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KAR Auction Services (KAR)
Q3 2012 Earnings Call
November 07, 2012 11:00 am ET
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
John Murphy - BofA Merrill Lynch, Research Division
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division
Robert Labick - CJS Securities, Inc.
William R. Armstrong - CL King & Associates, Inc., Research Division
John M. Healy - Northcoast Research
Bret David Jordan - BB&T Capital Markets, Research Division
F. David Melka
Previous Statements by KAR
» KAR Auction Services' CEO Discusses Q2 2012 Results - Earnings Call Transcript
» KAR Auction Services' CEO Discusses Q1 2012 Results - Earnings Call Transcript
» KAR Auction Services' CEO Discusses Q4 2011 Results - Earnings Call Transcript
I would now like to turn the conference over to Mr. Peisner. Please go ahead, sir.
Thanks, Jim. Good morning, and thank you for joining us today for the KAR Auction Services Third Quarter Earnings Conference Call. Today, we will discuss the financial performance of KAR Auction Services for the quarter ended September 30, 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, prospect, 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 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. Thank you, Jon, and good morning, ladies and gentlemen, and welcome to our call. I'll move right into our third quarter performance. And we did fall short of our expectations in the quarter. Adjusted EBITDA was $117 million. This was only slightly better than the prior year. And at ADESA and Insurance Auto Auctions, volumes continue to be challenged. But with that said, I believe that there is a positive outlook for 2013. We've had very good feedback from our customers on both the whole car side and salvage side of our business, which I'll talk more about in my comments here in a few minutes.
But the tough years are behind us. 2011 and 2012 have been the toughest years that we've seen in our industry. And I'm very pleased and very proud of how our employees and how our managers have managed through this period of time. We've been able to stay very focused on our business, still producing very strong gross profit, and as we'll talk more about exceptional free cash flow that this business is able to produce. And as I think of the toughest times being behind us, I believe and I'm excited to say that KAR is ideally positioned for a cyclical recovery.
As I think about ADESA in the quarter, we saw volumes increase 14%. All of this volume was attributable to the inclusion of OPENLANE. No question, OPENLANE has had a positive impact on ADESA. The OPENLANE customer mix is heavily weighted to the off-lease vehicles. And we knew that these off-lease vehicles were going to be declining in 2012, and it certainly impacted OPENLANE as we expected it would when we made the acquisition in 2011.
We did see a slight decline at ADESA's physical auctions. However, we also see an 11% increase in dealer consignment volumes. Now these dealer consignment volumes were offset by the declines in commercial volumes. But I think what's really more important, what I'd really like to highlight here is the initiatives that we've taken on dealer consignment over the last 2 or 3 years have really exceeded my expectations. The amount of training that we've done with both our employees and with our dealers, I feel that we've created some real stickiness with this business. And I'm confident that we can retain our share of the dealer consignment business as these commercial volumes recover in 2013.
So the outlook for ADESA is very positive from a top-down view of the industry. In speaking with our economist, Tom Kontos, and with other economists who cover our industry, they all project improved commercial volumes in 2013. As well, we've taken the opportunity to check in with most of our commercial sellers and confirm what their lease expectations are, their lease return expectations are for 2013 and going forward. And they've all indicated that their lease returns will be increased in 2013 with even greater increases coming in 2014 and 2015. And while we are not in a position to discuss any individual customers, I can tell you that the feedback that we've had from our customers increases our projections that we've had and that we continue to share for 2013. In fact, there are a number of articles that had been written in the industry where they've been quoted as saying that they expect hundreds of thousands of additional off-lease vehicles to be returned in 2013, I think also supported by the recent trends in new car sales as we continue to the SAR improve throughout 2012. We've seen looser credit standards, which will only add more loan delinquencies, increasing the opportunity for repossessions. And 2 of our businesses, PAR and RDN, our 2 businesses that we have that work very closely with managing the repossession process with many of these financial institutions, and this gives us some early insight into the trends that are taking place in the repossession part of -- portion of the business.