Openlane Inc (KAR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the KAR Holdings Inc. 2008 third-quarter earnings conference call. Today's call is being recorded. Today's host will be Brian Clingen, Chairman and Chief Executive Officer of KAR Holdings, Inc. and Eric Loughmiller, Executive Vice President and Chief Financial Officer of KAR Holdings. I would now like to turn the call over to your host, Mr. Loughmiller. Please go ahead.

Good morning, everyone, and welcome to the KAR Holdings third-quarter earnings announcement. Brian and I will discuss our third-quarter performance as well as address a number of factors impacting and businesses in the third quarter and into the fourth quarter. I would like to remind you that this conference call will contain forward-looking statements. Such statements 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.

Now I will turn the call over to Brian Clingen for some comment on our performance and other items of interest. Brian?

Thank you, Eric. Thank you for joining us this morning. I wanted to walk through some brief comments on our third-quarter performance, but probably more importantly, conditions as they exist out in the marketplace and in our particular business units. In general, we were satisfied with our performance in the third quarter. As you will see from the numbers and the detail, we continue to have strong year-over-year performance in two of our three business units, and overall, continued strong cash flow out of the businesses in total.

I think more importantly, the numbers are somewhat deceiving in that late in the third quarter, really beginning in September, we saw some very significant deteriorations across a number of our business units. And I will walk through each one of them and some of the specifics of that, starting with the ADESA whole car business, where again, we had a strong quarter in total, but we did see some very significant decline in our conversion rates, beginning really in mid-September and those conditions have continued into the fourth quarter. Much of the reason is, as you can imagine, the difficulties going on with the dealership base and their ability to obtain consumer financing certainly impacting their buying habits, as well as what's going on for many of them on their wholesale financing front, where conditions have tightened significantly there.

And then finally, the overall weakness in the sales environment in total has caused many of our dealer buyers to significantly reduce their participations at the auction. And as I said, we have seen some pretty severe deteriorations in our conversion rates, beginning really in mid-September, but continuing into the October period.

So a very difficult environment exists right now, certainly, for our consignors. Many of our consignor groups again are struggling also. Proceeds at the auction for them in many of the categories down significantly. And again, a difficult period, where, clearly, prices in the overall marketplace continue to move lower and extreme amounts of pain for many of our consignor customers.

So in total, the whole car business is undergoing some very challenging times. We continue to be very focused on our overhead base and our cost structures. Our pride initiatives continue at full force and we have accelerated some other initiatives to address the overall cost structure and overhead as it exists at ADESA. Again, we see the conditions that have deteriorated continuing in the fourth quarter and we're anticipating that 2009 could also be and will also probably be a very difficult year.

On the IAA salvage business, again, this is a unit that has held up, relatively speaking, very well all year long. We had a good third quarter, but some conditions in the marketplace again affecting IAA late in the third quarter and continuing in the fourth quarter, most specifically, the weaknesses in commodity prices and some significant declines in both scrap metal and platinum to commodities that definitely affect pricing at our auctions and proceeds to our consignors. We've seen the significant declines in those prices impact, again, very immediately our proceeds at auction at the IAA salvage unit.

In addition to that, the used car market and the weaknesses in the used car market also affecting buyers here. And in total, again, late in the third quarter, we saw weaknesses at our IAA business unit. We see those continuing in the fourth quarter and are bracing for 2009 to continue to have some of those difficulties based on conditions in both the commodity markets, as well as our dealer buying base.

And one additional point which we haven't been able to quantify as directly, but certainly the strengthening of the dollar against the euro, we believe has impacted some of our foreign buyers, who enjoy the benefit of a strong local currency for most of the year. And that condition has reversed itself of late and then we think could be resulting in some of the international buying to soften at this point in time.

And then finally, our AFC business unit, which, as we've discussed throughout the year, has suffered under some very difficult conditions, has continued to see problems with the dealer customer base that we are financing there. And we have unprecedented numbers of these dealers going out of business. Both September and October were record years according to the press and the number of dealers that are either failing or closing their businesses.

So we continue to see a shrinkage of the overall AFC portfolio. We do have the benefit there of our cost of funds situation beginning to reverse. And we now are enjoying what are some significant positive spreads in our overall pricing in that business. So a small positive there. We believe that the portfolio, while it has shrunk very considerably and continued to over the course of the third quarter that it is probably approaching a point where it will stabilize in size, again, down in excess of 30% from its high watermark at the end of last year.

But this business, again, based on the struggles and difficulties that exist in the used car dealership base, we think will continue to have a tough time and here, we're very focused on both our underwriting of new business as well as our credit and control policies and our collection efforts. So we're trying to have a very disciplined approach in this business unit, but again, they have suffered through some very difficult times over the course of the year. So that's a recap on conditions as they exist and how we view them in the three business units.

I would say on the positive front, this business in total continues to be a very significant generator of cash. And as difficult as things are out there, we still are seeing significant free cash flow generation. We're building cash on our balance sheet. We have access to significant liquidity, an unused revolver, as well as a locked-in funding source at very favorable rates with substantial capacity on the finance side of our business. So we feel that we're positioning the business properly to address the conditions in the marketplace right now, but we are preparing for continued difficult environment heading into 2009.

I'm going to turn it back over to Eric to walk you through the details of the financial statements.

Thank you, Brian. Yesterday, we reported our financial results for the third quarter of 2008. We also filed our Form 10-Q, which is available on our website at www.KARHoldings.com.

KAR Holdings posted second-quarter revenue of $444.6 million in 2008 compared to $394.3 million in 2007 an increase of 12.8%. Year-to-date revenues of $1,375.2 billion for 2008 compared to $1,190.5 billion for 2007, an increase of 15.5%. While a portion of our growth is attributable to acquire ADESA and IAA auctions, our revenue, excluding acquired locations, increased 9.1% for the first nine months of 2008.

Pro forma adjusted EBITDA, as defined in our credit agreement, for the third quarter of 2008 of $101.8 million increased from $98.6 million in 2007 or 3.2%. Pro forma adjusted EBITDA for the last 12 months ended September 30, 2008 totaled $430.0 million, an increase of 10% from $390.8 million for the 12 months ended September 30, 2007.

Pro forma adjusted EBITDA for the September 30, 2007 period excludes the unrealized cost savings from IAAI integration of ADESA impact that was included for purposes of computing leverage ratios in the senior credit agreement and revolving credit agreement. Now I would like to provide some comments on the performance of each of the businesses segments.

ADESA auctions reported revenues of $286.4 million for the third quarter of 2008 compared to $241.4 million in the prior year, an increase of 18.6%. The auctions enjoyed an increase in revenue per vehicle of 4% combined with an increase in the number of cars sold of 14%. The third-quarter enjoyed strong volume growth, but this performance was not consistent throughout the quarter. In particular, our volumes in the last half of September weakened, as retail used car sales declined and our buyers adjusted for reduced consumer demand.

Gross profit for the three months ended September 30, 2008 of $124.3 million represents a 17% increase from $106.2 million in the prior year. Gross profit as a percent of revenues was 43.4% for the third quarter of 2008 compared to 44.0% for the same period in 2007. The slightly lower gross profit is directly related to our mix of vehicles being weighted more heavily to institutions. This is also evident in our increased revenue per vehicle as ancillary services are the primary contributor to increased revenue per vehicle.

The shift in our supply mix of vehicles sold at auction was prominent in the third quarter. Within the institutional cars sold, we experienced increases in repossessed vehicles sold and off-lease vehicles sold. These two categories of vehicles also have higher conversion rates than dealer consignment vehicles and other institutional vehicles that contributed to the strong conversion rate of over 60% for the third quarter.

SG&A costs for ADESA auctions for the third quarter totaled $63.9 million, an increase of 27% from the prior year. The increase in SG&A is attributable to a $5.3 million loss recorded upon completion of the sale leaseback transaction in September that generated approximately $73 million in proceeds; $4.5 million in SG&A at sites acquired since September 30, 2007; $3.0 million in consulting and travel costs related to Project Pride initiatives; and other increases that individually were less than $1 million.

On a year-to-date basis through the end of the third quarter, ADESA auctions has increased revenues 19.8% to $862.7 million. Operating profit has increased 8.2% to $120.3 million for the first nine months of 2008. However, operating profit includes a number of non-cash and nonrecurring charges that are not reflected in the measurement of adjusted EBITDA, an alternative measure of our performance as described in our filing on Form 10-Q.

The total costs included in computing operating profit that are added back for purposes of computing adjusted EBITDA were $25.9 million for the nine months ended September 30, 2008 compared to only $7.4 million for the same period in 2000. If I were to exclude these costs from computing operating profit, ADESA auctions experienced a 23% increase in operating profit in 2008 compared to 2007. We believe this is indicative of the cost savings we are generating following our implementation of Project Pride and other initiatives directed on reducing our costs through more efficient delivery of administrative services at the auctions.

Insurance Auto Auctions revenue for the third quarter of 2008 totaled $135.4 million, an increase of 15% from $117.7 million in the prior year. Units sold increased 13% for the quarter. We experienced increases in same-store unit growth as well as a significant contribution of increased unit sales from acquired salvage sites.

IAAI's gross profit of $45.4 million in the third quarter increased 16.4% from $39.0 million for the same period in the prior year. IAAI showed a modest increase in gross profit as a percent of revenue to 33.5% for the third quarter compared to 33.1% in the prior year. While this percent improvement may appear modest, the third quarter is historically our lowest volume and revenue quarter of the year, reflecting the seasonality of our salvage business.

During the third quarter of 2008, IAAI successfully completed the integration of the salvage sites acquired from Verastar in February. We now have all US salvage sites operating on a common platform with consistent operating procedures. Our use of technology through ASAP, CSA Today and Ibid Live in conjunction with our hybrid auction methodology that combines a live auction arena with real-time Internet bidding, has proven to differentiate IAAI with the insurance companies that provide over 85% of the vehicles sold at our auctions.

SG&A costs for IAAI increased 22% to $18.3 million in the third quarter of 2008 from $15.0 million in 2007. The increase in SG&A is attributable to a number of items, none of which exceed $1 million. However, the most significant increases in SG&A relate to our technology and advertising costs.

IAAI's revenue for the first nine months of 2008 of $426.0 million increased 18.1% from $360.8 million in 2007. IAAI's revenue growth was a result of increased volumes from acquired salvage locations and an increase in volume on a same-store basis. IAAI generated operating profit of $53.2 million or 12.5% of revenue for the first nine months of 2008 compared to $29.5 million or 8.2% of revenue for 2007.

The increased profitability for the first nine months of the year is further evidence of the successful integration of ADESA impact into IAAI, the ability to bring 17 additional acquired properties onto the IAAI operating platform and the success our customers enjoy with our hybrid auction methodology, which is intended to maximize proceeds for the sellers of salvage vehicles.

With the recent opening of Reno, Nevada and Billings, Montana locations, we currently operate in 151 markets in the United States and Canada. We also have begun to see the benefit of the relationship between IAAI and ADESA auctions as we have been able to service noninsurance companies through a best venue approach. This allows us to maximize the proceeds for the seller by directing vehicles to the best auction site, whether it is a used car or salvage auction.

AFC's net revenue for the third quarter of $22.8 million represents a 35.2% decline from the prior year. Although interest rate spreads were under pressure during the third quarter, as we saw compression of the typical spread between the prime rate and LIBOR, the most significant item affecting our net revenue is the loan losses recognized as declining economic conditions and a lack of availability of consumer credit have caused an unprecedented number of failures of independent used car dealers.

Loan transaction volumes in the third quarter of 2008 were 4% below levels in the prior year. We expect this trend to continue as our portfolio shrinks in size. Operating profit as a percent of net revenue has declined in 2008. In the third quarter, operating profit of $3.6 million, excluding the impact of recording an impairment of our intangible assets, represented 15.8% of net revenues compared to $17.4 million or 49.4% of net revenues in the prior year.

Although the increase in loan losses is the primary driver of lower profitability in the third quarter, we also took a number of actions during the quarter in an effort to right-size this business for current volume levels and the increased risk of loss in certain markets. These actions included the closing of 14 locations, five full-service branches and nine satellite offices. In addition, we downsized our headcount at other locations to align our staffing levels with current volumes. We also reduced our headcount in the sales organization as expanding our customer base is not a priority at this time.

Now, I would like to address the accounting for goodwill and other intangible assets of AFC in the third quarter. Upon completion of KAR Holdings' purchase of ADESA, which includes AFC, the assets and liabilities of AFC were recorded at fair value. The excess of the purchase price over the fair value of assets and liabilities was recorded as goodwill as of April 20, 2007.

During the third quarter, AFC experienced a reduction in the portfolio of managed receivables consistent with recent trends in retail, used car sales, and general economic conditions affecting the financial services industry. As a result of changes in economic conditions and the impact on the volume of activity at AFC, we have recorded a non-cash charge to reflect the reduction in the carrying value of goodwill and trade names aggregating $164.4 million in the third quarter. This expense does not impact adjusted EBITDA as defined in our credit agreements and does not impact any of the covenants in AFC's securitization agreements.

AFC continues to be an important and viable part of KAR Holdings. Our actions to recognize the current economic climate and tightening of credit policies will make this business stronger and we expect provide an important source of capital for buyers at our auctions. Our recent moves have brought the mission of AFC much closer to the missions of ADESA Auctions and IAAI.

KAR Holdings generated $207.5 million in cash from operating activities in the first nine months of 2008. We have repaid $55.7 million of senior term loan this year and invested $85.7 million in capital expenditures. Included in capital expenditures is $22.2 million for the Kansas City relocation project that we expect to finance in a lease transaction upon completion of the project in 2009.

Our capital expenditures excluding the Kansas City relocation totaled $63.5 million through the nine months ended September 30, 2008 and are expected to be less than $90 million for 2008. We will also expect to spend an additional $18 million on the Kansas City relocation in the fourth quarter and will complete the project early in 2009.

During the third quarter, we completed the sale and leaseback of seven ADESA auction properties. This transaction generated $73.4 million in net proceeds with a corresponding increase in annual lease payments of approximately $6.4 million.

On October 3, 2008, we completed the sale of an eighth property with net proceeds of $7.3 million and a corresponding increase in annual lease payments of $600,000. We utilized 50% of the net proceeds of these sale leaseback transactions to repay the senior term loan and filed a notice of reinvestment indicating we intend to utilize the remaining funds for future capital expenditures or potentially acquisitions sometime in the future.

At September 30, 2008, our available cash balance was $97.5 million. Our total leverage ratio net of available cash for the 12 months ended September 30, 2008, was 5.63 times our adjusted EBITDA.

We had no amounts outstanding on our $300 million revolving credit facility at September 30, 2008. Our current cash balances, which we expect to continue to increase and available capital under our revolving credit facility, are adequate to meet our needs for the foreseeable future. At September 30, 2008, KAR Holdings was in compliance with all covenants of its credit agreements and AFC was in compliance with all financial covenants in its securitization agreement.

Thank you for joining us today, and we will now return to the operator to hand over the Q&A portion of our call.

(Operator Instructions). Kathryn O'Connor, Deutsche Bank.

I guess I appreciate the color you gave us at the beginning of the call about the markets and how things are shaking out. But I guess I'm trying to get a context for what you are saying in terms of conversion rates maybe this year versus last year. I think last year I had calculated that conversion rates were in the 55% area for Q4. Can you just give us an idea of how Q4 went last year on a month by month basis and how we are matching up right now?

Well, Kathryn, we don't really speak to conversion rates, but I will tell you in the month of October, which is historically a strong month, we might have expected to be much higher than what you experienced last year in the quarter and this year it's down substantially. Again, we don't like to speak about such short periods of times, but it's down substantially from what we experienced in the third quarter.

We are still selling cars but at a much lower rate. And ironically, the net result is also a buildup of the number of vehicles that are on our lots throughout the US and Canada. So it's not actually a lack of cars being presented at the auctions. It's a lack of buyer activity to buy them. And also pricing is a big impact on that as well.

So when I think maybe of a regular Q4, do you get a disproportionate amount of your sales done in say October and November and then it slows for the December holidays?

I would tell you it's October through about the middle of November. From the time we get to the US Thanksgiving through the end of the year, it's a much more selective buyer base. Pricing is an issue because I think most car dealers know that's not a very active time for retail activity.

Okay. And then I guess if I'm trying to think about the pileup of cars that you are talking about, at what point do you think that that eventually just pushes its way through the system at a lower rate? Where do you see the pileup kind of working its way through the system? Is it sort of a first-quarter event, second quarter? When do people kind of hit the breaking point, especially institutionals that want their money back on their repossessed car? Like when does that just eventually -- when do they eventually say I'm just going to sell this thing?

I would say that, for instance, on repossessed vehicles, we do not see the decline in conversion rates on those as significant. Those are vehicles that typically the consignor is selling at whatever he can get. But many of the other institutional cars which have not sold and clearly were not priced properly in the pileup, as you say, I would anticipate that the first quarter is going to see that clear and you would expect that the market should price things accordingly and the vehicles start to clear.

The only caveat to that being just the unprecedented conditions that exist in the marketplace right now and our continued concern for the health of our dealers, both from the standpoint of their ability to obtain consumer finance for their purchasers, as well as their ability to finance their inventory from a floor-planning standpoint. So both of those situations clearly are of concern, but I would anticipate that we will see the market begin to clear in the first quarter.

I guess -- I think what I took away from that is the institutional, just because they are less price sensitive and they want their money back, like on a repossessed car, they are still pushing transactions through. But it's really the dealer side of the equation that's slowed down and it sounds like you are cautiously optimistic that that could improve in Q1 of '09?

I guess I would agree with most of that except for the optimism. And we continue to be very guarded in our outlook for when the dealers will begin to recover and really start to show some increases in their buying activities at the auction. And that really is a concern and a question mark for us at the moment.

Okay.

And Kathryn, I'm going to add to that. Even within the institutional supply mix, we're seeing much lower conversion rates when you get outside of the repossessed vehicles and the off-lease. I mean it's a pretty significant deterioration. And typically, as I have talked to many investors, price adjusts to get supply and demand in balance. The price adjustments aren't getting them in balance right now. It's just a lack of demand in some regards.

Okay. And then I guess just given that backdrop, can you just talk about what your fixed costs are versus variable cost and where you can make adjustments? And then just also what level of conversion do things just sort of -- do they not make sense anymore in terms of where your fixed costs are? Could you just give us an idea of that?

Yes, I would say on the last point, we're nowhere near a point where the auctions are running at conversion rates where it's not profitable to run at auction. So I don't want to give the impression that these auctions are failing to that extent in the marketplace because that's certainly not the case. But we're talking about seeing conversion rates on the order of 8 to 10 points off from where we would like to see them and where we would expect to see them.

On the cost side, we continue to look very carefully and make moves to adjust our costs. It's a very labor-intensive overhead base that we have, so clearly we have the ability to adjust labor to react to the changes in the volumes coming through the auction. And there are other steps that we can take in a number of areas and we continue to look at those. But we do believe that we have had a head start through our Pride initiatives on adjusting our overall cost structure. And so we continue to generate good cash flow even in these very strained conditions of the marketplace.

And Kathryn, I've shared with you many at conferences while it's very difficult to split the cost, it's roughly about 60% of our cost base is variable and about 40% is fixed. I will point out there is a slightly heavier weighting of the fixed costs in the salvage business because we do not own a majority of the properties. We own very few properties. Where at ADESA auctions, we still after the sale leaseback, own 38 properties, for which there is no rent. So it's a little bit -- if you broke the businesses down, it would be a little bit heavier weighted towards fixed, but not a lot more for the salvage business, just to give you some guidance on that.

And one other area that we really didn't address but a significant cost line item for us in all of our auction businesses are transportation costs. And so we are the beneficiaries of this significant decline in overall gas prices. And so that is a positive on our overhead structure right now.

Oh, okay. I was going to ask that. So you think some of the costs we've seen to do with transportation in the last few quarters should reverse itself out now?

Yes. We do think we're going to be a significant beneficiary on that cost line item.

Okay, and then maybe just a little bit back to the costs on the SG&A side, specifically at the ADESA auctions. You had that $5.3 million hit in SG&A this quarter and I think your SG&A was $18.3 million in that segment. So are you saying that the normalized SG&A if you excluded that onetime item would have been like more like $13 million? Is it sort of inflated this quarter? Can we think of it as running at a lower rate going forward?

Well the $5.3 million, if I'm hitting the right number from you is the loss. The third-quarter total of SG&A was $63.9 million for ADESA auctions.

Oh, right, okay. But can I safely take that number off the $5.3 million?

Yes. And again, just let me explain that since you've asked, Kathryn. The $5.3 million loss is when we do our original opening balance sheet, we booked at fair value and allocated amongst all 48 properties. And when we sold these, we got the specific properties, there were differences. I would not say that the total value that we assigned to our properties at April 20 changed materially. It had to do with the eight specific locations that were sold and a reallocation amongst those and others in certain markets.

Okay. And then another question on the SG&A side at the holding company level. It looked like that SG&A also declined year-over-year. Did you take some actions in terms of letting people go? Or can we assume that that level that we saw at the corporate level is going to remain the right level?

Well, we've not taken any specific actions in the third quarter that I could highlight other than normal turnover. But the actions of 2007 you're seeing the benefit of, where we have spent a lot of time and effort as you know, Kathryn, trying to get more efficiency in our operations.

We have not reallocated people, but we have taken some functions that prior to 2007 were at the corporate level and they are now handled in the business units, such as communications and things that relate directly to the business. But these were actual cash savings, so I think you are seeing real savings from our initiatives.

You also have in the third quarter, the benefit of the reversal of our stock option expense that had previously been recognized. As you know, with the market conditions as they are today, market comparables are lower values. And so we had the reversal of stock option expense that was previously recognized, and that is a big item.

Could you let us know how big the item is?

Yes, I'm going to find it.

Just because I think the corporate overhead this quarter was $6.8 million and last year (multiple speakers)

All of the stock option expense reversal ran through corporate overhead.

Okay.

And it was in the neighborhood I thought of $7 million. I will get the number and I will present it on the call. Maybe you can go on to another call that Brian can answer while I look this up.

Yes, sure. That would be great. I guess then just moving maybe over to the salvage side, could you just give us an idea of the order of magnitude salvage versus whole car? I always had the idea the salvage was a lot more stable than whole car and obviously the conversion rates there at the salvage business are much higher than at the whole car. Could you just give us an idea on kind of order of magnitude, the performance of salvage versus whole car? How much better or worse it is in terms of just the effect it would have on (multiple speakers)?

Yes, and it really is not a conversion issue at salvage. It is a proceeds issue. And to the extent of the proceeds are down, that will affect our revenue line items. And obviously, that drops totally to the bottom line. So it is a proceeds issue there affected by some of the factors that I had mentioned earlier, commodity pricing, the help of some of the rebuilders' used car sellers and also potentially some of the moves in the foreign currency exchange rates.

So those items all affecting really proceeds as opposed to conversions, and our pricing model at salvage is tiered based on the proceeds that we get. And so a reduction in those proceeds will come through directly to our revenue line item and at a very high margin level down to our cash flow.

Okay. But I guess in the past I had understood that obviously volume was a bit more important for you guys than necessarily pricing. Could you just give us an idea of what percentage of the fee generally speaking at salvage comes from pricing?

Yes, again, I don't want to misconstrue it. The volumes, obviously, are very important and more important and the magnitude of weakness at salvage, nothing like what we are seeing at whole car. But nonetheless, what we had experienced at salvage all year was some very strong outperformance, and we saw late in the third quarter and into the fourth quarter we believe here some reversal of that based on some of these conditions that I described.

So this is not a situation akin to what's going on in the whole car business. And as we look into 2009, we still think the largest major contributor to either outperformance or underperformance at IAA will be weather. And this is a business that is much more stable vis a vis economic conditions, but can be impacted very significantly by either lots of severe weather or alternatively, very mild weather throughout the country.

Okay. So basically what you are saying is maybe we won't see as much outperformance. But in terms of baseline, it is obviously still a very stable business.

Very stable. And I think the volumes -- I mean one thing as we look into the future, I don't want to get too specific, but we have seen pretty strong volume growths, as we presented over the past several quarters. All the factors would indicate that perhaps the industry, given the number of claims the insurance industry is processing, is likely not to be growing salvage volumes in the fourth quarter and into '09. People will still wreck their cars. I'm not going to predict what the number will be. But I don't think we will see the same growth pattern.

But I guess 11% on the growth that you saw on that segment came from acquisitions. Some of that clearly has to be going forward.

Correct. Yes. But again, the acquisitions is a big part of what we have done and it's a bigger business. The problem is, as an industry, you might be going from a low single digit growth industry to flat, perhaps even slightly down. Again, depending on the weather around North America.

Kathryn, I have an answer on the option expense. It was $7.3 million of credit. For purposes of EBITDA, we subtract that out. It was a benefit in the quarter, so it does not impact EBITDA. We reverse out that benefit, but it was $7.3 million. So you should add back $7.3 million when comparing to that to prior years.

Okay, that's perfect. And anything else? Sorry.

And remember we also had stock option expense last year. I don't have that number in front of me. So the change from year to year from stock option expense was pretty substantial. Kathryn, we've got a long list of people that want to ask questions. I should probably give them a few of our minutes as well.

Thank you.

Gary Prestopino, Barrington Research.

Good morning. Just wanted to just drill down a little bit on the salvage side. In terms of your realizations, from say August through September through October, how much were they actually down?

Gary, we don't disclose that level of detail. But what I will tell you is with the decline in scrap metal and platinum prices, the decline in wholesale used car prices that we talk about in the used car business actually impacts the bids from our buyers. We have seen a noticeable decline. The problem is the variation in values, as you know, because you follow the industry, it's a much tighter range because these, instead of tens of thousands of dollars in vehicle prices that we have at used cars, these are thousands of dollars of values. And so the change as a percent may not be as significant, but it really impacts the insurance carriers and their proceeds.

We also believe that our volumes weakened into the third quarter as a result of miles driven decreasing fairly significantly over the summer period based on the gas prices. So again, what happened at IAA was that we saw our results be much closer to our original plans that were put in place the end of last year as opposed to what was some significant outperformance throughout most of the first two quarters of the year.

So I think a combination of both what we had mentioned was going on with proceeds as well as just vehicles entered probably being impacted by the significant decline in miles driven that occurred really starting in the summer months with the increase in the gas prices.

What about, you also mentioned there was some, at least as I jotted down notes, weakness in the buyer base in salvage as well. Is that a function of your buyer base needs to obtain credit and is having issues with credit? Or is that just in terms of the realizations dealing with what you said?

I really believe it's less of a credit issue and more of a conditions in their businesses, specifically those dealers that are involved in the scrap market significantly, saw some very large declines in scrap prices impacting inventory they had on hand. And they probably, for the most part, those large scrap buyers saw a real hit with the rapid decline in prices of scrap. We have a number of those buyers also that are focused on platinum and platinum prices again also seeing that very significant decline. So I think their business and their business models were hurt probably pretty significantly by what happened in those prices. But I think that those buyers focused in the rebuilding area and impacted by what's going on in the used car market in general were also hurt in just the amount of money that they were going to be able to get in their rebuilding activities.

Is it safe to assume that if the wholesale auction prices were down a number -- I know they were down about 10% in October -- is that quickly reflected in what the salvage values bring in terms of the magnitude of decline?

That would be one of the components and then you add to that, that I think scrap metal went from $500 a ton to $200 a ton. And as you realize, when anybody dismantles a car, there's a significant amount of scrap element to that. So I mean, it's hard to measure.

And then, Gary, one last thing is don't forget about Hurricane Ike. While not as tragic I think on the news as Katrina and not as much volume of vehicles, we have yet to see the impact of those vehicles coming to market, which you know increases supply and again, will impact pricing probably going forward at some point as those cars start to hit the market.

Just two other quick questions. Given that the prices of cars are coming down, would you anticipate that even with a lower amount of miles driven, that should positively impact total losses and quite possibly give you somewhat of a richer mix of cars coming into the auctions?

I do believe that will impact the percent of total losses to number of claims. It will keep that number quite strong. What I can't predict and won't predict is whether there will be more or less cars wrecked; I just don't know.

Okay. All right.

I'm praying for a good snow season in Colorado, Gary. That will help us.

Thank you.

[Bickford Brooks], Guggenheim Partners.

It's actually [Eric Shram]. Just a couple quick questions for you. I guess first, maybe it would be helpful for me anyway if you could just talk a little bit, kind of anecdotally about what you're hearing from your independent dealers. Do you have any anecdotes about foot traffic October versus the first part of November, and kind of what they're saying about the consumer's ability to get financing for a used vehicle? Are there any anecdotes at all that you could give us about that?

I mean, this is something that we really are getting feedback from our field people on a daily basis. And we think that the marketplace is still extremely strained and stressed, and especially for the independent used dealer, it's a very difficult environment. Traffic is down to the stores in general, I think, and availability of consumer finance, especially for these independent used car dealers is extremely challenging at the moment. So as I said earlier, the conditions are still very difficult. There's a number of these independent used car dealers failing.

The only good news and the only positive that I can add to that is that the used car dealers that have strong business models and are strong operators are going to be huge beneficiaries of this shakeout. And some of them are already starting to see the competitive landscape changing to a point where their business is going to significantly improve. So we think that this shakeout, when it ends, will be of great benefit, in both the independent and franchise spaces, in just reducing the number of competitors that these stronger dealers have in place. That process is still going on though and I think it still does have a ways to go.

I mean is there any kind of -- is the rate of how bad things -- I guess is there a change in the rate? Obviously, October was terrible. Is November continuing on the same trajectory or is it starting to level off? Anything kind of directionally there?

I mean at some point, there's only so many of these dealers left. And the numbers in both September and October were off the charts unprecedented, as far as dealership failures. I think you're going to see another large number in November. We don't have any of that data, but I would venture a guess that Tom Kontos and our analytics folks would tell you that they believe that November is going to be another very bad month for the dealers.

And Eric, were you asking as much about our volumes at auction as well?

Yes. I guess as it would affect your volumes at auction.

Again, we're seeing November pretty consistent with October.

And I would add that we really feel that from a volume standpoint, we have very significant volumes at the auctions and it is going to be our conversion that is going to be challenging and what we need to focus on. But as far as volumes coming in and where we are with our customers and consignors, we have very, very strong volumes.

And Eric, Tom Kontos, who evaluates the entire industry, not just ADESA, has indicated to me that our experience is consistent with the industry. This isn't just an ADESA phenomena. It's actually consistent with the industry.

Okay. That's helpful. A couple quick housekeeping questions for you guys. First, on the AFC side, you guys are in compliance with your covenants currently, correct? I believe 9/30/08, but that holds true for today as well?

Correct.

And then, has there been any change in terms of how much ADESA whole car volume AFC is financing?

No. We really -- proportionately, the AFC business has shrunk with virtually everybody they finance. So we would say nothing disproportionate.

Okay. And then one final question. Could you guys just give us a little detail on the securitization that you guys did? I think it was about $11 million in the quarter. Securitized from receivables, I think.

That actually related to the August repayment of debt, as we securitized the rental portfolio. We had been working on that for quite a while. And it was a portion of the portfolio that had not been involved in the securitization. That's the $11 million I think you're referring to, Eric.

Yes.

And we repaid the debt when we were able to include that in the securitization, consistent with the terms of the term loan.

Okay, great. Thanks, guys.

Saurabh Jain, Bay Harbour.

Hi, a couple quick questions, Eric. One, I wanted to -- the number of volumes that is going to the direct dealers that you're selling into AFC, what percentage of the overall transaction volumes are where you're financing on the other end, to kind of help with the flow?

Well, Saurabh, we don't disclose a specific number, but we believe we're consistent with previous trends, where AFC -- about 30% of the vehicles financed by AFC were acquired at ADESA auctions.

Okay. And then about -- charging a fee for the second or third time cars go through the auction, is there any color you can give on that?

Generally our fee structure is fees paid upon sale of the vehicle. Of course, there are exceptions all over the place, where certain vehicles -- but generally, I would tell you we get paid when the car is sold and not when it runs through auction.

Got it. Okay. And then lastly, how have volumes been tracking in October year-over-year? Because the way I look at it, it's not so much the conversion rate. It's really how much cash flow are you producing number of volume -- volume-wise? So that we can better model our projections going forward? I know it's a very unclear environment, but can you help us out in terms of what volumes are looking year-over-year?

You know, we typically don't talk about -- we have given you some color as to October and November. I think we will wait and talk about the fourth quarter when we release our earnings for the fourth quarter.

I will tell you that the business has changed year over year. We have done all the acquisitions. We have seven additional site -- actually we may have nine additional sites.

Yes, I guess more on a same-store basis. Because look, the third quarter was in each division, same-store sales were much better from a volume perspective. I think ADESA was up 7% and the salvage was up about 2%. So, any kind of incremental color you can give on that would be much appreciated.

The only color I will give you is the volumes in October are lower than the volumes that were disclosed for the third quarter. And so, again, I think we are operating consistent with the industry but I don't think we will see same-store growth rates at that level, perhaps not even see growth in same-store in October. But again we aren't going to discuss it specifically at this time.

Okay. And you haven't noticed any -- a loss in market share to Manheim or anything like that?

No.

No.

Justin Boisseau, Gates Capital.

Thanks. First, housekeeping. Did you give the organic growth in the quarter for the acquisitions? I heard year-to-date but what was the quarter's organic growth?

We did not give that other than to say that we were -- there was organic growth in each quarter. I think you can find some elements of that in the 10-Q, Justin.

Okay. Can you take me to the next step in the lower conversion rate process? So if these vehicles don't sell they go back to your [loss, the inventory builds]. The only way they eventually disappear is they eventually get sold at some price; is that right?

Yes, in large part it really is a pricing situation. And for the most part our consignors will rerun the cars and will move them at some point.

And are you charging them an additional fee when they're not accepting the price on the first run-through?

It's very nominal. And so from a margin standpoint it is definitely detrimental to our business to have to run the cars multiple times.

So I understand why it would be detrimental on a margins basis. What about on an actual dollar basis? Should you come out equal or ahead if you run it through twice versus one?

On the revenue line, yes, because we'll get a fee. But remember every time I touch the car I incur costs. That's why the gross profit is so important, Justin.

Right.

Because I am going to have increased labor to get that car sold. Not increased labor for that one auction, but the number of times I have touched the car since it hit the lot to the time it sold will go up.

On the Kansas City facility, you guys expect to finance in the first quarter. I think you said you're planning to spend $40 million in CapEx on it this year. Is the financing going to be approximately $40 million on a sale leaseback for that?

Yes, I would expect it to be. I don't have anything in place and my credit agreement allows me 270 days upon completion of the project and then it would be excluded from CapEx. That is why I'm giving you the two separate numbers. It's actually a term of our agreement.

Got it. Then when you talked about the salvage revenues and profits being impacted by the lower salvage prices as it related to scrap and other commodities, how can we think about your fee structure vis a vis the fixed fee you'll collect anytime you sell a car and then how much of the fee you collect on the sale is actually variable depending on the proceeds? Or are they all variable?

Well, no, the seller fee generally would be fixed, depending on who the seller is. But the buyer fee is the variable. And, again, there will be declines. They are tiered though. We do not do percent of sale or very few percent of sale. And so our fee structure is tiered. But again at each level in a salvage auction, the levels are much tighter than they are in a used car where they move in $1000 increments. So you will see a little bit of a decline. But there is a base fee; I mean it's not a percentage.

But even a call it a 4% or 5% reduction in the overall fee based on lower proceeds is almost a direct impact to our profit line as well.

Right. What's the likelihood that you and others in the industry would be able to raise prices in salvage to make up for that decline?

We don't comment on our pricing. We constantly look at our prices and try to analyze the market. So, again, I will just leave it that we will increase prices when we think it is appropriate for our customers and the services we are providing.

And I would also say, Justin, there are going to be opportunities for us to increase prices more than likely in 2009. But I can't comment as to what they will be and when they will be.

Okay. Discussing the trouble that you have seen with some of the retail used car dealers and the business problems they're having, are you seeing any of that in the salvage auction business? Obviously, there's a couple of large players, including yourself, but are some of the smaller players struggling? Would you expect to take share from them or do they seem to be hanging in okay?

Are you speaking specifically of auction service providers?

Yes.

Yes, I mean the small independent auction providers on both the whole car and salvage side are -- clearly there are some struggles. We have seen a few of them go out of business here just recently in the last 60 days. And we think there's potential for some of the smaller independent auction providers in both the salvage and whole car side of the business to perhaps exit.

And Justin, as you look at the sellers of vehicles, obviously, they are looking at their cost structures in these difficult economic times. And I think there's a huge advantage when you have a national player who can provide services and reduce the administrative costs of them monitoring these programs. So I think the national providers have an advantage over the independents, overall, with the insurance companies on salvage and with the OEMs and the finance companies on the used car side.

Perfect, that's all I had.

It's really a function of how much do they have -- how much time and effort are they going to put into managing the process.

Yes, got it. I appreciate it. Thanks.

Missy, I think we have time for one more question. Unfortunately, we have run out of time.

Fred Taylor, MJX Asset Management.

Yes, in terms of growth and maintenance CapEx, assume you don't buy anyone, what would the run rate CapEx be? And then I assume you have still got some plans for growth and acquisitions. If you could sort of ballpark how many you think you can do in '09?

On that second point on the acquisition front, in this environment here, we really are being very careful on where we might deploy capital. And what I would say to you is that absent an extremely, extremely favorable opportunity, we will probably have very limited to no acquisition activity in '09.

On the CapEx front, we currently are taking a hard look at where our overall expenditures are there and we are trying again to be very disciplined in making sure that the CapEx dollars that we're deploying are where they are needed and that they are delivering the kind of returns that we are looking for.

Fred, specifically, we are have covenants in our term loan that limited CapEx to no more than $100 million in '08. That number declines to $80 million in '09. However, we are allowed to carry over any unused portion of '08, not previous years, just the most recent year. And I indicated today we think we'll be just below $90 million, so that would give me $10 million of carry over. (multiple speakers)

But you don't think you'll go that level.

I don't think you're going to see us anywhere near those levels.

And we would expect -- I mean I haven't given guidance yet. In the fourth-quarter call, I usually give an idea as to where we see the CapEx for the following year. We probably, as I have indicated and when Brian and I were out on the road with Jim Hallett, kind of the maintenance CapEx number with our acquisition has grown from the $45 million to $50 million to probably in that $55 million range, would be what we have to spend every year just to meet the needs of our customers.

Which is systems related for the most part?

No, it is physical infrastructure plus systems. On the maintenance side, I would tell you the systems piece of it is a small subset of that. Our heavier investment in CapEx is heavily systems-related in terms of '08 and '09. But if you have got to the maintenance number, Fred, I would tell you that is not the biggest component.

Okay. Thank you very much.

I think that's all the time we have today, Missy.

Thank you. That concludes today's conference. Thank you for joining us and have a wonderful day.