IAA (2019 - Q4)

Good morning ladies and gentlemen and welcome to the IAA Q4 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recordedI would now like to turn the conference over to Arif Ahmed, Vice President of Treasury. Please go ahead, sir. Arif Ahm

Good morning, everyone, and thanks for joining us today for IAA's fourth quarter and fiscal 2019 year-end earnings conference call. Speaking today are John Kett, Chief Executive Officer and President; and Vance Johnston, our Chief Financial Officer. After John and Vance have made their formal remarks, we will open the call to questions.Before we begin, I would like to remind you that certain comments made during this call regarding our plans, strategies, and goals, and our anticipated financial performance constitute forward-looking statements and are made pursuant to, and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.Such forward-looking statements are based on management's current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from such statements.Those important factors are referred to in IAA's press release issued today and in the Risk Factors section of the information statement filed as Exhibit 99.1 to our Form 10 filed with the SEC on June 13th, 2019 and will be included in our annual report on Form 10-K for the year ended December 29th, 2019, which we expect to file on or near March 18th, 2020. The forward-looking statements made today are as of the date of this call, and the IAA does not undertake any obligations to update these forward-looking statements.Finally, the speakers will refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is available 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 us for our fourth quarter and fiscal year end call. Before discussing our results, first, I'd like to say on behalf of everyone at IAA that our thoughts are with all the individuals that are impacted by COVID-19. Our first priority remains the health and safety of our employees and their families. We have taken what we believe are the necessary steps to protect our employees around the world.At this point, it's unclear what the impact of the situation may have on our business and over what timeframe. While our volumes and revenue per unit quarter-to-date have been in line with our original expectations during that time period, this crisis has created a fluid situation. And we are in the early stages of gathering data and monitoring customers as well as assessing the market dynamics to assess the potential impact.In light of the current situation, we are not providing 2020 outlook or a long-term outlook today. But we plan to do so and are hopeful that we can do this on our first quarter call. We remain confident in the long-term fundamentals of our business, and we will continue to monitor the potential impact of COVID-19. And Vance will provide some additional thoughts during his remarks.Turning to 2019, 2019 was an important year for IAA as we accomplished many milestones, including our spinoff from car auction services in late June. During this year, we also successfully expanded some functions, broadened the depth of our teams, hired key talent, and enhanced our operating structure to support IAA's growth and independence. I'm extremely proud to say that the build-out of our public company functions is now largely complete.We also increased our capacity with the completion of 28 real estate projects, providing with -- providing us with additional flexibility for future growth. So, along with our near-term objective to stand up an independent public company in fiscal 2019, we also drove strong financial performance. For the year, we delivered organic revenue growth of 8.1%, ahead of our goal at the time of the spin, and organic adjusted EBITDA growth of 6.8%, in line with our original goals.While our fourth quarter was impacted by the known volume shift that we reviewed in our third quarter call, volume growth was still positive. I am pleased with the overall results that we delivered and feel confident in our competitive position as we look to the future.Underlying my confidence is the progress we have made and continue to make against our strategic initiatives as well as the opportunities that we see to drive further margin expansion over time, which I will discuss in more detail in just a minute.First, let me review the progress on our key initiatives. We continue to make great progress enhancing our international buyer network. Our efforts in digital marketing, market alliance partnerships and in-country visits are showing strong results. We now have market alliance partners in 12 countries, and international buyers continue to represent a growing percentage of our overall volumes. Through our search engine optimization work, we have significantly increased web traffic versus just six months ago and we have improved the efficiency of our digital marketing efforts as well.For the year, we drove double-digit growth in international buyer activity and units sold internationally increased by over 20%. Innovation is core to our business and we are seeing significant results from our ability to work with both buyers and sellers to bring innovative solutions to the marketplace.Through this work, we've developed such things as 360 View, which, as we have discussed before, is a tool that provides superior imagery through a full 360-degree view of vehicles interior and exterior and this is increasing buyers' confidence in bidding and buying. This is now rolled out across the U.S. and we continue to introduce enhancements to this product, including feature tour, which was integrated into the platform earlier this month.This tool enhances our 360 View capability by providing buyers with instant access to each vehicle's original manufactured features and options, as well as the ability to customize their evaluation of vehicles based on specific areas of interest.In addition, we continue to enhance our merchandising platform through key innovations such as virtual engine start and buyer recommendation engine. All of these introductions have seen very positive feedback from buyers and sellers.We are also assessing other auction optimization opportunities to improve the buyer experience, while continuing to make significant strides in enhancing our data analytic capabilities, all of which are focused on generating strong returns for our providers.Broadening our service offering to deepen strategic relationships is another key priority. As we reviewed last quarter, we've made enhancements in our industry-leading tools and services to reduce cycle-time as well as improve returns. One such service is IAA Loan Payoff.IAA Loan Payoff is the industry's only end-to-end solution, allowing providers to quickly and efficiently get a real-time payoff quote, receive a letter of guarantee and arrange payment for a positive or negative equity loan to receive the title. Loan Payoff is the only product in the marketplace that enables paying off negative equity loans, which are estimated to be up to 60% of all claims.Our lender base connected via IAA Loan Payoff portal continues to grow daily. Just a year ago, we had 13 lenders and today, we have over 1,000. Similarly, we continue to add new insurance providers every month. Our focus is to provide sellers with a seamless and efficient process, eliminating friction points where possible as well as reducing cycle-times.Through our acquisition of DDI and our integration with Dealertrack, we have further enhanced our IAA Loan Payoff product and capabilities. And we have seen additional reduction in cycle-times and believe that we have the opportunity to continue to build further efficiencies.We also recently announced an integrated partnership with Snapsheet, a leading provider of claims management technology. Our combined offering will greatly reduce the time it takes insurance carriers to process claims for total loss vehicles, by automating both the exchange of information as well as the control of the activities across all parties involved in the total loss process.Let me now turn to our margin expansion plan. Work on this plan has been underway for several months as we have carefully analyzed our business and the opportunities to expand margins. Key among these opportunities and one you've heard us discuss before is our buyer digital transformation initiative.During 2019, we made significant progress in enhancing our systems and capabilities in preparation to move to an almost entirely online model in 2020. This was an exhaustive process utilizing both internal and external resources and included conducting extensive surveys with our buyers to analyze and incorporate their feedback.We have enhanced our core technology, and we've made a number of enhancements to vehicle merchandising and have added tools, data and information, enabling buyers to bid with more confidence.We are well underway in rolling out our digital-only auction to most of our branches throughout the U.S. and in the current environment, we are accelerating the rollout. We are confident that we will complete the rollout by the end of the second quarter this year.Upon completion, we will recognize both cost and revenue benefits from eliminating live auctions and this will enhance the overall buyer experience. We also believe that we will be able to realign some of our yards, which in turn, will free up some additional capacity. Our goal is to make the process seamless and the experience exceptional.We've also now completed our assessment of additional margin expansion opportunities and have identified the following key additional initiatives; Pricing Optimization, Towing Optimization, Branch Process Improvement and Efficiency. Based on our assessment, we believe these initiatives; including Buyer Digital Transformation can effectively add $104 million to $122 million in incremental adjusted EBITDA by fiscal 2024.And I'd like to note that this does not incorporate any potential impact from the COVID-19 situation. We've already begun the implementation of Buyer Digital Transformation and we expect to commence most of the initiatives relatively soon.In summary, we are pleased with the overall performance in 2019 and many -- and the many accomplishments we achieved. We believe we are well positioned to deliver on the pillars of our growth strategy and execute our margin expansion plan.I want to thank all of our teams for their hard work and dedication and in executing against our goals. I'm also very proud that in 2019, IAA was awarded the certification of a great place to work from the Global Authority on Workplace Culture.We are committed to driving long-term value for all stakeholders by providing the best solutions and tools to buyers and sellers, delivering against our growth initiatives, executing our margin expansion plan and achieving our operational and financial goals this year and beyond. With that, I will turn the call over to Vance. Vance?

Thanks John. I will now review the key financial highlights of our Q4 and full year performance. And then we'll provide further color on our margin expansion plan. I will focus my discussion today on our adjusted non-GAAP results. Please see today's press release for more details on our Q4 and full year financial performance as well as our methodology in calculating non-GAAP results.For the fourth quarter, our top line was slightly better than we expected as we continue to benefit from industry tailwinds as the industry total loss ratio for the quarter was 20.3%, up from 19.5% in Q4 of 2018. For the quarter, we drove organic revenue growth of 5.5%, driven primarily by higher revenue per unit as well as a slight increase in volume.Higher revenue per unit was driven -- was primarily driven by the previous adjustment to fees as well as growth in our international buyer network and the benefit of our 360 View product and other ancillary products.Organic adjusted EBITDA growth for the period was 3.6%, primarily driven by our top line performance, which was offset by the increase in SG&A resulting from the incremental public company costs we incurred during the quarter.Interest expense also increased $6.8 million versus the fourth quarter last year, primarily driven by higher debt balances resulting from our new capital structure following our spin off. This increase in interest expense impacted our adjusted net income performance and as a result, adjusted EPS was $0.37 versus $0.38 in the prior year period.As it relates to our full year results, as John already reviewed, organic revenue growth was 8.1% for fiscal 2019, above our original and previous guidance, driven by a combination of volume growth and higher revenue per vehicle. The industry total loss ratio for 2019 increased to 19.2% from 18.6% in 2018.Gross margin was essentially flat versus the prior year despite the strong revenue growth due to a higher mix of purchased vehicles in our international segment as well as higher occupancy costs.Organic adjusted EBITDA growth for the year was 6.8%, in line with our original expectations and below organic revenue growth, primarily as a result of increased SG&A from additional public company costs. Similar to the quarter, interest expense was higher due to the higher debt balance following our spin off. For the year, adjusted diluted EPS grew by 6.5% versus fiscal 2018.Turning now to our cash flow and balance sheet. For the year, we generated free cash flow of $202.7 million, and ended the year with a leverage ratio of 3.1 times as we repay $22 million on our term loan. Capital expenditures of $68.5 million increased slightly over the prior year. Same-branch inventory declined 3.1%, driven primarily by the impact of volume shifts we have previously discussed.Now, with regard to our margin expansion plan, please refer to the slide presentation that is currently available on our Investor Relations website that I will be referencing during my discussion. Before proceeding, I do want to reiterate that the dollar amount of the EBITDA benefits I discussed today do not assume any potential impact from the COVID-19 situation. As we update our 2020 and long-term outlook, we may adjust the benefits.Please turn to slide three, as John discussed, we have been working on this plan for the past several months and have conducted a comprehensive assessment using both internal and external resources. We have identified four key pillars to drive margin expansion over the next five years and expect this plan to result in annualized net adjusted EBITDA benefits in the $104 million to $122 million range that will be partially realized beginning in fiscal 2020 with full realization by 2024.And now please turn to slide four. The four pillars of this plan are: one, Buyer Digital Transformation, two, Pricing Optimization; three, Towing Optimization; and four, Branch Process Improvement and Efficiency.Now, please turn to slide five, where we will discuss our Buyer Digital Transformation. John reviewed the key highlights for this initiative, and work is well underway to provide a best-in-class buyer experience while reducing cost and driving higher revenues.Through our new auction platform, improved merchandising and use of data science and differentiated features and information, we will improve the experience for buyers significantly. This transformation will impact both revenues and costs with higher revenue coming from increased Internet fees and higher overall proceeds for vehicles.On the cost side, elimination of most live auctions will result in a corresponding reduction in cost. We expect a total estimated annual net adjusted EBITDA run rate benefit of $42 million to $48 million from this specific initiative with our full run rate achieved in 2021.Please turn to slide six, we plan to optimize our pricing structure through selective buyer fee adjustments and pricing changes for ancillary products, including monetizing some valuable services that are -- that we provide our buyers today while also introducing new revenue-generating services.Our goal remains improving features and building a greater breadth of services for buyers while improving the overall buyer experience. This initiative is expected to generate a total estimated annual net adjusted EBITDA run rate benefit of $14 million to $18 million, with the full run rate achieved in 2023.Now please turn to slide seven. We are focused on optimizing our towing costs through an enhanced model and new performance management tools. This includes actions like expanding our portfolio of tower contractors, route network optimization and renegotiation of key vendor terms to name a few. These initiatives will expand our network of towers and increase competition, which in turn will drive more competitive rates.We will also be providing new and enhanced programs to benefit towers as well. We expect a total estimated annual net adjusted EBITDA run rate benefit of $24 million to $28 million, with our full run rate achieved in 2024.Please turn to slide eight. We also see an opportunity to improve efficiencies and reduce costs by aligning the operations with our new Buyer Digital Transformation model. Key elements include further automation of key branch entitling processes as well as implementing performance management tools. We expect to drive a better experience for both buyers and sellers. We expect an associated total estimated annual net adjusted EBITDA run rate benefit of $24 million to $28 million, with full run rate achieved by 2023.Please turn to slide nine, here, you can see the net cumulative run rate benefits that we expect to achieve by category by 2024 as well, as the anticipated timing to get to the full run rate by category. While our BDT and pricing work will require limited investment, we do expect a total capital investment of between $13 million to $17 million between now and 2024 to fund all the margin expansion initiatives.As John noted, we are focused on monitoring and evaluating the potential impact of COVID-19 and what it could have on our results. We had volume revenue per unit and cash flow quarter-to-date that has been consistent with our expectations. But over the past two weeks, we have all seen the measures that have been taken by companies either recommending or requiring their employees to work from home for an undetermined period of time.Key drivers of our business include total miles driven and the total loss ratio. With respect to miles driven, if the trend toward recommending or require employees to work from home continues for a period of time, it could have caused total miles driven to decline, which in turn would likely reduce accident frequency. Conversely, if people decide to drive instead of flying using mass transit or ride sharing, it could increase total miles driven.Because there is usually a two to two and a half week window between when a loss occurs and when we receive an assignment, and the move toward the stay-at-home economy has really only occurred over the past one to two weeks. We still don't have much data to review to determine what the impact could be. As a result, we are not providing guidance at this time as we believe it's prudent to take additional time to understand the potential impact of the current situation on our business.We will continue to monitor the situation. We plan to provide our 2020 and long-term outlook and we are hopeful that we will be able to do so on our first quarter earnings call, at which point we believe we will have a better sense of the potential magnitude and timing of the impact of COVID-19. As John noted, we remain confident in the long-term fundamentals of our business.With that, we will open up the call to questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions]Today's first question comes from Craig Kennison at Baird. Please go ahead.

Good morning. Thank you so much for taking the question and for the details you shared on the margin plans. I wanted to ask about vehicle miles traveled. I know it's very early. You just said that -- but I'm wondering if you have any anecdotes from conversations this week with collision repair shops or insurance companies that would give you some indication for the decline we're likely to see in accident claims.

Craig good morning. Thank you for joining us. We have been in contact with our customers and with other industry players. And again, they're -- it is all -- it is very early. We don't have -- I don't even have any anecdotes for you at this point that it's -- everyone's trying to do the same assessment. We are to understand where things are going to go.

Yes, that's totally fair and I appreciate you taking that question. Maybe just to stress test your model here. Could you give us a feel, Vance, for your cost structure? What's fixed and variable and cost of goods sold and SG&A as we try to think through the next few months?

Yes, it would be -- I can't really provide that in incredible detail. But I think if you think about our model overall, first of all, if you think about cost of services, the vast majority of that is sitting in our branches and related services that we provide in the field, whether those be titling services or customer care services or things of that nature.And what I would say is the vast majority of, as we've talked about before, of those costs are either employee-related cost or they are towing-related costs. And so obviously, towing is variable related to the volume that we have as you think about cost of running our branches, customer service costs, as you think about titling-related costs and the employees that do that, there's a large portion of that would be fixed.For some period of time, and that includes people costs as well as benefits and occupancy costs, but then there would be some portion of that would be -- it would be variable. And I think it's fair to think about SG&A in a similar fashion, which is some portion of that is going to be fixed. There are some variable components of that that obviously, we would assess and think about related to volume. But that's the way I think -- the way that you probably should think about it conceptually.

That's quite helpful. And then last question, just on liquidity, Vance. Any comment on any covenants that you may have that could be in play here given a potential downturn? Obviously, you've got a lot of maturities that are pushed out in future periods, nothing immediate, but just curious about your covenants and whether you see any exposure there?

Yes, I mean, we -- so we don't see any immediate exposure. We have a springing covenant that is only -- it only springs if we draw on our revolver, which were not drawn on at the end of the year and are currently not drawn on. And so -- and obviously, have plenty of cash on our balance sheet at this point in time. So, once again, at this point in time, things can change, but at this point in time, we feel comfortable with the situation where things are at.

Great. Thanks much.

Thanks.

And our next question today comes from Daniel Imbro at Stephens Inc. Please go ahead.

Hey, good morning guys. Thanks for taking our questions.

Yes, good morning Daniel.

Last quarter, Vance, we talked a lot about market share shifts, how they're impacting your business. It sounds like that's somewhat stabilized in 4Q. Would love to hear an update on just the state of that quarter-to-date and are there any details you can share about the changes you've made to your business about how you're improving your service levels and how your customers are responding to that?

Yes, I mean, I'll go and then I'll ask John to kind of jump in as well. So, one, thanks for joining the call and for your questions. So, I think a couple of things. I think, as John, in his prepared remarks, as we talked about today, we're really, really focused on providing the best experience in service, certainly to buyers, which is a primary initiative that we have going on, if you think about what we're doing with Buyer Digital Transformation, 360 View, feature tour a number of key initiatives that we have in place -- that we put in place in products and services that we think will significantly enhance the experience for buyers. It will also -- and doing so, allows them to be much more confident and bid on more cars and to bid more for those cars.And so we feel a primary focus of our efforts as we kind of move to primarily total digital auction plays is that we want to provide the best experience for buyers and the best set of tools and information for them and really focus in on merchandising the cars, the vehicles for buyers. And we think that, so far, that is -- we're seeing really good results from that. And we feel really good about that, and that's what we're looking toward in the future as well as a differentiating factor around how we're going to compete in the market.And then secondly, we talked a lot about loan payoff and what we're doing with sellers, really, which is trying to align ourselves with sellers and help them reduce cycle-times and help them have a more seamless business and relationship with us and we're seeing good strides there. And by the way, what we're doing to buyers, helps buyers, but also drives greater returns for sellers, which is something, obviously, that sellers are very, very focused on. So John.

Yes and the sellers are recognizing more and more what we're doing on the buyer side to improve the merchandising. So, that it is -- I mean, they recognize the translation of better merchandising leads to higher returns. And increasingly, they are recognizing the strides we're making there. So, I think -- yes, I mean, I think our sellers -- our sell-side customers are excited about both the products that we're offering them directly and what we're doing on the buyer side to drive higher levels of returns to them.

Got it. And then second question on the margin expansion plan, Vance. I understand you guys have worked on this for a while, but obviously, the backdrop today, there's not much visibility into the business near-term. So, I guess, how do you get comfort with the timeline of the plans you've given? Obviously, five years is a long time to look out. Are these already identified and quantified cost savings or how do you get comfort with the ranges today?

Yes. So, as John and I alluded to on the call, the work that led up to the presentation today as has been in work -- has been in process for some period of time. And in doing that work, we've had a big cross-functional team across the company that's been engaged in it.We've also used external resources as well. So, what you see on page nine of the margin expansion plan is really a cumulative effort. And we have specific identifiable sub initiatives under each one of these areas that we've identified and spent a lot of time and a lot of work on identifying them, assessing them and figuring out what we think the benefits are and the timing is related to each one of these.So, if you think about Buyer Digital Transformation or you think about Towing Optimization, for example, there are a number of sub initiatives that are very detailed and we have detailed work plans for each of those.So, the short answer is that we feel very confident about the plan, the initiative. And at this point, we feel confident about the benefits. Now, that's subject to, as we mentioned in our prepared remarks, around some of these are volume-driven and could be impacted somewhat by COVID-19 to a degree to which we don't understand it as we sit here today.

That's helpful. And then last one for me, Vance, more near-term. On the gross margin expansion, we saw in the quarter, this is the second quarter in a row of expansion despite tougher comparisons. Can you just talk about what's driving that? And how much of that may be driven by the price increase you took in 3Q? And then how sustainable, maybe ex the COVID-19 impact, but how you think underlying gross margins are trending in the business? Thanks.

Yes. So, a couple of things. So, one, I think that it's primarily being driven by the buyer fee adjustment that we enacted in the beginning of July of 2019. But also, we are seeing results, good results from some things that we've implemented across the business, including 360 View and things of that nature. But the primary factor would be the adjustment to buyer fees.

Got it. Thanks. Best of luck guys.

Thank you.

Thank you.

And our next question today comes from Stephanie Benjamin at SunTrust. Please go ahead.

Hi, good morning.

Good morning.

Good morning Stephanie.

I wanted to ask a little bit about the impact potentially. And I know it's early with COVID-19 on the buyer side. So, you spoke a lot about just what could happen from the miles driven and an accident frequency. But have you seen any kind of in the last -- again, I know it's very fluid, but just any demand or any change from the buyer side?And then maybe if you could remind us geographically, where you see a large percentage, not that you have to quantify it, but just kind of where you see a lot of your buyers residing, the geographic locations? Thanks.

Sure. Great Stephanie. So, yes, I mean, we have not -- I mean, again, it is very, very early, but -- and we do have a -- we have a very robust buyer base. Thousands of bidders every week are looking at bidding and buying our vehicles domestically and internationally. So, I think that's a benefit to our business in this type of environment. So, that's the short answer.Our buyers, we have, obviously, a really, really strong domestic buyer base. And then internationally, Mexico is our biggest international market and then it starts to spread around the globe. But we do have buyers in 110 countries. And again, we're reaching out to them through this process as well to make sure that we stay engaged and we're communicating to them about our business. So, yes, I mean, that's what we know of today.

Great. And just quickly, just I wanted to ask if you could remind us if you had any large contractual renewals with some of your big insurers from this year that may come due or maybe kind of the time line of some of those so we can think about it from that standpoint. Thanks.

Yes, again, we don't talk about specific customer. As I said in my remarks, feel confident about our competitive position, and that's all we're going to comment on that.

Thank you. Our next question today comes from Bob Labick at CJS Securities. Please go ahead.

Good morning. Thanks for taking the question.

Good morning Bob.

Good morning Bob.

I wanted to start with a kind of two-part question. Obviously, unprecedented times, we don't know what's going on. But if we all assume that there will be miles driven down for a period of time, can you talk a little bit about, first, how long does it take for reduction of miles driven to flow through into your volume, like generally speaking?And then part two, can you talk about the relationship between the prices realized at auction when volume falls and how long that takes? Because presumably, there's still going to be a lot of demand for the cars, so prices may be bid up.And just help us think through those two dynamics of initially, volumes may come down, but you'll have some offset potentially. If you believe that with prices, help us kind of think through those dynamics, please?

So, yes, I mean, as Vance said in his remarks, I mean, there's typically a two to two and a half week lag from accident to when we're notified. So, that's kind of the short time or short-term kind of frame that we would look at. In terms of the demand side, yes, I mean, there's a lot of -- there's obviously a lot of drivers of prices in our auctions.Volume is one of them. And then you've got the whole dynamic of used cars and new cars, is that going to increase demand for used cars. So, we've, over time, look at this, and it's hard to kind of pin it to one driver because there are so many things that affect pricing.But again, through our history, we've continued to drive up prices through all the work we're doing to find more buyers, to bring more services, to provide more information to our buyers. And again, we'll be -- as we've talked about, we are going to continue to drive forward with that to support the demand side.

And Bob, just to add to what John was saying, the two to two and a half weeks that I outlined in my prepared remarks, that's -- as John alluded to, that's between when the incident takes place and when we're get noticed of that. So, if you think about assignments coming to us.But then on top of that, there's a period of time, it could be a month or so at least on top of that on average. And by the way, no car, no carrier is the same, whereby we have to kind of, the carrier -- the provider has to get the title. We then have to convert that into a branded salvage title, and then we run the auction for the car. And so we've talked before about total cycle, 45, 58, something in that range.As you think about when the cars are -- if there was some decrease in miles driven that resulted in less incidents, then there would be that kind of a time frame between when we would actually see that show up in our results of cars sold.I think you're right. I think an important point here is that we don't know kind of what buyer demand, we're just in the process, as John said, we're evaluating kind of -- we're closely monitoring that as well. But in an environment, if there was one where buyer demand remained constant and you had less cars, then I think it would be a fair assumption to think that the bidding price for those cars may go up.But we don't -- once again, we don't know the degree to which we have less cars. We don't know kind of how buyer activity is changing. We're in the process of -- we're monitoring that. It's very, very early stages, given kind of how this is unfolding.

Got it. Okay. Those were helpful insights there. Appreciate that. And then just one more for me. Obviously, you have a lot of natural margin growth opportunity as you've outlined in the margin expansion plan. Can you talk a little bit about how much of that, if any, you're planning on reinvesting back into the business and what are the biggest areas of opportunity to reinvest it in? And is it accelerating the international buyer base or other initiatives that you may be able to take some of this margin enhancement and then enable that to accelerate growth or other growth plans?

Bob, yes, I know, it's Vance. So, I think as we've kind of outlined previously, the way that we're going to think about investment in capital, is consistent with the philosophy that we've laid out, which is that we're going to look at capital investment that we make in CapEx that we actually invest back in operations in the form of G&A, SG&A and otherwise, share repurchases, dividends, M&A, paying down debt, what have you, we're going to look at those relative to our cost of capital and our hurdle rate. And then we're going to look at those opportunities relative to the other opportunities that we have at any one point in time and what's the best financial opportunity that we have.Now, having said that, as we've also said, at least initially, our focus is on reinvesting back in the business because we think there are good opportunities to do so and drive our business. And by the way, some of those investments opportunities may include down the road -- may include land repurchases, may include also international expansion, things of those nature as well.But I think that's the philosophy as we kind of generate returns through the margin expansion plan. We'll think about reinvestment. And according to that philosophy, I think, with a slight tilt more towards, at least initially reinvestment back in the business we do see opportunities.

Got it. Okay, terrific. Thank you very much.

Thanks Bob.

Thanks Bob.

And our next question today comes from Bret Jordan at Jefferies. Please go ahead.

Hey good morning guys.

Hey Bret.

When you had put out a first press release on Digital 360 and the loan payoff program, you threw out some yield and cycle-time numbers. Can you give us an update or are we still sort of seeing that order of magnitude and improvement?

So, on Loan Payoff, we are. I mean, we're -- as we bring more lenders on and more insurance companies, we are seeing significant decreases in cycle-time. And yes, I mean, that's going really well. On the 360 View, in that press release, we talked about a pilot program with a limited number of or limited model year ban. As we've expanded it to the breadth of our inventory, you've got lower value vehicles.So, the nominal impact is probably not as great but it's still -- we're still seeing lift throughout our mix of vehicles, really positive mix. And as I said earlier, we continue to add features to it. So, we believe that it's going to continue to drive additional bidding.

Okay. And then, I guess, you'd commented about 28 incremental real estate projects and the fact that you would pick up some capacity by dropping the live auctions. I guess, assuming the auctions were gone, what capacity utilization are you running at?

Bret, we haven't provided that information previously. So, that's not information that we've provided publicly. But I think what we have said and feel confident with is that we have the real estate that we need to meet current demand as we see it right now and then in kind of the near and intermediate-term as well. So, we feel comfortable with the real estate that we have to provide the services that we need to for our seller providers.

Great. Thank you.

Thank you.

Thanks Bret.

[Operator Instructions]Today's next question comes from Derek Glynn at Consumer Edge Research. Please go ahead.

Hi, good morning. Apologies if I missed this, but on the timing of the benefits from the margin expansion plan, how much of that $104 million to $122 million benefit, would you expect to realize in 2020 assuming this is a more normalized environment, so excluding impacts from COVID-19?

Yes, I think we're not prepared today to give a specific amount, but what I would say is if you reference page nine, where we've laid out, and we've given some indication of that, the benefits by category. So, if you think about Buyer Digital Transformation, we've said net adjusted EBITDA run rate benefits of $42 million to $48 million. And we've said that the run rate will be -- we'll have a full run rate in 2021.As John said in his prepared remarks, our expectation -- and our expectation, we will be complete with the conversion to online-only auctions in all the markets that we're doing that, which is the vast majority of all markets. And in fact, it's going to be close to all of them in the U.S.And so we're going to be done by that by the end of the second quarter. And so from that, you could see that we would expect to be accreting the benefits of that in 2020, right? So, you're going to get a -- not on a full year basis, but you're going to get a decent amount of those benefits in 2020.Things like Pricing Optimization, Towing and Branch Process, Improvement and Efficiency, they have a little bit longer tails in terms of when we expect to be recognizing those benefits and then when we expect to be on a full run rate basis as well. But we do expect, specifically from Buyer Digital Transformation to incur benefits in 2020.

Okay, got it. And then on the Pricing Optimization initiative, can you just clarify is that targeting solely buyer fees or both buy and sell-side fees being evaluated? And then secondly, you called out adjusting where demand is more inelastic. Curious if you're evaluating demand based on geography or vehicle type or any other factors?

Yes. So, no -- thanks, that's a good question, Derek. So, no, the pricing optimization, the initiatives that we have under that are all related to the buyer side. And the way I would describe it is, as we said in our prepared remarks, some of that is where we believe that we have the opportunity to adjust fees on certain things where we think that makes sense based on the price elasticity work and the analysis that we've done.But secondly, I think there's a number of things that we outlined where we either have existing products or services that are in place where we either weren't charging for them previously or where we've looked at the analysis and we've looked at -- done customer research and better understood the willingness to pay for certain things. And now we think that there's ability to either charge for them or to charge something different more for those products and services because they're really, really valuable to buyers.In addition, there are new products and services that we're in the process of rolling out, a lot of -- so number of which we've talked about. And then we've also given thought and consideration to how we may price those. But everything related to Pricing Optimization is really on the buyer side.

Okay, great. And then just last one for me. You mentioned vehicle miles traveled and accident frequency, but also want to get your thoughts on the other side of the coin, accident severity. What are you thinking there on second order impacts like how repair costs may be impacted due to COVID-19?

I think that I can answer this, and I'll turn over to John, too, but I think that, one, we don't see anything that would suggest that the percentage of total loss would change relative to -- I mean, accident frequency, as we outlined, may change based on miles driven, but we haven't seen anything that suggests that the percentage of total loss would change. So, hopefully, that answers your question.

Yes. And just a little more color. I mean, some of the questions that are being asked among the carriers are around parts supply to repair vehicles. So, if there's disruptions in parts supply, what does that do to repair timing and cost? And then just timing, if it takes longer to fix a car? Is an insurance company going to think differently around? Do I want to incur rental for an extended period of time? That enters into their decision-making.So, those are questions that, as we've been having discussions with our insurance company providers, those are questions they're asking, we don't have a view on it or they haven't given us their view, but those are just areas that are being assessed as part of this whole situation we're in.

Okay, that's all very helpful. Thank you.

Thanks Derek.

Thanks Derek.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Just wanted to say thank you to everybody for joining us. And again, we look forward to talking to you at the end of the first quarter. Thank you all and have a great day.

Thank you.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.