Openlane Inc (KAR) 2004 Q2 法說會逐字稿

Good day everyone and welcome to this conference call announcing the ALLETE Second Quarter 2004 financial results. Today's conference is being recorded. Your line will be muted for the presentation and then we will conduct the Q&A period.

(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.

Such forward-looking statements in this earnings release distributed this morning, reflect management's best judgment at this time. But all such statements are subject to numerous risks and uncertainties which could cause the actual results to differ materially from those expressed or implied by the statement they're in.

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, David Gartzke. Please go ahead, sir.

Thank you. Good afternoon and thanks for joining us. With me this afternoon are ALLETE's President and CEO, Don Shippar, ALLETE's CFO, Jim Vizanko, ADESA's CFO Cam Hitchcock and also with us is Paul Sylvester, the VP of Investor Relations for ADESA.

Earlier today, ALLETE reported second quarter earnings per share of $0.40 compared to $0.53 last year. However from continuing operations earnings per share were $0.38 versus $0.45 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'd 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 are having some technical difficulties 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 for 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 quarter real estate remained 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 expectations 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 costs of serving our retail customers and evaluate the need for rate filing at some point later into the future.

You'll note that during the quarter, we recorded an impairment write down in our emerging technology portfolio, which was based on an estimated 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 in our Energy services business was up $2.5 million or 37% in the same period a year ago. And revenue was up 16%. (Inaudible) sales to our retail and municipal customers were up 5% compared to last year, with much of the increase coming from our industrial customers, which were up 7%.

We continue to expect industrial sales to be strong throughout 2004. Sales or excess power was on 44% from the same period last year. Yet margins from these sales were up over last year because an (inaudible) purchase power arrangement expired in the fall of 2003.

Investments and corporate charges were $4.9 million last in 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 remained 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 they received in the second quarter of 2003, resulting in a loss of $2.3 million.

Unallocated interest expense was $1.5 million more 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 that will comprise post spin ALLETE. YTD, net income from these businesses was up $6.1 million or 43% over the first half of 2003. And this includes about $2 million after tax of expenses related to the separation of automotive services businesses.

In discontinued operations 5.8 million are net gains from the sale of heater utilities and the remaining from the 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 from discontinued operations was $5.5 million less from last year reflecting the absence of operating income from the water services business.

Now let me talk about earnings guidance.

We expect net income for the post spin ALLETE companies will grow 15% compared to 2003. This guidance reflects YTD 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.

Showing (ph) you the balance sheet. Generally if you subtract ADESA balances from consolidated ALLETE entries, what would be left was post spin ALLETE figures.

Post spin, ALLETE's current assets increased to $229 million from the end of 2003. Cash increased by $221 million to a balance of 328 million. ALLETE will use a $125 million of cash to repay a 7.8% debenture on July 26.

After this debt is retired, we will have $426 million of debt on the post spin balance sheet and about $200 million in cash.

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

Thanks, Jim. I have some brief opening remarks that I'm going to make before I turn it over to Cam to review the second quarter results and the YTD results.

First, we're very pleased with the results of the success of our IPO and the issuance of a 125 million senior notes and all of the related re-capitalization. There was a good strong interest in both of those markets when we took the debt and the equity out and were very pleased with the way that it went.

As a result ADESA is well capitalized as a standalone 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 this spin-off from ALLETE to occur as planned and it will most likely occur before the end of the third quarter.

Now I'll turn it to Cam to discuss the results for the quarter and the YTD.

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 the PDF version as opposed to the HTML version. Our apologies there.

The first slide that I'm going to speak to, is slide four, which is a condensed version of our income statement on a GAAP basis. A couple of things that we should point out for the first six months of the year.

We had net income of 61.9 million as opposed to 61.2 last year, that's a rough about 1%. And we're going to walk you through some adjustments on the subsequent slide to get you through an apples-to-apples basis.

For the quarter, we posted net income of 28.6 million as opposed to 34.1 million in the prior year's quarter. On the revenue line, we saw our revenues had declined 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 on some of the repossession, Repo vehicles, as we call them.

On a six-month basis, our net revenue was up about 2% from 469 million to 478 million. The - despite the increased expense, which we'll detail later, our operating margins in the quarter were up 30 basis points. In our YTD basis our operating margins improved 140 basis points year over year. And as reflected over our continuing emphasis on direct costs at our auctions and I think at our management's 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 due to the re-capitalization -- we'll talk you through that part on a later slide. In YTD, it's up about 600,000 year over year.

Tax rate is in the low 39s. We'll expect that rate to remain there.

I'm now going to flip through slide five, for those of you who are following on the slide deck. This gives some comparative operating in 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 our repossession volumes.

We're also looking at a pretty strong (inaudible) from the second quarter of '03 to second quarter of '04.

If you look at the used vehicles segment, we sold approximately 27,000 less vehicles in the quarter and at June 30th versus the prior quarter last year. In our YTD basis, we were down about 7,000 vehicles or about 1%. The salvage segment was up slightly in the second quarter, about 2% to about 50,000 vehicles. And YTD, salvage vehicles sold through six months is up about 9%.

So, our Total Vehicles Sold, we report in this one segment, we are down about 5% quarter/quarter and flat on a YTD basis. That's slightly over a million vehicles for the first six 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 decline a little bit from its first quarter performance. As you recall, in the first quarter, we had about 68% conversion rate. We saw a conversion rate slightly below 62%, 61.7 in the quarter end of June 30th. What that gives you on a YTD basis, is a 65% conversion rate. On a comparable basis to the first six months of last year, we converted at 300 basis points better year/year. But that's a key message for us that helps us drive efficiencies and we'll talk a little bit more about that later.

Revenues per vehicle sold were up about 1%. That represents some of the mixed ship we signaled on the road-show, where we're selling a higher percentage of dealer mix in our overall vehicles. Loan transactions continue to be quite strong. They're up 13% in the quarter as well as YTD.

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 transactions, there. We have a very strong portfolio growth on -- year/year its grown about $73 million. What you see there in the decline in revenue for loan transactions is the booking of (inaudible) expense. (Inaudible) expense has not changed on a managed basis, but the way you have to book it for GAAP, you're going to see a decline in revenue for loan transaction. We'd be happy to talk about that a little bit later.

For those of you following the slides, I'm now going to go slide 6. This is the segment results for ADESA. These are on a GAAP basis. And there'll be more disclosure of this information when we file the 10-Q in a few weeks here. You'll note that before any of the adjustments that we're going to address later, each of our two operating segments boasted both quarter/quarter and YTD/YTD gains in net income.

Our Auctions and Related Services -- and to remind you guys, Auctions and Related Services encompasses both Old Car and Salvage. Net income there increased during the quarter, 6%. From 25 million to 26.5 million. For the six month period, it increased from 43 million to 51.9 million, which is an increase of over 20%. Dealer Financing, also known as our AFC segment, also had a very strong quarter and six months as you probably guessed given the growth in loan transaction volume. AFC's net income on quarter/quarter basis went from 9.1 to 9.4 million. YTD was up 1.7 million. From 17.7 to 19.4 million. That is, 3% growth in the quarter, quarter/quarter, 10% YTD. We have a holding company charge here. That is the gross public company holding expenses. That was 3.3 million during the quarter. (Inaudible) 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 can't really comment on because we are presently in the process of preparing our deal. But, we will vigorously pursue the appeal in this transaction (inaudible) lawsuit.

So, I'm now going to flip to slide 7. We wanted to show you apples-to-apples because there are a number of items that moved through both our income statement and our balance sheet related to the -- both the transaction and the formation of -- as a public company. So, this will be the slide where we depart from GAAP accounting. And there's a disclaimer at the bottom that our attorneys list. And certainly, you can read it at your leisure, but it -- this will get us to an apples-to-apples basis.

Starts with GAAP net income. That's the first line. And it shows the 28.6 million I just referenced in this year's first quarter versus the 34 last year. We add back the Cooper litigation settlement or the AIS litigation of 4 million after tax. That gets you to 32.6 million. And then the adjustments that we'd like to bring your attention, which are -- some of them are one-time and some of them are ongoing, primarily fall in three buckets. Transaction-related expenses with the IPO, public company expenses and additional interest expense. Those are all indicated on an 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 growth, 5%.

The six months story, starting again with net income, adding back the Cooper settlement and the YTD net tax, 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% increase in YTD net income on an adjusted basis. As we indicated, we had a very strong first quarter. We continue to perform pretty well under difficult conditions, (inaudible) conditions in the second quarter. We feel that the 16% (inaudible) for year-to-year in adjusted income from operations is pretty good performance, all things considered in our environment.

I'd like to now take you to slide 8. And we won't spend a lot of time on our balance sheet. There's been a lot of movements in our balance sheet. I'd say this quarterly balance sheet is a 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 in 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, we will record a $14 million pre-tax expense in the third quarter, which are related to the May call premiums. The only other thing I would call to your attention, here is in the current maturities of long-term debt, where you see the $161 million figure again. That's reflective of the $125 million in bonds that we're calling in addition to the schedule of amortization of our bank loans. You'll note that we have a very healthy cash position on balance sheet. Some of those proceeds are escrowed to pay off bonds. One of the additional uses of proceeds from the transactions as a whole would repurchase a common stock, which we can talk about later, from the (inaudible) 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'd like to talk about the environment that we're likely to operate in, in the second half of '04. As we sit here today, we see continued, very tight wholesale vehicle buying -- institutional vehicle buying. Again, principally driven by challenging off-lease environment as well as declines in repossessed vehicles.

And some of that's due to the healthy economies. Sort of a counter-intuitive approach. Are there upsides to that in the back half of the year? We're not sure. You're seeing additional incentive programs from some of the OEs. We are seeing some sporadic pull-aheads of leases, early terminations, but as we said here today, we're not sure that we could give you guidance that that will result in a lot of incremental volumes.

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/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 a high 50s to a 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 general conditions in the Salvage industry today. And again, our AFC loan transactions will -- the growth there -- the continued growth will be closely correlated with the strength of the Dealer Business, in particular the independents.

So, we'd 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 close to 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're close to the 34 to 39, that gives 100 to 105 million on the income from continuing operations line. The add-backs for the entire year are approximately $25 million, as we've footnoted for you in this box. So, $25 million on both sides of that range, takes you to 125 to $130 million.

We expect continued tightness in used vehicles. We see that being down; sort of a low, single-digit number, as we've indicated there. Salvage. 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 a low, 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 remained strong. And their marketing efforts are proving fruitful at this point in time.

What are the risks that are out there today? One of the things that we discussed extensively when we were on the road was the impact that incentives have on us and what the timings 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 large-scale incentive moves put back on. That's one of our largest risks, right there. Other than general economic risks in the U.S. economy, which impacts the macroeconomic demand.

So, in summary, where we're at today. We finished the IPO. I believe as Dave indicated, that the spin is still scheduled for the time frames we discussed when we were on the road-show. And we are firmly in transition from being a large sub of ALLETE to an independent public company. We talked about some of the transactional expenses in building corporate infrastructure and some of the related 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 the recapitalizations in both companies and our resulting higher leverage, slightly higher interest expense. And the operating environment continues to be challenging, but I think our operators are doing, particularly on the Old Car and Salvage sides are doing a great job in managing their direct costs. And with that, we'll turn it over to the audience, to Dave and ...

Just a comment before we proceed with your questions of the day. 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/CEO of ADESA. Bruce Stender, a member of our Board since 1995 will succeed me as the Chair of ALLETE.

That does conclude our prepared comments. And I'll turn it to you for questions.

(OPERATOR INSTRUCTIONS).

We'll take our first question from Jeff Sudland (ph) with CBS.

Good afternoon.

Good afternoon.

Good afternoon.

Cam, could you translate this earnings from continuing operations guidance to an adjusted EBITDA forecast?

I think, we've 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.

OK. If I look at page 7 of the adjustments, are those all in the operating income line? Or above the operating income line? Or are some of those in other expenses?

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

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

Those are bad debt dollars. And 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 reserve remains constant. Your dollars are just going to grow up or go up in terms of what you have to allocate. And that expense is a reduction for revenue. That's the way that that's 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 filing of the S-1, where we disclosed a 2.9%/3% net bad debt expense figure.

OK. And I guess, lastly, figures at the slide 8, I was wondering if you could review again, what the GAAP structure looks like, post to the spin on a pro forma basis for June.

Post the spin and post-spin, post -- we already the dividend to ALLETE. We've taken care of some of the third party (inaudible). When we're done, we have approximately $500 million of funded debt. And that's comprised of the senior, unsubordinated note for 125 million. The $200 and something million of amortizing bank term loans and the (inaudible) in terms of the rest of the components. But you'll have about $500 million of funded debt. And about $100 million of true economic cash on the balance sheet. It had to change since the disclosures we made in the road-show.

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

We'll take our next question from David Chandler with Janney Montgomery Scott.

Yes, good afternoon.

Good afternoon.

Good afternoon.

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

The one-time pieces for the ADESA piece, the two one-time pieces we had about a million dollars in separation expenses after tax.

OK.

We had -- in a part of continuing operations again, we had a impairment charge of 4.7 million after tax in emerging technology portfolio. And in discontinued, we had the Lotter gains basically off-set by a charge with ADESA related to the lawsuit that Cam was talking about.

OK.

Cam, in the automotive side there?

The lawsuit that Jim referred to was $4 million after tax.

OK.

And the aggregate in the second quarter of the after tax impact is about $3 million for the items that the incremental expenses added up.

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

The ADESA piece would be seven.

Seven.

7 million, roughly.

And the other is 5/7. OK. A couple of questions about the -- again, looking at the corporation as a whole, the income tax rate was slightly higher than your normal marginal rate. Would you expect that to go back 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 some being deductible to being non-deductible. And that raised the tax rate slightly in the quarter.

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

Yes, I think so.

OK. All right, thanks.

We'll hear next from Matthew Burke (ph) with Leffe Management (ph).

Hi, It's Matt Burke calling from Leffe Management. I just have a question for the ADESA piece of business. It is my understanding that the OEM didn't push their incentives as hard in the month of June. At the same time, your conversion rates came off a little bit. So, I just wanted to see if you guys could provide an understanding of how incentives impact option pricing as well as option (inaudible). Thank you.

I think there's a couple of components to that adhesive pricing and conversion. When there is a significant increase, new incentives on certain vehicles that has the impact of suppressing, pretty much immediately, those recent late model cars that are -- if this incentive comes out on a new suburban, that two-year old suburban takes a hit, in terms of its value. It takes the used car chains a while to move those suburbans out at their now-depressed value as a result of the incentives. So, that can also -- while that's happening -- to the extent that you have to run that vehicle two times, three times, four 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.

OK. But, the incentive environment was ...

I guess, less incentives ...

There were less incentives in June. So, wouldn't that mean that you'd possibly have a higher conversion rate?

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

OK. Thank you.

We'll hear next from Steve Wellgo (ph) from Cathay Financial (ph).

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 that might impact, if it does impact, the calculation of diluted shares outstanding.

Both -- if you (inaudible) question (inaudible). We issue the primary 6.25 million. The share count of the spin 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 two. And maybe if there's a little play in there, do the sum of the options and other shares.

Right.

We are going to contact and re-engage 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 talked about approximately 4.7 million shares plus or minus. And ADESA's debt agreements both public bond and bank allow us to repurchase up to $130 million of our own stock, in the notional value of our own stock.

And are all those shares counted in the treasury method for deluded shares outstanding? Someone here referred to the 88 million shares -- are those 4.7 all included in there?

In the 88 to date for ALLETE, are they counted?

I think the question is what impact it has on ADESA shares going forward? Or you ...

You buy back those shares?

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

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

That is correct.

All right, OK.

But turning to ALLETE for a minute because you -- ALLETE is unique. With the benefit plans (inaudible) benefit plan has unallocated shares. Those shares outstanding are not a part of shares used to calculate our earnings. There is a difference between earnings per share, the total shares outstanding, it can't be mentioned in the shares we use for earnings purposes and that difference is the unallocated shares that ADESA pulls.

That's about 3.7 million shares and those shares, they will have then 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 ADESA plan and tax regulations. So if those shares are brought back or those shares are sold and more ALLETE is repurchased with the proceeds, those shares will then subsequently -- excuse me, reduce the shares that we have outstanding for earnings purposes.

OK.

So I guess the -- the answer I guess to both questions here generally is, both of these transactions will reduce shares outstanding for both companies.

OK, thank you.

Your next question comes from Jordan Himelits (ph) with Philadelphia Financial (ph).

Hi, hey guys. I have a question. First of all, on slide 7, it seems the only permitted transaction related expenses in the four million are truly one time in nature. Are you are going to have the public company expense in addition to interest expense every quarter going forward, are you not?

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

OK, second question is, you said you sold 27,000 less vehicles year/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, we'll be in the third and fourth quarter year/year, and if you give percentages rather than numbers, that would be great, but what have 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 salvaged segment and the -- between salvaged and used vehicles, which are both covered under auctions and related services, you will see sales somewhere in the close to 950,000 -- between 940,000 and 950,000 -- somewhere in there

For the second half and what was for last year?

In the last -- second half of last year, it was about 970,000. So, (inaudible) year/year, between the salvaged and the used vehicle components, approximately 27,000/28,000 shares -- vehicles less total.

Well, or about 2% to 3% less.

That's correct. It's about 3%.

OK. And as we look towards '05, if trends continue, I mean, you think it could be 2% to 3% less than '05 as well, because in '05 is where really the acceleration happens in number of cars -- cars have slowed down of late.

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

OK and last thing, I mean, you guys only went public a few weeks ago, I mean, it seems like you are guiding below for the full year with -- in different continuing operations or the underwriters marketed you, is this because mostly the change in incentives that happened up in July or what was the event that kind of, made the change here?

I can't 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 million to $105 million from continuing operations. You've got about 25 million net of tax, so if you add that to both sides of that range, that takes you from $125 million to $130 million. And in terms of the range, last year our net income was slightly below $115 million. I don't think that marks us the side of the range that we're talking about.

I'm sorry, can you say that again? I apologize -- you're adding 20 million to 25 million?

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

I'm confused. I thought last year was a 100 from continuing operations, and this year you're saying it's going to be 100 to105?

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

All right. (Inaudible) later. I thank you for your time. I appreciate it.

We will hear next from Robert Kirkpatrick with Cardinal Capital.

Good afternoon. Do you have CAPEX numbers for the second quarter?

Just a second.

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.

OK. That's AL -- LA ?

That's right. And automotive is (inaudible) energy, real estate, everything.

OK and the automotive segment?

I think through six months grew about 6 million.

OK.

And that -- there will be -- there's some timing there. We would expect to spend 35 million or 40 million on a full-year basis, first of all, our projects that are falling into the second half of this year.

Are they more Greenfield startups or ...

No.

No, these are a combination of investments in existing sites for some expansion, some reconfigurations. There are some IT investments, capitalizeable IT -- there are no Greenfields planned for this year.

OK and do you have a bad debt number for the quarter or this or six months for just the automotives side? Just the number that shows up on the cash flow statement -- is that bad debt expense?

Just a second here.

OK, and while you're looking for that, can you explain to me what you mean by economic cash?

Economic cash is, that's the -- often you see a fairly significant cash number on the balance sheet, some of that is unavailable for some unavailable funds and ...

OK.

... to be cleared. By economic cash I mean real cash. There's no (inaudible) in there. It's money that's available to be reinvested.

No restrictions?

No restrictions, or to (inaudible) with.

OK. 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, and there is about $8 million to $10 million of 8 to 10 U.S. of restricted cash in Canada at this point.

And that's kind of a normal level of what casinos might call caged cash?

We refer to it as restricted cash.

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

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

When would you figure out -- when would you be willing to do that? Is that a ...

Well, as we complete this year, we will have the IPO, which certainly took a lot of time. And in the road show, 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, and as you heard, both companies are well-capitalized with a 100 million or so of cash on a deficit balance sheet and two times that at least.

In January, the Board of ADESA will meet and we're preparing our strategic plans as we speak for 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 will have a resource plan that will support and coincide with that strategy. At that point of time we will be giving our guidance for 2005, but not before.

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

That's right.

OK.

But we wouldn't expect it to maybe to answer your question partially, to be any different than what we have been telling folks during the IPO road show, when we market it this time.

OK and any look on that bad debt number?

I'm going to have to refer you to the queue because the disclosure is a little -- it's not -- the answer I would have to give you off the (inaudible) is inconsistent with what the queue required disclosure (inaudible) SEC.

OK. We will look for the queue in a few days. Thank you.

Thank you.

We will take a question from Jason Kristin (ph) with Asset Capital Management (ph). Mr. Kristin, your line is open. Hearing no response, we'll move on to Eric Puma (ph) with (inaudible) Capital.

Good afternoon, I have just a couple of quick questions. Once again, for both ADESA and for ALLETE post-spend, can you characterize the charges associated with (inaudible) saying it's going to be 25 million after tax, and that item is for -- basically, those are all the charges going forward for the spend. 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 the May call. We have -- the debt that we're retiring, the $125 million debenture retiring this month, as the May call premium, so that most of that $50 million is the after tax May call payment we expect to make. The rest is legal from bankers fees; just a variety of things.

OK. And then, it is accurate that for a debt that's 25 million?

There are a couple of different components to that 25 million. You have transactional costs including May call premiums, which are just shy of $15 million in the second half of the year. And our full-year basis will be about 17 million pre-tax.

OK.

Or, slightly over $10 million after tax. We have incremental interest expense and that will be ongoing.

Yes.

And the only reason we backed it up this time was to show you an apples-to-apples comparison to a year ago.

Yes.

The incremental interest expense this year as the result of the recap will be about $11 million pre-tax or about 6.7 or 6.8 after-tax. And we will have public company expenses on an ongoing basis that -- we talked about that on prior calls.

OK and -- the only other question is, historically, ADESA has been a good cash generator. I guess, could you just give us an idea of what type of target path structure are going forward, just looking at some of your peers because you have peers (inaudible) see this. Do you have plans to grab the (inaudible) to remove the debt from the balance sheet or is -- are you planning for expansion capital?

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

OK, thank you.

Next we will take a question from Robert Magnason (ph) with Merrill Lynch.

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

In the second quarter, it was about 5.05 million and for the sixth -- I'm sorry, for the six months, pre-tax it was 7.8 million.

Great, thanks. And do you have any update, I guess, on New Jersey expansion or timing or when that's going to hit the road?

It's underway right now; we've started.

And ...

I don't know the completion date off hand -- end of the year -- end of the year.

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

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

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

We'll take our next question from Erin Adelhein (ph) with Save Value Management (ph).

Yes, I was wondering if you could quantify, like how much in terms of book value, you're carrying -- will ALLETE carry in terms of real estate? And do you have like an anchorage that -- 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. OK. And you gave the proforma balance sheet for ALLETE as $426 million -- of that $200 million is cash flow, is that all -- is there any clue to proceeds for the Water utility sales?

Yes.

OK and I don't know if I missed it, but did you give, I guess EBITDA or an operating kind of, forecast for the ALLETE for, 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%, of growth over last year and that income without the guidance does not include the preparation-related expenses.

OK. And I guess, do you also have -- have you talked -- what will ALLETE I guess, does ALLETE have a particular strategy that they are going to pursue, once the set up is complete, just pretty much operate the same businesses, planning to expand or 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. So, 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 able to give guidance as to what ALLETE's for what after the spin-off's dividend will be?

We plan on doing that later this year.

OK, thank you.

And we have a follow-up question from Jeff Herbert (ph).

Yes, question -- just kind of a sequential performance. In the first quarter, you had a significant increase in the number of vehicles sold, and then in the second quarter, it reversed. I understand what you are 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 it and it's in July again.

And our own indication about that OEM sales are pretty good. And are you seeing any of your own indications from the field on July sales and in light of the fact that sales are up, I'm a little bit confused as to why your forecasts says that it is down to single digits.

OK, we'll have to see where our conversion rates come in and that's a key driver for us, as we talked before. But what comes in, clearly one of the benefits of risk new car markets are the units that get created in or pulled off these people, and many of those have ended up in auction. Even in a pipeline environment lesser of those are coming to auction.

We will have to wait and see the impact -- it takes a little while for us to gauge what the impact of any intended program is. We need to see it come into the market and see what it actually does, how broad it is or how highly focused and then you will see how it flows through 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 dreadlock situation, but sooner or later the market has to loosen up and people have to get out of the vehicles. If they're in, take the loses and move on and at that point in time, the velocity takes 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 volumes strength were by months? In the second quarter was June a particularly weak month?

We haven't done that historical adjustment and I don't think we are going to go there on this particular call.

We have been trying on the road show to talk to people about the way in which you have to look at this business in this industry, and not look at it on a quarter-to-quarter basis. I mean, if you drag it down to the monthly analysis, it can really get to be crazy because if 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 had extremely high conversions, and in the second quarter, they returned to normal and in the third quarter, we're looking at potential incentive and that's the norm for this industry. And what we believe is that year/year, the (inaudible) drivers, drivers that we continue to believe, we will be able to push up 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're pleased with the results we've had this second quarter in spite of the significant reduction in the (inaudible) vehicles. The YTD numbers are very good. We're especially pleased with the efficiency gains in spite of the drop in volumes. (Inaudible) enlightened 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 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 continue to believe that we're 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 don't look at this business and value it in the short term. We would ask you to not do that but certainly if there's any changes in trends or something that we would be concerned about, as it relates to things that we've 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, which will occur as permanent and draw any conclusions to it on a month-long basis.

I understand that and I understand some of the issues that you're facing. I just felt (inaudible) on the road, I thought we were talking (inaudible) trying to figure out what might have changed, maybe I just ...

The guidance we gave on the Road Show was for -- when we talked about the growth drivers, there were three components and those three components are buckets and we talked about mid-shifting between those buckets, generally was growth at the EBITDA line of 9% to 12%. We haven't (inaudible) that and if you take a look at the outlook we gave for the (inaudible) and I wanted to update the question that Mr. Himelits addressed earlier -- "If you back out, there was an item in the third quarter of last year, net income from continuing operations in '03 was 112.5. Reported net income was 114.8. So we have a 112.5 and if you can take that range that we gave you -- 100 to 105, plus the 25, that gets you the 125 to 130. And those numbers, net income base was back into that range on a EBITDA basis that we discussed on the Road Show.

All right, pretty good, one more last point. I may have missed this but can you tell what DNA was in the quarter?

DNA in the quarter was -- the DNA in the quarter was a 8.9 million, Jeff.

Right, thank you.

And another follow-up from David Chandler with Janney Montgomery Scott.

Yes, hi, one other question, up in my mind. Last time I had visited one of your options, I noticed that there was a market increase in -- you're used to the Internet, there were actually lanes where people were bidding from the net, and I was wondering if there was any comment that you would like to make on that evolving during the quarter and what you expect for the rest of the year?

I did what we generally discussed with people is that our Internet penetration in sales is sort of a mid-single digit. Do we think it could grow respectively? The answer is yes. One of the dynamics that we talked about was we think it is helping not only the selling incremental vehicles, but for those vehicles that are sold, we think the Internet bidding is growing incremental (inaudible) in helping the retention on those parts that are sold.

We haven't forecast what we think is going to it. We haven't seen explosive growth yet in that area but we are keeping an eye on it and we are positioned with our life technology or (inaudible) technology, and hope our auctions to accommodate that growth to show our customers demand it.

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

No, we continue to see it as a complimentary venue to sell (inaudible) and let's just add to that.

OK.

Anything further Mr. Chandler?

No, that's it.

One more question and I think we should close.

OK, we'll take our next question from Ralph Turner (ph) with (inaudible) Capital.

Hi guys. Can you talk a little bit about what you see as driving the salvage return tire -- you mentioned that in 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 the salvage side (inaudible) going more towards -- their exclusivity towards the Internet, driving their business -- what do you think is the result of that?

I'm not sure that we necessarily -- that the impact that (inaudible) is having, I mean, the salvage industry in general is doing well on the values that are being realized today. (Inaudible) is going to the -- their VV2 technology is basically the sole venue for them to move their product group. We are continuing to use a dual-channel strategy. What I mean by that are the physical auctions -- live physical auctions as well as offering access by our (inaudible) product and there is some other growth that we use in our salvage -- salvage operations.

And I would say that penetration there is growing electronically but we have not made the same business decision that (inaudible) has to try to drive to the completely electronic business channel.

What do you say in terms of volume of cars in terms of -- we know what's going on in terms of the Repo and the institutional side of the business, but what are you seeing in terms of availability on the salvage side?

It's actually tighter that you might think. There are less vehicles generally right now that are befitting that market I think (inaudible).

So, it's a seasonal thing? Are you talking on a year/year basis?

I think the second half of last year is a tough (inaudible) for us (inaudible) that's all we are going to say on the salvage front.

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

OK, thanks very much.

Well, I think that, 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 required period is over, so that will enable Cameron, myself, and Jim and Don and others to visit you folks.

I am really please with the way that the IPO has gone. It is positioning both company extremely well. The cash positions that both of us enjoy post spend are going to enable us to pursue our strategic initiatives. We have good strong balance sheets. I'm extremely pleased with these demonstrative 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 and I look forward to this spend, as I said, which we expect to be announced some date the later 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.