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KAR Auction Services' CEO Discusses Q3 2011 Results - Earnings Call Transcript

22.05.12

KAR Auction Services ( KAR ) Q3 2011 Earnings Call November 3, 2011 11:00 AM ET

Worker

Good day, ladies and gentlemen, and welcome to the KAR Auction Services, Inc. Third Quarter 2011 Earnings Convention Call. Today's call is being recorded. Today's hosts will be Jim Hallett, Chief Executive Office-bearer of KAR Auction Services, Inc.; and Eric Loughmiller, Executive Vice President and Chief Fiscal Officer of KAR Auction Services, Inc. I would now like to turn the conference over to Mr. Loughmiller. Please go forwards, sir.

Eric M. Loughmiller

Thank you for joining us today for the KAR Auction Services Third District Earnings Call. Today, we will discuss the financial performance of KAR Auction Services for the span ended September 30, 2011. After concluding our commentary, we will take questions from participants. We will make good every effort to accommodate all of the questions within the hour we have scheduled today.

Before Jim kicks off our scrutiny, I would like to remind you that this conference call contains forward-looking statements within the intention of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such well-advanced-looking statements involve risks and uncertainties that may affect KAR's business, prospects and results of operations, and such risks are fully complicated in our SEC filings.

Now I would like to turn the call over to KAR Auction Services' CEO, Jim Hallett.

James P. Hallett

Incomparable. Thank you, Eric. And good morning, ladies and gentlemen, and welcome to our third compassion discussion. Today, I'm actually -- I had Eric join me here in the Motor Conurbation. I've been on the road this week with Tom Caruso, President and CEO of ADESA; and Peter Kelly, President and CEO of OPENLANE, doing guy visits across the country and taking the time out to do this conference call. And really, there's 2 things I requirement to focus on today. I want to focus on our third quarter performance, and then I want to give you an update on OPENLANE, not only the possessions, but the feedback from customers and employees as well.

So with that, looking at the third quarter, as they say, give me the facts. Third quarter EBITDA, $116 million; year-to-time adjusted EBITDA, $375 million. And I would say that we are disappointed that the strong performances at Warranty Auto Auctions and at AFC were not enough to offset the 15% volume decline at ADESA. And as a consequence, we need to lower our 2011 adjusted EBITDA expectations from approximately $500 million to close to $485 million to $490 million.

The volume outlook for ADESA, we need that these industry headwinds will continue into 2012, and that 2012 institutional volumes are expected to be down from the 2011 levels. However, we do nullify future volume declines won't be as steep in the -- quarter-over-quarter active forward, as what we experienced in the third quarter of 2011. And we're hopeful that our Dealer Consignment volumes will persist in to improve. And hopefully, these volumes may offset the institutional volume declines.

I would also like to pith out that with the merger of OPENLANE complete, we will begin reporting their volumes as part of ADESA in Q4. The understood-only auctions are not included in the industry data, though OPENLANE's activity will be additional supply reported for our industry beginning in Q4 of 2011. So despite the challenges, KAR continues to fashion 45% gross margins, adjusted EBITDA margins of nearly 27% year-to-antiquated. And again, this is the result of the complementary nature of our business model that we continue to talk about.

Turning to OPENLANE. I've talked with you on a numbers of calls in the past that my major focus since becoming CEO of KAR in 2009 has been on technology for all of our business units. And I mull over that the acquisition of OPENLANE really addresses a lot of the concerns that I've had over this period of time.

OPENLANE at a squiffy level expands our market capabilities. It gives us a toehold into the virtual auction buy. That market is approximately 1 million vehicles, and we think we can continue to grow in that break. We also believe that OPENLANE will be in an enabler into the dealer-to-dealer trades and the dealer-to-wholesaler make available as well. And then if you add up the virtual sales, the wholesaler transactions and the dealer-to-dealer transactions, that moment is a 17-million-unit opportunity.

Also, I'm very pleased with the management team that we have in employment at OPENLANE. And really, what we've been able to do is we've been able to combine much of the existing management crew at OPENLANE, and then we've moved a number of the ADESA managers onto the OPENLANE team to have the first-class of the best, or as I would say, field an all-star team.

Peter Kelly, the CEO of OPENLANE, will be a show report to me. He will also be a member of the senior management team at KAR. And Peter got introduced, as they say, with a firehose last week. He attended our running meetings. He attended his first board meeting. He also spoke at a town hall conference in Carmel, where we had over 500 employees at our corporate office, where he introduced OPENLANE and the manipulation team of OPENLANE. So he's well engaged as we get kicked off here.

But I think it's very important, and I want to be plain, that this is not just about OPENLANE. It's about the combination of OPENLANE with all of our physical auctions, as well as all of our service offerings, and this will not only be a extensive benefit to ADESA and our other companies at KAR, but it will also be a great benefit to OPENLANE as well. This becomes very powerful and gives us what I've been referring to as an end-to-end remarketing resolution in the entire industry.

And just let me speak about that end-to-end solution and what that means. Not only does it give us a very garish presence in the physical space and a very strong presence in the virtual or Internet array, but it gives us all the services that a remarketer could possibly acquire. I'd like to say that a remarketer could designate one phone call and he would be able to satisfy any service that he would need. So we're talking about vehicle logistics and transportation, reconditioning, financing, inspections, the capacity for dealers to self-post, unmatched analytics available. Obviously, the repossession services that we produce, the guaranteed checks, guaranteed titles, this is really the customer value proposition that I articulate in about. And I think this is the way that we're going to market as a full end-to-end solution for our customers.

But the real key to this deal is effective to be integration. And as you know, we closed on the 3rd of October. The integration activities are in full force. It is our procedure that OPENLANE will provide the platform for all of ADESA's e-business requirements, and we would expect that we will be on a distinct platform by 2013. And coincidentally, sometimes it's better to be lucky than good, I think is -- from being on the way with all of our customers this week, our integration plan and the completion of that integration really matches up with our customers, as their volumes will escalating in 2013 going forward. So I think our timing has been good there.

Also, within OPENLANE, there's a pair other companies that we should mention, as they have a transportation solution. They have a company called CarsArrive, which is an online conveyance logistics platform, is asset light, is an Internet tool that allows us to join and transport vehicles. And as a customer -- as a dealer buys a car, there's really 2 things they covet to know after they bought it. And that's how much and how fast can I have it. And this has been a very successful technology for OPENLANE, and it is our plan to mesh the CarsArrive technology into our physical auctions at ADESA. In fact, Tom Caruso has rolled out a lead at 7 ADESA auctions this week, and we would hope that we would have CarsArrive transportation fully integrated with the ADESA diplomate auctions in the coming year.

As well, we acquired a company called Recovery Details Network, or as we say, RDN. RDN is a specialized provider of software or data solutions for banks and economics companies that have car loans. This allows them to track their repossessions with the agents. And currently, RDN has visibility into nearly 70% of all repossessions that take place in the United States. So we think this will be very powerful matter, and this data will allow us greater access to the repossession market going disrespectful.

So with that, we're excited about the integration, but I will say that it's not going to be overnight. We expect that it will be somewhere in the order of 15 months to 18 months, and we are surely not going to rush it. We're much more focused on getting it right than we are in being in a hurry, and we will keep you posted on that integration as we go head on future calls.

So with that, I would like to now turn it over to Eric for a financial overview, and then I would like to take back just before we go to Q&A and wrap up with some of my thoughts on how I see the company and the industry going forward into 2012 and '13. So with that, Eric?

Eric M. Loughmiller

In consequence of you, Jim. I would like to highlight just a few items in our performance for the quarter. First, consolidated gain was essentially flat. This reflects 16% growth in revenue at Insurance Auto Auctions, which was based on a 10% raise in volumes sold; and a 15% growth in revenue at AFC, which reflects a 13% distend in the number of loan transactions.

These strong performances, though, were not enough to offset the 10% decline in yield at ADESA. That revenue at ADESA, though, reflects a 15% decline in volumes. So the fresh news is we were able to partially offset that decline in volume with some increases in take per unit sold.

Source: Seeking Alpha