Eric M. Loughmiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President James P. Hallett - Chief Executive Officer and Director

Good day, ladies and gentlemen, and welcome to the KAR Auction Services Second Quarter 2013 Earnings Conference Call. This call is being recorded. Today's hosts will be Jim Hallett, Chief Executive Officer of KAR Auction Services; and Eric Loughmiller, Executive Vice President and Chief Financial Officer of KAR Auction Services. I would now like to turn the conference over to Mr. Loughmiller. Please go ahead.

Good morning, and thank you for joining us today for the KAR Auction Services second quarter 2013 earnings call. 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 businesses, 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. In light of the company's recently announced proposed secondary offering, there will be no Q&A session after management's prepared remarks. And the company will not be speaking about the offering during this conference call. 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 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 will turn the call over to Jim Hallett, KAR Auction Services' CEO.

Thank you, Eric, and good morning, ladies and gentlemen, and welcome to our call today. First, let me start by saying that I've been looking forward to providing everyone with this update. We are pleased with our second quarter results, and I believe each of our business segments are as well-positioned for the foreseeable future as I have seen since we formed KAR in 2007. I will admit these calls are easier to look forward to when things are generally positive for our businesses. I will start by letting you know that we are confirming our guidance of $535 million to $540 million of adjusted EBITDA for 2013. In fact, I would say that I'm very confident with our guidance now that half the year is behind us and we've had a look at the start of the third quarter and we've begun to get more information on how we believe each of our business segments will finish out 2013. As you saw in our announcement last night, we expect free cash flow to exceed $290 million for the year. As I've said in the past, our free cash flow is a financial metric we believe that demonstrates the strength of the KAR businesses. Our Board of Directors have approved the payment of a $0.19 per share dividend on October 3 to stockholders of record as of September 24. In addition to our strong free cash flow, we are also pleased with our most recent financial performance with consolidated net revenue of $541 million for the second quarter, an increase of 11% over the prior quarter. This generated adjusted EBITDA of $140 million for the quarter, an increase of about 9.5% over the prior year. Adjusted net income of $0.34 per share for the second quarter was up over 30%…

Thank you, Jim. I have just a few things to add to Jim's comments today. I would like to start by walking through the details of our guidance. As Jim mentioned, we are expecting 2013 adjusted EBITDA of $535 million to $540 million. This will result in net income per share of $0.82 to $0.87, and adjusted net income per share of $1.15 to $1.20. Our cash interest expense on corporate debt is expected to be approximately $78 million, and capital expenditure is expected to be approximately $95 million. None of these numbers have changed since our last earnings call. The only change to our guidance is we expect cash taxes of approximately $70 million, a decrease from our previous guidance for cash taxes of $85 million. The decrease in cash taxes does not change our expectations on our effective tax rate of approximately 40% used in computing net income per share and adjusted net income per share. The reduction in our cash taxes reflects our ability to deduct in the current year, a number of IT-related costs that are capitalized in our financial statements. This deduction only impacts the timing of the deduction. However, we will be able to currently expense for tax purposes, similar types of IT costs in future years as well. The net result is our expectation for free cash flow defined as adjusted EBITDA, less capital expenditures, cash interest expense on corporate debt and cash taxes of $292 million to $297 million. This represents free cash flow of $2.08 to $2.11 per fully diluted share outstanding. At our current dividend rate, we have allocated approximately 37% of our free cash flow to the payment of dividends. Our priorities for use of free cash flow have not changed. We are focused on reducing our net leverage,…

Again, that does conclude today's conference. We do thank you for your participation. Please have a great day.