CARMEL, Ind. -

Along with his assessment of third-quarter financial performance and additional insight into this week’s acquisitions by ADESA, Jim Hallett shared his thoughts about where wholesale volumes are heading, encouraging vehicle lease trends and how a certain new-vehicle SAAR level could rectify many industry ailments.

During the KAR Auction Services quarterly conference call with investment analysts Thursday, the chief executive officer emphasized how tight wholesales volumes have been this year because of lagging new-vehicle sales and lease activity. At ADESA, volume was off by 6.7 percent in the third quarter as compared to the same time last year, but Hallett insisted the decrease beat what he expects is an industry-wide average of about 8 percent.

“I think we all recognize that used-car volumes are down, especially the institutional volumes with the off-lease volumes being considerably down as we go into 2011 and beyond,” Hallett explained.

“What we’ve seen over the last couple of quarters is the dealers choosing to try to retail as many of the trade-ins as they can,” he continued. “With a tight wholesale market supply, they might be trying to retail cars they might not normally try, so we’ve not seeing those cars at transaction.

“Dealers are really stretching to sell inventory right now with cars they would not normally be retailing. The SAAR will take care of a lot of our pain,” Hallett went on to say.

With expectations for an October SAAR of 12 million or possibly slightly higher, KAR’s CEO thinks if new-vehicle sales can be maintained at that level going into next year and beyond it will benefit all segments of the used-vehicle industry immensely.

“We’re pretty confident that October SAAR will exceed 12 million units for the year,” Hallett offered. “There are some manufacturers that think we could get to 12.5 or 13 million units for 2011. The trend is in our favor. Whether it’s 12 million or 13 million it’s all good news for our industry. That’s a major driver of our business. New cars create used-car trades which create transactions at the auction.

Executive vice president and chief financial officer Eric Loughmiller chimed in after Hallett point with a quick summation.

“We can’t wait for these new-car dealers to become new-car dealers again instead of used-car dealers because then those trades will come back to the auction,” Loughmiller declared.

Whether or not these franchise dealers are selling new vehicles, Hallett also described how encouraged he is about new-vehicle leasing activity gaining momentum again.

“Let me reassure you that the world does not end in 2011 and 2012. In fact, we’re beginning to see some very positive trends,” Hallett began.

“Not only are the domestics getting back into leasing and getting back into leasing in a significant way, the foreign manufacturers have gotten into leasing during the past couple of years and they’re staying in,” he went on to say. “The thing that excites me about some of the leasing going on is many of these leases are being reported as 24- and 36-month leases. We can start to see those maturities in late 2012 and certainly 2013.”

More Perspective on Acquisitions, Las Vegas Groundbreaking

A day before the quarterly call, ADESA revealed it had secured six facilities from the Premier Auction Group. They included Bay Auto Auction in Bay City, Mich.; Dealers Auto Auction of Michigan in Clare, Mich.; East Tennessee Auto Auction in Fall Branch, Tenn.; Montpelier Auto Auction in Montpelier, Ohio; Premier’s Las Vegas Auction in North Las Vegas; and Wisconsin Auto Auction in Lomira, Wis.

Hallett emphasized how crucial these sites will be for the company’s ongoing initiative to push dealer consignment. In the third quarter, he said the percentage of total sales that were classified as dealer consignment reached 35 percent.

“These six sites are smaller sites, primarily focused on dealer consignment and specialty sales,” Hallett stated. “Typically, they’re going to sell in the neighborhood of 5,000 to 10,000 vehicles on an annual basis.

“These are sites we may not have looked at in the past,” he conceded. “I would say they might not even be in the secondary markets. In many cases they’re in tertiary markets. We feel it falls very much in line with our dealer consignment initiative. As we continue to drive dealer consignment to try to offset this downturn in the off-lease volume, we feel that getting into these markets and getting closer to the independent dealers is a good initiative and continue to complement the initiatives we have in place.

By bringing in all of the resources and solutions ADESA has its disposal, Hallett firmly believes each of the six former PAG sites should post organic growth in the coming quarters.

“We absolutely expect that we can have organic growth just with the ADESA shingle and our presence there,” Hallett insisted. “We feel that brand does attract more dealers. We feel like we can grow the technology and Internet offerings from those locations that don’t have those resources in place today.”

Meanwhile, on the same day ADESA revealed its acquisition plans, it announced details of its strategy to open a new facility in Las Vegas, just 10 minutes from the strip.

Hallett strung together several reasons why he thinks this new ADESA site should be cash positive quicker than what’s typically expected — about 12 to 18 months.

“It was almost a gift from heaven,” Hallett said of the new ADESA site in Las Vegas that’s scheduled to be operational by the second quarter of 2011 at the latest. “This facility was completely fenced, completely paved. The steel structures were up for another business. We were able to take the steel that’s already erected and convert it into auction buildings, body shops and reconditioning centers.”

Hallett reiterated that one of ADESA’s largest clients is expected to begin marshalling vehicles to the new Las Vegas facility as soon as it’s ready.

So could more acquisitions or greenfields be in the company’s future stemming from the moves made this week?

“The sellers know why they are and we certainly know who they are,” Hallett offered. “We may have even opened up some other opportunities based on our strategies to take on some of these smaller markets. We’ll continue to look at these opportunities and as they make sense from a strategic standpoint and a geographic standpoint we will continue act upon them.”

Overall Financial Report

Hallett and Loughmiller were delighted to share how KAR performed in the third quarter — a list of positive gains on numerous fronts.

The company reported its third-quarter revenue totaled $445.3 million, a 4-percent rise from the $430.1 million KAR compiled in the year-ago period.

The top executives also mentioned third quarter adjusted EBITDA climbed by 6 percent. The figure moved up from $114.0 million to $121.1 million.

As a result, the company’s net income in the third quarter settled at $25.6 million or 19 cents per share as compared with $8.6 million or 8 cents per share in the third quarter of 2009.

“I am very pleased with our third quarter performance,” Loughmiller surmised. “Despite lower volumes compared to the prior year in our ADESA and Insurance Auto Auctions business segments, we were still able to grow revenue and profit as a percentage of revenue and increase adjusted EBITDA.”

KAR also shared how its financial standing looks through the first nine months of the year that ended Sept. 30.

The company’s total revenue was $1.37 billion compared with revenue of $1.31 billion for the first nine months of last year. Adjusted EBITDA came in at $372.2 million, a jump from last year nine-month total of $326.2 million. As a result, KAR’s net income for the first nine months of 2010 was $62.3 million or 46 cents per share. A year ago, it stood at $17.9 million or 17 cents per share.

Update on ADESA

Turning next to a financial discussion strictly about ADESA, the company conceded that third-quarter revenue slid 1 percent or $3.4 million to $267.4 million. The figure was off from the year-ago total, which was $270.8 million.

The drop resulted in a 4-percent gross profit dip. The $5-million slide left the third-quarter total at $119.7 million, off from $124.7 million ADESA posted in the third quarter of 2009.

Furthermore, Loughmiller indicated gross margin settled at 44.8 percent for the third quarter of 2010 versus 46.0 percent in the year-ago quarter.

Triggering the decline was a 7-percent decrease in the number of vehicles sold, but Loughmiller said this was partially offset by a 6-percent increase in revenue per vehicle sold,

Also for the third quarter of this year, ADESA’s used-vehicle conversion percentage declined to 64.2 percent as compared to 66.3 percent in the third quarter of 2009.

“ADESA’s performance in the third quarter continues to reflect the tight supply of vehicles at the wholesale auctions,” Loughmiller said.

“We believe our decrease in volumes is better than the volume declines experienced throughout the entire wholesale auction industry,” he continued. “We were able to offset substantially all of the volume decreases at ADESA through selected fee increases, improved ancillary services revenue and a positive impact of the exchange rate for the Canadian dollar.

“Despite this small decrease, conversion rates remain significantly above historical levels,” Loughmiller added.

Hallett also offered a take on what other advancements ADESA is making.

“At ADESA, we’re continued to be very focused on technology. We feel we’re improving our Internet presence,” he stated. “We definitely feel we’re winning our share of the virtual marketplace.”

Insurance Auto Auctions Performance

Loughmiller noted IAA’s third quarter revenue moved up by 5 percent from a year ago, climbing to $142.3 million from $135.5 million. He said that produced a 13-percent rise in gross profit, allowing IAA to generate $55.7 million in the third quarter. In the third quarter of 2009, the figure was $49.1 million

The CFO indicated Insurance Auto Auctions’ gross margin came in at 39.1 percent for the third quarter, signaling a rise from last year when it was 36.2 percent.

“The increases in revenue and gross profit for the third quarter of 2010 were primarily a result of an increase in average selling price for vehicles sold at auction, partially offset by a decline of 4 percent in total salvage vehicles sold,” Loughmiller explained.

“The third quarter is typically a lighter-volume quarter in the salvage industry and this year was no exception,” he continued. “We had a number of insurance providers with lower volumes this year compared to last. These were partially offset by other customers that experienced increases in volumes. We also experienced a modest decrease in non-insurance vehicles. This reflects the small increase in Q3 2009 volume related to Cash for Clunkers which obviously did not exist this year.”

Hallett discussed what he described as several other positive moves made by IAA recently. He highlighted new facilities coming aboard in Louisville, Ky., and Fort Myers, Fla., as well as buyer capability to make purchases through mobile devices.

What might have excited Hallett most was his first-hand experience while attending IAA Insurance Leadership Summit last month.

“It was very well attended by our insurance customers. I was impressed with the strong support they have for our international buying initiatives,” Hallett noted.

“As you know, we have spoken before about that we have people on the ground traveling to many of these foreign markets to develop our marketplaces. We’re holding seminars and training buyers around the globe on to use the technology. We’re familiarizing them with currency issues and logistics,” he went on to say.

“In fact we’ve seen attendance exceed our expectations,” Hallett also mentioned. “Most recently we’ve been in Africa. Now we’ve sold cars in excess of 120 countries during the last year. Our call center is able to communicate in 10 languages, and our website communicates in six languages.”

Automotive Finance Corp. Performance

Another of KAR’s significant business segments, AFC, posted significant financial strides during the third quarter.

Loughmiller indicated AFC’s revenue spiked 50 percent, climbing from $23.8 million to $35.6 million. As a result, gross profit moved higher by 69 percent to $28.3 million from $16.7 million.

It all allowed AFC to enjoy gross margin of 79 percent in the third quarter, up from 70 percent the company posted in the year-ago period.

“The increase in revenue was primarily a result of a 25 percent increase in revenue per loan transaction and a 19 percent increase in loan transaction units,” Loughmiller highlighted. “The increase in revenue per loan transaction was primarily a result of an increase in average loan value and a decrease in credit losses for both loans held and sold.”

Proposed Credit Agreement Amendment

Finally, KAR also announced that it is seeking an amendment to its $1.865 billion senior credit facility.

Loughmiller indicated the proposed amendment should provide the company the flexibility to use cash on hand to redeem, repurchase or otherwise prepay a portion of its outstanding notes in an aggregate principal amount not to exceed $75 million. Pursuant to the proposed amendment, he said the company would also prepay a portion of the outstanding amount of its term loan under the senior credit facility in an aggregate principal amount not less than $75 million.

“The proposed amendment remains subject to approval by lenders holding a majority of the aggregate principal amount outstanding under the senior credit facility,” Loughmiller insisted.

“The company expects to complete the amendment transaction in November, subject to meeting customary conditions,” he added.