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spk05: Good morning and welcome to the IAA Inc. third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchdown phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Arif Ahmed, Vice President, Treasury. Please go ahead, sir.
spk02: Good morning, everyone, and thanks for joining us today for IAA's Third Quarter Fiscal 2020 Earnings Conference Call. Speaking today are John Kett, Chief Executive Officer and President, and Vance Johnson, our Chief Financial Officer. After John and Vance have made their formal remarks, we will open the call to questions. Before we begin, I would like to remind you that certain comments made during this call regarding our plans, strategies, and goals and our anticipated financial performance constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from such statements. Those important factors are referred to in IAEA's press release issued today and in the risk factors section included in our annual report on Form 10-K for the year ended December 29th, 2019, filed with the SEC on March 18th, 2020, as updated in our form Q filed with the SEC on May 6th, 2020. The forward-looking statements made today are as of the date of this call, and IAA does not undertake any obligation to update these forward-looking statements. Finally, the speakers will refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule of a non-GAAP financial measure to the most directly comparable GAAP measure is available in IA's press release issued today. A copy of today's press release may be obtained by visiting the investor relations page of the website at www.iaai.com. I will now turn the call over to John. John?
spk01: Thanks, Arif. Well, good morning, and thank you all for joining us on our third quarter earnings call. As we noted in our Q2 call in early August, our third quarter started off strong, with continued improvement in assignment volumes and units sold, along with the continuation of the record level revenue per unit that we had experienced in the second quarter. As the third quarter progressed, we continued to see strength across our business, as both assignments and units sold continued to improve at a greater rate than we had anticipated. In fact, we exited the third quarter with assignments down only slightly from pre-COVID-19 levels. As we also noted in our Q2 call, we thought revenue per unit strength might moderate in Q3, but that did not prove to be the case. Similar to Q2, we ended Q3 with revenue per unit near record levels. As a result of these stronger than anticipated trends and the benefits we were seeing for our margin expansion plan, we saw a meaningful improvement in our overall results in Q3. with 8.8% growth in organic adjusted EBITDA versus Q3 2019, even despite a decline of 4.7% in organic revenue versus last year. As a follow-up to our discussion on the Q2 call, we continue to believe that some of the underlying drivers of higher revenue per unit can be attributed to, first, the additional revenue that's associated with the full rollout of our digital-only auction platform, Second, the positive impact from new products and tools that we are now offering buyers, such as 360 View and Feature Tour, as part of the Interact platform. Third, the positive impact that less supply may have on bidding activity and proceeds per vehicle. And fourth, higher used car prices. we are feeling more and more confident that the impact from moving to an enhanced digital-only auction model and the tools and information we are providing as part of the Interact platform are having a more significant and sustained impact on proceeds, revenue per unit, and importantly, returns for our seller partners. At this point, it is a bit unclear to the degree to which reductions in supply vehicles is impacting proceeds and revenue per unit. but we do believe that elevated used car prices is having a positive impact. The September Mannheim used car index was up 15.2% versus the prior year. Another notable bright spot in the quarter was the strong growth in our non-insurance business, which was primarily the result of a targeted focus from our sales force. Now let me shift gears to review our progress against our strategic growth priorities. With regards to our margin expansion plan, following on the successful rollout of the buyer digital transformation in early April in the U.S., we accelerated the transition to online-only auctions in Canada in late July, and I'm happy to report the transition was without incident. Similar to the U.S., we are seeing the benefits from the deployment of 360View in both Canada and in the U.K. As for the other aspects of our margin expansion plan, we remain on track with the timing and expected benefits from our initiatives around towing optimization, pricing optimization, and branch process improvement and efficiency. I'd like to turn now to talk about our focused effort on enhancing our buyer network and their experience. As we have transitioned the business to a fully digital model, we have been focused on a continued engagement with our buyer network and remain laser focused on further elevating the buyer customer experience that we deliver across our platform. We are surveying our buyers regularly with both quantitative and qualitative metrics and incorporating their feedback into our platform and service enhancements. As an example of this feedback, we recently have expanded our payment options, including, among other changes, the addition of PayPal, which provides increased purchasing power and flexibility for our buyers. While COVID-19 initially had impacted buyer attendance, we have seen steady improvement in attendance this quarter. Domestic buyer attendance was above prior levels throughout the third quarter, and by the end of Q3, international buyer attendance also exceeded the levels of one year ago. In addition, at quarter end, the levels of active international buyers was up nearly 15% versus the same time last year. As we look ahead, we will continue to focus on enhancing our international buyer network along with making further progress on our other strategic growth initiatives. Now shifting to talk about our CAT response efforts, there have been several hurricanes and tropical storms, primarily in the southeastern U.S., over the last couple of months. We have done an excellent job of serving our provider customers during this period, and the feedback that we have received from them has been extremely positive. In addition to taking advantage of our deep pool of towing resources, as well as leveraging our NASCAR partnership, Our flexible capacity model provided safe, accessible acreage and towing capacity where and when it was needed and in close proximity to the affected areas. With our customer safety and convenience in mind, we established cat yards and locations that ensured vehicles would not have to be moved far distances. Our employees put an incredible amount of planning and dedication towards these events, and I continue to thank them for their efforts. I'm very proud of our teams and the progress we have made on our initiatives throughout 2020, despite a very uncertain macro backdrop. We're a little over a month into Q4 and continue to see positive trends, but we're also mindful of the uncertainty that remains with the pandemic. With that, I'll turn the call over to Vance to review our financial results. Vance?
spk04: Thanks, John. Good morning, everyone. As John discussed, Our third quarter results were stronger than we had anticipated, as favorable industry trends drove record-level revenue per unit, and we continued to benefit from our margin expansion plan and other strategic initiatives. Before I touch on our current trends, let me first review the key financial highlights of our Q3 performance. I will focus my discussion today on our adjusted non-GAAP results and just touch on some key highlights. Please see today's press release for more details on our Q3 financial performance and our methodology when calculating non-GAAP results. For the first quarter, consolidated revenues decreased 5.4 percent to $338 million from $357.3 million in the third quarter of fiscal 2019. Organic revenues, which exclude the impact of our DDI acquisition, foreign currency, and a non-GAAP revenue adjustment in the prior year, declined 4.7 percent to $336.9 million. For the quarter, volumes declined approximately 20.4%, primarily due to the impact of COVID-19 and fewer miles traveled. This was partially offset by higher revenue per unit, as John already reviewed. Branch inventory increased by 1.2% versus the prior year. Looking at our geographic performance, both our US and international segments had lower volumes and higher revenue per unit, with the international business actually growing slightly due to higher purchase vehicle revenue in Canada. Gross profit increased to $138.3 million from $136 million in the third quarter of fiscal 2019. Gross margin increased 280 basis points in the quarter, driven primarily by the benefits of both higher revenue per unit and the cost reductions achieved from our buyer digital transformation, as well as from other cost reductions specific to COVID-19. FD&A expenses were $34.9 million compared to $38.9 million in the prior year. Adjusted SG&A expenses were $34.5 million, a decrease of 6.8% compared to $37 million in the prior year period, driven by a reduction in discretionary spending across the organization, including items such as travel and meetings as a result of the COVID-19 pandemic. We are extremely focused on cost containment and continue to find ways to be more efficient. Adjusted EBITDA increased by 4.7% to 103.8 million from 99.1 million in the third quarter of fiscal 2019. Excluding the impact of foreign currency, DDI, and the 3.6 million non-cash revenue adjustment in the prior year, organic adjusted EBITDA increased by 8.8% to 103.9 million from the third quarter of fiscal 2020. Interest expense declined by 4.2 million through $13.3 million compared to $17.5 million in the third quarter of fiscal 2019. The decline was primarily driven by lower interest rates on floating rate debt, as well as a slightly lower debt balance. The interest rate on our term loan is currently 2.44%, which is over 200 basis points lower than the third quarter of last year. The effective tax rate was 25.5% versus 27.3% in the third quarter of fiscal 2019. The lower effective tax rate in 2020 was primarily due to the benefit from certain tax optimization initiatives. Net income increased to 52.8 million from 41.8 million in the prior year. Adjusted net income increased by 17% to 55.7 million, or 41 cents per diluted share, compared to 47.6 million, or 35 cents per diluted share in the third quarter of fiscal 2019. Adjusted net income increased more than adjusted EBITDA relative to the prior year due to the benefits of lower interest expense and a lower tax rate, as well as a lower level of amortization. Turning now to our cash flow and balance sheet. Capital expenditures for the quarter were 19.8 million compared to 18.9 million in the prior year. Capital expenditures in the quarter We're at a higher rate than earlier in the year due to a catch-up in certain maintenance projects as well as incremental spending relative to real estate projects. Our balance sheet remains very strong, and we are excited as we exited the third quarter with total liquidity of over $578 million, which is over $300 million higher than our year-end level. We ended the period with a leverage ratio of 2.8 times, which is down from 3.2 times at the time of the spending. We remain very comfortable with our total liquidity and leverage. During the first nine months of 2020, we generated free cash flows of over $223 million. As we had noted in our last call, we saw a reversal of the benefits from the deferral of certain cash tax payments this quarter that we expected, but still generated positive free cash flow for the quarter due to the aforementioned improvement in operating results and EBITDA, along with improved working capital management. we made good strides in further improving working capital, including extending payment terms. As noted in our earnings release, given the continued uncertainty regarding COVID-19, we are not providing guidance today. However, quarter to date, we have seen assignments, units sold, and revenue per unit all consistent with the levels we saw exiting Q3. With that, we'll open up the call to questions. Operator?
spk05: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchdown phone. For users to pick up the phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Craig Tennyson with Baird. Please go ahead.
spk04: All right. Thanks so much. Question for you on your innovation here. You released a few press releases on some patents you've been awarded. I'm curious if you can explain the importance of the tower dispatch and also the auction management patents, and then help us understand whether that innovation is something for which you can get paid either through higher ARPU or higher fees.
spk01: Great, Greg. Good morning. It's John. Yeah, you know, the patents that we've announced are really around the processes that we've put in to drive higher revenue, higher recoveries for our sellers. and better service to our buyers. So they're not in and of themselves. You know, we didn't do them thinking that we're going to monetize them specifically, but we just think they're all part of our overall offering that we can continue to drive better and better results for our buyers and sellers.
spk04: Okay, thanks. And just on the non-insurance side, it sounds like you had a solid growth there. Are the economics in that business as good as your insurance business or just based on the nature of some of your relationships, are those economics not quite as good?
spk01: So the non-insurance, there is a wide breadth of customers in that, everything from charities to car dealers and rental car companies, and the profitability profile also spans that based on the value of the vehicles. But all in, you know, we believe that it's a strong element of our proposition and our growth. We think it's good business, and we're going to continue to capitalize upon it. Great, thanks.
spk04: I'll get back in the queue.
spk05: And the next question today comes from Brett Jordan with Jefferies. Please go ahead.
spk04: Hey, good morning, guys.
spk01: Hi, Brett.
spk04: Good morning, Brett. Thanks. You called out your towing relationships in response to CAT events. You've talked about towing costs maybe being one of the margin drivers. Could you give us any numbers year over year as far as your towing expense? Yeah, Brent, this is Vance. We don't typically break out towing expense. I think what we have said is that it's a very large contributor to cost of sales. So in terms of how relevant it is, but we haven't given out specific numbers related to that. But, you know, as we commented on, you know, clearly part of our margin expansion plan is that we have initiatives aimed at, you know, optimizing towing expense and reducing that, and we continue to be on track with that. Okay. Probably a similar response to this one, but could you give us any color as far as the expansion of the international buyer base. He sort of also called out that they were up 15% year over year, but could you give us sort of a benchmark for the volumes? You know, yeah, somewhat similar, Brad. I mean, I think we tried to give as much color as we could. So I think the fact that, you know, during a, you know, the COVID-19 pandemic that we're able to kind of, you know, see that kind of increase, you know, bodes well for the actions that we're taking in developing our global buyer base, which as we commented before, our You know, a big portion of those are around, you know, digital marketing, search engine optimization, things of that nature. So can't give any more specific numbers than what we've provided. But, you know, we did say that because obviously we feel really good about the progress that we're making. Okay. And then one final, and this one should be that bad. The drive of revenue per unit, is the average age of the vehicle that was being totaled this year significant to the lower year? I'm just sort of thinking about what the insurance companies are doing that is driving this higher used vehicle value. Is the demographic of the car changing in addition to the underlying manhime going up? You know, we haven't seen anything yet that's materially different in terms of average age of the vehicle than, you know, maybe what we would have saw last year. Obviously, that's a contributing factor, you know, as you alluded to, but also, you know, I think, you know, Brett, what you're also implying around kind of younger vehicles and being more apt to, you know, be totaled as well. But in terms of the average age across, you know, the span of our universe of total loss, we haven't seen anything that's significantly different at this point. Great. Thank you. Thanks, Brett.
spk05: And the next question today comes from Daniel Embro with Stevens, Inc. Please go ahead.
spk04: Hey, good morning, guys. Thanks for taking our questions. John, I wanted to start on a follow-up on the non-insurance business. It appears from your social media there's been more of an emphasis on fleet and rental volume in the last few months. I think you mentioned it's a focus for your sales force. Can you talk about where you're seeing that growth within non-insurance, and then maybe how different is that from six to 12 months ago within the business?
spk01: Yeah, I mean, it is – As I said earlier, there's a variety of areas of growth there. I mean, the fleet and rental, you know, we've focused some of our tools, and as we've moved to this digital platform, we've been able to build some things that are very specific to that market that makes it, you know, more attractive to them. So we've been successful at that. You know, versus last year, I think we have done some restructuring of our teams to get them more focused on that segment, and I think we're, you know, we're bearing the fruits of that. Great.
spk04: And then, you know, to follow up on Brett's question on revenue per unit, you know, up almost 20%. You mentioned in your prayer remarks some of it was driven by, you know, initiatives such as online fees or ancillary services that you guys offer. Can you even help us quantify this or help us parse out how much of the increase is being driven by IAEA-specific initiatives, in your opinion? Like, what can you quantify based on the changes you guys are making? Yeah. No, it's very difficult to quantify that because, as you can imagine, what we're seeing play out, and first of all, as we've alluded to, for revenues per unit, we're at record levels. And it's tough to quantify the degree to which the things that we've done, which we believe are definitely having a positive impact, things like the new digital-only auctions for our platform, things like 360 View feature tour. Obviously, we did a pilot some time back on 360 View. We commented on the fact that they were having an impact of between $300 and $600 per vehicle in terms of proceeds, not revenue per unit, but proceeds. So you can certainly, if you think about that, that can give you some indication. We do continue to believe that 360 view and other tools that we've added since then are all having a positive impact. But what we don't know, it's very difficult to ascertain, is the degree to which supply-demand characteristics are impacting it, and as we've also alluded to, in addition to supply and demand, is huge car prices. And so it's difficult to kind of calibrate, you know, how much of each one of those. We do feel that used car prices are having an impact as they've kind of went up, that that's impacting what a buyer is willing to buy for a car, pay for a car, all things considered equal. But trying to figure out how much of the difference that makes is very challenging, as you can probably appreciate. Yeah, that's helpful, Keller. And then the last one for me, just to clarify on the inventory growth, I think you said it's up about 1% to end the quarter. Did the recent hurricanes have a quantifiable impact on that? Or maybe ask a different way, you know, what would inventory growth be if we excluded catastrophic volume from this year and last year? Just trying to get a sense of kind of where run rate volume is x some of the noise from hurricanes. Yeah, so I think the best way to think about it is, you know, there's been obviously a number of storms this year. But in terms of the volume of cars that have come from those storms, it's actually been relatively low. So we haven't had any, you know, thank God, you know, for those parts of the country, there hasn't been any extraordinarily significant storms, you know, that have caused, you know, had a massive amount of vehicles. There has been some volume, but the volume, relatively speaking, has been, you know, not so significant.
spk01: And the same as last year. The last year, the base compared to last year was relatively small as well.
spk04: Yeah, that's right. Yeah. So, you know, if you looked at last year, it would have been not as many storms. but a similar low level of volume from catastrophe units. And so that's what we're seeing. So it's not having a big impact. That's great, guys. I appreciate all the color and best of luck. Thank you.
spk05: And our next question today comes from Stephanie Benjamin with Truist. Please go ahead.
spk00: Hi, good morning.
spk05: Good morning, Stephanie.
spk00: Just to actually follow up on the last question there, I'm curious on how, you know, just the inventory number up 1%, but still seeing assignments down slightly, you know, pre-COVID levels. Can you maybe discuss, you know, just the discrepancy between those two metrics?
spk04: Yeah. So, yeah, there's a couple things that drive inventory levels. So one is obviously the amount of assignments that we get. And so we've seen assignments come way back up during the third quarter. But in addition to that is also the conversion rates and also kind of the time between when it's assigned and when the unit's sold. And so it has, you know, we're certainly happy and pleased with the fact that we've seen a lot more assignments. We've seen units sold come back up with that as well. But We have seen, you know, maybe a little bit of decline in some areas around conversion rates. Nothing significant, but that's, you know, been one element in addition to the increased assignments that's kind of resulted in inventory being up, which is a good thing because as we go into, you know, the fourth quarter, that means we have more units available for sale.
spk00: Got it. Helpful. And then on some recent announcements for some unit art expansions, it's Could you maybe talk on why you chose these specific projects and then, you know, what's really in your pipeline for additional opportunities for expansion forward? Thank you.
spk04: Stephanie, I think you're breaking up a little bit, but I think the, you know, the intent, the sense of your question was is that it was around other real estate projects. Is that correct?
spk00: Yes, I'm sorry. Just I think some of the most recent announcements have been primarily in the northeast. So just wondering why you chose specifically those yards and kind of what's your outlook for additional expansions going forward?
spk01: Yeah, Stephanie, so I think we've talked about the process of identifying, developing, getting a new piece of property into place can take 6, 9, 12, 18 months. So some of this is just the timing of when these particular projects, you know, actually got live, you know, we were able to take them live. We've got a deep pipeline of expansion. We look very closely at where we're growing, where our customers are growing, where we see opportunities for growth, and we're looking at additional property where we need it. So it is an ongoing process that we go through, and we will continue to invest in real estate, again, where we need it and where we believe we've got opportunities and, again, where our customers are growing as well.
spk00: Got it. Thank you so much.
spk02: Thanks, Stephanie. Thanks, Stephanie.
spk05: And our next question today comes from Bob Ladek with CJS Securities. Please go ahead.
spk03: Yes, good morning. It's Pete Lucas for Bob. Just on a macro level, can you talk about from a business industry perspective when you think that higher ASPs will lead to higher total loss frequencies? And I think you had said there'd been no change in total loss frequencies now, but do you expect that to change?
spk01: Yeah, I'm not sure we said that there's been no change in frequency. I think there was a question around the average age of vehicles.
spk03: Okay.
spk01: Yeah. So I do think the most recent data from CCC, I think, picked up.
spk04: Yeah, I think what we're seeing is a trend with total loss. Maybe this can help you. That continues to go up. You know, there's some seasonal adjustments to that. But in general, it tends to kind of follow the trend it has been. which is continuing to increase. So we're not seeing anything much different with that at this point.
spk03: Great. And the last one for me, you talked about the increase in the international buyers. Is the percentage of units sold internationally now greater or smaller than pre-pandemic given the increase that you've had?
spk04: You know, I don't think we've broken it out, um, between, uh, you know, what we can say two things. One is we've commented is that during the pandemic, we had really good, uh, response from buyers, domestic buyers, um, that, you know, that was a very good thing during the pandemic is you want to expect the onset of the pandemic, uh, international buyers participation, um, went down a little bit as you have, you know, just, you know, very difficult situation. And since then, it's bounced back really nicely, and we continue to have, you know, good traction with our domestic buyers and internationals picked up, as we alluded to in our call, and we feel really good about that as well.
spk03: Very helpful. Thank you. Thanks, Pete.
spk05: And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star, then 1. Today's next question comes from Gary Prestapino with Barrington Research. Please go ahead.
spk04: Good morning, all. John, I want to just make sure I'm clear on this. When you're doing non-insurance vehicles, they are all total losses. Is that correct or am I wrong there?
spk01: They are predominantly damaged vehicles, but it's not, you know, we do sell clear title vehicles for non-insurance sellers without question.
spk04: All right. And can you give us an idea of the growth of that metric in the quarter and or the percentage change or the percentage of non-insurance this quarter versus last year at this time um you know gary that's not something um that we're providing as a metric however um what we did say is that we had you know really good growth of non-insurance uh in the quarter so i think from that comment you know you can you know one would be able to ascertain that, you know, insurance, non-insurance rather, the percentage of our total mix would be up somewhat. Okay. But by the rules of your spinoff, you cannot go into the dealer market, is that correct, and sell a whole car, right?
spk01: Yeah, I mean, it's, again, a public document. It's not quite that simple, Gary. There are elements where we can continue to grow, and there are some, you know, royalty payments that would be made if we exceed certain thresholds.
spk04: Okay, great. And then lastly, just with the new services that you put in, enveloped in the Interact, I guess it's called, When you talk to your buyers, which one of these services do they cite as being extremely helpful in helping to make a decision whether to bid on a vehicle?
spk01: Yeah, I mean, it's – I don't know that there's one. I think, you know, we track and measure at several different points from registration right through bidding and buying. And, you know, we're seeing improvement in all of them. I think the overall – the level of information that we're now providing through Interact, whether it's 360 view or feature tour or enhanced vehicle detail page, if we are de-risking the transaction and they appreciate that, that gives them the ability to bid with more confidence, the more transparency that we can provide. And I think generally I'd say that's been the best feedback that we've received around Interact. Okay.
spk04: Thank you very much.
spk01: Thanks, Gary.
spk05: And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.
spk01: Well, thank you all for joining us this morning. Thank you for your continued support of IEA, and we look forward to talking to you in the future. Have a great day.
spk05: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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