Openlane Inc (KAR) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Quarter 1, 2005 Adesa Incorporated Earnings Conference Call. My name is John and I will be your coordinator for today.

[Operator Instructions]

I would now like to turn the presentation over to your host for today's conference, Mr. Jon Peisner, Vice President of Investor Relations. Please proceed, sir.

Thanks, John. Good morning, everyone. And thank you for joining us on Adesa's First Quarter 2005 Earnings Conference Call. Joining me on today's call are David Gartzke, our Chairman, President and CEO, Cam Hitchcock, CFO, and Paul Lips, our new Senior Vice President of Operations for U.S. auctions.

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 certain 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 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've compiled a set of slides that can be viewed under the IR section of our web site, along with 2005 and historical quarterly segment income statements and statistics. Following today's call, the Webcast, replay and slides along with a 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 first quarter results and highlighting some of our recent accomplishments. He'll then provide you with an update on industry conditions and some commentary regarding growth initiatives and cash deployment. We'll then turn the call over to Cam, who will provide you with a financial review of the quarter. After Cam's remarks, we'll conduct our usual Q&A session, and then Dave will provide you with some closing comments.

Many of the numbers we'll be discussing today 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'll be discussing, such as EBIDA, are non-GAAP. And as such, they're reconciled to GAAP in both the accompanying slides and the earnings press release. As a reminder, our web site is www.adesainc.com and the slides will be user-controlled today.

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

Thanks, Jon. And good morning, everyone. As we announced yesterday, Adesa reported first quarter revenue of $244 million and net income of 35 million, or $0.38 per share. Please note that these results included both 2.6 million additional shares and incremental to last year, after tax interest and corporate expenses of 4.3 million.

Remember also, the first quarter of 2004 was prior to the IPO, and recapitalization. Our corporate holding company expenses in last year's first quarter were just beginning to ramp up and the interest expense on our former debt was much lower.

Our first quarter performance was driven by a continued improvement in operating profit margins, increases in loan transactions and higher revenue per vehicle sold. We're very pleased with these results. Especially in light of the industry cycle we're in, relative to off-lease and repossessed buy-ins.

To highlight the key events from the quarter of 2005 and the first few weeks of the second quarter, please refer to slides 3 and 4. First, both our business segments saw continued growth in operating earnings. Despite modest volume softness, Adesa auctions posted earnings growth driven primarily by continued efficiency gains and a favorable mix of business. AFC also posted improved results based on a 6% increase in loan transactions to nearly 279,000, which, by the way, was a new first quarter record for AFC.

Second, we strengthened our management team via 2 key management realignments and the addition of Jon Peisner as VP of Investor Relations and Planning. Brad Todd, in addition to his role as President of AFC, is now also the Chief Operating Officer of our -- of our U.S. used vehicle auctions. Joining Brad, to also strengthen operations is Paul Lips, formerly the VP of Investor Relations and Planning, who is now Senior VP of Ops of U.S. auctions, which is -- he's also reporting to Brad.

These changes set the stage for further alignment of our businesses, which better focus on achieving additional synergies and efficiency gains. These changes will also enable me to focus more on strategy and growth.

As mentioned on our February call, we continue to see accelerating results from LiveBlock, which is our interactive, internet based auction bidding platform. For the first quarter of 2005, we offered over 265,000 vehicles for sale on this platform, which is twice as many, compared to last year. The percentage of vehicles sold to online bidders also continues to increase and is currently at about 11%. This in nearly double the percentage of the successful online bidders in the first quarter of 2004.

On our last call we discussed our plans to continue to roll out LiveBlock to our salvage sites. Our goal was to have 80% of these sites up and running. We've reached that goal, and we're extremely pleased with the results and the favorable customer reactions. Now to a brief update on our current capital projects.

To date, our cap-ex focus has primarily been concentrated on IT infrastructure enhancements, cost savings initiatives, and enhancing growth opportunities, at each location, via lane expansions.

Specific projects include a land purchase of one of our former leased facilities, in a major metropolitan area, and the completion of expansion projects in both New Jersey and Montreal, which were the lane expansions. Updating the share re-purchase program, year-to-date through Tuesday, April 26 we bought back about 1.3 million Adesa shares for approximately $31.1 million.

For the first quarter of 2005 the respective numbers were about 332,000 Adesa shares for $7.6 million. We will continue to assess the opportunity to make additional share re-purchases going forward, but as always, this rests on our cash position, other investment opportunities, and of course, our stock price.

Just 2 days ago, we declared our regular quarterly dividend which will be payable in June, to shareholders of record as of May 20. We're pleased to be able to utilize Adesa's cash for shareholder friendly actions such as share re-purchases and quarterly dividends.

These actions reflect our confidence in the future, and the strength of our balance sheet and the shareholder governance philosophy.

Before I turn it over to Cam, I want to provide you an industry update and touch upon growth initiatives, relative to our deployment of our cash. Please turn to slide 5. Relative to industry metrics, I believe it is important to view the auction industry and Adesa's position within the industry, from 2 perspectives -- where we are today, and what we see for the future. Today we are operating in an environment, with declines in institutional vehicle supply, which have only been partially offset, by dealer vehicles. Wholesale values have been strong, reflecting the short supply. But also demand continues to drive our high conversion percentages.

Since 2000, and 2001, leasing has declined in popularity, primarily due to low interest rates and incentives. As we look to the future, we are encouraged by what we see, and what it means for Adesa. Specifically, many of the head wins we see today are beginning to reverse. Perhaps the most important of these is leasing.

According to the CNW market research U.S. lease volumes in the first quarter were up over 14% to 881,000 units, up over 100,000 units compared to last year. These penetration rates were up nearly 300 basis points in the quarter from 19.7% last year to 22.6% in the current quarter. Also the current gradual rising interest rate environment should be a favorable driver for leasing.

Very importantly, we see our role as a steady partner for the OEMs and bank lessors, regardless of where we and they are in our economic cycles. We will continue to provide them with vehicle re-marketing liquidity. This increases our customers' opportunities and helps them to sell a better product to their dealer and leasing customers.

This leads me to Adesa's growth initiatives. And please turn to slide number 6. When we talk about growth initiatives, our focus is on increasing our share of the 45 million or so vehicles that trade hands annually, not just the approximate 10 million units that are sold at used vehicle auctions. As we've said before, we will achieve profitable growth both organically and via acquisitions that will further enhance both our competitive profile and shareholder value.

As Cam will explain, our available cash for reinvestment was about $140 million at the end of this quarter. As you're also aware we have nearly completed our share repurchase program of the $130 million. We will continue to evaluate share repurchases though we believe the best use of our cash continues to be expansion of our operations into new markets whether they're physical locations or virtual auctions.

With that I'm going to now turn the call over to Cam, who will provide you with some additional insights into our first quarter. Cam?

Thanks Dave, I'm pleased with the results Adesa posted for the first quarter. As Dave mentioned, our industry continues to be faced with lower volumes from its traditional institutional channels. But we've been able to navigate through those challenges and deliver improving results. Much of the noise that made it difficult to compare last year's financial results to 2003 is now behind us. However, to provide an objective view of our performance in 2005 relative to 2004, we will continue to adjust the 2004 results for the non-recurring transaction-related costs, which fell into last year.

As a result, many of the financial measures we will be discussing today will be in both a GAAP format as well as in an adjusted format. As a reminder, the adjusted format excludes only the effects of non-recurring or one-time charges related to the IPO and separation expenses in 2004.

As we did on the last call, we'll also point out to you the recurring costs that are incremental this year versus last year. These recurring costs are mostly holding company and interest expense related and will occur mostly in the first 2 quarters of 2005. We encourage you to utilize the data of the pro-forma of both years that will enhance your understanding of our performance. We believe that this basis of presentation continues to be the best way to zero in on the drivers of our performance.

Speaking of performance, it's important to highlight Adesa's exceptionally strong performance in 2004's first quarter prior to discussing our performance in 2005 first quarter. As we repeatedly noted, last year's first quarter is a very difficult comparative due to a 5% volume gain, very high conversion rates and excellent improvement in operating margins.

Now for 2005's first quarter. Before taking a detailed look at our income statement, I'll address our first quarter EBITDA stats. As most of you know, Adesa considers EBITDA growth a key internal metric. And you may want to refer to slides 7 and 8 for this discussion.

Compared to an adjusted EBITDA of $69.3 million in 2004, EBITDA rose 5.5 million or 8%, to 74.8 million in the first quarter. We accomplished this despite selling about 24,000 fewer units and absorbing an additional $2.9 million pretax and incremental corporate expenses, all things considered, we are pleased with this performance and we are confident that we can achieve our annual objective of 9% to 12% growth in EBITDA.

Adesa's performance again reflected the strength of our portfolio of service businesses, the experience of our operators and the organization's continued focus on cost control. I will comment on specific line items of our income statement.

Consolidated revenue for the quarter was $244 million, down about 3.3 million or 1% versus last year. I will discuss the revenue drivers in more detail as I cover our 2 segments.

And now I would like to speak about operating profit margins and I think turn to slide 9 if you want to follow. Our operating profit margin rose up to over 26%, a 230 basis point improvement versus last year's adjusted operating profit margin of 24%.

We have accomplished this after absorbing incremental pretax corporate expenses of $2.9 million during the quarter. Our auction operators continue to do a fantastic job of managing and matching variable costs to a changing vehicle mix and volume environment.

Our cost of services decreased about 5.6 million to a 115.2 million for the quarter versus a 120.8 million last year. In addition, to benefits from lower auction volumes, favorable mix and improved operating efficiencies, cost of services also benefit from favorable medical claims experience versus last year.

SG&A for the quarter was 55.5 million versus an adjusted SG&A of 58 million last year. The $58 million number for last year is net of about 1.2 million of non-recurring transaction related costs.

Main drivers behind the SG&A decrease were reduced incentive compensation cost and lease expense. It's key to recall that incentive comp costs were higher in 2004 versus 2005 due to the exceptional performance I mentioned earlier in the first quarter of last year.

The most important takeaway is that we were able to decrease adjusted SG&A, by $2.5 million despite incurring 2.9 million in incremental corporate expenses this quarter.

In summary, reductions and cost of services in SG&A were a function of lower auction volumes, a favorable mix shift, improved operating efficiencies, and lower medical incentive compensation and lease expense.

These benefits were partially offset by foreign currency translation and normal costs associated with loan transaction, handling increased non-transaction volumes at AFC.

A brief comment on interest expense, interest expense on a consolidated basis was 8.1 million versus $4 million in 2004. This increase was driven entirely by our June 2004 recapitalization and rising interest rates.

As for taxes, in first quarter of this year, our effective tax rate was 39.1% which was pretty comparable to the 39.3 last year. I'd now like to briefly walk you through our 2 business segments' performance drivers.

Appendix 1 contains a summary of our segments' key operating specifics for the first quarters of 2002 through 2005. Keep in mind that the percentage changes between years are all based upon the 2005 year as a benchmark in the appendix. As for segment performance, our Auctions performed very well on a number of fronts. Operating profit grew nearly 17%, which was driven by decreased cost of services and lower SG&A. These efficiencies more than offset a 1.6 decline in revenues due to fewer vehicles sold.

Operating profit margins in the auctions increased about 380 basis points, driven by SG&A declines and a decline in cost of services. Key drivers here are a modest mix shift towards more dealer vehicles, our ongoing focus on improving efficiencies and the previously mentioned, lower medical incentive comp and lease expenses.

Revenues per vehicle sold were up about 3%. The major driver behind this increase was the favorable Canadian currency translation, which accounted for about half of the $12 change. We also benefited from selected fee increases, as well as increased revenue from our online service offerings that David highlighted earlier. A combination of lower expenses, increased revenue per vehicle sold, more than offset quarterly volumes that were down about 24,000 vehicles or 4.5% versus last year.

As I mentioned earlier, the first quarter of 2004 is a difficult comp for us, given its volume dynamics and at the exceptional market conditions. You may want to refer back to appendix 1 for related operating statistics for your own reference. We continue to see fewer institutional vehicles coming to market versus prior periods. As a percentage of total vehicles sold during the first quarter, the percentage of institutional vehicles in our mix, decreased versus both the first and fourth quarters of 2004.

One of our key initiatives that we've discussed for 2005 is increasing the number of dealer vehicles sold. During the quarter, I'm happy to report that our dealer vehicles sold increased about 6% versus the first quarter of last year. This mix shift brought us closer to industry norms, relative to mix and helped contribute to the declines in revenue and cost of service. You will recall that ancillary service revenues associated with dealer vehicles, such as transportation, detail, body, and mechanical, are lower on a per-vehicle basis, and comparable than with institutional vehicles.

Going forward, we would expect to see some improvement in institutional vehicle sales, based upon projected near-term rental/lease return -- rental program vehicle returns, and a pick up in off lease units in Canada. We expect dealer vehicles sold will continue to grow, continuing to relieve some of the pressure from the overall decline in institutional vehicle supply. Longer term, we are just starting to see favorable leasing trends, which should translate into increased off lease volumes down the road. Also, anecdotally, we're hearing from our sub-client lending customers that repo volumes are also expected to improve.

Now on to AFC, and you want to refer to slide 11. On flat revenue, operating profit grew approximately 2% during the first quarter of 2005. Income from continuing operations rose 5%, which was driven in part, by a favorable decline in income tax rates. Both operating profit and income from continuing operations benefited from the record first quarter number of loan transactions that Dave discussed.

Operating margins at AFC increased about 80 basis points, despite the added costs of handling the 6% increase in loan transaction, and a decline in revenue per loan transaction of about $6. This $6 decline in revenue per loan transaction is primarily driven by an increase in the size of the portfolio. Which is up almost 10% versus 2004. Our reserve percentages however have been fairly constant. As AFC's loan portfolio increases, they record increased allowance for credit loss as well as an accrual for estimated losses on loans sold. Both based upon historical loss development factors. These items are booked at a specific point in time. In contrast, the portfolio revenues are realized over the life of the loans or as the loans are sold. And as a reminder, AFC reports its revenue on a net basis.

As a result, AFC had relatively flat revenue as lower revenue per loan transaction partly offset the increase in total loan transactions for the quarter. Year over year loan transactions grew by about 6%.

Both the number of independent dealers served by AFC as well as the number of loan transactions per dealer served, continue to increase during the quarter relative to 2004. And, perhaps, most importantly AFC has not experienced any deterioration in the performance of its managed portfolio. That stood at approximately $660 million at the end of the quarter, which is up nearly $60 million from the first quarter of 2004 and up about $75 million from the end of 2004. Consistent with prior periods over 95% of the portfolio is current. AFC's success has been and continues to be its focus on controlled growth. This 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 there is a relatively consistent business driven by transaction growth.

Now, briefly on to our balance sheet. Our balance sheet remains strong. With certain highlights on slide 12. Debt to capital now stands at 32.8% versus 33.8% at the end of 2004. Down slightly, due to the required quarterly debt amortization of about 9 million. We finished the quarter with a total cash balance of 342 million versus 309 million at the end of 2004. Directionally, our major uses of cash were capital expenditures, funding our working capital needs, cash taxes and debt and interest payments. These uses were largely offset by the EBITDA we generated.

Please note that, although AR minus AP and accruals improved by nearly 27 million versus the end of last year, first quarter working capital funding did cause our operating cash for the quarter to be slightly negative. This meant use of working capital was driven solely, and I repeat, solely by the timing of our tax payments. Our cash balance of 342 million at the end of the quarter has about 5 million restricted by our AFC securitization facility at about 195 million which is required to satisfy outstanding bank clearings.

Substantial- the substantial increase in the amount required to satisfy outstanding bank clearings is directly related to the increase in option volumes for the quarter relative to the fourth quarter of 2004. The remaining cash, what I've refer to historically as economic cash of roughly a 142 million, was available for shareholder value initiatives and a portion of that has already been utilized to repurchase additional shares of our stock in April. We had spent approximately 23.5 million on share repurchases thru April 26.

On our last call we anticipated cap annual 2005 CapEx to be in the range of 40 or 50 million. Based on our first quarter spend of approximately 20 million and our project list for the remainder of the year. We now anticipate an annual 2005 CapEx spend somewhere between 50 and 60 million. You will recall that part of this is catch up, from light capital years in 2003 and 2004. Our projected CapEx then could be impacted by timing as it has been often in prior years.

Please note that our estimate is exclusive of any expenditures related to prospective acquisitions.

Share count – as of the end of the first quarter, we had 91.2 million weighted average diluted shares outstanding versus 88.6 million in the year ago quarter. The increase in share count is mostly attributable to our second quarter 2004 IPO of 6.25 million shares and that of our share re-purchases.

The share count has also been affected to some extent by stock option exercises during the quarter and to a very small extent to share re-purchases late in the first quarter of 2005. On to our full-year guidance -- based upon our performance in the first quarter of 2005 and our outlook for the remainder of the year, we remain comfortable with our previous 2005 guidance of EPS of $1.37 to $1.43 a share and annual EBITDA growth in the 9% to 12% range.

As noted on our last call, that range was before any stock option expense, based upon the recent deferral by the SEC of start date for expensing stock options, this should not be a factor for us in fiscal 2005.

In summary, you can see that Adesa had another solid quarter and again demonstrated the strategic benefits of our portfolio of businesses, operationally focused management and a flexible cost structure which enable us to achieve respectable bottom line growth. Before I turn it over for questions and to Dave for his wrap up I wanted make mention of a couple of investor relation items.

First, in concert with the mailing of our year end financial data we have also produced an Adesa fact book which is the compilation of a broad set of historical financial industry and related statistical data. We hope you enjoy this book. If you did not receive a copy of the investor fact book, you can download one from the IR section of our website or contact Jon Peisner or Mary Ellen Frazier in Investor Relations.

Also, most of you should have received your invitation to our first ever Adesa analyst event, which will be held on June 1 and 2 here in Indianapolis. Space is limited, so if you are interested in attending I recommend you sign up early. In addition to meeting the senior management team and hearing detailed presentations on our operations, we will also be featuring a tour of our Indianapolis auction facility, which was recently recognized for excellence by both Ford and Chrysler.

Lastly, there's a dinner with management at the NCAA Hall of Champions. If you did not receive an invitation or if you have any questions on the event, I encourage you to contact Jon or Mary Ellen.

Lastly, before turning it over for Q&A, I would like to recognize Paul Lips for his exceptional efforts as the VP of Investor Relations and helping us take the company public and subsequently separate it from our former parent, ALLETE. Paul's going back to operations which is where he came from prior to doing his role and we think he is going to do a fantastic job in our U.S. old car operations.

Equally I would like to welcome Jon Peisner to the Adesa family. John has extensive investor relations experience, has also served as a Corporate Financial Officer in a publicly traded company and also has experience as a Chief Financial Officer. I think Jon will be a great add to our team.

I would now like to turn this over, this call over for any questions. Following the Q&A, Dave will have a few brief closing statements.

[Operator Instructions].

Our first question comes from the line of John Murphy of Merrill Lynch. Please proceed.

Good morning guys. I have a bunch of questions here. First, I don't want to (inaudible) give me a bit of conversion rate a little bit. We were at 69%, which is incredibly high. Yet it sounds like the viewer mix increased. I mean I -obviously the support in pricing is helping here. But the industry is converting at a higher rate? Is that something that's structurally changing over time here?

Yes, John, this is Paul. As the institutional supply has declined, those buyers in those lanes have been forced to go to the dealer lane to get product. Demand has been quite steady but the price shortage from the off-lease and the repo cars have caused the dealer conversion rates to go up dramatically. So we're seeing dealer rates that are higher than we've ever seen in probably the past 7 or 8 years.

Is that something you expect to stick or is it just a function of the low supply right now?

I think it's a function of the low supply and we're starting to see some off-lease vehicles come back in Canada. Rental cars start to return to the U.S. That will keep the buyers in the institutional lanes and could cause the dealer conversion rates to drop a little bit.

Okay. And just on the acquisition landscape, can you guys categorize that as how -- is it good, bad, is there anything on the horizon? How are valuations looking out there?

This is Dave, John. I think it's premature for us to comment on that because of diclosure. And I guess that's about all we can say.

Okay, then just on share buy-backs, another use of your capital. You're almost full up on the current authorization. Is it possible to get further authorization? I know you have some covenants that sort of handcuff you a little bit. But it seems like there should be more room this year. Can you do that?

The answer is yes we have the ability to approach our Board first for the authorization and then our bank group.

How much -- how much can you do under the current covenants?

We have to get the consent of the bank group to move beyond the $130 million which we now have.

Okay, so it's a one-time covenant not an annual covenant?

We put this together as we were preparing the IPO and for the spin, John. And so we put the 130 in there. We're almost done.

Got you. And just on that manage portfolio, you said 660 million. I thought the off balance sheet conduit was a $500 million conduit. Is that the reason that the restricted cash went up by 100 million? I mean is it possible to increase that off balance sheet conduit so you could get that -- you might be able to get to that cash in the future?

The restricted cash John has been fairly constant. When we say restricted we're talking about -- there's about a 1% cash trap or about $5 million at the AFC level. And remember we only fund part of that portfolio which are U.S. dollar conforming receivables go into that asset-backed facility. Could we amend that asset-backed facility prospectively and get more capacity should we need it? We're very confident we could do that.

It sounded like you mentioned that there was 200 million that had -- that was backing up some receivables from inventory or something out there?

The check clearings -- the cash that's tied up in check clearings is higher than -- the outstanding checks were higher. That was the 195 million number that we discussed.

That's purely a working capital item in the short run here?

That's correct.

Okay. And then just real quick on your stating -- where are you guys on own versus leasing?

We still -- we have both in our real estate portfolio, John. I think if you took a look at the swag, it is still predominantly owned real estate.

Okay, great. Thanks a lot guys.

Your next question comes from the line of Stacey Widlitz of Fulcrum Global Partners. Please proceed.

Thanks good morning. It seems that you guys are having some success in gaining share in the dealer cars. Could you just talk a little bit about what you are doing to attract more dealers? And then secondly, we know that revenue per car on the dealer side is a bit lower because of less services. Is there anything that you are doing differently to drive attachments and drive extra services to the dealer cars? Thanks.

Hi Stacey, this is Paul. With the dealer business, some of it is just the natural movement from the institutional lanes into the dealer lane. So we get a pick up just because of what is going on within the industry right now.

The rest is improving our selling techniques, going to the dealers, making sure that we are selling to the right dealers, based upon the product mix at our auctions and our buying base and selling with data, you know showing them that the residuals will be highest at our auction and matching the proper mix of buyers to sellers, to make sure the cars sell.

Within the auction, you know looking at lane acquirements, conversion rates, working with the auctioneers. The revenue per dealer is traditionally lower as you mentioned, and the biggest penetration we have seen in terms of other services with the dealers is really driven by the internet which drives the dealers to want to have more inspection services post auction because they are buying the vehicles remotely as opposed to in the lane and that's their insurance policy for when the vehicles shift back out.

Thanks.

Your next question comes from the line of Brian Nagel of UBS, please proceed.

Hi, good morning.

Good morning.

Nice quarter. Nice quarter. One question -- first question for you, could you talk a little bit about the trend in business during the quarter, both from the supply and the demand side, if anything shifted there as we progressed?

I don't think – we've never really commented on a month by month basis, Brian, but I would say taken as a whole it was a fairly consistent quarter. Obviously, conversion rates were strong throughout the quarter and I don't recall any abnormal monthly spikes.

But I think the trend in terms of the supply and the demand of vehicles, as an extension from last year, if that's what you are talking about, Brian, were we into trending on a quarterly basis, which can drive all of us nuts. I don't think we have seen any material changes –and we are expecting trends to be -- as we said in our outlook section, for the remainder of the year to improve.

Any comments as we now are about a month into the second quarter here, can you guys comment at all.

Oh, we are not going to go there Brian. I'm sorry.

Okay, another thing, looking at the expense, you guys are doing a great job controlling expenses. Cam, you talked about this in your prepared remarks, but anything specific there that you are willing – it's just amazing to me how well you guys are doing controlling that in a tough environment, so anything specific you are doing to control expenses in the auction side of the business right now?

I think it is the continual refinement, Brian of -- we are into the fourth quarter of being able to do this and it sounds simple as it is more difficult to execute but they are just doing a better job of matching incoming volume with variable labor and particularly with that mix shift coming on. And it is maintaining that flexibility in the cost structure and they are using, and we continue to use as much variable and/or contract labor as we can to manage some of the movements in volume.

And we have to be very careful how we do this Brian because we cut back on our part time employment which we can, as you know we have a large part-time employment base. But at the same time we have long term employees that are very valuable to us, and when the volumes recover or return, we have to make sure that those highly valued employees are there. And I think it's a real compliment to the auctions, to be able to balance that on a weekly basis and preserve the long term, highly valued employee, and at the same time manage the expenses. But it's due mostly -- due to the fact that we have a lot of part time employees, so we can have some variability with.

Thank you. Okay. Thanks a lot. Congratulations.

Your next question comes from the line of Brett Hoselton of Keybanc Capital Markets. Please proceed.

Hi. Actually Brett had to drop off. This is Steve Barger (ph).

Hi Steve.

Hi. I wanted to say nice quarter and congratulations to Paul and welcome aboard to Jon. In terms of the acquisitions, right now you can't be too specific but, in terms of the cadence, but are you more focused on the whole car or the salvage side as you think about acquisitions?

We're equally focused on both. They're both extremely important to us to gain share and to be in strategic locations that we need to be in, and we are also extremely interested in any financial transactions as well. I would say it's equal. I think it's, from a strategic standpoint, certainly more important for us to move into markets with our salvage side that we're currently not in. So, that's more of a strategic move, and probably from that standpoint has a higher priority.

Okay. Your revenue per unit of 4.18, what's your go forward assumption for 2005, do you think that is steady, or do you see some variance there?

I think we ended up last year at 4.16 a vehicle for the whole year. We could 1 to 3% growth this year, and I think we'll be within that range. The only variability we may see is, if the Canadian currency exchange rate continues to be high, that we get some pick-up from there that could bump us over, but we should be within that range.

Okay.

(multiple speakers) - significant Canadian business, which -- obviously that impacts.

Right. And in terms of the use of free cash, you talked about the share repurchase or potential acquisitions. But is debt pay down on the table at all?

I think it's an extremely low priority.

Okay. Well, thank you very much, and again, very nice quarter.

Thank you.

Thank you.

Your next question comes from the line of Joe Withone (ph) of Janney Montgomery Scott. Please proceed.

Yes. Hi, this is Dave Schanzer.

Hi Dave.

Hi. Couple of questions. First of all, did weather have any impact?

We had a real winner Dave, on the East Coast of the U.S. and in Canada. I would think it's not a huge negative, but we did probably incur more costs than we did in the light winter last year we had, in terms of snow removal and disruption to operations.

No estimate as to maybe an earnings per share effect?

No, I don't think we want to get that specific.

Okay. A follow up question about cost control. Again, I agree, I think you guys have done a great job. I realize a lot of lower costs have to do with lower volumes. I was wondering, looking out over the next 3 quarters, when you have some idea already in April, is it possible to maintain costs that may be a reasonable growth from '04 of let's say 2.5, 3%.

In terms of -- we clearly will have some wage like most major corporations do over time. I think the key for us is to watch our volume in terms of our production costs, if you will, at the auctions is to watch our volume. The interplay between volume and mix is going to be our single biggest determinant on how our cost plays out. A couple of the takeaways we've gotten from operating in this lower volume environment for the last 3 quarters as we -- well I alluded to earlier, is our ability (inaudible) to optimize and continue to optimizing our scheduling of labor to meet that incoming mix in volume that we have some visibility to a few weeks out. And that's the key to what we are really doing in terms of cost control.

Okay. You also mentioned that LiveBlock(tm) is moving ahead at a very good pace and I was wondering whether or not at this point you would maybe guesstimate that it's going to become more important than you had previously indicated. I mean in percentage of your total business.

Yes, Dave, this is Paul. Right now, we're seeing most of our institutional customers run on LiveBlock(tm). What we haven't seen is the penetration into the dealer rank. And, I think that'll come over time as the dealers become more accustomed to selling cars on the Internet. Right now they're getting comfortable with buying cars on the Internet. We've got to get the other side of the equation working and then I think you'll see LiveBlock(tm) continue to grow.

Any estimate as to where the upside is in terms of the percentage of your business?

I would -- I don't think we give a specific estimate, but I think that it's reasonable to expect over time, that you're going to see continued steady growth as LiveBlock(tm) becomes more accepted and particularly on the sell side by dealers.

Okay.

The biggest upside is for our customers because you expose your vehicles to more buyers which should translate into a higher retention.

Okay and the last question. Is there any indication of what the conversion ratio has been early in the second quarter at this point?

We can't go to -- we don't go to interim conversion ratios.

Okay. That's fine. Thank you.

Your next question comes from the line of Frank Brown of SunTrust. Please proceed.

Hi. Good morning. There's a lot of moving parts in terms of thinking about vehicle volume growth going forward. Certainly comparisons have become easier here in the second quarter. And the dealer business is very strong. And we keep reading about how the new car business is soft. I was just trying to get a feel for how we can conceptualize the year-over-year comparisons going forward on the change of vehicle volumes.

I don't think we want to address a quarter-by-quarter, Frank because when we discussed our earnings expectations and some of our volume assumptions we did it on an annual basis of sort of 1 to 3%. I think you have a valid point when talking about the first quarter; volumes in the first quarter last year were up 5% relative to the year before. So, when we look at a decline of about 4.5 that doesn't make us crazy because we knew coming out of the chute that it was going to be there.

Okay. Well just if I could ask you in a little bit different way. When you talk about the least penetration rate increasing, I think it was about 300 basis points sequentially. That's a big move. When might we see that flow into some stronger -- I mean, if it's a 40 month average lease that's going to take a while for us to see that reflected.

It started last year. You saw the -- if you looked at the data of the ramp up, I think it was second quarter when we saw it started to bump. You're right though, a lot of -- if we revert to a 40 month lease, you'd see that volume down the road. We are seeing a fair amount and anybody who's watched any television lately sees a lot of 24 month lease incentives out there. And we love that. I mean it helps on the OE side move their products and we love the 24 month lease market.

It sure increase our volumes and predictability, a lot of vehicles to the auctions.

Okay. In your slides you had a -- that you expected wholesale vehicle prices to be firm to down. Is that because the market is so strong right now or is that looking at new car sales softening, that is why you kind of have them flat to down?

I think it's the strong market today but it also, we didn't really set a time frame on that longer term and as these off lease vehicles that are being put into the market now come back two or three years down the road, we think that is going to actually push the price of wholesale used vehicles down, which is consistent with some of the other companies out there, such as ALG that predict future residual values.

Okay. And just the last question, I think you probably addressed this but I didn't catch it on AFC business the revenue per transaction was down and that held back the revenue comparison there you know after the fourth quarter being very strong. Could you just give a little bit more color on that so that we can think about it going forward?

(Inaudible) when you have a rapid portfolio ramp you end up booking your allowances and your evaluation reserves on the front end, you catch up with that over time, in fact if you look at our fourth quarter we often get a little bit of relief because fourth quarter our portfolio traditionally is not ramping hard on a quarter-over-quarter basis it's stabilizing or declining, that our historical stats we usually recognize fairly high revenue per loan transactions so we catch up, if you will. You book the bad bebt at the start and you earn your income over time.

Okay. Great, thanks a lot. That is helpful.

Your next question comes from line of Gary Prestopino of Barrinton Research, please proceed.

Good morning, could you -- do you have any statistics on what the amount of cars pushed over the internet were, this quarter versus sold?

Not in total for the whole Internet just what we put out there for the percentage that we sold to an online buyer via LiveBlock.

All right. What about -- are all the dealers, all the institutional lanes now have LiveBlock capability?

Yes.

What about, I know you're saying no dealer supplied cars are out there but are you thinking about possibly putting the LiveBlock(tm) on the dealer lanes as well?

Well, yes, the first step of that is getting the dealers comfortable of selling online and we've got an initiative out there that matches up dealer to dealer, so it's just an online environment. Once we see contraction there, then you can start making the investment to put the LiveBlock(tm) in the lanes but right now the dealers aren't prime for the investment into the lane's and return wouldn't make sense at this point.

Okay. And has all the lane expansion been completed in New Jersey and Montreal?

New Jersey has some finishing touches to go but they are running cars through them and using the lane and I think Montreal is just around the corner.

I think they're going to have their inaugural sale at Montreal Gary, in May, I think the second week of May.

Okay. Thank you.

Here is the next question from signal light of Charlie Mathy (ph) of Cova Limited (ph), please proceed.

Good morning gentleman.

Good morning.

Okay. Have you guys given any thought to might be a shift in volumes due to the troubles that are on the horizon with General Motors?

No, I don't think so. We are here to provide service for whomever is pushing product and vehicles out and we're certainly here to help General Motors and Ford and Chrysler and all of them with their liquidity but we don't see any significant impact on our business model resulting from that.

We have a pretty -- Charlie, this is Cam Hitchcock. We have a pretty broad footprint in terms of clients we serve both within the OE auto space as well as with -- in related fields, the banks we lease et cetera. We are trying to help them to the maximum extent we can by getting their retentions up particularly for the captives. And on factory cars coming to us from the Big 3.

All right that kind of addresses the next question. Your mix with the manufacturers, you don't feel that you're weighted General Motors over Toyota or Ford or see any problems on the horizon there that would affect volume?

We don't disclose that but the answer is no, we don't see any concerns there.

Well -- Okay. And I guess the information is readily available through the National Auto Association where you have program sales. Have you -- have you had any ability in leveraging your relationship with the Gulf States and Toyota in increasing the number of sales. Or that they're going to maybe put some more on due to their increased volume in the United States?

We have a great overall relationship with Toyota both at the -- on the auction side as well as via our upstream selling mechanism that we do for them. And we have a very healthy share of Toyota's business but we always like to get more and we always look for new services and ways that we can provide to them to get more.

What I mean is do you think that they're going to take – does their market share get stronger, have they -- are you looking for increased volumes of business throughout the country or maybe only because the plant is coming to San Antonio, or is there anything on the horizon that really gives you something to be excited about?

I don't think anything specific, Charlie but in general, as their volumes grow we should benefit from that.

Right, right. You are doing a great job guys, appreciate everything.

Thank you.

Yes sir.

[Operator Instructions].

Your next question comes from the line of Robert Kirkpatrick of Cardinal Capital. Please proceed.

Good morning. First of all, thank you for the fact book. I think that actually is an excellent compendium of a lot of good information about Adesa and the industry. Secondly, Cam, what did you actually pay in cash taxes during the second quarter. And were there any other sources -- substantial sources of cash flow during the quarter?

We're getting the cash tax number for you right now. I'll answer the back part of your question -- the most substantial source of cash for us during the quarter was EBITDA from operations as that is always our primary cash driver. We had some very modest option exercise and that was kind of dimimimus. So it's cash flow from operations is the key. Cash flow from EBITDA is the key piece.

The biggest cash outflows were CapEx interest, the principle payment and the dividend payment.

Okay and the total cash flow from operations for the quarter was --?

When we come out you'll see it will be a single digit negative. Let me explain the cash tax payment. We used to, when we were owned by and controlled by ALLETE the cash tax payment traditionally was in the fourth quarter. So we paid that to ALLETE out of Adesa. Our cash – we've shifted that, we paid that in the first quarter this year and the aggregate dollar amount of our cash taxes was about $19 million in the first quarter.

Okay great, and then David, a question from the proxy, I saw that there was an accelerated vesting of all the IPO related options. Could you go into a little rationale as to why that was chosen to be done?

I will take that question, Bob. We took a look at the impact of the adoption of FAS 123R -- which originally scheduled as -- for anything after June 1, after June 15 of this year.

We took a look at the -- our option grants last year were a little bit different in that because of an IP -- we were an IPO company last year, we essentially front-end loaded 3 years of grants for the most senior management team, and we in consultation with our board, we took a look at what that financial impact was as it moved through our income statement over the next 3 years and we took a look and we thought it was a distortion. So it would have distorted the normal option expense so we elected to accelerate.

And how much under the old version did it distort the income statement?

It would have been about 3 cents a share --3 to 4 cents a share ...

Per year -- per quarter?

Per year, in '05, it would have been the 3 to 4 cents in '05, I don't have that data with me for '06 but there was probably 2 cents to 3 cents in '06. And we have enough one-timers, we explain every quarter with the incremental corporate expenses and everything else.

And we're trying to make life easier for you folks and we were hoping that we were out of the woods on these one time events that will take us out of comparability.

Okay. That's great. Thank you so much gentlemen.

Ladies and gentlemen, this concludes today's question and answer session, I will now turn the call back to Mr. Dave Gartzke for closing remarks.

Well again, thanks everyone for joining us this morning. We are very, very pleased with the quarter and look forward to the remainder of the year. I'd like to make some final comments about our first quarter. I'd like to reiterate that our 2005 results again, demonstrate to me that Adesa's business model does enable us to continue to improve both our profitability and productivity despite the trends or cycles that arise from time to time within the industry.

Very importantly, we continue to find ways to become more efficient and in tandem with a favorable mix these factors were the primary drivers for the first quarter of 2005.

Our performance in this operating environment demonstrates to me that Adesa's teams' strong commitment to our customers and our shareholders, it's a great balance that we have in this business model and it serves both of us very well.

Without a doubt our team is committed to serving customers and driving shareholder value by providing superior service and value to our customers. And we understand their needs and we continue to strive to exceed our customers' expectations.

Recently the senior management team of our company outlined team objectives to continue to drive the future growth and ultimately the value to you our shareholders.

I really feel that these now commonly understood objectives and the alignment of management are going help lay the groundwork for Adesa to continue to drive business synergies, generate growth and improve our long term value. I really look forward to seeing all of you in our upcoming analyst days in June, I hope you can make it and I thank all of you for joining us today.

Ladies and gentlemen, we thank you for your participation in today's conference, this concludes the presentation, and you may now disconnect. Have a great day.