Openlane Inc (KAR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the KAR Holdings, Inc. 2008 fourth 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, Inc.

I would now like to turn the call over to Mr. Loughmiller. Please go ahead, sir.

Good morning, and thank you for joining in today's KAR Holdings fourth quarter earnings call. Today, we will discuss the results of operations of KAR Holdings, Inc. and its predecessor companies, ADESA and Insurance Auto Auctions.

As you know, KAR Holdings completed its acquisition of ADESA Inc. and simultaneous merger of Insurance Auto Auctions in April 2007. Accordingly, we will provide commentary on the performance of KAR Holdings, and to the extent necessary, its predecessor companies.

At the conclusion of our commentary, we will take questions from participants. We will try to accommodate all questions at the end of our call, but we will have to end today's call at Noon Eastern time, whether the questions are completed or not.

Before we begin today's discussion, I would like to remind you that this conference call may 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 it over to Brian Clingen for some overall comments on our performance and other items of interest.

Thank you, Eric. Thank you, again, everyone for participating. As we've done in the past, I'd like to give you some commentary on both the fourth quarter results as well as our full year activity in '08, and then some commentary and outlook on our '09 plan.

In speaking on the fourth quarter, the last time we conducted this call, which was early in that fourth quarter, we mentioned to you some significant deterioration in the marketplace, certainly for used cars and the overall environment that was dramatically affecting our businesses, both in the retail financing of cars, activity going on in the proceeds in the salvage auction unit, and continued strain on the dealership base for our finance business.

We continued to see those sorts of strains for much of the fourth quarter. I would say that that environment bottomed, we believe, in late November. And in December and into the first quarter of this year, we've seen a strengthening, both in our whole car auction business activity, as well as some improvement in some of our overall finance business.

So with that as a backdrop, what I would like to do is walk through each of the business units, starting with AFC, our finance business. And here, our customers experienced a double impact throughout 2008; the first occurring earlier in the year, with the oil prices rising very dramatically, causing a severe reduction in demand for both SUVs and pickup trucks.

The shock to the inventories that many of our dealers had on their lots and the losses that they took would, in and of itself, have made for a very, very difficult year, and would have caused a number of these dealers to go out of business, as they did.

In addition to that, to have the late third quarter and fourth quarter overall, what I would call, collapse in sales volumes, driven by many of the circumstances that you are all aware of -- retail automotive financing, et cetera -- that, combined with the earlier inventory shocks, resulted in really an unprecedented year for our customers at AFC, who as you know, are the independent used car dealers.

As a results of both of these, we saw record numbers of failures at these dealers and a significant reduction in the overall number of independent used car dealers. Our response to that situation was to make some significant changes in the way we conducted business at AFC.

We changed many of our underwriting practices; we had a number of pricing changes. The overall cost structure was adjusted fairly dramatically, and we believe that we needed to make these very significant changes in a very quick, short order, and believe that we did get them in place -- the result of which has been a significant reduction in our overall receivable portfolio at AFC.

And as Eric will discuss in more detail a little bit later, from a high of approximately $850 million in receivables at AFC, by the end of the year, that number was down to approximately $500 million. And as of today, it sits at something under $450 million. So, a very dramatic, but intentional reduction in the overall receivable portfolio that we have there.

But the changes that we made in pricing and, we believe, the changes that we made to adequately compensate us for the risk, as well as the underwriting changes that we made and the credit that we extended to the dealers, we believe were the right decisions, and have positioned that business to succeed as we move forward in the future.

So, it's been a very difficult year for AFC; difficult environment. In spite of all of that, the business itself generated almost $50 million in cash flow, and we believe it's positioned to improve upon that in 2009.

On the two auction businesses, the ADESA whole car business, as I mentioned, we saw dramatic declines in volumes in our conversion rates in the September/October and into Novembers periods. But then starting really in December, and what has continued in the first couple of months of this year, have been a significant improvement in auction activity and overall sales volumes.

And we believe that this is reflective of what many of you have probably read in the general press, of what appears to be a strong and continuing-to-strengthen used car market that may be somewhat driven by the fairly dramatic declines that continue in the new vehicle sales.

So we are cautiously optimistic with the overall sales volumes and activities at ADESA. Again, they did have, for much of the third quarter and fourth quarter, a very difficult environment where dealers were not active, and the consigners some dramatic reductions in the prices that they were receiving, and pulled back significantly from moving cars.

And then finally, at our IAA Salvage auction business, in the fourth quarter, we continued to experience a weakness in overall proceeds, driven in large part, we believe, by a decline in scrap metal values, as well as a strengthening dollar and a weakening economic environment in Eastern Europe, where many of our international buying is concentrated.

So, the combination of those definitely affected significantly weaker proceeds in the fourth quarter. And while we've seen some modest improvements in that in the first quarter, most of those effects, i.e., the scrap metal prices as well as the dollar and weakness of many of our international buyers, continues into the first quarter of this year.

With that being said, volumes at IAA continue to be very strong. 2008 as a whole was an extremely good year for IAA in spite of the significant weakness that we saw in the fourth quarter. And with some extreme weather, which we are seeing in many parts of the country, we continue to see strong volumes coming in at the IAA salvage business.

So, we are watching carefully the proceeds there and continue to be concerned about weakness. We do think that that can be offset in some part or perhaps, large part, by increased volumes.

So that is a brief recap on what happened in the three business units for 2008. As I said, in 2009, the first two months have given us some cautious optimism. We continue to be very careful and very watchful of the overall environment out there.

Our focus continues to be on cost control, with even an increased level of scrutiny on costs and discipline throughout all of the business organizations. But we, again, continue to be pleased with the business in general. In 2008, in spite of the very difficult environment, we saw year-over-year results, which were roughly flat, and that was in the face of the significant decline that we saw in the AFC finance business.

And in 2009, we continue to plan and be hopeful for recovery in the finance business and continued success in the two auction businesses.

So with that said, I'll turn it back over to Eric for some more of the details on the numbers.

Thank you, Brian. Last night, we reported our financial results for the fourth quarter and for our year ended December 31, 2008. KAR Holdings, Inc. net revenues for the fourth quarter of $396.2 million were 0.6% less than the prior year.

Adjusted EBITDA, as defined in our senior credit agreement for the fourth quarter, aggregated $57.8 million compared to $87.7 million for the fourth quarter of 2007, a decline of 34%.

KAR Holdings reported revenues of $1.77 billion in 2008 compared to $1.59 billion in 2007, an increase of 11.5%. Adjusted EBITDA, as defined in our senior credit agreement, was $57.8 million in the fourth quarter -- I'm sorry, I'd given you a bad number there -- was $396 million for 2008, which was comparable to the adjusted EBITDA of $395.5 million in 2007.

Now I would like to discuss the performance of each of our business segments. ADESA auctions reported revenue of $260.7 million for the fourth quarter of 2008, compared to $245.4 million for the prior year, an increase of 6.2%. The increase in revenue is attributable to a 5.7% increase in the number of units sold in the fourth quarter, as compared to the prior year, combined with a slight increase of about 0.5% in the average revenue per vehicle sold.

Gross profit for the ADESA Auction segment of 37.6% for the fourth quarter was below the gross profit percent of 40.2% in the prior year. During the fourth quarter of 2008, institutional vehicles represented 75% of the vehicles sold as compared to 66% in the prior year. This heavier concentration of institutional vehicles results in higher labor and other costs associated with selling the vehicle, and contributes to a lower gross profit percent.

Selling, general and administrative expenses for the fourth quarter of 2008 increased 17.1% compared to the prior year. The increase in SG&A expenses reflects the costs associated with Project Pride, including consulting fees, retention payments and severance, and the loss on sale of properties in the sale leaseback transaction completed in the fall of 2008. Excluding such costs in both years, SG&A was flat in the fourth quarter of 2008 as compared to the prior year.

ADESA Auctions revenue for the year ended December 31, 2008 of $1.1 billion represents an increase of 16.4% over 2007 revenue of $965.5 million. The increased revenues reflect a 10% increase in units sold to just over 2 million. In addition, we realized a 6% increase in the average revenue per unit sold in 2008 as compared to 2007.

Our mix of vehicles has changed, consistent with the auction industry. We have seen fewer dealer consignment vehicles sold at auction in 2008, with increases in fleet lease and captive finance vehicles. The increase in vehicles sold from these two sources reflects both the increased number of off-lease vehicles and the increased numbers of repossessions during 2008.

Our conversion rate for 2008 ended the year just above 60%, consistent with prior years. However, the mix of vehicles to a heavier concentration of institutional cars, especially in the fourth quarter, contributed to this 60% conversion rate. The decline in dealer consignment vehicles that historically convert at lower rates was more than offset by the increase in institutional vehicles that historically convert at higher rates. We saw vehicle prices decline in the fourth quarter, especially in October and early November, which caused lower conversion rates than expected for this period of time.

However, late November and December saw stabilization of pricing and higher conversion rates, as suppliers looked to monetize its growing inventory of vehicles sitting at our auctions.

Insurance Auto Auctions revenue for the fourth quarter of 2008 totaled $124.4 million, an increase of 2.2% over revenue of $121.7 million in the prior year. Salvage units sold in the fourth quarter of 2008 increased 9.6%. Obviously, this highlights the fact that we experienced lower revenues per vehicle sold during the fourth quarter of 2008, as compared to the prior year. In fact, we experienced a 7% decline in average revenue per vehicle sold. This reflects the combination of many factors that negatively impact the salvage business in the fourth quarter.

We had declining commodities prices for scrap metals; a strengthening US dollar, which impacted the foreign buyer base; reduced wholesale used car prices in all categories; and reduced profitability for automotive parts and aftermarket parts suppliers, which put negative pressure on the values bid at auction.

IAA's gross profit for the fourth quarter was 28.2% as compared to 33.1% in the prior year. This decline in gross profit was solely attributed to the declining revenues during the period. The fourth quarter is historically a softer quarter on pricing for salvage vehicles, and this situation was exacerbated with the economic conditions impacting car values.

IAAI's 2008 performance, notwithstanding the difficulties in the fourth quarter, was quite strong. Revenues increased 14.1% to $550.3 million in 2008 from $482.5 million in 2007. This strong growth in revenue reflects a 13% increase in the number of vehicles sold. Although the increase in vehicles sold was primarily the result of units sold at acquired auctions or new greenfield locations, we still experienced a 3% growth in same-store units sold.

IAAI was able to generate a consistent gross profit percent in 2008 as compared to 2007, despite the performance in the fourth quarter. Gross profit was 34.1% of revenue for each of the last two years.

Operating profit for IAAI increased 45.8% to $55.7 million in 2008 as compared to $38.2 million in 2007. This strong performance reflects the ability of IAAI to grow its revenue 14.1%, while controlling SG&A costs, which only increased 3.4% in 2008 as compared to 2007.

Despite the pressures on salvage vehicle values and the economic conditions affecting the salvage auto industry, we believe IAAI is well-positioned to be a leader in the industry. We continue to be committed to our hybrid auction methodology, which optimizes the proceeds at auctions for our vehicle providers.

In addition, we continue to invest in our operating systems, which support IAAI and our customers, in the tracking of vehicles through the salvage process, and providing data on the sale of comparable vehicles, which allows the providers to assess performance at our auctions, as they seek to maximize returns on their salvaged vehicles.

AFC's performance in the fourth quarter was a challenge. AFC has seen the impact of difficult economic conditions in the financial services industry and the retail automobile space, combined with unprecedented levels of failures of independent used car dealers.

These factors are magnified, as AFC continued to tighten lending criteria, reduce credit limits, and improve the overall credit quality of its portfolio. All of these factors have contributed to a steadily declining receivables portfolio since the first quarter of 2008.

During the fourth quarter, AFC experienced a 24% decline in floor plan fee income and a 38% decline in net interest income before the impact of bad debt, as compared to the prior year. This is the result of a 28% decline in units floored in the fourth quarter of 2008 compared to the prior year. In addition, AFC recorded $17.6 million in bad debt expense in the fourth quarter, most of which is reflected as a reduction in net revenues at AFC.

For the year ended December 31, 2008, AFC net revenues of $97.7 million declined 31% from $140.9 million in the prior year. Approximately half of this decrease, or $20 million, relates to increased bad debt expense recorded in 2008. The remainder of the reduction reflects reduced net interest rate spreads on loans and the reduction in the number of loan transactions in 2008, as compared to the prior year.

Even though we have focused on decreasing the size of our receivables portfolio, we continue to believe AFC is an important segment for KAR Holdings. We will continue to focus our lending to independent used car dealers, purchasing automobiles at auctions in the United States and Canada.

Now let me speak to our liquidity and capital resources. KAR Holdings continues to generate significant cash from operations. We had $88.9 million in available cash at December 31, 2008, an increase from $81.6 million at December 31, 2007.

During 2008, we were able to repay $59.3 million of our term loan. In addition, we expended $129.6 million on capital projects, including $38 million for the relocation of our Kansas City auction.

And during 2008, we completed the sale and leaseback of eight existing ADESA properties that generated $80 million in proceeds, of which half was used to repay debt, and the other half is available for reinvestment in the business. In addition, we did substantial acquisitions in 2008, which also used the cash from operations.

As we look forward to 2009, we expect our capital expenditures to be approximately $75 million. In addition, we continue to have ample loss carryforwards and deductions to avoid cash federal taxes in 2009, other than a small amount of AMT. We will have cash taxes related to several states and Canada that should aggregate less than $15 million.

That completes our remarks on the fourth quarter and the calendar year 2008. I will now turn it back to our Operator, Colleen, for the Q&A portion of our call.

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

I guess maybe just to start off, thinking about things sort of generally, I guess there's been a lot said recently, as you said, in the press about the used car market in general improving; but at the same time, people are questioning what demand for cars in total in the US will be; maybe hypothesizing that we're going to be, in terms of new car sales, at a rate that's lower than the scrappage rate in the US for the next couple of years. And speaking to the fact that that could be a function of the number of cars per household decreasing in the US.

Could you just talk about whether or not you buy into that? And then what affect do you think that would have on the used car market?

I think that some of the experts, if you will, have sort of been all over the map. I saw a study out yesterday calling for a couple of years of 8 million vehicles now being the level. There are other reports out that 12 million is still the number that is realistic for the next year or two.

I guess all of that is to say it's very difficult for us to draw any sort of conclusion, based on the environment that we've seen over the last three, four months, and trying to extrapolate that out for the next two, three years. I think Tom Kontos and our analytics folks believe that the market is going to stabilize somewhere in that range of 11 million to 12 million vehicles per year. I don't think that he is currently in agreement with some of those more dire predictions, but that's not to say that he's necessarily going to be right.

I think our focus right now is trying to operate the business in the environment that we're in right now. It clearly has been a much weaker new and used car environment over the past 12 to 14 months. The uptick in the used car market in general, over the past 60 to 90 days, we think could well be a reaction to some drastically-reduced new vehicle sales, as well as people trading down, if you will, from a new car to a used car as they either go into a vehicle or exchange it.

But I guess that's a long-winded way to say that we've really been trying not to extrapolate one way or the other, two or three years out, based on the activity that we've seen in the past three or four months.

And Kathryn, another factor in our favor -- or a couple of factors -- one is, the scrappage, which it goes well beyond the salvage business, but the cars taken out of the market, which means they don't renew their licensing, is greater than the new car numbers under any of the scenarios Brian just discussed.

And also some early data is out, where it appears there's an increase in miles driven now early in 2009, which we've had a decline for several months at the end of '08. With more miles driven, cars -- the age of the fleet or the age of cars on the road getting longer, that all bodes well for, to be honest, for there to be more scrappage and more replacement vehicles. And right now, used cars are an excellent alternative to a new car when you're replacing a vehicle.

I guess if you're thinking about that substitution effect and maybe going from a new car down to a used car, I think in the past, you had come up with some sort of ratio where you thought there would be a more definite substitution effect. Are we there?

And then if we are, what you think about how long people will substitute, and then how long it will take for that effect to increase the prices, such that it isn't as great of an advantage to switch down to a used car?

I mean, I think sort of the perceived wisdom has always been that in times of weak economic activity, that the used car market would benefit by that. And I do think that we're seeing some of that, and I think our analytics folks would say that we're seeing some of that.

And to the extent that the economy remains weak for an extended period here, it probably bodes well in general for the used car market. We do reach a point where -- and some would say we're seeing some of it now -- where used car demand strengthens to the point where prices start to get to a level, in the used car market, that the new cars and new vehicles sales then become much more competitive again.

I don't think we're there right now, but that certainly is a dynamic that could come into play, if we saw the used car market remain as strong as it's been over the past 30 to 60 days, for an extended period over the next 12 to 14 months.

And Tom Kontos does track that index, Kathryn. At our Analyst Day in Boston -- and that presentation is available on our website and was filed as an 8-K -- you will see a chart in there that shows the percent of a used car value to a new car has been declining. We've seen prices probably stabilize to maybe slightly increase early this year. But he indicated in his presentation that that was favorable to the used car market.

Okay, that's helpful. And then maybe just switching gears to AFC, I guess, given what's gone on over the last year, where do you stand in terms of your strategy with AFC? I think in the past, you said that somewhere between 10% and 15% of cars that are sold at ADESA Auctions use AFC to finance that purchase.

And from the flip direction that, if you look at AFC's portfolio, that 40% of AFC's portfolio comes from ADESA Auctions. Are you trying to align AFC to be more just focused on increasing sales at ADESA? Or how should we think about that? And how should we think about where we are in the cycle for AFC?

Well, I think that our focus really has been on some credit and some underwriting discipline, and really a strong effort to rightsize the portfolio to reflect the conditions in the overall marketplace. And we think much of the heavy lifting has been done there. We're extremely pleased with where the portfolio is right now.

We've seen very significant improvements in our overall delinquencies. We think that's going to translate into a much improved situation, as it pertains to charge-offs. And really, the focus of AFC now has begun again to be looking for growth and growth opportunities in the portfolio. It would be natural that we would turn first to opportunities that exist right at the ADESA Auctions. And we are doing that.

We have a new CEO at AFC, Don Gottwald, who came out of, most recently, HSPC's Automotive Finance business, but spent a number of years inside GMAC's organizations. And he has brought, I think, a lot in the way of new ideas of where we can take the portfolio.

But yes, we will be turning back to a mode of looking for profitable growth for AFC. We think we do have the portfolio at a level and a size that we can begin to look at growth opportunities again.

And Kathryn, we go beyond the portfolio -- individual customers, we've watched their behavior, and Don and his team have really monitored this. One of the things that we've been able to be successful in is getting them to have capacity within their credit limits, so that now that perhaps they start to see some activity this year, they have the capacity to borrow and they haven't used it on old units that are sitting on their lot, perhaps valued improperly for sale.

So, I think we're well-positioned. We probably do need some help from the economy and some improvement in the availability of credit to the consumer, to really see used cars take off again.

Okay. And then just one clarification on the number you said, I think, before -- did you say that $18 million of the whole year's write-offs of $20 million happened in the fourth quarter, in terms of bad debt write-offs for AFC?

Yes, I actually said $17.6 million.

I round it out. So, given the short duration of that portfolio, should we -- I mean, can we expect that all or a significant number of the write-downs have happened in the quarter, and that we won't see that going forward? Can you just give us some color on write-downs, then?

Well, I mean, you are right that because of the short-term nature of the receivables, the write-downs, in large part, have been taken. That's the good news. The bad news is, if we saw another leg down in severe deterioration in the economy, the short-term nature could result in increased write-downs later in the year again.

We don't see that and we don't expect that, but that really is the reality in the situation there, as far as it pertains to charge-offs.

I guess would your new -- I mean, you said you've put in some new standards for your portfolio. Would those new standards -- would you think that any write-downs in the future would have less of a magnitude, though, just given what you're trying to do with customers and monitoring? Would I see another $18 million write-down?

No. We believe that we've made changes in our underwriting procedures and many of our operating procedures that should not expose us to the kind of charge-offs late in 2008.

Okay. And I guess the size of the portfolio is also smaller, so that would limit those as well, I would assume, as a percentage of the total?

That's correct.

Kathryn, we should probably allow somebody else to ask a question.

Okay, thank you.

Jeff Skoglund, UBS.

You mentioned that the delinquency rates are significantly improved. I was wondering if you could maybe quantify some of that improvement.

I mean, we don't release any of the specific numbers, but I can tell you that our overall delinquency right now, as it would compare to, say, 90 days ago, is it is a factor of probably three times, three to four times better than what it was. So it is a very significant improvement that we are seeing in early-stage delinquency right now, from where it was a few months ago.

And the portfolio is down overall, but what is the -- did you change the advance rates on floor plan financing? Your offering -- sorry, are you guys less exposed on a per-vehicle basis than you might been a year or two ago?

We have made changes and adjustments on certain of those transactions. We feel that -- and we did a very thorough assessment of where we were taking our losses and how that correlated with some of the transactions, and made adjustments in the advance rates in a number of other areas.

Where are those advance rates generally now?

You know, again, for competitive reasons, we don't give you the details on everything. But we have different advance rates as it pertains to a purchase at our auction, versus potentially a purchase off another venue or a non-auction purchase. And those would be where you would see significant differences in the advance rates.

And Jeff, we still have a number of loans that would be at 100% loan to value.

Did you give the ending managed receivables for AFC for the end of the year?

No, we've not given that yet. It's just over $500 million. And you'll get the details of that when we file our 10-K.

And lastly, have you given any thought to buying back some of the loans at the current discount level?

Well, we've -- I get that question a lot, Jeff. We have restrictions in our credit agreement that make it difficult for us to buy back loans, given our capital structure and the fact this is a covenant-like deal. So there is very limited opportunities to do that within our credit agreement.

Okay. You haven't thought about trying to seek an amendment?

At this point in time, we think, as Brian mentioned in his commentary, the real focus is to build up our cash balances to be able to repay the term loan. We've not pursued an amendment at this point.

And then lastly -- actually I think that answers all my questions. Thank you.

Matt Nemer, Thomas Weisel Partners.

Thanks for taking my question. The first question I have is on the whole car business. I thought I saw an announcement recently that GMAC was going to use the Web for almost all of its fleet sales. I'm just wondering if you can comment on that development.

Yes. GMAC has their Smart Auction product, which is an online auction venue that they have used now for a number of years. And frankly, have been attempting to move all their vehicles through, at least initially, the Smart Auction online venue. So that is something that's been going on for a number of years.

They have moved a considerable percentage of that volume over to their Smart Auction product. And GM and GMAC in total are no longer nearly as large a customer as they've been in the past. But as I said, that's sort of a dynamic that's been going on for about three years now.

Okay. But was the announcement -- I thought it was more to the effect of that they were going to use the auctions -- rather than their own internal Smart Auction, they were actually going to use either you or Manheim's online platform to sell the vehicles as well?

Matt, that announcement was they're running -- they're going to use the Internet on their closed factory auctions, which is only their franchise dealers purchasing. And they're still using the physical auction space. The only difference is they're showing a photo of the car and not running it through the [link].

Got it. Okay. And then secondly, on the Insurance Auto Auction business, it looks like your revenue growth decelerated from this third quarter to the fourth quarter by about 12% or 13%. Is there anything in the year-ago that may have impacted that in terms of acquisitions? Or is that a reasonable proxy for the change in same-store sales?

Well, no. I mean, number one, I haven't checked your math, Matt, but the decline is really related to the selling price of the vehicles, which correlates to the auction revenue we generate -- primarily on the buyer fee. So if you're looking at -- I gave you the same-store unit sales at 3%; but yes, you are correct, that there was a decline in same-store revenue.

Okay. And can you give us any kind of directional sense of what the same-store revenue change was during the fourth quarter?

You know, I don't have that, Matt. I'd have to follow up with you. I just don't have it here. I mean it's --

And I would say that the weakness in that number we believe was fairly extreme. We've seen some improvement in that in the first quarter of this year. So, I would hesitate to extrapolate the kind of decline you saw in the fourth quarter throughout 2009. That's not currently what we anticipate, although as I said, we're watching overall proceeds at the salvage auction level closely.

And that leads into my next question, which is, there's a dynamic here where, as ACVs or proceeds decline, it could increase the number of total loss units. And I'm just wondering if you have any sense, as you look out into the year, if those two end up offsetting each other? Do you think we still end up being negative? Or how -- what's the dynamic between those two forces?

It's a good question and it is something we're looking closely at; because, as I mentioned, volumes have continued to be strong. I think that the changes in ACVs are somewhat driving that volume. I think not to the extent that weather in general does, but nevertheless, our volumes continue very strong. Weakening proceeds against that, there would be just a normal supply/demand relationship that you would expect, that those stronger volumes will put even more pressure on proceeds in general.

So again, it's difficult for us to predict how that is going to play out this year, but we do continue to be concerned about overall proceeds. And certainly, volume levels are going to effect that.

And Matt, right now, I mean, we're like you; we're saying we think they offset. We're flat to plus or minus a low single-digit percentage. And we can't get any more precise.

I will say that -- I made a comment -- the early indication is miles driven did increase in January and February, or at least has begun to increase sequentially. That will also be a positive end factor, as there's been a direct correlation in terms of number of insurance claims to miles driven. So we would hope that would also be, I guess, a positive for our salvage business.

Got it. And then my last question is, if this pressure on proceeds ends up being more permanent, do you target dollar buyer fees? In other words, are you looking to achieve a certain dollar/buyer fee and therefore, you might increase prices to get there, if we see this as more permanent?

Well, all's I'll say is we don't discuss our pricing strategies on this call. And we're constantly looking at the right mix of buyer and seller fee, and pricing to the market. This is a competitive environment. And we're looking at it constantly, making sure that, to be honest, we run this business profitably. But we don't have any more discussion on the strategy than that.

Okay, thanks so much.

Ivan Holman, RBC Capital Markets.

Good morning, it's Ivan Holman. Thank you for taking my questions, first of all. I was hoping that we could focus a little bit on having a follow-up on the ADESA volumes. I believe you said that your units increased by about 5.7% for the fourth quarter. First of all, is that number correct?

Yes, that was the -- let me confirm it -- a 5.7% increase in the number of units sold, yes.

Okay, great. Thank you for finding that. And I guess what I was trying to get at was just in terms of the pace of business. You mentioned that really had hit a head wall in terms of volumes in November. Could you give us an idea if -- what those unit volume increases look like with a monthly perspective in January and December? Was it far, far above that 5.7 kind of average for the quarter? What was the rate of acceleration? Is there a way that we could look at that?

Well, we're not going to comment on the first quarter until the first quarter ends. But what we will tell you is we've seen excellent activity at the auctions. The only thing I'll warn you on is we had a very strong first quarter last year, so the comps are quite difficult.

Okay, all right. Thank you. And just kind of switching gears, just from a competitive perspective, do you feel that the auctions have been gaining a bit of share from either the indies or perhaps [Copard] or any other players? Would you be willing to comment on that?

Yes, I mean, we're probably less focused on what's going on with the competitors. I would say that in both our whole car and salvage auctions, we've been pleased with where our volumes are and what at least our perceived share of the market has been, and how it's been moving.

So, we think we are moving in the right directions, and we're more focused on working with our customers and trying to remain a preferred provider in every instance that we can.

All right. Well, thank you very much. That answers my questions.

Saurabh Jain, Bay Harbour.

A couple of quick questions. Number one, there seems to be some confusion with respect to your covenants. I've seen some reports on the Street saying that there's the senior secured leverage ratio of 3.75 times in the fourth quarter, but that only applies if there's anything drawn on the revolver or any LC's outstanding. Can you tell us if that's correct or not?

We actually file our compliance certificate with a statement that that covenant only applies when we are drawn on the revolver. Letters of credit do not constitute a draw on the revolver.

Okay. And just on the second question -- as you -- I know it's very difficult to do, but if you run your stress scenarios for a difficult 2009, and when you look at your cost structure, how much is variable, how much is fixed -- what's your kind of worst-case modeling expectations for 2009? Do you see any scenario where that you could approach some kind of covenant default or anything like that?

We'd probably not want to talk about 2009 in total, other than to say we remain very comfortable with our capital structure and with where we see the business performing this year. So, again, we have a comfort level. We think the capital structure we have in place right now and our expectations of the business, even if we stress them, leave us feeling comfortable right now.

Just to pressure you a little bit more on that, let's say General Motors, Chrysler and Ford all filed Chapter 11 and let's say, in the same month -- would that be a big cash usage for you guys? And how much would you potentially have to draw from your revolver, if anything, if that were the case -- even if it were just for a short period of time?

Yes. And we've looked carefully and obviously been watching carefully the situation there. So we have worked very hard to minimize our exposure to bankruptcies coming out of any of the domestic manufacturers. We've got a small trial run with the recent bankruptcy of Saab, where we have some cars on the ground and some cars that we finance there.

So again, we have been watching that situation very closely, working with our exposures there, and no, we don't anticipate that even all three of them filing at once would be a circumstance that would cause us any sort of life-threatening event.

And Saurabh, keep in mind that our single largest component of cost at the auctions is labor, and a significant amount of it being hourly, not even salaried. So we have the ability to react to situations fairly quickly.

Right. And just lastly, on CapEx for 2009. You guys spent a fair amount in 2008, but what's your maintenance costs and CapEx costs and what's your estimation on what '09 will look like?

Well, I'd given you guidance that about $75 million is our target for next year, and I don't think there's a change. Previously, Saurabh, I've mentioned on calls like this that our maintenance number is probably around $50 million in the business the size we are. That would include some recurring updates. We have pavement and things like that. There might be some flexibility on the timing, but generally speaking, it's about $50 million and we don't get to move off that number too much.

Okay, thanks so much.

[Phillip Popacelli], Cantor Fitzgerald.

So, if I'm looking at 2009, and just some broad numbers here, your cash interest expense is about $200 million. You've stated that your target CapEx is about $75 million and you stated that your cash taxes for Canada is about $15 million. That totals about $290 million. So your business would have to decline roughly $100 million before you'd be free cash flow negative. Is that accurate?

That's roughly accurate, yes.

And then in terms of the $88.9 million of cash you have on the balance sheet, how much do you need to keep on the balance sheet to run the business? Can you draw that down to $0? Or do you need to keep a certain amount there for comfort?

We -- again, back to the Road Show even, Phil -- we've always felt we need to have access to about $50 million to handle the float, because we're settling the sale of cars with the sellers. So I would either -- I would want access to $50 million, either in cash or availability on the line of credit.

Got you. And then let's say, Armageddon occurs and you to get to that point, do you have an equity cure option with your sponsors? Do you think your sponsors -- do you have the option, one, and do you think your sponsors would utilize it, two, if you were to face a covenant issue later this year?

We have an equity cure in our agreement. And I don't think any of us should speculate what anybody would do until you have all the facts in front of you.

Okay, great. And then just my last question -- in terms of the whole car number of vehicles auctioned this year, do you have that number? For the whole industry.

You know, I'm not -- Tom Kontos puts out a report with that. I have not seen it. I do believe he has given one commentary where he projected the industry was down 2% to 3%. And that's out of his. And we do know that the number in 2007 was $9.6 million. Those are facts I can give you, but I have not seen a published, actual number yet.

I appreciate that. I'll let somebody else ask questions. Thank you.

Duncan Vise, AIG.

Just a couple of clean-up questions. One, the other expense line item of $15 million -- can you tell me what's in that?

It's predominantly foreign currency related to -- to be honest, it's an intercompany loan between Canada and the US that doesn't get eliminated. It is an add-back, though. The majority is, it's almost $14 million is foreign currency translation.

Okay. And then just on the AFC business again, I mean, where -- given all the changes that you've made to that business, I mean, you obviously say they did $50 million of EBITDA for '08 and you expect it to be better next year. Based on how you're looking at the business today, I mean, what's a normalized EBITDA, I guess, for AFC or how you're thinking about it?

Well, I think there's two components. One is obviously the portfolio size drove, in large part, the much higher EBITDA levels of a few years back. So, we see the portfolio size probably remaining at a much smaller level than it had been running.

But the other component is the pricing and moves that we've made in the overall pricing in that business. And we have made some significant changes to compensate us for perceived risk in that business. And we think that the business can be much more profitable than it has been, at a smaller portfolio size.

So what I would say is that we think that we will be able to generate significantly more cash at a smaller portfolio level. So, if our high watermark for that business was [$100 million plus EBITDA], and we're down to $50 million last year, I think it is very reasonable that you could see the business generating, on a normalized basis, somewhere north of the midpoint there.

Okay, that's very helpful. And just last question, just revenue per vehicle on the whole car business. It was up about 0.5%, I think, Eric, you said in the fourth quarter. The growth there has been kind of coming down steadily over the last couple of quarters.

What's driving that? I mean, when you look at the business, what's changing? Are people pulling back on some of the ancillary services? Or is it a lower fee mix? What's driving that?

Well, what's driving it, Duncan, more than anything is we had such great growth early in the year. It's flattening out because at the end of '07, you're comparing to numbers where my current sales team had already had success.

The absolute number remains quite strong -- in the mid-500's -- I mean, I'll give you some ideas. And when we did this transaction in April of '07, the average revenue per vehicle was in the 470 to 475 range. So, I think it's a matter of comps more than it's a matter of performance. And you are seeing some mix shifts.

Also, as -- Duncan, keep in mind, as values declines on a vehicle, they're more than likely not going to spend as much on it, because they aren't sure they'll get that return on that investment. So there is a little bit of maybe pullback, but you don't see it too much in our average revenue per vehicle.

Okay. So when you think of '09, then you're thinking somewhere more roughly kind of flat then versus what you saw in '08? Maybe down slightly?

Yes, I would tell you with the comps, I would expect the increases to be probably more mid to low single-digits as I look at it now, but it will fluctuate based on mix.

Okay, thank you.

Kirk Luedtke, CRT Capital Group.

You mentioned early in the call that credit availability to consumers is one of the keys to the business. I know that there's a lot of government programs being rolled out in a relatively short period of time. And it's sometimes tough to anticipate where all these are headed. But do you see anything on the horizon, either expanding the TALF beyond consumer loans to small businesses? Maybe reducing the AAA-rated bogie to something less than AAA? Do you see anything on the horizon that could be a game changer for financing used car dealers or consumers?

Yes, and I -- look, I think that what we've read on the TALF and the information we've gotten on the TALF, I did notice that the first applicant at the TALF will be World Omni, with a portfolio of retail auto loans. So, we do think that that is going to incrementally be a help.

I would say also that in general, the dealers, both on an independent used basis and the franchised dealers, have gotten very creative on getting their customers financed. So the increase in particularly used car sales has come along with a greater availability of retail financing. And some of that's been creative.

The buy here/pay here space at the lower end has taken up a lot of the volume that was formerly provided by some of the subprime lenders that now don't have access to credit. And I think that some of the less-than-prime lenders have seen their businesses improved dramatically by seeing what formally was a much stronger customer that they never would have been able to finance before.

So we do think that there is some loosening and some availability that's occurring in the retail auto financing space. Certainly, it could improve further. And we hope that things like the TALF are going to make a difference.

It doesn't sound like you have any applications into these programs yourself -- the benefit would be more indirect?

Yes, from our standpoint, our funding is in place and secure and priced extremely favorably for us. So it wouldn't be of interest to us. And I think, given the AAA requirement, and we're an AA credit, it wouldn't be available in its current format anyhow.

Yes. I'm just thinking if you enhanced the receivables in some manner, you could -- you may be able to qualify for maybe something --?

Yes, again, if we were challenged in the funding that we have at AFC right now, we certainly would be taking a harder look at it. We feel very good about the funding that we have in place right now at AFC.

Okay, great. And then with respect to the outlook for 2009, do you expect the balance sheet to be a source of cash? Do you expect -- you mentioned that your AFC receivables you thought would kind of stay about the same level, but do you see any other opportunities to shrink the balance sheet, the working capital accounts and generate some cash?

We've been pretty diligent. There are probably opportunities; nothing that I could point to specifically. We do have some properties that we would investigate for potential sale leaseback. But, again, in the current market environment, I can't predict whether we could actually get that done at a price interesting to us.

So, at this point, this business, I think our balance sheet is reasonably lean. There's probably opportunities but they're not very significant, but we're looking at them every day -- particularly in accounts payable management is areas where we're focused, in particular.

How much might the proceeds from the sale leasebacks be if you --?

I can't predict. We have a couple hundred million dollars in asset value on our balance sheet. We completed eight properties in the fall. It really comes down to pricings. And we just completed Kansas City and we'd look at that as well. And that was about a $40 million project. So, I mean, it'd be tens of millions, if that helps.

We also have approximately a $70 million to $75 million Canadian receivable portfolio, which we never were able to get securitized in our existing facility or a modification of. So, it is something that we still, at some point, would like to take a look at, providing some sort of funding off the balance sheet for. That would be a significant source, if that market loosened up again.

Okay. And then last question -- do you anticipate any cash restructuring in '09?

You mean restructuring costs?

Yes, I'm sorry, yes.

We haven't announced any plans that would result in that -- nothing significant at this point, but of course, we have to watch our performance to see if we have to make adjustments in our business, and we will deal with that at the time.

Okay, great. Thank you very much.

I think we have time for one more and that would be it.

Fred Taylor, MJX Asset Management.

Under the wire. I had the same question about the CapEx of $75 million -- you answered the $50 million of maintenance. Does the other $25 million include acquisitions? Or would that be separate?

That does not include acquisitions. It does include some CapEx related to properties acquired in 2008, where we have to bring them up to our standards, but that would be it.

Okay. And do you have a round number for acquisitions? It comes down to allocation of capital -- do you acquire? Do you repay debt?

At the moment, we have been very careful on the acquisition front, as you can imagine. I would certainly anticipate that we will not be aggressive on the acquisition front. We continue on a very opportunistic basis to look at things, but I would not anticipate us being very aggressive on the acquisition front in 2009.

Okay. Thank you for the call.

I'd now like to turn the call back over to management.

Thank you, everybody, for participating today. And we'll look forward to talking to you in about three months. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation. Have a great day.