KAR Auction Services, Inc (KAR)

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Industry: Consumer Durables
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KAR Auction Services (KAR)

Q4 2012 Earnings Call

February 21, 2013 11:00 am ET

Executives

Jonathan Peisner - Vice President of Investor Relations & Planning and Treasurer

James P. Hallett - Chief Executive Officer and Director

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

Analysts

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

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

Robert Labick - CJS Securities, Inc.

John Lovallo - BofA Merrill Lynch, Research Division

Bret David Jordan - BB&T Capital Markets, Research Division

John R. Lawrence - Stephens Inc., Research Division

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

Colin Daddino - Gabelli & Company, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the KAR Auction Services, Inc. Q4 2012 Quarter Earnings Conference Call. Today's call is being recorded. Today's hosts will be Jim Hallett, Chief Executive Officer of KAR Auction Services, Inc.; Eric Loughmiller, Executive Vice President and Chief Financial Officer of KAR Auction Services, Inc.; and Jonathan Peisner, Vice President and Treasurer of KAR Auction Services, Inc.

I would like to now turn the conference to Mr. Peisner. Please go ahead, sir.

Jonathan Peisner

Thanks, Augusta. Good morning, and thank you for joining us today for the KAR Auction Services Fourth Quarter Earnings Conference Call. Today, we will discuss the financial performance of KAR Auction Services for the quarter and year ended December 31, 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 measures can be found in the press release that was 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. Thank you, Jon, and good morning, ladies and gentlemen, and welcome to our call. My comments will be a little extended this morning as we do this call; number one, it's our year-end call, and there's been a couple of significant events that have taken place in the quarter that I believe that I should provide you with more color on.

So turning now to the summary of our financial statements or results. We finished 2012 with revenue of almost $2 billion on the sale of approximately 3.3 million vehicles. This represented a 4% growth over the prior year. Our adjusted EBITDA came in at just over $500 million, and that gave us an EBITDA margin of 25.5%, and this was the low end of our guidance range, which I'll talk more about here in just a few moments.

A couple key items that impacted the 2012 results for ADESA and ultimately for KAR. Number one is we did have an unforeseen weather event take place in the very last week of the year. We had a winter storm that started out in Texas and worked its way all the way through New England during the last week. And typically, during the last week of the year, we put in a conservative budget, but even our conservative budget was missed as dealers just weren't able to get the auctions -- weren't able to get cars to auctions or get cars sold. So that did bring our volumes in lower than we expected for that last week. And then we also had the double whammy effect of the additional expense of having to remove the snow, and this reduced ADESA's EBITDA, and overall, I believe this took us to the bottom of the range.

So as we look at the whole car volumes at ADESA, they remain low in the fourth quarter. We're expecting that the NAAA results will be out within the next couple weeks, and we expect that those volumes will be reported at approximately 7.9 million vehicles sold in 2012 for the industry. This will include the 260,000 vehicles sold from our OPENLANE platform. ADESA's volumes overall are up 8%. This includes OPENLANE. If we just look at our physical auctions, our physical auctions were down 4%. So we believe that the whole car volumes have absolutely hit the bottom in 2012. And I'll come back and talk a little bit more about what we see going forward in the future.

But with that, let me now turn to Superstorm Sandy and provide you with some color. There has been much read and much documented on Superstorm Sandy, but from our viewpoint, let me tell you that Superstorm Sandy was the most catastrophic event in the history of Insurance Auto Auctions. I'd say it was the perfect storm in the worst of ways. We were dealing with the most dense, heavily populated areas of the country, the most difficult infrastructure in most parts of the country when you think about the bridges and the parkways and the roadways and the access to move vehicles.

And then we're dealing with some of the most expensive real estate in the country. And we had to acquire an additional 400 acres to store and manage to sell these vehicles from. Many of you may have seen the pictures that made the way around the world of 2 runways that we had at the Calverton Airport in Long Island, New York, where we had 20,000 flooded vehicles parked.

And then we were dealing with the regulators. It wasn't easy dealing with the regulators as they made it very difficult for outside transporters to come into the state of New York in the haul vehicles. In many cases, we would expect to haul 6 to 7 vehicles a day, and we were lucky if we could get 2 vehicles hauled a day.

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