IAA : 2019 Industry Report

2019

INDUSTRY

REPORT

IAA, Inc. (NYSE: IAA) is a leading global digital marketplace connecting vehicle buyers and sellers. Leveraging leading-edge technology and focusing on innovation, IAA's unique multi-channel platform processes approximately 2.5 million total-loss, damaged and low-value vehicles annually. Headquartered near Chicago in Westchester, Illinois, IAA has over 3,800 talented employees and more than 200 facilities throughout the U.S., Canada and the United Kingdom. IAA serves a global buyer base located throughout more than 135 countries and a full spectrum of sellers, including insurers, dealerships, fleet lease and rental car companies, and charitable organizations. IAA offers sellers a comprehensive suite of services aimed at maximizing vehicle value, reducing administrative costs, shortening selling cycle time and delivering the highest economic returns. Buyers have access to innovative vehicle merchandising, efficient evaluation services and digital bidding tools, enhancing the overall purchasing experience.

Disclaimer:

The auto salvage industry as discussed in this document refers to the industry as experienced by IAA. IAA does not possess data on the performance of other salvage companies; therefore, the analyses are based on how different economic factors impact the performance of vehicles sold through IAA's auctions.

The statements contained in this report and statements the company may make orally in connection with this report that are not historical facts are forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected, expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include those matters disclosed in the company's Securities and Exchange Commission filings. The company does not undertake any obligation to update any forward-looking statements.

TABLE OF CONTENTS

2 Executive Summary

4 U.S. Economy

8 Automotive Industry

10 Segment Analysis

12 Economic Indicators

18 References

20 About the Authors

©2020 IAA, Inc. All rights reserved. The content and images included in this publication may not be reproduced or used in any manner without the express written permission of IAA, Inc.

This document is meant for informational purposes only.

1

EXECUTIVE

AUTOMOTIVE

Steady Fluctuations in the Automotive Industry

SUMMARY

ECONOMY

2019: The U.S. Expansion Continues

New Vehicle Sales

1.8%2.4%

Used-Car Price Index

Gasoline Prices	Diesel Prices
5.3%	3.8%

While new vehicle sales fell slightly in 2019 by 1.8%, the state of the industry is strong with new vehicles sales hovering at the 17 million vehicle mark for the year. High prices and trade uncertainty, along with the GM strike helped contribute

to the slight weakness in this sector's performance, with moderate decreases in gasoline prices at the end of the year helping to prop the market up. Gasoline prices ended the year down 5.3% while diesel prices fell similarly by 3.8%.

The U.S. economy continued its upward trajectory in 2019 marking its longest expansionary period. It showed a growth rate of 2.3%, marking a slight downtick from

2.3%	2.0%
Real GDP Growth	Income

ECONOMIC INDICATORS

the 2.9% increase in real GDP in 2018. The continued growth was complemented by a strong labor market with unemployment averaging about 3.6% in 2019. This corresponds to levels the U.S. has not reached in over 50 years. The tight labor market was a positive for workers as real wages increased by roughly 2% over the course of the year. While the fundamentals of the U.S. economy remained strong, a cloud of uncertainty pertaining to fear of a global slowdown and trade relations persisted. As a consequence, global investors moved towards the U.S. Dollar as it appreciated by 3.4%.

Unemployment Rate

3.4%6.2%

U.S. Dollar

Whole Crushed	Aluminum Prices
Auto-Body Prices
14.9%
20.2%

Platinum Price

1.9%49.1%

Palladium Prices

Salvage Industry

Prices in the used car market experienced a see- saw effect throughout the year with rising prices through the beginning of the year being met with falling prices for the latter. While seasonality helps to explain some of this trend, market fatigue may be contributing to the decreasing prices, but on the whole, prices ended up 2.4% for the year. Whole crushed auto-body prices fell consistently throughout the year, ending with a decrease in 20.2% for the year. The decrease in prices for scrap steel also carried over to the prices of aluminum and platinum which both experienced declines over the course of the year. Trade and regulatory challenges along with a weakening manufacturing sector in the US help to contribute to these trends. Palladium prices, on the other hand, are a different story with prices increasing by 49.1% for the year, partially attributed to a shortage in this precious metal.

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©2020 IAA, Inc. All rights reserved. The content and images included in this publication may not be reproduced or used in any manner without the express written permission of IAA, Inc.

This document is meant for informational purposes only.

CONTENTS

3

Expansion Continues

The longest expansionary period in U.S. history continued through 2019 as the economy entered its 127th consecutive month of positive economic performance in GDP and unemployment. The year saw real GDP surpass the $19 trillion mark in Q3 with it finishing at $19.2 trillion by the end of Q4, as the expansion is now entering its eleventh year. Despite tumultuous trade relations with China, the U.S. economy grew 2.3% in 2019, down from the previous year's growth

of 2.9%. Uncertainty and fear of a global slowdown likely contributed to a drop in the average growth of private investment from 5% in 2018 to just 1.8% in 2019, despite the Federal Reserve cutting rates for the first time since the financial crisis of 2008-2009.1 However, with an ever-tightening labor market putting upward pressure on wages, consumption spending was able to pick up the slack and accounted for most of GDP's growth in 2019.2

2.3%

GDP Growth

2018 Total Real GDP: $18.7 Trillion

2019 Total Real GDP: $19.2 Trillion

(Chained 2012 Dollars)

U.S.

ECONOMY

U.S. Real GDP Growth

Percentage Growth

Q1
2019
3.1%	Q3	Q4
Q2
2019	2019
2019
2.1%	2.1%
2.0%

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©2020 IAA, Inc. All rights reserved. The content and images included in this publication may not be reproduced or used in any manner without the express written permission of IAA, Inc.

This document is meant for informational purposes only.

CONTENTS

5

Labor Market Tightens, Unemployment Sits Historically Low

Dollar Rises with Uncertainty

Average Unemployment

6.2%

2018 Average: 3.9%

2019 Average: 3.6%

As the expansion continues, unemployment remained at historically low levels in 2019. Average unemployment for 2019 was 3.6%, which is a 6.2% drop from 2018's average unemployment. Unemployment opened the year at 4.0% and experienced steady declines across Q1, Q2, and Q3 finishing out the year at 3.5%. This means unemployment sat well below the CBO's estimate of the natural rate of unemployment of 4.4% for Q4 of 2019. Opportunities for employment continued to increase as well with 1.8 million jobs being created in 2019. However, this was down slightly from the 2.1 million jobs added in 2018.3

The dollar appreciated 3.4% in 2019, ending a two-year slide in the value of the dollar. The trade-weighted U.S. Dollar index averaged 92.01, up from 2018's 89.01. This occurred despite the Fed cutting rates not once, but three times in 2019. These were the first rate cuts since the recession and resulted in a 75 basis point drop in the target Federal Funds Rate over the course of the year. However, as investors confront rising global economic uncertainty surrounding Brexit and U.S.-China trade relations, it appears investors have chosen the dollar as a safe bet.6 Despite rate cuts typically lowering spreads all else equal, interest rates in the U.S. remained high relative to other large economies, which contributed to the greenback's 2019 appreciation.

3.4%

Trade Weighted U.S. Dollar

2018 Average: 89.0

2019 Average: 92.0

Pay-Day for the U.S. Worker

Fuel Prices: A Tale of Two Halves

2.0%

Median Real Weekly Wages

2018 Average: $353.00

2019 Average: $359.00

As the labor market continues to tighten, companies have continued to raise wages to attract new talent and fill vacancies. Median real weekly wages continued to grow through 2019 increasing almost 2.0% for the year and have grown every quarter since Q4 of 2017.4 Average hourly wages for 2019 also grew 3.3% from 2018 and outpaced 2018's growth of 3.0%.5 The continued strong consumer spending in 2019 is likely due to current increases in wages coupled with expectations that wages will continue to rise as more bargaining power shifts away from employers and into the hands of potential employees.

Despite significant increases in gas prices in the first half of 2019, the average gas price in the U.S. was down 5.3% or roughly $0.15 per gallon from 2018. Gas prices opened the year at $2.15 per gallon in January and peaked in May at $2.73. However, Q3 and Q4 saw steady, modest decreases allowing prices to settle at $2.47 by December.

The behavior of gas prices was largely due to fluctuations in crude oil prices over the course of the year.7 From January to April, crude oil prices increased $12.48 per barrel, roughly a 24% increase. However, this eventually gave way to falling prices in the latter half of the year.

Average Gasoline Price

5.3%

2018 Average: $2.64

2019 Average: $2.49

Average Diesel Price

Not surprisingly, diesel prices behaved similarly to gas prices in response to the fluctuations in crude oil. Diesel started January at $2.98 per gallon and rose 4.7% by April, or about $0.14 per gallon, before finishing the year at $3.06. Average diesel prices for 2019 were down 3.8% from the previous year which translates into about $0.12 per gallon.

3.8%

2018 Average: $3.18

2019 Average: $3.06

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©2020 IAA, Inc. All rights reserved. The content and images included in this publication may not be reproduced or used in any manner without the express written permission of IAA, Inc.

This document is meant for informational purposes only.

CONTENTS

7