Good morning, and welcome to the Q2 FY2022 Earnings Conference Call of KAR Auction Services, Inc. All participants will be in listen-only mode. Operator instructions were provided. After today's presentation, there will be an opportunity to ask questions. Operator instructions were provided. Please note this event is being recorded. I would now like to turn the conference over to Mr. Mike Eliason. Thank you. And over to you, sir.

Good morning. Before we begin, I will read a brief cautionary statement regarding forward-looking statements and uncertainties that may affect KAR's business, prospects, and results of operations. 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 yesterday, which is also available in the Investor Relations section of our website. Now, I'd like to turn this call over to KAR Global CEO, Peter Kelly. Peter?

Thank you, Mike, and good morning, everybody. I'm delighted to be here this morning to provide you with an update on KAR Global. During today's call, I will provide you with additional information and detail in three areas: first, our capital allocation strategy following the completion of our recent divestiture of the ADESA U.S. physical auction business; second, our view of the current market factors that continue to impact the automotive industry; and third, our second quarter performance and outlook for the remainder of this year. Consistent with our earnings release last night, the results that Eric and I will discuss here this morning generally exclude the divested ADESA U.S. physical auction business, which is treated as a discontinued operation in our financial reports. And as I did on our last call, I'm going to speak about our business in two segments, a Marketplace segment, which we formally call the ADESA segment, and a Finance segment, which we formally called the AFC segment. To begin, Q2 was an important quarter in the history of our company as we completed the divestiture of the ADESA U.S. physical auction business. This was a significant and historic milestone in KAR's history, and a transaction that will be transformative for our company, our customers, our employees, and our stockholders. Q2 was also a transitional quarter. The transaction closed on May 9, so we only operated as the company that we now are for approximately half of the quarter. The transaction itself generated approximately $1.65 billion of cash, net of taxes and fees. Over $900 million has already been used to repay our term loan B and amounts outstanding on our revolver. As we announced in our earnings release last night, we will also be conducting a tender offer to buy back up to $600 million of our senior notes during the month of August using available cash. I want to emphasize that KAR continues to generate cash and remains in a very strong cash position, with over $800 million in available cash at the end of the second quarter. Our strong cash position and our ability to generate cash from our business allows us to do two things. First, it allows us the flexibility to invest into our digital marketplace businesses. Our objective here is to expand our market share, enhance our product portfolio and improve the customer experience. We believe that these organic investments will position us to extend our lead in the digital marketplace business and position us for accelerated growth when industry volumes normalize. Secondly, we continue to believe our stock is undervalued. We repurchased approximately $82 million in KAR shares during the second quarter and have approximately $227 million remaining on our authorization from the KAR Board of Directors. We intend to continue buying back shares opportunistically going forward. Since the close of the transaction, I've spent quite a bit of time with our customers, and in particular, with our commercial sellers. Our customers are supportive of our strategy and share our enthusiasm for a more digital future. Also, I am always interested to hear our customers' perspectives on the near-term supply side challenges that have impacted the automotive industry over the past year-and-a-half, as well as getting their thoughts on the timing and pace of that recovery. I would summarize their recent feedback as follows. The supply side issues affecting new vehicle production appear to have bottomed out. Production has been relatively stable over the last six months, although at lower-than-normal levels, and several large OEMs recently reported that they expect to produce more new vehicles in the second half of this year than they did in the first half. Our customers expect the recovery in production to be gradual, leading to a gradual increase in the amount of new vehicle inventory on dealers' lots and also a gradual increase in the number of vehicles entering the wholesale market. Increased retail sales of new vehicles would also result in increased volume of trade-in vehicles going into wholesale channels. And finally, increased new vehicle production coupled with a higher interest rate environment will tend to put downward pressure on new and used vehicle prices. So to summarize, I think it's fair to say that while the supply-side equation remained very challenged during Q2, it didn't materially worsen versus Q1, and there is still widespread consensus amongst our commercial sellers and our dealer customers that these market factors that we've experienced over the past year-and-a-half are temporary and that if supply returns, prices will tend to rationalize, returning us to a more normal wholesale environment over time. No one can predict exactly when that will happen. But through our customer conversations, I'm hopeful that we may start to see the first signs of a year-on-year improvement starting later this year and into 2023, and hopefully accelerating over time. So with that as backdrop, let me cover some of the highlights of our second quarter results. For KAR overall, we generated $384 million in revenue, that was a 2% increase versus the same quarter of last year. We generated a total gross profit of $172 million, an increase of 3% from Q2 of last year. This gross profit represented 50.9% of revenue, excluding purchased vehicles. This resulted in Q2 adjusted EBITDA of $56.1 million, that was a decrease of 10% from Q2 of last year, but it was a sequential increase of 14% over the amount generated in the first quarter of this year. Specific to our marketplace segments, we sold approximately 343,000 vehicles in the second quarter. While the top-of-funnel supply remained relatively strong versus our expectations, we did see a decline in conversion rates across our marketplaces relative to Q1 and relative to the same quarter of last year. This decline reflected weaker buyer demand as sellers continue to hold out for higher vehicle prices that they have been accustomed to getting over recent quarters. And this misalignment between buyer sentiment and seller expectations resulted in reduced conversion rates and lower volumes sold. Notwithstanding those challenges in supply and conversion, we were able to increase our auction fee revenue per unit sold by 20% to $289 per vehicle sold. We also increased gross profit per vehicle sold to $282, an increase of 11% over the same quarter last year. In our finance segment, we experienced another solid quarter of performance, as AFC continues to expand its floorplan finance business. Our finance segment generated revenue of $92 million in the quarter. That was an increase of 34% over the same quarter last year. And revenue per transaction increased 19% to $229 versus the same quarter last year. AFC continues to generate a significant percentage of its revenue from non-interest, fee-based services and offerings. During the second quarter, fee-based revenue increased by 22% over the same quarter last year. So overall, we were relatively pleased with our performance given the market conditions. But I want to be clear, we do not believe that these results are indicative of what KAR is capable of achieving and we are taking significant steps to navigate the current environment by positioning KAR to capture share and accelerate our growth via the many opportunities that lie ahead for us. I'd like to highlight a few areas of progress from the second quarter where we were advancing the strategy and that I believe will benefit our performance in the second half of this year and beyond. The first is our focus on cost management. We've been diligent in adjusting our cost and operating structure to reflect the current realities of our market. But more importantly, the divestiture of the ADESA U.S. business creates an opportunity to shift KAR Global towards a more asset-light digital model with lower overhead. And we have made meaningful progress towards that goal. Specific to 2022, on our last earnings call, I spoke of our intention to reduce our SG&A run rate by $30 million annually by the end of this year. That work is now well underway. Our intent is now to achieve this goal by October ahead of schedule. This should contribute an additional full quarter of savings to our 2022 performance. Another priority in the second quarter has been a focus on pricing. First, we have increased fees and introduced new revenue streams across our digital dealer-to-dealer business that contributed to our second quarter performance and should continue to do so through year-end. In our commercial business, we have been negotiating with our customers to revise our pricing plans to reflect the current market environment as well as our shift to a digital marketplace business. In many cases, the fee structures were set years ago and contemplated materially different volumes versus those that currently exist. So we're working collaboratively with customers to institute fee structure changes that should help bridge the short-term challenges and ultimately mutually benefit both parties when volumes return. And lastly, we're simplifying the customer experience and increasing engagement across our marketplaces through platform consolidation. In the United States, we are finalizing the integration of BacklotCars and CARWAVE. I am pleased to report that we have now successfully hosted our first combined sale for CARWAVE on the BacklotCars platform during the month of July. So we are now well on our way to completing that integration. In Canada, we have launched a beta version of our single marketplace that will combine the totality of ADESA Canada and TradeRev buyers, sellers, and inventory on a single digital marketplace. So given the market conditions and the actions we are taking to control what we can control, I'd now like to speak to our outlook for the remainder of the current year. Generally, I expect our company to perform better in the second half of this year than we did in the first six months. This expectation is based on a number of key assumptions. First, a couple of assumptions related to revenue. Q1 and Q2 were impacted by the transaction, but they also reflect less than two months of revenue associated with the commercial partnership with Carvana. We expect to have the benefits of six months of that revenue in the second half of the year. Also helping to increase revenue, we expect to see some Q3 and Q4 benefit from the customer pricing improvements that I just mentioned. The go-live dates for those changes vary by customer, a handful started in June, others in July, August, and September, but we will have the benefit of those increases in the latter part of this year. The second assumption is the impact of our cost management actions. Many of those actions were initiated during the second quarter, and we anticipate that the remainder will go into effect during the back half of this year. This will also increase our second-half performance. I have confidence in those revenue and cost actions, and I expect them to contribute towards improved performance in the second half of 2022. These items are generally within our control and we are working hard to advance these efforts. The third factor impacting our results is conversion rate. As I mentioned, our Q2 volumes were impacted by a tight supply situation, coupled with conversion rates that were weaker than normal and weaker than what we had expected. While we still have a path to achieving $265 million, if the conversion pressures that we experienced in the second quarter do not improve, we would expect full-year 2022 adjusted EBITDA may be as low as $245 million. Accordingly, we are updating our previous guidance for adjusted EBITDA to a range of $245 million to $265 million. So to summarize my key messages for today. Our ADESA U.S. physical auction transaction is now closed. We have paid down a meaningful portion of our debt, and we're now fully committed to our digital marketplace strategy. The production issues affecting new vehicle supply appear to have bottomed out. And we expect to see a gradual recovery in new vehicle production starting in the second half of 2022. We believe that this will result over time in a corresponding recovery in wholesale vehicle volumes. In our Marketplace segments, despite challenges in the broader used vehicle marketplace that negatively impacted our Q2 volumes, we increased our revenue and gross profit compared to one year ago. We also increased our revenue per unit and our gross profit per unit sold in our Marketplace segment. We experienced another solid quarter performance in our Finance segment with AFC meaningfully growing revenue and revenue per unit. Adjusted EBITDA of $56.1 million represented a sequential increase of $7 million compared to Q1, despite weaker conversion rates and despite volumes being slightly lower than Q1. And as we look to the future, we're excited and energized by the many opportunities ahead. As we outlined in our Investor Update in June, we believe we have a significant opportunity for growth. We have a differentiated platform, a diverse and expanding customer base and a large addressable market space in which to innovate and invest. With that, Eric will now provide a more detailed review of the financial results for the quarter. Eric.

Thank you, Peter. I want to spend most of my time talking about our actions around managing capital, separating KAR's continuing operations from the recently discontinued operations, and provide a viewpoint on where opportunities exist to improve our cost structure going forward. I believe our financial results that were released last night do not need a lot of additional commentary. Let me start by pointing out information we are providing this quarter to assist with the analysis of our business. First, we have provided the annual results of continuing operations for 2020. It is extremely complex and costly to restate the individual quarters for 2020, so we will not be providing quarterly information for that year. We have provided the quarterly results for each quarter of 2021 in our earnings materials. This will allow you to make comparisons of our results for the remainder of the year for our continuing operations. We have updated our datasheet for the marketplace business to present key metrics for the continuing operations of KAR Global. There were no changes to the previously reported metrics for the finance segment datasheet. We also have provided line items in our segment reporting for the finance business that separate fee revenue and interest revenue. We believe this additional disclosure will allow the analysis of changes in revenue as interest rates are increasing. We have provided this additional information in our data schedule for the finance segment for all previous quarters. Now, I would like to cover more specifics on our capital transactions following the close of the sale of the U.S. physical auction business on May 9. We received $2.186 billion in cash at closing. We have $14 million of expected proceeds that will be received after receiving consent for two remaining property leases. As part of the transaction, we transferred approximately $70 million of cash to the U.S. physical auction business to provide adequate working capital for the business to continue operating. As required by the purchase agreement, we have reconciled working capital as of the close date and $13.9 million of this cash has been remitted back to KAR following our quarter end. We have paid approximately $40 million in fees and expenses directly related to the transaction and expect cash income taxes of approximately $430 million to be paid with our 2022 federal and state income tax returns. We have already remitted approximately half of these taxes prior to June 30, 2022, and expect the remainder to be remitted in the second half of the year. We are required to use a portion of the net proceeds of the transaction to repay the senior notes due 2025. We have 365 days from the date of the close of the transaction to redeem the senior notes. Yesterday, we announced a tender offer to redeem up to $600 million of senior notes at a redemption price of 100.75. This offer to redeem the senior notes earlier than the date required will be completed in the month of August. The detailed terms of the tender offer are included in a press release issued by the company yesterday. We have sufficient available cash to fund the redemption later this month. Upon completion of the tender offer, we will reduce our available cash balance by approximately $600 million. Included in income from discontinued operations is the gain from the sale transaction of approximately $534 million before taxes. The reason for this significant difference from the net proceeds from the sale of the U.S. physical auction business and what the book gain is, is because we were able to allocate significant goodwill and other assets to the discontinued business that reduces that book gain. The assets that reduce the book gain generally relate to the purchase accounting for the LBO transaction in 2007, when KAR Global was formed. Another item in our financial statements that needs some explanation is the increase in total SG&A in the second quarter as compared to the prior year. The items accounting for the increase are $10.3 million in non-cash stock-based compensation, $4 million in SG&A for CARWAVE, an acquisition that occurred after the second quarter of 2021, and $1.4 million in non-recurring severance as we exited headcount following the close of the sale of the U.S. physical auction business. One last housekeeping item that I would like to address is the dividend on the convertible preferred stock. Today, this dividend has been paid in kind as required by terms of the preferred stock. The requirement to pay this dividend in kind was for the first eight quarters following the investment. In the third quarter of 2022, this dividend will be paid in cash. All future preferred dividends may be paid in cash, stock or any combination of the two at the discretion of the company. Now, let me comment on some of the ongoing transition activities for separating the U.S. physical auction business from the continuing operations of KAR Global. We have a significant number of contracts that are in the name of KAR Global that provide services to both the discontinued and continuing operations. We are working urgently with the parties to these contracts to separate certain of these agreements and allow each entity to go forward independently. This is proving to be time consuming and we are prioritizing the most significant contracts. Until we are able to separate the contracts, KAR Global remains the party to the contract and is required to provide the benefits of the arrangements to the discontinued operations. As we separate the parties to these contracts, we continue to look for opportunities to reduce the cost incurred by KAR with many of these vendors. Another area we are addressing is our corporate office space. Following the transaction, we have determined that we can reduce our corporate office footprint in several locations, including our corporate headquarters. We are currently looking for an appropriate sublet opportunity for each of our corporate locations where we no longer need the existing space. We have early interest in our Carmel, Indiana and Toronto offices that would provide a significant reduction in our current cost structure going forward. At this time, we are looking for opportunities to be more efficient in our cost structure without impacting our core businesses. In summary, we are moving with a sense of urgency to address as many areas of cost as we can. With inflation, increasing interest rates, deteriorating consumer confidence, and uncertainty around retail demand for used vehicles in the near term, it is important to run our business for the circumstances of today. We have taken the opportunity to eliminate substantially all of our debt, reducing future cash interest payments by approximately $75 million per year once we complete the redemption of the senior notes. We are streamlining our SG&A to have a lower fixed cost structure as we move forward with an asset-light digital marketplace business model. And as Peter mentioned, we are using this unique opportunity to reposition KAR Global with our longtime customers who have acknowledged that the business of KAR Global has evolved. Things are very uncertain for a lot of businesses, and we are not immune from this type of uncertainty. The good news is the cash-generating characteristics of our business remain strong and could in fact be improved following the sale of the U.S. physical auction business. And I know for sure, we have reduced the cash interest payments for KAR and will continue to significantly reduce future interest obligations as we repay additional debt. And last, we believe we have sufficient capital to invest in the organic growth of our digital marketplaces. Our customers are excited about the opportunity we have described for them, and this is an exciting time for KAR Global to accelerate the pace of transformation of the wholesale used car industry. That concludes my remarks. And so I'll turn it back to Jacob and we will now take your questions.

Jacob, you can open the line for questions.

Thank you. We will now begin the question-and-answer session. Operator instructions were provided. The first question comes from John Murphy with Bank of America. Please go ahead.

Good morning, guys, and thanks for all the restatements and info here. I had two questions. First, Peter, as you look at what's going on right now, you alluded to the market being sort of in a disequilibrium at the moment and we certainly would agree and there's a huge issue on the supply side that may not get worked out for another year or two to somewhat normal levels. As you're transitioning the business amidst sort of this mayhem it's really kind of tough to gauge your progress in how successful you're being in transitioning the business to pure digital or almost pure digital ex-Canada. I mean, what are the key metrics that you're looking at and how are you thinking about understanding progress on KPIs or which direction you should drive into? I mean, there's just a lot of moving pieces here, so it's a very difficult time to manage your business. So just curious how you're thinking about KPIs and how to manage the volatility in the near term?

Yes. Thank you, John, good question. You're right first of all it continues to be a time of a lot of change. I do feel, as I mentioned, that the supply-side issues have kind of bottomed out; that doesn't mean I expect a full recovery in Q3, but I think I'm starting to see a little light at the end of the tunnel, which I do feel encouraged about. But you're right; with the transition of the business, we have an opportunity to think about our KPIs. Obviously, at a high level we focus on total volume sold, revenue generated, some of the metrics we talked about here, gross profit as a percentage of revenue sold, et cetera. When we look a little deeper, conversion rate is an important metric in the health of any marketplace. And our conversion rates differ by marketplace. OPENLANE is perhaps our highest converting marketplace right now given the scarcity of these vehicles. But conversion rate is an important metric. Customer participation, both on the sell and buy side — are we growing our customer base, customer levels of participation, et cetera — are important metrics around the health of the business. So we certainly measure and focus on that. And then, obviously, we measure the progress against our initiatives. As I spoke about on this call and another call, we're focused on consolidating platforms. We're focused on migrating to fewer technology stacks and addressing our cost structure. So progress on all those metrics is something we're very focused on as well. And I think while it's not perhaps yet fully apparent in our public metrics, I think a lot of the work we've done around the cost structure will become more apparent in coming quarters. The work around the consolidation and creating greater efficiency in systems will be very powerful for us as volume starts to recover because, again, this business, like most businesses, has a scale effect. I think the scale effect is even more magnified in a digital model than in a physical or a hybrid model. So I'm very encouraged that the work we're doing and the metrics I'm seeing and the progress we're making is going to be very positive for us as we start to see volumes increase. Now, obviously, we're going to have to prove that out. We recognize that, but ultimately we're trying to lay a foundation for future success.

That's helpful. And then just a second question on pricing. It sounds like you're adjusting pricing from now through August or through September for all your customers. I'm just curious what the receptivity is to this and what you mean? I mean, is it just simply higher auction fees or how are you going about this? And it sounds like you're not having any real pushback the way you talked about it, so just trying to understand that that's pretty unique?

Well, a couple of things. In late Q1 actually we increased some pricing in our dealer-to-dealer marketplace, so I think we're seeing some of the impacts of that in Q2 results. I mentioned how the volumes were relatively flat, actually slightly down versus Q1; the financial metrics were somewhat improved. So I think we see that showing up and that will have the benefit over the rest of the year. What I referenced in more depth in this call was more on the commercial side of our business. And what I'd say is, and it's actually less related to auction fees — buy fees and sell fees — it's more related to the services we're providing around inspection, in some cases logistics and other types of services for our commercial sellers. And frankly, as you can imagine, we've had a situation here over the last 12 months where our volumes in some cases have been down dramatically. But it has not been possible to take our cost down to that degree, yet we need to continue to provide service on a national basis, and we've addressed the costs where we can. So I think what we've really tried to do is, for those services, speak to our customers about the current reality around volumes and how the unit economics don't support these very low volumes. The customers have been very understanding of that. Essentially, what we've put in place are, instead of a fixed price structure at all levels of volume, we have converted to a tiered price structure, which has higher pricing at current volumes and then, as volumes increase over time, returns generally towards the pre-existing price if volumes get all the way back. So if you can imagine that type of scenario, they've been very supportive. I take from that that they value us as a business partner. They value the services we provide and they completely understand the volume picture that affects their business and ours. So I'm encouraged by that. These are meaningful changes at current volumes. What I'm perhaps even more encouraged about is that as volumes increase the impact of these changes may actually be more meaningful as volumes start to trend back up towards normal. And as you mentioned, that's probably going to take time. So we may get that benefit over a considerable period of time.

Yes. No, it seems like from a revenue side and a cost side, you're setting up well as volumes recover, there'll be a tremendous amount of operating leverage. So it seems like you're doing all the right stuff. So we appreciate it. Thank you so much, guys.

Thank you, John.

Thank you. The next question is from the line of Bob Labick with CJS Securities. Please go ahead.

I wanted to start with conversion rate. You gave us some interesting statistics on that and I'm assuming the lower conversion rate relates to the softening of used car prices. And it's kind of seen more broadly than just you guys. And that could last a while if prices continue to soften. So my question is a) is that right? And b) what are you doing to encourage the selling dealers to lower their limit price or to get more in line with reality? And how data driven is this decision on that limit price and how long does it take to normalize to get back to regular conversion rates?

Bob, thank you. Good question. So first, if I can comment on the metrics themselves and then what we are doing about it. First, I'd say the decline in conversion rate, relative to a year ago, has two factors. One factor is a straight mix shift. The percentage of vehicles sold from commercial sellers a year ago was higher relative to Q2 of this year. And again, as I mentioned, the conversion rates on, for example, the OPENLANE platform are our highest of our marketplaces right now. So just a straight mix shift — less OPENLANE, more dealer-to-dealer in relative terms — will tend to reduce conversion rates. So there's that impact, which is not a market factor; it's a mix factor. And then I'd say most of the impact we've seen has been the market factor of relative seller and buyer sentiment. If I contrast it with Q2 of a year ago, Q2 a year ago was unusually strong because we were in an environment where prices were running up and buyer appetite was increasing every month. We've had the opposite set of facts here over the last few months where sellers are holding on for high prices and buyers are recognizing that consumer demand is weakening and their appetite is weakening. So that's a set of facts. I think you are correct that if we anticipate an extended period of steadily declining prices, conversion rate could remain under pressure. None of us can predict precisely, but that's one reason we're being cautious in revising our guidance. If these conversion rates persist, that will show up in our numbers. So what are we doing about it? Obviously, trying to get sellers and buyers aligned on what the true value of the vehicle is a key factor. We don't have perfect control over that, but we do have some ability to influence it through data — offering the seller a guide that these offers or bids they have are strong in the large market in our opinion. We've also launched some technologies in certain marketplaces requiring the seller to put a definitive price on the vehicle before it's launched. In TradeRev in Canada, for example, sellers can launch vehicles with no floor price if they want and see how the market performs, and we find those cars typically convert at a lower rate. So we're trying to get more of our sellers to use floor pricing. We're also limiting the number of reruns that sellers can run the same VIN through the marketplace because if they run the vehicle two or three times then we believe they've had the benefit of what the current market sentiment is and running a fourth or fifth time isn't of great value. These actions impact things on the margin, but the principal driver is the market. I was encouraged by a number of factors: we haven't seen any worsening of the conversion rate in July relative to June, so that's encouraging. I did see a market report yesterday from Black Book that said, by their metrics, sellers are finally starting to respond and lower prices and there was a significant downward step in used vehicle prices last week as sellers released more vehicles to get higher conversion. So I think ultimately buyers and sellers learn pretty quickly, and these phenomena tend to be temporary because ultimately the cars have to sell. It's in everybody's interest to move through the marketplace quickly.

Okay, great. That's super helpful color on that. Very much appreciated. And then just one other and I'll get back in queue. Obviously the shift to digital began before COVID and was accelerated by need during COVID. Given the lack of many public physical options out there right now, my question is, how is it settling out since we can't really see these volumes? Has there been a partial switch back to physical just by virtue of everything opening up or where are we on what we all believe to be this long journey towards digital? And how is market share going and where is volume right now?

Good question. I don't have perfect data, but I do have some data. I think we're still on that journey to digital. Maybe the pace of that journey has moderated a little bit, but based on analysis we have, I believe that consigned volumes at physical auctions also declined in the second quarter. On a year-to-date basis I still see evidence of a share shift away from physical and towards digital generally in the industry, but the data sources are imperfect. There are other companies that report, so we'll have to see what the totality of that data looks like. But I do believe that shift continues, albeit at a somewhat moderated pace.

Thank you. The next question is from the line of Bret Jordan with Jefferies. Please go ahead.

On the pricing initiatives, sort of offsetting the lower volumes, what are you seeing in the competitive landscape? Are peers basically following the same trend given their volumes are down as well? I think you commented that you had slightly lower volumes in Q2 from Q1. Is that a competitive issue or just a market issue?

I think the volume issue is a market issue, Bret, based on the volumes we've seen — physical were down — and my assessment is that volumes have been under pressure industry-wide. On pricing, in the digital dealer-to-dealer channels we do benchmark our pricing versus competition. We think we're well-positioned there. We're competitive, maybe slightly different on some prices, but I feel good about our pricing structure. In terms of the commercial side pricing changes, I don't have perfect visibility into competitors' discussions with their customers, but given the volume pressures I wouldn't be surprised if others are having similar conversations. I just can't speak to it from a position of full knowledge.

Okay, great. And then, obviously, big success with AFC. When you look at the conversion and the other issues you faced this year and relative to your guidance range of $245 million to $265 million, what do you see as the contribution from AFC versus the auction operations?

AFC has been a significant contributor to overall profit performance recently, and we expect continued strong performance from AFC. Over time, however, we expect the Marketplace segment to drive the majority of the growth as we look forward. That said, we are very encouraged by AFC's performance. The rising interest rate environment has some benefits to AFC, though we must monitor credit risk. AFC is a strong business and will continue to be a strong contributor.

Thank you. The next question is from the line of Daniel Imbro with Stephens. Please go ahead.

Hopped on late, so apologies if you discussed this, but I wanted to start on the SG&A side. Eric, I appreciate the color on the non-cash items and the CARWAVE numbers, but one, is that non-cash number of $10.3 million a one-time item or is that going to continue as part of the run rate cost basis? And then at the Analyst Day you guys talked about $30 million of run-rate cost savings that you were targeting this year. How much of those were captured in the second quarter and how much is still to come?

Daniel, let me take the first part. The $10.3 million in stock-based compensation is a catch-up as a result of the gain on the sale transaction. Our long-term incentive plan is tied to certain performance thresholds; it had been below threshold for the 2020 and 2021 grant years and we're now accruing as our results have reflected. Relative to other items, as the business has transformed, it's difficult to see precisely the impact on run rate. We have made a number of actions that reduce costs, but at the same time we've had transition activity and some temporary costs associated with separating the businesses. I don't think the full effect has shown up yet in the cost structure. As we look forward, you'll see more of that in the second half of the year. Peter, do you want to discuss the $30 million target and where we stand?

Yes. I agree with Eric. I don't think the cost reductions have fully shown up yet. We had a cost agenda that began shaping before the transaction, but we wanted to get through the transaction because it dictated the shape of the cost actions we could take. We couldn't take cost actions within the business we were selling, and we needed the transaction to be closed before we could fully address our own operations. So most of this work really started after the deal closed in mid-May and has continued since then. I expect these actions to be more visible in the second half of the year. I would say I expect us to end the year with an SG&A run rate somewhere around $400 million, give or take, and that will be down from some prior periods. We're very focused on that work and on achieving the $30 million of annualized savings by the October timeframe.

All right. Thank you guys for that color. And then, Peter, I wanted to ask about the integration of CARWAVE, which began at the Analyst Day; it sounded like you were making progress. How is the integration going? And I know volume is pressured on the dealer-to-dealer side right now, but have the price increases allowed that portion of the business to remain EBITDA positive in this environment or has anything changed there? I think when you bought CARWAVE, you had said that business was profitable, but things are changing; any update there?

Thanks, Daniel. CARWAVE has continued to be profitable, which is positive. Volumes in the B2B channel have been under pressure, and that should correlate to some impact, but the business continues to be profitable. The integration plan is progressing well. Given the strength of the CARWAVE platform and customer feedback, we wanted to replicate that experience within the BacklotCars market. That work now exists and is in an advanced beta. We held our first combined sale in July, migrated cars over, brought over some buyers and sellers, and pressure-tested the system to get customer feedback. That was a key milestone and a positive one. We're in the latter stages of migration and expect to complete it this year. I feel good about getting to one marketplace, getting all our sellers and buyers into one digital venue, and leveraging the network effect. We're well on track and feel good about the long-term prospects for the digital dealer-to-dealer marketplace.

And Daniel, to add clarity: the combination of our digital dealer-to-dealer marketplaces — CARWAVE, BacklotCars and TradeRev in aggregate — are profitable in aggregate.

Right. That's all I had. Appreciate all the color and best of luck going forward.

Thank you, Dan. So I believe that concludes the questions. Jacob, do we have any more questions in the queue?

No, sir. This concludes our question-and-answer session. I would like to turn the conference back over to Peter Kelly for any closing remarks.

Thank you, Jacob. Well, thank you again for your questions and for your interest in KAR Global. I'm encouraged by our second quarter results in light of the current market challenges and I believe that we are executing well against the levers that we control. To summarize, once again, we completed the transaction and are fully committed to our digital marketplace strategy. We've paid down a meaningful portion of our debt and continue to generate positive cash flows. We've increased revenue and gross profits, despite weaker seller supply and despite marketplace conversion challenges. I believe we have a sound strategy in place to reach our 2022 goals and beyond. As I look beyond 2022, I'm also very encouraged by our longer-term prospects for growth. As we outlined in our Investor Day update in June, I believe our growth will be driven by a number of important factors. First, the ongoing secular shift towards digital marketplaces across our entire industry. This will drive increased volume in both the dealer and commercial parts of our business. Second, a broader recovery in commercial volumes across our industry. Third, the continued strong performance by businesses like AFC and ADESA Canada where we have differentiated offerings and a strong market position. And finally, our continuous focus on cost efficiency and being an asset-light digital company. Together, I believe these factors will help us navigate any short-term challenges while positioning us for accelerated growth in the future. I look forward to sharing our progress towards these goals on our next call. Thank you everybody and have a great day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.