ALLETE Inc (ALE) 2004 Q2 法說會逐字稿

Good day and welcome everyone to this conference call announcing Allete's second quarter 2004 financial results. Today's conference is being recorded. (Operator Instructions). This conference may contain forward-looking statements within the meaning of 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 provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this earnings release distributed this morning recite management's best judgment at this time. But all such statements are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed or implied by the statement 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 the Chairman of the Board, Dave Gartzke. Please go ahead, sir.

Thank you. Good afternoon and thanks for joining us. With me this afternoon are Allete's President and Chief Executive Officer, Don Shippar; Allete's Chief Financial Officer, Jim Vizanko; Adesa's Chief Financial Officer, Cam Hitchcock; and also with us is Paul Sylvester, the Vice President of Investor Relations for Adesa.

Earlier today, Allete reported second quarter earnings per share of 40 cents compared to 53 cents last year. However, from continuing operations, earnings per share were 38 cents versus 45 cents in 2003. Net income was 34.7 million versus 44.4 million in 2003. And consolidated revenue was 415.3 million compared to 409.9 million. Don and Jim will first discuss the results from Allete's post-spin business. And then, Cam and I will give you the details for Adesa. I would like to remind you that Cam is using some slides as a part of his presentation, and those slides are posted on Adesa's Website. We're having some technical difficulty with those slides, as some of you may have discovered. I apologize for that.

Now, I will turn it over to Don Shippar. Don?

Thank you Dave. We're very pleased with the results of the second quarter for both our energy services and real estate businesses. We continue to experience strong demand from our Minnesota Power industrial customers. And we expect it to continue throughout the remainder of the year. Likewise, demand for Florida real estate remains strong, and we expect this business to also have solid earnings for 2004.

Earlier this year, we told you that we were in the initial stages of preparing for a retail rate filing in early 2005. Since then, our earnings projection for the year has exceeded our original expectation, and our sales forecast has been revised upward. After thorough review, we do not expect to file during 2005. We will, however, continue to monitor the cost of serving our retail customers and evaluate the need for rate filing at some point earlier (ph) into the future. You will note that during the quarter, we recorded an impairment write-down (ph) in our emerging technology portfolio which was based on an estimate of value for those investments. After the write-down, the book value of the portfolio was 27 million.

Now, Jim Vizanko will give you some details for the quarter. Jim?

Net income at our energy services business was up $2.5 million or 37 percent from the same period a year ago, and revenue was up 16 percent. (indiscernible) sales to our retail and municipal customers were up 5 percent compared to last year, with much of the increase coming from our industrial customers, which were up 7 percent. We continue to expect industrial sales to be strong throughout 2004. Sales of our excess power were down 44 percent from the same period last year. Yet margins from these sales were up over last year, because an unprofitable purchase power arrangement expired in the fall of 2003.

Investments and corporate charges were $4.9 million less than the second quarter of 2003. Our real estate business met our expectations for the quarter, and contributed $2.2 million in net income compared to 5.2 million last year. As we have mentioned in the past, net income from this business is not consistent from quarter to quarter, which makes quarterly comparisons difficult. Real estate sales remain strong in Florida.

Within our emerging technology investment portfolio, we recorded an impairment of $4.7 million this quarter. By comparison, this portfolio sold some public shares it received in the second quarter of 2003, resulting in a loss of $2.3 million. Unallocated interest expense was $1.5 million lower in 2004 than in 2003, because of lower debt balances than last year. Corporate expenses for the quarter were $1.3 million higher than last year, primarily due to expenses related to the separation of automotive services. Energy services, combined with investments and corporate charges, represent the entities with will comprise post-spin Allete.

Year-to-date, net income from these businesses was up $6.1 million, or 43 percent over the first half of 2003. This includes about $2 million, after tax, of expenses related to the separation of automotive services businesses. In discontinued operations, 5.8 million of net gains from the sale of heater utilities and the remaining Florida water systems were recorded during this quarter. This was partially offset by a $4 million non-cash charge by Adesa, related to a discontinued automotive services business. Total net income for discontinued operations was $5.5 million less than last year, reflecting the absence of operating income from the water services business.

Now, let me talk about earnings guidance. We expect that net income for the post-spin Allete companies will grow 15 percent compared to 2003. This guidance reflects year-to-date results, including the emerging technology portfolio impairment and reduced interest expense resulting from funds received from Adesa. The guidance does not include approximately $15 million, after tax, of separation-related expenses that we expect to incur this year.

Turning to the balance sheet, generally if you subtract Adesa balances from consolidated Allete entries, one would be left with post-spin Allete figures. Post-spin, Allete's current assets increased $229 million from the end of 2003. Cash increased by $221 million, to a balance of 328 million. Allete will use $125 million of cash to repay a 7.8 percent debenture on July 26th. After this debt is retired, we will have $426 million of debt on the post-spin balance sheet and about $200 million cash.

Now, I'll turn the call back to Dave.

Thanks Jim. I have some brief opening remarks I am going to make before I turn it over to Cam to review the second quarter results and the year-to-date results.

First, we're very pleased with the results of the success of our IPO, and the issuance of 125 million senior notes, and all of the related recapitalization. There was good, strong interest in both of those markets when we took the debt and the equity out. And every pleased with the way that it went. As a result, Adesa is very well capitalized as a stand-alone public entity with this IPO, which gives it the flexibility I think it needs with the cash it is going to generate to be well-positioned to grow this company.

We expect the spin-off from Allete to occur as planned. And it will most likely occur before the end of the third quarter. Now, I will turn it to Cam to discuss the results for the quarter and year-to-date.

Thanks Dave. For those of you who are following the slides, we have been having some technical difficulties. I think people are having better luck with PDF version as opposed to the HTML version. Our apologies there. The first slide I'm going to speak to is slide 4, which is a condensed version of our income statement. It's on a GAAP basis.

A couple of things we should point out -- for the first 6 months of the year, we had net income of 61.9 million as opposed to 61.2 last year. So we're up about 1 percent. And we're going to walk you through some adjustments on the subsequent slide to get you to an apples to apples basis. For the quarter, we posted net income of 28.6 million, as opposed to 34.1 million in prior year's quarter. On the revenue line, you saw our revenues decline about $7 million for the quarter to 231 million. That was due primarily to the decreased institutional vehicle volume that we had discussed previously on the road show. And it's no secret what's going on in our sector with respect to off-lease vehicles, and to a lesser extent some of the repossession -- repo vehicles as we call them.

On a 6-month basis, our net revenue was up about 2 percent from 469 million to 478 million. Despite the increased expenses, which we will detail later, our operating margins in the quarter were up 30 basis points. And on a year-to-date basis, our operating margins improved 140 basis points year-over-year. That is reflective of our continuing emphasis on direct costs at our auctions. And I think our management has done a great job in reducing direct labor hours in a tough volume environment. Interest expense is up about 1.2 million for the quarter. Most of that is due to the recapitalization, and we will talk on a later slide -- and year-to-date it is up about 600,000 year-over-year. Tax rate is in the low 39s. We would expect that rate to remain there.

I am now going to flip to slide 5, for those of you who are following on the slide deck. This gives some comparative operating and volume statistics for Adesa during the quarter. Again, we faced a challenging volume environment with off-lease volumes being down fairly significantly, which we expected, as well as repossession volume. We're also looking at a pretty strong comp, second quarter of '03 to second quarter of '04.

If you look at the used vehicle segment, we sold approximately 27,000 less vehicles in the quarter ended June 30th versus the prior quarter last year. On a year-to-date basis, we were down about 7000 vehicles or about 1 percent. The salvage segment was up slightly in the second quarter -- about 2 percent -- to about 50,000 vehicles. And year-to-date, salvage vehicles sold through 6 months is up about 9 percent. So on total vehicles sold, we report it as one segment -- we are down about 5 percent quarter-over-quarter in flat on a year-to-date basis, at slightly over a million vehicles for the first 6 months.

In terms of conversion percentages, we answered a lot of questions on the road show about conversion. Conversion continues to be stronger than normal. In the quarter, you saw it declined a little bit from its first quarter performance. If you recall in the first quarter, we had about a 68 percent conversion rate. We saw a conversion rate slightly below 62 percent at 61 7 in the quarter ended June 30th. What that gives you a year-to-date basis is a 65 percent conversion rate. On a comparable basis to the first 6 months of last year, we converted it 300 basis points better year-over-year. That's a key metric for us. That helps us drive efficiencies and we will talk a little bit more about that later.

Revenues per vehicle sold were up about 1 percent. That represents some of the mix shift we signaled on the road show, where we're selling a higher percentage of dealer mix in our overall vehicles sold. Loan transactions continued to be quite strong. They're up 13 percent in the quarter, as well as year-to-date. And that is driven by the robust dealer business, particularly the independent dealers, which is the main focus for AFC, as opposed to franchise dealers.

And we have revenue for loan transaction there. We've had a very strong portfolio growth -- gone year-over-year, it's grown by about $73 million. What you see there, in the decline in revenue for loan transaction, is the booking of bad debt expense. Bad debt expense has not changed on a managed basis. But the way you have to book it for GAAP, you're going to see it decline in revenue per loan transaction. We would be happy to talk about a little bit later. For those of you following the slides, I'm now going to go to slide 6.

This is the segment results for Adesa. These are on a GAAP basis, and there will be more disclosure of this information when we file the 10-Q in a few weeks here. You will note that before any of the adjustments that we're going to address later, each of our 2 operating segments posted both quarter-over-quarter and year-to-date over year-to-date gains in net income. Our auctions in related services -- and to remind you guys, auctions and related services encompasses both full (ph) car and salvage. The net income there increased during the quarter 6 percent and 25 million to 26.5 million. For the 6-month period, increased from 43 million to 51.9 million, which is an increase of over 20 percent.

Dealer financing, also known as our AFC segment, also had a very strong quarter and 6 months as you probably guessed, given the growth in loan transaction volume. AFC's net income on a quarter-over-quarter basis went from 9.1 to 9.4 million. Year-to-date it was up a million 7, from 17.7 to 19.4 million -- that is 3 percent growth in the quarter, quarter-over-quarter, and 10 percent year-to-date.

We have a holding company charge here that is the gross public company holding expenses. That was 3.3 million during the quarter, net of tax, which gave you income from continuing operations of 32.6 million. As Jim alluded to in his comments, we did take a $4 million after-tax charge related to a litigation settlement that we cannot really comment on because we're presently in the process of preparing our appeal. But, we will vigorously pursue the appeal on this transaction for this lawsuit.

I am now going to flip to slide 7. We wanted to show you apples to apples because there were a number of items that move through both our income statement and our balance sheet, related to both the transaction and formation of the public company. So, this will be the slide where we depart from GAAP accounting. And there is a disclaimer at the bottom that our attorneys made us and insert. But you can read it at your leisure.

But this will get us to and apples to apples basis. It starts with GAAP net income. That's the first line. And it shows the 28.6 million that I just referenced in this year's first quarter versus the 34 last year. We add back the Cooper litigation segment or the AIS litigation of 4 million after-tax. That gets you to 32.6 million. And then the adjustments that we would like to bring to your attention, which are -- some of them are one-time and some of them are ongoing, primarily fall into 3 buckets -- transaction-related expenses with the IPO; public company expenses; and additional interest expense. Those are all indicated on after-tax basis. So, for the quarter, adding this back, you get an adjusted net income from continuing operations of 35.7 million, as opposed to 34.1 million in the prior year's quarter -- so, a growth of 5 percent.

The 6-month's story, starting again with net income, adding back the Cooper settlement and the year-to-date net taxes, gets you to an adjusted income from continuing operations of 70.6 million as opposed to 60.7 million last year -- which is a 16 percent increase in year-to-date net income on adjusted basis. As we indicated, we had a very strong first quarter. We continue to perform pretty well under difficult conditions -- volume conditions in the second quarter. We feel that a 16 percent bump year-to-year in adjusted income from operations is pretty good performance, all things considered in our environment. I would now like to take you to slide 8 and we will not spend a lot of time on our balance sheet.

There's been a lot of movements in our balance sheet. I would say this quarterly balance sheet is a sort of balance sheet in transition. It reflects part of the recapitalization. We have not completed all parts of the recap. For example, we will pull down another $100 million from our bank term loans during this quarter. We will also repay, as we indicated in a recent press release, $125 million of senior notes. And those are guaranteed by our parent today. In addition to the $125 million cash outlay, will record a $14 million pretax expense in the third quarter which were related to the May cold call premiums.

The only other thing I would call to your attention here is, in the current maturities and long-term debt, where you see the $161 million figure -- and that's reflective of the $125 million in bonds that were calling in addition to the scheduled amortization of our bank loans. You will note that we have a very healthy cash position on the balance sheet. Some of those proceeds are escrowed to pay off bonds. One of the additional uses of proceeds from the transaction as a whole were the repurchase of common stock, which we can talk about later, from the Allete benefit plan. But I would tell you that the true economic cash is in excess of $100 million on the balance sheet today.

The next slide is slide 9. We would like to talk about the environment that we are likely to operate in, in the second half of '04. As we sit here today, we see continued very tight wholesale vehicle volume, or institutional vehicle volume. Again, principally driven by a challenging off-lease environment, as well as declines in repossessed vehicles. Some of that is due to the healthy economy -- sort of a counterintuitive approach. Are there up sides to that in the back half of the year? We're not sure. You are seeing some additional incentive programs from some of the OEs (ph). We are seeing some sporadic pull-aheads of leases and early terminations.

But, as we sit here today, we're not sure that we could give you guidance that will result in a lot of incremental volumes. So, the dealer business continues to be strong for us. The independent dealers are having one of their best years in a long time. Their year-over-year volumes are up significantly. And that is, again, very principal source of business for our finance unit at AFC.

Conversion rates will trend down in the second half of the year, as they normally do. We would expect sort of a high 50s to 60-ish conversion rate in the second half of the year. Our salvage business continues to perform well in terms of gross returns to the seller. I think that's indicative of the general conditions in the salvage industry today. Again, our AFC loan transactions -- the growth there -- the continued growth would be closely correlated with the strength of the dealer business, in particular the independents.

So, we would like to take you to slide 10 to talk about our outlook for the second half of the year. The first line is income from continuing operations. We would expect to post somewhere in the $34 to $39 million range in the second half of the year. And that is after approximately 25 -- $20 million, net of tax, in additional transactional expenses, corporate expenses and interest expense, which gives us, on an annualized basis -- if you posted the 34 to 39, that gives you 100 to 105 million on the income from continuing operations line. The add backs (ph) for the entire year are approximately $25 million, as we have footnoted for you in this box. So $25 million on both sides of that range takes you to $125 to $130 million.

We would expect continued tightness in used vehicles. We see that being down sort of a low single digit number, as we have indicated there. Salvage is having a pretty decent year, particularly in the U.S. They had a very strong second half last year. We would expect to see them flat to slightly down by low (sic) single digit number.

We are calling for continued strong growth in loan transactions at our finance unit. We feel that dealer business remains strong. AFC's penetration remains strong. And their marketing efforts are proving fruitful at this point in time. What are the risks to this that are out there today? One of the things that we have discussed extensively when we were on the road was the impact that incentives have on us, and what the timing and the magnitude of those incentives are. It's very difficult for us to predict what the OEs are going to do, and clearly there is some impact if there are large-scale incentives moves put back on. That's one of our largest risks right there, other than general economic risks in the U.S. economy which impact macroeconomic demand.

So, in summary, where we're at today -- we finished the initial public offering, I believe as Dave indicated, that the spin is still scheduled for the time-frames we discussed when we were on the road show. We are firmly in the transition from being a large sub of Allete to an independent public company. We talked about some of the transactional expenses, and building corporate infrastructure, and some of the related to ongoing expenses -- we showed you those.

Our capital structure will have more leverage in it as a result of some of the payments and decisions that were made on recapitalizations of both companies. That will result and in higher leverage, slightly higher interest expense. The operating environment continues to be challenging. But I think our operators are doing, particularly on the full car and salvage sides, are doing a great job in managing their direct costs.

With that, we will turn it over to the audience to Dave and -- (multiple speakers)

I guess a comment before we go to you for questions -- this is Dave. The board will set the date for when it declares the record and the spin-off date -- in late August we expect. At the time of the spin-off, I will leave the Allete Board of Directors and remain the Chairman, President, and CEO of Adesa. Bruce Stender, a member of our board since 1995, will succeed me as the Chair of Allete. That does conclude are prepared comments. I will turn it to you for questions.

(Operator Instructions). Jeff Skoglund, UBS.

Cam, could you translate this earnings from continuing operations guidance into a -- adjusted EBITDA forecast for the year?

I think we have been advised Jeff -- there's enough pieces out there. I think you're going to need to do that on your own. But I think you can get to that pretty easily.

Okay. If I look at page 7 of this, the adjustments -- are those all in the operating income line? Or above the operating income line? Or, are some of those in other expense?

Just a second Jeff. We're -- yes. They're mostly in the operating expense line.

Okay. Cam, I was wondering if you could -- you made a comment earlier in the presentation that your charges for bad debt expense went up. I was wondering if you could elaborate on that.

Those are bad debt dollars. We need to make sure we're absolutely clear on that. With portfolio growing the way it is, clearly in a constant percentage environment -- meaning what you have reserved may remains constant -- your dollars are just going to grow up, or go up in terms of what you have to allocate. That expense is a reduction to revenue. That is the way that that is recorded. On a managed basis, our loan loss reserves have not changed. There was no deterioration in the quality of the AFC portfolio. We continue to refer people to the original filings of S1, where we disclosed a 2.9 percent to 3 percent sort of net bad debt expense figure.

Okay. I guess lastly, just looking at the slide 8 -- I was wondering if you could review again what the cap structure looks like post to spin for investment on a pro forma basis for June.

Post to spin -- we have already paid the dividend to Allete. We've taken care of some of the third-party debt, Jeff. When we're done, we have approximately $500 million of funded debt. And that's comprised of the senior unsubordinated notes of 125 million, the 200-some million dollars of amortizing bank term loans, and there are some odds and ends in there in terms of the rest of the components. But you'll have about $500 million in funded debt and about $100 million of true economic cash on the balance sheet. It has not changed since the disclosures we made in the road show.

That's all I've got. Thank you.

David Schanzer, Janney Montgomery Scott.

A couple of things, just for clarification purposes. It got a little bit confusing. I was wondering if you could, kind of taking the Corporation as a whole now with the two pieces, give us an idea what earnings would have been without all the one-time things?

The one-time pieces for the non-Adesa piece -- the 2 one-time pieces, we had about $1 million in separation expenses, after tax. We had -- in a part of continuing operations again, we had an impairment charge of 4.7 million, after tax, in emerging technology portfolio. And in discontinued, we had the water gains basically offset by a charge with Adesa, related to the lawsuit that Cam was talking about. And Cam, in the automotive side there?

Yeah, the lawsuit that Jim referred to was $4 million, after tax. The aggregate in the second quarter of the after-tax impact was about $3 million for the items that -- the incremental expenses at Adesa.

So, all told, you're talking about roughly 12, 13 million?

On the Adesa piece, it would be 7 million roughly. (multiple speakers)

And the others 5 7. Okay. A couple of questions about -- again, looking at the Corporation as a whole -- the income tax rate was slightly higher than your normal marginal rate. Would you expect that go down in the 39, 40 area in the next quarter?

Yes. And the reason why it was up was, there was a change in the accounting for the spin costs. There was some shifting for something deductible to being nondeductible. That raised the tax rate slightly in the quarter.

And I noticed that O&M was really leveled out in the quarter. Good cost control. Is that something we could expect again -- not going into the fourth quarter just yet, but is that something that we can expect from the third quarter as well? Ongoing O&M?

Yes. I think so.

Okay. All right. Thanks.

Matthew Berg (ph), Lafer Management.

Matt Berg calling from Lafer Management. I guess I have a question for the Adesa piece of the business. I guess my understanding is that the OEM kind of didn't push their incentives as hard in the month of June. At the same time, your conversion rate came off a little bit. So I just wanted to see if you guys could provide an understanding of how incentives impact auction pricing as well as auction conversion rights? Thank you.

I think there's a couple of components to that -- you said pricing and conversion. When there is a significant increase, new incentives on certain vehicles, that has the impact of impressing, pretty much immediately, those recent late model cars that are -- if an incentive comes out on a new Suburban, that 2-year-old Suburban takes effect in terms of its value. It takes the used car chains a while to move those Suburban out at their now-depressed value as a result of the incentives. So, that can also -- while that is happening -- to the extent you have to run that vehicle 2 times, 3 times, 4 times while that price gets adjusted down, that can impact conversion rates for us during that time period. Conversion rates can also just be impacted by the general level of demand in the retail used car segment.

Okay. But the incentive environment was -- I guess there were less incentives in June. So, wouldn't that mean that you would possibly have a higher conversion rate?

The incentives -- you know, various manufacturers, into the -- out of the market at various times. We had indicated that are conversion rates would fall or start to get back to the norm in some period of time. They typically do in the back half of the year. We started to see that decline in the month of June in particular.

Okay. Thank you.

Steve Velgo (ph), Cafe Financial.

I guess I had a question about the shares outstanding. Going forward, once the spin-off is complete, I believe Adesa is repurchasing a certain amount of shares from the employee benefit plan. But I wasn't sure how it would impact -- if it does impact the calculation of diluted shares outstanding.

It's a couple part question. We issued the primary -- the 6.25 million. The sheer account of the spin, Jim will be 80 -- wherever it's going to be, it's going to be approximately 88 million plus or minus.

Shares outstanding.

Shares outstanding. So the second that distribution is made, you're going to have the sum of those 2. And maybe there's a little play in there, due to some of the options in other shares. We're going to contact and reengage with the trustees of those benefit plans as we get closer to the spin date, to see if we can successfully negotiate a block repurchase of shares from those plans. We had talked about approximately 4.7 million shares, plus or minus. Adesa's debt agreements, both public bond and bank, allow us to repurchase up to $130 million of our own stock -- in notional value of our own stock.

And are all of those shares counted in the treasury method for diluted shares outstanding -- so when you refer to the 88 million shares, are those 4.7 all included in there?

In the 88 today for Allete, are they counted?

I think the question is, what impact it has on Adesa shares going forward.

Well you (multiple speakers)

You buy back those shares.

We would buy, but -- if we can't affect a block transaction in relatively short order, we have authorization to try to affect open market repurchases. But obviously that's going to take us a while to do. So in order to give you a diluted share count, it's a little tougher to figure out exactly an average number of shares for that. You know, the remainder of this year is going to be contingent on when we can pull those shares off the market.

But the shares bought back either way will reduce your shares outstanding.

That is correct.

Rights. Okay.

But, turning to Allete for a minute, because Allete is unique with the benefit plan. The ESOP benefit plan has unallocated shares. Those shares outstanding are not a part of shares used to calculate our earnings. There's a difference between the earnings per share -- the total shares outstanding that Cam had mentioned and the shares we use for earnings purposes. That difference is the unallocated shares that the ESOP holds.

That's about 3.7 million shares. And those shares -- they will have been in their possession 3.7 million shares of Adesa stock. And they need to sell that stock and buy more Allete shares, just because of the nature of the ESOP plan and tax regulations. So, as those shares are bought back -- those shares are sold and more Allete is repurchased with the proceeds, those shares will then subsequently reduce the shares that we have outstanding for earnings purposes.

Okay.

So, I guessed that's the -- answer I guess to both questions, or your question generally is, both of these transactions will reduce shares outstanding for both companies.

Okay thank you.

Jordan Hymowitz, Philadelphia Financial.

A couple of questions. First of all, on slide 7, it seems to only commit (ph) at transaction-related expenses in the 4 million are truly one-time in nature, you're going to have the public company expense and the additional interest expense every quarter going forward, are you not?

The purpose of this slide, Jordan, was to show comparability to prior periods. We'll have the interest expense, due to the recapitalization on a go forward basis. And we will have public company expense or increased holding expense -- company expense on a go forward basis.

Second question is, you said you sold 27,000 less vehicles year-over-year. And I'm sorry because the slide show's kind of not working on those slides. But what do you think, in the second half of this year, the number of cars sold will be in the third and fourth quarter year-over-year? And if you could do percentages rather than numbers, that would be great. Well, what you assumed in your guidance? Let me put it that way.

We took a look at what we sold last year. And we think, between the salvage segment and the -- between salvage and used vehicles, which are both covered under auction as in related services, you will see sales somewhere in the close to 950,000 -- between 940 and 950,000 -- somewhere in there.

For the second half. And what was the last year?

In the second half of last year, it was about 970,000 to -- talking about year-over-year between the salvage and used vehicle components -- approximately 27, 28,000 share -- vehicles less total.

(inaudible) Well, or about 2 to 3 percent less?

That's correct -- about 3 percent.

Okay. And as we look towards '05, if trends continue -- I mean do you think it could be 2 to 3 percent less in '05 as well, because in '05 is where really the acceleration happens in the number of cars that slow down off-lease.

You know, we could have challenging volume conditions until some of those lease returns begin. Again, we can't predict if any of those programs will be terminated and pull forward. But, clearly, we're out looking at other opportunities to not only take share, but also increase our dealer consignment business, which has partially offset the decline in institutional vehicles. It also -- you can see that in revenue per vehicle, that mix shift has slowed down a little bit of the growth in revenue per vehicle.

Okay. And, last thing -- you guys only went public a few weeks ago. It seems like you are guiding below for the full year with the income from continuing operations were that the underwriters marketed you. Is it because mostly the change in incentives that happened up in July? What was the event that kind of made the change here?

I cannot speak to where the underwriters marketed us. But if you look at the change in the range, after you add back the incremental expenses, we're talking about $100 to $105 million from continuing operations. We've got about 25 million net of tax. So, if you add that to both sides of that range, that takes you from $125 to $130 million in terms of the range. Last year, our net income was slightly below $115 million. So, I don't think that knocks us out of the range that we were talking about.

I'm sorry. Can you say that again -- I apologize. You are adding 20 to 25 million (multiple speakers)

We're adding 25, which is the number, net of tax, to make it comparable with last year. We're talking about 100 to 105 million of net income from continuing operations. You add the 25 back, net of tax -- that gets you to 125 to 130. Our income net income last year was a shade under $115 million.

(inaudible) I thought last year was 100 from continuing operations? And this year you are saying that it's going to be 100 to 105. Maybe I can -- (multiple speakers)

There's 25 -- you're missing the 25 million of add backs on incremental and transaction related expenses to get you to apples to apples.

All right. I'm going to follow up later. I thank you for your time. I appreciate it.

Robert Kirkpatrick, Cardinal Capital.

Do you have a CapEx number for the second quarter?

Just a second. We'll --

And/or a bad debt number that you're going to book for this -- on the cash-flow statement as well?

CapEx in total was about $26 million, for the total Company.

Okay. So that's Allete?

That's right. And automotive, as well as energy, real estate, everything.

Okay. And the automotive segment?

Yep. I think through 6 months we were about 6 million.

Okay.

And it will be -- there's some timing there. We would expect to spend 35 to 40 million on a full year basis. There are just a lot of projects that are falling into the second half of this year.

And are they more greenfield (ph) startups, or?

No. These are combination of investments in existing sites, or some expansion, some reconfigurations. There are some IT investments -- capitalizable IT. So no, there are no greenfields planned for this year.

Okay. And do you have a bad debt number for the quarter or the -- first 6 months, for just the automotive side? Just the number that shows up on the cash flows statement as bad debt expense.

Bear with us just for second here.

Okay. And while you're looking for that, can you explain to me what you mean by economic cash?

Economic cash is -- Adesa -- often you see a fairly significant cash number on the balance sheet. Some of that is unavailable. There are some unavailable funds. (multiple speakers) need to be cleared. By economic cash, I mean real cash, not -- there's no float in there. It's money that is available to be reinvested.

No restrictions.

No restrictions or to delever with.

Okay. And in your normal course of business, do you carry a portion of your cash that is restricted and therefore unable for you to deploy?

Under a couple of our financing agreements, there is -- particularly in one of our Canadian financing agreements right now, there is about $8 to $10 million of -- 8 to 10 U.S. of restricted cash in Canada at this point.

And that is kind of a normal level of what casinos might call cage cash?

(laughter) we refer to it as restricted cash.

That's what I figured. And then finally, in terms of the automotive side, looking at '05, given the trends you see now, would you expect '05 net income from continuing operations to be higher or to be lower?

We're presently not guiding to '05 at this point in time.

When would you figure out a -- when would you be willing to do that? Is that (multiple speakers)

As we complete this year, we have the IPO, which certainly took a lot of time. And in the roadshow, I think we spoke specifically to the value drivers that we were focusing on to maintain the organic growth of what we have. And equally as important is the cash management discipline of the company. As you heard, both companies are well capitalized with 100 million or so of cash on Adesa's balance sheet, and 2 times that at Allete.

In January, the Board of Adesa will meet. And we're preparing are such eject plans strategic plans as we speak through the second half of this year. And as we approach January for our board meetings, we will conclude with our strategy for 2005 and beyond, and have a resource plan that will support and coincide with that strategy. At that point in time, we will be giving solid guidance for 2005. But not before.

So, we would expect it with the fourth quarter report that you make.

That's right. But, we wouldn't expect it -- maybe to answer your question partially -- to be any different than what we have been telling folks during the IPO roadshow when we marketed the stock.

Okay. And any luck on that debt number?

I'm going to have to refer you to the Q, because it's the -- the disclosure is a little -- it's not -- the answer I would have to give you of the cash-flow is inconsistent with the what the Q -- required disclosure of the 10-Q is by the SEC.

Okay. We will look for the Q in a few days. Thank you.

Jason Krishnan (ph), Axel (ph) Capital Management.

Mr. Krishnan, your line is open. Hearing no response, we will move on to Eric Beaumont (ph), Copia (ph) Capital.

Just a couple of quick questions. Once again, for both address a Adesa and for Allete post-spin, -- can you characterize the charges associated with that -- I know for Adesa you're saying it's going to be 25 million after-tax. And that, I would assume, is for basically -- those are all the charges going forward for the spin? And also could you characterize any charges that Allete will have?

Sure. Looking at Allete, we're looking at $15 million after-tax. And the majority of that is a May (ph) call. We have a -- the debt that we're retiring -- $125 million debenture retiring this month has a May call premium. So, most of that $15 million is the after-tax May call payment we expect to make. The rest is legal -- some bankers fees, just a variety of things.

Okay. And then, it is accurate that for Adesa, it's the 25 million?

There's a couple of different components to that 25 million. You have transactional costs, including May call premiums which are just shy of $15 million on a -- in the second half of the year and on a full year basis would be about 17 million pretax. Or slightly over $10 million after tax. We have incremental interest expense, and that will be ongoing. The only reason we backed it up out this time was to show you an apples to apples comparisons to a year ago. The incremental interest expense this year, as a result of the recap, will be about $11 million pretax, or about 6.7, 6.8 after tax. And we will have public company expenses on an ongoing basis that we -- you know, we have talked about that on prior calls.

Okay. The only other question is you know, historically you -- Adesa has been a good cash generator. I guess could you just give us an idea of what type of target cap structure going forward -- just looking at some of your peers, to the extent you have peers for a public (indiscernible) and we could see this. Do you have plans to rapidly try to remove the debt from the balance sheet? Or is -- are you planning for expansion capital?

We're comfortable with the capital structure that we have now. Under the terms of some of our financing agreements, we do have to delever to the tune of about $37 million a year. That is accretive, given the debt paydown. Clearly our preference would be to reinvest that cash -- the remainder of that excess cash, beyond debt paydown and what we're going to return to the shareholders as a dividend in our existing operations and/or expansion opportunities.

Okay thank you.

Robert Magnuson, Merrill Lynch.

Just back to slide 7, here -- the transaction related expenses. Can you give that -- that's net of tax. What was the gross number for the second quarter?

In the second quarter, it was about 5.05 million. And for the 6 months, pretax, it was 7.8 million.

Great. Thanks. And do you have any updates, I guess, on New Jersey expansion? Or timing? Or when that is going to hit the road?

It's underway right now. We've started.

And (multiple speakers)

I don't know the completion date offhand. End of the year.

Great. And, what was the securitization balance at the end of the quarter?

Managed receivables were $599 million at the end of the second quarter. 375 of that amount was in the securitization vehicle, the remainder being financed on balance sheet.

Great. That's all I have. Thanks a lot.

Aaron Edelheit, Sabre Value Management.

I was wondering if you could quantify how much in terms of book value you're carrying -- will Allete carry in terms of real estate? And do you have an acreage, like an updated -- how many acres you still own in Florida?

What we have on land, on the books currently, is about $50 million of land on the books. And acreage is about 16,000 acres.

16,000 acres -- and is the -- you gave the pro forma balance sheet for Allete as $426 million in debt, $200 million in cash. Does that include the proceeds for the water utility sales?

Yes.

Okay. I don't know if I missed it, but did you give like -- I guess EBITDA? Or an operating kind of forecast for the Allete, I guess for 2004? Without Adesa?

We updated our earnings guidance. We have not given EBITDA guidance. We have given net income guidance. We updated that to be 15 percent growth over last year in net income without -- the guidance does not include the separation-related expenses.

Okay. And I guess, do you also have -- have you talked or -- what is -- what will Allete's -- I guess -- does Allete have a particular strategy that they are going to pursue? Once they -- the spin-off is complete? Just pretty much operate the same business, plan to expand -- what are your thoughts?

We plan to operate the same businesses and expand what we have. We plan on looking at properties, expanding the real estate operations in the state of Florida. We plan on looking for regulated operations. We also plan on looking at other businesses -- non-utility or real estate businesses as well. We do plan on growing the company, certainly off the businesses that we have -- real estate and energy.

When do you think you might be all to give guidance as to what Allete's after the spin-off dividend will be?

We plan on doing that later this year.

Okay. Thank you.

Jeff Skoglund, UBS.

A question -- I'm just looking at kind of the sequential performance. In the first quarter, you had pretty significant increases in the number of vehicles sold. And then -- in the second quarter it reversed. I understand what you're saying about incentives in June. But, I guess, I'm a little bit confused as to your guidance for the second half, because the OEMs have really boosted incentives in July again. And early indications are that OE sales are pretty good. Are you seeing any early indications from the field on July sales? And kind of in light of the fact that incentives are up, I'm a little bit confused as to why your forecast says you are down low single digits.

Well, A -- we will have to see where conversion rates come in. That's a key driver for us, Jeff, as we talked before about what comes in. Clearly, one of the benefits of risk, new car market, are those units that you traded in or pulled off lease. People -- many of those have ended up at auction in a tight volume environment, less of those are coming to auction. We will have to wait and see. The impact doesn't -- it takes a little while for us to gauge what the impact of any incentive program is. We need to see it come into the market and see what actually does, how broad it is, or if it's tightly focused. And then we see how it flows through in our vehicles.

We've gone through this several times in the last couple of years, when the manufacturers hit the market with these incentives. It tends to create a short-term gridlock situation. But sooner or later, the market has to loosen up and people have to get out of the vehicles that they are in, take the losses and move on. And at that point in time, the velocity picks up and things return to normal. And we usually get back what we lose in terms of volumes on a delayed basis at a later date.

Can you describe how the volume trends were by month in the second quarter? What was June a particularly weak month?

We haven't done that historically, Jeff. And I don't think we're going to go there on this call for

Yes, we've been trying on the roadshow to talk to people about the way in which you have to look at this business and this industry, and not look at it on a quarter-to-quarter basis. When you drag it down to the monthly analysis, it can really get to be crazy because the mix changes. It's a business where from month-to-month, things do change. That causes the conversions to be different. As you saw, the first quarter we have had extremely high conversions. In the second quarter they returned to normal. In the third quarter we're looking at potential incentives. And that's the norm for this industry.

What we believe is that year-over-year, these value drivers that we continue to believe we will be able to push -- of volumes, and revenue per car, and efficiencies -- are going to continue to give us the organic growth that we told folks when we took this company public. We are pleased with the results that we have had this second quarter in spite of the significant reduction in the off-lease vehicles. The year-to-date numbers are very good. We are especially pleased with the efficiency gains in spite of the drop in volumes, or in light of the drop in volumes.

We were able to control our direct expenses to coincide with it, combined with, SG&A, to give us a significant pickup in our bottom-line EBITDA -- which is what we told folks what would happen and could happen if volumes were to decline. On a revenue per car basis, and on a volume per car basis, on a going forward basis, we will continue to believe that we are well positioned to take market share and to penetrate markets that we're currently not in. And we are going to continue to pursue that.

So to look at this business and value it in the short-term -- we would ask you to not do that. But certainly, if there are any changes in trends, or something that we would be concerned about as it relates to things that we have told you in the past, we will certainly tell you about it. So anyway, I guess the short answer is, it's difficult to look at this industry, unless a material event were to occur that is permanent, and draw any conclusions to it on a month-long basis.

I understand that. And I understand some of the issues that you are facing. I just -- you know, when you guys are on the road, I thought we were talking -- kind of low single digit growth, not low single digit declines. I'm just trying to figure out what might have changed or maybe I just (multiple speakers)

The guidance that we gave on the roadshow was for -- when we talked about the growth drivers, there were 3 components. Those 3 components are buckets. And we talked about mix shifting between those buckets -- generally was growth at the EBITDA line of 9 to 12 percent. We haven't backed off of that. If you take a look at the outlook we gave in for back half of the year -- and I wanted to update the question that Mr. Hymowitz asked earlier, if you back out -- there was an item in the third quarter last year. Net income from continuing operations in '03 was 112.5. Reported net income was 114.8. So, if you have 112.5, and if you take that range that we gave you of 100 to 105 plus the 25, that gives you to 125 to 130. And those numbers, on a net income basis, back into that range on an EBITDA basis that we discussed on the roadshow.

All right. Very good. One last one, Cam. Do you know what -- I may have missed this -- but, could you told tell the what D&A was in the quarter?

D&A in the quarter was -- D&A in the quarter was 8.9 million, Jeff.

All right. Thank you.

David Schanzer, Janney Montgomery Scott.

One other question popped into my mind. Last time I had visited one of your auctions, I noticed that there was a marked increase in your use of the Internet. There were actually lanes where people were bidding from the 'net. I was wondering if that -- if there's any comments that you'd like to make on that evolving during the quarter and what you expect for the rest of the year?

I think what we generally discuss with people is that our Internet penetration in sales is sort of a mid single digit. Do we think it can grow prospectively? The answer is yes. One of the dynamics that we talked about was, we think it's helping not only the selling incremental vehicles, but for those vehicles that are sold, we think Internet bidding is drawing incremental bids and helping the retention on those cars that are sold. We haven't forecast what we think that is going to. We haven't seen explosive growth yet in that area. But we're keeping an eye on it. And we're positioned with our live technology -- our live (indiscernible) technology and our whole car auctions to accommodate that growth, should our customers demand it.

But you really haven't changed your opinion as to the outlook for that part of the business?

No, we continue to see it as a complementary venue to sell cars in. And it's just that today.

Okay.

Anything further Mr. Schanzer?

No. That's it.

One more question, and then I think we should close.

Ross Sterner (ph), Weintraub Capital.

Can you talk a little bit about what you see as driving the salvage returns higher? You mentioned that one on your slides. And just -- I know it's not a big part of your business. But maybe talk a little bit more about specifically what's going on, on the salvage side, with Copart going more towards their -- exclusively towards Internet driving their business. So, what are you seeing as a result of that?

I'm not sure that we are necessarily that -- the impact that Copart is having. I mean, the salvage industry in general is doing well on the values that are being realized today. The -- Copart has gone to the -- their VB2 technology is basically the sole venue for them to move their product through. We're continuing to use the dual channel strategy. What I mean by that are the physical auctions -- live physical auctions, as well as offering access via our Live Block (ph) product. And there are some other derivatives of that, that are used in our salvage operations. I would say that's penetration there is growing electronically. We have not made the same business decision that Copart has to try to drive to the completely electronic business channel.

What are you seeing in terms of volume of cars? In terms of -- we know what's going on in terms of the repo and institutional side of the business. But what are you seeing in terms of availability on the salvage side?

It's actually tighter than you might think. There are less vehicles generally right now that are hitting that market. I think if you talk to -- (multiple speakers)

Well, that's a seasonal thing. But are you talking on a year-over-year basis?

I think the second half of last year is a tough comp for us. Do you have anything -- that's all we're going to say on the salvage (inaudible)

Well, you know they've had normal weather. The scrap prices certainly help a little bit. Perhaps not as much as maybe our competitors are saying it has helped them. But, certainly the value of the scrap prices certainly helped this industry. It also correlates with vehicle wholesale prices as well. And all of those things tend to be contributing to our success as well as, I think, increased volumes in the United States.

Okay. Thanks very much.

Well, I think that should conclude the questions that we're going to entertain today. As always, I look forward to seeing many of you following these calls. The quiet period is over, so that will enable Cam and myself, and Jim and Don and others, to visit you folks.

I'm really pleased with the way the IPO has gone. It's positioning both Companies extremely well. The cash positions that both of us enjoy post-spin are going to enable us to pursue our strategic initiatives. We have good strong balance sheets. I am extremely pleased with the demonstrated growth of Adesa, even with -- in spite of the decline in the volumes the second quarter, which we did expect. You received revised guidance on growth from Allete. I think that we have strong management in both places. The boards for governance are in place for both Companies. I look forward to the spin, as I said, which we expect to be announced -- the spin date -- the latter part of August. Thank you for joining us this afternoon.

That does conclude today's conference. Thank you for your participation. You may now disconnect.