Good day, and welcome to the OPENLANE, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Bill Wright, Vice President of Investor Relations. Thank you, and over to you.

Thank you, operator. Good morning, everyone. Welcome to OPENLANE's Third Quarter 2025 Earnings Call. With me today are Peter Kelly, CEO of OPENLANE; and Brad Herring, EVP and CFO of OPENLANE. Our remarks today include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties that may cause our actual results or performance to differ materially from such statements. Factors that could cause such differences include those discussed in our press release issued today and in our SEC filings. Certain non-GAAP financial measures as defined under the SEC rules will be discussed on this call. Reconciliations of GAAP to non-GAAP measures are provided in our earnings materials and available in the Investor Relations section of our website. Please note that all financial and operational metrics presented during the call are on a year-over-year basis unless otherwise specifically noted. With that, I'll turn the call over to Peter.

Thank you, Bill, and good morning, everyone. I'm pleased to be here today to share OPENLANE's strong third quarter results. Let me begin by welcoming Bill Wright to his first OPENLANE earnings call as our Vice President of Investor Relations. As detailed in our press release, Bill is a seasoned financial leader with strong industry relationships and a proven track record of driving stockholder value. And we look forward to introducing him to you more broadly in the months ahead. Moving to our results. OPENLANE's strategy and the investments we've made to accelerate it produced another strong quarter of organic growth and profitability. The OPENLANE brand continues to gain momentum, customer preference and market share. And our focus on making wholesale easy is further differentiating our marketplace across the industry. On a consolidated basis, we grew revenue by 8% and delivered $87 million in adjusted EBITDA, representing 17% growth. As a reminder, these results were achieved against the prior year that included contributions from the automotive Keys business that we divested during the fourth quarter of 2024. In the Marketplace segment, while commercial vehicle volumes were down as expected, we grew dealer-to-dealer volumes by 14% year-over-year, representing the fourth straight quarter of double-digit volume increases. We also generated a 20% increase in auction fee revenue and a 22% increase in Marketplace adjusted EBITDA. Our Finance segment also had a great quarter, growing loan transaction units and average managed receivables while holding the loan loss rate to 1.6% and increasing adjusted EBITDA by 12% year-over-year. In summary, I believe our third quarter results further reinforce the strong scalability characteristics of OPENLANE's asset-light digital operating model. We are executing our 2025 plan with precision and leaning into investments that will help position us for long-term growth, profitability and shareholder value. Based on…

Thanks, Peter, and good morning to everyone joining us today. Starting with consolidated revenues, we're reporting revenues in the quarter of $498 million, which represents growth of 8%. Just as we reported last quarter, the key driver of our revenue growth was in our Marketplace segment, which we'll dive into a bit more shortly. Consolidated SG&A for the quarter was $111 million, which is up 14%. The year-over-year increase was split nearly equally between higher incentives related to 2025 performance and targeted investments we've made in our go-to-market and marketing efforts. Excluding the incremental incentives and our growth investments, our core SG&A actually declined 1 percentage point as we continue to monetize efficiencies in our back-office functions. Consolidated adjusted EBITDA for the quarter was $87 million, which represents an increase of 17%. The resulting adjusted EBITDA margin for the quarter was approximately 17%, which reflects margin expansion of 130 basis points over the same period last year. Consolidated adjusted free cash flow for the quarter was $5 million, which represents a conversion rate of 5%. I mentioned on the call last quarter that we'll be talking about free cash conversion more on an LTM basis given the volatility and timing considerations across quarters. On an LTM basis, our conversion rate was 61%, which is lower than our previously mentioned expectation of 75%. The main driver for the lower conversion rate was strong growth in our financing segment that used cash on hand to fund a portion of the $140 million increase in our loan portfolio. This increase typically shows up in Q4 as dealers build inventory for the spring tax sales season. However, this year, we pulled forward that growth into Q3 with some initiatives targeted to opportunistically grab share in selected markets. We anticipate that the timing of portfolio…

[Operator Instructions] We have the first question from the line of Jeff Lick from Stephens.

Congrats on an awesome quarter. Peter, I was wondering what do you think the -- when you talk about the AuctionNet data, what's your guys' take on how the actual market growth was units year-over-year? And then if you could just talk about where you guys see yourself either taking share or the new relationships with new dealers onboarding and how that kind of ramps over time?

Yes. Thanks, Jeff. I appreciate the comments there and the question. So -- yes, so the question -- we were talking specifically dealer-to-dealer volumes. Our volumes were up 14%. We're very pleased with that. But again, the nuance was largely driven by the U.S., Canada was in the mid- to upper single digits, which puts the U.S. sort of in the high teens year-on-year level of growth. So we're very pleased with the strong U.S. growth in dealer-to-dealer. We're still a relatively small market share player in U.S. D2D, and it's obviously the biggest TAM that's available to us. So that's an important growth opportunity for us, and we're very focused on that. So we're pleased with that, again, high teens growth there in the U.S. And the AuctionNet dealer volumes, I believe, were up low single digits. So that kind of gives you a comparison of the relative growth rate. So we feel good about that. In terms of what's behind -- what's driving that? Well, we -- I think some of it is -- we believe this industry is transitioning from a principally physical model to a more digital model, 70-plus percent of the volumes are still physical, but the digital share is growing, and we're a leader in digital. So that's an important aspect. And then I think, Jeff, the things we're focused on, making the platform very easy to use, very intuitive for sellers and buyers, the innovations and the technology that we've talked about, Audio Boost, making the condition reports better. Those are things we're doing all the time. There's a lot of focus on that. The increased go-to-market investments that we started in the first half of last year, and we've been, I think, with discipline, adding to those resources in areas where we…

Awesome. And just a quick follow-up. Any update on the -- you're onboarding the additional OE customer in the captive finance customer and lease returns. I think you had mentioned that should hit sometime in Q4. Just curious, any update on the timing? And then just kind of how do you see that ramping up in terms of magnitude?

Yes. So update on the timing is actually going to be Q1. It's going to be early Q1. And I spent a little bit of time with that customer actually this week, Jeff. Technology is essentially ready. It's ready to go live. They're just -- customer felt they wanted to derisk, not do a December launch, they'd rather do a launch right at the beginning of the new year. So I think that's going to be in early Q1, but we're excited to get that across the line and up and active, and we're working closely with the customer on an onboarding and migration process for all of their dealers. So we're excited about that.

Awesome. Well, congrats on the results and best of luck in Q4.

We have the next question from the line of Craig Kennison from Baird.

I'm looking at Slide 7, and I'm just wondering if you can provide any tangible examples that illustrate how OPENLANE and AFC are able to cross-pollinate each other's platform.

Yes. Thanks, Craig. I appreciate the question and the comments there as well. I guess at the highest level, when I think about our marketplace, we serve commercial customers, obviously, there's relatively fewer commercial customers. Then we serve dealers and dealers break down into franchise and independent. And both of those constituencies are really important customer groups for us. Franchise dealers are the buyers typically for our commercial cars and they're principally sellers in the D2D market. And then independent dealers are largely the buyers of the D2D cars. They buy some commercial cars, too, but they're obviously important customers of AFC. So that independent dealer category is a core customer group for us, very important for us. And obviously, we've got those 2 different offerings, the marketplace and AFC. So actively working to find those cross points and points of synergy is important. At a minimum, Craig, when that independent dealer is in the marketplace looking for inventory -- and by the way, they source most of their inventory in the wholesale market because independent dealers don't get as much sort of retail trade-in traffic in their business model. So when they're in the marketplace, we want to make sure they've got financing that they've got the capital to go and find vehicles and fund vehicles on their lot for the 60 days or so that takes before they retail that car. So AFC provides that dealer with liquidity, with capital in the marketplace, enables them to purchase and stock their inventory. So that's obviously important to us. And one stat we look at there is of the vehicles that, that dealer group constituency buys, what percentage do they floor using AFC. They have other floor plans. They have cash in some cases as well. So we look at…

We have the next question from the line of Gary Prestopino from Barrington Research.

Peter, you gave some AuctionNet data. You said units were up single digits. Is that the entire market? Or is that just the dealer-to-dealer? And if it is dealer-to-dealer, what was the entire market up in the quarter?

Yes, I don't have the exact number. That was dealer-to-dealer, Gary. But I think dealer was up lower single digit. I think commercial was up mid- to higher single digit. And I think the market overall that physical was up mid-single digit. Is my -- I'm going a little bit from memory here, but that's what I think it was. And obviously, we compare across category, dealer-to-dealer and commercial to commercial. Yes. And that is not the entire industry because, as I mentioned, some of the industry is digital, so that's not included in that number. And then there's -- particularly in the dealer-to-dealer space, there is, I think, a substantial volume of dealer-to-dealer transactions that happens, so I'll call it through an informal marketplace, through wholesalers, directly from one dealer to another, that's not really accurately measured or reported anywhere. So we don't include that in any sort of numbers that we run because it's just you can't kind of get a firm published number.

Okay. And then just my second question would be this. If your dealer-to-dealer units were up about 14% in the quarter, correct, could you give us some idea, and I think this would be real helpful from showing the progress that you're making in market share gains. How much of that was a same store versus new conquest in that 14% unit growth?

Well, I don't have a precise number to give on this call, Gary, but obviously, we do look at that when we were talking about that here this week as well. Here's what I would say, our overall dealer volumes were up 14%, but our U.S. number was more like a high teens number. Coupled with that, we saw growth in vehicles offered for sale. Actually, as I said in my remarks, vehicles offered for sale grew by a little bit more than sales. So you could put that in the 20-ish kind of range. And then we looked at a number of active sellers and buyers, and we saw strong double-digit growth in both of those metrics as well, the number of active buyers, the number of active sellers in our marketplace, double-digit growth, all-time record levels in Q3. We also saw growth in large dealer groups and the share we have with the largest franchise dealer groups. So listen, a lot of positives there. And then in terms of the growth, it was driven by 2 things: growth or the cohort of customers that were there and active a year ago, their volume grew. So they contributed some growth to the number. And then the rest of the growth was driven by new dealers that we'd added since a year ago. And typically, what we find when we launch a new dealer, the adoption curve tends to -- it tends to be a ramp. We rarely get in and we're selling all of their cars on day 1. They're testing us out with maybe 10% of their inventory or maybe they're giving us a little bit more, but their conversion rate is low. And then over time, as they learn the benefits of the system and the ease of use and the peace of mind they get when they sell or buy through us, we find that their same-store volume tends to start to creep up over time. So that's kind of typically what we see, Gary.

We have the next question from the line of Rajat Gupta from JPMorgan.

Congrats on the good execution here. Maybe just to follow up on some of the questions earlier today. I wanted to see -- I mean, obviously, you have pretty strong growth here on the U.S. D2D side, consistently strong market share gains in the last quarter and better than last quarter, I would imagine. I'm curious like have you seen any change or reaction from your physical competitors or maybe even digital competitors? Manheim recently, they acquired their inspection business, you're taking it in-house. It seems like they are fine-tuning their digital strategy recently. I'm curious if anything has changed when it comes to just the reaction from competitors? And I have a quick follow-up.

Thanks, Rajat. I appreciate the question, and I appreciate the comments there, too. I don't know that I'd say I've seen anything that's sort of massively notable in the recent quarter on that front. Obviously, our principal focus is on what we offer and what we do for our dealers and what the feedback we're getting directly from dealers. We try and put the principal focus there, and I alluded to -- I spoke to some of the things we're doing on -- in my comments. Obviously, we do pay attention to what our customers are doing as well. We saw Manheim buy 2 physical auctions. I think it was maybe not in the last quarter, but the quarter before. We see some rebranding of their digital platforms. But I'd say the competitive environment has been, I'd say, on the whole, fairly stable. I'd say one thing that's notable, Rajat, we saw some of the small -- and this is maybe over the last 12 months, some of the smaller digital disruptive business models exit the market. So I'm thinking specifically of CarOffer, which is owned by CarGurus and EBlock in California. So I think the market has somewhat consolidated. I think there's -- dealers are very aware at this point, if I want to be digital, what are the platforms that are available to me. I think OPENLANE is a leader there. And I think our presence and our preference as well with dealers has improved a lot over the last 12 months and over the last 24 months, even more. So I feel good about that. But nothing specifically I can point to in the last quarter, Rajat, that I'd say is worth highlighting on this call.

Understood. So you attribute a lot of this to like obviously, your own like product and penetration, but like a pretty -- an incremental shift towards digital auction continuing.

Absolutely. Absolutely, Rajat -- yes. That's where our focus is, Rajat, for sure. Sorry, I know you said you have a follow-up.

Yes. Just one on SG&A. I remember like last quarter, you had mentioned that you want to have some more flexibility for investments. If I look at the marketplace, SG&A, it actually went down sequentially. I know seasonally, volumes are down, so it explains some of it. But I would imagine SG&A to tick up given this seems like an interesting time and opportunity for you to just capture more share. I'm curious if this is just more like a timing thing? Or are you just like seeing a lot of leverage? Or is it both? Just any more color there would be helpful on how we should think about SG&A going forward as well.

Rajat, this is Brad. I'll take that. I appreciate the question. Yes, you're going to see some timing fluctuations within a quarter. We're making some targeted investments when those present themselves. And at the same time, I mentioned some of the cost synergies that we're able to monetize in our back office. So some of those could be a little bit lumpy in terms of timing as well. So when I really target my SG&A numbers going forward, I'm really looking on an annual basis because you could see some quarterly alignment or misalignment between when the investments get made or when the synergies offset. So I'd like to look at that on a 12-month basis.

We have the next question from the line of Bob Labick from CJS Securities.

Congratulations on strong results. I wanted to start with a question we haven't talked about in a little while. And purchased cars, I think it's the highest it's ever been, the revenue from purchased cars is certainly in a long time. And the trend for the last several quarters, it's been increasing. So maybe -- I know in the past, you've said that's a kind of breakeven proposition, but it seems unlikely that you would continue to grow that if it's actually breakeven. So maybe just remind us of what's the kind of motivation behind growing purchased cars and profitability there and things like that?

Yes, Bob, let me start. If Brad wants to offer any context from a CFO perspective, he can as well here. But first of all, you are right, it has been growing. There really are 2 sources of purchased -- what drives that growth in purchased vehicles. One is our European business. We don't talk about that a lot on these calls. More than 90% of our volume is North American. We do have a nice business in Europe, which is largely cross-border. And from an accounting and regulatory standpoint in Europe, when we -- when we're moving a vehicle cross-border, we need to take ownership of that vehicle. So it kind of appears on our books for a short period of time as we're sort of taking the vehicle, say, from France to Romania, to give you an example. So as our European business grows, purchased vehicle volume and revenue grows alongside it. Now we do -- that business is profitable. We do make a margin on that. Personally, as CEO, I'd rather if we could account for it on a net-net basis because it's kind of -- I think of the value of the car itself as kind of low calorie, where the car has been sold for EUR 17,000, and we've -- we're recognizing EUR 17,000 of purchased vehicle revenue. Now we're making some fees alongside, okay? So Europe drives probably more than half of the volume. But another driver of the growth has been our North American business. And in the calls in the past, I've talked about how we've created these guaranteed products for buyers and sellers. So if a seller -- or let's say, I'll put it in the context of a buyer, a buyer purchases a vehicle, they can purchase an as-described guarantee…

And Paul (sic) [ Bob ], I'll just add -- this is Brad. I'll just add to that. About 70% of that number in the quarter was Europe. So think of a split 70-30 between Europe and U.S.

Super. All right. And then just for my follow-up, just shifting. In terms of off-lease, you mentioned obviously stabilization in institutional down less each quarter this year. Lease equity, I think, is now below 1,000, but it's still not 0. So my question is kind of where are cars falling in the funnel now in terms of lessee grounding dealer closed open? And then as the market shifts next year and more off-lease come, how will that impact the P&L? I imagine it's higher gross profit -- gross margin rather, lower ARPU, but maybe walk us through kind of as off-lease comes back next year.

Thanks, Bob. Let me take the first part of that, and then I'll let Brad comment on the P&L impacts, okay? So first of all, in the off-lease category, I'm going to start actually with lease originations. Lease originations are continuing to be quite strong. And that doesn't have an immediate impact on our business, but it's a positive sign as we think about the growth of off-lease -- the growth of lease portfolios and off-lease vehicles 2.5, 3 years from now. So lease originations continue quite strong. I'm seeing more and more sort of lease adds on the TV, strong lease offers. That is a good thing. I'm seeing inventory at dealerships increase. That typically is correlated with increased incentives and increased lease originations. So all that to say is I think leasing is going to be an important feature of the automotive retail landscape in the United States and in Canada, just as it always has been, except for the last few years. So leasing is coming back is my view. Then we look at the off-lease side. So we know that off-lease maturities, 2025 is a low point. That's well documented. They're going to increase next year. They're going to increase again in 2027. But coupled with that, we're also seeing lease equity decline. You said it's below $1,000, Bob. You're right about that. I think it's going to continue to decline, okay? Because used vehicle values are going to come a bit more under pressure and the residual values in those portfolios, if anything, is trending up because the MSRPs and the average retail price has been trending up. So I think we're going to see the consumer, the less equity in the lease, fewer consumer buyouts, meaning more cars getting returned. And we're starting to see some evidence of that already. And then we're going to see those cars flow a little deeper in the funnel. So I'll let Brad comment on the financials here, but I'll just say, in the quarter we just had, the commercial volume sold in our open channel in the U.S. was up almost 2x over last year, okay, even though the top of the funnel was down, okay? So what you can tell from that is there are few vehicles at the top of the funnel, but they're flowing deeper in the funnel and OPENLANE is converting a higher percentage in that bottom of the funnel, which is our most lucrative channel, the open sale. So that's very exciting for us as we think about '26, '27. Obviously, that's a big part of our strategy is having a very liquid marketplace with thousands or tens of thousands of buyers on there. And obviously, this very differentiated pool of off-lease vehicles flowing into it and hopefully, those volumes increasing here in 2026. Brad, I'll let you comment on the ARPUs.

Yes, Paul (sic) [ Bob ]. So if you think about how do you translate that kind of into numbers, what you'll see when the commercial recovery comes back in, you will see kind of a blended tick down in our ARPUs because you'll see the yields or the ARPUs on the commercial side are going to be less than they are on the dealer side. So on a blended basis, that's going to come down some. But what you're also going to see is that gross margin in the marketplace in the high 40s, call it, around 50%, you'll see that number start to tick up slightly because the commercial vehicles do come in with a higher gross margin with kind of a lower incremental cost attached to them because of the scale that we get in these private label platforms. So I hope that helps.

Yes, very helpful. And the info from Peter on the commercial open channel up 2x year-over-year is super. That's a great trend for you. So congratulations on that.

Thank you, Bob.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Kelly, the CEO, for any closing remarks.

Thank you very much, Maron, and thank you all for your questions for joining us on the call today. We look forward to seeing you at the upcoming conferences in November and December and remain confident in OPENLANE's ability to deliver meaningful growth, profitability and cash generation over the next several years. Look forward to talking to our next call in early 2026. Thank you very, very much.

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