KAR Auction Services' CEO Discusses Q2 2012 Results - Earnings Call Transcript

KAR Auction Services, Inc. (KAR)

Q2 2012 Earnings Call

August 7, 2012 11:00 am ET

Executives

Jonathan L. Peisner – Treasurer, VP and Head-Investor Relations

James P. Hallett – Chief Executive Officer and Director

Eric M. Loughmiller – Chief Financial Officer and Executive Vice President

Analysts

Matthew Fassler – Goldman, Sachs & Co.

John Lovallo – Bank of America/Merrill Lynch

N. Richard Nelson – Stephens Inc.

Gary F. Prestopino – Barrington Research Associates, Inc.

Shreyas Patil – Credit Suisse Group

F. David Melka – New York Life Investment Management LLC

William Armstrong – CL King & Associates

Eli Halliwell – D. E. Shaw & Co., Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the KAR Auction Services Incorporated Second Quarter 2012 Earnings Conference Call. Today’s call is being recorded. Today’s hosts will be Jim Hallett, Chief Executive Officer of KAR Auction Services Incorporated; Eric M. Loughmiller, Executive Vice President and Chief Financial Officer of KAR Auction Services Incorporated. And Jonathan Peisner, Vice President and Treasurer of KAR Auction Services Incorporated.

I would now like to turn the call over to Jon Peisner. Please go ahead, sir.

Jonathan L. Peisner

Thanks, Deena. Good morning, and thank you for joining us today for the KAR Auction Services second quarter earnings conference call. Today, we will discuss the financial performance of KAR Auction Services for the quarter ended June 3o, 2012. After concluding our commentary, we will take questions from participants.

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. In providing forward-looking statements, the company expressly disclaims any obligation to update these statements.

Lastly, let me mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued yesterday, which is also available in the Investor Relations section of our website.

Now, I’d like to turn this call over to KAR Auction Services CEO, Jim Hallett. Jim.

James P. Hallett

Great, and thank you, Jon, and good morning, ladies and gentlemen, welcome to our call. I’d like to start where we left off on our last conference call. We left off telling you that we felt the second quarter would be a challenging quarter. And there’s no question that it did prove to be challenging. And I’d like to walk you through the results by the various businesses. In the whole KAR business at ADESA, we’ve seen commercial volumes in the industry continued to be soft. ADESA volumes were off 6% year-over-year, but with the OPENLANE addition, we were actually up 11%. And I would ask you to keep in mind that it’s difficult for us to breakout our online volumes between ADESA and OPENLANE due to the integration of the businesses.

Remember a year ago, the dealer blocked cars that were part of ADESA are now being reported as part of the OPENLANE sales. So let me give you some good news in terms of looking forward. We are looking forward to an improved supply situation at the end of 2012 and into 2013. We’ll talk more about that in a moment. We expect that 2012 volumes will be similar to what we’ve seen in 2011, we’re also expecting that the industry will sell approximately $8.4 million vehicles in 2013, and that number should rise to nearly $9 million unit sold in 2015. As I look forward, I am really excited about the supply and how well-positioned ADESA is to take advantage of what’s coming at us here. As you know or may not know, ADESA is nationally weighted on the institutional side of the business.

And we have very good long-term visibility with our leading commercial consignors. In fact, we know what their volumes look like two and three years out and what those returns are going to be. And I think ADESA, as these returns come, is in a very strong position to take advantage of these volumes, and I wouldn’t want to lose sight of the tremendous work that we’ve done on dealer consignment over the course of the last couple of years. I think we’ve done a great job in training our dealers, creating some good behavior both by our dealers and also some good training with our employees, and we’ve done a fabulous job of growing our dealer consignment business.

And as we stay focused on dealer consignment and then get the onslaught of commercial volumes coming back, I think this is going to put ADESA in a very, very good position. In terms of the integration activities between ADESA and OPENLANE, continues to go very well. We are now selling our online vehicles on a single platform that is powered by the OPENLANE technology, we continue to migrate ADESA’s private-label customers to OPENLANE.

And we continue to eliminate redundant corporate costs. Many of the OPENLANE’s corporate functions are now being performed by KAR. As I look back on this acquisition, when we originally bought OPENLANE, we really viewed it as possibly the fourth leg on the stool. But as we’ve continued to go through the integration process and we’ve had feedback from a number of our employees who have worked on this integration, but more importantly from our customers we’ve actually seen OPENLANE is really an additional service offering within ADESA, powered by the OPENLANE technology, and it’s really all one company. And for example at one point in time, we’ve seen it is needing two separate sales teams, we’ve now integrated those sales teams under one VP of Sales because the customers told us that they wanted one point of contact, things of that nature.

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