KAR Auction Services, Inc (KAR)

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KAR Auction Services (KAR)

Merrill Lynch & Co., Inc.'s 2013 New York Auto Summit

March 27, 2013 10:20 am ET


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

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


John Lovallo - BofA Merrill Lynch, Research Division


John Lovallo - BofA Merrill Lynch, Research Division

KAR Auction Services, ticker KAR, about a $2.7 billion market cap. KAR is a leading auction services provider in North America on the whole car and on the salvage side. They also provide used vehicle financing through their AFC division. Over the years, the company has been a very solid free cash flow generator, very stable business. They've also recently initiated a common dividend, $0.19 per share on a quarterly basis, which is about a 3.8% yield.

Now with us today, we have Eric Loughmiller, who is the Executive Vice President and CFO; and we'll also have Jonathan Peisner, who is the Vice President and Treasurer. So with that, I'll turn it over to Eric.

Eric M. Loughmiller

Thanks, John, and welcome, everybody, and thanks for coming to see us today.

KAR Auction Services is a business services company that deals in cars, so that's why we're here. And we have a number of investment highlights that I'll go through as we cover the slides that follow this. But what I think I'll point out in advance is what's really attractive about our business is the free cash flow generation, and we evidence our confidence in generating free cash flow long term through a dividend of $0.19 per share paid quarterly. It has to be approved quarterly, but that's about a 3.8% yield on our current stock price. And we also have a capital structure that's very flexible and low cost. So all of that is really contributing to the ability to be -- what we think provide a nice return to the shareholder.

And how do we do it? Well, we do it by having some businesses that are related but operate in different markets. ADESA is our largest business segment. That is a used car wholesale auction business. And so we are selling used cars on behalf of commercial consignors, the OEMs. Actually, many of the people here today speaking at the Bank of America Merrill Lynch conference are customers, either on the sell side or the buy side. So you have them all operating within this marketplace.

We operate this business with just over $1 billion of revenue, and this revenue is being generated at the bottom of a cyclical decline in the market that has occurred over the last 3 years. And we'll look -- I'll tell you in a few slides, we're looking forward to the recovery from that bottom, which is imminent as we look at the off-lease vehicles coming back beginning this year. The margins in this business, while they're about 22% on an EBITDA margin basis, if you go back to '09, the last peak period before we started the declines, we were at 26.8% EBITDA margin. So as we recover, we believe this is actually a low margin driven by the cyclical point that we are in the market in the number of cars we're able to sell.

Insurance Auto Auctions is another story. This is a salvage auction business. We're selling predominantly total-loss vehicles for the insurance industry. And in this business, we have -- while we're at 28.8% EBITDA margin in 2012, that's actually because of the Hurricane Sandy cars impacting us. This is about a 30% EBITDA margin business for the last few years and will be so if I exclude the unique nature of the Hurricane Sandy cars, which do contribute on the top line, but actually are losing money on the bottom line, and we'll get into that. So -- and again, the Hurricane Sandy cars are almost all sold, so we're very happy to hear that.

And then I have a finance business as floorplan financing provided to the buyers at all of our auctions. Again, their focus is providing floorplan financing to independent used car dealers buying cars at the ADESA auctions. But they also do floor planning for some of our IAA customers, although that's a very small component of the market, and this is a very high-margin business. They operate within the auction facilities. So they have a very low fixed cost structure, and they loan money and it's a fee-based business. They are generating 2/3 of their revenue from fees and 1/3 from the interest charge on the loan itself. The average loan in that business is about $8,500 right now, and there are over 11,000 customers with it. At any point in time, typically about 8,000 of them have an amount outstanding. So they'll borrow money and pay it off. So we're 8,000 to 9,000 at any point in time will have a loan outstanding at AFC.

In terms of the market we operate in, this is what I call the wheel of our business. There's 272 million vehicles on the road. And of those, we are going to have -- again, according to the BMO [ph] information this morning, we've got a solid 15.4 million in February, right, Jon? So that SAAR gives us [ph] 16 million. You got those cars coming in to the market. We have about 13 million units a year that are being taken out of service and of those 13 million, 3.5 million to 4 million are being sold at salvage auctions. So there's a large part of that market that's being disposed of through alternative channels, and we'll get into that a little bit about how we're going to track that and have growth in organic volumes within that salvage business.

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