Openlane Inc (KAR) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2004 ADESA Incorporated earnings conference call. My name is Anne Marie (ph) and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to Mr. Paul Lips, Vice President of Investor Relations. Please proceed, sir.

Thank you. Good morning, everyone. Thank you for joining us today on ADESA's fourth-quarter 2004 earnings conference call. Joining me on today's call are David Gartzke, our Chairman, CEO and President, and Cam Hitchcock, EVP and CFO.

Before we begin today's call, I'd like to remind you that this conference call contains forward looking statements. Such statements, including statements regarding anticipated financial results, are subject to risks, trends and uncertainties that could cause actual results to differ materially from those projected, expressed or implied by such forward-looking statements. The earnings press release from last night and the slides accompanying this call has a 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, along with 2004 historical quarterly segment income statement and statistics. Following today's call, a webcast replay and slides, along with the telephone replay, will be available on our Web site.

The format of today's call will be as follows -- Dave will start off by briefly recapping our fourth-quarter and year-to-date financial results, highlighting some of our recent accomplishments. Then he will also provide you with some strategic commentary regarding cash deployment. We will 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 the Company's outlook for 2005. After Cam remarks, we will conduct our usual question-and-answer session and then Dave will provide you with some closing comments before the call ends.

Many of the numbers we will be discussing on today's call can be found in yesterday's press release or in the slides and other information on our Web site and in this webcast. Some of the financial metrics we will be discussing, such as EBITDA, are of a non-GAAP nature and as such, they're reconciled to GAAP measures in either the accompanying slides or the earnings press release.

I'd also direct you to our S-1 filing for a review of the Pro Forma imperative (ph) financial information that the Company presented with respect to 2003 and the first quarter of 2004.

As a reminder, our Web site is www.adesainc.com and the slides with be user controlled on this call.

I'd now like to turn this conference call over to our Chairman, CEO and President, Dave Gartzke.

Thanks, Paul, and good morning everyone.

As we announced yesterday, ADESA reported record fourth-quarter revenue of 225 million and net income of $22 million or 24 cents per share. Please note that our EPS of 24 cents per share includes after-tax interest and corporate expenses of $5 million in total, or 5 cents per share, which ADESA did not incur while part of ALLETE in 2003.

Our fourth-quarter performance was driven by continued year-over-year improvement in adjusted segment operating margins, increases in revenue per vehicle sold, loan transactions, and revenue per loan transaction. We're very pleased with these results, especially in light of the industry cycle that we are currently operating in relative to the (indiscernible) clients.

Now I'd like to highlight some of the key events for the fourth quarter of 2004 and the first few weeks of 2005, and I'd like to refer you to slides 3 and 4.

First, (indiscernible) auction and AFC business segments saw a double-digit growth in income from continuing operations for both the fourth quarter and the full year. It's also important to note that both segments continue to grow their revenues. Despite expected softness in the off-lease and in-repo (ph) volumes, ADESA Auction posted solid earnings growth. AFC also posted strong results based in part on the 269,000 loan transactions, which, by the way, was a fourth-quarter record for us. Second, we reported full-year GAAP income from continuing operations of 109.5 million and adjusted income from continuing operations of 119.8 million or 1.31 per share. Next, in the fourth quarter, we bought back 4.4 million ADESA shares for $86.7 million. We continue to assess the opportunity to make additional share repurchases, as we weigh various deployment opportunities for our excess cash.

Our organic growth initiatives gained some traction early in 2005, as we added new impact salvage auctions near Hartford, Connecticut and Clearwater, Florida, and we opened some new AFC loan production offices in North and South Carolina. Importantly, we paid our first quarterly dividend in December and Wednesday, we announced our second quarterly dividend, which will be payable in March. We view these dividends as a very important measure of our commitment to you as our shareholders and are reflective of ADESA's cash generating capability.

Exciting to me is that, during 2004, we tripled the number of dealers registered online and we offered over 675,000 vehicles on LiveBlock. This is a live audio and visual feed direct to our lanes. The conversion percentage on these vehicles was over 80 percent. We have also seen the percentage sold to online bidders continuing to increase, growing to about 10 percent of the total LiveBlock sales for the year.

In Canada, where the system has been operating for a longer period of time, our results were even more impressive with even a higher percentage of sold vehicles going to these online bidders. We have approximately 95 percent of our used vehicle institutional selling lanes equipped with LiveBlock, which is triple the number we had at the end of 2003. We plan to accelerate the rollout of this LiveBlock technology to more of our salvage auctions with the goal of equipping over 80 percent of our salvage sites by the end of the year. The obvious benefit of this is more bids, which increases demand and the returns for our customers.

Before I discuss our strategy for deploying cash, I want to revisit a couple of areas that we covered on our last call. First is technology. We continue to work on a number of Information Technology projects aimed at fully integrating all of our service offerings to enhance our level of customer service, which increases our operating efficiency. Central to this effort is the deployment of an integrated supply chain management system for our auction sites. This results in a faster and a paperless process. We will also continue to enhance and improve this online service offering that I alluded to earlier.

Switching gears to a macrolevel and talking briefly about the business model, the strength of this model is that it's based on a used vehicle park in North America of nearly 250 million vehicles, which continues to grow at 2 to 3 percent per year. While about 45 or 46 million of these vehicles change hands each year, currently about 10 million are sold at auction. This continues to grow at the 2 to 3 percent level as well. This is what provides the tremendous opportunity for the auction industry as a whole and for us, ADESA.

Cash deployment -- as Cam will explain in detail later, our available cash for reinvestment was over $150 million at the end of this year for 2004. Our operating performance and capital discipline going forward will continue to drive strong cash flows, which we will continue to deploy to drive shareholder value. I can assure you that I, along with the rest of the senior management team and our Board, are committed to investing these funds wisely. We will patiently look for the highest shareholder return as we weigh various opportunities for this cash.

Although the biggest, highest risk-adjusted return is generated by reinvestment into our existing sites to expand capacity and further leverage our fixed costs, there are a limited number of these internal opportunities in any given year. Three of these projects are currently underway, one in Montreal, one in Vancouver and one in New Jersey. The second-highest return of this cash is to invest it in accretive acquisitions and expansion into markets that are underserved. We have done several expansions over the last six months, including 3 salvage sites and 3 AFC loan production offices.

We also feel that numerous opportunities exist for us to accelerate our acquisition strategy as approximately 30 percent of both auction markets, salvage and used, are still owned by independent auction operators. All we can say about these opportunities is that we will be patient and move into areas that benefit our customers and leverage our resources.

We will weigh all investment opportunities against a further share repurchase with the objective of maximizing shareholder value. Although we expect that there are numerous alternatives for deploying our cash, it's difficult for us to predict the timing of these opportunities. As such, we are willing to invest the cash for a reasonable period of time in a temporary, secure liquid investment strategy. We are not willing to make an investment that is not early evaluated and accretive for our ADESA shareholders.

In summary, you can see that ADESA had another strong quarter and again demonstrated the strategic benefits of our portfolio of businesses, operationally focused management and a very flexible cost structure, which added to both top and bottom-line growth.

With that, I'm going to turn the call over to Cam Hitchcock, who will provide you with some additional insight into the quarter and the annual financial results as well. Cam?

Good morning, everybody.

Before diving into our financial performance, I think it's important to remind everyone of our discussion on last quarter's call and our focus on an apples-to-apples approach for reviewing results.

This morning, most of the results will be discussed in both the reported GAAP format as well as in an adjusted format. The adjusted format detailed in the press release excludes only the effects of nonrecurring or one-time charges related to the IPO and separation transactions in 2004 and also takes into consideration $3.4 million pre-tax or 2.1 million after-tax gain on the sale of real estate which occurred in the fourth quarter of 2003.

We will also point out to you the recurring costs, mostly corporate and interest expense, that are incremental for 2004 relative to 2003. We encourage you to utilize these to Pro Forma for both years, as it will enhance your understanding of our operating performance. We believe that this basis of presentation is the best way to zero in on the drivers of our performance.

Now, I will talk about the fourth-quarter highlights. When we took ADESA public last June, we guided the investment community to expect annual growth and operating EBITDA of between 9 and 12 percent from ADESA's 2 business segments prior to incremental corporate expenses and prior to the nonrecurring gain in the fourth quarter of 2003. We met our commitment in 2004. Excluding 11.9 million of incremental corporate expenses, ADESA would have posted EBITDA growth of 13.4 percent. Including the 11.9 million, we posted 8.4 percent EBITDA growth. Slides 5 and 6 of our presentation take you through an abbreviated walk forward of EBITDA from 2003 to 2004 and a comparative analysis of EBITDA on both a quarterly and annual basis. As Dave mentioned, ADESA's performance again reflected the strength of our portfolio of service businesses, the experience of our operators, and management's attention to expense control.

Let's talk about revenue for a second. Consolidated revenue for the quarter was a fourth-quarter record at 224.8 million, up about 7 million or slightly more than 3 percent versus last year. The drivers of this gain are summarized on slide 7. I will discuss those more -- in more detail later when I cover the business segments.

Operating margins -- turning to slide 8, overall, our operating margin was steady with the fourth quarter of 2003 despite absorbing incremental pretax corporate expenses of $4.6 million during the quarter. Once again, our operators in both segments did a great job of controlling costs, as the institutional vehicles and inventory at the auctions grew at the end of the quarter and AFC experienced a significant increase in loan transactions.

Overall, our cost of services decreased about 1.8 million to 116.6 million for the quarter versus 118.4 million in the fourth quarter last year. This net decrease is a function of lower auction volumes, which was somewhat offset by an increase in loan transactions at AFC.

SG&A for the quarter came in at 57.3 million as compared to the reported SG&A of 46.3 million in 2003. It's important to point that, and we reflected this in our press release, that SG&A expenses in 2003 were favorably offset by a nonrecurring gain of 3.4 million pretax with in our Auction segment, making the adjusted fourth-quarter 2003 comp 49.7 million. The main driver behind the increase was the incremental holding company expenses of $4.6 million previously mentioned. The other major increases in SG&A during the quarter were mainly related to favorable related taxes and benefits and a stronger Canadian dollar.

Now a brief comment on interest expense. Interest expense for the fourth quarter of 2004 was 8 million versus 3.9 million last year. This increase was driven entirely by our midyear 2004 recapitalization.

Taxes -- in the fourth quarter, our effective tax rate was 36.8 percent versus 37.1 percent for the same quarter last year, bringing our annual effective rate to 38.8 percent. This was a one-time decline in our effective tax rate, which is attributable to the restructuring and other tax components associated with our separation from ALLETE. Going forward, we would expect the tax rate to settle in somewhere between 39.5 and 40 percent.

Now, I'd like to take you through our business segments. First, the Auction segment -- if you'll refer to slide 9, (indiscernible). Our auctions performed well during the fourth quarter versus last year on a number of fronts. Income from continuing operations grew over 10 percent on higher revenues. Operating margins increased about 140 basis points (indiscernible) is flat after adjusting the 2003 $3.4 million gain on real estate, and revenues per vehicles sold increased 5.6 percent. The revenue per vehicle and the flat operating expenses more than offset quarterly volumes that were down about 4 percent, or 19,000 vehicles. As discussed on our last conference call and in our filings, we saw fewer institutional vehicles coming to market as compared to '03. As a percentage of total vehicles sold during the quarter, the percentage of institutional vehicles in the mix increased from the third quarter. The number of institutional vehicles on our lot at the end of 2004 was up slightly versus 2003.

Dealer vehicles sold in the quarter increased 4 percent versus the fourth quarter of last year, and we ended 2004 with an overall 8 percent increase in dealer vehicles sold. We posted a strong quarter-over-quarter increase of $23 per vehicle sold to $433 driven mainly by 2 factors, an increase in ancillary services provided and favorable Canadian dollar exchange rates. (indiscernible) increases earlier in the year also contributed to the revenue per vehicle sold increase. Going forward, the Auction's revenue mix should reflect more dealer vehicles sold, which should put pressure on revenue per vehicle sold. Additionally, we're not expecting any further benefits from the currency translation.

Now, onto AFC. Please refer to slide 10. At AFC, income from continuing operations grew 17 percent on higher revenues. Operating margins increased about 100 basis points despite the added costs related to handling a 13 percent increase in loan transactions. Consistent with prior years, fourth-quarter revenue per loan transaction increased from the third quarter.

For the quarter, AFC again had double-digit growth in both revenue and income from continuing operations. Loan transactions grew 13 percent during the quarter. Both the number of independent dealers served by AFC as well as the number of loan transactions per dealer continue to increase. Perhaps most importantly, AFC has not experienced any deterioration in the performance of its portfolio that stood at over $580 million at the end of the year, which is up about $50 million from '03.

Consistent with our experience, over 95 percent of AFC's portfolio is current. AFC's success has been and continues to be its focus on controlled growth. Controlled growth means increasing the number of loan transactions to a known dealer population without changing credit standards. If you look at the historical performance of AFC, you'll see that it is a relatively consistent business driven by transaction growth.

A brief balance sheet comment -- our total balance sheet -- our balance sheet remains strong, as highlighted on slide 11. Debt-to-capital now stands at 33.8 percent versus 32.9 percent in the third quarter, up slightly due to the impact of our $86.7 million share repurchase. Gross debt-to-capital was 51 percent, and on a net debt basis, it was 20.4 percent. The major change to gross debt from the end of the third quarter was the principal reduction of $9 million on our bank loans.

We finished the fourth quarter with a total cash balance of 309 million, versus $420 million at the end of the third quarter. The major driver behind this change was our repurchase -- our share repurchase of almost $87 million. Other factors during the quarter were cash generated by operations, which is offset by 9 million in principal reductions, $18 million of CapEx and interest payment on our debts. The $309 million cash balance has about $5 million restricted by our AFC securitization facility and about 100 million which was required to satisfy outstanding bank clearings. Additionally, we earmarked about $50 million to cover working capital swings. This leaves remaining cash of about $150 million, which is available for the shareholder initiatives that Dave discussed earlier.

We had originally anticipated annual 2004 CapEx in the range of 33 to 38 million, and we ended the year with about 31 million. When we look at our balance sheet and our cash flows, it's important to remember that our revenues include only the fees that we earned from services provided. However, our working capital cash flows include the full purchase price of the vehicle as well as the fees we earn. On an annual basis, our auctions and loan production offices handle nearly $20 billion in cash flow.

Share count -- at the end of last year, we had 92.4 million weighted average diluted shares outstanding versus 88.6 million in 2003. This increase in share count is mostly attributable to our second-quarter IPO of 6.25 million shares out of our repurchase of 4.4 million invested (ph) shares in the fourth quarter.

On a year-to-date basis, I will just be providing a summary of these results, as the details are in yesterday's press release. 2004 revenues rose 2.2 percent to 932 million versus 912 last year. Transactional growth at AFC of about 13 percent, and strengthened revenue per auction vehicle sold were the main operating drives of the growth, while the strength of the Canadian dollar also contributed to just over half of the revenue increase. Our revenue growth was achieved despite a full-year decline of 2 percent or 40,000 auction vehicles sold.

As noted in our press release, our reported net income for the year was $105 million, or $1.15 per share, versus the 115 million or $1.30 per share reported in '03. The reported results for '04 included non-recurring transaction costs of 10.3 million after-tax, or 11 cents per share, and a loss from discontinued operations of 4.2 million net of tax or 5 cents a share. Absent these non-recurring charges and results of discontinued operations, income from our continuing operations would have been 119.8 million or $1.31 per share. Our weighted average diluted share count rose to 91.5 million shares versus 88.6 in 2003.

Now, on to 2005 guidance. I'd like to refer you to slides 12 and 13. As we discuss our guidance for 2005, please note that our guidance is prior to any third or fourth-quarter 2005 expenses, which may result from the new FASB requiring stock option expensing. The Company is currently evaluating an acceleration of the vesting of the one-time IPO brand issued (ph) in conjunction with our 2000 IPO. Against the baseline 2004 Adjusted EBITDA of 257.4 million, we would expect the drivers and expense components shown on slides 12 and 13 to result in EBITDA growth of between 9 and 12 percent in 2005. For comparative purposes, let me stress that this range does not include any expense associated with stock options. However, the 9 to 12 percent expected growth of EBITDA fully reflects and does include full-year corporate expenses.

We see our 4 main revenue drivers for this year as follows -- for vehicles sold, we anticipate sold volumes at ADESA auctions to grow between 1 and 3 percent; we anticipate that off-lease volumes in the U.S. market will decline again but not nearly to the extent we experienced in 2004. This will be offset to some extent by an increase in off-lease volumes in Canada. We expect to grow the number of dealer vehicles sold in '05 as a result of our dealer consignment strategy and the continued substitution of dealer vehicles for institutional vehicles.

Our salvage vehicles sold should increase generally in line with the salvage market.

Revenue per vehicles sold is expected to increase 1 to 2 percent relative to the full-year 2004 revenue per vehicle sold of $416. Our forecast assumes a steady Canadian dollar exchange rate, and we expect the mix between dealer and institutional vehicles to be representative of 2004 as a whole.

With regard to AFC, we would expect loan transactions to increase between 5 and 7 percent and AFC's revenue per loan transaction should be flat to up 2 percent.

For 2005, ADESA is currently anticipating EPS in the range of $1.37 to $1.43 a share with an assumed weighted average diluted share count of 92 million shares for comparative purposes. This range of $1.37 to $1.43 a share takes into account some incremental expenses relative to 2004. First, our full-year interest expense is going to be higher. We estimate incremental interest expense of about 7 to 8 million pretax or 5 cents a share. The majority of this will be in -- of this effect will be in the first and second quarters as the recapitalization occurred in the middle of 2004.

The second factor is the full-year corporate expenses. We expect an additional 4 to 4.5 million pretax over '04, or about 3 cents a share. Some of this increase is attributable to external services related to Sarbanes-Oxley. These expenses are estimated at about 1.5 million to 2 million pretax in '05. As with interest expense, the majority of this incremental expense will hit in the first and second quarters, as the corporate infrastructure was just ramping up in the first half last year.

Third, G&A is expected to increase between 3 and 4 million pretax or about 2 cents a share. This increase is driven by the CapEx we spent in '04 as well as our planned 40 to $50 million 2005 CapEx spend. I'd like to remind everyone that this is not a capital-intensive business, as our base for maintenance CapEx for facilities is still expected to be relatively low in the 15 to $20 million range.

As I mentioned earlier, our tax rate is expected to settle in between 39.5 and 40 percent. Lastly, while we will not be providing you with quarterly guidance due to the fluctuations that are inherent in our business, I'd like to point out that the comps for the second half of 2005 will be easier for us than in the first half of the year. Overall, we would expect to see additional improvement in our operating margins as we better leverage our fixed costs across higher volumes, and we anticipate that both cost of services and SG&A will improve as a percentage of revenue. The majority of our other income for 2005 will be the result of interest income on invested cash.

We've estimated that the impact of a new FASB on stock option expense in 2005 could be up to $3 million after-tax or about 3 cents a share. Stock option expense will increase in 2006 and 7 as each year will unfold (ph). Each year will include a full year of the expense as well as expected (inaudible) grant. As a reminder, this expense has not been factored into our guidance and, as I mentioned earlier, we're still weighing all of our alternatives relative to this issue.

Now, I'd like to turn this call over for questions. Following the Q&A, Dave will have a few pre-closing comments.

(OPERATOR INSTRUCTIONS). Brian Nagel with UBS.

Good morning. You guys can hear me? My question pertains to the volume growth in -- (technical difficulty) -- volume growth in 2005. Cam, you mentioned your dealer initiative. If you could just go into a little more detail exactly what you mean there by with the dealer initiatives.

Dealers have always been a pretty significant component of our business, Brian, and I think, when we talk about dealer initiative -- (technical difficulty) -- talk about providing the same types of resources and analytical information to dealers prospectively that we've traditionally provided to our larger institutions -- (technical difficulty) -- better information on the best venue to retail their vehicles, better analytics, better software tools, and generally just a heightened level of attention.

I think the LiveBlock technology is going to be something that's going to be an invaluable tool for them. Some, because of travel, others because of time, where they are able. Will train them; we'll set up labs in our auctions so that they are comfortable with the computers and with the LiveBlock systems that we have. So that if they are unable to visit an auction, they are able to do it back in their shops and be able to participate in all of our auctions anywhere.

We will have a much stronger focus with our sales force, like we have a -- like Cam said, a trusted business advisor approach with our commercial accounts. How do you do it with this many independent auctions? It's going to be a challenge but that's what we will do; we will train our dealer consigners to do it with information. Information is a very powerful thing and we are able to track dealers that have been coming to our auctions that for whatever reason have discontinued coming. We know the models that they buy, the price ranges they are comfortable with. It's just a matter of staying on top of that stuff and providing service when they do use our facilities.

Thanks very much. Good luck in 2005.

Marc Cohen (ph) with Force (ph) Capital Management.

Thanks for taking my call. Given that your competition used vehicles to date has basically been Manheim and the independent auctions, can you explain to us exactly what Copart is attempting to do in the used vehicle industry?

I think we know what they are attempting to do but I would prefer to not comment on what our competitors are doing in the same space. You know, they are a very successful company and we compliment them for what they've done. We look forward to a healthy competition with them.

Just talking about upstream selling, GM SmartAuction has taken like 1 million cars out of the lanes in the past few years, supposedly. Is that a growing trend or is that -- do you see large consigners doing that?

We haven't seen, Marc, increases in GM SmartAuction volumes. They like the product. We are involved in that SmartAuction process already. Marc, I don't know if you are aware that we actually provide the infrastructure and backbone for that process that is run in Canada. ADESA runs the SmartAuction for GM in their Canadian area, so we are pretty familiar with where they are going. Whether or not they intend to grow that over time is something you would have to ask them directly, but we have not seen, Marc, increases over the last couple of years; it's been relatively flat.

So what exactly do you guys do for them in Canada?

Well, we host -- we actually host a site for them. I won't get into too much detail here, but we photograph and post vehicles for them; we handle a lot of the back-auction back-office process that is associated with them running their auction, taking bids, etc.

Is that similar to what you do with Toyota here in America?

It has a fair amount similarity although there are differences.

What exactly do you do for Toyota here?

Well, it's a form of a closed sale. You are familiar with closed sales, which are sales that are exclusive with the franchise dealers to the manufacturer, in this case Toyota. We just use the technology to provide that closed sale for them so that Toyota dealers only can click on and see the products that the Toyota off-lease vehicles have. It's just technology that is exclusive to -- between Toyota and the Toyota franchise dealers.

Gary Prestopino with Barrington Research.

A couple of questions here regarding -- Dave, you mentioned some tech products for integrating all service offerings. When will that be fully rolled out?

I think you'll see our text service offering roll out in stages. I don't think you're going to see a Big Bang integrating the full auction technology. If you took a look all of the component parts, you're probably (inaudible) to 24 months out but there clearly will be significant pieces of it introduced before 18 to 24 months.

They are modules. It's not going to be 1 mammoth project. There are modules, one of which was recently completed, a transportation system, and another one, which is very important, which is the electronic condition and report system, which will hopefully be done in the next quarter. So we are taking it in modules, not as one project.

Okay. In regard to the dealer block and what you're doing -- I mean LiveBlock and the institutional vehicles -- what kind of lift are you seeing on pricing when a car is sold over the Internet?

I think it's difficult to pinpoint it, Gary, but a very interesting statistic is that a fair amount of the number of the individuals who finish second are bidding over the Internet as well. So that would tell you that that's helping to drive incremental bids. Incremental bids provide for better liquidity for the car. We can't pinpoint it on exactly but our sentiment is that it is valuable.

Then you mentioned some projects, Montreal, Vancouver and New Jersey. Is that lane additions?

Those are principally lane additions and reconfigurations.

How many lanes would you be adding in total with all of those?

Paul?

It looks like it's closer to 8.

8 in total? Okay, thank you.

Robert Kirkpatrick with Cardinal Capital.

Good morning. Cam, can you give me what the bad debt expense was for the quarter and what it was in the year-ago period?

Hang on just a second, Bob.

Okay. Secondly, while you're looking that up, on your forecast for 2005, you're clearly counting on some expanded margins at your business. Are those going to be weighed more towards the auction side of the business or towards the dealer floor plan side of the business?

Certainly, we will see it in the auction site. I would say the margin expansion on the floor plan side is somewhat limited. The value there is mostly in transaction growth, so the margin expansion is in the auction side.

We're looking for -- trying to dig the number up right now. AFC was about flat, pretty consistent quarter-over-quarter, and we're looking for the auction piece right now.

Okay. Then I was a little surprised to find that you booked a real estate gain in your SG&A. How does that work? Wouldn't that have been kind of another income below the operating line basis?

When we went through our S-1 process last year, in pretty close consultation with PW and some of the other people who were patiently directed at that point to put it at that level.

I'm sure you were directed. I'm trying to understand the rationale for it. Is it part of an ongoing business, to be buying and selling real estate?

We do have excess land and real estate in certain of our locales, Bob, and we clearly pointed that out in our filings and to the extent we would dispose prospectively of any of that, that would be pointed out as well. But we are a fairly high-volume user and purchaser of real estate. We will always disclose it, though.

No problem. Finally, if you could go into a little bit more detail about how the capital spending breaks down in 2005 in terms of your different plans for it.

We've guided between -- I gave some general guidance between 40 and 50 million. We had one project that just slipped from the fourth quarter into the first, but I think you would see a pretty good chunk of (indiscernible). Maintenance capital for our facilities will be pretty consistent, sort of in that $15 million area, 15 to 18. I think you'll see a fairly good chunk of IT-related spending, again sort of between 15 and $20 million on a capital basis. You'll again see some selective expansion opportunities, which we won't quantify in terms of dollars for competitive reasons. But the main component of increased (inaudible) will be a little bit higher IT capital spending. There is a real estate transaction that we have just closed in the first quarter that will drive that to be roughly 10 percent of the overall spending.

Then does the IT spending stay at that level as you look out to '06 and '07, or does that really begin to mark the completion of that -- those projects that you are in strategic need of?

I would fully expect the IT spending to stay at that level in '06 for sure. You might see the early part of '07 on a run-rate reflect some of that, but I think sort of the back half of '07, I think you'd see that start to tail off.

Great. Thanks so much, guys. I appreciate it.

John Murphy with Merrill Lynch.

Good morning, guys. You know, in the quarter, the cost performance was a little weaker than I expected. You know, backing out the real estate expense from last year and everything, year-over-year it seems like you're kind of in check. But first and the third quarter, when you guys had a very good performance on the cost side, it seems like the fourth quarter was a little bit heavy. Is that all coming from seasonality? If it is, what are the main components from the third quarter to the fourth quarter that changed?

John, this is Paul. The majority of the margin is due to seasonality. What we see in the fourth quarter is a significant decline in volumes here at the end of the year, but at that same time, we're taking a lot of institutional vehicles into inventory. If you looked at the end of the year, our inventory levels were actually up in '04 versus '03. So you need to keep the staff on hand to be able to process those vehicles and be on hand to come back after the first of the year to be able to sell those vehicles.

So it's really a question of inventory management without selling those vehicles?

Exactly.

The second question is, on share buybacks, you guys have about $45 million left in your authorization. Is that something we should expect to continue being done in '05? Does the 92 million-share count that you guys have used for your guidance incorporate any additional share buybacks? Because it seems a little like it's on the high side.

Yes, we just use the 92 for comparative purposes, so it's pretty easy to benchmark what we had at the end of the year. We are not going to comment specifically whether we are in the market (inaudible) or not but we will continue to evaluate that. The cash is ready, the cash is available, and we will undertake to update you ,just as we did at the beginning of this year, with a press release when we update you on certain milestones in a share repurchase program.

So the exit rate of that diluted share count is about 90.7 -- is that about right?

I couldn't --.

The exit rate on the diluted share count was about 90.7 at the end of '04. Is that about right? I mean, you had that big share buy-back in the fourth quarter.

You mean the standing share count at the end of the year?

Yes, the final one that would be on the balance sheet, or a balance sheet item. It seems like it would be a lot lower than the 92 million that you're talking about there.

Yes, it was about 90.5 million and then you get to the basic and diluted, you have to affect for the options and the grants they are offering (ph).

Okay, but are there any big options or grants that are coming on in '05 that would increase that number to the 92 number?

The maturity of the IPO grants from last year is the biggest piece, and then each year, we intend that management, both at corporate and in the field, would have new IPO grants that would add-on to that.

Then just switching gears to the salvage business, it seems like you are slowly adding on there with greenfields and small acquisitions. As far as the greenfields and developing that business, what are the biggest hurdles? Is it the fact that it's tough getting zoning for that kind of land or is it the relationships with the insurance companies? What's the big hurdle there?

I think both of those things are challenges that you have -- location, the price of the real estate, having a major account that's going to give you a book of business before you open a new facility, especially if it is a greenfield site. The combination is what we are currently exploring, where we have a number of locations that have excess real estate, so we are there. It's a matter of getting contracts with zones or regions when their contracts come up for renewal. So we have to have the locations that would give them the 4 or 5 points of delivery in a specific zone to do that. So it's being patient and waiting for the contract renewal and being ready in the zones when they are ready to provide opportunities for us.

Matt Burr (ph) with Highbridge Capital Management.

I'm always a little surprised that you volume number wasn't a little bit higher, given that AutoNation, UAG and Carmax realized mid single digit to high single digit used car comps. Is that because there is a lag effect on the buying of the used car dealers and the auctioneers? After they sell out their inventory in the lot, do they then come down -- auction -- would that be a leading indicator for next quarter for higher volume numbers for the auctions?

You know, we've tried to distance ourselves but are volumes are not perfectly correlated with our larger retailers' volumes. I guess we will wait to see, Matt, whether there is indeed a lag impact in terms of the volumes. That's the retail side of the house. Obviously, we are a wholesale play. They have, depending on which one of these guys we are talking about, there are other sources for those supply of vehicles that are coming in there that can influence their supply and then their run-rate at any given time.

Entering the first quarter, are trends similar to what they were at the end of the fourth quarter, or have they improved or have they gotten worse?

We're not commenting right now, Matt, on the first quarter. We are 5 weeks into it. Our tradition has not been to give monthly updates.

Not that we have to do this on a quarterly basis.

Okay. Then just -- you talked about the expanded salvage operations. How long is it before you get to break-even on the 2 salvage expansions? You know, is that a general rule for new salvage lots?

You know, salvage has a different cost structure, Matt, than our whole car operations. Depending on -- a lot depends on whether they open a site with a book of business. In that case, it could cash flow significantly sooner than if you open a site without a book of business in hand. But I would say that, toward the end of the second year, maybe early into the third, you would see some benefit and it could be sooner depending on if they walk in with a significant book.

Okay, thank you.

Brett Hoselton with KeyBanc Capital Markets.

Good morning. Let's see. I wanted to talk you a little bit about acquisitions. I know that you're probably not willing to specifically identify acquisitions. What do you think the possibility of you making an acquisition is in 2005? Do you think it's more likely on the salvage side or the whole car side?

I think the likelihood of acquisitions in 2005 is quite high. We did state that we can't predict exactly the timing of these acquisitions, but I think they are high because our interest is high, we're back in the market and there are independents on both salvage and auction that I think will be available for sale.

My guess is that there will be more opportunity on the salvage side than on the whole car side as it relates to the strategic value to us and to our customers to be in locations where we are presently not serving or providing services. There may be 3 locations, 3 or 4 locations that could be very strategic to our customers on the whole car side, whereas on the salvage side, there's many strong regions where we have to have a presence.

Then as you think about the accretion opportunity here of either salvage or whole car auction, is that something you'd hope to have accretive in the first year? If so --.

On acquisitions, they are always accretive immediately upon acquisition, always. We price them that way, otherwise we won't do them.

Any idea -- typically a cent 2 cents, 3 cents? Any idea along those lines?

It depends on the size of the deal. You know, if it's a $30 million deal, then it would have one impact; if it's a $10 million deal, relative to the size of the company, it would have a lesser impact.

Then Cam, with regards to the stock options, and I apologize; I was distracted for a moment there. What were your thoughts with regards to the stock options? Were you going to possibly do away with them or buy them out or something along those lines?

Our comment was we had a grant that was tied to our IPO last year that was normal than sort of -- significantly larger than was sort of our normal run rate annual grant. With the FASB expensing mandate having come down and then finalized in December subject only to legislator review, we were considering -- we modeled it and we gave that guidance, Brett. There is an option to accelerate those options that are invested and underwater. The impact of that IPO grant is disproportionate to what our normal ongoing grant would be, so we are weighing our alternatives as to whether or not the Board and others would vest those and (inaudible) those provisions to vest (ph) those and that would obviate some of that expense.

Very good. Thank you very much, gentlemen.

David Schanzer with Janney Montgomery Scott.

Yes, good morning. Dave Schanzer from Janney. First of all, thanks for the detailed guidance. Most of my questions have actually been answered by now, but I did want to take another look at the salvage vehicles. Could you give us -- I saw, in '04, that you showed about 5 percent growth. Could you give us an idea at this point of what your 3 to 5-year outlook would be for salvage vehicles?

From a macro view, David, is that what you are referring to?

Yes.

Well, we see growth in the salvage side to be comparable if not better than -- at least that's our opinion -- as growth in a macro sense in the auction side. What you're seeing, David if you read Tom Comtose's (ph) material, he's the economist that works for us, that we were experiencing or the industry is experiencing a much higher percentage of vehicles that are total loss than -- or damaged vehicles perhaps that become total loss -- so that will be a growth driver, as well as just a simple number of vehicles that continue to go on the road that are adding 2 or 3 percent as well. So the combination of those 2 statistics and the latter statistic or the first one is probably driven by the economics of the cost and risk of repairing these newer vehicles -- I think is a tremendous opportunity for us if we are well-positioned. So I see, at least my vision for growth in the salvage side, to be greater than what we see on the auction side or the used side.

So then it would be safe to say that, essentially, your expansion into the salvage side of the business is a function both of the availability of acquisitions and your growth assumptions. Is that the way you look at it?

The availability of acquisitions and points of entrance through the combination of facilities that are in the same region or zones that would facilitate us to get the contracts when they come up. Because with the salvage business, unlike the used car business, you need to have more than one location to do business with the remarketers.

Okay. You may have actually said this and I may have missed it, but could you give us a breakdown of the differential between -- not a breakdown but just kind of a number that would reflect the differential between the fees per vehicle for a whole car versus salvage?

David, we can't go there. I'm sorry. It is information that, at this present time, we just don't disclose.

Okay, So the numbers that you're talking about are combined numbers?

Correct. That's how we report our auction segment (inaudible).

Gary Steiner with Awad Asset Management.

I just had a couple of follow-ups. Just on the share count, I was confused to a response earlier on. The 90.5 million shares -- that's the primary share count or that's the fully diluted share count?

That's the primary share count.

Do you know what the fully diluted share count was at the end of the fourth quarter?

Just a second. At the end of the fourth quarter -- for the quarter, it was 92.38 million shares. For the year, the fully diluted was 91.45.

Okay, the 92.38 is at the end of the quarter, not the average for the quarter?

It is the average.

Do you know what the actual amount was at the end of the quarter?

That was closer to the 90.5 million.

In terms of the salvage business, do you expect that to grow in '05 internally, putting aside any acquisitions?

Organic growth? Absolutely, absent acquisitions.

Okay. Any sense of magnitude of growth there -- 5, 10 percent?

I think, Gary, if you look at that, that the salvage market has fairly similar growth characteristics over time to the whole car market for that 2 to 3 percent, and we would -- given our share and where we are at, we would expect to approximate the market growth.

Okay. Just my last question is a follow-up on the acquisitions, sort of acquisitions versus share repurchases. Is it fair to say that you will use your excess cash to do 1 of those, 1 of those 2 options as opposed to paying down debt? In other words, if you're not able to find accretive acquisitions that make sense strategically, that you will instead repurchase stock?

Clearly, in terms of percentage accretion, debt pay down offers us the -- offered our shareholders the lowest accretion, so that's the lowest on the totem pole. It's not to say we would never do it but clearly, the accretion from share repurchase and strategic acquisitions exceeds that of debt repurchase.

Do you guys see any sizeable transactions out there? I mean I know that you guys were sort of out of the market for a while and you've been ramping up the initiatives and talking to some of these people. Are there any sizable transactions or do you imagine that it would be a series of smaller deals?

I think it will be a series of acquisitions and they will range in size like I mentioned before. Some might be as high as 30 or $40 million and some may be as small as 10 to 20. I don't think we are too interested in a $5 million transaction that is an acquisition. A start-up might be 5 million. I don't know if that answers your question, but that's the order of magnitude of the independent acquisitions that we are currently looking at.

That does answer it. Thanks very much.

(OPERATOR INSTRUCTIONS). A follow-up question from Gary Prestopino with Barrington Research.

A couple of follow-ups -- Cam, I might not have gotten this. What was your cash flow from operations for the year?

We didn't post it yet, Gary. It's well in excess of 100 million, and when we put the statements out, we will post it.

Okay. The salvage sites that you added, were those co-location, greenfields or acquisitions?

The Connecticut site was a greenfield. There was a need there; we were at capacity in our other sites, so we're going to be able to provide some efficiency by having those sites in the Northeast market. Then the Clearwater facility was a vacant used vehicle facility. That gives us another point of entry into the Florida market, so it is technically a greenfield.

Okay. Then, according to my statistics, your salvage process was down about 4 percent quarter over quarter. Is that correct?

(technical difficulty).

Could you explain why that is? Because the market in and of itself has been pretty able yet. Is there still some issues (sic) in Canada?

We lost a major account in Canada in the fourth quarter that caused that event to occur.

Okay. Could you explain why you lost it? Is that a situation where they are going directly to the dismantlers?

It's a situation that I'm sure the market leaders are facing in the United States as well. We have approximately 70 percent of the market in Canada, so I think that, from time to time, we're going to see people switching to competitors because of our strong market presence.

Okay. Then just some other things here -- can you talk about or give us some idea of what the mix on the wholesale side between dealers and institutional cars was in '04 versus '03? Can you give that information out?

We've never broken it out, other than the only directional guidance we've given is the industry as a whole is 60/40. We are heavier than that --.

-- institutional and that was based on '03 industry numbers, 60/40. What we saw in '04 directionally, dealers made up more of the industry and had a higher percentage of the vehicles we sold.

A couple of other questions, just real quickly. How much did you expand your dealer base at AFC? Do you have those statistics, where you were in '03?

We are flipping back there.

Bear with us, Gary.

The number of dealers that were active, the 8,700 as presented on slide 6, that was up about 5 percent from the end of the prior year.

Okay, that's good. The last question -- in your guidance for this year, are you anticipating any fee increases on the salvage and wholesale side in those numbers?

We don't care to disclose the fee increases specifically. From time to time, if we feel that we are delivering value and the margins are (indiscernible) for our customers and so therefore it's kind of a mutual dependence that they would be supportive of fee increases for the added value or added margins that they're getting, we will do that. We've been doing this for every year that I've been involved in this business. So I guess that's a general way of saying that, yes, we expect to continue to be able to enhance our revenue through that vehicle and will (indiscernible) value to our customers, but specifically, we don't comment as to exactly how much it is and when we do it.

That's fine, David. As long as you are thinking along those lines, that's fine. Thank you.

Matt Burr (ph) with Highbridge Capital Management.

Just a follow-up on the online auction technology -- a lot of the (indiscernible) BB2 (ph) technology -- are there any usability advantages that BB2 has over the LiveBlock? Can you compare the features and functionalities between the 2 technologies?

I won't comment on the adequacy of the BB2 product, Matt,0 other than to say our LiveBlock -- I don't know if you've had the chance to -- (technical difficulty) -- when you were at our auction -- it's streaming video, live audio from the lanes. We feel that other -- it is a great product, it has great acceptance among our institutional consigners, and the dealer buyers who use it have said a lot of really good things about it. I think, if you wanted to compare and contrast, you could (inaudible) with some of the buyers who use the competing technologies but we feel that our technology is second to none.

It's integrated with the physical auction, too, and that is our strategic position.

Have you been able to (indiscernible) any ciphering-off of vehicles due to the licensing of BB2 to 40-some whole car auctions?

I guess it's just difficult for us to comment on that question. (inaudible).

I'm sorry?

(inaudible).

So you haven't seen any loss of vehicle?

No, not at all. In fact, I would say perhaps the other way.

Stacey Widlitz with Fulcrum global Partners.

Good morning. Can you guys just comment? If you expect the dealer mix shift to increase a bit, can you just give us an idea of how much that would affect gross margin increases and the SG&A decline? The second thing is, as some of the manufacturers consolidate the used business in terms of choosing one auction or the other, how are you sort of competing for that business when the manufacturers are making the decision between you and Manheim? Have you been able to gain some share there? Thanks.

We will answer the second question first because the answer is much more clear-cut. The answer is that when Ford went through their consolidation decision last fall, we lost 1 sale and brand X, the largest player in the industry, lost more than we did (inaudible), so we compete effectively for that business on the same basis as we do on an inbound basis. How good are your retentions? How good are your turns? What level of service do you provide. You know, Ford made the decision and others will make their decision, based on their own criteria, to the extent that they want to consolidate auction relationships.

The mix question that you mentioned, there's a lot of different components to how that impacts direct costs. You have to look at our total volume of vehicles and assess it over the full inbound site (ph). Clearly, the dealer vehicle costs us less to process because it has had fewer services typically attached to that vehicle. It has the profile, as I think you are aware -- it is a lower revenue per vehicle profile but it has a margin profile that is pretty attractive. It's actually superior just due to the fact that our highest-margin service that we offer is the actual auction block.

Hopefully that helps.

Joel Manelli (ph) with David J. Green (ph) & Company.

Just to drill down on the vehicles sold volume being up 1 to 3 percent in '05, is that primarily coming from increased penetration of the dealer channel, or are there further relationships being pursued on the OEMs channel as well?

You know, we always look at -- we always continue to be aggressive in competing for all the institutional business. I think it's coming from both we have continued to take marketshare over time from any number of our competitors and talked about how we do that. I would say the bigger component in '05 is probably the dealer component. (multiple speakers).

Would you say that the used vehicles entering auctions will be up a similar rate in '05 versus your expectation for used vehicles sold?

It's difficult for us to predict what the inbound supply is going to be because the dealer component is -- institutionally, it's a little -- there's a little more regularity in what they bring to auction and their ability to tell us, but if the dealer (inaudible) supply is tough to estimate and that's a pretty significant piece of anybody's business in this industry.

We include the insurance business in the salvage transactions when we talk about vehicles sold (indiscernible) so don't forget that.

Yes, I know. I'm just trying to drill down on what's really driving your assumptions for used vehicles sold being up 1 to 3 percent. I mean, is your expectation that the conversion rate will remain above 60 percent? Is that part of your assumption there?

It's partly due to our efforts to gain more marketshare in the U.S. with (ph) the institutional business, as well as the countertrend that we see on the off-lease vehicles from Canada where we have the lion's share of the market in that country. Then also, the dealer effort -- so it's really not working backwards from the conversion rate; it's looking at what are our efforts to get more vehicles into the auction and how does that translate into sold (indiscernible)?

Right. I'm just trying to drill down a little bit because this past quarter, you know, the inbound vehicles sort of fell below 700,00 for the first time in a little while. I just want to make sure that your assumptions for '05 -- or you feel confident that you can get at least 700,000 a quarter entering the auction. Obviously, you feel that way.

Yes.

I'd like to perhaps entertain one more question. You are asking very good questions, a lot of detailed questions and we will be available to take calls following this call to get into more details that I'm sure a number of you it sounds like would like to continue. So with that, I will take one more question and then make some closing comments.

You have no further questions at this time, sir.

The timing was good for all of us!

I'd like to reiterate that our recent accomplishments in 2004 really demonstrate that adaptive business model enables us to continue to grow our profitability and expand. The excellent performance in this operating environment I think demonstrates ADESA's team's strong commitment to our customers and to our shareholders. Our outlook for 2005 further reflects this potential.

I'd also like to make a final comment and try to (indiscernible) our strategy in a succinct way so that everybody understands what our strategy really is. You may gather what it is based on the comments that we've previously made. But our strategy is to deploy this excess cash into our core automotive, remarketing, service business model. We're not going outside this business model. It has to be related to our core competencies. Therefore, we will not touch it -- and doing business in North America. We are focused on enhancing our competitive position, which benefits our customers as well. As we become more efficient, we expand and improve our service offerings and we move into markets where we can better serve our customers' needs.

I think that's it in a nutshell. Without a doubt, our team is really committed to serving customers and driving shareholder value for you by providing the superior service and value. We certainly understand the customers' needs, and it's our goal to exceed their expectations.

With that, that concludes our comments. I thank all of you for being with us today, and I look forward, hopefully, to seeing most of you in the next quarter or two. Thank you.

Thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a great day.