CARMEL, Ind. — KAR Auction Services chief executive officer Jim Hallett tried to tie together how the company performed financially with how the industry as a whole behaved in the first quarter.

As a result during a quarterly conference call Thursday, Hallett shared a positive outlook for both the company and used-vehicle dealers.

While KAR as a whole posted significant gains in revenue, adjusted EBITDA and net income, it was ADESA's performance in particular that got Hallett into an extended discussion of the industry. He attempted to frame why ADESA's performance in the first quarter of this year appeared to be so far off from the totals reported in the same time period of 2009.

ADESA's revenue slid 5 percent from $288.3 million to $273.6 million. The segment's adjusted EBITDA in the first quarter dropped by a similar percentage, moving down to $69.8 million from $73.6 million.

Furthermore, ADESA's used-vehicle conversion percentage also dropped from an all-time high of 71.5 percent in the first quarter of 2009 to 68.7 percent in the most recent quarter.

"First of all, I will acknowledge there's no question that revenue and EDBITA is down for the quarter, but overall I would say I'm very satisfied with the results at ADESA, especially as I walk you through the quarter and some of the things that we dealt with," Hallett explained.

"If I can take you back a little bit in time as we ended 2008, we had a tremendous build-up in inventory with manufacturer bankruptcies going on and the credit crunch taking place," he recalled. "There were a lot of vehicles backed up and sellers were just not willing to sell those cars at those prices. So, we carried those vehicles into 2009."

Hallett estimated that ADESA had in excess of 50,000 more vehicles at facilities in January of 2009 as compared to the status at the outset of this year.

"Those sellers were very much anxious to push these vehicles through the pipe in the first quarter of 2009," Hallett stated. "We were seeing conversion rates at the highest we've ever seen in the history of the company."

Another factor Hallett went on to discuss was the harsh winter that dragged on during the first quarter. He emphasized how at one point snow and ice fell in nearly every state. ADESA estimated it lost the equivalent six sales because of inclement weather.

"When you lose a sale and dealers aren't able to get their vehicles to the sale or get to a sale to purchase, you do get the opportunity to sell the commercial vehicles at a subsequent sale but you never really get the opportunity to regain those dealer sales. That was certain a loss for us," Hallett point out.

Another significant first-quarter factor Hallett elaborated about stemmed from Toyota's recalls. He noted how much the situation affected rental-company fleets as well as inventories at auction sites. But Hallett mentioned he's had ongoing updates with Toyota, most recently as this week, to keep ADESA current on any recall matters.

"(Toyota) shared with me that of all of the vehicles that were grounded and scheduled to be sold in the first quarter of 2010, the majority of those vehicles did get sold," Hallett indicated. "However, there will be a carryover of some of those vehicles into the second quarter and beyond for the remainder of the year."

In finishing his discussion about ADESA's performance, Hallett reiterated a positive mood about the segment's potential for the rest of 2010.

"We're still very pleased with the conversion rates. They were very strong in the first quarter but certainly not like they were last year," Hallett said. "No question that inventory is tight and is going to remain tight for the balance of the year."

Ongoing Efforts to Boost Dealer Consignment

In a related topic to ADESA's financial performance, Hallett detailed again the concerted efforts the company is making to broaden dealer consignment at auction.

Hallett noted that 25 percent of auction sales were dealer consignment in the first quarter of 2009. He said that percentage increased to more than 30 percent this past quarter because of what he believes is enhanced dealer trust in what the company can offer.

"It's important to note that not only did we increase the percentage, but the raw number of vehicles increased as well," Hallett pointed out.

"This is not market share that we have to take from anywhere else. This is a whole new business that we've created. These are people who haven't been coming to auctions or having been attending auctions," he continued.

"The independent dealers that have survived are really healthy and they're back in the game," Hallett added. "We've also done a lot of training with our franchise dealers. Certainly, we have a long way to go, but it certainly shows that it's having some effect."

The CEO went on to reiterate how the executives in the field working with dealers throughout the country are why this dealer consignment push has seen an impact already.

"These people are going to the dealers and really taking them a basket of goods and services. They're helping the dealer not only understand the value of being to buy and sell at the auction but also the value of our ancillary services, how better to prepare the car, how to present the car for sale to get the best proceeds. They're teaching them how to use our technology, how to post cars on our DealerBlock technology, how to buy on that site, how to buy cars on our LiveBlock simulcast, teaching them how to get better pictures taken, better condition reports uploaded," Hallett explained.

"This business has changed dramatically over the last four or five years, especially with the growth we've seen on the Internet," Hallett went on to say. "I think a lot of dealers are still reluctant to really dive in and understand the services we provide. It's just going out there and saying to the dealer, ‘You don't have to be afraid. It's simple. Let me help you understand the services and technology.' It's all about getting him comfortable doing business with us and developing the relationship at the local level."

Overall Company Performance

The entire operation compiled a revenue sum in the opening quarter of the year of $458.4 million, which was a 4-percent jump from the 2009 first-quarter figure of $442.5 million.

KAR also revealed that its adjusted EBITDA for the first quarter of 2010 was $120.1 million as compared with first-quarter figure from the previous year of $97.1 million. The company indicated that was an increase of 24 percent.

Furthermore, the company's net income for the first quarter of 2010 was $8.1 million, or 6 cents per share, as compared with a net loss of $3.5 million, or 3 cents per share, in the first quarter of 2009.

"In terms of performance at a high level, we were very successful at growing our revenues and our margins," Hallett stressed.

Review of Insurance Auto Auction

Company executives reported IAA's first-quarter revenue increased $20.8 million, or approximately 15 percent, to $158.8 million. The figure was up from $138.0 million the segment posted in the first quarter of 2009.

The financial report also showed gross profit at IAA jumped about 41 percent, or $19.1 million, to $65.3 million as compared with $46.2 million in the first quarter of 2009.

Executives noted gross margin stood at 41 percent for the first quarter of 2010 versus 33 percent in the same quarter of the previous year. They went on to state adjusted EBITDA spiked by 50 percent or about $16.2 million to $48.8 million, a figure up from $32.6 million in the first quarter of 2009.

KAR attributed its increases in revenue, gross profit and adjusted EBITDA for IAA primarily to an increase in average selling price for vehicles sold at auction.

"In a nutshell, Insurance Auto Auctions hit an absolute home run. They had the best quarter they've ever had in the history of the company. Proceeds were at a record all-time high," Hallett declared.

"As much as weather has been a detriment in the first quarter for ADESA, it's really played in Insurance Auto Auction's favor," he continued.

"We have the opportunity at Insurance Auto Auction to see our inventory 60 to 75 days in advance. I can tell you that we can expect to see a strong continuing performance through the second quarter," Hallett added.

Performance Update on AFC

Like IAA, company executives highlighted several strong financial performance elements in the first quarter for AFC.

KAR noted that its revenue total at AFC jumped about 60 percent from $16.2 million to $26.0 million. The gross profit percentage increase was even higher, a whopping 141 percent. It moved the sum from $8.1 million to $19.5 million in the first quarter of 2010.

AFC's adjusted EBITDA for the first quarter of 2010 increased $12.1 million, or an astounding 216 percent. The total moved up to $17.7 million from $5.6 million in the first quarter of 2009.

Company executives believe the increase in revenue was primarily a result of a 41-percent increase in revenue per loan transaction and a 13-percent increase in loan transaction units.

Hallett emphasized that AFC exceeded performance expectations for the quarter. He also mentioned that the portfolio is 99 percent current and has been at that status for close to nine months.

"Not only were we able to increase our transactions and grow the portfolio, but the thing that's been very, very pleasing has been the quality of the dealer we've been able to attract. We're attracting a much higher quality of dealer. We feel like we've been able to eliminate the lower-end or the more-risky dealer. I think it proves out in the numbers," Hallett explained.

"We've always looked at AFC as being a complementary service to our whole-car business, ADESA," Hallett interjected. "But recently over the course of the last four or five months, we've been able to take AFC and roll it out to several of our salvage buyers.

"Although the salvage buyers remain a very small portion of our portfolio, we're really pleased with the traction we're seeing on the salvage side," he added.

Reaction to Possible Rental Company Consolidation

Hallett was asked during the call to share comments in light of the initial news about Hertz Global Holdings reaching a deal to acquire Dollar Thrifty Auto Group as well as the potential for Avis Budget to join the mix.

Hallett touched on the potential for a new consolidated company to use its own remarketing outfit rather than an auction to dispose of fleet inventory.

"First and foremost, rental car companies are looking to optimize various channels, that's nothing new to us. It's been something that's been going on for some period of time," he said.

The CEO went on to note that no matter how potential consolidations happen, KAR is in a strong position to work with any potential player.

"In terms of some of these consolidations and possible consolidations that could be taking place, we have very good relationship with all of the rental companies," Hallett asserted. "We have a very good relationship with Hertz, with the Avis Budge people, the Dollar Thrifty people who most recently have been in the news.

"We don't feel that it will have any impact one way or the other regardless of how these companies might consolidate," he continued. "We're doing business with them all on a regular basis."

Company Outlook for 2010

Hallett wrapped up the call by emphasizing the annual guidance KAR already shared.

The company expects adjusted EBITDA, net income per share and adjusted net income per share to be at the top end of its previously issued guidance of achieving adjusted EBITDA of $458 to $465 million.

"Our diverse business model that in itself is part of the value proposition at KAR, especially when you consider that we're No. 1 or No. 2 in market position with all three of our business segments," Hallett stated.

"We're not dependent on any one product or service. When you see this diversity that we have within in KAR, that adds tremendous value to our investors," he concluded.