Openlane Inc (KAR) 2006 Q1 法說會逐字稿

Good day, and welcome to the ADESA first quarter 2006 earnings conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Jonathan Peisner, Vice President of Investor Relations for ADESA. Please go ahead, sir.

Thanks, Cindy. Good morning everyone. And thanks for joining us today on ADESA's first quarter 2006 earnings conference call. Joining me on today's call are Dave Gartzke, our Chairman and CEO; and Cam Hitchcock, EVP and CFO. Also with us today are Brad Todd, Chief Operating Officer of Used Vehicle Operations and President of AFC; Chuck Tapp, EVP of Sales and Marketing; and Paul Lips, Senior Vice President, U.S. Used Vehicle Operations.

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 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 this conference call. To further assist you on this call, we have compiled a set of slides that can be viewed under the Investor Relations section of our website, along with 2006 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'll be providing with you a brief financial summary. Then Dave will be recapping our first quarter accomplishments, as well as providing you with our outlook on the industry. We'll then turn the call over to Cam, who will provide with you a financial review of the quarter. After Cam's remarks, we'll conduct our usual Q&A session and then Dave will provide you with some closing comments.

Many of the numbers we'll be discussing today can be found in yesterday's press release or in the slides and other information on our 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 the accompanying slides. In terms of the numbers, I'd now like to provide you with a high level summary.

Yesterday, ADESA reported first quarter revenue of $286 million. Income from continuing operations for the quarter was $36.3 million, or $0.40 per share, which includes approximately $0.01 impact from the adoption of FAS 123R, as well as $0.02 a share from a charge related to a former employee's concealment of unreconciled balance sheet differences. For the quarter all of our key revenue drivers increased.

Cam will be taking you through a detailed walk of the revenue and expense drivers and other financial information following Dave's remarks. As a reminder, our website is www.ADESAinc.com and the slides are automatically synched to correspond with our remarks. I'd now like to turn this conference call over to our Chairman, Dave Gartzke.

Thanks, Jon, and good morning everyone. Before commenting on the quarter, I'd like to review the '06 strategic initiatives that we outlined on the February 14 call. As a quick reminder, they were investments for growth, technology, operational improvement, enhancement of our dealer consignment focus, and as I said last quarter, most important to us was investment in our people which certainly includes management alignment and development. Taking the last first, you saw yesterday the announcement of A.R. sales joining our management team as our President and COO of ADESA, Inc. A.R. brings depth of operational and management experience and will be a tremendous addition to our team.

Soon after our February 14 call, we also announced Ron Beaver joining our team as our CIO and Executive Vice President. And you also saw his strong credentials. Those of you coming to our analyst day later this month will have opportunities to spend time with both of these fine gentlemen, along with the full complement of all of our management team, which I am very proud of.

Switching to investments for growth, on the last call, I discussed expanding our service capabilities in high growth markets, such as Kansas City, Dallas and Phoenix. We hope to announce locations for these needed relocations on the next call, which will significantly expand our service capability in these high growth markets. During the past quarter, we acquired two quality auctions, Northeast Penn, a salvage auction in Scranton, Pennsylvania, and a used vehicle auction facility in Sarasota, Florida. We also announced on the last call our 15% stake in Finance Express this year which provides great product and service for used vehicle dealers.

As stated in that call, we will continue to prudently invest in auction coverage expansion, technologies, new services and products that improve our competitive position. To dealer consignment, last quarter we mentioned completing rolling out our AuctionAccess, which made life easier for dealers coming to our auction and easier for us, as well. This quarter, we also began the roll out of salesforce.com, which enhances our ability to match buyers and sellers and improves our target marketing. The training and deployment will continue during the annual sales event which is around the upcoming ADESA 500 event.

Operational improvement and technology. With both A.R. and Ron on board, combined with the dedicated focus management that we've assembled, all I'll say at this time is stay tuned as we come together as one Company and further enhance our service delivery and efficiencies. Now to the highlights of the first quarter. As I stated on the February 14 call, we are optimistic about the outlook for the industry and ADESA for 2006 and beyond and we remain so. For the first quarter, we achieved increases in both same store and overall volume growth in both our auctions and AFC. These volume increases, in conjunction with rising wholesale vehicle prices, drove double-digit revenue growth.

We also experienced a 6% increase in the number of used vehicles which were entered for sale at our auction, and we began to see traction from our dealer consignment efforts. We are very encouraged by the increase of the vehicles entered for sale, which is a positive sign for ADESA. Conversion rates were down versus last year's record 69%, yet they remain well above 60%, which reflects an overall solid wholesale market.

However, the decline in the conversion was across the board, not a mixed shift that we've seen in the past. That means that the shops processed the institutional vehicles but the high leverage of the sale, which is across the block fees as you're aware of, declined. This is all in percentages. This has a profound impact on the profitability of our Company. As shown on slide 10, however, the first quarter used retail market was weak, looking back over the last three years, thus explaining the drop in overall conversions. Used vehicle prices, however, were very favorable as year-over-year prices in the first quarter rose approximately 5% to 6% versus the first quarter of '05.

We have been experiencing a trend since '03 of higher vehicle prices, in part, due to the declining substitution effect of new vehicles, meaning the gap in prices has widened. Higher used vehicle prices were significant factors to the increase in both our revenue per vehicle sold at ARS and the revenue per loan transaction at AFC. The combination of the decline in conversions, especially the institutional conversions, combined with the increased investment in training, operational improvement and acquisition activity and, yes, the accounting correction of the unreconciled balance sheet differences in Canada resulted in an EPS of $0.40 for the quarter. We are very comfortable with the guidance for the remainder of the year. Now I'd like to turn it over to Cam.

Thanks, Dave. Before I go into the details of the quarter, I want to comment on our incremental flow through and leverage inherent in our business model. It's there. During the first quarter, our volume entered and sold was up, yet relatively weak retail demand pulled down conversion rates. This resulted in ending quarter one inventory days at 31, the highest first quarter level since the first quarter of 2003. We would expect this volume to be pulled through, as retail demand picks up, in similar to what we've seen historically, supply and demand to get back to a better equilibrium. Net, net and for the long-term the influx of cars coming back to auction is clearly very good for ADESA. Now on to consolidated revenue.

Consolidated revenue was up approximately $43 million to $286 million. The primary drivers of the increase were organic growth at ARS, both in terms of higher sold volumes and higher revenue per vehicle sold, contributions from the Washington, D.C. and Sarasota wholesale acquisitions, and Charlotte, Ohio Salvage and Scranton salvage auctions, organic growth at at AFC, which had both higher revenue per loan transaction and more loan transactions. The remainder is due to favorable foreign exchange.

Now on to quarterly operating performance. As we've discussed before, volumes in pricing at both the auctions and AFC, combined with auction conversion rates typically drive ADESA's consolidated operating margins. Both our segments saw higher average vehicle prices year-over-year. Auction conversion rates, as Dave mentioned, were down nearly 300 basis points versus last year's record 69%. Consolidated operating dollar profits for the quarter were about flat, but operating margins declined about 420 basis points to 22.3%.

As Dave mentioned earlier, one driver of first quarter performance is that we have begun to recognize costs related to ADESA's investment on multiple fronts to better position the Company for its future growth and service capabilities. A number of these initiatives are now under their spend phase with benefits to follow over time. Our investment ran current with the first quarter strong ramp up in inbound vehicles at our auctions, and the margins reflect the impact of both of these factors. Before we go into the specifics of our operating performance, I want to isolate the impact of two accounting items. As disclosed in our press release, ADESA booked approximately $2.7 million into the auction segment's SG&A to rectify unreconciled balance sheet differences, which had been concealed by a former employee at our Kitchener auction.

This expense alone accounted for about 20%, or 85 basis points, of the decline in consolidated margins. Its EPS impact was $0.02 a share. Our press release also mentioned that the incremental impact of adopting FAS 123R was slightly less than $1 million. This expense is also recorded into SG&A and represents another 10% of the margin decline. Collectively, these two items represented 130 basis points, or about 30% of the total decline in operating margins.

With with respect to other operating drivers, the primary contributors to margin performance were handling costs for the 41,000 additional entered vehicles, mixed driven wholesale reconditioning expenses, significantly higher transportation revenue, the impact of acquisitions, and a modest mixed shift at our impact operations. Relative to transportation and other ancillary services it's important to note that the margin pressure we experienced here was volume driven.

While acquisitions were dilutive to overall margins versus last year, we were pleased to see that gross margins at our newly acquired auctions have begun to improve versus the prior quarter. In total, our consolidated operating expenses rose to $221.9 million versus $178.5 million last year. This increase was mostly at our Auction and Related Services segment and I'll provide some more color later.

Consolidated SG&A for the quarter was $66.9 million versus $54.8 million in last year's first quarter. So to arrive at an apples-to-apples comparison to last year, please remember that SG&A includes $3.7 million for the aforementioned FAS 123R and Kitchener charges. Of the remaining increase, a significant piece is employee salary and benefit related. Key drivers here are additional expenses from acquisitions, normal salary and benefit increases due to inflation, and expenses related to our investment in the five key initiatives Dave previewed earlier.

Finally, about 10% of the increase is FX related and another 10% is for higher travel and marketing costs. In summary, while consolidated revenues benefited from our growth and four revenue drivers, volume driven higher direct and indirect expenses and lower conversion rates led to a decline in operating margins. A quick comment on quarterly interest expense. Consolidated interest expense for the quarter was down $1.1 million to $7 million versus $8.1 million last year.

Similar to last quarter, the benefits of deleveraging and amending our credit facility more than offset 150 basis points of Fed interest rate bumps. Our weighted average effective interest rate for the quarter was 6.3% versus 6.1% in the year ago quarter. Taxes. As expected, our quarterly effective tax rate of 37.8% was down versus last year's comparable rate of 39.1% and was consistent with our effective tax rate expectations for the year.

Now on to EBITDA. Our consolidated EBITDA increased by $1.3 million. Excluding previously discussed $1 million FAS 123 R and $2.7 million Kitchener charge, EBITDA would have been up about $5 million or 7%.

I would now like to take you through our business segments' quarterly financial performance. First, our ARS or auction segment. ARS revenue was up double digits to $250 million versus $214 million in the year ago period. The majority of this growth was organic, driven by higher volumes, both entered and sold and surprisingly higher revenue per vehicle sold. About 20% of the growth was acquisition related and the remainder was attributable to FX.

A couple of comments on our organic growth. First, our team is encouraged by the uptick in both our vehicle volumes entered, as well as our organic vehicle volumes sold, which was our first positive sold volume comp since 2004. Second, while the growth in revenue per vehicle was strong, it's important to bear in mind, as we've discussed before, that revenue growth includes a mix of core auction fees, as well as fees for lower and in some cases zero margin ancillary services.

First, a high level view of our year-over-year operating performance at our auctions. Operating profits decreased on an absolute basis about $4 million or 500 basis points to $48.1 million versus a very strong comparable in the first quarter of 2005. Previously referenced accounting items accounted for $3.5 million of the $4 million segment drop. We had previously discussed that higher CapEx in 2005 would increase D&A in 2006, which it did in the auctions by $1.8 million. All told, the cumulative impact of the accounting items and higher D&A on our auctions' operating profit exceeded $5 million.

With respect to cost of services, we reported a $28.5 million increase in cost of services on a $36.7 million revenue increase. This increase was primarily volume and mix as we handled over 40,000 incremental vehicles and provided higher levels of transportation, reconditioning and other ancillary services. Transportation expense was again negatively impacted by higher fuel prices versus the prior year. However, the overall driver here was higher level of ancillary services within our institutional volumes.

Similar to last quarter, we were also impacted by a slight change in mix in our impact business. When combined with the accounting items, these factors more than offset the leverage benefits of higher sold vehicle volumes. Our Auctions' SG&A line reflects the previously discussed accounting items, increased wage and incentive compensation expense, IT investment, and less favorable medical self insurance experience.

Now, on to AFC. Our AFC business performed well as operating profits increased 26% on an 21% increase in revenues. Revenues rose over $6 million, primarily due to both higher revenue per loan transaction and increased loan transactions. The $21 increase mostly resulted from an increase in the average value of the used vehicles being floored and higher interest rates. Additionally contributing to the increase in higher revenue per loan transaction was an increase in average portfolio duration, as well as a decrease in provision for loan losses.

Quarter one operating margin increased by over 200 basis points as increases in operating revenues more than offset higher direct and indirect expenses associated with the added cost of processing more transactions. As of quarter end, AFC's loan portfolio stood at approximately $780 million and, consistent with the last few years, over 95% of the portfolio was current. Appendix 1 contains a summary of a variety of statistics from both of 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.

Some brief comments on our balance sheet. Our balance sheet remains strong and liquid as highlighted on slide 17. Debt to capital now stands at approximately 27% versus 28% at year end. Our quarter end cash balance of $246 million contains about $7 million in restricted funds and about $178 million unavailable due to bank clearings. As of March 31, cash available for growth initiatives, which is what we call economic cash, stood at about $61 million. As in prior quarters, we were able to grow earnings, invest and delever during the quarter.

Slide 18 walks you through the major cash flow items for the quarter and fiscal year. Our cash position and generation for the quarter enabled us to invest $42.1 million for the acquisitions of Northeast Penn and Sarasota and to acquire a 15% stake in Finance Express, reinvest $6 million into our businesses, and pay our customary $7 million common stock dividend. On share count, at quarter end, we had 89.8 million shares outstanding and 90.2 weighted average diluted shares outstanding. The comparable numbers for the year ago quarter were 90.8 million and 91.2 million respectively.

Now on to our outlook. ADESA gave its 2006 outlook on our February earnings call. ADESA continues to expect 2006 diluted earnings per share from continuing operations to be approximately $1.47 to $1.55 per share. Excluding approximately $0.03 per diluted share resulting from the adoption of FAS 123R, the Company expects its 2006 diluted earnings per share from continuing operations to be approximately $1.50 to $1.58 per share.

Now, before we turn this call over for questions, we wanted to take this opportunity to enhance our investors' understanding of the the relationship between AFC and ADESA's auctions, as well as address some questions we've been receiving regarding year-over-year changes, in both our trade and finance receivables and their associated reserves.

We're on to slide 21 now. Many of you are aware that AFC facilitates the sale of vehicles at wholesale auctions across North America including ADESA's auctions. In order to put it in perspective, about one in 10 cars, or slightly less than 11%, sold at our wholesale auctions are financed on an arms length basis by AFC. When viewed from the AFC perspective, about 30% of its business comes from ADESA source transaction, and the remainder from a wide variety of third parties. Our wholesale auctions report revenue on a net or fee basis.

One of the services we provide to consigners and buyers is that we handle and assume the risk for the vehicle receivables and payables. Accordingly, our auction trade receivables, which are shown on the auction's balance sheet, may seem disproportionate to our auction revenue, since the receivables include not only our fees, but the value of the vehicle. The auction AR balance is highly dependent upon the day of the week in which the financial period closes. In general, auction AR, are collected within five business days.

In a similar vein, AFC's revenue is reported on a net basis and primarily reflects fees and interest income. AFC's finance receivables also include the underlying value of the vehicles being financed. AFC finances its receivables using both its own balance sheet, as well as the securitization conduit. AFC has utilized the same bank securitization conduit since 1996.

The performance of both the trade receivables at our auctions and the finance receivables managed by AFC, whether on balance sheet or in their conduit, continues to be excellent. Growth in both businesses has not diminished the quality of either's receivables. AFC's portfolio, as I mentioned before, remains well over 95% current. Both our segments have rigorous [formulaicly] driven methodologies for establishing their respective loss reserves. These reserves are very closely monitored and regularly reviewed by management, our external auditors, and the audit committee.

Lastly, it's important to note that the 2005 decline in our trade AR allowance is due to the write-off of prior year receivables for which the Company was pursuing legal collection efforts. The expenses related to these 2005 write-offs have been recognized in years prior to 2005, when the loan loss provision related to these accounts was established.

I hope that these comments have helped to enhance your understanding, and operator we would now like to turn this call over for questions and understanding, or questions and answers. Following the Q&A, Dave will have a few brief closing comments.

Thank you. The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] And we'll pause for a moment to assemble the queue. We'll take our first question from John Murphy with Merrill Lynch.

Good morning, guys.

Good morning, John.

You know, if I'm thinking about the operating leverage going forward, I know there was a lot of moving parts here in the first quarter, but as we see volumes increasing through the year, really sort of as we expect and I think you guys do, too, also, is there going to be more operating leverage in the system, or are we going to see sort of these offsets through the year, or will we see margin expansion through the year and maybe even in the out years?

Well, we don't given guidance on that stuff, John, as you know. But I'll say this, that the operating leverage that we have spoke to many people about inherent in this business model is still there. I'll calculate some numbers for you that are hypothetical, but you can do the math yourself based on the information we've given you. We indicated that the vehicles entered increased 6% and you know what the base is. You can go back and calculate what that number is. We've also told what you the percent of vehicles sold were, which was 3%.

If you could did the math incrementally on those two numbers and knowing that they're across the board, assume that we had sold 60% of those incremental cars and do the math on what we've told you the operational leverage was, I think you'd see a profound different result in the profitability of this Company. And that's really what we expect, everything else being equal or constant is, as the economists would say, on a going forward basis. This was a very strange situation where you would see this kind of a change across the board on these conversions affecting our shops. So we wouldn't expect -- you know, we may see this kind of stuff from time to time, John, maybe as the short answer.

Okay.

But longer term we don't expect this to be permanent.

Okay. I just wanted to be sure of that. Then on internal controls and taking a step back and thinking about Kitchener, as you guys build your IT backbone, will that help keep track of these kinds of items more clearly in the future, and I'm just wondering if there's anymore, sort of potholes, hanging out there that are similar to this?

Certainly controls like IT and systems and centralization says and more random audit checks, et cetera, certainly will help and we've seen a lot of benefit from a lot of that activity over the last 10 years that we've been involved in this. But this is a people business. And you know, I'm not going to say that this will never happen again in this business. It's a very decentralized Company with many locations, where we're managing a lot of assets flowing through our books, and I'm not saying please expect this in our results on an annual basis, but I am suggesting that we can have the best systems and the best controls in the world but, again, this is a people business and with collusion and other things that go on in this world, unfortunately, these things may happen from time to time.

One of the keys is, John, we found this ourselves through our processes and we fully are pursuing the remediation of the situation.

We are centralizing and training the individuals that are in control positions. And if there's lessons to be learned in this situation, because if you were to look at all the controllers we have at 156 branches and auction locations, doing a good job of training and centralizing these people, I think, is probably more critical than systems.

If we think about the IT effort that you're undergoing or have been for a little while here, I mean, how far along are you in getting your auctions on a common system or common backbone at this point? You made some significant progress there. I'm curious about is it 50%, 60%, 70%?

The auctions today, John, do operate on a common operating platform, which is our AMS system. I think our real focus is to look at our overall operating environment because there are other systems which interact with AMS. And to optimize the way that we flow information both book the management to run the business, but of equal or greater importance back to our buyers as well as our consigners so they can monitor the performance and the status of their vehicles as they go through the redistribution process. So it's really not necessarily just focused on a core operating system that runs an auction. It's the IT structure that impacts the overall redistribution chain that we're focused on.

Okay. And if we think about valuations on auctions right now, just wondering what you're seeing out there in the market, if there's been a marked change from where auction valuations have been during the course of 2005 up, down or the same, maybe just directionally?

I don't think we can say we've seen any significant changes since you mentioned 2005 in valuation.

Okay. Then just one last question on the fee increases, or the revenue per unit increase in ARS. How much of that was because of fee increases and how much of it was because of further penetration of ancillary services? I mean, were fees up 2%, 3%, 5% in the quarter?

The vast majority of the dollar increase, John, was in the ancillary services. Taken as a whole, it was probably two-thirds, one-third, that's a pretty good ballpark.

The other piece, John, you have to remember, is that used vehicle values were up about 5% to 6%, so depending on how to brackets fall, that can have nice impact, as well.

Okay. And as far as the increases in the revenue per transaction at AFC, you know, we should expect to see similar increases through the course of the year?

A lot is going to depend, John, on wholesale. We're going to see wholesale vehicle prices are a key component there. We'll see what the Fed does or does not do with interest rates. It would appear that they are signaling at least they're going into a stabilization mode. Those are two key components we would watch to determine where they're going to go with revenue per loan transaction.

Great. Thanks, a lot guys.

We'll take our next question from Matthew Nemer from Thomas Weisel.

Good morning, everyone.

Good morning, Matt.

My first question is, Cam, you alluded to several initiatives that are still in spend phase and I'm just wondering if you could give us kind of a quick update of the two or three biggest, and kind of a timetable for when that spending starts to lift and we see the payoff?

I'll give you some perspective. I'm sure Dave will chime in, as well. I would say the dealer consignment initiative is in a spend phase and we're starting to see a little bit of traction and that relates to our investment, as Dave mentioned salesforce.com, training, we've spent more time on the road with our customers and in training, so dealer consignment is clearly in a spend phase now. But we would expect to continue to begin to reap benefits going forward from dealer consignment.

Operational effectiveness, or operational improvement, that we recently mentioned is still primarily in a spend phase. The team is being assembled. They're identifying their objectives. So they're in a spend phase at this point in time. With respect to leadership development or people development, that's a spend phase and the benefits there are less easily quantified or tangible.

In terms of acquisitions or growth, it's called the growth initiatives, acquisitions fall under there, we are clearly investing in non-organic growth, as well as investments in very interesting plays like Finance Express, and there are costs associated with executing those programs, as well. It's just not related to the acquisitions themselves. I would say those are the key areas, and, Dave, I don't know if you have anything more to add?

I don't want to be redundant, but certainly in the investment area, the equation is cumulative as you know. You make one investment and it may be $15 million or $20 million and you get a 6% spread on that. Taking to it the bottom line with a big denominator you might see the results, but cumulatively if we invest $100 million doing the math, on a 6% spread if that's what it is, you can see the profound impact of that. So hopefully we're beginning to see the fruits of those investments as we speak and the magnitude would be a function of how fast you can deploy that capital.

Technology is going to take some time to the previous question that was asked on this phone. It takes time to replace operating systems and it takes some time to invest in different technology and E business related technology going forward. To put a timetable to that, I -- it's pretty difficult to do and I'm not going to say anything that would put our new CIO in a bad position. I think it's going to be extremely helpful for all of us at the analyst meeting and hopefully within the next six months to address those questions.

On operational improvement and organizational efficiencies, we would expect that that would be a break even this year in terms of the additional resources we're putting against it, and the profound benefits of those types of initiatives we should expect to see next year and certainly the subsequent years. The dealer consignment focus, as Cam mentioned, we're beginning to invest a lot in training today and again the bigger benefit from that might appear next year and it may be a break even this year. And certainly the investment in our people is ongoing and hopefully we get the fruits of that investment immediately.

Okay. That's really helpful. And then my next question is on the transportation cost side, are you able to pass that on, can you assess a kind of a one-time fuel price fee or anything like that?

No, I mean, Matt, this is Brad Todd. In some respects we've had opportunities in the past to pass some transportation expense on to the customers from the surcharge, but not all across the board. Period.

And Matt, this is Paul, if you look at that, even if we did pass it on it's a very low margin business so it wouldn't really have had a profound effect on operating margins. It would have just eased some of the pain of the transportation costs we have.

Okay. And then lastly, on the change in the AFC loss provision, can you provide a little more detail on that?

You know, AFC -- I don't want to get in into a long discussion but would be happy to take you through it offline. AFC's loan loss provision is [formulaicly] driven. There are two factors that go into the calculation of the provision. The main driver there, Matt, is in the face of significant growth, the overall credit quality of AFC's portfolio continues to improve. So when you apply the two formulaic factors against it, against the growth, it comes out to -

Matt, this is Brad Todd on top of it as well, and just to add to what Cam is saying, the formulaic is based upon an agent and a static pool analysis that is similar to companies like AFC, and that model has been in place for the last six plus years, six or seven years, and it's been consistently used. Again, the management, along with outside, have continued to refine and view that every single year and make sure that it's consistent with not only the practices that should be in place, but also consistently driven, you know, throughout so that the actual formula itself is -- I was going to say consistent again.

It reflects the performance of the portfolio and it's consistently applied. That's about all we care to go into it on the call.

Okay. But do you disclose the actual percentage, the actual assumptions that you use in the formula or -- in your 10-Q?

No, we do not disclose those.

You don't, okay. Thanks very much.

We'll take our next question from Craig Kennison at Robert W. Baird.

Good morning.

Hi, Greg.

Could you discuss the motivation behind the President change and whether you expect any other additions to the management team?

Certainly. I don't think it's a change the presidency, other than myself no longer having that -- not just that title, but that role as President of an operating unit. We didn't have -- I guess I was in a dual role as the President, CEO of the Company. But I was also in a dual role as it related to being the effective COO or President of all operations, including Salvage and AFC. This is something that this Company desperately needed to have to bring this Company together as one organization and be able to leverage all of the resources we have across all business units, not just functionally, but strategically, too, as we go forward to focus on growth in every aspect of all our businesses.

So we needed the experienced leadership skill to be focused on the operations, the efficiencies in these initiatives we speak of, and at the same time by doing that, then I can focus solely on acquisitions and strategic development and division for the Company, and also have more time to spend with you folks, if that's good or bad, and with key customers and certainly in the employees in the field which a CEO should be doing.

So I look at it as something that we desperately needed for the last six months, and we took our time assessing how we do things like this and I think that we were criticized somewhat when we took so long to fill the CIO role, as well, but at the end of the day we ended up with a great individual. We made sure we took the time that was necessary to make sure that we get the right individual in that key position and we did so, and the same is true here.

Thank you, and you mentioned the CIO, Ron Beaver, could you have him address his priorities, as well? Thank you.

He's not here today. And he's only been on the ground for less than a month and he'll be in a position to do so in July and shortly thereafter. I encourage you to come to the analyst day, however, and I think he'll give you some highlights.

Thanks, again.

Thanks, Craig.

We'll take our next question from Gary Prestopino from Barrington Research.

Good morning, everyone.

Good morning, Gary.

Could you talk about LiveBlock this quarter, how many vehicles did you offer over it and what was the conversion rate?

Getting that stat. You know, Gary, the number -- this is John. The number of vehicles offered was up 30%. The number of vehicles sold was up almost -- sold on line was up almost 40%.

From last year?

You got it. From Q1 '05.

Okay. Can you give me a total, a number or you don't disclose that?

We have broken it out annually. I think last year we told you that the number of vehicles offered online was well over a million and the clip that Q1 '06 is on, it's a real good guide to surpass that. I don't want to guess what percent over, but it's a real good guide.

Gary, if you look at it and you wanted to segment that a little bit, the vehicles sold in our salvage auctions online is approaching near a quarter of the vehicles, so it's had very strong traction in our salvage business, as well as our whole car business.

Can you talk about what you're seeing on a conversion ratio? I know last year you said it was 80%. Did it kick up or is it sticking around that number? Just for the wholesale side.

I'm looking that up. Do have you another question while I research it?

Maybe, is that a question we could get back to you on, Gary?

That's fine. The other question deals with -- it looks like your vehicles financed was up less than 1%, whereas it had been mid-single digits prior? Is there any issues with this new competitor coming in as far as, you know, getting these vehicles to sign up with you for financing, or are you just being a lot more selective in what you're doing here?

I think if you look at AFC, AFC has taken some time to restaff, retrain and their guys are back out, aggressively in the market and have been over the last five to six months, combating the new entrant in the market, Gary. You've seen modest growth there. We've also seen penetration per dealer going up, which is one -- you know, number of vehicles financed per dealer, which is one of the key drivers for AFC. And if you'll recall, we also had the CNAC situation, which we discussed on a prior call, which is where we took individual units which were accounted for individually and we now report them as one transaction. So that probably impacted it a little bit, as well. Maybe about one click or so.

Okay. And then what is your estimate for the D&A is going to be this year?

I think what we told you it was going to be pretty much in line with CapEx spending.

$48 million, plus or minus.

Okay.

Gary, we count that conversion percent and consistent with prior quarters. The conversion percent for vehicles offered on LiveBlock lanes was north of 80%.

Okay. Thank you.

We'll take our next question from [Dex Salasky] at Gates Capital Management.

I was wondering, the $42 million that you had mentioned as far as spending, does that include capital expenditures?

No.

No. Our capital expenditures during the quarter, [Dex], were about $6 million.

$6 million. What was the cash flow from operations?

Hang on just a second. I don't know -- if you look at net cash from operating activities, [Dex], it would be about $1.5 million after investment.

But you'd have to adjust that you.

You clearly have to adjust that.

[INAUDIBLE] and-a-half after CapEx and after the $42 million?

No, pure operating. And we'd be happy to walk you through the components. In the first quarter have you the ramp up in receivables and payables, as well, due to the timing of the quarter cut-off.

[Dex], I can call you back after this call and kind of walk you through it, if you'd like.

Okay. And then are the volume trends continuing into the current quarter?

We don't provide interim quarterly stats on a monthly basis, [Dex]. I would tell you that we have continued to see a market where conversion rates have moderated relative to the -- there's some seasonal moderation in there, as well, but more normalized conversion rates.

Okay. So you're talking about higher conversion rates versus the 306 quarter?

I'm just saying they're moderating and they're approaching their more historical five-year trend lines.

Okay. And then -- let's see. What else did I have? Did you repurchase any shares in the quarter?

We did not.

Okay. And the status of your share repurchase program, do you have -- I don't see that you have any authorized.

We don't have any plans for a share repurchase at this time.

Okay. And then last question is the pipeline of acquisitions, can you discuss that at all?

I would characterize the acquisition pipeline as healthy.

Thanks a lot.

Thanks.

[OPERATOR INSTRUCTIONS] We'll take our next question from [Corey McCallum] at SunTrust Robinson Humphrey.

Good morning, guys. This is [Corey McCallum] for David Magee. Congratulations on your continued success. I was hoping that you could tell me how much of a concern would a return of new car dealer incentives be on the improving environment and the volume of cars coming to auction for the remainder of 2006?

I think it's difficult to predict exactly what that would be, [Corey]. What we've historically seen is it takes the wholesale market some time to adjust, depending on what the magnitude of the incentives are, how they're introduced, what classes of vehicles to which their applicable. But we'd have to gauge what those incentive programs look like, but the market typically adjusts within a relatively short period of time. So that's -- we'd have to see what they come out with.

And the dysfunction that those incentives have created in the past seems to be almost baked into the business model on a going forward basis. So there may be some effects from time to time but hopefully not as material as it's been in the past.

So you're saying short-term effects could be seen, but those would come back to you on the back end?

Well, it should. It creates a trade. If there's an incentive, the incentive is there for the sole purpose of generating a sale which generates a trade. And whether that trade makes its way in terms of the percentage of the trades coming in, find their way to an auction, if that model is changed significantly is really the question. We have seen situations where the franchise dealer is -- because of the incentives has gotten into the used car business much more in the past and sometimes that's slowed things down for us with respect to the volumes coming to the auction relative or compared to the independent dealer.

But that being said, I think that the market is fully adjusted for that and we'll see if they continue to do that more of a -- I think a general -- I don't know how to say this, reaction to it so that it won't be nearly as significant as it was, especially back in '01 when it began and I think what is a good indicator for me is that beginning of '03, even though the incentives had begun or continued, we've started to see separation between the prices in used and new vehicles. So I think the business model has absorbed it more so than in the past.

Okay. Thank you.

Okay. There appears there are no further questions at this time. I would like to turn the call back over to Mr. Gartzke for any additional or closing remarks.

Thanks everyone for joining us again on the call. In closing, I would just like you to remember several things that are highlights about what we've seen this first quarter. First being that the volumes are returning and the vehicles entered were extremely strong. The vehicles sold were not, relative to the vehicles entered, what we would like to see but it was still 3% up relative to the previous couple of years that you've been with us. We're extremely encouraged by that.

We're also encouraged by the acceleration of our capital deployment. It's beginning to accelerate, and, hopefully, we'll be able to demonstrate the success that we've all been hoping to see as it relates to that. And third, certainly very important, the management team of this organization is getting much, much stronger. I'd like to remind you that we'll be participating in a number of investor relation events over the next couple of months, including the Baird Growth Stock Conference next week in Chicago.

Our annual analyst day event here in Indy on May 31, and we're seeing a real high turnout for that so we're really excited about that. And June 1 -- I'm sorry, the KeyBanc Conference in Boston on June 6.

So if you need any details related to any of those events, please contact Jon and maybe one final note, I'll have a little bit more time to do more traveling to visit you people individually, too, so I look forward to that. Hope to see all of you at the upcoming events, especially here in Indy, and thank you for joining us on our call today.

Thank you. That does conclude today's ADESA conference call. You may disconnect at this time