Openlane Inc (KAR) 2006 Q2 法說會逐字稿

Good day and welcome to the ADESA Incorporated second quarter 2006 earnings conference call. Today's conference is being recorded. For opening remarks and introductions I would now like to turn the conference over to Jonathan Peisner, please go ahead, sir.

Thanks and good morning everyone. And thanks for joining us today on ADESA's second quarter 2006 earnings conference call. Joining me on today's call are Dave Gartzke, our Chairman and CEO; A.R. Sales, President and COO; and Tim Clayton, CFO. Also with us today are Cam Hitchcock, President of DSG; Chuck Tapp, EVP of Sales and Marketing; and Paul Lips, Senior Vice President, 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, future volume increases and the Company's competitive position 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 slides that are now available on our website 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 are user controlled and that can be viewed under the IR section of our website along with a 2006 and historical quarterly segment income statements and statistics. We posted our slides earlier this morning to our website ADESAinc.com and hopefully you have already had a chance to review them.

Following today's call, the webcast replay and slides along with the telephone replay will also be available on our website. 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 slides. I'd now like to turn this conference call over to our Chairman and CEO, David Gartzke.

Thanks, John, and good morning everyone. Today, ADESA reported revenue of of 276 million for the second quarter, which was a record for our second quarter bringing us to a corresponding record revenue level of 561 million for the year. As in the first quarter, the record revenue is a result of simply more cars coming to the auction which is a very positive trend and it's consistent with our internal expectations. The second quarter also saw a continuation of lower year-over-year conversion rates. This hurt the flow through of the revenue growth to our bottom line. Simply stated, missing the auction block operating leverage adversely affects the bottom line.

DSG continued it's strong performance seeing nice growth in volume of loan transactions and revenue per transaction. Overall, as a result of the weak conversion rate environment our net results were flat with the prior year at $0.40 per share. In our opinion, the macroconditions that are affecting the retail used car sales thus conversions include the general economic concerns such as unrest overseas, interest rates, and fuel prices.

Retail used car sales for the six months of '06 are down 4 % from last year. This represents the second steepest decline in the past seven years. I'm pleased with the way our auction services group responded to this environment, one that we do not expect to continue into '07 simply because the prices are moderating and the inventories especially on the institutional cars are up at our lot, and eventually they have to sell. Looking further down the road, we remain encouraged by the improvements in cars entered overall. Lease penetration rates are on the rise moving up from 24.6% of new vehicle sales from 19.3% back in February of '04 which is a big deal. Fleet sales are up 3.8% year-to-date and our dealer initiatives are proving effective. We have increased sales training that we're committing a lot of capital and energy and resources towards, and we're also utilizing tools like salesforce.com. These trends position us very well for the future as the supply of used vehicles coming to auction should continue to grow.

Also, OEM inventories are up versus year ago levels at our auctions, and these cars as I've said before will eventually sell. We saw this in the first quarter of '04. Our business fundamentals are also very sound. Our operating performance as measured by EBITDA was very strong. We continued to generate a significant amount of cash from our business model. Another very important development in the quarter was our management realignment which has also allowed me to focus more on strategic initiatives especially deployment of capital. During this quarter, A.R. Sales was brought in as our COO to oversee all of our operations; Brad Todd became President of our Auction Services Group to focus on the growth and alignment of our largest business unit which includes Canada, impact in our division; Cam Hitchcock was moved from CFO to head our Dealer Services Group which includes AFC; and Ron Beaver came in from a division of United Technology to lead our IT department and E-business. Recently, I asked Tim Clayton to step in as our interim CFO to allow Cam to focus on DSG. Tim and I have worked together for over 15 years and have a long history with ADESA as well. He has been able to step into this role without skipping a beat and will help us execute our acquisition strategy as well. Tim, I'm going to turn it over to you for more details of our financial results.

Thanks, Dave. and good morning, everyone. Let me say it's a pleasure to be working with ADESA again and I look forward to helping out in the next several months. Let me provide a little more commentary on the quarterly results before I turn it back over to A.R. and Dave for some operational comments.

On a consolidated basis, ADESA reported revenue of $276 million for the quarter ended June 30, 2006, which represents a $29 million increase over the second quarter of 2005 or a 12% growth in revenue. This was due to a number of increases including auction ancillary services which includes reconditioning, body shop, and transportation services that we provide, selective price increases at our auctions, increases in loan transactions and revenue per loan transaction at our dealer services group, acquisitions and changes in foreign currency exchange rates. While revenues grew nicely in the quarter, a significant drop in conversion rates driven by lower consumer demand resulted in increases to our cost structure that did not translate into additional revenue. Cars entered increased by over 50,000 vehicles in the quarter versus the second quarter of last year. Our conversion rate this quarter was 58% compared with 62% last year, and 66% in the first quarter of this fiscal year. In fact, conversion rates dropped more in the second quarter this year as compared to the prior year than in the first quarter.

Overall, cost of services grew by 22.6 million in the quarter, over the second quarter of '05 on a consolidated basis. During the quarter we incurred costs to handle more cars coming to auction and also incurred costs associated with cars that did not sell. This resulted in an increase in our costs of services by more than our growth in revenue. Other factors that affected our cost of services include transportation costs due to both more cars coming to auction and increasing fuel prices, costs associated with increases in shop services and the effect of foreign currency changes. Normal compensation adjustments were also a component of our cost increases.

This is one point of reference, it should be noted our fuel costs alone increased by almost $800,000 in this quarter over the second quarter of last year. On a consolidated basis, selling, general, and administrative expenses increased 13.7% or $7.7 million due to normal increases in compensation, the inclusion of FAS 123 R costs of about 800,000, newly acquired auctions and incremental spending on IT and Human Resource initiatives. It should also be noted that non-recurring employee hiring and separation related costs, some of which were previously described in previous announcements were recorded in the quarter and adversely affected operating results by about $0.01 per share. If the unusual or new items that recorded in the quarter were factored out of SG&A, our SG&A growth would have been 10.3% versus the 13.7% reported.

Consolidated operating profit declined by 1.9 million or 3% as improvements at dealer services offset conversion related and volume driven cost increases at our auction services. Interest expense dropped to 7.1 million, a decline of 1.4 million. This is due to an $80 million decrease in our outstanding debt balances since last year. Income taxes also declined as compared to last year by $1.1 million as our effective tax rate dropped by about 100 basis points. This rate is consistent with the first quarter of the year. Net income was 36.1 million in the second quarter of $0.40 per diluted share, the same as the second quarter of last year.

Now turning to our individual business units briefly, revenue at the auction services group increased by $25.4 million or 12%. The primary drivers were ancillary revenue from shop and transportation services, fee increases, in part related to the increase in the value of vehicles being sold, acquisitions and currency changes. Dave mentioned that we lost auction block leverage as a result of the drop in conversion rates. This relates to the higher margin auction fee revenue that was lost because a vehicle did not sell as across the block. This loss in revenue would have increased our top line and flowed almost dollar for dollar to our operating profit. We estimate that the effect of the lower conversion rates on our revenue and operating profit was approximately 5 to $6 million in the quarter.

cost of services increased by 21.1 million as a result of costs associated with providing shop and transportation services, including fuel costs, Costs of handling more than 50,000 more cars than in the prior year and currency changes. SG&A costs increased by 6.2 million due to normal compensation adjustments, newly acquired auctions and additional IT spending. Some of this increase is also related to increases in cars entered as we incur incremental costs to target and process cars into the auction. In addition, incremental stock based compensation at the auction group was about $0.5 million in the quarter. The separation related costs that I spoke of earlier were recorded at auction services group.

Operating profits at auction services decreased 2.9 million or nearly 6%. Strong increases in cars entered including significant increases in number of institutional vehicles caused a strong increase in lower margin ancillary service revenue. This coupled with additional handling costs as a result of the increase in vehicles entered and the lower conversion rate cause the overall operating profit margin to decrease to 20% from 23%.

Turning to the dealer services group, we saw continued strong growth in loan transactions and revenue per loan transaction causing revenue to increase 12% in the quarter. This revenue growth was also due in part to increases in vehicle values, interest rate increases, and an increase in the average loan life. Offset in these items was an increase in our provision for loan losses. Operating costs increased about 14% as we added people to support the ongoing growth of this business. Operating profit increased to 22 million from 19.7 million a year ago, an increase of 2.3 million or 11.7%. Operating profit margin decreased slightly to 60.8%.

Other important financial metrics as of June 30, include--EBITDA for the quarter was 76.2 million versus 77.6 million last year. After Considering FAS 123 costs, EBITDA was down 0.6 million or less than 1%. Cash at the end of the quarter was 217 million of which 57 million was available for our use. Debt including current maturities was 417 million. We had 197 million of availability on our revolving credit facility and our debt to capital ratio stood at a strong 26.3%. The Company continues to see strong cash flow fundamentals and is well positioned for future profitable growth. Accordingly we are maintaining the guidance we provided in May with the expectation that earnings per share for 2006 will be in the range of $1.47 to $1.55 per diluted share. Again, it's good to be back at ADESA working with Dave and the rest of the team and I look forward to talking to all of you in the near future. With that, Dave, I'll turn it back over to you and A.R..

Thanks, Tim. I'm going to provide a brief update on efforts on our strategic initiatives and then A.R. will talk briefly about the operational developments. On the first item of our initiatives, that being related to growth on the organic front, we are actively working to expand our facilities to support the additional growth in volume in growth markets. Examples are Kansas city which I've mentioned to many of you that attended our analyst date in Indianapolis, we have the necessary approvals to go forward with that project, construction is scheduled to begin this fall. The construction time will range between 9 to 12 months.

This facility, because of the value of the real estate that we have, will result in a net investment of about $5 million and will allow us to increase our capability in a new facility from 30 to 40,000 vehicles. We're looking at Dallas and Phoenix as other opportunities to relocate and expand our capability. We're close to securing land in these new markets In Toronto, we're relocating and expanding one of our largest salvage facilities. On the acquisition front, with Tim and A.R. on board, we've realigned our responsibilities internally to better enable us to focus on processing the pipeline faster. The pipeline is strong and it's improving and that's really all we can say at this time.

Technology. Ron and A.R. have identified a number of opportunities for area of investments which will significantly improve our revenue opportunities, improve our customer satisfaction, and lower our operating expenses. We will be moving on these initiatives and would be expect to see results as early as 2007. Operational excellence, I'm going to defer comments to A.R..

Last, but most important, our people. I believe our employees are our biggest asset, and we are committed to supporting them with technology, training, and development opportunities. I'm pleased to see the positive developments that have occurred over the past few months as we're increasingly working together to achieve our goals and I'm very proud of the great job our people all around the Company are doing to provide outstanding service to our customers every day. We are committed to building on this foundation. Now I'm going to turn it over to A.R. to discuss more specifically some of the operational developments over the past few months. A.R.?

Thanks, Dave. As Dave mentioned, we have been undergoing a transformation in our operating groups and I'm pleased to report that over the last quarter, we've made significant progress in getting our operating groups aligned. We're seeing much benefit from having a single point of leadership for the auction services group and for the dealer services group. It's really been very gratifying to see the kind of coordinated approach that we're beginning to see, both within the auction services group and between the auction services group and dealer services group. We're really seeing the benefits and have had several instances where collaboration that may have been tenuous in the past has actually given us some pretty good results. One specific example, we were able to get Adoban and our Montreal operation to auction our operation to work together and that will result in enhanced volumes up there.

In addition to that, there is significant dialogue taking place between the salvage side of the auction business and the whole car side in terms of opportunities to leverage the whole car footprint that we have, and we continue to make progress not only in new sites that we opened but in addition to that, in terms of new volume that we are capturing from existing customers. On the sales and marketing side, I'm pleased to report that we have now pretty much completed the rollout of salesforce.com. We're seeing a lot of benefits from that. Not only in terms of the things that we can track, but in the context of providing a comprehensive approach between our sales and telemarketing capabilities. We will be focusing on rolling out the third component of this which will be an e-mail capability that we don't currently have that will really tie in very well with the salesforce.com so the combination of the contact database, the telemarketing capabilities that we have had, and the e-mail marketing capabilities that we will be rolling out will really give us the ability to enhance our focus on the internal drivers of conversion rate which as you know continues to be a challenge given the environment that we operate at. It will allow us to have targeted contact and when you overlay some of the capabilities that we have of the financing side with AFC, we think that those will allow us to continue to deliver value in that area to our customers.

We continue the expansion of the multi platform auction services that we have worked under the last few years. I think the comprehensive focus on our E-business efforts that Ron Beaver has brought to bear since he joined the Company have really given us much added comfort in the way that we approach our various platforms and we will be announcing some time in the third quarter some of the things that are happening on the virtual space. And then finally as Dave indicated, we continue with the rollout of our operational excellence initiatives. The first wave of the internal training for process mapping is pretty much completed. We've identified the projects that we're going to focus on in the second half, and they will be projects that look at standardization, at reduction of cycle times and ways that we can enhance our customer satisfaction. So I'm pleased to tell you that after three months on board, I'm really happy with the progress that we're making on the operating side, looking forward to the second half of 2006, and excited about our prospects in 2007.

So operator, at this point, we would like to go ahead and turn over the call for Q&A. Following the Q&A, Dave will have a few brief closing comments. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to John Murphy with Merrill Lynch.

Good morning, guys. A question on the conversion rates. I mean it looks like, clearly it was a little disappointing to us and I'm trying to understand, I understand that the used car market is weak or pricing in the used car market is weak, but it sounds like the 50,000 or so increase in units entering your auctions were predominantly institutional and typically they will convert at whatever price they can get in the market so I'm just curious what's going on there. Or if I'm correct. Maybe those were a lot of dealer cars?

Well, first of all, the increase in our volumes are about 50/50 between institutions and dealers.

Okay.

So it's not predominantly institution vehicles, but we did see as we said an increase in our inventories on our lots of institutional vehicles. So some of those institution vehicles which you would expect to move didn't. For whatever reason, price points, or internal decisions within the institutions, but obviously we expect those will flush through the system here pretty shortly.

Does that lend further support potentially for the conversion rate in the third quarter as those vehicles are sitting on the lots and at some point will be passed through at a, theoretically a pretty high conversion rate?

Hi, John, this is Paul Lips. How are you?

Hi, Paul how are you?

Good. Normally the third quarter conversion rates dip from the second quarter if you look at the history to the extent that cars move through in a third quarter that didn't sell in the second quarter, there could be a little bit of a blip there but you do have the seasonality factor that will work against that.

Okay. And then just on share repurchases, were there any in the quarter? And considering where the stock is right now, is it more likely that you'll be looking at share repos than you have in the past few quarters?

No. With the transactions, like I mentioned, we do have transactions in the pipeline which I can't elaborate on. I think it's in the best interest of the Company to fund growth in acquisitions than a stock purchase or repurchase.

And there were no repurchases in the quarter.

Okay thanks and then just one last question. On the restricted cash, it looks like that was about 160 million in the quarter. Is that a decent number to be using? It looks like it's been running 160, 170 as we look forward as really cash available for acquisitions and whatever strategic actions. Is that a good number?

It's a little difficult to peg it at a certain number because so much of it does depend on timing of our month end close versus when the auctions are and also there's a -- year-end typically has a dip in those kind of numbers, so it's unfortunately, a little hard to peg a certain number there. The last two quarters, the way if you looked at it, our available cash has been roughly $60 million.

Okay.

So that may be another way to come at it.

Okay. Got you and then just one last question. Dave, you alluded in the press release to a slightly improving retail. I forget what the exact words were but a slightly improving retail market. Where are you seeing that? Was that sort of in late June or some time in July? And what's your view on where that's going to go for the second half of the year?

We look at dips like this in the market which we've had in the past as being short-term. We've lived through about six months of it now, we don't expect to continue to the end of the year. Eventually, the prices will continue to decline or equalize and these vehicles will flush. If this continued through the entire year and into next year it would be an exception to trends that we've seen in the past seven or eight years since I've been in the business and based on my conversations with people who have been in the industry longer than I, it would be an exception to them as well. So we look at this situation, maybe very similar to the incentives, when the incentives were hitting us hard and eventually over time, lots is lost -- it's effect on the pricing disequilibrium or dysfunction as caused in the marketplace as something that will eventually work it's way through the system. So we look at this as a short-term situation and things that we just live within this industry.

Great. Thank you very much guys.

We'll go next to Gary Prestopino with Barrington Research .

Good morning, everyone. How are you doing?

Good morning.

I guess I was thinking in terms of following up on the prior question. You're looking for a betterment of the macro environment on the back half of the year? Is that the key here because you've kept your guidance, yet the numbers in two seasonally strong quarters at least this quarter here have not been that good on a comparative basis. I mean what--?

Well, we're seeing the people adjust to situations. What's the first reaction to increases in prices at the pump? People don't drive as much and their decisions to purchase cars are maybe in limbo, but over time, you adjust and you begin to go back to the marketplace and make decisions to purchase vehicles and drive vehicles longer and differently and we're seeing some initial signs at least as we look at the month after the close of the quarter that are encouraging signs. And these are things that we just expect to see in this industry. Nothing more than that.

Well, that's fine but even if prices moderate, the bread and butter person that's buying these kind of used vehicles is someone that makes 50, 60,000 a year, shops at Wal-Mart and we're seeing that kind of consumer spending move down pretty precipitously here, so I'm just trying to get a handle on what's going to happen in the back half of the year especially if you got these cars at inventory and you have got to run them through your lots again. Are we looking at fairly high growth in cost of services again in Q3 and Q4 because we're not selling these cars.

Well, I think there's a couple things that we're looking at. Obviously, there's -- we do expect some moderation of the conversion rate to decrease if you will over the end of the year, but there are also some things on the cost side of the equation that we can do to mitigate some of that effect. We're also doing some things internally to better target our dealers to, hopefully to the extent we can influence conversion rates internally, doing some things to target the right people to the markets to be buyers in the lanes, all of which we think will have an effect towards the end of the year more likely in the fourth quarter.

Okay, thank you.

We'll go next to Brett Hoselton with KeyBanc Capital Markets.

Hi, good morning, gentlemen.

Good morning.

I have to confess that I'm struggling with the same issues that the prior caller is struggling with which is simply that we've had two quarters which appear to be fairly weak and now we're -- and we're looking at guidance and you're maintaining your guidance and the question is simply--Why is it that -- which implies that the back half is going to be stronger maybe than I guess I would think you originally expected possibly? Is that a misinterpretation and if it's going to be stronger then maybe, what is it that's going to drive the improvement as you move into the third and the fourth quarter?

Well, I do think that the expectation is that the end of the year might be a little bit stronger than we initially anticipated. I think frankly, there's some expectation that these cars will sell that are out there. Our third quarter last year was kind of a pretty weak third quarter. Weakest since '02, so using that a little bit as a benchmark we would see some improvement off of that. Obviously, there are other parts of the business that are doing well also in dealer services group is performing well and as I say I think there's some other internal things we can do to help manage towards that bottom line.

When you think about the other internal things, are these material and if they are, what might be some examples of some of the things that you might be able to do to help?

Hey, Gary, a couple of things internally. One is maturation of acquisitions. As you're aware, the acquisitions continue to improve in margin. Secondarily, we talked about on our year-end call back in February the strategic initiatives that the spending would be front end loaded, but the benefits from those initiatives would be back end loaded. So those are just two examples of a couple of internal things that we're doing.

And in this business, as you know, we have variable expenses. Some are controllable in the short-term and some are controllable perhaps in the longer term, so as we're dealing with the changes in this business model, we begin to make decisions on cost management that have an impact on the bottom line as well. But we look at the inventory levels of these vehicles that we have in our lots, the institutional vehicles that are sitting there and they are depreciating, once the prices adjust and the expectations adjust, like I said before, back in '04, these vehicles would come back to the auction and by our experience and history, we've seen these cars eventually make their way back and the profitability, it's timing and we've lived through these things with price dislocation many times where it's usually just a function of timing.

So as we look at the quarter and the conversion rates in the quarter if I understand your explanation correctly, I I think what you're saying is that sales prices are reasonably strong, wholesale prices are reasonably strong and that kind of scared off some of the buyers. Is that a fair assessment?

That's a fair assessment.

Thank you very much, gentlemen.

We'll go next to Brian Nagel with UBS.

Hi, good morning.

Good morning.

My question also pertains to the demand in the conversion rate. Just to maybe dig a little bit deeper. As you guys look at the demand in your lanes, can you characterize by like vehicle class if you're seeing different demand trends in the current environment are your high line vehicles selling better than say your lower end cars?

Brian, this is Chuck Tapp. Yes. We can and there are a lot of macro things going on, as you have probably seen from Tom Contos, there's higher demand for compact cars and there's lower demand for full size, used SUV's those sort of things are occurring. We don't at this time have any way to control that supply necessarily. On the conversion side for high lines, we haven't dug into that effect as much as you've asked the question, but we have definitely seen some shifting this year based on the macro conditions that Dave described earlier.

And anything -- while it seems like mostly macro factors, is there anything in the competitive environment where with you versus other auctions that could be affecting your conversion rates versus the industry?

We don't get a sense that that's the case.

Okay, thank you.

We'll go next to David Mcgee with SunTrust Robinson Humphrey.

Yes, hi, good morning. A couple questions, please. One is it's seems from a macro sense, things are changing, going south here a little bit in terms of economic activity and maybe rates come down. How do you all view that change with regard to your business in the second half of the year?

I'm sorry. You're saying with respect to the potential moderation of interest rates in the second half of the year?

Yes, and just a slowing economy, how do you all view those changes with regard to the impact on your business per se?

I guess that I'm not real familiar with the expectation of a dramatically slowing economy. I think the moderation of interest rates would probably help us from a standpoint of purchasing of the vehicle, in addition, as I say, the thing that I think is encouraging is that there are more -- we're getting more vehicles to the auction and our mix is typically a 60/40 institution in dealer kind of mix traditionally which should have a higher conversion rate. I think as some of these prices moderate we would expect to see that increase in vehicles entered benefiting us as the prices moderate from that standpoint and there's some more vehicles sold.

David, this is John. One case you can look at is if you look at our volume from '01 to '02, after 9/11 things were obviously very dire economically and otherwise, our vehicle volumes were flat, so net/net I don't know if people shifted from new to used, but you got one case book example that's in your fact book that shows you in a pretty severe recession -- actually volumes were up a few thousand, so.

John, I'd add to that. David, this is Paul Lips, that if you look back over the last ten years within this Company through various economic trends the Company has continued to perform and I think the bottom line driver for the auctions is what's happening with retail used vehicle sales because that's what drives demand for the buyers at the auction and as that picks up and they can move more inventory they will have a need to buy more inventory and that should help our conversion rates go up.

Well, thank you. And then secondly, as you look at the second half of the year, are you, I know the comparison might be somewhat easier, are you assuming a meaningful pick-up in terms of the environment in your own assumption?

I don't know if the economy is as bad or as dire as people think it is. I think it's the uncertainty of the environment that's creating the short-term grid lock which we've lived through before. Again getting back to the things that we see and the increase in the interest rates, but now the fuel prices and what's going on as I said with the unrest overseas, people are just uncertain and it's affecting the price of the cars. And people have to adjust to their expectations on the value of those vehicles. The retail vehicles have to move. They have to price adjust, and once they do, then the vehicles will be flowing through the auctions again, we expect, and we don't see the longer term economic downturn that maybe people are uncertain about, but we all live through uncertainty in our personal lives and you do in business as well and I think maybe the thing that's really interesting to me or that I find a lot of comfort in is that even in these situations, this business model performs quite well. And the vehicles are sitting on the lot and eventually they have to sell. Our cash flow characteristics are very good and once these vehicles come through, we've already reconned them especially if they're institutionals and they will have a profound impact on the bottom line. So again I come back to the conclusion that in this business, we don't live quarter by quarter or month by month. We live year-over-year and these situations are all-timing.

Thank you. And just the last question with regard to the dealer services business which is doing well, it looks like you're getting share there from other entities. Who might you be getting share from and how long can we see that persisting do you think?

Hi, David, it's Cam Hitchcock. We wouldn't want to speculate on who we're taking share from, but I'll tell you I think the growth in loan transactions even in a slower retail environment is indicative of the step up in our sales and marketing activities at the finance Company which followed the introduction of a new competitor last year. So they're out there calling aggressively and we're winning obviously more than our fair share of the business.

Great. Thank you, good luck.

We'll go next to Craig Kennison with Robert W. Baird.

Good morning. First question just has to do with the salvage market. Could you talk about organic volume in that market?

I'm sorry. Organic volume you mean in terms of growth in organic volume in that market?

Yes.

We don't break out the organic between salvage and used vehicles, Craig.

I mean, I assume though that the 15% growth included a significant impact from acquisitions?

Acquisitions, that was a good guy for us, no question.

Yes. There was an impact of that which has been predominantly in salvage, but not exclusively.

Okay. And then with respect to your guidance does it anticipate the acquisitions you've discussed or would that be upside?

That would be upside. Acquisitions that have yet to be made.

And your conversion rate in July? Do you have a sense for where that's trending?

No. We haven't compiled that data as of yet.

Okay. And then finally just can you give an update on the the CFO search and whether you expect to look for someone with industry experience or whether you would broaden that search? Thanks.

Fortunately, with Tim on Board, it gives us the time that we always take when we fill positions that are that critical to the organization to make sure that we're filling them with an individual that can add the value that Tim and Cam have added in the past. As you know it took us awhile and I was criticized somewhat for not getting a Chief Operating Officer in place, but we took the time that was necessary to make sure that that decision was the right decision and the same was true with the CIO and the same will be true with the CFO. All I can is that we're very fortunate to have Tim on board in the interim so that we can manage that transition very smoothly.

Thank you.

We'll go next to Matthew Nemer with Thomas Weisel Partners.

Takim Esther for Matt Nemer. We just want to drill down a little further on the conversion rate given kind of the strong used vehicle sales at some of the larger dealer groups and certain companies like CarMart talking about having a hard time finding good inventory out there, it just seems like demand from this channel remains strong and I was hoping you could kind of help us understand this disconnect?

Well, that's a pretty small segment of the overall used vehicle market in terms of the public dealers, and I would say that this doesn't seem to be overall consistent. In fact if you look at the data that we had I think on maybe one of the slides we put out which talked about used vehicle sales this year versus last year, the industry wide statistics show a decrease in used vehicle sales. So that's kind of the data that we're looking at.

All right . We were just kind of thinking that those might be used as sort of indicative of the rest of the market and I'm not sure it is really perfect data on used vehicle sales so that's kind of what we were going on, but thanks.

We have time for one more question.

There are no further questions at this time. I'd like to turn the conference back over to Mr. Gartzke for closing remarks.

First, after listening to this call I really want to make the point of the things that we're working on and I'm not going to go over them again, but to make the point that the things we're working on as it relates to our initiatives make us a stronger organization so that we're better able to internally manage to our expectations when these situations occur, and also reposition this Company as we believe the growth in this industry is going to continue. So there's things that are beyond our control, but I would say as we enhance our internal capabilities to the extent that we can react to those things that are beyond our control that we'll perform better in those situations, like we've been living through the last six months. So these initiatives are important. The IT initiatives, the things that A.R. was alluding to or mentioning in terms of operational effectiveness and bringing us together as one organization from an operating standpoint are going to be absolutely critical for our growth and also our ability to react and respond to these, to what I would call these opportunities.

We're in the business of providing liquidity to many, many customers that have to deal with these situations on a weekly and daily basis, and to the extent that we can better communicate with them, provide them better information, respond quicker and faster, gives us an opportunity in these situations to get more business from them for our customers in the longer term. So it's all about our service proposition and our ability to respond and react to these situations will be key in the long term for us.

Now back to my written which you always love to hear I'm sure, closing comments. Let me reiterate that the quarter included some long term positive developments for both the industry and the Company. The increase in vehicles entered is a positive long term trend as our improvements in lease penetration rates which we didn't talk about much, which are leading indicators of cars to come into the auction in the future, and we also expect continued increases in the dealer consignment business as well, a point that we didn't probably elaborate much on the call, but it's important. And we do believe that the conversion rates should improve as the economic condition strengthens and the retail used vehicle sales improve which we believe will occur.

Our management changes in the quarter have been very positive for this company, and it will enable us to focus more on our critical strategic initiatives and working together as one organization to grow the business. Thanks to all of you for joining us on the call today and for those that attended our analyst day and I thank you for listening in on this call this morning. And as I've said in the past, I look forward to conversations with most of you following this call and hopefully some personal visits here over the next three to four months. Thank you, everyone.

Thank you everyone. That does conclude today's conference. You may now disconnect.