OPENLANE, Inc. (OPLN) Earnings Call Transcript & Summary

Yes, sure. Thanks, Ryan. And I know I've talked also about simplifying our business, and one of the simplifications I'd like to bring is to give you less brands to speak about at some point here. But we have a lot of experience running asset-light digital platforms. So if I could speak to a couple of those OPENLANE, obviously, the one everybody talks about. CarsArrive is an asset-light logistics platform for the movement of used vehicles around our industry. We do that at scale. We -- that business has been very profitable for us. And we've got a lot of experience there. Recovery -- RDN, Recovery Database Network, it's the leading platform for -- it's a SaaS platform for automotive finance companies and repossession agents. They use it as a platform to communicate the workflow around repossessing vehicles across this industry. I believe 80% or more of all repossessed vehicles in North America are processed through RDN. Very, very high margin, incredibly sticky and continues to grow. I just wish it was a bigger market for us because it's an incredible business. It just doesn't happen to be a huge business. And Autoniq is a digital platform, again, very sticky, a very cost-effective and easy-to-use vehicle valuation tool for dealers. Typically, independent dealers play a small monthly subscription and they can just scan it in or they can look at auction run list and see what is -- what are the various guidebooks telling me this vehicle is worth. So I think a lot of experience there. We've been able to grow those businesses. And I think we've managed to increase the sort of digital DNA and talent of this company over time as well. So I feel good about our ability to continue to execute those types of businesses going forward.

Great. So many different things happened in your industry and your business itself saw so many changes during the pandemic and throughout 2020. And while there was so much focus on the digital dealer-to-dealer business. Really, the core business changed so much by the digitalizing of all the auctions, right? Those are very profound change. Maybe we were headed in that direction anyway. I'm not sure, but they say, what do they say, that "Necessity is the mother of invention," right? You have to move real quick, and this was an ability to affect that. And one consequence of it was that you posted substantially stronger margin, particularly at the level of revenue or units that you had. And there was a lot of discussion about the degree to which these savings are structural or sustainable and the degree to which the industry may go back to running cars down the lane. And I think the response has sort of been for a couple of quarters that, well, the mom-and-pops are doing it and -- but Manheim's not, and then I was going, well, Manheim is looking at it, but they don't really want to do it. They're more on our side. And now I just got a question from an investor here. And I've heard this in a couple of other places, Black Book talking about how maybe you're piloting some in-lane auctions at 11 different locations. So the question that I guess the investors would have is -- why are you doing it? Does it mean that some of the margin gains may have to be given up? Or if you don't give up the margin gains then somehow you lose share. What's the right way to think about this pilot program that you're working on?

So let me comment first on some of the cost side as you mentioned. I would say, yes, we have -- so we have reduced costs substantially. That is true. I think most of those cost actions will be permanent in nature. I think not running cars has been one aspect of that, but has not been certainly not been all of it. I don't think it's even been most of it. It's been a part of it, okay? So I think there's a lot of cost just of doing things differently in the way we process cars, that we manage our call centers, there were management layers, across the business, we've been very, very focused. So I don't think -- I think running cars has been one element of many elements to get us to that situation. And I'd also say that I don't think we're done. There's still a lot of opportunity to further reengineer the way we do stuff at this company, consolidate activity -- centralize activity, more -- digitize activities more and reduce costs. So that's going to be a continued focus, okay? Listen, on the running cars, I'm very focused on getting to a digital marketplace model for the business. I think that's the right model. Digital marketplace is underscored by physical infrastructure, because I think you need physical infrastructure to process detailed reconditioned vehicles and that's an important part, particularly if you want to serve commercial customers, which is what 70% of our business historically has been. I think it's also fair to say, Ryan, through our decision to not run cars physically, we lost dealer cars, and that's evident in our numbers. We gained dealer cars in digital. We also lost significant volumes in our lanes and they went, I would say, typically to independent auctions and maybe some to Manheim. So there is a strong constituency out there of dealers that still would like to see cars around the traditional way, okay? And there's also some commercial sellers who particularly have older rougher cars. So older repossessed vehicle portfolios who also have expressed a preference for that, particularly in light of the economy sort of reopening, et cetera. So in light of all of that, I basically made a decision, we would run a pilot at these 11 sites. And we would see what the data tells us. And I think the data I'm going to test it on 2 dimensions. One is, does it create any additional customer benefit in terms of price attainment or conversion rate or those types of metrics. I'm not sure it does, but we will see. And the second thing is, does it enable us to sort of gain some share back, particularly in the channel where we know we've lost some share. I'd say that's in dealer on-premise [itself]. And I'd also say, when I think about this pilot, and this is not really stated as much in some of our communications, but it really is a pilot. In those markets, we're actually going in even more aggressively with the digital model with BacklotCars into those markets. So can we create a really compelling offering to that dealer to say, "Hey, we want to leave with digital, car sales are first, but for the 30% or 40% cars that don't sell, we can sneak into our auction and get them sold, and that's something no other provider can do." So that's what we're going to do, and we'll see how it plays. And I think I want to be driven by the data. I have a preference. Preference is fully digital, can't get there soon enough. I think that's the model for the future. But I also recognize that in business, you have to be mindful of how quickly your customers can move and all that sort of stuff. So I want to be mindful about that too.

Great. And the next thing I'd like you to do is sort of take us bucket by bucket through those sources of vehicles entering the whole car auctions, dealer consignment. I think it's easiest for us to track on the outside because it's correlated with SAAR. But there are some thoughts that maybe with companies like Carvana and others comprising a larger portion of the market buying more vehicles from consumers without the intention to wholesale them. I don't know if there's some structural pressures there. I mean, I -- just predominantly going to move in line with SAAR. But -- and then these other buckets that are seeing the most impact from like used car prices, like the off-lease, you've talked extensively about that, but also the repossession volumes. Love to understand like we had a meeting with Chase Auto Finance earlier today, and they were just saying that people aren't repossessed. I mean, obviously, there's all the stimulus payments and everything. But also if people have so much equity in their vehicles, instead of defaulting, they could just sell it or they're less inclined to default since there is equity, et cetera. So I know used car prices have moderated a little bit here in the last 6 weeks as per Manheim, but what is the outlook for off-lease and repossession volume given the cycle? And then maybe some of the comments, too, on dealer consignment if there's anything structural to think about.

Yes. I think with dealer consignment, you're right, Ryan, it does correlate to SAAR. SAAR has been a little bit of pressure here, May, June, July, and production needs to come back up. But dealer consignment volumes have been the closest to normal, let's say, in our industry, if we look at year-to-date. And there's probably some secular, but the relative market shares of those businesses are still relatively very small. And by the way, a lot of what those customers are those entities, Carvana, CarMax, et cetera, purchase reenters the wholesale market as well. They don't turn around to retail all those cars, they actually sell a lot back into the wholesale market. So I'll leave dealer consignment there. If we go into repossession, you're right, stimulus, high-used vehicle values, repossession volumes are about 35% below normal right now and have been for an extended period. I think that they return to normal over time. It is my expectation. But I think it's going to take some time for that to happen. I think ultimately, stimulus payments go away, the rental protections, et cetera, go away and things get back closer to normal. On the off-lease side, again, it's the same thing, consumers having more equity in their vehicles. So not returning the car, not being motivated to return it. Or if they do, the franchise dealer to whom they return it, just turns around and buys the car before it reenters deeper into their market process. So I think what needs to happen there is new vehicle production needs to get back closer to normal, right? Now in terms of what is the data showing. You mentioned Manheim. I also looked at Black Book. They put out a weekly report. I think we're now in sort of week 6 or 7 of used vehicle values declining. And the other thing I noticed that this year is the rate of decline per week is running roughly double what it was between 2017 and 2019. So candidly, I take that as a positive that cars are sort of readjusting from these historically high prices that we saw in sort of late May and early June. But it is going to take some time for that to get back towards normal, Ryan. And I'm not expecting to be back towards back abnormal in the current -- in 2021. It's going to take longer than that, I believe.

Okay. And maybe, Eric, any thoughts on capital allocation and buybacks sort of mop up some of that pipe dilution? Or just generally what the priorities for allocation of free cash flow is likely to look like going forward? I don't know if there's anything from a tech perspective, still on the acquisition side? I don't know if there's any smaller players out there on the digital dealer-to-dealer side? Or just where you would focus M&A dollars? And how much goes to M&A versus how much to buyback versus deleverage or whatnot, what do you think?

So Ryan, in the first half of the year, we bought back just over $180 million of stock at an average price below the conversion price for the pipe. And our focus there was to offset future dilution, and we're on that path. In terms of looking at the rest of the year, our priority would be to support our strategic initiatives. If there's anything that could accelerate our growth in the digital marketplaces that would receive highest priority. We would then look at other -- we're constantly investing internally. We have adequate resources to support the platforms that already exist. And then we'll look at the opportunity whether there's still sufficient funds to return additional capital to shareholders at an attractive price. So we will -- I'm kind of like telling you what you always hear from me. It's a balanced approach. We look at all the opportunities. We are generating substantial cash in the first half of the year, and that will continue. So it's not as if the capital I've got today, I've got to figure out what to do. There will be more. So we're proactively looking at all of the options. And Peter has been very supportive of us early in the year buying back stock and hopefully, ideally continuing to invest in the growth of the business along the way as the stock appreciate some value and seeing these's better alternatives. Long term, I do have a 2025 maturity of some bonds to think about. I'm not saving for that yet. But over the long term, we have other things that we'll decide what's the right structure and will capital be deployed at some point to reduce debt. That will not be the focus in the near term -- near-to-medium term, no.

Okay. What about some of these investments that you've made in other companies and auto technology companies and whatnot. Curious if you want to comment on any of them to the extent to which you consider any of those investments to be core or not? I know it's led to some volatility in your adjusted EBITDA just on the unrealized gains quarter-to-quarter. Not that I think that, that's really important, but the extent to which maybe you would convert some of those unrealized gains to realized gains. And then how that might impact capital allocation going forward as you raise additional cash from having done that? When you do that?

First, Ryan, just to quickly clarify. Unrealized gains are excluded from adjusted EBITDA, but they are included in operating adjusted net income per share. So that isn't -- the volatility is on net income per share. The realized gains, I mean, listen, the only investments we've made have been with an eye towards supporting our strategy. And in doing so, the market has been such that some of those companies have gone public, I would say somewhat unexpectedly based upon their stage of development, but that's the market we're in today. We continue to look at opportunities where an important relationship, primarily a customer and would allow us with an investment to support their strategy as well as enhance our relationship as it relates to our strategy. So we don't do a lot of these. They tend to be small. Investments are typically $5 million or less each. And we would -- I would actually look forward to some opportunities because currently, my batting average -- as a company, the batting average is quite good, and we've created capital that we have to redeploy if its opportunities arise. But again, they're all strategic relationships not -- we do not consider ourselves an investment fund looking just for return. I probably would support that, that's a good strategy for everybody, if you can invest for and get a return is usually because you add some value to the relationship beyond your money.

Okay. Maybe just a last question is about to the extent that volume does transfer from physical locations to online selling platforms to some extent and the physical yards are less well utilized to some extent. I think there has been some contemplation of maybe repurposing portions of some of the facilities to accomplish other tasks, refurbishing vehicles for something other than auctioning in your yards or assisting various different fleet companies. What's the latest thought on that potential?

Yes. Thanks, Ryan. I'll take that one. We try to think of it less through a lens of an auction. An auction was a certain operation in a certain facility in the past. We kind of think of it as a vehicle logistics center with a digital auction running on top. That's the model we ultimately are trying to get towards. The footprint may end up being a little different. We've got to figure that out to see how volumes return and see what that need is. I can tell you that right now, an area we're seeing a lot of demand for is to get vehicles into a fully retail-ready state. We call it retail reconditioning. So in the past, we've been able to get many hundreds of thousands of vehicles a year, millions, perhaps some years into what I'll call wholesale reconditioning, which is -- they look good. They're clean. They look almost retail ready, but they're not retail ready. The dealer then buys that car has to do more work to the vehicle for their retail there. So retail reconditioning is getting it all the way where it could be delivered directly to a customer. We're seeing a lot of demand for that. We just -- it just seems to grow every month. It's from some of the players you might imagine, some of the names you've mentioned some of them already. They're good customers of ours. We can do that well, we can do it profitably. The other thing we find is when we're doing that business, it increases that customer's desire to source through us because that eliminates transportation legs, okay? And it also increases the likelihood that they'll bring a trade-in back to our facility because if they're dropping a car off a retail customer, then maybe the trade in coming back as well. So it hits lots of different sort of revenue points within our business, let's just say that. So we're excited about that and expecting that to continue to grow.

Very helpful. Kind of little bit over. I appreciate all your time and the insights that you shared today. We appreciate it.

Ryan, thank you very much, and delighted to be here. Thank you. Thank you for that.

Thank you.

Thank you, Ryan.