Yahoo Finance KAR Auction Services, Inc. (NYSE:KAR) Q1 2024 Earnings Call Transcript
KAR Auction Services, Inc. (NYSE:KAR) Q1 2024 Earnings Call Transcript May 1, 2024
KAR Auction Services, Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.21. KAR Auction Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the OPENLANE First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mike Eliason, Treasurer and Vice President of Investor Relations. Please go ahead.
Mike Eliason: Thanks, Cindy. Good afternoon, and thank you for joining us today for the OPENLANE first quarter 2024 earnings conference call. Today, we will discuss the financial performance of OPENLANE for the quarter ended March 31, 2024. After concluding our commentary, we will take questions from participants. Before Peter kicks off our discussion, I would like to remind you that this conference call contains forward-looking statements within the meaning of the safe harbor provision of the private securities litigation reform act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect OPENLANE’s business, prospects and results of operation and such risks are fully detailed in our SEC filings.
In providing forward-looking statements, the company expressly disclaims any obligation to update these statements. Let me also mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued this afternoon, which is also available in the Investor Relations section of our website. Now, I’d like to turn this call over to OPENLANE’s CEO, Peter Kelly. Peter?
Peter Kelly: Thank you, Mike, and good afternoon, everybody. I’m delighted to be here today to provide you with an update on OPENLANE. Joining me is OPENLANE’s Chief Financial Officer, Brad Lakhia. I will begin with a discussion of our company strategy and how we are positioning OPENLANE for growth. Then, I’ll hand the call over to Brad to cover the majority of our financial and operating metrics for the quarter. To start, I’m very pleased with the results that OPENLANE delivered in the first quarter. On a consolidated basis, we grew adjusted EBITDA to $75 million, and we also generated $100 million in free cash flow from operations. These Q1 results were largely driven by significantly improved performance in the OPENLANE marketplace, which grew volumes 13% compared to Q1 of last year, grew adjusted EBITDA by 40% on a clean basis, and contributed 47% of our total company adjusted EBITDA during the quarter.
AFC was also a strong contributor, generating approximately $40 million of adjusted EBITDA in Q1. These results demonstrate the positive impact of our brand and platform consolidation efforts, and also the strong scalability characteristics of our company. A leaner, more agile operating model, accelerated innovation, and a differentiated experience that makes wholesale easy for our customers. And I believe that Q1 is a compelling preview of the value that OPENLANE is capable of delivering. So, let me turn to our strategy and how we plan to build on this positive momentum. OPENLANE is highly focused on growth, growth in volume and market share, as well as growth in our financial results. We view these goals as complementary, and OPENLANE has spent several years transforming our business models to advance them simultaneously.
Our strategy for growth is anchored in our purpose, which is to make wholesale easy so our customers can be more successful, and guided by our vision, which is to build the world’s greatest digital marketplace for used vehicles. OPENLANE has several strategic advantages that I believe will help us achieve our purpose and vision and further accelerate profitable, scalable growth. These advantages include: first, our expanding volume and share in the commercial and dealer segments; second, the opportunities enabled by our asset-like digital model; and third, our focus on the customer experience. Let me address each of these individually, and I’ll start with volume growth and share. In the first quarter, OPENLANE grew its marketplace volumes by 13%, increased growth merchandise value by 17% to $7 billion, and also increased market share.
The volume, GMV, and share growth were largely driven by our U.S. business. These results, coupled with the financial performance that I referenced earlier, purely demonstrate the strength of our marketplace. And at the heart of that strength is a differentiated mix of commercial and dealer inventory. In terms of commercial off-lease volumes, OPENLANE remains a clear market leader. Our commercial off-lease volumes were up substantially in both the United States and Canada during the quarter. And based on auctionette [ph] industry data, our volume growth meaningfully outperformed the U.S. commercial market. Commercial off-lease supply is still well below pre-pandemic levels, and we expect volumes to remain pressured in the second half of this year and into 2025, given the low level of leases written in 2021 and 2022.
However, current lease originations of new vehicles are rising. They increased again in the first quarter, making Q1 and the fourth quarter in a row where that has happened, and they’re expected to increase further throughout 2024. So, OPENLANE will be a beneficiary of these future off-lease volumes when these leases mature. Additionally, given the financial results we produced in Q1, with just a modest increase in off-lease volumes. I’m increasingly optimistic about what OPENLANE can deliver when off-lease volumes are even more robust. We also see additional growth opportunities in the commercial segment, including expanding the products and services that we offer, growing vehicle consignment from new off-lease, rental and repo customers, as well as increasing conversion, particularly in higher revenue channels.
From a dealer volume perspective, we are also well-positioned for growth. First, we have a very strong dealer-to-dealer platform that delivers excellent results for our dealer customers in terms of time-to-sale, cost-of-sale, and financial outcomes. We are growing the number of franchise and independent dealer registrations across our geographies, and through our private label programs, we have the unique ability to transition thousands of franchise private label buyers into multi-channel buyers and sellers on OPENLANE. The story with respect to OPENLANE’s Q1 dealer volumes is nuanced. At an industry level, we saw declines in total dealer volumes sold in the U.S. and to an even greater degree in Canada. Additionally, we also saw significant growth in commercial vehicle supply in the OPENLANE marketplace.
This resulted in some dealers who in recent periods would have purchased dealer-consigned vehicles, in effect trading up and purchasing commercially-consigned vehicles instead. This is a direct result of our diverse inventory and is actually a positive trend for our marketplace. So the net-net of all of this for OPENLANE was as follows. Canada represented the majority of our dealer volume headwinds during the quarter. In the U.S., we saw increased supply from our network of selling dealers, we increased our D2D market share versus physical auctions, and we grew the total volume of open marketplace transactions in the United States. As I look to the future, there are several key factors that will support our dealer volume growth. First, there remains a large addressable market with the majority of industry volumes still being transacted at physical auctions.
We believe we will continue to take share here, as our digital marketplace enables faster and easier buying and selling and delivers better outcomes. Also, we now have a single platform experience with the unified sales team focused on growing our new customer base and our wallet share with existing customers. And then finally, we’re also highly focused on expanding our relationships with the largest dealer groups in the country. Many still utilize physical auctions, but again, our digital marketplace capabilities have already opened the door to many new opportunities and relationships. So in summary, OPENLANE is well positioned with both commercial and dealer customers, and there is growing evidence that having all of the buyers, all of the sellers, and all of the vehicles all in one place creates a more active and vibrant marketplace.
In addition to the volume opportunities, I believe we can accelerate growth by capitalizing on the opportunities that are enabled by our asset-light digital model. We continue to make good progress combining disparate tools and technology into a single marketplace platform. This will reduce our costs over time, but more importantly, it increases our operating leverage and also accelerates the speed at which we can bring new innovations to market. At our core, we are a technology company, developing and launching new digital products and features on a regular basis. Let me give you a few examples from the quarter. As we previewed on our last earnings call, during the first quarter, we launched our new Visual Boost AI condition report technology, which is aimed at improving the accuracy and transparency of condition reports in our marketplace.
To date, we believe we are still the only digital marketplace that gives buyers access to an AI-powered inspection visualization on every dealer vehicle listed in our marketplace. Our data has shown that buyers who utilize Visual Boost AI submit twice as many bids and offers on the vehicles that they view, and more bids leads to more seller confidence that we are achieving the best market outcome possible. One large volume buyer described Visual Boost AI as a game-changing technology. Others said it allows their dealerships to view the car as if I was standing right in front of it, and several have mentioned that it helps them buy with more confidence. So, Visual Boost AI is a powerful differentiator for us that is driving increased trust and transparency on the OPENLANE marketplace.
Another OPENLANE innovation that was deployed in Q1 is our absolute sale feature. This was deployed in the U.S. marketplace. Absolute sale is available to all sellers and visible to all buyers on that marketplace. Once the bidding has reached an acceptable price point to the seller, the seller can click on the absolute sale button to signal to the marketplace that they are now 100% committed to selling this vehicle. After the absolute sale process has been initiated, typically we see buyer bidding increasing rapidly, because buyers now know that if they submit the highest bid, they are guaranteed to win that vehicle. Sellers like this because it increases buyer engagement on their vehicles, and participating sellers have seen sale prices increased by an average of almost $500 after they have activated the absolute sale feature.
Based on this, it’s evident that absolute sale is also driving higher marketplace engagement, increased velocity of sale, and better outcomes for sellers. These are just two examples of a very robust and progressive portfolio of innovation that we’re investing in to create the greatest digital marketplace for used vehicles. And then finally, let me turn to customer experience, which is an area where I believe there is tremendous opportunity of differentiation, and an area that I believe will help drive meaningful growth. During the quarter, we formed a centralized customer experience team that will lead our customer experience strategy across OPENLANE, and leverage the data, the processes, and best practices from all of our business. This team is already advancing a broad portfolio of initiatives with two main goals: first, address any known customer pain points or issues; and second, identify the new products and features that will help make OPENLANEs a preferred platform for buyers and sellers.
In the first quarter, we designed a new customer NPS framework that is now being implemented across our business. This will help us monitor experience delivery more consistently than ever before, and will also help us benchmark with other companies and in other industries. We also deployed new technology to enhance key aspects of the customer experience and aggregate customer feedback in a way that will help inform and prioritize our products development pipeline. So it’s evident that we made positive progress on each of these fronts in the first quarter, growing our volumes, deploying new innovation, and improving customer experience. It’s also evident that when combined, these strategic areas are capable of driving a highly scalable business.
In the case of the first quarter, we saw approximately 40% adjusted EBITDA growth in the marketplace, on a 13% increase in volume, also with strong cash flows. As I look to the future, OPENLANE will build on this strong foundation and lean more heavily into our go-to-market strategy, investing further into sales, marketing, technology, and innovation to continue driving growth. And in terms of our finance business, AFC remains an industry leader and a strategic asset for OPENLANE. It increases buyer engagement and stickiness on our marketplace platforms, and contributes meaningfully to our bottom line. Consistent with comments on our last call, I believe the risk environment is flattening, and we remain committed to managing risk and growing responsibly in the AFC business.
So that was the quarter. But before I hand things over to Brad, I just want to reinforce OPENLANE’s key strengths in terms of our value proposition for investors and our ability to deliver stockholder value. OPENLANE is an asset-light digital marketplace leader for wholesale used vehicles. There is a large addressable market in North America and Europe, and we are well positioned to capture the opportunities to grow both dealer and commercial volumes. Our brand and platform consolidation efforts are enabling us to accelerate innovation and product development. Our focus on operational efficiency gives us the financial headroom to invest in innovation without sacrificing financial results. We are cash flow positive with a strong balance sheet, and we believe our business has the capability to generate meaningful earnings growth over the next several years.
With that, I’ll hand it over to Brad for a deeper discussion on our operational and financial metrics in the quarter. Brad?
Brad Lakhia: Thank you, Peter, and good afternoon, everyone. Before I begin, I’d like to remind everyone that all financial metrics I comment on at a consolidated level and a total marketplace segment level are on a net revenue basis which specifically excludes the impact of purchased vehicle sales. In addition, my comments will be on a first quarter year-over-year basis, unless I state otherwise. As Peter mentioned, we are very pleased with our first quarter results. On a comparable basis, our consolidated net revenue was up 4% year-over-year, mainly driven by the 13% unit volume growth in our marketplace segment. In our reported results, you will see our net revenue was down 2% as we continue to realize the impact from the transportation accounting change we made in the fourth quarter of last year.
This resulted in a $22 million impact to net revenue in the quarter. Consolidated gross profit improved $6 million or 3%, and gross margin improved on a year-over-year basis for the fifth quarter in a row, this time by 270 basis points to 56.5%. Gross profit and margin benefited from higher auction and service fees, higher marketplace volumes, and continued improvements to our cost structure. Consolidated SG&A in the quarter was $109 million and essentially flat to last year, even though our volumes were up 13%. We believe our digital model and our ongoing cost efforts will allow us to continue to scale efficiently, and we expect absolute SG&A to subsequently remain at these levels for the remainder of the year. Consolidated adjusted EBITDA was $75 million, an increase of $16 million.
Last year, we incurred an $11 million charge related to an early stage investment. Accounting for this adjusted EBITDA was up $5 million. Turning to the marketplace segment, our total volumes were up, primarily driven by our U.S. business. Our total marketplace dealer volumes declined, and this was primarily driven by our Canadian business. Similar to late last year, we continue to see Canadian buyers migrate towards commercial vehicles where supply has improved, and we expect this to continue as the overall wholesale mix of commercial and dealer vehicles shifts to pre-pandemic love [ph] norms. In terms of pricing and fees, for the third quarter in a row, we saw auction fees grow at double-digit rates. Total auction fee revenue increased 10%, driven by strong volume growth.
On a comparable year-over-year basis, services revenue was up 4%, driven by higher repossession, inspection, and key service revenue. We continue to focus on driving greater attachment of our ancillary services to our marketplace offerings. I want to note that our reported revenues show service revenue down 9%, again, primarily due to the transportation accounting change I discussed earlier. The collective positive impact of our volumes, pricing, and discipline cost management resulted in marketplace adjusted EBITDA of $35 million. Adjusting for the prior year one-time charge, this is approximately a 40% increase and represents 47% of OPENLANEs total adjusted EBITDA compared to 36% in the first quarter of last year. Marketplace SG&A was flat and as mentioned in my earlier consolidated comments, we expect similar levels of SG&A for the balance of the year.
As Peter said, we were very pleased with these improved results. But more importantly, we believe these improvements are sustainable and position us to deliver further improvements as we capture incremental value from our one marketplace solution. Turning to our finance segment. Loan transaction units in the quarter were relatively flat as we continue to balance growth and risk. Revenues for the quarter were down 2%, primarily driven by increased net credit losses and lower interest income resulting from lower vehicle values within the portfolio. These two factors were also the primary driver of our Finance segment adjusted EBITDA result of $40 million, down $5 million versus last year. The provision for credit losses was 2.3%, which was slightly better than our expectations.
The higher loss rate versus historical performance is attributable to the ongoing impact of higher interest rates, declines in used vehicle values, continued consumer inflationary pressures, and tightening retail credit availability. We are encouraged by the recent improvements we are seeing in the severity of losses. This is the result of stabilizing fundamentals and proactive risk mitigation actions we have taken over the last year. As I mentioned in our year end call, we continue to expect the overall first half loss rate to be comparable to the second half of 2023. As a result, as usual, I will provide an updated outlook for a second half 2024 expectations during our next earnings call, and I’d like to reiterate that our long-term loss rate target of 1.5% to 2% remains unchanged.
As Peter and I have said previously, we’re very pleased with OPENLANE’s portfolio of businesses and assets. As it relates to AFC, we value AFC’s market leadership, the synergies with our marketplace and its leading financial performance and cash flow characteristics. Moving to the balance sheet and capital allocation, consistent with prior quarters, we continue to generate strong cash flow. Cash flow from operating activities was $100 million in the quarter, and our consolidated net leverage was approximately 1 times adjusted EBITDA. This level of cash generation demonstrates the value of our asset-light digitally-focused marketplace business in combination with our leading floor plan finance business. Overall, our capital allocation priorities remained unchanged.
We continue to prioritize the funding of organic investments in our core digital businesses, while ensuring flexibility for high return, complementary strategic opportunities, and shareholder returns. At the end of the quarter, we continue to have $125 million remaining on our share repurchase authorization. And looking to the future, we have a $210 million senior note maturing in June of 2025. We intend to use cash flow generated by the business, along with our strong liquidity position to fund this maturity. Wrapping up, our 2024 adjusted EBITDA expectations remain unchanged. We are still guiding to adjusted EBITDA between $285 million and $305 million for the year. Other guidance metrics also remain unchanged and are available in our earnings release.
To summarize, we remain pleased with the business and financial performance. We generated $100 million of cash from operations in the quarter, and we were pleased with our overall volume growth. Our finance business credit losses were better than expected. And finally, on a comparable basis, our marketplace adjusted EBITDA grew approximately 40%, and we believe we are well positioned to continue to deliver continued improvement. With that, I’ll turn the call over to the operator for questions.
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