Q4 2020 IAA Inc Earnings Call
[music] margin.
Good morning, and welcome to the IAA, Inc. Fourth quarter 2020 earnings Conference call.
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Please note this event is being recorded.
I would now like to turn the conference over to of Reef Ahmed Vice President Treasury. Please go ahead.
Thanks, Chad good morning, everyone and thanks for joining us today for IAA fourth quarter of fiscal 2020 earnings conference call.
Can 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 for questions.
Before we begin I would like to remind you that certain comments made during this call regarding our plans strategies and goals.
Our anticipated financial performance constitute forward looking statements and are made pursuant to and within the meaning of the state of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Such forward looking statements are based on management's current assumptions and expectations and as such.
Just for risks and uncertainties that could cause actual results to differ materially from such statements.
Those important factors are referred to <unk> press release issued today and in the risk factors section included in our annual report on form 10-K for the year ended December 2009, 2019 filed with the SEC on March 18th 2020 as us.
<unk> in our form 10-Q filed with the SEC on May six 2020 and in the form 10-K for the year end December 27, 2020, which we expect to file on or near February 19, 2021.
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.
The schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Iaa's press release issued today a.
A copy of today's press release may be obtained by visiting the.
The Investor Relations page of the web site at Www Dot I E <unk>.
Dot com.
I will now turn the call over to John John.
Thanks Rich.
And thank you all for joining us for our fourth quarter and fiscal year on the earnings call.
Fans and I are in three different locations for their so please bear with us.
Particularly when we do the Q&A.
But let me just start out of to recap the to say the 2020 was an unprecedented year would be an understatement.
The challenges of the pandemic have tough for us all personally and professionally.
And I want to start by just saying how proud I am of the IAA team and how they rose to meet these challenges.
Our top priority throughout and continues to be the health and safety of our employees customers and suppliers.
We were pleased to be in a position very early on in the payment to help our partners respond through products and solutions such as the inspection services and title services that help providers remotely manage their workforce safely and efficiently without human contact.
At the same time, we also executed against the priorities delivering an improved experience for our buyers and sellers primarily through the accelerated rollout of our digital auction day.
So the only auction platform.
We also made great strides launching new products services tools and functionality.
This improved the experience along with favorable industry dynamics contributed to the strong revenue per unit trends that we saw for much of the year.
Which helped partially offset the pandemic driven volume declines that we also experience.
And as a reminder.
At the height of the stay at home orders in March of last year miles driven declined between 40, and 50% leading to a 45% decline in assignments that are trough in mid April.
Since then we have seen sequential quarterly trend of improvement and assignments and units sold as miles driven has improved.
The total loss frequency continued to be an industry tailwind, reaching 21 five per cent of claims in the fourth quarter of 2020 off.
Up 120 basis points over 2019.
And for the full year. The average total loss ratio was up 130 basis points, the highest year over year increase since 2015.
Combined all of this led to a year over year organic revenue decline of three 7%.
And our organic adjusted EBITDA decline of just two 2% for the full year.
As we mentioned on our last call early in Q4, we had seen assignments units sold and revenue per unit all consistent with the levels that we had seen exiting Q3.
As the quarter progressed, we continue to see solid solid volume trends in service revenue per unit remained near all time highs.
<unk> for the fourth quarter, we returned to revenue growth with an organic revenue increase of seven 5%.
From a profitability standpoint organic adjusted EBITDA grew 16, 4% driven by the continued strength in revenue per unit and the benefits of our buyer digital transformation, which more than offset the volume declines.
So let me now turn of talk about our strategic initiatives.
Over the last year and a half since the spin we have focused on six key initiatives.
I want to update you on the progress that we've made and where we're going with each.
And I want to start with discussing how we are broadening our service offerings to deepen the strategic relationships.
In 2020 as I mentioned, we were very pleased to be in a position to continue to assist our partners with key tools and products like construction services and title services the crew.
The extremely beneficial given the rapid shift to remote work environment.
And of focus on virtual client annually.
We also significantly enhanced our best in class.
Our best in class of loan payoff tool.
<unk> successfully integrated dealer track and DDI, while also making some European progress in adding more than 500, new lenders to the platform.
Ending the year with over 1500 financial institutions and insurance partners on the portal.
We continue to believe that our loan payoff tool is the industry's only end to end solution, allowing providers to quickly and efficiently. The real time payoff quotes we see the letter of guarantee and arrange payment for both positive and negative equity loans in order to receive the clear title.
Another example of enhancing our product suite was our announcement last month about DDI, expanding its electronic title and registration product offering and the Indiana, which will speed up processing of transactions in that state.
And with regards to of buyers are focus and progress with the rollout of our buyer digital transformation and the introduction of our interact platform with the tools such as 360 view virtual engine start and the future tour has continued to drive strong traction amongst new and existing buyers.
So continuing with the buyer of discussion of the next initiative is the continued enhancement of our international buyer network.
While the pandemic has certainly had an impact on our international buyer growth earlier. The earlier in 2020, we are pleased that for the full year, primarily through focused digital marketing search engine optimization initiatives. We grew our total buyer base by approximately 28 per cent.
And grew our international buyer base by approximately 40%.
We also added new Mark of Alliance partners in 2020 and between these alliance partners and our broker buyers.
Now having grown our in country coverage and our top 25 international markets.
We're also leveraging our voice of customer program and receive regular feedback from our buyers around what we're doing well and what we can do better.
From the feedback we've assembled us assembled internal teams to address specific items that are noted for improvement and we've gotten great praise from our buyers for our responsiveness.
The combination of these first initiatives positions us well to accomplish our next initiative enhancing existing relationships and expanding market share.
The foundation of related BTT and the improvements we have implemented a loan payoff in our ancillary product suite helped us make significant strides in improving.
Our competitive positioning, which we believe will serve us well to drive results going forward.
Now, let me speak to our next initiative expanding margins.
As we've already discussed.
We break this down to for targeted areas of improvement buyer digital transformation.
<unk> optimization branch process improvement and pricing optimization.
The first phase of our buyer digital transformation of was completed with the accelerated rollout of our digital only auction platform in the us during the second quarter of 2020.
We were extremely pleased with the smooth transition to an entirely digital platform and it is clear the both revenues and profitability were positively impacted from this initiative.
Our buyer digital transformation, resulting in meaningful benefits for 2020, EBITDA, even given the impact of COVID-19, and as an as is as important. We also received positive feedback from both buyers and sellers.
With regards to the three remaining pillars towing optimization branch process improvement and pricing we are still in the early stages of these initiatives, but we are on track in each.
For one example.
Continue to.
<unk>, our route optimization and a few more markets and have continued to see of benefit and reduced drilling costs without any degradation of service.
And we will continue to update you on our progress in these.
As we look ahead, we anticipate being able to execute against all of these initiatives and generate the net adjusted EBITDA benefit run rate the area with that.
We originally projected notwithstanding any prolonged macro impact.
Next is our continued work to innovate and enhance our data analytics capabilities.
Much of our success in building the foundation that I have discussed has been through our own innovation capabilities producing tools like 360 view and incorporating data science to focus on buyer acquisition and retention.
And then using digital marketing and search engine optimization to customize our engagement with these buyers.
And lastly, let me now cover.
Our initiatives focused on expanding international.
This focus to date has been and will continue to be in the near term on the international markets in which we already operate with our Canadian and UK operations.
We've made good progress and replicate a much of the work that we successfully executed in the us with some customization of takes into account the local practices and policies.
We have implemented an all digital model in Canada and rolled out tools like 360 view in both Canada and the U K.
With our U K business, we rebranded rebranded the operations to IAA.
Launched a new auction platform and transformed our technology platform.
We have made good strides in understanding the international landscape, having recently completed our assessment of additional markets to determine the areas.
We believe have the best long term opportunities for IAA.
So in addition to our strategic initiatives. We also completed 30 for land projects the increased land capacity in 2020, including a number of.
Including the combination of Greenfield locations expansions.
Of the existing facilities and relocations.
Additionally, we continue to benefit from our exclusive agreement with NASCAR, which provides us with catastrophic acreage in a very flexible manner.
We feel very good about our ability of our real estate to support meaningful growth and serve our customers effectively going forward.
In summary, given the unique circumstances under which we operated in 2020 again I could not be more proud of our team and the achievements that we've made in the year.
Given the uncertainty around the ongoing pandemic, we are not providing guidance at this time.
However, looking ahead, we will continue to make progress against all of our initiatives to further improve the experience for buyers and sellers and strengthen our platform and foundation for growth.
We will also continue to make the necessary investments to support our growth and adhere to the disciplined approach to capital allocation and investment that we've always taken and talked about.
I will now turn the call over to Vince to review our financial results.
<unk>.
Thanks, John and good morning, everyone I just wanted to spend the few minutes, providing some more detail and color on our results for the year and fourth quarter I.
I will focus my discussion today on a non adjusted on our adjusted non-GAAP results and just touch on some key highlights. Please see today's press release for more details on our financial performance and all of our methodology when calculating non-GAAP results.
The improved sequentially as we move past the peak impact of the pandemic earlier in the year capped by a strong fourth quarter that saw a return to revenue growth as we continued to benefit from the strong revenue per unit trends as well as improved trends and assignments and units sold for.
For the year, we saw a decline of three 7% and consolidated organic revenue and a decline of only two 2% for organic adjusted EBITDA, which we feel really good about considering where we were at in late March and the unknown impact of COVID-19 on our business.
John mentioned and we have previously discussed we benefited from higher revenue per unit, which we believe was largely driven by our efforts to accelerate buyer digital transformation and expand our global buyer network. Among other things indeed of really good job managing costs. During the pandemic, we generated free cash flow for the year of 240 240.
$2 million, which increased 18, 5% versus the prior year. Despite the revenue decline and we benefited from improved working capital.
We ended 2020 with liquidity more than double the level at the end of the prior year.
Before I review the key financial highlights of our Q4 performance a brief housekeeping note as you likely saw in our press release beginning of the fourth quarter results. We will now be breaking out revenue and cost of sales by vehicle sales as well as service revenue given the vehicle sales now represent greater than 10% of our consolidated revenue.
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For the fourth quarter consolidated revenue increased seven 8% to $383 5 million compared to the prior year period organic consolidated revenue, which excludes the impact of foreign currency increased seven 5% to $382 7 million as of <unk>.
18, 4% increase in revenue per vehicle was partially offset by a nine 2% decline in volume.
Service revenues increased three 5% to $332 8 million compared to the fourth quarter of fiscal 2019 and vehicles sales increased 47, 4% to $50 7 million compared to the prior year period, both of assignments and units sold increased sequentially versus the third quarter.
While service revenue per unit was down slightly from the third quarter. It was still very strong and in line with our expectations.
Looking at our geographic performance revenues increased in both our us and international segments were driven by higher revenue per unit offset by lower volume International revenue also benefited from a higher mix of vehicle sales as one of our providers switched from the consignment model to a purchase vehicle model during the fourth quarter.
Gross profit increased to 100, $152 4 million from $135 1 million in the fourth quarter of fiscal 2019.
Gross margin increased 170 basis points in the quarter and service revenue gross margin expansion more than offset a decline in vehicle sales gross margin.
We continue to see benefits from the incremental revenue and cost reductions from the buyer digital transformation.
SG&A expenses were $37 7 million compared to $36 2 million in the prior year. Adjusted SG&A expenses were $36 6 million, an increase of two 2% compared to $35 $8 million of the prior year period, due mainly to incremental public company costs.
Adjusted EBITDA increased by 16, 5% to of $115 8 million from $99 4 million in the fourth quarter of fiscal 2019, excluding the impact of foreign currency for.
<unk> adjusted EBITDA increased by 16, 4% to $115 7 million for the fourth quarter of fiscal 2020.
Interest expense declined by $3 7 million to $12 9 million compared to $16 6 million in the fourth quarter of fiscal 2019. The decline was primarily driven by lower interest rates on our floating rate debt the interest rate on our term loans was 244%.
The effective tax rate was 22, 2% versus 23, 9% in the fourth quarter of fiscal 2019.
Net income increased to $64 1 million from $45 6 million in the prior year adjusted net income increased by 33% to $65 3 million or 48 per cent per diluted share compared.
Compared to $50 1 million or <unk> 37 per diluted share in the fourth quarter of fiscal 2019.
Turning to our cash flow and balance sheet capital expenditures for the quarter were $27 9 million compared to $12 1 million in the prior year capital expenditures in the quarter, where the higher rate debt earlier in the year in part due to land purchases as well as some continued catch up on deferred spending for the full year capital expenditures were rare.
<unk> flat at $69 $8 million, including land purchases versus $68 5 million in 2019.
Our balance sheet remains very strong and we exited the year with total liquidity of $595 5 million, which is over $330 million higher than the end of last year, providing us with significant financial flexibility. We ended the period with a leverage ratio of two seven times EBITDA.
Adjusted EBITDA, which is down a full half churn for the $3 two times level at the time of the spin.
During fiscal 2020, we generated free cash flow of $240 2 million an increase of 18, 5% over fiscal 2019, as we benefited from improved working capital management.
Finally as noted in our earnings release, given the continued uncertainty regarding COVID-19, we are not providing guidance. Today. However, let me share some color of that may be helpful. First fiscal 'twenty 'twenty, one will be a 53 week year with the extra week following at the end of Q4.
And as it relates to the first quarter trends for assignments volume sold and revenue per unit remained consistent with fourth quarter levels.
I do want to note that our international markets, Canada, and the U K have had more stringent restrictions put in place then in the US and this may have more of an impact on vehicle miles traveled in those locations. We will continue to monitor the these restrictions and the potential impact with that we'll open up the call to questions operator.
Thank you we will now begin the question and answer session to ask the question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will come from Daniel <unk> with Stephens, Inc. Please go ahead.
Yeah. Thanks, Good morning, guys, congrats for the quarter and thanks for taking the questions.
Morning day.
John I wanted to start on debt of a higher level of one you guys had been online of labor roughly nine months now.
Execution gone, but more specifically how long of the international penetration gone have you seen success growing the international buyer base relative to your original expectations and then I don't know if the broken this out before but could you share what percentage of your U S vehicles are sold of received today.
Great. Thanks, So let me start with the.
The execution on the implementation.
Extremely extremely well we had really no.
The sort of hiccups of any significance and a couple of things here and there that we needed to correct and we curriculum really quickly, but I think our technology team as well as our implementation team for the two.
Really really good job of.
Implementing and again on an accelerated basis implementing and so I think.
Really no issue there and I think we're seeing it and we're seeing the results of the operational as we talked about the savings, but we're also seeing it in terms of our buyer engagement.
And what buyers are doing the.
They like the new platform sales.
The interaction they liked the interact or new or new market, our marketing platform and.
And so I think it really has been of success.
In terms of international buyers.
Yeah.
As I talked about in my prepared remarks early on there was disruption during the pandemic as the first for.
First came about but.
We're really really happy with with growing our international buyer base by 40%.
That is that is really successful given the what's happened in 2020 and.
We knew that we had.
Had a good plan.
Not just with the platform, but with our digital marketing efforts. So I'm not surprised that we grew up.
I'm just I'm really pleased with the results in terms of growing our international buyer base.
In terms of the percentage of vehicles that leads the country I don't think we have the answer of your correct me if I'm wrong I don't think we've disclosed that publicly.
That's right John we haven't updated that in the term result.
And again, Sam just there is some hazard and.
Because many of our domestic buyers turnaround and export it we don't necessarily know what theyre doing and what the vehicle so to put a hard number on it would be the would be difficult, regardless, but we're really pleased with what's happened with the international buyer.
Yes, correct.
The defense and I guess as a follow up to that 40% growth of the big headline number John but how mature how much more room do you think there is in front of you to continue growing debt are we anywhere near maturity or is there still a long runway of either existing countries or new countries that you can sell into to continue growing that base and driving revenue per unit higher.
Yes, great. Yes, we do see we do see continued what we call white space in terms of the international buyer. We still think there's there's areas to further penetrate the countries we're already in and there are still.
Additional markets that we think we can find buyers on again.
With the with the.
What we've put in place we are confident we're going to be able to find the banner and a pretty efficient way.
Great and then last one for me a bit of housekeeping and we've heard a lot of commentary on freight cost both ground, great and maritime overseas shipping becoming real inflationary here are you guys experiencing yesterday was that in the fourth quarter at all and then how should we think about those factors from a cost perspective, as we head into 'twenty one.
Sure.
The branch do you want to.
To take of Cracker barrel.
Yes sure.
Yes, again, we haven't seen anything to date.
With kind of inflationary spending there.
As you're probably aware of buyers purchase of our cars.
Typically the range for the transportation of those vehicles to their location that we are working on some things that we feel really good about those areas, but regardless of the buyer.
It will be taken on that cost.
We havent really heard or seeing anything from our buyers of suggests that that's an issue for them and.
And in fact, if you look at our of proceeds per vehicle and what type of revenue per unit and kind of the increase as we talked about earlier of international buyers of the suggest that theyre getting the drilling of that quite well and they continue to bid on the number of vehicles a bit higher and buy more vehicles.
That helps us.
Well, thanks, so much for the color guys and best of luck.
Thanks, Dan Thank you Dan.
The next question comes from dairy crest, the piano with Barrington Research. Please go ahead.
Good morning, all.
Good morning, Greg.
Thank you John.
You mentioned in your comments that I guess, the total loss ratio was up 120 basis points to 21, 5% in Q4, and then of 130 basis points and it didn't quite get what that percentage raw percentage number was at 20% or higher or lower.
For the that was for the full year Gary Yes.
Yes, Dan the reef to us I don't have that number in front of me what it was for the full year, but okay.
Certainly the carrier we can get it for you yes, yes, that's fine that's something you can get to me is there any chance now that you're breaking out your revenues that you can give us an idea of the.
Unit declines.
The declines and increases.
On.
The fee based vehicles versus purchase vehicles.
Sure.
Yes.
So unit so the vast joining on the terms of yes. Please please.
Yes, Gary that's not something.
Okay.
It's early disclosing at this point in time.
But.
Obviously with what you saw with the increase in vehicle sales.
If you consider that the.
If you think about the Odyssey revenue per unit has gotten higher as we've talked about so if youre not even in the quarter over quarter over quarter comparison in the fourth quarter of 2020 versus the fourth quarter 2019 that clearly would have been a factor, but also you would have.
Good performance on volume.
As you talk about kind of service revenues Odyssey of the primary factors of the alluded to in our prepared remarks is as debt should really really strong revenue per unit has been the primary factor in that offset volume declines.
Okay are you.
Going to give us some kind of the.
Historical data on the breakdown between service fees in vehicle sales is that when you file your Q4 of modeling purposes.
On a quarterly basis.
I think what we'll be providing us similar to whats been provided in the earnings release, which is going to be.
Just the fourth quarter and the full year.
So that's.
That's what.
The final <unk> and then obviously going forward.
<unk>.
We would expect that we would continue to break those out.
And then you can see that on a quarterly basis, Gary Okay, and then on what I don't have this in front of me.
I wrote in a report way back but of the three.
Elements of the margin expansion plan.
Still need to be completed, which which one will if any will be scheduled to be completed this year John.
Well.
Gary I think we provided.
We provided it over a multiyear period, and we're going to be making progress on all of us in terms of completed.
I don't know that we have.
Going to complete any one of them, but I think we're going to continue to attack over the next couple of years for answers that alright fair.
Yes, no that's net.
Fair I mean, if you Gary if you go back and you look at the plan that we rolled out in March of 2019.
I think we did give some sense of timing as it related we did give some sense of timing as it related to each of those.
Some of those.
Go on for a little bit longer than others right. So tolling optimization for example, and I think what we're seeing right now is that we're making really good progress.
We feel good about things and we're on track with the timing of the benefits at this point.
Thats fine I was really trying to get at as you did the digital transformation not much quicker than us thinking that maybe there were some things have been going better than expected and you may be able to wrap up some of these things as we go forward Alright, and then and then lastly.
In terms of the impact of these.
Elements of your transformation.
Is that going to be more of an impact on the gross margin side or the operating margin side.
As we go forward.
John You want me to take US one yeah go ahead Vince.
Yes, so gary of the vast majority.
Almost all of the it's going to be on the gross margin line, because if you think about buyer digital transformation.
That is kind of revenue and as the call.
For the service cost going.
Can we away from previously running live auctions and then pricing is clearly.
The gross margin line items, and then towing the cost of tolling hit cost of services.
So that is a gross margin items as well and branch process improvement and efficiency. Once again those costs fuel costs are primarily almost all of those will be kind of hitting the gross profit line as well. Okay. Thank you very much guys, Hey, Gary and I'll kind of losses.
25 for the full year of okay.
Okay. Thanks.
Sure.
Again as a reminder of if you have a question. Please press Star then one can we please ask that you limit yourself to one question and one follow up if there's additional questions you may reenter the question queue.
The next question comes from Bret Jordan with Jefferies. Please go ahead.
Hey, good morning, guys.
Hi, Brian.
Do you think about the vehicle sales being up 47% year over year is there a strategic shift we really sort of focusing on using that strategy to gain share and you've talked about one international provider switching to the purchase model how much of that single customer was the 47%.
So I'll, let answer the other advanced answer the second part of if we're going to say, but.
<unk>.
That's not our strategy to.
It is it is purchase contracts are much more prevalent in the U K and a little bit in Canada.
But it's not something that we're that we're using in the insurance market in the us to try and change.
We like the consignment model for a lot of reasons on our and our customers' do too. So we do see opportunities to buy to buy vehicles, and some particularly non insurance markets and we are going to continue the focus on that but it's a relatively small part of our of our mix.
Great.
In the fourth.
And Brent that debt.
Obviously with the.
A significant factor, which is why we kind of alluded to it but we're not going to break that out in terms of the percentage.
For the dollars related to that but we would only mentioned if it was a significant factor.
Okay, and then one question I guess sort of housekeeping on land acquisition you commented the capex.
A more significant piece there could you sort of carve that out for us and maybe talk about your strategy going forward in Atlanta purchase.
So I'll start and Vance certainly weigh in.
Yes, I mean.
As we've said.
As we've defined our own capital allocation.
If we look at real estate, we're going to be.
Looking at the best economic returns.
Land.
We believe that's a better deal and we think the strategic strategic needs.
For land in a particular geography that we think has a really long term value we will look at buying.
But if the returns are favorable we will continue to lease so it's really a.
It's just having the option.
To us both levers to procure property.
Okay, great. Thank you.
Thanks Brooks.
Thanks Brent.
The next question will be from Stephanie Benjamin with tourists. Please go ahead.
Hey, good morning, everybody.
Stephanie.
Alright.
Yeah.
I was hoping you could talk a little bit about how assignments trended throughout the quarter.
I think theres a lot going on in the fourth quarter just given.
Increased COVID-19 restrictions the holidays, and you talked a little bit about how the start of January held up for any additional color you could get that would be helpful. Thank you.
Vince you want to.
Yeah, no happy to us.
Morning, Stephanie.
So so what we saw really.
In terms of assignments.
If you think about vehicle miles traveled first assignments and the units sold that really those trends had come off of.
Not from the second quarter continued to sequentially improve in the third quarter and improved in the fourth quarter.
But obviously starting to get a little bit more stabilized in the fourth quarter.
What we saw and there wasn't anything that was abnormal really as it relates to the holiday period per se.
Other than the normal kind of seasonal fluctuations that we would typically see.
That's the way I would describe it now obviously there was probably some more vehicle miles traveled as it related to.
Traveling to see relative some things of that nature versus flying in the normally would be but in terms of our results we didn't necessarily see anything that was abnormal.
Abnormally more than what we typically see in terms of seasonality.
Got it Thats helpful and just as a follow up can you talk a little bit about what you're seeing right now in terms of of your inventory levels I believe that low.
<unk>.
Yeah.
Any of these are down.
You would characterize debt. Thank you.
Yeah. So.
Yes.
If you if you think about what's happened what happened in 2020.
Is is that we had obviously the decline in assignments in volume that John spoke about kind of hitting a trough in.
In mid April and then climbing back come then from that and move that inventory.
It came back US we've got more of assignments, obviously, we sold through things.
Things as well.
We were able to us we got more assignments, we have more vehicles in the inventory.
Ended the year.
Kind of slightly down from both of the two.
2019, which I think all things considered us.
It was a pretty good place to be as we enter into 2021.
And so and we're seeing it.
In the us.
Certainly in kind of the end of the FERC the beginning in the second quarter of somewhat in the second quarter, we saw a little bit more of an impact on conversion rates and we're starting to we've seen that stabilize as well. So I think we feel good about where the inventory sits now.
Great. Thank you so much.
The next question will be from Bob <unk> with CJS Securities. Please go ahead.
Good morning, and congratulations on excellent execution.
Thanks, Bob.
So I wanted to just the follow up a little on the total loss frequency that you discussed obviously, it's been rising but with the significant increase in an auction returns in Europe.
What's driving your <unk> that we can see do you think theres more room for total loss frequency to increase do you think it's kind of in concert with the auction returns or do you think or do you think that the.
They've gotten out of whack of little bit I guess is the question.
So I think we've obviously seen this trend over.
Some of the eight year period, where we're total loss frequency has continued to climb for a lot of reasons.
And we've talked about many of those the complexity of vehicles repair costs.
Age of the fleet of the car Park continues to age. So I think all of those things kind of contributed to total loss frequency.
And I.
I think and I think auction returns there is.
That's the somewhat separate discussion, although obviously there is some relationship but I think auction returns are more driven around the.
Just the demand side for parts as well as what we've done to broaden the buyer base to bring more.
Eyeballs and clicks to our platform I think that's driving up the value of the assets now our insurance company is going to.
Adjust their behavior based on what they are seeing returns.
Possibly but I think I think the longer term trends that we've seen in total loss frequency are small independent of what the sample eight with auction returns.
Okay got it great and then just.
The real quick I guess my follow up question just.
Could you discuss your priorities for your free cash flow, obviously very strong free cash in 2020 of them I would expect.
Very strong free cash flow.
Coming year as well and just.
Give us a sense of.
How youre prioritizing the reinvestment of.
Of the cash.
I'll start and Vance please jump in but again we're.
The laid out of disciplined capital allocation around.
Using our free cash flow to invest in the highest return.
The projects, whether Thats true.
Buying land or it's investing in SG&A or it's returning.
Money to shareholders. Those are all obviously different things for either pay down debt, obviously would be another.
Use of that but I think we're going to continue to just be very disciplined about it.
And the.
We're looking at all of those potential.
Revenues for.
For deploying our free cash.
Anything you want to add the ramp.
No I would just add debt odd.
We've been in the pandemic.
We like many others had been prudent with the.
The cash and we've been fortunate that we've been able to Warren generate a lot of free cash flow certainly of 2020 income.
Adjusted net back into the business.
The strategically on key growth initiatives technology things of that nature of some land purchases because we thought that we need to continue to do that throughout the US I think we've done that have done that well I think as we move forward.
As John alluded to our overall philosophy Hasnt changed which is is that we're looking to allocate capital to the highest return opportunities.
That we see.
To be very very disciplined and continuing to do that I think initially once we get more clarity in the line of sight as we kind of come out of the pandemic than will be <unk>.
<unk> things up even more but we've continued to invest back into our business, which will be the primary area of funding growth initiatives. Because we do believe there are a lot of high return.
Growth opportunities and kind of deploying capital back into the business.
That will be the primary focus along with land and then we will look at a variety of other opportunities as well.
And as we end the year.
About the that won't continue to come down but for comfortably with that kind of the leverage target that we had set out at the time of the spin.
Got it okay. Thank you very much.
Yes.
Thank you for the next question comes from Craig Kennison with Baird. Please go ahead.
Hey, good morning, Thanks for taking my question, it's been a helpful call Vance wanted to ask about.
Interest expense was lower.
Due to the floating rate debt would you consider fixing that right with the risk that we.
We could see rates move higher here.
We're looking at different options of that.
That is.
Pretty low I'm, sorry debt rate is pretty low that we have.
But we are looking at some different options.
What we see out there in the valley.
And those right now so that could be one of them but.
Nothing nothing more than that to say at this point in time.
Thanks, and I appreciate the reluctance to give guidance, we're trying to build the model and there are so many inputs that could go in different directions, it's hard, but if we just isolate our approved trends, which have been exploding on the upside.
How big of drag would it be if our approved backs off just because of price of clearly you have some drivers to our pre that.
Beyond just supply demand dynamics, but if we see that supply demand dynamic even out a little bit and then <unk> drops or normalizes.
How big of a drag is that.
How sensitive is your model to that dynamic.
Let me kind of.
Start with the last piece of the I mean at the end of the day. There is there is really kind of two primary drivers on the model.
Sure.
Primarily because you have such a big.
Typically portion of our costs are.
Variable in a true costs and things of that that are on are directly related to the per unit basis.
So the two primary factors our assignments.
And volume sold and then.
The new per unit driven by proceeds and then also feeds and so I think in that regard it as impactful as we've seen US it's moved on the upside it's been very impactful and if it was too.
Go down go down it.
It would be impactful as well.
But I think in terms of what we're seeing.
Interesting because I think there is the macro level impact factors, which are things like supply demand imbalance and then also used car prices and when we came out of the pen when the pandemic and we saw everything of that we saw revenue per unit balance really high kind of come to really high levels in the second quarter, but for demand.
Assignments of the covered we.
Thought okay, maybe some portion of that is due to supply demand imbalance of what we've seen since then is indeed assignments of volume sold has recovered.
Not fully but largely.
Most of kind of below the but largely recover of where it was pre pandemic and revenue per unit is still remain.
Really really hot and so.
Some slight.
Adjustments of the combined slight debt, but really it's remained at those kind of very high level. So that would suggest that supply demand is probably not as big of a factor of may not be much of a factor at all now used car elevated us coal prices.
We don't know the degree we do think intuitively that that makes sense that that would have an impact.
All things considered equal of somebody's console of their cars that they buy for more than they're willing to pay more for US right. We talked about that quite a bit but I think what we believe that the largest drivers of the we've been the things that we've done internally.
Moving to an all digital auction format buyer digital transformation.
The rolling out the interact platform. The 360 view feature tour and all of the tools that we're providing buyers and then the expansion of our global buyer network, we think that.
It's tough to kind of talk about it in degrees, but we think that.
The large part of it is due to that and we do believe that's sustainable over a period of time.
Thank you and thanks for sharing that growth in international buyers that helps explain things. Thank you.
Yeah. Thanks for thanks, Greg.
And the next question will come from Chris brought the glaring. The claim. Please go ahead.
Hey, guys. Thanks for taking the questions.
Sorry, I wanted to follow up first on the international buyer growth of screen impressive number could you give us some context for what that metric looks like say over 2019 2018.
The growth of and obviously, it's diminishing returns it for me.
Here kind of have that accelerated growth.
For the trends.
Yes, I mean, it's Chris.
It's not something we've talked about specifically, but we had a robust international buyer base in 2018 and 19, we've just we've really.
Again through the efforts that we've talked about this morning, and I have been talking about around the.
The new platform as well as our digital.
Marketing.
On the SCO work, we've really accelerated it so.
Yes.
It has strong growth, but it was of a pretty solid base from which to grow.
Okay and then.
Really impressive estimate of control this quarter.
You said that if I remember correctly.
Our shared service agreement expiring of couple of quarters.
It was two years.
A is that correct.
The can you remind us what that means for expenses and then it's.
Totality, how should we think of the SG&A growth next year will.
It would be helpful.
Vince you unemployment.
Yes, no happy to take that one.
So yes, Chris you are correct.
There is the transition services agreement with core out of it was put in place at the time to spend that rolls off and is no longer effective as of the end of the second quarter of 2021.
And so we'll have the half year, we will continue to pay some of them out for transition services fees as.
As we've also talked about on previous calls we have we really did a nice job of.
Getting basically everything on our platform and building up.
All of the functions, we needed and so effectively at the end of 2019, we're really no longer for all intents and purposes. There is no need over the longer using cars of support function, but there was a continuation of fees, we were able to kind of.
Work with them and reduce some of those fees, although we have not disclosed those publicly.
But the degree of that there are still feeds of payments. There are of those will roll off at the end of the second quarter as.
As it relates to SG&A going forward.
What I would say is that on the positive side, we will have the.
The only of half a year of the transition services fees that will be impacting us.
We will as we go back to a more normalized provided thats. The case and we think it will be more of the normalized environment. Some point in year. Then we would expect to have a little bit more discretionary spending travel things of that nature. Although there are things that we plan to kind of as we change our model with loans during the pandemic.
That will be things that will we will no longer do.
But we would expect to have some more of discretionary spending.
In the year than maybe we did the stripping in 2019 provided we go to the global.
Come back to the normal environment.
And then we had public company compositions and costs that we put in place in 2019.
Sorry in 2020.
And where most of the way there as we stand there there's only a few kind of minor things.
So, but some of those will anniversary will have an impact of full year impact in 2021 because of the pilot certain positions.
Throughout 2020, so that's how you described of the factors driving SG&A as we head into 2021.
That's really helpful. Thank you for the commodity.
Yep.
Thanks, Chris.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back of the John Kett for any closing remarks.
Thanks, Chad again, thank you everyone for your attention and for your support of our here. We look forward to continuing to update you on our progress in future quarters have a great day.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
Yes.
Yes.
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