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

Thanks for coming guys. We have OPENLANE here, one of the largest players in the wholesale, used vehicle and auction space in North America and Europe and has a fully digital approach, which is fairly unique. And they also operate a financing business through AFC. And so we have Peter Kelly here, CEO; and Michael Eliason, and we also have James here as well. So I guess you guys have some opening remarks if you want to.

Great. Sure. James Coyle is our President of North American marketplace. Delighted to be here. Thank you for your interest in OPENLANE. So I just got a few opening remarks and then we will go to Q&A and discussion. So OPENLANE, we're a leading wholesale digital marketplace for used vehicles, okay? Last year, we sold 1.3 million vehicles. Just over 90% of that is in North America, U.S. and Canada. But as Billy mentioned, we also have a profitable and growing business in Europe. Our customers include tens of thousands of dealers, both franchise and independent in North America as well as commercial sellers ranging from the largest OEMs and cash finance companies, automotive finance businesses, rental car company business, et cetera. Our business, as Billy mentioned, operates in 2 segments. I think of our marketplace business -- digital marketplace business is our core business. That's OPENLANE, and we also have finance subsidiary AFC, to provides floorplan financing to independent dealers. And independent dealers are core buyer audience in our marketplaces. We have a large addressable market, which in normal times, we estimate about 15 million units through wholesale in North America. So North America TAM wholesale 15 million-plus units in normal times. But for the last few years, it's been below normal. COVID and supply chain impacts, and pricing impacts caused the wholesale market to be substantially below normal. We now believe we are on recovery path back to a more normal market size over the coming number of years. OPENLANE is committed to a digital asset-light market. We believe the digital model give us great outcomes for our customers. The customers on the seller side are looking for speed of sale, low cost of sale and best proceeds for the vehicle. We think digital delivers all 3. And buyers are looking for convenience, condition reports they can trust, access to nationwide pool of inventory, [indiscernible] digital address with that very well. And we believe that the digital model continues to gain share versus, what I call, the legacy physical model and that secular shift of share from one model to the other is continuing over time. Our business is growing. Marketplace volumes grew 10% in the fourth quarter, so volume of vehicles transacted grew 10% in Q4. Our revenue last year grew 8% over the prior year. Our business delivered strong earnings and cash flows. Adjusted EBITDA of $272 million last year, that was 18% up on the prior year. Cash flow from operations last year was also very strong at $237 million, okay? Low leverage. Our current leverage is approximately 1x adjusted EBITDA, and we see a great opportunity for continued long-term volume shift as more and more of the industry moves in the digital direction. So there's a secular shift as the industry moves from physical to digital, and there's a cyclical recovery at the historically low volumes of the last few years recover towards normal. So there's 2 different growth drivers in our business. And obviously, we're driving that to our strategy as well. So in terms of our growth strategy, we're looking to continue to grow our share and especially in the United States from the shift in principally dealer-to-dealer volumes from physical to digital model, driven by the benefits I talked about; fast time to sale, low cost of sale, great outcomes for the seller and buyer. We're looking to grow in our commercial business, principally through cyclical recovery in commercial volumes. Off-lease vehicles, in particular, were very, very low in the last few years. That's a big segment for us. We're now seeing an environment where lease originations are increasing again, for consumer buyouts of off-leased vehicles are declining. That means more off-lease vehicles are starting to flow into the wholesale channel. That's very positive for our business. And then we have, obviously, a finance business, which, again, I would call that more of a mid-single-digit kind of growth opportunity there, but a strong cash flow business and a growing business there as well. And when I talked about our North American business, our Canadian business in Canada, we are the market leader. We see slower growth opportunity in Canada, but a very strong business in terms of market share and unit economics, profitability and cash flow in Canada as well with growth opportunities for us as well. One other thing we've noticed as we move to more digital model, the business is very, very scaled. The costs tend to be more fixed in nature, and the incremental returns as volumes grow are very strong. So we see this nice intersection of volume growth, revenue growth, but also a very scalable digital asset-light model. And finally, we're committed to being innovative, an industry leader, helping make wholesale easy so that our customers can be more successful, whether it's OEMs and independent dealers, franchise dealers, everybody is looking to be more efficient, leverage technology, leverage artificial intelligence, things like that, we're here to help them do that. So we invest in innovation and technology. Change drives a lot of that through our products and technology teams at OPENLANE, and we're very excited about the opportunity here.

Great. You already answered a bunch of my questions. So as we go through it, I'll ask some questions. And if you guys have questions, you can just hop in as well. I guess we could start off just on a volume standpoint, you guys did 1.3 million as you mentioned. But in the marketplace, what are you expecting for this year? And I guess, in terms of like the mix from dealer to dealer and commercial, what are you expecting on that one?

Yes. Thanks. I didn't speak about the mix between commercial and dealer, but last year, out mix skewed slightly more towards commercial, close to 50-50, but low 50% commercial, high 40% dealer last year. Now we see a particular opportunity right now on the commercial side because commercial volumes have typically been closer to 60%, 70% of our volume, but that has been very much under pressure for the last few years, again, because of the situation that exists with off-lease vehicles. Used car values are very high. The market value of the vehicle was higher than the residual value of the lease. And if that meant that at the end of the lease, if the consumer didn't have much motivation to return the car, they just buy it out. If they didn't buy it out, the dealer to whom they returned had bought it out because there's a lot of equity in that vehicle is taken advantage of. But that situation is now changing. We're seeing consumer buyout drop, and we're seeing more of the vehicles flow. We call it, funnel deeper into the marketing process where we get the chance to make more revenue. So we think that drives some growth opportunity on the commercial side. Dealer volumes are tied more to retail unit volumes, which are fairly steady, slightly up versus last year. So with new car sales, consumers love trade-ins and then the equation of how many of those patents that you don't want to retain versus wholesale. So on the dealer side, we see it more as the secular shift as we encourage more and more dealers and educate them on the benefits of digital transition of business from a physical model to a digital model.

Right. Great. And I guess to go along with that, you answered it a little bit, but just on supply, what are you seeing in terms of trends in the different channels? So like you said leasing is improving. What do you expect to improve the most, I guess, to really guess [indiscernible] a little bit more?

I think that this segment that's been slowest to recover is off-lease, and that still has some great [business] to go. Even though we're seeing improvement, we're still very below normal. If I go through the other segments, dealer volumes -- dealer confined volumes are still down 15-ish percent versus pre-pandemic level at an industry level. But that's not that much relative to what we've seen in some of the other segments. Repo volumes have been quite strong in the last couple of years -- last 1.5 years. So they're back to normal. Repo sale principally has a physical auction channel for various logistical and regulatory reasons. We have some businesses that we do make profits in that Repo segment, but we don't sell our Repo online. We're seeing increased volume from macro car players as they were able to get new vehicle allocation from manufacturers and replenish their fleet, that means they can de-fleet their older higher mileage vehicles, but we've seen a good recovery, again, in Repo and fleet dealer has been fairly steady. The segment that's been the hardest hit in all fleet and we're seeing, I'd say, the beginning of a recovery there.

Okay. Great. And you also already talked about this a little bit, but can you go into a little bit more depth about the equity gap and how that impacts like leasing volumes for you guys and how it impacts the business and what the trend has been recently?

Yes. So OPENLANE is the market leader in operating off-lease and marketing programs for most OEM brands in North America, okay? And the program we offer varies a little bit by OEM brand, but the broad brush strokes are very similar. An off-lease vehicle gets returns, it's first offered to the grounding dealer, the dealers from this returns. And then that dealer doesn't buy it, it's offered to the franchise network in that brand. And if those dealers don't buy it, it's been offered in our open marketplace to all dealers. So that's kind of the steps of the waterfall. And if we don't sell it there, then it's typically moved to a physical auction and sold there. So it's a 4-step remarketing process. And the revenue opportunity sort of increases as you go down that stairs and the revenue per vehicle sold goes up. So what we saw, I'd say, in sort of mid-2022 or 2023, frankly, consumers are buying out 80% to 90% of -- between the consumer and the dealer. And then whatever wasn't getting bought out was typically bought out by that very first year to where the vehicle landed. So they had no inventory, and they had a good opportunity to buy this car, the value of the car was higher than residual. So we're seeing that shift now. In normal times, consumer buys more like 20%, 25%. And today, we're somewhere between 19% and 20%, depends on the brand. We're still probably closer to the 19% than the 20%, but coming down, and as you imagine, for us, if that 10% extends to 30%, that's a threefold increase in supply for us. So that's pretty meaningful even if historically we used to [indiscernible].

It impacts our business very positively. And the gap has gone down every quarter for the last 3 to 4 quarters.

Yes. Great. And then I guess on supply, continuing on that part, we've been talking a lot about our research about how late-model vehicles [indiscernible] there, right, where there's a big glut because of the lack of production over the last few months. Do you -- and I know you guys operated across the spectrum, but do you guys have any sense in terms of when you think the volume there will really start to inflect positively and how does this impact your business?

I think what I'd say there, Billy, that's the reason why the recovery will be gradual because there was fewer vehicles produced in 2021, 2022, recovered pretty much back towards normal in 2023, but there was a deficit of production. With that, there was a deficit of leases originated, right? So there's a couple of sort of structural things that continue to play out over the next year or 2, that delay what would otherwise be a speedy recovery. But I still think there's a recovery, okay? I think that's another reason as well why I think used vehicle values while they have declined 20% from their post-pandemic high. They're still 30% give or take higher than pre-pandemic levels. But I don't think they're going to drop back down to those levels, because there is this sort of structural deficit of similar late model vehicles. Obviously, we've had inflation for a few years since then. So we see slight downward pressure on used vehicle values, but nothing -- we don't see dramatic unraveling of used vehicle values from the current levels.

Okay. Yes. We're thinking similar. And then I guess we can maybe shift a long bit to your digital-only strategy. So I mean this is pretty unique, and then you got -- how would it really benefits the consumer and not to continue with customer and dealers. What are the benefits you've seen for both dealers and customers and then your business, I'm going to like this one open online platform where you can kind of see everything halting. What are the benefits there?

Well, so we have a 2-sided marketplace in Canada, Europe and the U.S. And so I guess the first thing is the kind of the consolidation, you don't really want to have multiple sites as you enter in the marketplace, right? You want to aggregate your supply and demand in one place. So that was kind of an emphasis for the start, we have put together through acquisition. And so we had a lot and lot of brands, and so kind of -- I think from Amazon. We always wanted to have all of the supplies in one place. And so I think we kind saw top 4 benefits. So one, getting all the inventory to one place, we thought we'd really improve our CX. We had 2 sites in Canada, 3 sites in the U.S. and 2 sites in Europe. And so we went down to one in each region. So I think that's for one. And two, it just simplifies the experience for customers. You are not in more than 3 places. In some cases, if you're buying off these cars, you can go to 10 or 15 places because our private labels each have their own sites as well. But the problem with that [indiscernible] on the same place then. [Three], it just reduces our operating costs, right? We have technology teams for each site, and we were able to slim down that back-office costs as well and we get back office teams supporting each one of those businesses put together. So that was the third. And then we see a further consolidation in business processes as we go into the future. So when we look at the digital model versus physical, we still have business facilities in Canada when we sell cars digitally, from the time the [indiscernible] until someone gets the car is so much faster. And if you look at how it goes, off-lease cars sells right away versus going all the way to physical auction after about 25 days, in some cases, for the whole process. So if you get a car in and out 2 or 3 delivered in the best case. So the worst case it will move to months. And so I think when you're trying to maximize cash, the time value money, it's a really big deal. And we -- Canada was the first place we were entirely digital, we haven't seen any erosion, we haven't seen any lost customers. In fact, when you have an auction running, this auction [indiscernible] together, the physical auction takes a huge benefit of having all these online customers, right? You get way more buyers when you have the digital experience. We think it's been a good strategy for us. We obviously like the gross marginal impact [indiscernible].

Okay. So we can kind of get a few different directions here. Maybe continuing with -- I mean, you just mentioned about the technology. What are some of the product initiatives each year you guys have been working on and putting in? What are the biggest, I guess, initiatives that you think are really having a positive impact for the experience?

Well, you've always asked about AI first. Yes. We used [indiscernible] another type of technology. We see a lot of applications for customer-facing and a lot of internally focused like ops projects. Think somebody is calling and you're trying to figure out where the car is at, can you go through a whole bunch of different shipping [indiscernible] but I think from a front-end consumer-facing perspective, we have AI-enabled inspection right now that shows physical damage on cars. And we were the first to market with a viable solution that allows you to sort of toggle on and off with AI. And I think many people probably thought he would get their first. I think we were the first market and we've seen higher conversion on cars. I mean, if you think about it, our core marketplace is backlog cars, which is lot older high-mileage cars. And I think you get a lot of feedback around, I need to see that car or smell that car or touch that car, all that kind of old school language from auctions. We think we can show damage like you're there in person. And obviously, [indiscernible] or whatever. And so we've seen a couple of points of conversion increase just by having AI enabled inspection so far. We've built some of the technology that allows us to adjust to sensitivity on it as well. So if the car is older, we can make it really sensitive and show everything. We can also turn it down and not be quite as aggressive on the inspection. I think a couple of other things on AI that we've given -- all of our marketplaces have the sort of negotiation post purchase process. So you sell the car -- sorry, you probably need a reserve and then, let's say, the reserve price is $10,000 [indiscernible] there was a negotiation that happens to try to complete a transaction. And it's a very like methodical process, call it, the seller, hey, would you take [indiscernible] you go up. And so we've -- in Europe, we've actually put a negotiations to all that sort of does the negotiation like BAI, texting, e-mailing, [indiscernible]. We're actually getting sort of cost out of the process. As you can imagine, calling someone 5 or 6x will negotiate your price and kind of gets expensive over time, especially when you're doing it on like 20% or 30% of your transaction. So that's sort of some of the back-end items. The most recent thing we've launched in the U.S. marketplace as we can't move a lot, we sold in place where -- our marketplace sale normally is 3 days. The seller can flip it on [indiscernible] absolute sales. And so we're seeing pretty significant increases in proceeds from that project. And a lot of times, if there is [indiscernible] on a car, like, hey, I'm getting [indiscernible], let's just go and get it done today, and so we're seeing more value coming out of it, we're also see higher conversion off of it.

Peter, you've talked about this a bit on earnings calls, and I just want to go a little bit deeper into it. How your go-to-market strategy has changed with dealer customers and some of the value that the network effects are providing for them? So recently you've talked about how some dealers are finding profit on older used vehicles that they may -- were unable to get to before. And with your platform, they're able to realize that. Can you talk more about that?

Yes, sure. So if we think about the vehicles we're selling, our commercial vehicles are typically sold by commercial sellers. The buyer audience tends to lean more franchise dealer, okay, with some independence. And then our dealer consigned segment on the sell side is more a franchise dealer and the buy side seems more independent. So you kind of -- 2 different kind of portfolios of vehicles with 2 different seller and buyer audiences. And the franchise dealers in the middle of both to seller and the buyer, depending on the vehicle. So one go-to-market aspect is leveraging our commercial relationships and our franchise dealer relationships on the buy side to help convert franchise dealers into sellers as well, right? So we're doing that with some success. We're also helping franchise dealers in key aspects of the strategy. One aspect is, hey, you've got great quality off-lease vehicles entering your ecosystem at all of your different points and franchise dealers chains have gotten bigger through acquisitions, so they have more points than ever in many cases. We can help them sort of recognize that these vehicles are coming in, that they have real value to be retained within the group. Even if the vehicle is not right for the store that it's bought at, perhaps it's a great vehicle for another store within that group, and we can help them with that through technology. We're also helping franchise dealers, and we heard on the panel today, the best used vehicle is the one they get on trade or sometimes they take a car on trade at one store, and it's not the right vehicle for that store. It's the wrong brand, it's too high mileage or whatever, but it could be a great vehicle at another store within that same franchise ownership group. So we'll build technology that creates this intragroup trading platform that they can leverage before they put the car into an open wholesale channel. So we call that an intragroup trading network. And we do that for a good number of franchise dealership groups. And then after that, those cars that they don't want within their network, we can wholesale very, very quickly. And the speed of sale is pretty phenomenal, even though our marketplace listing in theory lives for 3 days, in reality, the car is sold within a day. Our average days to sell leader to leader is one day. So it means we inspect a car this morning, it's probably sold by tonight and it can be off tomorrow. So it's very, very fast. It's not expensive. So fees are attractive relative to the cost, putting it in a different channel. And obviously, we benchmark the outcomes in terms of pricing versus our other channels bringing in terms of guide book percentages, et cetera and it compares very, very strongly on that as well. So I think this is a pretty compelling model to dealers. I think dealers are entrepreneurs and innovators. They want to be more digital as well, but they want the process to be eased. So we've got to find a way to bring great technology into the solution, but make the process and the experience very, very easy for our sellers and buyers. And that's really where the heart of our efforts are. And pleased with the feedback we get on that, our system routinely from dealers [indiscernible] how our systems are very easy to use. The experience is easy. Obviously, we can keep investing into that.

And you talked a bit about being there. What's your, I guess, pricing strategy in terms of auction fees like -- are you guys trying to go for market share right now and maybe pricing a little bit under other players in the market to get more people onto the platform and leverage the network effect or -- is there opportunity to increase prices over time? Or how do you think about that?

I think in reality, Billy, given our volumes were so challenged in the last couple of years, particularly on the commercial side of business, which historically was a huge volume and profit force for us, and that was under such massive pressure. We were honestly trying to optimize for a level of profitability and cash flow from the business. So I think we were -- we raised fees, I guess, in 2022 and 2023 in the dealer-to-dealer part of our business. The unit economics are strong. The fees are typically sell fee and buy fee, more of the fee is on the buy side than on the sell. And our fees in our marketplace are very comparable to a digital competitor we have. They're probably a little bit below or physical auctions are charging, but not a lot. They're in that range. They're in the margin of error of that. So that's been our focus. I think at this point, we are focused on building our customer base and gaining share and converting more of our -- a very big network of franchise fee for buyers on our private labels, buying off these cars want to convert more of those into sellers. So we like the fact that we're I'd say, attractively priced vis-a-vis alternative channels, even if it's just by a little bit. I'll also say, frankly, customer feedback is the customers are more focused on outcomes, speed, time and principally speed -- speed and proceeds of the vehicle. Like if you can't bring appropriate market value on the vehicle, it doesn't really matter what your fees are right? Not going to get that business sustain. So the customers are rational and more focused on the outcomes we're getting for them or something that we figured out.

And then I guess like one more before we can go to some investor questions [indiscernible] outside of the auction fees, where do you see some of the opportunities in some of your other revenue streams for growth and how we drive that?

And actually, I should say, Billy, on that front, if you look at sort of auction fees for vehicles sold have generally trended up. Gross profit per vehicle sold trended up. Gross profit as a percent of net revenue has trended up strongly. And again, I think these are functions of our go-to-market strategy, but also our digital model. The cost improvement that James talked about the scalability of the business. So I'm very encouraged by that and the sort of operating leverage that this business now has is very impressive. So the revenue streams. We generated quite a lot of services revenues. In fact, more than half of what we call our net revenues are services. The biggest component of services revenue is logistics. When we sell a vehicle, we might make $400 of auction fees. There might be a $500 move of that PFS movement from AP. So that also appears as revenue. And that's low margin revenue. We do make a margin on that in the sort of mid-teens is typical to a transport margin. We have other services that we monetize. We monetize some of our inspection services. We have businesses kind of SaaS tech businesses, whether it's guidebook pricing, repossession management software, auction software that other industry players use. So I'll roll into our services revenue. So we like that component of revenue as well. And obviously, that's about 25% of our total revenue.

Right. So we haven't really talked about that. Maybe you can talk about some of the trends there you're seeing, obviously, I think a big topic is just where credit losses are trending and kind of delinquency in the market and what you guys expect for the rest of this year?

Yes. So our finance business is AFC. It's an independent dealer floor plan financing business. So it's -- we're not financing retail customers. We're financing independent dealers, it's secured with the inventory that they've acquired. We're lending some percentage of that based on an assessed value of that vehicle. And the short term, typically 60 days may be extendable to 90 or perhaps 120, but the initial floor plan period is typically a 60-day period. So it's a business we've got a lot of experience with. It's been a strong performer for us over decades over multiple business cycles. It's a business we know very well, probably the #2 market share in North America, but I think we're fairly close to #2 with very strong operating financial profile, cash flow characteristics, et cetera. Losses in that business were extraordinarily low in 2021 and 2022, when used vehicle values were appreciating rapidly, because you could lend on a $10,000 vehicle today, if the dealer got into difficulty, which was unlikely because their business is going so well. The vehicles were $12,000 four months later by the time with any trouble. So there's no loss. And obviously, with the depreciation of vehicles over the last 15, 18 months, risks over the last few quarters have been running slightly higher than our -- in the range we like to target. We like to target a range of 1.5% to 2% sort of normal, so a little bit higher than that. And our most recent earnings call, our messaging was we expect losses in the first part of this year to be comparable in the last half of last year in percentage terms. And we're somewhat optimistic that they may trend down in the second half of this year. And I'd say our opinion today is still broadly in line with that. But it's a great business. It's a strong contributor. It's a lower growth business, but a great cash business.

And I guess we go to the audience, if you guys have any questions, not I can just keep going.

Let me ask a question about conversion rate. There -- maybe can talk about historically kind of how much volatility were their in conversion rates. Obviously, they really spike, I think 2021 and then 2023, lots of data is showing kind of an uptick right now [indiscernible] with that. But also that -- is it fair for us to maybe assume that your business -- you talked about AI enabled is actually doing better conversion structurally higher over time. We certainly both [indiscernible] presumably and then also higher over time whatever that number could be?

Yes. I'll take a first attempt. James, if you want to jump in. So conversion rate is important because the higher the conversion rate that you tend to be very positive in terms of our gross profit percentages because conversion is 50%, you're kind of expecting 2 cars to sell one, if it's 65% your inspection cost per car sold go down and you get more leverage for sales and stuff like that. If we think of commercial and dealer -- our off-lease conversion pre pandemic was just above 50% across the portfolio of commercial sellers. It went up as high as 90% off of considerably lower supply for the situation I mentioned in 2022. So we were kind of converting everything, but at the very top of the funnel, where there wasn't a ton of revenue for us. So we've seen that come down. My hypothesis that will trend down as more supply enters the market. But structurally, I think we'll be higher than we were pre-pandemic because there's more buyers online. So that remains to be seen, but we're certainly higher than that prepandemic number right now, even though we're down from the 90% level.

And that business is a better gross margin answer for us as conversion goes down that way because it means more cars go deeper.

And on the dealer side, we target a conversion rate comparable to what physical auctions deliver. The conversion rate to think about as the key aspects of the customer experience both for the seller and the buyer, and it's also key for our economics. We do not want to expect 10 cars to sell 1. That's not a good business model. It's also not a good buyer experience. If I'm searching through 10 cars and only 1 of that is really going to sell. And it's not a good seller experience. So for all those reasons, we want to get conversion rates up. So we actively lean in to dealers to help them understand the tools that are available to them, tough to understand the techniques that are available to them that drive greater conversion. And James mentioned one, the absolute sale process that we launched really just in the last couple of months here. Again, it's designed with that in mind. And the way it works is the cars in this marketplace, a number of bids that come in, and maybe the seller hasn't got all the way to where they want the price to be. But if they hit this button and put it in absolute sales, they're basically signaling to all the buyers that this car will sell today, it's now 100% guaranteed sales. We don't yet know what price is going to be at this price or greater. I got a bid at this price, we've got 3 bids, the highest one bid price, I'm definitely selling it. And what that does, it brings in buyers, because buyers like, "All right, that's a car we're looking at because I know that was going to sell." And that buyer activity gives that car another lease of life. And if we see another run-up in bidding, we also see higher conversion, we'll also see greater outcomes and proceeds from sellers. So it's kind of a win on all these dimensions. We're really thoughtful about how we sort of build those experiences into the market.

To think of that particular challenge on conversion in both the U.S. and Canada. Is prices have fallen in the last 6 months? Did you get some sellers with some realized expectations? So that's probably the 1 challenge we're trying to fight through, but we don't -- we see commercial trend in positive we see conversion trending positively largely this year?

It does fluctuate seasonally. Yes, when prices are running up, conversion will tend to be strong, the prices are trending down, conversion will be under pressure. The audience that's more in tune with the actual demand is the buyer. The buyers are assessing demand based on the traffic they have on their websites, the traffic they have on the retail stores. They're absolutely in tune on consumer demand. The sellers are kind of looking to what they got last week, last month, I used to get $15,000 for this car, when you get 15,000 [indiscernible] and getting them sort of come to alignment there is a really key keeping convert [indiscernible].

Two questions. Your acquisition of Manheim's business in Canada, can you kind of talk about the decision behind that? And then also, I believe it has a physical asset as well?

Yes. We see that as very consistent with the digital strategy of our business, but let me sort of explain that we did acquire Manheim's business in Canada. Manheim operated at 5 sites, 5 cities in Canada, we operated 12. So in the 5 cities they operated and we also operate. Because of the shift of the industry from physical to digital and then also because wholesale volumes are down in Canada from normal for the same reasons that were down in the U.S., both our facilities were underutilized. Ours were underutilized, so were theirs. So the acquisition we bought their business, with the exception of 1 facility, we didn't buy their facilities. So let me -- so on the 4 locations we didn't buy their facilities, we have migrated their volume to our locations and their facilities get repurposed to other uses. And that's something [indiscernible] we will do. In the 1 location where we bought their facility, we're migrating our volume to their site, our site is bigger, and we're selling that site for other developments. So the essence of the transaction, I guess, reduces the total acreage of physical auctions in Canada, reflecting the fact that the industry has moved away from physical towards digital, right? It also gives us more scalability at our locations. We have now more volume of the same acreage [indiscernible] had before. And obviously, the benefit for the customers of the Manheim locations is they're now in a larger in terms of audience of buyers digital marketplace because our marketplace is the largest wholesale use digital marketplace in Canada.

Can you also talk about, I guess, maybe some of the offset between volume and price. And I might be wrong in this, but if prices on vehicles are coming down and maybe the buyer scheme potentially be connected to the value of the vehicle. So there might be some headwind there, but then volumes you're saying going from 90% to [ 20% ]?

Yes. Good question. So our buy fees, as I mentioned, most of the auction fees is on the buy side, so it's maybe a 70-30 [indiscernible] kind of split. The buy fees typically are stair-step based on the value of the vehicle. So it's -- but it's nonlinear, right? It adds the value -- the percentage of the vehicle value goes down as the vehicle value goes up, right? So as vehicle values come down, there is -- so I guess what I'd say is if vehicle values came down 10%, our average buy fee might come down 5%. So -- and that means our average total auction fees might come down 3%. So there is a relationship there, but it's not all that impactful in the grand scheme of things. We'd rather have the volume, because the volume keep the value high [indiscernible].

Do you have any expectations for how much of the market moves online over time?

So currently, in the U.S., about 75% of the market is still physical. The shift is going on nearly about [ 2 billion ] basis points a year for sale for digital-ish. If we look at the most recent data in Q4 and -- we have -- there's a tool called Auction Network, you can get all the physical auction data right now. You see digital auctions defining 10% in the U.S. right now year-to-date on the dealer side, the commercial side selling. So we think it will accelerate about 200 bps a year.

You're talking about time or cash too?

[indiscernible] that is digital in the physical book.

So I look at it in terms of addressable market a little bit. I guess the outcome is similar to what James said. If I look at the vehicles that flow through physical auction, off-lease segment, I think, is very addressable by our digital model because it was very addressable Pre-COVID, we're already at 55%, okay? It's gone up since then. So I think that segment is very addressable by digital, in the base of [ 70, 80, 90 ] as a percentage, but it's a significant piece of that section. I think the same is true on dealers-to-dealer. I think it took the industry longer to develop those tools. But today, these cars can be sold from the dealership about a day, okay, and move directly to the buyer, and that's very, very efficient. So we see a lot of dealers starting with digital and go to everything digitally first. okay? And then whatever doesn't sell, I'll take to auction. That's becoming very, very common. And then we see dealers within that having very high conversion. The average might be in the 50s, but there are some dealers there in the 80s and 90s. I think that's more indicative of where dealers through the right use of these tools can get to. So I think that segment, which is about half of the wholesale industry is, in my view, pretty much fully addressable by digital. Rental, the rental companies have been selling a lot of cars digitally for over a decade at this point on their own systems as well as on systems that ourselves and our competitors provide. So more than half of rental cars are selling digitally today. And then the last segment that I think is very sticky at physical is repo. Repo has some unique regulatory aspects to it about you need to allow the less with debtor, chance to make on defaults, there might be personal property of the vehicle. So there's reasons why a repo needs to be stored somewhere. And I think the physical channel is particularly sticky for that set.

Will you have a relationship with the dealership? Is it typically exclusive to? Like is ACV [indiscernible] like you're kind of sharing volumes from that dealership? Or do they pull choose one or the other?

It depends, like the big dealer groups typically use, well, some of the dealer groups are exclusive. I would say a lot of them are mixed because they don't want to have all their one on the sell side, in different sell side by side. Sell side usually is one. I think users will buy cars from anywhere, right? There's a car versus us versus the ACV and the unit economics work. I think we'll buy cars anywhere. The sell side is more, I think, the place where you get single ownership.

But that said, I'd say most dealers tell you both [indiscernible] Yes. rather doing, I got a digital and I got a physical or I'm using multiple digital. We hear dealers saying, well, for these types of vehicles, I put them over there and these types of vehicles they give them to you, because i tend to get better outcomes, if I do it that way. So it's a mix, and for the most part, I'd say it's not exclusive -- not exclusive relationships, but there are exceptions.

Okay. Unfortunately, I think we're out of time at this point. But thank you again here, James and Mike for coming in today's session.

Thank you. Thank you for your interest.

Thank you.