KAR Auction Services (KAR)

Q3 2011 Earnings Call

November 03, 2011 11:00 am ET

Executives

James P. Hallett - Chief Executive Officer and Director

Eric M. Loughmiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

N. Richard Nelson - Stephens Inc., Research Division

William R. Armstrong - CL King & Associates, Inc.

Patrick Palfrey - RBC Capital Markets, LLC, Research Division

Ryan Brinkman - Goldman Sachs Group Inc., Research Division

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

John Murphy - BofA Merrill Lynch, Research Division

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Unknown Analyst -

Anthony F. Cristello - BB&T Capital Markets, Research Division

Presentation

Operator

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

Eric M. Loughmiller

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

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

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

James P. Hallett

Great. Thank you, Eric, and good morning, ladies and gentlemen, and welcome to our third quarter discussion. Today, I'm actually -- I had Eric join me here in the Motor City. 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 customer visits across the country and taking the time out to do this conference call. And really, there's 2 things I want 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 acquisition, 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-date adjusted EBITDA, $375 million. And I would say that we are disappointed that the strong performances at Insurance Auto Auctions and at AFC were not enough to offset the 15% volume decline at ADESA. And as a result, we need to lower our 2011 adjusted EBITDA expectations from approximately $500 million to approximately $485 million to $490 million.

The volume outlook for ADESA, we expect 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 anticipate future volume declines won't be as steep in the -- quarter-over-quarter going forward, as what we experienced in the third quarter of 2011. And we're hopeful that our Dealer Consignment volumes will continue to improve. And hopefully, these volumes may offset the institutional volume declines.

I would also like to point out that with the merger of OPENLANE complete, we will begin reporting their volumes as part of ADESA in Q4. The virtual-only auctions are not included in the industry data, though OPENLANE's activity will be additional volume reported for our industry beginning in Q4 of 2011. So despite the challenges, KAR continues to generate 45% gross margins, adjusted EBITDA margins of nearly 27% year-to-date. 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 number 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 think that the acquisition of OPENLANE really addresses a lot of the concerns that I've had over this period of time.

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

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

Peter Kelly, the CEO of OPENLANE, will be a direct 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 management meetings. He attended his first board meeting. He also spoke at a town hall meeting in Carmel, where we had over 500 employees at our corporate office, where he introduced OPENLANE and the management team of OPENLANE. So he's well engaged as we get it kicked off here.

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