May 6, 2014
Executives
Jonathan Peisner - Vice President of Investor Relations & Planning and Treasurer James P. Hallett - Chief Executive Officer and Director Eric M.
Loughmiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Analysts
Samik Chatterjee - JP Morgan Chase & Co, Research Division Matthew J. Fassler - Goldman Sachs Group Inc., Research Division David Lee Kelley - BB&T Capital Markets, Research Division Gary F.
Prestopino - Barrington Research Associates, Inc., Research Division William R. Armstrong - CL King & Associates, Inc., Research Division Colin Daddino - G.
Research, Inc. Majid Khan - Tourbillon Capital Partners, LP
Operator
Good day, everyone, and welcome to KAR Auction Services, Inc. Q1 2014 Earnings Call.
On today's call, we have Jim Hallett, KAR Auction Services' Chief Executive Officer; Eric Loughmiller, KAR Auction Services' Chief Financial Officer; and Jon Peisner, KAR Auction Services' Treasurer and Vice President of Investor Relations. Just a reminder, today's conference is being recorded.
For opening remarks and introduction, I'll now turn the conference over to Jon Peisner. Please go ahead, sir.
Jonathan Peisner
Thanks, Debbie. Good morning, and thank you for joining us today for the KAR Auction Services First Quarter 2014 Earnings Conference Call.
Today, we will discuss the financial performance of KAR Auction Services for the quarter ended March 31, 2014. 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 measures 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
Great. Thank you, John, and good morning, ladies and gentlemen, and welcome to our call.
First, I'd like to start by saying that I'm very pleased with our first quarter performance. I believe that our first quarter exceeded our expectations going into 2014.
Our revenue was up 5%, our adjusted EBITDA was up 8%, and earnings per share was up 32%. And there's no question that weather was in the news throughout the quarter.
We did experience some increased cost in terms of clearing snow. We did have a delay in getting some of the vehicles sold.
However, overall, I would say that weather did not have a major impact on our consolidated results. In the long run, I believe that the weather has been a real positive for Insurance Auto Auctions as we've seen their volumes grow, which will be very positive for KAR through the first half of 2014.
And certainly, all of this has led to strong free cash flow in the first quarter. We did have our board approve a payment of a dividend of $0.25 per share, which will be payable on July 3, 2014.
In terms of our guidance, there is no change in our expectations for adjusted EBITDA of $580 million to $600 million. However, we do expect to increase our free cash flow projections based on the refinancing of our debt that took place in the first quarter, and Eric will comment on that more in his commentary.
Turning to ADESA. ADESA volumes were up 7%.
Online sales represented 37% of the units sold in the first quarter, and online-only sales drove our increased volume. We're seeing franchise dealers continue to buy a high quality of off-lease vehicles.
And the dealer consignment volumes continue to be strong, representing 50% of the cars sold at ADESA. I got to tell you, I'm very pleased with the success that we're seeing in the dealer consignment segment.
As many of you know, we began focusing on this dealer consignment segment 5 years ago. In 2009, our dealer consignment was 30% or less of our volume at that time.
In fact, at one time, I think we went as low as 25% of our volume. And we've steadily grown and increased our dealer consignment business.
And now, we're focused on maintaining our share of dealer consignment as the commercial vehicles and volumes grow. The commercial volumes increased in the first quarter, and we're able to increase our dealer consignment volumes at a comparable rate.
Conversion rates at our physical auctions were almost 64% compared to about 60% last year. I believe this increase in conversion rate reflects the strong demand in the lanes.
Values have remained relatively steady through the first quarter. And our economist, Tom Kontos, believes that prices will moderate by less than 2% through the remainder of the year.
This demand for the increase of off-lease volumes has remained steady, and we expect that the supply of off-lease volume will increase throughout the remainder of 2014. We spent considerable time talking about the increased supply causing more off-lease vehicles to get to the physical auction, and we do expect that this will occur throughout the balance of the year for a couple reasons I'd like to point out.
Number one, we've said that franchise dealers won't be able to handle all of the volume that's coming their way. And I want to make sure that we understand.
I'm not suggesting for a minute that the franchise dealers aren't going to buy as many of these cars as they have in the past. In fact, I could suggest that they may even buy more of these vehicles.
But when you look at the total number of vehicles that are going to arrive off-lease, I believe that, ultimately, these franchise dealers will reach a capacity where these vehicles will eventually make their way to the physical auction. And the second that I would make is the industry experts expect that end-of-lease residual values will exceed market values for the foreseeable future.
And I think that more of these dealers will pass the car at the point of being grounded to the point that they will go into the funnel. And as they work their way through the funnel, more will eventually get to the physical auction.
So with that said, I think we'll just have to wait and see how that plays out over the next few months. Adjusted EBITDA at ADESA was up 4% for the quarter.
But now, if I can just take a minute and maybe speak to the broader market in the whole car business. The SAR is expected to be at or above 16 million units.
Lease penetration rates on new car sales remain near 30%, and that number may continue to increase. And retail car -- used car sales are increasing year-over-year.
We hear a lot about the franchise dealers and the number of CPO sales that are taking place. I would point out, let's not take our eye off the independent used car dealers.
In fact, CNW reported during the first quarter that the independent dealers doubled the rate of growth for used car sales. In fact, the independent dealers sold more than the franchise -- more used cars than the franchise dealers or the private transactions combined.
A couple of other announcements that I think are good news for ADESA are the national retailers -- some of them have mentioned that they are in the process of opening dedicated used car locations and growing that segment of their business. And I expect ADESA to benefit as these retails go about acquiring their inventory for these new locations.
I view the increased focus on used cars by the national retailers as a real positive for ADESA. Turning to AFC.
I'll just continue to say AFC is just a great business. Adjusted EBITDA increased 5%, loan transactions were up almost 9% and revenue per loan transaction was down about 3%.
Provision for loan losses accounted for about half of this decrease, but overall, I would remind you that credit quality remained strong with 99% of our loans being current. At Insurance Auto Auctions, we saw revenue was up on a 3% increase in vehicles sold.
And I would point out that I believe this is extremely impressive when you consider the number of Sandy cars that were sold during the first quarter last year. Excluding the Sandy cars and the related revenue in the first quarter last year, revenue increased 15% and volume was up 14%.
Gross profit is approaching 40%, EBITDA margin is approaching 30%, and maybe the most important stat that I can give you for IAA for the first quarter is the vehicle inventory as of March 31 was up 15% as compared to the same point last year. So with that, I'll turn and talk about our priorities for our free cash flow.
At the very outset, I would say to you that we are constantly analyzing all of our options. And we understand that investing in strategic growth remains an extremely high priority here at KAR.
Although I don't have any specific initiatives or targets that I am going to discuss with you today, I do want you to know that we are evaluating opportunities in options in all of our business units. Another point is providing a return to our shareholders is an extremely high priority.
And we're currently allocating a substantial amount of our free cash flow to the annual dividend, and we're balancing the level of capital allocated to shareholder return with our opportunities to invest in strategic growth. With interest rates remaining as low as they are, we do not intend to repay debt, except what's required under the principal payments.
So before I turn the call over to Eric for his comments, let me conclude with a couple thoughts. First of all, I'm extremely pleased and extremely excited with the start of 2014.
I can tell you, this is the most enthusiastic I've been about our business in the course of the last 5 years. I'm optimistic on the prospects in each of our business segments.
And I can assure you that we're keeping a focus on controlling our overhead costs. We're looking to improve our adjusted EBITDA margins, and I see technology being a critical element of KAR's success.
In fact, I think it's a game-changer, and I think we've experienced that in the past here at ADESA and at IAA. And we will continue to invest in technology accordingly as we go forward.
I'm excited about the opportunities that I see for KAR, not only in 2014, but I can tell you, I'm extremely excited about what I see in this industry for the next several years. I can also tell you that the management team is synced up and laser-focused.
We're passionate and we're determined to grow KAR and achieve the goals that we've laid out. So with that, I thank you for joining our call today.
I'm now going to turn it over to Eric, and we'll be back for Q&A. Eric?
Eric M. Loughmiller
Thank you, Jim. Let me start with an overall comment as well.
We had a very good first quarter. Revenue grew 5%, and this is better than it appears on its face.
Insurance Auto Auctions revenue in the first quarter of 2013 was unusually high due to the sale of over 40,000 total loss Superstorm Sandy vehicles. Those vehicles accounted for over $26 million of revenue in 2013 that thankfully was 0 in 2014.
Gross profit was 44.4% of revenue, up from 40.6%. The current year gross profit was right in line with 2013 if you exclude Sandy.
Our consolidated selling, general and administrative expenses increased $26 million in the first quarter. $16 million of this increase was due to increased stock-based compensation expense, and $6 million is due to higher incentive compensation accruals, reflecting our strong first quarter performance.
These increases impacted each of our reported business segments as disclosed in our financial supplement to the earnings release last night. We also had SG&A costs related to Preferred Warranties and High Tech Locksmith that were acquired after the first quarter of 2013.
Adjusted EBITDA of $147.1 million was 25.2% of net revenue for Q1. At ADESA, revenue per vehicle sold was down year-over-year, reflecting the mix of increased online-only sales.
Similar to last year, revenue per vehicle sold for online-only is $114 compared to $122 in the first quarter of the prior year. This decrease is due to the continued success of our private label closed sites in selling off-lease vehicles to the franchise dealers.
Physical auction revenue per vehicle in the first quarter was $663 compared to $641 for last year. This improved revenue per vehicle sold reflects strong ancillary services performance, including High Tech Locksmiths and increased revenue from other related services, especially from repossession activity at our KAR subsidiary of ADESA.
Insurance Auto Auctions had an especially strong first quarter. As you saw in the financial information released last night, revenue grew, gross profit improved to about 39% and adjusted EBITDA margin was back to about 29%.
IAA's purchased vehicles were down to 6% of volumes sold compared to 7% last year in the first quarter. We are also pleased with the AFC's performance in the first quarter.
Revenue was up 16%, with 2/3 of this revenue growth coming from Preferred Warranty and 1/3 organic growth. As you saw in our financial disclosures, the provision for loan losses increased $900,000 over the prior year.
Typically, our first quarter has the highest write-off activity of any quarter in the year. As Jim mentioned though, the portfolio is in good shape as we enter the second quarter.
Holding company expenses for Q1 increased $7.1 million, primarily due to increased noncash stock-based compensation. For the remainder of 2014, stock-based compensation is expected to be less than the prior year.
We also have increased incentive compensation accruals in the first quarter due to our improved performance. Income taxes had a positive impact on first quarter results.
The effective rate of 32% contributed about $0.03 per share as compared to our expected effective rate of about 40%. As you saw in our earnings release, we are not changing our annual guidance of a 40% effective tax rate for 2014.
The first quarter benefited from some favorable state law changes and reversals of certain tax reserves due to the expiration of statutes on certain previously filed tax returns. Also, pretax income was lower in the first quarter due to the $30 million loss recognized when we completed the refinancing of our senior debt.
The loss relates to the write-off of unamortized debt issue cost from previous transactions. Our ratio of net senior debt to adjusted EBITDA is 2.95x at March 31, 2014.
As I mentioned, we completed the refinancing of our term loan in March. Our new senior debt arrangements includes $650 million due March 2017 that bears interest at LIBOR plus 250 basis points with no LIBOR floor and $1.12 billion due March 2021 that bears interest at LIBOR plus 275 basis points with a 75 basis point LIBOR floor.
Annual cash interest savings from this refinancing will be approximately $9 million with about $7 million of cash interest savings realized in 2014. Let me finish with a summary of our guidance for 2014.
As Jim mentioned, we expect adjusted EBITDA of $580 million to $600 million. This will result in GAAP net income per share of $0.95 to $1.05.
This is reduced from our previous guidance of $1.01 to $1.12 per share. The change reflects the loss on modification of debt, cash interest savings and lower amortization of debt issue costs for the remainder of this year.
Adjusted net income per share is expected to be $1.35 to $1.45. This is an increase from our previous guidance reflecting the reduced cash interest expense and the lower amortization of the debt issue costs.
Cash taxes are expected to be $105 million to $115 million. Cash interest on corporate debt is expected to be $61 million, a reduction of $7 million from previous guidance, and capital expenditures are expected to be $105 million.
This will result in free cash flow of $309 million to $319 million or $2.17 to $2.24 per share for 2014. I will now turn the call back to Debbie, our operator, for the Q&A session.
But I also want to send my thanks to you for joining us today. Debbie?
Operator
[Operator Instructions] We'll take our first question from Ryan Brinkman with JPMorgan.
Samik Chatterjee - JP Morgan Chase & Co, Research Division
This is Samik here on behalf of Ryan. The first question that I had was on the ADESA volumes, which were up 7% this quarter.
Now was there any weather-related impact on that? And also, when we think about the off-lease recovery going forward, how should we think about the cadence of quarterly volumes going forward?
Eric M. Loughmiller
Okay. Well, let me just make sure I understood the question because you broke up a little bit.
We're up 7% in the quarter and you're asking if weather had any impact on that?
Samik Chatterjee - JP Morgan Chase & Co, Research Division
Yes.
Eric M. Loughmiller
And then also what we think might be the cadence of the increases in off-lease volumes through the remainder of the year. Did I catch that?
Samik Chatterjee - JP Morgan Chase & Co, Research Division
Right.
Eric M. Loughmiller
Okay. So -- I mean, as Jim mentioned, weather -- you know what?
Early February, clearly, when dealer consignment cars couldn't make it to the auction with all the weather we had, it probably had some delay. But by the end of the quarter, it worked its way out.
So our view is weather might affect the timing a little bit. But over an extended period of time, it doesn't have much impact.
Right, Jim?
James P. Hallett
Yes. There's no question that we had some sales that were interrupted.
In fact, we had some sales that were canceled. But to Eric's point, by the end of the quarter, it pretty much worked itself through.
And I think I said on a previous call that weather can be a good guy and it can also be a bad guy. But pretty much, on a consolidated basis, we would say it's neutral.
Eric M. Loughmiller
And at IAA, we also mentioned that's probably the reason we had such strong inventory on the ground is the weather builds up those cars, and it takes a lot of selling [ph], an average of 70 to 80 days per vehicle from the time of assignment.
James P. Hallett
Yes. And as far as the lease cars go, I think you have to go to lease cars.
We would just tell you that we're expecting that the number of lease cars to grow starting here in the second quarter through the balance of the year with no specific numbers or percentages in mind.
Samik Chatterjee - JP Morgan Chase & Co, Research Division
Okay, okay. Just touching on the average revenue per unit in the other sub-business.
That came in quite a bit better than what we were expecting despite the year-on-year decline. Now I noticed that there was an increase in the average revenue per unit in physical auctions.
So can you help us think about what is driving that, and is there like more increased costs over that? How should we think about it going forward?
Eric M. Loughmiller
Well, good question. A couple of things.
First, with the addition of High Tech Locksmith, we're penetrating the key-cutting business even further than we were before. We've been in that business, but this is getting us, I think, a real advantage in the marketplace.
Jim, do you want to add anything to that? I mean, High Tech is what it is.
It's cutting these fancy keys that are quite expensive.
James P. Hallett
No. It's a nice business, and it's a business that we ran into a few years ago, I will say, by accident.
And we were able to grow it into a nice business, then we saw the opportunity to make an acquisition and really take it in a more serious way. And it's been a nice contributor for us.
Eric M. Loughmiller
And that's an important part of ancillary services, what business dealers need. And then the second part that I mentioned in my commentary is we're seeing nice gains in the repossession processing businesses, which we have PAR, and I didn't mention this, but also RDN, which is more of a subscription-based service.
But both of those are positive signs as we're starting -- and I think we're all reading about it. We're starting to see more defaults on car loans and more repossessions occurring, and so I think that's a positive trend.
But in the current quarter, it contributed revenue as we're beginning the processing of a lot of that repossession activity.
Samik Chatterjee - JP Morgan Chase & Co, Research Division
Great. So the last thing that I sort of want to touch upon is time for discussing your priorities regarding the use of your free cash flow.
But I sort of wondered -- approach it from the leverage angle, and do you distribute it [ph] into the whole car recovery? Is there an opportunity you can probably be more flexible on the leverage as you evaluate strategic investments and buybacks?
Eric M. Loughmiller
Well, let's not talk about the specifics. We do have the flexibility to increase our leverage and utilize that.
At this point, our focus is really just not to repay debt. But with the refinancing, we increase our flexibility to consider all capital allocation opportunities equally.
So -- and again, there is some flexibility, if the situation were appropriate, where we could increase leverage if that were a part of the strategy.
Operator
We'll go next to Matthew Fassler with Goldman Sachs.
Matthew J. Fassler - Goldman Sachs Group Inc., Research Division
So a couple of questions. First of all, is the -- kind of just a quick housekeeping question.
Is the Locksmith, High Tech Locksmiths' revenue counted in revenue per vehicle, or is that separate from that number?
James P. Hallett
No. It's counted, Matt, in revenue per vehicle.
Matthew J. Fassler - Goldman Sachs Group Inc., Research Division
Got it, okay. And I guess the second question, on ADESA, as we think about the sequential revenue per vehicle numbers, we did see a pickup in revenue per vehicle sold from Q4 to Q1, which I think is the first time that's happened in a while.
So is that a function of the more favorable pricing trends at physical? Is it a function of some of the pricing pressure abating online and it's a little tough to tell from the disclosure, or is there an exogenous factor, like perhaps High Tech Locksmiths contributing to that move?
Eric M. Loughmiller
Well, unfortunately, Matt, it's probably all of the above. You got a benefit from the additional ancillary services, of which High Tech Locksmiths was a major contributor.
We'd like to point out, we're cutting keys for existing clients. This doesn't bring -- we're not in the retail key-cutting business.
This is all done wholesale, and the customer base is the dealers. Second, I would add, it's what we call other related services, such as the repossession agency fees we get for PAR, the subscription fees at RDN and -- as they're assigning those things.
They were -- I would also point out, without specifics, there are things that declined during the quarter that were very similar in nature, though they were offsets. But those 2 were contributors.
The strong performance in dealer consignment should not be underestimated. That's helping us maintain this very high revenue per vehicle in the physical auction.
While they don't use ancillary services at the same pace of the commercial cars, they give us very strong auction fees per car sold, which helps keep that number growing, and it's a big part. At 50% dealer consignment without ancillary services, to maintain that number and keep a strong revenue per vehicle, I think it's quite an accomplishment.
Matthew J. Fassler - Goldman Sachs Group Inc., Research Division
Great. Another question I'd like to ask about, AFC.
So the decline in revenue per loan transaction was a bit of a directional change from what we have seen through the quarters last year. As you think about the prospects for that business in 2014, is that a run rate that you'd expect to maintain or would you expect to see smaller declines or flattish numbers in that metric?
Eric M. Loughmiller
Well, without getting to specific predictions for the future, I will tell you the first quarter has the highest level of write-offs every year with one exception, and that is the fourth quarter of 2008, which I think we all understand was a unique period. So, Matt, about half of that decline, which we haven't experienced, was provision for loan losses.
And you'll also see that we haven't -- again, when you get the Q, average loan balances are starting to moderate a little bit down. So that takes a little interest spread out a bit.
And I don't see this as going to be a negative trend. Perhaps we won't sustain the $160 we were having for some period of time last year in certain quarters, but I think it'll be fairly stable and, again, be consistent with what we've seen in the prior year, up or down, just a little bit, perhaps, depending on how the things come together on.
Average loan balance, what's the loss rates...
James P. Hallett
Used car prices.
Eric M. Loughmiller
How long is it taking them to pay off? If we get more curtailment, that would actually take that up a little bit.
Matthew J. Fassler - Goldman Sachs Group Inc., Research Division
And then one final question, if you would. To the extent the off-lease is sort of the dominant factor driving supply, can you talk about the seasonality of off-lease supply typically versus the broader marketplace?
Eric M. Loughmiller
Well, let me start with just telling you that I'm sitting here looking at the lease origination schedule that we get from third parties and if you go back to 2011, the great news is, and this is what we've been talking about, it was a steady, higher penetration rate through the year, month by month. And that's 2011.
On a SAR, that was 12.7, up from 11.6, which generated an absolute higher number of leases written. Now, Jim -- I mean, this is a normal trend as you're going back into the cycle, where we begin growing SAR and lease penetration's rates starting to recover.
James P. Hallett
So I guess the bottom line here, Matt, is these leases come to maturity. The bulk of the leases will start to mature later in this year as they were written throughout the course of 2011.
Operator
We'll take our next question from Bret Jordan with BB&T Capital Market.
David Lee Kelley - BB&T Capital Markets, Research Division
This is actually David Kelley in for Bret this morning. Just a couple of quick questions.
And first, on IAA, really strong growth and certainly solid unit expansion even off of a tough comp. Can you just talk about or provide some color in what you were seeing in as far as weather trends, vehicle utilization trends?
And also maybe some commentary on the current quarter as well will be great.
James P. Hallett
Well, there's no question, we've spoken about the weather and the weather being a good guy for our Insurance Auto Auctions. Just the amount of accidents and amount of collisions are obviously up.
And as that goes up, you're obviously getting more vehicles coming our way. I think that, overall, it's just -- the volume has been driven by the weather.
Plus, although we don't get into -- necessarily talking about specific wins and losses, we had some very nice pickups last year. During the course of last year, you recall, we won a number of RFPs, without mentioning names, we chatted about.
I think that those RFPs and those customers have now fully kicked in, if you will. And I think our market share has continued to grow and I think with all that, I think that all the stars and planets are pretty much aligned for IAA.
And as you know, we talked about the 15% increase at the end of March 31. We also know it takes about 70, 75 days to process an insurance car.
So we absolutely know what the first half of the year is going to look like, and then obviously we have our projections for the balance of the year as well.
Eric M. Loughmiller
And, David, I'll just add a little color. While, again, I don't want to predict volumes in that, there has been quite a bit of spring weather.
Especially last weekend and at the end of last week, we've had the typical weather-related spring. So this volume doesn't just stop when the snow stops.
It continues. So I think all of us in the industry are experiencing kind of a more normal weather pattern where it's kind of a steady volume creation as these accidents or these total loss vehicles come to the market.
David Lee Kelley - BB&T Capital Markets, Research Division
All right, great. And then just a quick question on ADESA as well.
If we're looking at the quality of the vehicles that are trickling down to physical auction, how would you compare what we're seeing in this cycle versus previous cycles when you're starting to see off-lease vehicles coming back, maybe in the early 2000 or so?
James P. Hallett
Yes. I think what you're seeing going to see -- or what we're seeing and what we will continue to see is we'll see the dealers being a little bit more selective.
In the past, where there was very, very tight supply, dealer may have gone outside his parameters, perhaps buying a car with a little bit higher mileage or buying a car that needed a little bit more reconditioning and willing to do that reconditioning. Now with the increased volume coming, you can be a little bit more selective.
And basically, that franchise dealer is now looking to buy a car that he can basically buy that day, take it home and get it on the frontline and ready for sale tomorrow.
Operator
We'll take our next question from Gary Prestopino with Barrington Research.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Jim, one of the comments you made about this off-lease volume is that you feel the franchise dealers will be unable to handle the volumes coming through. Is -- do we assume then that, that pipeline gets build up, that some of these lease cars are actually going to the independents or you're just talking in terms of that -- the franchise dealers can't handle that volume in terms of the grounded cars that come back to the dealers?
James P. Hallett
Yes, Gary, good question. First of all, I think that the franchise dealers, that population isn't growing.
There's only so many franchise dealers in the country. And I believe that they can only handle so much volume, and at some point, they reach capacity.
As you know, those cars go into the closed environments first, and that's where your franchise dealer primarily buys these vehicles. Then I think what'll happen is those cars are going to going to the open online sales we talked about.
When you go to the open line online sale, you go from just a -- those franchise dealers, you add 37,000, 38,000 independent dealers who are now eligible to buy those cars in an open online sale. And then obviously, when you get to the physical auction, again, that vehicle is now available to all those independent dealers as well.
So that's a long way of confirming what you said that, yes, I see more independent dealers getting to more of these off-lease vehicles.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Has that started to happen as of yet, or is that something that you're anticipating?
James P. Hallett
I wouldn't say that we could say there's any strong signs of that. But I believe it's more -- we've maybe seen a little bit, but I think it's more on the anticipation side.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
So in the past, when this has happened, because everything goes in cycles, I mean, at what point then that -- what percentage do you see in that shift of these lease cars coming back and being sold to the independents? Does it get maybe 20%, 30%, 40% at the peak, or is that too much?
James P. Hallett
Yes, Gary, I don't know if I'm really in a position to speculate on what that percentage may look like. I think we -- as I said in my commentary, I think we kind of have to wait and see how this kind of plays out.
And I think we're going to get a very early indication here. I think the indication is going to come here in the next 60 days or so that we'll start to see what percentage eventually makes their way to physical and what percentage are being bought by independents.
I do believe that once these vehicles do get to the physical auctions, there will be a higher percentage of those vehicles being bought at the physical auctions by the independent dealer.
Eric M. Loughmiller
And, Gary, the evidence of this is, again, we won't get into too many specifics, but in 2009, OPENLANE -- there were published articles. They were not a public company.
But OPENLANE sold about 390,000 units. And the number of units sold in relation to those listed was substantially lower as a percent than it is today.
And we've talked about that openly. So there were more cars going into that channel, but a lower conversion percent.
That's the history that we are expecting to recur. We don't know what the exact numbers will be.
But as there's more cars listed, they aren't going to buy as many more as there are cars listed. And we did confirm, and we've said this in previous calls, if it doesn't sell in the online-only venue, they end up in the physical auctions space.
They don't go other places. Right, Jim?
James P. Hallett
Right.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
And then just curious, you mentioned, Eric, that usually Q1 is the highest additional write-off for loans with AFC, easily [ph]. Is that just a function of the fact that if you have a lost, it's going to come from the dealer's side and you get dealers that just try and hang on and they get through Christmas and they can't make it?
Eric M. Loughmiller
I think that's a very -- basically, if they took chances on their inventory, those come to light as you near the end of the year and then they find themselves behind the 8 ball going into the first quarter. But the other thing to point out is seasonality.
Our portfolio tends to be at its peak in that kind of late January to middle February. And then we have what we call the February thaw, where -- due to high -- again, the tax season, as it's known in the used car business, they start selling their inventory, paying us back.
Actually, the portfolio balance starts to decline and then begins building again in the fall to early winter. So that's actually the seasonality is the pattern of the portfolio of size.
Operator
We'll take our next question from Bill Armstrong with CL King & Associates.
William R. Armstrong - CL King & Associates, Inc., Research Division
Can you talk about pricing trends at the salvage auctions? What are you seeing there in terms of supply and demand, and where are vehicle prices going?
James P. Hallett
Bill, I'd say that we're seeing prices pretty much flat at -- in the salvage industry, maybe moderating down slightly. But certainly, nothing material.
Eric M. Loughmiller
And, Bill, we would describe it as very strong -- while it maybe down slightly, very strong pricing, given the supply that we have. Many times, you'll see this kind of supply result in lower pricing.
There's a lot of demand out there, and pricing is holding quite strong in relative terms.
William R. Armstrong - CL King & Associates, Inc., Research Division
Is that demand coming from international buyers, or is it more parts dismantlers, the -- back here at home, you think?
James P. Hallett
You know what? I think it's all of the above, Bill.
There's no question our international buyer base remains very, very strong. But again, as we reported in the past, the demand for aftermarket recycled parts continues to be driving prices as well.
William R. Armstrong - CL King & Associates, Inc., Research Division
Got it. And a question on ADESA with the repo volume.
You've mentioned now for a couple of quarters that you're seeing increases in repo volumes. Are these cars mostly older cars or maybe sub-con buyers, or is it more across-the-board in terms of the sort of mix in miles and age?
James P. Hallett
Yes. Gary, I would say that these -- some of these financial institutions have short memories, and lots of these repos are very late model vehicles.
Vehicle -- if a vehicle is going to be repossessed, and I'm not sure exactly what's the status, but it's normally repossessed within the first 18 to 24 months. So these are relatively new vehicles or nearly new vehicles.
Once a vehicle gets past the 3-, 4- or 5-year stage, there's not as many of those vehicles being repossessed.
Operator
We'll take our next question from Bob Labick with CJS Securities.
Unknown Analyst
This is Robert Magic [ph] filling in for Bob. In IAA, last quarter, inventory was up 10% year-over-year.
In this quarter, volume growth was up 3%. Can you please help us understand the disparity between inventory growth and subsequent quarter volume growth?
Eric M. Loughmiller
Yes. I mean, it's actually the dynamic of Superstorm Sandy on a year-over-year basis that is causing that disparity.
Again, you talk about -- we're up at 10% and then we're only up 3%. Last year's first quarter had over 40,000 Superstorm Sandy cars in it that weren't in the sequential measure that you're talking about, Robert, which made comp.
If you exclude Sandy, we were up 15% of revenue and 14% in volume, as I mentioned in the commentary, which -- a year ago. So I think you're seeing kind of the dynamic of that.
Our inventory levels and growth have been a good -- not a precise, but a good leading indicator of the volumes processed in the subsequent quarter.
Operator
We'll take our next question from Colin Daddino with Gabelli & Company.
Colin Daddino - G. Research, Inc.
Following up on the last question, the 15% year-over-year growth in the Insurance Auto Auctions point, it's -- that's not adjusting last year for the exit backlog after Sandy, correct?
Eric M. Loughmiller
No. The 15% merely takes out the Sandy vehicle.
Colin Daddino - G. Research, Inc.
Okay, got it. And then -- so you clearly have pretty good visibility for the upcoming institutional volume for ADESA.
But I was kind of hoping you can maybe speak a little bit to the visibility on the dealer consignment volumes?
James P. Hallett
Yes, Colin. As I've said, I'm very pleased with how our dealer consignment is performing, and I talked about that in the commentary.
I also think that the dealer consignment will continue, and I believe that dealer consignment is going to be supported by the SAR as we get up over 16 million units. Obviously, this is a great creator of transactions of used car trade-ins, which ultimately make their way to auctions, hopefully.
But at 50%, this has been a real focus for us. And a year ago, I believe that I was asked if I thought the dealer business could be sticky with the commercial volumes coming back, and I said I believe that it could.
We could remain relatively at a high percentage on dealer consignment. And I can tell you, quite frankly, it's exceeded my expectations.
I think we've done a great job of attracting and retaining that dealer business.
Colin Daddino - G. Research, Inc.
That's great. And then another one on ADESA.
So as I understand it, kind of the vehicle mix and the revenue per vehicle is being dragged down a little bit because of institutional online sales. Do you kind of expect this to maybe soften or reverse in the next 60 days or so, where you said you may begin seeing some volumes still under the physical auction?
James P. Hallett
Yes. I don't necessarily think there's going to be any fewer cars sold online.
But I think as -- going back to my point, I think as more of these vehicles make their way through a physical auction or an open auction, that's where we're going to get, obviously, increased fees and increased revenue. So I don't see that taking revenue per vehicle down, if that's what you're asking.
Colin Daddino - G. Research, Inc.
Okay. So maybe a continuing $100 per vehicle sold in the online one, but then add more in physical auctions that you kind of bounce it out and you get more ancillary revenue?
James P. Hallett
Right. I think we've told you in the past that when that car goes from closed to open, it about triples the economics.
And then when it gets to physical and physical online, then the economics grow again. So there's no question, as more cars make their way to physical, that average number will grow.
Eric M. Loughmiller
And within the online-only, Robert, as it's moving to physical, it will get offered open online-only. And that's why you're looking at $122 per car a year ago down to $114.
Our mix has been unusually weighted towards the private label closed. It will start to get more open sales, which will even draw the online-only revenue per vehicle up a little bit over time.
But that's only when they get to the open sale.
Colin Daddino - G. Research, Inc.
Right. And then my final question is, have you had or has there been a board meeting since the debt refi in March?
And then when's your next board meeting?
Eric M. Loughmiller
Well, we have quarterly board meetings. So yes, there's been a board meeting since the debt refi.
And our next board meeting is held in conjunction with the annual meeting, which was announced for June 10.
Operator
[Operator Instructions] We'll go now to Majid Khan with Tourbillon Capital.
Majid Khan - Tourbillon Capital Partners, LP
Most of my questions have unfortunately been asked and answered. But while I have you here, I was wondering on the buyback or potential buyback.
On your guidance, your stock is sort of trading around a 7% yield. And if we share your enthusiasm on the off-lease vehicles going through the system, that's probably trading closer to a 10% free cash flow yield a few years out.
So I'm just wondering how you guys are thinking about deploying your free cash flow or potentially raising debt at 5%, 5.5% and potentially buying an asset that's yielding 2x that. And what other uses of cash do you have?
Eric M. Loughmiller
Again, I'll say something that was discussed in the year-end earnings call, the previous earnings call. We do believe that when you're considering all the alternative, the free cash flow yield on the equity is a known number with very little execution risk.
So as we look at strategic investments, they would be at a premium to that yield to meet the standard as to the allocation of capital. And again, now I'll turn it to Jim, I mean, to repeat what he said about our priorities, that they're all considered.
James P. Hallett
Yes -- no, I think it's an every day discussion in terms of constantly analyzing these opportunities in all of our businesses. We absolutely have targets that we're discussing and we're prioritizing.
Some of our strategic focus is a little bit more long-term focused. And I think it's just a question of waiting to see how these priorities come to us.
Oftentimes, they don't always come in the order that you might expect them to come in. So it's dealing with them as they come up.
But I can tell you that in all of our business units, we are having ongoing discussions. And I would say to you, stand by.
Operator
With no other questions in queue at this time, Mr. Peisner, I'll turn it back to you for closing remarks.
James P. Hallett
All right. This is actually Jim.
I'll close it out. And first of all, I want to thank you for your interest in our company, in our stock and for being on the call today.
But more importantly, I think I really want to share my enthusiasm and my outlook going forward. There's no question that we have come through a very difficult period of time.
We started to stick to a goal, a recovery that we told you was going to take place in 2013. We are now well into this cyclical recovery, but by no means are we done.
And I can tell you that we're feeling very good about our industry, and we're feeling very good about KAR's position in the industry. And I think that we're passionate and driven to continue to grow this business.
And I again thank you for your continued support, and thank you for being on the call today. So with that, I'll sign off, and have a great day.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today's conference.