IAA Inc (IAA) 2020 Q4 法說會逐字稿

Good morning, and welcome to the IAA, Inc. Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Arif Ahmed, Vice President, Treasury. Please go ahead, sir.

Thanks, Chad. Good morning, everyone, and thanks for joining us today for IAA's Fourth Quarter Fiscal 2020 Earnings Conference Call. Speaking today are John Kett, Chief Executive Officer and President; and Vance Johnston, our Chief Financial Officer. After John and Vance have made their formal remarks, we will open the call to questions.

Before we begin, I would like to remind you that certain comments made during this call regarding our plans, strategies and goals and our anticipated financial performance constitute forward-looking statements and are made pursuant to, and within the meaning of, the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from such statements.

Those important factors are referred to in IAA's press release issued today and in the Risk Factors section included in our annual report on Form 10-K for the year ended December 29, 2019, filed with the SEC on March 18, 2020, as updated in our Form Q filed with the SEC on May 6, 2020, and the Form 10-K for the year ended 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 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 over to John. John?

Thanks, Arif, and good morning, and thank you all for joining us for our fourth quarter and fiscal year-end earnings call. Arif, Vance and I are in 3 different locations today so please bear with us, particularly when we do the Q&A.

But let me just start out to recap. To say that 2020 was an unprecedented year would be an understatement. The challenges of the pandemic have tested 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 pandemic to help our partners respond through products and solutions, such as inspection services and title services, that help providers to remotely their workforce safely and efficiently without human contact. At the same time, we also executed against our priorities, delivering an improved experience for our buyers and sellers, primarily through the accelerated rollout of our digital auction -- digital-only auction platform. We also made great strides launching new products, services, tools and functionality.

This improved 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 experienced. And as a reminder, that was 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 at our trough in mid-April.

Since then, we have seen sequential quarterly trend improvement in assignments and units sold as miles driven has improved. The total loss frequency continued to be an industry tailwind, reaching 21.5% of claims in the fourth quarter of 2020, 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 this led to a year-over-year organic revenue decline of 3.7% and organic adjusted EBITDA decline of just 2.2% for the full year. As we mentioned in 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 volume trends and service revenue per unit remain near all-time highs.

Importantly, for the fourth quarter, we returned to revenue growth, with an organic revenue increase of 7.5%. 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 to talk about our strategic initiatives.

Over the last 1.5 years since the spin, we have focused on 6 key initiatives. And I want to update you on the progress that we've made and where we are going with each. And I want to start with discussing how we are broadening our service offering to deepen 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 inspection services and title services that proved extremely beneficial, given the rapid shift to remote work environment and a focus on virtual claim handling. We also significantly enhanced our best-in-class world -- our best-in-class loan payoff tool, having successfully integrated Dealertrack and DDI, while also making significant progress in adding more than 500 new lenders to the platform, ending the year with over 1,500 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 take real-time payoff quotes, receive 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 into Indiana, which will speed up processing of transactions in that state.

And with regards to our buyers, our 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 Feature Tour, has continued to drive strong traction amongst new and existing buyers. So continuing with the buyer discussion, the next initiative is the continued enhancement of our international buyer network.

While the pandemic certainly had an impact on our international buyer growth early 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% and grew our international buyer base by approximately 40%. We also added new market alliance partners in 2020. And between these alliance partners and our broker buyers, we now have grown our in-country coverage in 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 this feedback, we've 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 that we laid with BDT and the improvements we have implemented on loan payoff and 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 4 targeted areas of improvement: Buyer Digital Transformation, Towing Optimization, Branch Process Improvement and Pricing Optimization. The first phase of our Buyer Digital Transformation was completed with the accelerated rollout of our digital-only auction platform in the U.S. during the second quarter of 2020. We were extremely pleased with the smooth transition to an entirely digital platform, and it is clear that both revenues and profitability were positively impacted from this initiative.

Our Buyer Digital Transformation resulted in meaningful benefits to 2020 EBITDA, even given the impact of COVID-19. And as important, we also received positive feedback from both buyers and sellers. With regards to the 3 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, we continue to complete our route optimization in a few more markets and have continued to see a benefit in reduced tolling 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 these initiatives and generate the net adjusted EBITDA benefit run rate 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've 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 initiative that's 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 U.K. operations. We have made good progress in replicating much of the work that we successfully executed in the U.S. with some customization, taking into account 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 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 that we believe have the best long-term opportunities for IAA.

So in addition to our strategic initiatives, we also completed 34 land projects to increase land capacity in 2020, including a number of -- including a combination of greenfield locations, expansions of 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 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 Vance to review our financial results. Vance?

Thanks, John, and good morning, everyone. I just want to spend a few minutes providing some more detail and color on our results for the year and fourth quarter. I will focus my discussion today on our adjusted non-GAAP results and just touch on some key highlights. Please see today's press release for more details on our financial performance and on our methodology when calculating non-GAAP results.

Performance improved sequentially as we moved 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 continue to benefit from the strong revenue per unit trends as well as improved trends in assignments and units sold. For the year, we saw a decline of 3.7% in consolidated organic revenue and a decline of only 2.2% 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.

As 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, and did a really good job managing costs during the pandemic. We generated free cash flow for the year of $240.2 million, which increased 18.5% versus the prior year despite the revenue decline, as 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 with the fourth quarter results, we will now be breaking out revenue and cost of sales by vehicle sales as well as service revenue, given that vehicle sales now represent greater than 10% of our consolidated revenues.

For the fourth quarter, consolidated revenues increased 7.8% to $383.5 million compared to the prior year period. Organic consolidated revenue, which excludes the impact of foreign currency, increased 7.5% to $382.7 million as the 18.4% increase in revenue per vehicle was partially offset by a 9.2% decline in volume.

Service revenues increased 3.5% to $332.8 million compared to the fourth quarter of fiscal 2019, and vehicle sales increased 47.4% to $50.7 million compared to the prior year period. Both 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 U.S. 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 a consignment model to a purchased vehicle model during the fourth quarter.

Gross profit increased to $152.4 million from $135.1 million in the fourth quarter of fiscal 2019. Gross margin increased 170 basis points in the quarter as service revenue gross margin expansion more than offset the 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 2.2% compared to $35.8 million in the prior year period due mainly to incremental public company costs. Adjusted EBITDA increased by 16.5% to $115.8 million, from $99.4 million in the fourth quarter of fiscal 2019. Excluding the impact of foreign currency, organic 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 loan was 2.44%. 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 30.3% to $65.3 million or $0.48 per diluted share compared to $50.1 million or $0.37 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 were at a higher rate than 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 relatively 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 2.7x EBITDA -- adjusted EBITDA, which is down a full half turn from the 3.2x 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 that may be helpful. First, fiscal 2021 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, volumes sold and revenue per unit remain 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 than in the U.S., and this may have more of an impact on vehicle miles traveled in those locations. We will continue to monitor these restrictions and the potential impact.

With that, we'll open up the call to questions. Operator?

(Operator Instructions) And the first question will come from Daniel Imbro with Stephens, Inc.

John, I want to start on a bit of a higher level one. I know you guys have been online-only for roughly 9 months now. How has execution gone? And more specifically, how has 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 you've broken this out before, but could you share what percentage of your U.S. vehicles are sold overseas today?

So, great, Dan. So let me start with the execution on the implementation. It went extremely, extremely well. We had really no sort of hiccups of any significance. There were a couple of things here and there that we needed to correct, and we corrected them really quickly. But I think our technology team, as well as our implementation team, did a really, really good job of implementing it. And again, on an accelerated basis, implementing it.

So I think, really, no issue there. And I think we were seeing it -- and we're seeing the results of it operationally as we talked about the savings, but we're also seeing it in terms of our buyer engagement and what buyers are doing. They like the new platform. They like the interaction. They like to interact to our new marketing platform. And so I think it really has been a success.

In terms of international buyers, as I talked about in my prepared remarks, early on, there was disruption during the pandemic as it first came about. But we're really, really happy with growing our international buyer base by 40%. That is really successful, given the -- what's happened in 2020. And we knew that we had a good plan not just with the platform, but with our digital marketing efforts.

So I'm not surprised that we grew it, but 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 leave the country, I don't think we've -- Vance, sorry, correct me if I'm wrong, I don't think we've disclosed that publicly.

That's right, John. We haven't updated that anytime recently.

And again, Dan, just there is some hazard in -- because many of our domestic buyers turn around and export it, we don't necessarily know what they're doing with the vehicle. So to put a hard number on it would be difficult regardless. But we're really pleased with what's happened with the international buyer.

Yes. That makes a lot of sense. And I guess, as a follow-up to that, 40% growth, the big headline number, John, but how mature -- how much more room do you think there is in front of you to continue growing that? Are we anywhere near maturity? Or is there still a long runway of either existing countries or new countries that you could sell into to continue growing that base and driving revenue per unit higher?

Yes. Great. Yes, we do see continued, what we call, white space in terms of the international buyer. We still think 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. And again, with the -- what we've put in place, we were confident we're going to be able to find them in a pretty efficient way.

Great. And then last one for me, a bit of housekeeping. Yes, we've heard a lot of commentary on freight costs, both ground freight and maritime overseas shipping becoming real inflationary here. Are you guys experiencing that today? Or is that in the fourth quarter at all? And then how should we think about those factors from a cost perspective as we head into 2021?

Vance, do you want to take a crack at that one?

Yes, sure. Yes. So Dan, we haven't seen anything to date with kind of inflationary spending. I mean we're -- as you're probably aware, buyers purchase our cars. They typically arrange for the transportation of those vehicles to their location, but we are working on some things that we feel really good about in those areas.

But regardless, the buyer will be taking on that cost. We haven't really heard or seen anything from our buyers that suggests that, that's an issue for them. And in fact, if you look at our proceeds per vehicle and what type of revenue per unit, and kind of the increase, as we talked about earlier, I mean, international buyers would suggest that they're getting -- they're going with that quite well, and they continue to bid on a number of vehicles and bid higher and buy more vehicles, if that helps.

The next question comes from Gary Prestopino with Barrington Research.

A couple of things here. 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 130 basis points. I didn't quite get what that percentage -- raw percentage number was. Was it 20% or higher or lower?

For the -- that was for the full year, Gary?

Yes, yes.

And Arif, do you -- I don't have that number in front of me, what it was for the full year. But we certainly have it here. We can get it to 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 units declines and increases on fee-based vehicles versus purchased vehicles?

So unit -- so Vance, in terms of...

Do you want me to take that?

Yes. Please, please.

Yes. Gary, that's not something that we're necessarily disclosing at this point in time. But obviously, with what you saw with the increase in vehicle sales, if you consider that -- if you think about, obviously, revenue per unit has gotten higher, as we talked about. So if you're thinking a quarter-over-quarter comparison in the fourth quarter of 2020 versus the fourth quarter of 2019, that clearly would have been a factor. But also, you would have had good performance on volume. As we talked about kind of service revenues, obviously, the primary factors we've alluded to in our prepared remarks is that it's really, really strong revenue per unit has been the primary factor and that offset volume declines.

Okay. Are you going to give us some kind of historical data on this breakdown between services and vehicle sales? Does that mean you file your Q for our modeling purposes on a quarterly basis?

I think what we'll be providing is similar to what's been provided in the earnings release, which is going to be just the fourth quarter and the full year. So that's what -- as we file our Q and then, obviously, going forward, 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 it in a report way back. But of the 3 elements of the margin expansion plan that still need to be completed, which one will, if any, will be scheduled to be completed this year, John?

Well, Gary, I think we provided it over a multiyear period, and we're going to be making progress on all of them. So in terms of completed, I don't know that we are going to complete any one of them, but I think we're going to continue to attack them over the next couple of years. Vance, is that fair?

Yes. No, that's 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 is it related to each of those. And some of those go on for a little bit longer than others, right? So Towing Optimization, for example. And I think what we're saying right now is just that we're making really good progress, and we feel good about things. And we're on track with the timing and benefits at this point.

Yes. That's fine. I mean what I was really trying to get at is you did the digital transformation much quicker. And I was 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.

All right. 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 this one?

Yes. Go ahead, Vance. Yes.

Yes. So Gary, the vast majority, almost all of it, is going to be on the gross margin line. Because if you think about Buyer Digital Transformation, that is kind of revenues and there's cost included -- so our cost [coming] away from previously running live auctions. And then pricing is clearly a gross margin line item. And then towing, the cost of towing hit cost of services, so that is a gross margin item as well. And branch process improvement and efficiency, once again, those costs, field costs are primarily -- almost all of those will be kind of hitting the gross profit line as well.

Gary, the total loss is 20.5% for the full year, okay?

(Operator Instructions) The next question comes from Bret Jordan with Jefferies.

When you think about the vehicle sales being up 47% year-over-year, is there a strategic shift where you're really sort of focusing on using that strategy to gain share? And you talked about 1 international provider switching to the purchased model. How much of that single customer was the 47%?

So I'll let Vance answer the second part, if we're going to say. But it's -- that's not a strategy to -- it is purchased contracts are much more prevalent in the U.K. and a little bit in Canada. But it's not something that we're using in the insurance market in the U.S. to try and change. We like the consignment model for a lot of reasons, and our customers do, too.

So we do see opportunities to buy vehicles in some, particularly, noninsurance markets. And we are going to continue to focus on that, but it's a relatively small part of our mix.

Great. And the 47%?

Yes. And Bret, that's -- obviously, it was 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 or the dollars related to that. But we would only mention if it was a significant factor.

Okay. And then 1 question, I guess, sort of housekeeping. On land acquisition, you commented that CapEx had a more significant piece there. Could you sort of carve that out for us and maybe talk about your strategy going forward in land purchase?

So I'll start, and Vance, certainly, weigh in. But yes, I mean, I think as we've said, as we've defined our own capital allocation, we're -- as we look at real estate, we are going to be looking at the best economic returns. If buying land that we believe that's a better deal, and we think there's a strategic need for land in a particular geography that we think has a really long-term value, we'll look at buying. But if the returns are favorable, we'll continue to lease. So it's really a -- it's just having the option to use both levers to procure properties.

The next question will be from Stephanie Benjamin with Truist.

I was wondering if you could talk a little bit about how assignments trended throughout the quarter. Just -- I think there's a lot going on in the fourth quarter, just given increased COVID restrictions, the holidays. And you talked a little bit about how the start of January held up. But any additional color you could give would be helpful.

Vance, do you want to take that one?

Yes. No, happy to. Stephanie, so what we saw, really, in terms of assignments, if you think about vehicle miles traveled, first assignments and then units sold that, really, those trends had come up a lot from the second quarter, continued to sequentially improve in the third quarter, and improved in the fourth quarter, but obviously started to get a little bit more stabilized in the fourth quarter is 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. So that's the way I would describe it.

Now obviously, there was probably some more vehicle miles traveled. This is related to traveling to see relatives and things of that nature versus flying than normally would be. But in terms of our results, we didn't necessarily see anything that was abnormal -- abnormally more than what we would typically see in terms of seasonality.

Got it. That's helpful. And just as a follow-up, can you talk a little bit about what you're seeing right now in terms of your inventory levels? I believe it was a little -- ended the year down some, maybe how you would characterize it.

Yes. So yes, no, I think if you think about what's happened -- what happened in 2020 is that we had, obviously, the decline in assignments and volume that John spoke about, kind of hitting the trough in mid-April and then climbing back from then -- from that. And when that inventory came back as we got more assignments, obviously, we sold through things as well. And we were able to -- as we got more assignments, we have more vehicles in inventory and ended the year kind of slightly down from both the 2019, which, I think, all things considered, is a pretty good place to be as we enter into 2021.

And so -- and we're seeing in the -- certainly, and kind of in the second quarter and somewhat through the second quarter, we saw a little bit more of an impact on conversion rates. And we're starting -- we've seen that stabilize as well. So I think we feel good about where the inventory sits now.

The next question will be from Bob Labick with CJS Securities.

Congratulations on excellent execution. So I wanted to just follow-up a little on the total loss frequency that you discussed. Obviously, it's been rising. But with the significant increase in auction returns, which is driving your ARPU that we can see, do you think there's 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 that they've gone out of whack a little bit, I guess, is the question.

So I think we've obviously seen this trend over a 7, 8-year period, where 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, average age of the fleet or the car park continues to age. So I think all of those things have contributed to total loss frequency.

And I think auction returns, there's -- it's a 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 their 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're seeing in returns possibly. But I think the longer-term trends that we've seen in total loss frequency are somewhat independent of what we've seen of late with auction returns.

Okay. Got it. Great. And then just 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, and I would expect a very strong free cash flow in the coming year as well. And just give us a sense of how you're prioritizing the reinvestment of the cash.

I'll start, and Vance, please jump in. But again, we're -- we've laid out a disciplined capital allocation around using our free cash flow to invest in the highest-return projects, whether that's buying land or it's investing in SG&A or it's returning money to shareholders. Those are all, obviously, different things we can do, and 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 we're looking at all of those potential avenues for deploying our free cash. Vance, anything you want to add to that?

Yes. Yes. No, I would just add that, obviously, we've been in the pandemic, we, like many others, have been prudent with cash. We've been fortunate that we've been able to, one, generate a lot of free cash flow, certainly in 2020. We invested that back in the business and strategically on key growth initiatives, technology, things of that nature, some land purchases because we thought that we need to continue to do that throughout this. I think we've done that and done that well.

I think as we move forward, as John alluded to, our overall philosophy hasn't changed, which is that we're looking to allocate capital to the highest-return opportunities that we see, and we are going to be very, very disciplined in continuing to do that. I think initially, once we get more clarity and what line of sight as we kind of come out of the pandemic, then we'll be opening 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. And that will be the primary focus, along with land, and then we'll look at a variety of other opportunities as well. And as we end the year, we're [confident] it won't continue to come down, but we're comfortably -- we did kind of a leverage target that we had set out at the time of the [spend].

The next question comes from Craig Kennison with Baird.

It's been a helpful call. Vance, wanted to ask about interest expense. It was lower due to floating rate debt. Would you consider fixing that rate with the risk that we could see rates move higher here?

We're looking at different options and that debt is pretty low -- I'm sorry, that rate is pretty low that we have. But we are looking at some different options that we see out there and evaluating those right now. So that could be one of them, but nothing more than that to say at this point in time.

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 ARPU trends, which have been exploding on the upside, how big a drag would it be if ARPU backs off just because of price? Clearly, you have some drivers to ARPU that are beyond just supply-demand dynamics. But if we see that supply-demand dynamic even out a little bit and then ARPU drops or normalizes, how big a drag is that? Or how sensitive is your model to that dynamic?

Yes. Let me kind of start with the last piece of it. I mean, at the end of the day, there's really kind of 2 primary drivers on the model. Primarily because you have set such a big portion of our costs are variable in the total cost and things of that, that are directly related to the per unit basis.

So the 2 primary factors are assignments and volumes sold and then revenue per unit, driven by proceeds and then also fees. And so I think, in that regard, it is impactful. As we've seen, as it's moved on the upside, it's been very impactful. And if it was to go down the other -- go down, it would be impactful as well.

But I think in terms of what we're seeing, it's interesting because I think there's 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 -- went into pandemic and we saw everything, and then we saw revenue per unit bounce really high, kind of come to really high levels in the second quarter before demand assignments have recovered, we thought, "Okay, maybe some portion of that is due to supply-demand imbalance."

And what we've seen since that is, indeed, assignments and volumes sold has recovered, not fully, but largely, almost kind of below, but largely recovered where it was prepandemic. And revenue per unit has still remained really, really high. And so it's -- some slight adjustments, it's come down a slight bit, but really, it's remained at those kind of very high levels. So that would suggest that supply-demand is probably not as big of a factor. It may not be much of a factor at all.

Now used car -- elevated used car 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. If somebody can sell their car what they buy for more, then they're willing to pay more for it, right? We talk about that quite a bit.

But I think that we believe that the largest drivers have really been the things that we've done internally, going to an-all digital auction format, Buyer Digital Transformation, rolling out the Interact platform, with 360 View, Feature Tour and all 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 a large part of it is due to that. And we do believe that, that's sustainable over a period of time.

Thanks for sharing that growth in international buyers. That helps explain things.

And the next question will come from Chris Bottiglieri with Exane.

So I wanted to follow-up first on the international buyer growth, it's a pretty impressive number. Can you give us some context for what that metric looked like, say, over 2019, 2018 in terms of growth rate, obviously, like diminishing turns, but interesting to hear kind of how that accelerated to historical trends?

Yes. I mean, 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 talked about this morning, and I've been talking about around the new platform as well as our digital marketing and SEO work, we've really accelerated it. So yes, it is strong growth, but it was a pretty solid base from which to grow.

Got you. Okay. And then really impressive SG&A control this quarter. You should have a -- if I remember correctly, you should have a KAR shared service agreement expiring in a couple of quarters. I think it was 2 years. A, is that correct? Like B, can you remind us what that means for expenses? And then, in totality, how should we think of SG&A growth next year? Would be helpful.

Vance, you want to?

Yes. I'm happy to take that. So yes, Chris, you are correct. There is a transition services agreement with KAR that was put in place in 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 a half year, we will continue to pay some amount for transition services fees.

As we've also talked about in previous calls, we have -- we really did a nice job of getting basically everything on our platform and building up all the functions we needed. And so effectively, at the end of 2019, we were really no longer, for all intents and purposes, there is no need or were no longer using KAR as a 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 to the degree that there are still fees or payment, which there are, those will roll off at the end of the second quarter.

As it relates to SG&A, going forward, what I would say is just that, on the positive side, we'll have just only half a year of the transition services fees that will be impacting us. We will, as we go back to a more normalized -- provided that's the case, and we think it will be more of a normalized environment at some point in the 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, we've learned during the pandemic, that will be things that we'll no longer do. But we would expect to have some more discretionary spending in the year than maybe we did, certainly, in 2019, provided we go to a normal -- turn back to a normal environment.

And then we have a public company positions and costs that we put in place in 2019 -- I'm sorry, in 2020. And we're most of the way there, as we stand there, there's only a few kind of minor things. And so -- but some of those will -- will have an impact, a full year impact in 2021 because we would have hired certain positions throughout 2020. So that's how I would describe the factors driving SG&A as we head into 2021.

Ladies and gentlemen, this concludes your question-and-answer session. I would like to turn the conference back over to John Kett for any closing remarks.

Thanks, Chad. Again, thank you, everyone, for your attention and for your support of IAA. 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.