Good day, and welcome to the OPENLANE First Quarter 2024 Earnings Conference Call. Please note, this event is being recorded.

Thanks, Cindy. Good afternoon, and thank you for joining us today for OPENLANE's First Quarter 2024 Earnings Conference Call. Today, we'll 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 operations, 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?

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 model 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-light 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 gross 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 auction 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 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 volume, 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 multichannel buyers and sellers on OPENLANE. The story with respect to OPENLANE 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 a unified sales team, focused on growing our new customer base and our wallet share with existing customers. And then finally, we are 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 cost 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're 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're 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 it was standing right in front of them, 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 sales 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 for 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 businesses. 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 OPENLANE 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 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 product 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 these 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?

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 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 disciplined 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 OPENLANE's total adjusted EBITDA, compared to 36% in the first quarter of last year. Marketplace SG&A was flat. And as mentioned in my earlier comments, consolidated SG&A, we expect similar levels of SG&A for the balance of the year. As Peter said, we are 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 usual, I will provide an updated outlook for our 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 1x adjusted EBITDA. This level of cash generation demonstrates the value of our asset-light digitally focused Marketplace business, in combination with our leading, foreplanned 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.

Our first question comes from Rajat Gupta of JPMorgan.

Can you hear me now?

Yes, Rajat.

Could you give us a little more color on the trajectory of the dealer-to-dealer volumes in the U.S., what was your growth rate there? And any color on market share that you can provide in the quarter? And relatedly, any color on profitability of that business as well would be helpful. And I have a follow-up.

Thanks, Rajat. So, first of all, in terms of overall volume, dealer and commercial, we grew 13%. We believe that was a greater growth rate than the industry demonstrated. So we think it's a quarter where we gained share in the industry overall. If I look at U.S. dealer, we saw growth in dealer consignment volume of vehicles offered for sale. We increased our share vis-a-vis physical auctions. Physical auctions showed a decline in the quarter. And we grew the absolute number of open marketplace transactions in the U.S., the vast majority of which are dealer-to-dealer transactions. So we had a strong quarter. We believe we gained share overall, and we believe we gained share in the dealer-to-dealer segment, at least in comparison with physical auctions, which is the only data we have to compare with at this moment. So generally pleased with that. I'd also say profitability, while we don't break out profitability by the business units, our D2D business is profitable in the U.S. and in Canada and making a material contribution to our overall results. And I'd say we saw a significant improvement in the profitability of the U.S. model because in Q1 of last year, it was still an unprofitable business, whereas in Q1 this year, it was a positive contributor.

Understood. And maybe just a quick follow-up on the previous question. Any expected cadence for profitability in the U.S. D2D business, just given 1Q is typically a seasonally strong quarter. So wondering if we can continue growing profitability there despite some of the seasonal dynamics in the second half?

Yes, Rajat. Well, first of all, the business transitioned to be a positive contributor to our overall earnings in the middle of last year. So it's been a number of quarters now. So we expect this to continue. That is certainly the plan and the strategy. And again, the D2D business has a lot of strength. This digital model, as I mentioned in my remarks, is getting very good results for customers, high conversion rates, fast time to sale, low cost of sale, great price outcomes. So we're seeing great feedback from customers, strong adoption, consignment of vehicles by our selling dealers is increasing. Conversion rates are strong. The business is profitable. So I'm feeling good about that, Rajat. I will say that in the quarter, and this was evident in both U.S. and Canada, we saw a significant growth in commercial volumes, approximately 30% overall for the quarter. So that's positive for our business for sure. But one of the impacts of that is for a buyer in the marketplace, they're going to see a lot more commercial vehicles than they saw in prior periods. And for a lot of these buyers, the commercial vehicles are the more desirable vehicles. So a lot of franchise buyers would rather buy commercially consigned vehicles than other dealer consignment. So we certainly saw from a buyer appetite perspective, a trading up, I would describe it, from dealers that might have bought more dealer consignment last year, now buying more commercial supply. So there's an interplay between those two things. They don't exist in isolation. But on a combined basis, as I said, we grew volumes 13%, most of that driven by U.S. growth, which was the strongest part of our business here in Q1. I'm very pleased about that, and again, driven a lot by commercial supply as well.

The next question comes from John Murphy of Bank of America.

Peter, I just wanted to ask a question about your comment about market share gains in digital versus physical auctions, especially here in the U.S. and where you think we are on that? And then also, I just wanted to get a gauge where you guys are on your market share in closed auctions, specifically here in the U.S.? So the shift in the market from physical to digital and then what your market share is in closed auctions?

Yes, John. When we look at our volumes, first of all, our volumes are entirely digital. It's a digital marketplace business. If I look at our total volume growth of 13% in Q1, that, I believe, is greater than the volume growth in the industry overall in Q1. So that would point to increasing market share on an overall level basis based on the data we're looking at. And then it's possible to subdivide or estimate how much of that volume is commercial versus dealer. When we look at it through that lens, we believe we outperformed both in the commercial and in the dealer category in the United States during Q1 as well. So that's what we speak to in terms of market share. We think it's a positive quarter in that regard. In terms of the pace of transition, the majority of those off-lease vehicles sell in a digital format. We enable, obviously, a lot of that for a lot of customers. So the majority of our customers' vehicles are selling online in the digital format, a mix of closed and open. In the dealer-to-dealer category, the majority of vehicles are still selling in a physical format, going to physical auctions. That is still true, I believe, in the United States. But we see the digital channels gaining share. And again, we believe our Q1 volumes gained share versus physical volumes in the first quarter, when we look just at the D2D category. This industry takes time to evolve and adopt new technologies. But I think over time, it does and these trends become evident. When I'm talking to franchise dealer customers, I think there's an increasing acceptance and understanding among that customer group that digital really is the future, that digital offers a lot of benefits to them, both in terms of time, cost, price realization, and they're very receptive to greater adoption of digital channels as they look to the future.

Sorry, can you also comment on your market share in these closed auctions because it sounds like we're going to head more in that direction. It seems like as more vehicles coming off lease, more of those vehicles are going to be ending in closed auctions than maybe ever before. I think you have a pretty big market share there. Just curious if you could talk about that position.

Yes, John. The majority of the off-lease vehicles we're selling today sell within these closed auction marketplaces. Those are obviously very important to our OEMs and franchise dealer networks because many OEMs want to keep a high percentage of these vehicles within their franchise dealer network and support the brand and the used car portfolio. But importantly, they do also flow into the open, and that's an opportunity for us as well as for our customers to liquidate some of the vehicles there. The closed auctions are very important, and we have technology that supports the majority of OEMs and captive finance companies in North America. We've not lost customers through the period of low volumes. We still have those OEM relationships, those captive finance relationships, and those are very positive relationships for us and for our customers.

And as these volumes are coming back in whatever form they come back, obviously, it's all going to be digital, that you process these vehicles. Can you talk about just what the operating leverage is? I know we're kind of still bouncing off the bottom, so it was a good volume quarter, but op leverage wasn't necessarily huge. But over time, as you fill up the pipe here and units return to something that might be vaguely normal over time, how should we think about operating leverage as you're selling units? What kind of flow-through do you get to EBITDA? Things have changed and the models change. I'm just curious if you could talk about what you think that is.

I might answer that in qualitative terms, and Brad, if you want to add any further color, please do. Having worked in digital businesses for much of my career, I think the operating leverage is really strong in these models because so much of our cost structure is essentially fixed: the cost of our platform, the cost of our overhead, the cost of our sales team. The marginal cost for incremental vehicles sold is relatively low. In Q1, we had really strong evidence of operating leverage. We had a 13% volume increase but a 40% EBITDA increase in the Marketplace segment, and I think that's very strong. We continue to take steps to increase that operating leverage. We talked about some of the platform consolidation that we're doing. That reduces our cost and increases the speed at which we can deploy new innovation. I think this business has a ton of operating leverage and we got a glimpse of that in Q1. I would reiterate commercial off-lease volumes were still about 50% below normal in Q1. So the mental experiment I do is, if volumes returned to normal, the returns would look really strong. Obviously, that's not going to happen next quarter, but I think that opportunity exists. Brad, do you want to add anything?

Yes. I commented on our SG&A performance in the quarter compared to last year: overall flat SG&A. The topline unit growth benefited EBITDA because SG&A is much more fixed. You can see that in the year-over-year comparable. If you look at direct expense, we do have more variable costs related to inspections. So if volumes come back, inspection costs are more variable. In the legacy off-lease private label business, that's more of a fixed cost business, so as those volumes come back, there's scalability there.

Okay. And then just one last one. Peter, you mentioned something about Absolute Sale, just sort of this feature of basically a vehicle kicking over the reserve and that being disclosed to everybody to create a feeding frenzy around that vehicle. What does that ultimately mean to you as far as getting a vehicle converted that may have not converted before or the price higher? What does that actually mean? And how many other somewhat simple innovations do you think there are to drive the business going forward other than big changes in the tech stack?

Absolute Sale is similar to auction behavior where, once it's on the market and clearly will sell, it draws renewed interest. In less than three months since deployment, it's now the preferred selling mechanism for most of our franchise dealers in the U.S. marketplace. We've seen massive adoption, and sellers really like it. On average, once they hit the button, they're seeing another $500 on average in terms of price realization. And occasionally you get a car that runs up $2,000 or $2,500, which creates a lasting 'aha' moment for the seller. We're watching it. We think it's improving conversion, price and stickiness. We're looking at many opportunities across our marketplace to create value or eliminate pain points that are easier to deploy than reengineering the whole tech stack. More to come and we'll speak about more innovations on future calls.

The next question comes from Gary Prestopino of Barrington Research.

A couple of questions here. The commercial vehicle growth was really sensational. Was the bulk of that what you're seeing in return off lease? Or were there other buckets that are also starting to come back for you?

Good question, Gary. Off-lease is the biggest category. We also saw growth in rental consignment and sales. We saw growth in commercial in all our geographies: Europe, Canada and North America. So off-lease is most of it, but we saw growth in all categories.

Okay. That's fine. And then, as I'm looking at my numbers here, it looks like your gross auction proceeds were up about almost 17%. It looks like your gross auction proceeds per vehicle were up about 3.5%. Obviously, that's the impact of selling a lot more commercial vehicles. But yet, your auction fees per vehicle were down about 2.4%. Could you maybe square that with me? I think if you're selling a higher-priced car, your auction fees per vehicle should be going higher. Is there some distortion in there from the Canadian business that you purchased or something else?

Good observation. GMV increased 17%, volume increased 13%, so GMV per vehicle was up about 3.7%, driven by increased volume of commercial vehicles. A higher percentage of those are selling in the closed sales where we have a lower revenue per unit, lower auction fee revenue per unit. Offsetting that, we also have a lower direct cost per unit. Those commercial cars tend to come with lower auction revenue per unit, but sometimes with higher gross profit percentage margin. Volumes grew 13% and auction fees grew 10% in the quarter, so there was a bit of dilution in auction fee per vehicle.

The next question comes from Craig Kennison of Baird.

It's Craig from Baird. Just a quick follow-up on Absolute Sale. I'm guessing the seller can set that feature to on prior to the sale? Or is that something they have to monitor in real time?

Craig, thank you. So the way it's deployed initially, the seller manually activates the Absolute Sale button when they believe they've got enough action on the vehicle that gives them confidence to say this car is going to sell. Given its popularity, we're exploring whether we can set up automated rules to enable activation immediately in the auction or once a certain price level has been attained without the seller having to actively engage. Those are part of the roadmap.

And then naturally, you're going to get some growth if we see the off-lease cycle turn positive for you guys. But I'm curious about your sales effort and where you're focusing those sales dollars. Are you trying to add more dealers to the network? Or are you focused more on increasing the amount of cars you can do with your existing network of dealers?

One of the strengths of the business is we have a very strong network of participating dealers in all our geographies, tens of thousands of dealers active each month. Given the traction we're seeing and the one marketplace, we're leaning more into our go-to-market efforts. Principally, we're increasing the size of the network. We have many private label franchise buyers who are buyers but not yet sellers, so converting buyers into sellers is a focus. We are also focused on getting more wallet share from existing customers. There are initiatives addressing all of those aspects, and expanding the size and scale of the network on both the sell and buy side is important.

The next question comes from Bob Labick of CJS Securities.

I wanted to dig in further on off-lease. Equity in off-lease vehicles is stubbornly high in 2024. It ticked up a little bit since the end of last year, but it's down a lot since the beginning of 2023. How does that factor into the lessee retaining the vehicle or the grounding dealer buying the vehicle, meaning keeping them from going to auction? Is equity in leases low enough now that we're kind of normalized? Or is there more benefit for you to come as equity in leases continues to revert back to prior norms of 0 to negative?

Great question, Bob. Stubbornly high is a good description. It has declined, and that is leading to an increased percentage of vehicles being returned. However, the percentage being returned is still well below normal, which is why our off-lease volumes are still about 50% below normal even with the increase in Q1. Typically, Q1 has a spring market phenomenon that supports prices, so the equity gap didn't decline much in Q1 and by some metrics increased a bit. The expectation from some of our finance customers is that the equity gap will, over time, continue to decline. Two reasons: continued downward pressure on used vehicle prices as dealers have more cars and as manufacturers put more incentives on new cars, and secondly, as we lap newer cohorts of leases that were written at higher prices and higher residual values. Ultimately, this should revert to normal, but it will take time. We're dealing with it and trying to maximize performance given current constraints, but I'm pleased with the breaks we saw in Q1.

Okay. Fantastic commercial volume despite the higher equity. Related to that, dealer growth has been hard to come by for you for a while. What has to change and what will change to get dealer car volumes up in absolute volume?

Dealer volume growth has been hard across the industry as well. We launched our one Marketplace late in Q4, so Q1 was the first full quarter with that offering in market. I'm pleased with its performance: we grew our open sales transactions in aggregate compared to Q1 of last year. Much of the growth was commercial, but dealer consignment was also strong and we gained share versus physical auctions. We're improving the customer experience with innovations like Absolute Sale and the Visual Boost AI condition reports. We're increasing dialogue with large dealer groups and making progress. We've heard opportunities around brand awareness and potentially adding a person or two on the ground in certain regions. All of these are being addressed and it's a top focus to continue to grow this part of the business, particularly as the industry shifts toward digital.

The last question is from Bret Jordan of Jefferies.

I'll make it quick. As you look at the off-lease volumes and next year being the trough year in lease returns, and given your assumptions about equity gap and buyout rates, do you see your off-lease business growing in 2025, given it's a trough year in units, but with the lower buyouts that are likely coming offsetting that?

Great question, Bret. This is a scenario where it's possible to model but difficult to predict with confidence. We've done detailed scenario planning. My current assessment is that the interplay of fewer vehicles at the top of the funnel but a lower percentage of consumer buyouts will, in most scenarios we model, be a net positive for us. There are scenarios where it's more of a wash, but there are also plenty of scenarios where volumes move in a positive direction. I'm not committing to that on this call, but we do plan and model with that lens. The positive news is we're four quarters into increasing lease originations. In Q1, lease originations increased about 25% versus Q1 of last year. The trough is a fact, but it comes to an end. Leasing is rebounding, new vehicle incentives are increasing, number of new vehicles on dealer lots are increasing and volumes of off-lease vehicles will increase. We can see the light at the end of the tunnel and I think that will be very positive for this company. We're in a great position to serve our customers as those volumes come to market. Before we end the call, I would like to acknowledge Michael Eliason, our Treasurer and Vice President of Investor Relations. Mike will be retiring from OPENLANE before our next earnings call. Mike has been with this company for 25 years and has always kept our investor community updated and informed on OPENLANE's performance and all of the transactions and transformations that we've gone through over the past years. So Mike, a sincere thank you for your many contributions to OPENLANE, as well as to our investors, and we wish you all the very best. To the audience, thank you for joining us today. I look forward to speaking to you again on our next call and sharing more about how OPENLANE is making wholesale easy so our customers can be more successful. Thank you very much.

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