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

Great. Good morning, everyone. Thanks for joining. My name is Rajat Gupta. I'm a member of the automotive equity research team at JPMorgan. Very pleased to have with us the team from OPENLANE, Peter Kelly, CEO; and Brad Lakhia, CFO. Peter has a few prepared remarks and a small slide deck, after which we can dive into Q&A. Thanks, Peter.

Good morning, Rajat. Thank you very much. Thank you all for being here and for your interest in our company, really appreciate it. Yes, just a few remarks to start off and then we'll get into a discussion here with Rajat. So OPENLANE, we are a digital marketplace leader for wholesale used vehicles. So I just want to speak about the wholesale used vehicle market and then our digital positioning, just to give you some context. So wholesale used vehicle marketplace, first of all, if we go back to 2019, pre pandemic, industry volumes in that marketplace, approximately 15 million units per annum. That volume has been compressed a lot due to pandemic and supply chain issues. Analysts estimate approximately 9 million vehicles last year. So I just want to point out that this is one part of the industry where there's been a lot of volume compression based on just pandemic and supply chain-related issues. And we've obviously been affected by that because that's the industry we're in. That's a significant compression. However, most experts agree, and we believe, that those volumes are poised to start to recover from here forward. The industry is getting back towards normal. Vehicle production is getting back towards normal. We're seeing more inventory on dealers' lots. We're seeing used vehicle prices start to decline. And we're starting to see increased volumes in the wholesale market. And I think that's going to play out over many years to come. And that's going to be a strong tailwind in our business as those volumes recover towards normal over a multiyear period. So that's one important driver. The second point I just want to touch on is the digital positioning. So we're clearly a digital marketplace leader in this wholesale used vehicle market. And why have we chosen that? Well, a number of reasons. The first one is digital has been gaining share in this industry. The industry historically was more of a physical auction-based model but even pre pandemic had moved materially in a digital direction and continues to move in that direction. So the digital part of the industry is gaining share. And that's really the growth part of the industry. And that's where we're 100% positioned at this point. We have significant share with dealer-to-dealer business and with commercial sellers, U.S. and Canada. And we believe that both of those categories are going to move increasingly more digital in the years to come as well, and we'll benefit from that as well. The other reason to choose the digital positioning is just the efficiency of the model. The reason it's gaining share is it's more efficient for customers. It's faster, it's less expensive, it takes less time. There obviously are network effects and other efficiency benefits in a digital marketplace itself. But also for us, it's a much more scalable model. It's much more of a fixed cost type of business with high marginal economics per incremental cars sold. And we're seeing that really start to play out in our business already, even though volumes still remain challenged. So we see two real drivers of our business as we look to the future. One is this, I'll call it, a cyclical recovery in industry volumes, which is substantial, probably of the order of 50% growth versus the current levels. And the other one is a secular shift as our digital model gains share vis-a-vis the historical model. So that's the essence of the growth thesis for this business. So real quickly, just a couple of slides, our purpose statement. We make wholesale easy, so our customers can be more successful. Our platform -- sorry, please, my bad. Can you hear me better this way? My apologies. I thought nobody would hear me there. I should have known JPMorgan would have good audio equipment, so apologies for that. Make wholesale easy, so our customers can be more successful. So simplify the transaction for them, make the process easy and ultimately earn more of their business by doing that. Our vision is to be the leading digital marketplace for used vehicles in the world. Obviously, our focus at this point is North American-based. And we are the digital volume leader in North America by, I'd say, a substantial amount when it comes to pure-play digital businesses. The addressable market we serve. So 60 million used vehicle transactions annually. About 40 million of those are retail used vehicle transactions and close to 20 million wholesale used vehicle transactions on a North American basis. We're playing more obviously in the wholesale side of that business. But we do increasingly offer some services that touch the retail transaction and the retail trade-in transaction, enabling dealers to conduct that business more effectively. But we look at our addressable market as really the wholesale side of that, the 20 million wholesale used vehicle transactions. And then marketplace participants, we're a business-to-business wholesale business. Participants are dealers, commercial sellers, finance companies, rental car companies and so forth. And obviously, the majority of that 100,000 customers are dealers, both franchise and independent dealers in North America. We report in two segments, two business segments, a Marketplace segment that I view as our core business. That's the digital marketplace business that I talked about. We also have a very strong Finance business. We offer what's called floorplan financing to independent dealers. When dealers are purchasing vehicles in our marketplace, they can avail of financing. It's typically short-term 60-day inventory financing. And that drives a strong profitable business on the Finance side of our business as well. To go into a little bit more detail on both of those segments. The digital marketplace business, we sold 1.3 million vehicles last year. We're expecting to grow that number a little this year, despite industry volumes remaining very challenged this year. $23 billion in GMV, that was represented by that. Approximately 50,000 unique sellers and buyers participating in our marketplace, so again versus that industry number, obviously we've got strong penetration out there with franchise and independent dealers in North America. And offering about 200,000 vehicles for sale on our platforms in any given month currently. And again, we expect those volumes to grow over time. Another unique thing about our business is we've got this roughly 50-50 split between commercial and dealer volumes. So I consider that deep strength with both commercial sellers and dealer sellers. Commercial sellers would represent off-lease sellers, captive finance companies, automotive finance companies, rental car companies and so forth. And dealers would represent everybody from the smallest independent dealer to our largest dealer buyer, which would be CarMax, so significant penetration with both of those customer groups. And I mentioned briefly the Finance business. To give you some quick stats on that, approximately 1.6 million loan transaction units. Those are unique financing transactions annually, typically fairly short term, about a 60-day turn on those transactions. It's offered exclusively to independent dealers. We don't service the franchise dealer market with this product but about 15,000 independent dealer customers. We allow them to purchase vehicles in any marketplace, our marketplace or any other marketplace. So it's approved to use at about over 1,000 different inventory sources. And we operate that business through a mix of, I'll say, a digital model, where the dealers interact with us digitally from a transaction sort of processing perspective. We also have a local branch network of about 100 local branches. And what that enables us to do is stay very close to those customers, which is important from a customer relationship-building perspective but also important from a risk management perspective. We can visit the dealership, see how they're doing and make sure that their business is what they have represented it to be. I won't spend too long on this slide, but we've done a lot of evolution over the last number of years at this business. We've committed to a fully digital model. We divested of physical assets and reduced our debt, reduced our leverage to below 1x EBITDA at this point. We're focused on integrating digital platforms, consolidating all this inventory into one branded marketplace. That's OPENLANE. We rebranded the company earlier in Q2. We're going to market with a one branded strategy in both U.S., Canada and Europe. And that will enable us to focus our investments and innovation into those unique marketplaces, increasing our differentiation but also reducing our costs, consolidating systems in the back end and increasing the efficiency of our business. So we're excited about that as well. Brad -- I'm going to allow Brad Lakhia, our CFO, to just give an update on our Q2 and our investment highlights looking forward.

Yes. Thanks, Peter, and good morning, everyone. Thanks for being here. A few highlights here. I won't go too far into the weeds on Q2. We announced last week, and so there's a lot of information out there. Peter highlighted, we sold 1.3 million vehicles last year. We're on pace for that this year and then hopefully some, a little bit higher than that despite still a tough industry environment, as Peter described it. Really, really pleased with our financial results in the first half of the year, particularly coming out of our Marketplace business, our Marketplace segment. Year-over-year, on a year-to-date basis, we're about $45 million ahead of where we were last year. And again, that's in a flat industry environment. So some of the initiatives that we took on in the late part of 2022 and into 2023 around cost, those are starting to materialize in those results. Furthermore, I would say the actual delivery of those results and the strong cash flow characteristics of our business that Peter described earlier are also materializing. Peter mentioned our leverage now being below -- net leverage being below 1x. We reduced debt in the first half by over $100 million, generated operating cash flow of over $140 million in the first half. So the digital asset-light business model that we have constructed, that we've now transformed ourselves to be is starting to bear some significant fruits and particularly on the Marketplace side of the business. I'll turn to the next page, just summarize here some of the things that Peter highlighted. We are a digital marketplace leader, right? 1.3 million vehicles, you can benchmark it however you like, but I think that clearly indicates by any standards that we are the marketplace leader on a digital basis. Large total addressable market and meaningful opportunities for growth described, as Peter said it, cyclically and secularly, the secular shift to digital. The innovation, the one marketplace strategy, bringing all of our digital marketplaces and all of our liquidity for buyers and sellers into one marketplace will position us to continue to lead in this space. I talked about our cash flow. Finally, I would end on 15% to 20% CAGR growth over the next 3 years off of our 2023 guidance. Our 2023 guidance is still $250 million to $270 million. I would emphasize, I believe, like we said in our prepared remarks at the Q2 earnings release, probably on the higher end of that $250 million to $270 million this year and still confirming the 15% to 20% CAGR growth for the next several years. So I believe we have a strong investment thesis and confident in our business model and the investments that we're making. Now with that, I think, Rajat, we'll turn it over to questions.

Thanks, Peter and Brad. That was a very helpful overview. Maybe I will just start with like the 15% to 20% EBITDA CAGR. If you could help us break apart what the drivers are going to be to get to that number. Maybe we could start with like how depressed are volumes actually today versus normal levels or what you might perceive as a new normal, maybe break it apart between D2D and the off-lease segments and how do you see the recovery path looking like. And then within that industry, like how do you think the share gains are going to come and then how you'd leverage that to the bottom line to get to that 15% to 20%?

Yes. Thanks, Rajat. So let me speak to that. So obviously, we've got the 2 segments. So most of the growth we see is being driven by the Marketplace segment, so let me start there. Again, as I mentioned, industry volumes, I believe, are kind of at an all-time historical low at the present moment. Our current volumes of between 1.3 million and 1.4 million this year, we see an opportunity to grow that to something closer to 2 million units in a sort of 2026 kind of time frame, Rajat. So obviously, volume growth is an important component of that. We don't have to get all the way to 2 million, by the way. But we see it growing directionally much closer to that number. To give you some context on that, I will say OPENLANE, our digital off-lease business, in 2019 sold 1.3 million vehicles. This year, we'll sell north of 600,000. So again, that gives you a sense of the sort of opportunity for a cyclical recovery in that component of the business. We don't expect it's going to get all the way back to 2019 levels by 2026 either, for that matter. But we see an opportunity to grow volumes to closer to 2 million units. We see strong gross profits, given our digital model. Gross profits in the second quarter as a percentage of what we call net revenue for the business on a consolidated basis were in the mid-50s, I think 56% or something like that, mid-50s. We see gross profits remaining in the mid- to upper 50s in that volume scenario. So gross profits will be strong, the business is very scalable and will scale really, really well, given its digital model. We also think, as volumes grow, our SG&A cost structure doesn't grow at the same rate. SG&A, I think, as a percent of net revenue was just 30-ish-percent, maybe, let's say, 30%. We see that trending downwards, closer to 25% over that time frame as well but not all the way to 25%. And again, what are the opportunities to drive that? We don't think SG&A needs to grow at the same rate because of the inherent scalability of the business. We also have a significant amount of opportunity to improve our SG&A efficiency by consolidating platforms, consolidating business processes and so forth. So Rajat, that would give you a sort of some of the key parameters around volume, revenue, gross profit and SG&A. And that translates into, we believe, an adjusted EBITDA CAGR over that period of about 15% to 20%. If you were to segment -- break it into the two segments, our Finance business, we see growing at probably a mid-single-digit kind of CAGR and the Marketplace probably more like a 20% EBITDA CAGR. And that will get you the same result.

Got it. That's helpful color. I think one of the aspects of the story, which I think in my experience investors are struggling with, is I think people appreciate like the D2D side of things and what you've achieved there and the opportunity on that side of the market. It's the off-lease portion of the market where I think there is the most concern around the shape of recovery. So help us understand what that recovery shape is going to look like. I heard like different views. And we're also still trying to come up with like a firm view, given the fact that there had been fewer lease returns. But I think you were dependent more on like how many leases actually get returned and how many the dealers are passing on to the auction. So help us understand like how that will play out or how you expect to play out in order to achieve these targets.

Thanks, Rajat. Well, to give the audience some perspective, first, in terms of our market share with the off-lease customers, the principally captive finance companies, GM Financial, Honda Finance, people like that in U.S. and Canada, we are certainly the leader by far. We estimate that our sort of market share that we have with those customers is of the order of 75% or 80% of total leases written and maturing. Those customers are still very much part of our customer set. We have deep integrations with those customers. We run their off-lease programs. It just happens that their volumes are very depressed at the current moment. One of the reasons -- the principal reason the volumes are so low right now is we've seen a significant appreciation in used vehicle values over the last number of years, whereas the residual values on these vehicles were set 3 years ago before that appreciation happened. So you've got this equity gap, where the equity value of that maturing off-lease vehicle is substantially higher than the residual value of the vehicle. And that would result in most consumers deciding, "I'm not going to return that lease. Why would I return a $30,000 vehicle to get a $20,000 residual value check?" And that's kind of historical anomaly. Most normal times in the industry, leases are designed so at the end of the lease, the customer is actually incented to return the vehicle and acquire a new vehicle because leasing is really geared towards building customer loyalty at the retail level and keeping customers in that OEM brand. So Rajat, as we look to the future over the -- really, I'd say, the fairly near term, like next year and the year beyond, I'd say two important things we expect to happen. One is I think continued downward pressure on used vehicle pricing, given some of the supply, new vehicle production, et cetera. Now I don't expect used vehicle prices to drop back to where they were pre-COVID. But I do think the preponderance of pressure is going to be downward in terms of used vehicle values. They had a significant run-up. They've been depreciating over the last year, you could say. I think that pressure remains generally downward. The second thing is as we get into 2024 and 2025, those leases were written in 2021 and '22. So those vehicles were retailed at kind of all-time high MSRPs. The residual values are generally set based on MSRP. So we're going to get into a cohort of vehicles where the residual values are much higher and the used vehicle value pressure is downward. So I think this equity gap is really going to narrow here in the next year or 2, really starting next year. And that's going to result in more flow-through of those vehicles into our marketplace. And that's really the key driver, Rajat. And then over the longer term, I expect this to look much more like the leasing market of the past. I think leasing will remain a very important part of the way new vehicles are brought to market. We're seeing lease originations starting to increase again as OEMs are starting to incentivize retail sales again. So I think leasing will have a high penetration rate. There will be a lot of off-lease cars, granted it's going to take a number of years for that to play out. And I think as with most times pre pandemic, the majority of those leases are going to get returned. They're going to enter our marketing cycle. And we're going to be really well positioned to help our customers with that obviously but to generate revenues and profits as we do that.

Got it. That's great color. Is there a way for us to better understand the difference in profitability of the off-lease, the commercial to dealer versus the dealer-to-dealer in one -- and when you see the recovering volumes, does one lever better than the other? Or is the incremental EBITDA dollar per unit going to be similar across both? As we're watching cycles and making our own assumptions on what recovers first versus the other, is there a way to think about operating leverage?

Well, first of all, Rajat, the good news is both of them -- both of those categories are profitable in our marketplace today. Brad spoke to the results we had in the first half of the year. We've seen a $45 million year-on-year improvement in the profitability of our Marketplace business, first half of this year compared to first half of last year. And both our commercial and dealer-to-dealer categories made an important contribution to that. So I look at the profitability of our Marketplace business probably on 3 legs, Rajat. One -- and I don't have the exact numbers here with me today, but they in my mind would break down roughly sort of equal. Right now, we've got commercial seller volumes, profitable. I would say, Rajat, those tend to have maybe a little bit lower revenue per unit but a higher gross profit per unit because we have less direct costs attached to those vehicles and good bottom line profitability. Our dealer-to-dealer business would probably have a little more revenue per unit. But we have a bit more direct cost because we're out inspecting vehicles at dealers' lots, et cetera. But that business is profitable, profitable year-to-date. And I believe that profitability will grow in the future. And then we have a services portfolio of logistics services, repossession services, inspection services and a number of other services that all contribute to the overall profitability as well. And I expect all of these have significant growth opportunities as we look to the future.

Got it. And on the D2D side, it's interesting that you mentioned that the D2D aspect is also independently profitable today. The only public peer we can compare you to is ACV Auctions. I believe if we take out Canada and Europe, you're probably a little smaller in size than them. But where you are profitable in -- and the growth rates look pretty similar. As we get into this up-cycle of volumes coming back, do you think your market share gains can persist? Or do you think there's more investment probably needed to now get that incremental market share? How should we think about -- just maybe just tie the competitive landscape on the D2D side as well.

Yes. So I guess, just to -- as points of comparison, yes, I think our dealer-to-dealer volumes in Q2 were bigger than theirs. Obviously, ours are North American. For the most part, theirs are U.S.-only, so there is that distinction. But obviously, U.S. is still the majority of our dealer-to-dealer volume. Rajat, I'm pleased with our growth rates. We grew sequentially from Q1 to Q2. We grew our total -- this is total volume, is 4%. I think that exceeded that competitor's sequential growth. I would say, Rajat, it's a growth business. But our view is that it is a profitable growth business. We want to grow this business profitably. We have been through a number of years of investment in this business. We've done acquisitions in this space. These businesses are profitable. We're focused on finding that balance of profitability and growth. But we have to get both, is the way I would view that. I also think we have some unique advantages. We have just deployed in Canada our one branded marketplace, OPENLANE Canada. So 3 months ago, we had an ADESA marketplace and a TradeRev marketplace. Those have been merged into an OPENLANE Canada marketplace. In the U.S., we will have OPENLANE U.S. deployed by the end of this year. And what that does is that's going to integrate our commercial volume and our dealer volume into one marketplace. That has not been the case historically. We had those sort of separate venues for separate types of vehicles. I think that's going to create a unique differentiation for us in the business. Because we'll have this unique inventory set of, first of all, a significant volume of dealer-to-dealer cars, which tend to be a little bit older, a little bit higher mileage, a little bit lower price. But balancing that, this very, very attractive and growing portfolio of off-lease vehicles, which probably are the most desirable vehicles in this industry, 3-year-old, 1 owner, low-mileage, high-value vehicles. So we're going to be addressing the entire sort of demand spectrum in a way that I don't think any of our -- or that particular competitor can. And that's going to be a unique advantage for us as we move forward.

Do your targets take into account any volume synergies or cost synergies that you might get with this rebranding and integration? Or maybe like to ask another way, like how much incremental growth or market share opportunity does this unlock for you by doing this integration and rebranding on either side of the business?

Well, we think it offers both. We think a combined marketplace with a unique and differentiated set of inventory increases the appeal of our offering to our customers. And that, we believe, can translate into market share growth. So that's one component. But in addition to that, when we look at the efficiency of our operations, I think there's a real opportunity as well. Because we've grown by acquisition, we have different platforms, different systems existing in this business. But when we get all of our customers and all of our transactions taking place on one marketplace, which again we're there in Canada now, we'll be there in the U.S. by the end of this year, that enables us to go in behind the scenes and start to retire redundant and duplicate systems without really impacting the customer experience anymore. So without going into too much detail, we've probably got three or four user authentication systems in this company, the systems that dealers log in to get authenticated through. We don't need three or four, we need one. So we're going to consolidate those into one. And that's an efficiency benefit. That's a customer benefit because it's a better customer experience. But it's also an efficiency benefit. We're not supporting four different pieces of technology, we're supporting one. And that's just the start. You go through our platform piece-by-piece and there's a lot of duplication there. So that's one of our initiatives to really address costs in the coming years. So I guess, what I'd say, Rajat, we have, I'd say, a significant opportunity there as well. That is certainly part of our plan and reflected to some degree in the projections we've put out.

Got it. That's helpful. I do have a few more, but just wanted to open it to the audience to ask any questions. We have one here.

So now you're moving into a sort of a tech consolidation effort. Those efforts usually don't come for free. Is there going to be an upscale in some sort of estimated cost in technology that you're going to have to incur? And can you give us some sense of what the run rate for that will look like?

Yes. So the question was regarding our technology spend as we work to consolidate our platforms that support our digital marketplaces. I would say there will be some modest incremental investment that we're going to make. But if we look at our capital allocation today and over the next 2 or 3 years, we don't expect there to be significant increases overall in the funding that we would have to deploy to make that happen. We're going to reprioritize a lot of the resources that we have today that are working on supporting those different stacks, those different platforms and kind of realign them to actually work on a more integrated platform. So the actual incremental investment is going to be fairly modest.

Yes. And I would just maybe add to what Brad said, our integration of one marketplace in Canada and one marketplace in the U.S., that's built into our current year cost structure and current year CapEx. So it's really a repurposing of those resources. It's not any material incremental above what's currently in the business. It's more putting those resources on the next step of the project.

So is it fair to assume that, just to follow up on that question, that as volumes recover, your EBITDA per unit is not going to take a step back during that trajectory, right? Like you should continue to get incremental EBITDA dollars per unit as that happens?

I believe so, yes. Certainly, the numbers I look at, maybe the -- I look at more gross profit as a percent of net revenue, SG&A as a percent of net revenue, EBITDA as a percent of net revenue. And I think viewed through that lens, absolutely, those numbers should move in a positive direction. I believe the same is true on a per unit basis. Again, there's a little bit of a mix thing on commercial versus dealer. But I believe the same is true there, Rajat.

Got it.

Yes, within the marketplace, Rajat, I would say if you look at our EBITDA margins over the next few years and kind of line those up with our CAGR estimate that we put out there, you could see us moving to EBITDA margins in the Marketplace segment, high-teens and maybe even comping the 20 [ or more ] percent.

Yes. Okay, got it. One of the areas which I think does not get a lot of attention on the earnings calls and in conversations is your -- the ancillary products that you also offer outside of just the buy-and-sell portion of the transaction. Could you talk a bit more about the kind of services you offer, how lucrative they are to the bottom line? And are there like more services that you're working on that you could offer, like from a data perspective, from a condition report perspective, maybe like at some stage involving the consumer as well?

Yes. Thanks, Rajat. We offer a number of services. I think our services portfolio is a differentiation as well for the company. It's a robust services portfolio that makes incremental profitability for the business. Again, I'd say volumes in that category overall, generally depressed because of where the industry has been, so a real opportunity for growth as we look forward to there as well. I'd say the services break down into two principal buckets. There's, I'll say, services that require some level of headcount to execute. And then we've got more, what I'll call, technology services. Logistics is a big one. When we sell a vehicle, we offer the buyer transportation on that vehicle. And we get, in many of our marketplace, very high attach rates on that. So moving the vehicle is one area of service. That's probably about half of our services revenue. And that's, I would say, a mid-teens kind of margin business. We do inspection services for off-lease vehicles. We have a small key-cutting business. And then we have some, I'll call, very high-margin technology services. We offer -- we have a technology platform that serves the repossession space. It's the market leader in North America in terms of the way repossessions are managed between finance companies and their service providers. That's a high gross margin, high EBITDA margin SaaS business. We have a technology service that enables other industry players, independent auctions and some large dealer groups to run simulcast auctions. We have probably the industry-leading technology when it comes to simulcast auctions. And that's a high-margin service for us as well. So see a robust services portfolio with plenty of room for growth and, I'd say, generally strong margins today that hopefully will improve over time.

Got it. And then a question from Ryan.

You mentioned very interesting repossession services business that you have. When it comes to the actual auctioning of the repossession vehicles themselves, I believe there's some regulatory hurdles to doing that in an online-only way, which is the way that's available to you at this point. And it seems very outdated, right? Like it hasn't kept pace with the industry technological change. Is there any opportunity for that to be updated? How would that process proceed? Could you influence it? And what kind of opportunity could that potentially represent now to OPENLANE?

Yes. Thanks, Ryan, appreciate that. Repossession volume typically is about 1.5 million to 2 million units a year. It's been below normal a couple of years ago, but it's back at around normal levels now at this point. But as Ryan mentioned, most of those vehicles continue to be sold at physical auction for, I'll say, logistical and regulatory reasons. Ryan, I would agree with you that I think that becomes a little more anachronistic, particularly as the buyer audience moves more and more online. But I would -- I'm fairly, I'll say, conservative on the pace of what I think that change will be. I will say that we are experimenting, piloting at this moment with offering, I'd say, a small number of repossession vehicles in our digital marketplaces. We have sold some. We're working through the process. It is quite highly regulated. If you think, one of the benefits of an off-lease car or a dealer car, Ryan, is when you -- as soon as the vehicle is returned, you can sell it, right? So the lessee returns a vehicle, you can sell that car immediately, literally that next minute. Likewise, if a dealer takes a car in on-trade and they don't -- and they deem it a wholesale unit, we can sell it straight away. With the repossession, it's a little different because there may be personal property in that vehicle belonging to the consumer. In many states, the consumer will have a right to make good on their default and perhaps get the vehicle back. And that has to play out over a period of a week or two. So there are those factors that we have to be mindful of. Obviously, the piloting we're doing enables us to address those issues while leveraging some physical properties that we're getting through partner relationships, let's just say that. But I do think that over time, there is an opportunity. It is a significant one. And one of the benefits we have, given the business we own, is we probably know about every -- I won't say every, but 80-plus percent of the repossessions in the United States, the fact that it's happened, who the seller is, where the vehicle is, the condition of the vehicle before anybody else simply because of the digital platform that we have.

Thanks for the color. Any other questions from the audience? We've got one there.

Yes. So looking at used vehicle values, they're still maybe 30%, 40% above what we saw in 2019. Do you have any thoughts on -- do those have to come down a bit to get that volume back to 2 million, I think, the number that you mentioned? And then also, you have talked about some friction between the seller and the buyer at auction before. And just if you have any updates on if that's improved.

Yes. I don't think they have to come all the way down. I don't expect them to come all the way down. I think there will be downward pressure, but I do not foresee used vehicle values getting back to pre-pandemic levels. Frankly, there's been a deficit of 1- to 3-year-old vehicles produced over the last 2 years. So I think the -- while there will be downward pressure, I don't expect it to go all the way back. I don't think it has to because of the dynamic I mentioned with residual values. Residual values will be going up. Now the exact shape of that intersection will take time to play out, and we'll have to see it. But I think the trend lines, we can see that there's evidence for both trend lines to play out directionally like I've said. So I'd say that's, that factor, don't have to come down all the way. In terms of the friction between seller and buyer, that probably goes to what I'd call a conversion rate in the moment. What we generally find in our industry is when used vehicle prices are depreciating, that tends to put a little bit downward pressure on conversion rates or selling percentage. And the reason for that is the seller is kind of anchored on the price they were getting last week or last month for this type of vehicle. And the buyer is more in tune with, "What are my retail consumers willing to pay right now?" So that can put negative pressure on conversion rate. We obviously have tools to sort of address that. We try to educate our sellers in what the vehicles are actually worth in the moment, not what they were worth 3 weeks ago. I'm actually very pleased how our conversion rates are holding up despite what is a downward pressure environment over the last 4 months. So I think that's just part and parcel of the business. There will be ebbs and flows on conversion rate from time to time.

Great. I think we've run out of time here. But just if we can spend 1 minute on just capital allocation, you have a very enviable leverage position. How should we think about capital deployment, M&A, buyback, CapEx?

Yes, Rajat, thanks for the question. I think, listen, we're very pleased with where our balance sheet is at, very pleased, as we said earlier, with our cash flow generation. So we're going to continue to be focused on funding our internal growth plan. That will be our first and foremost priority. As we look out at our maturities, we don't have a major maturity now until 2025. So we feel like the capital structure gives us room to make those investments. We'll continue to evaluate strategic opportunities. As we've said, they have to be high hurdle rates, high returns complementary to our existing kind of business portfolio. So those will continue to be evaluated. And then beyond that, we'll kind of deploy our cash or capital allocation for shareholder returns.

Great. Awesome. Thanks, Peter and Brad.

Thanks, Rajat. Thank you, everybody.