Q4 2023 OPENLANE Inc Earnings Call

Good day and welcome to open lanes, 20th twenty-three yearend earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

Operator: today, and I like it. Thanks, Ed. Good afternoon, and thank you for joining us today for the openly fourth quarter 2023 earnings conference call. Today, we'll discuss the financial performance of Oak Lane for the year ended December 31, 2023. After concluding our commentary, we'll take questions from participants.

After todays presentation, there will be an opportunity to ask questions too.

To ask a question press Star then one on your telephone keypad.

To withdraw your question Press Star then two.

Please note this event is being recorded.

Now I'd like to turn the conference over to Mike Eliason. Please go ahead.

Michael Eliason: Thanks, Ed Good afternoon, and thank you for joining us today for the open late fourth quarter 2023 earnings Conference call.

Operator: Before Peter 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 Open Lane's business prospects and results of operations, and such risks are fully detailed in our SEC filing. In providing forward-looking statements, the company expressly disclaims any obligation to update these statements.

Michael Eliason: Today, I will discuss the financial performance of Oak Lane for the year ended December 31, 2023, 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.

Michael Eliason: Act of 1995 investors are cautioned that such forward looking statements involve risks and uncertainties that may affect open lines business prospects and results of operations and such risks are fully detailed in our SEC filings.

Michael Eliason: Providing forward looking statements the company expressly disclaims any obligation to update these statements.

Operator: Let me also mention that throughout this conference call, we will 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 this afternoon, which is also available in the investor relations section of our website. Now I'd like to turn this call over to Open Lane's CEO, Peter Kelly.

Michael Eliason: You also mentioned that throughout this conference call, we will 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 this afternoon, which is also available in the Investor Relations section of our website now.

Michael Eliason: I'd like to turn this call over to open Lane CEO, Peter Kelly Peter.

Peter Kelly: Thank you, Mike, and good afternoon, everybody. I'm delighted to be here today to provide you with an update on Open Lane. Joining me is Open Lane's Chief Financial Officer, Brad Lachia, who will cover the majority of our financial and operating metrics later in the call. I will begin by highlighting a few key areas of our 2023 performance, but will focus most of my remarks on the execution of our company strategy, the broader industry environment, and our positive outlook for the future. In terms of results, it's clear that our business made significant progress in 2023. We are now beginning to see the positive impacts of our strategic investments in innovation and technology, our brand simplification work, as well as our diligence around cost.

Peter Kelly: Thank you, Mike and good afternoon, everybody I'm delighted to be here today to provide you with an update on open late joining.

Peter Kelly: Joining me is open lanes, Chief Financial Officer, Brad Lochia, who will cover the majority of our financial and operating metrics later in the call.

Peter Kelly: I will begin by highlighting a few key areas of our 2023 performance, but I will focus most of my remarks on the execution of our company's strategy, the broader industry environment and our positive outlook for the future.

Peter Kelly: In terms of results, it's clear that our business made significant progress in 2023, we're now beginning to see the positive impacts of our strategic investments in innovation and technology, our brand simplification work as well as our diligence around cost.

Peter Kelly: I believe our solid execution in the fourth quarter and throughout 2023 delivered strong and encouraging results that position Open Lane for future growth and success. When I look at Open Lane's consolidated performance for the year, a few things stand out. We grew our volumes, revenue, and gross profit. Notably, consolidated gross profit increased by $92 million, or 13% compared to the prior year.

Peter Kelly: Our solid execution in the fourth quarter and throughout 2023 delivered strong and encouraging results that position open lane for future growth and success.

Peter Kelly: When I look at open lanes consolidated performance for the year, a few things stand out.

Peter Kelly: We grew our volumes revenue and gross profit, notably consolidated gross profit increased by $92 million or 13% compared to the prior year.

Peter Kelly: We beat our 2023 guidance by delivering consolidated adjusted EBITDA of $272 million. That was an 18% increase from the prior year. Open Lane had another strong year of cash flow performance, generating $237 million in cash flow from operations in 2023. Our finance business, AFC, demonstrated solid performance in 2023 against a backdrop of declining vehicle values and a higher interest rate environment. With a continued focus on risk mitigation, the business grew responsibly and made a meaningful contribution to Open Lane's bottom line. The Marketplace business made significant progress in 2023 and finished the year on a strong note. We grew fourth-quarter volumes by 10% to 318,000 vehicles.

Peter Kelly: We beat our 2023 guidance by delivering consolidated adjusted EBITDA of $272 million that was an 18% increase from the prior year.

Peter Kelly: Open Lane had another strong year of cash flow performance generating $237 million in cash flow from operations in 2023.

Our finance business AFC demonstrated solid performance in 2023 against the backdrop of declining vehicle values and a higher interest rate environment.

Peter Kelly: With a continued focus on risk mitigation the business grew responsibly and made a meaningful contribution to open lane is bottom line.

Peter Kelly: Our marketplace business made significant progress in 2023 and finished the year on a strong note.

Peter Kelly: We grew fourth quarter volumes by 10% to 318000 vehicles. This is the strongest year on year volume growth for open lane in any single quarter for over 12 quarters.

Peter Kelly: This is the strongest year-on-year volume growth for Open Lane in any single quarter for over 12 quarters. And for the full year 2023, we grew marketplace volumes by 3% to over 1.3 million vehicles sold. Looking at 2023 overall, we grew revenue, revenue excluding purchase vehicles, and gross profit in the marketplace segment. Most notably, gross profit increased by over 20% versus the prior year. The strong revenue and gross profit performance coupled with disciplined cost management drove a significant increase in adjusted EBITDA from the marketplace segment, as well as an expansion in Ibiza Margin. For Q4, marketplace adjusted EBITDA was $24 million, representing a more than 200% increase over the fourth quarter of 2022.

Peter Kelly: And for the full year 2023, we grew marketplace volumes by 3% over $1 3 million vehicles sold.

Peter Kelly: Looking at 'twenty twenty-three overall, we grew revenue revenue excluding purchased vehicles and gross profit in the marketplace segment, most notably gross profit increased by over 20% versus the prior year.

Peter Kelly: The strong revenue and gross profit performance, coupled with disciplined cost management drove a significant increase in adjusted EBITDA from the market place segment as well as an expansion in EBITDA margin.

Peter Kelly: For Q4 marketplace, adjusted EBITA was $24 million, representing a more than 200% increase over the fourth quarter of 2022.

Peter Kelly: And for the full year, we expanded our marketplace adjusted EBITDA to $108 million, representing a $79 million increase over the prior year. I think these Q4 and full year results provide compelling evidence that our digital strategy is the right strategy, that we are executing well given the realities of our environment, that we are investing in the areas that our customers value the most, and that we are delivering a better, more simplified customer experience. And because of this, I believe Open Lane is well positioned for increased competitive differentiation, continued growth, and strong performance in the years to come. So let me explain why I believe that to be the case, starting with the industry environment.

Peter Kelly: And for the full year, we expanded our marketplace adjusted EBITDA to $108 million, representing a $79 million increase over the prior year.

Peter Kelly: I think these Q4 and full year results provide compelling evidence that our digital strategy is the right strategy that we're executing well given the realities of the environment that we're investing in the areas that our customers value the most.

Peter Kelly: We are delivering a better more simplified customer experience.

Peter Kelly: And because of this I believe open lane is well positioned for increased competitive differentiation continued growth and strong performance in the years to come.

Peter Kelly: So let me explain why I believe that to be the case.

Peter Kelly: With the industry environment.

Peter Kelly: First based on what we're now seeing in the industry I think its increasingly evident that the industry environment that existed over the past few years since 2020 was likely an anomaly.

Peter Kelly: First, based on what we're now seeing in the industry, I think it's increasingly evident that the industry environment that existed over the past few years, since 2020, was likely an anomaly. Many of the factors that had a negative impact on our wholesale used vehicle industry are now starting to return back to what I would describe as more normal, not yet mirroring 2019, but trending in that direction. Manufacturers are able to build new vehicles; the supply chain constraints of the past few years appear to largely have been resolved at this point. There are more and more new and used vehicles on dealers' lots. Manufacturers are once again starting to use incentives to drive new car sales and leases, All of which is good news for the wholesale market and for Open Lane, particularly as we look out beyond the current year. Here are some of the facts based on third-party sources.

Peter Kelly: Many of the factors that had a negative impact on our wholesale used vehicle industry and now starting to return back to what I would describe as more normal not yet mirroring 2019, but trending in that direction.

Manufacturers are able to build new vehicles, the supply chain constraints over the past few years appeared to largely have been resolved at this point.

Peter Kelly: There are more and more new and used vehicles on dealers' lots.

Peter Kelly: Manufacturers are once again, starting to use incentives to drive new car sales and leases.

Peter Kelly: All of which are good news for the wholesale market and for openly particularly as we look out beyond the current year.

Peter Kelly: Here are some of the facts based on third party sources.

Peter Kelly: The new vehicle supply issues experienced during the pandemic and chip shortage have largely subsided, and new vehicle production increased over 10% in 2023. While this is still below pre-COVID levels, sales and production are expected to increase modestly again in 2024. The amount of new and used vehicle inventory on dealers' lots is also increasing. Day supply of new inventory was up approximately 30% in 2023 and also increased modestly for used inventory. We expect both of these to increase further in 2024 as well. Used car values remain structurally higher than pre-COVID levels last year but have been declining steadily from their peak in mid-year 2022. Now, let me be clear.

Peter Kelly: New vehicle supply issues experienced during the pandemic and chip shortage have largely subsided and new vehicle production increased over 10% in 2023.

Peter Kelly: This is still below pre COVID-19 levels sales and production are expected to increase modestly again in 2024.

Peter Kelly: The amount of new and used vehicle inventory on dealers' lots is also increasing.

Days supply of new inventory was up approximately 30% in 2023 and also increased modestly for used inventory.

Peter Kelly: We expect both of these to increase further in 2024 as well.

Used car values remain structurally higher than pre COVID-19 levels last year, but had been declining steadily from their peak in mid year 2022.

Peter Kelly: Now, let me be clear most experts predict a wholesale supply will grow only modestly in 2024, and we know that lease returns in the back half of this year and next year will remain low due to the lower volume of leases written in 2021 2022.

Peter Kelly: Most experts predict that wholesale supply will grow only modestly in 2024, and we know that lease returns in the back half of this year and next year will remain low due to the lower volume of leases written in 2021 and 2022. However, I'm very encouraged to see that in the 2023 year, lease originations increased by more than 20% versus the prior year, and they also accelerated quarter by quarter throughout the 2023 year. In fact, lease originations in the fourth quarter increased by more than 40% versus the fourth quarter of 2022.

Peter Kelly: However, I'm very encouraged to see that in the 2023 year lease originations increased by more than 20% versus the prior year and they also accelerated quarter by quarter throughout the 2023 year.

Peter Kelly: In fact lease originations in the fourth quarter increased by more than 40% versus the fourth quarter of 2022.

Peter Kelly: Increased lease originations are driven in part by Oems use of incentives and OEM incentives increased in 2023 with the average incentive offered increasing to close to 5% of the vehicle transaction price by year end.

Peter Kelly: Increased lease originations are driven in part by the OEM's use of incentives, and OEM incentives increased in 2023, with the average incentive offered increasing to close to 5% of the vehicle transaction price by year end. This was almost double what it was at the end of the prior year.

Peter Kelly: This was almost double what it was at the end of the prior year.

Peter Kelly: Given our strong position in the off lease segment as the increased volume of leases written in 2023 and expect it to be written in 2024 start to mature opening will be well positioned for growth in this important part of our business.

Peter Kelly: Given our strong position in the off-lease segment, as the increased volume of leases written in 2023 and expected to be written in 2024 start to mature, Open Lane will be well positioned for growth in this important part of our business. Additionally, as we now look at an environment with more new car sales, but also with more new and used inventory on dealers' lots. We believe this will tend to result in a higher volume of dealer trades being offered for sale in the wholesale market versus being retained for inventory.

Peter Kelly: Additionally, as we now look at in an environment with more new car sales, but also with more new unused inventory on dealers' lots. We believe this will tend to result in a higher volume of dealer trades being offered for sale in the wholesale market personally being retained for inventory. This.

Peter Kelly: So in summary, we're seeing positive signs that the industry is trending back towards a more normal environment with far less volatility and greater predictability than we've experienced over the past few years. And I believe that, over time, this will be very positive for OpenLink.

Peter Kelly: This should positively impact dealer consigned volumes as well.

Peter Kelly: So in summary, we're seeing positive signs that the industry is trending back towards a more normal environment with far less volatility and greater predictability than we've experienced over the past few years.

Peter Kelly: And then I believe that over time this will be very positive for Poland.

In terms of the execution of our strategy I believe we are successfully executing our plan and advancing our purpose, which is to make wholesale easy so our customers can be more successful.

Peter Kelly: In terms of the execution of our strategy, I believe we are successfully executing our plan and advancing our purpose, which is to make wholesale easy so our customers can be more successful. During the fourth quarter, we completed the integration of our dealer and off-lease exclusive inventory into a single open lane branded platform in the United States. This was a significant step forward for our company. The transition was very well executed without any technology issues, customer disruption, or negative impacts on sales or customer retention.

Peter Kelly: During the fourth quarter, we completed the integration of our dinner and off lease exclusive inventory into a single openly and branded platform in the United States.

Peter Kelly: This was a significant step forward for our company. The transition was very well executed without any technology issues customer disruption are negative impacts to sales our customer retention.

Peter Kelly: So we were entering 2024 with one brand one marketplace and one comes a customer experience in our largest market the United States.

Peter Kelly: So we are entering 2024 with one brand, one marketplace, and one customer experience in our largest market, the United States, and with a marketplace offering that is highly differentiated from our competition, and the primary differentiation is inventory. Open Lane includes the majority of captive finance companies whose off-lease exclusive inventory is available first in Open Lane before it is offered on any other digital platform or physical auction. Open Lane also has a national selection of dealer inventory at every age, mileage, condition, and price point.

Peter Kelly: And what the marketplace offering that is highly differentiated from our competition.

Peter Kelly: And the primary differentiations inventory openly and includes the majority of captive finance companies, whose off lease exclusive inventories available person open lane afforded offered and any other digital platform a physical auction.

Peter Kelly: Openly and also have a national selection of dealer inventory at every age mileage condition and price point.

Peter Kelly: This means that Open Lane has an inventory selection that is unique and highly attractive to both franchise dealers and independent dealers. Each week, tens of thousands of vehicles are offered for sale in our U.S. open-lane marketplace, with a roughly even split between commercial seller volumes and dealer volumes. We believe that the network effect of combining all of our sellers, buyers, and vehicles in one place will ultimately help us generate increased demand, increased supply, a better marketplace experience, and ultimately better outcomes for our customers, commercial sellers, and dealer customers alike. Here's just one quick example.

Peter Kelly: This means that open lane has an inventory selection that is unique and highly attractive to both franchise dealers and independent dealers.

Peter Kelly: Each week tens of thousands of vehicles are often a sale of our U S openly marketplace with a roughly even split between commercial center volumes and dealer volumes.

Peter Kelly: We believe that the network effect of combining all of our sellers buyers and vehicles in one place will ultimately help us generate increased demand increased supply a better marketplace experience and ultimately better outcomes for our customers commercial sellers on dealer customers alike.

Peter Kelly: Just one quick example.

Peter Kelly: When we did the final marketplace switchover in November we did it after regular business hours and the very first off lease vehicles sold in our combined open land U S. Marketplace was sold via a mobile App at 10 45 P M to an independent dealer.

Peter Kelly: When we did the final marketplace switchover in November, we did it after regular business hours. And the very first off-lease vehicle sold in our combined open lane U.S. marketplace was sold via mobile app at 10.45 p.m. to an independent dealer. From a dealer perspective, the feedback on our new open lane marketplace has been very positive and reassuring. Just over two weeks ago, I attended the National Auto Dealers Association Convention, and I met with many dealers ranging from large multi-store groups who are highly active on open lane to smaller single-point dealer owners. A senior manager from a large national dealer group commented to me that the results they achieve on Open Lane are the best of any remarketing channel that they use.

Peter Kelly: From a dealer perspective, the feedback on our new open lane marketplace has been very positive and reaffirming.

Peter Kelly: Just over two weeks ago I attended the National Auto Dealers Association Convention and I met with many dealers ranging from large multi store groups, who are highly active and open lane to smaller single point theater owners.

Peter Kelly: A senior manager from a large national intergroup Communist to me that the results. They achieve an open later the best of any of the marketing channel that they use.

Peter Kelly: Strong conversion rates average days to sale of approximately one day lower remarketing expenses and strong sale proceeds all helped contribute to this outcome.

Peter Kelly: The CEO of another medium sized franchise leadership group describes how he had been a reluctant convert to digital seller.

Peter Kelly: What day has instituted open lane at the preferred remarketing channel across all of his stores and Athena is general managers are very pleased with the results.

Peter Kelly: Strong conversion rates, average days to sale of approximately one day, low remarketing expenses, and strong sale proceeds all help contribute to this outcome. The CEO of another medium-sized franchise dealership group described how he had been a reluctant convert to digital selling but today has instituted Open Lane as the preferred remarketing channel across all of his stores and that he and his general managers are very pleased with the results. Having done that, this dealership group now wants to work with us to successfully purchase more highly desirable commercial inventory going forward. Another highlight of my weekend at the convention was a brief exchange with a dealer that owns three franchised dealerships. This dealer sought me out at our booth to tell me that Open Lane has completely transformed his business in a very positive way, enabling his dealerships to monetize trade-in units in a way that was never possible before when they were selling to a wholesaler or to their local auction. In his words, creating profits for profits that never existed before.

Speaker Change: Having done that this dealership group that wants to work with us to successfully purchase more highly desirable commercial inventory going forward.

Speaker Change: Another highlight of my weekend at the convention was a brief exchange with a dealer that owns three franchise dealerships.

Speaker Change: This theater stopped me out at our boots to tell me that open lane has completely transformed this business in a very positive way.

Speaker Change: Enabling his dealerships to monetize trade in units in a way that was never possible before when they were selling to a wholesaler or to their local auction.

Speaker Change: In his words, creating profits for profits that never existed before.

Speaker Change: This is truly why we created open lane and why we're so committed to making wholesale easy for our customers. So that they can be more successful.

Speaker Change: Yeah.

Speaker Change: So it's clear that our customers commercial sellers as well as franchise and independent buyers and sellers alike already experiencing the benefits of our 24 seven digital marketplace.

Speaker Change: And I believe that opened lins value proposition is very straightforward.

Speaker Change: In addition to our differentiated inventory our digital marketplace enables faster speed to sale in fact, our average days to sell for dealer customers in the United States is approximately one day.

Speaker Change: Also a larger always on buyer base can help drive more bidding and true market price discovery for all of our sellers.

Peter Kelly: This is truly why we created OpenLAN and why we are so committed to making wholesale easy for our customers, so that they can be more successful. So it's clear that our customers, commercial sellers, as well as franchise and independent buyers and sellers alike, are already experiencing the benefits of our 24-7 digital marketplace. And I believe that OpenLens' value proposition is very straightforward.

Speaker Change: And buying and selling digitally I openly and helps maximize financial outcomes, while avoiding the unnecessary costs of transportation reconditioning and higher fees associated with physical auctions.

Speaker Change: So with open lane, delivering fast time to sell low cost to sell an excellent price outcomes for the vehicles, it's not a surprise to me that our customers are excited about the launch of the new openly marketplace, where we're working collaboratively with many of them to help them rethink their marketing approach increased conversion and explore how open lanes data and technology offerings can help.

Peter Kelly: In addition to our differentiated inventory, our digital marketplace enables faster speed to sale. In fact, our average days to sell for dealer customers in the United States is approximately one day. Also, a larger always-on buyer base can help drive more bidding and true market price discovery for all our sellers. And buying and selling digitally on OpenLane helps maximize financial outcomes while avoiding the unnecessary costs of transportation, reconditioning, and higher fees associated with physical auctions. So with Open Lane delivering fast time-to-sell, low cost-to-sell, and excellent price outcomes for their vehicles, it's not a surprise to me that our customers are excited about the launch of the new Open Lane Marketplace. We're working collaboratively with many of them to help them rethink their marketing approach, increase conversion, and explore how Open Lanes data and technology offerings can help their businesses more broadly.

Speaker Change: Their business is more broadly.

Speaker Change: And I'm very excited about the opportunity to extend and reinforce these already strong customer relationships.

Speaker Change: In addition to the significant United States launch, we also completed the rebrand of our European business to open late in the fourth quarter.

Speaker Change: So we start 2024 with a single marketplace brand open lane in all of our principal geographies, the United States, Canada and Europe.

Speaker Change: Shifting to innovation one of the positive benefits of consolidating platforms has the ability to accelerate product development and more quickly deploy those innovations to our customers.

Speaker Change: We continued to deploy features and functionality aimed at making the wholesale process easier for our customers accelerating search reducing friction and increasing the velocity in our marketplace.

Speaker Change: A great example of this is our January launch of visual boost AI.

Speaker Change: Visual boost AI is our new AI AI powered technology and it helps dealers quickly identify and assess vehicle damage and make better informed buying decisions.

Peter Kelly: And I'm very excited about the opportunity to extend and reinforce these already strong customer relationships. In addition to the significant United States launch, we also completed the rebrand of our European business to Open Lane in the fourth quarter. So we start 2024 with a single marketplace brand, Open Lane, in all of our principal geographies, the United States, Canada, and Europe.

Speaker Change: And today it is available to all dealer inventory across the open lane marketplace, the United States.

Speaker Change: While we are only a few weeks and we're already seeing the impact of improved inspection quality and consistency.

Speaker Change: In fact dealers, who toggle on the visual boost button or more than twice as likely to make an offer on a vehicle and those offers helped to lead help lead to increased conversion over time.

Speaker Change: So as I look back on 2023, I believe we accomplished some very important and foundational work.

Peter Kelly: Shifting to innovation, one of the positive benefits of consolidating platforms is the ability to accelerate product development and more quickly deploy those innovations to our customers. We continue to deploy features and functionality aimed at making the wholesale process easier for our customers, accelerating search, reducing friction, and increasing the velocity in our marketplace. A great example of this is our January launch of Visual Boost AI. Visual Boost AI is our new AI-powered technology, and it helps dealers quickly identify and assess vehicle damage and make better informed buying decisions.

Speaker Change: We start 2024, and a much stronger position with a stronger offering and more differentiation in the eyes of our customers.

Speaker Change: As I look to the future I'm very excited for the opportunity that lies ahead and I believe that open lane remains very well positioned for growth.

Speaker Change: Okay.

In the U S. Our unified open end market places and unmatched mix of inventory, a large and expanding base of commercial and dealer customers and is deploying data and technology to deliver a differentiated customer experience.

Speaker Change: Our analysis suggests we are continuing to gain share in this market will remain a key focus of our growth in 2024 and beyond.

Speaker Change: In Canada, we are a clear leader with strong volumes profitability and cash flows the business. We acquired from Manheim is being integrated and this will make a positive contribution to our results in 2024.

Peter Kelly: And today, it is available on all dealer inventory across the Open Lane Marketplace in the United States. While we're only a few weeks in, we're already seeing the impact of improved inspection quality and consistency. In fact, dealers who toggle on the visual boost button are more than twice as likely to make an offer on a vehicle, and those offers help lead to increased conversion over time. So, as I look back on 2023, I believe we accomplished some very important and foundational work. We will start 2024 in a much stronger position with a stronger offering and more differentiation in the eyes of our customers. As I look to the future, I'm very excited for the opportunities that lie ahead, and I believe that Open Lane remains very well positioned for growth. In the U.S., our Unified Open Lane Marketplace is an unmatched mix of inventory, a large and expanding base of commercial and dealer customers, and is deploying data and technology to deliver a differentiated customer experience.

Speaker Change: Our European business is also performing well in fact, it had a record year in 2023.

Speaker Change: Europe remains a smaller contributor to our overall results were expanding our relationships and our offerings to capture what we believe is a larger longer term opportunity to serve customers across Europe.

Speaker Change: Our finance business AFC remains a consistent and strong performer, we will continue operating our conservative portfolio, while working to increase attach rates and identify new ways for AFC to help power the open line marketplace.

Speaker Change: We remain disciplined around our costs, we are now more asset light and more digital than ever and this has enabled us to expand our margins and to improve the scalability of our business.

Speaker Change: This in turn provides open lane with the financial headroom to increase our investments in technology and innovation.

Speaker Change: Staying on innovation with our teams aligned and unified we are leveraging our best talent and technologies to benefit our customers Open Lane has been a digital leader in this industry for over 20 years, and we still consider ourselves disruptors.

Speaker Change: And we look forward to bringing our deep pipeline of innovation of innovation to market to the benefit of all of our customers.

Speaker Change: We will continue to execute our plan. The results. We plan presented today are a direct reflection of our strategy and our ability to execute that plan.

Peter Kelly: Our analysis suggests we are continuing to gain share, and this market will remain a key focus of our growth in 2024 and beyond. In Canada, we are a clear leader with strong volumes, profitability, and cash flows. The business we acquired from Mannheim is being integrated, and this will make a positive contribution to our results in 2024. Our European business is also performing well. In fact, it had a record year in 2023.

Speaker Change: We will retain the strong focus going forward guided by our purpose, which is to make wholesale easy so our customers can be more successful.

Speaker Change: And finally, we're very optimistic for the future with the industry fundamentals are trending in a more positive direction for our business and our 2023 performance of the solid foundation, we believe that our talent data technology and the innovative spirit of the open lane team will enable us to deliver a compelling and highly differentiated offering to our customers driving our growth.

Speaker Change: And delivering shareholder value.

Peter Kelly: And while Europe remains a smaller contributor to our overall results, we're expanding our relationships and our offerings to capture what we believe is a larger, longer-term opportunity to serve customers across Europe. Our finance business, AFC, remains a consistent and strong performer. We will continue operating a conservative portfolio while working to increase attached rates and identify new ways for AFC to help power the open market. We remain disciplined around our costs. We are now more asset light and more digital than ever.

So with that I will now turn the conversation over to Brad for more detail on our 2023 results and our 2024 guidance Brad.

Brad Lochia: Thank you Peter and good afternoon, everyone.

Brad Lochia: Before I begin I'd like to remind everyone that all financial metrics I comment on at a consolidated level and a total market place segment level or on a net revenue basis, which specifically excludes the impact of purchased vehicles sales.

Brad Lochia: Let me start with the marketplace as Peter mentioned for the full year, we delivered 3% unit volume growth, which drove a 6% increase in marketplace net revenues.

Peter Kelly: This has enabled us to expand our margins and to improve the scalability of our business. This, in turn, provides Open Lane with the financial headroom to increase their investments in technology and innovation. Staying on innovation, with our teams aligned and unified, we are leveraging our best talent and technologies to benefit our customers. Open Lane has been a digital leader in this industry for over 20 years, and we still consider ourselves disruptors. And we look forward to bringing our deep pipeline of innovation to market to the benefit of all our customers. We will continue to execute on our plan.

Brad Lochia: For the year commercial volumes grew 7% and dealer volumes declined 2%.

Brad Lochia: While our overall dealer volumes declined 2%, we continue to deliver U S dealer volume growth that partially offset declines in Canada.

Brad Lochia: Peter highlighted the fact industry fundamentals are normalizing and in Canada, we experienced a more rapid decline in vehicle values in the second half of 2023 which resulted in a headwind to dealer volumes in the third and fourth quarter.

Brad Lochia: That said, we see our geographic diversification diversification as a clear strength.

Peter Kelly: The results we presented today are a direct reflection of our strategy and our ability to execute that plan. We will retain a strong focus going forward, guided by our purpose, which is to make wholesale easy so our customers can be more successful. And, finally, we're very optimistic about the future.

Brad Lochia: This is reflected in our leading Canadian market position and a growing profitable European business.

Brad Lochia: Combination of these provide us a unique ability to grow profitably and varied market environments.

Brad: With the industry fundamentals trending in a more positive direction for our business and our 2023 performance as a solid foundation, we believe that our talent, data, technology, and the innovative spirit of the Open Lane team will enable us to deliver a compelling and highly differentiated offering to our customers, driving our growth and delivering shareholder value. So with that, I will now turn the conversation over to Brad for more detail on our 2023 results and our 2024 guidance. Brad.

Brad Lochia: A couple of other additional top line highlights that are important.

First as we discussed in our last call our U S dealer volumes are growing and our U S dealer business is profitable.

Brad Lochia: And second in the fourth quarter overall marketplace volumes grew by 10%, which reflects improving dealer wholesale fundamentals and improved volumes and mix within our commercial.

Brad Lochia: <unk>.

Brad Lochia: For the year auction fees per unit increased 4% driven by fee increases, which more than offset the impact of declining wholesale used vehicle values.

Brad: Thank you, Peter. And good afternoon, everyone. Before I begin, I'd like to remind everyone that all financial metrics I comment on at a consolidated level and at a total marketplace segment level are on a net revenue basis, which specifically excludes the impact of purchased vehicle sales. Let me start with the marketplace. As Peter mentioned, for the full year, we delivered 3% unit volume growth, which drove a 6% increase in marketplace net revenue. For the year, commercial volumes grew 7%, and dealer volumes declined 2%.

Brad Lochia: And the impact of a higher proportion of commercial vehicle volume.

Brad Lochia: As we've discussed previously our digital fees are lower compared to physical auctions.

Brad Lochia: And therefore, our pricing and value proposition.

Brad Lochia: Position us well to capture share from the physical channel, while opportunistically increasing fees over time.

Services and service related fees remain a critical component of our revenue mix in our in our central components, delivering a leading digital marketplace solution to our customers.

Brad Lochia: For the year service fees comprised approximately 61% of marketplace net revenues.

Brad Lochia: These include transportation repossession data and technology related offerings.

Brad: While our overall dealer volumes declined 2%, we continue to deliver U.S. dealer volume growth that partially offsets declines in Canada. Peter highlighted the fact industry fundamentals are normalizing, and in Canada, we experienced a more rapid decline in vehicle values in the second half of 2023, which resulted in a headwind to dealer volumes in the third and fourth quarters. That said, we see our geographic diversification as a clear strength.

Brad Lochia: In 2023 service revenue was up 5%.

Brad Lochia: Driven by higher prices volumes and improved mix.

Brad Lochia: In the fourth quarter service revenues declined 1% in the quarter largely due to lower transportation services revenue.

Brad Lochia: This was driven by changes to a key customer contract that now result in some revenue being recorded on a net commission basis instead of a gross basis historically.

Brad Lochia: Looking forward you can expect similar transportation revenue declines on a year over year basis through the first three quarters of 'twenty 'twenty four due to this contract change.

Brad: This is reflected in our leading Canadian market position and a growing profitable European business. The combination of these provides us with a unique ability to grow profitably in varied market environments. There are a couple of other additional top line highlights that are important.

Brad Lochia: And for your modeling purposes, we estimate the impact to revenue versus 2023 to be approximately $20 million per quarter in Q1, and Q2 and $13 million in Q3.

Brad: First, as we discussed in our last call, our U.S. dealer volumes are growing, and our U.S. dealer business is profitable. And second, in the fourth quarter, overall marketplace volumes grew by 10%, which reflects improving dealer wholesale fundamentals and improved volumes and mix within our commercial channel. For the year, auction fees per unit increased 4%, driven by fee increases, which more than offset the impact of declining wholesale used vehicle values and the impact of a higher proportion of commercial vehicle volume.

Brad Lochia: It's important to note. This is not a change to the absolute transportation service volume profitability or realized margins.

Brad Lochia: The overall improvement in marketplace net room revenue resulted in a 21% increase in gross profit on a full year basis, or a 560 basis point improvement versus last year.

Brad Lochia: For the quarter gross margins improved 750 basis points or 24%.

Brad: As we've discussed previously, our digital fees are lower compared to physical auctions, and therefore, our pricing and value proposition position us well to capture share from the physical channel while opportunistically increasing fees over time. Services and service-related fees remain a critical component of our revenue mix and are an essential component to delivering a leading digital marketplace solution to our customers. For the year, service fees comprised approximately 61% of marketplace net revenues.

Brad Lochia: On both a full year and quarterly basis. These improvements resulted from the combination of improved volumes these mix and cost savings initiatives.

Brad Lochia: Although gross margins are dependent on our mix of services and the mix between our dealer in commercial volumes, we anticipate the margin improvements achieved in 2023 to be sustainable.

Brad Lochia: And we see further opportunities for improvement as we continue to execute on our cost management initiatives and we realize the value from our integrated digital marketplaces, including higher volumes over time.

Brad: These include transportation, repossession, data, and technology-related offerings. In 2023, service revenue was up 5%, driven by higher prices, volumes, and improved mix. In the fourth quarter, service revenues declined 1%, largely due to lower transportation services revenue.

Brad Lochia: As Peter highlighted our marketplace adjusted EBITDA for the year was $108 million and for the quarter It was $24 million.

Brad Lochia: That is a full year improvement of $79 million and a $16 million improvement in the fourth quarter.

Brad Lochia: As previously highlighted this was driven by collective improvements in volume price mix and cost.

Brad: This was driven by changes to a key customer contract that now result in some revenue being recorded on a net commission basis instead of a gross basis historically. Looking forward, you can expect similar transportation revenue declines on a year-over-year basis through the first three quarters of 2024 due to this contract change. And for your modeling purposes, we estimate the impact to revenue versus 2023 to be approximately $20 million per quarter in Q1 and Q2 and $13 million in Q3. But it's important to note this is not a change to the absolute transportation service volume, profitability, or realized margin. The overall improvement in marketplace net revenue resulted in a 21% increase in gross profit on a full year basis, or a 560 basis point improvement versus last year. For the quarter, gross margins improved 750 basis points, or 24%.

Speaker Change: Intentionally repeating what has already been said.

Speaker Change: As of the end of the year, we now have an open lane branded fully integrated digital marketplace platform in the U S, Canada and Europe.

Speaker Change: This unique and differentiated digital solution has the capability to further advance our dealer and commercial growth and will enhance our overall competitive advantage, while better positioning us to deliver scalable profitable growth within the marketplace segment.

Speaker Change: To our finance segment revenues for the year were up 5% driven by a 4% increase in loan transaction units higher interest income and higher fee income.

Speaker Change: For the quarter revenues decreased 4% versus prior year.

Speaker Change: Loan transaction units in the quarter were relatively flat and higher interest and fee income in a quarter.

Speaker Change: Were more than offset by higher credit loss by higher credit losses.

Speaker Change: Finance segment adjusted EBITDA for the year was $164 million down 38 million more than explained by higher credit losses.

Brad: On both a full year and quarterly basis, these improvements resulted from the combination of improved volumes, fees, mix, and cost savings initiatives. Although gross margins are dependent on our mix of services and the mix between our dealer and commercial volumes, we anticipate the margin improvements achieved in 2023 to be sustainable. And we see further opportunities for improvement as we continue to execute on our cost management initiatives, and we realize the value from our integrated digital marketplaces, including higher volumes over time. As Peter highlighted, our marketplace adjusted EBITDA for the year was $108 million, and for the quarter it was $24 million.

Speaker Change: Similarly in the quarter Finance segment, adjusted EBITDA was $38 million compared to 49 million last year, driven by German primarily by an $8 million increase in credit losses.

Speaker Change: For the full year, our credit loss rate was two 1%.

Speaker Change: And for the quarter, 2.5%.

Speaker Change: This increased loss rate was due to significant used vehicle value declines interest rate increases and tightening retail credit availability that impacted used vehicle retail sales.

Speaker Change: Going forward, we expect the first half of 'twenty 'twenty four to experience similar loss rates as the second half of 2023.

Brad: That is a full year improvement of $79 million and a $16 million improvement in the fourth quarter. As previously highlighted, this was driven by collective improvements in volume, price mix, and cost. Intentionally repeating what has already been said, as of the end of the year, we now have an open lane branded, fully integrated digital marketplace platform in the US, Canada, and Europe.

Speaker Change: As we've mentioned previously credit loss rates in this business will fluctuate over time and like other financing businesses across many sectors, we are seeing higher loss rates compared to our 1.5% to 2% targeted range.

Speaker Change: In fact, we are encouraged by the fact, our competitive assessment confirms that our loss rates remain notably lower than our than our key four planned Pierre.

Brad: This unique and differentiated digital solution has the capability to further advance our dealer and commercial growth and will enhance our overall competitive advantage, while better positioning us to deliver scalable, profitable growth within the marketplace segment. Turning to our finance segment, revenues for the year were up 5% driven by a 4% increase in loan transaction units, higher interest income, and higher fee income. For the quarter, revenues decreased 4% versus the prior year.

Speaker Change: In the meantime to mitigate losses and to continue to deliver leading returns we will continue to manage a conservative and disciplined portfolio.

Speaker Change: And we will leverage our leading risk management processes that are complementary complemented by a high touch customer service model.

Speaker Change: Turning to SG&A consolidated SG&A for the year declined $15 million, reflecting the successful execution of our cost savings initiatives.

Brad: Loan transaction units in the quarter were relatively flat, and higher interest and fee income in the quarter were more than offset by higher credit losses. Finance segment adjusted EBITDA for the year was $164 million, down $38 million, more than explained by higher credit losses. Similarly, in the quarter, finance segment adjusted EBITDA was $38 million, compared to $49 million last year, driven primarily by an $8 million increase in credit losses. For the full year, our credit loss rate was 2.1%.

Speaker Change: SG&A increased $11 million compared to the fourth quarter of 2022.

Speaker Change: Largely due to a $9 million increase in noncash compensation.

Speaker Change: In the fourth quarter of 2022.

Speaker Change: <unk> 9 million of noncash compensation expense was reversed for performance awards that were no longer expected to vest.

Speaker Change: And as we previously mentioned certain duplicative transaction transitional costs will no longer reoccur in 'twenty 'twenty, four and will help offset inflationary headwinds going forward.

Brad: And for the quarter, 2.5%. This increased loss rate was due to significant used vehicle value declines, interest rate increases, and tightening retail credit availability that impacted used vehicle retail sales. Going forward, we expect the first half of 2024 to experience similar loss rates as the second half of 2023. As we've mentioned previously, credit loss rates in this business will fluctuate over time, and like other financing businesses across many sectors, we are seeing higher loss rates compared to our 1.5 to 2% targeted range. In fact, we are encouraged by the fact that our competitive assessment confirms that our loss rates remain notably lower than our key floor plan peers.

Speaker Change: Moving to the balance sheet and capital allocation consistent with prior quarters, we continue to generate strong cash flow.

Speaker Change: Cash flows from operating activities were 237 million in 2023.

Speaker Change: This level of cash generation demonstrates the value, creating combination of our asset light digitally.

Speaker Change: Digitally focused marketplace business, and our leading floor plan finance business.

Speaker Change: Our cash generation has notably improved our overall liquidity position and further strengthened our balance sheet.

Speaker Change: In the quarter, our consolidated net leverage ratio increased to approximately one times adjusted EBITDA largely due to the funding of our Canadian acquisition in December.

Brad: In the meantime, to mitigate losses and to continue to deliver leading returns, we will continue to manage a conservative and disciplined portfolio, and we will leverage our leading risk management processes that are complemented by a high-touch customer service model. Turning to SG&A, consolidated SG&A for the year declined $15 million, reflecting the successful execution of our cost savings initiatives.

Speaker Change: And please recall in 2023, we repaid $140 million of our 2025 senior notes.

Speaker Change: And completed $22 million in share repurchases.

Speaker Change: Regarding the Canadian acquisition the purchase price for this acquisition was approximately 103 million U S dollars.

Brad: SG&A increased $11 million compared to the fourth quarter of 2022, largely due to a $9 million increase in non-cash compensation. In the fourth quarter of 2022, approximately $9 million of non-cash compensation expense was reversed for performance awards that were no longer expected to vest. And as we previously mentioned, certain duplicative transitional costs will no longer reoccur in 2024 and will help offset inflationary headwinds going forward. Moving to the balance sheet and capital allocation, consistent with prior quarters, we continue to generate strong cash flow. Cash flows from operating activities were $237 million in 2023.

The integration work is progressing well.

Speaker Change: We are migrating our existing Montreal operations to the acquired Montreal facility, and we are taking actions to sell our existing larger Montreal location.

Speaker Change: Although the sale process will take some time, we estimate the net proceeds from the sale will eventually serve to fund a meaningful portion of the acquisition.

Speaker Change: And as a reminder, the Montreal site is the only real estate, we acquired as part of this transaction.

Speaker Change: We are migrating all other components of the acquisition to our existing vehicle logistics centers and offices throughout Canada. This is this includes integrating all showed shared support functions business processes and systems.

Speaker Change: In January of this year, we executed a new $175 million Canadian dollar revolving credit facility.

Brad: This level of cash generation demonstrates the value-creating combination of our asset-light, digitally focused marketplace business and our leading four-plan finance business. Our cash generation has notably improved our overall liquidity position and further strengthened our balance sheet. In the quarter, our consolidated net leverage ratio increased to approximately one times adjusted EBITDA, largely due to the funding of our Canadian acquisition in December. And please recall that in 2023, we repaid 140 million of our 2025 senior notes and completed 22 million in share repurchases. Regarding the Canadian acquisition, the purchase price for this acquisition was approximately $103 million.

Speaker Change: While not reflected in our year end balance sheet and liquidity position on a pro forma basis. This facility will provide several benefits it will provide.

Speaker Change: Good flexibility to debt fund, our Canadian subsidiary at a level, where we can more effect more tax effectively service interest expense.

Speaker Change: It will optimize our ability to fund seasonal working capital and finally, it will improve open lanes overall liquidity position, which provides flexibility to fund investments and other future commitments.

Speaker Change: Overall, our capital allocation priorities remain unchanged and we will continue to prioritize the funding of organic investments in our four digitally focused business, while also ensuring flexibility for high return complementary strategic opportunities and shareholder returns.

Brad: The integration work is progressing well. We are migrating our existing Montreal operations to the acquired Montreal facility, and we are taking actions to sell our existing larger Montreal location. Although this sale process will take some time, we estimate the net proceeds from this sale will eventually serve to fund a meaningful portion of the acquisition. And as a reminder, the Montreal site is the only real estate we acquired as part of this transaction. We are migrating all other components of the acquisition to our existing vehicle logistics centers and offices throughout Canada. This includes integrating all shared support functions, business processes, and systems.

Speaker Change: During the quarter, we did not repurchase shares, but we continue to have $125 million remaining on our share repurchase authorization.

Speaker Change: I will wrap up by addressing a few annual guidance items, we expect 2024, adjusted EBITDA to be between $285 and $305 million.

Driven primarily by continued improvement in our marketplace segment.

Speaker Change: This outlook reflects the industry update Peter discussed earlier.

Speaker Change: <unk> ongoing improvements in our margin structure.

Speaker Change: And the risk outlook for a finance business, which I highly doubt highlighted earlier.

Speaker Change: We continue to target and benefit from the expected dealer shift from physical to digital however.

Brad: In January of this year, we executed a new $175 million Canadian dollar revolving credit facility. While not reflected in the year-end balance sheet and liquidity position, on a pro forma basis, this facility will provide several benefits. It will provide flexibility to debt fund our Canadian subsidiary at a level where we can more tax effectively service interest expense. It will optimize our ability to fund seasonal working capital, and finally, it will improve Open Lane's overall liquidity position, which provides flexibility to fund investments and other future commitments. Overall, our capital allocation priorities remain unchanged, and we will continue to prioritize the funding of organic investments in our four digitally-focused businesses, while also ensuring flexibility for high-return, complementary strategic opportunities and shareholder returns. During the quarter, we did not repurchase shares, but we continue to have $125 million remaining on our share repurchase authorization.

Speaker Change: However, I want to remind you the second half of 'twenty 'twenty four off lease volumes will begin to see pressure based on low lease originations and late 2021 and into 2022.

Speaker Change: In terms of profitability and margins. This top of the funnel off lease volume headwind could be mitigated by improved revenue per unit or mix as we see a gradual increase in vehicles flowing to non grounding dealers and our open digital marketplace.

Speaker Change: The remaining guidance metrics are presented in our earnings release, we expect operating adjusted earnings per share to be between 77 and 87 cents.

Speaker Change: As a reminder, we add back noncash acquisition related amortization to calculate operating adjusted EPS we.

Speaker Change: We believe this metric provides a more meaningful measure because of our company's acquisition history.

Speaker Change: Again these components of the calculation are detailed in our earnings release.

Speaker Change: Finally, we expect capex to be between 55 and $60 million in 'twenty 'twenty, four which is a slight increase compared to 2023 capex of $52 million.

Brad: I will wrap up by addressing a few annual guidance items. We expect 2024 Adjusted EBITDA to be between $285 and $305 million, driven primarily by continued improvement in our marketplace segment. This outlook reflects the industry update Peter discussed earlier, expected ongoing improvements in our margin structure, and the risk outlook for a finance business, which I highlighted earlier. We continue to target and benefit from the expected dealer shift from physical to digital. However, I want to remind you, the second half of 2024 off-lease volumes will begin to see pressure based on low lease originations in late 2021 and into 2022. However, in terms of profitability and margins, this top-of-the-funnel, off-lease volume headwind could be mitigated by improved revenue per unit or mix as we see a gradual increase in vehicles flowing to non-grounding dealers and our open The remaining guidance metrics are presented in our earnings release. We expect operating adjusted earnings per share to be between 77 and 87 cents.

Speaker Change: This incremental investment will focus on advancing and unifying our marketplace technology stacks and that translates in our ability to drive faster more efficient innovation, which results in making wholesale easier for our customers.

Speaker Change: With that I'll turn the call over to the operator for questions.

Speaker Change: Thank you we.

Speaker Change: We will begin the question and answer session.

Speaker Change: To ask a question press Star then one on your telephone keypad.

Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Speaker Change: And the first question today.

Speaker Change: It comes from Rajat Gupta with JP Morgan.

Rajat Gupta: Oh, great. Thanks for taking the questions.

Rajat Gupta: Just wanted to follow up on the off lease commentary.

Rajat Gupta: You know what will be the key driver of the commercial business. This year and do you see.

Rajat Gupta: The net impact of.

Rajat Gupta: Perhaps increase would've gone rates unbelievers.

Rajat Gupta: No one says the lower off lease returns in the second half being a net positive or or a headwind for the company and then where does what are the incremental volume growth going to come from the commercial side and I have a follow up thanks.

Brad: As a reminder, we add back non-cash acquisition-related amortization to calculate operating adjusted EPS. We believe this metric provides a more meaningful measure because of our company's acquisition history. Again, these components of the calculation are detailed in our earnings release.

Speaker Change: Thank you Richard.

Speaker Change: So you know I think the off lease segment, obviously, the historical strengths of the company. It's been really challenge the past few years because because of.

Speaker Change: What I call the equity gap vehicles being heavily in positive equity at the end of lease and getting bought out by the consumer by the grounding dealer.

Speaker Change: So that's in that period, but a challenge over the past couple of years, but we've seen that equity gap really decline pretty steeply and rapidly over the course of the last.

Brad: Finally, we expect CapEx to be between $55 and $60 million in 2024, which is a slight increase compared to 2023. This incremental investment will focus on advancing and unifying our marketplace technology stacks. And that translates into our ability to drive faster, more efficient innovation, which results in making wholesale easier for our customers. With that, I'll turn the call over to the operator for questions. The U.S. and the New York Times.

Speaker Change: You know nine to 12 months.

Speaker Change: And it's now at the lowest it's been certainly for the last I'd say 18, plus months, we are seeing increased volumes of off lease vehicles being returned at this point and entering their marketing funnel. So that is a positive for us in terms of volume. We're also seeing those vehicles are flowing more deeper into the remarketing funnel theyre not all getting purchased by the grounding.

Speaker Change: Dealer.

So that is another positive that that impacts makes in an RFP.

Speaker Change: So a little bit of that was evident in Q4, I think there is more of a probably happening in 2024.

Operator: Thank you. Thank you, Roger.

Speaker Change:

Rajat: Great. Thanks for taking the time to answer the question. I just wanted to follow up, you know, on the off-lease commentary. What's going to be the key driver of the commercial business this year? And do you see the net impact of, you know, perhaps increased return rates on leases versus, you know, the lower off-lease returns in the second half being a net positive or a headwind for the company? And then where is the incremental holding good going to come from on the commercial side? And I have a follow-up. Thank you, Rajat.

Speaker Change: And again, we would expect over the long run this will look much more like normal and normal would be most off lease vehicles at the end of the lease do not have any positive equity they have negative equity to get returned.

Speaker Change: And they enter their marketing process.

Speaker Change: So to your question on could that trend, which we're now seeing.

Speaker Change: Offset.

Speaker Change: The sort of top of funnel impact of fewer.

Speaker Change: Vehicles maturing because of lower lease originations.

Speaker Change: Rajiv it's possible.

Rajiv: I you know, it's it's it's difficult to model it with precision because you know we don't know the exact residual value status of all those vehicles, but at the at the present moment I'd say I'm encouraged by what I'm seeing and I take that as a positive.

Peter Kelly: So, you know, I think the off-lease segment obviously is a historical strength of the company. It's been really challenged in the past few years because of, you know, what I call the equity gap vehicles being heavily in positive equity at the end of lease and getting bought out by the consumer by the grounding dealer. So that period has been a challenge over the past couple of years.

Rajiv: We are going to have to see how it trends in the second half of this year.

Rajiv: Probably the most positive thing before I wrap up on off lease vehicles here is the increase lease originations.

Peter Kelly: But we've seen that equity gap really decline pretty steeply and rapidly over the course of the last, you know nine to twelve months and it's now at the lowest it's been certainly for the last you know I'd say 18 plus months we are seeing increased volumes of off-lease vehicles being returned at this point and entering the remarketing funnel so that is a positive for us in terms of volume we're also seeing those vehicles flowing more deeper into the remarketing funnel they're not all getting purchased by the grounding dealer so that is another positive that that impacts mix and our proof so a little bit that was evident in q4 I think there's more of it probably happening in 2024 Um, And again, we would expect over the long run, this will look much more like normal. And normal would be most off-lease vehicles at the end of the lease do not have any positive equity. They have negative equity, and they entered the remarketing process.

Rajiv: 20, plus percent increase allegedly originations last year and a 40 plus percent of lease originations in the fourth quarter. This really tells me that leasing is going to be an important part of the way vehicles are brought to market in the U S. As it has always been.

Rajiv: And.

Rajiv: It's going be a very important part of our business going forward. So it is very encouraging for me to see that trend I know, we're going to have to wait a couple of years for some of those vehicles to mature.

Rajiv: But.

Rajiv: I still think it's a significant positive, but as we look to the future.

Speaker Change: Got it.

Speaker Change: Color and just on the full year guidance.

Speaker Change: I think you mentioned that the EBITDA improvement is going to be primarily driven by the marketplace.

Speaker Change: Should we expect a AFC do we grow.

Speaker Change: And then bring far or do you think given like the exit rate on the credit losses.

Peter Kelly: So to your question on whether that trend which we're now seeing could offset the sort of top of funnel impact of fewer vehicles maturing because of lower lease originations, Rajat, it's possible.

Speaker Change: Yeah sure. He should we model that doesn't down in Georgia for a while.

Speaker Change: Paresh.

Paresh: So if you can give us a little more color on AFC.

Paresh: Yeah, Yeah, Yeah, Hey, rod thanks.

Paresh: Thanks for the question so yeah, I would say for AFC.

Paresh: We wouldn't want you to model it down for here to just to head that off directly.

Peter Kelly: It's difficult to model it with precision because we don't know the exact residual value status of all those vehicles. But at the present moment, I'd say I'm encouraged by what I'm seeing, and I take that as a positive. We're going to have to see how it trends in the second half of this year. Probably the most positive thing before I wrap up on off-lease vehicles here is the increased lease originations, a 20-plus percent increase in lease originations last year and a 40-plus percent increase in lease originations in the fourth quarter. This really tells me that leasing is going to be an important part of the way vehicles are brought to market in the U.S., as it has always been, and it's going to be a very important part of our business going forward. So it's very encouraging for me to see that trend. I know we're going to have to wait a couple of years for some of those vehicles to mature, but I still think it's a significant positive as we look to the future. Got it. That's helpful, Kalar.

Paresh: We actually see that business going forward year over year in terms of how we were kind of modeling it in planning it ourselves, but going forward modestly.

Paresh: As I said in my comments, you know first half losses.

Paresh: I don't want a loss rate, but in terms of dollars, we expect that to be fairly similar to the second half of 2023 and we as you can imagine have a pretty good line of sight to that right now.

Paresh: And we expect that those loss rates to moderate in the second half of 'twenty, 'twenty, three which year over year should provide us.

Paresh: A benefit and then I would also just say as we.

Paresh: As we alluded to in our comments, we're going to continue to look to grow that business, we're going to do it in a very disciplined manner very.

A very conservative manner.

Paresh: We have a it's a high performing business from a cash flow and an earnings contribution and we will continue to look to grow that business.

Got it great. Thanks for the color I'll jump back in queue.

Brad: And just on the four-year guidance, I think you mentioned that EBITDA improvement is going to be primarily driven by the marketplace. Should we expect AFC to grow in 2024, or do you think given the exit rate on the credit losses, should we model that business down in 24 or flattish? You know, I'm just curious if you could give us a little more color on the AFC outlook for 24.

Paresh: And the next question comes from Craig Kennison with Baird.

Craig R. Kennison: Hey, good afternoon. Thanks for taking my question I wanted to follow up on the prior topic. Peter you were talking about off lease.

Craig R. Kennison: The equity gap and that seems to be narrowing I'm curious based on the work you've done.

Craig R. Kennison: How long until we get to that normal environment, where a car comes off lease and there was actually negative equity if copper prices stay about where they are today.

Brad: Yeah. Yeah. Hey, Rajat.

Brad: Hey, thanks for the question. So, yeah, I would say for AFC. I certainly wouldn't want you to model it down here to just head that off directly. We actually see that business going forward year over year in terms of how we're kind of modeling it and planning it ourselves. But going forward modestly, as I said in my comments, first half losses, not only a loss rate, but in terms of dollars, we expect that to be fairly similar to the second half of 2023. And we, as you can imagine, have a pretty good line of sight on that right now.

Peter Kelly: Yeah, Craig it's a good question, it's hard for me to predicted with precision.

Speaker Change: But I do I would say a number of things that are relevant as we think about that one is where are used car prices trending.

Speaker Change: It's been interesting to you know in the first few weeks of this year they've continued to trend slightly downwards.

Speaker Change: So I still think Theres you know for the most part more downward pressure on used vehicle pricing than upward at the present time.

Brad: We expect that those loss rates to moderate in the second half of 2023, which should provide us, you know, a benefit. And then I would also just say, as we alluded to in our comments, we're going to continue to look to grow that business. But we're going to do it in a very disciplined manner, very conservative manner.

Speaker Change: Although I am not expecting a significant <expletive>.

Speaker Change: A decline over the course of 2024.

Speaker Change: And then the second point is where are the residual values on the leases lease contracts written and when I think of that.

Speaker Change: You you got to think not where now we're starting to lap leases that were written in early 2021 mid 2021 that's a period when we saw a rapid run up in <unk> and.

Brad: We have a it's a high-performing business from a cash flow and an earnings contribution point of view, and we'll continue to look to grow that business. Got it. Great. Thanks for the cover. I'll jump right into it. Hey, good afternoon.

Speaker Change: New vehicle transaction prices, so that would tend to correlate with higher residual values on those contracts. So I think you know the equity gap is being compressed from both directions.

Craig: Thanks for taking my question. I wanted to follow, Peter, you're talking about equity. Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES, How long until we... Normal.dotm, The Bulletproof Executive 2013 if car prices stay about where they are today? You know, Craig, it's a good question. It's hard for me to predict it with precision.

Speaker Change: And I expect it to normalize.

Speaker Change: In the not too distant future, but I hesitate to put a specific time on that.

Speaker Change: If you were to look at the cohort of leases made in late 2022 and used car prices really peaked.

Peter Kelly: But I do, I'd say a number of things are relevant as we think about that. One is where used car prices are trending. It's been interesting to me, you know, in the first few weeks of this year, they've continued to trend slightly downwards. So I still think there's, you know, for the most part, more downward pressure on used vehicle pricing than upward at the present time, although I'm not expecting a significant decline over the course of 2024. And then the second point is, where are the residual values on the leases written?

Speaker Change: Is it fair to look at those that cohort in particular and say those look to be candidates for having significant negative equity.

Speaker Change: Okay.

Greg.

Greg: I can't really sort of shed.

Greg: More light on that then I've already shared in my in my answer I think you know I guess theres, one possible complication, Craig that if theres fewer awfully fewer off lease vehicles at the top of the funnel there could be increased demand and the price of those vehicles could that could sort of lift the prices on those vehicles and that could cause.

Peter Kelly: And when I think of that... You gotta think, now we're starting to lap leases that were written in early 2021, mid-2021. That's a period when we saw a rapid run-up in new vehicle transaction prices. So that would tend to correlate with higher residual values on those contracts. So I think the equity gap is being compressed from both directions, and I expect it to normalize, you know, in the not too distant future, but I hesitate to put a specific time on that. If you were to look at the cohort of leases made in 2022 when used car prices really peaked, is it fair to look at those in that cohort in particular and say, Those look to be candidates for having significant negative equity.

Greg: That equity gap to not narrow as steeply as as one might like so there's there's just a lot of moving pieces here, Craig and I think here's what I would say we've seen the equity gap come down a lot we're seeing more vehicles enter there were marketing funnel.

Greg:

Greg: And you know based on my conversation with our commercial customers.

Greg: They expect those trends to continue in that percentage of vehicles entering their marketing to go up and that has the potential to offset the top of the.

Greg: Yes.

Speaker Change: We are aware of.

Speaker Change: Yes. Thank you very much Peter and then maybe if I could on the dealer side.

Speaker Change: Leave it was down just a little bit versus last year, I'm wondering if you're still adding dealers and if so are you seeing fewer transactions per dealer for any reason.

Craig: Craig, I can't really sort of shed more light on that than I've already done in my answer. I think, you know, I guess there's one possible complication, Craig, that is there are fewer off-lease vehicles at the top of the funnel. There could be increased demand, and the prices for those vehicles could, that could sort of lift the prices on those vehicles. And that could cause, you know, that equity gap to not narrow as deeply as one might like.

Speaker Change: Yeah, we've seen.

Speaker Change: As Brad mentioned, we saw some headwinds in the second half of last year on theater volumes in Canada.

In the very strong market of the prior year. There was a lot of export volume from Canada into the U S and that drove strong demand in Canada, and you know drove liquidity in the dealer segment. So that kind of went away I'd say largely in the second half of last year that was a little bit of a headwind, but we continue to add customers our customer base on DTD.

Peter Kelly: So there's just a lot of moving pieces here, Craig, and I think here's what I would say. We've seen the equity gap come down a lot. We're seeing more vehicles enter the remarketing funnel, and, you know, based on my conversation with our commercial customers. They expect those trends to continue and that the percentage of vehicles entering the market to go up. And that has the potential to offset the top of the..., that we are aware of. Yeah, thank you very much, Peter.

Speaker Change: To grow our U S. D D volumes grew in the fourth quarter.

Speaker Change: And I'm you know again as I mentioned in my remarks, very pleased with the very positive feedback that I've gotten from dealers, who are active customers and using our youth.

Speaker Change: Using our dealer to dealer solutions, both on the sell and the buy side. So I feel very encouraged about our offering.

Peter Kelly: And then, maybe if I could, on the dealer side. I believe it was down just a little bit versus last year. I'm wondering if you're still adding dealers and, if so, are you seeing fewer transactions per dealer? Yeah, we've seen, you know, as Brad mentioned, we saw some headwinds in the second half of last year on dealer volumes in Canada. In the very strong market of the prior year, there was a lot of export volume from Canada into the U.S., and that drove strong demand in Canada and drove liquidity in the dealer segment. So, that kind of went away, I'd say, largely in the second half of last year.

Speaker Change: And I think it's a very competitive vis vis all other offerings that are out there and.

Speaker Change: Very sticky with its customer base as well.

Speaker Change: Yeah, Peter Let me just I would just add Craig on the on the Canadian point.

Speaker Change: What we're seeing in Canada is not unique to us that the data the market intelligence that we have suggest that's more broad based so I just want to make it clear that it's not unique to our business there.

Speaker Change: Great Hey, thank you.

Peter Kelly: That was a little bit of a headwind, but we continue to add customers. Our customer base on D2D continues to grow. And our U.S. D2D volumes grew in the fourth quarter.

Speaker Change: Yeah.

Speaker Change: Okay great.

Speaker Change: The next question from John Murphy with Bank of America Merrill Lynch.

John Murphy: Hey, good evening guys.

John Murphy: For first question, Peter you talked about.

Peter Kelly: And I'm, again, as I mentioned in my remarks, very pleased with the very positive feedback that I've gotten from dealers who are active customers and using, www.youtube.com.uk Yeah, Peter, let me just add, Craig, on the Canadian point: what we're seeing in Canada is not unique to us, that the data, the market intelligence that we have suggest that's more broad based. So I just want to make it clear that it's not unique to our business there. Great Hey, thank you. Questions?

John Murphy: The dealer visits and in the U S being up a lot.

John Murphy: And it was totally in total was down so I'm just curious you know how much.

John Murphy: This was up in the U S. And then also Conversely on the commercial side.

John Murphy: Where that where the strength is really coming from I know, we're talking about off lease, but this rental government and.

John Murphy: And commercial.

John: Hey, good evening, guys. Just a first question, Peter. You guys talked about, "Do Your Business in the U.S. Being Up."

John Murphy: Marshall commercial.

John Murphy: On the fleet side of the business.

Peter Kelly: Aileen Smith, Derek Glynn, Gary Balter, John Sykes, Ben Bienvenu, Peter Lukas, Gary Prestopino, and commercial, commercial, commercial, on the fleet side, was there any kind of particular strength there where these companies are finally getting back into auction? selling as well as being buyers. Yeah, so thanks, John.

John Murphy: Was there any kind of particular strength there whether you see these companies are finally getting back in the auction lanes and selling as opposed to being buyers.

Speaker Change: Yeah. So thanks John.

Speaker Change: So on the theater side I said unit volumes were up in the in the U S. I didn't say up a lot of it's going to be clever, but they were up.

Peter Kelly: So on the dealer side, I said dealer volumes were up in the US. I didn't say by a lot, I just want to be clear, but they were up in Q4. And I believe, based on our analysis, we gained share in the dealer segment in Q4 as well, when we compare our dealer volumes versus what we saw, you know, in other data sources. In terms of commercial, you know, we're seeing growth in commercial in both the US and Canada. So I think it's fairly broad in scope.

Speaker Change: In Q4, and I believe based on our analysis, we gained share in the dealer segment.

Speaker Change: In in.

Speaker Change: In Q4, as well when we compare our dealer volumes versus what we saw.

Speaker Change: And other data sources.

In terms of commercial we're seeing growth in commercial in in both the U S and Canada.

Speaker Change: So I think it's fairly broad based.

Peter Kelly: I just spoke about off-lease vehicles. We're seeing increased consignment, more vehicles entering the funnel, and flowing deeper in the funnel. So that's a positive for us.

Speaker Change: I just spoke about off lease vehicles, we're seeing increased consignments more vehicles entering the funnel.

Speaker Change: Going deeper in the funnel. So that's a positive for us it was a.

Peter Kelly: It was, you know, positive in Q4, and we think that's the beginning of a trend. You know, in the industry, there's also been an increase in repossession volume, John. Most of those repos are sold at physical auction. I want to be clear on that. So we don't sell a lot of repos in our digital model yet, although we are piloting with some customers and having some success in that segment as well. But the volumes there for us are still quite small.

Speaker Change: A positive in Q4 and we.

Speaker Change: We think that's the beginning of a trend.

Speaker Change: You know in the industry. There has also been an increase in repossession volume John.

Speaker Change: Most of those repos are sold at physical auction I want to be clear on that so we don't sell a lot of repos and our digital model yet although we are.

Speaker Change: Piloting with some customers and having some success in that segment as well, but the volumes there for us are still quite small, but repo volumes drop off lease volumes are up and we do well.

Peter Kelly: But repo volumes are up, off-lease volumes are up, and we do sell rental cars as well for some of the major rental brands that you're aware of, and those volumes have been quite strong.

Speaker Change: We do sell rental cars as well for some of the major rental brands that you're aware of that and those volumes have been quite strong for us as well.

Speaker Change: And just lastly is there any potential upside in auction fees as we see.

Peter Kelly: Especially, is there any potential upside in, The dealer business may be strengthened in the coming years, or is this 280?ish your number kind of the upside, the upper limit? I mean, how much upside there is on price. We're competitively priced, I believe, vis-à-vis alternative channels. You know, it's evident to me that buy fees on the physical auction side of the business have increased materially over the past few years, so I think we're well positioned there. John, I'd say I like where we're priced right now.

Your business, maybe strengthen in the coming years or is this 280.

Speaker Change: Ish number kind of the upside.

Speaker Change: The upper limit I mean, how much upside is there potentially front from mix it doesn't even fee increases over time.

Speaker Change: I think there is upside on price, where we're competitively priced I believe these are the alternative channels.

Speaker Change:

Speaker Change: It's evident to me that by fees at the physical auction side of the business have increased.

Speaker Change: Clearly over the past few years, so I think we're well positioned there.

Speaker Change: John I'd say, I like where we're priced right now.

Peter Kelly: I think we give our customers a great value proposition in terms of the speed of sale, the low cost of sale, and also the outcomes they achieve on their via price. And, you know, as Brad mentioned, you see our consolidated results, but our D2D business in the U.S. was profitable. We did increase prices a little bit last year in that segment, and we've got some further opportunities to do that, but we don't have anything immediately planned. Thank you very much. Thank you, John. Gary. Hey, good afternoon, everyone.

Speaker Change: We give our customers a great value proposition in terms of the speed of sale are the low cost of sale and also the outcomes. They have achieved on their vehicles.

Speaker Change: And.

Speaker Change: As Brad mentioned are well you see our consolidated results, but our DVD business in the U S was profitable.

Speaker Change: We did increase price a little bit last year in that segment. So we've got some further opportunities to do that but we don't have anything immediately planned.

Speaker Change: Great. Thank you very much.

Speaker Change: Thank you John.

Speaker Change: Our next question comes from Gary Presta piano with Barrington Research.

Gary Presta: Good afternoon, everyone. Most of my questions have been answered but.

Gary: Most of my questions have been answered, but the reason for credit loss is going up as much as it did. Could you tell me, was that more systemic to your Canadian business? US Business. I know they're having a really challenging economic environment. So, could you elaborate on that a little bit? Yeah, yeah, Gary. It's Brad here.

So vision for credit losses going up as much as it did could you tell me was that more systemic to your Canadian business versus your U S business I know, they're having really a challenging economic environment up there.

Speaker Change: So could you elaborate on that a little.

Speaker Change: Yeah, Yes, Gary spread here. Thanks for the question I would say there is nothing I would say that we're seeing from a loss perspective, that's unique to Canada versus the United States or vice versa.

Brad: Thanks for the question. I would say there's nothing I would say that we're seeing from a loss perspective that's unique to Canada versus the United States or vice versa. You know, there's, it's, it's not anything systemic or unique.

Gary Presta: You know, there's it's it's fairly nothing systemic or unique I would just answer it that way.

Brad: I would just answer it that way. You know, I would say as we think about each market and our underwriting and risk, you know, appetite for each one, we do look at them differently. As we saw, as we said, the vehicle value declines in Canada are, we're a little bit more severe than what we see in the US. So from our, you know, financing business perspective, that's a factor we look at and not only in our underwriting environment for potential new customers but also in our risk management process. So in this kind of environment that we are in now, have you done this?

You know I would say as we think about each market as.

Gary Presta: And our underwriting and risk appetite.

Gary Presta: Appetite in each one we do look at them differently as we saw it as we said that the the valued vehicle value declines in Canada.

Gary Presta: We're a little bit more severe than what we see in the U S. So from our financing business perspective, that's a factor we look at and not only our underwriting environment for potential new customers, but also.

Gary Presta: In our risk management processes.

Gary Presta: So in this kind of environment we're in.

Gary Presta: Now have you done anything to increase your lot checks.

Brad: Lots, on a weekly basis, keeping tabs on these vehicles. Yes, more activity there has certainly stepped that up, and that's been true really throughout 2023 and will continue. I would also just add, you know, Gary, we have really driven a lot of progress in our analytics over the past several years. And our analytics have better positioned us to allow us to move accounts that are signaling higher risk to move them into what we call a wind-down status, which allows us to significantly mitigate losses versus letting them go to a full delinquent status. So our analytics, and risk management processes are allowing us to lean into some of those cases better than they historically have. Thank you. Thank you. Thank you. Thank you. Bob Ladeck, http://TheBusinessProfessor.com. Yes, hi, it's Pete Lukas on behalf of Bob.

Gary Presta: On a weekly basis, just to keep tabs on these vehicles.

Yes, more and more activity there certainly have stepped that up and that's been true really throughout 2023 and will continue I would also just add you know Gary we have really also driven a lot of advancement in our analytics over the past several years and our analog.

Gary Presta: <unk> have better positioned us to allow us to move accounts there are signaling higher risk.

Gary Presta: To move them into what we call a wind down status, which allows us to significantly mitigate losses versus.

Gary Presta: Versus letting them go to a full delinquent status. So our analytics, our risk management processes are allowing us to lean into some of those cases better than they historically have.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Our next question comes from Bob <unk> with CJS Securities.

Speaker Change: Yes, Hi, it's Pete Lucas for Bob.

Peter Kirk Lukas: Most of my stuff has already been addressed here, but just, I guess, as it relates to just one question, as it relates to AFC, how do you see net interest income and spread? fee income per unit trending in 24 and any color. Yeah, thanks for the question. I think, you know, Bob, let's start by just, you know, you know, reemphasizing the point here that this business continues to be a strong performer, the portfolios that we have, and our yields across the portfolio continue to be strong. If I go back to 2019, and through the years here, the overall yields have been, I would say, fairly consistent overall. That's both on a fee basis and an interest basis, kind of a net interest basis.

Peter Kirk Lukas: Most of my stuff has already been addressed here.

Peter Kirk Lukas: But just I guess as it relates to just one question just to see how do you see net interest income and spread and fee income per unit has been trending in 'twenty four and any color you can give there.

Speaker Change: Yeah. Thanks for the question I think you know Bob I'll start by just reemphasize. The point here that this business is continues to be a strong performer of the portfolios that we have in our yields across the portfolio continued to be strong if I go back to 2019 and through the years here the overall yields.

Speaker Change: And then I would say fairly consistent overall.

Speaker Change: Both of them, both on a fee basis, and an interest kind of a net interest basis.

Brad: So, the portfolio continues to perform well. You know, I would expect those yields into 2024 to not change materially at this point. That's very helpful. Thanks. Thank you for your time. Yeah, hey, good evening, guys.

Speaker Change: So so the portfolio continues to perform well.

Speaker Change: You know I would expect you know those yields in the 'twenty 'twenty four to not change.

Speaker Change: Materially at this point.

Speaker Change: Very helpful. Thanks.

Speaker Change: Our next question comes from Daniel <unk> with Stephens.

Daniel: Thanks for answering our questions. Maybe one question I wanted to ask about, maybe on the economic side, as we think about the shift back to commercial, historically, those off-lease cars carry a lower revenue per unit, maybe a lower gross profit per unit, if they get taken down by the grounding dealer. Curious as you think about the mixed shift into next year, maybe a little more commercial in the first half, how do you think that will impact revenue per unit but really gross profit per unit, probably more importantly, given those changes. Yeah, thanks, Daniel.

Daniel: Yeah, Hey, good evening guys. Thanks, I had a question.

Daniel: Okay that'd be one I wanted to ask about maybe on the unit economic side as we think about the shift back to commercial historically those off lease cars carry a lower revenue per unit, maybe a lower gross profit per unit.

Daniel: They get taken down by the grounding dealer curious as you think about the mix shift into next year, maybe a little more commercial in the first half how do you think about that impacting revenue per unit, but really gross profit per unit, probably more importantly, give given those changes and sources.

Speaker Change: Yeah. Thanks, Daniel So I'd say in commercial, particularly in our off lease and those those off lease volumes.

Brad: So I'd say in commercial, particularly in our off-lease, you know, and those off-lease volumes, as those move down to what we would call the remarketing, you know, phases of the funnel, we do get more ARPU. But I would say from a gross profit perspective, it also is more accretive to our gross profits in that channel or in that line. It's a more fixed cost business for us, and so the, you know, the incremental revenue that we get from that, particularly as it moves to the remarketing phase of the funnel, is more accretive. Dan, if I could weigh in, just... Just sort of high.

Daniel: As those move down to what we would call the remarketing phases of the funnel.

Daniel: We do get more our pool, but I would say from a gross profit perspective. It also is more accretive to our gross profits in that channel or that in that and that that line.

Daniel: It's a more fixed cost based business for us and so the the.

Daniel: The incremental revenue that we get from that particularly as it moves to the remarketing phases of the funnel.

Daniel: As.

Daniel: As more as more accretive.

Speaker Change: Dan if I could weigh in just.

Just sort of hot I mean every incremental vehicle as a benefit for our company so and.

Peter Kelly: I mean, every incremental vehicle is a benefit for our company, and this part of our business has a very high gross profit as a percent of revenue, which I like a strong gross profit margin. But I guess, at a high level, you know, the opportunity here is significant.

Dan: This part of our business has a very high gross profit as a percent of revenue, which which I like a strong gross profit margin, but I guess at a high level. The opportunity here is significant because I'd say, unlike the pre Covid era, we now have much more liquid online buyer base than ever before with more active buyers 24.

Peter Kelly: Because I'd say, unlike in the pre-COVID era, we now have a much more liquid online buyer base than ever before. We have more active buyers 24 seven in the marketplace. I talked about the days to sale for the dealer segment of, you know, on average about one day, high conversion rates in the dealer segment. There's an opportunity to replicate that on these vehicles that enter the open marketplace on the off-lease side. Historically, the conversion rates there were lower.

Dan: Seven in the marketplace.

Dan: I talked about the days to sale for the dealer segment.

Dan: On average about one day.

Dan: High conversion rates from the dealer segment, there is an opportunity to replicate that on these vehicles that enter the open marketplace on the off lease side historically the conversion rates there were lower so that's a real opportunity for this company obviously working in collaboration with our sellers the volumes are.

Peter Kelly: So that's a real opportunity for this company. Obviously, working in collaboration with our sellers, the volumes were, you know, very, very small a year ago. Now they're starting to get bigger.

Dan: We're very very small a year ago theyre, starting to get bigger or sellers see that theyre very focused on how can we work together with open lane to maximize those conversion rates. So we're exercising the playbooks. There. So this is an exciting area of opportunity for us and.

Peter Kelly: Our sellers see that. They're very focused on how we can work together with Open Lane to maximize those conversion rates. So we're exercising the playbooks there.

Peter Kelly: So this is an exciting area of opportunity for us. And, you know, once cars get into that stage of the process, the open sale, those are high ORPU units, high margin units, and very profitable for us as a company. That's great. And to follow up quickly on that one.

Dan: No one's cars get into that stage of the process. The open sales those are high <unk> units high margin units.

Dan: And very profitable very profitable for us as a company.

Speaker Change: That's great and to follow up quickly on that one so they're higher ARPA, even without reconditioning, because I feel like with pre COVID-19 a lot of that higher ARPA when they moved down the funnel with the recon right. So are they still higher RPM, even without because you sold it at that.

Peter Kelly: So they're higher ARPU even without reconditioning? Because I feel like for pre-COVID, a lot of that higher ARPU when they moved down the funnel was recon, right? So are they still higher ARPU even without since you sold the recon assets? Yeah, they're higher. They're higher sort of buy and sell fee kind of orpoo is, you know, auction fees. That's what I'm talking about, Dan.

Speaker Change: Yeah, they're higher they're higher sort of buy and sell fee kind of <unk>.

Auction fees, that's what I'm talking about Dan So, yes, we don't do recon we.

Peter Kelly: So yeah, we don't do recon. We obviously do the auction fees, the buy and sell fee. These are typically higher-value vehicles, $25,000, $30,000, and up.

Speaker Change: We do obviously the auction fees the buy and sell fee. These are typically higher value vehicles.

Speaker Change: 25, $30000 and up.

Peter Kelly: And there's also transportation revenue. The other thing I would like to add here, you know. I talked about sort of the unique offering that Open Lane represents in the marketplace. So now that we have the commercial and dealer volumes together in one marketplace, and in parallel with that, we're starting to see more commercial volumes flowing into that marketplace. That's having a real positive impact on our buyer base in that marketplace. Those off-lease vehicles are highly attractive to franchise dealers. So when I look at the sales report every day and see who's buying those cars, it's much more of the franchise dealers buying those cars versus, you know, in our dealer-to-dealer segment, where the buyers are typically independent.

Speaker Change: And Theres also transportation revenue the other thing I would like to add here I talked about sort of the unique offering that open lane represents in the marketplace. So now that we have the commercial dealer volumes together in one marketplace and in parallel with that we're starting to see more of the commercial volumes flowing into that marketplace.

Speaker Change: That's having a real positive impact on our buyer base in that marketplace. Those off lease vehicles are highly attractive to franchise dealers. So when I look at the sales report everyday and see who is buying those cars, it's much more sort of franchise dealers.

Speaker Change: Buying those cars versus you know.

Speaker Change: On our dealer to dealer segment. The buyers are typically independent dealers. So it's broadening the mix, it's increasing the appeal of the marketplace to our core customer constituency franchise dealers.

Peter Kelly: So it's broadening the mix; it's increasing the appeal of the marketplace to a core customer constituency, franchise dealers. And then as those dealers get to experience the power of this marketplace, they, in turn, are more interested in, OK, how can I leverage this to benefit my dealership on the sell side? So again, this goes to the strategy of what we're trying to do here, but I think we're seeing evidence of this.

Speaker Change: And then as those dealers get to experience the power of this marketplace. They in turn are more interested in okay. How can they leverage this to benefit my dealership on the sell side. So.

Speaker Change: This goes to the strategy of what we're trying to execute here.

Speaker Change: But I think we're seeing the evidence of this I think it's going to be very positive and again I think we've got a very very strong offering in a very differentiated offering out there.

Peter Kelly: I think it's going to be very positive. And, you know, again, I think we've got a very, very strong offering and a very differentiated offering out there for our customers at this point. Appreciate that color, Peter.

Speaker Change: For our customers at this point.

Speaker Change: I appreciate that color Peter and then quick follow up did you guys say I might have missed it how long do you expect the volume challenges persist in Canada.

Peter Kelly: And then, quick follow-up. Did you guys say—I might have missed it—how long you expect the volume challenges to persist in Canada? We're seeing some, I guess what I'll say, in Canada, we're seeing increases in commercial volume already, Dan, quite solid increases. We saw commercial volumes through much of last year and that is continuing. We have the benefit of the acquisition, so those are incremental volumes. The challenges in Canada have been on the dealer consignment side of the business, as best we can determine, you know, some dealers are just kind of, the industry term is upside down on their inventory, they've got vehicles in inventory, they paid a certain price for them, and they're not able to attain that price. But they're hesitant to wholesale them and take the loss. Instead, they're trying to retail their way out of the vehicle. So our dealer, it's really been in the dealer consignment segment. We started to see it improve a little bit here in the last few weeks. But, you know, Canada is sometimes a little later for the spring market to really impact up there.

You know, we're seeing we're seeing some.

But I guess, what I'll say in Canada, we're seeing increases in commercial volume.

Speaker Change: Already Dan you know quite solid increases we saw commercial volume through much of last year and are continuing.

Speaker Change: We have the benefit of the acquisition. So those are incremental volumes the challenges in Canada have been on the dealer consignment side of the business and.

Speaker Change: As best we could determine some dealers are just to kind of the industry term is upside down on their inventory they've got vehicles in inventory they paid a certain price for them, they're not able to attain that price, but they're hesitant to wholesale them and take the loss they.

Speaker Change: Theyre trying to retailer way out of the vehicle. So our dealer, it's really been in the dealer consignment segment.

Speaker Change: We started to see it improve a little bit here.

In the last few weeks.

Speaker Change: But you.

Speaker Change: You know, Canada, sometimes the middle later to for the spring market to really impact up there. So.

Peter Kelly: So, we'll have to see how it plays out over the remainder of this quarter and into April. Great. Thanks so much, guys.

Speaker Change: We'll have to see how it plays out over the next over the remainder of this quarter and into April.

Speaker Change: Great. Thanks, a lot guys best of luck.

Bret Jordan: Best of luck. Okay, I think we've got time for one more question. And our final question. Bret Jordan: Hey, good morning or good afternoon, guys.

Speaker Change: Okay I think we've got time for one more question.

Speaker Change: Thank you Ann.

Speaker Change: And our final question comes from Bret Jordan with Jefferies.

Bret Jordan: Hey, good morning, or good afternoon, guys. Good evening.

Bret Jordan: Hey, Brian 2.5% loss rate is that about as high as we expect it to move I think it was almost back like Oh nine great financial crisis levels, there and obviously they used retail market is challenged right now but.

Bret Jordan: 2.5% loss rates. Is that about as high as we expected it to move? I think it was almost back to like 2009, the great financial crisis levels there.

Brad: And obviously, they used retail markets as a challenge right now. But given how short term these are in your control over your borrower, should we expect them to cap out around here? Yeah, Bret.

Bret Jordan: Given how short term these are in your control over your borrower should we expect it to cap out around here.

Brian: Yes, Brett so listen I'll kind of just maybe reiterate a little bit of what I said I think the first half of 'twenty, four where we have pretty clear line of sight at this point.

Brad: So listen, I'll kind of just maybe reiterate a little bit of what I said. I think the first half of 24, where we have a pretty clear line of sight at this point, will be similar to the second half, including that 2.5% that we, you know, that we reported for Q4. So you'll see something similar in the first half of the year in Q1. So I think, you know, to say that it's going to cap out is difficult to kind of commit to that or say that affirmatively. But if you go back to the Great Financial Crisis, I think the loss rates were a lot higher then. I wasn't with the company then. I don't know that I could quote them off the top of my head, but I think they were quite a bit higher than 2.5%.

Speaker Change: Will be similar to second half, including that 2.5% that we that we reported for Q4.

Speaker Change: So you'll see something similar in the first half of the year in Q1.

Brett: So I think you know to say that it's going to cap out difficult to kind of commit to that or say that affirmatively.

Brett: But if you go back to the Great financial crisis, I think the loss rates were a lot higher than I wasn't with the company then I don't know that I can quote them off off the top of my head, but I think they are quite quite a bit higher than 2.5% and I. Even think if you go to the heart of Covid.

Brad: And I even think if you go to the heart of COVID, you know, mid-2020, they were probably around this level or about 3%. So we don't expect them to get back to that point. But it's difficult to predict. I say what I said earlier, the second half of 2024, we do expect it to moderate. Okay. And then on the physical asset, to sort of answer Dan Daniel's question about as you go down the funnel, were there commercial or, particularly, off-lease sellers that liked having that opportunity to have a car refurbished prior to sale? I guess as you've converted to digital only, is there volume that really does require a physical asset, or are everybody pretty much transferable to this platform? Probably different remarketers would have different opinions on that question.

Brett: Mid 'twenty 'twenty they.

Brett: They were probably around around this level or about 3%.

Brett: So we're we don't expect them to get back to that point.

Brett: But it's difficult to predict.

Brett: Let's say, what I said earlier, the second half of 'twenty 'twenty four we do expect it to moderate.

Brett: Okay.

Brett: And then on.

Brett: On the physical asset to sort of then Daniel's question about as you go down the funnel, where their commercial particularly off lease sellers that liked having that opportunity to have a car refurbished per year prior to sale I guess as you've converted to digital only is there a volume that really does require a physical asset or as everybody is.

Brett: Pretty much transferable to this platform.

Brett: No.

Speaker Change: Probably different remarketing would have different opinions on that question I guess, what I would say to that Brett is here's what I know is clear our sellers are <unk>.

Peter Kelly: I guess what I would say to that, Bret, is here's what I know is clear. Our sellers, our commercial sellers, and dealer sellers are really focused on a number of important metrics when it comes to selling a car. How fast can I sell a car?

Speaker Change: Commercial seller than dealer centers are really focused on a number of important metrics that comes to silicon how fast can I sell a car.

Peter Kelly: because that's holding inventory cost is the depreciation cost of capital. Well, the digital marketplace wins on that. We sell the car, you know, within a day or two or three of it being returned. So we're a clear winner on that. Second of all, what does it cost me to sell the car? And again, in terms of expenses, the digital channel is the cheapest. There is no transportation cost.

Speaker Change: Does that holding inventory cost is depreciation cost of capital well the digital market place wins on that we sell the car.

Speaker Change: Within a day or two or three of it being returned so we're a clear winner on that <unk>.

Speaker Change: Are all part of the cost me to sell the car.

Speaker Change: And again in terms of expenses the digital channels. The cheapest there is no transportation costs, you don't pay those higher fees, you don't pay for that Vita.

Peter Kelly: You don't pay those higher fees. You don't pay for that recon. And then the third one is, you know, what are the proceeds that I get from the vehicle? And again, I think, you know, we look at our dealer segments, and we look at, frankly, my discussions with commercial sellers. Open lane typically was the highest grossing channel that those commercial customers had, so I think we're a strong performer on the three core dimensions that customers are concerned about on the sell side. Now, in the past, yes, vehicles went to physical auction because that's where the market was. And when they were at physical auction, it made sense to recondition them because, you know, you spend $1, you get $1.50, that type of equation. But the question right now is if there's liquid.

Speaker Change: And then the third one is what are the proceeds that I get from the vehicle and again I think we look at our dealer segment and we look at frankly, my discussions with commercial sellers Open Lane typically was the highest grossing channels.

Speaker Change: Customers had so I think were a strong performer on the three core dimensions that customers are concerned about on the sell side now in the past yet vehicles went to physical auction, because that's where the market was and when they're at physical auction. It made sense to recondition them. Because you know you spend a dollar you get $1 50 that.

Speaker Change: Type of equation.

Speaker Change: But the question right now is if theres a liquid.

Peter Kelly: Demand based online today, that'll buy this car today. Is it really worth your while to send that car to a physical auction to sell it 21 days from now? and potentially get some benefit from recon.

Speaker Change: Demand based online today that will buy this car today is it really worth your while to send a car to a physical auction to sell a 21 days from now.

Speaker Change: And and.

Speaker Change: Potentially get some benefit from recall I don't know what it feels like a risk that that.

Peter Kelly: I don't know, it feels like a risk that that customer will take. So I think different customers will have different points of view, but what I know is many of our customers are keenly interested in how I can drive up conversion in the online channel because that's my highest performing channel. So we're going to work with our customers on that, and we're going to work with them not just this quarter, but every quarter and for years to come to maximize these conversion rates and gain share in this. Great, thank you. Great. Okay, so I think that's it.

Speaker Change: Customer would take so I think different customers will have different points of view of what I know is.

Speaker Change: Many of our customers are keenly interested in how can I drive up conversion in the online channel because that my highest performer channel. So we're going to work with our customers on that and that and we're going to work with them on not just this quarter, but every quarter and for years to come to maximize these conversion rates and gained share in the Senate.

Peter Kelly: Closing remarks here. Okay. So, again, thanks, everybody. I appreciate your time today. I appreciate all the questions as well.

Speaker Change: Great. Thank you.

Speaker Change: Great. Okay. So I think that's it.

Closing remarks here, okay. So again, thanks, everybody I appreciate your time today appreciate all the questions as well as I said at the beginning I'm pleased with our fourth quarter full year performance, we delivered volume growth revenue growth $272 million of consolidated adjusted EBITDA and more than $237 million in cash flow from <unk>.

Peter Kelly: You know, as I said at the beginning, I'm pleased with our fourth quarter and full-year performance. We delivered volume growth, revenue growth, $272 million of consolidated adjusted EBITDA, and more than $237 million in cash flow from operations in 2023. The improvement was driven by the marketplace business, which increased its just-a-dip-a-dub contribution by $79 million last year to $108 million for the full year.

Speaker Change: Operations in 2023.

The improvement was driven by the marketplace business, which increased its adjusted EBITDA contribution by $79 million last year to $108 million for the full year.

Peter Kelly: We intend to build on this strong marketplace performance in 2024, and we also expect our finance business to be a meaningful contributor to our overall results in 2024. In addition to the financial performance, I'm pleased with the brand and platform consolidation work to be accomplished in 2023. Open Lane enters 2024 with a highly differentiated offering, one brand, one platform, with dealer inventory and exclusive commercial inventory integrated into one marketplace. This benefits all of our customers, differentiates us versus our competition, and strengthens our offering going forward. I'm also pleased with the trends we're seeing in the industry. While we believe that the 2024 industry recovery and wholesale volume will be modest. We see that dealer inventory is increasing, prices are stabilizing, and lease originations are increasing once again.

Speaker Change: We intend to build on the strong marketplace performance in 2024, and we also expect our finance business to be a meaningful contributor to our overall results in 2024.

Speaker Change: In addition to the financial performance I'm pleased with the brand and platform consolidation work to be accomplished in 2023.

Speaker Change: Open Lane interest 2024, with a highly differentiated offering one brand one platform with dealer inventory and exclusive commercial inventory integrated into one marketplace.

Speaker Change: This benefits all of our customers differentiate us versus our competition and strengthens our offering going forward.

Speaker Change: I'm also pleased with the trends we're seeing in the industry.

Speaker Change: While we believe that the 'twenty 'twenty four industry recovery in wholesale volume will be modest we see that dealer inventories increasing prices are stabilizing and lease originations are increasing once again all of this is good news for the future of openly.

Speaker Change: We're focused on continued strong execution in 2020 for advancing our strategy, making wholesale easy for our customers and growing the business this year and for many years to come.

Speaker Change: Thank you all for joining today's call and I look forward to updating you on our continued progress on our next call.

Speaker Change: The conference has concluded.

Speaker Change: Thank you for attending today's presentation you may disconnect.

Speaker Change: Yeah.

Peter Kelly: All of this is good news for the future of Open Lane. We're focused on continued strong execution in 2024, advancing our strategy, making wholesale easy for our customers, and growing the business this year and for many years to come. Thank you all for joining us on today's call. I look forward to updating you on our continued progress on our next call.