Are we ready to go? Yes, we are. Here we go. Okay, I'm already mic'd up. So you guys, George, we'll have you in the middle. Got Tim Fox. Okay, very good. All right, so we'll keep the train moving along our schedule here. So it's my pleasure to host this next fireside chat with the team from ACV Auctions. We've got George Chamoun, CEO, Tim Fox, VP, IR, Strategic Finance. Guys, thanks so much for being part of the conference. Thank you, Eric. I think, George, you're now multiple years covering the conference. Yeah, so very You're a vet now of this event- Yeah ... so we appreciate it. Thank you. Okay, so maybe let's start big picture, before we get into some of the weeds in the business, but for those who are less familiar with the story in the room, maybe talk a little bit about the ACV platform, the value proposition, and where the company sits in the broader auto industry ecosystem. Yeah, certainly, Eric. So where ACV's core business, our auction business, at least started, and also just kind of go to where we're going at a really high level, is started out in the dealer wholesale side of the ecosystem. Where dealer wholesale fits in is within the 17 million new cars and 34 million used cars that dealers are retailing, they take in trades. Those vehicles that they decide not to retail, and it really established over the years, over 10 million cars that are wholesaled from one dealer to another. Massive market most investors hadn't really ever heard of. In addition to the dealer wholesale market, there's a commercial wholesale, which is another 8 million units a year that are sold that we're a smaller and new player in. The first market is really where we've started our journey, growing the business and started to scale. Okay, that's great. Maybe one more big, big picture question, as well. We get a lot of questions from investors about the moving pieces with the macro environment. So can you give us your take on the lay of the land, of what you're seeing in terms of dealer inventory, consumer and demand, the incentive environment, all the aspects of your business that can be impacted by components of supply and demand brought back to the macro environment? Yeah, I'll start, and Tim, if I leave anything out, please chime in. Sure. You know, we're compared to a couple of years ago, where we saw SAAR get reduced by millions of units a year. We're now seeing new cars come back. That's really important to our ecosystem. The more cars dealers are selling, the more cars in their lots, the more likely they are going to wholesale these vehicles. So we're starting to see and more and more incentives on these vehicles. I think the average incentive vehicle right now is, like, $4,000. Yeah. So, OEMs are really trying to move these vehicles. We're starting to see interest rates will play into affordability. Even before the interest rates were dropped, affordability started to come into play this year. Used cars are starting to add up on dealer lots, even though they're still 20% less than they were in 2019. You know, we're starting to see cars start to add up on dealers' lots, which means they're in a higher likelihood of wholesaling units. So all in all, more new cars being sold, more cars starting to be lined up on dealers' lots are gonna increase the likelihood of them wanting to wholesale a car. Any more? No, I'd say that that's exactly right. So you'd say new vehicle situation, rosier for sure. Yeah. Used coming back. The combination of those, really, we look at this trade to wholesale mix. Mm-hmm ... which is the percentage of trades coming into the dealers, that they actually turn to a wholesale channel instead of retailing. That's moving in the right direction, right? That historically had been about half cars were going into the wholesale channel. That dropped to a low of basically 40% at one point. So they were just keeping much more of this trade in inventory than normally they would. That's starting to normalize again. That's gonna be a big driver of market recovery over the next several years. Okay, so that's, that's the current environment you find yourself in. That's how it might shift going forward. Let's go one more step back. The addressable market you talk about, would love for you to lay the groundwork for the addressable market you're going after, how you see the competitive landscape against that addressable market today, and what's causing market share shifts against that addressable market dynamic? Sure. So within the dealer ecosystem, there's franchise dealers and independent dealers. 75% of our supply today comes from franchise dealers. Again, these would be new car dealers, and 25% of our supply coming from independents. Collectively, between franchise and independents, you know, they were wholesaling over 10 million units a year in 2019. That market came down to 8, high 7s- Below, yeah, high sevens. ... High sevens, eight. So, you know, that market contracted quite a bit. We think this year it levels out, and we think next year it starts to return back to normal. So, whether it's 9 or 10 or 11 million, it's a big market, right? It's a really big market. And we're today 9% share overall. That's not just digital, it's physical, it's digital. We're about 9% share across the country. How we get to that 9% share in the dealer wholesale side is in some markets, we're 40% share. We've been there for a number of years. We're the dominant player, and in some markets, we're 1% or 2%, right? So collectively, across the country, we're at nine, but you're seeing a regional dynamic that the longer we're in a market, the stronger we get, the flywheel gets, you know, faster, more and more sellers, buyers come on, and we tend to be a more material player. On the commercial side, we're very early. It's only 5% of our volume. So I would say we have a little less than 1% market share on commercial today. So I want to follow up on that with commercial, because that seems like a pretty big opportunity set for you guys. As you highlighted, George, it's early innings in terms of what it contributes today. What kind of incremental investments do you think you have to make to unlock that opportunity? How do you think about IT investments against the opportunity versus just execution against the opportunity? I'd love to go a little bit deeper there. Yeah. So, one way to think about this is we already have the demand, right? Two-sided marketplaces. We've got, you know, we've got the buyers who want to buy these cars. And not only do we have the demand of our current buyers, some of our sellers, which are franchise dealers, also want to buy these vehicles, so it turns some of our sellers into buyers. So the simplified way of looking at this is we've got the demand, we've got a marketplace, but these commercial partners typically require two things we didn't have. One, land. Some of them required land. So for example, repos, which are bank-owned, you know, vehicles, those cars need land. Rental in some markets requires land, because they need these cars off, let's say, an airport location or otherwise. Fleet, government cars tend to need land. As far as off-lease cars, they only need land if they're not sold upstream. Okay, so collectively, a way to think about this is, of the eight million cars that are sold in commercial, you know, probably 5 million-6 million need land, okay? And maybe two to three million of it will be sold upstream. So land is a part of it. Reconditioning for some of these vehicles is the second part. So if it's a bank and they want to auction the vehicle, they first want to get the vehicle back to a certain price point. So if it's only got three tires, it needs a fourth tire, right? So it's very simple. We say recon, it doesn't mean like you're rebuilding engines. It's typically like adding a tire or, you know, doing some very simple recon to hit a minimal viable requirement. But we didn't have that in our core model. The M&A has helped us get started, so we're building out software that will help us accommodate these requirements. You've heard us talk about the software we're building. So over the next few years, you'll see us add to our 10+ locations we have today. We've said forty locations would get us to 80% of the population, so at least it gives you a proxy of when we'd be able to get to a material market share. And then, you know, we'll also be incrementally releasing software that we think will serve a more competitive opportunity than what these commercial containers typically see. An ability to leverage our inspection capabilities. Commercial consignors are going to be able to really understand whether they should be reconditioning a vehicle more intelligently than they have today, and also leverage our buyer base. Okay, understood. So maybe bringing Tim into the conversation, you guys have talked a lot about your medium-term targets. You've had a number of analyst days in the last couple of years, talking about them a lot on some of the earnings calls we do. Maybe for those who are less familiar, talk a little bit about what those medium-term targets are with respect to revenue and adjusted EBITDA margin- Sure. and talk about some of the different scenarios and building blocks to get to those goals. Yeah. So what we laid out for the midterm targets was a revenue of $1.3 billion and $325 million of adjusted EBITDA, so effectively 25% EBITDA margins. This year, we're going from what was - 4% to + 4%, so a nice 800 basis point improvement, but still a ways from 25%. So how do we get there? The mid-term targets are predicated on 1.5 million units, right? That's a combination of dealer wholesale being about 1.3, and then the balance being a combination of commercial and what we call consumer to dealer, so kind of ClearCar. And, you know, relative to what we said in June of last year, I'd say that commercial estimate's probably a little conservative, but nonetheless, 1.5 million units. The rest of the equation comes down to expanding what we call revenue margin, which is basically gross margin, going from what was 50% last year, will be 53-ish% this year, and then 60% by the time we get to the midterm targets. And I can talk a little bit about how we get that last 700 basis points, but we've demonstrated an ability to grow that revenue margin significantly over the past three years. And then below, you know, from an OpEx perspective, it really is largely a fixed operating model, right? When you look at our territories today, where we've been in for, you know, six or seven years, we have territories today that are at 30%, 31%, 32% EBITDA margins. Today, with revenue margins that are at 53%, not 60%. Right? So it's volume driven, right? And so ultimately, you've got a significant amount of fixed costs on go-to-market, on R&D, G&A. And so as you drive more and more volume on a digital marketplace, it drops to the bottom line. And we've said, you know, thinking in terms of sort of incremental margins from an EBITDA perspective, that on an organic basis, we should be able to drive about 40% incremental margins from an organic basis. Obviously, it's a little bit lower when you factor in some of the M&A that we've been doing, but that's a really good bogey and, and something we do to, you know, target for the go-forward model. Okay. So with that as the backdrop, George, you know, you remain pretty innovative on the product side. You know, I feel like every year we come see you guys at an analyst day, you talk a lot about product innovation, you put a lot of it on display... Talk a little bit about what the leading examples are of product innovation in the platform right now, what you've been building, and how you think it changes the platform over the medium to long- term. Yeah, it's always tough to pick the leader on it. It's like picking your favorite child, right? But just to list a few, the products you hear us talk about the most are products like ClearCar, and that's because it's helping dealers solve a big problem, which is acquiring more consumer vehicles. So I would say that's the product, which we can go into a little bit more if you'd like, that gets probably the most attention. Yeah. ACV MAX is helping dealers price their retail vehicles, make the right decisions, and that's a category that came up a few times today. I realize investors didn't realize that we have a lot of data today from about a thousand plus rooftops, and at that data. Not only do we make a subscription revenue for this ACV MAX product, but it's helping us build our data moat. There's additional products and services, as you know, we've built around products that have helped us make better decisions around arbitration, inspection, helping us scale the business and make the right decisions. So you've seen us release a series of products that you heard, one called ArbGuard, one called Co-Pilot. Look at those, you know, those products as just unbelievable innovations around scale. So whether it's helping dealers solve their number one problem, whether it's helping us have a data moat that no one else in the world has, or whether it's helping us scale our business, those are all areas that are all key, that we thought was very worth our while from an investment perspective. I want to get to ClearCar in a minute, but something interesting you said there, and I run into it in my own investor conversations. What do you think, George, is the most misunderstood part of ACV with respect to data overall? The data you have and how data can factor back into the business. Mm-hmm. Our model is. Our data model is incredible. I hate to boast, but I'll I just will for a second, I guess. But it's, you know, there's, when you start to really try to go from averages to machine learning, to truly using artificial intelligence, it's all about curated data. And when you look at what ACV has, not only do we have a million cars a year we're inspecting with our teammates working hard on the field, but we have unbelievable data. The way the car, you know, the engine sounds, you know, the dents, the scratches, so it's unbelievable amount of data. But then we've got all the data from ACV MAX, which is all the cars our dealers are retailing, all the dealers' cars they've reconned. And now, all of a sudden, we're getting these consumer data points that it's now gonna allow us to launch things that the industry's always asked for. For example, you'll hear us talk about marketplace companies, you know, third-party marketplace companies that are looking to sell cars online. They need a trade value. That'll come from ACV. OEMs that wanna do a trade value on their websites, that'll come from ACV. And why could you do a trade value to the point where you could move towards an e-commerce model and know, you know, that you could actually trust the number? This condition-adjusted value allows us to give a number to the consumer, and as long as you're telling us the truth, we don't have to change the number. And so the part that... You know, we try to use these terms like condition-adjusted value. I don't know if we yet give justice to this data moat we're really building and the product innovation that could come around this data moat. Okay. Sounds like a potential future analyst day, series of slides. Yeah. We'll leave it at that. Not to give Tim homework- I appreciate that! out of the company. Duly noted. But ClearCar, you talked about it, George. You introduced it. I wanna come back to it. Talk a little bit about ClearCar as an offering and an opportunity. How should we think about adoption among franchise dealers, and what do you think that innovation can do for the broader marketplace business in regards to creating a halo effect? Sure. So if you kind of look at this as sort of phases, so our number one priority this year was to help our dealers buy more cars. Tim mentioned earlier this trade-to-retail mix of franchise dealers are keeping too many of these cars. The reason why they're keeping it is they're not buying enough. CarMax wholesales 50% of the cars that they trade or buy, and they don't sell new cars. And when you say it out loud to yourself, like, three times, it really kinda makes you think, going, "Wait a minute. A used car company wholesales 50%. These new car guys, who also sell new, are wholesaling a lower percentage." So franchise dealers need to buy more cars. They didn't have the right tools, they didn't have the right process, and now with ClearCar, if a consumer's in to change their tires, you know, get an oil change, whatever it may be, the dealer can put a number on that car, and they now have the tool to actually basically do what CarMax and Carvana are doing. That's a breakthrough for this industry. We're literally just getting started. We're also hearing the things they want for next year, about how they wanna be able to scale even faster, put even more numbers on cars. Think about this moving from being a widget on a website to being a series of services that allow you to do a condition-adjusted value, and we'll talk more and more about that between now and early next year. That's channel one: dealers buying more cars, dealers trading more. That same, data opportunity allows you to break into new channels, whether it be OEMs, other marketplace companies. That same model allows you to grow into new markets as well. So think it really revolves around consumer self-inspection, dealer self-inspection, and, I mean, the simplified way to look at it is it's a competitor to Edmunds or KBB, but it's way bigger than that. It's really a way to understand the value of an asset, whether it's in the consumer's driveway, whether it's at the dealership, and as long as they use our tool, they can get to a definitive value of that vehicle. Okay, understood. One of the things you've built over the last couple of years is you've layered more ancillary services on the platform that you built. Two jump out at me, you know, ACV Capital, ACV Transport. Would love you to give the audience and those listening sort of a little bit of a backdrop of what you've built around both those two opportunities, but then broaden it out, George, and give me a sense of what do you think where it might go longer- term in terms of ancillary services on the platform? So I'll start. Why don't you chime in, too? Sure. Okay, 'cause I'm talking, talking a lot. I want to give Tim's got a great voice here to be heard. ACV Capital, we're at the early stages of helping our independent dealers have the floor plan capital to buy vehicles. That, in and of itself, can keep growing from them not only buying cars from ACV, but buying cars from consumers in other categories. So think leveraging more than one product together. Leverage ACV Capital, leverage ClearCar, leverage ACV MAX. So think this next phase is bundling. Now, let's talk about ACV Transport. The advantage thing about Transport is buy cars from ACV, the car gets shipped to your dealership, but it could get even more interesting. Buy the car, it happens to be in the consumer's driveway, you have to use ACV Transport. Or it's, for example, a repo company using ACV Transport to get the car from here to one of our locations. So each one of these services are really an opportunity to bundle with other services. So the oversimplified way of looking at the ACV model is it's a series of value-added services that collectively give us an advantage over the old ways. Okay. And that's what we're so excited about. We're so excited about that. As each of these mature, you know, yes, there's also margin and EBITDA benefit from transport and capital, but it also is making us stronger. But what else, what did I forget? I was going to say, you know, one thing to understand about ACV Transport. Some from investors hear that, and they go: "Oh, my goodness, you guys are getting into buying trucks?" Just to be clear, it's a marketplace within a marketplace. We don't own any of this. It's all third party. So we have over three thousand transport companies that tie into our ACV Transport platform. 90%—over 90% of the jobs are auto-dispatched, no human intervention whatsoever. We've gone from that business losing money three years ago to breaking even, to this year on a gross margin basis, being close to 20%. We recognize the dollars in that business on a gross basis, so it's a really interesting and EBITDA generative business. We're already at kind of mid-teens attach. I'm sorry, mid-fifties attach rates. It can go up a little bit from here, but, it's a fantastic value add. It drives buyers to the platform. It drives faster time to market. Dealers get their cash faster. Our SLAs are the best in the industry. Team's done a wonderful job, and, you know, we're leveraging AI to do the pricing right now and getting more sophisticated every day. Okay. Tim, I do want to stick with you. You gave us the building blocks around margin before, but I want to come back to a couple of things- Mm-hmm. You said and maybe put a finer point on margins overall, so against those targets, I think one of the questions we get a fair bit is the theme you talked about, which is fixed cost leverage. Mm-hmm. How should investors be thinking about cost growth versus just scale when they're trying to think about the inputs that are driving some of that margin trajectory you talked about earlier? Yeah. So I mentioned, you know, we've got the, the gross margin/revenue margin will happen with revenue mix for ACV Capital and, and as we drive costs down for arbitration. So I think that piece of it, investors generally understand. On the OpEx line, really the only truly variable cost in that whole series of, OpEx is the vehicle condition inspectors, right? And really, today, there's a lot of excess capacity there. So we have 800 of these folks across the country doing inspections. On average, they're doing about six a day. If you look at places like Long Island East and some of these other more seasoned territories, they're doing 12, right? So there's a lot of pent-up capacity that we can continue to leverage. Over time, though, when you do get to a certain level of penetration, you do have to hire another VCI. But from sales and marketing, you know, we've got the territory managers in place, regional sales directors, VPs, so the sales go-to-market infrastructure is basically fixed. We'll add a little bit more on the commercial side and maybe a few more inside sales folks over time, but you're talking nowhere near the level of revenue growth. R&D, again, that's discretionary. It's been growing. You know, we pulled back a little bit on the growth rate in 2023, picking up this year as we start to invest in commercial. But again, going forward, we've got a couple different levers there. We've established an offshore presence in India. That's gonna be upwards of a hundred folks by the end of this year. So a lot of leverage in there. And then G&A is- ... G&A. So building on that, one of the questions we get a lot is if you play out the idea of getting to those targets, roughly around, you know, as we talked about, $325 million of adjusted EBITDA, how should investors be thinking about the conversion of EBITDA into free cash flow longer- term in the model so they can even back into dynamics that are more available? Yeah, it's a good question. So, if you look at, so, part of what affects the cash flow story is we always have the float on the marketplace. If we actually model out, call it two or three years, what's interesting is that the change in float, which is positive as the number of vehicles that are sold increases, effectively offsets CapEx and capitalized software. So adjusted EBITDA is actually a really good proxy for free cash flow. Yeah. Okay, perfect. That's, that's super clear. Yeah. I want to turn next to capital allocation, a topic we've talked about collectively before, invest a lot on earnings calls. When you think about investing back in the business, possibly doing M&A, returning capital to shareholders, I know, George, you and the whole team, including Tim, have that conversation a lot, have it with the board. Maybe refresh us on your priorities around capital allocation. Sure. So, I don't think we've been shy about having our goals of both accomplishing, you know, hitting our EBITDA goals that we've mentioned to our investors. I think we've done a really great job of achieving that. But in addition, investing very significantly into technology, innovation, and you're seeing us produce that. So I would say, you know, when you think about objectives, I think if you look back to the last handful of years, I think we've been very prudent, but yet investing in the future. We have a large technology investment, you know, we'll see the fruits of this for five years from now, 10 years from now, 20 years from now. And then when you think about our M&A capital, you know, commitments thus far, most of these have been profitable, you know, EBITDA producers, that one geography we could, in most cases, double or triple the EBITDA from that geography. So not only buying these businesses at, you know, let's say 7x-10x EBITDA, but it's something we could double or triple or quadruple, you know, within, you know, let's say within a 5-7-year period of time. So we feel really good that, you know, our core thesis of continue to invest in tech, continue to invest in innovation, but also buy these, you know, regional businesses that help us broaden our TAM. We feel really good about how this all collectively ensures not only we hit this mid-term target model, but the number is much bigger than that. Okay, understood. So we only have a few minutes left. George, we're trying to end each one of these because we're at a technology conference, looking forward. So what do you think will be the biggest surprise in either the online auto industry or the overall industry as you look out over the next year? And you've talked a little bit about it, but what are you most excited about with respect to ACV over the next three to five years, over the medium- term? I think watching... The, probably the biggest surprise is watching what affordability will do for consumers. I think new cars, which should be very strong, at least my sense from just what I'm hearing out there, is consumers want to buy these products. And I think I really do feel like over the next year, affordability will be addressed- Uh-huh. to any consumer that actually has a decent credit score. So when you put that into one segment, you know, every single day, franchise dealers are telling us, "We could be selling more cars. All we gotta do is hit a certain payment." And I think as you all do your research, you'll feel and hear that same theme. So, I'm hoping what I'm hearing is true, because that'd be good for the entire market. And if it really just gets to affordability with the way aged vehicles are on the road today, it's tough for the everyday consumer to keep fixing these cars. Just to put a final point on that, I still want to get to your medium-term answer. That's purely a dynamic of the financing environment out there and an output of interest rates. Is that your view? I think it's, it's both. At least what I'm hearing, a combination of interest rates, but also with OEMs, with the incentives that are coming out. Yeah. If you're an OEM and you see what folks like VinFast and others are doing, these new market entrants- Yeah ... and you see these prices for these cars, you've got to get more aggressive. Yeah. I think for us, it just means a consumer... To simplify it to most of us, a consumer's gonna be able to get to a $400 a month payment. Yeah. Right? However, they can get to that $400 a month payment or that magic payment price point- Right ... whether it's the OEM incentive, whether it's interest rates, that's good. For all of us that are in the volume side of the business, that's a great thing. Understood. So that would be one. I think by putting it out in the ether, maybe it also brings more positivity, right? I like it. And that 3-5 -year play, I kind of hinted it earlier, but it's really the ACV data moat now enabling online retail. It's enabling consumers and dealers to make the right decisions, commercial partners to make the right decisions. And I think in a three to five-year play, you, you just start to hear a dealer say, "What's the ACV? What's the actual cash value?" You start to hear a commercial partner say: "What's the ACV?" What, what do they mean by that? It's what's the value of that asset, the actual cash value of that asset, based on the condition? Because we've made it so easy for anybody to understand the value of that asset wherever it may be, which then should just strengthen our overall marketplace, and I think we're making great strides to making that happen. Okay. Well, first, always appreciate the opportunity to talk to both of you. Thanks so much for the insights, and please join me in thanking ACV Auctions for being part of the conference this year. Thank you, Eric. Thank you.