IAA, Inc. Common Stock

Good morning, and thank you all for attending the IAA-incorporated Q1 2022 earnings call. My name is Sam, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star 1 on your telephone keypad. This time, I'd like to turn the call over to our host, Arif Ahmed, Vice President of Treasury. Arif?

Thanks, Sam. Good morning, everyone, and thanks for joining us today for IAA's first quarter fiscal 22 earnings conference call. Speaking today are John Kett, Chief Executive Officer and President, and Susan Healy, our Chief Financial Officer. After John and Susan 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 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 January 2nd, 2022, followed with the SEC on February 28, 2022. The forward-looking statements made today are as of the date of this call, and IEA 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 IEA'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?

Thank you, Arif. Good morning. Thank you all for joining us for our first quarter earnings call. Today I'm going to both provide some highlights from our first quarter performance and review our continued progress against our strategic initiatives and then turn the call over to Susan to discuss our financial performance and outlook in more detail. We were pleased with a solid first quarter performance, reflecting both the progress that we've made against our strategic initiatives and continued industry tailwinds. Organic revenue in the quarter was up approximately 20%, with a corresponding growth in adjusted EBITDA of 7.4%. At a macro level, used car pricing remains at elevated levels, despite the recent slight decline. This provides a favorable backdrop for continued revenue per unit strength. We've also seen claim frequency increase as a result of the higher levels of driving and miles driven and other factors, and this acts as an offset to the decline that we've seen in the total loss ratio. I also want to stress the resiliency of our business and the strength of our operating model, regardless of the economic environment. Looking back to 2008 and 2009, despite a very weak global economy, we continued to grow and performed extremely well. In addition to our confidence in the overall industry dynamics, we have continued to see the benefits from and the growth in IEA strategic initiatives and our leadership position in innovation. Our digital marketplace, powered by deep data analytics and unique vehicle merchandising capabilities, provides enormous benefits to both our selling and buying customers. And I'll expand on these items in just a few minutes. But let me start by providing some more detailed updates on several key priorities, beginning with our progress on M&A and international expansion. As you will recall, in the fourth quarter of 21, we announced the acquisition of Synetic. We have since obtained full clearance from the UK Competition and Markets Authority and we're moving forward with integrating the two businesses, which is proceeding well. As we've noted in the past, the goal of this transaction was to create a growth platform in the UK, with IEA's state-of-the-art auction platform combined with Synetics' capability in parts and dismantling to expand our product offering and provide another option to maximize proceeds for customers. We now have over 25 locations across the country enabling us to better serve our customers. And though the integration is just beginning, we're already seeing examples where the combined expanded footprint is allowing us to better manage transportation for our seller customers. Synetic brings to IEA a roster of strong customer relationships and a highly respected driven management team. We now also have a unique business model focused on an integrated approach, that looks to maximize financial value while minimizing the environmental impact for our customers. We believe that CENETIC's first-to-market focus on sustainability and the circular economy from vehicles is a true differentiator as insurance customers in the UK market are increasingly making sustainability a priority. And this approach is proving to be effective in the marketplace. Since the third quarter of last year, we've secured additional volume from both new and existing customers and have entered into several new customer parts contracts. In addition to Synetic, our predecessor UK business has also performed well over the last several quarters, including the renewal of a key customer contract. The other part of our international segment is our market-leading Canadian business. The Canadian market has recovered more slowly from COVID-19 than in the U.S., but this quarter we saw a nice pickup in activity. While assignments in Canada are still below 2019 levels, they increased significantly compared to the prior year, and we have secured new volume with several Canadian customers. Also in February, we rebranded our Canadian business to the IEA Global Brand. This move highlights our commitment to investment, innovation, and excellence in customer experience in the Canadian market and to our global buyer base. So as a wrap-up to our M&A discussion, I will remind you of our acquisition of Auto Exchange in June of last year, which has been very successful, outperforming our initial projections. In the first nine months of ownership, we've grown both revenue and adjusted EBITDA significantly. And the business performed extremely well during Hurricane Ida, providing us with a competitive advantage in New Jersey, where available real estate is scarce. Real estate capacity is one of our most important commitments in servicing our clients. During the quarter, we added three new branches to our U.S. network in Illinois, Iowa, and California. And in the U.K., we secured ground for the construction of a new full-service facility in Bristol to provide critical coverage in the Southwest. Back in the U.S. in early April, we acquired our location in the Washington, D.C. area, reflecting our continued focus and strategically investing in properties where we see a long-term benefit and attractive return on capital. Our supply-side customers also continue to praise the data analytics work that we're doing via our bespoke seller portals, which help them better obtain and evaluate data to maximize their proceeds. Just this quarter, several of our customers adopted our automated predictive value tool, which has helped them to improve reserve pricing which helps them optimize auction outcomes. We will continue to further invest in, expand, and strengthen our digital marketplace through data analytics. With better data, our selling customers are making more informed decisions regarding their assets, resulting in higher net recoveries. Our buying customers benefit from an improved experience, allowing them to research and efficiently find the vehicles they need and to bid confidently. We continue to have very positive and effective collaboration with both existing customers and prospects and are encouraged to see the additional opportunities ahead for product and service pilots as well as additional digital integrations. So speaking of products and services, we continue to have success with and further enhance both the buyer and seller experience, helping to grow our revenue. We continue to expand loan payoff, processing approximately $560 million of transaction value through our portal in the first quarter, a 75 percent increase over the first quarter of last year. Adoption by both financial institutions and insurance companies continues to grow. On the demand side, IEA Transport, which we launched last year to assist buyers in sourcing and scheduling the transport of their vehicles, has been a great success. We've tripled our volume of transactions relative to the first quarter of last year, and we've increased our gross margin by nearly 360 basis points. And one more important offering is our continued expansion of the number of floor plan financing companies that we work with to provide additional purchasing power and flexibility to our buyers. So in addition to strengthening our buyers' experience, through expanded or enhanced services, we're also continuing to expand our overall network of international buyers, which grew by nearly 10% year over year. Our market alliance network now includes 50 locations across 20 countries. This includes the addition of auction centers in both Ghana and El Salvador in the first quarter. Not only do these new centers address the needs of the growing buyer basis in these strategic markets, but we also tend to sell higher value vehicles to international buyers. Given the situation in the Ukraine, I did want to note that while we do have buyers in Russia, Ukraine, and other Eastern European countries, network disruption in one part of the world does not have a material impact given the diversity of our global buyer base. To give you some sense of this, in 2021, Russia and Ukraine together accounted for less than 1% of consolidated volume, And even when you add in buyers from the other nearby Eastern European countries, the number is still below 2%. And our units sold to international buyers as a percentage of the total remains above last year's levels. We also continue to focus on improving overall customer experience. Our demand side MPS score continues to improve, and we have now leveraged that framework and implemented an improved CX discipline across our entire organization. This will provide all customers, both on the demand and the supply side, with a consistent industry-leading level of service. The improvement in MPS was driven by seeking feedback across vehicle search, payment, digital experience, and branch experience. And one recent example of the results of this feedback was the release in the first quarter of several new modifications to our buyer search capability. This feedback also led to the release of an updated version of our buyer recommendation engine. Using data analytics combined with buyer feedback, we've significantly increased the accuracy of our buyer recommendations, much to the praise of our demand-side market, who appreciate their improved ability to quickly find vehicles to bid on and to buy. We will continue to be extremely responsive and innovative in order to meet our customers' evolving needs. So how does all this progress and these initiatives show up in our results? First, the continued growth of our Market Alliance network, the further expansion of our international buyer base, leveraging data, and the benefits from addressing the feedback that we receive from our buyers all contribute to a strong and competitive online marketplace. And this results in better outcomes for our sellers and increased revenue per unit. The second important impact of our progress and success around innovation, data analytics, buyer development, real estate expansion, and additional products and services can be seen in the growth of our market position among provider customers. In the first quarter, we expanded our relationship with a top 25 insurer and secured new and renewed agreements with several regional carriers, including the largest customer from our auto exchange acquisition. And in regard to the one customer that we've talked about extensively over the last several calls, our share position remains stable, and we continue to have productive dialogue with that customer. So as evidence of this success, our U.S. volume grew 12% in the first quarter of 2022 versus the first quarter of last year. This excludes the loss from that one top customer and the extra units that we received from Hurricane Ida. So switching now to talk about the cost side of our business, like most companies, we do continue to experience inflationary cost pressures, primarily in towing and branch labor. On the towing side, we started to see towing rates stabilize, although the higher price of fuel resulted in surcharges beginning in certain markets in late Q1. We remained focused on route optimization and improving tour utilization to offset the higher rates. We've also seen increases in the cost of branch labor, although rates have stabilized over the last few weeks. We did implement a service fee increase for our buyers in February, which has also helped to offset the cost increases we're experiencing. And Susan, of course, will provide some more detail on costs in her remarks. So I'd like to now provide an update on the letter we received from a shareholder requesting that we take certain actions. As a public company, we have regular dialogue with our shareholders, and we're always interested in the constructive feedback that they offer. Through a very open and productive set of discussions with this particular shareholder, we arrived at a mutually beneficial outcome. As noted in our press release, we are excited that Mike Seeger will be joining our board of directors. Mike is a recently retired executive who spent over 30 years on the claims side of the insurance and we're thrilled to have someone with this deep industry knowledge to join our board. In addition, our board is forming an operations committee focused on enhancing our overall performance. So I'll briefly touch on our guidance now, and then Susan will provide more details. Based on year-to-date results and our assumptions for the remainder of the year, we now expect revenue of $2.0 to $2.1 billion and adjusted EBITDA in the range of $535 to $575 million. I want to sincerely thank our employees for their hard work, dedication, and customer focus. I'm very proud to announce that we have again been selected as a great place to work now for the fourth year in a row. Our success as a company is a result of our people and their execution. So before I hand it over to Susan, I would like to underscore the strong nature of the IEA business. The same macro factors that have driven industry growth, increased vehicle complexity, higher repair costs, and higher proceeds from a global buyer base should continue over the long term. We have built a differentiated marketplace with unique digital capabilities and continue to create additional products and services that deliver value to our buyers and sellers. We are focused on driving our global business and growing our long-term profitability in this ever-evolving market environment. And with that, I'll turn the call over to Susan to review our financial performance and expand on our 2022 guidance. Susan.