, but.
Confident we'll upgrade scalability here.
Got it got it that's helpful color and then maybe as a follow up you know just in case.
The price increases or the rping trajectory going forward.
Particularly as a new spot prices you may stop your mood board and the second half how should we think about the <unk> or the option as in.
Any way to think.
Think about modeling that you know maybe blaring in the.
The commercial mixed coming in as well.
Do you think the best for you can still has the ability to drive you know fee increases like every year to to offset you know just.
The headline declining used car prices, how should you be thinking about that going forward yeah.
Some some fraction of the <unk> is tied to vehicle values, because the higher value the vehicle.
As you know rush out the bite these are often sort of stair steps and value bands. So.
If used vehicle prices declined there could be some downward pressure.
On that prices on the sell side, the marketplace or more fixed less dependent upon.
Vehicle value.
I guess you know.
We're seeing competitors increase their prices in this industry. So we think we have room, if we needed to.
I think we're being.
Cautious about that but we have certainly try to optimize pricing in various parts of the business over the last 12 months and that's been reflected in the numbers I would say.
They should increase at a minimum at the rate of inflation and then Rashad as you know there is a mix components to the extent off lease volumes do come back and considerably greater numbers and sell in that upstream channel those both have a lower our poo, but obviously a higher gross profit percentage.
Than other than other types of transactions in our market places.
Got it so someone gross profit for a unique perspective like should we expect any meaningful changer would that next shift or.
Is that.
You'd think that that can be interesting consistent.
<unk> coming up.
I've been very pleased with how that metrics trend. It I mean, we've done a really good job of gross profit per unit.
But I will say that we do generate gross profits that are not directly tied to transaction volumes. So you know as transaction volumes increase.
Not not all of those components will increase at the same rate.
The number I focus on more candidly is gross profit as a percent of net revenue in the marketplace I think that's really.
Sort of Insulates the risk not the risks they mix shift. So there was there was a mix aspect to this but from a management perspective can we optimize and maximize gross profit as a percent of net revenue that to me is the key sort of K P. I that I look at each month.
Got it got it and I think we've been doing a good job with ethanol. Thanks.
Thanks for job. Thank you.
Thank you. Thank you.
And our next question today comes from John Murphy Your Bank of America. Please.
Good morning, guys. You just three quick ones first you you mentioned the migration of customers to it to a single platform and you were doing some training for for those customers I'm. Just curious if you could talk about that process, a little bit more and and if there's any sort of leakage. You think is your kind of transitioning.
With a single platform or actually you, you've essentially making some some gains of new customers as as you consolidate.
Great well, so I was speaking specifically John to our Canadian migration and the launch of openly in Canada, which really happened the very end of the quarter. So was the last I think two weeks in tune.
But they're obviously with a lot of planning work and execution work done in the earlier part of the quarter.
Listen I think it went really well we were delivering a brand new.
You know marketplace in terms of feature in function to market. So we put a lot of effort into training Webinars you know all sorts of.
Activities to help our customers sort of understand how the new site worked obviously, we tried to make it as simple as we code as well.
We migrated the customers and cohorts, we actually started with a trade Rev dealer.
Dealers first because we felt those are probably the more digitally adept.
And then once that was done and we've been focused on migrating the deaths of customers, but jot. It went well and went really well no.
No measurable leakage I think that was the phrase used <unk> you know our Canadian rolls remains strong throughout.
And customers are getting the benefit of.
All the all the vehicles in one place so we've had dealers that in.
In the past just weren't trade Rev buyers and now they're looking at those cars and saying, Hey, I can buy a car and you'll deliver it to me and that's great you know.
So we're.
We're very excited about that excited about what it does for rocket position in the market.
We planned in the U S is a little bit different John it's really going to be a rebranding of the backlog cars marketplace to an open lane Bryant and then the integration of the commercials oriented that marketplace. So I thought actually Derisks are you mess migration of loss because from a user experience perspective, the thousands of dealers that are logging onto.
That market place every day the.
The feature function is not going to change all it's gonna change. It is called the logo on the top left is going to change some of the color palette is going to change, but the the technology itself the business process will.
Be the same but in addition, they'll now have access to all these what we believe will be a growing volume of off lease vehicles that are gonna start to associate that marketplace in 24 and beyond so I think that's sort of derisks that one.
But.
But obviously, we still have a lot of execution between now and the end of two four when we plan to get that done.
And <unk> to my second question. Your your expectation is it binds or bottoming out here and will recover you know it sounds like somewhat meaningfully in 24 and beyond.
What are the key channels, you're expecting to recover it sounds like repo was actually recovering right. Now is there a kind of a tape delay on on lease you know another dealer Leech returns and then hopefully deal dealer side I mean, how do you how do you kind of see the progression of bottoming out in recovering by you by segment of bright by channel coming back.
Yeah, I guess, John Thank you, specifically, what I, what I feel confident of is the volumes in the second half of this year will be higher than the volumes in the second half of last year.
And then as we looked at 2025 2024 and 25, we expect further further volume growth.
Perhaps accelerating over time as we as we get into this sort of 25 26 timeframe would be my view, but to go sort of segue.
Segment by segment, let me start with you or.
What's more cars on dealers lots theaters are.
More likely to put a car into wholesale than they were say a year ago, because a year ago. They had empty lot.
To get these cars on trade in and they'd say you know what maybe I, maybe I'll retailers car. So what we're seeing is we're seeing actually growth in the volume being posted by dealers were seeing you know cars posted per dealer starting to increase.
You know fairly meaningfully in the second quarter, I'd say I'm not consistent with more new cars on their lot greater inventory on a lotta et cetera. So I think we see.
A positive driver and the data D space, but you know it's it's that segment was never too badly impacted by the by the compression, but but but but still positive repo. Obviously has been up now our <unk> our business.
Services to repost segments that benefits us, but we don't sell repose in our market places for the most part.
Because they typically set on a physical model now that that may have changed over time, but today, John and the United States most both solipsism.
We're seeing more sailed rental sellers.
And I spoke at some length about lease we didn't see an increase in lease.
Returns if you like in the second quarter some of our customers are telling us that they're model show lease volume increasing later this year and into next year.
But what I, what I pointed out, but I thought very positive news in the second quarter was just to see an increase in lease originations.
That you know at least originations have been have been down, but we're seeing that started to increase again in a meaningful way.
I think that reinforces John My view that leasing is gonna be an important part of our industry an important part of the way of vehicles brought to market. We obviously have a very strong position there I recognize it's going to take some time for those vehicles to to reach maturity, but.
And passes quickly and I'm excited to see leasing on a rebound in.
The retail environment.
And then just one last how how's he going to 20 million dollar early termination payments can you guys just tell us exactly what what that foreign and you'll be in a quarter in any kind of one time or just something should be spread over and over periods that we shouldn't be back and yeah, I just wanna understand what's going on there.
Yeah, a little bit of nuance on that.
No.
John It's a one time early termination of a contract associated with 2019 transaction.
And.
Over the past number of years that contract is generated I would say about $5 million a year all paid the third quarter of the year.
So you know.
That that was a fact in that contract was gonna.
Continue through say the.
The third quarter of next year.
So you you know there's.
If you like we're trading a 20 million dollar one time payment for two five ish million dollar payments Q through the Q3 of this year Q3 of next year. That's how I would think about that obviously that was done through mutual agreement on both parties happy with that outcome.
Okay very helpful. Thank you very.
Thank you John .
Alright, and our question today comes from Bob Robert <unk> Securities. Please go ahead.
Good morning, and thanks for all the comprehensive answers just to have a.
Couple of nuanced.
Questions here too now obviously remained great progress with a platform consolidation and that's very exciting.
Given the kind of the.
A week industry volumes, how do you how are you going to gauge success. Other new metrics you can share with us your traffic on the new site or how how are you internally gauging the success of the platform consolidation given.
The bottom and the bottom of a of a cycle.
Thank you Bob Good question obviously.
One of the things I like about a digital business. In addition to being very scalable as you get tremendous Peter because every customer traction leaves a recordable footprint. So we look at a tremendous amount of data across this company.
I would say the five metrics I look at the most in terms of a marketplace would be volume sold.
Volume posted.
From that how does he drive conversion rate.
Participating sellers participating buyers and then retention rates of your of your customer base and.
So those are the metrics, we look at obviously our results correlate the closest with volume sold in any given period of time, because that's what drives revenue, but the other ones are all inputs into that.
So we look at all of those listen I'm pleased with a lot of the metrics. We're seeing we're seeing we're seeing increased customer participation. As I mentioned earlier, we are seeing increased volume of vehicles posted per per selling dealer start that starting to trend up again <unk>.
Conversion rates have been strong used vehicle prices have been under pressure and Q2, they declined pretty much for the entire quarter and we did see conversion rates drop a bit relative to Q1, but they were quite resilient.
I take some comfort from that.
And then sort of the the retention rates of customers with our platforms.
Is very strong.
You know these these are platforms that build a habits with customers.
Who come in daily weekly smaller customers might come in monthly, sometimes a customer might skip amongst not by any cars, maybe they're got too much inventory or maybe.
Maybe I'll sell cars, because they've got two little inventory, but typically.
They're back a month later.
There's a lot of good fundamentals in these marketplaces, a great customer and Ah repeat a very repeatable customer interaction.
Which I think is the strength of the business.
Okay, great. Thank you that's very helpful. I appreciate it and then just real quick I think and auction fee section of the one of the releases.
You mentioned.
A slight increase in fees from a smaller mix of you know lower fee commercial off premise vehicles.
And you know I think that's probably undergrounding dealer buying it or whatnot can you just give us a sense of kind of what drives that and have that trend.
May change over the next several quarters.
Yeah.
Good question Bob.
Listen I'm very much looking forward to an improvement in off lease maturity volume because.
Why do we really sort of had to sort of work our way through over the last couple of years is not just reduce volume at the top of the funnel reduced number of cars sort of flowing in.
And that was substantial reduction down 50 plus percent, but also.
Essentially the transactions all kind of migrating up into the top of the funnel grounding dealerships actions, which is our lowest revenue transaction in this entire business right.
So we have a volume compression with revenue compression you multiplied those together and you got severe compression on that business and as I look to the future I see both of those things starting to unwind in reverse.
Now I'm not promising that is going to happen immediately I think it's gonna play out over time, but I'm confident it will happen.
And I think that's gonna be.
A double positive as we see not only volumes increase but but the mix shift.
And I will say you know we started C a mix shift in.
It is.
Reversed in Q1 that used vehicle prices. Appreciate it right. Then I was it was on a little unexpected how strong used vehicle pricing wasn't Q1.
I will say in the last month or two we're starting to see the mix shift more positively again it was not material in the second quarter.
But we're starting to see a more favorable mixing upstream channel for us as well, which drives a R.
Super Alright, thanks very much.
Thank you and our next question today comes from Brett Jordan Jeffries. Please go ahead.
Hey, good morning, guys.
Could you give us maybe as we look forward two or three years, how you see lease returns obviously, what's gonna get bought out you can't predict but I guess leasing probably troughed in the second quarter of 20, when dealerships were closed but.
How do you sort of see on an annual volume the cadence of lease returns in 24 25. When is when is the cyclical growth year.
Thanks bread you know if you look at least originations.
The least origination percentage declined from 2000 22022.
And what that means is there are fewer off lease vehicles and those portfolios.
And you can again pink or at least.
Rule of thumb thumb three year maturity, so least in 2022 maturing of 2025.
So that's the very very top of the funnel how many vehicles are in the portfolio and I think we are.
Going to see there is that number is reduces.
Through twenty-five ended increases pulse 2025 would be my view.
The second question, which is probably more important right now is of those leases what percentage actually get returned.
And that's that's driven by the equity position of the vehicles. So.
You know for the last 18 months the equity position of all six vehicles has been extremely strong so consumers have been hanging on to them and.
And not returning them.
And then if the return the grounding Peter by them. So.
So I think over the next two years are going to see the intersection of two kind of contradictory forces on the one hand, there's fewer off lease vehicles off the top of the funnel, but on the other hand consumers are going to.
By a declining percentage of those in an increasing percentage of you are going to be returned and the reason I think that is we're going to see.
Downward pressure and used vehicle values, but also the residual values of those least cause it was written the higher levels because they were sold of hiring us a R. P.
So I guess in that unexpected.
Small increase in lease volumes in the coming two years put a more favorable mixed within our market and then accelerating.
Accelerating volume and mixed picture.
Kicking in towards the end of 2025 and beyond and I guess I would say longterm I believe leasing will be a very important part of the way vehicles were brought to market I think it'll be back into three to 4 million units a year least we'll see high consumer will see high consumer return rates and we will have a very very good business in the awfully space I believe.
Okay, and then a quick question on the deal with a dealer impairment charge I think you've noted.
Lower longterm revenue growth associated with a cycle.
Is the is the size of that market different than you were projecting back in 19 when.
The business was what I ate was spot out in trade Rep was sort of a focus or is it really just the lack of dealer consignment cars, it's impacting that longer term view.
I don't think the size of the market is different in any long term view I think in the last couple of years, it's been a little compressed for some of the factors I mentioned.
You know industry data sources have that data to determine get.
At a low and 6 million units, but that does not include vehicles that are transacted sort of informally between dealers. So high and estimates run you know 10 or 10 above 10 million units in that market. So it's a big segment, a big opportunity for us I liked how were positioned in the market.
I think we're on the right side of a physical to digital secular shift.
Which I think would be positive longterm for the company I can also say that you know I spoke about her improved EBITA performance in the first half of this year.
Without question are digital DTD model was a strong contributor to that improvement and we had our best ever sort of.
Financial performance from that segment in the second quarter, So I'm really pleased about that.
Seeing strong customer adoption strong numbers round.
Volume was posted et cetera strong conversion rate so.
I kind of look at the goodwill thing is somewhat a tech technical accounting driven.
And does not in any way impact my view of the long term opportunity in this space.
Okay, great. Thank you.
I think we have time for one more question Rocco.
Yes, Sir and our final question today comes from Daniel Remember what Stevens. Please go ahead.
Yep. Thanks, I. Appreciate you guys give me a minute here then just a couple of questions eight one.
So I had to follow up on on rundown of question earlier marketplace actually your name has been pretty consistent kind of low 30 per cent.
Volume would you expect to have to add back expenses.
Handle the volume Peters said it scalable so should we expect further issue.
Hi, 20th how how would you think about SG&A marketplace margin going forward.
Yeah, I think but thanks for the question and I think the way to think about it is essentially what Peter referred to earlier I mean, we see.
The marketplace business is being very very scalable very fixed costs space in terms of its structure. So in terms of the incremental SG&A dollars that we need to support incremental volume.
Fairly modest.
And then a quick followed when AFC Peter left a few quarters loan origination El Pais marketplace volume growth.
Fifth they were closer.
Closer to parity, how do you feel about the loan origination outlook.
Any change in the health of your core independent used auto dealer and how do you feel about the 2% charge off going forward as you project more used price pressure or maybe more pressure on the independent you do wear out there.
A good question.
First of all this and I think independent dealers are an important part of this retail ecosystem and will be.
As far as the future as I can see the survey they provide a unique offering in the market and I think there's a strong demand for that offerings. So.
They will be in business and we'll be in business then.
So.
In the first and second quarter loan loss ratio was at the high high end, the 2% and have a one to one and a half to two per cent range. So I guess given that fact, we've just been a little bit more focused on managing risk and running the more conservative business that we've talked about on this on these calls.
Obviously.
Signing up new customers in generating new loans is important too. So we're focused on that but you know in this business. It is a balancing act and we've been.
We've just been focused on making sure we've got a good handle on the risk environment. We believe we do.
Think it was clear in my remarks, we expect solid performance from AFC, but there's no question with the benefit of hindsight last year, and then probably the prior year.
F C with a beneficiary of historically low risk loss ratios that we should not expect to recur in the foreseeable future.
And anything on the loan origination outlook part of that.
Oh.
We expect to continue to grow the business, but I would expect AFC to continue to be a contributor but we expect most of the growth in the performa to come from the marketplace side of the business again, we love Dfc business, but we take a conservative view on the market and we we are we're growing it we want to keep.
Growing it but we also want to make sure we have the right sort of portfolio.
We like having in this business.
Alright, My first generally color.
Thank you. Thank you and then the gentleman.
Gentlemen, this concludes our question and answer session I would like to turn the conference back over to the management team for any final remarks.
Thank you Rocco I appreciate that and to the principal. Thank you all for your time today for your questions.
Before we close I would like to leave you with more takeaways from the border.
Q2 results demonstrate a significant improvement in the business and I believe they provide me and hopefully all of us with increased confidence in our digital asset life model as we look to the future.
Again, I'd like to highlight our company has strong cash flow characteristics. It has improved its overall liquidity position in the quarter and now has increased flexibility in terms of capital deployment.
I believe our one brand one marketplace strategy will increase our differentiation in the marketplace and will also enable us to continue to increase our efficiency and reduce our costs.
Finally, the macro factors that icy 0.2, and improving outlook for commercial off lease volumes I believe that the headwinds of the last three years look set to become tailwinds in the years to come.
So thank you all for your joining today's call I look forward to updating you on our progress in our next call three months from now thank you very much.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation, you may not so much for calling and have a wonderful day.
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