Openlane Inc (KAR) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the ADESA third quarter 2004 earnings conference call. My name is Carlo and I will be your coordinator for today's presentation.

(OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the presentation over to your host for today's call, Mr. Paul Lips, Vice President of Investor Relations.

Please proceed, sir.

Thank you. Good morning and thank you for joining us today to review ADESA's third quarter financial performance. Joining me on today's call are David Gartzke, our Chairman, President and Chief Executive Officer, and Cam Hitchcock, Executive Vice President and Chief Financial Officer.

Before we begin today's call, I'd like to remind you that this conference call contains forward-looking statements. The earnings press release from last night and the slides accompanying this call have the full text of the safe harbor statement, and you should refer to it in the context of the statements made on this conference call.

To further assist you on this call, we have compiled a set of slides that can be viewed under the investor relations section of our Web site. Following today's call, the Webcast replay and slides, along with the telephone replay, will be available on our Web site, www.adesainc.com.

Dave will start off by briefly recapping our third-quarter financial results and highlighting some of our recent accomplishments. We'll then turn the call over to Cam, who will provide you with an in-depth financial review of the quarter and year-to-date results, and some general guidance for ADESA's full year financial performance.

After Cam's remarks, Dave will provide some additional comments, and then we'll conduct a Q&A session before Dave formally closes the call. Any of the numbers we will be discussing on today's call can be found in our press release from yesterday, or on the slides on our Web site and in this Webcast.

As a reminder, our Web site is www.adesainc.com, and the slides are set up to be user controlled on this call. With that said, I'd now like to turn this conference call over to our Chairman and CEO, Dave Gartzke.

Thanks, Paul. As our press release stated, ADESA, Inc., which is all of ADESA - that's ADESA Corp, Impact and AFC - reported third-quarter revenue of $229 million, which is a record for us for our third quarter, and net income of $22 million, or 23 cents per diluted share. As we mentioned in the release, these results included $9 million, net of tax, of non-recurring transaction cost, or nine cents per diluted share.

If we exclude these one-time, non-recurring charges, our net income would have $30 million, or 32 cents per share. We're very pleased with this performance, particularly in the current environment of lower institutional volumes that we expected. The adjusted EPS of 32 cents for the quarter is notable, since our weighted average share count for this quarter was 7% higher, with 95 million shares, versus the 89 million shares last year as a result of the recent IPO, as you know, that placed 6.25 million shares into the market.

Our adjusted third-quarter EPS of 32 cents per share also includes incremental after-tax interest and corporate expenses, this is relative to 2003, of $4 million in total, or five cents per share. EBITDA is also an important measure for us, and I would expect for you as well. Our EBITDA results for the third quarter and the nine months ending September 30th are $52.9 million and $188.2 million.

Excluding the non-recurring transaction costs, EBITDA for both periods would have been $67.3 million and $205.2 million, as noted on slide nine, which represents growth of 9.3% for both periods. Remember, EBITDA for 2004 also includes the incremental corporate expenses mentioned above, and if you were to adjust for these expenses, or adjust 2003 for these expenses, you would see the higher percentage growth in EBITDA, which would exceed the 9.3%.

I would like to draw your attention to slide 14, which illustrates the goals for the value drivers that we used on the road show and our third quarter performance relative to those goals. I don't have comments, but please take a look at those.

I would now like to highlight some of the key events that have occurred since our last earnings call. First, the auctions and AFC both saw double-digit net income growth during the third quarter, and both were able to grow their revenues.

Despite the expected lower off-lease volumes, as well as the unexpected lower repo volumes, we were still able to post solid earnings growth. Second, the ADESA board authorized management to commence the share repurchase program up to a maximum of the $130 million. We intend to launch this repurchase program shortly, and view this program as a very important component to enhance shareholder value.

We continue to expand our operations with the addition of a new Impact salvage auction sites in Sacramento, California. We also added an AFC loan production office in the greater Washington, D.C. market. As Wednesday's press release indicated, ADESA's board declared the company's first quarterly dividend payable on December 15th to shareholders of record as of November 15th. The amount of the dividend will be 7.5 cents per share, and we expect the same quarterly dividend rate for the foreseeable future.

Our spin-off from ALLETE was completed on September 20th, putting 88.6 million additional shares of ADESA into the market, which brings our total shares outstanding to approximately 94.9 million. We also redeemed 125 million of unsecured senior notes. It was for interest in the high 7% range. This redemption triggered the $14 million in non-recurring charges that we previously mentioned.

I would now like to take a few minutes to discuss the operating environments for both of our business segments. First, the auctions, and please refer to slide 10. Net income for our auctions grew 28% for the third quarter of 2004 versus 2003 on slightly higher revenues.

Operating profit margins increased two percentage points. Revenue per vehicle sold, which is total revenue received for all services provided, for all of our business, please keep that in mind, increased 5.6%, and the operating expenses decreased 3.2% in total, making up for the volumes that were down 5%, or approximately 24,000 units.

As discussed in our last conference call and in our filings, we continue to see fewer institutional vehicles than in 2003 due to the expected decline in vehicles coming off lease, as well as the unexpected softness that we saw in the second quarter in the repo volumes. Slide 12 will provide more detail on the stats that you'd want to look at for each of these segments.

So what are we doing to address these vehicle market conditions? First, ADESA continues to focus on its market share with institutional customers. We continue to realize and achieve market share gains despite the institutional supply being down. Our current market position will serve us very well when the institutional volumes normalize.

Second, initiatives have been underway in ADESA to grow our dealer consignment volumes, and we see year to date growth of nearly 9%. Third, we're focusing on increasing our service content per vehicle. I think this makes sense regardless of the environment. Increased service revenue per vehicle, combined with margin improvement, more than offsets the decline in volume.

I think this is evidenced by the bottom line growth of the EBITDA per car sold. Revenue per vehicle sold increased by 5.6%, and we improved operating profit margins by two percentage points. The driving forces behind our increase in service revenue per vehicle have been selected pricing actions that we took earlier in the year and increased penetration or utilization for vehicle inspections and e-business services such as AutoVin and LiveBlock

Margin improvement is primarily the result of our operators doing a great job of controlling costs and their labor hours in response to the lower institutional volumes, but also the changing mix between the dealer and the institutional vehicles.

The used vehicle mix shift during the third quarter was not as dramatic as the shift we saw in the second, and we do expect the percentage of the dealer consignment vehicles to remain steady.

Now we'd like to shift to AFC. AFC had a double-digit growth in revenue and net income as year over year loan transactions grew by almost 13% for the quarter, and as you know, the growth in this business to the bottom line is primarily driven by transactions.

AFC's customers are independent dealers, you know that, and these dealers have had a strong year in terms of the number of vehicles sold, and that has certainly helped AFC. The increase in retail sales by the independent dealers and the stabilized used vehicle wholesale pricing has allowed them to increase both their inventory levels and their inventory turns.

AFC has seen an increase in both the number of dealers it serves as well as the increase in the number of loan transactions per dealer. Perhaps most important, in addition to the portfolio growth, is that AFC has not experienced any deterioration in the performance of its $600 million-plus portfolio. The success at AFC is due to a focused, controlled growth strategy. This means increasing the number of loan transactions to a defined dealer population without lowering its credit standards.

In summary, I feel, we feel, that ADESA had a strong quarter and we're really well positioned for the future. Hopefully, this quarter demonstrates to you the strategic benefits of this portfolio of our businesses, and we continue to focus on operating margins and efficiencies.

This focus and the business diversity has allowed us to grow our bottom line despite lower numbers of institutional used vehicle. With that, I'll now turn the call over to Cam, who will provide you with an in-depth financial review of our third quarter and the year-to-date financial results.

Cam?

Thanks, Dave. Before we dive into our financial performance, I'd like to make a comment on our method of presentation. We understand that your analysis is best done on an apples-to-apples basis. Most of the results we will discuss this morning will be presented in an as-reported, as well as an as-adjusted format. The adjusted format excludes only the effects of the non-recurring charges related to the IPO and separation transactions on both a quarterly and year-to-date basis.

In most cases, we will also identify the recurring costs that are incremental for 2004 relative to 2003 in the event that you would like to pro forma both years. We believe that this presentation basis is the best way to enhance your understanding of the underlying drivers of our business.

Some of the metrics we will be discussing are of a non-GAAP nature, and thus they are reconciled to GAAP measures in either the accompanying slides or the press release that was issued last night. I would also direct you to our S-1 filing for a review of pro forma information that the company presented relative to 2003 and the first quarter of 2004. And now, for third-quarter highlights.

On a revenue basis, consolidated revenue for the third quarter was a record at $228.5 million, up $4 million, or about 2%. Both the auctions and AFC experienced year over year top and bottom line growth. The strength of our value-added business model in the auction segment drove our service revenue per vehicle to $418, a 5.6% increase.

The growth is attributable, as Dave mentioned, to pricing actions taken earlier in the year, and perhaps more importantly, better penetration in ancillary services such as vehicle inspections and e-services like AutoVin and LiveBlock. When combined, these factors offset a 5% decline in vehicle volumes compared to the third quarter of 2003.

The net of these factors was a modest revenue gain for the auctions to $202.2 million. AFC continues to experience strong and consistent growth. In the third quarter, AFC's revenues rose $11 million to $28.3 million. Their loan transactions increased almost 13% to nearly 268,000 transactions, with essentially the same revenue per loan transaction. AFC continues to benefit from the breadth of its relationships in the independent dealer community and the strong penetration rates it has with that community.

A brief comment on cost of services. In total, our direct operating cost decreased nearly $1 million, or 1% to $113 million. This reduction highlights a couple of key attributes in our business model. First, ADESA was able to reduce its direct cost while simultaneously increasing revenue. Our operations are able to flex their cost with volumes, while at the same time selling additional services to our customers.

And, secondly, the cost savings we achieved during the quarter are net of the additional cost we incurred at AFC to prod (ph) this over 30,000 additional loan transactions. Now I'd like to comment briefly on SG&A.

Reported SG&A for the quarter came in at $50.4 million, or $50 million when you adjust for the $400,000 in non-recurring expenses, as compared to $49.6 million in 2003. SG&A as a percent of revenue was flat at 22.1% as compared to last year. Our 2003 SG&A numbers did not have certain expenses associated with us being an independent public company. These incremental public company expenses were $3 million on a pretax basis this quarter.

Had the third quarter of last year included the same level of public company costs as we had in '04, SG&A as a percent of revenue would have decreased year over year. We continue to closely monitor our SG&A in the coming quarters and will make adjustments quickly if necessary.

Interest expense. Interest expense for the quarter was $8.7 million, versus $4 million in the year-ago quarter. The $4.7 million increase was driven entirely by our recapitalization. The $8.7 million included 45 days of interest expense related to the former unsecured senior notes, which we retired during the quarter.

As indicated on slide four, we completed ADESA's recapitalization by drawing down the final $100 million tranche of our bank term loans. Loss on extinguishment of debt - as previously disclosed, the company recorded in the quarter a non-recurring $14 million prepayment penalty for the early retirement of our former senior notes, which had an aggregate principal amount of $125 million.

We had signaled this $14 million charge during the road show and during our second quarter conference call. This $14 million charge constitutes the majority of the $14.4 million in non-recurring transaction costs which are detailed on slides seven and nine.

A brief comment on tax rates. We recorded income tax expense of $14 million in the quarter for an effective tax rate of 39.3%, versus 19.8% or 40.4% in the year ago quarter. Our balance sheet has had some changes. Compared to the December statements, our debt to total cap now stands at 33% versus 28%, while our asset base has increased to 2.1 billion from 1.6 billion. These changes largely reflect our June IPO and completion of the recapitalization I mentioned earlier.

As of quarter end, our gross debt balance was $525.4 million, which includes the capital lease obligation of $34.5 million. Our effective interest rate for the quarter was approximately 5.8%, and we made our first principal reduction of $9 million on the bank term loan facilities during the quarter.

We finished the third quarter with $420 million in cash, as opposed to $116 million at December of '03. I'd like to briefly walk you through the makeup of the $420 million. Our current cash balance includes restricted cash of $14.3 million, $130 million which is earmarked for our share repurchase program and $197 million for current payables due, which is basically outstanding checks.

The remaining cash, along with cash we expect to generate in the fourth quarter, will be more than sufficient to fund operating needs, scheduled debt service and payment to shareholders. As discussed previously, we expect to have approximately $100 million of unrestricted available cash on hand at our balance sheet at year end for potential funding of strategic growth opportunities.

Working capital. Our investment in operating working capital, which we define as the net of our accounts receivable and payable declined to $127.3 million, or 6% of assets, from $129.5 million, or 8% of assets, at December '03. This improvement versus year end continues to demonstrate our focus on asset management and efficiency.

Share count, which is an important topic we've spoken to many of you about. As of September 30th, '04, we had 95.1 million weighted average diluted shares outstanding, versus 88.6 million shares for the third quarter last year. This increase in share count is primarily attributable to our second quarter IPO of 6.25 million shares. The weighted average diluted shares outstanding for the quarter are slightly higher than the actual shares due to outstanding stock options and restricted stock grants.

Year to date, I have just a few brief comments on our year-to-date results, which are detailed on our press release and on slides seven, eight and nine. Year-to-date 2004 revenues rose about 2% to 707 million versus 684 million last year. As signaled in our second quarter 10-Q, vehicle volumes were expected to be down in the third quarter, which also brought down our year-to-date total vehicle volumes sold by 1.4%.

We'll talk more about full year volume expectations and financial results in a few moments. As noted in our press release, our as reported net income for the nine months ended was $83.4 million, or 92 cents a share, versus $90.2 million, or $1.02, in the year ago quarter. The results for the current nine-month period include non-recurring transaction costs of $10.3 million net of tax, or 11 cents per diluted share.

Absent these non-recurring charges and the results of discontinued operations, income from continuing operations would have been $97.8 million or $1.07 per diluted share. The year-to-date weighted average diluted share rose to 91.1 million shares versus 88.6 million a year ago.

We'd like to comment briefly on our 2004 full year outlook. Please refer to slide 13. For 2004, we are currently anticipating revenue to be in the range of $915 million to $925 million. We are very pleased to raise our expectations for reported income from continuing operations to the range of $105 to $110 million. If you were to add back the $10 million of after-tax non-recurring transaction costs, this range becomes $115 to $120 million.

It's important to remember, as you look at our fourth quarter, that our operating margins typically decline 500 to 600 basis points relative to our third quarter operating margin. This margin performance is driven by seasonality, which we discussed in the S-1, as well as on our road show, typically lower conversion rates in the fourth quarter, and lower volumes sold. We have no reason to believe that this year will be any different.

Our current full year estimates are based on a number of assumptions. We presently anticipate selling between 1,945,000 and 1,960,000 vehicles. We expect revenue per vehicle sold for the remainder of 2004 to be comparable to what we saw in the quarter just ended. For AFC, annual loan transaction volumes are estimated in the range of 1,060,000 to 1,080,000. Revenue per loan transaction in quarter four is expected to be comparable to what AFC had in the third quarter and could potentially exceed that figure.

Some of you have been asking and maybe looking for guidance for ADESA for 2005. At this time, we are currently developing our budget forecast for our operations. We will have a better indication of our 2005 outlook when we report our full year results in early 2005.

In summary, ADESA continues to deliver very real improvements in our operating result and is meeting our earnings growth commitments, even in a down market for the largest portion of our business.

I would now like to turn the call back over to Dave, who will provide you with some closing comments. Dave?

Thanks, Cam. Before I got to Q&A, I'd like make just a few more comments about our technology, our value-added business model and its distinction from, perhaps, the retail model, our people and the growth potential of this company.

First, the technology. For ADESA, information technology is very important and is a significant part of the long-term strategy of this company as it continues to drive revenue and efficiency at our auctions. And it expands our service offerings to existing and new markets.

As you may know, the LiveBlock technology allows dealers to bid via the Internet in real time with dealers at our auctions. At this time last year, only a small percentage of our institutional vehicle auction lanes were equipped with LiveBlock, but today I'm pleased to say that nearly 90% of our institutional auction lanes are equipped with LiveBlock.

Acceptance of the Internet is growing in our industry. That's an opportunity for us to further expand our presence and our market share. An October 18th Automotive News article highlights our dealer-to-dealer electronic selling tool that we designed and implemented for Toyota Financial Services. We will continue our significant investments in technology, which will position ADESA's superior service offering in all market channels.

To our business model, and not to insult the intelligence of a low of you, who perhaps understand the distinction or difference between the wholesale model from the retail model. I think it's just important, given all the press that's out there about the automotive sector, to make it perfectly understandable as to what we think the difference is from the retail space.

ADESA, as you know, is a wholesale market provider providing liquidity for used vehicles, or the used vehicle industry. We align wholesale sellers and buyers without taking any inventory risk. We receive fees for our service. That's our strategy - fees, be it the AFC, Impact or ADESA Corp. The retail business, as you know, has an investment risk, and that's the nature of their business, and is impacted by incentives.

We're not completely insulated from these dynamics, as they can temporarily impact used vehicle pricing, which they do, and the short-term supply and demand at the auctions. However, ADESA's performance has been very resilient over time during these varying market conditions.

Another point - over 60% of the vehicles sold at our used vehicle auctions come from institutional supply channels, and nearly all of the vehicles sold at our salvage auctions are from insurance providers, the point being that these institutionals and insurance customers are motivated to convert their vehicles into cash in the shortest amount of time possible in order to reinvest that cash into their core businesses. These vehicles must be converted to cash.

So, regardless of what is taking place in the retail market, once these institutional vehicles enter the auction channel, they're going to be sold. This reality, coupled with the fact that we are a service provider in the wholesale market and do not have inventory risk is the major differentiator between our business model and other business models that are directly dependent upon various trends in the retail marketplace.

Next, our people. Bottom line, I feel that we have the best operators in our industry. We continue to focus on improving our margins and efficiencies, which has continued to allow us to grow our bottom line. Our operators at the auctions sites, the loan production offices, the corporate office, have driven this improvement and have managed the business very well and very profitably in a very competitive and soft market.

Next, our growth potential. Our operating performance does drive the strong cash flows, and so does the business model, that we will continue to deploy to drive shareholder value. We declared our first dividend payable in December, and we intend to follow this regular pattern of paying a dividend of 7.5 cents per quarter.

In addition to our cash flow for dividends, we intend to deleverage the company by over $37 million each year. After our annual cap ex, deleveraging and dividends, we expect to have $35 to $50 million annually of excess cash for reinvestment in ADESA, Inc. initiatives. As Cam stated, we'll have an estimated available cash balance at the end of this year of $100 million.

First and foremost, our highest return use of that excess cash is to reinvest it into growth initiatives at our existing sites. The second and highest return of that cash is to invest it in accretive acquisitions, and we expect that the industry will continue to consolidate, and we anticipate that we will be active in any such consolidation.

Following that, we would consider accelerating debt paydown and potentially repurchasing existing shares of our stock.

That concludes my formal comments.

I'd now like to turn the call over for questions.

Following the Q&A, I will have a few brief closing statements.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

Our first question is from the line of John Murphy with Merrill Lynch.

Good morning. I have a couple questions here. First, on the cost savings in the quarter, they were pretty impressive, and I'm just wondering how much of that is sustainable, how much is on the variable side and how much is on the fixed side, if you can characterize that. The second is on the added capacity that you just mentioned, I know there's some extra lanes going in in some of your facilities, just wondering how you were performing.

And then the third is just a quick housekeeping. There was a $4 million charge, or something, discontinued ops, in the second quarter that seems to have disappeared. Just wondering if you could update us on that.

Your first question was the sustainability of our cost model. We continue, John, as you know, to watch our operating hours, particularly in some of the shop hours at our auctions, very carefully. We think that we'll continue to tailor that to the institutional and dealer volumes that go through there.

We haven't broken down what those savings are between fixed and variable, but there's a pretty good component of them that are variable.

Your question - your second question?

I can touch the second one, Cam. It was related to the added capacity (inaudible). We'll break ground on New Jersey for four lanes and hope to have it in service this spring. We're also breaking ground in Montreal for an additional four lanes, and we expect that to be up and running in the spring as well.

We have a couple of relocations and greenfield that I think are noteworthy as it relates to capacity, excess capacity, the first in Golden Gate, which was done a couple of years ago, and we're now beginning to see the dealer habits change and more bid badges showing up, and the growth and profitability there is starting to move favorably towards our expectations to hopefully double the capacity that we had before.

Atlanta is another relocation that has the capability of doubling its capacity, sales capacity, and we're in the process of changing the dealers' habits and stuff and making other changes there, as well. When we make these relocation changes, it typically takes a year or two before we get the pickup in the volumes that we'd like to get, because we have to change people's habits, but also switching costs associated with larger accounts have to materialize, as well. But it's a major market, and we expect we'll do well there.

Long Island was a greenfield site, as you know, and it was supported by a few of our large customers that encouraged us to be there, and the business was there as soon as we opened the doors, and we're landing some major accounts as we speak.

So we're pleased with the progress that we've made on the capacity expansions that we have and we have potential, much potential for more business to grow in those facilities.

Last question I think was related to ...

Yes, it was related to discontinued operations.

From the second quarter, it seems like there was $4 million that's faded off, here.

It shows as well, John, the nine-month savings, and that relates to the litigation, and our only update on that is we're submitting an appeal.

OK, I just missed that in the numbers. But, Dave, just to characterize your comments on the cost there, what you're saying is there's a little bit of structural but a lot of the cost savings was more in response to the lower volumes? Meaning the variability in your cost that went along with the decline in volumes is what drove the quarter? Is that a fair characterization?

Some of it, and some of that is a little bit of mix shift, although the mix shift has decelerated and we're seeing a more stable mix right now as well.

And you expect that to be flat in the third quarter versus the third quarter, the mix shift?

It's really tough to predict, but we ...

OK.

... think it's going to be pretty close. We have some other initiatives, John, that we just started on cost reduction, and they're technology driven. I think we talked a little bit about that on our last quarter, and those have a longer lead time, so I'd say right now we're doing a great tactical job of handling both overhead on the SG&A line as well as direct labor hours, and we have some other structural type of initiatives that'll come online toward the end of next year.

Great, thanks a lot, guys.

Sir, your next question is from the line of Brett Hoselton with KeyBanc Capital Markets.

Good morning, Dave, good morning, Cam, Paul.

Good morning.

Good morning.

Can you - I was hoping you could provide a little bit more definition of the share repurchase program. Specifically, I'm wondering, at your current stock price, I think you're planning on repurchasing a number of shares from an employee account, but at your current stock price, you're not going to be able to burn, I don't believe, all $130 million. I'm really looking, wondering, first of all, what's your share count supposed to be like in the fourth quarter, and what's it supposed to be like in 2005? And, secondly, what do you do with the extra money if you end up with money left over with the $130 million.

Well, it's hard to predict how quickly you can purchase shares. Obviously, after the dissemination of our earnings information, we'll be back in contact with the plan trustee to determine what he may be willing to part with, both on a short-term and intermediate-term basis. The program as announced allows us to pursue either privately negotiated transactions with the trustee or open-market transactions. So we'll have to see how that develops. Those conversations will obviously accelerate now that our earnings are out.

We'll just have to see - with respect to share count, we'll just have to see what we can get and what the flow looks like.

The tax rate, Cam, 39%, probably pretty consistent going forward? Is that reasonable?

We're looking, now that we've been separated for 31 days from our parent, we're looking at all of our tax positions. That 39% to 40% range, unless we see something unusual, is probably where we're going to be, but when we give guidance for '05, we'll firm that up a little.

And then when we think about your revenue per loan versus interest rates and the increase we're seeing in interest rates, how do we think about how the revenue per loan should be affected by interest rates?

I think there is very little variation in the revenue per loan with interest rates. As you know, it's a spread business, and the fees we charge haven't changed for many, many years. So it's been floating around maybe 104 to 107, which isn't material because of a loss provision we have to take as the size ramps up or ramps down, sometimes causes minor fluctuations in it, but that's what it's driven by - accounting more than what we receive from our customers.

Thank you very much, gentlemen.

And, sir, our next question is from the line of Gary Prestopino with Barrington Research.

Hi, good morning guys. A number of questions. Could you possibly address or give us some guidance as to what was the mix - was there a mix shift between dealer and institutional cars this quarter?

Relative to last year?

Relative to last year, relative to Q2.

I think you saw - relative to Q2, you saw a slight mix shift with dealer maybe picking up another point or two relative to the second quarter.

OK, and then year over year?

Year over year, that would be - let's see - the year over year we saw a - let's call it a two to three point shift, again, from institutional toward dealer in the overall mix.

OK, so you're doing more dealer cars. And then question for you is you mentioned services helped to grow - helped your revenues this quarter. Could you give us some idea of what percentage of your cars received services versus last year, and as well are you seeing an increase in dealer cars that are using these services?

We don't know exactly, and perhaps we can't disclose it in terms of percentage terms, but we know that the utilization of the institutions at some of the new stores that we have, Golden Gate being the example, is increasing. So we're seeing much better utilization of these big recon shops.

On the dealer side, we've yet to penetrate what we would consider to be a good opportunity with respect to getting the dealers to use these recon facilities, and that's work in progress.

I think, Gary, you could say that you are seeing the dealers' penetration on post-sale inspection increasing, though.

That's right. Forgot about that.

OK, then just a couple other quick questions, if I could. What percentage of capacity are you operating at right now?

I would say it's really tough to gauge, Gary, because capacity can be altered by running additional sales, assuming that a local marketplace would support that. But I would say 70%, plus or minus, is about as close as we could get you, and that's a pretty broad guess.

And then just two other quick ones. Beyond the $130 million you've got earmarked for share repurchases, can you use some of this excess cash flow, given where your stock price is now, to buy additional shares beyond that $130 million, or you've got to pay off the debt first?

We would have to evaluate all our alternatives for the use of that cash. We would have to - our credit agreements, one of them allows us to do it, and the other we'd have to, if we wanted to extend share repurchase beyond the $130 million, approach our bank group.

OK. OK, I'll let somebody else go. Thank you.

Sir, your next question is from the line of David Schanzer with Janney Montgomery Scott's.

Hi, good morning, guys. Congratulations on a solid quarter.

Good morning, David.

Good morning. I had some of my questions answered, but a couple other questions. You were talking a little bit about IT and the Internet, and I was curious as to whether or not your outlook going forward has changed as to what percentage of your business will come from that area? Is it really picking up to the point where you'd depart from what you said before?

And, secondly, there wasn't a whole lot said about the salvage business, and I thought maybe it would be worthwhile if you guys could give us your outlook on what's going to look like for the next 12, 24 months.

We have seen increased interest and activity on the Internet, especially the closed and open factory sales. And we have the technology to accommodate it, and to the extent that it expands, we have the capacity to service it. In terms of percentages, that being the percent of vehicles that are sold via the Internet, I think we've indicated before that in the past that it's maybe been in the below 5%, and it may be approaching 5% today. Whether or not it gets 10%, that's speculation, but I think we're still in that 5% range, and I think what we need to do is to provide that option to them, as it adds value to the customers and we have the capacity to do so. And we get a piece of that service, as well.

Would you say that above 10% would be unlikely at this point?

I think at this point it would. I'm not going to out on a limb and say that in five years that it couldn't get to 10%.

OK, great.

Your second question was on our salvage business, and I think our salvage business is having a good year. Recoveries were up. For competitive reasons, we're not going to tell you what that is, but they're having a very strong year overall, year to date.

Would you say that has taken sort of a back seat in terms of where you would expect to expand the company going forward?

No, I wouldn't say that all, David. As we go through our strategic planning process and we look at allocating our resources, salvage has just as good a chance as the whole car piece or the dealer finance piece in terms of the capital allocation and in terms of its growth strategy.

Sure, the profitability from salvage on a per car sold basis is equivalent to what we get on the used vehicle side, and given the options and opportunities that we have, and with our combination facilities, we're going to continue to take a hard look at that.

Great, that's what I wanted to know. Thank you.

And sir, our next question is from the line of Brian Nagel with UBS.

Hi, good morning.

Hi, Brian.

I have a couple questions. First off, with respect to the guidance you guys gave for net income in today's release, just help me square that up with what you put in your 8-K after last quarter's release. It looks like you indicated $105, $110 million this time, and last time it was $100 to $105 million. But it looked like the non-recurring or one-time piece of that's down.

We've looked at our total cost estimates this year and we think we're going to come in maybe a couple million light on some of these transitional and corporate expense. We've seen very strong operating performance in both of our segments, which I think is continuing to contribute to drive that range up.

Just so I understand this, so then you're saying the one-time or the non-recurring expense piece, now you're expecting that to be less than you previously thought?

I think we had originally given guidance of 11, and now we're saying it's probably 10, net of tax, but we'll have to see what comes in. The fourth quarter, Brian, we're looking for some cleanup in terms of legal expenses and our corporate expenses, which are recurring in nature, might be 1 million or so less than we had thought on a full-year basis.

I mean, the number I'm looking at here is you have the 10 million and plus six to seven gives you 16 to 17, and then in the 8-K, you indicated 25, but are those numbers comparable.

The 25 was a net of tax number, and you'll probably come in somewhere in the $183 million net of tax area.

OK, OK, I just wanted to make sure that's square. Second, with respect to the nice jump you guys saw in revenue per vehicle sold, can you go into a little more detail of how much of that is pricing versus, say, further penetration?

We haven't broken that out publicly, and for competitive reasons, we won't. But I will tell you that if you look at our year to date price increase, the revenue per vehicle on a year to date basis is up about 2.2%, which is pretty consistent with where we think CPI will be this year. We are very pleased with the acceptance on some of the e-business we're seeing, particularly AutoVin and our LiveBlock sales. So it's a nice mix.

So the price increases that you've pushed through, are they any different in magnitude than what you've done historically?

I'm sorry, Brian?

The pricing increases that you guys have enacted, are they different in magnitude from what you've done historically?

No, when you look back over a longer period of time, I think they're in the range of what we've typically been able to do.

OK, great. With respect to repossessed vehicles, I know that was an issue that caused volumes to fall short in the second quarter. Anything - you mentioned this remained an issue. Any further insight into what's causing that?

We had some conversations with some of our larger customers, from whom we get our repossessed volumes, and they cited a number of factors, including some of the tax reforms and tax checks earlier in the year which they felt they may have pushed off. Delinquencies, they stated. The employment picture isn't great, but until recently it seemed a little more stable than it had been historically, so you had less people who were out of work. Some of them had taken the opportunity to raise credit standards over the last year and a half or so, and that was driving lower delinquency rates.

In our conversations with them, they indicated that they thought that the repos would come back to sort of normal historical volumes over time, for competitive dynamics in their sector, as well as the fact they felt the delinquency rates would sort of revert to the norm.

And, just finally, remind me what are repossessed vehicles as a percent of total volumes?

I don't think we've ever disclosed that piece, Brian.

OK, well, thanks. I'll let someone else ask questions. Thanks.

Thank you, Brian.

Sir, our next question is from the line of Adrienne Vail (ph) with CIBC.

Hi, thank you. I was just wondering, what would you consider to be sort of your planned pace of acquisitions, going forward?

I don't think we have a strategic target for a number of acquisitions. Our plan would be - it would be strategic in nature, it'd be accretive. We'd look at a number of parameters, including geographic coverage, market share, access to new customers. There are a number of criteria that we would use in our auctions business. Our AFC business has traditionally not grown through acquisitions. Their growth has been organic. But I don't think there are any shortage of acquisition targets or opportunities out there.

OK, and then what was your cap ex guidance for this year?

Our full-year cap ex guidance was about 35 to 40, and I'm glad you asked that question, because through three quarters, it's sort of in that 14 to 15 range, what we've spent so far. And it may be a little lighter than normal this year, and that's not planned. A lot of it's due to timing. We'll have to see. There are a number of significant projects, as Dave mentioned earlier, that are kicking off some spending in this fourth quarter. So some of that may carry over into next year.

Your full year this year could be in the high 20s to low 30s.

But please keep in mind that almost 50% of it is IT related, and 25% of it is lane expansions.

OK, great. And should we also assume that there was no impact from the recent hurricanes or what have you? Or no significant impact, anyway?

I would classify it as a significant impact. We did lose a number of sale days in the states that were impacted by the hurricane. The total impact in the third quarter was not large. It will have some minor impact in our fourth quarter here as well.

OK, great. Thank you.

The next question is from the line of Matt Berg with Lafer.

Hi, good morning. It's Alan (ph) Lafer. I have a few add-on questions please. Can you give us any idea whether the ESOP administrator has been granted the extension that was requested so that they don't have to sell their shares in an allotted time?

Alan, I think you'd have to refer that question to ALLETE, because it's their ESOP.

OK, fine. Can you go into any further details on your initiatives on the dealer side of the business, and have you ever disclosed your average revenue per vehicle at the dealer side?

We've never disclosed the average revenue per vehicle on the dealer side, and from an initiatives point of view, it's a pretty broad-scale initiative. If our VP of dealer consignment were on the phone, I think he'd tell you that we're trying to train our salespeople to treat the dealer consigner just like we do a small institutional account where we provide them with better market information, better technology tools, where we educate them on the value of using - not only just using the auction, but using some of the ancillary services at the auction to try to enhance the value of that vehicle that they're getting. We think we've seen some success year to date, and we're just starting to get traction on a much broader front on that initiative.

OK, great. And do you expect to have additional or extra auctions this year due to the calendar, since Christmas and New Year's fall on Saturdays?

I think relative to last year, doing the math, the answer would be yes.

OK, good. And just two short questions - have you seen any impact in our business from non-Manheim auctions that are using co-parts BD2 (ph) systems?

With both revenue increases and strong earnings increases, I'd say the answer so far is no.

OK, and we noticed the huge increase in cash on the balance sheet. Can you go into any detail of where that came from and how much of that is restricted?

A lot of it's due to the recapitalization, Alan. Where you'll see it go is, we mentioned earlier that there's $130 million that's earmarked for share repurchase. You'll see a dividend payment. We have a principal payment. You'll see cap ex of - depending where we fall in the range $15 to $20 million, and the restricted piece of that is about $14 million.

OK, OK, that's great. Thank you very much. I appreciate it.

Thanks.

Sir, your next question is from the line of Brett Hoselton with KeyBanc Capital Markets.

Gentlemen, follow up, how are you?

Good morning, how are you doing, Brett?

Dave and Cam, I know that you're not prepared to give earnings guidance for 2005. I was hoping, however, that you might be able to provide some idea of where you would anticipate some of the major trends taking your used vehicle volumes, specifically, leasing, rental, repossession or dealer volumes into next year? Do you see up, down, so forth?

I think the only thing we can state are things that are available in the public that we look at as well. A statistic that perhaps we haven't talked about on the phone but you have available has been the significant decline in the off-lease vehicles that are projected to come through auctions in total, not just our auctions, but all the auctions, falling last year from 1.7 to 1.4 million this year. The expectation to the vehicles, or that count to 2005, relative to 2004, is perhaps a belt (ph) of 100,000 vehicles.

So the year over year change in off-leases - or decline in off-leased vehicles should be significantly less for us. So, therefore, our ability to offset that growth through gains in consignment and market share should be much better than it was this year. At this time, I think that's about all we can say with respect to trends, and we'd like to maybe reserve our expectations for the 2005 call.

OK, fair enough. Thank you very much, gentlemen.

Sir, our next question is from the line of Charlie Massey (ph) with Cole Limited (ph).

Good morning.

Good morning, Charlie.

How are you?

I'm just fine, sir.

Hey, first, I kind of had a question that I had answered, but I do want to make a comment, that I am really, really pleased with the info and the clarity of the presentation. It's a 100% turnaround from the June conference call and the detail. Really, you've done a great job in laying out how the quarter's gone and how you see the market.

You were asked a little bit about the Florida and east coast impact as a result of the hurricanes, and you responded somewhat, but do you really see an opportunity for a windfall in the salvage area there in Q4, much like occurred in Texas a few years back?

We have some salvage vehicles down there as a result of that, but to just - as it adversely affected the used vehicle in kind of an immaterial way, I think it's safe to say the same is true with respect to the salvage side as well. There is a hedge there and we are getting the benefit, but I don't think it's significant on either side.

Great. OK, that was all. Keep up the great work, keep pressing.

Thank you, Charlie.

Yes, sir.

Ladies and gentlemen, there appears to be enough time for a few more questions.

Sir, our next question is from the line of Robert Kirkpatrick with Cardinal Capital.

Good morning. I'd reiterate the earlier gentleman's comments on the conference call. Secondly, could you provide us with what the bad debt expense was during the quarter that you booked?

Just a second, here.

OK, and while that's going on, since you had a partial period where you had some interest expense on the debt you retired during the quarter, we should expect your interest expense in the fourth quarter to be down from the level that you had at the current quarter. Is that correct?

Let me go ahead and address your first question. Bad debt was a little under $2.5 million during the third quarter, and interest expense for our fourth quarter would be about - yes, you might have a little bit of an offset. It's going to be fairly comparable, and here's why. We had the extra interest on the former senior notes that we carried, but we also took down the last $100 million of the bank term loan, the primes on the bank term loans, so it'll be close.

OK, and the bad debt of $2.5 million compares with what in the previous quarter? Or the previous year's quarter? Is that about flat?

It's up a little bit, but there were some adjustments in the year prior quarter which make it tough for comparability.

And on page 10 of your slides, you break down revenue between the two groups, and then you break down income from continuing operations. That's obviously net income from continuing operations. Do you have those numbers on kind of your segment income basis that you report in the Qs?

I think it's in the press release attachments and will certainly be in the Q as well.

OK, thank you.

Thank you.

And, sir, we have a follow-up question from the line of Gary Prestopino with Barrington Research.

Did you mention - you said that you got the LiveBlock out to 90% of your lanes ...

Eighty percent.

On the institutional lanes, Gary. We haven't yet with the (inaudible).

Did you say it's 80% of the ...

I'm sorry, it's 90% of the institutional lanes, which is about 50% of all lanes that we have.

OK, can you give us some idea of what percentage of your vehicles you're selling over the net now?

We talked about electronic selling sort of being in that mid single digit area.

OK.

It's trending upward. It's five, trending upward.

And just on what one of your competitors has with this total live auction that they're trying to get into a couple of the wholesale sites, independents, have you gotten any feedback from some of your buyers that have used this as to what their feeling is on it, and do you kind of view it as possibly a competitive threat?

We have, but I'd prefer not to go there on this call.

OK, that's fair. All right, thank you.

Thanks, Gary.

Ladies and gentlemen, it appears that we've exceeded our time for question and answers today. Mr. Lips, Mr. Gartzke, back over to you for any closing remarks.

Thank you, and I appreciate everyone's patience on this call. I had lengthy closing comments, but I think I'll pass on giving them to you. I think you've heard the news and you've received, I think, the important message about our ability to enjoy the diversity of the three businesses, ADESA Used Car having I think a great year managing its margins and other things, revenue, for the total services it provides to deal with the off-lease vehicles. And certainly AFC and Impact is doing extremely well supporting the EBITDA growth of 9.3%, which excludes the pretax incremental corporate expenses. So I'm very, very pleased with the way that we've been able to perform in this market.

Every company says they're focused on driving shareholder value and they're optimistic about their future. We say the same, but hopefully the way we've performed and the way that we've communicated with you demonstrates that we indeed are focused on shareholder value creation. Our newly announced dividend policy and our approved share repurchase program hopefully further cements that commitment to you.

Without a doubt, our company is committed to serving customers by providing superior service and value to them, and certainly our investment in IT over the past few years and on a going forward basis illustrates that. And then we understand the customer's needs and we strive to exceed their expectations. Service drives the value of this company, and we're focused on that as well.

In closing, I'd just like to comment that Paul, Cam and Tom Kontos, who many of you know as our VP of Industry Relations and Analytical Services will be speaking at the Midvalley (ph) Conference in Las Vegas November 2nd, so if you care to come out there, maybe make a few sports bets, I'd be willing to take that. And, as always, we're always in New York, Boston, San Francisco and all over the globe, at your convenience. And I look forward to seeing all of you.

Again, thanks for being on the call today, and I look forward to seeing you again.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes your presentation and you may now disconnect.