Openlane Inc (KAR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the KAR Auction Services, Inc. Q4 2014 earnings conference call. Please note today's conference is being recorded. At this time I'd like to turn the conference over to Mr. Jonathan Peisner, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Thanks, Holly. Good morning and thank you for joining us today for the KAR Auction Services fourth-quarter and year-end 2014 earnings conference call. Today we will discuss the financial performance of KAR Auction Services for the quarter and year ended December 31, 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 would like to turn this call over to KAR Auction Services CEO Jim Hallett. Jim?

Great, thank you, John. And good morning, ladies and gentlemen, and welcome to our call. I'm very pleased to report our fourth-quarter results and our full-year results for 2014. But even more important, I'm looking forward to sharing our outlook for 2015 as we move forward.

Today on the call I want to give you an overview of our performance, I want to update you on a number of initiatives, provide guidance and our outlook for 2015, and then talk a little bit about capital allocation. So, starting with the KAR performance, KAR had a very good year with a very strong finish in the fourth quarter.

Our adjusted EBITDA came in at $599 million, which was right at the top of our range in terms of our guidance. And we experienced this through a 9% growth in revenue. We were able to expand our gross profit percentage. And we did a good job of controlling our SG&A and we saw our adjusted EBITDA margin decline to 25.3% and our cash flow came in at $321 million.

As I turn to the business segment, starting with ADESA, ADESA's revenues were up 9% for the year and 13% for the fourth quarter. Adjusted EBITDA came in at $285 million, which was an 11% increase year over year.

And if I can focus on the fourth quarter for just a moment, the fourth quarter we've seen a 7% increase in volumes at the physical auction, as well we saw revenue per unit at the physical auction grow to $700 per vehicle sold. And this is exactly what we've been waiting on. We started talking about this last year in the second quarter when I got out of the predicting business, and then we saw it rise to about 4% in the third quarter, and now we see 7% here in the fourth quarter. So, I would now say it's starting to look like a trend.

With that said, we also saw success in our online business. Our online business, our volume grew 17% in the fourth quarter and our revenue per unit rose to $106 per unit, and that's up from the last two quarters that we reported. So, there's no question that the increased supply has been a positive outcome for both our physical auctions and for our online auctions, as well.

Turning to insurance auto auctions, we spend a lot of time talking about the whole car business. I think it would be a huge mistake to look past the tremendous job that the folks at Insurance Auto Auctions have been doing here in 2014 and even beyond. Insurance Auto Auctions grew their revenue 8%, their volume was up 7%, they improved their gross margin and their adjusted EBITDA margin, and, more importantly, they are extremely well-positioned for 2015 as of December 31 we finished the year with 20% more volume than we had one year previously. So, as we look at IAA, there's no question that they've been a model of consistency over the last several years in terms of their performance and their contributions to KAR's overall consolidated results.

And then looking at AFC, AFC had a very challenging first half. But the good news is we finished very strong -- kind of like the story of the tortoise and the hare. The loan portfolio has now grown to $1.4 billion, which is up almost 25% from 2013. And, as we indicated, we had a very strong fourth quarter where we saw a 10% increase in loan transactions.

With that I'd like to give you a quick update on TradeRev. Many of you know that we made an investment in TradeRev last year. The progress in Canada continues to be very good. We've entered a number of new markets, we've seen as increase in growth in our listings, as well as vehicles sold.

We lag a little bit behind in the US markets. We've been focused on hiring staff and getting staff trained. We have rolled out to four major metropolitan markets. And we recognize the need to continue to move quickly as we roll into other markets throughout the United States.

In terms of the acquisition pipeline, there are really two areas that I would suggest you focus on, and one is we are very focused on acquisitions that will involve technology that can be used by our sellers and by our buyers. And then, secondly, I would say we're still interested in expanding our footprint through brick-and-mortar.

There's no question that dealers and sellers become more and more focused on the use of technology, and we not only want to be able to enhance our technology, and grow our technology and acquire new technologies to support our dealers and our sellers, but we also feel there's an opportunity to expand our footprint in brick-and-mortar, as well. When you think about brick-and-mortar you should not just think about the physical cars and ancillary services that we get, but you should think about creating the buyer base, and expanding the buyer base in new markets, which not only contributes to physical but certainly supports our online selling, as well. So, with that, I have nothing to announce today but I would say that over the coming months you should look for some announcements in the areas of technology acquisitions and brick-and-mortar acquisitions.

You may have also read the announcement that we put out not long ago about ADESA's decision to form a digital services group. And this is really bringing all of our technology offerings together.

When you think about ADESA.com powered by OPENLANE, our private label websites, CarsArrive, RDN, all those technology offerings were reporting maybe to different people within the Company. And we felt it was important to align all of these technology offerings under one person. And we're pleased that we are able to announce that Peter Kelly will become the President of ADESA Digital Services. And, again, many of you may know that Peter was one of the cofounders of OPENLANE.

Not only is Peter a bright guy that gets technology, he's also a passionate entrepreneur that has a very good relationship with our customers, not only externally with our commercial customers but internally with our employees. We think having Peter head up digital services really brings a focus on all these technology offerings, and not just managing these technology offerings day to day, but how do we enhance them, how do we improve them, how do we expand them, and what new offerings do we need to bring into the group to serve our customers as we go forward. So, as we would say, we think we got the right guy in the right chair, and we're excited that Peter has taken the leadership position for our digital services group.

In terms of our guidance for 2015 we've announced that we expect guidance in the $630 million to $660 million of adjusted EBITDA will result in free cash flow of approximately $325 million to $350 million. And with that, I would say there's a lot of very positive trends that are taking place in our industry, starting with retail new and used car sales continue to be strong. Most are predicting that we're going to see a SAR of somewhere in the neighborhood of 17 million vehicles. And if you think about that, the very peak for new car sales was back in the year 2000 where volumes came in at 17.3 million, so we're almost reaching record highs here in 2015.

Leasing continues to be very strong. Leasing came in right in the neighborhood of 29%, 30% as a percent of new car sales for 2014. And we expect that leasing could even grow as we go into 2015 and beyond. There's no question that the low interest rate environment is having an impact -- a positive impact -- on vehicle sales, certainly on leasing originations, and also a very positive impact on our securitization costs.

When you think about the average age of a vehicle on the road today, it's approaching 12 years. And these vehicles not only need to be traded, these vehicles need to be replaced. And as you think about this, this is going to be very good for the retail business, and it's also going to be very good for the recycled parts business, which is certainly going to have an impact on our salvage business.

And, again, lower fuel prices having a very positive impact on what's taking place in our industry. Not only is it having a positive impact just on general transportation costs, but I would also mention to you it's having a positive impact on the pricing of vehicles, especially in the luxury lineup, the SUVs and the pickups. And then as we've reminded you often in the past, there is a direct correlation between miles driven and the amount of accidents that take place, and this is obviously going to have a positive impact at Insurance Auto Auctions.

Used car prices are a little bit off the peak that we've seen in 2011 and 2012. However, I would say that they remain quite strong. And, again, I mention the high inventory levels at Insurance Auto Auctions -- 20% above where we've seen year over year at December 31. And then the collision repair industry remains very strong and growing.

So I would say all looks very good for 2015. If there was one headwind that I would caution you on it would be foreign currency and the strength of the US dollar. And I know Eric is going to comment on this in his comments, as well. But the impact of currency could impact KAR's adjusted EBITDA by more than $10 million in 2015.

So, as we think about the return on capital, we've announced our dividend of $0.27 per share for the first quarter. We've announced our share repurchase program. And we are utilizing available cash. In fact, we are purchasing shares in the open market daily. And in January we utilize $3.3 million to purchase 94,900 shares. And I would say our goal for using our cash is certainly to return value to our shareholders and to support our strategic growth initiatives as we go forward.

Let me conclude by saying if I haven't expressed it up to this point in time I feel very good about 2015. The cyclical recovery continues in the whole car business. We're seeing more vehicles get to the physical auction. Revenue per unit continues to increase as we see growth in the use of our ancillary services. There's no question we continue to have a market-leading position in our online selling.

Insurance Auto Auctions continues to grow. The demand for recycled parts continues to be strong. And the AFC loan portfolio is growing, as well, with very low loan losses, and, again, these continued low interest rates. And, finally, as I mentioned, I think we've done a great job of controlling SG&A.

So, with that I'll turn it over to Eric and then will come back for some Q&A. Eric?

Thank you, Jim. I believe Jim's commentary in our earnings release and supplement issued last night provide adequate description of our performance in the fourth quarter and for 2014. I'd like to clarify a couple of items and then provide a little more detail on our guidance for 2015.

First, you will notice that we have provided additional disclosure this year on our fourth-quarter performance. In past years we provided management's discussion and analysis for the full year and left it to our investors to back into the fourth-quarter results. I hope you find our additional disclosure helpful in seeing our fourth-quarter performance separate from the full year. And we will include this disclosure in our annual report on form 10-K which we expect to file later today.

Now let me speak to our SG&A for 2014. There's one particular item that I want to highlight. This is stock-based compensation expense that was $28 million in 2014. This includes about $7 million in expense related to recent grants to directors and officers of the Company.

The remaining $21 million relates to accounting for grants of options that were issued prior to our 2009 IPO. This is the last of the expense related to these old grants. As a result, I expect a decline in stock-based compensation in 2015 as compared to 2014.

Our long-term incentive grants generally vest over a period of three or four years. We had a relatively small number of grants in 2014 and have introduced a broad-based program in 2015. Only about one-third of the expense of this broad-based program will be recognized in 2015.

We anticipate our long-term incentive program will have annual grants, so we will see the expense for long-term incentives increase in 2016 and 2017 as the 2015 grants vest, and roughly one-third of each year's grants is also recognized. For purposes of determining adjusted net income and adjusted earnings per share, we will not make any adjustment for stock-based compensation expense after 2014 as it relates to grants under our new programs.

In terms of our SG&A trends, we have been successful in keeping our SG& A relatively flat, other than costs added from businesses acquired, like Preferred Warranties and High Tech Locksmiths. We have now anniversaried those acquisitions so they will not impact future comparisons. However, any future acquisitions will obviously increase our SG&A and we will disclose this impact, as appropriate.

Next I would like to speak to our effective tax rate for 2014 of about 36%. This rate was below my expectations for the year as we benefited from a couple of discrete items.

First, we had tax rate reductions in certain states that were implemented in the fourth quarter. This required us to recognize the lower tax rate prospectively, and this provided a benefit in the fourth quarter as we revalued all deferred income tax balances in accordance with Generally Accepted Accounting Principles.

We also were able to reverse selected reserves established for uncertain tax positions. As the statute of limitations expires on these positions we benefit from the reversal of these reserves. These two items accounted for a reduction in our 2014 effective tax rate of about 2%.

Our capital expenditures for 2014 were $101 million, below our expectations for the year. This level of capital expenditures is the result of the timing of completing projects, especially at ADESA and AFC, and not the elimination of projects. The reductions in 2014 will result in expenditures in 2015 as projects are completed. We have included this carryover in our estimate of 2015 capital expenditures.

Let me quickly summarize the calculation of free cash flow for 2014. We began with adjusted EBITDA of $599 million, less capital expenditures of $101 million, cash interest on corporate debt of $61 million, and cash taxes of $116 million, resulting in free cash flow of $321 million.

We also experienced an unusual amount of negative working capital at December 31, 2014. The use of cash for working capital was created by the significant growth in our securitized loan portfolio. As you know, we securitized about 78% of the gross loan portfolio and the remaining 22% is funded from the Company's working capital.

The strong performance of AFC and resulting growth in the loan portfolio in Q4 is the reason for the negative working capital impact on our cash. This growth in the portfolio is attributable to the strong industry auction performance in Q4. As we begin to see the loan portfolio decline in late February and into the spring -- this is our normal seasonal pattern -- we should see this use of working capital become a source of working capital.

In terms of our guidance, we expect adjusted EBITDA, as I mentioned, of $630 million to $660 million in 2015. Our capital expenditures are expected to be $115 million, cash interest on corporate debt is expected to be approximately $60 million, and cash income taxes are expected to be approximately $130 million to $135 million. This will result in the free cash flow for 2015 that Jim mentioned of approximately $325 million to $350 million, or $2.27 to $2.45 per share.

We expect earnings per share of approximately $1.40 to $1.55 for 2015. Adjusted earnings per share is expected to be approximately $1.60 to $1.75. I recognize that the low end of our guidance is below our 2014 adjusted earnings per share and I would like to explain this.

First, we expect an effective tax rate of approximately 38% in 2015. This is about 2% higher than the actual rate in 2014. This is a $0.05 impact on 2015.

In addition, we have stock-based compensation expense related to our long-term incentive program that reduces 2015 adjusted EPS by about $0.06 per share. This is actually less expense than incurred in 2014, but the 2014 addback for adjusted EPS related to this item was $0.09 per share and will be zero in 2015. And, finally, we have the headwinds from foreign currency which could be as much as $0.05 per share drag on adjusted earnings per share.

My last topic is to let you know about a change we're going to make in reporting our adjusted earnings per share beginning in 2016. And, as a result, I will be providing this calculation beginning with our first quarter of 2015.

We have had a lot of investor feedback that a more meaningful measure of our performance would be a cash earnings per share number. After looking at a number of companies that utilize this concept we have decided to migrate to this measure over the next year. We will be utilizing the term operating adjusted earnings per share to distinguish this new measure.

In determining operating adjusted earnings per share we will be excluding the after-tax amortization expense per car. We will not be excluding depreciation or amortization of capitalized software costs as these expenses relate to our ongoing capital expenditures.

The primary reason for migrating to this new definition is that the private equity ownership and related expenses are now behind us. We do not have expense related to one-time stock grants from the LBO any longer. And the impact of stepped up depreciation and amortization from the 2007 LBO is well understood.

I believe this will be a cleaner presentation and allow comparison to many other companies that provide a similar adjusted earnings per share calculation. I will provide more detail in our Q1 earnings call and I will not be discontinuing our current adjusted earnings per share disclosure and guidance until 2016. In terms of the impact of adding back amortization in 2015, this would increase our estimate of adjusted earnings per share by about $0.20 per share on an after-tax basis.

That is enough for now. I'm sure I bored you with all these details. And I will turn the call back to Holly, our operator, for questions. Thank you.

(Operator Instructions)

Ryan Brinkman, JPMorgan.

Hi, congrats on the quarter. Thanks for taking my question. Could you just elaborate on the drivers of the improvement in ADESA physical auction volume. Was it primarily a continuation of the factors that benefited you in Q3, like repo cars? Or was it a result of the improvement in off-lease volume, as you've been calling for it? And how does the composition of the type of volume at physical auctions in 4Q caused you to maybe think differently about how it might trend in the future?

Ryan, thank you for your question. I would say all of the above. And to break that down for you we had a good performance in dealer consignment. We saw our dealer consignment rise by 3%. And that continues to be impressive with the number of leased cars in commercial cars that we see coming.

And then when you think about the commercial sector, all those segments actually did well. Not only we recognized the off-lease cars but certainly the factory volumes grew and the repossessions in rental cars grew, as well. So it was a combination of all those things.

And then you asked about going forward. We are hopeful that we can maintain those levels on dealer consignment. This is really an initiative that started several years ago, as you know. We thought that dealer consignment could possibly fall with the increased commercial volumes. So, hopefully we can continue the dealer consignment trends.

But there's no question that we're expecting an additional 700,000 off-lease cars to come to the market in 2015. So, I think the outlook is that those off-lease cars will continue to drive commercial volumes, which ultimately, we feel, will continue to improve the number of cars that get to a physical auction where we can provide those ancillary services and continue to offer, or continue to grow those revenues.

Okay, great. And then switching from ADESA volume to ADESA ARPU, it continues to grow. You mentioned ancillary services as a driver in your prepared remarks. But what about the other puts and takes?

For example, it looks like your on-line-only ARPU also improved. So, what happened there?

And then how do you think about the impact of the Canadian dollar? Maybe just remind investors of your exposure to Canada. I think it's a bit higher than most appreciate. And does that then mean that adjust for FX, that ARPU would have been even higher?

I think the ARPU on the online sales was a result of the mix of vehicles and the customer mix, just the way that they came in. In terms of the ancillary services, I think, obviously we continue to be able to offer those ancillary services on the cars that get to physical auction, although sometimes the margin is a little bit less on those cars. But overall we came in at $700 and we would expect that trend would continue. I'll defer to Eric, perhaps, to talk a little bit more about the Canadian currency here.

Sure, Jim. And I'll go back -- on ancillary services, real strength in transportation. And that's across the board for us -- cars getting to auction, moving cars between dealers as they are doing business with us online or at the physical auction. And then we've also seen success in other services like our repossession business. Again, it goes across the board.

In terms of the Canadian dollar, Canadian revenues make up about 15% of our total revenue in the business, and a little bit more than that in terms of adjusted EBITDA. So, it's a pretty significant factor. And that is a bit of a headwind and will continue, in our opinion, to be a headwind and has been factored into our guidance for 2015.

Okay, great. I'll just finish with a housekeeping item. Does the EPS outlook include the impact of any repurchases you might do? And then did you do any repurchases in 4Q? I know sometimes it takes a bit of time to get the mechanics of a buyback plan in place. Thanks.

Ryan, good point. We put the buyback plan in place. It took some time to get the mechanics in and, again, to put a plan in place and a cooling-off period. But now we are active in the marketplace and our guidance contemplates, while we aren't giving disclosure specifically about the numbers, yes, our guidance contemplates that we will continue with a stock repurchase program route 2015.

Great, appreciate it. Thank you.

Bret Jordan, BB&T Capital Markets.

Hi, good morning, guys. A couple quick questions, and one on TradeRev. I assume that there was more expense attached to TradeRev than there was income in the quarter. Could you give us a feeling on how many pennies you spent on that initiative and what your thoughts are on it turning towards profitability in 2015 or 2016?

Let me speak to -- it was not even pennies. The good news, as Jim mentioned, Canada was doing well and that's paying for -- again, our share of that loss was very insignificant, both for the quarter and for the year. It rounds to zero, not to a penny. It's that small. And the success we're contemplating is really just getting the velocity up in the United States, right, Jim?

Exactly. In fact, we really hadn't factored anything material into our 2015 numbers from the outset. Again, it's getting it rolled out to new markets here with a sense of urgency.

And just a reminder, we use equity accounting because we only own 50%, so it does not have any impact on adjusted EBITDA. It does run through earnings per share but not adjusted EBITDA.

Okay. And then a question on IAA with your inventory being pretty robust at the end of the quarter, how are we looking on cycle times on the salvage side of the business? I think it had slowed a bit in the beginning of last year, and maybe we're about to anniversary that. Is inventory high because there is just a lot of products coming to you or is inventory up 15% because we're still seeing a delay on cycle times on a comparable basis?

Bret, thank you. Two things. Number one is there's no question we feel we continue to gain share and continue to grow our volumes there. But the other thing that we've mentioned in previous calls which plays into this is we do have one major customer who has changed their internal processes in terms of how they want to process their vehicles, and they've been holding inventory back. And as a result of those vehicles, those vehicles are going through a slower cycle than our other customers. So, it's a little bit of a build up from both.

Okay, great, thank you.

Matthew Fassler, Goldman Sachs.

Thanks a lot. Good morning to you. My first question, just to be clear, of the 15% of the business that comes from Canada which division does that show up in? Is that primarily ADESA or is it spread evenly?

It's spread fairly evenly Matt. It's in actually all three major segments. But one segment that isn't impacted as much would be the holding company. We actually have most of that in the US. But in terms of the operating segments it's spread across all three.

And then a couple questions on ADESA metrics, one to follow-up on a question that Ryan asked. You talked about your growth in revenue per car sold at auction. And I guess that was up 4%. Is that number inclusive of dilution from currency translation or does that exclude the currency translation?

It's inclusive.

So, in other words it would have been up more than 4% had you not had the burden of currency translation?

That is a fair assessment, yes.

Got it. And then also on the ADESA piece, your revenue per car sold at physical, that's up very nicely 6%. Last quarter had been up 9%. Not to quibble over 2 or 3 percentage points, was there any meaningful difference in trend other than currency that would have led to that deceleration? And as a follow-up to that, what do you think is sustainable? In other words, can this metric continue to grow in 2015?

Matt, I would tell you, as you know, last quarter was $697. This quarter it's $700 number. That's not a rounded number, that's the actual number. And we disclosed those numbers. It's really the comps that are the issue. And I think it's really just the maturation of the use of ancillary services. And, Jim, you and I would both agree that there's room for more.

Yes. And the other thing is, not only the ancillary services that you see at physical auctions but there is other revenue from other services that can grow, as well, as we think about things like High Tech locksmiths and our Dent business and other businesses, as well. So, I would feel comfortable in saying we do feel it is a sustainable number and there is room for growth there.

Great. And then my final follow-up, Eric, just relates to your shift to operating adjusted EPS. Can you just clarify for us one more time which type of depreciation you are going to exclude and which you are going to include in operating results?

Sure. All depreciation and amortization will be included except for amortization that's related to intangibles typically through acquisitions, the intangibles that are created that aren't tied to an annual spend in CapEx.

And that D&A tends to show up, if you look at your three divisions and then your corporate line, which of the four divisional disclosures would that D&A typically fall in?

It's actually in all four. There would be very little in holding company because the acquisitions aren't there. And in our current disclosures, just a heads up, amortization includes amortization of capitalized software costs. We will be breaking that out separately so that you can get to the amortization number that is added back in the reconciliation of net income to operating adjusted earnings per share.

And you said that'll be about $0.20 a share, which it sounds like, if we're just thinking about the Op ticks, would more than offset the hit that you are going to take by not adding back an adjustment for LTIP next year?

The impact of long-term incentive this year was, I think I said 6%. Let me check my notes -- $0.06.

I think you said $0.06. Yes, okay.

The $0.20 is a net of tax number. They are independent. I'm not going to say they net but, yes the long-term incentive in total for 2014 was $0.09. And that was a full amount. So, I think the two numbers, the long-term incentive, would be less than that $0.20 that I'm adding back for the amortization.

Got it. Thank you so much.

Craig Kennison, Robert W. Baird.

Good morning. Thanks for taking my question. Eric, I want to thank you for the additional disclosure, as well, this quarter. Very helpful. Jim, you mentioned acquisitions and you hinted at bricks-and-mortar. I'm curious about your geographic aspirations and then whether you are more interested in salvage or whole car type acquisitions.

Thank you. A couple things. I would say we're interested in acquisitions in both of those businesses, both at ADESA and at Insurance Auto Auctions. We have told you in the past that there are some holes in the footprint that we feel that we would like to fill, and we continue to look at filling those opportunities. But we wouldn't let those opportunities stand in the way if something came before it.

And I would say that we identified three markets in the past that we said there was a hole and I could speak to those. They were in the Detroit market, the Chicago market, and the South Florida market. But certainly we wouldn't limit it to that. If there was an acquisition to surface and it made sense from the metrics that we look at, we would certainly be prepared to act on that, as well.

And as a second question, Jim, in the past you've outlined the Kontos outlook on whole car volumes for the upcoming years. What is Tom Kontos' opinion of volume this year and also in 2016 and 2017, if you have those figures?

The net will be actually summarized in our 10-K, Craig. But we think we were right on this 2014 year. And we have 2015 moving to about 9.5 million units, 2016 at about 9.8 million units, and then about 10 million units in 2017. And that is the disclosure we'll have in our 10-K, and you will see that in our investor presentations that we'll put out within the next couple of weeks.

Very helpful, thank you.

John Healy, Northcoast Research.

Thanks, guys. A bigger picture question. A year ago in this timeframe we were debating if ARPU would ever turn positive and now it's headed in the right direction at a nice pace. I feel like we should be thinking about where the potential is for that. You and Eric both seem to feel that we're not there yet from a mix standpoint and an attachment standpoint. But is there a way you could think about maybe a milestone or a goal, or maybe just aspirationally where you think ARPU might be able to get to from a dollar standpoint hypothetically for the Company over maybe the next two years, three years?

I always get accused of being too optimistic so I'm going to allow Eric to answer that.

John, that's a good question. We don't want our guidance to get to that level of detail because there are so many variables. But I think, as you look at the business just in general, we've talked in the past when you take an off-lease car you could have as much as $900 to $1,000 in ancillary services. So the question is what is the mix -- how many cars are using a heavy dose of ancillary services and how many cars are just using transportation, which would be a much lower number.

We think the upside is, as the mix changes and the heavier users of ancillary services grow, that number will continue to grow. But I don't want to put a number out there because it would be nothing more than a guess.

And, again, it's going to be highly driven by the number of vehicles that get to physical auction site.

But the way we look at it, John, again I'll just reiterate, if it's more off-lease cars we do assume higher than $700 in ancillary services. That's what makes the number go, not inflation of the value of ancillary services.

Fair enough, gentlemen, that makes sense. And I wanted to ask about the Insurance Auto Auction business. You've done really well there for a while. How do you feel you're positioned from a share standpoint? Are you picking up share versus the market?

And, secondly, what's on the RFP docket for 2015 or 2016. Maybe not naming names but are they very active years where there are opportunities out there or are they fairly normal years?

I think that, again, we feel that we've grown our share and we feel we've grown our share with the major providers and the fastest-growing companies. And in terms of RFPs coming, I would term it as just part of the ongoing business. We're always dealing with RFPs. And, as you say or you alluded to, we don't get specific with customers. It's just part of what we do with on a daily basis.

And I'd like to just remind you, 2014 we acknowledged it was going to be a very light year because there had been a very active period in 2012 and 2013. And now we're probably back to a more normal cycle. It's really part of that business that happens all the time, back to a more normal cycle of RFPs.

Okay, great. Thank you, guys.

John Lovallo, Bank of America Merrill Lynch.

Hi, guys, thanks for taking the call. First question is, there appeared to be again solid pull-through to the physical auctions, which is pretty encouraging. But I thought what was interesting, too, is it seemed to be at the top of the funnel and more closed sales versus perhaps open sales, which lowered the revenue per vehicle on the online channel. So, it seems like at the top of the funnel, the bottom of the funnel, there was increased activity. Am I thinking about that correctly? And how should we think about that dynamic?

I think it's just the result of more cars going into the final, right? There are more vehicles coming of and there's more activity. As you said, I think you said it well, there's more activity at the top and certainly more activity resulting at the bottom as they make their way through.

You did see, if you look back from a year ago, the number of vehicles sold as a percentage at the top of the funnel was a higher percentage than what it actually was in the fourth quarter, which obviously demonstrated more cars getting into the physical.

Yes. And, John, you captured it right. A year ago in the fourth quarter we were $115 per car sold online-only, and now $106. That is the top of the funnel. But compared to the last two quarters we had fewer grounding dealer sales where we get even less revenue than we do in the closed transaction at the top of the funnel.

That's very helpful. And this next question may seem a little bit odd, but given the severity of the weather that we've experienced in the first quarter, is it possible that the weather was actually too severe where people weren't driving at all which may have actually reduced accidents? Or do you expect that the really bad weather that we've had is going to result in pretty good inventory, even going into the next quarter?

I think if you are in Boston that would be a problem. But other than that we would tell you, and we've said it in the past, we're dealing with weather all the time. And at the end of the day we consider it to be a push.

In fact, I would tell you we have relatively good weather in the fourth quarter. And that's being offset a little bit here in the first quarter with some of the whether that we've experienced recently. And, again, I think at the end of the day it's just something we deal with. We know it's going to take place at one point or another and it just evens itself out over the course of a year.

Okay, that's helpful. Finally, in the AFC division, very strong volume, but revenue per loan, I believe, was flat year over year. And the question is, are we reaching asymptotic limits on what that revenue for loan could be, or is there still room for upside there?

Jim mentioned competition at the beginning. It's a competitive environment. I think it's been fairly stable. The main factors that are going to influence it and going to be loan losses and foreign currency. That's really what's going to impact it.

I'm not going to say we don't have opportunities to take price once in a while but I probably would tell you there wouldn't be much of that as long as we're going competitively against another large company. It's probably in the right pricing range right now. And you look at our margins, John, we have to be a little careful not to charge too much.

Okay, thanks a lot, guys. I appreciate it.

Shreyas Patel. Credit Suisse.

Hi, thanks for taking my question. I do want to follow up on a previous question where it looked like online-only volumes decreased sequentially for the second quarter in a row. I'm not sure if that's a seasonal trend. Should we continue to think about online-only as outpacing physical as we look ahead to 2015 and maybe even 2016?

Shreyas, I think you are referring to the growth rate in online-only volumes has decreased two quarters in a row not the -- the absolute number is up actually 17% in Q4. And I think it was only 11% or 12% in Q3 but I don't have the right up front of me. We think that's good. That means we are back to normal.

And while there will be growth in online-only, as more cars come to market, again, we have believed that they will get to physical auction because there's not more demand in the online-only venue than what can be met as that market reaches back to stable levels, because it's a limited number of days that it's in that menu. Jim, you may want to add some color to that or is that enough? No, I think that pretty much gets it. The one thing I could add is that these vehicles get priced at the top of the funnel. They normally get priced at a premium. And sometimes when you have that much volume coming, the franchise dealer is now taking a look -- do I buy this thing at the top of the funnel or do I let it work its way to the physical auction where I might be able to buy the car for considerably less? And, Jim, you'd find that true because there's so many cars. They know there will be cars that make it through the funnel. When there's a limited number of cars they buy it because they're not going to be there at the end. Is that correct?

Exactly. When you have that oversupply -- and I go back to my dealer days -- you can be more selective

And then the other thing that plays into it a little bit -- I said maybe I'll add one more thing -- the other thing that plays into it a little bit is, when the dealer is buying the car at the physical auction, he's buying the car now fully reconditioned and not having to spend a number of days to turn that car to get it to the front line. And basically he can buy the car and put the car on his lot for sale that same day. So, there are advantages when you have the oversupply to waiting to buy the car at the physical auction that don't necessarily happen when you have a tight supply like we've seen in 2011 and 2012.

Okay, got it. And then looking at IAA, obviously the volumes have been really good the last few quarters. But it looked like the ARPU growth slowed a little bit in the fourth quarter. I'm just trying to think about how those two dynamics could play out going forward. Should volume growth still be relatively strong in 2015 and maybe ARPU growth slows? Or how do you guys think about that?

In terms of revenue per unit the place we're seeing the most pressure is the low end of the market, the very low-value car that probably has limited recycled parts available from it and it's more of a scrap vehicle. That's where we probably see the pressure on revenue per unit in the salvage business.

The rest of the market, it's been moderating, softening somewhat, but staying quite strong relative to historical patterns, other than, again, the peak of 2011 and 2012 that everybody experienced. The way we look at it is perhaps the moves will be moderate and they will be focused on the low-end car, is where we think there will be the most pressure. And that will really just tie to commodities prices.

And in our guidance we contemplated various scenarios under that. We feel any reasonable outcome is covered by the range of our guidance.

Okay. And then just lastly, on incremental EBITDA margins, it looks like you guys did really well in 2014, 32% for the total Company. That's well above the run rate for the last few years. I think they were in the mid teens. Is 30% a reasonable run rate for you guys given how well you're doing on SG&A and some of the other factors?

I don't want to get into a reasonable run rate because that might border on guidance. But I will tell you, we have said in the past, as the incremental margin comes from ADESA, IAA, utilization of their facilities, especially now ADESA and AFC growing, it has stronger attributes than we saw over the past few years when they were still coming to the bottom of the cycle and growing a little less slowly.

So, I really think you're seeing the leverage of the business model that we have. Again, IAA has been at the top of its game in performance, and now ADESA and AFC are seeing the volumes come back and that's where you're going to see the real improvement in incremental margins. And I think it's a fair reflection, however you are calculating it. People do it different ways. You are seeing the power of ADESA's strength of performance coming through, because that's our biggest operating unit that's been under the most pressure for several years.

Okay, great. Thanks a lot.

John Lawrence, Stephens.

Good morning, guys Just quickly, can you take that as far as -- most everything has been addressed on ADESA -- but geography across the country? Can you give a sense of what places were strong and weak? Was it pretty even? And how did the flow of the quarter, even from that decel in the third quarter, how did the flow of the quarter go?

I would say it was pretty much consistent across the country across all markets. And I would say the flow was consistent, as well. Without diving into the details of each specific market, it's contributions from across the country.

And then, secondly, on TradeRev, any idea what kind of CapEx they'll spend there this year? You've got four US markets. Where would you expect to be, say, by the end of 2015?

In terms of the CapEx, TradeRev's a 50% venture so it's not consolidated so there's no CapEx related to it. Again, it's a technology company. It's really just paying technology people, whether that's capitalized were expensed. TradeRev actually probably expenses that right now, as opposed to capitalizing it. But it's not requiring cash, it's self sufficient. Back to expectations --.

In terms of markets, the simple answer is, as many as we can. Obviously we are in four now. We are continuing to push with a sense of urgency. There isn't a specific target. My goal would be to be in every market in the country but that probably is not going to happen.

Great, good luck. Thanks, guys.

Bob Labick, CJS Securities.

Good morning. This is Robert Magic filling in for Bob. Despite higher volumes gross margins were down year over year. What were the key factors and where do you expect gross margins to settle out?

The key factors really, it's impacted a little bit by the average selling price, especially at the low end. And a little bit of impact was with the strong inventory we built up at the end of the year and throughout the year. It's increased our field cost for the lots and the costs that we incur on the ground, which hopefully will lead to higher margins later on as we sell more cars.

But I think the outlook is fairly stable. We're down about 50 basis points year over year, is what I show, I think, Robert. Again, I don't think anybody looking at that business could be more precise than that. That's more just a function of how the costs come in.

Great, thank you.

Bill Armstrong, CL King & Associates.

Good morning, guys. I will also add my appreciation for the additional fourth-quarter disclosure. You just answered my question on the gross margins at IAA for the quarter. What margin trends are you baking into your forecast for 2015 for IAA?

Again, we don't want to get into anything specific. I think it's a stable industry, it's a stable business at IAA. The growth has been sustained over a long period of time. And we're settling in at a gross profit profile that's in the high 30%s, nearing 40%. I don't want to be more specific than that but I think that's what we are seeing.

My point is, we're not seeing a lot of pressure other than, again, what's the mix of the vehicles -- are they more high end, more low end. That's really what --. And then what is, again, our field costs relative to occupancy as we store more inventory or we sell more than we store. It will vary because of those factors.

So, that sounds like that's something that could bounce around from quarter to quarter but we're not necessarily seeing a big trend up or down.

That is correct. That's a good way to put it. And, like I said, it's less than 1% change in the margin percentage as I have looked at Q4, year over year, and the year, year over year. It's fairly modest. I know it changed but it's fairly modest in the big scheme.

Understood, okay. And then I just wanted to go back and clarify on the LTIP. I want to make sure I have this right. I think you said that LTIP cost $0.09 a share in 2014?

In 2014 the add back to calculate adjusted EPS is $0.09 per share. By the way, that's not all of the long-term incentive. That's only the portion that related to the historical grants. There's a little bit more than that. You can do the calculation. I told you it was $28 million, $21 million of which related to those old grants. So, the gross SG&A was $21 million and that number will now not be added back and it's an impact of $0.06.

Okay, an impact of $0.06 for 2015.

That is correct.

Got it. Okay. Thank you very much.

(Operator Instructions)

At this time we have no further questions in the queue. Mr. Hallett, I will turn it back over to you for any additional or closing remarks.

Okay, thank you. And just quickly, I will say thank you very much for joining the call today and the interest you have in our Company. Obviously we enjoy reporting these calls a little bit more in recent quarters and hopefully going forward. We're optimistic and looking forward to a good 2015. So, thank you, and appreciate your support.

Thank you. Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.