Good day, ladies and gentlemen and welcome to the KAR Auction Services Incorporated Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer-session and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to turn the conference over to Mike Eliason, Treasurer and Vice President of Investor Relations. You may begin. [0CJR6Z-E Michael Eliason]: Thanks, Sonia. Good morning and thank you for joining us today for the KAR Auction Services second quarter 2018 earnings conference call. Today, we'll discuss the financial performance of KAR Auction Services for the quarter ended June 30, 2018. After concluding our commentary, we will take questions from participants. Before Jim kicks off our discussion, I would like to remind you that this conference call contains forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may affect KAR's business, prospects and results of operations, and such risks are fully detail in our SEC filings. In providing forward-looking statements, the company expressly disclaims any obligation to update these statements. Lastly, let me mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the applicable GAAP financial measure can be found in the press release that we issued yesterday, which is also available in the Investor Relations section of our website. Now, I'd like to turn this call over to KAR Auction Services' CEO, Jim Hallett. Jim?

Great. Thank you, Michael, and good morning ladies and gentlemen and welcome to our call. This morning, I'd like to review highlights of our second quarter performance, provide some insights into the performance of each of our businesses, take a look at what we see for the second half of 2018 and confirm our guidance for the year, review our progress on a number of strategic initiatives, as well as update you on our uses of capital for 2018. Starting with the highlights of the second quarter performance; we're pleased to report 11% revenue growth on a consolidated basis. This led to 12% growth in operating profit and 8% growth in adjusted EBITDA. Operating adjusted net income per share increased 26% to $0.82 for the second quarter. Over the past 18 months, we have acquired several entities that have different operating models than our traditional auction businesses. These are technology companies and substantially all of their costs are SG&A, and we are in the early stages of developing their offerings and they do not yet make any money. Beyond the SG&A required to support these new technology offerings, I'm focused on identifying SG&A costs in other parts of KAR that can be reduced or eliminated. Now, let me provide you with some comments on ADESA's performance. First, it is clear to me that we made absolutely the right choice in developing our online selling platforms. Physical auction volumes were down 4% in the second quarter. The trend of reduced dealer consignment volumes down 11%, offset by the increase in commercial volumes up 14%, is consistent with our expectations. The decline in physical auction volumes were more than offset by an increase in our online-only volumes, up 41% for the second quarter. Total volumes of ADESA increased 9%. We're gaining market…

Thanks, Jim. Let me start by commenting on our guidance. We are confirming our guidance as previously issued and as laid out in our press release last night. I want to comment on the impact of increased interest rates; while we have experienced increased interest rates in 2018, our interest rate caps on $1.2 billion of our floating rate debt has protected us against any significant increase in cash interest expense. Our interest rate caps are in place into 2019, so further increases in interest rates will not significantly increase our interest expense. In fact, our interest rate caps will save approximately $5 million in cash interest for us this year alone. There is no change in our effective tax rate for 2018. Year-to-date, our effective tax rate is about 25%, compared to our annual guidance of 26%. I am expecting a slightly higher tax rate in the second half than we experienced in the first half. One item that could reduce this slightly higher tax rate is the exercise of stock options. The exercise of stock options reduces our effective tax rate in the period of exercise. If employees exercise options prior to year-end, this would reduce our effective tax rate for the year. Operating adjusted net income per share is expected to be $2.89 to $3.04 for the year. We have assumed 137 million weighted average diluted shares in our guidance. We are continuing to purchase KAR shares in the open market and this may reduce the number of shares below our estimate for the year. In addition, we have about 1.4 million options outstanding that are all in the money. We utilize the treasury stock method in computing the number of common stock equivalents included in our share count, so variations in the value of KAR stock…

Thank you. Our first question comes from Matt Fassler of Goldman Sachs. Your line is now open. Matthew J. Fassler - Goldman Sachs & Co. LLC: Thanks so much guys and good morning to you.

Good morning, Matt. Matthew J. Fassler - Goldman Sachs & Co. LLC: Thanks so much for all the color. Two quick questions. First of all, to the extent that you are holding your overall guidance for the year while raising the implied investment in TradeRev and your acquired platforms, what's changing to offset that incremental hit? Is it stronger earnings elsewhere within the ADESA platform or is it better performance in the salvage arena that's helping you to maintain that guided level, while including higher than previously contemplated TradeRev losses? I'll wait for my second one, thank you.

Matt, this is Eric. Good observation. And really what I was pointing out is the strength of all of our businesses. The core growth is quite strong. And it is both the ADESA business and the salvage business, and AFC are all having really strong performance allowing us to then invest some of that profit back into TradeRev without reducing our expectations for the year. So, it's actually the strong performance that's giving us the confidence that we can increase that spend, and move even faster through the end of the year. Matthew J. Fassler - Goldman Sachs & Co. LLC: And Eric and I know you had expected some losses from TradeRev in the second half of the year, it sounds like a bit less than you've decided to go with. How much higher is the loss implied in your guide than what you had thought about when you reported the first quarter?

Since we don't give guidance at that level, Matt, let me just say it's a meaningful increase from where we started the year and what we thought we would do. The first half is in line with the spend plan that we had, in the second half, we just want to match it. We had expected some of those event-driven marketing activities to not be recurring in the second half and they won't be. And that would have reduced it. We're actually going to reallocate those dollars into the field team and the technology. Matthew J. Fassler - Goldman Sachs & Co. LLC: And briefly on the second question, to the extent that you're thinking about doing more overseas. I may have missed this in Jim's initial comments, but does this relate to the whole car business or more so to the salvage business?

Yes, Matt, and thank you. I would say that we've identified a number of specific targets that really focuses on – at this point in time, focuses on the whole car business, and what we would call very mature markets with stable economies. And we really feel that we have the opportunity to not only acquire the business, but we have the opportunity to enhance these businesses with the KAR assets that we would bring like TradeRev, like CarsArrive, AFC and the list goes on. So the ones I spoke about earlier that you mentioned were primarily related to whole car. Matthew J. Fassler - Goldman Sachs & Co. LLC: Thank you so much.

You're welcome, Matt.

Thank you. Our next question comes from Gary Prestopino of Barrington Research. Your line is now open.

Hi, Gary.

Hi. A couple of questions. Good morning, everyone. Jim is the market in and of itself on the auction side, all car side growing at about 2% to 3%. So it's safe to say you're growing – you're gaining market share at a three time rate of the growth of the industry about?

I'm trying to digest your question. I would say that the one thing that I definitely would agree to is that we are gaining market share. And we're doing that Gary, to what I mentioned, commercial volumes is up, dealer consignment we mentioned is down. The real strength is our online growth and Eric and I both mentioned 41% in the quarter, phenomenal growth. And then we feel when you add it all up physical, online, commercial, dealer all the segments, we definitely feel we're gaining market share.

Do you feel longer-term that because you're able to invest in online and some of the major independents probably can't keep up with your investments that this industry is going to maybe look like the salvage industry 10 years from now where there's fewer independents, and most of your mix is going to move towards commercial vehicles versus dealer vehicles beyond a couple of year timeframe that you gave or it will get up to a certain percentage?

You know, Gary, it's a good question and one that we think about. I have tremendous respect for the independents. I was an independent at one time in my life and I think there's always room for these independents to exist, especially in some of the smaller, local markets that focus primarily on dealer cars and not so much on the commercial cars. But there's no question that the investments that we're making, especially in technology, digital and the investment that's required by our commercial sellers is a very steep – it's a very steep investment and one that as standalone independent auction, you're not likely to want to continue to make those investments based on the size of your operation. When you think about the investments we made and we talk about openly and we talk about TradeRev and we talk about CarsArrive, but even more so, data and analytics, the reliance that our customers are now putting on us for data and analytics so that they can make better decisions; just all the things that are kind of being demanded by these customers just to be in the game and to stay in the game, I think it really limits it to the duopoly that you see in our business.

And then you've mentioned at the start with your comments that you're focusing on the SG&A expenses and I know you're investing in a lot of things here, but where would that focus be on independent of what you're investing in TradeRev, and other new endeavors?

So, Gary, first and foremost, our SG&A is a primary focus, as I said. And this isn't something we're waiting for. This train has already left the station and we've got a number of initiatives that we're working on that will take us through the end of 2018. I'm not going to size that for you today. But we are working on a number of things. But as we go into 2019, we're really focused on SG&A being top of mind for the senior management team across all the KAR businesses, regardless of where they sit today. And the focus is going to be on innovation and automation. As we think about how we do business, we have to do more innovation, we have to do more automation, and we have to find a way to continue to improve that SG&A.

Okay. Thanks a lot.

You're welcome, Gary.

Thank you. Our next question comes from Bob Labick of CJS Securities. Your line is now open.

Good morning, Bob.

Good morning. Thanks for taking the questions. I wanted to start with TradeRev. Obviously, you've highlighted doubling year-over-year in volume, and then just we could see from last quarter the sequential growth was tremendous as well. Is most of that growth kind of same market or same-store growth so to speak, or is this a result of entering new markets, and how should we think about that growth path going forward in those volumes at TradeRev?

Thank you for the observation. And you're right. I think TradeRev is hitting that inflection point where I talk about the flywheel gets turning, and it can turn at a rapid pace, and we're continuing to see records on a daily, weekly, monthly basis as we speak today. I think that – I'm sorry, I lost track of my thought there.

One other thing Bob is, we're selling to dealers that we previously hadn't been doing business with.

Yeah. That's where I wanted to go. I'm sorry Bob, I lost track of my thought there for a moment. But what we're seeing is we're seeing with TradeRev we're seeing a lot of dealers that we've never done business with before because the fact of the matter is, we thought that it's normal to be doing business with dealers that are in your market where you have a physical presence. But we're now dealing with dealers and markets where we've never been, where we don't exist, where people hardly knew the name prior to us showing up with TradeRev. And as we talk about TradeRev and we talk about technology just the reach that it has, we have a, what I would call, a coast-to-coast buyer network. We have buyers buying cars in California and sending them to New York and buyers buying cars in New York and sending them to California and Texas. So it's just the reach that we have. And one of the – you didn't ask this, but I'll comment on, one of the things I often get asked is, Jim are you cannibalizing your physical auctions. And I would tell you not as much as I anticipated. Going into TradeRev, we felt that we would cannibalize some of our physical sales, but we haven't cannibalized them nearly to the degree that we were thinking. And it's really been being able to go into new markets and bring new dealers, both buyers and sellers onto the platform, which obviously has been a real delight for us, so to speak, that we haven't had to cannibalize our auctions to the extent that I thought it might.

Okay. That's terrific and helpful and sounds like it's going to continue to accelerate from here, which is great. Just to the earlier comments on the potential international opportunities and acquisitions. If I think back 6 to 12 months, I think the international story was going to be as a disruptor led by technology. Now it sounds like more of a potential hybrid approach where you're seeking physical assets and then I assume bringing in technology to change it. What changed in the mindset of just taking the asset-light approach internationally to now potentially seeking assets internationally and then bringing your technology?

Well, first I would say, we still have an asset-light mind, right? That's our focus. Our focus is technology, data analytics, asset-light, that's not to say there couldn't be some real estate, some brick and mortar attached to some of these acquisitions. So, I would say the number one thing that we focus on as we acquire these businesses, aside from acquiring a good solid business with a good solid management team, we really focus on the buyer base, and with each of these acquisitions comes a strong buyer base and an established buyer base and we believe that we can add to that buyer base by adding these technology enhancements that we bring. And again, I could walk you through that list, but I think you're familiar with them. And I think that's the way that we take an established business and we expand the business by layering on these technology offerings. So, I wouldn't say that we've gotten away from an asset-light base. I would say to you that it's going to be a combination of both. Some of these businesses will be more technology-based businesses and then some of them may be a combination of both technology and some real estate and of various sizes. But let me make one thing clear. There is no big transformational deal that we're talking about here. It's really a collection of putting together a number of technology and auction-related companies that we feel can take and disrupt the market and grow in the market.

Okay. Very exciting. I can't wait till we go a little further and learn more of it. Super. Thanks for taking my question.

I can't wait to share it with you. Thank you.

Thank you. Our next question comes from Bret Jordan of Jefferies. Your line is now open.

Hey. Good morning, guys.

Good morning.

Good morning, Bret.

Hey. On TradeRev, is there sort of a metric we could start to look at as far as the number of dealerships that you're into, sort of get a feeling for penetration growth?

No. No, Bret. I mean the issue is maybe as we get further along, and we think – the issue and it was asked earlier, this is all new markets. So, at some point, maybe we'll be thinking unique buyers is one measure that we would look at. I'm not sure we're willing to disclose that competitively, but maybe give you an indication of the growth in the number of buyers. Our goal is not just to add numbers of sellers, but those sellers selling more cars, so that's why I'm not sure that metric would tell you as much. Volume, as you know, Bret, is the key measure in our business. How many cars are we selling? And so, that's what we're focused on.

Okay. And, I guess, maybe some more – a better way to look at it around ARPU for TradeRev or maybe the profile of the car. Because originally, it sort of looked like TradeRev might be a way for dealers to swap stuff that they didn't want to hold for resale amongst each other locally. But it sounds as if you're talking about guys are really trading cars across the country. So, are these higher value cars than your average ADESA transaction and I guess what kind of ARPU are we looking at?

Yeah. So Bret, listen. These are all cars. They are not necessarily higher dollar cars. They are not lower dollar cars. It's a mix of everything that you would see at a physical auction. And in terms of the revenue growth, not only do we get the typical buyer and seller fees, but we're also getting an opportunity to sell ancillary services. A number of these customers are using our AFC financing on the floor plan. I mentioned earlier, there's revenue being generated through our CarsArrive network. There's revenue being generated through our inspection services. We have an inspection service now, AutoVIN. And again, we're innovating and we're going further on those inspections, not only with increased pictures and artificial intelligence, but also with videos that we can let dealers see. So, there is revenue being generated from more than just the transaction itself. So at the end of the day, when you think about the revenue that I spoke about at physical auction at $839 last quarter, about half of that is from ancillary services. So, we still have the same opportunity to sell these ancillary services, maybe just a little bit differently. And then I just want to go back to your comment about is this over-aged inventory or is this fresh trades? This is fresh trades. I mean we're talking about dealers that are buying fresh trades right at the time that a new car is being purchased by the consumer. Now, that's not to say that they couldn't sell aged inventory, but what the real appeal is to the buyers here is to be able to get those fresh trades directly from the dealer. So hopefully I've answered your question.

Yeah. Thank you. Appreciate it.

You're welcome.

Thank you. Our next question comes from Stephanie Benjamin of SunTrust. Your line is now open.

Good morning.

Hi. Good afternoon or morning. Jim, I wanted to go back to your comment where you spoke about just kind of expanding the data analytics and kind of data capabilities. So I was hoping maybe you could – particularly on the salvage side, so I was hoping if you could maybe expand on that a little bit kind of what you're looking to provide or what kind of services. I know that there's been some talk before about being able to provide a more customized kind of e-mail or customized approach to your customers. So just looking what you might be looking to expand on further.

Yes. Great question and excited to talk about it. I'll tell you, let me start with a comment made by one of the largest captive finance companies in America. When I visited with them recently, they said to me, they said, Jim, your acquisition of DRIVIN is a game changer. There is nothing like this in the industry. And so I'll start there and say this was really demand driven. It was our customers were telling us they needed help in making better decisions. So they needed help in making better decisions on how to price their cars, what channel they should sell the car in, how much they should be spending on reconditioning. All different sorts because they have basically all the data on their own portfolio of vehicles, whereas KAR has data on millions and millions of vehicles. And we just have so much more data that we can crunch, and help them make better decisions. So that's what we're doing, and we've gotten into a number of, what I would call, pilots with a number of different OEMs and commercial customers. And these pilots have demonstrated very, very well. They proved very well. And we're definitely able to help our sellers get a lift on these vehicles. The second thing is what we didn't really expect coming out of the gate was the interest that we would get on the salvage side of the business. In fact, I was with John Kett last week. And John Kett basically told me there's a lineup of insurance customers waiting to get more of this data on the salvage business, which nobody has ever provided in the salvage business right down and, Eric, you can speak some of this too, but right down to the point where we're being able to price salvage. We're being able to provide a salvage guide as to what prices would be in the market. Eric?

And then, Stephanie, a really interesting part is helping buyers get through tens of thousands of cars. What's the cars that are most interesting to them based on what they usually buy. The data and analytics can help do that to make it more efficient. And so, you take all the data, the – there may be a buyer out there that buys cars that are $1,500 to $2,000, doesn't want to be looking at cars that are $300 to $400. You can help them with that process, give e-mail notifications of where the cars are available, things like that.

Yeah. And, Eric, I want to go back to that is we have this program, Stephanie, called the daily e-mail. And this is for the buyers. And, again, I'll be a little bit windy here, but forgive me, being a former dealer if you sent me a file of 500 cars in it, I'm immediately going to push the delete button. I am not going to sort through 500 cars trying to find the one or two or three or four cars I want to buy. What this daily e-mail does is that we have your history of what cars you sell, what cars you sell for the most profit, what cars turn the fastest, what cars you spend the least on. We have all these different metrics in our database. But now we're able to send that dealer four cars and say every morning when you open your inbox, you're going to have four cars that we recommend that you should buy based on your history. And I can tell you sending those four cars we've had tremendously – we've had an increased take rate on those cars. Not only have we had an increased take rate on those cars but they've also done – they also may not bought that specific car because it wasn't the right color. So they've gone and they've searched and they bought another car like that. So, we're doing this for the buyers, but we're really being motivated by the manufacturers to do this for their dealers. So I can tell you right now we have three manufacturers that have asked us to do it for their entire dealer network. And you'd think about that as we continue to roll this daily e-mail out to the other manufacturers, it's just going to increase the take rate and increase the number of cars that we can sell through the use of data and analytics, and I got to tell you, there's nothing to sell here. I mean this is stuff that buyers and sellers are absolutely dying to get their hands on. So, that's a little more than you asked for, but I hope I got you covered.

No. Absolutely. I really appreciate it. Very helpful and looking forward to hearing more. Thanks.

Thank you.

Thank you. Our next question comes from Craig Kennison of Baird. Your line is now open.

Yeah. Hi. This is Alice (41:40) on for Craig. Good morning gentlemen. I just wanted to follow-up on your comments about ancillary services and ARPU. Just how should we think about ARPU growth at ADESA over the next three years, because presumably as more transactions move online, that's a headwind to ARPU growth? But can your efforts on ancillary services continue to offset that trend in a meaningful way going forward?

Yes, Alice (42:02). Good question and it's interesting. We measure the revenue. Not all of the revenue that we're talking about is generated on cars that are being sold at our auctions. We're generating revenue from services off-premise, might be doing inspections on cars that never even come to our marketplace. So, we're all over this. We think the mix of vehicles, Alice (42:25), as Jim mentioned in his comments is the driver of this and we look at the indices, the valuation and the Kontos index out there on values of cars. They are continuing to grow. These higher value cars are more likely to use our services and then connect that to ultimately however they sell, whether it be online or in the lane. If we can provide those services, that will enhance our ARPU.

Great. And I just want to touch on the conversion rate. It's been up pretty nicely at physical auction for the last six quarters. Can you talk about the factors behind that? I guess I'm wondering, is it primarily a function of mix or are you actually seeing some of your new tools and customer initiatives moving the needle on this metric in a meaningful way?

Yes, I think it's primarily the mix of vehicles that you're seeing coming to auction. These cars are very attractive cars. They are younger, lower mileage, better condition. Even when we sell them online, we're able to get higher-quality condition reports and make it easier for the buyer to buy these cars. The other program that we put in place and we've expanded recently is a product that we call ADESA Assurance and ADESA Assurance is a buyback program that we provide after a certain period of time. They can actually buy insurance where if they don't sell the car within a specified period of time that we'll actually take the car back and resell it. And that program is very – it has served us very, very successfully, and has been, again, creating more confidence for the buyers, creates more conversion or higher conversion rate.

Great. Thanks. That's all for me.

Thanks, Alice (44:05).

Thank you. Our next question comes from Chris Bottiglieri of Wolfe Research. Your line is now open.

Hi. Thank you for taking the questions. So, I'm going to start with maybe disentangling some of the ancillary services just given the complexity that kind of from mix shifting. I guess, one, at a high level are you able to quantify how much higher average transaction prices and a higher commercial mix is helping the reported ARPU figures?

Well, Chris, as – the way you're asking, it's the primary driver, but because those cars use more of the services. So – and they happen to be higher value. So, it's hard to disentangle it the way you're asking me. But there is a component that is, for example, we're getting strong growth in end of lease inspections, which actually have very little to do with selling the car in lane, although that inspection report is very helpful in the online venue. So, again, end of lease inspections already go to the cap to finance companies and banks higher value cars, typically, three-years old, in good condition, low mileage. So, I don't know how to disentangle it for you other than this is actually driven by the mix of vehicles going commercial and commercial typically a higher value car than the average, call it, dealer consignment trade that's being auctioned off, which eight years ago was more than 50% of the marketplace. Does that make any sense to you?

No, it does. That's helpful. I guess I'm trying to get at is I think there's some concerns in the marketplace as the business goes digital, this ancillary service revenue kind of disappears. So just trying to maybe understand if you were to segment like what are some of the – if you think of the revenue mix of these services, what are some of the bigger buckets within that. And to say this world goes digital 100% some future, like what do you think sticks.

So the biggest bucket market is transportation. You can't – you cannot send the car over the Internet to the buyer. It has to be moved physically. And the second biggest is reconditioning. Reconditioning gets in there and by the way if the car needs reconditioning, if you choose not to do that for the online sale, Jim, what do you do as a dealer. You get less value for the vehicle. That's a cost benefit analysis. What will be interesting and Chris you asked a really good question is when will the intersection occur where they bring it to the auction to get the ancillary services and then we can sell it online to a buyer who is not attending the auction. And we're very focused on having the tools that can do that.

Got you. That's helpful. Okay. Then just on related big picture question on mobile-to-mobile. We experienced thus far is there a first mover advantage to having mobile auction platforms. By our math, it looks like you're the industry leader above ACV and Manheim Express just recently launched. So, I guess these markets where you do find this overlap, are you finding that dealers are exclusive to TradeRev or how are you guys are thinking about that today?

I think obviously you mentioned some of competitors. There's competitors in the space, there's always going to be competitors, but somebody used the phrase recently with me that I'll repeat. As they said, in these digital businesses, it's usually winner take most and I guess we want to position ourselves to be that winner. We want to position ourselves to be that leader. And quite frankly, as we talk about the increased spend here in the second half on TradeRev, it's because we want to try and do everything we can to get that leadership position because we know that leader will get most of the revenue and most of the profitability. That's not to say that people won't try other platforms and use other platforms, but I do believe there's only two companies that have the assets to really compete and to win this space, and that's ourselves and our competitor, Cox because not only do we have the physical auctions and we have all the ancillary services, the transportation, the financing, the inspections. You can go down to popping dents and cutting keys. I mean there's nobody else in the world that has these kind of assets and this collection of assets. So, yes, there will be competitors, but I believe that we're in a leadership position now and I'm going to do everything I can to make sure I continue to put the gasoline on this thing that we don't lose that spot.

And let me just add one comment. The reason we're putting the gasoline on is to be the first in the market. You do want to be the early offering. Maybe you don't have to be first, but you better be first or second, right Jim?

No question.

Otherwise, you're fighting an uphill battle even though we think we have the arsenal of services that can overcome competition if it's already there, but being first will give you the best chance for success. And so, we're pushing hard to get into these markets first.

Got you. Very helpful. Thank you.

You're welcome.

Thank you. Our next question comes from Ben Bienvenu of Stephens, Incorporated. Your line is now open.

Hi. Thanks. Good morning, guys.

Good morning.

Hi, Ben.

I wanted to ask about the IAA segment. The volume continues really strong (49:34). You did make some comments in your prepared remarks around some people (49:40) saying that might point to moderating growth. I'm just curious given the – it seemed to be secular driver of the total off rate perpetuating and (49:48) moving higher, just curious around what those indicators might be, and how you're thinking about the growth trajectory of the volume in that business.

Yes. So, I think, I got most of that. You broke up a little bit. But, first of all, I would say, we see maybe a little bit of moderation. We're at 7%. And we'd say that could slip to maybe 5% to 7%. And up to this point in time, we would tell you it's primarily weather related. The fact is we haven't had any of those significant storms that we experienced over the past several years up to this point in time. Now, God forbid, we know that these things can take place and they can happen at any time. But I think that's why we would look for, up to this point in time, we would look for some moderation.

Okay. Great. And then on the SG&A as it relates to TradeRev. It's expected to be elevated in the back half. Clearly, that ceding share volume for you guys. I'm curious as we extend beyond 2018, would you expect this to be kind of the level of run rate for spend in that business, or could it moderate or accelerate from here? Just trying to think about the leverage ability of expenses as we move forward.

So, Ben, number one, we don't make a lot of comments beyond 2018, but I'll just in this particular case, I'll just point out to you, the costs don't go away. What happens is the revenue grows. And so the net can improve, but we're not yet giving any information out on our expectations for 2019. But the growth in volume provides gross margin to offset some of this SG&A spend as the business matures.

Okay. Great. That's helpful. Thanks. Best of luck.

Thank you.

Thank you. Our next question comes from John Healy of Northcoast Research. Your line is now open.

Thank you. Hey, Jim I wanted to ask a big picture question. If you kind of take a step back and you look at kind of the trends in the wholesale market, it seems like this year has been pretty good for volumes. It seems like used car values are healthy and conversion rates at auction very strong and if you look at the used volume numbers that came out a lot of the franchise dealers over the last couple of weeks and they've been quite impressive. And I'm just trying to get your thoughts on what you think is really driving dealer success in the used market right now. And as you talk to dealers and as you kind of rely on your past experiences, how sustainable you think the growth in the used market is in terms of units and health in the full (00:52:22) car auction business for the next couple of years.

Yeah. So, I think a couple of things. First of all, I think a lot of this has to tie to the economy. Right now we're in a very, very good economy. Unemployment is as low as we've seen in many years. People are working, people are making money and they need transportation. They're buying cars. And not only are we seeing it in the new car business and at the franchise level, but we're seeing it with the independent dealers as well. One of the things John is, we have very good visibility. We kind of look at it kind of in three years out. And as we think about it, I talked about the leasing continuing to grow through 2019. We know what 2020 looks like. We look at leases that are being written today as we speak. That's all right at 30% and we know that those cars are going to be coming back in 2021, 2022 and 2023. We think about auto loans and the availability of credit. They're at historical highs, over $1 trillion out there in automotive loans. We talked about the SAAR being stable wherever you have that somewhere between 16 million and 17.5 million units. That looks stable and looks like it's going to be that for the foreseeable future. It's a good picture. The tailwinds are with us, right? And even though people think we're coming out of this – we're coming out of this cycle where off-lease cars are going away. That's not true. These off-lease cars aren't going away. They're maybe going to drop from 5 million down to 4.5 million and then plateau out there, but that's still going to be a very, very strong source of supply and there's nobody, nobody better positioned to sell those cars than our online platforms and our digital channels like TradeRev.

Fair enough. And just a question on IAA. As you guys think about the – as you go into the spin next year and you look at the portfolio, are there any kind of meaningful chunks of business that come up for renewal or recompete before now and potentially when you spin the business is an opportunity or is a potential risk as we kind of think about the business as standalone?

Yeah. John, good question. I think the biggest opportunity is with our existing customers. IAA is clearly focused on serving the insurance customers. And we are aligned with what we would call the right insurance customers in terms of market share with the large insurance companies and the fastest-growing insurance companies. I think the real opportunity for IAA is to gain more share with those existing customers as well. I know that John Kett and his team are working on some other innovative products like reducing cycle times that we talked about, like this pricing, I think that Stephanie and I were talking about on the salvage side of the business where we're able to provide the buyers with information and we're able to provide the sellers with more information, create a seller's guide on the salvage side. This is all new stuff. And as we bring out this new stuff that I talk about, I think, it creates a lot of opportunity for IAA.

And, John, specifically, there's always RFPs in the marketplace in both of our businesses. It's just part of the process, and it's part of business as usual.

Understood. And just one final question. On the spin, could you give us maybe a little bit more color on the mechanics of what maybe is taking longer for you guys to get the spin out relative to what you thought? I don't know if it's the private letter ruling or just what the aspects are that are kind of holding things up?

Yeah. So, John, I think at the outset, I think that we may have been a little bit more optimistic on the timing than what we originally anticipated. I guess, we – I say that right. We were more optimistic on the timeframe than what really took place here in terms of some of the things that we had to achieve and complete in getting towards the spin. One thing that I want to make very clear and make clear in my statement, we're committed to the spin and there's no question about that. Then the other thing, quite frankly, we're doing a number of acquisitions. In fact, we're working on some of those now, and it takes resources. And many of these resources are working on both some of the acquisition activity that would be working on the spin activity as well. So, with that, there's also some timing issues. And, Eric, maybe you can speak to those.

Yeah, John. We have to get agreements in place. As we mentioned in our press release, there's a number of steps in the way. Also, I would just tell you, you have to have a debt structure finalized, and there's – we don't want to be into a market that's not typically when lenders are anxious to put new loans on their books. So, trying to do something early in the calendar year is actually proving more difficult there. Just aren't open windows where you would go out to the market and introduce a new public company. So, all that enters into it. We're working hard. Nothing has arisen that would tell us it's at risk. So, here we go. Just give us the time to get it done right.

Understood and good luck.

Okay. Great. Thanks, John.

Thank...

I think that's all we have, Sonia.

This does conclude our question-and-answer session. I would now like to turn the call back over to Jim Hallett for any closing remarks.

Great. Thank you, Sonia, and thanks everybody for being on the call today. Obviously, we very much appreciate your interest in our company and in our stock. I think this is an exciting time. It's an exciting time for our businesses. I say we've got a lot of opportunities in front of us. We've got a lot of tailwinds. I'm excited that – about the spin. I think we got the opportunity to create two great companies with two great management teams and two boards to guide these management teams. I believe we will have two very good companies. I'm excited about what's going on in the industry. As I said, I'm excited about the visibility we have and the opportunities we have and some of the new products that we're bringing to market. And if I sound a little over enthusiastic about what's going on with TradeRev, specifically, when you see the kind of growth that we experienced and the velocity and how rapid this growth is taking place, it's really encouraging that I really believe that we've got a chance to really transform the way this business gets done. So, with that, I'll leave it. Thank you for being on. We appreciate and we look forward talking to you next quarter.

Ladies and gentlemen, this does conclude today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.