Openlane Inc (KAR) 2016 Q1 法說會逐字稿

Good day and welcome to the KAR auction services Q1 2016 earnings conference call.

(Operator Instructions)

At this time I'd like to turn the conference over to Mr. Mike Eliason. Please go ahead Sir.

Thanks Tony. Good morning and thank you for joining us today for the KAR Auction Services first quarter 2016 earnings conference call. Today we will discuss the financial performance of KAR Auction Services for the quarter ended March 31, 2016. After concluding our commentary we will take questions from participants.

Before Jim kicks off our discussion I'd 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 KARs business prospects and results of operation. 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 [comparable] GAAP financial measure can be found in the press release that we issued yesterday which is also available in the investor relations section of our website. Now I'd like to take -- turn this call over to KAR Auction Services CEO Jim Hallett. Jim?

Great. Thank you Michael and good morning ladies and gentlemen and welcome to our call. Today I'd like to provide you with an outlook for the year, review our first quarter performance, and then discuss our capital allocation activities including our expectations for the remainder of 2016.

We had a very strong first quarter and what we're seeing has caused us to update our guidance after only one quarter. We entered 2016 with a very positive view on our expected performance and we are pleased that we have already exceeded our expectations. We continue to see very positive fundamentals that will continue through the remainder of the year. Retail new and used car activity continued to be relatively strong and industry supply of commercial vehicles especially the off lease and the repossession units will continue to grow throughout 2016. Used car values are declining at a moderate price or a moderate pace.

So what does all this mean for KAR? At ADESA we expect will exceed the volumes -- we will exceed the volumes to 2016 over last year. Online only is likely to grow at a greater pace in the physical auction volumes even not at the same level as we saw in the first quarter. And the increased supply of off lease and repo volume should continue to support the increased volumes at physical auction.

We believe the strong revenue per unit or the RPU will continue as we see our consigners spending money on the vehicles to improve the condition so the buyer can quickly retail the car. This is also important for maximizing the residual for the lease returns as well. We do face some headwinds, especially at insurance auto auctions. We continued to deal with currency and scrap prices, however these headwinds are consistent with the expectations that we set during our guidance earlier in 2016.

The net of all this is that we are increasing our guidance of adjusted EBITDA. We expect adjusted EBITDA of $735 million to $760 million. This will include approximately $25 million from the Brasher acquisition and our free-cash flow guidance remains the same as before. The improved operating performance is offset by an increase in cash interest expense and free-cash flow is expected to be approximately $340 million to $365 million for 2016. I will let Eric cover more details of the refinancing which drove our increase in cash interest expense for the year. All in all, our outlook for 2016 remains positive and the year is shaping up to be better than what we originally expected.

Now let me highlight our strong first-quarter performance. On a consolidated basis, we've seen our revenue grow 18% over last year. Adjusted EBITDA is up 17%. And our operating adjusted EPS is up 17% and obviously, this is a great way for us to start 2016. ADESA is driving our strong performance during the first quarter where we've seen revenue up 22% over the prior year and 17% on a same-store basis. Volumes grew in online only as well as at the physical auction. Our online only was up 33%. Our physical auction volume was up 12%. And I'm very pleased to report that this also includes 10% increase in our dealer consignment volumes year-over-year.

RPU was up in both channels as well. Online only RPU was up $9, to $116 per unit, and physical auction RPU was up $56, to $737 per unit. We're seeing strong revenue growth from transportation services and repossession related activity; as well we're seeing an increase in utilization of ancillary services such as reconditioning and mechanical. ADESA's adjusted EBITDA grew 35% over the prior year, 31% on a same-store basis, and AFC is also benefiting from the strong wholesale used car activity. Revenue grew on a 10% increase in loan transactions, average loan values are increasing and we did see more bad debt in the first quarter than last year. The increase in bad debt expense was right in line with our expectation for the first quarter and I think it's important to point out that the portfolio has grown 26% over the past year.

As mentioned earlier, insurance auto auctions continue to face challenges in proceeds. Scrap and foreign currency negatively impact the amount bid on salvage vehicles; however, that volume is more than offsetting this pressure, and our ability to withstand these challenges demonstrates the value of our diversified business model. And this is really what Eric and I have been talking to you about for several years is really the strength of our business and the strength of our business model is how complementary these businesses are to one another and it's really, as I say, a beautiful thing.

So the pressure that we're seeing at IAA is offset by strong performance in the other parts of our business. Inventory is up 4% over the prior year at March 31. This is a lower increase than we have reported for many quarters and I believe there's a couple of things here that I would mention. Number one, I think it reflects on the mild winter conditions, and the other point I would make is we're seeing improved cycle times especially with one of our largest insurance companies. And as you know these improved cycle times benefit our consignors. As they say, time is money.

With that said, despite our strong performance, I know that we need to continue focusing on SG&A and going back to the call in the previous quarter I mentioned that we were getting laser focused on SG&A. We've seen SG&A was up over $20 million over the prior year. About $10 million of this increase relates to acquired SG&A and the timing of expenses for cost of our medical plan and accruals for annual bonuses. The rest of this increase relates to increases in our technology cost, people, and other expenses required to support the growth in our businesses. Our management team is focused on controlling SG&A. We've also realize that we need to support the growth in our businesses with the resources, so this is really a balancing act. The key is maintaining SG&A at a level that allows us to increase our adjusted EBITDA margin.

In terms of capital allocation, I think everybody is aware that we closed the Brasher deal on April 1. This is a deal that we paid $275 million for 8 auction locations. We are very excited about adding the Brasher family to the ADESA organization. This truly represents -- or I should say this truly strengthens our presence in the Northwest United States where we were previously unrepresented. So with that we have also announced plans to purchase an auction in Orlando, Florida. We have been focused on strengthening our presence in the key Florida markets and as you probably know Orlando is a very strong commercial market and we expect to close this transaction in the next few weeks.

We also announced the payment of our quarterly dividend of $0.29 per share and we will continue to return capital to our shareholders in the form of a quarterly dividend. We will also evaluate all of our capital needs in utilize share repurchases as we see appropriate. I don't believe that we are done allocating capital to expanding our businesses. We are in active discussions with a number of targets and at the right price as these deals can make sense to us, we would certainly look to move forward on doing more acquisitions. There is no assurance that we will get any of them to the finish line in the near term, but I do like the way our discussions are progressing. And with that let me finish up my comments with an update on ADESA Chicago.

Construction is on target for opening in the third quarter. The customer reaction has been very, very positive. And I would say to you as I mentioned before, Chicago is the third or fourth largest car market in the United States. We're moving into a major market that's been a big gap for us at what I would call a real opportune time as we are in the middle of the cyclical recovery. I couldn't think of a better time to be opening this location in Chicago, so we're excited with that.

So I'll now turn the call over to Eric for some additional comments and then will come back to you for Q&A. Eric?

Thank you Jim. I would like to start my comments with a summary of our refinancing of long-term debt that was completed in March. On March 9, 2016, we completed the refinancing of our long-term -- of our term loan B1 and revolving credit agreement. We issued $1.350 billion in term loan B3 at an interest rate of LIBOR plus 350 basis points with a LIBOR floor of 75 basis points. Term loan B3 matures in March 2023. We also established a $300 million revolving credit facility with interest at LIBOR plus 250 basis points that matures in March 2021.

The proceeds of term loan B3 were used to repay the outstanding balance on term loan B1 and amounts outstanding on our old revolving credit facility. In addition, funds from this financing were used for the purchase of Brasher's Auctions for $275 million that closed on April 1. As a result of the issuance of term loan B3, we repriced the outstanding debt on term loan B2 to LIBOR plus 318.75 basis points from LIBOR plus 275 basis points. Both the old and the new interest rates have a LIBOR floor of 75 basis points. Term loan B2 to has a maturity date of March 2021.

As a result of this refinancing activity, we have updated our guidance on cash interest expense for 2016 to approximately $95 million from $85 million. In addition we wrote off $4 million in unamortized debt insurance costs in the first quarter. We have capitalized original issue discount and debt issuance cost incurred in the refinancing and this will increase our non-cash interest expense going forward which I have reflected in our updated guidance.

Now I would like to clarify a couple of items impacting our financial results for the first quarter. I will start with ADESA. As you saw on our earnings slide released last night we have provided detail on the incremental operating profit margin for ADESA. The difference between adjusted EBITDA for acquisitions in the last twelve months of $3.1 million and operating profit of $1.7 million as disclosed in the earnings slides is depreciation and amortization of $1.4 million. Excluding acquisitions, incremental margins for ADESA in the first quarter were 42.4% on an adjusted EBITDA basis. This is computed as the increase in adjusted EBITDA excluding acquisitions divided by the increase in revenue excluding acquisitions for the quarter.

In the online only channel we have enhanced our disclosures after seeing the growing impact of the ADESA assurance program. The ADESA assurance program allows any vehicle purchased in the online only open venue to be returned within 30 days, no questions asked. We have a very small number of vehicles returned under this program, but we found the impact on RPU to be more significant. Like purchased vehicles, upon resale of these cars online, we recognize the gross auction price as revenue instead of the net fees. Excluding cars sold after being returned under the ADESA assurance program, RPU for the online for vehicles increased to $110 per unit in the first quarter from $105 per unit in the prior year.

Now let me speak to the impact of HBC, our UK salvage business, on the Insurance Auto Auctions margins in the first quarter. Substantially all of the salvage vehicles sold by HBC are purchased vehicles. The impact of including HBC within our salvage segment is a reduction in the gross profit of 1.4%. At AFC we experienced increased bad debt expense in the first quarter as compared to the prior year. $5.5 million of net bad debt expense, up from $3.5 million last year was in line with our expectations for the quarter and reflects a level of losses we would expect going forward. This level of bad debt is still at a run rate below 1.5% of average portfolio balance of the year.

We have projected capital expenditures for 2016 of $145 million. In the first quarter, we expended $36 million including $1.3 million for ADESA Chicago. As you may recall, we estimated approximately $19 million in capital expenditures will be incurred in 2016 for ADESA Chicago. We expect the pace of spend to increase as the weather improves and we are anticipating an opening in the third quarter of this year.

In terms of guidance other than adjusted EBITDA and free cash flow that Jim spoke to, I would like to highlight that our GAAP net income per share guidance has been reduced to $1.56 to $1.71. Operating adjusted net income per share guidance has been reduced to $2.03 to $2.18. These adjustments to our guidance reflect the impact of our refinancing including non-cash interest expense, which is offset by the increase in our expectations for adjusted EBITDA for the year. We have seen recent improvement in the Canadian dollar versus the US dollar, but this is still within the range of our expectations in our initial guidance. We have made no adjustments in our expectations related to changes in the Canadian dollar at this time.

I will now return the call to Tony, our operator, so we can handle your questions.

(Operator Instructions).

Ryan Brinkman, JPMorgan.

Hi good morning, congrats on the quarter.

Thanks Ryan

So obviously ADESA was great from both volume in our perspective versus expectation maybe not as quite as high as it did but obviously it's been strong for a while. For my conversations the RPU was a big surprise. But can you walk us through a little greater detail about the headwinds and tailwinds to ADESA RPU.

Maybe you can sort of help us sort of gauge the magnitude of impact to RPU from say lower used car prices and then we know that RPU increases on a financial services just as more full cars fall further down into the funnel. But there also is this paradox in this tailwind where the lower used car prices go, people want to do more ancillary services to preserve residuals. How can I think about that?

Yes Ryan I think you've got the -- first of all, what you've got is you've got sellers wanting to maximize the resale price, getting the most money they can for the vehicle. And so they're doing more and more work to achieve better results financial results from the car.

The second thing is they want to convert at a higher rate. They want to get more of these vehicles sold the first time through the auction and the best way to assure that they can get these vehicles sold the first time through the auction is to do more work to them.

In the third thing that many of these manufacturers are focused on is they're focused on residual values and keeping those residual values as high as they can going forward with additional leasing. So all in all we are seeing increased utilization.

And it's really a question of how do I make my car stand taller? How do I separate my car from the pack and attract more buyers to my lane versus the lane beside me?

So it's a combination of all those things I think that has really driven the revenue here and I think that the opportunity continues as we see more and more of these leased cars coming and more of these leased cars and vehicles making the way to the physical auctions we feel that there's opportunity to continue to grow those ancillary services. Eric.

And I'd add that the mix of vehicles is important with more commercial vehicles you know when you look at that denominator it's more cars that are using the services then when there's a heavier dealer consignment. And we this quarter were at 46.5% dealer consignment versus 53.5% commercial which is a strong shift from that 50-50.

So we're selling more transportation and its profitable transportation because outbound transportation has profit. And we see more activity on the repo side bringing those cars in through our PAR and RDN businesses and things like that. So all that adds up to what Jim was summarizing there.

Okay great that's helpful and just kind of a follow-up on the ADESA volumes side then. With the big increase, have you started the think about when growth is inevitably going to kind of normalize lower.

If we look at the year over year increases in lease originations, it looks at the peak increase was in 2013. Is that what you see? I know you don't guide to 2017 obviously but off lease and it's going to go up clearly through 2019. But is also fair to say that it peaks this year?

And then just on a related note, for the potential for modest increase is kind of beyond 2019 not what we're seeing now but it looks like lease penetrations gone from 30% at the start of 2016 to 34%-35% now. What you think is driving that and do you care to guess how high it could potentially go?

Well, I'll start with your leasing question. You know on the leasing part I think it comes back to the fact that people can afford half a car more than they can the full car and leasing is really being able to drive a new car and your payment and it's merely managing your payment. So there's just more of an attraction to leasing in the fact that you get to turn the car over every three or four years, I think is still part of the American culture. In terms of --

In terms of the peak, the largest increase might've been from 2012 to 2013 but we're looking at at least a half a million lease originations each year going 2014 or 2015 and now 2016's looking like it's on the same path, wouldn't you say Jim?

Right.

So when you say peak maybe the largest year-over-year increase in lease originations might occur from 2012 to 2013 but there's strong growth that's continuing as you say in the 2016 where we're seeing 33% or 34% lease origination rates.

I really don't think we know. We do have what we would term is very good visibility for the next few years. But getting beyond that I think we just have to wait and see it play out.

Okay and then last question on online only RPU. I heard Jim in the prepared remarks I think you said it was up to like $109, something like that. When you think about when growth in online only was preventing the incremental volume from flowing through the physical which is no longer the case. I remember you were asked on these calls if there is anything you could do to help get increased fees from online only and your response then was kind of like we're trying but it's really really hard. So just curious how you are able to take up that online only RPU with the outlook for that is and maybe going forward.

I think Ryan the biggest opportunity there has been what we've able to do in the open sale. When that car goes from close to open then we're able to expose that vehicle to a whole new buyer base beyond the franchise dealers. And I think that's where we're able to increase our fees. As you know the economics getting much much better in the open sale and that's where we've been able to increase the average fee or the average revenue per car on those online sales.

And with that said Ryan I'd like everyone to know in 2011 when we acquired open link we had a plan as to what we could do in the online only space. I would say we are obtaining those goals if not even exceeding those goals even with all of these closed sales. I mean this has been a great differentiator for a business. And a great performer.

Great. Thank you.

You're welcome.

Matthew Fassler, Goldman Sachs.

Thanks a lot and good morning.

Good morning Matt

Terrific quarter obviously.

Thank you.

First question on ASP and RPU, can you talk about the degree to which underlying pricing is changing in any way to help drive that number? Also Eric, related to that if you could -- I appreciate the enhanced disclosure. If you could just put repeat precisely which numbers are impacted by the -- by the returned vehicles and what the reported number is and what the adjusted number is just so we can get the right context.

Okay. On the average selling price I think you're seeing what's being published. You are seeing we'll call it 3% or so decline in the average selling price. But when you think about what that does, Jim mentioned, what that does to the consignor who's trying to optimize if not maximize residuals, they're going to spend money on the car and we see that Matt. So that is the answer to that.

On the online only in the ADESA assurance program, thank you I can repeat that and you'll see it in the 10-Q that we filed tonight. We reported $116 per car sold compared to $109 in the prior year and when I take out the ADESA assurance program and I'll give you an example that's directionally correct. That number should be $110 because on a car that we purchased -- that we repurchased under assurance and then resell, there's no real economic value to the transaction. We're just making good on our promise.

That $110 compared to $105 by excluded the past year. By giving you that $6 number and the number of units we sold, you can calculate the value of the ADESA assurance program.

And when you consider most of those are off lease cars, let's hypothetically use a value of $15,000 per car that means that 75 cars sold is all in the quarter. That's how small the number of cars is. Yet you had a $6 influence.

That's all things you'll get out, it's in our earnings supplement, Matt. That's what I was calling out because I felt you might reach the wrong impression on the growth in RPU there when the 75 out of what 180,000 cars or whatever the number was, let me look at up, I should give you the right number. It was a distortion I felt we needed to clarify.

Got it. And then to rephrase the first part of the question, on your fees per se, has there been any change in your pricing or your fee structure of late that would help explain the ASP acceleration? Or is it really more about mix in the ancillary services that are being added to the package?

Yes. Matt, I think it's a little bit of both. Primarily I would say focus on the ancillary services in the things that are going on there. But as I've always said, at ADESA more so, we continuously are monitoring the buying fees and these aren't nationwide increases.

These sometimes can be regional increases our local increases. And there have been some of those go in place probably in the first quarter. But again I would take you back to -- I would focus on the increase in ancillary services more so.

Great. And then one followup from that. Your reported gross margin in ADESA it was up I believe 98 basis points. It's the first increase of anything that magnitude that we've had in at least two years maybe more.

And you've had other quarters where your volume growth has come close to this. So is that really an outgrowth of that of pricing the average revenue per vehicle or is there something else in the cost side which I know you alluded to? Is that what is that is contributing to the better flow through of the gross profit line?

Matt as we look at it, the gross profit is coming really I think, through the mix of vehicles getting us that leverage in the use of the shop and it's from the ancillary services. Also kind of look at things like PAR in our repossession activity, again greater utilization. While that might be a lower margin business, it has a lot of scale in it and we're getting the activity. So it's more of the scale with a little bit coming from the auction fees margin that would be slightly up but not account for a significant portion of that 90 basis points.

Got it. Understood and appreciated. Thank you.

Thank you Matt.

Gary Prestopino. Barrington Research.

Yes a couple of questions. First of all as Chicago starts rolling out this year, how long would a new site like that be a drag on the adjusted EBITDA results?

Gary, typically we would tell you for our Greenfield location to be cash flow positive, we normally look at it in a period of 12 to 18 months. In the case of Las Vegas, which was the last one that we did, we are very pleased that we're cash flow positive there in the first 12 months.

And let me say I'm optimistic that we can have strong results going in the Chicago market. I think we're going in a very good time. We are absolutely got the ideal location.

The buyer base is there. The cars are there the customers of there. I'm expecting -- I'm expecting a strong performance there coming out of the gate.

And Gary let me add when we say negative EBITDA initially it's not going to be a material number. It's not something I would be expect to be calling out as an influence on our performance. It's just not a big contributor.

Okay. Just was curious there. And then just that industry question. In terms of the cars coming through lease -- from lease returns, are you seeing less of an appetite for the grounding dealers to take these cars initially. Their flowing through the pipe and then going more towards the independent dealers versus the franchise dealers. Is there a shift that starting to occur here because the franchise dealers have ample inventory of used cars now?

Gary I think there's first of all the grounding dealer, the residuals are maybe a little bit higher than market value. So you're seeing the grounding dealer pass on some of these cars at termination.

And then when they're getting into as we call the top of the funnel in the closed sale, there's a lot more vehicles to choose from, so the dealers can be more selective. And then there's more cars going to the online open sale, which then brings in a whole new buyer base. It brings in all those independents and you've already said it but just to reinforce what you said, you've now got all those independents that are able to acquire some of this inventory as well.

So it's a combination of all those things. And primarily all being driven by the residual value at termination.

Okay. And then just a last question on the long lost reserve increase which is understandable because of the growth of the portfolio. It's my understanding that really you would have a huge loss if there were some kind of outright fraud at the dealership where the car was domiciled where they bought it from you. Is the increase in the lost reserve really a function of the time from when it was bought to what the market value is now and you've got to write down that loan?

Yes, Gary, we actually write off the loan actually. This occurs so quickly given the nature of the foreplay lending business.

But most of the losses are lost value and the vehicle where we feel we can't recover from other assets. But the most significant individual losses are exact -- what we call sold out of trust. The car is sold, the proceeds are received by the dealer, and they're not remitted for payment on the loan and there's no collateral for us to act upon.

As you would suspect, even in declining values, that loss would be relatively minor if we could repossess the car. But if the car is in the possession of a consumer, consumer protection laws prohibit us from repossessing from the consumer even though we may have held title as collateral.

Okay.

Again the losses you see are heavily weighted by the cars sold out of trust.

Okay. Thank you.

You're welcome.

Tony Costello, BB&T Capital Markets.

Thank you. Good morning.

Good morning Tony.

The first question is sort of a bigger picture question. We continue to hear about more technology in the industry. Dealers looking for ways to speed up the process of auction in or move vehicles from dealer to dealer and in some instances bypassing auctions. And I know you've got trade rev and some other initiatives.

I'm wondering if you could expand on how you will take advantage of a shift perhaps in technology and be able to continue to better balance both the physical and the online use of where things may have evolve.

Yes. I think we're very much aware of potential disruption and how we could be disrupted. I would like to tell you that if there's disruption it's going to occur, we'd like to be disrupting ourselves. And that's exactly what we're -- what our plans are with TradeRev. We also feel that we are disrupting ourselves there.

That TradeRev continues to roll out and we continued to add resources in the markets that we are in with TradeRev. We are experiencing what I would call success. We're seeing the numbers continue to grow on monthly basis.

We've brought in -- we've enhanced some of our technology with other products. We've talked about AutoLink which gives the dealer real values on his smart phone while he's in the lane.

I think it's being aware of what the technologies are that can really add value to the customers both on the sell side and on the buy-side and allowing them to make better decisions. I think some of the things that we're doing with data and planning on doing with data in terms of big picture will give the buyers and sellers better information to be able to make more informed decisions. So --

Our investment in Photo Booth. Allows you to look at an image and then you might buy that car online instead of waiting until it gets to -- all of this better inspection reports. Enhancing and technology around check and processes. It's all about taking time out of the process so the car can be sold quickly.

And the other thing that I mentioned in my commentary that all go back to is, we talked about the cycle times that insurance auto auctions. Cycle times is money and I think people are aware that the average cycle time historically as the salvage business has been in at 75 to 90 day range.

We have a new product that we're offering insurance auto auctions called total loss solutions that we're introducing to some of our customers. It's a product that we can scale across some of our customers that can potentially reduce cycle times and I'm talking about potentially reducing cycle times significantly by 20 or 25 days. That becomes a very meaningful number.

And I guess it seems like the technology part on ADESA you're sort of being part of that evolution of change. With IAA it sounds like you're being able to help improve what the insurance companies see as probably one of their bigger expenses. So on that cycle time, or if you look at where the biggest opportunities are to communicating with the DMV's and improving that, is it being more efficient at that first notice of loss point? Are you able to see opportunities for yourself to continue to improve and obviously offer better services to your customers?

You know I think it's a little bit of all that you mentioned really. You think about -- you think about the technology, you think about the enhancements to our existing technology, bring in a new technologies that we've talked about, bringing in the data in the analytics and other things that we may be doing and working on. I think it's kind of that story of a little bit plus a little bit plus a little bit adds up to a lot. And it's just being very focused on what's going on in their industry and what the trends are and what the shifts are and making sure that we are staying ahead of the curve.

And Tony using automation, the key is you can track it. It's not sitting on somebody's desk for five days waiting. It's in a queue that somebody says this is ready for the next step. What would that be again at the reconditioning shop or the mechanic shop right? It's everything, not just paper it's everything.

Okay. Great. That's great. Appreciate your time.

Thank you.

Craig Kennison, Baird.

Great thanks for taking my question. It's really on this recall trend I think Auto Nation recently announced, it changed to its recall policy and may end up ultimately wholesaling more vehicles if they can't get the repair done in a timely fashion. If that goes mainstream, does that have any influence on your volume trends?

Well, perhaps it could increase our volume overall if they start wholesaling more of those vehicles. But I think that we would probably be required to get those recalls done before the vehicle got resold.

Okay. Thank you.

You're welcome.

Ollie Fogrie CRT Capital.

Good morning thanks for taking my question and congrats on a great quarter. So, total physical auction volumes were up 12% and dealer consignment was up 10%. I think that implies commercial was up roughly 12% to 13% in the quarter which is a nice acceleration from low single digits last quarter.

Can you give some color on what drove that specifically. Was that off lease repo or maybe timing? And then also maybe some color on the cadence of volume trends out of ADESA throughout the quarter.

Yes there is no question on the commercial. There is just more and more volume coming. These leases are continuing to come.

The question that we answered earlier, the grounding dealers passing on these cars and putting more vehicles into the funnel. And then with the financial institutions, there's writing more and more consumer credit and that's just a straight math calculation. The more paper written, the more repos you're going to have.

If I go back in history, we peaked at about 1,000,009 repos back in 2008 - 2009 and we took that number down to 1.1 million. Now we are seeing those repossessions climb back up to that 1.5 - 1.6 million I would expect that number will continue to grow as they continue to write more and more paper.

So the heavy influence has been with the commercial cars there's no question. And then I think that on the dealer consignment, I'm extremely proud of what our ADESA organization has done with dealer consignment. That was really an initiative that many of the you are familiar with. It started back in 2009.

When we put that whole network in place with 300 people in the field approximately that are very focused on calling on dealers one at a time. We had people calling on the midsized groups in the large dealer groups and we've just really created some good habits for our dealers.

And we've started to treat the dealer consignment business more like we treat the commercial business providing more and more services to them. And I think the proof is in the pudding.

We're getting the results and dealers are all about results and if they have a good experience, they're returning and I think that dealer consignment team again, is just done a remarkable job. Quite frankly Eric and I have been saying this for probably the last two or three years, is we're surprised that the dealer consignment numbers have held up as strong as they have when you consider the impact of all these commercial vehicles coming back. So it's really been a great win for us.

And let me clarify. I think you will find the commercial volumes were up much more than 12% to 13%. If 46.5% of the physical auction volumes were up 10% the other 53.5% were up by a greater amount. Ollie, we can walk you through that at a later time but you'll get a much higher number than 12% -- than the 12% to 13%.

Great and then just on the cadence of volume trends as well throughout the quarter?

I think it's been steady. There's been again --

I'd say it follows our seasonal pattern. January was January because of slow start to the year and got very strong in March because that's one of lease returns really pick up.

Great. Thank you.

Thank you.

Sorry. Go ahead.

Bret Jordan, Jefferies.

Good morning guys.

Good morning Bret.

Question on the IAA inventory up 4%. You talk about improved cycle times. Was there any impact from generally warmer and less icy weather in the Northern and Northeastern states? And again some volume shift with [farmers] in the quarter or is it primarily just the cycle times?

Yes Brent I had mentioned that there is certainly was some impact from the mild winter that we experienced. In terms of customers we really don't get into talking about specific customers but you have your wins in your losses and they pretty much offset each other.

But maybe the bigger impact was improving the cycle times. As I mentioned in my commentary, especially with one very large customer that we mentioned previously that they had taken a pause and they taken a timeout to restructure a lot of their internal processes and now that they've got those restructured, and they're working with us in our total loss solutions now in terms of how they cycle these vehicles through the market, that has reduced inventory at the end of the quarter. (multiple speakers)

Let me clarify one thing. They are utilizing the expertise of total loss solutions. We're not processing titles for them.

Okay. Okay. And housekeeping question on SG&A, you said 10 million of the incremental 20 million was acquired how much of that with Brasher's and maybe how do you see Brashers adding that SG&A on the year?

Brasher's is not in our numbers.

Okay.

They were acquired April 1 so they don't even hit the one-day Brett, but Brasher's again will get more color on that we just close the transaction. It's got a business that looks very much like the ADESA business with about 25 -- 24% - 25% EBITDA margins coming in and it's a local operation. It will fit very nicely in the business model of ADESA.

And the other thing I would just add is a very similar mix to what you see at ADESA as well between commercial and dealer.

Okay great. Thank you.

You're welcome.

Ben Bienvenu, Stephens.

Thanks good morning guys. Good morning.

Touching on the salvage business. Your acquisition that you made in the UK I'd be curious to hear the progress there. How discussions with insurance companies are going to the extent you can touch upon? Then your thoughts on the broader market there as well.

As it turned out our timing wasn't great when we did that acquisition. I think as we said scrap prices couldn't go any lower than they were at the time that we were getting that acquisition closed.

And we've mentioned previously that we did go over and we sat with the management team. We did kind of restructure the business model a little bit, not in terms of -- not in terms of the amount of cars bought but in terms of some of the pricing that was going on.

And as Eric mentioned in his commentary, we are pleased that HBC was a positive contributor in the first quarter. And we think we've got the business model right and we think we can continue to grow that. And in terms of looking forward, we're a very, very, very distant number two player but we think there is opportunity to do further consolidation. We'll just have to ask standby and see how that plays out.

Great. And then your comments earlier around active discussions and deals. Should we think as possible opportunities in both North America and abroad and then also ADESA and IAA. Maybe give us a sense of what those opportunities look like at this segment.

Yes I think you should think about all of our businesses. And that we're actively looking at opportunities and targets. And you should think of them both domestically and internationally.

And as I mentioned in the past, we're still very much a believer in brick and mortar. We believe brick-and-mortar still has a role to play here. And we can buy these at what we would believe are very attractive multiples.

And as I've said previously there's 5 to 10 what I would consider really plum type acquisitions out there. Not that we're going to buy 5 to 10. That's not what I'm saying, so don't misunderstand that. But I'm saying of those 5 to 10 we are in active discussions with a number of those and I would hope that we could possibly close on some additional independents with no timeline in mind.

Fantastic. Best of luck going forward.

Thank you.

Bob Levesque, CJS Securities.

Good morning.

Hi Bob.

A lot of my questions have been answered. But just according to some trade magazines TradeRev is moved into the Washington DC area and I was wondering if you could just talk about your progress in your plans on rolling out in the US. Obviously it started in Canada and stuff, just tell us how long you would expect this to take or how you're planning the rollout if there's a lot of capital that has to go behind it at all. Give us more insight onto that please.

So you a couple of things. First of all I'll acknowledge the Washington DC market. We did have a press release announcing that TradeRev is now representing the Pohanka group there. I think it's 17 stores we're managing -- we're selling I believe the majority or all of their vehicles -- all of their trade vehicles in the inventory on TradeRev. So that was a big announcement for us.

We've also updated our technology on TradeRev. We've come out with what we call a TradeRev 3.0. That's been rolled out in both Canada and the US.

We've added a number of resources here in the US in terms of people. And it's really one market at a time. And it's just getting to these markets in an organized manner. I

n the markets that we're in, we're experiencing success like the one you mentioned with Pohanka. Pohanka's not the only deal but we're experiencing success, we're building the buyer base and we're building the seller bases well. Again we're seeing positive trends where the volume continues to reach new levels each month.

So we're very pleased with TradeRev. But I think the thing that I would remind you of is, I do believe TradeRev has an opportunity to really be transformational in that dealer to dealer space. But I wouldn't want to suggest that this is going to be an overnight deal. I think this is with a longer-term vision.

I think about TradeRev as really being fully deployed and really hitting on all eight as they say probably over the course of what I would think three to five years. I think it has the opportunity to really transform that dealer space. So with all that said, we are very pleased with what we've seen.

Great. Appreciate that. Thank you very much.

You're very welcome.

Will take our final question from Bill Armstrong from CL King & Associates.

Good morning gentlemen. An insurance auto auctions looks like we declined in revenue per vehicle are getting less negative. I was just wondering if you could discuss what you're seeing in terms of scrap pricing. Is that starting to become more less of an issue?

And you were mentioning cycle times reducing. Is that helping your revenue per vehicle in any way?

Yes Bill. As I said I don't think scrap prices can go any lower. So anything is going to be an improvement and we are seeing a slight improvement in scrap prices. Also, I had mentioned we're seeing a slight improvement in currency as well.

And then so yes, that is helping mildly I would say. Very mildly at this point in time. And certainly the improvement in cycle time is just moving these cars through the system quicker.

Does that cycle time improvement really -- does that help your revenue per vehicle or is it more maybe help on the gross margin side?

Bill to the extent that it can have a higher auction price because it didn't further depreciate, there might be a slight pickup in the buy feed but that would be the only way you'd see it.

I see Okay. Thank you.

You're very welcome.

Thank you and at this time I'd like to turn the conference back over to Jim Hallett for any closing comments a remarks.

Thank you Tony and ladies and gentlemen thank you very much for being on the call. Again, we continue to appreciate your interest in your investment in our Company.

Obviously we're very very pleased to report on the quarter that we've reported on. But more so, I would say that we're pleased with the visibility that we have going forward. And not only in 2016 but as we talked about as you look out the next couple years, we think the business is in really good shape.

We think management is very focused on managing this business and providing you with the best results that we can possibly provide you with and making the best acquisitions and deploying capital in the most disciplined manner to get the greatest returns. So we're excited about the business. We will look forward to coming back to you next quarter and hopefully reporting more good news. So with that, thank you for being on and have a great day.

Thank you. This does conclude today's conference.