Openlane Inc (KAR) 2005 Q4 法說會逐字稿

Good morning. My name is Shashanta and I will be your conference operator. At this time, I would like to welcome everyone to the Q4 and fiscal 2005 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Mr. Peisner, you may begin your conference.

Good morning, everyone. Thanks for joining us today on ADESA's fourth-quarter 2005 earnings conference call. Joining me on today's call are Dave Gartzke, our Chairman, President and CEO and Cam Hitchcock, ADESA's CFO. Also with us today from our U.S. used vehicle auction is Brad Todd, Chief Operating Officer and President of AFC and Paul Lips, Senior Vice President U.S. used vehicle op.

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 the Company's and the industry's 2006 outlook and the Company's goals and strategies, 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 the call. To further assist you on this call, we've compiled a set of slides that can be viewed under the Investor Relations 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 a telephone replay, will be available on our website. The format of today's call will be as follows. I will be providing you with a brief financial summary and then Dave will give you a recap of 2005 accomplishments. He will then provide you with some brief commentary regarding the industry and our vision going forward, as well as the strategies and tactics we are deploying to achieve that vision. We will then turn the call over to Cam who will provide you with a financial review of our quarter and year and our outlook for 2006. After Cam's remarks, we will conduct a Q&A session and then Dave will provide you with some closing comments.

Many of the numbers we will 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 will be discussing, such as EBITDA, adjusted income and adjusted EPS, are non-GAAP measures and as such they are reconciled to GAAP (technical difficulty).

In terms of the numbers, I would like to now provide you with a brief summary. Yesterday, ADESA reported fourth-quarter record revenue of 239 million and income from continuing ops of $23.3 million or $0.26 per share. For the year, we reported record revenue of $969 million and adjusted income from continuing ops of $127.6 million or $1.41 per share. For the quarter, records in revenue per vehicle and revenue per loan transaction more than offset a decline in loan transactions and drove both our top and bottom-line growth. Cam will be taking you through the detailed financials following Dave's remarks.

As a reminder, our website, which has been recently updated, www.ADESAinc.com, and the slides are automatically synced to correspond with our remarks. I would now like to turn this conference call over to our Chairman, President and CEO, Dave Gartzke.

Thanks, John and good morning, everyone. Before I share with you the Company's vision for '06 and beyond, I would like to recap our '05 highlights. This is our first full year as a standalone public company. As John stated, we achieved record revenue levels for the fourth quarter and the full year, which did serve to enhance our bottom line. I'm very pleased with these results, which are a reflection of the hard work of our nearly 11,000 employees throughout North America and in a year, which included (technical difficulty) volatility from incentive pricing programs and hurricanes.

While we certainly would have liked stronger volumes, we did hit our financial targets through a combination of vehicles sold volumes, revenue per vehicle, loan transaction volumes, revenue per loan transaction and improved (technical difficulty) with the increase in the consignment business.

Second, with the continued alignment and the development of our management team. Changes in responsibilities led to better alignment (technical difficulty), auctions, (technical difficulty). Third was the use of our cash in '05. (technical difficulty) discretionary debt paydowns and the beginning (technical difficulty) strategy.

Capital was invested to improve efficiencies and utilization at key facilities, adding two lanes at our Boston auction, four at Montreal and four at New Jersey. We continue to invest in our technology offerings, which is critical for us and our customers. During '05, we rolled out auction access and the integration of the auto vision inspection technology. Utilization of the auto vision inspection technology for LiveBlock, audio and video (technical difficulty) also continued to grow. And last but not least assuming reinvestment of dividends, shares of ADESA delivered a 16.6% total return to shareholders versus 12.6% for the S&P MidCap 400 and 5.6% for our peer group. We are pleased with this performance but more so I am excited about the future.

We recently put out two press releases that I should comment on. First, we announced entering into an agreement to acquire the Northeast and Salvage auction near Scranton, Pennsylvania, which expands our salvage footprint into the mid Atlantic region. And last week, we announced making a 15% investment in Finance Express, which is a startup company that has developed a software system to facilitate the loan origination process between independent used vehicle dealers, their customers and a variety of consumer lending institutions. We believe this investment will provide us with a competitive advantage relative to other floor plan companies, will increase dealer volumes through our auctions and will increase floor plan revenues for AFC and will enhance future product development efforts targeted at the needs of our core customers, which are the independent used vehicle dealer.

Related to the Company's vision for the future is the current state of the industry as we see it. This slide provides a summary of industry performance in '05 and some of the macro factors that could have a significant effect on used vehicle industry in '06. Relative to history, vehicles in operations in North America or VIO continue to increase. Currently, our best estimate is that at the end of '05, the VIO stood at approximately 258 million units. We estimate that the number of used vehicle transactions rose to 46 million units, which means that nearly one in five vehicles in operation changed hands last year.

The increase in used vehicle transactions, which was largely driven by last year's pricing incentives, primarily benefited franchise dealers as opposed to the independent dealer and the auction industry. In fact, overall auction industry volumes declined slightly during '05 from 9.7 million units in '04 to 9.6 million (technical difficulty) in '05.

For '06, we expect industry auction volume to increase to 9.8 million units. Tom Kontos will be releasing his '05-'06 GBR very soon and I would expect that all you folks would like to have a copy of that. We are very optimistic about the industry outlook for '06 and beyond.

First, I just mentioned that the VIO again grew to about 258 million units in '05. Contributing to this growth was a 10% increase in rental and commercial lead sales. We believe our industry should continue to see this type of increase in '06 and beyond.

Second, off-lease volume declines will continue in '06 but should finally taper off as off-lease volumes are anticipated to begin increasing in '07. As of December, percentage of leases as a percentage of all new vehicles was up nearly 400 basis points, 23.1% from its low in the first quarter of '04, which was 19.3%. ALG also recently stated that vehicle leasing is on the rise.

Third, we believe ADESA has an attractive opportunity to continue to increase its dealer consignment penetration. We will invest heavily in resources, training and marketing in order to better serve dealer consigners and to earn more of their business.

Fourth is value pricing. Lower, stable sticker prices should lessen the used price volatility, which supports auction conversion rates. Therefore, with all factors considered, '06 should be an inflection point for our wholesale vehicle volumes and we strongly believe that, with proper focus, we can achieve increased vehicle volume in '06 and beyond. We will continue to invest heavily to properly position us and support both our '06 and longer-term growth.

Last week, management and the Board of Directors met and strongly endorsed the vision, goals and strategic initiatives for the Company. I would like to share with you our vision, which is now shown on slide number eight. Our vision is to be the industry leader in diversified remarketing and financing services, which is based on sustainable profitable growth and best-in-class service.

A couple of important thoughts and comments about our vision. The word diversification means that we will do two things. First, we will leverage the business synergies between our operating units to maximize our revenue streams and the utilization of our existing assets. For example, we will look to improve the leverage of the co-location of our Impact and ADESA auctions and the improved monetization and utilization of our real estate where appropriate.

Secondly, we will look to diversify by investing in related products and services (technical difficulty) our organization by addressing our customers' needs. Our investment in Finance Express is an example of an investment, which will serve to strengthen our relationship with our customers.

The goals we have are very simple. The first is increasing the number of vehicles we remarket via physical auctions and the Internet from about 2 million today to 3 million by the end of the decade if not sooner. If successful, we believe that the second goal of attaining sustainable double-digit profit growth and the third goal of enhancing total shareholder (technical difficulty).

The initiatives to achieve these goals are investments for growth; second, continued investments in technology improvements; third, a focus on operational improvement; fourth, enhanced dealer consignment focus and last but certainly to me it's the most important, continued investment in our employees and our people.

But first, investment for growth. The Board and management are committed to geographic expansions of our capabilities through acquisitions, (technical difficulty) auctions and investment in floor plan service providers, expanding combination site opportunities and relocation of existing facilities in growth markets such as Kansas City, Dallas, Phoenix and perhaps more. We will also continue to explore complementary new products and services such as Finance Express.

The second is technology. We know we have to improve our capabilities to deliver on our customers' needs and we will. The rollouts of AuctionAccess and AutoVision are just two examples. We will also focus on new product development in this area, which certainly includes e-business and technology.

Operational improvement. As everyone knows, ADESA has grown through acquisitions of 15 or more independent auctions or sellers and several larger transactions over the past 10 years. Each of the acquired auctions were operated differently. But I am extremely proud of ADESA's ability to integrate and improve the performance of these acquisitions through leveraging common resources and sharing a broader customer (technical difficulty) room for improvement.

With investments in technology and continually thinking as one company, I am convinced that by working smarter and better, we will continue to improve our service delivery and efficiencies.

Dealer consignment. We will continue to improve our service offerings and our marketing of these services to the dealers. As I stated earlier, we recently completed the rollout of AuctionAccess throughout our U.S. auction sites. It certainly makes life much easier for both dealers coming to our auctions and to us as dealers can now bring a single ID card to check in and to do business with us.

We have also started to roll out salesforce.com, which enhances our ability to match buyers and sellers and improves our target market. Training of our dealer sales reps naturally goes along with this as we invest in our people who are working with our customers.

Human resource development. I firmly believe that investment in employees is the best investment we can make. And our budget for '06 reflects this. This past year, we initiated a leadership development program throughout the entire organization. We are going to continue to invest in training thereby providing our employees with the necessary tools to ensure that their developments and training will provide customers with the excellent service delivery objective that we have. Now I would like to turn it over to Cam.

Thanks, Dave. Good morning, everyone. Before I dive into the fourth-quarter and full year results, I'd also like to make a couple of observations about ADESA's commitment to our customers and to growth. Our customers and our operators are excited about ADESA aggressively investing in all aspects of our business, whether that is in technology, physical location, product line extensions or any combination thereof. We touch and strive to provide superior customer service to more than 40,000 buyers, sellers and borrowers.

ADESA's growth is energizing to both our customers and our operators who built a strong two-way commitment. We believe that the (technical difficulty) of our people is a key competitive advantage that merits our continued investment regardless of industry dynamics from time to time.

Now we will move onto the financials starting with quarterly revenue. Revenue for the quarter was a record $239 million, up $15 million or about 7% versus last year. Primary growth drivers were higher sold volumes and higher revenue per vehicles sold in our auctions. That was about half of it. Acquisitions accounted for about one-third of the growth and the remainder due to favorable foreign currency and top-line growth at AFC.

Now briefly onto operating margins. Volumes and pricing at the auctions and AFC along with auction conversion rates are key drivers of ADESA's consolidated operating market.

Following incentive driven weakness in the third quarter and in the early fourth quarter, the used vehicle auction industry recovered nicely during the last six weeks of the quarter. As Dave mentioned, fourth-quarter sold vehicle volumes were up slightly versus last year and conversion rates were up about 240 basis points.

Consolidated operating margins for the quarter declined about 100 basis points, 17.6%. The primary contributor to this 100 basis point decline was an approximate $15 million increase in consolidated operating expenses of $196.6 million versus 181.2 million last year. This increase was mostly at our auction and related services segment. I will provide more color on this increase during my segment commentary.

(technical difficulty) D&A was also a piece of this increase as it rose about 15% versus the fourth quarter of 2004. D&A growth has been driven by higher capital expenditures (technical difficulty) IT expenditures typically. A good portion of ADESA's IT CapEx in the back half of 2004 and into 2005 has a three-year depreciation (technical difficulty).

Consolidated SG&A for the quarter was [7] million (technical difficulty) 7.6 million (technical difficulty). The main drivers behind the SG&A increase was included higher travel and marketing costs and the (technical difficulty).

In summary, while revenue (technical difficulty) four key revenue drivers. Higher direct and indirect expenses led to a slight decline, about 100 basis points in operating margins. A brief comment on interest expense. Consolidated interest expense for the order was down $800,000 to 7.2 million versus 8 million last year. That has bumped interest rates 200 basis points (technical difficulty) fourth quarter of last year. However, we have more than offset these increases by a combination of deleveraging and amending our credit facility in July of '05.

In fact, during the fourth quarter, we paid down $27.6 million of debt, which included a $20 million discretionary pay down. Our weighted average (technical difficulty). As far as taxes, our quarterly effective tax rate was 37.2% versus 36.8 for last year's fourth quarter. We indicated in our last conference call that our tax rate for fiscal 2005 would be about 37.6%. Our full year effective rate for '05 came in at 37.5%, within ten basis points of our prior estimate.

With respect to EBITDA, the only comment I would like to make on the slide is that for the quarter, consolidated EBITDA rose about $3 million or 6% to $55.1 million.

I would now like to take you though our business segment's quarterly financial performance. First, our ARS, or auction segment. Marketing environment for available supply improved in the later part of the fourth quarter as the market benefited from rental returns, which had been delayed due to Hurricane Katrina. Revenue in the ARS segment was up about 7.5% to $207 million versus $192 million last year. A little less than half the growth was driven by higher revenue per vehicle due to selective fee increases, additional revenue from companies growing Internet services offering, which Dave addressed, ancillary services penetration and to a lesser extent higher wholesale and used vehicle values.

About one third of the growth was due to our 2005 acquisitions and the remainder was attributable to the higher transportation revenues and foreign exchange. A slight (indiscernible) transportation revenue because it is a pass-through service, which lifts revenue but hurts margins, particularly in times of rising fuel prices such as we saw in 2005.

Operating profits increased about $2 million or nearly 7%, $29.7 million on relatively flat operating margins in the segment. During the quarter, we benefited from higher revenue per vehicle, more vehicles sold and a reduction in SG&A.

I have just a couple of comments regarding the auctions cost for services. The increase of $11.7 million was driven by several factors. The most significant of which was the impact of newly acquired auctions (technical difficulty), higher transportation (technical difficulty) and higher benefits costs. Higher fuel costs hit our transportation business meaning currency also negatively impacted (technical difficulty) purposes. (technical difficulty) approximately 170 basis points (technical difficulty) offset the benefits of a 240 basis point improvement in our conversion rate. This higher conversion rate is half of what we experienced as a mix shift of about 200 basis points from institutional and dealer vehicles.

Now onto AFC. Our AFC business segment (technical difficulty) revenue less than a 1% decline in operating profit. Revenue grew about $1 million primarily due to interest rates that were 200 basis points higher, as well as continued favorable portfolio performance. Quarter four operating margins at AFC declined by about 200 basis points as AFC was impacted by certain legal and transaction expenses, as well as new employee training, travel and relocation (technical difficulty). AFC operating margins (technical difficulty).

As we discussed last quarter, the transition of one of AFC's long-standing customers from a traditional loan basis (technical difficulty) comparing year-over-year loan transaction volume numbers. We estimate that the relative impact of this change accounted for about 1500 units of the 9600 unit quarter-over-quarter decline of AFC transaction volume.

While this transition negatively impacted the number of loan transaction units, it positively impacted our revenue per loan transaction in the fourth quarter. At year end, AFC's loan portfolio stood at approximately $655 million and consistent with prior periods, over 95% of the portfolio was current. As a sidenote, the portfolio at 12/31/04 $584 million.

(technical difficulty) contains a summary of a variety of statistics from both 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.

Onto our balance sheet. Our balance sheet remains strong and liquid as highlighted on our slide 15. Debt to total cap now stands at approximately 28% versus 30% at the end of the third quarter. Our year-end cash balance of $246 million contains about $6 million in restricted funds and about $127 million, which is unavailable due to bank clearance. As of December 31, cash available for growth initiatives, which is what we term economic cash, stood at about $113 million. As with prior quarters, we were able to grow earnings, invest and delever at the same time.

(technical difficulty) Slide 16 walks you through major cash flow items for the quarter and the year. Our cash position, strong operating cash flow for the quarter enabled us to make a $20 million discretionary pay down, invest about $10.5 million in acquisitions, reinvest $7 million into our business, pay our normal $7 million common stock dividend and pay our normal $7 million common stock dividend. Cash pay for interest versus the third quarter was up due to the timing of the semiannual interest payment on our 7 5/8 senior subnotes.

Additionally cash taxes were up (technical difficulty) due to the fact that we were not required to make certain tax payments in the third quarter.

Our 2005 CapEx spend came in at $55.3 million, in the middle of our capital range estimate of 50 to $60 million. Our outlook for 2006 is for capital spending, excluding potential facility relocation, to be relatively in line with our estimated D&A of about $48 million. As always, this estimate can be significantly impacted by both project timing, as well as capital expenditures (technical difficulty) that are not included in this estimate.

Now on the share count -- at year end, we had 89.6 million actual shares outstanding, 90.3 million weighted average diluted shares outstanding. At year end 2004, the comparable numbers were 90.5 million and [91.5] million respectively.

I'll provide just a brief summary of our fiscal 2005 results as the details are in yesterday's press release. Revenues for fiscal 2005 rose about 5% to a record $969 million versus $926 million last year on sold vehicle volumes, which is down approximately 1.3% versus last year. Loan transaction growth at AFC was a little over 2% (technical difficulty) increases in revenue per vehicle sold and revenue per loan transaction are the primary operating drivers pricing of about 45% of our top-line growth.

Continued strength of the Canadian dollar contributed about $13 million or roughly 30% of our revenue increase and acquisitions accounted for the balance. Our conversion rate for the full year was 63.1%, which was approximately 60 basis points better than 2004's rate. As noted in our press release, 2005 adjusted income from continuing operations was $127.6 million or $1.41 per diluted share versus adjusted income from continuing operations of 119.3 million or $1.30 per share in 2004.

Our 2005 weighted average diluted share count declined to 90.3 million shares versus 91.5 million shares a year ago in line with the share buybacks we've previously discussed.

Now onto our 2006 outlook. (technical difficulty) a little bit earlier 2006 as a year when we're focused on five key initiatives; vesting for growth, vesting in technology, focusing on operational improvements, increasing our dealer consignment business and human resource development. These initiatives guide our actions and will lead to solid financial performance for ADESA in 2006 and beyond.

While industrywide, off-lease vehicle volumes are expected to be down slightly in 2006. This year is seen as the (indiscernible) inflection point. We anticipate that the multiyear trend in decline off-lease vehicle volume will reverse itself next year, 2007, for the auction industry. This backdrop frames our outlook for 2006, which is to achieve income from continuing operations in the range of $137 to $143 million. Based on our estimate of a weighted average share count in the range of 90.5 to $91.5 million, this equates to EPS of $1.50 to $1.58 a share. These numbers exclude, and I repeat, exclude any impact from the adoption of FAS 123R, which, for ADESA, equates to approximately $0.03 a share. Including this impact, income from continuing operations should be in the range of $134 to $140 million or $1.47 to $1.55 a share.

As you evaluate this outlook there are a couple of key points to keep in mind. First, in terms of the four primary drivers of our business, we will provide you with directional guidance on each driver as opposed to specific numeric guidance. We made this change due to the many macro factors that influence our business, which are very difficult to accurately forecast in the near term to intermediate term. Two of last year's macro events, which were outside of our control, were the second and third quarter OEM employee pricing initiatives and hurricanes.

Our first key driver is vehicle volumes and we see higher vehicle sold volumes in 2006 primarily due to the benefits from our new dealer consignment initiative, as well as from having a full year of our 2005 acquisitions. It's too early to tell whether we will benefit from increased repossessions, which have been down the last two years.

The second key driver is revenue per vehicle. Revenue per vehicle should also be a positive for us. Directionally, growth in this driver should be a bigger positive for us than the growth in vehicle volumes. The impact could however be a little muted depending on how much mix shift we experience between institutional and dealer consignment vehicles. You will recall that dealer consignment vehicles have significantly lower revenue per vehicle than institutional vehicles.

Third, we see growth at AFC, both revenue per loan transaction as well as overall loan transaction growth. We anticipate that growth in revenue per loan will be stronger than loan transaction volume growth. This dynamic is fueled by a full-year benefit of Fed interest rate bumps, slightly longer days outstanding per loan, as well as competitive factors.

Lastly, we would expect the majority of the benefit from our operational improvement initiatives, which Dave outlined earlier, to come in the second half of the year.

There are a few bullet points that I would like to spike out with respect to the 2006 guidance. As previously mentioned, depreciation and amortization should be about $48 million in '06 due to the shorter depreciable life of IP investment and our 2006 investment spend. It appears to us that many analysts have understated the impact of the relatively shorter technology life on ADESA's D&A expense for 2006.

Also looking forward, any prospective acquisitions and/or relocations would be added to both our assets and D&A. Secondly, SG&A as a percentage of revenue will increase slightly versus 2005 based on some of the strategic investments in the service offerings that we previously mentioned. Third, we would expect higher benefit costs in 2006 mostly in the area of health and worker's comp. Fourth, though our 2005 acquisitions are starting to shape up to be financially accretive, they are likely to cause market pressure in the short term due to the integration and maturation process. That has always been our experience with newly acquired actions. Fifth, our annual tax rate should be in the range of 2005's annual rate.

With that, I would like to turn this call over for questions and (indiscernible) on the phone, I think we would like to focus our questions on some of the strategic initiatives. As always, John and I and Steve would be happy to take detailed financial questions off line and help you with your modeling. With that, operator, we'll open it up for Q&A.

(OPERATOR INSTRUCTIONS). John Murphy, Merrill Lynch.

Just a question on the debt pay down. It seems like there was a fair amount of an acceleration in debt pay down in '05. You have $37 million in self-amortizing debt that you paid down to $83.6 million. I am just wondering how you're thinking about that versus acquisitions? It seems like that is sort of second on the list versus acquisitions.

John, we took the opportunity because we had excess cash and knocked out some of that debt and reduced our negative carry. When we restructured the debt facilities in the summer last year, we put in a bigger revolver component, which would allow us to take that debt down yet utilize it in the case of any acquisitions and that is why we did the restructuring.

If we just think about the acquisition landscape though and what that might mean for that, how does the acquisition landscape look for the whole car auction businesses out there?

That's a general question, John. We believe that there are opportunities in both the whole car space and certainly the salvage space for acquisition of independents. We mentioned the relocations as well where there are several facilities that we have that are in growth markets that we consider to be underserved by us, which would be an opportunity for us to invest and realize a decent return as well. The acquisition opportunities are there. And we are more focused this year than last year for obvious reasons to address those opportunities.

And how many of those relocations -- if you can discuss the specifics on that -- do you see in '06?

Well we -- it takes some time from the time that we have identify a location at the beginning of construction to the completion of construction. So my back of the envelope estimate would be at least a couple of years before we can complete the relocations that I mentioned earlier. Kansas City is one in particular that, if we get the approval for the (indiscernible) financing, we should be able to start construction in the latter part of the summer this year and hopefully have it done by next summer.

Just a question on the franchise dealers, it sounds like they are capturing a lot of the used car volume out there. Is that something you expect to continue in 2006 and is that something that you can mitigate through your sales efforts?

We expect our utilization of our auctions by the independent dealers, both buying and selling, to increase in '06. I am not sure if I understand the latter --

It sounds like the franchise new car dealers kept a lot of the used cars because they were having a tough time in the new vehicle market. I was just wondering if you have any concerted efforts there to try to capture or pull some of those vehicles in or focus on the new car franchise dealers.

The new car franchise dealers did quite well last year because of the incentives and they got discounts on nice products for trade-ins and they elected to retail those, which hurt the independent dealer. I think that situation with the price incentives has changed in '06 and the dynamics have changed so the independent dealers should do a lot better relative to last year. They have more product.

One just last question. On LiveBlock, how far are you penetrated in your liens right now and how is that going?

This is John Peisner. We offered over one million vehicles on LiveBlock equipped lanes in '05 and over 10% of the vehicles sold went to an Internet buyer. Conversion rates continue to be north of 80%. So it is pretty strong growth.

In terms of the rollout, John, it is in all of the lanes today, institutional lanes where we need it to be.

Matt Nemer, Thomas Weisel Partners.

A question related to technology. Two of your auction competitors are out with new dealer inventory management products and I am just wondering if you plan to play in that game as well?

I think the answer is yes, Matt. We work closely -- I don't want to get into all the specific but we have relationships with some of the other firms today that are supplying technology into the dealer space for dealer management, as well as some of the wholesale alternatives. So the answer is yes; I think it is pretty early still for all the factors that we have discussed on prior calls. Meaning it is the trust element on the dealer to dealer side that I think is going to be the biggest single issue that people grapple with as that business matures.

So you do expect to offer some type of a product for dealers that allows them to help manage their used car inventory and maybe ties into your auction facilities?

We're clearly looking to drive more volume to our auction facilities and yes, that would be one of the avenues that we would look to use to do that.

And then second, can you help me understand the reason and the cost associated with the relocations and just -- I missed some of the actual facilities that you're planning to relocate.

The one in Kansas City is one I think that we have recently disclosed where the purchaser of the existing facility is going to use the property for a different business purpose and it happens to be located in an area, because it is a relatively older facility, where the city has expanded around it. Therefore, the value of that real estate almost equates to the cost of us building a new facility. So the net investment for us in that new facility to enhance capability by maybe 30% to 40% may only be 3 to $5 million at the most. So that is an excellent opportunity for us to recognize the value of that real estate and help us fund a new facility that not only will have more capacity or capability but it will also, because of the avoidance of all the outlocks and touches vehicle to realize much better efficiencies.

The other locations I mentioned are in markets that are significantly growing that we have a presence in. One being in Dallas where we have a great facility that has expanded its volumes by three times in the last five years. And we have a diverse customer base and therefore, again, I think it is a market where we need to have a stronger presence and we will do so.

The cost of a facility on average, if it sticks to an (indiscernible) facility, I think that's (technical difficulty) don't have any estimates so don't hold me to this, is probably 25 to $30 million. So if we fund this over a couple of years and build it into our cash flow generation that we have, it should not have any dilutive effect at all. In fact, once it goes into service with (technical difficulty) efficiencies, it should help.

The third one that we mentioned was Phoenix and Phoenix again is in a growth market for us. We have done extremely well in that market and our customers are saying the same and we need to again not only increase our capability and capacity in that market, but again it is a very old facility and it probably isn't the most efficient in its design and Internet capability as well. So to me, (technical difficulty) property that is probably for a different business purpose worth a lot more than it is to us. So again, we might be looking at another Kansas City example where utilization (technical difficulty). So I think we see an opportunity here where we can relocate and expand our capability and our service offerings significantly utilizing the value of that real estate.

And then just to follow up on that. Is there an example where you have relocated perhaps out here at Golden Gate where you have had a substantial increase in the number of customers or can give you us an example of sort of what has happened after a relocation?

We have had a number of greenfields too in the past if you have been following with us. Matt, you've been with us for a long time (technical difficulty) greenfield that took probably five years before it was at the levels where it is at today. It went from zero to one of our strongest facilities. So it does take time to build into these new facilities when you expand them as well. Golden Gate has increased its volume. It took a year or two before the dealers became comfortable with it and changed their habits and patterns. But we took a lot of efficiencies or built a lot of efficiencies into the new facility immediately. So we got an immediate pickup on efficiencies and now the volumes are starting to increase.

Atlanta was another one where again it was a very inefficient facility. Now we have a state-of-the-art facility and the volumes are just beginning to move but we had efficiencies the first several years. But it does take time is my point before, maybe two to three years, before we really start to see some (technical difficulty) but that's what we're doing.

Today, we're looking at ways to enhance our capability and, as we spoke of early, we expect the volumes in this industry to really begin to move north in '07 and '08 and we want to be in a better position to enjoy that growth and be better prepared for it.

Then last question on AFC, have there been any -- are you aware of any changes in pricing in the marketplace from your competitors in the last quarter?

Excuse the voice. This is Brad Tod. No, there is no change in the overall marketplace and pricing over this last quarter what we have seen in the past.

Steve Bagra, Keybanc Capital Markets.

I've got a lot of static so I'm sorry if I missed some of this but of the legal transaction and training costs that you called out as affecting operating profit at AFC, can you tell us the respective impact of those things and are those largely behind you now?

If you look at them in aggregate, it is probably in the $600,000 range plus or minus and I would think a pretty good slug of those you won't see again.

Good. And the operating performance, was that all pricing and mix or were there any accrual reversals in there this quarter?

I'm not sure we understand the question. Could you repeat it please?

I think that sometimes when you have accruals throughout the year they might reverse in the fourth quarter. As I think about the margin pressure that you saw at AFC, I was wondering is there are any reversals that happened in the fourth quarter?

We look at our -- we and any other public company review our accruals every quarter as part of our standard procedure internally and externally. So the answer is no; there was no unusual accrual activity in the fourth quarter.

Okay. And for the CIO search, can you give us a quick update on that, any progress or timing? And to follow up on a previous question about dealer management product. Is that something that we might look at in 2006 or is that more of an out year?

The dealer enhancement product is something we're really excited about. The sales force.com that I mentioned will give us invaluable data combined with the training of 100 plus sales force that are in the field that have access to that data. That marketing tool, along with just accountability, I think is going to help us and our customers a ton.

Regarding the CIO search, I have always said that if you're making a big decision, be it an acquisition or a key management position, that sometimes patience is the better avenue to take so you don't move too fast. Obviously this is a very important position for the Company but I don't want to strip our gears. Not that we've got it in neutral but we're certainly taking our time making sure that we have got the most qualified candidate that we can find.

Having said that, the key to our technology growth and e-business initiatives are going to be and will continue to be the involvement of our business people in all of the businesses and the people that are interacting with our customers who are part of that team. That is one of the changes that I have seen this year is the way that we collectively work with the IT department to identify what the customers' needs are and to determine what the IT priorities should be.

When the new CIO gets on board with the vision that that type of individual will have at this organization, it certainly will be a significant impact not only up from the development of technology but hopefully helping us see the vision for where we think technology should be three to four years out.

With respect to the timing, I just can't say. It won't be six months; it won't be four months. Hopefully we can announce something relatively soon. That's as far as I can go.

And one final question. I think when you were talking about the greenfield before that really grew into a successful auction, as you look at the acquisition front right now based on whole car or salvage, are you less inclined to do greenfields rather than buy something or is that something that you would consider as you think about --?

I am less inclined to do greenfields. But having said that, Long Island was an exception that did very well because of the market. They were available for us when we built that new facility and we didn't overbuild it so we can grow as the business grows. To that was an example of the right way to break into a greenfield and there are several locations that I am interested in. Actually looking at a greenfield where there doesn't seem to be an opportunity to acquire an independent for us to break into that new market. So we may be announcing some greenfields here in the next six months or so as well.

David McGee, SunTrust Robinson Humphrey.

A couple of questions. First on marketshare, I'm just curious how do you all look at marketshare and how you did last year with that metric.

Marketshare is an interesting stat. You can look at the number of vehicles going through the auction relative to what we sell going through auctions but you can also look at the market potential -- I think it was related to some of the questions we had earlier on dealer to dealer Internet transactions. The definition of the market for this industry is growing outside of the traditional 9.7, 9.6 and 9.8 definition. But specific to that definition, we are certainly holding our share as we have been in the past and I am pleased to see that we are gradually increasing it. We had some nice share gains the last couple of years. Hopefully with the recovery of the institutional accounts this year, especially next year with the off-lease vehicles, we expect our share on an organic basis to move north again.

And then on that same note, you would expect the auction share of the used business to increase this year as well?

Keep in mind that a part of the share when you talk about used cars changing hands are including the independent dealer consignment sales too.

And then the second question, can you comment on I guess directionally where you expect the cost of services to be in '06 relative to '05?

I would think that cost of services is impacted by a lot of [deals]. I would expect it to be flat to slightly up and that is primarily the annualization of the impact of some of the acquired properties, which as we have characterized a couple of times typically will have slightly lower margins than the core business that we're integrating them into. We also have some other -- fuel costs are continuing to be up. Transportation is an area that, if we can break even there I think that would be great, but with the higher fuel costs, that is proving to be a bit of a challenge as well.

David, the only thing also to keep in mind -- this is John -- is how strong this mix shift is to dealer consignment because that would also play a factor.

Thank you and good luck.

Brian Nagel, UBS.

It's [Steven Larson] calling for Brian. Just had a couple of questions. I have had a staticky connection today and if you could detail the split between institutional and dealer consignment volumes coming to auction in the fourth quarter.

We don't typically split that out. We did see some mix shift in '05 as a whole and that continued in the fourth quarter. We are still -- if you look at the total inbound supply, we are still heavier institutional even after the mix shift than we are -- than the industry as a whole.

Okay. And final question, any color on the trend in conversion rate or volume for the fourth quarter?

I think you saw it independents recovering in the back half of the fourth quarter; they had a very difficult summer and early fall. I think you saw a strong bid for those vehicles which were available, which helped conversion rates. And I think we mentioned on our last call one of the trends that we saw that constricted supply a little bit was the deferred return of some of the rental vehicles. So for those vehicles that were there, you saw a strong bid and we think that translated into strong conversion rates.

(OPERATOR INSTRUCTIONS). Peter Barlas, KJ Harrison.

Can you provide us with an update on the competitive pressures that you're seeing from DSC?

This is Brad Tod. Overall, the competitive pressures have been consistent when they started in last year, no different than what we have seen really from DSC, but others in the overall marketplace. So I think we have said a number of times in the past, we have competitors come into the marketplace in general at each one of the locations throughout the year. So I would say that the market in general from a competition standpoint is consistent from what we have seen in the past.

Thanks. And with respect to acquisition opportunities, we understand that you can't force people to sell if they are not ready to but can you talk a little bit about what the Company is doing to identify opportunities to deploy capital and to ensure that you don't miss out on any of these opportunities?

Certainly as we all do in the industry and at auctions are and also maybe (technical difficulty) that might be available for development. I think everyone is aware or familiar with that information. We also look at the demographics. We also look at the demographics. We look at markets that are underserved by us. We all have the same information. The number of vehicles that are going through auctions in general, the number of vehicles that are sold by the dealerships, by the volumes, by the makes, all that information is available and the growth in those markets. That is where I think the most interesting part of the analysis is is where do you see the growth in the population in the vehicles changing hands and the potential for cars going through auction by different markets.

It is interesting, when you look at the changes we have seen. We also look at competition. There are some markets where there's a large concentration -- the demographics would indicate that of vehicles changing hands and the market might be more than adequately served. So we certainly don't want to jump into those situations. So it is a good detailed market analysis. So it isn't, what we're saying, a knee-jerk reaction to an independent (technical difficulty).

I think it's pretty clear too that few people know that we're back in the markets. So from an industry point of view, we are going to get the call I think.

It feels like the questions are starting to taper off. I will entertain one more question before we make our closing comments.

Jeff Gates, Gates Capital Management.

Can you tell us what cash flow from operations was for the year and also how much was out on the accounts receivable facility at year end?

Sure. I will answer the second question first. At year end, we have an asset backed facility that -- I assume that is the one you're referring to at AFC? There was about $400 million funded in the asset backed facility at the end of the year last year. And we just recently increased the available liquidity of that facility due to AFC's growth rate. And if you look at net cash provided by operating activities in '05, and again that would be before capital investment or acquisitions, it was $139 million. Again, we spent about $55 million last year on capital.

Thank you.

Thank you. I think that concludes the questions. I would like now maybe to make some closing remarks and then certainly as I've always said in the past, indicate that folks that are interested in seeing Cam and Jonathan and myself, as always, I'm sure you contact these gentlemen to let them know your interest because we do plan as we (indiscernible) and our shareholders meeting to make visits to the coast and also to the Midwest so that we can talk to people individually.

In closing, I will have to say that I'm extremely excited about the initiative, the projects, the goals, the process that this company went through the past several months to determine the strategic direction for this organization. It is an exciting time for me personally. I think it is an exciting time for the whole organization as we begin to take this company to another level.

We have the Board's commitment, the organic growth strategies that we have outlined and the nonorganic growth initiatives that we just recently discussed. And in combination, I believe that it is going to give us the growth results that we have all been expecting to see. As Cam just indicated, we have a very strong balance sheet and we continue to have the significant free cash flow characteristics of this business model, which enables us to invest in these strategies and drive the value of the bottom line probably unlike any business I've ever seen.

We are excited about the opportunities we have in front of us. We believe that successful execution of these initiatives will continue to build a bright future for ADESA, its employees, its customers and its shareholders.

As always, I appreciate your support and I thank all of you for joining us on this call today.

Thank you. This concludes today's Q4 and fiscal 2005 earnings release conference call. You may now disconnect.