CARMEL, Ind. -

While ADESA’s softer third-quarter performance forced KAR Auction Services to lower its expectations for full-year adjusted EBITDA, chief executive officer Jim Hallett remains extremely upbeat about the future because of the OPENLANE acquisition.

Having officially closed the deal last month, Hallett used a good portion of Thursday’s quarterly conference call with investors to highlight everything OPENLANE brings to KAR’s portfolio. Hallett also touched on how early on KAR’s clients are cheering the move.

“I’ve talked with you on a number of calls in the past that my major focus since becoming CEO of KAR in 2009 has been on technology for all our business units. I think the acquisition of OPENLANE really addresses a lot of the concerns that I’ve had over this period of time,” Hallett said.

The KAR boss shared that he was actually speaking from Detroit because he’s been joined by ADESA’s Tom Caruso and OPENLANE’s Peter Kelly on a nationwide tour that began on the West Coast. Hallett reiterated some of the capability highlights he believes KAR now has because of OPENLANE and its subsidiaries CarsArrive and Recovery Database Network now being integrated with ADESA, Insurance Auto Auctions and Automotive Finance Corp.

“This gives us what I’ve been referring to as an end-to-end remarketing solution,” Hallett insisted. “Not only does it give us a very strong presence in the physical space and a very strong presence in the virtual or Internet space, but it gives us all of the services that a remarketer could possibly require. I like to say that the remarketer could make one phone call and he would be able to satisfy any service that he would need.

“We’re talking about vehicle logistics and transportation, reconditioning, financing, inspections, the ability for dealer to sell post, unmatched analytics, the repossession service we provide with guaranteed checks and guaranteed titles,” he went on to say. “This is really the customer value proposition that I speak about.

“It’s very important and I want to be clear that this is not just about OPENLANE,” Hallett added. “This is about the combination of OPENLANE with all of our physical auctions as well as all of our service offerings. This will not only be a great benefit to ADESA and our other companies at KAR but it will also be a great benefit to OPENLANE as well.”

Plan to Integrate All Companies

Hallett admitted the integration of OPENLANE into the KAR portfolio is going to take time — as long as 18 months.

“We are absolutely not going to rush it. We’re much more focused on getting it right than we are in being in a hurry,” Hallett emphasized.

KAR’s top executive recapped that the integration began with high-level managers from OPENLANE and ADESA blending together into what Hallett described as “an all-star team.”

Since Kelly remained as OPENLANE’s CEO, Hallett said he has been introduced “as they say with a fire hose last week.”

Hallett indicated Kelly was a part of several management meetings and his first KAR board gathering. Kelly also spoke in front of about 500 KAR employees during a town-hall style gathering at corporate headquarters.

“He’s well engaged as we get kicked off here,” Hallett said about Kelly, who became the top boss at OPENLANE back in April.

As the workings in the boardroom ramp up, there are tangible changes dealers can already see. One is a pilot program that’s made the CarsArrive transportation platform now available at seven ADESA locations.

“When a dealer buys a car, there’s two things they want to know. How much and how fast can I have it? This has been very successful technology for OPENLANE. Our plan is to integrate CarsArrive’s technology into our physical auctions at ADESA,” Hallett explained.

“We would hope to have CarsArrive fully integrated in the coming year,” he added.

Following the call, ADESA sent the specific locations and implementation dates for the CarsArrive pilot program. The sites include:

—ADESA Colorado Springs: Oct. 31
—ADESA Minneapolis: Nov. 7
—ADESA Phoenix: Nov. 28
—ADESA Pennsylvania: Dec. 12
—ADESA Indianapolis: Dec. 12
—ADESA Winnipeg: Jan. 4
—ADESDA Toronto: Dec. 19

Hallett emphasized the plan remains that OPENLANE will provide the platform for all of ADESA’s e-business requirements and that all of KAR’s operations should be operating on a single platform by 2013.

“Coincidently, sometimes it’s better to be lucky than good,” Hallett acknowledged. “From being on the road with all of our customers this week, our integration plan and the completion of that integration plan really matches with our customers’ business. Their volumes will increase in 2013 and going forward. Our timing is good there.”

KAR 3Q Performance and Nine-Month Totals

At the beginning of Thursday’s call, Hallett and executive vice president and chief financial officer Eric Loughmiller went over KAR’s bottom-line figures.

During the third quarter, the company posted revenue of $447.0 million and adjusted EBITDA of $115.7 million. In the same period a year ago, KAR’s revenue and adjusted EBITDA was $445.3 million and $121.1 million, respectively.

Loughmiller noted third-quarter net income increased 26 percent to $32.2 million or 23 cents per diluted share as compared with net income of $25.6 million or 19 cents per diluted share a year earlier.

He went on to mention third-quarter adjusted net income per share for was 23 cents, an 18-percent drop from a year ago when it was 28 cents per share.

Looking at the nine-month span that ended Sept. 30, KAR generated $1.400 billion in revenue, up from $1.373 billion during the same time frame a year ago. That represented a 2-percent increase.

KAR’s adjusted EBITDA through the first nine months of this year also ticked up slightly. The 1-percent gain came via a rise from $372.2 million to $375.1 million.

Due to the early extinguishment of debt in the second quarter of this year, Loughmiller pointed out net income for the nine months that ended Sept. 30 declined 7 percent to $57.7 million or 42 cents per diluted share as compared with net income of $62.3 million or 46 cents per diluted share a year earlier.

Furthermore, KAR’s adjusted net income per share through nine months of 2011 was 95 cents versus adjusted net income per share of 85 cents last year, marking an increase of 12 percent.

Revised 2011 Outlook

KAR previously indicated this year’s adjusted EBITDA would be approximately $500 million.

As a result of the decline in vehicles sold at ADESA auctions, KAR reduced its expectation for this year’s adjusted EBITDA to $485 to $490 million.

The company anticipates this year’s net income per share to be 45 cents to 50 cents and adjusted net income per share to be $1.18 to $1.20.

“Adjusted net income per share represents GAAP net income per diluted share excluding excess depreciation and amortization and stock-based compensation, both resulting from the 2007 merger, net of taxes, as well as other items,” Loughmiller explained.

The KAR CFO went on to note the company continues to expect its 2011 cash taxes to be in the range of $40 million to $50 million, its effective tax rate to be approximately 25 percent and its capital expenditures to be approximately $85 million.

Despite that revised expectation, Hallett emphasized his positive attitude about KAR’s future.

“There’s no question that OPENLANE brings a lot of excitement to the party. I think we all see the advantage of that. OPENLANE is only part of the reason for my optimism,” Hallett began.

“When you think about Insurance Auto Auctions, they continue to excel at understanding the needs of the insurance and non-insurance industries. That’s been witnessed by the 10-percent unit growth they’ve seen in the third quarter. I think that speaks volumes,” he continued.

“AFC continues to use a very disciplined growth model to achieve strong profitable growth while maintaining a portfolio that’s 99-percent current,” Hallett pointed out.

“There’s no question as we’ve talked about the pressure and supply shortages at ADESA,” he acknowledged. “But despite the declining revenues at ADESA, EBIDTA margins remain robust and ADESA sales are now 45 percent dealer consignment. This is an initiative we spoke to you about a couple of years ago. I’m very pleased with the way that initiative has been rolled out and performed.”

More Industry Reaction to OPENLANE Deal

With Hallett barnstorming through the country with his other top executives, he shared some feedback about how the industry views KAR’s deal for OPENLANE.

“The customer meetings have really exceeded my expectations in terms of feedback. Customers are very excited about what we’ve been able to do here complementary of both ADESA and OPENLANE,” Hallett highlighted.

“The feedback is ‘Hey this is a great fit within the industry,” he continued. “Bottom line, the words that are getting tossed around is this is a real game-changer. It’s a real game-changer for ADESA. It puts us in a very good position to handle what’s coming at us and what changes are coming in the industry.

“We have a physical footprint. We have a great Internet platform. Now it’s up to the market to decide how these vehicles get sold,” Hallett projected.

“If the Internet is going to cannibalize what’s going on with the physical auctions, we want to absolutely make sure that we’re canalizing ourselves. We believe we have the two platforms that allow us to keep this business within KAR,” he went on to say.

ADESA’s 3Q Performance

As Hallett referenced earlier in Thursday’s call, the company acknowledged ADESA’s third-quarter revenue decreased $26.1 million or 10 percent to $241.3 million as compared with the $267.4 million the segment posted a year ago.

Gross profit for ADESA decreased $16.1 million or 13 percent to $103.6 million. A year earlier it was $119.7 million.

The company noted ADESA’s third-quarter gross margin was 42.9 percent, down from 44.8 percent a year ago.

ADESA conceded the decreases in revenue and gross profit were primarily a result of a 15-percent decrease in the number of vehicles sold, partially offset by an increase in revenue per vehicle sold.

Furthermore, ADESA’s selling, general and administrative expense decreased $2.1 million to $50.1 million, primarily due to decreases in compensation and related employee benefits, marketing costs, professional fees and other miscellaneous expenses, partially offset by increases for costs at acquired sites and fluctuations in the Canadian exchange rate.

Turning to data through nine months, ADESA’s revenue is off by $54.0 million or 7 percent to $767.1 million as compared with $821.1 million posted during the first three quarters of 2010.

As a result, ADESA’s gross profit through nine months is down $33.9 million or 9 percent to $330.7 million from $364.6 million.

ADESA said its gross margin for the nine months ended Sept. 30 was 43.1 percent versus 44.4 percent a year earlier.

Pointing to dropping volume, ADESA indicated decreases in revenue and gross profit were primarily a result of an 11-percent decrease in the number of vehicles sold, partially offset by a reduction in cost of services.

ADESA’s SG&A ticked slightly lower through the first three quarter of this year, dipping  $0.4 million to $157.6 million due to decreases in marketing costs, compensation and incentive compensation costs and other miscellaneous expenses, partially offset by increases for costs at acquired sites, fluctuations in the Canadian exchange rate and travel costs.

In other ADESA metrics, the company said its third-quarter used vehicle conversion percentage declined to 57.3 percent as compared to 64.2 percent in the year-ago quarter.

Through nine months, the used vehicle conversion percentage declined to 61.6 percent as compared to 65.9 percent.

ADESA stressed the decline in conversion rates was driven by the company’s growth in dealer consignment vehicles, which typically convert at a lower conversion rate than institutional vehicles.

Insurance Auto Auction’s 3Q Details

Shifting gears to a review of Insurance Auto Auctions, the division’s third-quarter revenue jumped $22.4 million or 16 percent to $164.7 million. A year earlier, it was $142.3 million.

The allowed IAA to post $64.7 million in gross profit, a rise of $9.0 million or 16 percent from last year’s third-quarter figure of $55.7 million.

Insurance Auto Auction saw its gross margin move slightly higher year-over-year during the third quarter, up to 39.3 percent from 39.1 percent.

IAA said the increases in revenue and gross profit were primarily a result of a 10-percent increase in vehicles sold, an increase in fee revenue per unit due to an increase in average selling price for vehicles sold at auction and the incremental revenue attributable to non-insurance vehicles sold.

The division’s selling, general and administrative expense increased $2.4 million or 13 percent to $20.3 million as compared with $17.9 million a year earlier. IAA attributed the SG&A increase to an increase in professional fees related to information technology and marketing initiatives.

For the first nine months of 2011, Insurance Auto Auctions enjoyed a 12-percent or $55.4 million increase in revenue to $513.8 million, up from $458.4 million.

IAA’s gross profit is up by an even higher percentage through three quarters. It’s 14-percent higher, climbing $25.9 million from $186.5 million to $212.4 million.

As a result, IAA’s gross margin ticked up from 40.7 percent to 41.3 percent.

Insurance Auto Auctions said the increases in revenue and gross profit were primarily a result of a 6-percent rise in vehicles sold, an increase in fee revenue per unit, due to an increase in average selling price for vehicles sold at auction, as well as the incremental revenue attributable to non-insurance vehicles.

Furthermore, the division’s SG&A expenses through nine months are 2 percent higher than a year ago, increasing $1.4 million from $58.5 million to $59.9 million.

IAA pointed to increases in compensation expense, incentive-based compensation expense and professional fees related to information technology and marketing initiatives, partially offset by decreases in stock-based compensation expense, relocation expenses and severance costs, as the reasons for higher SG&A.

Update on AFC

Finally taking a look at AFC’s third-quarter performance, the division increased its revenue 15 percent or $5.4 million from $35.6 million to $41.0 million.

AFC’s gross profit climbed by 17 percent from $28.3 million to $33.0 million. Gross margin ticked up 1 percentage point from 79 percent to 80 percent.

AFC management said increases in revenue and gross profit were primarily a result of a 2-percent increase in revenue per loan transaction and a 13-percen jump in loan transaction units. Executives added the uptick in revenue per loan transaction was primarily a result of increases in the average portfolio duration and loan value, as well as a decrease in credit losses.

Comparing the first nine months of this year and last year, AFC’s revenue is 27 percent higher, climbing $25.2 million from $94.2 million to $119.4 million.

The division’s gross profit moved 30 percent higher from $73.3 million to $95.6 million, a jump of $22.3 million.

AFC’s gross margin moved from 78 percent through nine months of last year to 80 percent in 2011.

Officials stressed the increases in revenue and gross profit were primarily a result of a 10-percent increase in revenue per loan transaction and a 15-percent increase in loan transaction units.

They added the increase in revenue per loan transaction was primarily a result of the adoption of Accounting Standards Update 2009-16 in 2010, a decrease in credit losses and related provision and increases in the average portfolio duration and loan value, as well as floor plan and other fee income.

Furthermore, AFC’s selling, general and administrative expense increased $1.1 million to $14.6 million, primarily as a result of an increase in compensation expense and travel costs, partially offset by a decrease in incentive compensation.