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

Thanks, Keith. Good morning, everyone and thanks for joining us today for IAA’s second quarter fiscal 2020 earnings conference call. Speaking today are John Kett, Chief Executive Officer and President; 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 as well as our anticipated financial performance constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management’s current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from such statements. Those important factors are referred to in IAA’s press release issued today and in the Risk Factors section included in our Annual Report on Form 10-K for the year ended December 29, 2019 filed with the SEC on March 18, 2020 and in Form 10-Q filed with the SEC on May 06, 2020. Forward-looking statements made today are as of the date of this call and IAA does not undertake any obligation to update those forward-looking statements. Finally, the speakers will refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is available in IAA’s press release issued today. A copy of today’s press release may be obtained by visiting the Investor Relations page of the website at www.iaai.com. I will now turn the call over to John. John?

Thanks, Arif. Good morning, and thank you all for joining our first quarter earnings call. Starting out, we would like to express our gratitude to all the essential workers for their tremendous efforts and sacrifices during the pandemic. COVID-19 has had far-reaching effects from across the globe to our own backyard. For our employees who have been impacted, I want to extend all of our well wishes to you and your families during this time. This past quarter was challenging for IAA as we continued to navigate through the impact of macro headwinds. The entire team got quickly focused on the task at hand and responded, implementing actions to ensure the safety of our employees, serve our customers, manage costs to align with the reduced volume and enhance our liquidity. I'm proud to say that we were very successful in each of these initiatives. As we discussed at length on our last conference call, late in the first quarter we began to feel the effects of the pandemic response as stay-at-home orders led to significant declines in miles driven, resulting in a sharp reduction in assignments. On that call, we also noted that we had begun to see stabilization in assignments as economies began to reopen in late April. We anticipated that as these dynamics changed, we would see improvement in both miles driven as well as assignments. Since our call in early May, we have seen trends improve at an even faster rate than originally anticipated. At the time of our Q1 call, miles driven were down approximately 30% from pre-COVID lows. By the end of May, this had improved to being down approximately 10%, and by the end of the quarter, miles driven were essentially back at pre-COVID-19 levels. Assignment volumes, consistent with the trend of miles driven, were up approximately 35% from the trough by the back half of May and continued to increase gradually, ending the quarter down less than 15% from pre-COVID-19 levels. Units sold bottomed out in the second half of May, increasing at a gradual pace every week for the rest of the quarter. We have continued to see a significant increase in net revenue per unit, driven by several factors while our move to 100% digital options and our enhanced merchandising platform, including the 360 view. We noted on our Q1 call that revenue per unit had started to see pre-COVID-19 levels. Revenue per unit continued to increase gradually for the remainder of the quarter, reaching new record levels in the second half of the quarter. So while revenue fell by 19% for the quarter overall versus the prior year, we are pleased with the improvement we saw in assignments, units sold, and especially revenue per unit from their respective trough levels. As it relates to profitability, adjusted EBITDA fell approximately 27% for the second quarter, driven by the overall decline in revenue for the period. As we communicated on our Q1 call, we took swift actions on the expense side, realigning expenses to current volume levels while continuing to prudently invest to advance our strategic priorities. This combination, along with the higher revenue per unit we experienced, helped mitigate the magnitude of deleverage we would normally see with a 19% revenue decline. As volume trends continue to improve, we have begun to prudently ramp back up certain costs, including labor hours at branch operations across many locations beginning to normalize. Our second quarter financial results were materially impacted by macro developments, and I am proud of the team's resiliency and focus during this time. As it relates to our margin expansion plan, as we already disclosed in early April, we transitioned to digital-only auctions and eliminated physical auctions in the US. The associated cost benefits from shifting to a fully online model are flowing through our financial results as we have reduced costs associated with the physical auction from auctioneer expenses to auction day labor and other costs, as well as revenue benefits from online fees associated with these digital sales. Along with the financial benefits from this transition, we continue to receive very positive feedback from both buyers and sellers regarding our online auction platform and enhanced services like Feature Tour and IAA 360 View. While we accelerated the timing of our digital transformation, our remaining margin expansion initiatives remain on track with the original timing we communicated back in March. We're already seeing some early progress in the towing area from implementing improved route optimization in several locations. During the quarter, we also continued to execute against our other strategic growth priorities and as a result, our second quarter benefited from our enhanced service offerings for both buyers and sellers. In May, we announced the introduction of IAA Interact, the industry platform for buyers that leverages imagery, information, personalization, and key tools such as 360 View, Feature Tour, and Virtual Engine Start. This merchandising platform is designed using extensive research to create greater digital trust and efficiencies for buyers, which in turn will drive increased online bidding and buying. The initial response to IAA Interact has been very positive. During the quarter, we also enhanced our service offering globally by introducing 360 View in Canada and IAA buyer and seller portals and vision salvage management system in the UK. While still early days for many of these tools, we are pleased with the progress we're making in both our US and international markets. We've also continued to strengthen our real estate portfolio and have taken advantage of the flexibility we now have as an independent standalone company. As an example, after considering both the financial and strategic implications, we recently completed two land acquisitions. We've also expanded several more branches during the quarter, providing additional capacity to support growth. With our strong cash flow, we will continue to maximize opportunities regarding real estate, utilizing both fractional purchases of land. Our financial performance in the second quarter was better than we anticipated when we last spoke with you in early May. While we are cautiously optimistic that the worst of the COVID-19 impact is behind us, the situation continues to be uncertain and evolving, and we are actively monitoring developments in different markets. Given the lag effect of the decline in assignments with regards to volume, we are continuing to see an impact on units sold. So far this quarter, we've seen improvements in both assignment volumes and units sold since the end of the second quarter. Revenue per unit remains consistent with what we experienced at the end of the second quarter. Our financial position and balance sheet remained very strong, with over $540 million of liquidity, providing us with the financial flexibility to invest for the long term. In closing, I want to thank all of our teams for their continued hard work and dedication to IAA, and the resiliency, adaptability, teamwork, and customer focus they've demonstrated throughout this period. IAA was recently named one of the Best Workplaces in Chicago for 2020 and a great place to work in the US. These certifications and recognitions could not have been achieved without our great people. With that, I'll turn the call over to Vance.

As John mentioned earlier, while our second quarter performance was materially impacted by COVID-19, we did see a stronger than anticipated rebound in many underlying drivers of the business, and we're continuing to see stabilization and improvement in these trends. Before I touch on our current trends, let me first review the key financial highlights of our Q2 performance. I'll focus my discussion today on our adjusted non-GAAP results and just touch on some highlights. Please see today's press release for more details on our Q2 financial performance and our methodology when calculating non-GAAP results. For the second quarter, consolidated revenues decreased 19% to $296.8 million from $366.4 million in the second quarter of fiscal 2019. Organic revenues, which exclude the impact of our DDI acquisition as well as foreign currency, declined 19.3% to $295.6 million. For the quarter, volumes declined approximately 28.8%, which was partially offset by higher revenue per vehicle. As John reviewed, we have seen higher proceeds due to strong demand and more limited supply and are also seeing benefits from 360 View and our enhanced merchandising platform, along with higher penetration of internet purchases. All of these factors are driving higher revenue per vehicle. Rent consignment inventories declined by 16.6% versus the prior year, primarily due to the impact of COVID-19. As noted, we did see a time as it gradually improved throughout the quarter. Looking at our geographic performance, volumes were impacted for both our US and international segments due to the impact of COVID-19 on vehicle miles traveled. It's important to also remember with regards to our international segment that we are comparing to a strong performance from last year as all revenues increased nearly 39% for the prior period, driven primarily by a higher mix of purchased vehicles. Gross profit decreased to $111.7 million from $138.7 million in the second quarter of fiscal 2019. Despite the lower volume, gross margin was only down 30 basis points in the quarter. We benefitted from both strong revenue per unit as well as the completion of our buyer digital transformation and other cost reductions. SG&A expenses were $34.3 million compared to $33.7 million in the prior year. Adjusted SG&A expenses were $32.9 million, an increase of 4.1% compared to $31.6 million in the prior year period. The increase was driven by public company costs and a higher reserve for credit losses, as well as costs specific to DDI, which was acquired in late July 2019, partially offset by lower incentive compensation and overall cost and expense discipline as we managed through the pandemic. Adjusted EBITDA decreased by 26.5% to $78.9 million from $107.3 million in the second quarter of fiscal 2019, primarily due to the decline in revenue. Due to the impact of foreign currency as well as DDI, organic adjusted EBITDA was $79.3 million for the second quarter of fiscal 2020, a decrease of 26.1%. The effective tax rate was 24.4% versus 27.9% in the second quarter of fiscal 2019. The second quarter of 2019 had certain discrete tax items associated with the spinoff from KAR, which adversely impacted the rate last year by 170 basis points. We also benefitted this quarter from the implementation of certain tax optimization initiatives. Net income decreased to $33.2 million from $51.3 million in the prior year. Adjusted net income decreased to $36.6 million, or $0.27 per diluted share compared to $59 million, or $0.44 per diluted share in the second quarter of fiscal 2019. Turning to our cash flow and balance sheet; capital expenditures for the quarter were $11.5 million compared to $15.9 million in the prior year. We continue to take a disciplined approach to capital spending, although we did acquire some land opportunistically. As John mentioned, our balance sheet remains strong, and for the first six months of fiscal 2020, we generated free cash flow of $195 million, ending the period with a leverage ratio of 2.9 times. We generated strong free cash flow due to the working capital benefits associated with lower assignments, as well as the deferral of certain cash tax payments, including state, local, and provincial taxes in the US, Canada, and in the UK. Cash benefits from taxes are expected to mostly reverse in Q3, and we would expect working capital to be a use of cash in the back half of the year as assignments recover. Our ending cash balance was $187 million, and total liquidity was $542 million, which is more than double the level that we had at year-end. Our financial strength gives us the flexibility to manage through the COVID-19 pandemic while continuing to invest in and execute our strategy. As noted in our earnings release, given the continued uncertainty regarding COVID-19, we're not providing guidance today. However, let me share some color that may be helpful. To date, as John said, we have seen an improvement in both assignment volumes and units sold since the end of the second quarter, and revenue per unit trends have new exit rates. While this is encouraging, it is hard to determine how long these elevated revenue per unit levels will last given that we would expect supply to return, and these strong revenue trends may moderate. In addition, in Q3, we will also be anniversarying the price increases implemented in July 2019. With that, we'll open up the call to questions.

Our first question comes from Stephanie Benjamin of Trust. Please go ahead.

I wanted to touch a little bit on if you could give some color on, I guess, June trends. You noted that assignments were down less than 15%. Is that from pre-COVID levels, or is that year-over-year? Just trying to gauge as you mentioned there are improvements going into 3Q what that ending level was for the second quarter?

Stephanie, this is Vance. Yes, what we mentioned on the call about 15% relates to pre-COVID levels. So that was assignments trying to sit relative to where we were before the pandemic hit us.

And then I was hoping you could touch a little bit on the CapEx, the new yards that you acquired during the quarter. Was this an opportunity where it was based on geographic opportunity or maybe some more color on those, as well as some of your decisions to expand your real estate with existing yards?

I think as we've talked about before, any investment that we make, we're going to look at what we believe the economic returns are. When you talk about real estate, there is also a strategic element to consider, which is about where it's at, where we think we're going to need property over a longer period of time, and again, the relative value of the land itself. So in a couple of situations, buying it made more sense than leasing it, and then we had other decisions we made where we went ahead and leased property to expand our footprint.

Got it. Did these investments come primarily from a geographic perspective along the coast of the US, or were they spread out across the country?

Some were closer to the ocean than others, but it really was more around as we looked at the individual markets and where we saw their growth potential for us.

Thank you. Our next question comes from Daniel Imbro with Stephens Inc.

Want to start on the strength in revenue per unit. Obviously, the factors I saw between supply and demand, online fees, can you help parse out kind of what was the stronger of those drivers? Maybe help us bucket or rank order the strength of those. And then did the strength in Q2 include any benefit from your pricing optimization that you called out in your long-term plan, or is that not rolling in yet?

Vance, you can weigh in. It’s only hard to parse out what drives proceeds higher, whether certainly the supply and demand; we really believe that our new platform we're seeing really great engagement with buyers. So we're attributing at least a portion of it to our own efforts, but like we always talk about with proceeds, there is a variety of factors that go into it. There are macro factors around metal prices, used car prices, parts prices, all those things enter into what's driving the selling price at the auction, and again, we believe that we've developed a platform that will drive higher proceeds all things considered equal. And then in terms of price optimization, Vance, do you want to add? Yeah Dan, just echoing what John said, we believe that all those things are contributing. It's tough to really break out and just gauge which is contributing more than the others, although we do think that the limited supply is having an impact on proceeds and revenue per unit. The pricing optimization we have is really just kicking that off, so we have actually not seen part of the impact today.

And then shifting over, the buyer digital transformation is clearly seeing some cost savings there. Can you help us think about Vance, are we already seeing the full run rate benefits? I think when you first called it out, it was $45 million annually at the midpoint. Are you already seeing the full run rate benefits of that as we think about modeling the back half of the year?

Yes, Dan, as you might remember, the digital transformation has really provided three main benefits. First, we've seen a reduction in costs from auction day expenses, including lower auctioneer and labor costs, as well as other live auction-related costs. Second, there's been an increase in internet fees; we've moved from selling around 70% of our units online to now selling 100% of them online, which means we're earning internet fees on the full amount. The third benefit comes from the implementation of features such as 360 View and Feature Tour to our platform, enhancing our revenue per unit. All of these factors have contributed to our current situation. We have successfully transitioned to a fully online digital marketplace, so we are effectively operating at a run rate moving forward. However, two of these three benefits are dependent on volume, meaning while we are at a run rate, it doesn't align with the previously projected figures because those were based on volume. The same applies to the 360 View concerning live auction costs; we are at a full run rate, but again, it is contingent on volume. Does that clarify things, Dan?

That's helpful, and then a last one if I can sneak it in. Maybe just stepping back from the quarter, last year competition was a big focus. The market, obviously, you guys acknowledge that with some of the share shifts. Can you, as you look at your offering today, how you think with the changes you’ve made, do you still see a need for further improvement, or does that seem like a bit of higher thinking given the improvement you’ve made?

No, we feel very good again with the Interact; we really think that we have deployed a leading platform for buying and selling vehicles. We feel very good about that, as well as the balance of our portfolio from both a buyer and a seller perspective. What we've done with loan payoff and inspection services and our title procurement product on the seller side, and then we've talked already this morning about what we're doing on the buyer side. I think we've got a really good offering for both buyers and sellers, and again, we're getting good traction from both buyers and sellers in response to it.

Our next question comes from Bob Labick of CJS Securities.

I just wanted to; you’ve given us a lot of color already, so thank you for that. I wanted to get a sense of how you're seeing recovery and how you are budgeting for the options to the sites and things. Obviously, unprecedented through July, how are you thinking about things through year-end just more generally as you return people back to the sites?

So we've got pretty decent visibility in the miles driven, and again our assignment volume because there is a bit of a lag, we can match up labor pretty well with assignment volumes. So yeah, as we said, it's basically back to where it was in terms of miles driven, and assignment volumes are coming back as well. So yeah, I mean we've got a flexible labor model that we can adjust as we need.

And then in terms of, can you give us a sense of the buyer base and how they've reacted through this in terms of international buyers? I know you probably haven’t been out prospecting as much and certainly not traveling, but who have been the primary drivers of the increased proceeds? Has it been more domestic buyers? Has it been rebuilders? Any kind of sense of the buyer base and what's happening there?

Yeah, early on it was much more domestic. Early on, I mean during the pandemic, as we were beginning to sell vehicles, we saw more disruption from the international buyer community, but the international buyers have been coming back. We've seen steady progress in growth in international activity. So it really has been a pretty balanced response, and again, we believe through our platform, we're reaching and penetrating either buyers we didn't have before or buyers that we did business with doing more. We've deployed a number of digital marketing tools on the buyer side to recruit and engage with buyers; thus, a lack of travel isn't really hurting our marketing efforts in that regard. So yeah, it has been a pretty broad recovery in terms of the buyers.

Our next question will come from Gary Prestopino of Barrington Research.

I just want to make sure I got this right because there is a lot you gave, but you said miles driven are almost back to pre-COVID levels at this juncture right? Assignments up 35% from the trough in May, but they're currently at or close to about 85% of pre-COVID levels right now, is that correct?

As of the end of the quarter, Gary. We also commented that since the end of the quarter, that assignments and units sold have continued to increase from there as well.

Okay. That's fine. And you said your consignment inventory was down 16.6%. What was your total inventory down? Can you give that with the purchased vehicles or do you not make that public?

Gary, that's something we haven’t made public previously, and remember purchase volumes are a very small portion of our overall business.

I understand that a lot of the trends you see in assignment rollup could be attributed to the fact that while miles driven were up, during the peak of COVID, insurance companies were mostly totaling cars without being able to send adjusters out to assess them.

It's hard to say. We've often not gone across the board to tell us that was a comp trend or comp-related. Yeah, I mean I think they're coming back.

Gary, certainly from the trough if you think about the first kind of 8 to 10 weeks after the pandemic had hit. So yeah, across all markets it's bounced back and it varies by market, but it's widespread now.

Our next question comes from Bret Jordan of Jefferies.

When you first rolled out the 360 products, you sort of commented on what the incremental yield was. Do you have any way to quantify what you're seeing maybe on a like-for-like car basis from the digital offerings, whether it be the engine recording of the digital 360 in the second quarter?

Bret, again, it's hard to pick apart. There are macro drivers as well as what we're doing internally. They're all part of the recipe for driving higher proceeds. It’s difficult for us to isolate the impact of one versus another.

But the trajectory of that Digital 360 product is as you'd expected, you’re seeing higher yields you think on a like-for-like basis?

We believe so, yes.

Another question on units, I guess you commented in the prior quarter about share gain versus loss. Do you have any way to quantify what the loss or gain impact was in the second quarter?

Yes, I mean there is a lot. And Bret, just to clarify, so your question is quantifying share gains per unit. We certainly in insurance and non-insurance, right? So we have to send to kind of what the share looks like across some portion of the insurance side that's much more difficult to quantify given there are multiple aspects of non-insurance and multiple players that are involved in that, right? So that's much more difficult to quantify.

And this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Well, thank you all for your time and your attention and your support of IAA. We look forward to updating you next quarter. Thank you.

You may now disconnect your lines.