Good day, ladies and gentlemen, and welcome to the KAR Auction Services First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Mike Eliason, Vice President of Investor Relations and Treasurer. Sir, you may begin.

Thanks, Chelsea. Good morning, and thank you for joining us today for the KAR Auction Services first quarter 2017 earnings conference call. Today, we will discuss the financial performance of KAR Auction Services for the quarter ended March 31, 2017. 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?

Thank you, Michael, and good morning, ladies and gentlemen. And welcome to our call. Let me start with laying out what I plan on covering on today's call in my comments. I want to provide a update on our guidance for 2017, give you an overview of our performance in the first quarter, discuss what we're seeing in the marketplaces that we serve. I'd like to talk about a couple of key strategies that we have going on within KAR and then provide you with some information on our acquisition of DRIVIN that was announced in mid-April, and then I'd like to finish up with an update on our plans to refinance our existing debt. So, starting with our guidance for 2017, I can tell you that I feel very, very good about our performance of our businesses and more or so our outlook as we continue to move forward. There are no changes to our previous guidance as you saw in our earnings release. The cars are coming to auctions. And as I like to say, nobody is stockpiling these vehicles. These vehicles are primarily commercial vehicles, off-lease vehicles, repos and fleet vehicles and these cars are going to sell. They traditionally sell at a very high conversion rate the first time through and if they don't sell first time through for one reason or another, we know they're definitely going to get sold second time through, the vehicles are not leaving our auction once they arrive there. So, with that said, I would also mention that we continue to see the value in the complementary nature of our various businesses that we've spoken about many times. And again, I remain positive not only in the near term, but in the longer term outlook for KAR. As I look…

Thank you, Jim. I would like to cover a couple of items in more detail. Let me start with a quick overview of our consolidated results. Revenues grew 14% in the first quarter, which led to an 11% increase in adjusted EBITDA and a 13% increase in operating adjusted net income per share. We benefited from a lower effective income tax rate in the first quarter, as the benefit from stock-based compensation is recognized as a reduction in income tax expense beginning in 2017 in accordance with the new accounting pronouncements on accounting for stock-based compensation. Previously, this income tax benefit was recorded as an increase in additional paid-in capital. I would like to point out that the impact on our first quarter effective tax rate is higher than what we expect the impact to be for the full year. A majority of our stock-based compensation programs have vesting dates in the first quarter. Now, let me speak to a couple of items affecting the results of our business segments. ADESA had 20% growth in revenue and 20% growth in adjusted EBITDA. Gross profit as a percent of revenue was down slightly, but this is consistent with our expectations when revenue growth is driven by the increase in revenue per unit as it was in the first quarter. While volume growth was attributable to the online-only sales and acquired auction locations, the improvement in revenue per unit reflects the impact of the shift in mix of commercial vehicles to 56% of vehicles sold in 2017, from 53% of vehicles sold at physical auction in 2016. While our same-store volume growth was only 4% in the first quarter and flat year-over-year at physical auctions, I remind you that we had a tough comparison when looking back to last year's first quarter…

Thank you. And our first question comes from the line of Elizabeth Suzuki with Bank of America. Your line is now open.

Good morning, guys. Your tax rate was fairly low in 1Q and you mentioned the impact of stock-based comp, but you maintained your full year expectation of 37%. Do you think that your effective tax rate is really going to be 38.5% for the rest of the year to make that 37% for the full year or is that just some conservatism on your part?

Well, Liz, it's what we think, but it's driven by the fact that this benefit is all in Q1, I'll have (18:50) a full year of earnings. If it has an impact, it will be fairly minor relative to the effective tax rate and what we expected at the beginning of the year. And our higher tax rate is really driven by state taxes more than federal taxes and that's the unpredictable portion is what will it actually turn out to be. I'm hoping for good news, but not counting on it.

Okay, great. Thanks. In next quarter, the Brashers acquisition will have anniversaried. So, again, as we're thinking about organic volume growth, what are your expectations for the rest of the year, obviously we have some somewhat tough comps. So, I mean do you think somewhere in the mid single-digits is reasonable for organic growth or is it likely to kind of stay in the lower range?

Yeah, Liz, I would think that we would expect it to be in that mid-single-digit range or perhaps a little bit better. As we look at – we have a good feel for the existing business, for the new business we've been able to put in place. And then with the volumes that are coming, as Eric would say, we feel good about mid single digits, and we would hope that it could be a little bit higher in that.

Great. And I'll just squeeze in one more quick one which is, with used vehicle pricing coming down on a like-for-like basis, do you think it's reasonable to assume that your revenue per vehicle at ADESA could continue to trend positively just due to mix shift, or do you expect to see some pressure there by the end of the year?

No, first and foremost I would say that, with pricing – although you didn't necessarily ask it this way, we're very focused on the transaction. We're very focused on getting the car and selling the car. And we know that more and more of these cars are going to be these off-lease cars, and as they get to physical auctions, they are the heavy users of these ancillary services. And now we're starting to see revenues that start with an eight, and those are the numbers that we haven't seen in the past. So, I think our revenues continue to improve.

Great. Thanks very much.

You're welcome, Liz.

Thank you. And our next question comes from the line of Bret Jordan with Jefferies. Your line is now open.

Hey, good morning, guys.

Hi, Bret.

A couple quick questions. And I guess, I'll start with dealer consignment and obviously it stabilized sequentially in the quarter. Could you give us maybe an outlook and where we might expect to see the trends go from here? I think it had gone from sort of a minus 3% midyear last year to minus 7%. And obviously given the comparisons and some of the dealer trends, could you maybe give us an outlook?

Yeah, Bret. First of all, I can tell you that it's very much in line with our expectations and what we were thinking it would come in at. Before we went into the recession, if you go back a number of years, we were heavily weighted on commercial where we're 70% commercial and 30% dealer. And as we worked our way through the recession, we're able to bring that balance to 50%-50%. And we always felt that as we went into the cyclical recovery that there would be no question that the off-lease cars would displace some of these dealer consignment cars. And quite frankly, it didn't happen as fast as we thought it would happen, it held up stronger as you probably heard me say before. We currently, I think Eric reported we're 56% commercial in the quarter, and 44% dealer. We think that number will look somewhere like 60%-40% when it's all said and done. We think that's kind of the numbers that we're pointing to and that's what our expectation would be.

Okay, great. And then on the IAA, we've heard a lot about hail and flooding in the recent past, are we seeing any sort of catastrophic event growth in the current quarter around IAA? And just sort of a second question on IAA while I have you, what's the export volume looking like, is there any change either around a strong dollar or relative change to the dollar versus the volumes that are sold at IAA that are going overseas?

Yeah. So, let me first of all say, catastrophic events, hail, storms, hurricanes, snow, sleet, ice, all that stuff related, those events are always going to be part of our industry, always part of what we do. We don't factor them in one way or the other. Normally when they happen, they are obviously to our benefit and they're good for our business and it's good that we can provide this service for our customers. So, not predictable, not something that we build into our plans, but when they happen, it's good for our business. So with that, the second part of the question on the exporting in the currency, I'm going to let Eric take that.

Yeah. Bret, good question. We're still seeing active export activity. Even though the U.S. dollar is strong, gross auction proceeds or average price paid for a vehicle has come down to the point where it seems to be a very attractive transaction and we haven't seen anything that has caused a change in the interest by the international buyer. And again, we see plenty of cars going overseas, that's always been in that 25% to 30% of the vehicles and it's probably about that same amount right now going to wherever they're buying the vehicles.

Okay. Great. Thank you. Appreciate it.

Okay. Thank you.

Thank you. And our next question comes from the line of Matt Fassler with Goldman Sachs. Your line is now open. Matthew J. Fassler - Goldman Sachs & Co.: Thanks a lot, good morning.

Good morning, Eric. Matthew J. Fassler - Goldman Sachs & Co.: A couple questions, first, on the whole car business and this was asked, I think a couple questions ago, maybe a bit differently. So, we have a couple quarters now under our belt with 4% unit growth ex acquisitions. And I know you talked about the impact of the election in Q4 and then you had the tax rebate issue impacting the entire market plus a very stiff compare in Q1. Jim, when you were talking about mid single digits or a bit better than that, was that essentially discussing the organic unit growth so would that suggest that without those impediments to the market and with some more normative compare, you could see a bit of acceleration underlying the guide for the rest of the year?

That would be a yes, Matt. Matthew J. Fassler - Goldman Sachs & Co.: Okay. And then secondly, also on whole car, Eric, you talked about I guess one unusual factor that impeded the incremental margins a little bit in the whole car business. Should we be targeting something in the 20% to 25% range as kind of a sustainable incremental margin rate with the kind of line that you guys are discussing?

Matt, again, we talked about February really impacting incremental margins. And we saw great movement on the integration of those activities, and as was pointed out earlier, we anniversaried those. We still think we can have stronger incremental margins than the mid-20s on the invested business. Matthew J. Fassler - Goldman Sachs & Co.: Got it. And then finally on AFC, so there was a point in time, call it a year ago, when you had talked about increasing competition, and presumably some irrational pricing gunning for that business. I know that the issue for the moment is more loan losses than anything else, we're familiar with what's going on in the market. Should we assume, based on what you said about taking rates a bit higher that some of the competition that had been entering the market and impeding profitability is pulling back, giving you the opportunity for sustained better pricing? Is that visible and (26:53) are people responding to that market adversity?

Yeah, Matt, I think good point and I would call it responsible behavior. I think people have pulled their horns in a little bit and are acting in a more responsible way in terms of how we look at extending credit. Eric, you might want to add to that.

Right. I wouldn't call it pulling back, but I don't think they're using the pricing component as a competitive lever. That's what I would say, Matt. They're still in the marketplace aggressively pursuing market share. There still seems to be ample credit available for customers, and in some cases, more than we would like to lend, and we're making sure that we aren't involved in those customers where they have too much credit. That's really where we're focused. Matthew J. Fassler - Goldman Sachs & Co.: Understood, gentlemen. Thank you so much.

Thank you, Matt.

Thank you. And our next question comes from the line of Ben Bienvenu with Stephens Inc. Your line is now open.

Yeah. Thanks. Good morning.

Good morning.

Focusing on the ADESA business, the gross margin is under pressure, understandably given the mix shift towards institutional commercial volume. What are some of the things that you can do operationally to sustain or prop up that margin and help alleviate some of the pressure as a function of mix?

Yeah. I think, a couple of things. Really there is two things that stand out to me is number one is we absolutely have to get these integrations completed that we acquired in 2016. We acquired a lot of businesses in 2016. I won't go through them all; I think you're familiar with them. But it's completing those integrations, and then the other thing that we've been focused on – I spoke a little bit about data and analytics and the acquisition that we made there. We've also brought a lot of talent into the organization and what I would term is key talent, senior levels, highly comp – and this is really bringing the skill set in to support what we're doing in terms of growing the business and just growing the things that our customers are expecting of us. Now, for the most part, those jobs have been filled, the most part we're well into the middle innings of integration and I think you should see those margins start to improve in the back half of the year.

And we're referring to gross margin as well on that Ben, because part of what we do is go in with a management operating system that really focuses on maintaining direct labor in line with the volume running through the auction. So you should see it at both the gross margin line as well as the adjusted EBITDA margin line.

That's great color. Thanks. Switching gears to IAA, you came into the quarter with inventory buildup 25%; you reported 11% volume growth and then you ended the quarter with inventory up 17%. Am I right to think that perhaps activity slowed in January, February, while you were selling through the inventory you had at the end of the quarter and then picked back up in March sort of coming into 2Q? And if so, is that just a function of milder weather that we saw during the quarter, maybe help me think through some of the sequencing of that?

Yeah. I'll start that conversation and then let Eric weigh in as well. At IAA, there is a much longer holding period for these vehicles. The average days to sell from the time that the car arrives to the time that it is sold is somewhere in the order of approximately 75 days. And so what you get there is you get an overlap of when the car arrives and when it actually gets sold and it could arrive in one quarter and go into the next quarter. So, you have to think about the processing and the time that it takes to process those vehicles. With that, Eric, you want to add?

Yeah. And Ben, I'd point out, last year's first quarter was up 14% over 2015. Again, I don't want to complain about our comps, because they're great news in the past. But we were up against a tough compare, we had very strong flow-through in the auctions and the weather actually helped us get more cars out and that helped us reduce that inventory level a little bit, which is what our insurance carriers were pursuing. So, I would tell you it was all good news in the first quarter in the way it came together.

That's great. And then just one last one on the acquisition strategy, you highlighted some international markets that you're looking at, I assume both potentially ADESA and IAA; how do you think about the sort of critical mass that you need to achieve when entering a new market to make the economics work on that business? And what kind of pace do you think about, is the pipeline relatively robust? Or is this – I would assume it's a longer-term time horizon to sort out build out the capacity that you might need?

Yeah. So a couple things there that I'd mention is, first and foremost I would say that we're focused on mature vehicle markets, where the cars are. And I think a great way to maybe explain it – a good way for me to explain it is to take a look at what we did in the UK. We went into the UK, we focused on businesses that we feel we know something about, businesses that we operate here in North America. We wanted to buy smaller existing businesses that have a customer base that we could grow in the businesses and we did it in salvage, we did it in an online platform with GRS and we introduced TradeRev. But maybe really, really key was our focus on the management team. Whenever you go into these international markets, certainly I believe that I and the management team support the fact that there's nobody from North America going over there to tell these people how to run their business. And we have to have management teams that we're very confident in that not only know and understand the business that are interested in staying locked down and being part of our business going forward and we've been successful in doing that. So as we look at these businesses, and we look at new geographies, we're really looking at opportunities in all of our businesses; could be in salvage, whole car, could be with some of our other products and some of our services, a lot of our technologies that are very much in demand around the world that don't exist in other parts of the world. So it's kind of assessing and prioritizing and looking at them one at a time and then I guess the great debate is, which one comes first. And that's something that we just have to take one step at a time in terms of where we get to with the seller and at what point we get there. But I would tell you without getting specific, there are a number of opportunities and we feel good about where we are in those discussions and we feel even better about where we are in those relationships and the things that we think about that are important to us. So with that said, I would say, we hope to be able to deliver you some good news on that front going forward.

And I'll add, we want to get started quickly, but this is a multi-year effort, because what we've learned is when we buy these businesses, we need to allow time for integration and to nurture them and bring to them the capabilities of KAR. So look to get started as quickly as they make sense, but it will be over multiple years that we build out that capability in new markets.

Okay. Thanks, guys. Best of luck.

Thank you.

Thank you. Thank you, and our next question comes from the line of Ryan Brinkman with JPMorgan. Your line is now open.

Hi. Good morning, this is Samik here on behalf of Ryan. Jim, thanks for your comments on New Wave and just wanted to check with you, particularly in terms of timing based on the progress you've made, do you still feel comfortable with the timing. I think you earlier have mentioned that you should be able to launch something later this year. Earlier on this call, you mentioned you are doing specific projects with New Wave. And also in terms of technical capabilities, looks like DRIVIN will be helping in the launch of New Wave. Do you think you need more capabilities, more technical capabilities or acquisitions to sort of provide a integrated platform to the customer?

Yeah. So if I got all your questions, let me say, first of all, New Wave we obviously announced the capital investment of $20 million, $25 million over the next three years. I would say we're at the very front of that project. Obviously we've begun the work, but we're in the early stages and really nothing more than I can report other than I believe that the feedback from our employees and the feedback from our customers have been very positive. As I've been out talking with customers and visiting with customers, they're very complimentary of the fact that we continue to make the investment in New Wave. With that said, your comment on DRIVIN, I would ask you to think of DRIVIN as a complementary service or a complementary company to what takes place within New Wave and within some of our other products and service offerings as well. And is there an opportunity to acquire more businesses like DRIVIN, I think you asked. I would say to you if there was an opportunity that came along and made sense and it was a good fit and we thought it would even build out our service more, obviously we would take a look at it, because in the big scheme of things, these are relatively small investments.

Got it. Got it. And secondly just on the IAA group, the average revenue per unit there was roughly consistent with 1Q last year and this is despite a pretty strong increase that we saw in crushed auto body prices. I'm wondering what the headwinds probably there were; you mentioned the export market is still quite strong, so maybe what headwinds are you seeing that's offsetting the better commodity environment there?

The commodity environment that we read about is typically being driven by the recyclers. We have a little bit of a lag before we typically see it in the prices paid at the salvage auctions. So that's why I'm optimistic, as I mentioned in my commentary, that we'll see it in future quarters because seeing it hold – we saw some increases last year that didn't hold and it never really was seen in the low-end car. Right now, we're seeing some positive trends where we think it will start showing up as we get later in the year and come through. So, the recycling that – or the commodity prices you're seeing really are related to what the recyclers are selling their crushed auto body for, after they've bought our car.

Great. Thanks for taking up the questions.

Thank you.

Thank you. And our next question comes from the line of Craig Kennison with Baird. Your line is now open. Craig R. Kennison - Robert W. Baird & Co., Inc.: Good morning. Thank you for taking my questions. So, Hertz recently called out the Uber risk to the car rental model. What is your exposure to the rental fleet and how do you assess the opportunity with ridesharing over time?

Great question. I would say in a word, opportunity. As you think about ridesharing, these are going to be very, very large fleets and these fleets are going to be very much interested in using – I believe in using the auction services. Number one is there's not only an opportunity to sell these vehicles, but I believe that there's going to be an opportunity to maintain and service these vehicles as well, which we have facilities that can provide those services which will be a good thing for KAR. The other area that I expect that could benefit here is many of these cars in ridesharing would be expected to come back with, say, 300,000 miles on them. I believe that those vehicles will be very, very ripe for the export market and do very, very well in the export market. The other thing is when you start thinking about ridesharing and you start thinking about cars with 300,000 miles on them, start to think about the number of turns that these vehicles could take. It's like when we're returning vehicles in the rental fleet every six months, right, the miles are going to build up very, very fast. So this isn't a rideshare car coming in and maybe turning once every three years. This is possibly ridesharing building up these miles and turning over with much more velocity, maybe one or two or three times more than what just a single lease car or rental car would, which I believe is going to produce more cars coming into the industry overall. Craig R. Kennison - Robert W. Baird & Co., Inc.: That's great. And then I had a question on TradeRev. I'm just curious where you see the intersection between TradeRev and OPENLANE and whether having both of those assets has created any new opportunities?

Yeah. So when you think about OPENLANE and TradeRev, I do believe that it just gives us an additional channel, it gives customers an additional choice in a little bit different environment. As you think about OPENLANE, we're focused on the off-lease cars, we're focused on the private-label business and we're focused on really, really selling those cars in a bid now, buy now environment. And when you think about TradeRev, TradeRev is the opportunity to be able to sell vehicles for our dealers and our commercial consigners over a mobile application. And again, a very short time period, an hour in duration, happens very, very quickly, and it just becomes another channel. We talk about the waterfall, and may be a term that I haven't used that much in the past but you'll be hearing a lot more about the waterfall as I go forward. In the waterfall, it used to be that it would go to a closed sale, then it would go to an open sale and from an open sale, then it would move to a physical sale. And as you know, we had two exclusive opportunities in the open and the closed sale. Well, now think about TradeRev becoming another channel in that waterfall. So, now it would go close, it would go open, and now we're having customers move it to TradeRev before they go to shipping it to a physical auction. So I think there is a real opportunity where TradeRev comes in and complements what's going on in OPENLANE. Craig R. Kennison - Robert W. Baird & Co., Inc.: Thanks. And a quick question for Eric on DRIVIN, how should we expect that to flow thorough the financial statements?

Craig, it will have no impact on our expectations in 2017 and beginning in 2018 we think we will see it through our organic growth because again it's a data-oriented service offering. They have a couple of other revenue platforms that are very insignificant, and that will continue, but primarily you will see it in our organic growth in the existing businesses of ADESA. Craig R. Kennison - Robert W. Baird & Co., Inc.: Will it just show up as additional revenue per unit?

Yeah, probably more; we're expecting it could have an impact on conversion rates and therefore the total volume in any of our channels; that would be online as well as physical. Craig R. Kennison - Robert W. Baird & Co., Inc.: Got it. Thank you.

You're welcome.

Thank you. And our next question comes from the line of Matthew Page with Gabelli & Company. Your line is now open.

Good morning. Thanks for taking my call.

Good morning.

Just a couple of questions left for me. The first is, one technology we haven't touched on yet in this call is Autoniq, so I was wondering if you could just provide an update on that and talk about customer acceptance of the product and where you're seeing the opportunity going?

Yeah. So, you were very, very faint there, but I got your question, give you an update on Autoniq, which is another great story. We acquired this company a couple years ago, it's a subscription-based business that provides, really aggregates the data on the valuation of vehicles from all the different data sources over your iPhone. We continue to grow that business very, very nicely. Our subscriptions continue to grow. We continue to penetrate the franchise, as well as the independent market. And I would tell you, performing not only to our expectations, but maybe performing a little beyond our expectations. So very, very pleased with Autoniq. And as we think about Autoniq, now we think about how we can integrate Autoniq with some of our other offerings. So, as you think about OPENLANE, you think about TradeRev, you think about some of the things we're doing with DRIVIN and we think about data and analytics, it's how do we bring all those forces together to provide a better outcome for our customers. So, again, glad you asked the question because it's a great story.

Great, thanks. And hopefully this is a little bit better, but you also mentioned international opportunities. Are there any geographic areas in the North American market that you feel that IAA or ADESA are not well represented and you'd want to expand your presence?

I think we're well represented in the markets that we certainly want to be in and I get asked this question from investors. I would tell you that there is probably a handful of markets that we would still take a look at if they were to come available. We would certainly continue to take a look at them; nothing imminent or on the radar as we speak right now. Internationally, it's wide open. I mean the opportunities there, it's just a question of how soon can we get to them, and we're probably being very cautious in terms of how fast we go, although I do believe speed wins. But we've had a couple of press releases here in the last little while about two major pilots we rolled out with two of the largest leasing and fleet companies in the world, Arval and Motability. And those pilots have gone very, very well, where we've seen our customers report back to us. They're pleased with the technology but they are even more pleased with eliminating the days to sell, and the fact of the matter is, we've been able to achieve more net proceeds than what they've been able to achieve at the physical auctions that they were using. So again, a lot of geography, a lot of markets, a lot of interest, not only from dealers but from the fleets and from the OEMs. I believe the opportunity is really unlimited, it's just a case of how quickly can we get to them.

Great. Well, thanks for taking my call and good luck.

Thank you very much.

Thank you. And our next question comes from the line of Bob Labick, CJS Securities. Your line is now open.

Thank you, and thanks for all the information so far on the call.

You're welcome.

I want to dig a little deeper in DRIVIN. Could you talk to us a little bit more about the business model itself, is this is a product for the OPENLANE customers, the dealer customers or both, and do they take inventory or is it just an agency transaction?

Yeah. So let me start by saying, first of all, DRIVIN has a transactional component platform that it can transact business on, but that was not what attracted us to the business. We were attracted to the business for the analytics capabilities that they have and the talent that they had within their organization. As we thought about our data science team, and I may have mentioned this before, but forgive me for repeating if I am. I've been spending a lot of time with customers. And what customers are really focused on right now is these volumes that are coming at them. And they really have limited information. Our customers have information on their cars. KAR has information on cars within the entire industry. So we have millions and millions of data points. And what our customers have really come to us and the conversations I'm having along with our senior management team is it's kind of the conversations are, Jim, how can you take our data along with all this industry data and how can you turn this into predictive analytics? How can you turn this into actionable intelligence that will help us make better decisions on, number one, what's the best channel to sell the car in, what's the best market to sell the vehicle and then what price should I be getting for the car? All those things. And this is really what DRIVIN brings to the table. Now, we were building a data science team here, doing a very good job of building a data science team and attracting some really good talent. But we knew if we continued to build that it was going to take perhaps two to three years to build out that team and attracting the data scientists and the PhDs…

Got it. And so in terms of if it's not primarily transaction based, it's subscription based, or how does the revenue model work?

Bob, the revenue model – the interesting part, the revenue model will vary based upon the customer. But we will generally realize the value through the transactions, but not the transactions of DRIVIN, the transactions of ADESA.

Okay, great. Thank you.

You're welcome.

Thank you. And our next question comes from the line of Gary Prestopino with Barrington Research. Your line is now open.

Hey, good morning, everyone.

Good morning, Gary.

Hey, Gary.

Couple of questions. Number one, Eric, what gives you the confidence that, in the back half of the year, the reserves at AFC are going to decline, relative to the first two quarters?

So Gary, what's interesting is, you have visibility into what the performance of new loans is doing. And we've already seen improvement in the portfolio for loans made in the last 90 days. So again, we have visibility into actual transactions and the things that are causing the write-offs and the bad debt now are cars that were perhaps put on the floor plan and current at the end of last year that aren't selling and you start to get the age of the vehicle and things like that. So we have all of that information. That's what gives us the confidence. It's real data on the actual loans that are outstanding. It is little harder to look into Q4 but we already have visibility into things that we've loaned on now, what's again, the payoff rate, et cetera, because if it's not paid off now those will start to become issues in Q3.

Okay. So, some of the steps that you outlined, I think in the Q4 call as far as future lending are starting to take hold and you're just doing a better job of it?

Right. I think we always did a great job of lending the money. What we've done is focused on what part of the market do we have the least risk and it's actually the lower end of the market. And as we mentioned in the yearend call, it's really these large balances that have caused the issue in the last couple of quarters. And deemphasizing that and not taking as much exposure into that part of the market is paying off for us.

Okay. And then the choppiness that you saw in the independent dealer market in Q1, attributed to some of these tax refunds not coming through in February, does that portend that coming out of Q1, you were still seeing the independent dealer market, was still showing some strength and then that would translate into a better environment for the auction business itself?

Yeah, Gary, I think that we would expect that there will be continued increase in kind of what's taken place as we now get these tax refunds coming through. We would expect that independent market to pick up a little bit.

Okay. So it wasn't to have anything to do with the fact of extension of credit to the independent dealers for selling cars, it was just – a lot of it how had do with that tax issue?

Yeah, I think what happened is independent dealers got caught holding some inventory and they weren't able to move their inventory, which kind of choked them a little bit. And their only release was to either take that car back to the wholesale market and be forced with perhaps some potential losses or holding the vehicles. And I think they've had to some vehicles and now they've got to work their way through vehicles that were maybe bought at a little bit of a higher price in the previous market that they now have to liquidate in the current market.

And Gary, I'd like to remind you what Jim said, with a strong January and strong March, the inventory they bought in January didn't sell at the same pace that they expected. That's what slows it down, they sell the cars, March picks up again.

Okay. Thanks. Then lastly on DRIVIN, who is the end customer? I mean, I went to their website, I looked at it, it looked like a specialized, almost, search engine for dealer-to-dealer transactions. And from what you're talking about, it seems that you're going to more or less emphasize the data versus the dealer-to-dealer transactions. So who is the end customer? Is it your consigners, it that the dealers? How does this all work? And then the other question would be, where are they getting the data from, or where would you get the data from? Are there direct connects into the dealer's VMS system?

Okay. So there is a lot there, Gary, but let me try and get that for you. First of all, understand that I did say that DRIVIN has a platform where they can transact and what I was referring to there is, we're servicing both the sellers and the buyers in terms of matching vehicles. DRIVIN has the ability to be able to know and understand a dealer's inventory, what inventory he buys, what inventory he sells, and to be able to match the inventory needs with the inventory that is being offered. So, there is that capability where we serve the buyer and the seller, but then from the data standpoint, the data is really focused on helping these major commercial consigners. I think about the OEMs and the captive finance and the fleets and the rental companies and that whole commercial segment is helping them better understand the pricing of their vehicles. And then when you move the vehicle through the system, there is usually a reason why the vehicle doesn't sell in a close environment and it's either price or condition. So, when that vehicle comes from a closed environment to the open environment, there has to be – there should be a price adjustment there, there should be a price adjustment unless it's just purely condition. But so, it's helping them understand how to price that vehicle in the open market. And then if it doesn't sell in the open market, then I mentioned to you, there's an opportunity to re-price that car and put it on TradeRev, because you would go through all these channels to avoid maybe the transportation costs and the days to sell, the depreciation cost of actually sending it to a physical auction. So, it's helping these customers make better upstream decisions before they decided to finally send it to a physical auction. And this is where this data is really going to help them and as I said, I've sat in on a number of presentations and the discussions are very much heading in a direction where customers are really saying, think we need this help.

Okay. Thank you.

Thank you.

Thank you. And that does conclude today's question-and-answer session. I'd now like to turn the call back to Chief Executive Officer, Mr. Jim Hallett, for closing remarks.

Thank you, Chelsea, and maybe I can just take a moment here and wrap up today with a few additional comments is first and foremost, I want to thank you for being on the call, and I want to thank you for the interest that you continue to take in our company. One of the things that I look back on is – as I look back on my career, over 40 years in the retail car business, over 30 years in the auction business, and I've seen a lot of change, and priding myself as an entrepreneur, I very much welcome change and I embrace change. But I will tell you, I've never seen change at the pace of change that we're seeing in the current market. The customers' expectations, their pain points, the areas in which they need help and require help and the services that they need is accelerated beyond anything I've ever seen in my career. But the good news about that is, I feel that we, KAR, have never been in a better position to provide that service and to deal with this rate of change as we're positioned to today. If I can, if you think about it just for a moment, we came together in 2007, and we got off to a great start and then along came the recession, we're working our way through the recession. We acquired OPENLANE in a down market at a critical time and we all know how that worked out, and then we went into the recovery in 2013, and we continued to focus on acquiring businesses that will continue to improve our customers' experience, help their economic outcome and take this company and transform it to another level. And just quickly, we focused on technology and we focused on brick and mortar. We acquired TradeRev, we acquired DRIVIN, Autoniq, we acquired DataScan, we acquired CarsArrive, RDN and there is probably some that I'm leaving out there. And then we acquired brick and mortar. Last year you've seen us acquire 12 brick and mortar auctions. And then we invested in our existing platforms and we brought new benefits and features and enhancements. And with all of that, we've built a great company and we have positioned ourselves very well. I would tell you in 2007, we may have been seen as a bit of a laggard. I can tell you today, I couldn't be more proud of this management team and what we've been able to accomplish and I see KAR very, very much as a leader in this industry, in all aspects of this industry. And now we have great visibility into 2019 and we know what's coming at us. And I would tell you, I am more confident and more enthusiastic and more energetic as to how we're prepared for what's next. So, with that, I'll say thank you and we look forward to bringing you more good news. Have a good day.

Ladies and gentlemen, thank for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.