Good morning. My name is James and I will be your conference operator today. At this time, I'd like to welcome everyone to the IAA, Inc. Q2, 2019 Earnings Call. [Operator Instructions]. Thank you. I'd now like to turn the call over to Arif Ahmed, Vice President of Treasury. Please go ahead.

Thanks, James. Good morning, everyone. And thanks for joining us today for IAA second quarter fiscal year 2019 earnings conference call. With me are John Kett, Chief Executive Officer and President and Vance Johnston, our Chief Financial Officer. After John and Vance had 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 IAA's press release issued today and the risk factors section of the Information Statement filed as Exhibit 99.1 to our Form 10 filed with the SEC on June 13, 2019. 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 measures to the most directly comparable GAAP measures is also available in IAA's press release issued today. A copy of today's press release may be obtained by visiting the investor relations page of this website at www.iaai.com. I will now turn the call over to John. John?

Thank you, Arif. Good morning and thank you for joining our second quarter earnings call and our first as a new public company. You know it took a lot of hard work to get us to this important milestone for IAA as we successfully spun off from KAR Auctions Services in June. I want to thank all of our team members for their hard work and dedication to get us to this point. We feel really good about the future for IAA and we have a lot of great opportunities in front of us. We have grown to be a leader in our industry and as a standalone public company. We are now able to benefit from an enhanced strategic focus and a streamlined operating structure. With a significant addressable market for our services and strong industry tailwinds that have driven an increasing percentage of claims to be declared a total loss. We believe the resulting favorable industry backdrop combined with our strategic growth initiatives, position us well to grow our business and drive shareholder value. Now I'd like to briefly touch on our recent financial results and outlook, which were outlined in our press release this morning. We delivered a strong quarter with solid top and bottom line performance, including a 10% consolidated revenue growth and close to 60% adjusted EBITDA growth compared to the second quarter of 2018. We saw strong results in both our U.S. and international businesses and we were pleased with the growth in revenue per unit and volume. As we look ahead of the full year, we feel good about our business and expect to deliver results in line with our previously communicated outlook. We have experienced some shifts in volume that we believe are temporary in nature, a higher mix of purchase vehicles…

Thanks, John, I want to read or reiterate how excited we are to be a standalone public company. We still have some work ahead of us in the near term, as John mentioned, to strengthen certain corporate functions and processes but we feel really good about the progress we're making. With that said our business continues to be strong as we delivered a solid Q2, our first quarter out of the gate, which I will now review in more detail. I will focus my discussion today on our adjusted non-GAAP results. Before I begin there is one housekeeping item I want to know. We have made changes to certain adjustments to the non-GAAP measures we will present going forward versus what was previously reported for IAA under KAR included in the Form-10. Going forward for adjusted EBITDA, we will no longer adjust for stock compensation expense and differed realm [ph] which together totaled 1.3 million for the second quarter and 3.2 million year-to-date but will continue to adjust for items that are not representative of our ongoing operations as we have detailed in our press release. For adjusted EPS we will not adjust for stock compensation expense and deferred rent, but will adjust for items that are not representative of our ongoing operations and will also adjust for amortization related to acquired intangible assets. We believe that this provides more clarity, and have changed this for all proprietary comparisons for the second quarter of 2019 and year-to-date. Now for the second quarter. Consolidated revenue increased 10% to 366.4 million from 333.2 million in the second quarter fiscal 2018 primarily due to increased volumes of approximately 6% and higher revenue per vehicle of approximately 4%. U.S. revenue increased 6.8% to 320.5 million from 300.1 million in the prior year period. International…

[Operator Instructions]. And our first question comes from the line of Daniel Imbro from Stephens, Inc. Go ahead. Please, your line is open.

So on the top line specifically revenue per unit growth of 4% pretty strong in the quarter and it seems like higher than you guys were expecting, prior to this move, can we maybe dig in a little bit more Vance on what drove that in the quarter? And how sustainable you think these drivers are? As we look through back half and kind of into 2020?

Just a couple of thoughts on that. So revenue per unit, you know, is really driven by a couple of factors. One it's driven by the average proceeds that we get for the cars that are sold at auction, and then also buyer fees, as well and then is as we -- you know certainly the other thing that can impact it as well, is the mix of purchased vehicles and so as you think about the second quarter a couple things. One is that we do continue to see on average slightly increasing kind of higher proceeds per vehicle. The other thing that contributed as well is that as we outlined in our prepared remarks, we did have a higher mix of purchased vehicles in the second quarter of 2019, relative to the second quarter of 2018 for example, primarily due to the new business that we want in Canada and the impact that had. So that's hopefully that answers your question.

Yes, definitely helpful. And then a follow up one on the international opportunity. John, you mentioned growing the international buyer network seems like a big opportunity. What do you imagine the biggest barrier would be to that you talked about your, you know, increasing your marketing now, how is that going? And then how is your ability to offer some of your ancillary services internationally? Do you have those capabilities today? Or would you look to build them via M&A over the coming years? Thanks.

So in terms of the international buyer network, we do have a very robust international buyer network, but we do see enormous opportunity to continue to grow that, you know, we're selling in 120 plus countries. We through some targeted marketing, we think we can more deeply penetrate the markets we already serve and find additional buyers, and make it easier for those buyers to do business with us. So in terms of the buyer side, that's really the opportunity. We're making good progress towards continuing to grow that and really that renewed focus on international buyer. In terms of ancillary services for international buyers, the most obvious request they have is around transportation. So can we find a solution to be able to move vehicles from North America to these international markets? We're looking at that we were really building out our domestic bio-transportation services first and we think the next stage of that will be to offer international but that's a little ways out for now.

Your next question comes from the line of Craig Kennison from Baird. Go ahead, please. Your line is open.

Congratulations on a really well run process to get to this point as a public company. I wanted to ask about your property plans. How should we model growth in land capacity over the next few years, and maybe just talk about the process for identifying, permitting and developing land to offer your services?

So as we think about growing our footprint to support our growth, finding land that we need to run our business. Now we're looking for industrial property, but we typically need to go through zoning, and even a special use process. So it can be a fairly prolonged process but again we're good at it, we do it. You've seen some of the -- we just put out some releases on our additions in Phoenix and McAllen, Texas and Houston, Texas. I mean, we continue to grow our footprint to support our growth. So the process I think we're good at it is longer than then I would like sometimes, but I think we've got that down. In terms of the opportunity going forward, and Vance can certainly jump in and talk about as we think about capital allocation, but really going forward, we're going to be looking at the opportunity. We need to procure more land, we're going to look at the best economic outcome. If it’s a lease we're going to look at leasing, if we have the opportunity to buy property and we think the returns on the purchase make more sense. We're going to potentially buy property.

So I would just add, you know, one, thanks, again, for the support and nice to speak with you. We do feel comfortable with the amount of capacity that we have, both for short and medium term growth. Obviously, as we think about the process and the pipeline that we're developing. We're looking out a number of years, as John alluded to, what will change for us, which we view is a very good thing is that we now have the option to vote to either lease or to purchase the land depend on what we think is the best return profile and what's the right thing to do for shareholders. So that would be a bit different than what we've done historically, which is primarily leased [ph].

Thanks. And just the follow up question would be on DDI the recent acquisition that you made? How should we think about the margin profile of that, or what's the best way to think through how you monetize an acquisition like that.

So it's really, it's really going to be in support of our loan payoff product, I mean that and first and foremost, because of the connectivity it has, but we also see opportunities because they are electronically linked to 25 DMVs, that we're going to be able to improve our cycle times by being able to more quickly and efficiently process title with the DMV, because I think as you know, it's a critical part of our service and there's a time element, depending on which state you're dealing with. So we think this is really going to help us improve our efficiency of our branch operations by being able to move vehicles through the process more quickly.

Your next question comes from the line of Bret Jordan with Jefferies. Go ahead, please. Your line is open.

You commented about timing of customer wins and losses impacting the second half of the year. Could you talk about what you're seeing as far as any meaningful shifts of customer base and or market share?

Yes, I mean, so you know, as we operate this business, there are from time to time movements, and ships and volume. You know, we, in any year we win business we lose business but as I said earlier, I feel very, very comfortable and feel really good about our competitive position in the market.

Okay, great. And I guess, as we look at the purchase vehicle mix and the trajectory into the second half of the year, are we looking at sort of a ramp and accelerated mix of purchase vehicles in the third quarter from the second quarter?

So obviously we purchase vehicles from time to time, either because, in working with some of our big anchor insurance, customers, sellers, if you will, or in some situations where there's catastrophic events, will do that. And then as we outlined in our prepared remarks, we had an opportunity when we won new business in Canada that was all purchased vehicles, obviously, we don’t really good about this business and it's very, it's good business for us and that we took on in late in the second quarter of 2018 and so the impact of that is, is that it is, you know, for the first half of 2019 and the second quarter of 2019 it had a significantly impact on our revenues and on our cost of services and gross margin because we did not, once again we did not have that business in the first half for 2018 but did in the first half of 2019. As we move forward in the back half of 2019 we will be anniversarying that and it will start to normalize because we have that in the back half of 2018.

Your next question comes from the line of Chris Bottiglieri from Wolfe Research. Go ahead, please. Your line is open.

I was wondering if you could quantify how much gross margins would have changed that you exclude purchase vehicle revenue and COGs and then separately, like if you would ever consider disclosing purchase vehicle revenue separately kind of distorts the margin profile, which I think would be viewed as unattractive so just kind of want to hear your thoughts on how you think about that disclosure policy?

So a couple things is that we are not going to be quantifying at that level of detail. What I would say about purchase vehicles and the impact it has on margin so purchase vehicles is still a very small percentage of our total business and you can move a little bit from quarter to quarter I think as we outlined in our prepared remarks in the second quarter of 2019. We just happen to win some business that was really good business in Canada at the end of the second quarter of 2018 and so it has an impact of one much higher revenue because we have that new business in the first half of 2019 and we did it in 2018 but also it's magnifying because it was all purchased vehicles. I think as we look at purchased vehicles, the way that we treat it, we're very disciplined about it. There are good opportunities out there, where in certain circumstances to purchase vehicles. This was one of those, we feel really good about it and certainly it's a good return profile which is the primary thing that we look at what's the return on investment and running yet, even though it comes at a slightly lower gross margin, it's certainly higher gross profit dollars to leverage SG&A and to drive higher EBITDA and so that's the philosophy the way we think about it, we do expect it as we go on to continue purchase vehicles to continue to be a small component of the total picture but it can move around a little bit from quarter to quarter.

Okay. And then kind of related but as you did in your revenue guide is kind of lagging the purchase vehicle mix, you have revenue at the top end of the guide but how do I think about volume specifically? You mentioned some shifts in volume was this positive or negative and I know this metric isn't super predictive for your inventory growth started the quarter was very high ended up at three implying some deceleration at back half of the quarter. So kind of want to think about kind of totality what the message is on volume growth. Thank you.

So we still have volume growth built into our plan. We had wins and losses, right. As I said earlier, there is movement of volume in this industry that occurs on a regular basis, but we still have growth built into our plans.

Your next question comes from the line of Stephanie Benjamin from SunTrust. Go ahead, please. Your line is open.

I was hoping you could touch a little bit about your plans to penetrate some existing accounts and then also increase your total market of insurance and non-insurance accounts. Maybe you could speak a little bit about capacity and just kind of maybe even in any capacity constraints that you have to kind of increase some of your penetration with these accounts and then maybe what you're specifically looking for, and the account you'd be going after on the non-insurance side. So any color there would be great. Thank you.

So as we think about further penetration, it's really if you think about the entire total loss claim from the beginning of the claim through the services we've historically provided, which really have been at the tail end. But if you think about all the things that happened through that claim, we believe we've got some expertise, and that there's inefficiencies in those processes. And we think that products like loan payoff, and some of our Title Procurement Services, that's when we talk about penetrating existing clients, we're really we're talking as much about penetrating further upstream in their process because we think we can make it more efficient. We can generate revenue and reduce the cycle time for the transaction. And then when you think about the balance of the addressable market of insurance, yes, we've got adequate capacity to grow our business that's not a constraint around volume and then in terms of non-insurance roughly 20% of our volume we sell for non-insurance sellers today. These are banks, rental car companies, fleet operators that have damaged and low value vehicles and we've been a good partner to those customers and we see additional opportunity to continue to market and grow that segment as well.

Great. And then lastly, I just wanted to touch on some commentary you made around the guidance in terms of the some shifts in volumes, mix and purchase vehicles, but also a change in buyer fees. So could you elaborate a little bit on just the buyer fee change that you mentioned?

So yes we did make some changes, adjustments to our buyer fees that's out in the market and available, which effectively increased our buyer fees in some categories. So what we basically are saying is, is that that is, you know, reflected in our outlook for the back half of the year.

And was that done kind of towards the end of the quarter? How should we think about even kind of reflecting that next year? When that was implemented?

Yes, you can think about more, you know, right at the beginning of the third quarter.

Your next question comes from the line of Gary Prestopino from Barrington Research. Go ahead, please. Your line is open.

Can you give us the percentage of vehicles that was sold online this quarter versus last?

We don't these. This is Vance and thanks for dialing in. We don't have the exact percentage to be able to provide at this moment but I think consistent, I think it was consistent with the trends that we've seen over the last couple of quarters. So think, you know, kind of in a range of around 66% - 67% of cars were sold online. As we've kind of discussed before, you've seen that go up even in the last about quarters, certainly in the last couple of years in our anticipation, as buyer habits continue to change and demographics that that will continue to change will continue to go up.

Right. And that leads to my next question. I mean, John, you mentioned something about the fact that your buyers want to buy more online? Are you guys giving any thoughts to possibly going in certain sites to an all online venue rather than having an auctioneer at the site?

Yes, we are Gary. I mean, as part of our digital transformation, we're laying the groundwork to be able to do that.

Okay, you have any sites doing that now?

We do not, although we do you know, we've part of the part of the acceleration of the online percentages has been we continue to offer new products. We've got a timed auction product out there now where buyers are buying vehicles without it going through the traditional auction process. It's going through a timed auction, and then we're selling the vehicle. So in some sense we are selling vehicles today without an auctioneer.

Okay, and then lastly, this acquisition, does this give you any DDI? Does this give you any services that you currently were not offering?

It does. So the DDI offers electronic vehicle registration and then sent electronic lien and title processing that we had partnered with some states, but now we have an access to 25 states really deepens that service offering?

Do all the states have the ability to e-title and lien processing? Or is it just the 25 states that are listed?

Well, it's even a subset of the 25. So within the 25, we have different levels of connectivity with the states.

Your next question comes on the line of Derek Glynn from Consumer Edge Research. Go ahead, please. Your line is open.

Just on the potential for lease buyout. Can you help quantify for us to contextualize that opportunity? What portion of your facilities or land [ph] have these lease buyout options of the potentially economically attractive for you to pursue over time?

So there's a couple things. So one is we are just kicking off a process and a project to be looking at kind of lease buyout opportunities. The way that we'll look at it is that you know, first and foremost, in most cases, we have to have a lease where there is a buyout option, we have to look at the property and view it and decide whether or not it's an attractive property for us over the longer term, because those will be the ones that will be interested in buying out leases. So it has to A, have a lease buyout provision or a strong willingness or we can from the counterparty to be to negotiate a buyout, even if there's not a provision in the lease which is probably less likely. Two, is that it’s an attractive property for the long term that we're interested in and then three, we have to be able to negotiate and come to terms that makes sense for us from a capital investment perspective and a return perspective, to be able to purchase that land and buy out of it. We don't know, it's too early to tell in terms of kind of how many opportunities will actually look like that but that's the process that we will be going through and where those opportunities exist. You know that we believe that that will be a good use of capital.

Your next question comes from the line of Bob Labick from CJS Securities. Go ahead, please. Your line is open.

I wanted to touch back on the margin expansion you talked about, and then a Q&A a little bit about the auction platform change potentially going to purely digital as opposed to live in digital? Have you is it an across the board thing? How long do you think it would take to implement something like that? Have you started it just where are you in that process, in that thoughts process.

So we've really been laying the groundwork for this for close to two years in terms of enhancing our platform, so that we can be much more flexible about how we sell vehicle. So we're in the fourth quarter we are going to be rolling out some changes to our platform, which is really the first step and then we will be in 2020 beginning to test and pilot and look it online only to see how buyers are adapting to it, what they think of it and being prudent to make sure that we're continuing to drive the highest level of proceeds for our sellers and satisfying what the buyers desires are.

This is Vance, I would just add thoughts to that. So one to answer your question around kind of dimensionalizing kind of do we think it exists in all locations or something less than that? I think we believe that there's a obviously, that the market is trending that way buyer demographics and buyer needs are turning that way we think we have a product, as John alluded to and enhancements we will be making to our auction platform that will be really great for buyers and online buyers and that will even help us kind of leapfrog in terms of our auction platform. And so we think that, you know, will certainly help and be a really great thing for buyers, I think in terms of kind of we're going to be very diligent and think about what's the best thing for buyers and for sellers and there could likely be certain markets where there is a robust live auction that continues to take place and so much so that it continues to make sense to make the investment in the live auction and in those markets probably a small subset longer term of the total but in those markets, we could see a situation as things evolve, where we can still we would still offer live auctions because it would make financial sense to do so and it would make sense for our buyers and sellers.

And then just for my other question, can you talk a little bit more about HPC now that you've had some time to work with it, I know it was under par, not IAA before, but now that you've had some time with them talking about the business and the any plans to expand that over time or what you've learned since they've been brought into the fold.

So HPC you know, we do see opportunity there, the UK market is slightly different and that is primarily a purchase agreement type of market but we do see opportunity to grow there, there is some fragmentation. HPC we are providing some technology support to improve their systems and be able to offer some of the products that we've developed in North America, introduce them to the UK market and so we do see opportunity to grow that business. We got a good management team, we've got a good footprint there. We think that there definitely is opportunity to get that business thriving.

[Operator Instructions]. And our next question comes from the line of John Healy with Northcoast Research. Go ahead, please. Your line is open.

I wanted to ask a little bit more about the international opportunity to drive that buyer base higher. Are there any regions or pockets of the globe that you feel you're underrepresented in? And has it been the historical gating factors that have created that maybe that void in the buyer base?

Yes, so again, I wouldn't characterize it as a void, I think it's just an opportunity to grow it continue to grow it .We've grown that international buyer base significantly over the last four or five years but the more we grow it, the more we see additional opportunities. So we've got a solid buyer base in Mexico, Central America, West Africa, the Middle East, Eastern Europe, and in all those markets we see opportunity to grow, we're learning and utilizing social media, as well some digital advertising. And it's really is just a matter of a renewed focus to really accelerate the growth that we've already seen in our international buyer.

Great. And then I wanted to ask about your comment you made earlier in the call about gaining share of wallet, enhancing existing relationships. I can imagine most of the insurance companies are pretty close to each other in terms of what their seller fees are these days. So when you're winning business and you're losing business what are kind of the reasons for that and what's the value proposition that you're bringing to the insurance companies today to win that share?

Right. So really, each industry, each, particularly the large insurance companies, they really are unique, you really have to talk about them almost independently because of how they make decisions and what's important to them in terms of their claims process. The way we continue to grow and maintain share is through our service offering the breadth of our service offering and our execution on the ground. I mean, when you're processing, thousands and thousands of vehicles are focused on getting those vehicles picked up as quickly as we can checked in through our process as efficiently as we can and really trying to make it easy for the insurance company to do business with us to help them in their process. That's really how we have been successful and will continue to be successful with them.

And there are no further questions at this time. I'd like to turn the call back over to our presenters.

So thank you all for joining us. We really appreciate it our first quarter call and the new IAA. Thank you all for your support and we look forward to talking to you as we go forward. Thanks and have a great day.

This concludes today's conference call. You may now disconnect.