Openlane Inc (KAR) 2005 Q2 法說會逐字稿

Good morning. My name is Nicole, and I will be your conference facilitator. At this time, I would like to welcome everyone to ADESA's second quarter 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS].

Thank you. I would now like to the turn the call over to Mr. Jon Peisner, Vice President, Investor Relations and Planning. Sir, you may begin your conference.

Thanks, Nicole. Good morning, everyone. And thanks for joining us today on ADESA's second quarter 2005 earnings conference call.

Joining me on today's call are David Gartzke, our Chairman, President and CEO; and Cam Hitchcock EVP and CFO. As always, Paul Lips, representing our Operations, will be available for the Q&A session.

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 have compiled a set of slides that can be viewed under the IR section of our website along with 2005 and historical quarterly segment, income statements, and statistics. Following today's call, the Webcast replay and slides, along with the telephone replay, will be available on our website.

The format of today's call will be as follows. Dave will start off by briefly recapping our second quarter results and highlighting some of our recent accomplishments. We'll then provide you with an update on industry conditions. We'll then turn the call over to Cam who will provide you with a financial review of our quarter and year-to-date performance and some commentary regarding our outlook for the reminder of the year. 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 website and in this Webcast. Some of the financial metrics we'll be discussing, such as EBITDA, are non-GAAP measures and as such they're reconciled to GAAP in both the accompanying slides and the earnings press release. As a reminder, our website is www.ADESAinc.com and the slides are automatically synced to correspond with our remarks.

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

Thanks, Jon, and good morning, everyone.

As announced yesterday, ADESA reported second quarter revenue of 248 million, and net income of 36 million or $0.40 per share. These results included incremental interest and corporate expenses of 4.8 million or $0.03 per share compared to last year's second quarter. Also note that last year's second quarter included 1.4 million, or $0.01 a share, in non-reoccurring costs that were associated with our IPO and the separation from ALLETE, and 4 million or $0.04 per share related to discontinued operations. Our second quarter performance, like our first quarter, was driven by continued year-over-year improvement in operating margins, revenue per vehicle sold, revenue per loan transaction, and loan transaction volumes. Also, AFC again achieved an all-time record volume of loan transactions which we believe speaks to the strength of the service relationships AFC has with its dealers. We're very pleased with these results, particularly in light of the current industry conditions.

I will now like to highlight some of the key events, second quarter and the first few weeks of the third quarter. First, both business segments, the auctions and AFC, experienced growth in revenue and operating profit. While year-over-year second quarter vehicle volumes were flat for ADESA auctions, we're pleased that the second half volume comparisons for the remainder of the year are going to be up versus the first half. Importantly, ADESA auctions continue to benefit from the growth in the other revenue drivers as well as our ability to control our cost and to manage our business well. AFC has posted group results based upon a 3% increase in the loan transactions to 280,000. Second, under the leadership of Chuck Tapp, we have further strengthened our sales and marketing team with the appointments of Brent Huisman and Vice President of Dealer Relations, and Jason Ferreri to Vice President of Sales. We had previously indicated that we would be strengthening our sales and marketing team and our focus on increasing dealer consignment volume. In this newly created role, Brent will be directing our sales, marketing and best practices for our dealer consignment side of our business.

Our LIVE BLOCK streaming audio and video platform continues to experience strong growth. For the second quarter of '05, we offered over a quarter of a million vehicles for sale on this platform, which is more than double when compared to the prior year. A few take aways are as follows: The conversion percentage for vehicles sold online remains strong, currently at over 85%. The percentage of vehicles sold to online bidders rose rose 107% [ph] versus last year's second quarter. The percent of total sold is still under 10%, but it provides this mixed venue of our service offerings and it adds to the demands in our lanes.

Perhaps most important, during the quarter, we initiated our acquisition strategy. To date, we have invested about 19 million to complete two acquisitions. First, a used vehicle auction facility in the Washington, D.C. area, and two, a salvage auction facility near Charlotte, North Carolina. Our new 87-acre D.C. auction facility expands our geographic footprint into a new and economically vibrant market. We feel that the D.C. facility will be a key facility for ADESA in this large metro area, while our new 120-acre auction in Charlotte further strengthens our salvage presence in the Southeast. In tandem with our 99-acre Clayton salvage auction in the Raleigh/Durham, area, our two largest salvage facilities are now in North Carolina. Importantly, just two weeks ago, we announced the opening of our second salvage site in Orlando, Florida, to accommodate growth in customer demand in this most important geographic region. In total, we now operate 32 salvage facilities and growing.

Also, yesterday, we announced that we refinanced our senior credit facility. While Cam will be providing you with all of the details, this $500 million facility expands our financial flexibility at a lower effective cost of funds. And just two days ago, we declared our regular -- regularly quartered -- quarterly dividend -- tongue tied, that will be payable September 15 to the shareholders of record as of August 17th.

I'd now like to provide you with some industry commentary, particularly the impact of the OEM employee pricing programs. As most of you are aware, last month, General Motors kicked off their GM Employee Discount For Everyone program. This program, which GM announced will end on August 1, drove GM's sales to 46.7% increase in June. Both Ford and Chrysler subsequently initiated similar programs the week of July 8. For the auction industry in general, and ADESA specifically, the question is, What is the impact of these programs on us, both short-term and long-term? When viewed from a historical perspective, we believe there are both short-term and long-term impacts of these programs. As many of you are aware, previous to the recent GM employee pricing, used vehicle auction activity was characterized by strong prices due to the tight supply of institutional vehicles and the strong retail used vehicle sales, which is demand for us. In terms of short-term impacts, in June, we saw pricing and actively -- moderate as used vehicle demands softened due to GM 's new car pricing programs. Further, we believe this program may continue to cause used vehicle auction prices to moderate until a new equilibrium price level is obtained. Our experience is that developments like this may also negatively impact conversion rates until auction prices have reset. It is the short-term uncertainty we always see with events like this.

What's the long-term impacts? First, virtually every new vehicle sale ultimately becomes a used vehicle sale. Thus I believe others in the industry echo this sentiment. The increase in the big three's new vehicle sales should ultimately equate to an increase in big three used vehicle sales, many of which will come to the auction. For many reasons, higher levels of new vehicle sales are always preferred over lower levels. A majority of these new vehicle sales will likely bring trade-ins, many of which will find their way to used vehicle auctions. Those that don't are sold retail and the industry's financial health is stronger. Second, underlying retail demand for used vehicles has historically grown at approximately two percentage points per year and based upon underlying demand drivers of increased household formation and increasing vehicle density per household, we would expect used vehicle demand to continue to grow. In fact, we believe that one of the side benefits of GM's Employee Pricing program is that it has created a vehicle purchasing buzz in this country that may positively impact both new and used vehicle sales. Third, used vehicle sales remain a very profitable program for automotive dealers. Average dealers' gross profit for used vehicles has traditionally been higher than new vehicles. Employee pricing programs tend to widen this profitability advantage. Additionally, as noted in Tom Kontos' GVR, the North American used vehicle dealer market is approximately two and a half times the size of the new vehicle market, so it remains both a large and attractive segment for dealers to focus on. Last but very important, while we do expect vehicle prices to further soften as supply and demand reach the new equilibrium, our banded fee schedules serve to mitigate, but not totally offset, the effect of the ups and downs of underlying used vehicle pricing.

Before I turn it to Cam, I want to cover one additional item. Last Thursday, we filed a lawsuit against a new competitor in the financing business who commenced originating loans in early July. The lawsuit alleges, among other things, that this competitor misappropriated trade secrets and certain customer information from AFC. We believe that this competitor has solicited and hired AFC employees in an effort to increase their access to AFC's customers and the confidential information. We have replaced most of these employees with excellent individuals and have implemented a series of actions and controls to protect our trade secrets and confidential customer information. While the competitive landscape for AFC may be changing, AFC continues to conduct its business with the same level of vigor and excellence in customer service that has been its hallmark. We welcome fair competition. We look forward to competing against this or any other competitor on a fair basis. Lastly, please note that this matter is in litigation; there for, we must limit our comments with respect to this subject.

Overall, we're very pleased with our second quarter, and we continue to position ADESA, this Company, for a very bright future. I'd now like to turn the call over to Cam, who'll provide you with some additional insights into our second quarter and year-to-date results. Cam?

Thanks, Dave. Good morning everyone.

I also wanted to make the audience aware that a number of members from my finance staff, whom you met at the analyst day, are in the room with us today. I'm very pleased with the quality of the results that ADESA posted for both the second quarter and year-to-date. Dave discussed some of the industry dynamics such as lower supply from traditional institutional channels, as well as the potential impact of recent OEM new vehicle pricing programs. Fortunately, due to the experience of our operators, strength of our customer relationships, and flexibility of our business model, ADESA continues to successfully navigate through these dynamics and deliver improving results. Now that ADESA has lapped its first year as a public company, this earnings call will be the last one in which we highlight incremental and corporate and interest expense due to our separation and public company status.

I will now briefly walk you through our consolidated results and then speak to our segments. Our consolidated revenue for the quarter was $248 million, up approximately 17 million or 7% versus last year. Benefits from favorable Canadian currency exchange contributed 4.2 million or about 25% of the revenue increase. Consolidated ADESA operating margins for the quarter rose 70 basis points to 26.3% versus adjusted operating margins of 25.6% last year. You might recall that last year's second quarter included, as Dave mentioned, 1.4 million pre-tax and non-recurring transaction cost related to our IPO. Importantly, we this year discussed -- we this year increased margins while absorbing incremental pre-tax corporate expenses of about $1 million or $0.01 a share during the quarter. Our auction operators and AFC management continue to do a great job of managing their direct labor and other costs relative to changing vehicle mix, volume, and transaction flow.

Sold vehicle volumes were flat due to -- primarily due to the dynamics in the off lease and repo segments which we previously discussed. Our cost of services increased about $5 million to 115.8 versus 110.8 in the second quarter of 2004. The primary drivers of this increase were foreign exchange, and operating costs related to our newly acquired Washington D.C. facility. SG&A this quarter was up slightly to 56.7 versus adjusted SG&A of 52.2 in '04. The main drivers behind the SG&A Increase include the previously mentioned increase in public company costs, compensation expense, unfavorable FX impact and incremental SG&A from our newly acquired facility. In summary, ADESA benefited from three of our four revenue drivers which were partially offset by higher operating expenses. The combination of these two factors led to solid improvement in revenue and operating margins.

Now, a brief comment on interest expense. Interest expense on a consolidated basis for the second quarter was 8.5 million versus 4.7 million in 2004. This increase was driven by our 2004 recapitalization and significantly higher year-over-year interest rates.

In the second quarter of 2005, our effective tax rate was 39%, which is pretty comparable to last year's 39.2%. For those of you who are new to ADESA, EBITDA growth is a measure we follow quite closely. In the second quarter, consolidated EBITDA rose 8.9 million or 13% to 77.5 million as compared to an adjusted EBITDA of 68.6 million last year. We accomplished this growth despite flat sold volumes and absorbing an additional $1 million in pretax incremental corporate expenses. All things considered, we're very pleased with our consolidated performance, and we will remain confident that we can achieve our long-term objective of 9 to 12% annual EBITDA growth.

I'd now like to briefly take you through our business segments' financial performance. First, to our ARS or auction segment. Our auctions performed very well on a number of fronts. Revenue was up 6% for the quarter to 216 million versus 203 million last year. As mentioned in our earnings release, this growth was due to favorable Canadian currency translation of $4 million, selective fee increases, additional revenue from our D.C. acquisition, and revenue related to the Company's growing internet services offering as well as from ancillary services. Our operating profit grew nearly 8% or 20 basis points on flat volumes. This improvement was driven by a 70 basis point decline in cost of services, partially offset by a 20 basis point increase in SG&A, and 30 basis point increase in depreciation and amortization due to the timing and amount of some of our expenditures. Improvement in operating margins is primarily attributable to two factors, mix and conversion rate. For the quarter, there was approximately 170 basis point shift in our mix from institutional vehicles to dealer consignment vehicles. Importantly, in spite of this mix change, our conversion percentage rose approximately 70 basis points versus the year-ago quarter. Given the mix shift, we believe that the improvement in our conversion ratio reflects industry dynamics generally as well as ADESA's accelerating efforts in the area of dealer consignment. Revenue per vehicles sold were also up, increasing 6% versus last year which is attributable to the previously mentioned drivers.

Now, on to AFC, our finance business. On 3% increase in loan transaction volume, second quarter 2005 revenues rose 13%, while operating profit grew approximately 24%. This favorable performance was helped by a 225 basis point increase in interest rate, as well as increased utilization and pricing of certain fees and improved portfolio performance from a credit standpoint. These items, as well as the 250 basis point decrease in cost of services, resulted in a 24% increase in operating profit. Quarter two operating margins at AFC increased over 500 basis points despite the added cost of processing a 3% increase in loan transactions and opening our 84th facility, which is located in Las Vegas, Nevada. Given the 3% increase in loan transaction volumes and 13% increase in revenue, revenue per loan transaction increased about $11 from 104 to $115. During the quarter our loan portfolio experienced low single digit growth versus the first quarter of 2005; and from a credit quality point of view, over 95% of the portfolio is current which is consistent with prior periods. In terms of the sector that AFC operates in, we continue to see competitors enter and exit the wholesale dealer financing business. We believe that AFC's competitive advantages, strong relationships with their dealers and customers, tight credit controls, and a focused service culture will continue to serve as the platform and foundation for this business. This formula has been at the heart of the historical success we've achieved at AFC. Appendix one to this deck [ph] contains a four year summary of a variety of statistics from our business segments. As always, following this call, this entire slide deck will be posted as a PDF file under the IR section of our website.

Now I'm going to move on to our balance sheet. Our balance sheet remains strong with highlights on slide 12. Debt to total capital now stands at 32.5% versus 32.8% at the end of the first quarter of this year. Our cash balance at the end of the second quarter of 2005 was 254 million versus 342 million at the end of the first quarter. Slide 13 will walk you through the major cash flow items in the quarter. The major drivers behind the $88 million change in our cash balance were cash used for capital expenditures of approximately 17 million, acquisitions of approximately 19 million, share repurchases of 39 million, cash taxes of 25 million, and debt interest and dividend payments of 26 million. We also had a decrease in outstanding checks of about 23 million. Collectively, these uses more than offset the $78 million in EBITDA that I highlighted on an earlier slide.

On our last earnings call, we indicated that our annual CapEx for 2005 would be in the range of 50 to 60 million. We still feel that this is a good estimate, though we feel it will likely be at the higher end of the range. As always, this estimate may be further impacted by project timing as well as capital expenditures related to any prospective acquisitions.

Our cash balance or 254 million at the end of the quarter has about $6 million restricted by our AFC securitization facility and about 160 million which is required to satisfy outstanding bank clearings. The remaining cash of $90 million was available for shareholder initiatives. I've referred to this in the past as economic cash.

Share count. As of the end of the second quarter, we had 89.5 million actual shares outstanding and 90.1 million weighted average diluted shares outstanding. In the year-ago quarter, the comparable numbers were 94.9 million and 89.7 million. As mentioned in our press release, ADESA now estimates that its weighted average diluted share count for fiscal 2005 will be approximately 90.5 million shares.

I'd now like to make a brief comment about the senior credit refinancing that Dave alluded to earlier. We announced yesterday that ADESA had amended its $525 million senior credit facility with a more flexible, lower-cost $500 million facility. As shown on slide 14, this five year credit facility is comprised of a $350 million revolver, $150 million term A loan and no term B loan. In addition to providing us with interest rate savings of approximately 100 basis points on both the resolver and the term A facility and by eliminating the term B facility, this new credit structure provides us with enhanced financial flexibility, particularly with the larger revolver. In concert with this refinancing, we also expect to incur a third quarter pretax charge of approximately $2.8 million or about $0.02 a share related to the write-off of unamortized debt financing cost and related costs and expenses.

I'll be providing a very brief summary of our year-to-date results as the details are in yesterday's press release. Revenues for the first six months of this year rose 2.8% to 491.7 million versus 478 million last year. This was accomplished on sold vehicle volumes, which were down approximately 2.4% for the first six months. Loan transaction growth of AFC of approximately 4% and increase in revenue per vehicle sold were the primary operating drivers of this growth. Continued strength of the Canadian dollar contributed about $7.5 million, or just over half, of ADESA's year-to-date revenue increase. As noted in our press release, year-to-date income from continuing operations is $71 million or $0.78 per diluted share versus adjusted income from continuing operations of 76.5 million or $0.76 per share last year. Please remember that the second quarter of 2004, we incurred a loss from discontinued operations of $4 million after-tax or about $0.05 a share related to litigation concerning our former vehicle importation business. Our year-to-date weighted average share count rose to 90.7 million shares versus 89.2 million shares a year ago.

I'll now conclude by addressing our 2005 outlook. As we stated on our last two earnings calls, ADESA has four revenue drivers that together lay the foundation for achieving our 2005 earnings targets in concert with our operating efficiencies. These drivers are sold vehicle volume, revenue per vehicle sold, loan transaction volume at AFC, and revenue per loan transaction at AFC. As noted on slide 16, when we look at year-to-date performance for these drivers we see that while used vehicle volumes are trending slightly below our expectations, revenue per vehicle sold exceeds our expectations. Revenue drivers for our AFC segment are tracking to our original outlook. Relative to the first half of 2005, we expect vehicle comparisons to prove in the second half of 2005 while revenue per vehicle comparison should be relatively stable.

In conclusion, we continue to believe that all of our revenue drivers and continued focus on operational efficiency will serve as the foundation for ADESA achieving 2005 net income from continuing operations of 126 to $131 million. This range excludes the impact of the previously mentioned 2.8 million pretax that charge that we'll be incurring in this year's third quarter as well as any interest expense savings attributable to the refinancing. As we noted in our press release, ADESA now estimates that its weighted average diluted share count for this year will be approximately 90.5 million shares, or 1.5 million shares less than the basis upon which we gave the former earnings guidance of $1.37 to $1.43 a share. Adjusting solely for the revised share count, which is just a mathematical exercise, we now estimate that ADESA's fiscal 2005 EPS will be between $1.39 and $1.45. Again we are adjusting solely for the revision in share count.

ADESA had another solid quarter and again demonstrated the strategic benefits of our portfolio of businesses, operationally focused management team, and a flexible cost structure which enabled us to achieve both top and bottom line growth.

I'd now like to turn this call back to the operator for questions; and following the Q&A, Dave will have a few brief closing remarks.

[OPERATOR INSTRUCTIONS]. John Murphy, Merrill Lynch.

Good morning, guys.

Good morning, John.

Just a quick question on the revenue per unit in the auction business. At 436, that's definitely on the high side, and obviously mix plays a big part in that, but is that something that you can maintain in that range or should we be sinking it back down closer to the $400 range?

John, that's always a little difficult to predict because of changes in mix, but I think what we've said relative to the first half of the year that we don't see any significant changes in that during the back half of the year.

Yes, John, this is Paul. What you've got there, you've got the normal fee increases that would go in each year, you've had strong used vehicle pricing that has increased throughout the year, and then as of late and this happened late second quarter and we expect it to continue into the third quarter and early fourth quarter, is the volume of rental vehicles that picked up and those tend to use more of our ancillary services in the shop. And they all run through LIVE BLOCK which also carries an additional internet fee so that also helps to boost that revenue up.

John, also, please remember that you have $8 of Canadian currency in that, so just factor that into the mix.

Got you. Then just another opportunity that seems to be floating out there for fees is there's been quite a bit of concern around certified pre-owned programs from a lot of OEMs and a lot of consumers. I know you guys do some certification there. Is that an opportunity going forward and what kind of fees could you get on CPO certification?

We've been doing that since CPO began, and we do some inspections for them to identify the cars to determine if they're ready for the program or not, and then we help them with some of the prep work, but that only gets the car to what is called a certifiable point and then when the dealer purchases the car, they complete the inspection and they do any mechanical repairs to get it up to the certification standard. So there is some revenue associated with that for us, but it's not a big program and hasn't been for the past few years.

Could you see that growing over time? Or it is growing?

Yes, I think it will grow over time, but, John, it's a very small percentage of our business.

And just real quick, housekeeping items. Who's the AFC competitor who's entering the market that you have this lawsuit with? And then on the debt refinancing, were you able to get any covenants lifted on the share repurchases?

John, Cam. I'll address both those questions. The competitor that we're referring to is based here in Indianapolis is called Dealer Services. And with the -- yes, the new facility -- the credit facility does permit us to repurchase as much as $50 million of our own stock annually to an aggregate of $200 million during the life of the facility.

That's a big lift there on that covenant.

We have -- it's the additional flexibility that we like and when we came -- when we were separated from ALLETE last year we had a one-time bucket and now we have a --

Manual bucket.

Manual bucket.

Great. Very much.

Brian Nagel, UBS.

Good morning.

Good morning, Brian.

Couple questions for you. First off, Dave, I wanted to follow-up on the comments you made regarding their current market environment. This is -- what we're seeing with the manufacturers' employee discounts right now, do you think you've seen any pick up in the volume of cars coming to your auctions as a result of those -- those circumstances?

Well, in the short-term as I mentioned we haven't seen it yet. We expect in the not-too-distant future -- in the longer term that it should. We haven't seen it yet, but we expect it to. There's a delay when you go through price resets and events like this.

Then on the demand side, you're looking at the conversion rate. I know when we were down at your analyst meeting a couple of months ago that's right when they began, I think GM initiated their plan. At that point -- I know you sale that day got hit -- the conversion rate got hit. Did you see an improving conversion rate as the quarter progressed?

No, the conversion rate actually went down a little bit and that was a result of the tenants coming into the market and you also had rental vehicles pick up so that pushed down the demand for the vehicles that were in the dealer lanes. Overall, the dealers in buying the vehicles since they had bought vehicles a week, two weeks, a month or two before, they bought those at higher prices because the incentives pushed down the price of used vehicles, so that put downward pressure on conversion rate. That's one thing we may see with the trade-in vehicles, that when the trades come to auction, the demand may be a little bit light because they're in the cars for more money than what the cars are coming to the auction and what they're bringing.

In the context for that remark also, Brian, you need to keep in mind that you have that dynamic and conversion rates in the third and fourth quarter of the year typically are a little bit lower than they are in the first half, so you've got a couple of things going there on conversion.

Okay, great. Thank you very much.

Dave Schanzer, Janney Montgomery Scott.

Good morning. Congratulations on the good quarter.

Thanks, David.

Several questions. First of all, I'm a little tiny bit confused about the vehicle volume outlook for the rest of the year and -- as opposed to these new car incentives, employee discounts and so fourth. Usually, the impact of the new car incentives and particularly these which seem to be very popular would be that volume would decline, and yet you folks are predicting sort of a better remainder of 2005. Is that because there's identifiable inventory to be worked off?

I think we're looking at comparison, David, versus -- we've had some pretty difficult comps in the back half of '04, et cetera. We think we will see the volume ultimately hit the auction, but there are factors -- conversion rate, et cetera, et cetera. So we're not changing our long-term volume outlook, but what we've seen is a little softness year-to-date versus our full-year estimates in the 1 to 3% sold volume growth.

But given the fact that you're at a relatively high conversion ratio, you wouldn't necessarily -- you're not -- you're saying you're not necessarily predicting any kind of additional weakness beyond that.

Our outlook is -- all we can say, David, so far is we've observed our volume growth to be a little less than we expected, pretty much flat in the second quarter, and we have better comp and better comps going to the back side and I think that there's an opportunity there.

All right. Secondly, is there anyway to get an idea of what SG&A is? It was up, I think 8.5 or 8.6%. Is there anyway to see that on a same-store sales basis? I know that that included the Washington unit.

I don't think to be honest with you David, we don't calculate SG&A on a same-store --

Okay.

-- sales basis. I mean, I will tell you anecdotally that the performance was pretty solid from the carry over base of auctions and the real difference in SG&A as we've talked about were you had the public company costs, you had sort of normal inflation-related bumps in compensation costs and then you had foreign currency in there, which was a bad guy on the expense side, and then you had the operating costs and the SG&A costs associated with Dulles site.

It's probably not material.

It's not a big item.

Okay, and the dealer service company that's entered the financing market, is that a regional outset or is that with a national footprint? Or isn't that evident yet?

I think there are -- there's a fairly broad geographic scope where they've established offices and that's about as far as I want to take that one.

Okay, and then another thing which we track quarter-to-quarter is your outlook on LIVE BLOCK's potential. Where do you see that in terms of percentage for your overall business going forward? Percentage wise.

Well, as we said, it's below 10%, it's been growing, there's a lot of interest in it from our customers. It doesn't take, as a practical matter, dealers out of the lane. It's a more convenient venue for dealers that otherwise maybe came to the lane but then there's also dealers that happen to have been coming to the lane that now are trained and are interested staying home. It gives them more flexibility to do so, so I think there's going to be continued interest in it. As to how far it will go, I don't think it's going to reach anything of large proportions like 30 or 40%, but it might creep over 10%. It adds a lot of value to us and it's a much -- it's more than just a convenient tool for the buyer, so I think that we're going to see a continued interest in it not only in the whole car space but in the salvage space as well.

Okay, thanks.

Brett Hoselton, KeyBanc Capital Markets.

Good morning. This is actually Steve Barger on for Brett.

Good morning, Steve.

Hey, a question. You said in your press release you reinitiated strategic growth programs. What is the likelihood of acquisitions in the remainder of 2005, and where would you target that, at more whole car or salvage?

We haven't laid out, Steve, a specific target. I will tell you that there is a fair amount of activity that is out there. We are being highly selective in what we look at and the discipline on what we buy and purchase price. And the second part of your question, we are equally considering acquisition -- within the ARS arena, we are equally considering both whole car as well as salvage acquisitions.

Okay. In a follow-up to the auto trend for per transaction revenue, do you think the loan revenue per transaction is sustainable, that increase?

That number can bounce around a little bit as you've seen in prior quarters. A lot of it's going to depend on the -- a couple of factors. Portfolio growth, overall -- the interest rate environment historically hasn't had a huge impact but with a 225 basis point increase we've seen some impact year-over-year, so I think you -- I wouldn't count on that kind of transaction growth period-over-period every quarter in terms of revenue per loan transaction.

Right. So it's more lumpy going forward?

It's a number that kind of squirts around anyway due to some of the dynamics on when you reserve, et cetera, et cetera.

Okay, and one final one. Is there any change in your outlook for lease volumes?

Not until the latter part of '06, and certainly in '07 we should see a significant improvement.

You've seen penetration increasing, and that's generally a good thing. You saw a little disjunction in lease penetration in the -- and we have highly incentivized purchase programs, but the trend line is that leasing penetration continues to increase.

All right thank you.

Gary Prestopino, Barrington Research.

Good morning.

Good morning, Gary.

I just want to get something straight. I overheard you say that volumes profits were flat on the wholesale side. I would assume that the increase in the raw number is basically due to the acquisition of the D.C. auction?

Yes. If you wanted to back out the D.C. impact, Gary, we sold about 4,000 cars, maybe a little bit more. We didn't really -- we owned D.C. for a little less than two months.

Right.

So if you back it out and you round up, it rounds up to 1%. It would be 1% down rounding up.

Okay, 1% up without D.C.

No, 1% down and then D.C. is worth about -- or -- if you exclude -- let's say it this way. If you exclude the D.C. volume, it comes in at 0.something-or-other, which rounds up to a 1% decline.

Got it, okay, that's fine. All right. Just a question that I had, and it really relates to the leasing question that was just asked. I mean, if you're lowering the cost of new car ownership through these employee discounts, and it looks like this kind of pricing is going to -- may be the norm going forward, doesn't that really impact the outlook for leasing overall on a longer-term basis?

I think that they're two separate things, Gary. One is the pricing driving the attractiveness of acquiring the vehicle. The second question is how do you finance it? And I think that currently the way interest rates are structured, there's been more interest in financing versus lease financing, but I think as interest rates start to move north, the economics of that financing decision should change.

Gary, this is Jon. In addition to the rising rates that Dave talked about, in terms of loan to value as well, folks have to put down a larger down stroke on that new vehicle purchase, which also makes leasing a more attractive option, so they can buy just that piece of the car they want versus getting the whole thing.

And we have seen the leasing trends increasing.

Okay, as far as the -- on your institutional lanes, is LIVE BLOCK on all your lanes now?

Yes, it is. All of the lanes where it needs to be, which is about 50% of the lanes that we have.

LIVE BLOCK's a little institutional. Anything you can tell us about what you're -- any progress you've made on getting the dealer cars on the net as well as what you're doing with your sales force to the dealer network?

That's one initiatives of the dealer focus. That's exactly what it is, is to have the 170 sale reps in the field working with the dealers in the field to educate them and train them on using LIVE BLOCK plus other services we have as well.

The dealer penetration, Gary, is still pretty low. It was up, but it's up off of a pretty low base, so I think it's going to be a slow, long process with the dealers that we hope to ramp up, but --

Is that what you're talking about on a LIVE BLOCK basis or just overall capturing more share?

Overall and LIVE BLOCK.

LIVE BLOCK is the -- we think it can offer the dealer significant benefits but you have to overcome a lot of prior practice and attitudes toward -- from dealers toward electronic selling of their vehicles.

Great, thanks.

[OPERATOR INSTRUCTIONS]. Matt Nemer, Thomas Weisel Partners.

Good morning, everyone.

Good morning, Matt.

First question is related to the volume -- potential trade-in volume from the OEM programs. Is it fair to assume that that should start to hit about 60 days out from the start of the programs? That is, if I'm a GM dealer and I take some trades in that aren't GM brand, I might bring them to the auction if they don't sell in about 60 days?

Every time they do this, it's a unique time frame, Matt. The 60 days is a pretty good swang at it.

So we might start to see some of that volume in the very near future then?

You'd see the volume and that was our earlier comment on conversion. We'll have to see what that influx of volume does or does not do to conversion, once it actually hits the auctions.

Okay. The next question is, you mentioned that your volumes have been a little bit below expectations, and I'm wondering, if you could give us a sense of how you think you're benchmarking to the overall industry? And I guess what I'm getting at is, have there been any changes in market share? Did you win or lose any major accounts?

No, there hasn't been any change. If anything, I think we've gained some share. I think that the one item that continues to contribute to the volumes being slightly less than what we're expecting is the repossessions. And because of the low interest rates and the way that they're setting their terms and conditions, that continues to impact that. We're seeing change in the way in which vehicles are being financed, and if interest rates go up I think we're going to start to see recovery of the repos, but that's -- that's what it was and it's effecting all of us in this industry.

Got it. And then one more -- actually two more quick ones. One, the -- your new competitor in the AFC business, is that being run by somebody that used to be the CEO of AFC at one point, or a major somebody in senior management at AFC?

Yes.

Okay. And then lastly, on the rental car front, is there a difference -- any difference in the behavior of your rental customers in terms of one that's it's run by on OEM versus one that's owned or run by a financial sponsor or private equity firm, in terms of the way that they dispose of vehicles?

I would say the only difference would be in the level of reconditioning. That with the manufacturer sometimes it would be more reconditioning done of the car, more damage repaired in the body shop and mechanical. Sometimes it's a little bit lighter by the rental car companies and that'll effect the value of those cars, but from a sales conversion rate, they're pretty similar.

Got it. Okay, great. Thanks so much.

Robert Magnuson, Merrill Lynch.

Hey, guys. Great quarter.

Thanks, Robert.

Just quick housekeeping item. The new revolver, how much is outstanding on that today, and what's your availability on that $350 million facility?

Curt Phillips. There's 173 million outstanding on the revolver today.

172?

173.

And availability?

The total revolver's 350 million.

And there's no LC's or anything else?

About 12 million of LC's.

Great. Thanks.

Dax Vlassis [ph], Gates Capital Management.

Yes, just to understand your guidance on the volumes, you're basically talking about the second half of this year, 2005, being above the first half of 2005? Is that your guidance for volume?

No. This is Jon Peisner. What we're doing is that first half number, the minus 2.3%, that's a year-over-year number, and so what we're saying is that the second comps are better than that first half comp. Does that make sense?

So it's going to be better than negative 2.3%?

You got it.

And -- to break that out, if you recall, Dax, in our first quarter that was a particularly difficult comp. We were down about 4.5% quarter-over-quarter. This quarter, we were pretty flat, so that gives you an idea of sort of how the movement has been quarter-to-quarter so far this year.

Okay. And the tax rate for the full year, what is your current guidance on that?

With the few FASB coming out on uncertain tax positions, we're still combing through our state tax positions post-spend, so I think -- we initially came out, I think, 39 to 39.5, somewhere in that range, and I think that's probably still a pretty good range once we get done looking at the FASB's impact on uncertain tax as well as some of the clean up on the state tax positions that we inherited from our former owner.

Okay, and as far as the availability on the share repurchases, you said it's something like $50 million a year. Does that exclude what you've already purchased this year?

No. We have -- those are discrete programs, Dax. The 130 that was approved last year was discrete, so our -- we closed this facility, what? Monday of this week or Tuesday, whatever day that was, and we now, the clock starts basically from July to July and that's -- so we have 50 million bucks if we were to elect use it and the Board were to approve that between July of 2005 and July of 2006.

Okay. Understood. Thank you.

Chris O'Donnell [ph], Caxton Associates.

Good morning, and congratulations on the good quarter. I'd just like to get a little bit of a better understanding of the kind of the quality of the vehicle that you guys are going to be processing in an effort to try and determine conversion rates. You mentioned -- and I'm relatively new to the industry, so please forgive my lack of understanding, but you mentioned in lots of these trade-ins the consumers were under water and you expected that to impact conversion rates in your auction. If I understood you correctly. Would you say that the average age of vehicles that you're processing is getting newer, getting older? And given that these new car dealers are going to be kind of struggling for sales, how do you think the quality of the vehicles that you guys are going to be processing might change as they might try and cherry pick the best of their trade-in inventory? Thank you.

This is Paul. The age of the vehicles and the quality of the vehicles, we're not seeing that change dramatically. It really deals with the volume of the vehicles that could be coming in on trade and making their way back to auction. The players whose are under water are the buyers of the vehicles that are auctioned. The wholesale dealers -- the wholesale cars between dealers as well as the independent franchise dealers that have used vehicle inventory on their lots, they bought those vehicles a month or two months ago at higher prices so they're the ones under water and that could effect their demand to absorb more vehicles coming through auction.

Got it. Thank you.

[OPERATOR INSTRUCTIONS]. Alan Lafer, Lafer Management.

It's Barry Lafer. Congratulations on the quarter. Do you have an expectation of whether you will go to the Board to authorize any portion of the stock repurchase availability?

I think that we always have that flexibility if the circumstances are such that it would be in our best interest to do so. I think that given the price and the cash position of the Company and other investment opportunities, all of those will be factors in such decisions. I don't expect us to initiate a program like we did this last year which had a specific purpose in mind to do so, but we'll always have that flexibility, Barry, and we'll use it if -- as I said those three situations where we don't have opportunities, we have a lot of cash, and the market is, for whatever reason, unstable, that we would always reconsider going into the market and doing so, but we've not decided yet.

So it would be fair to summarize your thoughts as the potential for stock repurchases as a safety net right now? [technical difficulties].

Barry, did you have a follow on?

I asked whether you would categorize that -- the ability to repurchase as a safety net rather than something --

I'm sorry, I did answer yes.

We had phone problems. Thank you very much. Okay. Good job. Thank you.

At this time, there are no further questions. Are there any closing remarks?

Yes, I do have some closing remarks before I get into my prepared closing remarks. We're all discussing the volumes, and I think we all feel the same way about the volumes. There is the short-term situation that we're certainly marching through, and I think we're doing an extremely good job. In marching through that environment, certainly the other revenue drivers have been very, very important for us. The used vehicle industry is doing very, very well and that's certainly indicated in the results for AFC. We've seen our dealer consignment business grow, which is something that strategically we're going to give more focus and direction toward, but we're seeing pick up in that absent our initiatives this year that's helping us offset these other declines. I always like to look at the EBITDA per car sold and I'm very pleased at seeing that continuing to go up as the mix changes and it effects our cost profile or different things, maybe lower-end vehicles versus higher-end vehicles because of different seasons change. To me the bottom line is that EBITDA per car sold, and that thing continues to grow for this organization. It captures everything. Efficiencies, prices, mix, et cetera.

Back to the prepared closing comments. Before I end this call, I want to reiterate that ADESA continues to make important progress in expanding its market presence, and leveraging its business models so as to maximize the value add we provide to our customers. This customer value added philosophy guides our entire strategy. It is deep and abiding and ultimately serves as the basis for the value that we create for our customers and our shareholders. The investments discussed on this and our earnings call are critical tactics for us in this regard. Last month, many of you spent the better part of two days here in Indianapolis touring our auction facility, meeting members of our excellent management team, and listening to the detailed presentations from all of us as to our value add operating philosophy. For those of you that were able to attend this event, I believe that you saw and felt the excitement of the positive momentum that we're creating here at this Company. For those of you new to this Company or ADESA,and were unable to attend this event, I sincerely hope to be able to meet with all of you in the near future. I know that we're scheduling a series of investor trips for the third quarter that will feature the array of all of our senior management team. It's important that you get to know all of us. We are a team, and this includes me. I hope you're able to attend one of these investor meetings, and I encourage you to contact Jon, as always, to find out if we will be in the area near you.

Again, I want to thank you for joining us on the call, and I really hope to see you in the near future. Thanks again.

This concludes today's conference call. You may now disconnect.