IAA, Inc. Common Stock

Good morning, ladies and gentlemen. Thank you for attending today's IAA second quarter earnings conference call. My name is Jaquita, and I will be your moderator for today's call. Our lines will be muted on the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to your host, Caitlin Churchill, with Investor Revisions. Caitlin, please go ahead.

Good morning, everyone, and thanks for joining us today for IIAA's second quarter fiscal 2022 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 Security Litigational 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 IEA's press release issued today and in the risk factor section included in our annual report on Form 10-K filed with the SEC on February 28, 2022, and in our quarterly report on Form 10-Q filed with the SEC on May 10, 2022. The 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, Caitlin. Good morning, everyone, and welcome to IEA's second quarter earnings call. My plan today is to first provide some highlights from our performance in the quarter and then review our continued progress against our strategic initiatives. I will then turn the call over to Susan to discuss our financial results and outlook in greater detail. Let me begin by telling you how pleased I am with our team's focus on serving our customers at the highest level, even in a period of economic uncertainty. As we reported this morning, organic revenue grew by approximately 9% in the quarter, and as expected, adjusted EBITDA declined. Despite some top line headwinds, which I'll discuss in more detail, our U.S. volume grew nearly 5% in the second quarter versus the second quarter of last year, excluding the loss from the top customer that we've talked about in the past. We are encouraged that our overall market share not only remains stable throughout the period, but our efforts to increase share also continue to build positive momentum. That said, we were impacted by several industry headwinds in Q2, including a decline in the percentage of vehicles declared a total loss, driven primarily by high retail used car prices. as well as lower non-CAT weather-related volumes compared to what we normally experience in the second quarter of the year. Outside of insurance, our dealer, commercial, and consumer-facing volume was also soft during the period, driven primarily by the continued low inventory in wholesale markets. Switching to the cost side of our business, like most companies in today's market, we continue to experience inflationary cost pressures primarily in towing and branch labor. While these higher costs were anticipated, we are actively working to offset them by further driving operational efficiency and improved service levels throughout the organization. And as we've previously mentioned, we have established an operations committee of our board. The committee is active, meeting on a regular basis, and providing guidance to us on these initiatives. We continue to invest in automation of manual tasks throughout the vehicle lifecycle, from vehicle release through towing and titling, streamlining the process to achieve efficiency gains and enhanced service levels. In one example, we recently implemented title automation in our West Coast Title Center and have seen greater levels of accuracy and speed at a reduced cost. And while tow costs are still elevated, we are encouraged to see rates stabilize. We remain focused on leveraging data analytics to optimize routing and improve truck utilization to offset higher towing rates. Identifying and driving operational efficiencies is a way of life at IEA and will continue to be a focus regardless of the economic environment. Moving now to talk about the macro pricing environment, both retail and wholesale used car prices have remained high, despite some sequential moderation over the last few months. This provides a favorable backdrop for continued strength in RPU, and as noted, total loss frequency was lower during the quarter than in Q1. The industry also continues to feel the impact of the higher costs of fuel, towing, and labor. Despite these macro challenges and the potential for a broader economic downturn, I remain bullish on the near and long-term outlook for both IEA and the industry as a whole. While ongoing OEM supply shortages have reduced new vehicle sales, used car values remain near record highs, creating significant demand for the vehicles we sell and their corresponding parts. We continue to see secular long-term growth in repair costs, as both parts and labor are impacted by increasing technology complexity. This should bode well for future long-term growth in total loss rates and in turn industry volumes, especially if used car prices continue to moderate. In addition to the positive industry dynamics, it is important to emphasize that throughout our history, IEA has performed well throughout a wide variety of economic cycles. While currently we're managing through higher labor and towing costs, Our primarily consignment-based revenue model helps mitigate their impact. Our business is resilient, and our team has the experience and the knowledge to continue to navigate the dynamic macro environment. The continued execution of our strategic initiatives, particularly in the areas of technology and innovation, further differentiate us. Every day our team is focused on improving our digital marketplace through data analytics and enhanced vehicle merchandising. With that in mind, let me update you now on the strategic initiatives on the supply side, starting with the data analytics work that delivers such significant value to our customers. With better data, our selling customers are making improved decisions and optimizing the channels where their assets are sold. resulting in higher net returns for them while translating into additional benefit to IEA as well. Unique to the industry, we provide buyers with four ways to bid, proxy, timed, live bidding, and buy now. This gives our buyers greater flexibility while helping us and our sellers understand buyer behavior, resulting in maximizing the value of the assets that we sell in our marketplace. The IEA Advisor Portal Our industry-leading seller analytics platform uses the data that we gather to highlight key opportunities for sellers to increase proceeds and reduce cycle time. In another example, we collaborated with one of our largest providers after we jointly identified an opportunity to improve results. By modifying their reserve setting and auction channel strategy, we unlock significant improvements in their returns. This example serves to reinforce our continued efforts to collaborate with both existing customers and prospects on additional opportunities and potential pilots. We also continue to successfully drive revenue through enhancements to the seller experience. We further expanded IA loan payoff, processing nearly $1.2 billion of transaction value through the portal year-to-date, up 70% versus the second quarter of last year. This growth is driven by greater adoption by insurance companies and increased penetration of financial institutions. Our lender coverage is now essentially 100%, with 80% of all liens written nationally covered by lenders with digital direct integrations to loan payoff. Top carriers are using the platform nationally and are realizing 12 to 15 days of savings in addition to the efficiencies of ACH transfer. In fact, with carriers who are directly integrated, we're seeing some assignments submitted to the portal and funded in less than 24 hours. We believe our broader solution set, including unique innovations such as loan payoff, continue to resonate with sellers and provide the winning formula for IEA to deliver long-term customer value. On the demand side of our market, IEA buyers continue to benefit from an improved experience on our Interact merchandising platform through enhanced digital trust created by our custom features, including vehicle score, engine start, and feature tour, all which promote an in-person experience while researching vehicles digitally. Further driving an improved experience IEA transport, which we launched last year, to assist buyers in sourcing and scheduling the transport of their vehicles has been a remarkable success. Year-to-date volume of IEA Transport has more than doubled from last year, and Q2 volume was up nearly 80%. In May, we launched the IEA Transport mobile app, empowering buyers to shop for quotes, arrange transport, and track deliveries from anywhere, all within the app. In addition to enhancing our buyers' experience through expanded or improved services, we're also continuing to expand our overall network of international buyers, which grew by 5% year over year. This growth is driven in part from our focus on improving the overall experience for our customers. Our demand side MPS score continues to improve, and we are on target to exceed our goals for 2022. We've 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. Our next initiative, strategically building real estate capacity throughout our global footprint, remains one of our most important commitments to servicing our clients and meeting growing demand. During the quarter, we expanded our capacity in central California, a key rapidly growing market for IA, and acquired our location in the Washington, D.C. area. In the United Kingdom, we opened a new facility in Bristol to provide additional coverage in the southwest of that country. These additions reflect our continued focus on strategically investing in properties where we see a long-term benefit and an attractive return on capital. In addition to satisfying our ongoing customer demand, we've committed to prepare for cat season, by expanding our footprint and resources in those areas at the greatest risk for extreme weather. And we've completed thorough reviews with all of our clients for 2022. In southern Louisiana, we recently expanded two locations, permanently converting these facilities to support IA's long-term flexible land and capacity strategy in this hurricane-prone region. While we cannot predict the timing or severity catastrophic events, servicing and supporting our customers in their time of need is a high priority. We will continue to expand our presence and capabilities across CAT-prone regions in preparation for any significant weather event. Lastly, turning to our international business, Q2 marked the first full quarter since we obtained full clearance from the UK Competition and Markets Authority for our acquisition of Synetic. The integration process is progressing as planned, including cross-pollination of historic Synetic buyers onto IEA's platform, greater utilization of real estate, and savings in towing and technology costs. As we've said from the beginning, the goal of this transaction was to create a long-term, sustainable growth platform in the UK. IEA's state-of-the-art auction platform and Synetic's capability in used parts and dismantling expands the product offering, and provides the broadest options to maximize proceeds for customers. While synergies between our legacy UK business and Synetic are creating efficiencies, our forecast for Synetic is trailing our prior expectations. Subsequent to our acquisition, Synetic secured an exclusive agreement from one of the top five UK insurance providers. The cost of onboarding this additional volume, which comes ahead of revenues, will reduce SYNETIC's 2022 EBITDA. The transition of the new volume is also taking longer than expected, but our view of the long-term benefits remain unchanged. In addition, certain market dynamics in the UK, which Susan will discuss, have also impacted SYNETIC. We do remain confident in the long-term growth opportunity in this business. In addition, we believe SYNETIC's market-leading focus on sustainability and the circular economy for vehicles is a true differentiator and a model for the future, given that insurance companies in the U.K. market are further embracing sustainability. Demonstrating this importance to the business in May, Synetic achieved its new ISO accreditation, which requires an ongoing sustained improvement in energy efficiency and reduction in greenhouse gas emissions. This is a good example of IEA's overall progress on our ESG goals. which culminated in the publication of our first comprehensive sustainability report this last April. The report highlights the critical role we play in the circular economy and our sustainability initiatives push us to be more efficient and develop innovative solutions for our customers. Furthering this goal, we are leveraging carbon literacy education and training from the UK and starting to roll it out globally. Through our ESG efforts, we also remain focused on building a stronger, more diverse, and engaging workplace for all our employees. Lastly, while our market-leading Canadian business has recovered more slowly from COVID than in the US, we continue to see positive momentum during the second quarter. Although it will take some time for assignments in Canada to come back to 2019 levels, we are excited with the progress that we've seen year to date. So before I hand it over to Susan, I want to thank all our employees for their continued dedication to further strengthening our operational execution and providing industry-leading customer service. We've overcome many of the headwinds emanating from today's unique macro environment, and our people are a big reason why I'm confident in our ability to adapt to any market conditions going forward. In close collaboration with our board, we remain focused on running a world-class operation that delivers the most innovative and effective offering in our industry for all of our stakeholders. We have built a differentiated digital marketplace with unique capabilities and will continue to create additional products and services that deliver value to our buyers and sellers. And with that, I'll turn the call over to Susan to review our second quarter financial performance and our 2022 guidance. Susan?