Lee Jagoda: It’s actually Lee Jagoda for Bob. I think you already commented a little bit on kind of the lease volumes and where they’re going. But can you break it down a little bit more in terms of just talking about lease volumes in general, and then what part of the funnel the off-lease cars are going to today and breaking that down between the lessee, the grounding dealer, closed auctions, or open or physical?
Peter Kelly: Yes. Thanks, Lee. Let me attempt to do that. I guess I’ll say, first of all, that in what I would call a more, a normal or typical lease environment, which I’d say the 20 years pre-pandemic would be examples of. We would typically see something like the following: consumers would buy out maybe 20% to 30% of the maturing volume; and then 70% to 80% would enter the remarketing process; and then you have some component of that would sell to the grounding dealer, some into the franchise dealer network, some on the open sale and the rest go to physical auction. What we’ve seen really over the last two years and continuing through to today, for the most part, is there’s been such a runup in used vehicle values that these vehicles are sort of strongly in an equity position and the consumer — the percentage of vehicles that the consumer is buying out is considerably higher than before.
It’s sort of 60%, 70%, in some cases, more than that percent. And to the extent the consumer doesn’t buy out the car, a lot of OEMs and captive finance companies give the grounding dealer the same buyout option the consumer has. So if the consumer doesn’t buy out the car, it gets returned to the grounding dealer and they exercise that because the car again is in equity. So that has meant that for the last couple of years, the amount of vehicles flowing deeper into the channel has been down, I’d say, by 90% versus what we would have called normal. And obviously, for that to get addressed, the equity gap has to decline and all that sort of stuff needs to play out. So we see that happening. We see the sort of beginnings of that right now. It depends, it varies by brand, by portfolio, right?
But what I see happening as we move into 2024 and 2025, first of all, those leases were written against much higher new vehicle transaction prices, okay? Because the vehicles, the sale price of the car was considerably higher. So they tend to have higher residual values written into the contract, right? So the residual value line has trended up. And then on the other side of that, the actual value of the vehicle, we’re seeing downward pressure on that. So I think these two lines are going to converge and get back to a more normal type of environment. I hesitate to predict exactly when that’s going to happen. But I believe it will happen, and it will be positive for us as it happens. And then the second part of it is obviously the new lease originations and with OEMs getting back to sort of full production again and with consumer demand, being somewhat weaker.
We’re seeing some increase in incentives. We’re seeing an increase in leasing and that points to a strong off-lease volume well into the future.
Lee Jagoda: Great. And I think it’s fairly clear that the consensus out there is the secular, that there is a secular shift to online dealer-to-dealer from physical. Presumably, that’s going to be a lumpy transition. Can you speak to maybe your best estimate of the physical versus digital volumes in the market and their growth year-to-date? And then how should we think about that going forward into 2024?
Peter Kelly: Yes. I guess, Lee, what I’d say to that is, based on the data we look at, and obviously, we’re public, some of our digital competitors also report public volumes. If I look at the U.S. market, our assessment is that approximately 30-ish percent of the volume has transitioned to sort of fully digital off-site model, and 70% is transacting in a physical or more hybrid model today. Now there’s also dealer-to-dealer transactions that don’t take place in either of those models, that take place sort of informally through wholesalers and other types of channels. So I’m really just talking about the formal channels. So I think we see digital at 30%. To be honest, it’s been fairly steady at that level for the last year or two, because I think there was a little bit of a rebound in the physical coming out of COVID, the pandemic eased and consumers kind of consumers in many industries kind of went back a little bit more to physical and in-store type of thing.
But I think if you correct for that and look over a longer period of time, you’ll still see that there’s a, I believe, a steady secular shift towards digital. And our interviews with customers, our surveys of customers really sort of support that fact, particularly talking to franchise dealers. I think there’s a clear preference there from dealers. The majority of those dealers prefer to purchase vehicles online. They do not put a priority on going attending physical auctions in person anymore. And when we look at independent dealers, they’re probably not as far along that curve. But I’d say there’s no question that digital preference is still very well established there and is, I think, gaining all the time well.
Operator: And our next question today comes from Bret Jordan with Jefferies.
