Openlane Inc (KAR) 2014 Q3 法說會逐字稿

Good day, and welcome to the KAR Auction Services third quarter 2014 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jonathan Peisner, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Thanks, Randy. Good morning, and thank you for joining us today for the KAR Auction Services third quarter 2014 earnings conference call. Today, we will discuss the financial performance of KAR Auction Services for the quarter ended September 30, 2014. After concluding our commentary, we will take questions from participants. Before Jim kicks off our discussion, I would like to remind you that this conference call contains forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect KAR's business, prospects and results of operations, and such risks are fully detailed in our SEC filings. In providing forward-looking statements, the Company expressly disclaims any obligation to update these statements. Lastly, let me mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the applicable GAAP financial measures can be found in the press release that we issued yesterday, which is also available in the investor relations section of our website.

Now, I'd like to turn this call over to KAR Auction Services CEO, Jim Hallett. Jim?

Great. Thank you, John, and good morning, ladies and gentlemen. Welcome to our call. Last night, we announced our third-quarter earnings. As well, we announced an increase in our dividend and the share repurchase authorization. But before I discuss the capital allocation topics that I know many of you are interested, I would like to highlight our excellent performance in the third quarter, which is really what we're focused on on a day-to-day basis.

As we look at the third quarter, net revenue increased 10%. Adjusted EBITDA increased 14%. And as you will see in the comments to follow, we had a very strong performance in each of our business segments. At ADESA, revenue increased 12%, adjusted EBITDA was up 16%, and volume was up 6%. Revenue per vehicle sold was up 6%, and physical auction revenue per vehicle sold was at $697. This represents a 9% increase over the prior year. This increase was primarily driven by the increased ancillary and other services revenue.

In terms of our online only volumes, they increased 11%, and revenue per vehicle sold online was just under $100. This was similar to what we reported to you in the last quarter. And again, this is being driven by the [grounding] dealers continued to buy off lease vehicles at the residual value. Volumes sold at physical auctions increased 4% over the prior year, and our performance and dealer consignment segment continues to be strong, representing 53% of our overall volume in the third quarter. We've also seen an increase in re-possessions.

So with that, we would say the cyclical recovery at ADESA is in the early stages. As many of you know, the SAR continues to be strong, at over 16 million vehicles sold. Lease penetration rates are holding strong, and may continue to increase. Sub-prime lending continues in the new and used vehicle markets. And while used car pricing may be down year over year, these declines are fairly modest, and much in line with what I reported to you in the previous quarter.

All in all, ADESA is well positioned as we look forward to the next few years, and I can say that I'm extremely pleased with the results at ADESA. Turning to insurance auto auctions, another strong quarter for our salvage business. Revenue grew 9%, adjusted EBITDA increased 18% over the prior year, and volume was up 7%. Revenue per vehicle sold was up 2%, and the gross profit at insurance auto auctions continued to improve. And maybe more importantly, we are well positioned as we enter the fourth quarter, with a 15% increase in inventory levels over the prior year.

Insurance auto auctions is clearly demonstrating that they are a leader in the salvage industry, and I would point to a couple things. I believe that insurance auto auctions is leading in the area of technology. I also believe they are leading in the area of service to their customers on both the buyers and the consignors side. And then, when you look at performance, whether you want to measure it by net proceeds for their consignors or the ability to grow profitability for our shareholders, insurance auto auctions is doing a very good job.

In looking at AFC, revenue increased 7%, adjusted EBITDA increased 6%, and loan transactions grew by 5%. Revenue per loan transaction was roughly the same as last year, and I would say that this is a very strong performance, given the market conditions. Retail used car sales by independent dealers did decline by about 2%, and I would remind you that AFC is more than just loaning money to the independent used car dealer. We provide value-added services to each of our customers, and we've consciously made the decision to invest in over 100 local branches, in order to stay close to our customers.

And while it's a real advantage to be able to stay close to your customers and to serve your customers and touch your customers on a weekly basis, it's also an excellent way to monitor risk. The portfolio has continued to grow, and we're experiencing minimal credit losses. And again, this just continues to be a great business, and another great performance, by AFC. Changing gears, now let me speak to free cash flow, which I believe is the strongest attribute of our performance. Our Board approved an increase in our quarterly dividend to $0.27 per share. And in addition to the increase in our dividend, the Board of Directors has authorized a share buyback of up to $300 million over the next two years.

As I've mentioned before, strategic investments are a priority for KAR. Each of our businesses continued to evaluate a number of targets, and believe me, there are no shortage of opportunities in the pipeline. In the meantime, we have the option of using our available cash for share repurchases, when other capital deployment alternatives are not imminent. The most important point that I would want to make is that strategic investment and share repurchases are not mutually exclusive. We intend to maintain leverage near 3 times adjusted EBITDA for the foreseeable future. So with that, I'd like to turn to our latest acquisition that we announced last quarter, which is TradeRev, and give you an update on our first 90 days.

There's nothing meaningful to report in terms of financial statements. However, we have made some significant progress. We focused on enabling three key enhancements to the TradeRev application. We have now integrated AFC, and we're funding purchases on TradeRev with AFC. And we've actually had a number of transactions take place in the early stages. We've also been able to integrate our transportation quotes and fulfillment through Cars Arrive. And again, we've actually been able to ship cars through TradeRev with the Cars Arrive network.

And then finally, we've integrated ADESA, so that we can stand in the middle of the transaction, which is what I've talked about previously. It's in terms of handling the flow of funds, processing the titles, providing the arbitrations, and the other services that we provide at physical auctions, and even at our online auctions. So we're now in a position that we're ready to launch TradeRev in the major US markets, and we've actually accelerated the growth in the Canadian markets. I continue to be very excited about this product offering as we go forward.

So before I conclude, a couple things I want to speak to, number one being our guidance. Adjusted EBITDA of $580 million to $600 million is unchanged. Our results and free cash flow of approximately $309 million to $319 million, which Eric will speak to a little bit more detail here in a few moments. So in conclusion, a number of comments that I'd want to make. Our three businesses are performing extremely well. Cash flow is very strong. Our adjusted EBITDA guidance is unchanged.

We've increased our dividend. We have a full pipeline of acquisitions and opportunities. We've authorized a share repurchase program. But maybe most importantly, we've just reported on a great quarter. And this is not only great for our shareholders, but it creates a lot of energy and a lot of enthusiasm for our employees, and for the culture at KAR. So with that, I'd now like to turn it over to Eric for some additional color on our financial performance, and we'll be back with Q&A. Eric?

Thank you, Jim. I only have a few things to add to your comments this morning. First, on a consolidated basis, our gross margin of 44.3% of revenue is in line with the prior year. I believe this is important to point out, as we have seen an increase in ancillary services and other revenue at ADESA, which often has a lower gross profit profile. We also experienced growth in preferred warranties revenue at AFC, which also has a lower gross profit characteristic. Overall, this demonstrates we realized some operating leverage, as we saw our revenues grow on a consolidated basis.

We are also maintaining our discipline in controlling SG&A. The absolute dollar value of selling, general and administrative expenses declined in the quarter. This decrease was primarily driven by reduced stock-based compensation. Excluding stock-based compensation expense, our SG&A increased by less than $3 million in the third quarter. Our strong year-to-date performance is the reason for this increase. We have accrued annual incentive pay in all of our reported segments, at a rate greater than the prior year in the third quarter. Our incentive pay programs are based on financial performance at the consolidated, business segment, or local operating level.

Our pay for performance compensation design rewards our employees when results are strong, and provides a lower cost structure when the business is under pressure. The ability to leverage our SG&A cost is a primary driver of our improved adjusted EBITDA margin for the third quarter and year to date. On a consolidated basis, our adjusted EBITDA margin was 25.3% for the third quarter, and 25.6% for the nine months ended September 30, 2014. In terms of business segment performance, I believe Jim's comments, combined with the financial supplement we made available last night, provide a good explanation of the strong performance in each of our business segments.

Overall, all of our businesses are performing well, and the combination of these businesses provides KAR the operating leverage to increase our adjusted EBITDA margin over time. Our overall liquidity continues to improve. Our senior leverage ratio, including capital leases, is 2.8 times adjusted EBITDA at September 30, 2014. Our available cash at September 30, 2014 was $148.6 million. As you may have noted, we have been increasing our finance receivables at AFC, and this results in the use of some working capital for the portion we do not securitize.

This is not unusual for the third quarter, and is a combination of the seasonal trends and our success in growing the AFC business. Our capital expenditures are in line with our expectations for the year. Through the first nine months of the year, we have expended $70 million in capital expenditures. Just over half of the capital expenditures have been for technology investments in all of our business segments. We will continue to prioritize technology investments going forward.

At the same time, our physical infrastructure is a key to having these strong technology offerings. So as Jim has said many times, the physical auction locations are not going away, and remain an important element of our technology-based service offerings. Now let me speak to our guidance in a little more detail. As indicated in our earnings release last night, there are no changes to our adjusted EBITDA, cash taxes, cash interest on corporate debt, and capital expenditures expectations. As a result, we continue to expect $309 million to $319 million of free cash flow, or $2.17 to $2.24 per share.

We have updated our net income per share and adjusted net income per share guidance for the year. Our effective tax rate for the first nine months of the year has been below 40%, and we expect this to continue through the end of the year. As a result, we have lowered our expected effective tax rate to 38%, from 40%. In addition, we have experienced lower depreciation and amortization expense than originally anticipated in our guidance. As a result, we are increasing our guidance for net income per share to $1.05 to $1.15 per share. We now expect adjusted net income per share for 2014 of $1.45 to $1.55.

So that concludes my remarks. Thanks for joining us today, and I will now turn the call back to our operator, Randy, to facilitate questions.

(Operator Instructions)

We'll now take our first question from Matthew Fassler from Goldman Sachs.

Good morning, Matt.

Congratulations on a nice quarter here.

Thank you.

I'd like to dig a little bit deeper into the composition of ADESA. And Eric, you alluded to the margin profile of ancillary, et cetera. But what do you think changed this quarter, in terms of that revenue per vehicle at physical auction? Because the move was pretty dramatic, and obviously flowed through to overall revenue per vehicle. And I know we've all been waiting for physical auction to pick up, and it seems like the pace was rather sudden and dramatic.

Yes, I'll let Eric get into the details, Matt, but obviously, as these cars get to physical auction, we did experience a growth in our ancillary services and other revenues. So maybe Eric, if you want to break it down a little bit?

Yes, sure, Matt. As we look at it, it's really being driven by the fact, as more cars get to physical auction, we can do more work on the cars. One aspect is transportation, but it gets into mechanic work, body work, inspections. Cutting keys is an element of it, the repossession activities of our PAR and RDN. So it's across the board. And that's what makes what I think was an excellent quarter for ADESA, is getting that ARPU up to $697, I think is something we've all been waiting on. And now we've seen it in the third quarter. But it really ties in. I would tell you, it really ties into the ancillary services at the physical auction locations, as much as any of the other revenue sources that we have.

And do you feel like those trends are directionally sustainable, both in terms of the growth in cars at physical auction and the revenue per car sold?

Matt, I've told you in the past, I have gotten out of the predicting business. But I think we'll just stand by and see what happens here going forward.

But the color I'd add for you, Matt, is with this type of mix, I do expect this is the type of revenue per vehicle we have. What we can't tell you is what the mix will be the next quarter, or the quarter after. But with this strong physical auction volume, we've been telling you they tend to use services at the auction lines.

If I could ask one follow-up. I know we expected this to happen for a while, and we're grateful that it finally did. To the extent that you can now look back and see, if you can see, where the volume came from, was it off lease, was it repossession? Did the CPO vehicles seem to back up a bit in the channel, leading them to spill over into physical? Any sense of what finally gave way to enable this trend to start to kick in?

Matt, I think it was a combination of a number of things. There's no question that the lease cars are having an impact, whether we're getting the lease car directly to the physical auctions that we save through the funnel, or whether the lease cars is displacing a dealer car, and we're getting the dealer car. But I don't want to lose sight of the fact that yes there are the lease cars but we also did a very good job on dealer consignment. We are seeing more re-possessions. So I think it's a combination of a number of things.

Great. And then one very final quick one, just a between the lines question. You gave us a great break out, in 8-K last night, of the different components of online only. And you have the downstream piece of that, and upstream and midstream continue to grow at a very rapid rate, over 30% in units. The downstream is coming down. We are not concerned about that, but just want to understand the moving pieces within that online only business.

And Matt, I want to be careful. You're using terms that we use in the business, when you say downstream, like online only was up 11% year over year.

Yes.

That's -- we generally call that upstream.

I'm talking about the 79,000 cars, down from 91,000, that piece of the mix.

Again, those are your numbers. Generally speaking, I think it's more seasonal than anything. Again, the third quarter volumes, as opposed -- and again, you look at it, the online sales remain quite strong, in the high 30s for us. So -- and that's online total, not online only. So I really -- you saw the upstream, or the online only, drop sequentially. It went 128,000, 132,000, 120,000 for three sequential quarters. That's a seasonal trend, not a change in the marketplace.

Thank you.

You're welcome, Matt.

We'll now take our next question from Bret Jordan from BB&T Capital Markets.

Good morning, Bret.

A question on IAA, and one of your competitors recently [service] was talking about some structural increases in expenses, related to the insurance contracts. Were you pushing against headwinds in that category? Were there offsets that allowed you to grow the business? Or are you seeing less structural impact?

I can't speak for what they had to say, but I can tell you that I think that we're just doing a good job of managing our business, first of all. I think there's a couple things that point to that. I think we're demonstrating that we're leading with technology, in terms of the way that we're servicing our customers, mobile applications, the way we're integrating with our customers.

And then, I think the thing that we've talked about for years, the fact that we offer every car online, and we offer that car physical, as well, continues to play out. And the way it continues to play out is demonstrating that we are driving higher proceeds and getting better results. And I think customers are taking notice of it. And at the end of the day, I think it's allowing us to win business.

Great, thank you.

You're welcome.

We'll take our next question from Ryan Brinkman from JPMorgan.

Good morning, Ryan.

Congrats on the quarter.

Thank you.

Regarding the decline in used car prices during the quarter, that's starting to get some increased attention in other circles, too. Do you think that the decline is simply a function of increased supply of cars at whole car auctions? Is that the primary driver? Or do you think it relates to other things happening in the broader economy impacting demand? Or the trend in new car price? My sense is, it's a function of supply. But because you guys have some unique insight here, I thought to ask you.

Yes, Ryan, I think I would term it in terms of supply. The declines are modest. I think we pointed out to you last quarter that we expect that those declines would be somewhere in the 2% to 3% range. Overall, on a year-to-date basis, that's the numbers that we're seeing.

Okay. And then I think investors are pretty pleased with the 4% increase in physical auctions today. In your prepared remarks, though, you talked about cyclical recovery at ADESA being in the early stages. And I know your -- you described yourself in recent quarters as being out of the prediction business, in terms of when those volumes would inflect. But now that they seem to actually have inflected, or started to inflect, I'm curious if you feel more comfortable in commenting further on the expected trend there?

I'd point to a couple things. I know we've said a number of times that there's an additional 700,000 off-lease vehicles coming in 2015, and another 500,000 coming in 2016. And at some point in time, we have said that we thought more vehicles would get to the physical auction. I don't want to jump all over 4% here in one quarter. But I will say, over the long term, I've always maintained that they cannot absorb all these cars at the top of the funnel, and these cars will eventually, at some point in time, make their way to the physical auction.

And let me add to that, Ryan. In Jim's comments, he commented we have a strong SAR, we have the average credit score in the new car transaction declining. All of that is actually good for the supply of vehicles in the wholesale marketplace. It isn't just one factor, right, Jim?

Very true.

Okay. And then I think there's been a lot of focus, or there has been, on the mix of your volume between high ARPU physical, medium ARPU, online only, open, and I guess low ARPU online only closed. And maybe you've got some ability to try to influence that mix, but not a whole lot. What about the effort, though, to increase ARPU in each of these channels? Which it seems that you might be in a [buy dirt] position to impact. For example, charging a higher fee in online only closed, where you have got some dominant share in technology. Is there any progress there?

Again, what you see is really, the progress is in providing more services to the consigner, in advance of selling the car, drives ARPU up at the physical auction. At this point, you look at mix, we're waiting for more cars. Ultimately, we hope more cars will be selling in the online only open channel. And when that happens, there's a natural pickup in revenue per unit in the online only channel. But again, most of it is really driven by the nature of the car, not by pure price increases for common services that we provide.

Okay that's helpful. Last question. On the 16% increase in inventory at IAA, total loss inventory, just trying to think about the modeling implications of that strong increase. Your co-parts talked about some of the increase in their inventory level relating more to a rise in cycle times. And just tried to parse out the impact of cycle times versus underlying gain. I'm just curious if you're influenced at all by the phenomena? Or whether the underlying gain really is that strong?

No, we clearly -- and again, we've seen this with, in particular, with certain customers, the cycle times have increased as they change their title processing. We think that will come back over time. But there's a real increase in the absolute number of cars on the lot, as well, unrelated to cycle times. Again, our representation with our customer base, and its really been a good season in terms of collisions and total losses, relative to our business.

And while the number of insurance claims may have declined slightly this year compared to the prior year, severity is up, and that has typically has been good for the supply And the collision repair industry needs these parts. So we're in a pretty good spot, and sitting again with -- a lot of that inventory is really related to accident rates more than cycle times.

Okay. Very helpful. Thanks for the color.

Thank you.

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

Good morning, Craig.

Good morning. Thanks for taking my question. It's nice to see the progress you've made integrating TradeRev so far. I'm wondering how you would frame the volume opportunity in 2015. I know you don't like to predict, but we're trying to figure out what kind of metrics we should hold you, to see if we're gaining traction in that new business model?

More so, Craig, I would maybe speak to what the addressable market is. If you take a look at vehicles that are being sold, dealer to dealer, there's approximately 20 million to 22 million vehicles in that space. And if you would think that the dealer is going to keep a number of those vehicles for their own inventory requirements, and then they're going to sell off other inventory. If you think of that maybe as keeping half of it and selling off half of it, that gets your market to about 10 million units, 10 million, 11 million units. We would be looking for some slice of that, as we go forward, on an increasing basis. So other than, that's about as much of a prediction as you're going to get from me.

Okay, I thought I'd try. And then with respect to the repo market, I know that your market share does depend on category. You have a different share of institutional volume versus dealer volume. You have a high share of the off lease volume. What does your share look like in the repo space, as that volume starts to pick up?

Yes, Eric, and I'll let you quote the numbers there. But I can just tell you that this is a space that we've tended to do very, very well in. We have a large number of customers with a large share in the repo space. Eric?

The commercial vehicles, we've said that we're overrepresented in -- probably more in that 30% range, as opposed to that 24% to 25%, where our total market share is. And Craig, like anything, we actually evaluate the customer, not the nature of the car and why it's with us. So I would just point to, that's our share of that commercial space. It's in the low 30%s.

Got it, thank you.

You're welcome, Craig.

We'll now take our next question from John Lovallo from Bank of America Merrill Lynch.

Good morning, John.

Good morning. Thanks for taking my call. First question, just following up on Craig's question on the repo volume. The increase there, can you attribute this -- is it looser financing terms, which could have some economic implications here? Or is this just something that's a little bit spotty and bounces around from quarter to quarter?

I would say to you that it's just, there's more credit availability. And I think that many of these lenders are just taking on more paper. Eric?

Yes, and I'm looking at a chart that's published in the industry. This is not our data. There's an absolute reduction in the average FICO score on a new car transaction. And that is one of the leading indicators, John, of increased credit risk being taken by the lenders. And when you take more risk, in the retail transaction in particular, you are going to have more re-possessions.

That's very helpful, guys. Next question is on AFC. There was a slight decline -- and I'm not trying to beat you up on this -- but a slight decline in revenue per loan, if you strip out the other services. What were the main drivers there?

The driver of that was a very slight -- but relative to portfolio, it's really modest -- increase in provision for loan losses, which is a negative on our revenue per unit -- revenue per loan transaction.

Okay, perfect. And then final question is -- sorry, go ahead.

However -- I was just going to add, with that said, this portfolio continues to perform at a very high level. We're still over 99% current, and the portfolio has continued to grow. So I would say it's very modest, Eric.

Exactly, and that slight increase is more seasonal than something related to the portfolio. That third quarter is oftentimes where dealers that maybe took some chances in their tax season inventory have to pay the piper. And we end up with some loan losses every year during the third quarter.

Helpful. And last question. There's a large British auction company that's in the -- just filed an S1. I guess I'm curious, is this something you guys took a look at? And I'm just wondering if the buyback being put in place now is due to the fact that these guys look like they are pursuing the IPO route?

Yes, we really don't have any comment on that at this point in time.

And again, the buyback is independent of any discussions in the marketplace, right? We said they are mutually exclusive of our strategic priorities. We'll do what's right with capital allocation, as the opportunities are in front of us.

Very helpful, guys, thank you.

You're welcome.

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

Good morning, Gary.

A couple of questions on TradeRev, which is -- I find intriguing. First of all, in doing your analysis pre-buying this and all that, and what you're going to do with it, how many of the dealers domestically, right now, the franchise dealers, have some kind of technology-driven system to do dealer-to-dealer trades?

I'm not sure of what kind of products are in the marketplace. I can tell you that there are some products in the marketplace, Gary, but TradeRev was the one that stood out to us as having the best technology and the best platform that we thought would be most appealing to dealers. Eric, do you have any thoughts on that?

And Gary, I'd add, most of the products that we see would be like our DealerBlock, or SmartAuction, that really were focused on aged inventory, wouldn't you say, Jim? <ore than fresh trades. Is that a fair way to say it?

Yes.

So the key differentiator there is their focus on fixed trades and their technology to do the transaction -- or to facilitate the transaction?

Very much so, Gary. You're really starting an auction process, as we say, with TradeRev, while the customer is sitting in your show room. You're basically going out, and you're taking a couple photos of that vehicle, and taking a shot of the VIN plate. And you're immediately sending that out to a network of buyers, and you're instantaneously starting to receive bids on that vehicle. So we're really talking about fresh trades, even before the new car deal gets transacted.

Okay, that's -- okay. And then in terms of this increase in physical auction revenue driven by services, can you -- do you even measure this in terms of, what has been the more prevalent service that you're seeing right up front? Is it detailing, minor body work, painting, some mechanical repair? Can -- I'm just trying to get an idea of what kind of car is coming in right now that would be facilitating this increase in revenue per vehicle?

Yes, Gary, I would say, again, it's all of the above, as well as transportation being another one. And these consignors are going to do whatever work is required. If it's body, if it's paint, if it's mechanical, reconditioning, cutting keys, whatever. And they are doing what they need to do to make sure that they are getting the car in a competitive spot in the lane, so that they are going to attract the most buyers and achieve the highest resale price. And again, it's going to be different work. But most of this work tends to -- a lot of this work tends to focus on appearance-type items, those being paint and tires and detailing, and things of that nature.

Is there any statistics you can share with us that, as you get deeper into the cycle, how many of these -- like you're saying about 700,000 off lease vehicles next year. How many of those -- as the inventory pipeline gets filled, what's the shift going from close to just down to the physical auction? Do you have anything (multiple speakers) -- go ahead, I'm sorry.

The one thing we've said in the past, Gary, that is still true, the off lease car is the biggest user of ancillary services, historically.

Okay.

(multiple speakers) Every finance company does something. At a minimum, reconditions the car, but they will do more work on the car than probably any other segment in the industry.

And I think, Gary, as far as -- okay, sorry, go ahead.

I'm sorry, go ahead.

No, I was going to say, as far as the shift, I think we just to wait and let it play out. Then, we've seen a little bit of that this quarter, and I think it's too early to get into forecasting what that shift is going to look like.

Okay. And these leases coming next year, it dovetails with the seasonality with car sales, correct? In terms of being spread out across a year?

Yes, I would think so. It's -- if you take a look, we know the number is 700,000. There could be some seasonality based on when the lease was written, but I think it is spread across 12 months, without looking at it in detail here.

And keep in mind, Gary, we were coming -- three years ago, we were coming off the bottom in new car sales. So there was a more steady increase than there probably was in a typical seasonal pattern of new car sales.

Okay, thank you.

You're welcome.

We'll take our next question from John Lawrence from Stephens.

Good morning, John.

Yes, could you take on that -- looking at that just a little further, on those services and the margins that they represent, if you have more paint mix one quarter versus mechanical, does it really move the margin on those different services? Or are they are all about the same?

Yes, no. Those margins -- or those services have varying margins. And I'll let Eric break that down a little bit. But hat would tell you at the outset is, my focus is more on EBITDA dollars than it is perhaps the margin. But Eric, maybe you want to speak to some of those margins on the various services?

Yes, John, we've talked in the past. The lowest margin business is transportation. And again, by just the competitive nature of transportation and moving the cars. And then after that, they vary a little bit. We do pretty well on reconditioning, and static paint and body work. Mechanical is good, but not as good. It's a little lower. Post-sale inspections, very strong. So it varies, but I would tell you, other than transportation, we generally would tell you it's a 30% to 40% margin on ancillary services. The high end might be more reconditioning and paint and body work, and the low end might be more mechanical.

Would you share on that range? Would this be -- this mix for this quarter would be -- that total mix -- toward the top of the stronger margin, or toward the average?

You can do all kinds of math, and many have done it for me. It varies. What is going to put you at the bottom of that range will be probably more transportation, nothing to do with whether it's mechanical versus body. Transportation is what swings this margin up or down, more than anything. It is our largest ancillary services revenue component.

Yes, I think I would go back to Eric's point that we're going to average somewhere, on ancillary services, in that 30% to 40% range, with the exception of transportation. And then you'd have to adjust for transportation volumes being -- impacting that down.

Yes.

Great. Thanks for that. Secondly, can you talk about the flow of the quarter? Did it -- these increases really start July? Or was September a hockey stick month? Or how did that flow during the quarter?

That's a level of granularity, but there is a seasonal aspect to the business. As people finish their summer vacations, retail used car activity is a little lower. And then Labor Day and beyond, it really picks up. So I would tell you, it -- as is normal in our business, it would tend to be the last half of the quarter over the first half. But that has more to do with the calendar than the flow of vehicles.

And last, regionally, pretty strong across all regions?

Yes. With -- one thing with us, we -- the US is up-course in the recovery, and Canada is lagging. We have not begun to see the recovery in Canada quite yet, although there is some very positive retail activity up there, it will take it a few years to hit to our market place.

Yes, and I wouldn't necessarily think of Canada as a region. But if you've been following it, Canada is predicting perhaps a record, in terms of new car sales. And also with leasing being now fully back in vogue, we expect those leases to really -- the impact here we really expect to see in 2017 on those lease returns.

Great, thanks, good luck.

Thank you.

We'll now take our next question Bob Labick from CJS Securities.

Good morning. A lot of my questions have been answered, but just wanted to dig a little deeper. On IAA, fantastic results there. And then the inventory build was up sequentially, from 10% at the end of June to 15%. Didn't seem like there was unusual weather. Can you -- I know you don't want to comment specifically, but is there market share shifts or new account wins? Is industry volume growing that much? Or what do you attribute the sequential growth there to?

I think we did mention that we do have a customer or two that are in the process of changing their processes, and in terms of the way they take these vehicles to market. And that has backed up inventory a little bit.

And again, Bob, good point, although we look at weather in our local region. Its been a very steady weather year. There's a lot more activity in isolated pockets within the United States, in particular, than we might all relate to in our local market. It has been a steady stream. And also keep in mind, last year's third quarter, we had been coming off Sandy, and inventory levels might have just been a little bit lower, too. I didn't look at that, but that could have been a cause of it, as well.

Okay, great. No, because your volume pass-through of 7% off of a plus 10 seems like you passed through pretty well, right? So it didn't seem like that would be the sequential --

I'm referring to the inventory level, not the pass-through of a year ago.

Right, no, exactly. I'm saying your volume was good off of a plus 10 inventory, so I thought that something may have changed it to continue to grow that. But if the cycle time is certainly understandable, as well.

As we go back to Sandy, and coming out of Sandy, and a number of RFPs that took place last year, there was no question that we did well in gaining market share through some of those RFPs. And perhaps some of that is showing up in the volume, as well.

Yes, no complaints here, it's great. I was just trying to get a little more color there. And then one more, in terms of just a little deeper. You spoke about it, obviously, on the call already. But on the online only closed versus open auctions, obviously, there's a big revenue difference to you. Can you talk to the proceeds to the seller difference? Is there a significant -- the higher proceeds to the seller in an open versus closed auction? And if that is the case, can you help influence more closed auctions to become open auctions online?

I like the way you're thinking. Eric, I'll let you take that.

Yes, essentially, it's the venue at which the buyer transactions a price that the consignor is willing to take. What we are doing, Jim talked about in the last call, is we're giving the analytics to our customers. We do think there's an opportunity, in the online only open, for them to transact, where when they let it get to physical auction, perhaps they're not getting a better result than they might have gotten without moving the car, right, Jim?

Right.

So -- but again, it's more data analytics than it is, what's the value? The question on the open is, are they getting net more than they get at the physical, because it has already gotten through that private label closed.

Yes, and one of the things that we've done to encourage more of those vehicles being able to be sold in the open online sale -- Eric has pointed to the analytics. But I would also point to a couple policy changes we made, in terms of, we've simplified the fee structure. And we've made a little bit more of a -- I would say, of a liberal arbitration policy, where we've relaxed some of the arbitration rules a little bit. And I think all of this is in an effort to drive more of those vehicles to be sold in the open sale.

Okay, great. Thanks very much.

You're welcome.

(Operator Instructions)

We'll now take our next question from Bill Armstrong from CL King & Associates.

Good morning, Jim and Eric.

Good morning.

On the insurance auto auction side, your gross margins were very strong, up over 200 basis points year over year. And considering that the average selling prices, I would imagine, were a little bit lower than a year ago, just wondering if you could delve into maybe some of what the drivers were of the higher margin? And are these sustainable drivers going forward?

Bill, good question. One of the things you'll point -- that I would point to is, we had 6% of our volume was purchased vehicles, where last year, that was a little bit higher percent. That does actually impact margin, because of how we have to recognize the gross sale price in our revenue, if we purchase the vehicle. So we picked up a little bit of margin improvement, merely because we have a lower mix of purchase vehicles. And then the rest of it is really just the ability to manage the business, as Jim mentioned.

Okay, got it. And that actually was a follow-up question. What -- was there anything to call out that was behind the relative decline in the purchased vehicle, 6% versus 8% from a year ago?

No, other than that was the target we set. We felt we needed to reduce that, as there has been a healthy -- again, we go back a few years, where there was a shortage of total lost vehicles that we were supplementing by purchasing vehicles and things like that. We have a healthy supply right now, and so there's less emphasis on that. And also, in this -- the current pricing environment of cars, it's a little bit riskier transaction. So it's not as beneficial for us.

Okay got it. And on the guidance, so if we take your guidance and back into the fourth quarter, that would imply just an EPS of $0.23 to $0.33, which obviously is quite a wide range. What sort of assumptions, or what sort of trends, would you be looking for that would move that number, either towards the higher end of the range or the lower end of the range? In other words, what are the opportunities, and what are the risks, within that range of estimates?

Bill, we don't speak to individual quarters on our guidance. But it's like the whole -- when we talk about the whole year, what creates a range for us is really the mix. The mix of vehicles within our businesses. So that would be the primary driver that would allow the range for the year.

Okay, great, thank you.

You're welcome, Bill.

And this concludes our question-and-answer portion. I would now like to turn the call back over to Mr. Jim Hallett for closing comments.

Thank you, Randy, and thank you, ladies and gentlemen, for being on our call this morning. We appreciate your time, and we appreciate your interest in our Company and in our stock. Obviously, we're extremely pleased with the quarter we've been able to report to you. But I would say even more so as we look forward to what lies ahead of us. We're feeling very good about how we're positioned, and how we can continue to grow this Company to the next level. So with that, I thank you, and look forward to talking to you next quarter.

This does conclude today's conference. Thank you for your participation.