IAA Inc (IAA) Q4 2020 Earnings Call Transcript

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IAA Inc (IAA)
Q4 2020 Earnings Call
Feb 16, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the IAA, Inc. Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]

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

Arif Ahmed -- Vice President, Treasury

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 10-Q filed will the SEC on May 6, 2020, and in 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 the call over to John. John?

John W. Kett -- Chief Executive Officer and President

Thanks, Arif. Good morning, and thank you all for joining us for our fourth quarter and fiscal year end earnings call. Arif, Vance and I are on three 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 remotely manage 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 -- a 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, at this -- 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 unit 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 have seen exiting Q3. As the quarter progressed, we continued to see solid volume trends and service revenue per unit remained 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 that 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 year and a half since the spin, we have focused on six key initiatives. And I want to update you on the progress that we've made and where we're going with each. And I want to start with discussing how we are broadening our service 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 management.

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 get 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 in the Indiana, which will speed up processing or 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 among 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 earlier -- 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 these 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 in our ancillary product suite helped us make significant strides in improving our competitive positioning, which we believe will serve us well to drive results going forward.

Now, let me speak to our next initiative, expanding margins. As we've already discussed, we break this down to four 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 US 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 it -- as is -- as important, we also received positive feedback from both buyers and sellers.

With regards to the three remaining pillars, Towing Optimization, Branch Process Improvement and Pricing, we are still in the early stages of these initiatives, but we are on track in each. For one example, we continued to complete our route optimization in a few more markets and have continued to see a benefit in reduced towing 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 rates that we originally projected notwithstanding any prolonged macro impact.

Next is our continued work to innovate and enhance our data analytics capabilities. Much of our success in building the foundation that I have discussed has been through our own innovation capabilities producing tools like 360 View and incorporating data science to focus on buyer acquisition and retention, and then using digital marketing and search engine optimization to customize our engagement with these buyers.

And lastly, let me now cover our 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 UK operations. We have made good progress in replicating much of the work that we successfully executed in the US, with some customization taking into account the local practices and policies.

We have implemented an all digital model in Canada and rolled out tools like 360 View in both Canada and the UK. With our UK 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 and 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?

Vance Johnston -- Executive Vice President and Chief Financial Officer

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 a non-adjusted -- on our adjusted non-GAAP results and just touch on some key highlights. Please see today's press release for more details on our financial performance and 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 cost 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 an 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 US and international segments, were driven by higher revenue per unit, offset by lower volume. International revenue also benefited from a higher mix of vehicle sales as one of our providers switched from 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 a decline in vehicle sales gross margin. We continue to see benefits from the incremental revenue and cost reductions from the Buyer Digital Transformation.

SG&A expenses were $37.7 million compared to $36.2 million in the prior year. Adjusted SG&A expenses were $36.6 million, an increase of 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 2.7 times EBITDA -- adjusted EBITDA, which is down a full half churn from the 3.2 times level at the time of the spin.

During fiscal 2020, we generated free cash flow of $240.2 million, an increase of 18.5% over fiscal 2019 as we benefited from improved working capital management.

Finally, as noted in our earnings release, given the continued uncertainty regarding COVID-19, we are not providing guidance today. However, let me share some color 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 remained consistent with fourth quarter levels. I do want to note that our international markets, Canada and the UK, have had more stringent restrictions put in place than in US 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?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question will come from Daniel Imbro with Stephens Inc. Please go ahead.

Daniel Imbro -- Stephens Inc. -- Analyst

Yeah. Thanks. Good morning, guys. Congrats on the quarter, and thanks for taking the questions.

John W. Kett -- Chief Executive Officer and President

Good morning, Daniel.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Good morning, Daniel.

Daniel Imbro -- Stephens Inc. -- Analyst

John, I want to start on a bit of a higher level one. You guys have been online only for roughly nine months now. How execution is going? But more specifically, how is the international penetration going? Have you seen success growing in the international buyer base relative to your original expectations? And then I don't know if you provided this before, but could you share what percentage of your US vehicles are sold overseas today?

John W. Kett -- Chief Executive Officer and President

Well, 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. 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, and again, on an accelerated basis implementing. So, I think, really no issue there. And I think we're seeing it -- and we're seeing the results of it operationally. 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 Interact, 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 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, will you correct me if I'm wrong? I don't think we've disclosed that publicly.

Vance Johnston -- Executive Vice President and Chief Financial Officer

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

John W. Kett -- Chief Executive Officer and President

And again, Dan, just there is some hazard, and 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 buyers.

Daniel Imbro -- Stephens Inc. -- Analyst

Yeah. 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 country that you can sell in to continue growing that base and driving revenue per unit higher?

John W. Kett -- Chief Executive Officer and President

Yeah. Great. We do see continued, what we call, live space in terms of the international buyer. We still think there is 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 are confident we're going to be able to find them in a pretty efficient way.

Daniel Imbro -- Stephens Inc. -- Analyst

Great. And then last one from me, bit of housekeeping. 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? Was that in the fourth quarter at all? And then, how should we think about those factors from a cost perspective as we head into 2021?

John W. Kett -- Chief Executive Officer and President

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

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah, sure. Yeah. So, Dan, we haven't seen anything to date with kind of inflationary spending. We're -- as you probably aware, buyers purchase our cars. They typically arrange for the transportation of those vehicles to their location. Now, we are working on some things 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 suggest that that's an issue for them. And in fact, if you look at our proceeds per vehicle and what's happened with revenue per unit, and kind of the increase, as we talked about earlier on international buyers, it would suggests that they're getting -- they're doing that quite well and they continue to bid on a number of vehicles and bid higher and buy more vehicles. That helps?

Daniel Imbro -- Stephens Inc. -- Analyst

It does. Well, thanks so much for the color, guys, and best of luck.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Thanks, Dan.

John W. Kett -- Chief Executive Officer and President

Thank you, Dan.

Operator

The next question comes from Gary Prestopino with Barrington Research. Please go ahead.

Gary Prestopino -- Barrington Research -- Analyst

Good morning, all.

John W. Kett -- Chief Executive Officer and President

Good morning, Gary.

Gary Prestopino -- Barrington Research -- Analyst

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 it 20% or higher or lower?

John W. Kett -- Chief Executive Officer and President

For the -- that was for the full year, Gary. And Arif do you? I don't have that number in front of me what it was for the full year. But...

Gary Prestopino -- Barrington Research -- Analyst

Okay.

John W. Kett -- Chief Executive Officer and President

We certainly have it, Gary. We can get it to you. Yeah.

Gary Prestopino -- Barrington Research -- Analyst

Yeah. 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?

John W. Kett -- Chief Executive Officer and President

So, unit -- so, Vance [Speech Overlap] Yeah, please.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah. Gary, that's not something that we're necessarily disclosing at this point in time.

Gary Prestopino -- Barrington Research -- Analyst

All right.

Vance Johnston -- Executive Vice President and Chief Financial Officer

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 looking at quarter-over-quarter comparison, 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 talk about kind of service revenues, obviously, the primary factors that we alluded to in our prepared remarks is that really, really strong revenue per unit has been the primary factor in that offset volume declines.

Gary Prestopino -- Barrington Research -- Analyst

Okay. Are you going to give us some kind of historical data on this breakdown between service fees and vehicle sales, as -- when you file your Q for a modeling purposes on a quarterly basis?

Vance Johnston -- Executive Vice President and Chief Financial Officer

I think what will 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.

Gary Prestopino -- Barrington Research -- Analyst

Okay.

Vance Johnston -- Executive Vice President and Chief Financial Officer

So, that's like 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.

Gary Prestopino -- Barrington Research -- Analyst

Okay. And then on -- what -- I don't have this in front of me. I wrote in a report way back. But of the three elements of the margin expansion plan that's still need to be completed, which one will -- if any, will be scheduled to be completed this year, John?

John W. Kett -- Chief Executive Officer and President

Well, I think we provided 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 over the next couple of years. Vance, is that fair?

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah. 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 gave some sense of timing as it related to each of those.

Gary Prestopino -- Barrington Research -- Analyst

Fine.

Vance Johnston -- Executive Vice President and Chief Financial Officer

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 seeing right now is 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 of time.

Gary Prestopino -- Barrington Research -- Analyst

Well, that's fine. I mean I was really trying to get at is, you did the digital transformation, not much quicker and I was hoping -- thinking that maybe there will -- some things have been going better than expected and you may be able to wrap up some of these 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?

Vance Johnston -- Executive Vice President and Chief Financial Officer

John, do you want me to take this one?

John W. Kett -- Chief Executive Officer and President

Yeah. Go ahead, Vince. Yeah.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah. 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 the cost [Technical Issues] so that you know, costs of going away from previously running live auctions. And then, pricing is clearly a gross margin line item. And then, towing, the cost of towing, it's 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 those will be completing the gross profit line as well.

Gary Prestopino -- Barrington Research -- Analyst

Okay. Thank you very much, guys.

Arif Ahmed -- Vice President, Treasury

Hey, Gary, the total loss is 20.5% for the full year. Okay?

Gary Prestopino -- Barrington Research -- Analyst

Okay. Thanks, Arif.

Arif Ahmed -- Vice President, Treasury

Sure.

Operator

[Operator Instructions] The next question comes from Bret Jordan with Jefferies. Please go ahead.

Bret Jordan -- Jefferies -- Analyst

Hey. Good morning, guys.

John W. Kett -- Chief Executive Officer and President

Hey, Bret. Good morning.

Bret Jordan -- Jefferies -- Analyst

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

John W. Kett -- Chief Executive Officer and President

So, I'll let Vance answer the second part, if we're going to say. But it's -- that's not a strategy. It is -- purchase contracts are much more prevalent in the UK and a little bit in Canada. But it's not something that we're using in the insurance market in the US to try and change. We like the consignment model for a lot of reasons and our customers do too. So, we do see opportunities to buy vehicles in some particularly non-insurance markets, and we are going to continue to focus on that, but it's a relatively small part of our mix.

Bret Jordan -- Jefferies -- Analyst

Great. And the 47%?

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah. And, Bret, that -- 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, the dollars related to that. But we would only mentioned if it was a significant factor.

Bret Jordan -- Jefferies -- Analyst

Okay. And then one 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?

John W. Kett -- Chief Executive Officer and President

So, I'll start and Vance certainly weigh-in. But -- yeah, I mean I think as we've said, as we've -- to find our own capital allocation where -- as we look at real estate, we are going to be looking at the best economic returns. If buying land, if we believe that's a better deal, and we think there's strategic need for land in a particular geography that we think has 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 property.

Bret Jordan -- Jefferies -- Analyst

Okay. Great. Thank you.

John W. Kett -- Chief Executive Officer and President

Thanks, Bret.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Thanks, Bret.

Operator

The next question will be from Stephanie Benjamin with Truist. Please go ahead.

Stephanie Benjamin -- Truist Financial -- Analyst

Hey. Good morning, everybody.

John W. Kett -- Chief Executive Officer and President

Hey, Stephanie. Good morning.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Good morning.

Stephanie Benjamin -- Truist Financial -- Analyst

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. Thank you.

John W. Kett -- Chief Executive Officer and President

Vance, you want to take that one?

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah, happy to. Good morning, 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 during 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 as it related to traveling to see relatives and things of that nature versus flying that normally would be. But in terms of our results, we didn't necessarily see anything that was abnormal -- abnormally more than what we'd typically see in terms of seasonal.

Stephanie Benjamin -- Truist Financial -- Analyst

Got it. That's helpful. And this is 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 little [Technical Issues] ended the year down some -- maybe how you would characterize it? Thank you.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah. So, 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 with 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 and new toy and ended the year kind of slightly down from 2019, which I think all things considered is -- was a pretty good place to be as we enter into 2021. And so, we're seeing in -- certainly in kind of the end of the first -- at the end of the second quarter, and somewhat, in 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.

Stephanie Benjamin -- Truist Financial -- Analyst

Great. Thank you so much.

Operator

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

Robert Labick -- CJS Securities -- Analyst

Good morning, and congratulations on excellent execution.

John W. Kett -- Chief Executive Officer and President

Thanks. Good morning, Bob.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Thank you, Bob.

Robert Labick -- CJS Securities -- Analyst

All right. 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 is 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?

John W. Kett -- Chief Executive Officer and President

So, I think, we've obviously seen this trend over a seven, eight 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 -- of the car park continues to age. So, I think, all those things have contributed to total loss frequency. And, I think, auction returns there is -- 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 the buyer base to bring more eyeballs and clicks to our platform, I think that's driving up the value of the assets. Now our insurance company is going to adjust their behavior based on what they're seeing in returns possibly. But I think the longer-term trends that we've seen in total loss frequency are small and depending on what we're seeing of late with auction returns.

Robert Labick -- CJS Securities -- Analyst

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 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?

John W. Kett -- Chief Executive Officer and President

Yeah. I'll start, and Vance, please jump in. But, again, we 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 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 revenues for deploying our free cash. Vance, anything you want to add to that?

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah. No, I would just add that, obviously, we've been in the pandemic. We, like many others, have been prudent with cash, and we've been fortunate that we've been able to generate a lot of free cash flow, certainly in 2020. We invested that back in the business strategically on key growth initiatives, technology, things of that nature, some land purchases, because we thought that we need to continue to do that to help us. 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 in what lie and excite us 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 will look at a variety of other opportunities as well. And as we end the year, it won't continue to come down, but we're comfortably with in kind of a leverage target that we had set out by the time it is soon.

Robert Labick -- CJS Securities -- Analyst

Got it. Super. Okay. Thank you very much.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah. Thank you.

John W. Kett -- Chief Executive Officer and President

Thanks, Bob.

Operator

Thank you. The next question comes from Craig Kennison with Baird. Please go ahead.

Craig Kennison -- Robert W. Baird -- Analyst

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

Vance Johnston -- Executive Vice President and Chief Financial Officer

We're looking at different options, that 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. We're evaluating those right now. So, that could be one of them. But nothing more than that to say at this point of time.

Craig Kennison -- Robert W. Baird -- Analyst

Thanks. And I appreciate the reluctance to give guidance. You're trying to build a 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?

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah. Let me kind of start with the last piece of it. At the end of the day, there is really kind of two primary drivers on the model, primarily, because you have big -- sort of big portion of cost or variable, and tow cost and things of that, that are directly related to the per unit basis. So, the two 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 moved on the upside, it's been very impactful. And if it was to 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 is the macro level impact factors which are things like supply/demand imbalance and then also used car prices. And when we came out of the pandemic -- we're into the pandemic and we saw everything then we saw a revenue per unit bounce really high kind of come to really high levels in the second quarter before demand assignments have recovered, we thought OK, maybe some portion of that is due to supply/demand imbalance. And what we've seen since then is indeed assignments and volume sold has recovered, not fully, but largely in almost kind of below, but largely recovered to where it was pre-pandemic and revenue per unit has still remained with a really high. And so some slight adjustments, it's come down a slight bit, but really it's remained at those kind of very high level. So that would suggest that supply demand is probably not as big of a factor or 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 makes sense, that would have an impact. And all things considered equal if somebody can sell their car that they buy for more then they're willing to pay more for it, right. We talked about that quite a bit. But I think what 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, the 360 View, Feature Tour, and all the tools that we provide 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.

Craig Kennison -- Robert W. Baird -- Analyst

Thank you. And thanks for sharing that growth in international buyers. That helps explain things. Thank you.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Thanks, Craig.

John W. Kett -- Chief Executive Officer and President

Thanks, Craig.

Operator

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

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

Hey, guys. Thanks for taking the question. So I wanted to follow-up first on the international buyer growth, it's very impressive numbers. Can you give us some context for what that metric looks like say over 2019-2018 in terms of growth rate, obviously, in addition to current, but interesting to hear kind of how that accelerated to historical trends?

John W. Kett -- Chief Executive Officer and President

Yeah, I mean, it's -- Chris, it's not something we've talked about specifically, but we had a robust international buyer base in 2018 and '19. We just -- we really, again, through the efforts that we talked about this morning and I have been talking about around the new platform as well as our digital marketing and SEO work, we've really accelerated it. So, yeah, it is strong growth, but it was a pretty solid base on which to grow.

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

Okay. And then really impressive SG&A control this quarter. If you have -- If I remember correctly, you have a car shared service agreement expiring in a couple of quarters. I think it was two years. A. Is that correct? Like, B. Can you remind us what that means for expenses? And then, in totality, how should we be thinking SG&A growth next year? It would be helpful.

John W. Kett -- Chief Executive Officer and President

Vance, you want to...

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yes. Happy to take that. So, yeah, 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 where we'll continue to pay someone out 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 was no need or been 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 that were paying, which there are -- those will roll off at the end of the second quarter.

Related to SG&A going forward, what I would say is that on the positive side, we'll have only a half a year of the transition services fees that will be impacting us. We will as we go back to a more normalized divide if 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 public company compositions 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 end verse -- 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.

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

Yeah. Okay. That's really helpful. Thank you for the clarity.

Vance Johnston -- Executive Vice President and Chief Financial Officer

Yeah.

John W. Kett -- Chief Executive Officer and President

Thanks, Chris.

Operator

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.

John W. Kett -- Chief Executive Officer and President

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.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Arif Ahmed -- Vice President, Treasury

John W. Kett -- Chief Executive Officer and President

Vance Johnston -- Executive Vice President and Chief Financial Officer

Daniel Imbro -- Stephens Inc. -- Analyst

Gary Prestopino -- Barrington Research -- Analyst

Bret Jordan -- Jefferies -- Analyst

Stephanie Benjamin -- Truist Financial -- Analyst

Robert Labick -- CJS Securities -- Analyst

Craig Kennison -- Robert W. Baird -- Analyst

Chris Bottiglieri -- Exane BNP Paribas -- Analyst

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