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

Good afternoon. This is Kunal. I'm the smid-cap Internet analyst at UBS. Thank you so much for joining in. It's a pleasure to host Eric Loughmiller from KAR Auction Services. He's the EVP and CFO over there. Eric, I'm terribly sorry to have messed up your name. Welcome. Thanks for joining us.

Oh, thank you, Kunal. It's great to be here.

I think as a start, I wanted to start with one of the things you recently said and talked about, which is being #1 in the U.S. long term, that being your goal. Can you talk about that in terms of how far is it? Where are you in the process? And what do you need to do to kind of get there?

A great question. And when we said be #1 in the U.S., we really were focused on the digital dealer-to-dealer marketplaces. I don't want to discount our goal of being #1 across all marketplaces, but that comment was focused on that. And ACV is currently -- has more share than we do in that, narrowly defined. We still sell more dealer-to-dealer vehicles in the U.S. than they do but not on our digital marketplaces, which in the U.S. is BacklotCars, and we've just added CARWAVE to it, which is great news for us. Now when I made that comment previously, and Peter Kelly made the same comment, our CEO, we were referring to the U.S. but we said we first will be #1 in North America. And I believe with the CARWAVE acquisition, adding that volume, we are now at the same size or very -- or maybe slightly bigger, slightly behind, but we are co-leaders with ACV in North American digital D2D. But we said we don't want to stop there. We would like -- we are #1 in Canada, and we want to be #1 in the U.S., not just #1 when you add the 2 together. So how do we get there, to be honest, is by continuing to grow the buyer base so that the sellers want to use our platform. If you think about it, we're very focused on having the most liquid marketplace that any dealer who has a car they want to wholesale -- we are wholesale only. We do not do retail. And in that focus, it's about creating the greatest liquidity across all of our marketplaces. And so we think as we continue to grow by adding CARWAVE, which is the #1 player in the West Coast, California specifically, BacklotCars was strongest in the middle of the country, just take a line -- lines down the middle. Take the middle third, and that's where their strength was. TradeRev, which is now integrated in the BacklotCars, had strength in the Mid-Atlantic down to the Southeast. And now put those together onto a single platform where I could combine the liquidity, I've put the greatest number of buyers into one marketplace, that is how we think we get there. I don't want to predict what date we would be able to be #1 in the U.S., but we are aggressively trying to get there fast. The CARWAVE acquisition is evidence of that. We believe the U.S. marketplace, the dealers, in particular, were forced into a transformation to operate in an e-commerce world for wholesale. Because of COVID, everything was shut down. Physical auctions were not allowed to operate. Everything was done online. We want to take advantage of that by accelerating the pace of change that we were anticipating might take 5 to 10 years now to get it to a much shorter period of time. We thought it was 5 to 10 weeks of 2020 when it happened and all. Well, guess what? Now that other competitors are running cars physically, some dealers are migrating back to what I call the old way of doing business. We still think a transformation is occurring where, in the future, all cars will be sold digitally in the wholesale marketplace. But we are having to respond to our customers, especially the sellers who want to run the cars. On a limited basis, we are running cars. But again, over 60% of those vehicles are selling to online buyers. So we -- I see the transformation occurring. It's an exciting world we operate in.

It totally is. In fact, e-commerce was -- again, all the transformation that is likely or could happen, that's again something you'd want to talk about. But sticking to the digital dealer-to-dealer kind of a market, you talked about the 3 different platforms in 3 different parts of the country. When do you expect CARWAVE to be kind of fully integrated with the rest of the platforms, to the other 2 platforms?

Well, Kunal, TradeRev was in -- TradeRev is now no longer operated in the U.S. It's all on BacklotCars. We did that transition over about 2.5 months really, that was very quick. Now with CARWAVE, they have a -- and TradeRev had a timed auction. BacklotCars runs a 24/7 bid-ask marketplace where the cars can be listed up to 3 days. They don't -- it's not timed. At the end of 3 days, it's not over. It ends whenever the buyer and seller agree on a price through the bidding process, typically in about 26 hours from the time of cars posted, it's sold. So if you wait till the third day, the car is probably gone, which is part of the gamification of the marketplace. You want people to feel tension around I have to bid or I might lose the car to somebody else. CARWAVE runs an event sale. So they have online bidding but it's in a 2-hour window, say, Thursday afternoons, 1 to 3 p.m. Pacific Time in California. And you can bid on the cars during that 2-hour window, so it's a different format. Because CARWAVE has the greatest market share of D2D transactions in California against all alternatives, we don't want to put that at risk. So what we're working on is having a platform, whatever it's called, the platform will be allowed to meet the needs of the customer and, in California, not put us at risk of them going to another format because we changed it. So it's going to take a little longer, but I think that's measured over the next quarter or 2. It is not a long, long process, but we are talking now about having multiple formats on the platform, but you're still -- all the buyers and sellers are going to one marketplace no matter how the transaction is going to be executed.

And so within those multiple formats, who decides which format a particular car will go to? Is it the seller that says, "I want like this 2-hour window thing versus a 3-day thing," or something else?

Yes. And what we think is -- actually, we've been talking about this unrelated to CARWAVE because we went from a timed auction to a 3-day bid-ask marketplace. And there is nothing stopping us. We could run a timed auction on the Backlot platform. So now we're saying it's really up -- it's up to the seller. And the seller is going to decide -- for example, this is a hypothetical example for the audience. I might say, "Well, if I could get full value for my car in 45 minutes, I want to do that. But if I don't, I don't want to be out of options." We could have a situation where you choose one format to discover price. And if you're satisfied, you take it, but that allows you to maybe use one of the other formats. That gives a little longer period of time or more planning. We've been very successful in Canada with this approach. We're not doing it on the -- now TradeRev is the brand in Canada. It's a timed auction. And where we've been successful is we have an integrated offering with ADESA. And with the customers in Canada, they will choose to run on TradeRev. If it does not get full value, whatever they've defined to be, it automatically can go into an on-premise auction on simulcast. Sell digital, car never moved. And it can be -- and the reason you're doing is you might get access to different liquidity. There might be different buyers in that format than there was in the 45 minutes that it was on TradeRev. We also have customers going the other way. I'd like to test the market in the on-premise. And if I don't get full value, the market will know the car is coming, we will have it on TradeRev but in between the next auction event. So there's -- I get another opportunity to sell the car. You can do this in the B2B marketplace because most of the dealers are watching car values. And I'm finding it compelling that we can offer a solution that is not a one-stop shop.

Interesting, interesting. And so the -- and I think I read somewhere, maybe it was The Wall Street Journal or one of the financial trade rags, where they kind of talked about how maybe the manufacturers might rationalize their dealership networks, maybe go with like less dealers in every locality and kind of going to a just-in-time kind of a thing, especially with the chip shortage and the parts issues that we are facing right now. Maybe that becomes a longer-term model where people kind of order in advance online and pick up their cars whenever the cars are ready and are back in the dealer lots. When that kind of happens, how does your model kind of change and adapt to a new environment where maybe you have less dealers but how people are still going to sell used cars?

Well, interestingly enough, I do think that's a long road to hold because we have dealer councils that have a lot of power with the OEMs. Obviously, Tesla broke that down with Tesla going direct. Rivian is showing a direct model. So there are examples where they're trying to change it. And I would not doubt that many OEMs would like to see that change. But the good news is they're all my customers, the dealers, the OEMs, the captive finance companies, the banks, rental car companies, all of them are our customers. So in a period of change, we typically have relationships and knowledge that can assist in anything that happens. The bottom line is, if that were to happen on new cars, I think there'd be an increased emphasis on those dealers utilizing their capabilities in the used car front, like they've done while there's been a shortage of new cars. I do think we have the ability. We have services. We have the ability to store vehicles on our physical locations and sell them digitally without ever having customers having to touch it. We have the capabilities that some of our competitors in the digital space do not. We have the relation. We have significant capacity for reconditioning vehicles. We have announced in our Analyst Day in September that one of our opportunities for growth above and beyond the historical performance of this business is what we call retail reconditioning of vehicles. That doesn't mean selling retail. Going to dealers who have a car that they need to prepare for delivery to a consumer, they actually have a bottleneck in their process right now, they don't have the capacity to recondition the cars fast enough given how many consumers are starting to buy either on omnichannel or e-commerce sites. And so -- and the other thing is they have to move the cars. It's very expensive to move cars. And so the concept is can they move it once, have it reconditioned and then delivered either to a dealer lot or to a consumer driveway. So we see ourselves as being a service provider to all of these retail models. We do work with the current e-commerce players like Tesla. We do work with all those companies. Why? We have space, they do not. When they take cars off lease, where do they park them? Until they remark -- by the way, they remark it on their own site, used cars. That may be where you're reading about it. Everybody likes that model. You have this issue, where do you store them? How do you secure them? And who gets that car ready for retail delivery? Who gets that car in retail condition? Well, we think we can provide that to the marketplace broadly over time.

That's an interesting one. So -- and as you look at monetization within this dealer-to-dealer kind of space. How are you thinking in terms of like potential additional fees, price increases? How does that -- and how does that kind of play into your path to profitability for the business?

Well, we are -- we have now reached profitability. With the CARWAVE acquisition, we've committed that we have crossed the chasm as they say. We are now in the land of profitability. And it will -- and as we scale, it will get increasingly profitable on a unit economic basis. And the way we've attacked this, ironically, because of COVID is by accelerating the growth rate through acquisition, buying BacklotCars, migrating to one platform, buying CARWAVE. Now we're going to migrate that to one platform, trying to increase the liquidity. We've also now connected the strength of each of those initial platforms geographically across a true national network that can deliver that. So monetization -- and when we did this, we have tended to keep our fees lower than what we think the rest of the market is charging. Why? When you're trying -- you're in a land grab. You want economics not to be the reason they choose somebody else. So we eliminated the sell fee. And last year, we did it when we bought -- BacklotCars did not have a sell fee. That's how they were growing faster. You eliminated a reason for a seller not to use your site. Hey, it's a free -- you don't have to pay. Even if you sell it, you have no fees. The buyer pays that. Well, we felt that was a good strategy when you're grabbing land. It's a land grab, right? Now it's time, we've analyzed the market, we had 3 looks at it, TradeRev, BacklotCars and CARWAVE in the U.S., and our fees are at the low end. So we see opportunity to get price on the transaction. But what we had to do first is we had to focus on service levels. We had to make sure when you buy a car that we can deliver it as fast or faster than anybody. You -- they make the money. The retailer makes the money when he buys wholesale and retails the car. He can't retail that car typically until it's on his lot. That may be different with Carvana, Vroom and Shift. But typically, they need to know -- if I sell that car, I've got to be able to deliver it within a few days. Even if it's not on my lot, it's got to be somewhere where I know it can be ready for delivery. We -- that's what excites us about the marketplace, getting the liquidity, having the full breadth of services. Our competition that were start-ups, they're building all of that capability, and so that's taking capital. We have a finance subsidiary that allows dealers to pay for the car immediately through a floor plan. Our competition is putting together a capital structure to allow them to do that. We have a national transportation network that already moves over 3.5 million cars a year, more cars than we even sell in some years. They move them in and out. Our competition is building up a network like that. So we think we've got to take advantage of the assets that we've got. We've got a quit, actually, being proprietary about how we use them. We can't associate them with physical locations any longer. We've got to look at the marketplace more broadly in an e-commerce world. And we got to take advantage of the strengths of our business model, the cash flows that we generate from them that have been used to build up these service offerings and then really get the market focused on -- it's a lower-cost transaction as -- and the cost may not be our fees. It may be the ancillary cost of moving cars and maybe you're just moving them less. And we have an efficient transaction with all this -- in one place, you can get all the services you need to get that car from wholesale to retail delivery. That's our value proposition.

Of things in there, one of the things that you talked about was detailing and how much capacity you have for detailing. And one is how labor-intensive is that? And why I'm asking that question is there's like -- there's just so much that is being written about labor shortage and wage increases especially as the markets have opened up. How are you thinking in terms of like both capacity and costs as far as detailing is concerned?

Well, you are correct. The labor is an issue you have to deal with. But the bigger issue is getting facilities licensed that have the space. It's very difficult to get large-scale facilities to move this many cars [ through ]. And if you don't have the facility for the cars, you shouldn't worry about the labor because you don't have anything to do. We feel -- again, our marketplace allows us to offer some advantages over, say, a retail service facility or a body shop. We have more standardized hours. We can keep you busier. You don't have to worry about, oh, if there's not an accident, who's going to come into my shop? I'm sitting between cars. We have the throughput. Even in our wholesale business, we have that. So it's not just the retail. We're not dependent on that. So we think we can attract labor. Prior to COVID, we were actually looking at the labor cost at the low end. To remain competitive, we had actually given our hourly employees, especially at the lower end of compensation, an increase back in 2018. Why? That was what we had to do to compete actually with Walmart, Amazon. I mean all these other companies that are hiring people at or slightly above minimum wage. And minimum wage is kind of irrelevant today, in my opinion, unless you're using part-time work perhaps in the fast food industry. And what it is, is we've got to pay, that gets people there because I've got the throughput. The good news is retail reconditioning, as we call it, actually is a higher-margin business. It's a higher value proposition because the car has been sold than the wholesale transaction. And so paying more labor is not negative to my performance. It will actually be an enhancement to the reconditioning I was doing prior to COVID, which was wholesale-oriented because it's a lot of high-value work. But we see the ability to get the labor. We have the facilities. We can give them really, really what they need. We can give them a fixed schedule, 5 days a week, not working in weekends, not having retail customers complain to you. That's a big advantage we have when hiring these types of skills. You don't have to talk to your customer. And it's a corporate relationship. So we think we can overcome the labor issue, although we would agree it's very real. You just have to -- and you might have to pay a little bit more per hour to do it. But working conditions and stability of hours is equally important for people that work in the auto industry. Most of your dealerships have night shift, have you working certain days, working Saturday mornings to meet the need because there's so much demand for services at these dealerships. So we have a pool of talent that we can access with a good value proposition that's more than just the hourly rate.

That makes sense. Switching to the wholesale industry. When you think of like areas of improvement or opportunity for KAR, what -- which areas kind of excite you most?

Well, digital D2D is the first because it's helping us make -- recover back from the COVID depression that occurred on volumes when supply really got disrupted. And it's got -- in fact, Kunal, we will sell more digital -- more D2D -- not digital, more D2D vehicles in 2021 than we sold in 2019 pre-COVID. We will cross over -- we sold about 1 million cars, and we're going to be at 1.1 million this year. We've said that in our Analyst Day. And we think it continues to grow. It's not just the market recovery. It's also growing the total addressable market in the D2D transactions. By taking out some of the friction cost of moving cars around, we can take what used to be 5 million cars in the industry, and we think that number grows to 10 million to 15 million cars over time. Why? You can avoid fees. It doesn't matter if -- the auction fees could be the same. If I avoid moving the vehicle, I avoid it sitting idle and not being available for retail. You can retail these cars while they're being wholesaled. If a customer walks in, you just sell at retail. So it's a very attractive offering. And I think that's the part that excites me, and that's the part that's going to be growing now. It's growing now. Behind that, I've got repossessions. We've had an unusual situation for the last 18 months. Household incomes have not increased. Unemployment spiked and then now it's back down. And we've had no repossessions, even though people have been buying cars at all-time record prices. At some point, I'm expecting the markets to normalize. And when they normalize, what we're going to find is the collateral values are going to drop and the banks are going to get -- and the captive finance companies are going to get more concerned about sitting on short payments and early signs of default, and we'll get back to a more normal repossession activity. I think that will occur before the off-lease disruption is fixed. Off-lease is a function of new car production being down. The cars are not making it to the wholesale marketplace because they -- either the consumer is buying at residual value in the contract or the grounding dealer buys it. Our -- the e-commerce retailers are buying the consumer out of their car directly because the car is worth more than that contract residual value. That probably follows after the repo. And then rental cars, the last thing recovers. The rental car recovery for the wholesale marketplace is likely going to come after they're able to buy cars in the fleet sales programs of the OEMs when they can buy in quantity. And the reason being our marketplace gives them instant liquidity for large numbers of vehicles. Right now, when they're taking a few cars a week out of service at each location, they have time to retail. They have time to use different -- I probably have -- that is probably the last to recover, in my opinion.

The situation that we are going through is probably unprecedented in terms of COVID and then everything else that's happened after that and then, of course, the supply disruption, the chip shortage. I don't know if there is a precedence in the economic cycle, in the past, in terms of when the market kind of recovered and how that recovered or when was the -- when was it repositioned, when was that supply kind of -- started coming back. But looking at past economic cycles, is there like a precedence where repossession kind of started at one particular stage of the economic cycle versus another that we can kind of look to?

Yes. But look, we call it the Great Recession of 2009. The causes are different. So I would tell you, in a smaller scale, it was actually 9/11/2001. There was a complete disruption to auto manufacturing. And you may recall there was a program, I don't -- I'll get the name wrong, but it was get back to work. The idea after we were shut down in the economy very temporarily for the terrorist action, the recovery was about getting back on the road, auto manufacturer and big driver. That was short. The recession in 2009, we saw a 3-year reduction in new car production. That was, again, not chip shortages but different reasons. We had shut down the plants. We had bankruptcies. There was uncertainty. And the good news is the recovery is more of a steady line of recovery. It's not cases of a recovery in steps, but our marketplace services so much variety of customers. Some just recover early and steady. Others recover later. Others -- I see it. I see the dealer-to-dealer space recovering faster, I see the rental car at the very end, and I see kind of off-lease and repo in the middle of those 2. The good news is I'm not dependent on one source or one segment of my marketplace. It will tend to balance out and give us a steady recovery. We show steady growth from 2009. We were flat '08 to '09 in adjusted EBITDA. Revenue started to decline. The first thing you see when our business is under pressure is we're able to react and change the unit economics. And we've done that already. Our gross profit per transaction is at all-time highs now. And we can -- we believe we can sustain that through the recovery. The second thing you see are elements of the segments of our market recovery, and this goes into a very long term. We showed growth from 2009 until 2019 in our performance. In 2019 -- we had announced 3 years earlier that '19 was the peak. We knew new car sales, everything was peaking in '19. And after '19, it might be flat. It might even come down a little bit, but that was peak. Well, COVID made it -- made us very, very correct. It came down more than a little bit in 2020, but that was unrelated. It was COVID that brought it down. But now we've reset the base. I think we'll see very similar things. And I know with e-commerce and the things you talk to me about, people think it's going to be much different. In 2011, we invested in a digital platform called OPENLANE. At the time that off-lease vehicles were all -- I mean, 90% of the volume was off these vehicles. We said we are going to go through another couple of years of declines in volumes in the off-lease sector, but we're buying it now opportunistically because we believe when it comes back, more transactions will occur. Between OPENLANE and ADESA, the top 2 players in the off-lease space, the private label space, which is primarily on those platforms, we went from selling 0.5 million cars in 2009, the peak year, to selling 1,438,000 vehicles on that platform in 2019. We were right. We think when they come back, these marketplaces will grow, and there could be shifts in the channel. Like I'm going to build more digital. We think that's the direction. Well, we actually grew the total number of transactions. Now part of that was there were more lease transactions than ever in history. But we still had to serve that marketplace, and we have such high share there that we were the winner in that. And so we're making that type of bet on digital D2D as well. We believe as it recovers over the next several years, it's going to be heavily weighted towards the digital because it's a more efficient transaction with less cost, even if it's friction cost, moving the vehicle, there's less cost than the transaction. And we're prepared for that. I think it's an exciting time to be in our business. And the reset that COVID gave us, I would have preferred to live without. But I don't think it hurts our long-term view. We are very comfortable with the numbers we put out for 2025 in September as our long-term goals, and we don't think those are aggressive. We think they're very realistic, perhaps even conservative in some regards.

Eric, it's interesting you brought up 2025. We have a question from the audience. In fact, one other thing. For the audience, we have a Q&A line. [Operator Instructions] So this question is more about -- we talked about 2001. We talked about 2009. This time around, there is one other element that is coming into play or maybe a couple of elements coming into play. One is electric vehicles. The other is a tendency for the millennials and Gen Z-ers to kind of wear towards environment and greener and sustainable kind of futures. As that demand kind of starts to come true for vehicles, how do you see the demand for gasoline-powered vehicles, especially on a used car market?

Well, I agree with everything you said being a focus of different groups of people. But at the end of the day, basic transportation, you're after the lowest cost transportation so I can go to work and have the most money to take home. And the truth of the matter is electrification is still a fairly expensive proposition. Even though you're not paying for gas, you're paying a premium for the vehicle. And the used car values have been very high on electric vehicles today. Now that's primarily driven by Tesla. And now the Europeans are coming more aggressively into that market because of the issues in Europe, but again, they're probably more aggressive on climate change there. But we see this as a huge opportunity. Number one, you need scale and you need -- again, you need physical infrastructure to handle the electric vehicle. You need charging -- supercharger. You can't afford to plug it in at the house. It takes too long, and you have to be more efficient. We have a number of people that invest in our company in a number of funds. While we don't do a sustainability report to date, we've been studying this. We've improved our website, our corporate website to provide a lot of information on our focus on sustainability and the environment and diversity, by the way, all complex ideas that are out there right now that we need to be responsive to. And our business is getting -- as we -- listen, the only thing worse than driving that car is getting rid of that car. It just -- there's nowhere to put it. And so you want to run the useful life out of it. So we see that. I mean, again, the modern car, the more -- now that we're working through the K cars are gone and a number of the cars that were inefficient, we're getting to the age -- the average age of a vehicle that we are selling is probably 7.5 to 8 years old. Those cars have a lot of technology. They tend to be relatively fuel-efficient, not 50 miles a gallon, but the CAFE standard as the longer-term target. But they're not as inefficient as the gas guzzlers were of 20 and 30 years ago. So keeping those cars providing -- economical look at mass transit today. There's more capacity than utilization because of the concerns over COVID. How can someone get low-cost transportation is typically a used vehicle not a new vehicle. The total cost of ownership is very attractive on that. You have the initial depreciation out of the retail price of the car. And you typically have a very useful economic asset to use. So we call that our version of recycling. We recycled used cars back into the marketplace so that they can get their highest and best use until end of life, which will take them out and, over time, gradually replace with electric vehicles or more efficient hybrids or whatever it may be. The more things change, the more they are the same in the wholesale marketplace. Why? We aren't tied to a particular asset. We aren't tied to a particular value. We provide a marketplace where whatever the asset is, buyers and sellers can reach an agreement on fair value and exchange it for its highest and best use at the time.

That is true. That is so true. But when we think of like valuations, valuations for used cars are pretty much at all-time highs or -- and loan losses are really low. As you talked about, the repossession rates are really low. How does that change in a rising rate environment? And I don't know if we have really seen high rates [ at retail and ] more in the '80s. But as rates rise from current levels, how do you think of that kind of being a more important factor than it has been previously in terms of supply?

Yes, we'll see if this is the '80s or the 2010s. I mean when you go back to 2009, I saw my overnight rates go from 1.5% to 7% overnight in -- now I'm going to thank Lehman Brothers and all of them for that because there was total disruption to those marketplaces. However, even after that, rates then came down and then they went gradually back up. An increasing rate environment and inflation is typically good for our marketplaces. Why? Because we're a clearing house. I am not worried about the value of the vehicle. I want more transactions in all. So that's a little unique. It does bother my customers, though, again. But the truth of the matter is increased interest rates and inflation probably are going to be drivers of growth into the wholesale marketplace because, again, even modest inflation, the risk is the dealer gives us a value and trade and doesn't realize that value because the price of the car in real dollars declines. And the way they protect is by wholesaling the vehicle. And knowing that there's an active marketplace, when they need that vehicle, there will be one like it that they can buy later on, perhaps at a lower value. We -- and that's what I'm seeing right now. I do believe we're seeing more D2D transactions, even though this is a seasonally low period between Thanksgiving and New Year's and the reason being that dealers are worried about holding that inventory until they sell it, which is to say after the New Year, in the -- what we call the tax season. That's when the used car market declines for the holidays and then picks up after tax refunds are received, ironically. It's kind of interesting. Well, they don't want to hold the car through that and potentially have the values decline before they can retail it. So they'll wholesale the car today, knowing that they'll likely be able to find similar inventory later. That starts to churn the flywheel of our marketplace. It feeds itself. Dealers taking trades is very -- I mean, again, the declining used car values will be very positive for the churn of cars because you don't want to hold the car and have it lose value after you valued it fairly. And increased interest rates, if you look at the car payments people are making, there's almost no interest cost component to that payment. New or used, interest rates go up. Used -- the values have to come down. That's why they don't have to provide incentives on vehicles right now is because the incentive has reduced interest rates. I have a very attractive car. Well, when interest rates start going up, I'm going to have to lower the principal value or the payment goes up and they can't afford more payment. They're already -- most people maxing out what they can afford because they want a better car, a cooler car, whatever it may be. So we see that as a real opportunity for our marketplace to begin, again, seeing the dynamics of the past, a flywheel affect, a lot of transaction volume churn. Through all of this that we've talked about where the whole wholesale supply has been constrained, there's been no -- or little or no impact on used car retail sales. That's the factor I think you should look at. The more it changes, the more it will be the same. They still take trade on a high percentage of those transactions. When valuation normalizes, supply will normalize. If supply normalizes, it will force -- they work together. Valuation will go down. Why? Because the demand has not changed even through COVID. We still have 40 million used car transactions a year in U.S. and Canada, that number hasn't fluctuated hardly at all.

So Eric, in this whole situation with COVID where people may be afraid to kind of take or use public transportation and are buying cars, that has probably pulled forward maybe several years of demand over the past 12 to 18 months. So as you think of the used car market post that period, once COVID kind of ebbs out going forward over the next 12 months or so, will used car demand be around the same levels? Or do you think it kind of declines as we kind of normalize for this pull-forward of the demand?

Kunal, I can see it declining, but probably not during the remainder of my career. Now I'm over 60 years old, so it may not be that long, right? But what I'm saying is, I think it's a -- I think you're right, maybe. Here's the problem. The cars we've been selling are older with more mileage on them than historically have been bought because that's what's available in the marketplace. Those cars are going to run into end of life. And guess what? I'm going to create a transaction because that millennial that bought a $5,000 car for basic transportation needs to go find another $5,000. Oh, by the way, when he's looking, that's probably now $7,000, $8,000, $10,000. He's also making more money. I want a nicer ride. I'm moving to the suburbs. I need now -- I think while there will be a -- I don't know that there's been a pull-forward, I think -- because the number hasn't grown. I will agree people that didn't previously need a car, now the question is, will they sell? You are correct. If they sell the car and go back to public transportation, we're seeing a lot of resistance to that. You know what I mean? So far, I think there's more people that are going to work remote. The question is will all of us that are working remotely, at least part of our normal work life, are we going to go back to 100% in the office? What do you think of that? I don't know the answer. I don't think we return back to where it was. I don't think it stays where it is today, right? I think it will be in the middle, and that will be good for our marketplace.

That's a very interesting observation. Yes, you're right. I mean who knows what the new normal kind of looks like. So as you think of like your 2025 Analyst Day targets, do the targets include like acquisitions down the road? Or is it just organic growth that gets you there?

It was organic growth. We will acknowledge while we had not yet announced -- we had announced the intent to buy CARWAVE, so that was in there. It was closed on October 14, which was a few weeks after the Analyst Day. So that was in there but nothing else. We acknowledge it was an organic plan, except it included a -- we had already announced that we were acquiring CARWAVE in August, so we did include the announced acquisition. But that was also part of our digital D2D strategy. Without doing that, our numbers would not likely have changed. It's just we accelerated the pace to get there. We had intentions of growing to that level. Now we just took a big step with CARWAVE.

Okay. So does that mean that by 2025, with that -- with CARWAVE in there and with the synergies that you can potentially get out of it, that your 2025 targets may be conservative?

There are those who believe that. And I would tell you that we're a public company, I'm not going to put everything on the line every day, am I? I'm going to hold -- now the conservatism also goes with a volume recovery that's unpredictable. We do believe that we have opportunities to either make that number better or offset the areas where it doesn't turn out the way we projected, if you follow me on that, Kunal. So the cost conservatism is there. We've talked about -- we're really looking at that hard, and there are further opportunities. I will tell you that we've acknowledged on the digital D2D that the profitability in this -- from the current level of performance, we said there was $150 million improvement through volume and scale that's reached in the digital D2D. In that statement, I do think that, that would put us on an EBITDA per car sold for the dealer-to-dealer segment. That is below what it has been historically. So I would say, in that regard, it's conservative. Whether I get there by 25 or later is really up for debate. On the commercial side, I think we've been conservative on the unit economics. But again, we get back to a very sizable number in 2.5 million cars but we were 2.7 million commercial vehicles in '19. So I think we're somewhat conservative on the volume and the unit economics, but that conservativeness on the volume actually may not turn out to be conservative depending on what the flow of new car sales that I can't predict on, that's the type of thing.

No, of course, of course. And then I think we are up for time, but one last question. On leverage, you are 3.2x levered post the CARWAVE acquisition. How are you thinking of capital allocation, whether it is for share repurchases or whether it is for further M&A?

Yes, Kunal. Our actual leverage on a -- was not pro forma. It was 3.2x, and we spent that money on CARWAVE. So it actually will go up from 3.2x. But we think, in a quarter or 2, our goal is 3 times or less. We have not changed that goal, and that is our priority. Now that our leverage will be -- and again, it's above that because my LTM adjusted EBITDA has gone down. I've got -- as I anniversary those bad quarters, including the fourth quarter of '20, my numbers will grow. And so part of it is natural, I think, delevering that ratio. But it's a priority. That's where we're focused. We still have flexibility. I have no limitations on what I do, but I do not want to increase leverage in order to execute past strategies. So we're probably focused right now on getting the leverage back below 3x. We're always opportunistic if something came up in an acquisition. But third, discretionary decisions are likely to wait until we're back to 3x levered or less.

Great. Thank you. With that, we are at time. I'd like to thank you, Eric, for taking time out and being with us and for responding to all our questions. Thank you, everyone, for joining our conference. With that, we will conclude this fireside chat. Thank you, Eric.

Thank you, Kunal. Thank you. Thank you to UBS as well.