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Edited Transcript of IAA.N earnings conference call or presentation 13-Aug-19 1:00pm GMT

Q2 2019 IAA Inc Earnings Call

Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of IAA Inc earnings conference call or presentation Tuesday, August 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arif Ahmed

IAA, Inc. - VP of Treasury

* John Kett

IAA, Inc. - CEO & President

* Vance Johnston

IAA, Inc. - EVP & CFO

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Conference Call Participants

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* Daniel Imbro

Stephens Inc. - Analyst

* Craig Kennison

R.W. Baird - Analyst

* Bret Jordan

Jefferies LLC - Analyst

* Chris Bottiglieri

Wolfe Research - Analyst

* Stephanie Benjamin

SunTrust - Analyst

* Gary Prestopino

Barrington Research - Analyst

* Derek Glynn

Consumer Edge Research - Analyst

* Bob Labick

CJS Securities - Analyst

* John Healy

Northcoast Research - Analyst

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Presentation

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Operator [1]

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

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Arif Ahmed, IAA, Inc. - VP of Treasury [2]

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Thanks, James. Good morning, everyone, and thanks for joining us today for IAA's second-quarter fiscal year 2019 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 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 the 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 its website at www.IAAI.com. I will now turn the call over to John. John?

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John Kett, IAA, Inc. - CEO & President [3]

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Thank you, Arif. Good morning and thank you for joining our second-quarter earnings call and our first as a new public company. It took a lot of hard work to get us to this important milestone for IAA as we successfully spun off from KAR Auction 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 6% adjusted EBITDA growth compared to the second quarter of 2018.

We saw strong results in both our US and international businesses and we were pleased with the growth in revenue per unit and volume. As we look ahead at 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 and some changes to buyer fees, all of which have been factored into our outlook for 2019. We feel really good about our competitive position in the market and the progress we are making on a number of initiatives that we think will further strengthen our position. Vance will provide some more details on our outlook in a few minutes in his remarks.

But as we look forward, let me now talk about both our short-term and longer-term plans. Our near-term focus is on, one, reinforcing a few of our public company functions and processes; two, ensuring we continue to execute our business well every day to deliver great results for our sellers and buyers; and three, further developing and beginning implementation of our margin expansion plans.

We also remain focused on driving our other key strategic growth initiatives and delevering our balance sheet. Longer-term our focus will be on fully implementing our margin expansion plan accelerating our growth strategy and instilling a disciplined approach to capital allocation as we grow. Disciplined capital allocation will be the foundation for how we manage the Company.

So, next I'd like to spend a little bit of time outlining our growth initiatives that support these longer-term plans. They are as follows.

First, enhancing existing relationships and expanding share. We see opportunity to more deeply penetrate existing anchor accounts by increasing our share of wallet with them as well as increasing our share of the total addressable market of insurance and noninsurance sellers. We are making good progress in both of these fronts.

The second growth strategy is broadening our service offerings to deepen these strategic relationships. As we look to further meet the needs of our customers we are focused on adding more innovative services and capabilities to our leading end-to-end solutions.

For our sellers, examples would include key services such as loan payoff, title procurement and inspection services. With IAA Loan Payoff we are seeing increased adoption by our insurance company and financial institution partners that is helping them both reduce cycle time and save money.

For our buyers are most recent efforts have been focused on further developing and expanding IAA 360 View and our buyer transportation services. We think we've developed an excellent product with IAA 360 View that provides high-quality video of the inside and outside of the car, which enables bidders to get more accurate information on the condition of the vehicle, leading to increased bidding activity and higher proceeds.

Our third initiative is around enhancing our international buyer network. We are focused on aggressively expanding our international buyer base through new programs, improved targeted advertising and improved buyer policies to make doing business with IAA even easier. And having a larger buyer network enhances competition and helps to maximize prices for our sellers.

Fourth, we are focused on expanding margins. We believe we have an opportunity to meaningfully improve our margins. And you know, we regularly are assessing market trends and listening to our buyers who are telling us that they desire to buy vehicles increasingly in a digital arena. As a result we are making changes to our auction platform to facilitate a move towards an increasingly online model. This transformation will benefit buyers, sellers and IAA.

We think the enhancements we are making to our auction platform, including IAA 360 View, will dramatically improve the experience for online buyers. And this increased engagement and participation will also drive higher proceeds for our sellers. Longer-term the move towards more digital auctions will enable us to achieve meaningful cost reductions. We are also in the process of conducting an assessment of additional margin improvement opportunities and we expect to have more detail on the specific opportunities early next year.

The fifth initiative is driving innovation and enhancing our data analytics capabilities. We continue to invest in innovation and have been able to develop and implement a number of value added service solutions with our seller and buyer partners, including the previously mentioned IAA Loan Payoff, IAA 360 View and buyer transportation.

We are currently working on a number of other promising projects with our partners and through our innovation lab at the IAA Engine House in Chicago's 1871 innovation center and we expect to see continued progress in this area.

And our sixth and final growth strategy is expanding our operations internationally in attractive markets. Our international team is primarily focused today on continuing to build our strong business in Canada and grow our HBC business in the UK. We are also in the process of assessing other international markets and identifying opportunities. We will be disciplined and the way we grow internationally, focusing on high priority opportunities that generate strong returns.

As I previously mentioned, one of our growth strategies is around broadening our service offerings. To that end we are really excited about our acquisition of Decision Dynamics, Inc. With this transaction and through its electronic lien product we are now directly integrated with over 5,300 lending institutions, many of which are regional credit unions.

With DDI as part of IAA we are further advancing our established IAA Loan Payoff product which now has the ability to settle negative equity loans for total loss claims. We believe this is a competitive advantage and we look forward to providing our sellers with this enhanced service as we integrate DDI.

In summary, we are so excited to begin this new chapter for IAA. And I would again like to thank our employees and our seller and buyer partners for their commitment and support over the years. We look forward to continuing to deliver upon our goals and driving value for all of our stakeholders.

So, thank you and I will now turn the call over to Vance to go over our results and outlook in more detail before we open up the call for questions.

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Vance Johnston, IAA, Inc. - EVP & CFO [4]

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Thanks, John. I want to 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 are 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 note. 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 including in the Form 10.

Going forward for adjusted EBITDA we will no longer adjust for stock compensation expense and deferred rent, 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 of fiscal 2018 primarily due to increased volumes of approximately 6% and higher revenue per vehicle of approximately 4%.

US revenue increased 6.8% to $320.5 million from $300.1 million in the prior year period. International revenues increased 38.8% to $45.9 million from $33.1 million in the prior year period. Foreign currency exchange movements negatively impacted international revenue by 10.9%.

The significant increase in international revenues was primarily due to increased volume and a higher mix of purchased vehicles from our Canadian business. We added additional volume from new business in Canada late in the second quarter of 2018 which impacts year-over-year comparisons for Q2 and year-to-date 2019. The impact was further magnified since this volume was generated from purchased vehicles where we record the entire sales price as revenue.

Gross profit, which is defined as consolidated revenue minus cost of services and exclusive of depreciation and amortization, increased by 5% to $138.7 million from $132.1 million in the second quarter of fiscal 2018 primarily due to the increase in revenue, partially offset by a higher mix of purchased vehicles in our international business as previously mentioned, as well as an increase in occupancy costs. These items contributed to gross margin decreasing 180 basis points to 37.9%.

We only purchase a small amount of vehicles versus the majority of our business, which is consignment based. However, when we do purchase vehicles we record the entire sales price as revenue and the purchase price as cost of services which results in lower gross margin versus vehicles sold at auction on a consignment basis.

Adjusted SG&A expenses were $31.5 million compared to $30.6 million last year. Adjusted EBITDA increased by 5.8% to $107.3 million from $101.4 million in the second quarter of fiscal 2018 primarily due to the increase in consolidated revenue which was partially offset by an increase in cost of services and slightly higher SG&A expenses.

Interest expense was $11.9 million compared to $9.7 million in the second quarter of fiscal 2018 with the increase driven primarily by incremental interest related to the $500 million senior notes offering issued in the quarter.

The effective tax rate was 27.9% versus 25.9% in the second quarter of fiscal 2018. The increase in the effective tax rate is primarily due to an adjustment to our deferred taxes related to the spinoff. This discrete item negatively impacted the effective tax rate in the second quarter by 170 basis points.

Adjusted net income increased 8.3% to $59 million or $0.44 per diluted share from adjusted net income of $54.5 million or $0.41 per diluted share last year.

Now with regards to our year-to-date performance, consolidated revenue increased 7.9% to $723.6 million from $670.5 million in the prior year period primarily due to increased volumes of approximately 3% and higher revenue per vehicle of approximately 5%. US revenue increased 5.2% to $634.8 million from $603.5 million in the prior year period. International revenue increased 32.4% to $88.8 million from $67 million in the prior year period for the reasons previously mentioned.

Foreign currency exchange movements negatively impacted international revenue by 12%. The increase in international revenue was primarily due to a higher mix of purchased vehicles as well as an increase in volume and revenue per unit.

Gross profit increased by 5.6% to $277.5 million from $262.7 million in the prior year period primarily due to the increasing consolidated revenue, partially offset by a higher mix of purchased vehicles in our international business as well as an increase in occupancy costs. These items contributed to gross margin decreasing 80 basis points to 38.4%.

Adjusted SG&A expenses was $64.3 million compared to $62.8 million last year. Adjusted EBITDA increased by 6.8% to $213.2 million from $199.6 million in the prior year period primarily due to the increase in consolidated revenue which was partially offset by an increase in cost of services and slightly higher SG&A expenses.

Interest expense was $21.6 million compared to $19.3 million in the prior year period with the increase driven primarily by incremental interest related to the $500 million senior notes offering issued in the second quarter as we previously mentioned.

The effective tax rate was 26.9% versus 25.4% in the prior year period. The increase in effective tax rate is primarily due to the adjustment to our deferred taxes related to the spinoff that we previously mentioned. This discrete item negatively impacted the effective tax rate for the first half by 100 basis points.

Adjusted net income increased 10.3% to $119.1 million or $0.89 per diluted share from an adjusted net income of $108 million or $0.81 per diluted share last year.

I would just like to briefly touch on our cash flows and some key balance sheet metrics as well. Free cash flow, which we define as cash flow from operations less purchases of property and equipment, was $122.2 million for the first six months of 2019 compared with $136.3 million in the prior year period. The decline of free cash flow was due to an increase in working capital, which is a function of our growth, as well as a $9 million increase in capital expenditures, which is primarily due to timing of spending.

During the second quarter, in conjunction with the spinoff, we completed the offerings of $500 million of senior notes, an $800 million term loan B, and a $225 million undrawn revolving credit facility. These transactions provide us with a capital structure that will allow us to execute on our growth strategy.

Net debt at the end of Q2 was just under $1.3 billion. Our current leverage ratio, which we define as net debt divided by LTM adjusted EBITDA, is 3.2 times and we intend to delever in the near-term with a goal of getting within our targeted range of 2 to 3 times.

As John mentioned in his remarks, we are focused on instilling a disciplined capital allocation approach. In the near-term we will be focused on paying down debt while also continuing to evaluate high return growth opportunities both on an organic basis as well as selective M&A opportunities. We will also prudently evaluate options to buy out leases.

Turning to our outlook, given our year-to-date performance and our expectations for the second half, we are now tracking towards the higher end of our revenue growth target for the year. As a reminder, this 2019 targeted growth rate, which is also our long-term growth target, represents a 5% to 7% increase in revenues from the $1.3 billion in consolidated revenues we reported for fiscal 2018.

Based on the timing of customer wins and losses, as well as timing of revenue generated from catastrophic events in 2018, we would expect revenue growth in Q3 to exceed revenue growth in Q4. Our 2019 and long-term growth targets for adjusted EBITDA are for an increase of 6% to 8%. Adjusted EBITDA in fiscal 2018, based on our new definition, was $383 million.

We do anticipate continuing to have some margin pressure from a high mix of purchased vehicles and we will -- a higher mix of purchased vehicles, and we will have an incremental public company cost that we have factored in as well. Therefore, adjusted EBITDA growth for this year is expected to be below revenue growth, but still in our previously provided range of 6% to 8%. With that we'll now open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions). Daniel Imbro, Stephens Inc.

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Daniel Imbro, Stephens Inc. - Analyst [2]

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I'll start 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 the spin. Can maybe you 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 to the back half and into 2020?

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Vance Johnston, IAA, Inc. - EVP & CFO [3]

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Yes, sure, Dan. Just a couple thoughts on that. So, revenue per unit is really driven by a couple 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 as we -- 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 increasing 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 won in Canada and the impact that had. And so, that's -- hopefully that answers your question, Dan.

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Daniel Imbro, Stephens Inc. - Analyst [4]

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Yes, no, it's definitely helpful. And then as a follow-up (inaudible) 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 you are 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?

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John Kett, IAA, Inc. - CEO & President [5]

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Great, thanks, Daniel. 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. We are selling in 120-plus countries. Through some target 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 and we are making good progress towards continuing to grow that and really that renewed focus on the 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're really building out our domestic buyer transportation services first and we think the next phase of that will be to offer international, but that's a little ways out for now.

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Operator [6]

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Craig Kennison, Baird.

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Craig Kennison, R.W. Baird - Analyst [7]

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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.

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John Kett, IAA, Inc. - CEO & President [8]

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Sure, great, and thanks for your comments, thanks for your support. So, as we think about growing our footprint to support our growth, finding land that we need to run our business -- we are looking for industrial property but we typically need to go through a 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. We continue to grow our footprint to support our growth. So the process I think we're good at. It is longer than 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 to be looking at the opportunity. We need to procure more land, we're going 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 are going to potentially buy property.

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Vance Johnston, IAA, Inc. - EVP & CFO [9]

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I would just add, 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 are developing we're looking out a number of years, as John alluded to.

What will change for us, which we view as a very good thing, is that we'll now have the option to either lease or to purchase the land to pay down what we think is the best return profile on what's the right thing to do for shareholders. And so, that will be a bit different than what we've done historically which is primarily leased.

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Craig Kennison, R.W. Baird - Analyst [10]

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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? What's the best way to think through how you monetize an acquisition like that?

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John Kett, IAA, Inc. - CEO & President [11]

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So, it's really going to be in support of our loan payoff product. 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 are going to be able to improve our cycle times by being able to more quickly and efficiently process titles with the DMVs.

Because I think as you know, this is a -- it's a critical part of our service and there's a time element depending on which states are 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.

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Craig Kennison, R.W. Baird - Analyst [12]

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Great, thank you.

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Operator [13]

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Bret Jordan, Jefferies.

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Bret Jordan, Jefferies LLC - Analyst [14]

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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?

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John Kett, IAA, Inc. - CEO & President [15]

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As we operate this business there are from time to time movements and shifts in volume. 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.

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Bret Jordan, Jefferies LLC - Analyst [16]

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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 a ramp, an accelerated mix of purchased vehicles in the third quarter from the second quarter?

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Vance Johnston, IAA, Inc. - EVP & CFO [17]

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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 we will do that. And then as we all aligned in our prepared remarks, we had an opportunity where we won new business in Canada that was all purchased vehicles. Obviously we feel really good about this business and it's good business for us.

And that we took on late in the second quarter of 2018. And so, the impact of that is -- for the first half of 2019 and the second quarter of 2019 it had an over-significant 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 of 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 had that in the back half of 2018.

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Bret Jordan, Jefferies LLC - Analyst [18]

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Great, appreciate the color. Thank you.

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Operator [19]

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Chris Bottiglieri, Wolfe Research.

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Chris Bottiglieri, Wolfe Research - Analyst [20]

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I was wondering if you could quantify how much gross margins would have changed if you excluded purchased vehicles revenue and COGS. And then separately, if you would ever consider disclosing purchased vehicle revenue separately. It kind of distorts the margin profile, which I think would be viewed as unattractive. So, I'd just like to hear thoughts on how you think about that disclosure policy.

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John Kett, IAA, Inc. - CEO & President [21]

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So, a couple things is that -- we are not going to be quantifying that at that level of detail. What I would say about purchased vehicles and the impact it has on margin, so purchased vehicles is still a very small percentage of our total business and it can move a little bit from quarter to quarter, I think as we outline our prepared remarks.

In the second quarter of 2019 we just happened 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 didn't in 2018. But also it is magnified because it was all purchased vehicles.

I think as we look at purchase 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 we're going to get.

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 and the way we think about it. We do expect it, as we go on, to continue -- purchased vehicles to continue to be a small component of the total picture, but it can move around a little bit from quarter to quarter.

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Chris Bottiglieri, Wolfe Research - Analyst [22]

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Got you, okay. And then kind of related, but as we think about your revenue guide kind of lapping the purchased 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 the volume. Was this positive or negative?

I know this metric isn't super predictive, but your inventory growth start of the quarter was very high. You ended up at 3. It implies some deceleration in the back half of the quarter. So, kind of what to think about totality, what the message is on volume growth. Thank you.

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John Kett, IAA, Inc. - CEO & President [23]

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So, we still have volume growth built into our plan. We had wins and losses. 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.

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Chris Bottiglieri, Wolfe Research - Analyst [24]

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Got you. Okay, thank you.

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Operator [25]

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Stephanie Benjamin, SunTrust.

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Stephanie Benjamin, SunTrust - Analyst [26]

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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 noninsurance accounts. Maybe you could speak a little bit about capacity and just kind of -- maybe even any capacity constraints that you have to increase some of your penetration with these accounts. And then maybe what you're specifically looking for in the accounts you'd be going after on the noninsurance side. So, any color there would be great. Thank you.

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John Kett, IAA, Inc. - CEO & President [27]

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So, as we think about further penetration, it is 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 happen 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 -- when we talk about penetrating existing clients we are 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.

So -- and then when you think about the balance of the addressable market of insurance, yes, we've got adequate capacity to grow our business but that's not a constraint around volume.

And then in terms of the noninsurance, roughly 20% of our volume we sell for noninsurance sellers today. These are banks, rental car companies, fleet operators that have damaged and low-volume vehicles. And we've been a good partner to those customers and we see additional opportunity to continue to market and grow those -- that segment as well.

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Stephanie Benjamin, SunTrust - Analyst [28]

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

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Vance Johnston, IAA, Inc. - EVP & CFO [29]

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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 stating is that's reflected in our outlook for the back half of the year.

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Stephanie Benjamin, SunTrust - Analyst [30]

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And was that done towards the end of the quarter or how should we think about just even reflecting that next year -- when that was implemented?

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Vance Johnston, IAA, Inc. - EVP & CFO [31]

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

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Stephanie Benjamin, SunTrust - Analyst [32]

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All right, thanks so much.

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Operator [33]

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Gary Prestopino, Barrington Research.

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Gary Prestopino, Barrington Research - Analyst [34]

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

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John Kett, IAA, Inc. - CEO & President [35]

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Do we have the exact -- I mean?

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Vance Johnston, IAA, Inc. - EVP & CFO [36]

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Gary, we don't have the exact -- 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 kind of in the range of around 66%, 67% of cars were sold online.

As we've discussed before, we've seen that go up even in the last -- if you think about quarters, certainly in the last couple of years. And our anticipation, as buyer habits continue to change and demographics -- that that will continue to change, will continue to go up.

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Gary Prestopino, Barrington Research - Analyst [37]

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Right and that leads to my next question. 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?

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John Kett, IAA, Inc. - CEO & President [38]

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

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Gary Prestopino, Barrington Research - Analyst [39]

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Okay. Do you have any sites doing that now?

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John Kett, IAA, Inc. - CEO & President [40]

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We do not, although we do -- 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.

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Gary Prestopino, Barrington Research - Analyst [41]

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Okay. And then lastly, this acquisition, does this give you any -- of DDI -- does this give you any services that you currently were not offering?

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John Kett, IAA, Inc. - CEO & President [42]

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

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Gary Prestopino, Barrington Research - Analyst [43]

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Okay, do all the states have the ability to do e-titling and lean processing or is it just the 25 states that are listed that they work with?

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John Kett, IAA, Inc. - CEO & President [44]

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

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Operator [45]

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Derek Glynn, Consumer Edge Research.

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Derek Glynn, Consumer Edge Research - Analyst [46]

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Just on the potential for lease buyouts, can you help quantify for us or contextualize that opportunity? What portion of your facilities or land have these lease buyout options that would be potentially economically attractive for you to pursue over time?

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Vance Johnston, IAA, Inc. - EVP & CFO [47]

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So, there's a couple things. So, one is we are just kicking off a process and a project to be looking at lease buyout opportunities. The way that we will look at it is 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 would be the ones that we would 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 is 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 make 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 how many opportunities will actually look like that. But that's a process that we'll be going through. And where those opportunities exist that -- we believe that that will be a good use of capital.

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Operator [48]

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Bob Labick, CJS Securities.

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Bob Labick, CJS Securities - Analyst [49]

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Congratulations on the spin. I wanted to touch back on the margin expansion. You talked about -- and then in the Q&A a little bit about the auction platform change potentially going to purely digital as opposed to live and digital. Is that 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 thought process?

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John Kett, IAA, Inc. - CEO & President [50]

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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 vehicles. So, we are in the fourth quarter 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 at online only to see how buyers are adapting to it, what they think of it and being prudent to make sure that we are continuing to drive the highest level of proceeds for our sellers and satisfying what the buyers' desires are.

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Vance Johnston, IAA, Inc. - EVP & CFO [51]

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I would just add some thoughts to that. So, one, to answer your question around dimensionalizing do we think it exists in all locations or something less than that. I think we believe that there's -- obviously the market is turning that way. Buyer demographics and buyer needs are turning that way.

We think we have a product, as John alluded to, and enhancements we'll be making to our auction platform that will be really great for buyers and -- online buyers and it will even help us kind of leapfrog in terms of our auction platform. And so, we think that will certainly help and be a really great thing for buyers.

I think in terms 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 could 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.

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Bob Labick, CJS Securities - Analyst [52]

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Okay, great. That's helpful, thanks. And then just for my other question, can you talk a little bit more about HBC now that you've had some time to work with it? I know it was under KAR, not IAA, before. But now that you've had some time with them, talk about the business and the plans to expand that over time or what you've learned since they've been brought into the fold?

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John Kett, IAA, Inc. - CEO & President [53]

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Great, yes, so HBC -- we do see opportunity there. The UK market is slightly different in that it's primarily a purchase agreement type of market. But we do see opportunity to grow there. There is some fragmentation.

HBC, 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've got a good management team, we've got a good footprint there. We think there definitely is opportunity to get that business thriving.

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Operator [54]

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(Operator Instructions). John Healy, Northcoast Research.

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John Healy, Northcoast Research - Analyst [55]

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I wanted to ask 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 are underrepresented in? And have there been historical gating factors that have created that -- maybe that void in the buyer base?

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John Kett, IAA, Inc. - CEO & President [56]

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Yes, so again, I wouldn't characterize it as a void. I think it's just the 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 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 are learning and utilizing social media as well as some digital advertising. And it really is just a matter of a renewed focus to really accelerate the growth that we've already seen in our international buyer.

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John Healy, Northcoast Research - Analyst [57]

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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 kind of 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 the reasons for that? And what's the value proposition that you are bringing to the insurance companies today to win that share?

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John Kett, IAA, Inc. - CEO & President [58]

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Really 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 our focus 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.

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Operator [59]

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

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John Kett, IAA, Inc. - CEO & President [60]

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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.

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Operator [61]

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