Openlane Inc (KAR) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to the KAR Auction Services, Inc. Q3 2015 earnings conference call. Today's conference is being recorded. And at this time I would like to turn the conference over to Jonathan Peisner, Treasurer and VP of Investor Relations.

Please go ahead sir.

Thanks Danny.

Good morning and thank you for joining us today for the KAR Auction Services third-quarter 2015 earnings conference call. Today we will discuss the financial performance of KAR Auction Services for the quarter ended September 30, 2015. 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?

Good, thank you John, and good morning ladies and gentlemen. And please allow me to add my welcome to our call. Obviously another quarter has passed and I am very pleased with the results that we are seeing. In fact, all of our businesses are performing at double-digit volume levels. What I want to cover today is really a couple of things.

I want to speak to our performance, want to give you a brief update on what's going on with TradeRev, speak to capital allocation as well as to our guidance, and then focus on what I see as we look ahead going forward. So with that, from a consolidated standpoint our volumes increased as I mentioned in all segments which led to an overall 9% increase in adjusted EBITDA.

There is no question you are going to hear a lot and you have already read about our Canadian currency is having a negative impact overall. Canadian currency had a negative $6 million EBITDA in the quarter, and year-to-date it's been a negative $13.2 million.

At ADESA we are seeing an increase in our volumes in both the online and the physical auctions. We also experienced growth in commercial as well as in dealer consignment. And our dealer consignment segment was up 10% and this was driven by what we have seen is very strong new car sales.

As you know new card sales create a lot of trade-ins and those trade-ins hopefully eventually make their way to the auction which has been very, very strong in our business. And then we also have seen very good performance in the commercial business primarily driven by the off lease vehicles as well as the return of the factory vehicles. Our factory business is up and this includes a number of rental cars and as you know, a number of rental companies have gone to guaranteed buyback cars which are what we refer to as the program cars, are coming back.

The capital finance segment, primarily driven by off lease vehicles is up 13% overall. And I think the good part about the increase in the off lease vehicles is more of these vehicles were sold at the physical auction than what were sold online. And this is true in terms of both absolute numbers as well as percentages and certainly this is what we have been telling you over the last several quarters, is what we have been experiencing over the last several quarters, and what we expect to continue to see going forward.

The one thing I would point out is you think about capital finance, remember that this includes repossessions as well, but primarily this segment is driven by the off lease vehicles. You know a lot of our investors have been focused on incremental margins and I am pleased to report that excluding acquisitions, incremental adjusted EBITDA margins at ADESA are 35%, and Eric is going to provide more color in his commentary here in a few moments. As we look at Insurance Auto Auctions we have seen very strong growth at 16% volume growth.

This is 15% growth excluding HBC and I believe this is a result of our continued investment in technology, our continued expansion of the footprint, and then our focus on our highbred methodology of selling these vehicles both live and live online. I think these factors have clearly added value and have led to the volume growths that we have seen at Insurance Auto Auctions. That is not to say that we haven't had a couple headwinds.

I think everybody is familiar with what's going on with commodity prices, especially scrap metal prices, and maybe there is one example I can share with you that really tells the story quite well. I want to talk about crushed car bodies. In January of 2014 a crushed car body was selling for about $312.

In December of 2014 a year later that crushed car body was selling for about $198, and then if you fast-forward that to September 30, 2015 a crushed car body was selling for $124. That's a 60% drop in less than a two year timeframe, and it has created a 3% decline in revenue per vehicle at Insurance Auto Auctions. There is no question that the Management team at Insurance Auto Auctions are constantly reviewing their fees and looking at their service offerings and certainly trying to offset the impact of scrap metal prices, but certainly haven't been able to increase the fees to a level where it completely offsets the scrap metal prices.

Another thing is we spoke about Canadian currency, but foreign currency is also having an impact on the results at Insurance Auto Auctions. As you know the US dollar is very strong compared to foreign currency and this reduces the value of the local currency for our foreign buyers. These buyers are still very active, they are still bidding, they're bidding just as much, but unfortunately with their currency being devalued they are not able to pay as much for the vehicles as they have been able to pay in the past as they compete with the US dollar.

With that I will turn to AFC. Again another very good story, up 13% in volume, and I think the market truly appreciates the business model at AFC and the service levels that we are providing to our customers there. No question we have seen increased competition.

There has been a pressure on fees but I can tell you that this still remains a very profitable business and I think that the AFC Management team has been able to respond to the competition and grow our market share in this space. In fact, just the size of the average loan -- or the average revenue per loan transaction is down approximately $5 overall just to put that in perspective for you. So I think we are in a good spot there.

We also think about interest rates at AFC. We are very well positioned. As you know, our average loan is about 60 days in duration, and I believe that the structure of our securitization limits, our interest rate exposure, and although interest rates may increase later this year or possibly in 2016, I think we are in a good position. If I could turn to TradeRev for a moment.

I would start by saying TradeRev remains a very, very high priority for me. We're allocating more resources to support the US rollout. In fact, we are now tapping into some of the talent we have within the Openlane organization to assist us with the rollout of TradeRev here in the US.

It wasn't that long ago that Openlane was rolling out a technology product here in the US and I think they have a lot of experience rolling out a startup technology company. I think there are a lot of similarities between the rollout of Openlane and TradeRev, and I think we would be very wise to use that talent we have within the organization. So we do expect to add more resources and continue to add more resources as we go forward.

And just the other thing I would mention on TradeRev. I would like you to think about this is not being a quick hit. I think we need to think about TradeRev over a little bit longer period of time and I think of it as maybe over the next three to five years that business model really transforms and that's my thinking on that.

You know as we look at the acquisition pipeline I shared some comments with you last quarter. I said the pipeline is active. We have targets within all of our business units but I also mentioned that it wasn't likely that we would complete any deals prior to year end. And as a result we announced a $200 million accelerated share repurchase program, that was initiated on August 6, and we are expect it to settle the purchase of those shares in the first quarter of 2016.

I can tell you that the Senior Leadership team at KAR has been very much focused on really reviewing our strategy and clearly identifying what we believe fits and also what we believe doesn't fit within the KAR strategy as we go forward. And I would say that probably my major focus right now is on expanding the buyer base and increasing our market share at ADESA. I believe that we need to be in a position to truly benefit from the cyclical recovery of the used car supply that is taking place within the whole car business.

As far as the other targets that we have got on the radar screen for acquisition I can share with you that I expect that we will deploy capital for growth early in 2016. We are certainly executing on the strategy that we've determined within -- internally here. And also I would share that we expect to increase our leverage to our target of 3 times in 2016.

In terms of guidance, our guidance has not changed. We still expect adjusted EBITDA in the range of $635 million to $665 million that will produce approximately $310 million to $335 million of free cash flow, and again Eric will give you a little more color on guidance. As I look forward I am really excited about the picture that I see.

I think we have some real positive momentum, and our businesses are performing extremely well and working well together. We have an excellent pipeline of off lease vehicles. We know the number of leases that have been written over the last three years, and we know what those maturities look like and when they're coming to market and how they are coming to market so we have very good visibility on these leases as we go forward in the next three years.

As you all know we're talking about very strong new car sales. I think the most recent information I read is they're looking at a SAR next year of approximately 17.4 million vehicles which will be a record all-time high. And again, to my earlier point, new car sales produce used car trade-ins, and those used car trade-ins hopefully eventually make their way to auctions and we are certainly seeing that in our dealer consignment segment.

Another most recent article, in fact just out this morning, that you may have read is Experian put out an article this morning and said that outstanding car loans are at an all time high, nearly $1 trillion, and this represents a 53% increase over the last five years. So I think that bodes very well for our Business. Certainly bodes very well for the repossession segment, and as you know I have often said there is a direct correlation between the number of contracts that are written and the number of repossessions that come back to market.

So with that we spoke about interest rates, possibly they would increase, but we don't believe that they would be disruptive and I think as you think of all these conditions that I just walked through I think these are very, very positive conditions for both ADESA and AFC. And then as I think about Insurance Auto Auctions, I think about lower fuel prices and then we talk about miles driven. Miles driven are at a record all-time high.

And then we think about the increased technology and the complexity of these new cars that they are manufacturing. I think this all bodes very, very well for the salvage volumes that we see going forward. And I also believe that the volumes that we expect at Insurance Auto Auctions will more than offset the negatives that we are experiencing on commodity and foreign currency.

So with that I think our initiatives here are to expand through acquisition at values that are accretive, and more importantly in a timeframe that really allows us to take advantage of the cyclical recovery that's going on here in the US and that's about to start in the Canadian marketplace. So I would also assure you that if for any reason any of these acquisition targets don't make sense, if we don't get them over the goal line for one reason or another, we have other options to deploy capital to our shareholders.

Our absolute focus is on returning value to our shareholders, and so with that I am going to can conclude my formal remarks, going to turn it over to Eric for his commentary, and will be back for some Q&A. Eric?

Thank you Jim.

I would like to start by giving some context around some new information we provided to supplement our earnings release. We have provided earning slides that provided a tabular presentation of information included in our earnings supplement. This is information you will also find in our quarterly report on Form 10-Q that I expect be filed later today.

As Jim mentioned in his remarks, and you can see in the earning slides, translation of the financial performance of our Canadian operations had a significant impact on our results when compared to the prior year. This is just a translation impact and did not impact the performance in Canada. In addition to the impact on adjusted EBITDA that Jim mentioned, foreign currency negatively impacted revenue by $15.2 million, and adjusted earnings per share by $0.02 in the third quarter.

For the first nine months of 2015 foreign currency negatively impacted revenue by $34.9 million and adjusted earnings per share by $0.05. We have also provided a schedule that analyzes incremental operating profit margins for ADESA. It is clear that recent acquisitions have made it difficult to determine the incremental margins for ADESA as we analyze the contribution for increased revenue provided by the organic growth in the ADESA business.

First, the incremental adjusted EBITDA margin for the ADESA business is 35% as Jim mentioned. Acquisitions contributed $2.2 million of adjusted EBITDA in the quarter. The difference between operating profit as disclosed in the earnings slides and adjusted EBITDA is the depreciation and amortization expense for the acquired businesses.

This gives you sufficient information to compute an incremental EBITDA margin for ADESA. If we take it a step further and use a common currency in this calculation, the incremental adjusted EBITDA margin at ADESA is 36%. I would also like to comment on average revenue per unit, or ARPU, for ADESA.

Let me first discuss ARPU for the online only vehicles. We saw growth in the number of vehicles sold in online only open sales that contributed to an increase of $13 in ARPU. This increase is net of a negative $4 per unit from the foreign currency translation. At physical auction, ARPU increased $2 to $699.

This is better than you'd think given that foreign currency negatively impacted ARPU at physical auction by $22. Another area that our acquisition activity has made comparisons more difficult is in SG&A. On a consolidated basis SG&A increased $12 million to $128.5 million. SG&A for the third quarter includes $3 million for businesses acquired by ADESA in 2015, $800,000 for HBC acquired in June, and $600,000 in professional fees directly related to acquisitions.

In addition, ADESA SG&A includes a loss on disposal of land of $1.2 million. This is a non-cash loss related to the sale of an idle property. In the 2007 LBO transaction, the land was recorded at the fair value as of the date of the LBO.

The fair value at that time was significantly greater than the acquisition price of the land many years earlier. The sum of these items that I just described is $5.6 million. Net of this, SG&A grew 5% in the third quarter.

I would also like to update you on efforts at AFC to mitigate the risk of increasing interest rates on net interest spreads for floor plan loans. In 2008 during the financial crisis, AFC instituted a prime rate floor of 5%. As prime has been below 5% since that time, this insured an adequate spread was earned on the loans.

In the past two years, AFC has successfully eliminated the prime rate floor for a large portion of its portfolio. This has minimize the impact of increasing interest rates, reducing net spreads as the prime rate increases from current levels of 3.25%.

In August we initiated a $200 million accelerated share repurchase program. We retired 4.6 million shares of common stock based on the initial delivery of shares. This represents 90% of the expected share repurchases.

Upon completion of the share repurchases, additional shares will be delivered in the final settlement. This program will be completed prior to February 19, 2016. I don't expect the final settlement prior to year end, but we will be able to give you an update on our year-end earnings call.

While we continue to report adjusted earnings per share, we will be using operating adjusted earnings per share beginning in 2016. The reasons are obvious in the third quarter.

As you saw in the earnings release last night, adjusted earnings per share increased 5% to $0.42. In comparison, operating adjusted earnings per share for the third quarter increased 9% to $0.47. Amortization expense net of tax related to acquisitions is a sole reason for this difference.

Our guidance for 2015 has not changed from the last quarter. We continue to expect adjusted EBITDA of $635 million to $665 million. Capital expenditures of $134 million. Cash taxes of $130 million to $135 million, and cash interest on corporate debt of $61 million. This will result in free cash flow of $310 million to $335 million, or $2.17 to $2.35 per share.

Adjusted net income per share of $1.62 to $1.77 is expected for 2015. This assumes a fully diluted share count of 142.5 million shares. You can find a copy of our earnings release, earnings supplement, and Q3 2015 earnings slides in an 8-K filed last night or on our website at www.karauctionservices.com.

That concludes my remarks. We will now turn it back to Danny, our operator, for questions.

(Operator Instructions)

Ryan Brinkman, JPMorgan.

Hi good morning, thanks for taking my questions. Maybe just firstly on the reiteration of the full year guidance, I think that implies a fairly wide range in 4Q for adjusted EBITDA of $140 million to $170 million. Was the decision to not narrow the range just a reflection of the fact that you are on track with how you thought that the year would play out, or are there some swing factors in 4Q that could cause EBITDA to be on the higher, lower end of the spectrum and if so what are the most important of those factors?

Thank you Brian for the question and that's a good question. It's been our practice in our history since going public that we only adjust our guidance annually and only during the year if there's a material change to the guidance. And so again with our practice we are not adjusting the range and it's because our expectations are still within the bottom and the top of the range that we described in January. But not a reflection on market condition on a quarter-to-quarter basis.

Okay that's great to hear. Thanks. I know you are in a position per what you just said to talk about 2016 more on the next quarter call. I'm just curious if you could talk about the sustainability of some of the drivers that impacted 3Q? For example, the very strong volumes at ADESA is probably a lot of reason to think that will continue, right, with what we know about the off lease market? But maybe comment on price net ADESA used car prices have really defied expectations [to default much].

Is that sustainable going forward? And then on the IAA side, people are driving more lower gas prices, that should help volumes, but maybe you don't have next year the type of market share gains that you had this year, I don't know. Then on the pricing side there if you sort of straight-lined that the metal prices, or don't you expect them to straight-line? I'm not sure. What does that imply for IAA pricing going forward?

Okay Ryan, I'll try and remember everything you said. (Multiple speakers).

Volumes and price for both divisions, yes.

With the volumes in the whole car business, obviously I outlined in my commentary we have very good visibility. Again, I will just remind you of those things. Number one the leases -- we know the leases that were written, we have very good insight especially through our open lane relationships, and then just our physical auction relationships we have very good insight to what's coming on leases.

I mentioned to you the opportunity for repossessions. We expect that repossessions segment will continue to grow. Then I had mentioned that the program cars and the rental cars -- we're going to see those cars come back in a much larger volume. As you know there's a trend four or five years ago for these rental car companies to take more of these cars on a risk basis and sell them on their own. Now that trend is kind of reversing itself with a few exceptions and the rental car companies are back to the program cars so we're going to see more and more of those program cars coming back to the market.

And then it's probably dealer consignment. I can speak for Eric and myself, we continue to be amazed at the performance of our dealer consignment business. This quarter alone dealer consignment represented 52% of our business and for that number to stay up at 52% with the amount of commercial vehicles that we see coming through is beyond our expectations quite frankly. We expect that number to drop down a little bit.

So again a very good picture. At ADESA volumes look good, our online business continues to perform very well in that private label space. The other thing that I see, and we can talk about, is I see more of our vehicles getting sold in the open online which is a real opportunity for us and as you know probably the economics really increased when those vehicles make it to the open online space.

So ADESA, in terms of prices, I don't believe that there is any price so much from the seller side of the equation but there is price opportunity on the buyer side of the equation. And then when you think about insurance auto auctions, I think that we are going to continue to deal with scrap prices here for some time. I think we're going to continue to deal with foreign currency for some time, and I think what you're going to see there is you're going to see I would say pretty moderate, level to moderate growth there.

And within the AFC business, I think I said it already but the AFC business is competing very well. There has been pressure there. There's been competitive pressure. But I think our decision at AFC to continue to operate these 106 or 109 loan production offices that we have in the field services our dealers very well and puts us in a very strong competitive position where we really do have a strong value proposition.

Overall, do I sound a little optimistic? Yes, I am very optimistic. As I continue to say, this is as good as our businesses have performed collectively on a consolidated basis since we came together in 2007.

And Ryan, let me add just a little more commentary. Scrap prices, the Canadian dollar, all took the hit in the first quarter of 2015. As we go into 2016 we will not have the difficult comparisons that we have had all year this year on those two factors.

That doesn't mean there's going to be relief, but on a year-over-year basis you won't see the same impact because I'm not saying we're at the bottom and were at the bottom all year, but clearly a majority of the pressure that has been on our comparisons has been felt all this year, and I don't know that it will get significantly worse

Okay. That was super helpful. Thanks a lot, guys.

Matthew Fassler, Goldman Sachs.

Thanks a lot. How are you? Thank you and good morning. I would like to dig a little deeper into the profitability of the salvage business. I think you shared the impact of the acquisition, you also shared the impact of purchase contracts, and even with that I guess the margin came down a little bit and we are seeing a bit of a tougher -- a bit of a softer moment for profitability of that business.

Can you share with us what if anything would have changed from Q2 to Q3 and whether you think ex the impact of HBC you can stabilize the EBITDA margin and salvage?

Sure, Matt this is Eric. And good morning. One thing you are seeing is a typical seasonal impact. Q2 is the strongest quarter volume wise in the salvage industry. You've got all the winter accidents that are being sold through the spring and into the early summer. So there is a seasonal impact.

And then we can't fight it. Jim mentioned it. The headwinds that are created by lower proceeds, our lower average auction values paid for the vehicles. And while we can put in minor price increases over time and have responded that way, we cannot offset all of that.

And then the scrap values have steadily dropped and have hit a very low point, down -- in fact we're already down to about $120 per ton per crushed car bodies. It continues. Jim gave a number that was $124, this month it's dropped another few dollars. Not meaningful but still the bottom is there. That is what we are fighting. Again, volume of seasonal volumes will help as we move forward, but more importantly it is still going to have the headwinds that Jim mentioned, the foreign currency on the international buyer, and scrap metal on all the buyers.

Got it and from a margin rate perspective, because once again the HBC is very transparent, and the purchase [car piece] is very transparent. Does the price compression on, just associative of what's happening in the broader option pricing market and of course related to scrap, does that take down margin rate as well as ASP, which by the way wasn't all that bad this quarter, you held your revenue per car. Year-over-year that gross rate down three was consistent so that seems to have hit a stable point.

Yes but that down 3% in a quarter where you have lighter volume is going to have less leverage off of the infrastructure which is a direct expense. It's a gross margin impact, not an SG&A impact. And then these purchased vehicles, they really hurt more than it looks here because an HBC is 90% purchased vehicles and it's in those numbers and when your margins thin out on that, it takes that gross margin down to low single digit in some cases, and that had a big impact

It does look like your backlog in that business is extremely strong. Can you frame for us how you feel about that relative to perhaps how you felt about entering the third quarter?

In terms of inventory?

Yes, the inventory you currently hold in the salvage business.

Yes, the inventory is very strong and as we go into the next quarter we are going in with increased inventory and again I think it's a result of this volume growth that we are experiencing.

And Matt, that would be a positive because usually the summer months are where you work that inventory down because of the lower volumes, and the truth is the cars entered are exceeding the cars being sold because of that strong activity Jim mentioned, miles driven, more accidents, technology causing more total losses.

And again Matt, you probably get tired of me saying it, but at the end of the day I don't think there's anything more important than our business model at IAA where we offer every car, physical as well as online, and I think we've demonstrated quarter in, quarter out, year over year that the hybrid methodology does provide increased returns for our insurance providers. And I think it's showing up in these volumes and I think that's why as you look at the volumes at IAA they are outperforming in the market.

Great. Thank you so much guys. I appreciate it.

Elizabeth Suzuki, Bank of America Merrill Lynch.

Good morning. Could you talk about the conversion rate for ADESA this quarter because it looks like it was up nicely compared to 3Q 2014. Could you talk about what was driving that improvement or if it was just an easy comp?

I think that primarily it's driven by the increase in volume of commercial vehicles. As you know, or as you may know, when you think about commercial vehicles, commercial vehicles tend to have a much higher conversion rate than the dealer consignment segment, and I think the overall conversion rate would have been up because of increase of those off lease cars, repossessions, daily rental cars, factory cars, program cars, the things we talk about outside of dealer consignment.

Okay, so we can probably think about that conversion rate as being relatively strong going forward given the mix of commercials?

Yes I believe as these commercial cars keep coming I would look for that conversion rate to your point to remain strong.

But Liz, I would highlight there is a seasonality to a fourth quarter. Price is definitely stronger as you get into the first of the year and second quarter -- first and second quarter of next year that would be the seasonal impact. Fourth quarter I'm kind of expecting a strong conversion rate but it can go either way, right Jim? You've been in the business a long time.

There's a lot of factors that come into play in the fourth quarter. We will start dealing with some weather here, and we will start dealing with some other elements that could cause business to possibly slow in the fourth quarter. It's a little bit more unpredictable.

Okay. Great. Just one more, which is at IAA and AFC your EBITDA margins have been coming under some pressure despite the very strong volumes. Could you talk about specific cost headwinds that are likely to continue, or what if anything you can do to lower costs of services in a weaker pricing environment?

Let's start with insurance auto auctions, Liz. First, we've talk in previous calls about the service levels being required by the insurance companies. That does have the impact of more direct costs for towing, having to move the cars around faster, try to get them through the auction and incur a little bit more labor. I don't know that that's disruptive to us but that's a pressure.

When you combine that with lower average auction prices which comes through the buy fee, the seller is not really impacted. They are paying a fixed fee, but the buy fee is being directly impacted and contributing. And then last, the mix. It's really interesting, even though we had 6% purchased vehicles a year ago and 7% this year, when you dig into that, that 6% last year had a much higher sale price with more margin in it than this year.

While the price went down which put pressure on revenue believe it or not the margins all but disappeared because of scrap prices because a large number of the purchased vehicles are the very low end vehicles. So Jim, do you have anything to add onto insurance auto auctions?

Maybe I could just add that the Management team at IAA is very focused on continuing to expand its opportunities working with expanding the buyer base and expanding some of the services that we're providing to the insurance companies. One of the areas that we are very focused on right now is total loss solution that we're working with the insurance companies that can really accelerate the turn times that it takes for a vehicle to come in and make its way back to the marketplace.

And now going to AFC, the next unit you asked about Liz, AFC it's two things. It's hard to say which is greater but let's just call them both impacts. First is competitive pressure causing us to look at our pricing structure on certain deals. And it may be we don't even lower the fee but that fee may be covering a 45 day period of a loan rather than 30 days and if they go 45 days we don't get a curtailment which is a very profitable part of the transaction, a very high revenue per loan transaction.

And second, the mix is changing slightly but PWI expanding, rolling out into new markets, you get the revenue and actually the profitability in that business historically and will continue to lag a little bit as you season the service warranty claims. It's a lower margin business. We gave some details on that in the supplement. You're going to find that business is going to be a mid-teens to maybe 20% margin business and as a percent of total revenue that goes up a little bit, it puts a little pressure on the incremental margins there.

Thanks. That's very helpful.

Ali Faghri, Sterne Agee CTR.

This is Ali Faghri from Sterne Agee CRT. Thanks for taking my question. Just a quick question on capital allocation. In your prepared remarks you sounded a lot more confident and direct about capital allocation in terms of deploying capital increasing your leverage target in early 2016. What's driving that confidence?

I am very optimistic and I am very committed to getting capital deployed here. I think I shared with you that we have assessed what fits and what doesn't fit. We've developed a strategy on these targets, we're well down the road and our conversations with a number of these targets and I feel that we will get some of these targets over the finish line in early 2016.

We know that our investors are very interested in how we are deploying capital and how we return value and I think it's been a major focus not only of Eric and myself, but of the entire Senior Management team as to how we continue to do that. Without being able to give you any specifics I can just tell you we all have full time work.

Great. Thank you. And one quick follow up, is there any way you can outline with the fourth quarter acquisition contributions are going to be?

You know Ali, that's -- we'll report it as it comes in. We've said the integration is going to take about a year so in terms of achieving some targets we set out in the earnings supplement of last quarter, those were for 2016 not expected to be [had] in the fourth quarter of 2015.

Okay. Great. Thank you.

Gary Prestopino, Barrington Research.

Good morning. Eric, why was your interest expense up 20% year-over-year? Could you give us some detail on that?

Yes. You are looking at corporate interest expense on the P&L, Gary? That includes the interest on the AFC securitization. Which has a significant increase year-over-year. The portfolio is up over 20% on a year-over-year basis. I don't have that number right in front of me, but it's a very significant increase.

And secondly, while there is no change in the spread on that information, part of the reason that is up as we reported again in the previous quarter we increased our advance rate. So in other words part of it is we're using the securitization more -- yes, 31% the securitization is up year-over-year, so it's a big number so that's what's driving it.

We've not seen on the corporate interest and we have not had changes in our corporate debt so it's all being driven by AFC. And as you know that gets adjusted in the adjusted EBITDA calculation in the AFC business. That is taken out of our contra revenue for purposes of adjusted EBITDA in our calculations.

Right. I know that. And then in terms of insurance auto, could you maybe size the percentage of vehicles or your percentage of revenue that is being impacted by strength in the dollar?

Yes. That's a difficult calculation. Eric, do you want to speak to that?

Sizing it, Gary, is the issue. It's one of those things where somebody's going to buy the car -- the domestic buyer might be impacted by scrap metal prices, and the foreign buyer by foreign currency because they're going to use the car differently. But neither one of them is bidding more. So I would say if it weren't one it would be the other work, and splitting hairs and differentiating would be very difficult.

On top of that each buyer is going to have a unique perspective on the value of the car. Bottom line, those two factors are both contributing to the value of the car going down because the economic transaction has lost value in US dollars for whoever is buying the car.

And so I guess some of these guys have agents too here in the United States and they're paying in dollars but it's hard to --

But again, paying that agent is the same as paying us. They have less local -- they have the same local currency and less US dollars as Jim mentioned.

At some point in time, Gary, it all reverts back to their local currency.

Okay and then in terms of -- Jim, you talked about expanding the buyer base for ADESA, you are focused on that. At a high level can you give us an idea of how you do that? I would assume that anybody who knows it's an oligopoly -- everybody knows you're out there selling cars, so how do you get more buyers through the door?

I think a couple things, Gary, and we've talked a little bit about this in the past. Number one, we have publicly stated that we are interested in acquiring additional physical auctions. We have done an acquisition that we talked about in Pittsburg. We've announced that we are opening a new Greenfield site in Chicago mid-2016, and we have said that we will continue to pursue brick-and-mortar auctions.

By adding these brick-and-mortar auctions there is no question as you go into a new market you pick up new buyers. And not only do you pick up new buyers for the physical auction, but there is a direct correlation with online buyers as to where you have the physical presence. So we believe that through these physical auctions we get both pick up the physical buyer and the online buyer.

And then the other area that we can expand the buyer base is two other areas really. Is number one, is we can enhance our technology, enhance some of the technology offerings we have added. One of the products we have added recently as we have added Autoniq, which is a service that we again added that the dealers very much appreciate and wanted. It gives them real-time pricing on vehicles while they are in the lane buying vehicles. Those kinds of technologies will certainly help build the buyer base as they tap into technologies.

And then the other area that we have been focused on recently is we have really been focused on best venue where we have taken an opportunity to take a look at our buyers at IAA, take a look at our buyers at ADESA, and where they overlap, and is there an opportunity to get more of the buyers from each of those segments buying in the other segment and we've absolutely proved that there is an opportunity to bring buyers from one segment to the other. That's another way that we have been able to grow our buyer base. So hopefully that gives you some indication of what we are doing.

Yes. That's great. Thank you. Beyond that just quickly are you seeing anything beyond normal seasonality in pricing at auction?

For the most part I would say no. You get adjustments from time to time but for the most part I would say it's pretty stable and I think I read an article yesterday, again if you can believe everything you read, I read an article yesterday that's saying they're expecting used car sales to be up in 2016 as well and that's also with the prediction that they're going to have a SAR of 17.4 million new cars. So again it looks like a very good picture as we look forward.

Yes, and if you read (inaudible) commentary, our economist, he puts out a monthly report that gives you some pricing information. It's remained amazingly strong with the supply increasing and that's been a pleasant surprise for everyone in the industry.

Yes. Thank you very much.

Bob Labick, CJS Securities.

Good morning. It's actually Robert Magic filling in for Bob. Volumes remain pretty strong. Are there opportunities to get more leverage out of SG&A as you integrate some of the acquisition?

Robert, that's a good question. As we announced again last quarter as we integrate that we do expect to improve the profitability from the current levels. I had mentioned last quarter these acquisitions that were done to-date, and there were none added this quarter, would add $5 million to $10 million of adjusted EBITDA and obviously we are in that range with how we are performing on a quarterly basis, and we expect that to grow to $20 million to $25 million once integrated into our businesses. And so you see, some of that will come out of leverage of the SG&A and those are all numbers we talked about last quarter.

Great. Thanks. And with the full quarter under your belt from the HBC acquisition, what's your overall impression of the acquisition and the UK market?

Robert I'm glad you asked. As a matter of fact I've just been in the UK here within the last 30 days and I had an opportunity to personally visit with our office in HBC and meet with the Management team as well as meet with the employees. I can tell you that these commodity prices are having a stronger impact, more negative impact, on our UK operations than they are here in North America.

As you know and I think previously mentioned, there cited on the call, about 90% of our vehicles with HBC are purchased vehicles. So the impact is being felt heavier. But the good news is I was very pleased while I was there, the Management team had prepared for my arrival and they had actually outlined the strategy of how they plan on shifting the business model both for the seller and the buyer in terms of the pricing, and they have actually made a shift in that respect.

And I think they've got us in a good position going forward and I think we will be pleased with the outcome as we head into 2016. But there has been no question in terms of our timing on acquiring that business and scrap metal prices being what they were, we got off to a difficult start.

Appreciate it. Thanks a lot.

Suresh Patel, Credit Suisse.

Thanks guys. I just had a couple questions around the acquisitions at ADESA. Could you maybe just give us a sense of what the impact unit sold was from the acquisitions, and is the revenue per unit similar to sort of your core ADESA business?

Suresh, this is Eric. The volume it accounts for, I'm looking it up here, ex acquisition was about 2% less, so it contributed about 2% year-over-year on the quarter, obviously it was zero last year, and that's from the Pittsburgh auction. The other businesses we acquired don't contribute volume. There are services around the auction process.

Does that answer that question? You'll have to calculate what you think that number is, we don't disclose specific volumes. In terms of profitability you won't be surprised. I find in all of our acquisition the profitability prior to integration tends to be a little bit lower than our core business.

Not materially different, but tends to be a little bit lower as we put in our pride processes, as we call them, and other things we do in an auction, as we integrate our technology acquisitions into the technology footprint that we have as a Company as a whole and leverage their skills.

It's actually not reducing it, it's leveraging their skills over a broader technology need of the organization and integrating that I do think there's opportunities to increase the profitability once fully integrated. And again I will remind you of what I said last quarter because I'm not giving new information, that's how you get something that contributes $5 million to $10 million this year to $20 million to $25 million once integrated and we get a full year of results.

Okay.

And none of that was coming from beyond normal growth of the topline revenue. It was really how that business should run. [And then I said] if we bring new customers that would be on top of those numbers.

Okay so basically net -- if you are doing sort of a 15% EBITDA margin this quarter that should eventually go up to where ADESA is typically performing let's say 25% in that range?

Right. That would be true. And again, we don't call it all out but there is integration cost and there is more cost actually we add to it before we take it out as we're trying to integrate the Business.

Okay and just lastly on -- you guys had mentioned that rental units were up in the quarter. I was just wondering if any of that was tied to GM in particular because they have been pushing a relatively higher number of units so far this year just due to timing of the recalls.

Yes. We are not going to speak to specific customers but I can tell you as you look at the segment overall, across the board the segment is up and that would include probably all the constituents that you could name. With maybe the exception of a few.

Okay and if I could just squeeze one more in. About 50% of your volume in IAA was transacted online. I was wondering if you could remind us what the ARPU differential is between online and physical at IAA. We know what it is at ADESA. Is similar or is it a little different?

There would be no meaningful difference. I mean you might get into online are they buying a higher value car or lower value car, I can't answer that. It might tend to be even in some cases there a lower value car. In terms of the pricing structure the only difference is there is an Internet fee if you buy online that you can avoid in our business because we do offer the opportunity to buy live at the physical auction, you would avoid that fee where the rest of the market may not have that differentiation.

Okay. Got it. Thanks a lot.

(Operator Instructions)

Bret Jordan, Jefferies.

Good morning guys. Question on TradeRev. You were talking about maybe accelerating some investment or reallocating some resources into that program. Is that something that is going to be an increase investment or just you are bringing folks in from other parts of the organization? Is it impactful in EPS next year?

Your first question is that we're utilizing internal resources and we're also --

Are you bringing in incremental resources or just reallocating internally? Is it going to cost anything?

We are definitely recruiting some additional talent into the Organization that we think can specifically add value to rolling out TradeRev. In terms of anything meaningful in the next year I think you asked, I would say I would not expect anything meaningful in 2016.

And Bret, let me add those resources are being added to the company that owns TradeRev, of which we own 50%. It does not hit our P&L, it has anything other than our interest in a minority owned subsidiary, so it's below the line per se. And it's not going to be material.

And then a question sort of big picture on crushed car bodies. Do you have a longer-term inflation adjusted range that that's been in so we can get a feeling for how close to the bottom we might be?

I don't have it in front of me, Bret, but I can tell you the bottom -- the last bottom we hit I recall was following the 2008 Olympics when China discontinued buying crushed car bodies in the United States pretty much, and it probably got below the current levels. My recollection is it's bottomed out below 100 at some point, but generally speaking I don't know what the bottom is but we're in the range of the bottom now.

Great, thank you.

At some point it doesn't have as big an impact on us anymore because they are at the minimum bid and that's the key. The bigger impact is when you move from Jim's numbers of $312 million to even $198 million, and then $198 million to $124 million. Those were big shifts because they were affecting minimum bid -- they were still taking away some of our ARPU.

Great. Thank you.

Bill Armstrong, CL King & Associates.

Good morning Jim and Eric. Just a couple questions on SG&A. With insurance auto auctions your telecom costs were up about $1 million and that's actually been the case for the last three quarters. Why are they up so much and what should we look for going forward on that?

Well, I don't want to get technical, Bill, but I can't answer the question. The telecom costs are going up because we're upgrading the networks and the accessibility.

When you're on a live and live online auction the important part of telecom is that's your network, and that ties directly into your network access, and again I don't want to get too specific, but we have been upgrading the infrastructure throughout all of our businesses and it just happens to be one of the larger differences that we are using because we explain everything over a certain dollar amount and that's one of them. But it's really the updating of the infrastructure at all of the auctions and it's part of our normal process and with that the cost has been going up.

Got it. And then on the holding company, it looks like SG&A is about $25 million per quarter. Is that a good run rate to use going forward?

You are probably excluding D&A when you're at that number. Because it's actually not--

Yes, excluding the D & A

Again I don't want to get to forward-looking on that but I'm not seeing any significant changes at this point in time although technology is the biggest component of that and as we look at our businesses investing in technology some of that could hit in the holding company and the benefit be [derived] in the business segment.

Most of our technology spend is in the holding company where the benefit of that in revenue ends up in the business segments. I don't want to get into specific guidance on that number but I think it's a good number for now. I will tell you if we're going to make major shifts. I don't see that happening.

Okay and one last question on HBC. About 90% is purchased vehicles. Is there an opportunity to start to shift the model more towards an agency model in the UK as you go forward?

I know [Copardis] had some success doing that but not completely. What is the outlook there? What is your view on trying to move that mix more towards an agency model?

Bill, I would tell you at this point in time we have no plans to try and change that model. I think one thing that we have learned from our international relationships is people very much appreciate allowing the local culture to kind of manage the local culture and not have people from the US and North America come over and tell them how their business model should work and at this point in time we have no plans on changing or disrupting that model.

Okay. Understood. Thank you.

Ladies and gentlemen, at this time we're done with our Q&A session. I would like to turn the call back over to Jim Hallett for any closing or additional remarks.

Good, Danny. With that, ladies and gentlemen, I just want to say thank you again. Thank you for your interest in our Company and I can just recap by saying we feel very, very good about the Company and very good about how the Company is performing. I won't go through the list again but there is a long list of bright spots and opportunities in this Company.

We are never without some challenges and a few headwinds that we spoke about, but we really like the visibility we have, we like the picture that is in front of us and now it's up to us to go out and execute and deliver that value. With that we look forward to a great fourth quarter and reporting year-end results and I thank you for your time for being on the call this morning. Thank you.

Ladies and gentlemen that does conclude today's presentation, and we appreciate everyone's participation.