Cool. Welcome back to the afternoon session at the TIMT conference here with RBC. I always say that if the cookies have come out at this point, they've kind of turned the heat up in the room. Everyone's getting a little sleepier, so we'll try and perk it up here, last couple of hours of the day. So, v ery pleased today to have the management team, CFO, and Head of IR from OPENLANE, previously KAR Auction Services, Brad Lakhia, Mike Eliason. Thank you, guys, for being here.
Yeah, thank you, Brad.
Nice to see you. Yeah. So the company looks a lot different than it did a year and a half ago or so. Maybe, you know, just for those who are maybe new to it in the room, maybe just catch us up on kind of what the transition was with selling ADESA, rebranding the company, and we'll kind of go into it from there.
Sure. No, thanks, Brad, and thanks for the opportunity to have us here. This is, it's been a good day for us, and we're happy to be here. I'll share a little bit about OPENLANE. KAR is still our ticker, K-A-R. So we didn't change that. That's probably one of the only things we haven't changed, and we're not planning on changing. So, you know, the transition that Brad was referring to, as many of you probably know, last year, we completed the sale of our U.S. physical auction business to Carvana.
And that, you know, really was the last major step that we took as a company to transition to a pure-play digital marketplace business. If you go back kind of in our history, we've always been kind of a digital leader, a digital pioneer in the digital kind of wholesale used car marketplace. Really started back in 2010, 2011 when we acquired a company called OPENLANE, which was, you know, at that point in time, a commercial off-lease proprietary platform that attaches very closely to OE captive finance companies.
And then that followed on with some acquisitions of digital, yeah, D2D, dealer-to-dealer businesses in Canada, a company called TradeRev. 2019, we acquired a business called Cars OnT he Web in Europe, which is also a digital platform. 2020 and 2021, we then bought a couple businesses in the U.S., that were digital D2D businesses. So by the time we kind of exited 2021, we had made some very notable investments in digital marketplace businesses for wholesale, but we still had this very, you know, large, you know, physical business.
So we made the decision, Brad, the strategic decision to go exclusively digital in 2022, and the result of that is, again, like I said, pure-play digital marketplace business. We also have a financing business, so we have two segments: marketplace, which is what I just described, and a financing business that is a large, you know, well-positioned leader in independent dealer financing business that we've grown and established well over 30 years. So strong business there.
And we rebranded, as Brad alluded to, in late April, early May. We made a decision to rename the company OPENLANE, but then also take OPENLANE as our flagship brand and position it in the marketplace as our really exclusive brand for all these digital markets. So as we acquired these businesses that I described a little while ago, those each had their own brands, they had their own heritages, and so we made the decision to bring, you know, one unified brand to the marketplace.
But more important perhaps than that, is we're actually, you know, completing this quarter the migration of what we're calling our one marketplace platform, and that is taking all of those different platforms where a customer, a buyer, and a seller in the wholesale market may have had to log into different platforms to go see our inventory, to be able to sell their vehicles or buy vehicles. And we're integrating those now into one common unified platform for our customers, for our buyers and sellers, which is gonna enable significantly more liquidity, better assortment of inventory, and obviously, in a two-sided marketplace, buying, selling marketplace, you know, very transparent, very, very confident price discovery.
Yeah.
That's a little bit about...
No, that's great.
...background on what we did.
That's great. And so, you know, given you're coming from owning ADESA, right, being, I think, the second largest player in the industry with that and having huge incumbency, talk about the kind of relationships you kept even as you sold the physical business and talk about that with your dealer penetration.
So we have a long-standing, you know, long-standing relationships, very deep relationships with two sides, really, the dealer side of the business. So think, you know, franchise dealers and independent dealers, so long-standing relationships that were not only established through the, you know, historic U.S. physical business that we had, but also through these digital platforms that we've acquired over the years. So that's been, you know, very strong. Those relationships have remained intact.
Those were customers that were already using our digital platforms but may have also been using our physical business as well. So, you know, largely unchanged there. And the other thing that's unchanged, I would say, is our commercial off-lease business, where we have very long-standing, deeply integrated customer relationships with the OE- primarily the OE captive finance companies and other companies that are large lease players. Those are businesses and customers we've had, long-standing history with and, remain intact in terms of our portfolio.
Got it. And as you kind of, you know, set out here as a native digital, how do you guys think about market share, right? Like, you're- y eah- c learly, like I said, number two player previously. How do you think about that as you enter the digital world within wholesale?
Yeah. So the secular shift from physical to digital is still very much underway, r ight? Depending on what, you know, market data points you want to use. The physical market still is roughly probably in North America, about 70% of the market. Digital players like us probably still have roughly in the neighborhood of 30%. And, you know, I would say we're well positioned within that thirty percent. You know, have a leading position, as I described, in the commercial off-lease platform, but then also a leading position in the dealer-to-dealer platform, not only in the U.S., but Canada.
We're clearly have a clear kind of leading position in Canada, and we also have a presence in Europe, albeit a little bit smaller of a business, a very profitable business, and a business that we believe positions us well for growth over there. So that, that's kind of how I would respond there. The, I think, you know, the thing I would highlight is two things when you think about our story. One is there's the secular shift, which customers, by and large, are always telling us they prefer digital, right?
It's easier, it's more efficient, it's more cost-efficient. It's actually, you know, in terms of thinking about the management of a vehicle, whether you're a buyer or seller, being able to move that vehicle logistically is easier through digital platforms. Not having to go to a physical auction, leave a physical auction to move from a seller to a buyer, ultimately, in that middle point, middle, middle touch point. The, the other thing I would say is, you know, digital, this digital secular shift will be complemented by what will be a cyclical recovery, right?
You know, the auto industry has been plagued by supply chain disruptions. So as the new car ecosystem continues to improve, production levels of new vehicles continue to improve, inventory on franchise dealer lots continues to improve. We believe that'll have a knock-on effect and provide some support for what should be a good, strong cyclical recovery.
Got it. You spoke to that, I think, a little bit on your earnings call.
Yeah.
So you mentioned some of those indicators. Maybe, tie that together with kind of how you guys might participate or over participate with some of those positive indicators.
Yeah. So, so I think on the dealer side, we just. We came off of a quarter where we, you know, provided about 8% year-over-year growth in volumes, albeit off of a low base. This would be the second consecutive quarter where we've had year-over-year volume growth. That's not only on the dealer side, but also on the commercial side. So we see, you know, clearly an opportunity on the wholesale dealer side. The other side that will be, although a longer recovery, a longer tail recovery, will be the commercial off-lease business. So last 12 months, we've sold about 1.3 million vehicles.
Half of those vehicles are commercial vehicles, primarily off-lease vehicles, and the other half are dealer vehicles. If you go back, you know, prior to the pandemic, pre-supply chain disruption, the off-lease commercial vehicles, we sold about 1.2. So we're running at about half of pre-pandemic levels in terms of our commercial business, and obviously, we've invested in these digital businesses, and those are growing as well, not only as part of the secular shift, but also, you know, the cyclical recovery that will help, you know, help guide that as well.
Got it. And maybe just, you know, again, as investors get to know the story and, and you guys better, talk about the products that, that you bring in terms of the platform of the auction and, and the marketplace itself, right? There's, there's obviously been a lot of fanfare with some other native digital partners, and some of them are platform companies. Some of them we'd, we'd call them more of like a point solution company, right- p rogrammatic in particular. Talk about your guys's, A, the portfolio, but also the, the thesis and the strategy of how to grab hopefully the biggest part of the market.
Yeah. So it's a two-sided market, obviously, sellers and buyers. You know, I would say on the seller side, we feel like we have a strength, an overwhelming strength there, particularly as we think about the commercial off-lease sellers being able to provide that inventory of vehicles into the dealer channel as those vehicles move down what we call the funnel of off-lease, returning from consumers, from grounding dealers out in the open auction. So that's a strength that we have that we believe, you know, our competitors, primary competitors don't have.
Yeah.
And then, you know, from a product capability perspective, you know, feel like we have a leading platform there, right? You know, we've acquired a number of platforms. We're integrating those, as I described earlier. And then from a services, when you think about a digital marketplace, sellers and buyers, there are services that need to come up, you know, come with that. One is inspections, right? So if you're a buyer, you know, in a two-sided market, you don't see the vehicle other than pictures online on our platforms.
So the inspections and the reliability of those inspections, those condition reports, are paramount to providing an efficient, you know, trusted, two-sided market. And we have a very, very good strong offering there as well, Brad. And then transportation services. So again, seller has a vehicle on his or her lot, vehicle sells on our digital platform. That seller wants that vehicle off their lot as soon as possible. So when that buyer, you know, buys that vehicle, we're providing transportation services, brokerage services, essentially to be able to arrange transportation to get that vehicle from the seller's lot to the buyer.
Got it. And do you have a view on, you know, again, auctions, programmatic, a combination thereof?
Are you- I'm sure, Brad, you're referring to kind of like timed auctions?
Exactly. Kind of the traditional wholesale approach versus, you know, with the native digital comes the ability to buy with the push of a button.
Yeah. So we have, we have both.
Yeah.
We have 24-hour marketplace that's out there where, you know, buyers can have their vehicles posted 24 hours, and sellers can see them 24 hours, and that format works well. We've had demonstrated, you know, good success there. We're also, you know, in the timed auction, you know, marketplaces too, digitally where, you know, you can schedule a timed auction, the vehicles are run, and there'll be, you know, the big bid ask process will play out in a timed window, 2 hours, 3 hours. And we're finding both work, and both work for, in some cases, customers like both, and we'll experiment and play in both. And some others, you know, customers like to be able to show up at a timed auction, get the shopping done that they want to get, and get out and be done.
Yeah.
And then in some examples, you know, we hear from customers who are, you know, ready to go to bed at night, and it's 9:00 P.M., 10:00 P.M. at night, and they're on our app, and they're, you know, shopping for vehicles, and lo and behold, they're buying one or two at 10:00 or 11:00 P.M. at night. So that 24-hour marketplace is also nice.
Yeah. That's the beauty of being in a digital environment, right? You can adapt...
...to what your customers want.
Yeah.
As your customers evolve, you're gonna adapt your technologies to fit their needs.
Yeah. And when you guys are taking share with, like, an existing dealer customer, what would you say the specific drivers are of that?
Yeah.
You know the next question I'm gonna ask.
Yeah. Let's start with this one. What most people might believe is price, price, price, right?
Yeah.
What are the fees that we're gonna charge? And they would be price-- or fee sensitive, I should say. In reality, what customers want is they want liquidity in the market, so they want to make sure that their cars, if they're a seller, they're out in a liquid market where they're gonna get good price discovery. And if they're a buyer, they want good condition reports, as I explained earlier. They want quality of service, they want transportation services, and customers want, you know, good resolution processes.
They want the- i f there's an arbitration, if there's a conflict that occurs as part of the transaction, they want to know that we are sitting behind that, and that we're gonna resolve their conflict and their arbitration timely, efficiently, and fairly. And so those are the things customers care most about. I'm not saying, suggesting they don't care about fees, but we're finding fees to be, you know, kind of more on the lower end of the list for customers.
Yeah, got it. And then opposing that, I guess, in situations where maybe you've lost some share at certain dealers, you know, is there anything attributable to that? I, I understand there's gonna be whatever, one-offs- but anything you can point to- where you're, "We're working on things," so to speak.
Yeah. I would say stickiness with customers is, there's some customers that are just gonna shop in new platforms because they can get, you know, lower fees and whatnot.
Mm-hmm.
But in cases where the few cases where we have lost some share or lost, you know, some share of account, you know, it's been, you know, again, back to those areas where, you know, there's either either been a disappointed customer around an arbitration, w here they just didn't feel like it was worked out fairly, o r there's been a situation where maybe the transportation services didn't show up w hen they were supposed to show up. So it's really around those customer service items.
Okay. Got it. I just wanted to... Any questions? Yeah.
Hey.
Hi.
So on the cyclical part of your story, volumes of this request, but what do you think needs to happen for that cyclical rebound to continue? And what are the indicators are you guys looking at to see if it's on track? Then second, another question on the structure part of your story. If the value proposition of digital is so compelling, how come only 30% of the market is online?
Yeah. So I think the first- to answer the first part, oh, let me take the second part first. So, you know, 30% is what I kind of quoted as a rough estimate of the digital share versus physical. I would say that has shifted significantly in the last few years. So pre-pandemic, that was probably 10%-15%. So it's moved pretty meaningful to 30%. And, you know, feedback we get from the market, from the customers is digital's more convenient, it's more cost-efficient, it's more effective. So we believe, and that's where we've placed our bets, obviously, that, you know, pure play digital, that's where we're gonna invest, that's where we're gonna place our investments. The first question, I'm sorry.
On the cyclical.
Cyclical.
Yeah.
So the cyclical, what do we need to believe, you know, what indicators are out there from a cyclical recovery? First, I would say the new car fundamentals, right? You know, production start from the manufacturers is one. New inventory on franchise dealer lots is the second. And then that effect that it's ultimately gonna have on used vehicle values. You know, I would say kind of the normalization of used vehicle values are the three indicators we're really looking at.
And there's the vehicle values, I would say, also say, kind of come into play on our commercial off-lease platform, where the last couple of years we've had a significant equity position, where residual values on leases written 2, 3, 4 years ago have been significantly lower than used vehicle value. So as those values continue to come into play, and residual values come up, and those kind of meet in the middle, so to speak, that'll be another indicator we're looking at.
Got it. So one other question I had was, you know, internet marketplace is 101, right? Scale, beget scale, essentially. And you guys, you know, when you listen to some of the other digital players out in the market, right? They're small, they're gaining share. That's all fine and good. But they also, you know, the flywheel hasn't necessarily gone there because they're all starting from- I don't want to say zero, but they're starting from a smaller number in terms of dealer rooftop customers, right, v ersus what you guys have. Talk about your supply advantage. Where are you in terms of supply share, and how much does that help you, from a tailwind perspective?
So Brad, I would say we feel, we believe we have a leading position. So again, I'll quote, sold about 1.3 million vehicles over the last 12 months. You know, you could point to some of our other key competitors out there. They're selling about half of that, and about half of that is mostly in the dealer channel, where we again, we have a commercial, a commercial moat and volumes that are, that are about half of that 1.3. So I think, you know, from a scale perspective, we're well positioned to grow.
And when you complement that with what we're doing with our one marketplace, where our customers now have one place to go shop and buy and sell, where all the vehicles are there, all the inventories are there, you know, we feel like that gives us a very advantaged position to be able to go capture that growth, both cyclically and secularly.
I guess, and the question really then is that, you know, you've seen this with other internet marketplaces, right? And sometimes those can become winner take-- not winner take all but it's called winner take most outcomes. I recognize used car, wholesale, wholesale vehicle market is probably a little bit different in many respects, but is there any kind of dynamic where that, that plays in your favor longer term?
Well, like I said, I think our current scale positions us well. It highlighted kind of the 30/70, 30% digital, 70% physical. So we think there's plenty of opportunity for the current players that are there to be able to, to grow with that secular shift. So I think there's room for growth for, for a multiple players at this point. Beyond that, looking further into the future, Brad, how much room is there as that secular shift kind of takes hold and, and kind of reaches maybe its plateau or something that's closer to its plateau? It's kind of harder to speculate, b ut in the near term, we think there's plenty of room there.
Got it. Okay. And then on the marketplace, you mentioned you're—I think you guys are standing that up here shortly, the one marketplace. What were some of the product investments? And, maybe just talk about what it has taken investment-wise to stand that business up h ere in the next, I think you said next few weeks. Am I right about that? Yeah.
Yeah. Well, we did, so I will just highlight, we did the Canadian migration in Q3.
Mm-hmm.
That's where we brought ADESA.com and TradeRev together onto one marketplace- one OPENLANE marketplace, and that, that went very, very well. Coming out of that, we didn't see any impact on customer attrition, so our retention rates were really good. And the volume that we delivered in Q3, in the midst of that, the volume growth i n our Canadian marketplace was on par or better to the overall growth rate that we saw. So that gives us confidence i n what we're doing now in the U.S..
So we'll launch in the U.S. here over the next couple of weeks, the consolidated one marketplace. We've been very methodical with our customers of making sure that they are anticipating it, giving them the opportunity to go in and experiment and understand kind of what's going to change. What I will say is, largely what's changing in the U.S. is two things: one, a rebranding of the BacklotCars marketplace to OPENLANE.
Mm-hmm.
Our customers will see a rebranding change. They'll see different colors and a different brand and a different logo on their screen or on their platform. And then the second thing that's going to change is the commercial off-lease vehicles that flow to the OPENLANE marketplace, to the OPENLANE wholesale marketplace, will now be available to those customers to be able to see. Where previously, they would have to go to OPENLANE.com when and/or BacklotCars, log in to two different places, that inventory is all going to be in one spot.
Got it. Okay. And what about marketing spend? Obviously, you know, we're not out necessarily blasting the consumer on Google here, b ut what do you foresee from a marketing spend perspective?
Yeah, certainly, that gives us more efficiencies in terms of our marketing spend. We're not necessarily looking at it, Brad, as an opportunity to pare back, but really get more efficient and be able to scale more with our marketing spend.
Okay.
The other side of the one marketplace initiative that we have, while this first step that I explained is really out with, you know, one unified sign-on for our customers- one place for all the inventory, all the cars. The back end of that is also something we're starting to work on. So you think about the technology platforms that support what our legacy TradeRev, OPENLANE, ADESA.com, Backlot- t hose technology stacks are still back-end behind the scenes, a nd we're kicking off an initiative to unify that as well.
Got it.
That, that'll do a number of things for us. One, we believe it'll continue to improve the customer experience, right?
Yeah.
Because to the extent we want to innovate and drive product enhancements, product features, innovate with new products or services or, or marketplace features, ability to do that across one technology stack versus four or five c reates agility. Ultimately, we think it'll also provide us, you know, what I would say, top line to bottom line efficiencies around being able to manage revenue, cost, and, and profitability.
Got it. Okay. And then maybe just to follow up, from a marketing perspective, any new initiatives to market as you roll out the new brand and unify everything?
No, the new initiative, I would say, is for our dealers that are, you know, Backlot dealers, Backlot customers t hey're now going to have, as I said earlier, access to that off-lease inventory that they would have had to either go to a different platform to see, or, you know, wouldn't have been more readily available to them.
Got it.
So that's a big change, actually, a nd particularly as that off-lease recovery takes hold and more of those vehicles start, you know, coming into the open marketplace, we feel like that's going to be a real competitive advantage.
Gotcha. Okay, and then on the finance business, we haven't really talked about that. I think sounds like you've gone through a little bit of a normalization period with some of the credit losses and everything. Talk about kind of what's happened lately, and then if we let's hopefully assume we have a somewhat stable rate environment here going forward. How does that business respond under that kind of macro scenario?
Yeah. Well, I would say our finance business, which is our business that provides floorplan financing largely to independent dealers throughout North America, not very rate dependent, right? So our model there is basically a prime rate plus a spread, depending on the credit quality of the customers that we're lending to and providing financing to. So not a high degree of rate dependency there. And on the loss side of things, Brad, which you were mentioning earlier, we have seen what we would describe as a reversion back to the normal- back to the mean.
Yeah.
The last couple of years, 2021, 2022, with the scarcity of supply of vehicles- y ou know, dealers were buying and selling vehicles and moving them off their lot fairly quickly, so there was a really steady churn of liquidity and availability of cash for dealers. Historically, our loss rates as a percentage of our portfolio, our average portfolio value, has been between 1.5%-2%.
Yep.
It's been about running about 2% this year, and we expect it'll probably finish at about 2% this year. Kind of looking into 2024, I'd say we're back to kind of that, you know, 2% or below is normal.
Mm-hmm.
2021 and 2022 were well below 1% w e had a little bit of a false positive.
Yeah, everybody's year was weird then.
Yeah.
So yeah.
Yeah.
Lastly, let's just hit margins. Kind of where are you at today? Where do you think you can go? And particularly, how much of that is dependent top line versus just pure sort of operating leverage?
Yeah. So, I'll kind of point to Q3 to start In referencing our marketplace business. You know, we had about a 500 basis point improvement in our margins in our marketplace business, driven by a number of factors. I would say it's some combination of volume, so we saw the year-over-year volume improvement of 8%. The cost initiatives that we've been driving the last couple of years, particularly the last 12-18 months, post the divestiture of the ADESA physical business, are starting to show up, the structural costs, you know, savings initiatives that we've had.
That's having an impact there, a positive impact. And then I would say, you know, just the overall kind of, you know, the recovery that we're starting to see the last couple of quarters, as I said, volume is helping that. So about a 500 basis points improvement year-over-year. Sequentially, that was about a 200 basis points improvement Q2 to Q3. And we're seeing that that's pretty sticky so far, s o we think that's pretty sustainable. Then the second part of your question is to kind of look out into the growth trajectory of our business.
As that cyclical recovery and this continued secular shift to digital takes place, the volume scalability of the drop-through of that top line to the bottom line is quite strong. Our SG&A cost structure is largely fixed. So if you just looked at SG&A and kind of scaled that with volume, you can kind of get a dimension of what our margin improvements could look like over time.
Got it. Okay, great. One last question or two. I have to ask you a channel check question. Apologize.
Okay.
I'm a channel check guy. Very near and dear to my heart. So let's talk cloud. Let's talk- y ou're in the used car business. Let's talk cloud, right? Makes sense. Over the last year, it's not a secret that most companies who work with, you know, the hyperscalers, the big public cloud vendors, have saved money, right? They've all been, we call it- optimization, rationalization, whatever- fancy word you want to use. And I think to some degree, we've kind of, you know, that started a year ago, and so a lot of people are starting to lap that.
I guess my question for you is, based on your conversations with those folks and sort of what you guys see for next year, do you feel like either you guys or companies in your similarly situated are going to find incremental opportunities to rationalize costs for cloud? Or do you think '2023 was kind of this, like, special year where we all f ound a bunch of cost savings, and now it's kind of b ack to business as usual going forward? Which of those would you say?
Probably a little bit more biased to business as usual. We had- I think in 2023, we had some cloud migrations that we performed- that, you know, will take hold in terms of some cost efficiencies, cost savings as we lap into 2024. So I think we captured some of the benefits of that, not only with some of the migration work that we did, but also with, you know, kind of the rate environment that you described.
Yep.
So but having said that, there's still opportunities out there.
Mm-hmm.
There's still opportunities out there, and as I described, as we work on consolidating our tech stack, you know, how we manifest and how we think about capturing those opportunities, w e'll be pretty intentional about.
Got it. Okay. And then last one, wouldn't be a tech conference. We haven't talked about Gen AI the whole time.
Gen AI.
It's amazing.
Yeah, r ight.
From your perspective, and this could be related to OPENLANE or just things that you've observed in the market, most interesting Gen AI use case that not enough people are talking about.
Um...
We're gonna talk about.
Yeah. So, for OPENLANE, I mean, listen, there's a number of use cases that we're evaluating and experimenting with, and I would say that we think there's a clear opportunity there. I think our challenge is how do you make sure you govern it in a way that, you know, because the governance side of this is still evolving and forming its own kind of set of communities. So there's a governance element too, and then there's this enablement, right, element to it. A nd on the enablement side, I think as we think about being a pure-play digital marketplace and a leader in that space, we see clear opportunities to innovate and pioneer some AI-based technologies. But nothing yet, Brad, that we're going to be quite public with.
Got it.
All right?
All good.
Yeah.
Brad, Mike, thanks for being here.
Yeah. We really appreciate it. Thank you for hosting us.
Yeah.
Enjoyed it. Thank you.
It's great to have you.