Good day, and welcome to the IAA Inc. Q3 2019 Earnings Conference Call and Webcast. 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 this event is being recorded. I would now like to turn the conference call over to Mr.

Arif Ahmed, Vice President of Treasury. Mr. Ahmed, the floor is yours sir..

Thanks Mike. Good morning, everyone and thanks for joining us today for IAA's third quarter fiscal year 2019 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 13, 2019.

The 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 the call over to John.

John?.

Thanks, Arif. Good morning and thank you everyone for joining us for our third quarter earnings call.

In our first 4.5 months of being a stand-alone public company, we have made significant progress on our short-term priorities, including building out our necessary teams and functions and continuing to enhance our product and technology offerings to buyers and sellers. We are also making good progress on our six key strategic initiatives.

I'm very proud of our teams, and I thank all of them for their hard work and dedication. Turning now to our third quarter results. We generated 11.3% revenue growth, and a 13.1% increase in adjusted EBITDA. On an organic basis, excluding the impact of our DDI acquisition, foreign currency, and a non-cash revenue adjustment revenue growth was 9.8%.

This quarter we benefited from higher revenue per vehicle as well as higher volume. Our international business continues to drive strong results led by Canada, where we have had success with customer wins and enhanced service offerings.

Before I review the progress on our key initiatives, let me spend a few minutes discussing the volume shifts we mentioned in Q2 that were incorporated in our outlook provided at that time and continue to be reflected in our outlook for 2019. As we said last quarter, our outlook reflects known volume shifts and buyer fee changes announced in Q3.

While we do not discuss customers on an individual or name basis, there have been some volume shifts, which include a top three customer who is shifting about 30% of their volume away from IAA to diversify their business. This shift is substantially complete has played out as we expected and should be completely finished by the end of the year.

While we've had some key customer wins as well, this year we have lost more share than we've gained. Insurance customers are motivated by a number of different factors, when deciding how to allocate or diversify their business across their salvage partners.

Proceeds, pricing, product offerings and service levels, catastrophe management and customer relationships, including changes in claims organizations are just some examples. I am confident in our ability to drive share and additional volume over the medium to long-term.

I also believe our sharp focus on driving innovation through the expanded products and services we are bringing to the market will further strengthen and differentiate the value proposition we offer to buyers and sellers.

We are fully committed to having a best-in-class digital marketplace and are making great strides with both new and enhanced products and services that we've delivered for buyers and sellers and continue to aggressively pursue additional enhancements.

We are in the middle of our budgeting process for next year, but as Vance will discuss, there will be an impact to anniversarying this shift in volume next year, resulting in revenue and adjusted EBITDA growth in 2020 potentially falling somewhat below our longer-term targets.

Having said that, we still feel confident in the longer-term outlook for organic revenue and EBITDA growth that we previously provided. We will provide our formal outlook for 2020 on our Q4 call. Now, I'd like to spend a few minutes talking about some of the key innovative product services and initiatives that set us apart in the market.

Those include IAA Loan Payoff, IAA 360 View and our Buyer Digital Transformation initiative. Loan payoff digitally connects insurance companies and automotive lenders to enable more efficient document sharing and processing of loan payoffs.

With more than five million vehicles deemed a total loss each year and growing and approximately 60% to 70% of them having vehicle loans, better managing this traditionally manual time-consuming process is a significant benefit to insurance customers.

Loan payoff is demonstrably reducing cycle time, by an average of 19 days so far and generating significant economic value for our insurance provider partners.

Reduced cycle time means less vehicle depreciation, faster receipt of proceeds, lower processing costs and higher customer satisfaction, which results in less policyholder churn, along with other savings for insurers.

Our recently announced acquisition of DDI and our strategic partnership with Dealertrack provide additional tools and lender relationships to further accelerate and enhance the use of loan payoffs. We are very excited about this innovative product and the positive impact it is having for our insurance provider partners.

The next new product 360 View provides buyers an online interactive 360-degree view of both the exterior and interior vehicles in high-quality video with detailed imagery providing a more accurate visual of the vehicle. This improved merchandising helps build buyer confidence, drives higher bids, all these results in higher proceeds for sellers.

We are really pleased with the results we're seeing. To date, we have seen a proceeds increase when using 360 View, by approximately $300 to $600 per car on average. The third topic, I want to talk about, is our Buyer Digital Transformation initiative.

Over the last couple of years, we have developed and brought to market several new key pieces of functionality. IAA Timed Auctions, Buy Now, IAA AuctionNow and 360 View, are all examples of recently implemented solutions for digital buyers to dramatically enhance and improve user experience and engagement. We've also completed our full U.S.

rollout of AuctionNow, our significantly enhanced auction platform and we are pleased with the results that we are seeing.

AuctionNow drives a superior buyer experience through features like improved auction monitoring, new bidding features, enhanced auction reminders and improved vehicle imaging and merchandising that is producing an increase in buyer bids and ultimately driving increased proceeds that benefits our sellers.

We will continue to innovate our auction platform and additional enhancements around the way. We plan to provide a more detailed update on buyer digital transformation in early 2020, as part of our review of margin expansion opportunities, but expect to be substantially complete with the rollout by the middle of 2020.

And these are all part of our progress on our six key strategic growth initiatives. I've already discussed the progress that we're making on buyer digital transformation and loan payoff, which are key components of our initiatives to broaden our service offerings, deepen our strategic seller relationships and expand margins.

I'd like to talk a little more now about what we're doing on another really important initiative, growing our international buyer network. We continue to have considerable success, increasing both our international buyer network as well as our overall sales to international buyers.

We currently have buyers in approximately 136 countries; offer our website in six different languages and our call center support 13 different languages as well. In this past quarter units sold to international buyers, were up 22% versus the prior year.

However, we know we have an opportunity to further expand our international buyer network and increase our sales to these buyers. Our strategy to achieve this consists of the following four parts. First, we're going to continue to build brand awareness through in-country seminars that educate potential buyers on the salvage auction process.

Second, we're strengthening our marketing alliances internationally through relationships with established local partners and agents and utilize satellite bidding offices selectively. As an example in Poland, we now have 10 satellite bidding offices in major cities. And as a result, units sold in that country year-to-date are up more than 25%.

Third, we're going to target specific countries with strong growth opportunities through focused digital marketing. By delivering a country-specific curated content and leveraging social media channels, digital advertising and search engine optimization, we are focused on increasing brand awareness and expanding our buyer base.

And fourth, and perhaps most importantly, we are utilizing our technology innovation to create a better buyer experience.

Through new merchandising technology like 360 View, Timed Auctions and AuctionNow, we are providing better vehicle data and a more comprehensive visual display of vehicles, allowing all buyers the opportunity to conduct more thorough research, which in turn increases buyer confidence and raises bidding and buying levels.

We expect this momentum to continue as we roll out additional innovative products and enhancements. In addition to the initiatives that I've just mentioned, as we have discussed, we will be laying out our margin expansion plan by early next year. We will be providing more detail on our key initiatives, including the margin improvements that we expect.

So, in summary, I am pleased with the early progress that we have made as an independent public company and the focus our organization has on delivering innovative products and technology, as well as enhanced service levels to drive a better buyer experience and improved outcomes for our sellers.

We feel good about our position going forward, given that we operate a leading global marketplace in such an attractive industry with company-specific margin opportunities that we intend to capitalize on to drive shareholder value. Thank you for your interest and support.

And I will now turn the call over to Vance to discuss our financial performance in further detail.

Vance?.

Thanks, John. We delivered a strong third quarter, which I will now review in more detail. I will focus my discussion today on our adjusted non-GAAP results. Please see today's press release for more detail regarding our methodology when calculating these numbers.

For the third quarter, as John mentioned earlier, consolidated revenue increased 11.3% to $357.3 million from $321.1 million in the third quarter of fiscal 2018. As discussed in our press release, we had a $3.6 million non-cash adjustment for certain revenue agreements and a $1.9 million revenue benefit from DDI, which was acquired on July 31.

FX negatively impacted revenue by $700,000. Excluding the impact of these items, revenue growth was 9.8% due to increased volumes of approximately 4.8% and higher revenue per vehicle of approximately 5%. U.S. revenue increased 11.1% to $318.1 million from $286.4 million in the prior year period, due to an increase in both volume and revenue per unit.

International revenues increased 13% to $39.2 million from $34.7 million in the prior year period, due to an increase in volume as well as a higher mix of purchase vehicles. Total purchased vehicle revenue increased by $2.9 million or 10.5% to $30.3 million compared to $27.4 million in the prior year.

Gross profit, which is defined as consolidated revenue minus cost of services and exclusive of depreciation and amortization increased by 14.7% to $136 million from $118.6 million in the third quarter of fiscal 2018, primarily due to the increase in revenue, partially offset by an increase in our cost of services.

Gross margin increased 110 basis points to 38.1%. Excluding the benefit of the $3.6 million adjustment to revenue, gross margin was 37.4%. Adjusted SG&A expenses were $36.9 million compared to $30.8 million last year. The increase was primarily due to increased public company costs consistent with what we expected.

Adjusted EBITDA increased by 13.1% to $99.1 million from $87.6 million in the third quarter of fiscal 2018, primarily due to the increase in revenues, partially offset by an increase in cost of services and higher SG&A expenses.

Excluding the $3.6 million related to a non-cash adjustment for certain revenue agreements, unfavorable currency of $100,000 and a loss from the DDI acquisition of $400,000 organic adjusted EBITDA was $96 million, an increase of 9.5% over the prior year.

Interest expense was $17.5 million compared to $9.6 million in the third quarter of fiscal 2018 with the increase driven by a higher debt balance resulting from our new capital structure following the separation from KAR Auction Services. The effective tax rate was 27.3% versus 26.4% in the third quarter of fiscal 2018.

Adjusted net income increased 7.2% to $47.6 million or $0.35 per diluted share from adjusted net income of $44.4 million or $0.33 per diluted share last year. With regards to our year-to-date performance, consolidated revenue increased 9% to $1.08 billion from $991.6 million in the prior year period of fiscal 2018.

Excluding the impact from DDI and the non-cash non-recurring adjustment for certain revenue agreements as well as a negative impact of $4.8 million from FX, consolidated revenue increased 8.9% due to increased volumes of approximately 3.7% and higher revenue per vehicle of approximately 5.2%. U.S.

revenue increased 7.1% to $952.9 million from $889.9 million in the prior year period due to an increase in both volume and revenue per unit. International revenue increased 25.9% to $128 million from $101.7 million in the prior year period due to a higher mix of purchased vehicles as well as an increase in volume and revenue per unit.

Total purchased vehicle revenue increased by $21.2 million or 27.4% to $98.6 million from $77.4 million in the prior year. Gross profit increased by 8.4% to $413.5 million from $381.3 million in the prior year period, primarily due to the increases in revenues, which was partially offset by an increase in our cost of services.

The increase in cost of services was primarily due to a higher mix of purchased vehicles in our international business as well as an increase in occupancy costs, which contributed to gross margin declining 20 basis points to 38.3%. Excluding the benefit of the $3.6 million adjustment to revenue gross margin was 38%.

Adjusted SG&A expenses were $101.1 million compared to $93.7 million last year, primarily due to the increase in public company and transition costs previously mentioned.

Adjusted EBITDA increased by 8.7% to $312.3 million from $287.3 million in the prior year period primarily due to the revenue growth partially offset by an increase in cost of services and higher SG&A expenses.

Excluding the $3.6 million related to a non-cash adjustment for certain revenue agreements unfavorable currency of $1 million and a loss from the DDI acquisition of $400,000 organic adjusted EBITDA was $310.1 million, an increase of 7.9% over the prior year.

Interest expense was $39.1 million compared to $28.9 million in the prior year period with the increase driven primarily by a higher debt balance resulting from our new capital structure following the separation from KAR. The effective tax rate was 27% versus 25.7% in the prior year period.

Adjusted net income increased 9.4% to $166.6 million, or $1.24 per diluted share from adjusted net income of $152.3 million, or $1.13 per diluted share last year. I would just like to briefly touch on our cash flows and some key balance sheet metrics.

Free cash flow, which we define as cash from operations less purchases of property and equipment was $193.2 million for the first nine months of 2019, compared with $203.4 million in the prior year period.

The slight decline in free cash flow year-over-year was primarily due to higher capital expenditures in 2019, which is partially a function of timing. Our same branch location vehicle inventory at the end of Q3 was up 0.7% versus the prior year. Net debt at the end of Q3 was just under $1.3 billion.

Our current leverage ratio, which we define as net debt over last 12 months adjusted EBITDA is 3.1 times and we intend to continue to delever in the near-term with the goal of getting within our targeted range of two times to three times.

Consistent with these priorities on September 30 at the beginning of the fourth quarter, we repaid $12 million of our term loan. Now turning to our outlook.

Given our year-to-date performance and our expectations for the fourth quarter, we now expect full year organic revenue growth to be within a range of 7% to 7.5% compared to fiscal 2018 consolidated revenue of $1.3 billion.

This updated outlook compares to our previously provided consolidated organic revenue growth range of 5% to 7% and excludes the non-cash adjustment for certain revenue agreement -- revenue agreements, revenue from DDI and the impact of foreign exchange movements I previously discussed.

Excluding these items, we also expect adjusted EBITDA for the full year to increase organically by 6% to 7% from fiscal 2018 levels of $383 million. This compares to our previously provided range of 6% to 8%.

Finally, we are still in the early budget review process, but as John mentioned given the known volume shifts that have occurred this year, our preliminary view is that growth in revenue and adjusted EBITDA in 2020 could potentially fall somewhat below our longer-term targets. We will give formal 2020 guidance on our Q4 earnings call.

We are confident in our ability to continue to drive long-term results, as we enhance our business model improve our margin profile. With that, we will now open the call for questions.

Operator?.

Great. Thank you, sir. We will now begin the question-and-answer session [Operator Instructions] And our first question will come from Daniel Imbro of Stephens Inc. Please go ahead..

Hi. Good morning guys. Thanks for taking our questions..

Hi. Good morning..

Hi, Dan..

I wanted to start on actually the revenue per unit side. You saw some nice sequential acceleration.

Can you help us parse out how much of that 5% was maybe industry-driven? What you're seeing with the vehicles coming to auction? And then how much of that 5% was driven by company-specific initiatives such as price increases or incremental service offerings? And then I do have a follow-up..

Yeah. Hi, Dan. This is Vance and thanks for joining us on the call this morning. What we would say is, we don't break out or provide specific guidance on the different elements of growth in revenue per unit. But as you can imagine the adjustment that we made to the buyer fees did have a significant impact on that in the third quarter.

But we also continue to see higher proceeds per vehicle that's driving up revenue per unit as well..

Got it. Thanks. And then just a follow-up on the market share comments. Obviously, some puts and takes. It sounds like you won some share. Obviously, there were some share shifts.

But is there a consistent feedback you're hearing from customers when you are losing share around why that is? And then the same thing when you're winning business1, is there a consistent feedback you're hearing from your customers as to why you're winning that business?.

Hey, Dan. Yeah, thanks. It's John. So each situation is unique. It really -- it comes down to what the priorities are of the carrier, how they're thinking about this part of their claims organization.

So I mean it comes down to the things I talked about; proceeds, service level, the relationships, just how they think about diversification kind of all those things go into the decision. So they're -- I wouldn't say there's one consistent theme one way or the other..

Okay. Got it. Thanks so much guys. Best of luck..

Thank you..

Thanks, Dan..

Next, we will have Derek Glynn of Consumer Edge Research..

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

Good morning..

Good morning..

Good morning. I just want to get some clarity on the market share shift.

What gives you confidence that volume shift from this top three customers will only be 30% of their volumes just want some clarity there?.

Yeah. I mean, it's what we know now. We continue to have a really strong relationship with all of our top customers and we're doing a number of things with each one of them that we think we're a good long-term partner, and we fully expect to be for the foreseeable future.

So, yeah, I think they made their decision, and we're continuing to work well with them as well as the balance of our top and midsized customers..

Okay. And then also just had a question on bridging to your full year EBIT guidance, which seems to imply a step down in growth in the fourth quarter. Can you just walk us through the puts and takes there? What should we keep in mind on a margin or cost side of things that would impact the fourth quarter? Thanks..

Yeah. So, Derek, this is Vance. So I think that the biggest elements that are impacting the fourth quarter, one, I mean the business continues to be really solid and we continue as we did in the third quarter expect to have good trends overall in the business.

However, we did have the volume shifts that we talked about, so those are on a run rate basis are going to be more impactful in the fourth quarter than they would have been in the previous quarters. So that's probably the biggest thing. That is somewhat offset by the buyer fee adjustment that we made at the beginning of the third quarter.

And then in addition, I would say that, we have taken some measures where appropriate to reduce cost supporting our business given some of these volume shifts. So those are the major elements that are impacting it..

Okay. Thanks, guys..

Yeah. Thanks..

Next we have Craig Kennison of Baird. Hello Mr. Kennison.

Is your line muted sir?.

Sorry, about that. I wanted to ask about a couple of your innovations here the loan payoff tool the 360 View.

To what extent, are you able to generate additional revenue from those capabilities? And is that above and beyond the fee increase that you've announced already?.

So, thanks Craig. So 360 View is really an enhancement we're making to the buyer. So there isn't a – there isn't specific fee attached to it. But as I have said, we are seeing higher levels of bidding and buying activities. So we are getting higher proceeds on those vehicles. So obviously that results in additional buyer fees for us.

And then in terms of loan payoff, loan payoff the value that we're going to see from that there is a revenue component of it although, it's relatively modest. It's really around cycle time and the benefits that both ourselves and our insurance customers gained from selling those vehicles faster.

So there's – they're not – again, it's not revenue specific, but we're going to see cost savings. We're going to see improved efficiency. We're going to see higher selling prices from better utilizing that product..

Thanks. And I know you've acquired DDI to enhance some of those capabilities.

Is there additional M&A that's required for you to fully build out some of the service portfolio you offer?.

We think it's very robust right now. But we again, we continue to look at ways to improve it. I mean, if there's opportunities to make it even better, we'll certainly – we certainly have our eyes out and are looking at and thinking about that..

And then finally I think I heard that on DDI is to generate a loss in the period? What is the expectation for that business over time?.

Again, I think we bought that business more for the capabilities it's going to provide in our core business.

So the efficiencies that we're going to gain across our core operating business, I don't have the details on the – Vance do you?.

Yeah. Just – yeah, Craig this is Vance. Just to add to what John was saying I think a couple of things. One is obviously, we just acquired the business and – but the expectation would be the business on its own would be profitable.

Secondly, the strategic rationale for acquiring the business was the additional – the lender the network of lenders that we're acquiring as well as the additional tools that we're acquiring with DDI and the impact that that's going to have on loan payoff, which we think is going to be really beneficial to the loan payoff product.

And so that obviously was the major reason for the acquisition. But we still feel very, very good about that..

Great. Thanks for all the color..

Thank you..

Thank you..

And next we have Bob Labick of CJS Securities. Please go ahead..

Thank you. And good morning, and yes, thanks very much for all the color on the call. .

Good morning, Bob..

Hey, Bob..

Good morning. Hey. I just wanted to start with – one of your initiatives is over time to shift some of your auctions to all-digital versus the hybrid auctions.

And I just wanted to ask about the necessary steps to go to that? And when do you believe is it a 2020 event that you'll cross over your first auction or -- and maybe like the first 25%? Or how are you thinking about the timing of the rollout? And what's necessary to get there?.

Yes. I mean Bob thanks for the question. Yes, it's our expectation that by the middle of next year, we'll have deployed digital auctions in most, if not all of our -- we're still going to have some branches where we truly believe there's a strong live buyer base that we're not going to change for the foreseeable future.

But we believe that's a minority of the total. So, it's certainly something, we're going to get done in 2020. And we've been -- as I said, we've been laying the groundwork with some of the other tools that we've deployed to really make it a superior experience..

Got it. Great. And then, you may have mentioned this, I apologize. But in terms of the 360 View, which obviously is a benefit to that all-digital as well.

Where does that rollout stand? Has that rolled out across the country? Or what's the timing on that one?.

It is rolled out across the country. Again, we started with the newest model year and have been working backwards. So, I think, today we're at 2011 in newer vehicles that we're putting through 360 View, but it's our expectation that in 2020, we'll virtually all of our vehicles will go through that platform..

Okay. Great. Thanks. And then one just last one and just kind of housekeeping I guess. You mentioned the $3.6 million noncash revenue adjustment; I think you said it's nonrecurring. I just wanted to ask if it repeats in Q4.

And maybe, any more details on what it is because I'm not entirely clear what the adjustment was for?.

Yes, no. So this is just a -- once again, it's a noncash revenue adjustment related to an agreement that we have and basically we had to kind of make that adjustment per GAAP accounting. So, given that it's a noncash thing, it's not typical.

We decided the best way to treat that and the most transparent way to treat that would be to -- for organic revenue growth purposes to exclude the benefit of that. So, that's -- hopefully that's what you're looking for, but that's a little bit more specific on it..

Okay. Got it. Thanks very much..

Thanks Bob..

Next, we have John Healy of Northcoast Research..

Thank you, guys. I wanted to ask a question about market share opportunities over the long run. I feel like, we're very focused on what's happened in the near term.

But when you think about, kind of expanding the international buyer base, the digitization approach to the locations, I feel like a lot of us are thinking about those as profit-enhancement tools.

But did you view them as market share enhancement tools? And once you get this kind of IAA 2.0 kind of rolled out completely, at what point do you think the market needs to digest it to where you would then be on the potential side of maybe market share wins? And is that a right way to think about it that these are both savings and share opportunities that you're going after with the strategy?.

Yes. Well, and they're very complementary, right? If we can drive higher proceeds at auction and a more efficient experience, it's -- we're going to get higher yields which is going to help us grow margins -- additional sellers to our platform.

So, I think they go together and we certainly are focused on implementing solutions that are going to help our insurance customers get better outcomes, which is going to help us grow our share..

Okay.

And when you look at the international efforts to expand the buyer base, could you maybe talk to what some of the -- on the ground initiatives are? And how long the payoff period takes for those initiatives to result in kind of more meaningful results through the platform?.

Great. So, I talked about several different initiatives, we have on international. But in terms of in-country, we literally will take a team into the country, we'll do a little advertising, we'll actually recruit people that are interested in buying cars and educate them on how and we'll register them right there.

So, I mean, we get very quick feedback and response to our efforts to the in-country efforts that we've undertaken..

Okay great. And then just last question for me. When you think about the moving parts of the industry, I feel like the used car prices have actually started to now finally come down a little bit.

And when you look at the kind of the calculus for growth rates in terms of volumes and revenue per unit for you guys, would you rather see a moderating used car market or more of a stable one? I guess I'm trying to understand, what's the optimal equation for you guys as it relates to volume gains by used car values falling? And how much revenue you lose on the revenue per unit side based on the different price bands.

What's kind of the optimal environment for you guys?.

Yes. I think -- I mean it is a bit of calculus as you just identified, but I think stable and consistent, I think throughout is better because I think buyers have a better sense of what vehicle values are going to be worth if they buy them in our auction. So, it takes some of the risk out of the transaction.

So I think stable is -- would be better kind of all in..

Great. Thank you..

Thank you..

The next question we have will come from Bret Jordan of Jefferies..

Hi, good morning guys..

Good morning, Bret..

Good morning, Bret..

I guess as you look at the less exclusive relationship with that insurance partner, does this give you the opportunity to renegotiate seller pricing with fewer volumes, can you get a higher seller rate for the remaining volume?.

I mean each -- again each situation where the carrier is different in terms of how fees are assessed, so that's possible, but it's not always that direct..

Okay. And then I guess on the cadence of the impact, it sounds as if the fourth quarter is going to have a greater volume shift.

And then does it stabilize for the first half of next year then you start lapping some of the volume shift, so the second half is less impactful?.

Yes. Bret as we said -- this is Vance. And as we said in our prepared remarks, we -- it's kind of going as we expected. And it's substantially complete at this point in time and we expect it to be finished by the end of 2019. So as we kind of then transition into 2020 all of it will be done.

So in the first half of 2020 by example, we will be -- we won't have anniversaried that, so it will impact directly comparable versus the first half of 2018, because we would have had the benefit of that volume -- I'm sorry, versus 2019 because we would have had the benefit of that volume in the first half of 2019, but it will have been shifted out in the first half of 2020..

Right.

But the volume shift started sort of mid-2019, right? So we start anniversaring in summer of 2020?.

Yes, at some level. So once again, some of it happened and this is something that happens on a progression as units are assigned and then you also have to take into consideration those units being sold as well..

Right. And I guess the visibility on the volumes, it's relatively contractual, so you know that it's a 30% of the shift it's -- there's not sort of the probability of it becoming 50 because they like their experience is relatively low.

Or is that -- or is it sort of a moving target?.

Yes. So a couple of things on that. As John pointed out in an earlier conversation on the call, we feel really good about the relationships that we have with the large insurance providers on all our insurance providers for that matter.

And we feel at this point that the one that was mentioned where 30% of the volume has been shifted that's what we know at this time. And we believe there's nothing else that gives us a thought to believe anything else. So we feel really good about that..

Okay. Thank you..

Now having said that things can change over time. But for the moment, we feel good about that..

All right. Thanks..

Thank you..

Next, we have Chris Bottiglieri of Wolfe Research..

Hey, guys. Thanks for taking the question.

I guess first question, as we think about the kind of cadence the volume shift, any reason we shouldn't use the inventory growth metric you provided is kind of like a near-term gauge of kind of unit volumes incorporating the net effect of market shares?.

I think -- Chris, this is Vance. So I think that certainly that can give you a sense. It's not the only thing because obviously the amount of inventory that we sell-through in any one quarter going forward is also going to impact our revenue. But I mean that's certainly -- that by itself can be helpful, but it's not the complete answer..

Got you. Okay. And then I just wanted to like more holistically think about the impact of international bidders. Can you just like frame what the opportunity is numerically? Obviously, it's like a theoretical arguments like more buyers is good for a marketplace platform.

But when you have more international bidders, what does that do to ARPU specifically? Is there a way to quantify that what that means for ultimately ARPU and returns? Thank you..

I mean we have done some work -- the value of international buyer is greater than a domest. We've tried to do some analysis around that. So we do see the kind of all other things being equal an international bidder will pay more for the same vehicle. So that in of itself makes it more attractive to go after the international buyer.

We see enormous opportunity. Again, we've had strong growth. We're doing a number of things to accelerate that growth and we still see enormous opportunity that keeps attracting more and more international buyers..

You. Okay. And then just one last quick one. Given the EBITDA guidance for next year I haven't had a chance to raise my model yet, but when we think about SG&A kind of given like the shared service agreement and the transition of KAR and having to do this yourself like that can get pretty complicated.

How do we think about the trajectory of SG&A dollars over the next kind of couple of quarters? Like should we just take the Q3 run rate and grow that sequentially, or what's the right way to think about that?.

Yes. I would say that -- Chris, this is Vance speaking. I would say that we won't be kind of have the full run rate of transition services and public company costs more importantly, public company costs and until at least Q4 and likely a little bit into the first quarter of 2020.

So I would say from that either thinking about using Q4 is more of a run rate or the first quarter of 2020 would be a better proxy for SG&A expenses. Now having said that, we are also going to be very focused on managing SG&A including where we think there's some opportunities to reduce SG&A.

But I would think a good proxy before we identify and implement those opportunities as part of our margin expansion plan would be either Q4 2019 or Q1 2020..

Got you. And are we talking like a couple of million step-up in Q3? Or just any kind of guardrails you can give us would be like directionally helpful..

Yeah. I don't want to give the detail at this point in time. So, part of it is that we're still in the process of hiring on some folks. There are some processes that were public company processes that we're putting in place, some kind of small system conversions things of that nature. It's not a huge. It's going to be a huge impact.

But I think probably the right thing to do and wait until we get through Q4. And then also, as we obviously go forward into 2020, we'll be providing an outlook for 2020. And within that, we'll be incorporating what we think the impact of the run rate of public company costs will be within that..

Got you. Thanks for the question and clarity of this quarter. Thank you..

Thanks, Chris..

Next we have Stephanie Benjamin of SunTrust..

Hi. Good morning..

Good morning, Stephanie..

Good morning, Stephanie..

I first -- just a clarification of a question asked beforehand about just the continuation or of that non-cash revenue adjustment in the third quarter.

That doesn't continue going forward, correct?.

That's correct..

Okay, great. And then I wanted to touch a little bit on just what you're doing from the loan payoff side and kind of reducing cycle times. I know at the Analyst Day, there was a lot of discussion about kind of expanding of ancillary services, and seeing revenue better from that standpoint as well as just the natural reducing cycle time.

So, maybe you can talk a little bit about the ability to increase ancillary services and drive higher ARPU, and kind of some more initiatives you have planned for the remainder of this year and into next? Thanks..

Thanks, Stephanie. So, as I said earlier, the ancillary services, we do think there is an ARPU component to it. We think it's relatively small compared to our -- if you think about our overall ARPU.

But we do -- whether it's inspection services where we do make money and charge fees for that that's really at the front-end of the process where we're helping insurance companies assess the value of the total loss vehicle, and the damage through loan payoff where again there is a revenue opportunity to charge for the service and we are.

But the cycle time savings from that product, in particular, to us are really the most valuable parts.

So, sometimes it comes down to the actual individual product or service about whether we really think it's an ARPU enhancement or it's going to help us from an efficiency perspective, which again it's got ARPU elements as well as cost reduction if we can make it the process more efficient..

Great, thanks so much..

Thank you..

Thank you, Stephanie..

Well, this will conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. John Kett for the closing remarks.

Sir?.

Thank you for joining us, and we look forward to updating you next quarter on our progress..

All right. And we thank you sir and the rest of the management team for your time today. Again the conference call has now concluded. At this time, you may disconnect your lines. Thank you again everyone. Take care and have a wonderful day..