Prompt:
Human: During the call, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors.
A transcript of this conference call will also be posted on our website.
The recovery we have seen over the past year continues to accelerate, led by strength in our leasing and capital markets businesses.
Our closely integrated One JLL philosophy and market-leading products and services are resonating with clients.
I would like to express my gratitude to all JLL employees for the outstanding service they provided to our clients in 2021.
This dedication to serve our clients has led us to transform JLL into a more efficient global enterprise.
Three years ago, we embarked upon an ambitious multiyear transformation to enhance the seamless global integration of our services and expertise.
During this time, we made several organizational design changes, orientating around business lines in set of geographies.
These realignments will enable JLL to reduce structural complexities and leverage best practices while accelerating growth.
Today, we are announcing the final phase of this transformation process, which will align our external reporting with how we internally manage our business.
This new reporting structure will make JLL easier for investors to understand and will provide enhanced transparency of our business line.
Karen will discuss the reporting change in more detail shortly.
Turning to the current market environment.
Conditions continue to improve, but still significantly vary by geography.
And the global office leasing market, the emergence and rapid spread of the Omicron variant has brought additional uncertainty to the return to office time line.
Despite this uncertainty, we have not noticed a discernible impact in our leasing numbers as companies continue to take a longer-term view of the future office needs.
Channels research indicates that in the fourth quarter, all three global regions registered positive net absorption in the office market for the first time since the onset of the pandemic, creating a solid foundation for the ongoing recovery.
remained slightly below 2019 levels, but continued to show improvement.
In the U.S. specifically, fourth quarter office leasing volumes were down 23% compared to pre-pandemic levels.
office leasing volumes were down 44% just two quarters ago.
Overall, we continue to believe office demand will recover to pre-pandemic levels and that the office will remain the center of the word ecosystem.
Shifting to other sectors.
Activity in the industrial and multifamily markets remain robust in the fourth quarter.
High demand and tight supply continued to define the industrial space, leading to rent increases and record low vacancy rates.
The scarcity of land near ports and other key logistical areas is driving a supply demand imbalance and additional supply will be needed to meet growing demand in these industrial markets.
Global capital markets transactions volumes reached an all-time high in 2021.
Investment activities served 54% to $1.3 trillion, supported by an improving global economy and high levels of liquidity.
Cross-border capital flows, which were at a depressed level in 2020 accelerated throughout 2021 and closed the year at record high levels.
The combination of accelerating cross-border capital flows and significant levels of dry powder bode well for sustaining recent growth rates within capital markets.
Similar to the trends in leasing, strong performance in the industrial logistics and multifamily sectors benefited capital markets volume in 2021.
The office and retail sectors improved as the year went on, although their share of transaction volume remains below pre-pandemic levels.
Fundamentals in the multifamily market remained strong and show no signs of cooling off.
Urban markets are recovering while rent increases in suburban markets persist.
Global investor interest in multifamily assets remained high in the fourth quarter.
This is evidenced by two of the sector's largest ever deals being completed in Germany during the quarter.
Institutional investors remain active in Asia Pacific, particularly in Japan and Australia.
Let's now shift our attention to JLL's performance.
As I mentioned at the beginning, fourth quarter and full year financial results were very strong and broad-based.
Fourth quarter consolidated revenue rose 23% to $5.9 billion, and fee revenue increased 42% to $2.8 billion in local currency.
Fee revenue benefited from strong performance in our leasing and capital markets businesses, which recorded growth of 68% and 62%, respectively.
Adjusted EBITDA of $622 million represented an increase of 50% from the prior year, with adjusted EBITDA margin expanding from 21.3% to 22.4% in local currency.
Adjusted net income totaled $447 million for the quarter, and adjusted diluted earnings per share was $8.66.
Our adjusted EBITDA results in the fourth quarter benefited from $103 million of equity earnings, primarily a result of an increase in the market value of our strategic technology investments.
Technology is a key differentiator for JLL, and our focus continues to be to bring the best technology to our clients and raise the productivity of our brokers and account managers.
For the full year, consolidated revenue rose 15% to $19.4 billion, and fee revenue increased 31% to $8.1 billion in local currency.
Adjusted EBITDA for the year rose 73% to $1.5 billion, reflecting a margin of 18.6%.
Our full-year adjusted EBITDA margin was toward the upper end of our 16% to 19% target range, driven by the strong gains in our higher-margin transactional businesses investment gains in JLLT and LaSalle and disciplined cost management.
We continue to repurchase shares in the fourth quarter, returning over $150 million to shareholders.
This brings our full year return of capital to over $340 million, up significantly from $100 million in 2020 and $43 million in 2019.
In addition, I am pleased to announce that the Board has authorized a new $1.5 billion share repurchase program.
We remain committed to investing in the business to drive future growth while also returning capital to shareholders.
Fourth-quarter results reflect a strong finish to a year that began with considerable uncertainty.
Our investments in our people and global platform over the last several years allowed us to enhance our competitive position, capitalize on accelerating business momentum and deliver full-year results that were well ahead of both our initial expectations and 2019 levels.
Over the course of 2021, we made significant progress on our strategic priorities, investing to meet the evolving needs of our clients while also accelerating our return of capital to shareholders.
The robust business fundamentals, along with our continued efforts to improve our operating and capital efficiency resulted in nearly $800 million of free cash flow in 2021, reflecting a cash conversion ratio of approximately 80%.
Moving to a detailed review of operating performance.
Our fourth-quarter consolidated real estate services fee revenue increased 42%, driven by strength in the Americas and transaction-based revenues globally.
Compared to a strong fourth quarter 2019, real estate services fee revenue grew by 19%.
The real estate services adjusted EBITDA margin of 21.8% compared with 21% a year earlier and 20.1% in the fourth quarter of 2019.
The growth of our transaction-based revenues and $83 million of equity earnings from JLL Technologies more than offset higher commissions and incentive compensation related to differences in business mix, the impact of COVID-related discrete items, the expected reduction of certain 2020 nonpermanent savings, and incremental investments in our people and technology.
Turning to the Americas.
Capital Markets and Leasing led broad-based fee revenue growth.
Fee revenue increased by 56% compared to the fourth quarter of 2020 and with growth across most service lines.
Compared to the fourth quarter of 2019, fee revenue increased by approximately 31%, which is an acceleration from the third quarter increase of 25% relative to 2019.
Within Americas capital markets, unprecedented strength in industrial, multifamily and alternative along with improving activity in the retail, office and hotel sectors and the surge in cross-border capital flows led to record transaction activity that drove 75% growth in fee revenue over the prior year quarter, and a 62% increase compared with fourth quarter 2019.
Fee revenue from U.S. investment advisory sales more than doubled and U.S. debt and equity advisory increased approximately 60% from the prior year quarter.
Our multifamily debt origination and loan servicing businesses maintained strong momentum, highlighted by loan servicing fee revenue growth of approximately 34%.
Our full year 2022 U.S. capital markets pipeline is up 47% compared with this time last year, supporting our optimism for healthy growth opportunity in the year ahead.
Americas leasing fee revenue growth of 74% over the prior year quarter was led by a rebound in the office sector and continued strength in industrial.
Compared with fourth quarter 2019, Americas leasing fee revenue increased 22%, with strong industrial sector growth more than offsetting a not fully recovered office sector.
We saw a significant increase in transaction size versus both a year ago and the comparative 2019 quarter with average deal size up 33% and 25%, respectively.
Deal volume, as measured by the number of transactions has also increased meaningfully versus last year, up 35%, and return to the 2019 level.
From a profitability standpoint, the Americas adjusted EBITDA margin increased to 27.5% from 25% in 2020 and 22.5% in 2019.
Strong growth in transactional revenues and JLLT equity earnings more than offset the expense pressures impacting the consolidated real estate services margin.
Anemia, fee revenue grew 24% over fourth quarter 2020 and 1% versus the comparative 2019 quarter, driven primarily by higher leasing and capital markets volumes as economic activity and investor sentiment improved.
Leasing fee revenue increased 55% versus fourth quarter 2020 and 22% over fourth quarter 2019 with growth across all asset classes, most notably the office and industrial sectors.
For the quarter, EMEA Capital Markets grew 45% versus 2020 and 14% compared with 2019, driven by accelerated recovery in our key markets and a significant increase in the number of large deals.
EMEA's fourth quarter profitability declined versus the prior year due to several factors, including the expected reduction of certain 2020 nonpermanent savings and discrete items, higher incentive compensation due to differences in business mix, and incremental investments in our people and technology platform.
We are encouraged by the growth within EMEA and remain focused on improving the margin profile for the region.
Within Asia Pacific, quarterly fee revenue grew across all service lines, except property and facility management, which was flat compared to the prior year.
Led by the office sector, Asia-Pacific leasing fee revenue was particularly strong as growth accelerated to 49% from 33% in the third quarter and was up 20% versus fourth quarter 2019.
Higher commissions due to differences in business mix, the expected reduction of certain 2020 nonpermanent cost savings and incremental investments in our people and technology platform drove a decline in Asia Pacific's profitability, partially offset by the growth in our higher-margin transaction-based revenue.
Built primarily by new client wins and contract extensions in the Americas and EMEA, our global work dynamics fee revenue grew 7% versus the prior year, with growth of its annuity-like business more than offsetting the absence of COVID-related project work in 2020.
Work Dynamics fee revenue was up 3% compared with 2019.
The global real estate services outsourcing market opportunity remains compelling, and we believe JLL is well-positioned for continued growth.
Valuation increases and continued robust capital raising drove an 11% increase in assets under management and translated to advisory fee revenue growth.
In addition, strong investment performance across the platform, led to $56 million of incentive fees in the quarter.
Considering LaSalle's approximate $12 billion of dry powder at year-end, and $8.2 billion of capital raised over the past year, including $1.8 billion in the fourth quarter, we expect a continuation of the recent LaSalle advisory fee growth trends in 2022.
Equity earnings on LaSalle's approximate $350 million co-investment portfolio totaled $18 million in the quarter, about half of which was cash.
I'll expand briefly on our JLL Technologies investment as I discuss the strategic rationale of our early stage PropTech investment on prior earnings calls.
At year-end, the fair value of our JLLT investment totaled approximately $350 million, up from nearly $100 million a year earlier, driven in part by approximately $140 million of valuation increases.
Beyond the investment returns, which were substantially a function of subsequent financing rounds at higher valuation, the investments in former strategic direction allow us to evaluate and test technology solutions for our clients.
and generate incremental revenue.
Shifting now to an update on our balance sheet and capital allocation.
Along with the growth in our business and resiliency of our cash flow, our balance sheet remains solid, as indicated by our net leverage at 0.2 times and liquidity of $3.2 billion at year-end.
This provides a strong foundation to execute on our strategic priorities, which are: first, to invest in our business and capabilities to better serve our clients and drive long-term profitable growth; and second, to return capital to shareholders.
As Christian mentioned, we did both in 2021.
We invested in our people and global platform, completed acquisitions totaling approximately $450 million and made strategic investments of over $100 million, net of distributions and our JLLT initiative and LaSalle co-investments.
In addition, we repurchased $343 million of shares representing about 43% of free cash flow generated in 2021.
Investment opportunities remain dynamic and we intend to maintain flexibility to capitalize on organic investments and select M&A opportunities alongside continued share repurchases to drive long-term shareholder value.
Looking ahead, our underlying business fundamentals and investments in growth initiatives, along with positive industry trends and the global economic outlook, provide an attractive backdrop for continued business momentum and fee revenue growth in 2022.
We continue to expect to operate within our 16% to 19% adjusted EBITDA margin target for the full year 2022, effectively managing a return of certain expenses and inflation while also investing in growth initiatives.
Like 2021, business mix, the pace of economic growth and evolution of the pandemic and the amount of equity earnings, among other factors, will influence where we will land within our target margin range.
We expect our 2022 full-year effective tax rate to be similar to 2021 at approximately 22%, based on our assumptions that meaningful changes to tax code will not be implemented until later this year.
I also note that we are closely monitoring the escalation and geopolitical events in Ukraine, but it is too early to comment on a potential business implications.
Our focus is the safety and well-being of our people, clients and suppliers.
Before closing, I'll briefly elaborate on the segment recording change Christian announced in his remarks.
Beginning with the first quarter 2022, we will transition our reporting to five business line segments, comprising markets advisory, capital markets, work dynamics, JLL Technologies and LaSalle.
Additional service line revenue detail will be provided within each segment.
Profitability will continue to be reported at the segment level.
The new financial reporting structure better aligns with how we've evolved our management structure over the past several years and improved transparency, making it easier for investors to understand our performance and our key drivers.
In closing, I'd like to express deep gratitude to my JLL colleagues for their astounding collective efforts in 2021, embracing our One JLL philosophy to deliver exceptional service to our clients and generating a substantial long-term value for all stakeholders.
Christian, back to you.
Improving global economic trends, increasing allocations of capital to the CRE industry and positive investor sentiment provide a favorable market backdrop as we enter 2022.
Geopolitical turbulences continue to be the main limiting factor to an ongoing growth of our target markets.
The outlook for 2022 is less tied to the pandemic than the past two years.
Labor markets are tight and attracting and retaining top talent will be a key focus point for organizations in the coming years.
Inflation is likely to remain high in 2022.
Real interest rates will stay deeply negative despite all the expected rises of interest rates by relevant central banks.
And that environment, real estate continues to be a standout asset class.
The tight labor markets, combined with the significant inflation have resulted in rising compensation costs.
We take every effort to make use of our global platform and our superior tech infrastructure to hire the talent wherever we can find it streamline our processes and support the productivity of our producers to continue to raise the revenue per head.
In closing, our fully integrated suite of services and industry-leading technology platform makes JLL a preferred partner for clients around the globe.
We remain well-situated to capitalize on the continued macroeconomic recovery and favorable underlying trends altering the commercial real estate industry.
I continue to be very optimistic in JLL's ability to achieve sustained growth and create meaningful shareholder value not only in 2022, but also for the years to come.
Operator, please explain the Q & A process.
 Assistant:

Chosen response:
q4 adjusted earnings per share $8.66.
consolidated fourth-quarter revenue and fee revenue increased 23% and 42%, respectively.
qtrly revenue $5,945.7 million versus $ 4,845.4 million.
qtrly fee revenue $2,772.3 million versus $1,962.6 million.


Prompt:
Human: With me on the call today is Jeff Powell, our President and Chief Executive Officer.
Before we begin, let me read our safe harbor statement.
These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Following the remarks, I will give an overview of our financial results for the quarter and the year, and we will then have a Q&A session.
I'll begin by discussing our operational highlights and our fourth quarter financial results.
The fourth quarter was a solid finish to a challenging year.
Despite the uncertainties brought about by the pandemic, we had a solid execution during the quarter and generated strong cash flow while safeguarding our employees.
Strong capital project activity across all our operating segments and robust demand for our Parts & Consumables led to record bookings and cash flow in the fourth quarter.
I'll provide more details about this activity when I discuss the results of our operating segments.
Our balance sheet remains healthy and our liquidity position has strengthened throughout the year.
Robust cash flows have always been a strength of Kadant, and we expect this will continue as economies recover from the effects of the pandemic.
Turning now to our Q4 performance.
We achieved a notable turnaround from the prior quarter's weak business levels.
Our Q4 bookings were a record $197 million, up 23% compared to the prior year, with our Industrial Processing segment driving this growth.
Strong demand led to a 9% sequential increase in Parts & Consumables revenue, which made up 67% of total Q4 revenue.
Total revenue was down 8% compared to the fourth quarter of 2019.
We were particularly pleased that our adjusted EBITDA margin increased to 19.1%, and our free cash flow was up 7% to a record $38 million in the fourth quarter.
Overall, the quarter was better-than-expected and I'm pleased with how our employees delivered these solid operating results.
While 2019 was a record year on many fronts, and we began 2020 with positive momentum, no one could have anticipated the full impact that the pandemic would have on the world and the global economies.
Full year revenue declined 10% to $635 million, while our bottom line performance benefited from a favorable product mix along with cost containment measures and government systems programs.
Cash flow from operations strengthened throughout the year, and free cash flow was near a record $85 million for the full year 2020.
Our diluted earnings per share was $4.77 and on an adjusted basis, declined 7% to $5 compared to our record of $5.36 per share in 2019.
Our workforce around the globe deserves a tremendous amount of credit for these results as they adapted to a new way of work and performed exceptionally well under very challenging circumstances.
I'm extremely proud of our talent and dedicated employees for the work they've done and continue to do to serve our customers.
Next, I'd like to review the performance of our three operating segments.
Our Flow Control segment benefited from a rebound in capital project activity in the fourth quarter, which led to bookings increasing nearly 9% compared to the prior year period.
Our quarterly bookings performance moved in the right direction as the year progressed and positions us well for a solid start to 2021.
Our Parts & Consumables revenue was up 5% sequentially and made up 68% of total Q4 revenue.
As many of you know, our aftermarket parts business has a more favorable margin profile compared to capital business, and the product mix combined with improved operating leverage led to a 13% increase in adjusted EBITDA compared to Q4 of 2019 and represented 26% of revenue.
Looking ahead, we expect the first quarter of 2021 to show stability in terms of both capital project bookings and demand for Parts & Consumables.
We believe market conditions are improving and will continue to strengthen as the COVID-19 vaccine becomes more widely available and businesses are permitted to fully reopen.
Turning now to our Industrial Processing segment.
We continue to experience strong demand for our wood processing equipment and also for our stock prep equipment, with capital bookings in this segment more than doubling compared to the prior year.
This demand was largely driven by two factors.
One was a robust U.S. housing market, which saw single-family homebuilding, the largest share of the housing market, increased 12% in December.
The other was a significant increase in our stock prep capital project activity in China and North America, which more than doubled compared to the prior year.
Revenue in this segment declined 13% to $69 million year-over-year, but increased 11% sequentially.
Parts & Consumables revenue was up 12% compared to the same period last year, and made up 70% of total revenue in the fourth quarter.
A favorable product mix and good execution led to a 250-basis point improvement in our adjusted EBITDA margin.
While government systems programs were significantly reduced in the fourth quarter, we did have some remaining benefit that helped allow us to retain our talented workforce.
In our Material Handling segment, we continue to see relatively stable yet moderate order activity.
Revenue was down 7% to $39 million, and Parts & Consumables revenue in the fourth quarter made up 58% of total revenue.
Capital bookings in our Material Handling segment increased 23% compared to the same period last year and were up 18% sequentially.
We are encouraged to see our customers showing increased confidence in the economic outlook by awarding us these larger capital orders.
As in all other segments, we are seeing increasing market activity.
Looking ahead to 2021, we believe this segment will continue to strengthen throughout the year.
As we look ahead to the first quarter of 2021 and the full year, we are seeing signs of increased project activity and expect industrial production to continue its modest rebound.
Our strong cash flows combined with a strengthening balance sheet have us well positioned to capitalize on opportunities that may emerge with the improving global economy.
While we are hopeful the worst of the pandemic is behind us, there is still a great amount of uncertainty, particularly in Europe, regarding how economies will respond to pandemic given the unevenness in the vaccine distribution.
This uncertainty limits our ability to forecast the timing of orders and as a result, we will not be providing guidance at this time.
I would like to pass the call over to Mike for a review of our Q4 performance.
I'll start with some key financial metrics from our fourth quarter.
Consolidated gross margins were 44.1% in the fourth quarter of 2020 compared to 40.9% in the fourth quarter of 2019, up 320 basis points.
The increase was primarily due to higher gross margins on Parts & Consumables in the quarter and a higher percentage of Parts & Consumables.
Our overall percentage of Parts & Consumables revenue increased to 67% of total revenue in the fourth quarter of 2020 compared to 60% in the fourth quarter of 2019.
Also contributing to the increase in gross margins was approximately 50 basis points due to the receipt of government assistance benefits related to the pandemic.
SG&A expenses were $47.4 million in the fourth quarter of 2020, down $0.2 million from the fourth quarter of 2019.
SG&A expense as a percentage of revenue was 28.1% in the fourth quarter of 2020 compared to 26.1% in the fourth quarter of 2019.
There was an unfavorable foreign currency translation effect, which increased SG&A expenses by $1.1 million, and we received government assistance benefits of $0.4 million in the fourth quarter of 2020.
Excluding these items, along with backlog amortization and the SG&A from our acquisition, SG&A expenses for the fourth quarter of 2020 were down $1.3 million or 3% compared to the fourth quarter of 2019, primarily due to reduced travel-related expenses.
Our GAAP diluted earnings per share was $1.40 in the fourth quarter compared to $0.76 in the fourth quarter of 2019.
Our GAAP diluted earnings per share in the fourth quarter includes $0.12 from an intangible asset impairment charge, $0.01 of restructuring costs and $0.01 of acquired backlog amortization.
In addition, our fourth quarter results included pre-tax income of $1.2 million or $0.07 net of tax attributable to government employee retention assistance programs.
Our tax rate in the fourth quarter was 20.4% and included approximately $0.12 of tax benefits related to the following items.
A reversal of tax reserves associated with uncertain tax positions, the exercise of previously awarded employee stock options and return to provision adjustments.
Excluding these items, our tax rate would have been 27%.
For the full year 2020, gross margins increased 200 basis points to 43.7% compared to 41.7% in 2019.
Excluding the government assistance benefits, which contributed approximately 60 basis points to the 2020 gross margins and the amortization of profit and inventory in 2019, gross margins were up 90 basis points, primarily due to higher gross profit margins on Parts & Consumables and a higher overall percentage of Parts & Consumables.
Our percentage of Parts & Consumables revenue increased to 66% in 2020 compared to 63% in 2019.
SG&A expenses decreased $10.6 million or 6% to $181.9 million in 2020 compared to $192.5 million in 2019.
As a percentage of revenue, SG&A expenses were 28.6% in 2020 compared to 27.3% in 2019.
We had $0.6 million of SG&A from our acquisitions in 2020 and incurred acquisition-related costs of $1 million and $2.2 million in 2020 and 2019, respectively.
In addition, there was a favorable foreign currency translation effect of $0.4 million and we received government assistance benefits of $2.2 million in 2020.
Excluding SG&A from our acquisition, acquisition-related costs, the impact of foreign currency translation and government assistance benefits, SG&A expenses were down $7.4 million or 4% compared to 2019, primarily due to a decrease in travel-related costs.
Our GAAP diluted earnings per share in 2020 was $4.77, up 5% compared to $4.54 in 2019.
Our GAAP diluted earnings per share in 2020 includes $0.12 from an intangible asset impairment charge, $0.07 of restructuring costs, $0.04 of acquired backlog amortization, $0.03 of acquisition costs and $0.03 from a discrete tax benefit.
In addition, our 2020 results included pre-tax income of $6.1 million or $0.39 net of tax attributable to government employee retention assistance programs.
In the fourth quarter of 2020, adjusted EBITDA was $32.1 million or 19.1% of revenue compared to $32.2 million or 17.6% of revenue in the fourth quarter of 2019.
On a sequential basis, adjusted EBITDA increased 7% due to increased profitability in our Material Handling segment.
For the full year, adjusted EBITDA was $115.9 million or 18.3% of revenue compared to the record set in 2019 of $127.1 million or 18% of revenue.
In the fourth quarter of 2020, operating cash flow was a record $40.3 million and included a positive impact of $12.8 million from working capital compared to operating cash flows of $39.2 million in the fourth quarter of 2019, which included a positive impact from working capital of $17.9 million.
For the full year, operating cash flow was $92.9 million, down 5% compared to the record of $97.4 million in 2019.
We had several notable nonoperating uses of cash in the fourth quarter of 2020.
We repaid $30.1 million of debt, paid a $2.8 million dividend on our common stock and paid $2.2 million for capital expenditures.
For the full year, we repaid $72 million of our debt.
Free cash flow was a record $38.1 million in the fourth quarter of 2020, increasing 69% sequentially and 7% compared to the fourth quarter of 2019.
For the full year, free cash flow was $85.3 million, down $2.2 million or 2% compared to the record of $87.5 million in 2019.
Let me turn to our earnings per share results for the quarter.
In the fourth quarter of 2020, GAAP diluted earnings per share was $1.40 and adjusted diluted earnings per share was $1.54.
The $0.14 difference relates to an intangible asset impairment charge of $0.12, restructuring costs of $0.01 and amortization of acquired backlog of $0.01.
The $0.12 intangible asset impairment charge is associated with our timber harvesting product line, which is part of our Wood Processing Systems business.
This is an ancillary product line that was part of our acquisition of NII FPG's Forest Products business in 2017 and represents less than 1.5% of our consolidated revenues in 2020.
We experienced a decrease in demand for these products in 2019, which continued into 2020 due to several factors including a general softening in demand for equipment used in steep slope logging due to reduced availability of timber, higher stumpage fees and the resulting closure of some sawmills in Western Canada.
We evaluated the recoverability of the intangible asset related to this business, which resulted in a pre-tax impairment charge of $1.9 million in the fourth quarter of 2020 and $2.3 million in the fourth quarter of 2019.
After these impairment charges, the remaining intangible asset for this product line is $0.5 million.
In the fourth quarter of 2019, GAAP diluted earnings per share was $0.76 and adjusted diluted earnings per share was $1.32.
The $0.56 difference relates to a $0.55 charge for the settlement of a pension plan, an intangible asset impairment charge of $0.16, and restructuring costs of $0.01, which were partially offset by a $0.16 tax benefit associated with the exercise of previously awarded employee stock options.
The increase of $0.22 in adjusted diluted earnings per share in the fourth quarter of 2020 compared to the fourth quarter of 2019 consists of the following: $0.21 due to higher gross margins, $0.15 from a lower recurring tax rate, $0.07 due to government assistance programs, $0.06 due to lower interest expense, $0.02 due to lower operating expenses and $0.01 from the operating results of our acquisition.
These increases were partially offset by $0.29 due to lower revenue and $0.01 due to higher weighted average shares outstanding.
Collectively, included in all the categories I just mentioned was a favorable foreign currency translation effect of $0.03 in the fourth quarter of 2020, compared to last year's fourth quarter due to the weakening of the U.S. dollar.
Now turning to our earnings per share results for the full year on slide 17.
We reported GAAP diluted earnings per share of $4.77 in 2020, and our adjusted diluted earnings per share was $5.
The $0.23 difference relates to an intangible asset impairment charge of $0.12, restructuring costs of $0.07, amortization of acquired backlog of $0.04, acquisition costs of $0.03 and a discrete tax benefit of $0.03.
We reported GAAP diluted earnings per share of $4.54 in 2019 and our adjusted diluted earnings per share was $5.36.
The adjusted diluted earnings per share excludes $0.55 from a pension settlement charge, $0.32 for the amortization of acquired profit and inventory and backlog, an intangible asset impairment charge of $0.16, acquisition costs of $0.06, $0.01 of restructuring costs and $0.29 of tax benefits from the exercise of previously awarded employee stock options.
Decrease of $0.36 in adjusted diluted earnings per share from 2019 to 2020 consists of the following: $1.87 from lower revenue and $0.05 from higher weighted average shares outstanding.
These decreases were partially offset by $0.45 from lower operating expenses, $0.39 from government assistance programs, $0.35 due to lower interest expense, $0.33 from higher gross margins, $0.03 from the operating results of our acquisition and $0.01 from a lower recurring tax rate.
Collectively, included in all the categories I just mentioned, was an unfavorable foreign currency translation effect of $0.04 in 2020 compared to 2019.
Now let's turn to our liquidity metrics, starting on slide 18.
Cash conversion days measure, calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable, was 125 at the end of the fourth quarter of 2020, down from 140 at the end of the third quarter of 2020, but up from 104 days in the fourth quarter of 2019.
The increase in cash conversion days from the prior year was driven by a higher number of days in inventory and lower number of days in accounts payable due to a number of factors, including delays in capital project deliveries, weakness in capital project activity and delays in maintenance spending by our customers.
As I've noted on past calls this year, our subsidiaries managed their inventory supply to ensure that critical components are available for our customers as needed and the timing of these purchases has been difficult to predict in the current environment.
Working capital as a percentage of revenue was 14.2% in the fourth quarter of 2020 compared to 15.6% in the third quarter of 2020 and 12.2% in the fourth quarter of 2019.
Net debt, that is debt less cash, at the end of 2020 was $166.8 million compared to $232.8 million at the end of 2019.
We were able to lower our net debt by $66 million due to the excellent free cash flow generated in 2020.
Our interest expense decreased 42% or $5.4 million to $7.4 million in 2020 compared to $12.8 million in 2019 due to our ability to successfully leverage cash generated around the world to pay down debt and lower interest rates.
Our leverage ratio calculated defined in our credit agreement was 1.61 at the end of the fourth quarter of 2020, down from 2.03 in the fourth quarter of 2019, as we continue to make excellent progress in paying down debt.
Regarding guidance, our current environment continues to make forecasting difficult.
Given the current uncertainty, we'll not be providing formal guidance at this time for 2021.
We will reevaluate providing guidance as we progress through the year.
While we are not providing guidance, I would like to provide a few directional comments on our outlook for 2020.
We had a significant increase in demand for our Parts & Consumables and especially our capital products in the fourth quarter, and we anticipate an overall increase in bookings in 2021.
We currently anticipate an overall increase in revenue of 9% to 12%, with stronger performance in the second half of the year.
We anticipate the first quarter will be our weakest quarter and the fourth quarter will be our strongest.
I would caution here that this is predicated on the COVID-19 vaccination rollout improving business conditions in the second half of 2021.
We also anticipate the mix will be weighted more toward capital in 2020.
Excluding the government assistance programs, our gross margins came in at 43.1% in 2020.
For 2021, despite the heavier mix toward capital, we anticipate gross margins will be close to this level.
As a percentage of revenue, we anticipate SG&A will be approximately 27% to 28%, while the percentage of R&D expense will be the same as 2020.
Overall, we expect minimal benefit from government assistance programs in 2021 compared to the $0.39 we received in 2020.
We expect our recurring tax rate will be approximately 27% to 28% in 2021.
Our recurring tax rate in the first quarter of 2021 may be lower than the remaining quarters as we anticipate receiving a tax benefit from the vesting of equity awards.
We anticipate capex spending in 2021 will be approximately 2% of revenue.
In addition, we expect depreciation and amortization will be approximately $30 million to $31 million in 2021.
We hope these directional comments will help provide insight into how we see our current business environment.
 Assistant:

Chosen response:
q4 adjusted earnings per share $1.54.
q4 gaap earnings per share $1.40.
qtrly revenue decreased 8% to $168 million.
will not be providing guidance at this time.


Prompt:
Human: 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.
Let me also mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures.
Today on the call, we have Jim Hallett, Executive Chairman; Peter Kelly, CEO; and Eric Loughmiller, CFO.
Consistent with our announcement earlier this year, Peter Kelly has transitioned into the role of CEO of KAR Global beginning April 1.
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.
I appreciate that, Jim.
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 industrywide 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 two segments: ADESA and AFC.
As I see at the ADESA segment has two 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 three 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 number two in terms of our overall market share, we are number one 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 number two 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, etc.
Finally, the data from our entire digital marketplace with over three 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 stand-alone 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, etc.
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 five 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, two 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.
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.
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 two 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.
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.
 Assistant:

Chosen response:
q1 revenue fell 10 percent to $581.6 million.
previously stated 2021 guidance remains unchanged.


Prompt:
Human: Today we'll discuss the financial performance of KAR Global for the quarter ended June 30 2021.
And after concluding our commentary we'll take questions from participants.
Let me also mention that throughout this conference call we will be referencing both GAAP and non-GAAP financial measures.
I will also go into some detailed vehicle supply dynamics in our industry and what we can expect to see over the rest of this year and into 2022.
And I will also provide updates on the continued growth of our dealer-to-dealer platforms BacklotCars and TradeRev the solid performance of our finance business AFC and our continued diligence and management of a KAR's overall cost structure.
So I'll start with the second quarter.
I was pleased with our second quarter performance particularly given the supply headwinds in our industry.
Despite operating in an environment of very constrained vehicle supply especially from commercial sellers we achieved the following results.
For KAR overall we generated $585 million in revenue an increase of 40% from Q2 of last year.
We generated total gross profit of $252 million which represents 51.7% of revenue excluding purchased vehicles.
We generated $116.5 million of adjusted EBITDA which was a 46% increase compared to Q2 of last year.
We had another strong quarter of cash generation.
Cash flow from operations for the quarter was $131 million.
Within the ADESA segment we facilitated the sale of 711000 vehicles representing for $11 billion in gross auction proceeds.
53% of our Q2 sales were from off-premise locations.
That was similar to our experience during Q1.
We sold 119000 vehicles on the TradeRev and BacklotCars platforms on a combined basis.
This represents our strongest performance to date in our digital dealer-to-dealer marketplace.
It represents a growth of 65% compared to Q2 of last year and sequential growth of 19% versus Q1.
I continue to be encouraged by our performance as part of the business.
We generated $277 in gross profit per vehicle sold in the ADESA segment.
That represented an increase from the $264 in Q1.
SG&A for KAR overall was $140 million for the quarter.
SG&A for the ADESA segment was $131 million which was down $9 million from Q1 resulting in SG&A of $185 per vehicle sold.
So I'd now like to speak about the supply dynamics of used vehicles within our marketplaces the headwinds that we faced in Q2 and why I believe the medium and longer-term outlook is much more encouraging.
In our last earnings call I mentioned that KAR was operating in an environment of constrained vehicle supply across the wholesale used vehicle market particularly in regard to volumes being offered by commercial sellers.
I said that the root causes varied but they all originated with the COVID pandemic.
Those supply constraints worsened during Q2 and they represented a significant headwind to our performance during the quarter.
That's why I'm encouraged by our performance in spite of those headwinds.
I also believe there's increasing evidence that we're now at the bottom of the cycle and that we should expect to see some recovery in those commercial volumes.
And when that happens it should be a very positive thing for KAR.
To help explain all of this I'd like to look back to Q2 of 2019 and to what a more normal supply dynamic looks like for our company and our industry pre-COVID.
So in Q2 of 2019 KAR facilitated a sale of 994000 vehicles.
Over 70% of those approximately 700000 vehicles were sold by commercial sellers.
The remainder which was approximately 275000 vehicles were sold by dealer sellers.
So from that statistic alone we can see that historically commercial sellers have represented the majority of KAR's used vehicle supply over 70%.
This is more so than our industry overall which is more like 50-50.
One challenge that KAR has faced over the past few quarters is that those commercial seller volumes have been under much greater pressure than the dealer volumes for reasons I will discuss here in a moment.
I believe that pressure is cyclical in nature and I believe that we are now at the bottom of that cycle.
During Q2 of this year the volume sold on behalf of commercial sellers was approximately 420000 vehicles a decline of over 40% versus Q2 of 2019.
So that's a significant and painful decline.
However a key question is how does that compare to the market overall?
A good basis for comparison is to look at the total volume of vehicles sold by commercial sellers at all U.S. auctions that is at ADESA and its competitors.
This data is published by Auctionet.
In Q2 of 2021 the volume of vehicles sold by commercial sellers at all U.S. auctions was down by 48% versus Q2 of 2019 in our industry according to Auctionet.
Based on that statistic KAR's decline in total commercial volume across all channels was less than the industrywide decline in commercial vehicles at U.S. auctions.
So that tells me that we did not lose share with these commercial sellers.
Our performance in Q2 should be judged against what I would consider to be historically low industry volumes of vehicle supply from commercial sellers.
And viewed through that lens I am pleased with the performance.
I also mentioned that there is evidence that we're currently at the bottom of the cycle.
The dynamics relating to off-lease vehicles repossessed vehicles and rental vehicles all point to an improving commercial supply picture over time.
I believe that when this happens it will be very positive for KAR given our digital shift our streamlined operations and our resulting lower cost structure.
And I'd like to go through that in a little bit more detail.
I'm going to start with off-lease vehicles.
KAR sells significant volumes of off-lease vehicles through OPENLANE and also at ADESA.
The volume of off-lease vehicles flowing through both of these marketplaces has been severely impacted by the disruption to new car production brought on by the shortage in semiconductors.
In the face of this supply shortage of new vehicles market values for used off-lease vehicles have increased by as much as 40% versus one year ago.
This means that consumers now have considerably more equity in their off-lease vehicles than at any point in history.
Based on our internal analysis the average equity in an off-lease vehicle increased to an all-time high of close to $8000 per vehicle in Q2 and that was up from an average of less than zero two years ago.
This makes lessees much less likely to return the vehicle from the lease sense.
And if the lessee does return the vehicle it makes it much more likely that the grounding dealer will purchase the vehicle since many grounding dealers have a contractual option to purchase the vehicle at residual value.
We saw both of these trends in Q2.
The positive equity situation for lessees resulted in a reduction of over 50% in off-lease vehicles being returned versus what we would normally expect.
For those vehicles that were returned we saw upstream conversion reach an all-time high of approximately 80% in Q2.
So while we enjoy nearly 80% market share in the upstream off-lease segment in North America a record number of vehicles were kept up by consumers where we received no fees or by the grounding dealers where we generate lower revenue.
The results of both of these changes was that considerably fewer vehicles flow deeper into the marketing process where they would have generated stronger economics.
So as we look ahead we believe that the semiconductor production issues are now being addressed and we expect production of new vehicles to start to improve starting in the second half of this year.
While we believe it will take time ultimately this increased production will drive a normalization in supply and demand and a moderation in used vehicle values.
This should in turn result in increased volumes of off-lease vehicles being returned and processed through our private label platforms and flowing into our higher-margin channels like adesa.com and our on-premise sales.
But clearly this will take time.
In the meantime we also know that lease originations continue to be strong meaning that off-lease vehicles will continue to be a strong source of supply for our industry well into the future.
The second category of vehicles is repossessed vehicles.
We sell a significant of repossessed vehicles at ADESA given the large number of banks and lenders in our commercial seller portfolio.
In just about every prior economic dislocation event our industry has experienced an increase in repossession volume.
However this did not happen during the COVID pandemic and I believe that the unprecedented level of government stimulus served to avert it.
Government stimulus coupled with other consumer protections has meant that consumers could continue to make their monthly payments and avoid repossession.
In Q2 based on our data repossession volume across our industry continued to be about 35% below what we would consider to be normal levels.
Looking ahead after the current wave of government stimulus ends I think it's reasonable to expect that repossession volumes will trend back toward normal levels over time and that our volumes in that segment should correspondingly improve.
And finally there are rental vehicles.
We have less exposure to this category but we still have a meaningful customer base in the segment and this segment offers us an opportunity for volume and profit when the rental market strengthens.
Rental supply within our wholesale marketplaces was very close to zero during Q2.
In fact a number of rental companies were actively buying used vehicles within our marketplaces because they were unable to source new vehicles from motor manufacturers owing to the semiconductor shortage.
The post-COVID increase in travel has caused rental car companies to start rebuilding their fleets.
I take this as a positive signal for our industry and our company.
since it points to return toward normal at some point in the future.
So as we look to all of these three segments off-lease repo and rental I believe that the fundamentals lead us to conclude that compared to our Q2 experience we should expect to see considerably increased volumes over time.
The key question is when will this happen and to what extent?
My best assessment is that it will take time but there are some key factors that we're watching that may be predicted.
The most significant factor in my mind is new vehicle production.
We're also monitoring used vehicle values and seeing the unprecedented high prices starting to moderate and even decline a little.
Lower used vehicle prices will help drive more off-lease supply into our marketplaces.
Finally we are monitoring for any further government stimulus and its impact on the repossession market.
So now I'd like to provide an update on our progress in the dealer vehicle category.
We sold 292000 dealer vehicles in Q2 of this year.
That was an increase of 6% versus the 276000 dealer-owned vehicles that we sold in Q2 of 2019.
Even if we were to include backlog cars in the 2019 number our total dealer volumes have increased versus Q2 of that year.
So our total dealer volumes have now recovered back to what we would consider normal and I'm pleased that we're showing modest growth.
If we look at the digital dealer category only Q2 represented our strongest performance yet with 119000 vehicles sold representing year-over-year growth of 65%.
And by the way that includes BacklotCars volumes in the prior year number.
I was pleased with this performance.
Q2 represented our first full quarter in the U.S. where we had migrated to the BacklotCars platform.
We saw record numbers of participating sellers and buyers and increased volumes of vehicles posted for sale.
Although these higher volumes of vehicles posted were offset by a slightly weakening conversion as the quarter progressed due to the high used vehicle value trends that I talked about earlier.
In Canada our TradeRev business performed very well in Q2.
It delivered strong volumes and strong profitability.
The fact that TradeRev has delivered profitability in Canada which is a more mature digital dealer-to-dealer market makes me encouraged for our prospects in the U.S. market and at an even greater scale.
Our own analysis of the trends in both the U.S. and Canadian markets also demonstrates that our offerings are helping us address a segment of vehicles that was not coming to our auctions in the past.
We are attracting new sellers and new buyers on a daily basis and this reinforces our belief that the digital solution expands the total addressable market available to our business.
I'd like to spend a few moments talking about our cost structure.
Over the last several calls we have discussed our strategic focus on reducing our cost structure to reflect our transition to a digital marketplace company.
The lower volumes in Q2 coupled with the high percentage of offsite sales continue to reinforce the need for KAR to be very focused on its operating model and its cost structure.
So delivering that level of performance in that environment reflects our focus on operations and costs.
I believe that this focus is reflected in our strong gross profit performance in the quarter both as a percentage of net revenue and also in terms of the gross profit per vehicle sold.
Our cost focus has also been reflected in the close management of our SG&A.
This management of costs has enabled the business to deliver a stronger operating performance off of lower volumes.
Over the course of the quarter we've also identified further savings opportunities principally relating to SG&A.
These have now been acted on or are in the process of being addressed.
I also believe that as we look to the future there will be opportunities to further refine our processes increasing our efficiency improving the customer experience and reducing our costs going forward and this will continue to be a focus.
I want to stress however that these reductions have not come and will not come at the cost of strategic investments or of our customer commitments.
We continue to invest in the technology the people and infrastructure necessary to extend our lead in the digital transformation and position our company for long-term growth.
Finally I'd like to provide some updates relating to our finance business AFC.
I've been pleased with AFC's performance in the present quarter but also over the past 18 months since the onset of the pandemic.
AFC continues to have healthy margins with gross profit for the quarter right at 80% and with SG&A of under 13% of revenue.
In terms of its key metrics AFC had 356000 loan transactions in the quarter.
This was in line with the levels that we had expected.
Revenue per loan transaction was strong at $193 for the quarter.
Key drivers of this were higher vehicle values and lower risk levels.
And finally speaking of risk we continue to experience lower-than-expected risks driven by current market conditions combined with strong operating processes at AFC.
So to summarize my key messages for today I am pleased with our performance for the quarter.
Specifically I am pleased that we were able to deliver this level of performance despite historically low levels of commercial seller vehicles which has always been our core business segment.
I believe we are now likely at the bottom of the curve in terms of commercial vehicle supply.
I believe that the outlook for off-lease repossessed and rental vehicles will be one of increasing volume over time ultimately returning toward historical levels.
This recovery will take time but it's clear to me that we should be a strong beneficiary of this when it happens.
And I think that we're now starting to see the very first signs that that recovery is nearing.
When I look at dealer consignment we sold more dealer consigned vehicles in the same quarter pre-COVID and we delivered our best quarter yet in terms of volumes in our digital channels.
Our TradeRev business had a strong profitable quarter in Canada.
And our data suggests that our digital model is expanding our addressable market across North America.
I also believe that our Q2 results and strong unit economics demonstrate that KAR has the ability to be more profitable at lower volumes than was the case historically.
What is important about this is that it also means that as we see the cyclical return of these commercial seller volumes we have the opportunity to be more profitable in the future than we have been in the past.
Finally notwithstanding the growth levers that exist for us we continue to be very focused on costs finding opportunities in Q2 to further improve our operating model.
We intend to maintain that focus and discipline going forward also.
With that I will hand over to Eric for a more detailed review of the financial results for the quarter.
Let me start by highlighting a few items that stand out this quarter.
Adjusted EBITDA of $116.5 million represents approximately 20% of operating revenue.
Given the volume and related revenue headwinds this was a solid performance for the quarter.
Gross profit for the quarter was 51.7% of revenue net of purchased vehicles.
The primary drivers of this strong performance gross profit per unit at ADESA $277 up from $224 in the prior year and $264 in the first quarter.
AFC revenue per loan transaction was $193 up from $115 in the prior year and $177 in the first quarter and this more than offset a decline in the number of loan transactions compared to the prior year and the first quarter.
Peter mentioned the sequential decline in SG&A.
However SG&A was up from the prior year as we had a substantial number of our employees on furlough for all or part of the second quarter of 2020 and many employees had temporary reductions in compensation last year as well.
Operating adjusted net income per share of $0.15 was negatively impacted by a reduction in net unrealized gains on publicly traded securities and an increase in our effective tax rate to 44% primarily driven by nondeductible expenses related to the increased contingent consideration recorded for the CarsOnTheWeb acquisition.
And last the working capital generated at KAR continues to be a strength of our operating model.
We have generated $296 million of cash from operating activities in the first six months of 2021 of which $131 million was generated in the second quarter.
The free cash flow conversion of our business is worth pointing out.
As our markets return to normal in the near future I am confident we have sufficient capital available to support our business and its growth for the foreseeable future.
Now let me give some color on the highlights of our performance.
First our total volumes sold at ADESA was up 10% over the prior year.
Given the industry headwinds particularly around the commercial vehicles as Peter mentioned we are pleased with 10% year-over-year growth.
I am not providing a same-store growth rate because we have integrated all of our U.S. digital dealer-to-dealer business on the BacklotCars platform.
If I include the BacklotCars volume for the second quarter of 2020 in our denominator our growth in volume is 4%.
I think most impressive in our performance is the 65% growth rate in digital dealer-to-dealer for the U.S. and Canada.
I have included the BacklotCars volume in both years so this is an organic growth rate for the business.
We benefited from strong auction fees in the ADESA segment.
Auction fees per vehicle sold of $333 was up 21.5% from the prior year.
We benefited from strong used car pricing in our marketplaces.
Average selling price for all vehicles in the second quarter was $16400 compared to $14800 one year ago.
As I dug into the details of our auction fees I found that increased average selling prices was not the biggest impact on average auction fees per vehicle sold.
Average auction fees on off-premise transactions increased from $119 in 2020 to $153 for 2021.
This increase was accomplished even though average selling prices for total off-premise transactions declined slightly as we grew the digital dealer-to-dealer channel 65% while the off-premise commercial volumes declined 15% in the second quarter.
The average auction fees for the digital dealer-to-dealer marketplace our fastest-growing marketplace was $268 per vehicle sold an increase of only $1 from the prior year.
I point this out as some may believe our increased auction fees is completely driven by record high used car values.
While increased used car values is a factor it is not the most significant contributor as some of our digital marketplaces do not have auction fee structures that are highly correlated to used car values.
Our services revenue has also rebounded even though it is not near fully recovered due to the limited supply of commercial vehicles.
The mix of revenues is contributing to our improved gross profit.
Our services revenue mix is less concentrated on the low-margin transportation revenue and more concentrated on value-added ancillary service.
We have all seen the strong used car performance of public retailers.
In some ways this is confusing when you look at the wholesale markets and we discuss a lack of supply.
However this situation is creating an opportunity for ADESA.
A number of used car retailers have called upon us to provide retail-ready levels of reconditioning to help them meet consumer demand.
Based on our early successes with various retailers we expect to grow revenue from this service offering.
AFC's strong performance was driven by tremendous growth in revenue per loan transaction as the provision for credit losses is a contra revenue account for a finance entity the significant reduction in the provision for credit losses was a key factor to improved revenue.
However another key contributor was interest and fee income per loan transaction that increased to $191 per loan transaction from $155 per loan transaction last year.
This demonstrates the impact of having over 50% of the revenue for AFC from fees creating less dependence on interest rates to drive revenue.
Lower interest rates on floorplan loans were offset by higher average loan balances due to the record high used car values.
Also contributing to the strong second quarter results for AFC was lower direct cost and disciplined control over SG&A.
Now let me speak to the items that impacted operating adjusted net income per share.
We currently hold a common stock of CarLotz a publicly traded company that requires us to mark-to-market our investments.
CarLotz went public through a SPAC transaction in late January and this resulted in us recording our investment at market instead of costs.
As the stock price of CarLotz has declined since March 31 we have reduced the unrealized gain on investments by $11.9 million.
This required adjustment to the carrying value resulted in a reduction of net operating adjusted net income per share of $0.04 net of income taxes.
We also recorded $4.5 million of accrued contingent consideration related to the CarsOnTheWeb transaction as the performance of ADESA Europe formerly CarsOnTheWeb has exceeded the amounts recorded using a Monte Carlo simulation of possible outcomes at the time of purchase.
Our performance in Europe continues to be strong despite the lack of supply and I expect we will record additional contingent consideration through the end of this year when the earn-out period ends.
The earn-out is capped and we are recognizing the increase to the maximum earn-out payment amount ratably over the year so the quarterly expense should not increase from $4.5 million.
This is purchase price and will be paid to the previous owners but GAAP requires the adjustment to contingent consideration be recorded as other expense.
It is not included in SG&A in our financial statements.
Let me close with comments on our capital situation.
We continue to have a strong balance sheet with our focus on controlling costs and managing the business through a low point in supply in our industry.
We deployed $100 million to purchase KAR stock in the open market at an average purchase price of $17.77 in the second quarter.
Year-to-date we have repurchased $180.8 million of KAR stock in the open market at an average purchase price of $16.66.
We have just under $110 million left on our share repurchase authorization.
We have sufficient working capital available to support the business through the current economic cycle and also invest in strategic growth as opportunities arise.
Through the first half of 2021 our capital expenditures totaling $50.7 million have been focused primarily on our digital marketplaces.
And preparing our platforms for growth we expect to be driven by a cyclical recovery over the next several years.
We will continue to invest responsibly in the future of our business through capital projects and maintain or improve our leadership position in the wholesale used car digital marketplaces.
Although the root cause and duration of the current environment in our industry is much different than 2009 and the period that followed I also see many similarities in the impact on volumes trends in used car pricing and the prospects for recovery following a period where we are at the bottom of the down cycle in our industry.
I continue to see great opportunity for KAR and its investors once the cyclical recovery begins in the near future.
Stephanie you can open the line.
 Assistant:

Chosen response: q2 adjusted operating earnings per share $0.15.