Good day and welcome to the KAR Auction Services Q2 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Eliason. Please go ahead.

Thanks, Leo. Good morning and thank you for joining us today for the KAR Auction Services second quarter 2016 earnings conference call. Today, we will discuss the financial performance of KAR Auction Services for the quarter ended June 30, 2016. After concluding our commentary, we will take questions from participants. 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 business, 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. 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'd like to turn this call over to KAR Auction Services' CEO, Jim Hallett. Jim? James P. Hallett - Chairman & Chief Executive Officer: Great. Thank you, Mike, and good morning, ladies and gentlemen, and welcome to our call. I do look forward to talking about another good quarter performance of KAR. Just to outline my agenda for today, I want to obviously review the highlights of our second quarter performance, update you on our integration activity as well as provide you with an update on our strategy for new geographies, starting with the UK, and then provide you with an overview on the key focus for our strategy in North America and then…

Thank you. We'll take our first question from Elizabeth Suzuki of Bank of America.

Good morning. A number of the auto dealers have mentioned that there was a material portion of their used vehicle inventory that's on stop sale for the Takata airbag recall. Has that had an impact on your business that you can quantify? James P. Hallett - Chairman & Chief Executive Officer: Elizabeth, I'm not sure how we can quantify it. I can tell you we do have some vehicles sitting in our inventory. That is on recall. And I will speak to the dealer vehicles in a minute, but the vehicles in our inventory, were really at the direction of the seller. Some of these sellers want to hold the vehicle until the recall is completed. Other sellers will sell the vehicle with an announcement that it does have an open recall. And then obviously there is some cases where there are laws that prohibit you from selling cars at all which are the rental vehicles. In terms of the dealers and you talk about the stop sales, I do believe their inventory is backing up on the dealers lot and I believe that there were a number of vehicles that the dealers were not able to ship to the auction and as a result there is a backlog. The good news is at some point in time, the backlog will get released, and these vehicles will make their way to the physical auction. So I think it's just a point in time that we have to wait for these vehicles to be cleared.

Okay, great, that's helpful. And Avis talked this morning about some de-fleeting that they're seeing in the market from the rental companies. Can you talk about the trends that you've been seeing in off-rental coming through the auctions? James P. Hallett - Chairman & Chief Executive Officer: Again, that's a portion of our commercial business. It's the smallest portion of our commercial business, but we continue to receive rental vehicles. And as we start to approach Labor Day, and the Labor Day weekend, that's usually a time that these rental companies start to de-fleet. It is just a seasonal thing. Kids are back in school. Holidays are over. There is less demand and the de-fleeting starts. So, we would expect to see an uptick in the rental vehicles as we go into the third quarter here.

All right. Thank you. James P. Hallett - Chairman & Chief Executive Officer: You're welcome, Elizabeth.

We will take our next question from Ben Bienvenu of Stephens, Inc. Your line is open.

Yeah, thanks. Good morning guys. James P. Hallett - Chairman & Chief Executive Officer: Good morning.

So, you talked a little bit about your expectation for used vehicle prices, they've been kind of stubbornly high in the front half of the year. I think in the past you talked about maybe an expectation for 3% to 5% decline in 2016, which implies a bit of a decline in prices in the back half. I'd be curious to hear what you are thinking about the market, why you think prices are staying as high as they are? James P. Hallett - Chairman & Chief Executive Officer: Well, first of all, let me say, Ben as we went into the year, we anticipated a 3% to 5% price decline which you have acknowledged. And we are still seeing – we are still very much within that range and it was anticipated. And this was anticipated, just as a result of the volume of vehicles that were going to be coming to the market. So, it's strictly volume-driven. Prices, we are seeing – they were strong in the first half of the year, and they didn't drop 3% to 5% but we are now starting to see them softening a little bit more and we may get to those 3% to 5% levels. In terms of how that impacts us, as I mentioned in our commentary, we are a transaction company. We are focused on the transaction. And the selling price really doesn't impact us a great deal. Two things, number one is our fees are stairstepped in $500 increments, so a vehicle that actually have to fall in price by $500 for it to have any impact on our economics, and on the flipside of that coin, because of all these off-lease vehicles, we are selling a much higher dollar car, a one-year old car, two-year old car, three-year-old off-lease car, which will bring a higher fee with it. So, the bottom line is, we are not impacted by those fees. Eric? Eric M. Loughmiller - Chief Financial Officer & Executive Vice President: And Ben, I would like to add, there is more one-year old to three-year old used cars in the marketplace now than there has been in the last three years or four years. As we measure used car pricing, it may be the richer mix is keeping that number unusually high as it works through and now we are going to get to a situation where there is even more supply of those cars and we will start to see it come through the indices as quoted by Tom Kontos in his publications.

That's really helpful color. And then along those same lines, you mentioned in your supplementary detail, you are seeing grounding dealers that appetite for vehicles at auction wane a little bit that's supporting online only ARPU. Could you just talk a little bit about as we see used vehicle prices decline, I would think that trend should accelerate. And maybe why even with used vehicle prices remaining a little bit higher there, you are seeing that appetite slow a little bit from those guys? James P. Hallett - Chairman & Chief Executive Officer: Yeah. So if I understand your question, there is no question that the grounding dealer is buying fewer and fewer of these vehicles and these vehicles are making their way into the online channels. And I would expect to see that continue. As we see more volume, we have more selection. And the dealer rather than paying what might be the residual value on the vehicle at termination would rather take his chances on buying the vehicle online or in an open sale or closed sale or physical sale. With that said, let me expand a little bit on that, because we get asked this question a lot. Is as a pure number, there are more vehicles being sold in the online sales. But as a percentage of the overall vehicles that are coming to auction, that percentage is dropping. And we are seeing a drop in conversion rates, which means that more of those vehicles are getting to a open online sale and then eventually making their way to a physical sale, which was evidenced in the second quarter where we saw a 9% increase in the commercial car segment at the physical auction. So Ben, have I covered your question?

Yeah. That's great. Could I slip one more in quickly? James P. Hallett - Chairman & Chief Executive Officer: Yeah.

So you talked about some of the duplicative costs associated with recent acquisitions, Brasher's in particular. How should we think about these duplicate costs burning off over the next couple quarters and maybe that underlying incremental operating or EBITDA margin at ADESA starting to shine through? James P. Hallett - Chairman & Chief Executive Officer: Well, I would tell you first and foremost, everybody is on high alert as it relates to those costs. And we have now started the transition of – I've talked to you a little bit about the DataScan and the AutoVIN transition. That's now at a place that we think we can start taking costs out. In the case of Brasher's, we're starting to implement our systems there. We're in the early stages, we've got eight auctions there. That's going to go perhaps a little bit slower. That sale has performed so well with the transition, we don't want to do anything to screw that up, pardon the expression. And then as you think about the other integrations, we're hoping to get Orlando done in six months. We're trying to compress that timeframe. We're just trying to move, I would say, more quickly in a very disciplined and very focused manner. We're putting more resources on it. and as we complete these integrations, then obviously we would look for these costs to go down. Eric M. Loughmiller - Chief Financial Officer & Executive Vice President: And Ben, I'd like to clarify, on Brasher's historical information we disclosed they had about a 24% EBITDA margin which is very close to ADESA. That would indicate there won't be a lot of cost take-outs there. There will be some efficiencies, but not as much as some of the other acquisitions including places like Orlando, where that EBITDA margin was much lower than the ADESA margin.

Okay. Great. Best of luck. James P. Hallett - Chairman & Chief Executive Officer: Thank you.

We will take our next question from Matt Fassler of Goldman Sachs. Your line is open. Matthew J. Fassler - Goldman Sachs & Co.: Thanks a lot. Good morning. James P. Hallett - Chairman & Chief Executive Officer: Good morning, Matt. Matthew J. Fassler - Goldman Sachs & Co.: I have two questions. The first relates to incremental margins. Eric, if you could just repeat the incremental margin numbers that you gave for ADESA, excluding acquisitions, it would be real helpful. I have the slides and just want to make sure that my understanding of the numbers matches up. Eric M. Loughmiller - Chief Financial Officer & Executive Vice President: Yes. This is incremental adjusted EBITDA margin. The slides are incremental operating margin. So, they are different. Matthew J. Fassler - Goldman Sachs & Co.: Got it. Okay. Eric M. Loughmiller - Chief Financial Officer & Executive Vice President: And the incremental adjusted EBITDA margin was 39% for Q2 and 41% for the first six months of 2016 excluding acquisitions. Matthew J. Fassler - Goldman Sachs & Co.: Got it. And so if we look at the operating margin, I think the delta between the second quarter and the first quarter was probably a little bit greater. I guess it was a 4 point difference year-to-date in Q1 versus a 2 point difference for EBITDA. So any sense as to what accounts for that bigger gap? Eric M. Loughmiller - Chief Financial Officer & Executive Vice President: About the only difference between the two is amortization. Although there are a couple of add-backs related to acquisition cost that would not have been added back or would not have been adjusted for in operating income, like the $3.3 million I referred to. Matthew J. Fassler - Goldman Sachs & Co.: Got…

Our next question comes from Ryan Brinkman of JPMorgan. James P. Hallett - Chairman & Chief Executive Officer: Good morning, Ryan.

Thank you for take my question. Good morning. I see on page seven of the supplemental that ADESA online only ARPU rose 24% from $99 a year go to $123 this quarter. On previous calls you talked about how as more vehicles are transacted online, you'd like to improve your online only ARPU, but it's quite difficult to do. So have you kind of figured out the formula here with this I guess ADESA Assurance program. Is that driving the increase or are you more just taking price from the sellers which you had indicated was hard or is it the mix of online only open versus closed which you touched a bit on earlier? Eric M. Loughmiller - Chief Financial Officer & Executive Vice President: Ryan, this is Eric. Let me start with explaining the $124. That $124 when you adjust for ADESA Assurance which was less than 200 vehicles repurchased, it would be $109, a 14% increase, and we give that number. And you will see it in our 10-Q, it is in the supplement as well. With that, you actually hit on it. The $109 up from $99 reflects the mix of vehicles. As an example we only had 105,000 grounding vehicles versus 99,000, up literally 6,000 units, yet the total of online sales at ADESA increased 14,000 units, so more of them were outside of grounding dealer. And within that you are going to have more open sales activity versus private label close. So it's really – we would describe it as that's reflecting the mix of the sales channel, but $109 is the number I'd look at, not $124, and we do disclose the number.

Okay. That's helpful. And then I know, a lot of the focus with regard to ADESA volume is on the institutional side. Can you talk a little bit about the puts and takes on the dealer consignment side, the visibility there. I know it lasts – start with flat in the second quarter versus up 3%, but what are the other factors influencing dealer consignment volume, dealer decision to hold the vehicle for resale versus auction, et cetera? And how should we think about those volumes trending going forward? James P. Hallett - Chairman & Chief Executive Officer: Yeah. Ryan, I feel very good about our dealer consignment and have continued to feel very good about it. You know, we did talk a little bit about perhaps some cars got held at dealers because of recall and they weren't able to get pushed through the system and I anticipate they would come through the system here in the coming weeks and months, as these recalls get cleared. And as I look forward, I take a look at last year in the third quarter our dealer consignment was up 10%, in the fourth quarter our dealer consignment was up 9%. I would tell you those are pretty tough comps. And it's going to be hard to replicate that. But, I do believe that our dealer consignment will continue to perform well.

Okay, thanks. And just last question. It's clear you're very excited about ADESA Chicago. How should we think about the materiality of this new location? How quickly the volume is expected to ramp-up? You have now with Brasher's, I think, 76 locations or so – is it one divided by 76 or is this a bigger footprint store in one of the biggest markets, and so the volume benefit to you is going to be greater? James P. Hallett - Chairman & Chief Executive Officer: Well, Ryan, you're talking to the eternal optimist here. You know, I've been waiting on ADESA Chicago for a long time. And it is – as we tell you, it's the fourth largest car market in the United States and we think we're very well positioned geographically there in comparison to our competition. You know, it's not going to have anything meaningful that we can report for the balance of this year. But, I think as we look at the last greenfield that we did in Las Vegas; Las Vegas was actually positive cash flow in basically the first 12 months. You know with no predictions, I feel that Chicago has the opportunity because of the size of the market and the number of cars in that market and the number of dealers in that market and the need for another auction to be in that market. I feel very optimistic about what Chicago will be able to do going forward. But, I'm not able to break it down as 1/76, or I'm not able to break it down into the numbers that you'd like to hear.

Okay, thanks for the color. James P. Hallett - Chairman & Chief Executive Officer: You're welcome.

Thank you. We'll take our next question from Gary Prestopino of Barrington Research. James P. Hallett - Chairman & Chief Executive Officer: Hey, Gray. Eric M. Loughmiller - Chief Financial Officer & Executive Vice President: Good morning. Hey, Gray.

Yeah, Gray changed his name. Hey, couple of questions just in terms of SG&A expense as a percent of sales, obviously, you had a one-time issue with the – in the quarter, but going forward as you further integrate some of these companies and all should we expect that to come down relative to where it's been as a percentage of sales? James P. Hallett - Chairman & Chief Executive Officer: You know, Gary, good question, and I think, Eric did a good job of breaking down the SG&A. And we're doing everything we can, everybody in this company is focused on SG&A and getting SG&A down and wherever we can reduce SG&A, wherever it makes sense, we're going to do it. But as I look at SG&A, I really look at it in three buckets. I look at it in performance, I look at it in terms of acquisitions, and then I look at it just in terms of investments and what I would call our organic business or our ongoing business. And as you know, this business is growing, it's becoming much larger. We mentioned that we have more – we have to invest more in our technology, we have to invest more in people and other resources to continue to support this business. But I think the important thing is if you take a look at what happened within our business units, I think, our business units are doing a good job of controlling SG&A. And as we think more about that one company that we spoke about in our commentary, that's where I really look for opportunities. As one company, I look for opportunities to be able to take some of these technologies and leverage them across the entire company, as you would like a shared service, and I think, if we can do those types of things, those are the things that will have the most meaningful impact on reducing SG&A going forward.

Okay. Well, I only ask the question in the context of you doing more institutional cars, we're not going to see dramatic increases in your gross margin because you've got more touch points there. So that's why I asked that question. James P. Hallett - Chairman & Chief Executive Officer: And then, Gary, we agree with the strong topline revenue growth, it would naturally we would expect the SG&A as a percent of sales – of revenue to begin declining.

And then just lastly, vehicles sold at physical auction locations were up 15%, but only 3% at the base ADESA business excluding Brasher. Is that just solely a function of that you are seeing more leased vehicles coming through the pipeline or are you seeing more participation in open sales over the net? James P. Hallett - Chairman & Chief Executive Officer: Well, Gary, let me start by saying the math hurts us a little bit, the 3% decline in dealer consignment, which we've highlighted for you is what causes that. It's up 9% on commercial, and part of that is really tough comps. Last year was a very strong year. Second quarter had good growth. So I think it's year-over-year that's causing some of that to look perhaps a little lower than it did in the first quarter. But we feel very good about the strength of the business and the number of cars coming into auction, and you'll see I think a continued strong performance on the volume front at ADESA not just this year but in a couple years going forward.

Okay. Thank you. James P. Hallett - Chairman & Chief Executive Officer: You're welcome.

We'll take our next question from John Healy from Northcoast Research.

Thanks. I just wanted to dig in a little but more on the dealer consignment commentary. Jim, you sounded optimistic going forward, but I just wanted to think conceptually, is there any sort of, I would say, shrinking or cannibalization going on in the business because of the growth in off-lease and simply maybe that there are as many trades for the dealer consignment market for the dealer to process just because those cars are moving through an institutional consignor. Because I know we've all been talking about the improvements on off-lease, but is it reasonable to think that in the flat-to-down SAAR environment or a flat SAAR environment that the dealer consignment market or addressable market probably shrinks? And your optimism is based on taking share. I'm just trying to think about how all these different factors flow together. James P. Hallett - Chairman & Chief Executive Officer: Yes. So, John, let's go back to when Eric and I had first started talking about the cyclical recovery, and that was nearing the end of 2012. And one of the things that we pointed at that point in time is we said with the amount of off-lease cars that we see coming over the next few years, we would expect dealer consignment to taper off a little bit. And, quite frankly, we've reported to you on a quarterly basis over the last two or three years how well dealer consignment has held up, even with this onslaught of lease cars coming. And, again, as we look at the volumes of off-lease cars that came in the last quarter, being down 3%, I don't really feel that signals anything significant. I feel very good about our dealer consignment and I feel that we're in a good spot with dealer consignment knowing that if you allow me to repeat, some of these cars are being, as Elizabeth said at the very first point, our very first comment, that we talked about the stop sale cars that are sitting on dealers' lots that weren't able to get to auctions. We've got some recalled vehicles sitting in our inventory that we're not able to sell. So, at the end of the day, I think that we're in a good place, and I don't really see a huge change coming here.

Okay. That's helpful. And then I just wanted to ask about the Insurance Auto Auctions business. One of your main competitors there put out some pretty aggressive CapEx plans for the next 20 months or so in terms of opening 20 new yards and 20 expansions. How are you guys thinking about that business? Do you need to put a lot more capacity into the model? And is there anything changing competitively between the two of you guys? James P. Hallett - Chairman & Chief Executive Officer: You know, John, I would say, this is what we do every day. We don't wait to buy 20 yards to announce 20 yards. We're buying, we're expanding our lots all the time, we're relocating our lots all the time, we're greenfielding our lots all the time. We have a very competent real estate staff in this company that is continuously working on buying and acquiring and expanding and leasing real estate and it's just part of what we do. And I can tell you there isn't a month that goes by that we're not having a real estate discussion about where we need to be or how we can better service our customers by expanding capacity. And so it's just an ongoing part of our day-to-day work.

Sure. Thank you so much. James P. Hallett - Chairman & Chief Executive Officer: You're welcome.

Our next question is from Bob Labick of CJS Securities. James P. Hallett - Chairman & Chief Executive Officer: Good morning, Bob.

Good morning. Sticking with IAA, if we back out HBC, looks like gross margins grew for the first time in about six quarters now that the scrap and FX have stopped being a big headwind. Can you just talk a little bit about the opportunity for further gross margin expansion there and how you're looking at the operating leverage at IAA? Eric M. Loughmiller - Chief Financial Officer & Executive Vice President: Yes, Bob. Good observation, and yes, the gross margin did expand. And I would attribute it to two factors. Number one, we're seeing the beginning of really on proceeds or the bids at auction, which will naturally as they increase will bring up the buy piece. Second, you'll get some details, etc. in the earnings supplement. The percent of its volume that will purchase vehicles actually is down and starting to decline, which is also a positive contributor to gross margin. So I think it's those two factors: higher proceeds and it's modestly higher right now. But I feel scrap is coming off the bottom and starting to increase. Recent scrap prices are actually getting up in the above $150 now. Combined with, if the purchase vehicles are less, that will be a positive to gross margin.

Okay, great. Thanks. And then also we've seen you've recently announced some expansion of some locations to accommodate run-and-drive at IAA. Could you just talk a little bit about what percentage of cars are run-and-drive now and maybe what they've been or where you expect them to go? And where you source those cars? Are those coming over from ADESA at times or what are the primary sources for those run-and-drives? Eric M. Loughmiller - Chief Financial Officer & Executive Vice President: It's interesting, Bob, you bring that up. IAA's business model has always been a live auction and we have been running and driving cars all the way back to when Jim and I started talking about it in 2007. So this isn't new. I do think it's getting an increased focus because when you run the car and the buyer can see that the engine operates, it generally we believe yields a higher bid on the vehicle. So expanding that, I will tell you it's less than half the cars. I will give you that. But it's a substantial number of cars and we have targets for each of our locations to run and drive as many vehicles as possible and they have incentives to do that. And again, it's to drive higher returns for the insurance companies is why we're doing it.

Great. Thanks very much.

We'll take our next question from Bill Armstrong of C.L. King. James P. Hallett - Chairman & Chief Executive Officer: Good morning, Bill William R. Armstrong - C.L. King & Associates, Inc.: Good morning. Good morning, gentlemen. My question kind of segues from the previous one and that is at IAA so it looks like you're starting to see some higher bids at the auction. Do you think this is being driven mostly by scrap prices leveling off or do you see foreign exchange? In other words, are you seeing more foreign buyers coming in now and maybe bidding more? James P. Hallett - Chairman & Chief Executive Officer: Yes. I think, Eric mentioned that we are seeing what we would call modest lift on scrap prices, which is a good thing. Certainly no celebrations going on. Nowhere near where it was at the high point, but that's certainly helping. And then the international buyer activity, I would say, is pretty much the same as it's been. I don't think we've really seen any impact or any increase based on anything that's happened with currency relative to the last quarter. William R. Armstrong - C.L. King & Associates, Inc.: So sounds like it might be more scrap driven. James P. Hallett - Chairman & Chief Executive Officer: Yes. William R. Armstrong - C.L. King & Associates, Inc.: Are you seeing any changes, either increases or decrease, in the usage of the various services that you provide at the auction? Maybe generating additional incremental fee income? James P. Hallett - Chairman & Chief Executive Officer: Bob, are you talking specific to IAA or are you talking whole car as well? William R. Armstrong - C.L. King & Associates, Inc.: Well, I was speaking to IAA, but while we're at it, we…

And it does appear that we have no further questions at this time. I'd like to return the call to Mr. Jim Hallett. James P. Hallett - Chairman & Chief Executive Officer: Great. Thank you, Leo. And ladies and gentlemen, I just want to say again thanks for being on. We're very pleased with the quarter. We're very pleased with our business. As I've talked with management and others, I feel that all of our businesses are performing as well as one right now as well as they ever have over the course of the last I guess nine years almost now since we came together. And, again, I think we have good visibility. I think the businesses are well positioned. We're focused on managing these businesses and running these businesses to give our shareholders the best possible returns we can. And I appreciate you being invested in our stock and our company, and we look forward to delivering you a good third quarter. So thank you for being on today. I appreciate it.

Thank you. This does conclude today's KAR Auction Services Q2 2016 earnings conference call. You may now disconnect your lines. And everyone have a great day.