IAA, Inc. Common Stock

Good morning and welcome to the IAA Inc. fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. 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 State 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 IAEA'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 29th, 2019, filed with the SEC on March 18th, 2020, as updated in our Form 10-Q filed with the SEC on May 6th, 2020, and in the Form 10-K for the year ended December 27th, 2020, which we expect to file on or near February 19th, 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?

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 in three different locations today, so please bear with us, particularly when we do the Q&A. But let me just start out to, you know, 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 IA 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 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 units 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 had 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 now 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 a remote work environment and a focus on virtual client handling. We also significantly enhanced our best-in-class loan payoff tool, having successfully integrated dealer track 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 into Indiana, which will speed up processing of 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 Future Tour has continued to drive strong traction amongst 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 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 this 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 and our ancillary product suite helped us make significant strides in improving 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 U.S. 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 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've 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 rate 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've 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 on replicating much of the work that we successfully executed in the US with some customization and taking into account local practices and policies. We have implemented an all digital model in Canada, and rolled out tools like 360View in both Canada and the UK. With our UK business, we rebranded the operations to IEA, launched a new auction platform, and transformed our technology platform. We have made good strides in understanding the international landscape, having recently completed our assessment of additional markets to determine the areas that we believe have the best long-term opportunities for IAEA. 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. 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 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 with 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 continued 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 costs 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, and 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 U.S. 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 in the incremental revenue and cost reductions from the buyer digital transformation. STNA 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 adjusted EBITDA, which is down a full half turn from the 3.2 times level at the time of the spend. 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, volume sold, and revenue per unit remain consistent with fourth quarter levels. I do want to note that our international markets, Canada and the U.K., have had more stringent restrictions put in place than in the U.S., 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?