Openlane Inc (KAR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's KAR Auction Services Incorporated Q4 2009 earnings conference call. As a reminder, today's call is being recorded. Today's host will be Jim Hallett, Chief Executive Officer of KAR Auction Services, Incorporated, and Eric Loughmiller, Executive Vice President and Chief Financial Officer of KAR Auction Services, Incorporated.

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

Good morning and welcome to the KAR Auction Services earnings conference call. Today, we will discuss the results of operations of KAR Auction Services Inc. After concluding our commentary, we will take questions from participants. We will try to accommodate all of your questions, but our call will end promptly at 12 noon.

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 the call over to Jim Hallett for comments on our performance and other items of interest.

Good morning, ladies and gentlemen, and welcome. Before I begin my formal comments, I'd just like to take a couple minutes and thank all of you for your interest and your investment in our Company. As you know, we completed our IPO in December, and I believe the successful completion of the IPO not only permitted us to repay a significant amount of our outstanding debt, but I also felt it was an energizing event for our employees, as well as for many of our customers. And as we go forward I look forward to an ongoing dialogue with our investors now that we are a publicly-traded company.

For KAR Auction Services in 2009, we reported adjusted EBITDA of $425.9 million. We are very pleased with the performance during a year that had as much uncertainty and economic pressure as any period during my 35 years in automobile-related businesses.

I have asked Eric to provide more details on our financial performance in a few minutes, but before we get to that, let me state that 2009 performance was on target with the objectives that we established going into 2009. And I feel this was an exceptional accomplishment and reflects the commitment of all of our employees for our customers. As well, I feel it reflects the strong and the valuable relationships that we have established with our customers in all lines of our businesses over many years.

As we look forward, we believe KAR Auction Services can generate $458 million to $465 million of adjusted EBITDA in 2010. A number of initiatives will contribute to our growth in EBITDA, and I would like to comment on a couple of the keys to our success for 2010.

First, we expect to continue to improve our EBITDA margins in all of our business segments. ADESA and Insurance Auto Auctions have had a strong track record of improving operating efficiencies over the last three years, and we expect to continue to see this improved performance in 2010. The operating efficiencies that we identified through Project Pride at ADESA are implemented at all of our 62 whole car locations.

However, I think it's important that we point out approximately only half of these facilities implemented the changes identified in Pride during 2009, and we have yet to realize a full year of the benefit from these efficiencies.

Furthermore, we continue to challenge our employees to focus on the improvements, and we will focus on further savings from these efficiencies. In fact, we have put in place an operational audit team at ADESA, and we will continually review the performance at each of our auctions. And again, I think it's important to note that the Pride Project was not just one initiative, one project, but in fact it's an ongoing initiative for all of KAR Auction Services. And accordingly, our Pride team will continue to pursue cost efficiencies in areas such as procurement, travel and related costs and other opportunities to consolidate a number of corporate functions.

We've seen 2010 begin with increased retail used-car demand and improving used-car prices. However, our industry continues to see tightness in the supply of vehicles at auction. We see the opportunity for increases in the number of dealer consignment vehicles over the next few years, and dealer consignment will be a major focus for ADESA in 2010.

We have reorganized our effort for dealer consignment business at all of our auctions, and we have established a new management team to coordinate our efforts throughout North America and put in place dealer consignment managers at each of our 62 whole car locations.

By the end of the first quarter of 2010, we will have almost 150 dedicated personnel focused entirely on dealer consignment.

The auction industry has experienced reductions in the number of dealer-consigned vehicles over the past 18 months. However, our outlook for this segment of the market is positive, and we would feel that dealer consignment, our market share will improve in 2010 and going forward.

Our Insurance Auto Auction segment completed 2009 with a very strong quarter. Increases in average miles driven, severe winter weather conditions throughout the United States and Canada and stable scrap metal prices have all contributed to our recent performance.

Insurance Auto Auctions will be completing a review of its operating processes that began in 2009. We have reengaged [Synergetics] to assist us. You may recall that Synergetics assisted Insurance Auto Auctions in its last review of operating practices during 2001 and 2004, which resulted in significant operating improvements. As well, Synergetics assisted ADESA with its Pride Project in 2007 going forward. And I believe that this initiative to review our operations at Insurance Auto Auctions is expected to identify opportunities to further our margin improvement and continue to improve our exceptional customer service levels.

Taking a look at AFC, we feel that AFC is well-positioned as we enter 2010. Our portfolio of quality remains high, revenue per loan transaction improved throughout 2009 and retail used car sales continue to increase for the independent dealers that are utilizing AFC.

As many of you know, we completed the securitization of Canadian finance receivables earlier this month, and this expanded the committed liquidity for our securitization resources from $450 million to approximately $525 million. We feel we have adequate capital available to fund our growth in this segment of the business.

Our businesses have been strong generators of free cash flow and we expect this will continue in 2010. The growth in EBITDA, combined with the relatively low capital expenditure requirements of our business, modest cash tax obligations in 2010 and the ability to control working capital and generate strong cash flows that will -- we will use to further reduce our outstanding debt.

Now I'd like to take a couple of minutes to address a few items that have been in the news recently. First, I would like to comment on the Toyota recall and the impact this has had on our business.

As Toyota dealt with the recall of its vehicles, we have taken a couple actions. We temporarily suspended the sale of the affected Toyota vehicles at auction during the month of February, while Toyota put in place the programs to repair the affected vehicles. The period of time Toyota vehicles were not being sold at auction was very short in duration, and we are now selling Toyota vehicles throughout all of our Toyota auctions throughout North America.

Second, we have had a number of inquiries regarding the announcement of an exclusive national contract with Allstate by our salvage competitor. We do not typically discuss individual customer wins and losses, but the public announcement of this contract has caused us to respond.

As we indicated in our press release last week, we were disappointed in the decision by Allstate to award all of its salvage business to a competitor. However, we value the relationship with Allstate and we will assist Allstate with the transition of this business over the course of the year. And let me reiterate what we stated in our 8-K filing. This announcement does not materially affect our outlook for KAR Auction Services.

In the second half of 2009, we had significant wins with a number of top 10 auto insurance carriers. And I think it's important to understand that each of these wins were based on objective head-to-head comparisons with our competitors. Our insurance company customers continue to evaluate their returns against actual cash value of the damaged vehicles, and we believe that our hybrid auction methodology maximizes the number of buyers participating, which we feel drives customer proceeds.

Our continued growth at Insurance Auto Actions is a testament to our track record, and we continue to believe that we can grow our salvage volumes at a rate that will be consistent with the future growth in the salvage industry. Recent experience with increased average proceeds supports our expectations for increasing revenue per unit.

In conclusion, I would like to point out that KAR Auction Services has a diverse base of business. We have demonstrated over the last three years the ability to overcome challenges in each of our industries that we serve. We will continue to invest in technology in an effort to provide the services that our customers demand, and we will continue to improve our operating efficiencies with the focus on providing the highest levels of customer service in the industry, while at the same time controlling our costs to deliver these services. And we will continue to take advantage of cross-selling opportunities available to us from the combination of physical and Internet offerings to both the whole car and to the salvage industries.

At this point in time, I will turn it over to Eric to provide more detailed review of our financial performance.

Thank you, Jim. Yesterday, we reported our financial results for the quarter and year ended December 31, 2009. Net revenues for the fourth quarter of 2009 of $417.9 million increased 5% from $396.2 million in the prior year.

Net revenues for the year ended December 3, 2009 of $1,730,000,000 decreased 2% from $1,771,000,000 for the prior year. I will discuss the components of the changes in revenue by business segment momentarily.

Adjusted EBITDA, as defined in our credit agreement, aggregated $99.7 million in the fourth quarter of 2009 compared to $57.5 million in the prior year. For the full year 2009, adjusted EBITDA of $425.9 million increased 8% from $393.5 million in 2008.

I will now provide some financial highlights for each of our business segments. ADESA Auctions reported fourth-quarter 2009 revenue of $249.9 million, a decrease of 4% from $260.7 million in the prior year. The decrease in revenue is due to lower revenue per vehicle sold of $540 in the fourth quarter of 2009 compared to $560 during the same period in 2008.

Same-store volumes for the fourth quarter of 2009 decreased less than 1% compared to the prior year.

Revenue for 2009 of $1,089,000,000 decreased 3% from $1,123,000,000 in 2008. The decrease in revenues is primarily due to lower revenue per unit sold of $540 for 2009 compared to $550 in 2008. The decline in revenue per unit sold reflects a lower utilization of ancillary services in 2009 as compared to the prior year. Consistent with the fourth quarter, units sold in 2009 declined less than 1% compared to the prior year. Although final data is not yet available from NAAA regarding total auction industry volumes, preliminary data indicates 2009 units sold at auction will decline by approximately 5% from 2008.

A factor impacting the number of units sold at auction has been significant -- a significant decrease in the supply of vehicles from the OEMs. Not only has this contributed to the lower volumes in 2009, but also this has been a major factor in the average revenue per vehicle sold. OEM-sourced vehicles have historically been heavy users of ancillary services.

Gross profit at ADESA for the fourth quarter of 2009 of 41% was a significant improvement from 37.6% for the fourth quarter of 2008. For the full year 2009 gross profit of 43.5% improved from 41.7% in 2008.

Our completion of the rollout of Project Pride at all 62 of our auction facilities was a major contributor to the improved gross profit in 2009. We also experienced improvement in gross profit due to the high conversion rate experienced in 2009 as compared to previous years.

Selling general and administrative expenses of $49.9 million for the fourth quarter of 2009 were a substantial decrease from $63.1 million for the prior year. Contributing to this decrease were reduced professional fees and marketing expenses and reductions in bad debt expense.

ADESA has also realized approximately $1.9 million in gains from the sale of property in the fourth quarter of 2009 that reduced SG&A costs. This gain was included as a nonrecurring item in determining adjusted EBITDA. SG&A for 2009 of 270 -- I'm sorry -- $207.1 million decreased from $244.2 million in 2008.

Now let me speak to Insurance Auto Auctions. Revenue for IAAI in the fourth quarter of 2009 of $140.6 million increased 13% from $124.3 million for the prior year. Units sold in the fourth quarter of 2009 increased 9.6% compared to 2008. The remainder of the increase in revenues reflects the increase in revenue per unit sold.

2009 revenues for IAAI of $553.1 million increased less than 1% from $550.3 million in 2008. Same-store unit volumes for 2009 were essentially flat with 2008 volumes. Increases attributable to greenfield and acquired sites accounted for a 3% increase in total volume for the year for IAAI.

Although same-store volumes for the year were flat, we did experience year-over-year growth in units sold in the second half of the year, especially the fourth quarter, which offset declines earlier in 2009.

Gross profit at IAAI in the fourth quarter of 2009 was 37.7%, a vast improvement from 28.2% for the fourth quarter of 2008. This increase in gross profit for the fourth quarter is directly related to stronger selling prices experienced at IAAI in the fourth quarter of 2009 as compared to last year.

For the full year 2009, gross profit aggregated 36.3% of revenue compared to 34.1% for 2008.

SG&A for IAAI of $13.4 million in the fourth quarter of 2009 decreased from $17.4 million for the prior year. The decrease in SG&A is directly attributable to actions taken by management early in 2009. These actions included reductions in travel costs, professional fees and sales and marketing expenses.

SG&A for 2009 of $65.5 million decreased from $70.1 million in 2008. This decrease in SG&A in 2009 is net of an increase in stock-based compensation expense of $2.3 million in 2009 as compared to the prior year.

Now let's talk about AFC. AFC net revenues for the fourth quarter of 2009 of $27.4 million increased from $11.2 million for the prior year. Due to management's initiatives in late 2008 and early 2009 to stabilize the AFC portfolio, our number of loan transactions in the fourth quarter of 2009 was still down significantly compared to the prior year. However, this decrease was more than offset by the increase in revenue per loan transaction that increased to $130 per loan transaction in the fourth quarter of this year compared to less than $50 for the same period in the prior year.

Net bad debt expense, reflected as a reduction in revenue in our income statement, was $3 million in the fourth quarter of 2009 as compared to $16.3 million for the same period in 2008.

AFC net revenues for 2009 of $88 million declined from $97.7 million in 2008. This decrease is attributable to fewer loan transactions in 2009, partially offset by an increase in the average revenue per loan transaction. The increase in revenue per loan transaction resulted from the lower bad debt expense, increased fee revenue and an increase in net interest rate spread.

The portfolio at AFC remains quite strong, with a total of $613 million under management at December 31, 2009. We continue to have low delinquencies, with 98.7% of the portfolio current at December 31, 2009.

Now let me turn back to KAR Auction Services as a consolidated entity and speak to our liquidity and capital resources. KAR Auction Services generated $250.8 million in cash from operations during 2009. In addition, we completed our IPO in December, which provided $310 million in net proceeds. Prior to year-end, we repaid $250 million on term loan B. Our available cash balance at December 31, 2009 was $325.9 million.

In early January 2010, we utilized approximately $250 million of our cash to prepay $225.6 million principal amount of the 10% Senior Subordinated Notes and approximately $25 million in costs and expenses, including the tender premium related to the retirement of the notes.

At December 31, 2009, we had no borrowings on our revolving credit agreement. Our capital expenditures in 2009 aggregated $65.6 million. At this time, our available cash and cash generated from operations are sufficient to meet the liquidity needs of KAR Auction Services for the foreseeable future.

At December 31, 2009, (technical difficulty) debt leverage ratio was 4.57 times.

Now let me comment on the 2010 outlook. As Jim mentioned in his remarks, we expect KAR Auction Services to generate $458 million to $465 million of adjusted EBITDA in 2010. Adjusted EBITDA is the primary measure of performance for KAR Auction Services at this time. We expect, however, 2010 earnings per share of $0.40 to $0.45. I would like to point out that our EPS estimates include the loss on extinguishment of debt realized in January, which had previously been expected to be realized in December until we extended the deadline for our tender offer as a result of the exercise of the greenshoe and receipt of those proceeds.

We have also included approximately $13 million in stock compensation expense for 2010 in this estimate.

As we compare KAR Auction Services to other publicly-traded companies, we feel an adjusted earnings per share is a more appropriate comparison. We are adjusting earnings per share determined in accordance with generally accepted accounting principles for excess depreciation and amortization resulting from the step-up in asset values for the 2007 transaction, stock-based compensation expense and the nonrecurring loss on extinguishment of debt.

Our expectation for adjusted earnings per share in 2010 is $0.90 to $0.95.

Capital expenditures for 2010 are expected to be $75 million, with approximately $50 million of this amount related to maintenance CapEx and the remainder attributable to CapEx supporting our growth initiatives. This capital expenditure guidance does not include any acquisitions.

We will not be a federal taxpayer in 2010 due to net operating losses and deductible expenses associated with the retirement of debt. This will result in approximately $15 million to $20 million in cash taxes, primarily for state and Canadian obligations in 2010.

Thank you, and that now concludes our formal remarks, and we will now return the call to Andrea for Q&A.

Thank you, gentlemen. (Operator Instructions) Matt Fassler, Goldman Sachs.

Good morning and thank you so much for the detail so far on this call.

I would like to ask a couple of questions, if I could. Both of them are sort of bigger market questions. You obviously had a year of very strong used-car demand relative to supply in 2009, with used car prices having risen quite sharply. And I guess the most recent monthly data show some consistency, but no longer price increases. What do you think this kind of environment means for your outlook? How are you reflecting that in the forecast that you gave us, please?

Thank you, Matt. And I would say that we very much expect that 2009 will look -- or 2010 will look similar to what we've seen in 2009. We don't expect there is going to be a tremendous increase in new car sales. We expect there is going to continue to be strong demand for used car product. And we expect to see similar demand and similar conversion rates going forward.

Got it. Second question, a couple of days ago, one of the major car rental companies on its conference call spoke about reducing the mix of used cars -- or cars rather that it disposes of through auction; talked about going dealer direct and some consumer direct.

How new is that dynamic relative to your outlook, and what is your thought process on the rental channel as a source of vehicles as it is embedded in the forecast?

Matt, I think this has been something that has been going on for really the last two or three years. You are going to -- rental companies are trying -- as you know, are taking more and more risk vehicles. And as they take more risk vehicles, they have to find ways to remarket their vehicles. And in the past, quite frankly, the rental companies have never had a defined strategy on how to remarket vehicles, and I think right now they are exploring all channels.

They still continue to sell at physical auctions, but there is no question that they're experimenting with the online and virtual opportunities -- or virtual channels as well.

So it is nothing new -- I'm sorry, Matt -- it is nothing new, but maybe they are getting a little bit more focused in terms of some of their remarketing strategies.

And your forecast imbeds the trends that are evident from their intent and from what you've seen from them so far?

Yes.

Great. And then one final financial detail question for Eric. You talked about the cash taxes you are likely to pay and federal tax dynamic, etc. To get to the $0.90 to $0.95 adjusted EPS number, what tax rate should we think about using against the adjusted net income -- the adjusted pretax number?

The tax rate -- the effective tax rate is about 41%.

Got it. So that actually is using a full statutory tax rate, and the lack of federal taxes is reflected in cash flow.

That is correct.

Got it. Thank you so much.

Thank you, Matt.

Joe Durham, Credit Suisse.

So you talked a little bit about the situation with Allstate. And I guess the question that is on my mind is why did they decide to move or go exclusively with your competitor? What goes into that decision? Is it purely a price decision? Are there other things that the company is considering when they are making a decision like that, and what are they? Can you just discuss a little bit more the dynamics around why they would make that decision?

Well, I can't speak for Allstate. But I would say, Joe, that I would determine this as a unique situation. I don't think it is a trend. I think that we are also somewhat under confidentiality with regards to the content of the RFP. But I would say to you that it was really them transitioning the balance of the business to our competitor.

Okay. Did they -- do they give you a chance to counter on price?

No.

Okay.

Well, I think more importantly, I don't think it would be appropriate to talk about the details of their confidential RFP process, Joe.

Right. Okay. And so, I guess turning to the guidance then. Can you tell me what level of cash flow would correspond with the adjusted EBITDA guidance that you guys gave for 2010? And also, if you were to achieve that guidance, what that would mean in terms of debt paydown for 2010 -- beyond what you have already done in the first quarter.

Again, I think the best way to look at that, Joe, is to take our guidance of 455 -- $458 million to $465 million of EBITDA, reduce it by -- I mean, all of the analysts have their estimate of cash interest -- reduce it by the CapEx of $75 million and the $15 million to $20 million of cash taxes, and generally that's somewhat been correlated to the cash we generate in the business.

And then it is our intent again to delever. I'm not going to sit here in February and give you the timing and the amount of cash we would repay. At this point, our credit agreement would require the cash from operations to be used to repay term loan B when and if we make a debt repayment.

Okay. And then I guess last question. I think I am able to back into some market share for ADESA as a whole, based on what you gave. Do you have any update on the retail side there? Are you able to get a feel for what you are running without the NAAA data being finalized in terms of market share on the retail side -- or I should say the dealer consignment side?

You know, we don't disclose our volumes down to that level of detail. But, Jim, I don't even think we have any data yet to really calculate it.

Yes, and you know the final data for -- that the National Auto Auction Association produces for 2009 has not been released yet. And to Eric's point, we don't take it down to that level.

But I can say that on the dealer consignment side, that, generally speaking, our percentage of market share runs lower than our overall percentage of our total market share.

Yes. Okay. Thanks, guys.

Himanshu Patel, JPMorgan.

Hi. Good morning, guys. A couple of questions. Can you talk about what underpins your 2010 guidance in terms of, just directionally, volume and revenue per unit for both of the businesses?

Sure. Again, I would rather speak generally as to specifics in the business. But Jim mentioned the tightness in supply of vehicles. So while our long-term view is that we can see low single-digit increases in volumes over time, we think this is a year that will be flat to low single digit on the whole car side. And on the salvage side, we continue to view that we will participate in what has been low-single-digit growth in the industry for the salvage industry, and we will get our share of that.

Okay, and --?

That is on the volume side. We continue to see revenue per unit improvement, as we have demonstrated in the fourth quarter. And again, we think that will continue, again, for the foreseeable future; that we will have opportunities when the market will accept price increases, primarily in the buyer fee side of both the whole car and the salvage business.

And then we do get the benefit at AFC of basically very good comps, as we had very low revenue per loan transaction typically for the first three quarters of 2009. And what we saw in the fourth quarter is more indicative of what we hope to see going forward for 2010.

Okay. And then can you give us some color on what is going on with Toyota's residual values since the recall began?

You know, I don't think we are really in a position to comment on the residual values at Toyota. All I can tell you is that these cars are being repaired and they are reselling at all of our auctions. We are not so much focused on the residual prices as we are just on transactions.

And I can tell you as recently as yesterday, I spoke with Toyota and they have informed me that 90% of the grounded stock at auctions has been repaired and is in the sale process.

Okay, and then last question. Similar to the Allstate announcement, are there any other insurers that you have the entirety of their current business? And sort of can you just explain to us how often these contracts come up for renewal and where would you think of in terms of customer concentration? Are there any few big ones that we should be we should be thinking about over 2010?

Again, I would go back to our point is we really are reluctant to comment on individual customers and the nature of our contracts and our market share by volumes with these customers. It's just that I will go back to my earlier comment that I really see the Allstate decision as a one-off and certainly don't see it as a trend.

Could you at least tell us how often do these contracts typically last in terms of duration?

I would say rarely.

Okay.

But not never.

Thank you.

John Murray, Bank of America Merrill Lynch.

Hey, guys, it's John Murphy. How are you? Maybe just to follow up on that, I mean, Jim, are these contracts multi-year contracts or are they multi-month contracts or do they just vary across the board? I'm just trying to get -- I think Himanshu -- and I think we're all kind of just trying to figure out what the timeframe for these contracts. Are they 10-year contracts? What is the timeframe?

Yes, again, without speaking to any specifics, I would just say that they vary. But certainly, I would say that nothing in terms of any long-term contracts. And when you mention 10 years, I don't think there is anything of that nature that I am aware of. But I would say they vary.

And, John, we do have some that go out three years. I'm not aware of any significant contracts that would go beyond that. Most would be annual, though.

Okay, so they would be annual, and three year would be the long end of the term. So we could see something like this switch back in a year, potentially. I mean, not saying it's going to happen, but it could happen on an annual basis.

Yes, but if it switched in our favor, we would hope that would happen, yes.

Okay, good. Market share, it seems like you guys did a great job on the ADESA side, on the whole car side, seeing that your volumes were only done 1%, the industry was down 5%. You have been doing a great job on these market share gains. What was the driver this year?

You know, I think it's just an overall effort. I think it was a really -- there were really three areas where we are able to gain share. Really there was some that came from some of the independents, some came from our major competitor, and then there was maybe some that came a little bit from the acquisitions that we did in 2007 and -- well, 2008 really.

So it was a combination of everything just coming together. I would just say that I would focus you on the fact that I think ADESA is very much a relationship-driven company. We really focus on our relationships and really pay very, very close attention, not only at ADESA but at IAA as well, to our customers. As a result, we continue to win share.

And, John, we continue though, as Jim has mentioned, we are focused on dealer consignment. We continue though through 2009 to be heavily institutional so it would have been driven primarily by institutional relationships.

Got you. Then if we look at conversion rates in the fourth quarter. I know you guys didn't release this specifically but we would sort of be able to back into about a 62% conversion rate. It's down quite a bit from where it was in the first three quarters in that 67% range roughly for the first three quarters.

Is that really just seasonal or did something happen in the market or your auctions that would have taken that conversion rate down? And is that 62% about right?

John, did I hear you say 62%?

In the fourth quarter. Is that correct for the fourth quarter?

I will just say directionally it is correct, but keep in mind the fourth quarter is always a much lower conversion rate. And that far exceeded the previous year's fourth quarter where the conversion rate was in the high 50%s.

Okay. So that decline really was a seasonal factor in the year over year -- I mean it looks like it was 50 -- in the --. Okay so that really is a seasonal impact.

Yes.

Okay. And then just on the Toyota conversion rates. Are these vehicles all selling and the conversion rates there haven't changed dramatically? I know you can't comment on pricing, but the conversion rate on those vehicles would have an impact on your -- could have an impact on your profitability. So just trying to figure out whether those conversion rates at Toyota had a meaningful change.

Again, I would say to you that, no, the Toyota vehicles continue to sell, both in the physical auctions and online. And there appears to still be demand for the vehicles in the marketplace.

Okay. That is great. And then last thing on AFC. Obviously, there is a big change in the base of borrowers as far as the used car dealers. I was just wondering what you are saying in those base of borrowers for AFC at this point. Obviously, it has been skinnied down or narrowed. But is that a much healthier base of borrowers, and now can you maybe start growing that portfolio on an origination and sort of managed-receivable basis?

Yes, I mean, the answer is yes. The base of borrowers -- it is still a very large group. So don't -- it has not shrunk down to a size where there isn't a lot of independent used-car dealers out there that are entrepreneurs.

But I would say generally that the portfolio of our receivables, I would describe it as they have right-sized their businesses as a whole, and they are probably in a stronger financial position, generally speaking.

And we did -- as indicated in our 10-K, we did see growth, and particularly in the fourth quarter, in the number of loan transactions. That is a direct reflection of what you are commenting on, John. Because again, they are back in the lines, buying cars and flooring those cars. And I do think that we're in a good position to have the capacity to loan money to them.

Great, thank you very much.

You're welcome.

Tony Cristello, BB&T Capital Markets.

Thanks. Good morning, gentlemen. The question I had was on -- dig a little deeper on the Project Pride. I think, Jim, you noted that about half of the facilities implemented changes during 2009. On the timing of that, was sort of half completed by Q3 or Q4, and does that give us a tail wind in the first half of this year, as far as benefits you should receive?

Yes, I think we feel that, to your point, obviously half of these rollouts were completed in Q3 and Q4. And we will see the full-year effect of those as we go into 2010. So we obviously expect to see greater efficiencies come in the full year of 2010.

And Tony, let me add to that -- the largest facilities were completed in 2008. So while it is half, they were the medium and smaller facilities. So it won't be the same magnitude as we saw 2008 going into 2009.

Okay, okay. When you look then -- and you talked a little bit about the 150 people now on the ground, going into the market for dealer consignment -- how does that number compare to sort of how you approached dealer consignment a year ago?

And then can you talk a little bit about the process and just how they actually go out and are trying to get more aggressive on that business? And obviously, I'm assuming you can get some share non-dependent on volume recovery in the industry.

Yes, I would say in the past that dealer consignment was one of several tasks that were being handled at the individual auction sites. And now, what we have done is we have created an entirely new management team that reports directly to our President and CEO of ADESA.

And this management team was -- primarily, the senior management team was recruited from outside, people who were very familiar with dealing with dealer organizations and large dealer groups and the retail side of the business. And then what we did is we went to all of our 62 individual whole-car locations and we hired in a dealer consignment manager. Many of these people came from the retail used-car business that are very familiar with the retail used-car business in their local markets. Because I do tend to believe that the dealer business is very much focused on the local market.

And then we brought this new management team and we brought the 62 managers at all of these sites together in Indianapolis for two weeks of focus, if you will, best practices, what it was that we wanted to train them on and how we were going to roll this out to the individual auctions.

And we trained them on a number of things. Number one, obviously, just getting dealers familiar and comfortable with using the auction, helping them understand how to utilize our technology to purchase vehicles and to sell vehicles on both live block and dealer block. How to use our ancillary services that are at auction. Perhaps how to get access to AFC financing. Just all the different services that we provide, we created this standardized program, that now we are going to these dealers, basically one at a time, we're calling on dealers across the United States and Canada.

And we are not only asking them to participate with their vehicles in terms of buying and selling, but we are helping them to understand the benefits of the auction and what they can realize from that.

So we have pretty much completed the rollout. I think I mentioned in my comments, this rollout will be completed by the end of the first quarter. And although I am not about to give a two-month update, I can tell you that we are very pleased with the early results that we are seeing.

And is the compensation or the incentive based upon the actual traction that you receive with new wins, or is it just as we monitor some type of progression over the course of two or three or four quarters?

No, these people are compensated directly on their ability to increase dealer cars sold at auctions.

Okay. And one last question then is, how critical then will these market share gains in the consignment business when -- I think, Eric, you commented on sort of flat to low single digit increases in ADESA volumes -- is that reflective of any percentage increase based upon this or will this be incremental to what you see in industry volumes?

You know, we really don't get down to that level of detail. But we will tell you we have been consistent. We do expect some increase this year, even though it is a new initiative.

Okay, great. Thank you.

You're welcome.

Scot Ciccarelli, RBC Capital Markets.

A couple of questions. You guys have talked a little bit about the timing of new contract negotiations, but my understanding is that your competitor did have to give some sizable price concessions to get the Allstate deal. Can you just comment on your concerns at this point that this could potentially precipitate a price war?

Yes, again, I would say to you we are not going to comment on the RFP or the content of an RFP or -- I'm not even sure if we do know what the totality of the decision was made on. But we do not see this as a price war. We -- I don't believe that it is something that is going to be a trend. And again, I will go back to the comment that we made earlier, is we really see it as a unique, one-off situation.

And are there -- was there certain unique aspects about either their relationship with Allstate or your relationship with Allstate to make it kind of a one-off as opposed to a trend?

You know, Scot, we've got a press release out there that states our position on it. I mean, what we can say is we did not have a significant piece of their business and they were looking for an exclusive provider.

Okay. And then I guess the other question is, if we were to see -- you kind of talked about your outlook for the auto industry, kind of -- it's very subdued in terms of overall volumes for new cars. If we were to start to see an increase in terms of new car production, new car sales, how long of a lag would you expect to experience before you started to see an impact on both volumes and pricing at the ADESA units?

I think it would be very short. I mean, you know, obviously, if new car sales are able to increase, we're able to generate more trade-ins, more trade-ins means more vehicles at auctions, more opportunities. I think it is very quick reaction.

Okay, great. Thanks, guys.

Rick Nelson, Stephens.

Thank you and good morning. Follow up on Hertz and what they said on their call this week about cutting back on the use of auctions. Are you seeing similar trends from the other rental car companies? And how big a customer as a group are the rental car companies?

Yes, I'm not going to speak, again, to specific customers, but I will speak to the segment at large, is that we feel that the rental car companies are really trying to determine what their best strategy is. We continue to see them take advantage of all channels. And in many cases, we are selling a number of vehicles for rental companies on our dealer block. And overall, we think that our opportunities to sell rental cars will increase.

You know, it is not a huge segment of the business. I think that probably NAAA guidance would point to it represents about 5% of the overall industry. And we think as they determine their strategy, both from a physical standpoint and from an online standpoint, that not only with our physical auctions, but with our dealer block offering, that it puts us in a position to really gain share in this area.

Thank you for that. Also, I would like to ask you about the conversion rates on dealer consignment versus your regular way, institutional business.

You know, I would say historically, dealer consignment conversion runs at a lower percentage than the commercial vehicles. But as we are looking -- as we are looking at demand, that will fluctuate somewhat in these times where there is very strong demand for used cars, that I think the dealer has a better opportunity to sell a higher percentage of vehicles when the demand is higher. But generally speaking, the commercial cars sell at a higher percentage.

And Rick, let me add to that, recently, with strong used-car pricing and generally tighter supplies in the industry, we have seen a higher dealer consignment conversion rate, especially in the last half of 2009, compared to what we had before. I mean, it has moved up, and that is because they are getting a good price and there is a lot of interest in used-car dealers getting cars.

Got you. Thank you and good luck.

Thank you.

Craig Kennison, Robert W. Baird.

Good morning, gentlemen. Thank you for taking my call. Just following up on the Allstate issue. Is there a scenario in which a trend towards national contracts would actually benefit you, in the sense that you are one of only a handful of nationwide providers, and why you should be able to take some share if that trend were actually to emerge?

You know, Craig, I can't speak to the trends. What I can tell you is generally in our industry, we have seen a lot of the decision-making for the remarketing of salvage vehicles within the insurance companies to reside in their regions. So that is what I can tell you factually.

And you know, perhaps maybe I could just add to Eric's comment. Generally speaking, I think that most remarketers, either on the insurance side or on the whole-car side, do look for balance. It is hard for any one company to provide the geographic service throughout the entire nation -- or throughout North America. And I think that -- I think that they do look for balance and they don't necessarily look to put all of their eggs in one basket, so to speak.

Okay, thanks for that. And lastly, certainly we have seen a trend towards more uninsured drivers as the economy continues to lag. Has that been a factor at all in your total volume and do you see that as a concern heading into 2010? Thank you.

Well, Craig, you know we've benefited -- while that probably is a factor for the insurance industry, we have benefited from increased severity in the accidents, therefore a higher percentage of claims resulting in total loss. And we have not been as impacted in terms of the total number of premiums written.

But at this point, we are very focused -- and we have talked about this in our strategy in the S1 and in our 10K -- we really think there is an opportunity to go to the noninsurance vehicles for the salvage auctions and increase the ability to serve the general market, which would include the uninsured motorist that has to dispose of a car.

So it's an opportunity for us, to be honest. How can we get them to understand the ability to remarket that vehicle or to get that vehicle out of their driveway, perhaps, through the salvage auctions, if that is the appropriate venue.

Would it require significant new investment to get a hold of those vehicles or do you have channels in place that would be easy to (inaudible)?

I am confident that our network of tow drivers that pick up vehicles would be happy to pick up any vehicle. I think that the infrastructure is in place. It is probably, from our perspective, more awareness than it is having the systems and support to be able to do it.

Great, thanks for taking my call.

Thank you.

Phil Volpicelli, Cantor Fitzgerald.

I'm trying to back into a revenue guidance for 2010. And I think, Jim, you mentioned that EBITDA margins or operating margins should be up in 2010. If I take the 458 and 465 and I divide those by, let's say, a 25% EBITDA margin, should that get me in the right range for where I think revenues will be in 2010?

You know, Phil, we are not going to provide revenue guidance. That is a decision (technical difficulty).

Okay. How about if I tackle it a different way? In, I guess, 2008, when you did the largest Project Prides, I think it was $35 million to $40 million was the savings goal. Can you give us a quantification of what you think 2010's benefit will be from Pride?

No. Again, we are continuing -- this is continuing that project. We are very pleased we have actually met the goals we had set up when we did the high-yield bond deal. And in fact, we would tell you we have exceeded those goals in terms of cost savings.

But at this point, no, we are not giving that level of granularity. We will, though, again, reiterate what we said as we were selling the stock. We do think there is room for margin improvement over the next two to three years, without a doubt. And a lot of it will come from these activities, and we think we can continue at the pace that we have been experiencing.

And, Eric, I just wanted to clarify one thing you said. With all of the free cash flow that you get, is all of it required to pay down the term loan B, or is it only 50%? And if it is less than 100%, is there restricted payments capacity to buy back some bonds in 2010?

Again, we filed that amendment in October -- or we got approval of the amendment. That is what permits us to use 50% of any offering proceeds to pay down the subordinated notes or the senior notes.

It (multiple speakers) -- that is not permitted within the credit agreement for term loan B. At this point, any cash from operations, 100%, if it is used to repay debt would have to be applied towards term loan B under the current agreement.

Great. Thank you very much. Good luck, guys.

Bob Labick, CJS Securities.

Good morning. Thanks for taking my questions. A lot of my questions, obviously, have been answered already. But you mentioned positive same-store sales at IAAI in Q4. Could you quantify that number? And more importantly, can you just tell us basically where did you get the increased volumes? Was that part of the customer wins you discussed in your opening comments?

Yes, Bob, I gave the number 9.6% increase in same-store sales for the fourth quarter. But let me first point out, it is compared to a fourth quarter of 2008, where we all described it at the time as a complete meltdown in the industry, values had dropped precipitously, tremendous uncertainty in the used-car market place. And so I do believe you are against a fairly easy comp when you go back to the fourth quarter of 2008.

Right, and what (multiple speakers) --?

But the sources of vehicles, yes, some would be attributable to the increased business from customers where we had wins. And generally the strong proceeds was the primary driver. Our insurance customers were very anxious to sell cars. For example, in December, where previously they had seen lower proceeds and might have been reluctant to put as many cars up on the block in the month of December compared -- in prior years.

Great. And do you have a same-store volume number?

I gave you same-store volume, 9.6%.

Okay, 9.6% is the volume number. Okay, great.

-- is the unit volume increase. Our revenue growth was 13% year-over-year for the quarter. So we also picked up some revenue per unit growth.

Terrific. And then as addressed earlier, according to Mitchell and CCC, obviously there's rising ACVs and there is lower collusion insurance, which could lead to lower volumes this year. Obviously, it hasn't happened for you guys right now.

But what does that mean for the dynamics for the year, and how do you gain share in an environment like that? Are there more acquisition opportunities as independents see a tough year or two? Could you just address that, please?

Well, first let me address -- we will let Mitchell and CCC be the prognosticators on terms of what is going to happen in the insurance industry. What we will stand behind is, again, our consistent message that we believe we will participate in the volume growth that the salvage industry experiences. Some of that will be new cars coming through the salvage network as opposed to other means where perhaps they disposed of the vehicles.

And we have not once commented that we think that part of this story is us gaining market share, generally speaking. We think we are at a spot where it will be about that level of market share going forward.

Okay, terrific. Thank you very much.

And with that, I will turn the call back over to you, Mr. Loughmiller, for any final and closing remarks.

Well, thank you, everyone, for participating. Jim and I look forward to talking to you next quarter.

And once again --

Thank you very much.

And once again, everyone, this does conclude today's call. Thank you for your participation.

Thank you.