KAR Auction Services, Inc (KAR)

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Call Start: 11:00

Call End: 12:03

KAR Auction Services, Inc. (KAR)

Q2 2011 Earnings Conference Call

August 10, 2011 11:00 ET

Executives

Jonathan Peisner – Vice President and Treasurer

Jim Hallett – Chief Executive Officer

Eric Loughmiller – Executive Vice President and Chief Financial Officer

Analysts

Gary Prestopino – Barrington Research

Tony Cristello – BB&T Capital Markets

John Murphy – Bank of America/Merrill Lynch

Rick Nelson – Stephens

Bill Armstrong – C.L. King & Associates

Scot Ciccarelli – RBC Capital Markets

Craig Kennison – Robert W. Baird

Matt Fassler – Goldman Sachs

Tom Shandell – Goldentree Asset Managemnet

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the KAR Auction Services Incorporated Second Quarter Earnings Conference Call. Today's call is being recorded.

Today's host will be Jim Hallett, Chief Executive Officer of KAR Auction Services Incorporated; Eric 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 Mr. Peisner. Please go ahead, sir.

Jonathan Peisner – Vice President and Treasurer

Thanks, Michelle and thank you for joining us this morning for KAR Auction Services second quarter earnings call. Today, we will discuss the financial performance of KAR Auction Services for the quarter ended June 30, 2011. After concluding our commentary, we will take questions from participants. We will make every effort to accommodate all 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 are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those projected, expressed, or implied by such forward-looking statements and such risks are fully detailed in our SEC filings.

I would now like to turn this call over to KAR Auction Services' Chief Executive Officer, Jim Hallett. Jim?

Jim Hallett Chief Executive Officer

Great. Thank you, Jon, and good morning, ladies and gentlemen and welcome. I will start with the performance of the consolidated entity, and despite flat car revenue, I would say that I am very pleased with the performance for the quarter. Adjusted EBITDA margin topped 28%; adjusted EPS was up 19% and this is consistent with the 15% to 20% long-term target that we have stated and again these businesses continue to be very strong generators of free cash flow.

Again, we have talked to you much in the past about the complimentary nature of our businesses, and I think as you look at our performance for the quarter and year-to-date even for that matter, it shows how these businesses are really able to offset the ebbs and flows of the different business units.

A couple of financing highlights, we completed in the quarter that Eric is going to talk about in more detail. We did complete the refinancing of almost all of our debt, which allowed us to push our maturities out to 2017 and remain covenant light and we were successful in amending our U.S. and Canadian securitization taking the facility up to $750 million and extending those maturities out to 2014 and we were able to attract, very attractive pricing on this securitization and I think this is reflection of AFC’s strong track record of performance over the past couple of years.

In terms of the business units, Insurance Auto Auctions continues to perform. Revenues were up 10%, adjusted EBITDA was up 11% and they experienced a 5% increase in volume as well we were able to achieve higher revenue per units. This revenue increase was primarily driven by buyer’s fee, which is primarily driven by the higher cost of used vehicles. IAA has continued to focus on their synergetics project as you know this is the efficiency cost takeout standardization of processes and things of that nature.

Continue to have success with the vehicle remarketing division or as we refer to it as the VRD. VRD focuses on selling those low end cars. They don’t typically make it to a whole car auction. I often refer these as the push, pull, drag sleds that are sitting in the back row of dealer’s lot. We have now rolled this VRD program to approximately 50% of our sites at IAA and we will continue to roll out more sites as we go forward, but we are having good success with that program.

Another area that we have experienced some recent success with in the IAA is the rental car companies and I think IAA has been enabled to leverage ADESA’s relationship with many of these whole car providers and sell these rental cars. As you know, these rental car companies are for the most part self insured and there is a number of vehicles that are damaged as we would say less than perfect and these vehicles in the past have been sold out a whole car auction and we have now piloted a program with the rental car companies to sell these rental cars at Insurance Auto Auctions and the result have been we have had very good success.

I believe get them in front of a better buyer base that would buy these damaged vehicles. We have been able to increase the proceeds for the rental car companies and as a result we are getting more and more of these rental cars coming to Insurance Auto Auctions and then particular there is one large rental company that were working with that is really setting the pace for this business at Insurance Auto Auctions.

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