KAR Auction Services Inc

NYSE:KAR

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the KAR Auction Services Quarter 1 2021 Earnings Conference Call. Please note that today's call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Mr. Mike Eliason, Treasurer, Vice President, Investor Relations. Mike, the floor is yours.

[Mike Eliason, executive]

Thanks, Jay. Good morning, and thank you for joining us today for the KAR Global First Quarter 2021 Earnings Conference Call. Today, we will discuss the financial performance of KAR Global for the quarter ended March 31, 2021. After concluding our commentary, we will take questions from participants.

Before Jim kicks off our discussion, I'd 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 KAR'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 last night, which is also available in the Investor Relations section of our website. Today on the call, we have Jim Hallett, Executive Chairman; Peter Kelly, CEO; and Eric Loughmiller, CFO. Now I'd like to turn this call over to KAR Global Executive Chairman, Jim Hallett. Jim?

[James Hallett, executive]

Great. Thank you, Michael, and good morning, everyone, and thank you for joining today's call. Consistent with our announcement earlier this year, Peter Kelly has transitioned into the role of CEO of KAR Global beginning April 1. So in a few moments, I will be handing the remainder of this call over to Peter and to Eric Loughmiller, our CFO.

As Executive Chairman, however, I wanted to take the opportunity to thank all of you for your support over the years. It has been my pleasure getting to know so many of you and sharing KAR's story with you. I also want to congratulate Peter Kelly and all of KAR on what I would call a seamless leadership transition. Peter has been an inspirational leader in our company for over a decade and is a true industry pioneer. He has been the architect of our digital transformation and has a clear bold vision for KAR's future, which I know he will begin sharing with you today. This is the right time for this transition, and Peter is the right leader for our customers, for our investors and for our employees. So with that, I'm very pleased and very proud to pass this call to KAR Global CEO, Peter Kelly. Peter?

[Peter Kelly, executive]

Well, thank you, Jim. I appreciate that, Jim. Thank you very much, and good morning, everybody. I'm delighted to be here this morning with all of you for my first earnings call as CEO of KAR Global. On today's call, I plan to speak to our first quarter results. I will then provide some insights on the dynamics in our industry and what I believe we can expect to see over the rest of this year. But I plan to spend most of my time focused on my vision for the future of KAR Global. I'm going to start with the first quarter.

I was pleased with our first quarter performance. Despite operating in an environment of constrained supply across our industry, we achieved the following results. We facilitated the sale of 753,000 vehicles, representing gross auction proceeds of $11.4 billion. We generated $582 million in total revenue and $489 million in net revenue. We generated a total gross profit of $251 million, representing 51% of net revenue. And we generated adjusted EBITDA of $123 million, an increase of 39% versus Q1 of last year. Perhaps even more importantly, we saw our strongest performance to date by far in our digital dealer-to-dealer marketplaces, BacklotCars and TradeRev. We completed the migration from TradeRev to BacklotCars in the U.S. in the first quarter ahead of our schedule.

On a combined basis, we facilitated the sale of over 100,000 vehicles on these marketplaces within Q1, representing growth of 81% compared to Q1 of 2020. This is very encouraging. Eric will provide more detail around these and other financial and operating results later in the call. I would now like to speak to what we can expect over the rest of this year. I mentioned that in Q1, we were operating in an environment of constrained vehicle supply across the wholesale used vehicle market. This is particularly the case when it comes to the commercial vehicle category, affecting repossessed vehicles, off-lease vehicles and rental vehicles. The root causes vary, but they all originate in the COVID pandemic. These supply-side dynamics for commercial vehicles are industry-wide and they're not in our control. However, there is a silver lining. First, I believe that these dynamics are temporary and volumes will return to normal over time. When that happens, I believe KAR will be a strong beneficiary given our market position, our technology platforms and our strong relationships with commercial consignors. Until that happens, we will continue to run the business prudently recognizing and adjusting to the volumes that are available to us.

The dealer consignment category has been less impacted by these dynamics, although many dealers are more likely to keep their trade-in vehicles given the current high demand and prices on used vehicles.

So given that fact, I am even more encouraged by our strong performance in dealer consignment in the first quarter. The second piece of good news is that even with these shortfalls in supply, our business continues to perform well. We have meaningfully and permanently adjusted our cost structure and streamlined our operations in every corner of our organization. This has enabled us to react to downward changes in the market, while remaining well prepared for when supply increases again. A focus on cost management is part of our corporate culture, and it is important for us to continue to demonstrate strong unit economics during this period of supply constraint.

So with that, I'd like to spend the balance of my time sharing some perspectives on the business and what I believe is the significant opportunity that exists for KAR as we look to the future. KAR operates leading used car digital marketplaces, serving business-to-business customers in North America and Europe. We do this through an off-premise model, which means cars are launched for sale that are not physically at our sites, as well as through an on-premise model, which means cars are physically on our sites, to efficiently enable our business-to-business customers to sell, buy, service, transport and finance used vehicles. We provide these services using our digital platforms, our proprietary data developed from tens of millions of transactions, our unique inspection tools and capabilities, our transport and logistics expertise, our ability to value and finance vehicles and our ability to store and service cars from a North American footprint of over 70 locations.

Core of this business are a long-standing relationships with dealers, motor manufacturers, finance companies, fleet operators and rental car companies. And as you know, we report our business in 2 segments: ADESA and AFC. [ As I see at the ] ADESA segment has 2 components. The first component is our North American used vehicle marketplaces. There were close to 20 million wholesale used vehicle transactions in the U.S. and Canada in 2020. In our marketplaces, OPENLANE, BacklotCars, ADESA.com and TradeRev facilitated approximately 3 million of those. The marketplace gross auction proceeds of those transactions was approximately $44 billion. And we served over 30,000 unique sellers and over 60,000 unique buyers in 2020. While we are #2 in terms of our overall market share, we are #1 in a number of important categories, such as our open lane powered private label marketplaces that support over 80% of North America's off-lease inventory. The second component within ADESA is our international used vehicle marketplace. We entered the European market some years ago through CarsOnTheWeb and via ADESA in the U.K. We continue to pursue opportunities to serve our global customers and to grow our international presence and market share. And within our AFC business segment, we are the #2 by volume of loan transactions with total outstandings of $1.9 billion. We provided [ 1.5 ] million loans to over 14,000 dealer customers in 2020.

With that as a backdrop, I'd like to comment on our strategy. And I'm going to focus the remainder of my remarks today on the North American marketplaces, and I will cover AFC and International in future calls. So the market for buying and selling used vehicles is undergoing significant change. Our customers are evolving. Some are eager to embrace the power of digital technology and the shift to digital marketplaces that COVID has accelerated. Other customers are adapting to transition to off-premise sales more slowly. Our goal is to provide all customers, buyers and sellers with a full range of capabilities to meet their needs and to help them to be more successful.

Today, we are no longer running vehicles in lane, and we have no plans to do so. However, we have the ability to inspect and launch for sale vehicles from any location [ or ] alternative to bring them to any of our 70-plus sites to store, inspect and if need be, service them before selling them. As a result of this, 100% of the cars we sold in Q1 were sold digitally, and 54% of them were sold off-premise compared to 46% sold off-premise a year ago. I know that some investors are concerned that this shift to digital could erode our profit margins. I would point out that we were able to increase our gross profit per vehicle sold in the ADESA segment to $264 in Q1 of this year versus $228 in Q1 of last year and $242 in Q1 of 2019. I believe digital marketplaces are the future of the business-to-business vehicle marketing industry and that they offer superior outcomes for customers.

Some competing auctions are running cars in lane, appealing to what was familiar to buyers and sellers pre-pandemic. However, this gives us an opportunity to run real-life experiments to demonstrate to buyers and sellers that our digital marketplaces offer superior outcomes for both sides. Benefits of our digital marketplace model include: for buyers, greater convenience, greater choice and selection and lower costs; for sellers, increased buyer participation with more buyers viewing and bidding on your vehicles, greater geographical reach, reduced days to sale, reduce time to cash and improve proceeds. While off-premise sales are likely to continue to increase, and we are well positioned for this, there is still a role for bringing vehicles on-premise to our facilities and for providing related services. This is particularly true for commercial sellers, who have the greater need for these services and who have typically been the principal customers for these services in the past. So this leads me to our overall competitive position and our points of differentiation. Wholesale automotive industry remains a network effect business, where like any other marketplace business, scale and breadth of capabilities to get success. In this context, my belief is KAR is better positioned than anybody else. We offer buyers and sellers a broader set of marketplace offerings tailored to their specific needs. For example, The OPENLANE platform provides our OEM and captive finance customers with a highly customizable platform for their marketing of their off-lease vehicles. Our BacklotCars and TradeRev marketplaces are also strongly differentiated platforms for the off-premise dealer segment in their respective geographies. We believe that our physical infrastructure is a strong differentiator and will remain one even in the more digital world of the future. We offer the ability to sell cars either on-premise or off-premise. And we have the capability to deliver value-enhancing services, such as detailing, reconditioning and vehicle repair for those vehicles at our facilities. We also offer our customers a larger base of market participants and counterparties, meaning more buyers and more sellers, and a broader suite of ancillary services, such as transportation, financing, buy back guarantee products, et cetera.

Finally, the data from our entire digital marketplace with over 3 million vehicle sales transactions annually, creates unique opportunities for our business. So when I think about our competitive position, I think we have a strong positive differentiation in the eyes of our customers. Versus our physical auction competitors, KAR offers superior digital capabilities, with best-in-class offerings, such as BacklotCars, TradeRev, OPENLANE, Simulcast Plus. We strengthened these digital capabilities further this week with the acquisition of Auction Frontier. Finally, we also have considerably broader reach than any standalone independent auction versus newer vendors who offer point solutions for the digital off-premise dealer segment. Just looking at that off-premise dealer segment by itself, we have a similar scale to our leading competitor. But taking the market as a whole, we have considerably more scale. We also offer our buyers and sellers a broader set of marketplace offerings, a choice of on-premise or off-premise, a larger base of counterparties, a broader suite of ancillary services, such as reconditioning, transportation, land, data, financing, et cetera.

So I'd like to speak to where we're going to as a company and to our key initiatives. In the simplest form, we intend to grow our volumes and grow our share. The automotive marketplace is large and relatively stable. Total new and used vehicle retail transactions in the United States alone amount to 50 million to 60 million vehicle transactions in most years. We estimate well over 20 million retail -- used vehicle trade-in transactions per year as well. And also another 20 million wholesale used vehicle transactions. We believe that a more digital model significantly expands our addressable market to include all of the approximately 20 million wholesale used vehicle transactions currently taking place each year and potentially vehicles in some of the other marketplace categories. So we will be focused on growing our volumes and increasing our share in this larger addressable market that now exists for our services.

We also aim to achieve a tighter integration of services across our marketplace platforms. We'll create a one-of-a-kind value proposition for buyers and sellers. Today, we have a number of best-in-class technology and data capabilities and other service offerings that may be only available on select platforms that we offer. We are working to integrate those across all of our platforms so that all of our customers can benefit from them.

Digital will also allow for a more streamlined cost structure for our operations. We will preserve the digital sales model that we have transitioned to during COVID, and I believe this will allow us to sustain the cost reductions that we have already achieved. However, we will also continue to adjust our fixed cost structure to reflect the fact that as we grow our business, an increasing percentage of our sales will likely be off-premise. We will constantly evaluate where we have had the opportunity to become more efficient and where we need to invest to accelerate our growth. Our physical auctions of the past will evolve into our vehicle logistics centers of the future. We also intend to grow our ancillary services businesses, including AFC, by increasing the cross-selling and increasing the attach rate for these services on the vehicles sold within our marketplaces.

Greater use of our services by existing customers provide a meaningful opportunity for financial growth, and I believe that digital will help raise awareness, interest, engagement and the attach rate of these offerings by our customers. We intend to measure and report on our progress using our fresh set of key metrics that reflect our transition to a digital marketplace company. There are 5 key metrics that we will use for the ADESA segment. The first metric is total vehicles sold and total gross auction proceeds.

In Q1, we sold 753,000 vehicles, representing [ $11.4 billion ] in proceeds. Notwithstanding the near-term supply constraints that I discussed earlier, our intention is to grow our volume of vehicles transacted over time. We will measure our performance based on growing the volume of cars sold in the aggregate across all of our marketplaces. Second metric is the percentage of vehicles sold off-premise, and in Q1, this was 54%. We believe this metric gives investors the opportunity to understand how our customers are evolving and is an indicator of our transition to a more asset-light model. The third metric is the number of vehicles sold on the TradeRev and BacklotCars platforms on a combined basis. Again, in Q1, this was 100,000 vehicles, representing 81% growth versus Q1 of last year. This metric will provide insight on this important and growing segment in our business. It will make it easier for investors to compare our volumes with those of competitors.

A fourth key metric, gross margin per vehicle sold within the ADESA segment. In Q1, this metric was $264. This is a key metric that will help investors understand how we are navigating the mix shift from on-premise to off-premise. The on-premise and off-premise models have different fee structures, but they also have different cost structures, and ultimately, those get reflected in an overall gross profit per vehicle sold.

And the fifth metric, SG&A per vehicle sold within the ADESA segment. In Q1, this was $186. We believe this metric provides investors with an understanding of how we are transitioning our fixed cost base to align with our transition to a digital marketplace-driven business, one that is more asset-light. In addition to those metrics within the ADESA segment, we will also be focused on the following key metrics at AFC. The number of loan transactions in Q1, 372,000 loan transactions. And the revenue per loan transaction, which in Q1 was $177. Finally, 2 key metrics relating to KAR overall. Adjusted EBITDA, Q1 $123 million, I believe that adjusted EBITDA remains the most relevant metric of KAR's earnings performance and will continue to be a key metric for myself and the management team.

Finally, cash flow from operations. In Q1, $165 million. We will continue to highlight the strong cash generation power of the KAR business model, and we'll continue to view this as a key performance metric. So to conclude my remarks here this morning, I am pleased with our performance in the first quarter. More importantly, I'm pleased with our progress of our digital transformation, our successful integration of TradeRev and BacklotCars platforms and the continued growth in our off-site or off-premise sales mix.

As we look to the rest of 2021, we should expect a continuation of the supply constraints that I described. When it comes to our future vision and our performance, I believe we have a significant opportunity to grow this business and substantially increase the value of this company for all of the reasons that I've mentioned earlier. I will be excited to deliver on that in the months and years to come. Our growth will be propelled by a relentless focus on our customers, consistent with our stated purpose, which is to make wholesale easy so that our customers can be more successful. And finally, I want to be very clear. We have crossed the digital chasm, and we are operating as a digital marketplace business with industry-leading platforms, solutions and infrastructure that clearly differentiates us from our competitors. We will build on our strong position, and we intend to extend our lead in operating the most active, technologically advanced and data-driven marketplaces within our industry, consistent with our vision of building the world's greatest digital marketplaces for used vehicles.

With that, I will hand over to Eric for a more detailed review of the financial results from the first quarter. Eric?

[Eric Loughmiller, executive]

Thank you, Peter. And let me start by stating our results for the first quarter were much improved over the fourth quarter despite continued supply constraints. The results were driven by our focus on controlling costs, both direct and SG&A and taking advantage of the full suite of KAR Global offerings to optimize performance across all of our digital marketplaces. In addition, we realized the benefit from minority investments in early-stage auto retail businesses. I will talk more about the strategy behind these investments in a few moments. We are pleased with the increase in auction fees per vehicle sold, increasing 6% to $313 from $296 last year. This metric was also up sequentially from $304 in Q4. The auction fees per vehicle sold reflect the increase in the average selling price for vehicles across all of our platforms. I consider this quite an accomplishment given the strong performance in our private label platforms that have the lowest auction fees per car sold.

Another positive that I don't believe is obvious is the sequential improvement in services revenue despite the continued shortage of supply on our on-premise marketplaces. Not surprising, services revenue is down 21% from the prior year, but on-premise volume was down 25% for that same period. I will admit that high wholesale used car prices and low supply do put a premium on time to market, which often results in lower attachment rates for ancillary services. However, we have offset some of the negative impact of these factors by increasing our revenue and services provided to buyers of wholesale used vehicles.

Many retailers are using our reconditioning services to prep cars for retail sale or delivery, as our capacity and service capabilities provide a faster, more cost-effective reconditioning capability than the alternative's retailers may have available internally or in their local market. We consider this a growth opportunity for ADESA going forward.

Peter has covered some of the key metrics that demonstrate the strength of our performance, including gross profit as a percent of net revenue and gross profit per vehicle sold for the ADESA segment. The strong gross profit performance reflects our ongoing focus on managing costs in line with the volumes sold and services delivered. We did benefit from the strength in used car pricing, confirming our view that the losses on sale of ADESA Assurance and inherited vehicles in North America that we experienced in Q4 were transitory. Despite a 23% year-over-year increase in revenue from purchased vehicles, we experienced a 100 basis point improvement in gross profit due to decreased losses on purchased vehicles. To be clear, we incurred a loss reflected in our gross profit for the quarter from the sale of these vehicles, but these losses were in line with normal trends we typically experience.

Net losses on the sale of vehicles returned under the ADESA Assurance program were approximately 33% of the premiums earned in the first quarter. We have recently expanded the reach of our ADESA Assurance offering and see this as a growing contributor to our performance.

Staying on the ADESA segment, I am often asked about the run rate of SG&A. I consider the first quarter a fairly clean quarter within SG&A at ADESA. SG&A includes 25% of a full year bonus and a full quarter of BacklotCars' expenses. We did complete the migration of the TradeRev U.S. platform to BacklotCars and may have the opportunity to realize additional synergies in future quarters that may offset additional costs as we enter new markets. The AFC segment also performed well in the first quarter. Operating profit was essentially flat with the prior year. Adjusted EBITDA for the first quarter was up 10% year-over-year. We saw our loan portfolio decline through most of 2020 and are now seeing the portfolio grow, as strong wholesale prices result in higher average loan balances per vehicle floored. While lower transaction volumes in all auction channels were clearly a headwind for AFC, we saw strong unit economics with revenue per loan transaction up to 177 from 155 a year ago. We also have reduced total SG&A in the AFC segment by 12% compared to the first quarter of 2020. We had a significant decline in the provision for credit losses in the first quarter as compared to the prior year as well. This decline reflects the strength in the wholesale used car market despite the constraints on supply. I will also point out that the allowance for credit losses was increased $3.5 million over the year-end balance in this allowance.

We recognize in the allowance the expected losses for loans originated. I consider this a conservative position given the strong credit performance we are seeing in the market today. A strength of the KAR business model is the cash-generating characteristics of the business. As you can see in our statement of cash flows, we generated $165 million in cash from operations. Typically, we see the first quarter as a consumer of working capital through most of the quarter, but a characteristic of a tight supply environment is faster turn times for services and reduced cycle times for the sale of vehicles. This creates a very positive situation for our cash position.

As Peter mentioned previously, the outlook for the remainder of the year is likely to be constrained supply of vehicles. One of the positives in this supply environment is it will be very good for generating cash from operations. With our strong cash position and our outlook to continue generating strong free cash flows, it is important that we continue to have a balanced prioritization of capital allocation. In the first quarter, we purchased $80 million of [ KAR ] stock in the open market at an average price of $15.47 per share. Our open window was very limited in the first quarter, and this represented the maximum number of shares we could purchase during the open window. To the extent we acquire shares in the open market at attractive prices, we can offset the dilution created by our issuance of the preferred stock last year. We are being disciplined in our share repurchase program and have approximately $210 million remaining on our share repurchase authorization. We also utilized $80 million of cash for the purchase of Auction Frontier this week. This acquisition is clearly aligned with our strategy, as the Auction Frontier technology is an integral part of the digital marketplaces we operate, as well as others operated in our industry.

In addition to the cash paid at closing, the transaction includes $15 million in contingent consideration tied to customer retention. The contingent consideration is payable in 2 years if the terms of the contingency are met. We still want to be conservative, as it relates to our cash balances and deploying capital. We think it is a real asset right now to have a strong cash balance. With that said, we will continue to generate strong cash flows in our businesses while investing in growth, especially in the digital dealer-to-dealer marketplace.

Now let me speak to the gains on investments we had in the first quarter. Over the past several years, we have taken the opportunity to develop strategic relationships with certain early-stage retail used car businesses. These strategic relationships were centered around providing our services to support the development and growth of these businesses. In some cases, we have taken the opportunity to participate in investing in capital raises by these businesses to demonstrate our commitment to supporting them. These investments have all been minority positions. Two of these investments that have been publicly disclosed are CarLotz, and most recently, Ravin AI.

We have made other investments that have not been publicly disclosed, and those investments were all less than $5 million each. The primary goal when making investments in these enterprises is to establish a strong strategic relationship. And we feel this goal has been achieved in each situation we have deployed capital. And now we are seeing the recognition of the value of the businesses created by these early-stage enterprises in significant appreciation of our investments. All of these investments are carried at cost until the underlying securities become quoted on an established stock market or the investment is monetizing cash through an alternative transaction. In the first quarter, we realized approximately $17 million in realized gains from proceeds from the sale of equity securities.

We have an additional $43 million in unrealized gains on equity securities that are now publicly traded. We are currently restricted on the sale of these equity securities and those restrictions lapse later this year. For clarity, both realized and unrealized gains are included in operating adjusted net income. As adjusted EBITDA excludes noncash items, we have excluded the unrealized gains in the computation of adjusted EBITDA.

We will continue to periodically invest in early-stage businesses that we see operating in our marketplace. However, we do not expect these situations to be common and are not expected to be a material use of capital. My last piece of business today is to give you an early heads-up on our plans to host an Analyst Day following our second quarter earnings release. At that time, Peter will provide a detailed review of our strategy and what the future of KAR holds for our investors. We will get a [ safer ] date out as soon as the details are finalized, but we continue to -- we wanted to give you early notice of this event. This will give Peter the opportunity to go into much more detail on our strategy, what our business model will look like in a fully digital world and highlight the many competitive advantages KAR Global has, as we look forward.

Thank you for your time this morning. We will now take your questions. Jay, I'll turn it back to you.

[Operator]

[Operator Instructions] Our first question comes from the line of Ryan Brinkman of JPMorgan

[Ryan Brinkman, analyst]

Maybe starting with last quarter, there was some discussion that maybe some of the smaller independent auctions were moving more toward reopening to physical in-person bidding. Are you able to comment on how that trend may have tracked in the first quarter? Do you suspect that it may be that the independents are doing this more because they do not have as established online capabilities? And then I think there was some observation too that Manheim was looking to maybe respond more in kind and some speculation that, that could necessitate a response on your end? And just wanted to check in again on what might be happening on the ground competitive wise and how that plays into the sustainability of some of the margin benefits that you've been enjoying?

[Peter Kelly, executive]

Yes. Thank you, Ryan. I appreciate the question. At this point, I would say most independent auctions have returned to the traditional format of running cars in lane. And I did speak a little to that in my remarks. But -- and I do think perhaps their -- the relative lack of digital capabilities relative to somebody like us might be a key factor in that decision. And as regards Manheim, Manheim I believe, has returned to running some cars at most of its sites, but by no means all of the vehicles.

So Manheim is probably more akin to us, although I would argue we have superior digital capabilities in many key areas. But in terms of our approach, as I said in my remarks, Ryan, we do not plan to return to running cars in lane. We obviously are in close dialogue with our customers. We closely analyze our performance and our relative performance. And we believe that a digital model and the model we have can generate very strong outcomes for customers, very strong conversion rates and represents also the model for the future and clearly the model that customers are transitioning to over time.

[Ryan Brinkman, analyst]

Okay. And then just my last question is, obviously, a very strong quarter volume-wise at BacklotCars. And I understand you're not wanting to call out profitability specifically each quarter. But are you able to comment on anything or generally on -- relative to the cost savings post integration or maybe on the gross profit per car relative to some of your targets? And then just more generally, thinking about the offering relative to ACV, I think with that firm now being public and communicating with investors how they think that their offering compares to yours, I don't know if there's anything you want to say relative to the customer feedback that you receive, different aspects of your offering that you think might be more appealing than ACV's or alternatively, areas where you expect to maybe become more competitive over time?

[Peter Kelly, executive]

Thanks, Ryan. Well, yes, like you, I was very pleased with our performance in Q1 with the integration and the volume growth that we saw in that digital dealer platform and the migration from TradeRev to Backlot in the U.S. 80% volume growth, the integration completed ahead of schedule. But maybe even more importantly, just very, very strong feedback from our customers. We introduced the concept to our customers early in Q1. I would say we've migrated essentially all of those customers with no loss. We had a record performance in the first month post migration. And as Eric alluded to, we really didn't get the benefit of any cost synergies within Q1 because it really was the end of February when the migration was actually completed.

So very positive feedback. And I -- we liked the Backlot model pre-acquisition. And I would say it has lived up to our expectations every month since. Customers really like the simplicity of the platform, the user friendliness of the platform. We see an increased level of engagement from the customers in the platform directly without us having to be in the middle of facilitating the transaction, so to speak. So just a lot of strong points. And I would say a lot of positive differentiation versus the alternative platform that you mentioned. I think -- frankly, I think we've got the best platform in the industry. The focus is on growth and market share, as I mentioned, particularly in that category.

But the unit economics within that platform, even though we're not going into detail on this call as to what those specifically are, are strong. And I think one of the attributes of Backlot pre acquisition was its relative capital efficiency. It had achieved substantial scale and a substantial growth rate with limited capital invested. And I think that aspect of the platform continues post acquisition as well. So we're very excited and very focused on really taking that to our customers so they can all benefit from that very, very strong platform.

[Eric Loughmiller, executive]

And Peter, let me add, Ryan, you asked specifically about performance. In the first quarter, it was a modest loss, less than $10 million in total, and that includes a full allocation of our global sales cost to that unit. And also, I'd like to highlight the gross profit there, we've talked about at maturity, achieving something near 60%. We're already very close to 50%, just under 50% gross profit on that channel. And I'm very pleased with that result because that's including all costs, and that's before any synergies are realized going forward. So that's a very strong performance, in my opinion.

[Operator]

Next question comes from the line of John Murphy of Bank of America.

[John Murphy, analyst]

Congratulations, Jim, and congratulations, Peter. I just wanted to get into, Peter, as you're thinking about the business here, I mean, there's 2 competing forces. There's the short-term disruption here in supply and at the same time there are these secular changes that are occurring, both of which seem to be creating some disruption in your business or pressure. Which one do you think is a greater force at the moment? I mean an optimist could argue, hey, the supply constraint will ease as we get into next year and you'll handle this digital transformation very well and it might not be going as fast as people are thinking and a pessimist might say, "Hey, listen, the supply is what it is and this disruption on the secular digital transformation is something that you're not handling that well and there might be increased competition. I mean how do you parse those out and think about the strategy going forward?

[Peter Kelly, executive]

Thanks, John. I appreciate the good wishes, first of all. And to your question, obviously, there has to be a focus on near-term considerations. And clearly, there is a supply constraint, particularly in commercial vehicles, that is industry-wide, but it affects us as well as our competitors. And that's just a reality we have to deal with. It is temporary in nature. And I think the time line you talked about is probably a reasonable assessment.

So we've got to manage through that. And I think we're doing a good job of managing through that. And I think our Q1 is a good evidence of that. And as I said in my remarks, I believe when that volume starts to return to normal, we will be a very strong beneficiary for that because, as you know, we tend to lean more heavily into the commercial segment in our business overall. But I'd say the bigger focus is on the longer -- the secular trend that you mentioned, which is taking place over time and has obviously been accelerated through COVID.

And to be honest, I suppose that's something I've been really part of now for all my career in this industry being an early digital disruptor in some respects with OPENLANE. But there's been a secular change. It has accelerated through COVID. I like to think of it as an opportunity. I think we've just seen a quarter where more than half of the vehicles we sold were off-premise. That speaks to an opportunity we have built for KAR, where historically, all those vehicles had to come to our auctions for us to sell them. That's no longer the case. We now can address vehicles anywhere, anytime for any customer. So I think there's a tremendous opportunity, and we talked about the increased addressable market and the chance to grow into that. So I think we have to stay focused on the longer-lasting secular trend and on the opportunities that, that provides our company, which I think are really, really substantial.

[Eric Loughmiller, executive]

And John, if I could add, you were around back then, you and I have been working on our business for quite a while. In 2011, when we acquired OPENLANE, volumes were down. We were in a position where there's a secular shift in supply to our marketplace that lasted in the commercial space until about 2015. And yet at the time, we said this is -- when it comes back, they will be used to the digital transactions, and we have never looked back on that, as you know, John, on the success of OPENLANE. I'm expecting something similar here. Good habits are formed in difficult times and the good habit of spending less time at the physical location, more time transacting online, I expect to continue.

[John Murphy, analyst]

And maybe just a second question, a follow-up to that. I mean traditionally, in a very simple then way, you kind of always think about 10 million units, give or take as the physical auction opportunity set. But Peter, as you kind of alluded, there's 20 million when you throw in dealer-dealer and what's going on with wholesalers and some of the consumer stuff. As you look at that doubling of the potential market that you're going after, what's your right to play in that second half of that incremental $10 million for the competition, how fragmented is it? And as long as you go in there and operate well, is it kind of just like taking candy from a baby because it's such a fragmented market that's disorganized and not well run that you have a huge opportunity. I'm just trying to understand -- it seems like there is -- if you can break into it, you're going to break into it pretty hard.

[Peter Kelly, executive]

Well, John, I think, first of all, I always tend to have a healthy respect for my competition. I never take anything for granted. I would say historically, you're right, it has been fragmented and low tech, a lot of relationship selling within that segment of the marketplace. But obviously, the competition -- you know who some of the competitors are the likely competitors in the future. There is a substantial opportunity for growth. I would argue, frankly, in Canada where our business has been a little bit more established in this digital footing for longer, we've seen us continue to grow and frankly, the growth accelerate into that segment and grow our total volume of dealer consignment. And now I see the same trend starting to become evident in the U.S. So there's a lot of opportunities for growth, but I would not characterize it as taking candy from a baby. It's a competitive environment.

But within that, we have a very compelling offering. And at some level, what does KAR have here, as these marketplaces mature, and I think we're on the cusp of that right now, we've got an engine [indiscernible] any vehicle in any location into cash in the shortest amount of time possible with a full set of services wrapped around that transaction for any customer. And that's a really powerful engine that can be brought to any wholesale vehicle, it can be brought to enabling a retail trading transaction on behalf of our customer. There's a lot of potential advantages that, that brings to bear. So that's part of the opportunity that I see for the future of KAR.

[John Murphy, analyst]

And I'm sorry. And then just one last one, Peter. And I'm not sure if it's a fair question right now, and we might need to get into it at the Analyst Day. But I mean if you look at the physical locations, is there an opportunity to [ pare ] back there? And then also, if you think about the international operations, what are truly the synergies back to North America? I mean, it seems like a whole other vertical or sleeve, even though you might argue it's a similar business. Is the opportunity set so great in North America that building Europe might not necessarily be necessary at the moment, might be more of a capital and human capital distraction?

[Peter Kelly, executive]

So on the first question, the footprint. Obviously, we continue to evaluate that, and I talked in my remarks about how we see I'll call it a vehicle logistics center model in the future. I think the physical assets, as I said, are a positive differentiator for our company. They provide necessary services to many customers, historically and mainly to our commercial seller segment, but obviously tremendous value there and underpin some of the key relationships we have with that segment. And as Eric alluded to in his remarks, increasingly, we are using -- are being asked to provide reconditioning services for companies that are then retailing those cars direct to consumers. So dealers, franchise dealers, independent dealers and large used car, used vehicle retail operations. So the facilities have real value, but the activities that take place at those facilities change. So again, the most obviously, we're not running cars today. But with a more digital model, there's a different set of activities that will take place in the locations versus will be sort of centralized and handled through centralized service provision and through technology. So that's an evolving picture. We have a team evaluating that day in, day out in our business, and then we'll continue to manage that.

As regards to the international business, what I like about -- one of the things I like about international business is, it is an asset-light digital-only model that we have in Europe. It is demonstrating very strong performance, as I mentioned, in terms of gross profit per car sold. Your observation is correct that the synergies between North America and Europe, they are fairly limited, right? It's not that vehicles are really transacting across that ocean in our segment because there just isn't an economic driver for that. But there are some synergies on the technology and in terms of some of the customer relationships. But it's a business I like and for sure, it's a growth opportunity. And I do think that the more digital our business becomes the greater its potential to be a globally extendable business. You don't have to go in and build the physical assets globally, you can go in with technology. So that is an opportunity for our company. But I would say that my personal focus has, for sure, been more on our North American operations here in my first month on the job.

[Eric Loughmiller, executive]

And Peter, I received a couple of questions overnight on e-mail. When we talk international, I'd like to turn, John, to a subject that's confused at least a couple of people. Our contingent consideration recorded as an add-back in the first quarter, a big portion of that relates to our international acquisition of CarsOnTheWeb. As a result of their performance, when we did the purchase accounting, we used a Monte Carlo simulation model to calculate the ultimate contingent price and added that in. Our performance has exceeded what the probability was. And so we have had to record that. Those are payments to the former owners. They're not related to compensation to employees. We also had the same thing happening with our TradeRev platform. Our contingent consideration is going to exceed what we originally calculated, demonstrating the strength of these digital marketplaces, probably in part by COVID. There was a minor offset. We acquired Dent-ology where we're going to pay less than we anticipated. And all those were netted and recognized in Q1 in the $11 million add-back. I added that, you didn't ask, but I had several questions last night and thought this would be a good time to explain it.

[John Murphy, analyst]

That's incredibly helpful. Eric, what's the tail on that on those contingencies just so we can think about that going forward? When do those run out?

[Eric Loughmiller, executive]

Ironically, all of them run out in 2021. So we're at the end of the cycle, which is why you have these adjustments, you've got great visibility into what the ultimate payment is going to be.

[Operator]

Next question comes from the line of Craig Kennison of Baird.

[Craig Kennison, analyst]

Congratulations, Jim. Peter, your prepared remarks, I think, were really helpful. So thanks for that. I'm not sure that we have all of those metrics on a quarterly basis going backwards. So I would make that request as well. I'm wondering if you could shed a little bit more light on the cyclical pressure your more cyclical businesses are facing? Share with us some metrics, such as your off-lease business and what kind of residual values you're seeing in that channel? And what will it take for those cyclical pressures to become more of a tailwind?

[Peter Kelly, executive]

Thank you, Craig. Good question. So I guess, in terms of some of the cyclical pressures I mentioned how they originate in the pandemic, if I look at, say, the off-lease segment, which there's a -- still, at least on the book, a large supply of maturing off-lease vehicles this year. But what has transpired with I'd say the lack of new car supply from the chip shortage and high retail demand driven in part by economic stimulus, there's been a sort of a mismatch between consumer demand and new car supply, which has led to a very, very significant appreciation in used car values. And what that has led to is a lot of vehicles [ in ] equity, which means less is -- less likely to return them, or when they are returned, very, very high conversions on the upstream platform.

So for example, OPENLANE, and again, we've got a lot of share here had its all-time record high quarterly conversion of off-lease vehicles within Q1. And if anything, it has strengthened since then. So conversion rates upstream very, very high. Those count as transactions for us. But they're not as lucrative, let's say, as downstream transactions in that segment.

Craig, I think the first thing that needs to happen is we need to see some return to more normal on the new car production side. And you guys have probably as much data around that as I have, but it's something we continue to watch closely and talk to our customers about. So return to more normal new car production. And probably a return to some of the stimulus having made its way through the economy and a return to more normal economic environment as well, would probably be a positive, in my view, for our business. So the time line on that, I'm not making firm predictions, but I do think these are temporary phenomena. There still are a lot of off-lease vehicles on our captive finance company's books, which now extend out another 3 years into the future. We have visibility into that. So those vehicles are there. We expect to see repossessions return to normal over time. They're still below normal, and we've got high market share in the repossession category.

And rental cars, I think, will take a little longer. It will take time for us -- I think people are starting to travel. I've heard rental companies are back lease leading, buying into fleets again, but it will take a period of time for those vehicles to enter a remarketing phase. So anyway, that's -- for all those reasons, as I said, we're continuing to be prudent about our expectations in managing our costs and all the things I talked about in my remarks.

[Craig Kennison, analyst]

That's great. And Eric, if I could follow up with you. From a capital allocation standpoint, could you put brackets around the amount of capital you'd be willing to deploy for share repurchase?

[Eric Loughmiller, executive]

Well, we -- Craig, the bracket I'll put around it is we have a $210 million authorization by our Board of Directors. So that frames what we would be authorized to do. But that's over a period of time.

[Operator]

Next question comes from the line of Daniel Imbro of Stephens Inc.

[Daniel Imbro, analyst]

And Peter, I'll add my congratulations on the new role. I want to start on the guidance. Just to clarify, so did the original guidance include the $17 million gain on investment you called out in the quarter? And if not, I think, Peter, in your prepared remarks, you mentioned a few times you expect supply will remain constrained for the rest of the year. So [ if we back up that ] $17 million, can you maybe talk about what's going to drive the implied ramp to get to the full year $475 million in adjusted EBITDA?

[Eric Loughmiller, executive]

Daniel, we were aware of the gains we had on these transactions, and we did expect to realize some gain in the current year that would become adjusted EBITDA in the form of cash, which is in part why we said at least $475 million. We don't know how much it will be, how much we will realize in cash throughout the year of that $43 million that remains unrealized.

So again, the nature of our guidance, we did not give an upper end to this, but there was a contemplation there would be some gains in that number. Relative to the ramp, again, we don't give quarterly guidance. I would suggest that we continue to believe we can run a very profitable business with strong unit economics, the current supply environment if it were to continue through the end of the year, Peter and I talked about this at length, would permit us to achieve a $475 million or better adjusted EBITDA without seeing a recovery in supply back to improved levels over what we see today. It will be a tough road for anybody in this environment, but we're up to it.

[Daniel Imbro, analyst]

Got it. And then just 2 clarifiers on that. So last year, were there any gains on investment in that EBITDA number or not?

[Eric Loughmiller, executive]

No. If they were, they would have been less than $1 million or something. Daniel, I'll just comment. The recent activity with [ IPOs and SPACs ] has caused some of our small investments to become public enterprises. That's what's causing this, not anything else.

[Daniel Imbro, analyst]

Okay. Got it. That's helpful on the guide. And then just on BacklotCars, you touched on this earlier, Peter. But I'd be curious, how are dealers responding to your change in the auction format? You went from a timed auction to a 24/7 kind of 3-day bid platform. Can you maybe talk about the dealer reception to that, whether it's driving more bids per car or kind of what you're getting in net proceeds? And then have you seen any competitive response to your removal of a seller fee. I think TradeRev removed the seller fee late last year. Obviously, BacklotCars has no seller fee. Can you maybe talk about any competitive response to that?

[Peter Kelly, executive]

Yes. Good question, Daniel. Thank you. I guess, first of all, I'd say we saw extremely strong performance in both TradeRev in Canada and Backlot in the U.S. in Q1, both in terms of total volumes and growth. So pleased with both.

Yes, the BacklotCars format is different, and you mentioned the 3-day cycle. It is, in theory, a 3-day cycle, but vehicles typically sell in about 24 hours, okay? So it's really a 1 day to convert the cars into -- the vehicles into cash. Backlot started, I would say, in the lower value segments of the market, which I actually think is a good place to start as a digital disruptor. So has -- our analysis of the data says Backlot delivers extremely strong performance on that lower-value sub $7,500 vehicle, let's say. But we're also seeing with the integration of TradeRev, the average price -- sale price of cars on Backlot has now started to go up market to a materially higher number while maintaining really, really strong conversion rates. I think that is another feature of Backlot. The conversion rate is absolutely higher, materially higher than it was on TradeRev.

So I really look at the conversion rate as a key success factor for both the buyer and the seller. If you think about what those customers want, both of them want very, very strong conversion rates, and we're delivering that. And I think that feeds into the customer feedback being very, very strong. And I mentioned that earlier. In terms of competitive response to the pricing model, I haven't seen a sort of a direct response. I know our competitors are in market with their own offers and their own programs, and that's kind of their business. We're kind of focused on our business. But we have -- again, as I said, we feel good about the model we have. We feel great about the customer feedback we're getting, and we're excited to continue to grow this business going forward.

[Operator]

Our last question comes from the line of Bob Labick of CJS Securities.

[Bob Labick, analyst]

I'll try to be quick. The gross profit dollar per unit, the $264 you quoted is a record as far as we can tell, looking back quarterly for 7 or more years. But there obviously has been significant volatility in the metric. And Eric, you pointed out Q4 versus Q1. I was hoping if you could kind of go back and clarify some of the volatility. And then the question is, is the $264 or $260 to $270 or whatever that a reasonable number going forward to expect for profit dollars per unit?

[Peter Kelly, executive]

Good question, Bob, and you've gone further back in your analysis than I have, but it is a strong number even on the shorter time frame that I looked at. So yes, good observation. It is a strong number. It was helped by strong conversion rates in Q1, tight supply environment, strong conversion rates helps gross profit. But even with that, I think there's a focus on gross profit, and there's a focus on managing direct costs. And I would like us to try -- seek to maintain and maybe ultimately grow, but I'd say something in the $250 to $265 range is a good range, a good performing range for our business. And I do think some of the volatility of prior quarters, there was obviously some one-off situations in various quarters. But I think we've got maybe greater opportunity looking ahead to manage this number more closely. I think a digital model gives us maybe a more -- a greater opportunity to scale our costs up or down more quickly with volume and manage the gross profit more effectively. So we're focused on doing that, and that's one of the reasons I view it as a key metric for the business.

[Eric Loughmiller, executive]

And Bob, if I could add a little flavor. The third quarter of last year, I think we were at $249 is the number I recall. That was also much higher than we normally have. We're sustaining that. Mix does impact the number a little bit, which is why a $255 may be just as strong a performance as a $269 or $264 in another quarter, as it relates to the number of cars sold. When that denominator gets bigger, it will change it, but the mix will be strong, and we expect it to be stronger than what you saw over the 7-year period prior to the third quarter of last year.

[Bob Labick, analyst]

Okay. Great. And then just looking forward on a long-term basis, last one, promise. How should gross profit per dollar per vehicle change as the mix goes to more off-premise versus on-premise? And in the short term and in the long term, how does that impact that -- how does the mix shift impact gross profit per vehicle?

[Peter Kelly, executive]

Well, Bob, as I mentioned, the revenue structure is different in both of those, but also the cost structure. So I think managing the gross profit per car sold is an important metric for us, and it kind of speaks to a whole bunch of factors, how we're managing the revenue profile on both sides of that mix and how we're managing the cost structure on both sides of that mix. And I think we'll be able to do that. I would say that when I think of the digital off-premise model, scale becomes really important. And I think at scale, you get a number of -- and we see this in digital marketplaces across multiple industries. When you get to scale, you get improved economics, improved unit economics, increasing returns to scale, both on the revenue side and on the direct cost side of that. So I don't think that our current gross profit per car in the digital off-premise model, even though it is strong, I don't think that is where it will be in the long term. Assuming we can continue to gain scale and have a strong market position, I think we'll be able to improve that number over time, and that will be favorable to the statistic.

[Eric Loughmiller, executive]

And Peter, I'll add, [ he ] commented there's a real focus on attachment rates of all of our services. That's what's going to help drive that number up. We do not include the AFC gross profit in that number. I want to be clear. And that's one of the things we think we can do. But all the other services do end up. And as they generate gross profit, whether it be for the buyer who acquires a car online then has us recondition it, transportation all creates opportunities for us to continue growing [ gross ] profit and not adding an additional cars sold. So that's how the attach rate will be a key contributor to this, right, Peter?

[Peter Kelly, executive]

That's a very good point, Eric. That's a very good point. So Well, thank you, Bob, for that. So I think we're at closing remarks. So Jay, we'll have to not take any more questions. Thank you, Jay, and thank you, ladies and gentlemen, for your time this morning and for your questions.

On a personal note, it is a real privilege to take over from Jim as CEO of KAR Global, and to have the opportunity to lead what is a great company. I'm excited about the opportunity ahead for our company, for our shareholders and for our employees. I am looking forward to get to know you better and hopefully getting to meet many of you at some point. And Eric mentioned our upcoming Analyst Day, that will be a good opportunity to start to do that. I just want to close out my remarks this morning and just reinforce what I'm going to be focused on in the coming months here.

First of all, we're a digital marketplace business. I'm going to be focused on building out our platforms, our capabilities and our skill sets to be a true digital marketplace leader when it comes to wholesale used vehicle category. Secondly, we have a significant opportunity in front of us with the growth in our off-premise volumes. We will seek to build on the strong volumes and growth rate that we demonstrated in the first quarter. And third, I'm focused on simplifying our business, making it easier for investors to understand, making it easier for our customers to understand and engage with and also matching our cost to our volumes and the mix shifts and making sure we continue to demonstrate strong unit economics and strong overall performance going forward. So with that, we'll end this morning's call. Thank you all very much.

[Operator]

And again, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.