Good morning and welcome to the IAA Inc's Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Arif Ahmed. Vice President, Treasury. Please go ahead sir.

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 Johnston, 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 IAA'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 29, 2019 filed with the SEC on March 18, 2020, updated in our Form Q filed with the SEC on May 6, 2020. The forward-looking statements made today are as of the date of this call and IAA does not undertake any obligation to update those forward-looking statements. Finally, the speakers will refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is 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 the Web site at www.iaai.com. I will now turn the call over to John. John?

Thanks, Arif. 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 unit sold along with the continuation of the record level revenue per unit that we'd experienced in the second quarter. As the third quarter progressed, we continued to see strength across our business, as both assignments and units sold continue 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're 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…

Thanks, John, and 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 continue to benefit from our margin expansion plan and other strategic initiatives. Before I touch on our current trend, 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, our Q3 financial performance and our methodology in calculating non-GAAP results. For the first quarter, consolidated revenues decreased 5.4% to $338 million from $357.3 million in the third quarter of fiscal 2019, organic revenues which excludes the impact of our DDI acquisition, foreign currency and a non-cash revenue adjustment in the prior year declined 4.7% 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 U.S. and international segments have 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 some other cost reductions specific to COVID-19. SG&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…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Craig Kennison with Baird. Please go ahead.

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.

Great, Craig. Good morning. This is John. The patents that 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 buyer. So they're not in of themselves. 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 that we can continue to drive better and better results for our buyers and sellers.

Okay, thanks. Just on the non-insurance side, it sounds like you had a solid growth there, but the economics in that business as good as your insurance business or just based on the nature of some of your relationships, those economics not quite as good.

So the non-insurance there is a wide breadth of customers in there, everything from charities to car dealers, rental car companies and the profitability profile also spans that based on the value of the vehicles. But all in, it's, we believe that it's a strong element of our proposition and our growth, we think its good business and we're going to continue to capitalize from it.

The next question today comes from Bret Jordan with Jefferies. Please go ahead.

You called out your towing relationships in response to cat events? You've talked about towing costs, maybe being one of the largest drivers. Could you give us any numbers year-over-year, as far as your towing expense?

Yes, Bret. This is Vance. We don't typically break out towing expense, I think what we have said is, is that it's a very large contributor to cost of sales. So, in terms of happening, how relevant it is, but we haven't given out specific numbers related to that. But, as we commented on clearly part of our margin expansion plan is that we have initiatives aimed at, 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, instead of also called out that they were up 15% year-over-year, but could you give us sort of a benchmark for the volumes?

Yes. Somewhat similar Bret, I mean, I think we tried to give as much color as we could. So I think the fact that during the COVID-19 pandemic, that we're able to kind of see that kind of increase, bodes well for the actions that we're taking in developing our global buyer base, which as we commented before are a big portion of those are around digital marketing, search engine optimization, things of that nature, so, can't get any more specific numbers than what we provided. But we did say that, because obviously, we feel really good about the progress that we are making.

Okay. And then one final one. This one should be that the drives of revenue per unit is the average age of the vehicle that was being totaled this year, significantly lower year-over-year, I'm just sort of thinking about what the insurance companies are doing that is dragging this higher used vehicle values, the demographic of the car changing, in addition to the underlying Mannheim going up.

We haven't seen anything that is materially different in terms of average age of the vehicle, than, maybe what we would have saw last year. Obviously, that's a contributing factor, as you do, but also, I think, Bret, what you're also implying around kind of younger vehicles and be more apt to be told as well. But in terms of the average age across the span of our universe of total loss, we haven't seen anything that's significantly different at this point.

The next question today comes from Daniel Imbro with Stephens Inc. Please go ahead.

John, I wanted to start on a follow-up on the non-insurance business. It appears in your social media, there's been more of an emphasis on fleet and rental volume in the last few months. I think you mentioned is the focus for your salesforce. 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?

Yes. I mean, it is, as I said earlier, there's a variety of areas of growth there. I mean the fleet and rental 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 more attractive to them. So we've been successful with that 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 bearing the fruits of that.

It’s great. And then, the follow-up on Bret's question on revenue per unit up almost 20%, you mentioned in your remarks, some of it was driven by initiatives such as online fees, ancillary services that you guys offer? Can you help us quantify them or help us parse out how much of the increase is being driven by AI specific initiatives in your opinion, like what can you quantify based on the changes you guys are making?

Yes. No, it's very difficult to quantify that, because as you can imagine what we're seeing play out and first of all, 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 options, the digital only option for our platform, things like 360 View, Feature Tour, auto executive 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 per vehicle. So you can certainly if you think about that, that can give you some indication, we do continue to believe the 360 View and other tools that we've added since then 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 how much of each one of those, we do feel that used car prices are having an impact as they kind of went up. But 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 different that it makes is very challenging, as you can probably appreciate.

Yes, I've never heard that purple color. And then last one for me, just to clarify on the inventory growth, you said it about 1% to end the quarter, did the recent hurricanes have a quantifiable impact on that? Or maybe ask a different way 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, some of the noise from hurricane?

Yes. So I think the best way to think about it is, 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 thank God, for those parts of the country, there hasn't been any extraordinarily significant storms that has caused a massive amount of vehicles, there has been some volume, but the volume relatively speaking has been not so significant.

And the same as -- the last year, the base compared to last year, there's relatively small as well.

Yes, that's right. Yes. So, if you looked at last year, there have been not as many storms, but a similar low level of volume from catastrophe units. And so that's what we're saying. So it's not having a big impact.

And our next question today comes from Stephanie Benjamin with Truist. Please go ahead.

Just to actually follow up last question there. I'm curious on how, just the inventory number up 1% but still sitting assignments down slightly, pre-COVID levels? Can you maybe discuss the discrepancy between those two metrics?

Yes. So, 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 that between when it's assigned and when the unit sold. And so it has, we're certainly happy and pleased with the fact that we've seen a lot more assignments we've seen unit sold, come back up with that as well. But we have seen, maybe a little bit of decline in some areas around conversion rates. Nothing significant, but that's been one element in addition to the increase in assignment that's kind of resulted in inventory being up which is a good thing because as we go into the fourth quarter, that means we have more units available for sale.

Got it helpful. And then, on some recent announced [Technical Difficulty] expansions in northeast, could you maybe talk on why you chose these specific projects? And then, what's really in your pipeline for additional opportunities for the board? Thank you.

Stephanie, I think you're breaking up a little bit. But I think the intent, the sense of your question was, is that it was around other real estate projects. Is that correct?

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?

Yes, Stephanie. So I think we've talked about the process of identifying, developing getting a new piece of property and place can take 6, 9, 12, 18 months. So some of this is just the timing of when these particular projects, actually got live, we're able to taken live. We've got a deep pipeline of expansion. We've looked 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.

And the next question today comes from Bob Labick with CJS Securities. Please go ahead.

It's Peter Lukas 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'd said there'd been no change in total loss frequencies now. But do you expect that to change?

Yes. 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. So I do think the most recent data from CCC, I think picked up.

Yes. I think what we're seeing it is a trend with total off, maybe this can help you is that that continues to go off. There's some seasonal adjustments to that. But in general, it tends to kind of follow the trend that has been, which is continuing to increase. So we're not seeing anything much different without at this point.

Great. And 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?

I don't think we've broken it out between, we can’t say two things. One is, we've commented is that during the pandemic, we had really good response from buyers, domestic buyers, that was a very good thing during the pandemic as you want to expect the onset of the pandemic, international buyers participation went down a little bit as you have very difficult situation. And since then, it's bounced back really nicely. And we've continued to have good traction with our domestic buyers and international is picked up as we alluded to in a call and we feel really good about that as well.

[Operator Instructions] Today's next question comes from Gary Prestopino with Barrington research. Please go ahead.

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 here?

They are predominantly damaged vehicles, but it's not -- we do so clear title vehicles for non-insurance sellers without a question.

Okay. All right. And can you give us an idea of the growth of that metric in the quarter and/or the percentage change, what are the percentage of non-insurance this quarter versus last year at this time?

Gary, that's not something that we're providing as a metric. However, what we did say is, is that we had really good growth at non-insurance in the quarter. So I think from that comment, you can -- one would be able to ask our team that insurance -- non-insurance rather the percentage of our total mix would be up somewhat.

Okay. But by the rules of your spin off, you cannot go into the dealer market, is that correct and sell a whole car, right?

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 royalty payments that would be made if we exceed certain thresholds.

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 that they cited as being extremely helpful in helping them make a decision whether to bid on a vehicle?

Yes. I mean, it's -- I don't know that there's one, I think, we track and measure at several different points from registration, right through bidding and buying and 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 derisking 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.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for the final remarks.

Well, thank you all for joining us this morning. Thank you for your continued support of IAA and we look forward to talking to you in the future. Have a great day.

Thank you, sir. This includes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.