Q1 2024 Earnings Summary
- Strong Growth in Commercial Vehicle Volumes Across All Geographies: OPENLANE experienced 13% volume growth in the first quarter, driven primarily by substantial increases in commercial vehicle volumes, particularly off-lease vehicles, across the U.S., Canada, and Europe. Peter Kelly stated, "We saw growth in commercial in all our geographies, Europe, Canada and North America... We saw growth in all categories." This growth contributed significantly to volume and profitability increases for the company.
- Dealer-to-Dealer Business Turned Profitable and Gaining Market Share: The dealer-to-dealer (D2D) business became profitable in the U.S. and Canada, transitioning from a loss in the previous year to a positive contributor in Q1 2024. Peter Kelly mentioned, "Our D2D business is profitable in the U.S. and in Canada and making a material contribution to our overall results... We believe we gained share overall, and we believe we gained share in the dealer-to-dealer segment." OPENLANE believes it gained market share in the D2D segment, outperforming physical auctions.
- Rebounding Lease Originations to Boost Future Off-Lease Volumes: New lease originations increased by approximately 25% in Q1 2024 compared to the previous year, marking the fourth consecutive quarter of increases. Peter Kelly noted, "I believe in Q1, lease originations increased by about 25% versus Q1 of last year... 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." This trend is expected to continue, leading to higher future off-lease vehicle volumes as these leases mature, which will benefit OPENLANE.
- Potential Decline in Off-Lease Volumes Due to Historical Low Lease Originations: The company acknowledges that off-lease volumes, a significant part of its business, are still at only 50% of normal levels. With the expected trough in off-lease volumes in 2025 due to low lease originations in 2021 and 2022 , there may be fewer vehicles entering the "top of the funnel," which could negatively impact volumes in the coming quarters.
- Pressure on Auction Fees Per Vehicle and Revenue Per Unit: Despite an increase in gross auction proceeds and volumes, auction fees per vehicle decreased by 2.4%. The shift towards selling more commercial vehicles in closed auctions, which have lower auction fee revenue per unit, is causing dilution in fee per vehicle. This decrease in auction fees per vehicle may indicate fee compression or a less favorable sales mix, potentially impacting revenue growth.
- Cannibalization Risk Between Commercial and Dealer Consignment Volumes: The increased supply of commercial vehicles may lead to franchise buyers preferring commercial consignments over dealer consignments, potentially cannibalizing dealer-to-dealer volumes. Buyers are "trading up" to commercial vehicles, which could result in pressure on dealer consignment volumes and affect growth in that segment.
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Off-Lease Volume Outlook
Q: How will off-lease dynamics affect future volumes?
A: Off-lease volumes increased in Q1 but are still about 50% below normal. Despite expected lower lease returns in 2025, lower consumer buyouts should offset this, potentially leading to volume growth. We're modeling various scenarios and believe volumes can move in a positive direction. Lease originations have increased for four consecutive quarters, with a 25% increase in Q1 compared to last year ,. -
Operating Leverage with Volume Growth
Q: How will operating leverage improve as volumes return?
A: The digital model has strong operating leverage due to a largely fixed cost structure. In Q1, a 13% volume increase led to a 40% EBITDA increase in the Marketplace segment. As volumes normalize, we expect significant flow-through to EBITDA, improving margins. -
Market Share Gains in Digital Auctions
Q: What are your market share gains in digital vs. physical auctions?
A: We grew total volumes by 13%, outpacing industry growth and indicating market share gains. In dealer-to-dealer transactions, we gained share versus physical auctions, which showed a decline in the quarter ,. -
Profitability of U.S. D2D Business
Q: Is the U.S. dealer-to-dealer business profitable and sustainable?
A: The U.S. D2D business became profitable mid-last year and remained a positive contributor in Q1. We expect continued profitability despite seasonal dynamics, supported by strong customer adoption and business fundamentals. -
Dealer Growth Strategies
Q: Are you focusing on expanding dealer network or increasing volume per dealer?
A: We're aiming to convert existing buyer dealers into sellers and increase share of wallet with current customers. Enhancing our go-to-market efforts, we're addressing opportunities to grow both the network size and transaction volumes. -
Absolute Sale Feature Impact
Q: What impact does the Absolute Sale feature have?
A: Absolute Sale has quickly become the preferred selling method, enhancing conversion rates and price realization. Sellers see an average price increase of nearly $500, with some vehicles increasing by $2,000 to $2,500, creating a positive experience. -
Auction Fee Dynamics
Q: Why did auction fees per vehicle decrease despite higher proceeds?
A: Increased commercial volume led to higher gross auction proceeds but lower auction fees per vehicle because commercial vehicles often sell at lower fees. However, these vehicles can have higher gross profit margins, balancing the effect. -
Commercial Vehicle Growth Drivers
Q: What's driving the growth in commercial vehicle volumes?
A: Growth was driven by increased off-lease volumes due to lower consumer buyouts, as well as higher rental consignment. Off-lease remains the biggest category, but we saw growth across all commercial segments. -
Equity in Off-Lease Vehicles
Q: Is high equity in off-lease vehicles affecting returns to auction?
A: While equity remains stubbornly high, leading to lower than normal return rates, it's starting to decline. This should result in more vehicles entering remarketing as the equity gap narrows.