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

Good morning, and thank you for joining us today for the KAR Global Analyst Day. I'm Mike Eliason, Head of Investor Relations for KAR Global. We're grateful that you are taking time today to learn more about KAR's strategic direction and future outlook. Please note that midway and after our commentary, we'll take questions from participants. Before Peter kicks off our discussion, I'd like to remind you that this presentation 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 could cause actual results to differ materially from what we presented today and such risks are fully described in our SEC filings. In providing forward-looking statements, the company expressly disclaims any obligation to update these statements. Lastly, let me also mention that throughout this presentation, 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 in connection with today's event, which is also available in the Investor Relations section of our website. Now I'd like to turn this call over to KAR Global's CEO, Peter Kelly. Peter?

Thank you, Michael. And good morning and welcome, ladies and gentlemen. I'm Peter Kelly, CEO of KAR Global, and I'm delighted to welcome you to our Analyst Day event. I'm very excited to tell and to share the KAR's story here today. I believe that it's a compelling story. I believe it paints a picture of how KAR can and will deliver significant growth and a great return for our shareholders. We're going to cover a lot of content today with some product demonstrations, customer testimonials, market data and also our own volume and financial projections. You'll also get to meet some of the team here at KAR. But before we get into all of that, to start off, I'd like to update you on our guidance for 2021. You will have seen that following close of market yesterday, we removed our guidance for the year. The principal reason for that is the semiconductor shortage affecting new vehicle sales and the related impacts on used vehicle pricing and volumes within our marketplaces. Specifically, we announced the following 3 things: First, we are removing our guidance for the remainder of this year; second, we are providing guidance that we expect adjusted EBITDA of between $95 million and $100 million in the current quarter; and third, we're expecting full year sales of approximately 2.6 million vehicles sold for the full year 2021. So I'd like to spend a few moments to connect the dots from a semiconductor shortage affecting new vehicle production to reduced volumes of used vehicles in our marketplaces. I'm sure you've all been following the news and seeing reports about the global shortage in semiconductors. This was an item that first came on to our radar screen in the first quarter of this year, and its impacts have increased and worsened since then. These supply chain impacts have resulted in significantly increased lead times for semiconductors across all industries, with the automotive industry being particularly badly affected. And currently, average lead times for semiconductor supply in the automotive industry have increased to an all-time high of over 26 weeks. This, in turn, has resulted in fewer new vehicles being produced on a global basis. There were 1.4 (sic) [ 1.4 million ] fewer new vehicles built in the first quarter of this year. And that deficit increased to 2.6 million fewer vehicles in the second quarter, and that's a global production number. So we've been keeping in contact with our OEM customers over the past weeks and months. We've been taking stock of their updates including their notices of increased plant shutdowns. We've also been having some discussions with semiconductor industry experts and following reports from entities like IHS Markit and others. And based on all of that information, we expect that these production impacts will persist through the rest of this year and into 2022. We expect to see some small improvements in the first half of 2022 and more substantial improvements coming in the second half of next year. However, we also expect that despite these improvements, global automotive manufacturing will remain below normal levels even in the second half of next year and probably will not return to normal until 2023. So this decline in new vehicle production has been showing up in terms of reduced new vehicle sales in the U.S. with the SAAR dropping from over 18 million units in April, which was the high point of this year, to 13 million in August. This is a significant decline despite a relatively strong economic environment and significant consumer demand. So it's a decline that's purely based upon vehicle supply, and we've seen average days supply metrics of vehicle inventory at dealerships dropping to their lowest ever levels. For example, I read in JPMorgan's state of the auto industry report yesterday that new car inventory on dealership lots is currently less than 1 million vehicles. That compares to a pre-pandemic level in February of last year of 3.6 million vehicles. So very significant impacts to supply and to new car sales. The shortage of new cars has driven a significant appreciation in used vehicle values. And this increase is evident at the retail level as the chart -- the following chart here from Black Book shows. And if you look at this chart, you'll notice that vehicle prices ran up and peaked in June and then started to weaken a little bit in July. But that trend we noted started to reverse again in mid to late August and used vehicle values returned to an upward trajectory once again. The same exact trend or very similar trend is evident in our own data of the wholesale market as this graph shows here today. This also shows a peak in used vehicle prices. Ours was in May, a little earlier than the retail level. And a decline from May through July. But then we saw a pickup starting here again in mid-August and continuing into September. So these dynamics impact KAR in a number of different ways. For one, fewer new vehicle sales typically results in fewer used vehicles being traded in by consumers at dealerships. And that reduces the volume of vehicles available in our dealer-to-dealer marketplaces. So that represents a headwind to our business. However, despite this headwind, our dealer-to-dealer volumes have been performing quite well, and we expect to grow our total volume in the dealer-to-dealer marketplace this year. However, there is an even bigger impact on the off-lease space, and that's what impacts us perhaps the most from all of this. Higher used vehicle values mean that consumer with leased vehicles had now have more equity in their vehicle and are less likely to return those vehicles at the end of the lease. And this chart, which is based on our own data -- internal data from the United States, shows this very clearly. And by the way, OPENLANE represents approximately 80% of all North American off-lease volume. So we believe that the trends reflected on this graph are very indicative of our industry overall. So the bar to the left in light blue shows how much off-lease volumes, the volumes returned by lessees, have declined over the past year, with our expected volumes in the current quarter, Q3, down by 57% compared to the actual volumes in Q4 of last year. So a significant decline in the volumes returned by lessees, more than half. But not only are there fewer vehicles being returned but the vehicles that are being returned are being purchased by -- in increasing percentages upstream, usually by the grounding dealer who, in many cases, has the exact same right as the lessee to purchase that vehicle at residual value. So you can see this trend evident in the darker navy bar on this graph. The upstream conversion rate has increased from 58% in Q4 of last year to an all-time high of 86% in the current quarter. And that has resulted the vehicles that are left over, which flow downstream into the physical auction channel, you'll see how that has been reduced because of this by over 85% -- an 85% reduction in the volume flowing to the physical auction channel compared to Q4 of last year. And by the way, I would just emphasize that that's the volume of off-lease vehicles flowing to all physical auctions, not just ADESA auctions from the OPENLANE platform. So this set of circumstances has represented a significant headwind to our commercial seller volumes in the current year, in a way that was not expected at the start of this year. And you'll see from this chart that compares our expected volumes for the current year with our 2019 volumes, which represents our last normal year pre-COVID pandemic. So the first thing I'd like to highlight on this table is that if you compare our dealer consignment volume in 2021 with 2019, we're showing a modest growth in that part of the business. However, if you look at the commercial seller volumes, we have declined by approximately 1.2 million vehicles -- we will have declined by approximately 1.2 million vehicles since 2019. So the volume challenge that we face at KAR is clearly tied to the commercial seller volume category. And again, this category represented more than 70% of our volumes in 2019. Now I also want to be very clear that this decline in commercial volume is not a loss of market share. It's an industry-wide situation as the following slide clearly indicates. So this slide compares average weekly volumes sold by commercial sellers at all U.S. auctions and compares that with the weekly volume trend at ADESA's U.S. auctions -- commercial seller trend at ADESA's U.S. auctions. And what we're doing is we're comparing each week sales volumes with the same week in 2019, and we're showing the percentage decline relative to that week in 2019. And you can see a number of things from this graph. First of all, ADESA's trend mirrors the industry very closely. In fact, over the past 4 months, ADESA's decline has been slightly less than the industry when we make that comparison. Secondly, there's been a steady decline from the post-lockdown bump, which we experienced in June to August of last year, all the way through to May of this year, although there was a slight uptick, slight bump in the first quarter. Finally, if we look at the last sort of 8 to 10 weeks on this graph, the decline appears to have bottomed out with approximately a 55% reduction in commercial vehicle supply to the downstream channel. Ultimately, as this set of circumstances affecting volumes of vehicles being made available for sale by our commercial sellers that is negatively impacting our volumes and our performance at KAR. The semiconductor supply chain issues disrupted what we had hoped and expected would be the start of a volume recovery that we would start to experience in the second half of this year. We had been encouraged to see used vehicle prices peaking in May or June and starting to decline into the June -- into the July and August time frame. We took that as a positive. However, the more recent announcements and further production cutbacks by OEMs and a renewed uptick in used vehicle prices have shown otherwise and led us to our announcement yesterday. So before I move off this topic, I just want to say 2 more points. First of all, as a new CEO of the company, it's certainly not my preference to have to remove our guidance. But the simple fact of the matter is that we're dealing with a situation that was not foreseen at the start of this year. And that despite various forecasts from various OEMs and experts is, one, that appears to have gotten worse, not better when it comes to new vehicle production. And secondly, we've been taking steps to mitigate these impacts as best we can across the business. I call that controlling what we can control. We've had to adapt to a 1.2 million vehicle reduction in our commercial volume in the current year versus 2019. When I think of it in those terms, I can take some small level of satisfaction in the results that we have actually delivered. And I'd like to just reinforce a few of those here. If I think of the key milestones, I would like to highlight the following 4. First of all, we have accelerated our transformation to a digital marketplace business. And that has been and still is -- it remains a key strategic priority for this company. We have eliminated over $150 million of operating costs. These are permanent cost eliminations and they reflect our digital transformation, and they do not impact our ability to strategic investments for the future. At the same time, we have increased our gross profit per vehicle sold to $270 in the first half of this year. We did that through cost management and increased utilization of value-added services by our customers. And perhaps most importantly, despite a 25% drop in volume from the first half of 2019 to the first half of 2021, we actually increased our EBITDA per car sold by 23% in that same time period. And I think that's something that's difficult to do, increase your profitability per unit when your total number of units have dropped by almost 25%. Now I firmly believe that the decline that we talked about in commercial seller vehicles is transitory and is ultimately tied to this COVID pandemic. I'm confident that the volumes will recover in time. And that when they do, those increased volumes, coupled with our more efficient digital model that I just spoke to, will enable us to benefit very strongly from that recovery. And that's going to be an important part of our story here today in our Analyst Day. Having addressed that, I'd now like to turn our attention to the future and the opportunity that lies ahead for KAR Global. In short, what this business can deliver. And as I think about KAR and the opportunity ahead of us, here are some of the key facts that I want to convey to everybody watching today. First, we're a digital marketplace business, and we have a large addressable market. We believe that our transition to a more digital business actually expands the addressable market for our services compared to our historical physical-only model. Second, we have an omnichannel capability that meets the unique needs of our customers. Our platforms such as OPENLANE, BacklotCars, TradeRev, adesa.com, those platforms differentiate us and they create stickiness with our customers. As we continue to integrate these platforms and leverage their unique technology, it will create a better customer experience and more opportunities for us to engage a broader seller and buyer base across our marketplaces. Third point, our network of physical assets and our ability to perform value-added work on vehicles is a competitive differentiator for our business. Vehicle processing and storage are a necessity for many of our customers. Our physical assets enable us to serve the entire market in a way that a digital-only competitor cannot. They also give us an incumbency with commercial sellers that is hard to disrupt. Fourth, our complementary services such as financing, reconditioning, inspection, logistics help us serve our customers in the marketplace and beyond the marketplace and they provide new opportunities for profit and growth. And finally, this is a business that has a strong history of profitability and cash flow. The disruption owing to COVID has been perhaps the most challenging period the company has experienced. However, KAR continued to deliver profits and cash flow throughout that entire period. And we believe that the changes we have made mean that our profitability and our cash flow will set new high watermarks in the future as industry volumes recover. So in our presentation today, we're going to talk about our expectations for the future and as well, we're going to explain how we plan to get there. We're going to be putting a stake in the ground with respect to our anticipated levels of performance in 2025, which is 4 years from now. I believe 2025 is a good year to choose because it's close enough in so as to be meaningful to our investors, but it's far enough out so that we expect to be past all of the secondary impacts of COVID on our volumes that we're experiencing at the present moment. And as we talk about our expectations for 2025, we're going to make references and comparisons to 2 other years, 2019 and 2021. I believe 2019 is a relevant year for comparison because it represents our last normal year prior to the COVID disruption. It was also our previous high watermark in terms of total volumes sold. So I think it's an important comparison to keep in mind. And 2021 is obviously relevant because it represents our current level of performance. As I look to 2025, our expectation is that we will deliver significant growth in our volumes, in our profitability and in our cash flow. And I'd like to turn to that now. First, when it comes to volumes, we intend to deliver 4.25 million vehicles -- total vehicle transactions in 2025. This is approximately 60% growth versus our revised expectations for the current year. Now 60% is a significant amount of growth. On the other hand, 4.25 million is only 16% higher than our previous high of 3.8 million, which we set in 2019. So viewed against that comparison, I believe, it seems very achievable. I'm confident in our ability to deliver this volume, and I know it will be driven by 2 principal factors. First, we expect to see a recovery in commercial volumes, one that will positively impact our business, particularly at ADESA and OPENLANE. This recovery will drive over half of the volume increase between now and 2025, an increase of approximately 1 million commercial seller vehicles in 2025 relative to -- compared to today. And I want to point out that even with that 1 million vehicle increase, our total commercial seller volume forecast for 2025 is actually less than what we actually sold in 2019. Second, we expect to grow our volumes in the dealer-to-dealer channel, principally through gaining volume on our digital platforms, TradeRev and BacklotCars. Growth in dealer-to-dealer volumes will drive the balance of the increase or an additional 700,000 vehicles between now and 2025. This will increase our total digital dealer-to-dealer volumes to 1.2 million vehicles by 2025. We expect the balance of our dealer-to-dealer volume, approximately 600,000 additional transactions, to be transacted through our ADESA channel. So this increased volume of commercial and dealer-to-dealer volume will drive increased revenue, gross profit and earnings for KAR. And this leads me to our second target. We project that by 2025, KAR will deliver over $750 million in annual adjusted EBITDA. And again, I'm confident in our ability to deliver this EBITDA -- this level of EBITDA performance by 2025. And the key drivers of that performance will be the following. Again, the volumes that I just talked about, both in commercial and dealer-to-dealer; secondly, increased utilization of value-added services by our commercial and dealer customers; and finally, a strong cost discipline as we continue to adjust our business towards a more digital operating model across the entire enterprise. And we're going to go into more detail on all of these 3 very important drivers later in today's presentation. Now $750 million of adjusted EBITDA by 2025. That represents a compound annual growth rate of 15% compared to our performance over the most recent 12-month period. That, in turn, will drive a compound annual growth rate in operating adjusted earnings per share, we believe something north of 20%. So I spoke about our history and our history of profitability and cash flow. And building on this, this feeds into another very important target for our business for 2025. And our target is that we will generate approximately $1.5 billion in additional cash flow from operations between now and 2025. So again, these are the 3 performance objectives for 2025. Now I'd like to speak for a moment to the initiatives that will enable us to deliver on this performance. First, we must maintain our commercial seller market share so that we benefit from the volume increase that we expect to happen. So that's the first objective, the first initiative. And when I say maintain our share, I want to let you know that my objective and our objective here at KAR is always to grow our share. And I believe we have opportunities to grow our share. But in terms of our model, growth in share would represent upside. In order to deliver the volumes that we have in our model, we need to maintain our share. Secondly, we need to grow our volume in the digital dealer-to-dealer market. We assess our current share in the digital dealer-to-dealer market at something between 30% and 40% of North American digital dealer-to-dealer transactions. Our goal is to maintain or perhaps even increase that share a bit, but mainly to grow the addressable market for those services and take a larger volume in that market than we've ever had in the physical dealer-to-dealer market of the past. Third, we need to -- we intend -- it's an initiative for us to increase the attach rate and utilization of services across our marketplaces. We see significant opportunity to do this as our business trends in a more digital direction. And finally, we need to manage our costs so that as volume grows, we keep our costs to a lower growth rate than volumes and revenue and thereby increase our efficiency and improve our overall unit economics. We're going to talk about all of these things in more detail here today. So I believe that by executing and delivering on this plan, we can and we will deliver a very compelling return for our shareholders. However, I don't think the story ends there. One of the things that I am excited about for KAR is that there are also some white space opportunities that exist for our business, opportunities that have not been factored into these projections. And we're going to touch on some of those here later on this morning as well. So I'm excited to get started and to tell this story. But before I jump into tell you how -- telling you all how we get there, I want to share a little bit more about who we are today, especially for members of the audience who maybe are new to KAR and maybe perhaps less familiar with our business or with the automotive ecosystem. So we're going to talk about all of that here in a little bit. But to get us started, I'd like you to watch this brief video from our employees about KAR's purpose and the value that we bring to our customers. [Presentation]

Well, thank you. So that short video provides an introduction to our company, what we do and why; in other words, our purpose. And at KAR, our purpose is to make wholesale easy so our customers can be more successful. Now we think and I think that, that simple statement captures a lot. First of all, it speaks to the customer experience. And our focus is on creating a great customer experience, making what sometimes can be a complicated process easy, painless and fast. Secondly, it speaks to results. Our customers are businesses and, ultimately, those businesses are driven by key success metrics. Metrics such as price attainment, conversion rates, attach rates, days to sale, and we need to deliver on all of those metrics to help them be successful. And finally, it speaks to our role as a B2B business. The wholesale process is an important activity -- business activity for our customers, but it's not their core business. Their core business may be building and marketing new vehicles. It may be retailing vehicles, financing vehicles or it could be running a rental car business. Ultimately, our goal is to help them execute that core business more successfully. Now our purpose statement puts our customers at the heart of everything that we do here at KAR. And I'd like to spend a moment on who are our customers. And at KAR, I would say we have a large and diverse group of customers across this automotive ecosystem. And that ranges from automotive OEMs and captive finance companies to independent auto finance companies, banks, rental car companies, franchise dealers, independent dealers and the large used vehicle retail brands such as CarMax, Carvana and Vroom. In short, we do business with over 100,000 different marketplace -- well over 100,000 different marketplace participants, ranging from the smallest used vehicle retailer to all of the largest players in this industry. And we have strong and long-standing relationships with these customers, and that's a real strength of our business. Now at KAR, we also have a vision statement and our vision statement speaks to our longer term vision of the future and what we aspire to be. And our vision is to build the world's greatest digital marketplaces for used vehicles. So what does this mean? Well, first of all, I'd say it reflects an aspirational view of the company that we're trying to build here at KAR Global. We want to be the best in the world of what we do. We aspire to be #1 in volume, #1 in performance and #1 in customer satisfaction. You will notice the explicit focus on digital marketplaces, and we believe that the future marketplace -- that in the future, the marketplace for used vehicles will be a digital marketplace. So we want to be explicit that, that is where we want to lead. And finally, you may notice that there's no explicit reference to wholesale in this statement, and that's also a deliberate choice. So while our focus is clearly on wholesale, we also see opportunities to help our customers be more successful as the retail market for used vehicles also trends in a more digital direction. And we'll speak to some of those opportunities here today as well. So as we think about our purpose and our vision, we also need to think about our assets and our capabilities and how can we make this vision a reality. And when I think of it in those terms, I think of KAR as having 3 principal capabilities. First of all, we operate digital marketplaces that facilitate the sale of millions of used vehicles each year between businesses. So we are a B2B digital marketplace business. In that context, we have an omnichannel capability that supports different customer groups and in different geographies. In addition to this digital marketplace capability, we operate a nationwide network of vehicle logistics centers; locations across the U.S. and Canada, where vehicles can be transported, secured, reconditioned, cleaned and made ready for sale. We own or lease all of those facilities, and we perform and deliver all of those services. In the past, we called those facilities auctions, but today, we call them vehicle logistics centers. And finally, we operate a wholesale financing business called AFC. And that business provides short-term inventory financing, which is known as floor planning, to independent used car dealers. Doing so helps drive liquidity within our marketplaces, but is also a significant profit generator in its own right. I'm going to go into more detail on each of these 3 areas. And I'm going to start with our digital marketplaces. So our industry has been trending in a more digital direction for many years at this point, but KAR has been at the forefront of that transformation throughout that entire period. KAR actually began selling vehicles online on adesa.com more than 20 years ago. But it really started building out a significant portfolio of digital marketplace assets with the acquisition of OPENLANE in 2011. I was a co-founder and CEO of OPENLANE at the time, and that's how I came to work at KAR. Now OPENLANE has grown significantly since its acquisition by KAR, and it continues to be the category leader today. KAR has further accelerated its digital transformation over the past 5 years through a combination of organic investments and organic growth, but also investment in and acquisition of a number of digital brands. These investments have driven a significant increase in the percentage of our vehicles that are selling digitally. And by that, I mean, vehicles that are purchased by an online buyer. And that percentage is very close to 100% of all our vehicles today. Now these investments have also enabled us to expand our addressable market, and we can now sell vehicles that don't have to come to our facilities. And in fact, over the first half of this year, the number of -- the percentage of our vehicles that we're selling off-premise was over 50% of our total volume. There is no doubt that KAR now has a differentiated and unique set of digital marketplaces. Our adesa.com marketplace has seen significant growth in usage since we pivoted towards digital during the COVID pandemic. Most of the vehicles processed through our vehicle logistics centers today are now sold digitally on adesa.com. With OPENLANE, we have the leading platform for commercial sellers of off-lease vehicles and their franchise dealer networks. In the digital dealer-to-dealer space, TradeRev is the #1 platform in Canada and BacklotCars is the #2 platform in the United States. On a North American basis, we are a co-leader in digital dealer-to-dealer with similar volume, similar economics and similar growth rates as our largest competitor. Our ADESA Europe marketplace continues to gain traction and now sells over 70,000 vehicles annually to buyers in over 40 countries. So each of these marketplace brands has a unique position and brings unique capabilities that our customers value. But I believe there's a potential for even greater value and one thinks of what they can do together. And we're working on identifying and leveraging those benefits across the platforms, integrating them to deliver a better customer experience while preserving those unique elements that our customers love. This is an ongoing process, but the continued integration of these platforms and their seller bases and buyer bases will be an important initiative in our future. And I'd actually point out that our migration of TradeRev U.S. customers to BacklotCars platform, which we completed earlier this year, was a very good example of that. So while we've been advancing the digital transformation of our company for many years, the work certainly accelerated with the onset of COVID. And this has resulted in numerous milestones across many different parts of our business, but I just want to highlight a few of them here. First of all, 25,000 new digital bidders enrolled across our platforms; 12,500 first-time Simulcast buyers; and 70% growth in our digital dealer-to-dealer marketplace in the first half of this year relative to the first half of last year. Accomplishments like these reinforce our confidence in the digital future of our industry and confirm to me that our digital offerings are resonating with our customers in the marketplace. Moving to the physical assets. As I mentioned a few moments ago, ADESA operates over 70 vehicle logistics centers in the U.S. and Canada. We have a vehicle logistics center at or close to most of the major metro areas in both of those countries. And we're 1 of only 2 companies with that type of a network. We have over 5,500 acres with facilities that range in size from 20 acres to over 200 acres at the largest. We have over 6 million square feet under roof. This represents auction arenas, body shops, detail shops, mechanic shops as well as field offices. We perform value-added services on millions of vehicles each and every year, from cutting keys to rotating tires, changing oil, tuning engines, body work, paint work, detailing of vehicles. Whatever services are needed on the vehicle, we are equipped to deliver those at scale. These vehicle logistics centers are important to our customers and essential to many of them. They enable us to secure, store and improve their vehicles as they prepare them for sale. And we're also finding new use cases for how these logistics centers can also add value to our customers in the future as well. And we're going to talk about that a little bit later today also. Now I mentioned how liquidity is critical to building successful marketplaces. We're going to talk more about that later today. And that's one of the reasons AFC was founded more than 30 years ago. Ultimately, it was to provide inventory financing to independent dealers and in through doing so, increase the liquidity in our wholesale used vehicle marketplaces. AFC has proven its value time and again. Today, it provides inventory financing to over 14,000 independent dealer customers. And this, in turn, helps drive improved liquidity within our marketplaces and improved outcomes for our seller customers. And of course, AFC is also a significant profit driver in its own right. It's an important part of our business today and in the future. We're going to speak to that in more detail later in this presentation as well. We believe that we have a strong differentiation in the eyes of our customers. We have an exclusive focus on whole KAR remarketing. We have industry-leading digital capabilities, a nationwide network of facilities and an offering that addresses the needs both of commercial sellers and dealer sellers alike. I would say that none of our customers -- competitors -- sorry -- can claim the exact same attributes as that. And I would also point out that many of these advantages cannot be easily or quickly replicated. And finally, we operate within a large industry with a large addressable market for our services and one that represents significant opportunity for future growth. So I'd like to turn to that next. So in this section, addressable market, I'm going to provide a high-level overview of the automotive ecosystem in which we operate, the used vehicle ecosystem. I'm going to provide some industry volumes. These volumes, for the most part, relate to the combined U.S. and Canadian markets, which I'll also describe as the North American market. Now we also operate in Europe, including in the U.K. And I would say that all of Europe, which is not directly addressed in this section, is similar in size, but somewhat smaller than the North American market, with most comparable market metrics, approximately 75% the size of their North American equivalent. And obviously, our exposure to that market is also much less than North America, but we do have a growing presence there. So if we look to North America, there are approximately 300 million vehicles in operation, and we can think of all of those vehicles as being used vehicles. While the exact breakdown is hard to find, our estimate is that over 90% of those vehicles are owned by private individuals and less than 10% owned by businesses and fleets such as rental car firms, portfolios of vehicles that are financed or on lease, company cars, work trucks, rental car firms, et cetera. Now each year, approximately 19 million new vehicles are added to that vehicle park. And these are largely new vehicles being sold by franchise dealers to consumers and to fleets. Vehicles are also removed each year from the park through scrappage and other processes. But over time, the vehicle park tends to increase by a few million vehicles each year. Within the used vehicle park itself, vehicle ownership is always in flux. Every year, for example, there are approximately 12 million consumer-to-consumer transactions. Today, these do not directly impact our business at KAR. In addition to that, each year, franchise dealers in North America sell about 16 million used vehicles to retail consumers. So we see that franchise dealers are important both in the new vehicle and used vehicle channels. And additionally, independent dealers, and this includes everybody from the corner used vehicle lot to CarMax and Carvana, sell approximately 16 million used vehicles to consumers. So in total, we see over 40 million used vehicle transactions at the retail level in North America, and approximately 75% of those are facilitated through dealers. So where do dealers get those 30 million or so vehicles that they sell to consumers? Well, the first thing to note is that part of -- that as part of selling a new vehicle or a used vehicle to a consumer, the dealer may also purchase a trade-in vehicle from that consumer. And our estimate is that each year franchise dealers purchase approximately 17 million trade-in vehicles from consumers. Independent dealers, we estimate, purchase another 6 million trade-in vehicles from consumers. Now the fact that a dealer purchases a trade-in from a consumer doesn't mean that, that specific dealer will turn around and retail that exact vehicle back to another consumer. In fact, particularly in the case of franchise dealers, often the vehicle that they take in on trade will not be the right vehicle for them to retail. It may be the wrong brand. It may be too old, too high mileage or too damaged. The better course for that dealer is to sell that vehicle in the wholesale marketplace, liquidate it quickly and where it ends up getting purchased by another dealer for whom it's a better fit. So it's this reallocation of vehicle inventory between dealers that drives the dealer-to-dealer market. That market is estimated to be as large as 15 million units per year. I would say it's a core marketplace for KAR, both in terms of our physical and our digital offerings. Historically, approximately 5 million of those dealer-to-dealer cars were sold at physical auctions. There were also significant volumes of vehicles traded through less formal channels, through wholesalers directly from 1 dealer to another and so forth. Now in addition to this dealer-to-dealer market, the other source of used vehicle supply that is an important source of vehicles for dealers is inventory being sold by commercial sellers. Commercial seller vehicles such as off-lease vehicles, repossessed vehicles, rental cars, fleet vehicles are also reallocated through a wholesale marketplace. Annual volumes of commercial seller vehicles are estimated at approximately 8 million vehicles per year. So that creates a total wholesale market of approximately 22 million vehicles per year. Historically, volumes of vehicles sold at physical auctions represented 8 million to 10 million units per year, roughly equally split between commercial seller volumes and dealer-owned vehicles. Our digital platforms help us address vehicles that don't come to physical properties. For example, our OPENLANE business has sold as many as 1.5 million vehicles per year. And that is in addition to the volume that's coming to our physical sites and those of our competitors. Our TradeRev and BacklotCars platforms are now doing the same thing in the dealer-to-dealer market. So to summarize it at a high level, we see an addressable market of over 20 million wholesale used vehicle transactions with a total gross merchandise value at or more than $200 billion. And again, that's North America only. We also see some other areas of opportunity in the ecosystem, and we'll speak to those a little later today when we talk about some white space opportunities. But to preview it here, I will say we see opportunities in the consumer trade-in space with over 20 million vehicles being traded in by consumers to dealers as well as in reconditioning of vehicles for retail sale. And again, approximately 30 million vehicles being sold by dealers to consumers each year, 30 million used vehicles. Before we move on, I just want to speak to our market share here at KAR. I'm going to start with commercial seller vehicles. So in 2019, KAR sold 3.8 million vehicles, 2.7 million of which were commercial seller vehicles. Assuming a total market for commercial seller vehicles of 8 million units, our market share is approximately 35%. We don't know our largest competitor's exact volume, but at 2.7 million vehicles and a 35% of the overall total, we estimate that this would make us either #1 or a very close #2 in overall market share for commercial seller vehicles in this industry. If we divide the commercial seller market into upstream and downstream, we believe we've got a considerably higher market share, close to 80% in the upstream space, making us #1 by volume. And for those of you that are not familiar with the term, I just want to confirm that by upstream, we mean the sale of a vehicle on a digital platform prior to moving it to auction. We have a market share of approximately 30% in the downstream, our physical auction space, with commercial sellers, making us #2 in this category. And I would say that these market shares have been quite stable over the past number of years. Commercial seller volumes have been negatively impacted through COVID, as I spoke about. I've spoken about how our reduced volume reflects a reduction in industry volume and not a loss of market share. And we believe that this volume decline is transitory. Ultimately, we expect these volumes to recover. And hopefully, we expect to see the beginning of that in starting next year. We believe that our strong market share with commercial sellers will enable us to benefit from this positive trend. Switching over to the dealer-to-dealer space. We expect to sell approximately 1.1 million dealer vehicles this year, and that will reflect a small increase in volume versus 2019 despite the challenges in the macro environment. 1.1 million vehicles sold makes us the #2 player by volume in North America. However, it represents a market share of less than 10% of the 15 million dealer-to-dealer addressable market that I've referenced earlier. Now if we look at -- purely at dealer vehicles being sold through physical auctions, we are #2 by volume and our market share has historically been in the range of 15% to 20%. However, we believe we have a higher market share in the fast-growing digital dealer-to-dealer space. We are a close #2 in this category with a market share north of 30%, as I mentioned earlier. Also, we believe that longer term, that market is larger. Now there's an open question as to how much of that 15 million dealer-to-dealer market on the left of this slide is truly addressable even with digital solutions. At this point, we believe it's reasonable to assume that something of the order of 10 million vehicles is addressable by our combined digital plus physical model. So we believe that dealer-to-dealer transactions represent a significant area of opportunity for KAR, and we're going to speak to that in detail later today as well. I'd now like to transition to a more detailed review of our solutions, what we actually deliver for commercial customers and our dealer customers. And I'm going to start with commercial. So moving into our commercial seller solutions. As you know, I've already spoke to the fact how this is a key customer group for KAR and how in 2019, this accounted for over 70% of our total volumes sold. I've also explained in my introduction how this is an area where the industry has seen a very significant volume decline owing to COVID and the related disruptions and one where we predict, obviously, in our numbers, a strong volume recovery in the years to come. So for all these reasons, I want to go into this in some depth and provide insight into our current business, our differentiation and our plans for the future. Now in the previous section, we described how commercial seller vehicles account for approximately $8 million of the total market each year in North America. Now there are several different types of vehicles that make up that commercial seller segment. Off-lease vehicles is the biggest segment, representing about 50% of the category; repossessed vehicles comprise about 1/4 of the volume; and then rental and fleet vehicles represent the other 25%. The chart on the right of this slide here is based on our internal numbers, KAR's 2019 volumes, and this shows how our volumes are reflected into each of these 3 categories. You will see that at KAR, we have a greater exposure to the off-lease space, representing 64% of our commercial seller volume. This is largely due to our strong position with OPENLANE. Repossession is also a very important segment for us, representing 26% of our total commercial seller volume, although all of this volume is transacted from our on-site locations, our vehicle logistics centers. And then rental and fleet vehicles account for about 10% of our total commercial seller volume. So now I'm going to go deeper into our 2 principal commercial seller categories, which are off-lease vehicles and repossessed vehicles. And again, as I've just said, together, those 2 account for about 90% of our total commercial seller volume. I'm going to start with off-lease. Now when we think about the off-lease vehicle life cycle, it's a sequential or a waterfall type process through which a vehicle is returned by the lessee and ultimately sold by the finance company. That life cycle includes numerous opportunities for the sale of that vehicle through the process, and those are highlighted a little brighter on this slide here. We divide that process roughly into 2 areas, and we call those upstream and downstream. Now the upstream process takes place while the vehicle is still located at the grounding dealer, the dealer where the lessee returned the vehicle to. That's the upstream process. The upstream process includes an opportunity to sell the vehicle to that dealer or to another dealer within that same franchise network, that brand network, or to any dealer through an upstream open opportunity on adesa.com. And then the downstream process, it happens when the vehicle is picked up and moved to a physical auction location where it's reinspected, reconditioned, prepared for sale and ultimately sold. Now an important point I want to make here today is that KAR is differentiated insofar as our assets address every part of this marketing process from beginning to end. We have the inspection capabilities, the digital assets, the logistics capabilities and the nationwide physical network to address every aspect of this process. And that is a large part of what drives our strong share in this part of the commercial seller market. I'm going to double-click into OPENLANE for a few minutes. OPENLANE is an area where KAR is clearly positioned as the leading solution in the industry with a large installed base of commercial customers and many, many franchise dealers across North America. To get us started on OPENLANE, I'd like to introduce a short video. [Presentation]

Well, thank you, Jessica. Now as we saw from that video, OPENLANE caters principally to captive finance companies and motor manufacturers as sellers and to their franchise dealer networks on the buy side. There are approximately 16,000 franchise dealers active as buyers on the OPENLANE platform. The vehicles transacted on the platform are typically 3-year old off-lease vehicles with an average value of over $20,000. Now OPENLANE has a strong and sticky market position. We operate over 40 private label marketplaces for those commercial seller customers across the U.S. and Canada. For the most part, those are exclusive agreements where we are the sole provider of this service for that brand, and the average length of those relationships is over 10 years. We stay very close to those customers to make sure we're meeting their needs and delivering a state-of-the-art solution in a very effective way. In terms of our market share, we assess our market share based on the retail market share of the brands that we have on the platform. And based on that math, we assess a market share of approximately 80% for OPENLANE in North America. So what is it that makes OPENLANE so strong in terms of its offering and its market share? Well, I think 1 important fact to realize is that OPENLANE is much more than a marketplace. Yes, it's true that at its core, it is a platform that processes an off-lease vehicle and offers us for sale to various buyer groups. So it is a marketplace in that regard. We call those opportunities the grounding sale, the nongrounding sale and the open sale. However, OPENLANE's capabilities go way beyond that. In addition to being a marketplace, it's also a vehicle management system that manages the vehicle through the entire process, from pre-turn-in by the lessee through the turn-in process, the inspection process, through the upstream sale, the downstream sale and handles all aspects of the post-sale process as well. And of course, every aspect of that process has significant complexity in its own right. I don't plan to go through all of this here today. But the simple fact of the matter is that each OEM and each customer has the ability to customize a process flow for their unique needs, or if they want to, they can customize multiple different process flows for different types of vehicles that they have in their portfolio. So it's all of these types of things that make the service so sticky and give us such a strong position in the space. In fact, I think it's possible to think of OPENLANE as a SaaS platform for OEMs and for their franchise dealer networks, but it's one where we have a transactional fee structure as the revenue model. In terms of the technology itself, we continue to invest in the platform. We look to increase the integrations that we have across the ecosystem, which in turn drives further stickiness at the platform level. We're also investing in improving user interfaces, building artificial intelligence to power vehicle recommendations for buyers and build more effective marketplaces for our sellers. There is no doubt that OPENLANE's volumes and performance have been negatively impacted, in fact, significantly so over the past 12 months by the supply chain factors that I described and showed earlier today. However, I'm also very confident that those volumes will come back in due course and that OPENLANE will be a very strong contributor to our future performance. In addition to that recovery in off-lease volume, we also see an opportunity to grow OPENLANE further. Rolling out new capabilities that we can monetize, adding new customers and also increasing the conversion rate in the upstream open channel. That upstream open sale process takes place on adesa.com, as Jessica referenced in her video. I'd now like to spend a few minutes on that marketplace. Adesa.com is our largest marketplace. It's important to our commercial sellers with all different vehicle types. It's important to our dealer sellers and, obviously, it's important to all of our buyers. I'm going to start where Jessica left off with our upstream open inventory, and by which I mean vehicles that have been coming through the OPENLANE marketplace, through those private label marketplaces, but are now at the part of the life cycle where they're made available to all dealers outside of the closed brand network. So we branded this segment earlier this year and called it off-lease exclusive. And we think that name resonates with our buyer audience as well as being a good descriptor of what it actually is. First of all, these are principally off-lease vehicles which are highly desirable to dealers and by extension to their retail customers. Secondly, they're exclusive to KAR. Our 80% market share in the upstream channel means that these vehicles are offered first on adesa.com before they get offered in any other open sale venue or any other physical auction across this industry. So there's an exclusivity aspect to our offering for dealers with respect to these vehicles. We've also been steadily increasing our conversion rate on these upstream open vehicles. Our results earlier this year were setting new records for the company. Unfortunately, the supply constraints that I talked about mean that the volume of off-lease vehicles flowing into this channel is down significantly, as you saw from that graph I showed earlier, but I fully expect it to rebound over time. So there's no doubt that this off-lease exclusive is a very important channel to our customers, but also one that differentiates KAR in the marketplace versus our competitors. Now adesa.com is also the venue for the sale of vehicles located at our vehicle logistics centers. I'd like to spend a few minutes on that topic. Over 90% of those vehicles that are sold from our vehicle logistics centers are offered either in the Simulcast or Simulcast Plus auction formats. In the Simulcast format, the vehicles are usually located at our facilities. And they're being offered sequentially 1 vehicle at a time in a live auction format with a live auctioneer. These sales may be entirely digital, meaning there is no in-lane presence, no in-lane bidder or there may be a hybrid where there are -- there is in-lane bidders in addition to the online bidders. And finally, the vehicle may even be driven down the lane in some cases. The Simulcast Plus format is exclusive to KAR and it's also a sequential auction format. But unlike Simulcast, it does not have a live auctioneer. Instead, it has an automated auctioneer. And typically, with Simulcast Plus, there are no in-lane bidders. Simulcast Plus enables us to be flexible as to where the vehicles are located. Vehicles may be located at our vehicle logistics centers or they may be located off-site. They may be located at a combination of multiple different vehicle logistics centers or any combination of on-site or off-site. So we've got a lot of flexibility in terms of how we put these sales together. We're very excited about the potential for Simulcast Plus. Many of our largest commercial customers are already committed users of the solution. And our buyers tell us that they love the transparency that it brings to the sale. So I'd like to share with you a short video demonstration of our Simulcast Plus product. [Presentation]

Well, thank you, Stephanie. Now as I said before the video, we're excited for the potential for a Simulcast Plus offering. And I'd also say, I think it's another example of how we lead this industry with innovation. Now when we look to adesa.com in its totality, it is our largest marketplace, as I said earlier. We have over 70,000 marketplace participants. Vehicles sold on adesa.com include our upstream open vehicles as well as all of the vehicles located at our vehicle logistics centers. We are also now offering vehicles from our -- that originated in our TradeRev and BacklotCars marketplaces on adesa.com as well. Sellers include our commercial sellers, our dealer sellers, and buyers on adesa.com include both franchise and independent dealers. Today, the average sale price per vehicle sold is approximately $14,000 in that marketplace. The factors that I've described mean that adesa.com has some unique advantages when it comes to addressing the needs of sellers and buyers in our industry. If we look at it through the lens of the seller to start with. First, we can sell the vehicle from any location. The vehicle can be at 1 of our 70 vehicle logistics centers or it can be at any off-site location. So ultimately, we address the entire market. From a buyer perspective, we can serve those buyers who are committed digital buyers. We can also serve those buyers who want to come in person and see the vehicle and bid on it in person if they want to. Now it's no secret that we've made a strong push in a more digital direction. I've spoken how I see digital as representing the future for our industry. We see a digital marketplace as the future because it offers advantages to our customers, opportunities for an improved customer experience. But it also offers opportunity for us to build a more efficient and more effective marketplace. And a key aspect of that is data capture. When we ran our auctions principally as in-lane auctions, all of the bidding activity was lost from a data perspective; who were the second, third and fourth bidders on any given vehicle, for example. None of that data was really captured. However, today, as we now use a more digital format, we capture that data and a whole bunch of other data along with it. This increases our customer insight and enables us to better target our offerings and our vehicles to customers and, ultimately, build a more liquid and a more efficient marketplace. We see a significant field of opportunity when it comes to adesa.com. As I mentioned, there's an ability for a closer integration between adesa.com and our BacklotCars marketplace in the U.S. and our TradeRev marketplace in Canada. And we're doing that. This means we can increase the number of off-premise vehicles that are being offered under adesa.com and, ultimately, creating more of an integrated omnichannel experience. We're doing this today and it already represents thousands of incremental sales on a monthly basis. Also by improving the digital checkout experience, we believe that offers a considerable opportunity to increase the attach rate of value-added services, services such as logistics, financing, assurance and so forth. Our attach rates for those services at adesa.com -- at ADESA, I should say, are materially lower historically than the attach rates that we're seeing in our digital platforms. So we believe that as our ADESA marketplace trends in a more digital direction, there is greater opportunity for the attachment of those services to every transaction. And I think that has a number of benefits. I believe it improves the customer experience for the seller and the buyer but it also, obviously, represents opportunity for increased revenue and profit for KAR. So now I'm going to transition to our second largest category of vehicles, which is repossessed vehicles. And I'd like to say at the outset that there's a significant difference between the way repossessed vehicles are sold compared with how off-lease vehicles are sold. As you saw with off-lease vehicles, typically 60% or more, and today it's over 80%, of those vehicles will sell upstream with the remainder moving downstream to the physical auction process. In the repossessed -- with repossession vehicles, almost no vehicles sell upstream. The downstream process is the de facto process for just about all the repossessed vehicles across this industry. And there are very good reasons why this is so, and I'll get to those in a moment. But before I go there, I do want to talk for a few minutes about a business that we really talk about with our investors but is a critical part of the repossession workflow. It's also a business that I like a lot and that we own here at KAR. And that business is RDN. Now RDN is a profitable, growing, Software-as-a-Service business. It connects automotive lenders that have vehicles that need to be recovered, connecting those lenders with the recovery service providers that perform the services on their behalf. It's an incredibly sticky platform and has significant market share and also has the potential for increased monetization as we look to the future. OPENLANE acquired RDN in 2010, and the business has grown considerably since then. Today, we estimate that approximately 90% of the repossessed vehicles in the United States flow through the RDN platform. In some respects, RDN acts like an industry utility. The majority of recovery service providers in the United States are paying subscribers, and their employees represent the majority of the 23,000 active users on the platform. The software is accessed via computers and mobile devices and is typically in the trucks that are performing the recovery work. It's a highly active and real-time platform with approximately 18 million daily API requests. Ownership of RDN gives us an almost complete line of sight into all of the repossession activity that's taking place in the U.S. in real time. And again, the business has grown considerably over the past decade. Today, we estimate the value of vehicles being repossessed through RDN as close to $20 billion a year. And all of this means that we have an opportunity to continue to monetize and grow this platform in the years to come. Now I mentioned a few minutes ago about how repossessed vehicles typically don't sell upstream, but they require an on-premise solution. And there are many good reasons for this, and I'd like to explain some of those now. First of all, repossessed vehicles often come with personal property and PII. This needs to be removed from the vehicle, inventoried and returned. In many states, the finance company is required to give the borrower time to make good on their default. This means that those vehicles cannot be sold immediately, but they must be stored. Finally, vehicles are often recovered in a damaged state. They're often missing keys, they often require cleaning or repair. So the value-added services that we offer at our physical facilities are very important to the seller in order to maximize value in the sale of the vehicle. And there's very strong data that supports that. And by the way, maximizing value not only is something the seller would want to do, it's actually part of their obligation. They have a duty to the borrower to do that since any deficiency will be charged back to that borrower as a cost. And finally, all of this is very heavily regulated, as you might imagine. So for all of these reasons, I struggle to see a viable upstream process for repossessed vehicles at scale in the near or medium term. I believe that these repossessed vehicles will continue to flow to our vehicle logistics centers well into the future. Now you may be aware that back in July, we announced an in-lane pilot at 11 of our locations. And we also said that, that pilot is going to be focused on dealer-owned vehicles and repossessed vehicles. So I want to provide a brief update on that here. At this point, we've run pilot sales at 11 different ADESA locations and over 50 different sale events. And the data that we've gathered has been interesting. It tells us in a nutshell that the in-lane pilots have benefited our customers in those locations and that those benefits have been most pronounced on lower-value vehicles. In terms of buyer attendance at our sales, we've seen higher attendance from the in-lane buyers, but without any material falloff in our online buyer audience. So we believe that our online buyers are sticking with online, but we also believe we're winning back some in-lane buyers who had left us when we went 100% digital. We're seeing that the majority of the vehicles sold at these pilot locations are still selling to the online buyers. And that's obviously a big positive and a big change since pre-COVID. We've also seen improved conversion rates and increased proceeds for the seller. Now those benefits have been most pronounced on vehicles below $7,000 in value, and we've seen very little difference in the outcomes on vehicles over $15,000 in value. Finally, we've also been able to generate more volume at ADESA through these pilots as sellers who had a preference to see their vehicles sold through an in-lane -- a live in-lane format returned to these locations. So this increased volume, obviously, has benefited us, but it also benefits our online buyers who now have access to more inventory. And finally, I would say we've been able to execute these pilots while managing our costs. It's true there's a limited additional cost of putting a driver back in the car for sale day, but a lot of our cost actions that we've taken place over the last 18 months are independent of this decision. Based on all of that, we have decided to expand that program to an additional 25 locations, all of which are in the U.S. Our focus will continue to be on lower-value vehicles, principally dealer consignment and repossessed vehicles. This will result in approximately 36 locations running some vehicles in-lane. While that would represent about half of ADESA's network, we estimate it will represent about 35% of ADESA's on-premise volume. And finally, just before I move off this topic, I want to reinforce that this in no way detracts from our digital marketplace vision for this company. At the end of the day, I see this as a very pragmatic decision. I see it as a decision that will be good for KAR, good for our customers as together we navigate our transition to a digital future. As I mentioned a few minutes ago, rental and fleet represents approximately 10% of our commercial seller volume. I'm not going to go into that segment in any great detail here today, but I will say that we fully expect to see a recovery of volume in those segments from their very low levels today. So in my introduction, I spoke to our 2025 expectations. And I mentioned how the recovery in commercial volume was 1 of the 3 key drivers towards achieving our 2025 growth and earnings targets. So I want to go into more detail on that and what gives us confidence in those numbers. And again, to summarize our commercial seller volume picture. Our volume sold in 2019 was 2.7 million units. We are projecting approximately 1.5 million units sold this year, representing a decline of 1.2 million. And our 2025 target is to sell 2.5 million units, which is an increase of 1 million from the current year but still below our 2019 level. We believe this is achievable for all of the following reasons. First of all, if we look at the off-lease space, which is a very important segment for us, we see that leasing continues to be very popular with OEMs, with their captive finance companies and with retail consumers. Lease penetration rates are stable around the 30% level. This is in contrast with the Great Recession where lease penetration dropped into the teens. And by the way, on our call last night, I got a question about how leasing is correlated with higher new car sales prices, and we believe it is correlated. The higher the new car sales price, the more popular leasing will tend to be. This lease penetration rate means that total -- the total volume of vehicles under leasing is increasing again after a drop last year caused by COVID. Now I also want to be clear that the current supply disruption and reduced new car sales represent a headwind to further growth at the present time. But ultimately, that will abate. And assuming lease penetration remains strong, as I believe it will, the portfolio and leased -- the portfolio of leased vehicles will continue to grow. So the real question impacting leases is the following: when will production of new cars normalize? And when will that serve to restore the balance between residual and market values on 3-year-old off-lease vehicles? In reality, I expect to see a trend in that direction -- start to trend in that direction over the course of 2022. But I do not expect it to return to normal in 2022. But I do believe it will return to normal well before 2025. And when it does, our strong incumbency, which we've just shared with you, will make us a winner with off-lease volumes when that happens. By the way, I was encouraged to read an analyst report just last week on new vehicle production that echoed our sentiment showed on this graph. It forecasts a tougher 2021, 2022 than they had originally modeled, but it also forecasts an even stronger recovery in the 2023 to 2025 time period. Turning now to repo. Again, as I mentioned, this is a smaller segment for us, but because of the exclusively on-premise nature of repossessed sales and the high revenue per unit, it is a strong and important profit driver for our company. Now first of all, if we look at the portfolio of vehicles being financed, that portfolio continues to grow. We see a steady upward trend on this graph, 28% growth over the past 5 years. Now let's look at delinquency. In just about every prior recession, delinquency increased. You can see from this chart what happened in the Great Recession. However, that did not happen with COVID, and that was due to strong government stimulus and consumer protections during the pandemic. In fact, current delinquency is approximately 30% below the long-term average, and it's 40% below the pre-pandemic level. We expect this to normalize over time. And we expect that this will drive a 40% or greater increase in the repossession volumes compared to their current levels, 2021 levels. And again, our strong incumbency with ADESA and our visibility into the space with our platform like RDN makes us ideally placed to benefit. In my discussions with auto finance company -- with customers in the auto finance business, they've also mentioned a scenario that could potentially drive an above normal volume of repossessions in future years, although I would point out that we have not modeled an above normal volume of repossessions into our projections. But the scenario that we've talked about is that in reality, for the past 9 months or more and continuing today, vehicles are being financed at very high values. Used vehicle prices are high at the retail level, and these high retail values are being reflected in the finance contracts that are being written today. There is the possibility that if used vehicle prices moderate or fall, consumers that find themselves in default will have very little motivation to continue to make payments, knowing that the value of the vehicle that they're paying for is now less than the amount they have financed. So while we've not modeled that into our projections, that possibility does exist. So to summarize our commercial volume recovery thesis, first of all, I believe that the principal reason by far for KAR's struggle over the past 18 months has been the rapid -- really the unprecedented fall in commercial seller vehicle volumes, principally off-lease and repo; a drop of 1.2 million vehicles from 2019 to 2021. Frankly, we have never experienced a drop of that magnitude before. Now it's also clear to me that this drop is industry-wide and is not reflective of any loss of market share for KAR. However, I also believe that the causes of this decline are all rooted in the pandemic and that, ultimately, this decline is entirely transitory. I believe that commercial seller volumes will return to normal levels in time. And I believe that KAR will benefit greatly from that and that KAR will, ultimately, be a long-term winner with commercial sellers in our industry. So with that, I'm now going to turn to the second very important driver of our future success. And this is volume growth and expanding the addressable market in the dealer-to-dealer marketplace. To help that -- tell that story, I'm delighted to invite Justin Davis, Co-Founder and CEO of BacklotCars, to the stage. Before Justin gets to the stage, we're going to open with a short video, where we'll get to hear from some of his many, many happy customers. [Presentation]

Hi. I'm Justin Davis, Founder and CEO of BacklotCars. Before we get into what BacklotCars is and what excites us about the future, I thought it would be helpful to give you a little insight on where we come from and a little bit of background about myself. So I grew up in and around the automotive industry as my father owned a number of franchise dealerships in the Atlanta area. After graduation, I joined Manheim Auctions and learned the wholesale side of the business. But I quickly realized that there had to be a better way to do business. So I took this wealth of knowledge of automotive, and then I started studying technology companies and other marketplace companies that had done it before. And one of the key people that I studied out of the gate was Peter Thiel and his book Zero to One. He talks about great marketplace companies, how they don't necessarily need to go out and boil the ocean and go and build something massive from day 1, but they can actually start in something niche and grow and serve a greater market over time. But the core goes back down to 4 principles, right? Creating proprietary technology, building strong network effects, delivering economies of scale and ultimately having great branding. In addition to Peter Thiel, I studied other marketplace founders such as Simon Rothman, the founder of eBay Motors, who talks about having a core focus on a core KPI. In our case, it's liquidity, right? Simon describes liquidity on marketplace businesses is not the most important thing, but really, the only thing that marketplace founders should be focused on. So with all this knowledge, we took it together and created our own purpose statement. What would drive us on a day-to-day basis and really drive us to greatness over time? And that's to make wholesale easy so our dealers can be more successful. So we took this combined knowledge in our purpose statement, and we took it to Kansas City, our home headquarters. And we had a blank slate. And here, we started talking to dealers, testing, failing, learning, getting feedback on what they needed for a digital solution. And then what happened was nothing short of amazing. We began selling low-end cars across the state of Missouri, right? This wasn't just Kansas City to Kansas City transactions or St. Louis to St. Louis transactions. These are transactions that never had happened before. And as we started to expand out from Kansas City into tangential markets, we saw this demand continue to build and continue to compound and grow and grow and grow until where we're at today, where the state of Missouri supplies cars for buyers from over 43 states today. And as I mentioned, our growth strategy was to go from the center of the country out going into tangential markets, and we eventually reached our first A market, the great state of Texas. And what happened was pretty amazing because all the hard work that happened in the prior years continued to pay back in Texas. The demand that we had created, the success we had delivered to the buyer side of the marketplace, pulled those cars in and provided liquidity from day 1. And this didn't just stop where we had currently launched, but continued to grow and grow and grow, where we're at today, again, providing buyers from 44 states cars from Texas. And this wasn't just in the Midwest. We went nationwide. We went where our competition was and found success. New York, we provide buyers from 45 states vehicles today. And even California, we saw success east to west. And what's most exciting about this visualization is it doesn't include KAR wave, which will only further accelerate our digital dealer-to-dealer platform upon closing. So now that you have a little bit of an idea of where we've come from and the scale we've been able to reach in a very short period of time, I would like to show you a little bit behind the curtains on how BacklotCars works on a product demo. [Presentation]

Now that you've seen a little bit about how our platform works, let's talk about how we measure what matters and touch on some of the core KPIs that we know deliver success to our buying dealers and selling dealers on BacklotCars. First up is our North Star metric, sales conversion. Since inception of BacklotCars, we've been able to deliver a 58% sales conversion on Backlot. So sure, we're selling a high number of the cars that enter in the platform, but what about the value we deliver to our sellers? Since 2020, we've actually been able to beat market, delivering 107% of average Black Book on our core inventory, which is $7,000 and less. And you may be scratching your head and wondering why are buyers willing to overpay and pay a top price on BacklotCars, where we built trust, transparency in our inspection and marketplace model, plus we've also granted them the access of inventory that they didn't have before. So on average, our buyers, if they're not in a local market of -- within a 50-mile radius of the seller, are actually traveling on average 440 miles to access the inventory on BacklotCars, which is absolutely amazing. So these core metrics continue to drive success on our marketplace. But we are extremely mindful, as we are building our business, to also introduce value-add services that continue to drive liquidity and increase the buyer confidence and increase the customer success on our platform. First up is our transportation solution, which I believe is industry-leading at a 65% attach rate. This gives the access to the BacklotCars' network to our buyers at a click of a button. We aspire to be like Amazon Prime now that we have access to the over 70-plus vehicle logistics centers at ADESA. This is a huge asset for us, and we're going to continue to double down on a sophisticated logistic layer because we believe it is a differentiator and it's table stakes for us to win this market in the long term. Next up is our flexible financing solutions. Today, we have a 15% attach rate on this business unit, which has grown substantially year-on-year. Not only does this create sticky buyers on our platform, but they also become power users who buy more and more and more on BacklotCars. In addition, we believe there's a ton of greenfield in this opportunity right now because still 65% of our transactions, the dealers use ACH to fund the transaction. So we believe there's an opportunity similar to a firm to provide flexible financing at the point of checkout to deliver more liquidity on our platform. All of these things have compounded into what we've seen as extremely strong user cohorts, both on the seller side and both -- and on the buyer side. So let's double-click into those now. Starting with the sell side, on the left-hand chart, you're going to see sales building over time. On the right-hand side, you're going to see unique sellers build over time. What's most exciting is seeing the organic growth that we're continuing to see in both of these categories. Also, 1 thing to note is that the markets that we launched early on in our history in '16 and '17 were your smaller C and B markets. And as we move to the coasts, California, Texas, Florida, New York, those are the A markets that we launched in '18 and '19 that are continuing to grow at a very, very, very rapid pace. What this tells me is there's still a lot of greenfield in our market, and we're continuing to prove out that we can deliver organic growth, which is extremely pleasing. This pattern doesn't stop on the sell side of the marketplace, but also is seen on the buy side of our marketplace. Again, the left-hand chart shows how buyers are continuing to buy more on BacklotCars and the right-hand side continues to show the build of unique buyers in our markets as we continue to grow. Again, the organic growth is phenomenal. And again, pattern to look out for is the earlier cohorts we are launching were smaller markets and eventually moving into larger market cities. Now as Peter mentioned, earlier this year, we combined the BacklotCars and TradeRev platform in the United States. And what we saw was absolutely amazing. It was truly a 1 and 1 equals 3 opportunity. And this takes a look at what the sell side of the marketplace has been able to do. We've seen tremendous growth on unique sellers. And the important thing to note that this wasn't just a logo change in moving 1 person to another platform and just swapping the logo. This was actually reselling them on the value prop that BacklotCars delivers. And we've seen even stickier users and producing more volume than what we had seen in the past. So we're really, really excited to see this performance on the sell side of the marketplace. Again, this doesn't end with our sellers. We also did this on the buy side of the marketplace, again, reintroducing them to BacklotCars and reselling them on the value that we deliver on a consistent basis. And again, we've seen this unique buyer growth just sort of explode. So now that you know what we've been up to, to date, let's talk about what excites us about the future. And plain and simple, my team gets excited about selling 1 million cars online. In fact, we want to sell 1.2 million cars on our digital platforms. This is inclusive of BacklotCars, TradeRev and CARWAVE upon closing. So sure, this seems like a big number, but what I'm going to outline in the next slides is how do we get there? First and foremost, in order to go from where we're at today to 1.2 million sold, it's a 25% organic growth rate per year. On the right-hand side, you can see the growth levers that are going to get there. Help us get there. And we're going to start first the most powerful one, which is the power of the KAR platform. So as Peter mentioned in the previous section, there's a ton of assets that KAR has. And BacklotCars, as an independent company, were able to achieve tremendous growth, but now we can have access to all of these assets to continue to fuel our growth in the future. First, we're going to start with the physical assets that we have. This not only helps us with our logistics layer, making transportation even better, but it also helps introduce more complex workflows, including storage and we can introduce other services to add along the value chain with our users on BacklotCars. In addition to the physical space, we have massive cross-sell opportunities across all of the portfolio companies here at KAR, and we're going to exploit that. One example is tapping into the 14,000 independent dealers that AFC currently lends to. This gives us a massive unlock on 1 side of our marketplace, as we deliver backlog cars to them and give them the best place to buy cars. Last, this company throws off petabytes of data almost on a monthly and daily basis. This data that historically maybe hadn't been captured is now being pushed back into our marketplaces to make them more intelligent. So that way, we can continue to invest in better matching and better technology in the future to allow us to win. Next, as Peter mentioned, we've also seen an expanded TAM in North America. Why this is exciting is because it shows that we're able to penetrate the nontraditional auction market, people who maybe did solutions themselves and bring those into our ecosystem. This chart highlights that we've seen nearly a 19% growth rate over the first half of '19 to 2021. Again, showing our ability to bring those customers into our ecosystem and provide complex workflows to make them more successful. Next, we have an opportunity to move up market. As I mentioned, our go-to-market strategy in our name says, we started at the low end of the market, but we can simply sell more expensive cars. And we've seen this pattern happen every year since 2018. In fact, we've moved upmarket over 40% year-on-year. The other unlock that we have now is that we have over 5,000 selling dealers, franchise dealers on our platform, and there's massive cross-sell opportunity to introduce them to buyers on our platform, as they have needs to buy on BacklotCars and find inventory today. Finally, at our heart, we're a technology company, and it's our duty to continue to innovate and make the new wholesale processes of tomorrow and continue to listen, so we can deliver success to our buying and selling dealers. So 2 -- the following 2 slides, touch on a couple of the many bets that we have going at BacklotCars that really excite me. First is how we continue to build trust on our marketplace. And this starts with our inspection. Every inspection we ingest -- in arbitration, we ingest, we calculate this data and then push that back out to our inspectors in real time, allowing them to get real-time insights on what to check out as they're inspecting the car. What this has led to is more clean inspections and lower arbitrations, which obviously delight the buyers because they're buying more consistently with less issues. To give you an example of what we've been able to accomplish with 1 of our inspection guided framework rules, we've targeted 1 manufacturer and 1 individual item, a transmission. Since implementing this rule, we've seen a 50% reduction in arbitrations and an 85% reduction in arbitration costs. This amounts to about a $200,000 run rate here in 2021 in savings that we're delivering on BacklotCars. Next is all about creating automations around our marketplace. We're reducing the amount of effort needed to buy on BacklotCars and to sell on BacklotCars and reducing the maximized results for our buyers and sellers. We're delivering tools to our buyers and sellers on BacklotCars similar to what CarMax, Carvana room are all doing at scale. We want to be able to democratize these tools and again, allow our dealers to be more successful on BacklotCars with less inputs. For example, we've been able to automate nearly 1/3 of our sell-side price discoveries to date just by using 1 of these autopilot framework rules. In addition to all these growth levers that get us to 1.2 million cars sold by 2025, we're not going to stop there, right? We actually believe there's a massive opportunity to continue to drive revenue on our platform by introducing more value-add services and continuing to deliver the success on our platforms. We can see that we have a proven track record of increasing ARPU over time as we've increased this 52% since 2018. In addition, we believe we're aggressively priced with room to grow. And one final note. This doesn't include AFC. So again, all of this is additional upside that we can capture as we continue to deliver upon our mission statement and continue to drive volume through our platform. So in closing, I hope you've had a much better experience and understanding of what we've been able to achieve in BacklotCars in a very short period of time and really where we're going in the near-term future. These 4 points, scale, liquidity, innovation and revenue growth, these are ultimately going to be the things that help us to win. But in addition, we're focused on near-term profitability, which ultimately helps us build a sustainable business that can continue to reinvest in the future of this space. So that concludes my section. Now I'd like to invite Peter back up to take us to Q&A.

Well, thank you, Justin. We can -- if we just go ahead and take a seat, and Eric is going to join us as well. Great job with the presentation. I hope the audience can see many of the reasons we're so excited about BacklotCars. So with that, I know we've covered a lot of ground here this morning in this initial section. So at this point, we thought we would open the lines to an initial Q&A session for about 15 minutes or so. And I believe on screen, you should be able to see a phone line where you can call in to ask questions. I'll just preview what's coming up after the Q&A. After this initial Q&A, we're going to take a quick break of about 5 minutes, and then we'll come back with the second portion of the program. In that second portion, I'm going to talk about AFC. After which we'll cover how we're managing our growth and managing our costs across KAR. Eric will review our financial model. And then we'll talk about what I like to call our white space opportunities. So with that, we'll go ahead and get started here with the Q&A.

There was a little audio difficulty there, but I think that was Rajat. Hi, Rajat. So let me -- I think I got the gist of your question. Let me attempt -- let me attempt to answer your question, Rajat. Thank you. So in terms of the 1.2 million digital dealer-to-dealer transactions for 2025, I'm aware that some other companies may have different targets or different rates of growth. What I would say, the way to think about it is we're focused on a market share. I don't think anybody can say definitively at what rate this market will grow. We recognize there is a bigger opportunity for digital dealer-to-dealer transactions in the future than historically came to physical auctions. But there's a process that needs to take place as dealers learn that, learn how to use those solutions, adopt those solutions, and that grows the -- what we call the addressable market. So we're focused on growing that, driving that. And I would say we're very focused on our share. If the market grows at a faster rate, then we would seek to grow at the rate the market is growing. We're certainly not looking to give up share vis-à-vis our current share. But we felt that the numbers we put in represent a reasonable assessment, our best assessment, I would say, of the rate of which we think that market will grow and our goal of maintaining a similar level of share, perhaps increasing that share, obviously, with CARWAVE as well, but maintaining that share at that level as the market grows. [Break]

Ladies and gentlemen, please welcome back. Peter Kelly.

Welcome back, ladies and gentlemen. I'm going to now turn to our finance business, AFC. I've mentioned a few times already the strength and consistent performance of AFC. How it drives liquidity within our marketplace, but also generates revenue and profit for KAR. And you heard Justin just talk before the break about how critical liquidity is to marketplace success. He said it's not the most important thing. It's the only thing to quote that Simon Rothman quote. However, if our buyers don't have the capital available to go bid on vehicles, then that liquidity in our marketplace is reduced. The ability to quickly and easily have funding ready to hand. That's critical for so many of our buyers. Without it, many of those buyers, particularly smaller independent dealers, would be sidelined and unable to participate in the marketplace. So enabling those dealers to purchase drives liquidity in our marketplace and enables us to deliver better outcomes for our seller customers across those marketplaces. But of course, as I mentioned, AFC is also an important contributor to the performance of profitability in its own right. So if we look more closely at the AFC business, there are over 14,000 independent dealers currently approved to finance with AFC, with established lines of credit. As Justin alluded to, these 14,000 independent dealers represent a remarkable opportunity to expand the buyer base in all of KAR's marketplaces. The average floor plan loan per vehicle is approximately $14,000. And the vehicle's average age is approximately between 7 and 8 years old. And on average, a typical AFC dealer floor planned approximately -- a little over, in fact, 60 vehicles per year with us. The vast majority of those vehicles that are floor planned are floored directly from the vehicle being purchased in the wholesale marketplace. Typically, the vehicle is purchased either from a physical or a digital wholesale auction. AFC is integrated with over 1,200 of those approved inventory sources. Those 1,200 sources include ADESA auctions, include our digital properties, but they also include competitors' auctions and digital marketplaces across the industry. Today, when we analyze the source of the vehicles that are floored with AFC, just under 30% of them originate within cars marketplaces, principally ADESA, BacklotCars and TradeRev, and the balance, approximately 70% being purchased in other locations. So I'd like to speak to a minute -- for a few minutes as to what differentiates AFC as well as our plans for the future. If you were to ask AFC's customers or its employees, what makes AFC successful, they'd say it's the relationships. AFC is focused on serving the customer better than anybody else in the space. Those customer relationships are enabled by AFC's digital tools and also supported by a local branch network. And we believe it's this combination that gives us an edge over the competition when it comes to delivering a personal yet streamlined customer experience. In terms of its digital presence, AFC has always been at the forefront of KAR's digital transformation. And today, AFC offers a very powerful, simple and easy to use digital experience for its customers. As a result of that, today, over 85% of all AFC's transactions are processed digitally through that digital customer interface. In terms of our branch network, these are typically located in close proximity to our buyers. Sometimes they are co-located close to an ADESA auction or in an ADESA auction. Sometimes they're closer to maybe a competitor's auction. But ultimately, all these locations are close to our customers. This local presence enables AFC to humanize the financing experience for our dealers, while also offering a personal and convenient touch point pretty much anywhere that our dealers are. And I would say that these local branches also provide us with eyes and ears on the ground, and that's very important when assessing and managing risk. We estimate a market share of approximately 20% for AFC today based on the following math. AFC's customers are independent dealers on the buy side of the marketplace in the U.S. and Canada. As I mentioned, independent dealers sell about 16 million used vehicles a year across North America. We estimate that around 30% of those vehicles are floored. That's somewhere between 4.5 million and 5 million vehicles a year. And that would put AFC's share at about 90 -- at about, sorry, 20% of that total. So we believe there's still plenty of room for future growth at AFC. AFC has a disciplined risk management and risk mitigation strategy and as well as strong relationships with our lending partners. These, coupled with our focus on our dealer customers, have all played a role in AFC's continued success. And we intend to maintain and grow all of those going forward. We are leaning into 4 different areas to drive future increased performance at AFC. First, customer acquisition. We're leveraging our digital platforms, Justin just talked about backlog cars, for example, and our local presence to increase our market share, building relationships with new dealers and new buyers who haven't done business with us before. Secondly, account servicing. We believe that the easier we make it for our dealers to transact and to self-service their accounts, the more they'll keep coming back and the more they'll use our services over time. We also believe it will drive increased stickiness and greater customer retention. Increasing the attach rate for our services, particularly within the marketplaces that we own. Justin talked about this with BacklotCars and the 15% attach rate we have for financing within that marketplace. We have initiatives underway with ADESA, TradeRev, BacklotCars to increase our attach rate and to grow as those marketplaces grow. And finally, from a cost perspective, we have a digital back office initiative and we've made a lot of good progress on this front at AFC, but there's room for more. We're taking a lot of the processing activities in the paper out of the branch locations and centralizing them and digitizing them. And ultimately, this creates a more scalable and a more efficient operating model and improves our overall performance. We've made some big strides with that at AFC this year. I want to comment for a moment on our 2025 targets and the numbers that we're sharing with you here today. You'll see these coming in Eric's section, which is coming up soon. I will say we have been very conservative in the way we've modeled our projections for AFC between now and 2025. We've modeled a modest amount of growth from current levels, ultimately growing our total loan transaction units to a very similar level in 2025, as we actually experienced in 2019. So I believe there may well be a credible upside case to the AFC projections that are included within the numbers that Eric will share with you later. So before I hand over to Eric for a financial review, I want to summarize some of the key messages that we've heard so far today, particularly those factors that will be most material to driving our performance as we look to the future. And I also, in this section, I want to speak to our cost management agenda. So as I look to 2025, our expectation is that we will deliver significant growth in volumes, in profitability and in cash flow. I mentioned earlier that we intend to deliver 4.25 million vehicles sold by 2025. That represents approximately 60% versus our updated projections for the current year. But on the other hand, it's only 16% higher than our previous high of 3.8 million vehicles, which we set in 2019. I explained to you how this volume increase will be delivered -- driven by 2 principal factors: a recovery in commercial seller volumes, coupled with volume growth and a TAM expansion in the dealer-to-dealer space. Looking more closely at the commercial seller space. We expect to see a recovery in commercial volumes that will positively impact our business, particularly at ADESA and OPENLANE. That recovery we project will drive over half of the volume increase between this year and 2025, an increase of approximately 1 million commercial seller vehicles. Now 1 million vehicles may sound like a big increase, but even at that level, we are still below our 2019 high watermark. Given the data that I've shared with you, I'm confident we can deliver this. We talked about how sticky our solutions are with off-lease and our strong incumbency in the repossession segment. The principal factor relating to the timing will be the recovery of new vehicle production and the normalization of prices in the used vehicle market. The reason we show 2025 volumes as below 2019 levels as that we expect some level of disruption to new vehicle production next year. And this will have an echo effect in terms of somewhat fewer 3-year-old vehicles in 2025, and that's reflected in our numbers. The second driver of our volume growth is that we expect to grow our volumes in the dealer-to-dealer channel, particularly through gaining volume on our digital platforms, TradeRev in Canada, BacklotCars and also CARWAVE in the U.S. and obviously, that's pending regulatory approval and closing of that transaction. This growth in dealer-to-dealer volume will drive the balance of the increase or an additional 700,000 vehicles between now and 2025. And as I mentioned, that growth in dealer-to-dealer will be driven largely by growth in our digital platforms, TradeRev and BacklotCars, as shown on this graph. Our 2025 target for digital dealer-to-dealer is 1.2 million vehicles. From where we stand today, that represents a compound annual growth rate of approximately 28%. And while I recognize that the CARWAVE transaction has not yet been approved or closed, if one were to include CARWAVE in the current year volumes, then the compound annual growth rate required to achieve that 1.2 million is closer to 20%. So whether we're talking about our commercial seller volumes or dealer volumes, this level of growth that we're describing here today, growing our business to 4.25 million vehicles sold by 2025, that's going to be very exciting for our business. However, as I mentioned in my opening remarks, there's an important third leg to the strategy. And that is that we need to control our costs and to make sure that our costs are managed and do not grow at the rate that revenues and volumes grow. So I want to focus on our cost agenda here for a few minutes. As you all know, we have been very focused on our cost over the past 18 months, and I believe we've made some very significant accomplishments. We have eliminated over $150 million in operating costs across this business. We've increased our gross profit as a percentage of revenue by 400 basis points from the first half of 2019 to the first half of 2021. And please note that I'm excluding the revenue derived from selling purchased vehicles from this math. Finally, we've increased our gross profit per vehicle sold to $270 in the first half of 2021. But the cost management work isn't over, and we've got an important cost management agenda as we look to the future. There are 2 key metrics that I'm focused on as we think about our plans for 2025. I want to keep gross profit as a percentage of revenue. And again, I'm excluding revenue from purchased vehicles in this math. I want to keep that gross profit as a percentage of revenue above 50%, and I believe we can do that. Secondly, as our volume returns, I want to closely manage our SG&A, keeping SG&A growth under control and getting leverage from our SG&A expenditures across this company. We have a medium-term target. And by medium term, I mean 2025 of SG&A per vehicle sold under $125 per vehicle. So we're putting a lot of focus on this cost management agenda here at KAR. We have commissioned internal teams to develop plans to help us accomplish those goals that I just described. We're also leveraging input from outside experts. And we're focused on 4 principal areas within our business. Streamlining our go-to-market approach, consolidating our service operations, getting more leverage from our technology investments and managing our SG&A. Within this framework, I'd like to address some questions that I get from time to time from investors. Do we have opportunities here at KAR to streamline our brands? I would say, yes, I believe that we do. And that, that will be part of our go-to-market agenda. So you should expect us to talk about that in the months and quarters to come. A second question, do we have opportunities to consolidate processes, back offices and reduce our costs? And I would say, yes, I believe we can. That will be part of our service operations agenda. We've already made good progress. We continue to lean in heavily into that. Can we consolidate on fewer technology platforms and get more leverage from our technology investments? I'd say it's possible that we could do so, but it's also complicated. It's also desirable. This is something for sure we need to look at and see what's possible. And this will be part of our technology agenda. So in summary, I would say there's a robust cost management agenda here at KAR. I'm not going to share specific targets at this point. but Eric will speak to cost also in his financial review, which is coming up next. So my final comment before I move off the subject of cost is to refer to a phrase that I've heard many times in business that good habits are born in tough times. And I personally experienced this in the dot-com crash in the Great Recession and, again, now. I think we've built a lot of good habits here at KAR over the past 18 months, dealing with the volume situations that I described earlier in my dialogue here. My intention is that we keep those good habits and that we build on those good habits and that we become more effective and more efficient as we go forward. So with that, I'm going to hand over to Eric for a financial review, after which I'll be back to speak about some white space opportunities. Eric?

Well, Peter has covered a lot of ground, and I do not plan to repeat the information he has provided. However, I think we should summarize the information and provide additional detail on where we are today and what we see in 2025. I also want to provide some background on what gives us confidence we can achieve our expectations for 2025. I would like to start with a look at the current COVID-impacted period and how it compares to our last major disruption in the wholesale used car industry, the Great Recession. Let me start with a review of the total wholesale used car volumes by year for KAR. As you can see on this graph, the Great Recession began in 2009 with volumes declining followed by a return to prerecession levels and then grew beyond those levels in subsequent years. We see many similarities in how the current COVID-impacted period looks in comparison to the Great Recession. The most obvious is wholesale auction volumes declined due to disruption in the supply of vehicles. At the same time, retail demand for used cars was strong throughout the period. Supply was disruptive and the retail used car market remains strong despite the disruption of supply in the wholesale markets. Another important similarity is we were able to improve the performance of our business as we experienced the disruption in supply and improved our unit economics very quickly following the initial period of disruption. In both the Great Recession and the COVID-impacted period, the decline in volumes was significant, while the declines in revenue and adjusted EBITDA were much less than the level of volume decline. In terms of what is different between then and now, I have 2 observations. First, the supply disruption today is driven by the supply chain issue, impacting new car production. This creates imbalance in supply and demand that causes increased average selling prices and many other impacts in the auto ecosystem that trickle through the wholesale used car market. The second difference is the state of the economy and availability of credit. In the current environment, the economy has remained relatively stable, interest rates have declined and credit is readily available. I expect this will provide important fuel for the increased supply once we get through this period of supply disruption. So where are we today? As you can see in our comparison of 2019, 2020. In the last 12 months ended June 30, 2021, we have offset declines in revenue with an improved cost structure that Peter discussed earlier. We have significantly improved gross profit per vehicle in the ADESA segment and reduced our cost structure throughout our business, taking over $100 million of SG&A out of our consolidated results. In terms of revenue, volume is the primary driver of the decline in revenue. Auction revenue per transaction has increased as values have increased, but our business model is driven by the number of transactions, not the value of the transaction. The declines in commercial volumes also drive lower services revenue across many units of the ADESA business. And in 2020, uncertainty around the finance business caused us to be cautious in lending money in the second and third quarter of that year, but we have begun growing the portfolio again. Also reduced provision for credit losses contributes to increased finance revenue at AFC and increased profitability. A highlight of our performance is the gross profit. We have permanently taken cost out of the business, and this is reflected in improved gross profit per unit at ADESA. The shift of our business to digital marketplaces for on-premise auctions is a key element of our performance now and in the future. We have made significant reductions in our SG&A and these reductions are permanent. Actual savings of over $100 million has been realized. We will have additional opportunities for reductions from synergies and integrating our digital dealer-to-dealer marketplaces. And as Peter mentioned, we are looking at all of our processes to support our revenue-generating activities and may be able to identify further efficiencies in our cost structure as the business begins to grow in the cyclical recovery we expect over the next few years. So we have taken all of the inputs and assessed our performance outlook for 2025. As Peter mentioned, we expect approximately 4.25 million wholesale transactions in 2025. We have analyzed the range of outcomes expected, and they are summarized on this page. In summary, revenue of $3.4 billion to $3.5 billion is expected to result in adjusted EBITDA of $750 million to $800 million. Now what are the major drivers for taking our current adjusted EBITDA of just under $450 million to $750 million to $800 million. The biggest driver is growth and improved performance in the dealer-to-dealer and commercial markets. Our investments in the digital dealer-to-dealer marketplace is already producing results that exceed 2019 pre-COVID levels. Increasing our share and expanding the total addressable market by using this technology is a key driver to improve performance going forward. We also will benefit from the cyclical recovery that will drive increased commercial volumes. In addition to the improved auction performance from these commercial volumes, we will also increase the related services revenue. The contribution from increased services revenue on this chart is driven by the commercial segment of our business. And our focus on continuously improving our processes and SG&A cost structure is expected to contribute to our improved performance as well. We acknowledge that the growth in our business going forward will have some level of SG&A, but that growth will be substantially less than the growth in the revenue. For presentation purposes, we have used the midpoint of our expected adjusted EBITDA performance to provide the financial impact of each of these areas through 2025. Now let me summarize this information into a growth algorithm for the car business. Over the period 2020, our most recently completed calendar year through 2025, we expect volumes to grow approximately 7% per year that will drive revenue growth of the same level. We expect gross margins, excluding purchased vehicle revenue to remain above 50%. This will result in adjusted EBITDA growth of approximately 15% per year and operating adjusted net income per share growth of over 20% per year. And finally, this level of performance will result in approximately $1.5 billion of cash from operations through 2025. This will allow us to continue investing in our marketplaces, invest in strategic growth, return capital to shareholders or reduce leverage over this period. KAR is well positioned for the future. And like all of you, we are anxious to see the volume picture improve so we can see the impact of all the changes we have made in our business, especially over the past 2 years. So I'll now turn it back to Peter to cover a few more points for us.

Thank you, Eric. I appreciate that. So I hope that by now you're getting a clear picture of our plans for the business over the coming 4 years. 4.25 million vehicles sold, $750 million in adjusted EBITDA and $1.5 billion in cash flow from operations by 2025. That our volume growth will be driven by a recovery in commercial seller volumes and by volume growth in TAM expansion in the dealer-to-dealer segment. We've also covered AFC and our plans and expectations for that business, which I believe are conservative. We talked about our cost management agenda, which is a very important part of the overall strategy. And Eric has just provided an overview of how all of that gets reflected in what I believe will be a strong set of financial results, taking the company to new heights in terms of performance. However, before we conclude today, I want you all to know that the opportunity for KAR doesn't stop there. We have opportunities that go well beyond that. Opportunities that are consistent with our purpose of making wholesale easy, making our customers more successful and also consistent with our vision of building the world's greatest digital marketplaces for used vehicles. For the most part, these opportunities that I'm going to talk about here have not been modeled into our 2025 projections in any significant way. So you can think of them as potential upside cases to what we presented or as an alternative path to deliver on our objectives. But either way, we know they represent interesting opportunities for us here at KAR. I'm going to discuss 3 specific opportunities: They are vehicle reconditioning opportunities, consumer trading opportunities and international expansion. I'm going to start with vehicle reconditioning. To get us started, I'll provide a quick overview of our well-established wholesale reconditioning capabilities, after which we'll pivot into a whitespace opportunity of retail reconditioning. But before I do that, let's take a quick virtual tour of one of our vehicle logistics centers, ADESA Riverside. [Presentation]

Well, thank you, Srisu. Hopefully, you found that tour helpful to understand the scale and capacity of our network of vehicle logistics centers and the types of services that we offer. As Srisu mentioned, we provide a wide range of services at those locations, just about anything a customer wants or needs done to make a vehicle more sale-ready, at scale, we can do. As regards reconditioning activities themselves, the services highlighted here on the right represent the core reconditioning services that we provide and the ones that our customers use most frequently. We have the most experience on what we will call wholesale reconditioning. What I mean by that is getting a vehicle to a level of preparedness where we can maximize the ROI outcome for the seller in a wholesale market context. This reconditioning work is typically driven by the seller's strategy and goals and the anticipated ROI that they desire to see from the services they select. Typically, we work with the seller in a collaborative way as we engage and help them figure out the best approach to achieving their overall objectives. On average, revenue per car from wholesale reconditioning services is about $140. Now that is a relatively low number on a per-vehicle basis. And the principal reason for that is quite a number of our sellers just choose to have the vehicle cleaned and detailed, and that's a relatively inexpensive service done to a large number of vehicles, so it tends to drag down the average dollars per vehicle quite a bit. In 2019, the total revenue generated from reconditioning activities at KAR was $250 million, and that made a solid contribution to our overall performance. The other big benefit is that it supplies our marketplaces with improved quality vehicles that attract more buyers and deliver higher outcomes for sellers. We believe there's still room for growth and uncaptured revenue within wholesale reconditioning, and we have opportunities there to help make our customers be more successful. And I'd like to showcase one of the things we're doing to help achieve that. We recently launched an initiative here at ADESA that we call Smart Seller Reconditioning. And here's how it works. We receive a vehicle at one of our vehicle logistics centers, and we perform an inspection. The inspection and condition information enters a data engine. And using machine learning and artificial intelligence, we run it against an extensive database of damages, vehicle repair information, vehicle grades data, and obviously, marketplace transaction data, and ultimately create clear line item actionable recommendations for the seller on possible reconditioning activities they could perform to that specific vehicle. And against each activity, we provide an estimated impact to the vehicles grade, to its overall likely sale proceeds, and obviously, the cost of the repair. All of this is highly automated and happens basically in real time. Sellers can review the menu of recommended reconditioning services and see the expected impacts. And based on that, they can make a decision on what services that they want us to action. Or they can auto-decision the process and let the machine make the determination. We believe this benefits sellers because now they have clear data-driven decision-making as opposed to just going off intuition or gut feel. And of course, buyers benefit because they get access to a higher-quality selection of vehicles, which is something that they like, vehicles that are more attractive to their end customer, the retail customer. And finally, of course, it benefits us because we have the opportunity to attach more reconditioning services to each vehicle and earn more revenue. We're seeing some strong positive results from this pilot and we're expanding implementation to more locations and more sellers. We initially piloted with 8 commercial sellers, and we found that the average cost of the services that the sellers ended up selecting was about $440 per vehicle. And that resulted in an average lift at the wholesale level of about $900 on those vehicles, yielding an average ROI of just over $460 or $2 for every $1 invested. Again, I think those are strong results, benefiting our customers, growing the volume of reconditioning services and offering better quality vehicles to our buyers. So I'm going to pivot now for a few minutes and talk about retail reconditioning, which is a new business activity for KAR but one that we're excited about. So we continue to see strong evidence across our country of consumers moving to a more digital retail experience in terms of how they want to acquire their next used vehicle. We see companies like Carvana, CarMax, Vroom and others leaning in heavily to deliver that type of experience to their retail customers. And now we're also seeing dealers and manufacturers making significant investments to enable a more digital retail experience for their customers also. A more digital used vehicle retail experience may not even require the consumer to visit the dealership. The vehicle can be delivered directly to that consumer's home. All the seller really needs to have is a last-mile delivery capability and a vehicle that's fully reconditioned ready for retail sale. And that's where our nationwide network of vehicle logistics centers comes in. As Srisu mentioned, we have a coast-to-coast presence close to all major metro areas where vehicles can be prepared to retail-ready condition and made ready for next-day delivery. If we think about the size of this opportunity, there are over 30 million used vehicle retail transactions from dealers to consumers annually across North America. With an average cost of about $600 per vehicle in terms of reconditioning to get it to a retail-ready state, that's a $20 billion market opportunity. And again, while we're very small in this space today, we think we're well positioned to capture and grow -- to grow and capture some of this opportunity. It's also consistent with the purpose of making our customers more successful in their core business. And finally, it has nice strategic overlaps with our business. For example, if a dealer or retailer reconditions their vehicles with us, it starts to make more economic sense that they would also source the vehicles from us because that eliminates one move of the vehicle and reduces their cost. And also, if a dealer or a retailer is delivering a vehicle from our facility to the consumer's home, then there's an increased likelihood that when that truck comes back, it brings back another trade-in vehicle to our facility and a new vehicle for our marketplace. We're getting a lot of requests from our customers to expand our capabilities when it comes to retail reconditioning. This interest is coming from large used vehicle retailers, but also from dealers and OEMs. And there's also interest from new market entrants like Canada Drives up in Canada. I think all of those customers see the power of what our network of vehicle logistics centers can enable. That network offers a natural and complementary solution for all of those dealers and retailers. We have the scale, the coverage and the capabilities to quickly process large volumes of vehicles ready for retail sale on a nationwide basis. So I'm going to quickly just walk you through how the process works. First thing is the vehicles delivered to our -- to one of our vehicle logistics centers. We inspect it. Reconditioning services are evaluated and selected on that vehicle, and then we quickly perform those as requested by our customer. Once that process is complete, we capture images of the finished vehicles. And these images are ready to be posted on that retailer's consumer-facing website, made visible to the end customer, while the vehicle is still at our facility. Once the vehicle is sold online, before it leaves our facility, there's a final safety check, safety and quality check by the retailer's representative. And then the retailer handles the last-mile branded delivery experience for the consumer. Hopefully, that delivers one more satisfied retail customer. And if we're lucky, the cycle repeats when they bring a trade-in vehicle back on the truck. As you might imagine, retail reconditioning is more intensive and uses more higher-value services, ultimately generating more revenue per vehicle than wholesale reconditioning. If you look at the mix of services used, you'll see there's a higher attach rate on the higher-value mechanical and body work aspects compared to wholesale. And this drives a much higher revenue per vehicle. In fact, currently, our average revenue per vehicle for retail reconditioning is close to $800, over 5x our average revenue per unit in the wholesale reconditioning space. In terms of our current scale, from a starting point of 0 a little over a year ago, we've ramped capacity to currently 1,000 vehicles per week. And currently, 20 of our 70 vehicle logistics centers are enabled to offer retail reconditioning services. We're scaling up this capacity rapidly, adding more VLCs, vehicle logistics centers, each quarter. And we have a goal to get to a capacity of 2,000 vehicles per week in the near future. Our average cycle time is about 10 days, and we're achieving high accuracy and customer satisfaction scores from our customers. As we look to the future, we believe the need for these services will only increase. And with the breadth of our network and the scale of our capabilities, we're well positioned to capitalize on this opportunity. Our current annualized revenue for these services is about $40 million on a run-rate basis, so still relatively modest in the context of our overall business. However, we have significant customer demand sufficient to drive a rapid expansion. I would characterize this as our customer demand could easily drive a threefold expansion of this over the next 12 months if we could bring that capacity online. So for all of these reasons, we see it as a significant opportunity. Now having said that, we've only included a very modest amount of this in our current projection for 2025. So we see it as an incremental opportunity over and above what Eric presented. The second white space I'd like to talk about is somewhat related to the last one and relates to the retail trade-in of vehicles and the opportunity we now have to enable our customers to deliver a more digital retail trade-in experience to their end customer, the retail customer. And again, let's look at the addressable market. In our ecosystem review, we saw over 20 million trade-ins from consumers to dealers each year across North America. We know from our research and from consumer trends that most -- that increasing number of these consumers would prefer a more digital experience. They prefer not to have to come to the store and haggle over the value of their car. We know that brands like CarMax, Carvana, Vroom, We Buy Any Car and others are enabling this type of digital retail trade-in experience. But we also know that many of our other customers such as dealers, OEMs and other business partners are trying to enable a more digital trade-in experience for their customers also. I think the timing of this opportunity is interesting for us because over the past number of years, we've built out new capabilities that we can now deploy to enable a more digital trade-in experience for retail customers. First, there's liquidity. Today, through our digital marketplaces, particularly TradeRev in Canada and BacklotCars in the U.S., we can turn any vehicle at any location into cash in a very short space of time. The vehicle does not have to come to our facility and does not have to wait for next week's sale. Secondly, there's data. Through our digital marketplaces, we now have instant real-time data on what all types of vehicles are transacting for in our marketplaces. This enables us to make an accurate assessment of value, and ultimately, to guarantee a price. We have relationships with all of the major players across this industry and a purpose statement that aligns with our goal of making them more successful. We have state-of-the-art inspection capabilities, which can be delivered and enabled either through our employees, through third parties or through consumer self-inspect tools. And finally, we have logistics and physical assets to ship, store and recondition vehicles if needed. So I think there's a great match between these capabilities and what our customers need. So as we think about this retail trade-in process, how might it work? The first thing I want to be clear about is we're not trying to build a consumer-facing brand. Instead, what we're trying to do is enable our customers to interact and serve their retail customers. So let's imagine for a moment, there's a retail customer engaging with our customer, that could be a dealer or an OEM, in a digital way, perhaps via that customer's website. That consumer has a vehicle they wish to get a trade-in quote on. Our technology and our data can be integrated into that experience in a way that enables our customer to put a guaranteed price on that vehicle. And we can stand behind that price. If the consumer accepts the price, the vehicle is taken to a dealership or picked up from the consumer's home. We can monetize that service through a relationship with the dealer, the OEM or the business partner. And in addition to driving revenue from that, we have an opportunity now to have a new used vehicle enter our marketplace. The building blocks of all of this are in place, and we're already up and running transacting vehicles. I'd like to talk about 2 ways in which we're doing that here today. So the first one of these is a pilot program that we're running in Canada called Trade In at Home. And through this program, consumer-owned vehicles are offered and sold within the TradeRev marketplace while still located on the consumer's driveway. Here's how it works. First of all, a franchise dealer who happens to be a TradeRev customer is engaging with a retail customer online. And that consumer has a trade-in vehicle that they want to get valued. Through the TradeRev app, the dealer generates a private link for that retail customer. The dealer sends that link out via e-mail or SMS directly out of the TradeRev system to the retail customer. The customer then clicks on that private link, and that link enables the customer to do a quick walk-around inspection of their vehicle, including a few photos. This typically takes just a few minutes. This condition report -- this condition information is then immediately visible to the dealer within a TradeRev application, and we can give the dealer valuation guidance on that vehicle at that point. But we can also enable the dealer to launch the vehicle into the TradeRev marketplace while the vehicle is still at the consumer's home. And through doing so, in less than an hour, the dealer can have offers from dealers all across Canada for that vehicle. So what this enables the dealer to do is put a stronger price on that trade-in, increasing the opportunity to secure the trade-in for the customer and maximizing the outcome for the consumer. The fact that the consumer knows that the vehicle is being bid on in a large national marketplace often increases their confidence that they're getting a good price. This program has been in pilot since earlier this year. Dealers are sending out thousands of these private links each month, and we're launching well over 1,000 vehicles a month into the TradeRev marketplace. Of the vehicles we launch, we believe that well over 50% end up being purchased by that dealer or by another dealer in our marketplace. This generates sales fee and buy fee revenue for us in the process. The second opportunity I'd like to talk about in the context of retail trade-in is something we're doing with Black Book. Now we have a long-standing partnership with Black Book that goes back many, many years. Black Book is an expert on used vehicle valuation. That's their core competency. In fact, Black Book has a tool set that's embedded in many OEM websites and many retail dealer websites, and this tool offers price guidance to consumers on the value of their used vehicle. However, price guidance is not a price guarantee, and that's where we come in. So again, we have the liquidity, the data, the operational capacity -- capability to turn any vehicle anywhere into cash in a short space of time. So by working with Black Book, we can now enable them to augment their price guidance capability with a price guarantee to that retail customer, a price that we will stand behind. And we can do this in partnership with Black Book and our mutual customer, which is the dealer, the OEM or the business partner. So we're very excited about this partnership and the opportunity that we have with Black Book to propagate this innovative digital solution and what we believe will be a winning consumer experience across the automotive ecosystem. And again, this is consistent with the purpose of making our wholesale easy so our customer, the dealer or the OEM can be more successful. Now we've not officially announced the details of this partnership yet, but we're looking forward to making a more detailed and more complete announcement in the not-too-distant future. And the final white space opportunity I want to discuss here today is international. If we take a very high-level view, new vehicle sales in North America represent around 27% of the global total. So there's no doubt that with 73% of vehicle selling outside of North America, there's a very significant overseas market opportunity. In terms of the markets we operate in today, Europe is by far the largest market outside of the U.S. that we operate in, so I'll confine the majority of my remarks to that mainland European market. If we look at the European automotive market, it's approximately 75% the size of the North American market in terms of vehicles in operation and new vehicle sales. We established a presence in Europe at the beginning of 2019 through the acquisition of CarsOnTheWeb, which we have now rebranded as ADESA Europe. ADESA Europe is a 100% digital marketplace for used vehicles. We source the majority of our vehicles through seller relationships, principally with commercial sellers, in the 7 Western European countries shown on this map. Most of our vehicles, as I said, are sourced from commercial customers, although there are some dealer customers that we post for sale here as well. Our buyer base is considerably more geographically diverse. And today, we sell vehicles into over 40 different European countries shown on this map. Over 90% of the vehicles we sell move across at least one country border. Directionally, vehicles tend to move east from Western European countries into Central and Eastern Europe. This geographically distributed buyer base as well as our in-house capability to move and process vehicles is a key competitive differentiator for ADESA Europe. As is the case with our volume in North America, our volume growth in Europe and our absolute volumes in Europe have been negatively impacted by the COVID pandemic there also. But we have gained new customers, and we've also been able to deliver improved margins. And that has resulted in a relatively strong bottom line performance for that business over the past 18 months. We believe there's a significant long-term opportunity, and we're excited for that opportunity for growth. From an organic growth perspective, we're focused on the following drivers: First, expanding that core business, adding new seller relationships and adding more buyers across our geographically diverse buyer base. Secondly, growing our digital dealer-to-dealer platform in Europe, which is called GWListe. This is a platform -- dealer-to-dealer trading platform that originated in Germany. It's still not even fully national across Germany. We're focused on expanding that business in Germany and launching new territories in that country. We're also looking to launch it in some new markets such as Italy. Third, delivering private label solutions to commercial seller customers in Europe, particularly for those who'll drive sticky long-term relationships and feed more vehicles into our open-sale channel. And finally, improving our inspection capabilities, making it easier for dealers and customers to inspect vehicles anywhere and load them into our digital marketplace. This improves our operations but also brings new sources of supply and enables us to grow the marketplace more quickly. So our targets for 2025 include what I would characterize as reasonable volume growth in Europe. I would characterize that growth as a volume rebound post COVID, coupled with a modest amount of organic growth, proportionately similar to what we expect to see in North America. We do expect some erosion in our current gross margin per vehicle sold in the European market. I mentioned that was particularly strong over the last period of time. But overall, the combination of the volume growth, even with some small erosion in gross profit, should still drive a solid growth in profitability overall. So these are the 3 white space opportunities that I believe exist for us. Before I leave this section, I just want to comment on what was modeled into these projections so we're all clear on that. In terms of retail reconditioning, we've modeled in a modest amount of growth from our current levels, but nothing close to the demand that I believe exists today from many of our key customers. In terms of the retail trade-in opportunity, we've not modeled any material volume or revenue into the projections. So anything in that regard would be upside to what we've shown here today. And finally, in terms of international, we've modeled in an organic growth similar to what we've modeled in for a North American business, but no rapid expansion beyond that and certainly, no acquisitions. Now I know that the potential opportunity goes well beyond that in all these 3 areas, but I thought it was important to reflect the fact that our core focus and my core focus remains on our North American market and on our core business, at least until such time as we see our volumes recover and the performance improve as we've talked about earlier. And the last thought I want to leave you before we leave this section is that these white space opportunities are all significant. They're not small markets, but they're significant areas of opportunities for KAR as we think about our path for the future. So we're just at the end. But before we move to Q&A, I just want to summarize what I believe are the most important points we covered here today. First of all, our purpose statement. We have a clear purpose here at KAR: to make wholesale easy so that our customers can be more successful. We also talked about our vision, our vision to build the world's greatest digital marketplaces for used vehicles. We talked about our capabilities and what differentiates us as a company. We operate industry-leading digital platforms. We are #1 or #2 in their respective categories with platforms like OPENLANE, ADESA.com, TradeRev and BacklotCars. We are increasing our integration between those platforms over time. We have a nationwide network of physical assets called vehicle logistics centers, where we can deliver value and value-added services that are important to our customers, particularly our commercial customers, and create stickiness. And we operate a finance company that provides floor plan financing to independent dealers. This increases the liquidity in our marketplaces, drives improved outcomes for our sellers and also increases the overall profitability of KAR. Now we recognize that there have been supply-side challenges in 2021, and we expect those challenges will persist into 2022. These supply-side issues have been negative to volumes across our industry, but we have not lost market share with our commercial sellers. We expect that in 2022, these semiconductor and supply chain issues will begin to improve. New vehicle production will start to rebound, and that will start to alleviate the supply-side issues that we've been experiencing within our marketplaces. As we look further out to 2025, we talked about our longer-term targets: 4.25 million vehicles sold, $750 million in annual adjusted EBITDA and $1.5 billion in cash from operations. Double-clicking into those projections, if I start with the volume. We expect a recovery in our commercial volume. Our solutions are sticky. We have a strong incumbency with these commercial seller customers. The recovery in commercial seller volume, we expect, will deliver an increase of approximately 1 million vehicles by 2025. And even at that level, our volume of commercial seller vehicles will be lower in 2025 than what this company delivered in 2019. We also expect significant volume growth in dealer-to-dealer. We expect to grow from 1.1 million vehicles sold in the current year to 1.8 million vehicles sold in 2025. Most of this will be driven by growth in our digital dealer-to-dealer channel. And it represents a compound annual growth rate of just over 20% in that channel, and I'm factoring the closing of the CARWAVE transaction into that math. We shared the initiatives that we have to deliver this performance by 2025, maintain our share with commercial sellers, benefiting from the volume recovery that we expect to happen. We did a deep dive into our commercial seller solutions. We talked about how sticky they are with our commercial seller customers, how they're uniquely differentiated and how they address the needs of our customers with off-lease and repossessed vehicles. We talked about how they deliver real value to those customers. In the dealer segment, we will grow our dealer-to-dealer volume as that business moves online and as the addressable market expands. We did a deep dive into our BacklotCars marketplace in the U.S., providing insight into our progress there and our plan to deliver our growth targets. Again, assuming we close the CARWAVE acquisition, we expect to be able to deliver the growth rate that we've modeled into these projections. So we feel confident in that. Services. We intend to increase the attach rate and utilization of services across our marketplaces, services that add value but also improve the customer experience and also drive revenue and profit per car. We did a deep dive into some of those services, particularly floor plan financing at AFC and wholesale and retail reconditioning at ADESA. And finally but importantly, we intend to manage our costs, making sure our business grows and scales in an efficient and profitable way. If we double-click into our cost management agenda, we talked about 2 important targets: delivering gross profits over 50%, again, excluding purchased vehicle revenue from that math; and reducing our SG&A per vehicle sold as our volume grows to below $125 by 2025. Ultimately, our goal is to deliver a compelling financial return for our investors. And we shared with you -- Eric shared with you how we expect to see our financial and operating model to deliver the following results from 2020 to 2025: a compound annual growth rate in revenue of 7%; consolidated gross margins of over 50%; controlling our SG&A so that as volume grows, SG&A decreases to below $125 million; this drives a compound annual growth rate and adjusted EBITDA of approximately 15% and total adjusted EBITDA for KAR Global of $750 million or greater by 2025; and finally, this also drives a compound annual growth rate in operating adjusted earnings per share of over 20%. And finally, as I've just mentioned, there are some white space opportunities that go beyond what we've modeled, new ways and new opportunities that we have to serve our customers to drive more revenue and profit and create greater value for our customers. So ultimately, I believe all of this points to a very bright future for our company, one that I believe will deliver a very compelling return for our investors. I'm looking forward to making that a reality. And with that, we have concluded our prepared materials for today. We're now going to move again to Q&A. I'm going to invite Justin Davis and Eric Loughmiller back to the stage, where we hope to be able to take and answer your questions. Thank you very much.

[Operator Instructions] Our first question comes from the line of Ryan Brinkman from JPMorgan.

Rajat Gupta on for Ryan. Just had a first question on the online dealer-to-dealer targets of 1.2 million by 2025 versus roughly 550,000 this year if we include CARWAVE. Your competitor, ACV, is growing from a similar size today and is targeting roughly 1.8 million units for their platform by 2025. So just curious as to the disconnect. Would you say there is some conservatism in your forecast? Or is there anything constraining you to get to a similar kind of growth? Or could you invest more aggressively to take more share? Just thoughts on that. And then relatedly, of the 10 million addressable market that you talked about in the dealer-to-dealer channel, already you see your market share settling once the market hits majority on the online side.

Well, thank you, Rajat. I appreciate the question, and apologies for the difficulty -- the technical difficulties earlier, but I'm glad we got your question now. So I don't want to comment too much on our competitors' projections or rate of growth. I think there's, ultimately, an assessment of how quickly one believes the market for digital dealer-to-dealer services will grow and expand in the marketplace. And I would say we're very focused on maintaining our market share. We talked about our market share in digital dealer-to-dealer as being somewhere in the range of 30% to 40% today. So I'd say that's what I'm most focused on is maintaining our market share in -- as that market grows. And by the way, that's a considerably higher market share than we've had in the dealer-to-dealer category in the past. If the market share -- if the market -- the addressable market was to grow faster than we've predicted, we would still be focused on maintaining the market share and growing faster with that market. I'd say what we did is we made our best assessment of how we believe that TAM will expand. You could construe that as some conservatism perhaps, but obviously, it's still a significant growth relative to current size of that digital dealer-to-dealer market. So we think we've made our best estimate of that. And to your question, is anything constraining us? I would say, absolutely not. There is nothing constraining us in terms of our ability to go after that market. And we're going to be aggressive, and again, focused on being ultimately a leader in that market, I would say, and having a share at or above our current level.

Our next question comes from the line of Gary Prestopino from Barrington Research.

Peter, could you maybe just help us out here and maybe talk about what is your attach rate on reconditioning for commercial vehicles as well as what is your overall tax rate for just using any kind of service that ADESA has now?

Gary, thank you. I appreciate that question. If we construe reconditioning as including vehicle detailing, which is in some respects the most basic service that we provide, a wash and a vac of the vehicle. I guess a wash and vac is actually the most basic. So if we think of it in those terms, then I would say most commercial seller vehicles get some reconditioning attached. It's certainly north of 80%, probably north of 90%.

Actually, with that definition, Peter, it's actually 99%.

Yes.

We've looked at the data.

Right. So it's...

At physical locations, at vehicle logistics centers.

Yes, at vehicle logistics centers. Now if we think of more value-added services like paint work, body work or certainly mechanical work, that percentage falls off a lot. I do believe there's a slide in the deck that shows the attach rate of those services on commercial seller vehicles. So that's obviously a considerably lower number. And even though that smaller percentage comes with a higher ARPU of maybe $400 or so per vehicle, as a blend, it all comes out at $140 across our commercial seller portfolio. Hopefully, that helps answer the question, Gary.

Our next question comes from the line of Daniel Imbro from Stephens Inc.

Eric, I wanted to ask about digital dealer-to-dealer profitability. Last night, you mentioned the 5-year outlook includes CARWAVE. And I think in the bridge in the slide that showed a $150 million improvement from the last 12 months. My understanding, the last 12 months, this was still a losing money business, so that would imply 2025 EBITDA somewhere in the $130 million range. Are we backing it to the right numbers there? Or asked another way, on those 1.2 million units, what is the EBITDA expected to come from the digital dealer-to-dealer business?

Daniel, specifically, currently, we're at a very modest loss. I don't want to speak to the current quarter. But on a monthly basis, the loss is less than $1 million a month on BacklotCars in TradeRev, including all costs, including the sales organization. So what you're looking at there -- and earlier in the year, it was a little bit greater the first part of the year, and then it actually made money for a couple of months this year. So we're going from a net loss that's fairly small relative to where it's been to a positive contribution, and that's the $150 million. And remember, we're taking that number beginning into -- on the LTM numbers of roughly $450 million. So that $150 million would take us to profitability in the neighborhood of $120 million in that forecast in that period. And the math -- you can just do the math of -- what that means is roughly -- you can do it. It's about $100 per car sold. And we think there's opportunity to go up from that over time as the market continues to grow.

Our next question comes from the line of Stephanie Moore from Truist.

I think my point of clarification -- it's more of a point of a clarification as you talk about these growth drivers expanding the dealer side of your business and the dealer-to-dealer really. Can you confirm what is the current size of the digital dealer-to-dealer market today? And what, I guess, we think it could be over time? And what would be the drivers of that expansion? I guess I'm just trying to split the pieces together where you're looking for the expansion on the dealer side over -- as we bridge the 2025 target.

Thank you, Stephanie. I'll attempt to answer that. So in terms of the current market today, we size that based on our own internal volume. Obviously, we've got one public competitor whose volume we know. We're familiar with CARWAVE's volumes through our diligence, and we have estimates of a number of other digital dealer-to-dealer competitors. And I'd say those estimates are probably reasonably accurate. And that enables us to size it. And based on that, we have a market share we assess of somewhere between 30% and 40%. I think the second part of your question went to growth. And what I'd say there is we -- again, to an earlier question, there's uncertainty, I guess, at what pace that will grow, but we expect it to grow. We're seeing it grow. And Justin showed a slide in this presentation that shows how the sum total of dealer vehicles sold on digital and physical platforms has increased by almost 20% over the past 2 years. So we do believe the digital tools are expanding the TAM. And again, we're very focused on, really, a share number being in that sort of north of 30%. Obviously, there's no upper limit. We'd like as much share as possible, but we're certainly very focused on maintaining our share at least at that 30% level in the digital dealer-to-dealer market space.

Our next question comes from the line of Bret Jordan from Jefferies.

On the digital dealer-to-dealer labor model, when you think about your inspection force, what percentage of your labor is salaried versus third-party inspections for backlog TradeRev?

In the United States, the majority are contract labor. We found this model to be highly effective. As we grew the market, we could expand that workforce seamlessly. So in core markets, we do have some FTEs. But in the majority of our markets, we do rely on that contract labor, which has been highly effective, to maintain sort of the supply of vehicles coming into our ecosystem.

Our next question comes from the line of Ali Faghri from Guggenheim.

So my question's on your dealer market share. A lot of your comments were focused on maintaining market share in the commercial market, but it looks like you grew your dealer volumes 100,000 units between 2019 and '21 or about 10% growth. But this is despite adding over 20,000 units through M&A of dealer-to-dealer platforms and also despite the overall market being up 12% during that period. So what's driving this market share loss on the dealer side? And then as part of that, your 2025 guidance implies market share gains in dealer. But what gives you confidence that the share losses in the dealer side you've seen over the last 2 years reverse?

Thank you, Ali. I appreciate that. So to get to your question, first of all, I think the M&A amount was a little less than 200,000, but I'll -- I won't debate that too much. But the reason for what you talk about is when we moved to a fully digital model at ADESA, we lost some in-lane dealer business. That was a known risk and a known choice. And I think I've spoken to that on an earnings call in the past months as well. But clearly, when certain facilities, there was a loss of in-lane dealer volume that impacted our total dealer volumes. And that's reflected in those numbers. But the growth rate in digital dealer-to-dealer has actually been quite strong. Now we also spoke to our pilot or in-lane pilot, and I shared some data with you today. What we have seen as we have brought those 11 sites back into the pilot is we've seen the beginning of an increase in dealer volume at those sites as well as our dealers that have a preference for in-lane solutions return with some volume to those locations. So I think as we look to the future, we have, first of all, an absolute ability to grow our digital dealer-to-dealer channel, and that's reflected in our numbers. But I also think we have a little bit of a hedge as well on the physical side because I think our numbers over the last 12 months have been unusually low for us given we had just a fully digital model for in-lane selling. So we'll see how all that plays. But I think in a nutshell, we're confident of our overall volume. And again, we're very focused on maintaining our share, hopefully, growing our share in that digital segment at whatever rate that digital TAM ultimately grows.

And Peter, I'd like to add, in the middle of all the time frame you're looking at, we took an existing business, TradeRev, integrated it with BacklotCars, moving the customers over, and we actually saw our growth accelerate after that integration. And we think we can continue that momentum going forward.

So I think that is all the questions that are in the queue. So thank you all for those questions, and most importantly, thank you for joining us here today. We certainly enjoyed this opportunity to talk about our company with our investors and with the industry. We're excited about the opportunity ahead for KAR. We're excited about where we're going. And we hope that the material we presented here today gave you all a clearer picture of the significant opportunities we have ahead of us here at this company. With that, we'll close it for today. Thank you all so much, and have a great rest of your day.