ALLETE Inc (ALE) 2004 Q1 法說會逐字稿

Good day and welcome to the ALLETE first-quarter 2004 financial results conference call. Today's call is being recorded. You line will be muted for the presentation and we will conduct a question and answer session after the presentation. (OPERATOR INSTRUCTIONS) Today's conference may contain forward-looking statements within the meaning of the federal securities laws including statements concerning business strategies and their intended results and similar statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the Safe Harbor provision of the private securities litigation and reform act of 1995.

Forward-looking statements in the earnings release distributed this morning reflect management's best judgment at this time. But such statements are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed in or implied by the statements therein. Additional information concerning potential factors that could affect future financial results is included in the Company's annual report and from time to time in the Company's filings with the SEC. At this time I would like to introduce Chairman, Mr. David Gartzke. Please go ahead, sir.

Thank you. Good morning, everyone. Thanks again for joining us today. With me are ALLETE's President and Chief Executive Officer Don Shippar, ALLETE's Chief Financial Officer Jim Vizanko, and ADESA's Chief Financial Officer, Cam Hitchcock. This morning we reported our first-quarter earnings per share of 62 cents which compares to the 54 cents that we reported last year. However, from continuing operations our earnings per share was 63 cents versus 46 cents in 2003.

Net income was 52.5 million compared to 44.3 million in 2003 which is an increase of 18.5 percent. Consolidated revenue was up 8.4 percent from 422.9 million from 458.5 million. Obviously we are very pleased with the performance as we start out the year. All of our businesses reported growth from last year's first quarter. Cam will give you the details of ADESA's quarter and Jim will follow with comments on ALLETE's other businesses and then I will wrap up with a few comments before we take your questions.

I'm pleased to report that Automotive Services had a strong earnings growth this quarter. ADESA's operating revenue increased 6.4 percent or about $15 million from last year. This reflects a 5.5 percent increase in the number of vehicles sold at both our used vehicle and salvage auctions and an increase in the number of loan transactions at our finance subsidiary AFC. Conversion rate at our used vehicle auctions was 68.4 percent for the quarter which is up from 62.4 percent last year. The increase in operating revenue outpaced the growth that we saw in our operating and other expenses.

The high conversion rate contributed to our operating margin improvement as we were able to sell more of the vehicles the first time through the auction lines. Which allows us to avoid additional handing costs of running vehicles in subsequent auctions. We were also able to absorb about $1 million after-tax of separation related expenses and about $1 million after-tax of additional corporate staffing expenses as ADESA prepares to be a stand-alone public entity.

The strong conversion percentage was the result of increased demand for the vehicles available at auction and an increase in the prices of these vehicles thus leading the sellers of these units to sell more vehicles the first time they were offered for sale at the auction. The demand for wholesale used vehicles has increased as retail used vehicle sales continue to show improvement and wholesale prices of these vehicles increased due in part to the high demand, as well as the decline in the number of late-model off-lease vehicles as compared to last year.

The mix of vehicles sold through our used vehicle auctions shifted as compared to 2003. We saw a 15 percent increase in the number of dealer vehicles sold and in spite a decline in off-lease vehicles a slight increase in institutional vehicles sold as well. At our salvage auctions vehicles sold increased 17 percent or 8000 units due in part to market share gains at the U.S. salvage auctions and weather patterns that resulted in additional total loss claims by insurers.

Loan transactions at AFC increased nearly 13 percent or 30,000 transactions over 2003. The increase in retail used vehicle sales and the increase in wholesale used vehicle prices has increased the demand for used vehicles and used vehicles in the inventory turns of AFC's customers driving up the number of loan transactions. Total receivables managed by AFC increased 17 percent over last year to $618 million reflecting the increases in loan transactions and wholesale used vehicle prices.

I will now turn it over to Jim Vizanko who will give you some more details about ALLETE's other businesses.

Thank you, Cam. For the quarter ALLETE Energy Services net income was up 17 percent over the same period in 2003. Minnesota Power experienced strong demand for electricity from its industrial customers during in the quarter. We continue to expect that the Taconite mining customers will operate at close to full capacity over the remainder of the year. Our paper and pipeline customers are also operating at the higher levels than last year.

The first quarter of last year included purchased power payments for Lakefield Junction and net income from the Split Rock Energy alliance which roughly offset each other. Both of these items ended during 2003 but we didn't incur the income or expenses this year. As expected pension and post-retirement health expenses were higher this year, but they were partially offset by lower interest expense.

Within investments and corporate charges ALLETE Properties had a very strong quarter and demand for our real estate properties continues to be high. This quarter's net income contribution was $11 million compared to 4.2 million last year. This quarter sales were anticipated to occur later in the year but due to increased demand for our properties, we now anticipate higher earnings than we originally expected at ALLETE Properties for the entire year.

Corporate debt expense was done about $1.7 million after-tax from last year due to lower debt balances in 2004. Corporate expenses during the first quarter this year included about $1 million of after-tax expense related to the separation of Automotive Services. Now I'd like to take some time to update our earnings guidance for 2004.

I want to emphasize that this guidance only refers to the businesses that will make up the whole full spin (ph) ALLETE. Energy Services and investments and corporate charges. At the beginning of the year we expected our 2004 year end net income for these businesses would be similar to last year. This projection included an after-tax increase of $4 million for additional pension and post-retirement benefit expenses over 2003, and $4 million of after-tax expenses related to plant maintenance at the (indiscernible) generating plant which will occur later this year. These expense increases were offset by the expectation of a 5 to $10 million after-tax decrease in interest expense due to lower debt levels this year.

We now expect that our 2004 year end net income will be 10 to 15 percent higher than 2003. This new projection reflects the strong earnings performance of the first quarter and expectations of higher sales at both Minnesota Power and ALLETE Properties than originally expected. I would like to remind everyone that we expect to further reduce our debt by between 150 to $200 million after the ADESA IPO and recapitalization. As we have stated previously our earnings guidance does not reflect the financial implications of the separation of the automotive services to ALLETE including the lower interest expense that will result from the reduced debt or the onetime transaction fees and debt retirement premium.

I would like to mention a few other things before we open up for your questions. First, we are still on track to complete the partial IPO of ADESA in the second quarter and the spin-off in the third quarter. I have to say again that we are severely limited in what we can say about the transaction but again we refer you to the S-1 which provides a lot of details and can be the source of any information hopefully that you need that we are able to disclose at this time.

The second comment is a follow-up to our last conference call simply stating there have been no further developments regarding the SEC informal inquiry. We will now take your questions.

(OPERATOR INSTRUCTIONS) Stephen Kogo with Cafe Financial.

Yes, I know you talked about the higher conversion rate in the quarter but could you just go through in a little more detail why the first quarter was so strong in terms of the conversion rate and is it essentially unsustainable at those types of levels. Or is this a new development that you expect to last for some time?

I can answer the first part of your question. Conversion rate is reflective of retail demand ultimately for vehicles; retail demand for used vehicles in the first quarter was very strong. That is one of the key base drivers behind rates at which vehicles through the auction. Now whether or not it is sustainable we are unable to comment on that at this time since we are in registration.

Could you just give a sense as to how to think about the contribution that you would get from that higher conversion rate or not specifically, but just in general terms, the higher conversion rate translates into?

It's a difficult question to answer in isolation. Because it depends on which customer is causing the conversions for the whole company. In this particular case, as Cam mentioned, the higher conversions are coming from the consignment side of the business which typically has low conversion rate. So the pick up to the bottom line from a conversion rate of just picking hypothetical numbers of 50 to 60 percent on the dealers side a substantial impact to the bottom line perhaps much mores than a conversion pickup on the commercial side. That will vary from time to time, from quarter to quarter. It's difficult for us to speculate and can't speculate as to the trend of this type of conversion rate on the consignment side of the business at this point in time. But it does impact the company differently depending upon which customer product it's coming as it affects expenses.

Dave Chancer with Janney Montgomery Scott.

Congratulations on a very, very good quarter. Couple of questions, first of all we are probably entering a period of rising interest rates, perhaps maybe not spiking up radically. But going back over the history of AFC when that happens has there been a notable effect on AFC's performance?

AFC's revenue mix is predominately B (ph) driven, David, and if you looked at the impact of declining interest expense over the last three years on AFC's net margin it's diminimus and because of the fee mix is so high we would not expect rising interest rates to have a substantial negative impact on the business either.

That's what I thought. The second question has to do with the salvage business, now just correct me if I'm wrong, you guys said there was about a 17 percent growth quarter over quarter in the salvage results? Is that right?

That is correct, did about an 8000 unit increase.

If I recall there wasn't any significant acquisitions made in that timeframe, is that right?

No. We have not acquired any new salvage auctions during the first quarter.

If my memory serves me correct and I think it's correct but last year we had unseasonably warm weather and therefore we were off relative to our expectations last year. And this year if you want to call it normal weather we did have some difficult weather that unfortunately causes a lot of accidents and more vehicles to come to the salvage auctions. I think that that was in part as we said in our opening comments a big part of it was the increase as well as the market share gain.

Let me ask the question a different way then. If you have a normal situation and you the expected acquisitions that you would likely make as you try to advance that part of the business to becoming a greater percentage of the whole, do you still think 15 percent rate of growth is what you're looking for? Or is it now somewhat higher?

Unfortunately David we cannot comment on that question at this time.

No problem. My last question has to do with the Florida real estate operation. The performance in the quarter does that include any one single large transaction?

No. Basically what is in the Florida numbers it's just operations and we are now losing money because we still have over excess overhead associated with that as we continue to sell the remaining system.

Okay. In the upcoming quarters are there any large transactions potentially on the books?

For Florida there's the heater gain we expect to close in the second quarter and we are continuing to work on selling the remaining Florida water system.

But nothing in the real estate area?

Real estate sales had a very good quarter, but real estate sales will continue throughout the year. We do expect to continue to sell properties in all quarters. (multiple speakers) as large as the first quarter but we will continue to sell property.

(OPERATOR INSTRUCTIONS) Dave Parker with Robert W. Baird.

Good morning and congratulations on a good quarter. Hopefully you can comment on a couple of these shifts, you commented in your comments about shifting a little bit from cars coming off leases as far as the sales mix at ADESA to dealer cars, then a long-term trend that you expect to continue to play out in '04. Is that something unique to this quarter?

I think the Company has previously commented that in public forums that we would expect that off-lease volume to be historically weaker, weaker than it has been in historical levels for some period of time until the new leases that are being generated at the OEs and by others would begin to hit the secondary market. That is something that's been out there for a while.

You also talked to Cam, a little bit about this dealer optimism or just activity interest on a buyer's perspective increased; part of that as you mentioned was increased prices in car sales. Anything else on a macro that you can identify that may have changed in the last couple of quarters to improve that sentiment?

On a macro basis, no, just the general improving health of the economy appears to be the most basic underlying driver.

I guess we would expect back to David's question if dealer cars sold continued to at an increased clip won't we see that AFC's growth rate would be a lot higher than what we realized in 2003?

That would be a logical deduction but I -- as the largest independent financing source for that market.

Over to ALLETE utility operations. With the increased guidance it looks like its split between real estate as well as the utilities, when we look at the expectations previously for kilowatt hour sales there it looks as if your improved optimism is it because of taconite industrial load that seems to be more robust or is your outlook for wholesale sales, other wholesale sales (inaudible)?

It's mostly from the industrial customers. Not only Taconite but all of our industrial customers were seeing strong sales across all industrial.

From the wholesale side, Dave, I think as we mentioned before we have basically sold all Taconite Harbor so we are not as sensitive as we once were to changes in the wholesale market during the summer.

Given that your industrial customers are running at almost full capacity and Taconite Harbor is spoken for this year, is there any upside taking advantage of maybe more hydro conditions in the upper Midwest?

If we have excess of our generating over (indiscernible) load.

That is what we've got left?

That's right.

Excellent, thanks and congratulations again.

John Murphy with Merrill Lynch.

Good morning. I have two questions for you. The first is on the increase in loan transactions how much of that do you think is a result of the general increase in your volumes and how much of that you think is from market share gains? And the second question is on the whole vehicle auction business it looks like your volumes were up. How much of that is from a general increase in the volumes in the market and once again how much of that might be from market share gains in the areas that you operate?

Will take the AFC question first. We don't have the attribution on how much of it is a market share gain. I think it probably is a very strong correlation with the increase in the general sales of used cars and the activities of the used car dealers who are their principal customers. That's what we would say on the AFC side.

On the whole car side you asked about the general level of cars going through; the actual level of cars that were consigned, was down year over year. But the level being sold, the actual sales going through were up as were the conversion rates for those vehicles going through.

You would have to assume that you are both gaining some share and increasing your conversion rates there?

It's probably not clearly the conversion rates are up -- that is statistically proven out and there probably is some share in there as well although we don't have that data.

Thanks a lot.

Joe Cornell with Spinoff Advisers.

I had two questions regarding the ADESA IPO. I want to make sure I heard you right; it sounded like you said you hoped to do the IPO this quarter and I wanted to see if you had any idea what the range of the initial flow would be for ADESA.

We are in registration right now and characterize it as a fairly normal registration process. With regard to the flow we couldn't comment on that at this time. We have talked about 150 million in proceeds but have not made any further disclosure as to what percentage that would constitute of ADESA stock.

caller So that I heard you right earlier that you hope to get the IPO done this quarter?

That is our current thinking, correct.

Barry Lafer with Lafer Management.

Congratulations. With regard to salvage units which I guess are up 9000 sequentially, can you talk about the impact on the bottom line of changes in scrap prices? And on a totally different subject it looks like the billions of kilowatt hours sold to other power suppliers your resale is up 8.5 percent quarter over quarter. Is that part of a trend or a change in strategy and what do you see in the next few quarters?

With regard to scrap, it's hard for us to directly link scrap prices to our bottom line. For us it is about our ability to efficiently convert on those vehicles which we receive.

We do get a fee for the auction service we provide; I don't know if it translates into an increase in revenue for vehicles sold as the scrap prices are going up. To the extent there is better activity and a healthier buying base it certainly doesn't hurt our business. And that's about as far as we can go with it.

So the profitability is largely driven by volume as opposed to by scrap prices?

I believe that's accurate.

The resale to others is included in there is sales to municipals; we have some large municipal accounts we sell to and those sales are up substantially in the first quarter.

(OPERATOR INSTRUCTIONS) Brian Koenig with Corsair Capital.

Can you tell us what level of EBITDA would correspond to the guidance you gave on the utility and real estate business or maybe get us a growth parameter or an EBITDA?

The EBITDA numbers we disclosed in the Q but do we do not disclose those numbers at this time.

I guess I am not asking for the specific number then but if you're giving guidance of 10 to 15 percent increase in net income, could you comment on how that would translate to a percentage increase in EBITDA?

The percent increases in EBITDA would be less because part of the driver of the net income change is interest. One of the larger drivers. I don't know how much it is in EBITDA, how much that percent changed but it would be significantly less than 10 to 15 because of interest.

So 5 percent? But there is some level of increase?

Yeah, I think it would be five is probably, five or less, it certainly again is a big chunk of that 10 to 15 is interest driven.

And can you tell us how much cash is on the balance sheet?

Cash on the balance sheet, investable cash at ALLETE is about 10 million less than it was at year end. At ADESA cash, the working capital cash just because of businesses is up from last year, normal cycle.

Great, thanks a lot.

Elizabeth Lily with Woodland Partners.

Elizabeth Lily with Woodland Partners: I wanted to drill down a little bit more into the salvage business. Correct me -- so salvage revenues were up 17 percent, is that correct?

Vehicles sold.

Vehicles sold were up 17 percent?

Yeah.

Can you talk about so if units are up 17 percent I mean, is that, is there any pricing in that or is it just strictly volumes there are up 17 percent?

I would say it's primarily driven by volume.

And I would imagine that you took share then from the competition because I can't imagine the market growth (inaudible).

We have not seen the market statistics to confirm that, but that would be our belief. That we did in fact take some share.

Especially in the United States.

You didn't do any acquisitions, correct?

No, no acquisitions.

That's very helpful. Thank you very much.

Ben Zarrillo (ph) with (indiscernible) partners.

Ben Zarrillo Good morning. Two questions actually. Can you break out AFC's revenues for 2003 and 2004?

At this time, no.

Can you then comment on any material differences in financing packages that AFC provided? In 2004 first-quarter versus 2003?

I'm sorry is your question did AFC change the basic terms and condition upon which it lends money?

Yes.

No.

Thank you very much.

And gentlemen, there are no further questions at this time. Mr. Gartzke I will turn things back over to you for any additional or closing remarks.

Again thanks everyone for joining us this morning. I am particularly pleased with the results, obviously the first quarter also the fact that all businesses seem to be doing quite well. The economy certainly doesn't hurt us; it helps us with our real estate, it certainly helps our industrial base on the power side of our company being more viable and stronger and certainly the auto sales across the entire industry helps our automotive business as well.

We're very pleased with the condition of our business. Our base business as I (inaudible) look at it, basic businesses in this economy. We are on schedule for the IPO on the spin, and that being said I guess I should just simply say that I look forward to seeing most of you hopefully this spring. Thanks again for being with us this morning.

That does conclude today's conference call. I would like to thank everyone for joining us today.