Q4 2019 Earnings Call
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Good morning, ladies and gentlemen, and welcome to the eye, a Q4 2019 earnings conference call.
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Oh now I turn the conference over to a refund med Vice President Treasury. Please go ahead Sir.
Good morning, everyone and thanks for joining us today for <unk> fourth quarter and in fiscal 2019 yearend earnings Conference call.
Speaking today, or John Cat, Chief Executive Officer, and President and Vance Johnston, our Chief Financial Officer.
I forgotten advances made their formal remarks, we will open the call to questions.
Before we begin I'd 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 could differ materially from such statements.
Those important factors that referred to in a press release issued today and the risk factor section of the information statement filed as exhibit 99.12, our form 10, but with the FCC and June 13th 2019.
And we'll be included in our annual report on form 10-K for the year ended December 29, 2019, which we expect to file on or near March 18th 2020.
The forward looking statements made today are as of the date of this call NIH does not undertake any obligations 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 available and I is press release issued today.
A copy of today's press release may be obtained by visiting the Investor Relations page of the website at Www Dot AI dotcom.
I'll now turn the call over to John John.
Thanks, Larry.
Good morning, and thank you all for joining us for our fourth quarter and fiscal yearend call.
Before discussing our results first I'd like to say on behalf of every one of the idea is that our thoughts are with all the individuals that are impacted by cobot 19.
Our first priority remains the health and safety of our employees and their families.
We have taken what we believe in the necessary steps to protect our employees around the world.
At this point, it's unclear what the impact of the situation may have on our business and over what time frame.
While our volumes and revenue per unit quarter to date have been in line with our original expectations during that time period.
This crisis has created a fluid situation and we are in the early stages of gathering data and monitoring customers as well as assessing the market dynamics to assess the potential impact.
In light of the current situation, we're not providing 2020 outlook for a long long term outlook today, but we plan to do so and are hopeful that we can do this on our first quarter our call.
We remain confident in the long term fundamentals of our business and we will continue to monitor the potential impact of code 19 advance will provide some additional thoughts during his remarks.
Turning to 2019 2019 was an important year for Ita as we accomplished many milestones, including our spinoff from KAR auction services in late June.
During this year, we also successfully expanded some functions.
Robin the depth of our teams higher key talent and enhanced our operating structure to support our U.S growth and independence.
Im extremely proud to say that the buildout of our public company functions is now largely complete.
We also incurred increased our capacity with the completion of 28 real estate projects, providing with providing us with additional flexibility for future growth.
So along with our near term objective to stand up an independent public company in fiscal 2019, we also drove strong financial performance.
For the year, we delivered organic revenue growth of 8.1% ahead of our goal for time has been.
And organic adjusted EBITDA growth of 6.8% inline with our original goals.
While our fourth quarter was impacted by the known volume shift that we reviewed in our third quarter call volume growth was still positive.
I am pleased with the overall results that we deliver and feel confident in our competitive position as we look to the future.
Underlying my confidence is the progress we have made and continue to make against our strategic initiatives as well as the opportunities that we see to drive further margin expansion overtime, which I will discuss in more detail in just a minute.
First let me review the progress on our key initiatives.
We continue to make great progress enhancing our international buyer network.
Our efforts in digital marketing market Alliance partnerships and in country visits are showing strong results. We now have market Alliance partners in 12 countries and international buyers continue to represent a growing percentage of our overall volumes.
Through our search engine optimization work, we have significantly increased web traffic versus just six months ago.
And we have improve the efficiency of our digital marketing efforts as well.
For the year, we drove double digit growth in international buyer activity and units sold internationally increased by over 20%.
Innovation is core to our business and we're seeing significant results from our ability to work with both buyers and sellers to bring innovative solutions to the marketplace.
Through this work we've developed such things the 360 view.
Which as we have discussed before as a tool that provide superior imagery through a full 360 degree view of vehicles interior and exterior.
And this is increasing buyers confidence in bidding and bye.
This is now rolled out across the us.
And we continue to introduce enhancements to this product, including feature tour, which was integrated into the platform earlier this month.
This tool enhances our 360 view capability by providing buyers with instant access to each vehicles original manufactured features and options as well as the ability to customize your valuation of vehicles based on specific areas of interest.
In addition, we continue to enhance our merchandising platform through key innovations such as virtual engine start and fire recommendation engine.
All of these introductions that seemed very positive feedback from buyers and sellers.
We're also assessing other auction optimization opportunities to improve the buyer experience, while continuing to make significant strides in enhancing our data analytic capabilities all of which are focused on generating strong returns for our providers.
Broadening our service offering to deepen strategic relationships is another key priority.
As we review last quarter, we've made enhancements in our industry, leading tools and services to reduce cycle time as well as improve returns.
Once us one such service is IEI loan payoff.
Loan payoff is the Industrys only end to end solution.
Along providers to quickly and efficiently get a real time payout quote receive a letter of guarantee and arrange payment for a positive or negative negative equity loan to receive the title.
Loan payoff is the only product in the marketplace that enables paying off negative equity loans, which are estimated to be up to 60% of all claims.
Our lender base connected to the low loan payoff portal continues to grow daily.
Just a year ago, we had 13 lenders and today, we have over 1000.
Similarly, we continue to add new insurance providers every month.
Our focus is to provide sellers with a seamless and efficient process, eliminating friction points, where possible as well as reducing cycle times.
Through our acquisition of Dbi and our integration with dealer track, we have further enhanced ri, a loan payoff product and capabilities and we have seen additional reduction in cycle times and believe that we have the opportunity to continue to build further efficiencies.
We also recently announced an integrated partnership with snap sheet, a leading provider of claims management technology, our combined offering will greatly reduce the time. It takes insurance carriers to process claims for total loss vehicles by automating both the exchange of information as well as the control the activities.
Across all parties involved in the total loss process.
Let me now turn to our margin expansion plan.
Work on this plan has been underway for several months as we have carefully analyzed our business and the opportunities to expand margins.
Key among these opportunities and one you've heard US discussed before is our buyer digital transformation initiative.
During 2019, we made significant progress in enhancing our systems and capabilities in preparation to move to an almost entirely online model in 2020.
This was an exhaustive process utilizing both internal and external resources and included conducting extensive surveys with our buyers to analyze and incorporate their feedback.
We havent enhanced our core technology, and we've made a number of enhancements to vehicle merchandising and have added tools data and information, enabling buyers to bid with more confidence.
We are well underway and rolling out our digital only auction to most of our branches throughout the us.
And in the current environment, we are accelerating the rollout.
We are confident that we will complete the rollout by the end of the second quarter. This year.
Upon completion, we will recognize both cost and revenue benefits from eliminating live auctions and this will enhance the overall buyer experience.
We also believe that we will be able to realign some of our yards, which in turn will free up some additional capacity.
Our goal is to make the process seamless and the experience exceptional.
We've also now completed our assessment of additional margin expansion opportunities and have identified the following key additional initiatives.
Pricing optimization.
Tolling optimization.
Branch process improvement and efficiency.
Based on our assessment, we believe these initiatives, including by our digital transformation can effectively at $104 million to $122 million, an incremental adjusted EBITDA by fiscal 2024.
And I'd like to note. This does not incorporate any potential impact from the Coburn 19 situation.
We've already begun the implementation of our digital transformation and we expect to commence most of the owners initiatives relatively soon.
In summary, we are pleased with the overall performance in 2019 and many in the many accomplishments we achieved.
We believe we are well positioned to deliver on the pillars of our growth strategy and execute our margin expansion plan.
I want to thank all of our teams for their hard work and dedication in executing against our goals. I'm also very proud that in 2019 IEI was awarded the certification of a great place to work from the global authority on workplace culture.
We are committed to driving long term value for all stakeholders by providing the best solutions and tools to buyers and sellers delivering against our growth initiatives executing our margin expansion plan and achieving our operational and financial goals this year and beyond.
With that I will turn the call over demands Vance. Thanks, John I will now review the key financial highlights of our Q4 and full year performance and then we will provide further color on or margin expansion plan I will focus my discussion today on our adjusted non-GAAP results. Please see today's press release for more details on our Q4 and full year finance.
Performance as well as our methodology for calculating non-GAAP results.
For the fourth quarter, our topline was slightly better than we expected as we continued to benefit from industry Tailwinds as the industry total loss ratio for the quarter was 20.3% up from 19.5% in Q4 2018 for the quarter, we drove organic revenue growth of 5.5% driven.
Primarily by higher revenue per unit as well as a slight increase in volume.
Higher revenue per unit was driven was primarily driven by the previous adjustment to fees as well as growth in our international buyer network and the benefit of our 360, new products and other ancillary products.
Organic adjusted EBITDA growth for the period was 3.6% primarily driven by our topline performance.
It was offset by the increase in SDMA, resulting from the incremental public company costs, we incurred during the quarter interest expense also increased 6.8 million versus the fourth quarter last year, primarily driven by higher debt balances, resulting from our new capital structure falling or spin off.
This increase in interest expense impacted our adjusted net income performance and as a result, adjusted EPS was 37 cents versus 38 cents in the prior year period.
As it relates to our full year results as John already reviewed organic revenue growth was 8.1% for fiscal 2019 above our original and previous guidance driven by a combination of volume growth and higher revenue per vehicle.
The industry total loss ratio for 2019 increased to 19.2% from 18.6% in 2018 gross margin was essentially flat versus the prior year. Despite the strong revenue growth due to a higher mix of purchased vehicles in our international segment as well as well as higher occupancy costs.
Organic adjusted EBITDA growth for the year was 6.8% inline with our original expectations and below organic revenue growth primarily it as a result of increased SGN a from additional public company costs.
Similar to the quarter interest expense was higher due to the higher debt balance following our spin off for the year adjusted diluted EPS grew by 6.5% versus fiscal 2018.
Turning now to our cash flow and balance sheet for the year, we generated free cash flow of 202.7 million and ended the year with a leverage ratio of 3.1 times as we repaid 22 million on our term loan.
Capital expenditures of $68.5 million increased slightly over the prior year same branch inventory declined 3.1% driven primarily by the impact of volume ships. We have previously discussed.
Now with regard to our margin expansion plan.
Please refer to the slide presentation that is currently available on our Investor Relations website that I will be referencing during my discussion before proceeding I do want to reiterate the dollar amounts of the EBITDA benefits I discussed today do not assume any potential impact from the cobot 19 situation as we update our 2020 and long term.
Outlook, we may adjust the benefits.
Please turn to slide three as John discussed we've been working on this plan for the past several months and conducted a comprehensive assessment using both internal and external resources. We have identified four key pillars to drive margin expansion over the next five years and expect this plan to result in annualized net adjusted EBITDA benefits in the 104.
Million to $122 million range that will be partially realized beginning in fiscal 2020 with full realization by 2024 now. Please please turn to slide for the four pulls the four pillars of this plan, our one buyer digital transformation to pricing optimization three towing optimization.
And for branch process improvement in efficiency.
Now please turn to slide five.
Where we discuss where we will discuss our buyer digital transformation John review the key highlights for this initiative and work is well underway to provide a best in class buyer experience, while reducing cost and driving higher revenues through the new aucs, our new auction platform improved merchandising and use of Daddy steady science and differentiated features and info.
Formation, we will improve the experienced for buyers significantly this transformation will impact both revenues and costs with higher revenue coming from increased internet fees and higher overall proceeds were vehicles on the cost side. The elimination of most live auctions will result in a corresponding reduction in costs.
We expect a total estimated annual net adjusted EBITDA run rate benefit of 40 to 48 million from this specific initiative with our full run rate achieved in 2021. Please turn to slide six we plan to optimize our pricing structure through selective buyer fee adjustments and pricing changes for.
Alex including monetizing some valuable services that are that we provide our buyers today, while also introducing new revenue generating services. Our goal remains improving features and building a greater breadth of services for buyers, while improving the overall buyer experience.
This initiative is expected to generate a total estimated annual net adjusted EBITDA run rate benefit of 14 to 18 million with the full run rate achieved in 2023 now please turn to slide seven.
We are focused on optimizing our towing costs through an enhanced model and new performance management tools. This includes actions like expanding our portfolio our portfolio of total contractors route network optimization and renegotiation of key vendor terms to name a few these initiatives will expand our network of tours and increase.
Action, which in turn will drive more competitive rates.
We will also be providing new and enhanced programs to benefit tours as well we expect a total estimated annual net adjusted EBITDA run rate benefit of $24 million to $28 million with our full run rate achieved in 2024.
Please turn to slide eight.
We also see an opportunity to improve efficiencies and reduce costs by aligning operations with our new buyer digital transformation model key elements include further off automation of key branch entitling processes as well of implementing performance management tools, we expect to drive a better experience for both buyers and sellers.
We expect an associated total estimated annual net adjusted EBITDA run rate benefit of $24 million to $28 million with full run rate achieved by 2023.
Please turn to slide nine.
Here you can see the net cumulative run rate benefits that we expect to achieve by category by 2024, as well as anticipated timing to get to the full run rate by category.
While our ATM pricing work will require limited investment we do expect a total capital investment of between 13 to 17 million between now and 2024 to fall in all the margin expansion initiatives as John noted, we are focused on monitoring and evaluating the potential impact of Carbonite team and what it could have on our result.
Yes.
We had volume revenue per unit and cash flow quarter to date that has been consistent with our expectations, but over the past two weeks. We've all seen the majors that have been taken by companies either recommending or requiring their employees to work from home for an undetermined a period of time.
He drivers of our business include total miles driven and the total loss ratio respected miles driven if the trend toward recommending are required employees to work from home continues for a period of time. It could it caused total miles driven to decline, which in turn with likely reduce accident frequency. Conversely, if people to decide to drive.
Five instead of flying.
Using mass transit or ride sharing it could increase total miles driven because there is usually two to two and a half week window between when a loss occurs and when we receive an assignment and the move toward the stay at home economy has really only occurred over the past one to two weeks, we still don't have much data to review to determine what the impact could be.
As a result, we're not providing guidance at this time as we believe it's prudent to take additional time to understand the potential impact, but the current situation on our business. We will continue to monitor the situation. We plan to provide our 2020 and long term outlook and we're hopeful that we will be able to do so on our first call.
The earnings call at which point, we believe we will have a better sense of the potential magnitude and timing of the impact of Coven 19, as John noted we remain confident in the long term fundamentals of our business with that we will open up the call to questions operator.
We will now begin the question and answer session.
To ask a question Human Press Star then one under Touchtone phone.
The reason the speakerphone, please pick up your handset for pressing the keys. So much on your question. Please press Star then too.
Today's first question comes from Craig Kennison at Baird. Please go ahead.
Hey, good morning. Thank you so much for taking the question and for the details you shared on the margin plans I wanted to ask about vehicle miles traveled I know, it's very early just said that but I'm wondering if you have any anecdotes from conversations this week with.
Collision repair shops or insurance companies that would give you some indication for the decline were likely to see in accident claims.
Yes, I mean, Craig good morning, Thanks for joining us.
We have been in contact with our with our customers and with other industry players and again there. It is all it is very early.
We don't have any I don't even have any anecdotes for you at this point that it's it's.
You know everyone's trying to do the same assessment where to understand.
Where things are going to go.
Yeah, that's totally fair and I appreciate you taking that question.
Maybe just to stress test your model here could you give us a feel advance for your cost structure, what's fixed and variable and cost of goods sold in SGN and as we kind of think through the next few months.
Yes.
It would be I can't really provide that incredible detail, but I think if you think about our model overall first of all of you think about cost of services.
The vast majority of that is sitting in our branches and related services that we provide.
In the field, whether those be title in services or customer care services or things of that nature and what I would say is the vast majority of as we've talked about before those costs are either.
Employee related cost or they are tolling related costs and so obviously.
Tolling.
It's variable related to the volume that we have.
As you think about cost of running our branches customer service costs as you think about tiling related cost in the employees to do that there. There was a large portion of that would be fixed for some period of time and that includes people cost as well off benefits and occupancy costs, but then there would be some portion of that would be very.
The variable and I think of its fair to think about SGN, what congestion and a similar fashion which is.
Some portion of that is going to be fix there are some variable components of that.
Obviously, we would assess and think about related to volume, but thats the way I think.
The way that you probably should think about it conceptually.
Thats quite helpful. And then last question just on on liquidity Fandstan any comment on.
Any covenants that you may have that.
Could be in play here given potential downturn, obviously you've got.
A lot of maturities that are put style in future periods nothing immediate but just curious about your covenants and whether you see any.
Exposure there.
Yeah, I mean, we too so we don't see any immediate exposure.
We have a spring covenant that is only the only springs, if we draw on our revolver, which were.
We're not drawn on the ended the year and are currently not drawn on.
And so and obviously have.
Plenty of cash on our balance sheet at this point in time. So once again at this point in time things can change, but at this point in time, we feel comfortable with a situation where things are at.
Great. Thanks, so much.
Thanks.
Next question today comes from Daniel Umbro Stephens, Inc. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Yes.
Good morning.
Last quarter event, we talked a lot about market share shifts how they are impacting your business. It sounds like that somewhat stabilized in fourq you.
I would love to hear an update on just the state of that quarter to date and are there any details you can share about the changes you've made to your business not how you're improving your service levels and higher customers are responding to that.
Yes, I mean, I'll go in and all as John to kind of jump in as well. So one thanks for joining the call in for your questions.
So I think a couple of things I think as John and his prepared remarks, as we talked about today, we're really really focused on Friday, providing the best experience in service.
Certainly to buyers at which is a primary initiative that we have going on if you think about what we're doing with buyer digital transformation Threesixty view feature tour.
A number of key initiatives that we have in place that we put in place in products and services that we think will significantly enhance the experience for buyers. It will also went in doing so allows them to be much more confident and to bid on more cars into bid more for those cars and so we feel our primary focus of.
Our efforts as we kind of move to primarily total.
Digital auction place is that we want to provide the best experience for buyers the best set of tools and information for them and really focus in on merchandising the cars that vehicles for buyers and we think that so far that is have we're seeing really good results from that and we feel really good about that and thats what were looking toward in the future as well as a dip.
For achieving back around how we're going to compete in the market and then secondly, we've talked a lot about loan payoff and what we're doing with sellers really which is trying to align ourselves with sellers and help them reduce cycle times and help them. How they are more seamless business and relationship with us and we're seeing.
Good strides there and by the way what we're doing with buyers helps buyers, but also drives greater returns for sellers, which is something obviously that sellers are very very focused on for John Yeah, and the sellers are recognizing more and more what we're doing in the bar side.
Crude the merchandising so that it is I mean, they recognize the translation of better merchandising leads to higher returns increasingly there are recognizing the strides we're making there so I think.
Yes, I think our sellers or sell side customers are excited about both the products that were offering them directly and what we're going in the bar side too to drive higher levels of returns to though.
Got it and then second question on the margin expansion plan than I.
I understand you guys have work on this for a while but obviously the backdrop today, there's not much visibility into the business near term. So I guess, how do you get comfort with the timeline of the plans you've given obviously five years. The long time to look out or these already identified and quantify cost savings or how do you get comfort.
It would the ranges.
Today.
Yeah. So you know is John I alluded to on the call.
The work that led up to the presentation. Today has been in work has been in process for some period of time and in doing that work we've had a big cross functional team across the company. That's been engaged in that we've also used external resources as well. So what you see on page nine of the margin expansion plan.
Is really a cumulative effort and we have specific identifiable sub initiatives under each one of these area than.
Identified and spent a lot of time and a lot of work on understood identifying them assessing them and figuring out what we think the benefits are and timing is related to each one of these so if you think about buyer digital transformation or you think about telling optimization. For example, there are number of sub initiatives that are very detail.
Sales and we have detailed work plans for each of those so the short answer is is that.
We feel very confident about the plan the initiatives and at this point, we feel confident the benefits now that's subject to as we mentioned in our prepared remarks around some of these are volume driven and could be impacted.
Somewhat by Cobot 19.
As a reader, which we don't understand that and as we sit here today.
That's helpful. And then last one from me van more near term on the gross margin expansion. We saw in the quarter. This is the second quarter in a row of extension despite tougher comparison.
Can you talk about what's driving that and how much of that they'd be driven by the price increase you took in Threeq you and then how sustainable maybe ex that cobot 19 impact, but how you think underlying gross margins are trending in the business. Thanks.
Yes, Thank you Dan.
A couple of things so one I think that.
It's primarily being driven by the buyer fee adjustment that we enacted.
In beginning of July of 2019, but also we are seeing results. Good results from some things that we've implemented across assays, including 360 view and things of that nature, but the primary the primary factor would be the adjustment to buyer fees.
Got it thanks best of luck.
Okay. Thank you.
And our next question today comes from Stephanie Benjamin at Suntrust. Please go ahead.
Hi, good morning.
Good morning, that's happening.
I wanted to ask a little bit about the impact potentially I know, it's early with the 19 on the buyer side tell you spoke a lot about just what could happen from the miles driven accident frequency, but have you seen any kind of nonetheless.
And I know, it's very fluid, but just any demand or any change on the buyer side and then maybe if you could remind us geographically where you see a large percentage now that you have to quantify it but just kind of where you see a lot of your buyers residing the geographic location. Thanks.
Sure Great 70, so yeah, I mean, we have not I mean again it is very very early but but.
We do have a.
Now that we have a very robust buyer base thousands of bidders every week or looking at bidding and buying our vehicles domestically and internationally. So I think.
That is.
Some benefit to our business and this time type of environment.
So that's the short answer our buyers we have obviously, a really really strong domestic buyer base and then internationally.
Mexico is our biggest international market and then and then.
It's a spread around the globe, but we do have buyers and 110 countries.
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And again, we're we're.
We're reaching out to them through this process as well to make sure that we stay engaged and we're communicating with them about.
About our about our business. So yes, I mean, that's us that's what we know today.
Great and this will quickly just.
I wanted to ask.
He said remind us if you've had any large contractual renewals with some of your big insurance ensure ensures some this year that may come due or maybe the timeline of some of those so you can think about it from that standpoint. Thanks.
Yes, again, we don't talk about specific customer.
Well I as I said in my remarks feel confident about our competitive position and that's all we're going to comment on that.
Thank you. Our next question today comes from Bob Labick CJS Securities. Please go ahead.
Good morning, Thanks for taking the question more about right about ryba I wanted to start with a kind of two part question.
Obviously unprecedented times, we don't know what's going on but if we all assume that there will be.
Miles driven down for a period of time can you talk a little bit about first how long does it take for reduction of miles driven to flow through into your volume like generally speaking and then part two.
Talk about the relationship between the prices realized at auction when volume Paul's and how long that takes because presumably.
There are still gonna be a lot of demand for the cars. So prices maybe bid up and just help us think through those two dynamics of initially volumes may come down, but you'll have some offset potentially if you believe that yes.
With prices help US you know kind of think through that those dynamics. Please.
So, yes, I mean as Vance said in his remarks, I mean, there's typically a two to two and half we flak from from accidents or when were notified so that's that's kind of.
The short time or short term kind of frame that we would look at.
In terms of the demand side, Yeah, I mean, there's a lot of Theres, obviously, a lot of drivers of prices in our options.
I am as one of them.
And.
Then you've got the whole dynamic of used car new car is that going to increased demand from for used cars. So you know weve overtime looked at this and it's hard to.
It's hard to kind of Pinot to one driver because there's so many things that affect pricing.
But again through through.
Our history, we've we've continued to.
Drive a prices through all the work, we're going to find more buyers to bring more services to provide more.
Information to our buyers and again it will.
As we've talked about we are going to continue to drive fourth with that.
Two.
To support the demand side.
And Bob just add what to do what John was saying you know the two two and a half weeks.
Outlined in my prepared remarks.
Thats as John alluded to Thats between when the incident takes place and when were noted get notice of that so if you think about assignments coming to us, but then on top of that Theres a period of time, it could be a month or so.
At least on top of that on average and by the way no cargo carriers. The same whereby we have to kind of the carrier has a provider has to get the title. We then have to convert that into the branded salvage title and then we run the auction for the car and so we've talked before about total cycle 45 50.
Something in that range as you think about when the cars are you know as if there was a some decrease in lot of miles driven that resulted in less incidents than there would be at that kind of a timeframe between when we would actually see that show up.
In our results of cars sold I think you're right I think.
An important point here is that and we don't know kind of what buyer demand. We're just in the process of John says evaluating.
We're closely monitoring that as well, but in an environment. If there was one where buyer demand remain constant and you had less cars than I think it would be a fair assumption to think that the bidding price for those cars may go up.
But we don't once again, we don't know the degree to which we have less cars. We don't know kind of how buyer activity is changing we're in the process of we're monitoring that it's very very early stages, given kind of how this is unfolding.
Got it okay. That's helpful insights there I appreciate that and then just one more for me. Obviously you have a lot of natural margin growth opportunity as youve outlined in the margin expansion plan.
Can you talk a little bit about how much of that.
You know if any or you're planning on reinvesting back into the business.
What are the biggest areas of opportunity to reinvested and then is it.
Accelerating the international buyer base or other initiatives that you may be able to.
Take some of this margin enhancement and then.
Enable that to accelerate growth or other growth plans.
Yes.
Bob pianos bands. So I think is we've kind of outlined previously the way that we're going to think about investment in capital is consistent with the philosophy. We've lost we that we laid out which is is that.
We're going to look at capital investment.
That we make in Capex that we actually invest back in operations in the form of DNA SDMA and otherwise.
Share repurchases dividends M&A or paying down debt what have you were going to look at those.
Relative to our cost of capital in our hurdle rate and then we're going to look at those opportunities relative to the other opportunities that we have at any one point in time and what's the best financial opportunity that we have now having said that as we've also said it at least initially our focus is on.
Reinvesting back in the business, because we think there or good opportunities to do so and drive our business and I know about away some of those investment opportunities may include.
Down the road domain May include on land repurchases May include also international expansion things of those nature as well, but I think that's the philosophy as we kind of generate returns through the margin expansion plan, we'll think about reinvestment. According to that philosophy, I think with a slight till more towards at least.
Initially reinvestment back in business, because we do see opportunities.
Got it okay terrific. Thank you very much.
Thanks, Bob.
Next question today comes from Bret Jordan Jefferies. Please go ahead.
Hey, good morning, guys, Hey, Brett.
When you had put out Brett first press releases on digital Threesixty and the loan payoff program throughout some yield and cycle time numbers can you give us an update you are we still sort of seeing that order of magnitude an improvement.
So on on loan payoff.
We are I mean, we're we're as we as we bring more lenders on and more insurance companies, we are seeing significant.
Decreases in cycle time and.
Yes, I mean, thats going really well on the on the.
360 view.
With that press release, we talked about a pilot program with a limited number of are limited model year band as we've expanded it to the.
The breadth of our inventory.
You've got lower value vehicles. So the nominal impact is probably not as great, but it's still we're still seeing we're still seeing lift throughout our mix of vehicles.
Really positive mix and as I said earlier, we continue to add features to it. So we believe that it's going to continue to drive additional bidding.
Okay and then it gets you commented about 28 incremental real estate projects in the fact that you would take up some capacity by dropping the live auctions I.
I guess, assuming the auctions were gone what capacity utilization are you running out.
Yeah, Brett we haven't provided that information.
Previously so that's just that's not information that we provided publicly.
But I think what we have said and feel confident with is that we have.
The real estate that we need to meet current demand as we see it right now and then in kind of the the near and intermediate term as well so we feel comfortable with the real estate that we have.
To provide the services that we need to four or solar providers.
Great. Thank you.
Thank you thanks Brett.
Our next question and then ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one at this time.
Next question comes from Dare, Glenn Consumer Edge Research. Please go ahead.
Hi, Good morning, Paul Paul do you spend is just on the timing of the benefits from the margin expansion plan, how much of that one zero, Florida 122 benefit would you expect to realize in 2020.
Assuming this was a more normalized environment, so excluding impacts from from Coven 19.
Yeah I think.
We're not prepared today to give a specific amount, but what I would say as if you reference page nine where we've laid out and we'd given some indication of that the benefits by category. So if you think about buyer digital transformation, we've said that adjusted EBITDA run rate benefits of 42 to 48 million.
Dollars and we've said that the run rate will be a full run rate in 2021 is Johnson his prepared remarks.
Our expectation not our expectation we will be complete.
With the conversion to online only auctions in all the markets that we're doing that which is the vast majority of all markets.
And in fact, you know, it's going to be close to all of them.
In the U.S.
And so yeah, we're going to be.
Done by that by the end of the second quarter and so from that you could see that we would expect to be creating the benefits of that.
In 2020, right, so you're going to get a not on a full year basis, but you're going to get a decent amount of those benefits in 2020 things like pricing optimization towing and branch process improvement and efficiency they have a little bit longer tails in terms of when we expect to be recognizing those Ben.
Fits and then when we expect to be on a full run rate basis as well, but we do expect to specifically from buyer digital transformation to incur benefits in 2020.
Okay got it and then on the pricing optimization initiative can you just clarify is that targeting solely buyer fees or both.
By side by Intelsat fees being evaluated and then secondly, you called out adjusting where demand is more inelastic curious if you're evaluating demand based on geography or vehicle type or any other factors.
Yeah. So no. Thanks, that's a good good question Derek so no the pricing optimization.
The initiatives that we have a under that are all related to the buyer side and the way I describe it is as we said in our prepared remarks. So that is where we believe that we have the opportunity to adjust fees on certain things, where we think.
That makes sense based on the price elasticity work and the as many analysis that we've done on but.
Secondly, I think there's a number of things that we outlined where we either have existing products or services that are in place, where we either work charging for them previously more aware we've looked at the analysis and Weve looked at all done customer research and better understood the willingness to pay for certain things.
Earnings and now we think that theres ability the charge for them more to charge something different more for those products and services because they are really really valuable to buyers.
In addition, there are new products and services that were in the process of rolling out a lot of so number of which we've talked about and then we've also given thought in consideration to how we may price those but everything related to pricing optimization is really on the buyer side.
Okay, Great and then just last one from me you mentioned vehicle miles traveled and accident frequency, but also wanted to get your thoughts on the other side of the Quane accident severity. What are you thinking there on second order impacts like how repair costs may be impacted due to coven 19.
I think that I can answer this in a I'll turn to John too, but I think that.
One we don't.
See anything that would suggest that the percentage of total loss.
Would change relative to I.
I mean accident frequency as we outlined may change based on miles driven but we haven't seen anything that suggests that the percentage of total loss of would change.
So hopefully hopefully that answers your question.
Yeah, and just a little more color I mean, some of the questions that are BNS. Among the carriers are around parts supply to repair vehicles. So if theres disruptions in parts supply what does that due to repair timing and costs.
And then just timing if it takes longer to fix a car is an insurance company guys think differently around.
Do I want to occur rental for an extended period of time.
You know that enters into their decision, making so those are questions that as we've been having discussions with our insurance company provider sort of your questions. There they're asking we we don't have overview on it or are they havent next they haven't given us their view, but those are just areas that are that are being.
Assessed as part of this whole situation right.
Okay. That's all very helpful. Thank you.
Thanks to our thanks dark.
Ladies and gentlemen. This concludes the question answer session I'd like to turn the conference back over to the management team for any final remarks.
Just wanted to say thank you everybody for joining us.
And again.
We look forward to talking to you at the end of the first quarter. Thank you all have a great day.
Thank you Sir todays conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines another wonderful day.