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spk17: Good morning, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. Welcome to the Ritchie Brothers Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your questions, please press star, then the number two. I would now like to turn the call over to Mr. Samir Rathod, Vice President of Investor Relations and Market Intelligence, to open the conference call. Mr. Rathod, you may begin your conference.
spk00: Hello and good morning, and thank you for joining us on today's call to discuss the acquisition of IAA as well as our third quarter 2022 results. Joining me today are Ann Fandozzi, our Chief Executive Officer, Eric Jacobs, our Chief Financial Officer, and John Kett, Chief Executive Officer of IAA. The following discussion will include forward-looking statements. Comments that are not a statement of fact, including but not limited to projections of future earnings, revenue, gross transaction value, and other items, and expectations regarding the proposed acquisition of IAA, including the anticipated timing, benefits and synergies of IAA transactions and future opportunities for the combined business of Ritchie Brothers and IAA are considered forward-looking and involves risks and uncertainties. These factors include but are not limited to the satisfaction of the closing conditions, including shareholder and regulatory approvals for the proposed transaction. The risks and uncertainties that could cause actual results to differ significantly from such forward-looking statements are detailed in our earnings and joint IAA transaction release issued this morning, as well as the most recent quarterly reports and annual report on Form 10-K of each of Ritchie Brothers and IAA, which are available on their respective investor relations websites on Edgar and Cedar as applicable. We will also make important filings with the FCC and applicable Canadian security regulatory authorities in connection with the proposed transaction. You are urged to read those materials carefully when they become available. On this call, we will also discuss certain non-GAAP financial measures, including forward-looking non-GAAP financial measures. For the identification of non-GAAP financial measures, the most directly comparable GAAP financial measures, and applicable reconciliation of the two, we are our news release Form 10-Q and presentation posted on our website. We are unable to present quantitative reconciliation of forward-looking non-GAAP financial measures as management cannot predict all necessary components of such measures. Investors are cautioned not to place undue reliance on forward-looking non-GAAP measures. We have two separate presentations on our website this morning, one for our normal earnings release and another standalone presentation for the IAA transactions. All figures discussed on today's calls are in U.S. dollars unless otherwise indicated. Given that we will have a wider audience than normal, we may run long by a couple of minutes to make sure we have enough time for the Q&A session. I would now like to turn the call to Ritchie Brothers Chief Executive Officer Anne Fandozzi.
spk16: Anne Fandozzi Thank you, Samir, and good morning to everyone joining our call today. I will give a few quick highlights on our third quarter after which Eric will give a brief update on our financial results before we move to discuss the exciting acquisition of IAA. We are pleased with our performance this quarter in what continues to be an uncertain macroeconomic environment. I am proud of the efforts our teams have made across the organization to deliver the third quarter in a row of double-digit service revenue and double-digit bottom-line growth. We are accomplishing all this while we continue to invest in improving our customers' experience through the expansion of local yards, a new sales coverage model, and modernizing our technology. Let me now hand the call to Eric Jacobs to quickly highlight our financial results.
spk02: Thank you, Anne. Good morning to everyone. I'm sure we have enough time to discuss the expected strategic and financial benefits of the IAA transaction. I'm only going to touch on a few highlights about our strong quarter. Those looking for more information, our normal earnings deck with more details can be found on our investor relations website. To start, we are very pleased with our 10% growth in GTV, excluding the impact of foreign exchange. This is especially noteworthy given that we cycled over the almost $100 million Barilux deal from last year. Prices of used equipment are still relatively strong on an absolute basis. However, prices are down compared to the highs we saw earlier this year. With regards to supply, we did see a rebound in volumes this quarter, with total lots increasing 17% year-over-year. This growth in lots was driven by several significant deals from our strategic accounts group, as well as growth in low-value lots. While we are encouraged by the increase in lots, it's still too early to call this a trend. Let me move to revenue and start with total service revenue. Total service revenue increased 15%, and our take rate, where service revenue is a percentage of GTV, expanded 130 basis points to 18.2%. This was driven by a strong contribution from other services and higher buyer fees. Inventory return increased 40% to $17.5 million due to a 43% increase in inventory sales revenue. This was driven by strategic accounts and solid execution by the OutRisk team. With regards to earnings, our adjusted EBITDA increased 12% due to strong revenue performance, partially offset by planned investments, higher performance-based compensation, and inflation. Overall, a very strong quarter. Moving on to the fourth quarter, there are a few things that we'd ask you to consider. First, on GTV, like most companies with international operations, Foreign exchange headwinds are expected to impact us more meaningfully in the fourth quarter. FX could negatively impact our GTV growth by as much as 500 basis points. Therefore, despite the strong momentum in our business, we may see low to mid-single-digit GTV growth in a quarter on a U.S. dollar basis. Next, on selling general administrative expense, we're forecasting that SG&A expense, exclusive of share-based payments, adjustments for unusual or non-recurring expenses to be between $124 million and $129 million. Lastly, for modeling purposes, we are forecasting interest expense of $10 million to $11 million and adjusted tax rates between 25% and 27%. Before I hand the call back to Anne, I wanted to highlight for you that the Globe and Mail, a leading Canadian newspaper, recently selected Ann as one of the top five CEOs in Canada. She is being recognized as Innovator of the Year, a category that honors CEOs whose vision and guidance has been instrumental in the successful creation and commercialization of a truly disruptive product or service. The entire Ritchie Brothers team is extremely proud of Ann for this well-deserved honor. With that, back to Ann.
spk16: Thank you, Eric. Thank you, Eric. It is a privilege to accept this award on behalf of the incredible team at Ritchie Brothers. As we continue our transformation to a global marketplace, we continue to innovate to enhance our customer's experience and being recognized for this strengthens our resolve to go even further and faster. It is in the spirit of this innovation that I'd now like to turn to the exciting news we announced this morning of having entered into an agreement to acquire IAA. I'm going to walk through some of the reasons why we think this is such a compelling combination and our vision for our future as a combined company. I'm proud to be joined this morning by John Kett, CEO of IAA, who will also provide you with some background on the impressive business they have built. Finally, Eric will highlight the attractive combined financial profile of bringing Ritchie Brothers and IEA together through this transaction. This transaction is an important step in advancing the strategic vision that Ritchie Brothers announced in December 2020 to become the trusted global marketplace for insights, services, and transaction solutions. For the last two years, our team has been hard at work executing on that vision, delivering impressive results and creating strong momentum despite a challenging operating environment. Our relentless commitment has resulted in significant progress in marketplace technology, our inventory management system, new sales coverage models, and expansion of our satellite yard footprint. In addition, we made strategic acquisitions, such as Rouse and SmartEquip, that are foundational to our marketplace and that accelerate our transformation. When evaluating potential transactions, we look for companies with great businesses that bring capabilities that can advance our marketplace vision. IAA does just that. Through this transaction, we will combine complementary businesses operating in adjacent verticals to unlock accelerated growth. IAA will increase our scale, allow us to diversify our business by entering the large vehicle market with a proven leader, and allow us to leverage our marketplace investments over a much wider array of assets. At the end of the day, this transaction is truly one plus one equals four. As we add additional capabilities and our expertise, we will further amplify the work that's already underway at IAA. This transaction is all about creating a stronger Ritchie Brothers and IAA that will accelerate the long-term growth trajectory of the combined business. We believe that the combination will deliver significant value to our stockholders while unlocking compelling benefits for our customers, team members, and communities.
spk10: At this point, let me cover the key terms of the transaction.
spk16: We are acquiring IAA for a mix of $10 in cash and 0.5804 shares of Ritchie Brothers common stock per share of IAA stock, which translates to a total per share consideration of approximately $46.88 per share. This leads to a transaction value of approximately $7.3 billion, including the assumption of IAA net debt. The purchase price also represents a transaction multiple of 13.6 times IAA last 12 months adjusted EBITDA as of the end of the third quarter, or an implied multiple of 11.3 times when including the midpoint of our full run rate cost synergies of $100 to $120 million.
spk10: plus dollars.
spk16: Following the close, Ritchie Brothers stockholders will own approximately 59% of the combined company, and IAA stockholders will own approximately 41%. We intend to fund the cash consideration of the transaction for a combination of cash on hand and new debt. We have already secured the necessary bridge financing commitments. Looking at what this means for our capital structure, at closing, we expect to have an approximately three times net debt to adjusted pro forma EBITDA leverage ratio. As we have done in the past, we will prioritize deleveraging following the close in order to maintain our flexibility to continue to pursue our growth priorities and return of capital to stockholders. In addition, We expect to maintain our quarterly dividend of 27 cents per share as we de-lever our balance sheet while also considering future increases as our leverage continues to come down. Following the completion of the transaction, I will continue to serve as CEO and we will welcome four current IAA board members to our board of directors. Eric Olson will continue to serve as board chairman and we will provide further details on our board as we work through the integration planning. While Ritchie Brothers will continue to be legally incorporated in Canada, and we will retain our offices and employees in Burnaby, British Columbia, IAA Chicago offices will serve as the official headquarters for the combined company, given our combined significant U.S. employee and customer base. We expect the transaction to close in the first half of 2023, subject to approval by both companies' stockholders, regulatory approvals, and customary closing conditions. Now, to tell you a little more about an IAA business and the sector and geographies in which they operate, I'll hand it over to John Kett, CEO of IAA.
spk14: Well, hello, everyone. And thank you, Anne, for that welcome. I share Anne's excitement about this transaction and the incredible opportunities that we see ahead for our combined business. In terms of a 1,000-foot overview of IEA, we are a leading global marketplace that connects vehicle buyers and sellers. Simply Ritchie Brothers and IEA are very similar businesses in terms of what we do for our clients. It's just applied to adjacent verticals. We operate 210 facilities throughout the U.S., Canada, and the U.K., and a digital platform that serves customers in more than 170 countries. Over the last 40 years, we've built deep relationships with a global customer base across the vehicle ecosystem and have expanded our capabilities to create a true one-stop shop that supports customers at every step of the sale and purchase process, offering multiple bidding and buying digital channels, innovative vehicle merchandising, and efficient valuation services. This transaction marks a new chapter for IEA, and we could not think of a better partner than Ritchie Brothers. Through our discussions, we've come to appreciate just how well Ann and the rest of the team understand our industry, as well as how applicable Ritchie Brothers' platform and capabilities are to our ecosystem. Because of this, we are highly confident that together, we can more effectively unlock the tremendous market opportunity for IEA. This is an incredible milestone, and all the opportunities that this transaction creates is due to the passion, dedication, and hard work of the IEA team. Our team has made significant strides to build out our technology, enhance our data analytics, and improve our efficiency to deliver improved value to our customers. With Ritchie Brothers, we believe the best days are ahead of us as we'll be able to enhance our business for customers as we grow together. And of course, I'm pleased this transaction will also maximize value for our stockholders through the immediate cash component and the ability to participate in the substantial growth opportunities ahead for the combined business. Turning to the next slide, this is a snapshot of the US used vehicle market. The used vehicle market is stable and steadily growing, supported by the consistent outflow of vehicles into the secondary market. On average, we see about 40 million used vehicle sales a year, about a third of which leave the car park, with the remainder going through the secondary sales that place them back on the road.
spk13: That equates to approximately 12 million vehicles in our market at any time.
spk14: If you do the quick math, given that there are on average 14 million vehicles entering the market every year and only about 12 exiting, that means that the number of vehicles on the road increases each year, the growth of our market. Let me turn to the next slide. Our business has a long track record of growth through various economic cycles. Since 2004, we've driven consistent growth. In fact, over this period, the compounded average revenue growth rate has been approximately 12.7%. We have strong secular tailwinds in our industry that we expect to persist for the long term. More vehicles are in operation, and the average age of the car park has increased over time. Compounding these factors is the complexity of newer vehicles, particularly over the last 10 years or so, which has led to a steady rise in repair labor and parts costs. And of course, as a result of the constraints on the new vehicle market, we've seen higher utilization rates for recycled parts. These factors together are leading to consistent growth for our market and appreciable runway for potential future expansion. with Ritchie Brothers, we will be able to seize upon these opportunities. With that, I'll turn it back to Ann to talk about the compelling combination of the similar business solutions and complementary customer bases.
spk16: Thank you, John. In some ways, it's like a homecoming for me and many members of the leadership team, as cars and insurance carriers represent a vast amount of our collective backgrounds. I'm personally looking forward to reestablishing those relationships, as we look towards the future. It's important to recognize that despite IAA having different end markets, we both provide tech-enabled business solutions for our respective customers. As you see on the left side of the slide, our business processes are very similar. From consignment of commercial assets or vehicles, to appraisals and inspections, to data and information analytics, all the way through transaction solutions and services. At the end of the day, the truly complimentary nature of our businesses is why we believe this is such a compelling transaction. What gives us unparalleled conviction in this transaction is this leadership team's deep knowledge of IAA's business. We know the vertical, we know the players, and we know what it takes to achieve success, a relentless focus on the customer, Moving to the next slide, the strategic rationale for this transaction covers a wide span of categories, from driving best-in-class customer experience and engagement due to our omnichannel platform, to accelerating growth and innovation across a wider array of verticals, to increasing scale and diversification, which, as I mentioned earlier, will allow us to achieve significant annual run rate cost synergies of 100 to 120-plus million by the end of 2025. We believe these cost synergies are highly achievable and will look to identify additional opportunities throughout our integration planning process. That said, the transaction is expected to be accretive to Ritchie Brothers' adjusted earnings per share by low single digits in the first full year following the transaction and mid-teens after that. Importantly, this accretion excludes potential revenue opportunities that we believe we can unlock together across our expanded addressable market.
spk10: The complementary nature of our businesses, including our well-aligned customer-centric cultures,
spk16: will allow us to drive profitable growth and improve returns to efficiency as we combine our technology platforms, similar business processes, and yard footprints to unlock future growth potential. Now, let me focus on the diversification aspect of the transaction, which creates more resiliency in our business models. Our combined company would have a pro forma GTV of approximately $14.5 billion for the trailing 12 months. Both our businesses leverage a consignment and inventory revenue model. IAA diversifies our business by expanding beyond commercial assets into an adjacent vehicle protocol. with our revenue derived more from sellers and IAA's revenue derived more from buyers. Let's go back to the example that I just gave about our combined yard footprint. The transaction will also allow us to expand our presence in key U.S., Canadian, and European geographies by combining Ritchie Brothers' existing footprint of over 40 owned and 24 leased facilities with IAA's footprint of approximately 210 facilities, many of which are leased. Together with IAA, we will have new opportunities to advance our yard strategy more efficiently with a combined 13,600 acres of yard capacity in key regions across the United States and internationally. We will be able to leverage our broader footprint by strategically increasing capacity to serve both commercial asset and vehicle customers. This will be particularly powerful in the case of catastrophic events, as we will have more yards where our customers need us most to ramp up capacity. In particular, Ritchie Brothers will bring additional capacity in states where catastrophic event risk is the highest, such as Texas and Florida. Additionally, we will be closer to customers of both businesses enabling us to serve them faster and more cost-effectively than ever before. I'll now turn the call over to Eric, who will speak to the significant value creation opportunities we see ahead for the combined company.
spk02: Thanks, Anne. As one could expect with similar business models, we expect to achieve 100 to 120 million plus in annual run rate cost synergies by the end of 2025. We expect these These cost synergies will primarily come from the back office, finance and technology, general administrative, and operational areas. While we are only quantifying the expected cost synergies from the transaction today, as Dan highlighted, we also expect to unlock an array of incremental growth opportunities over time. These will include cross-selling opportunities for services, such as Ritchie Brother Financial Services, increased automation to support a frictionless customer experience, accelerated marketplace innovation globally. On this next slide, let me discuss the highly attractive financial profile of the combined company. Sam previously discussed the more than the doubling of our combined gross transaction value, or GTV, from $5.9 billion to $14.5 billion. Likewise, The last 12-month revenue is also more than double, growing from $1.6 billion on a standalone basis to $3.8 billion combined. What is equally compelling is the doubling of our profitability and cash flows, even before we consider synergies. On a pro forma LTN basis, the combined company would have an adjusted EBITDA of approximately $1 billion. And as we consider a quick deleveraging post-close, from an expected initial leverage ratio of approximately three times, combined company's LTM free cash flow of approximately $800 million, free synergies, is expected to be extremely helpful. With that, I'll turn the call back to Ann to wrap up our comments before we take your questions.
spk16: Thanks, Eric. I want to reiterate how enthusiastic I am for this transaction and the compelling benefits we believe it will deliver to both of our company's stakeholders. With IAA, we will be able to accelerate our progress to create a leading omnichannel platform with a comprehensive suite of tech-enabled services and empower our customers with insights to help them make the very best decisions. We will do so by bringing together two of the most talented teams in the industry and fostering a customer-centric culture rooted in a commitment to innovation. Running a business of this size will require the combined talent of both of our organizations, and we expect to create new and exciting opportunities for employees as we grow. Scaling our business will also allow us to even better support our local communities with more jobs and by expanding on our ESG priorities to help advance a lower carbon future. With enhanced scale, an accelerated platform for growth, and a more resilient business model, we expect to be able to deliver enhanced value to stockholders of both Ritchie Brothers and IAA. Thank you all again for joining us today We look forward to welcoming the IEA team to Ritchie Brothers and coming together as one organization to unlock the incredible opportunities we see ahead for our combined platform. Just as a note to participants, we please ask that you focus your questions on the transaction. And with that, operator, please open the line.
spk17: Thank you. ladies and gentlemen we will now begin the question and answer session if you would like to ask a question please press star followed by the number one on your telephone keypad if your question has been answered and you would like to withdraw it please press star followed by the number two and kindly keep in mind if you are using a speakerphone to please flip the handset before you enter any keys Your first question will come from John Healy of North Coast Research. Please go ahead.
spk08: Thank you. Congratulations to everyone involved here. Truly a transformative day that I don't think many of us had on our bingo card this morning, so congrats. I wanted to ask two questions. Anne and John, maybe you could give us a little bit of backstory, maybe just about how this acquisition came together. Was this a process, John, that you guys were running. And then secondly, when the deal closes, is there any sort of change in control provision relating to seller contracts on the insurance side of things in terms of how those relationships might evolve or be moving around a little bit? Thank you.
spk16: Hi, John. It's Anne. Let me start, and it's not often when we can surprise you guys, so I think that's a good thing. Thank you for asking about the backstory because I do think that really is a fantastic setup. So, first of all, IA is a company that I have known and admired in John and his management quite some time. As a reminder to those on the call, The previous business that I was with was in the collision repair space, so it was very much in cars, and then obviously if a car cannot be brought back to its former condition, it would be considered a total loss and then would obviously go into John's ecosystem. Also, as a reminder, a huge percentage of the leadership team has both. the background in this vehicle and insurance ecosystem. So that's number one. We've known each other for a long time. What became apparent after we rolled out our strategy in 2020 for becoming a marketplace for insight services and transaction solutions, we were really looking for anything that could accelerate our journey. So when you think about it, that really comes in two forms. So either in terms of M&A, right, there's a lot of organic things. But in terms of M&A, we would look at incredible businesses that could accelerate us. And some have to do with capabilities, like a Rouse or a SmartEquip. They added capabilities to us. And some have to do with scale, right? When you are a marketplace, scale is If you want to pick a single KPI once the capabilities are behind you, scale is it.
spk10: Organically, it's time to drive.
spk16: If there's an M&A opportunity like this is to increase it, it's just magical. So let me just talk about how we saw the IEA business from our scale. So first, The completely complementary nature of the business. Let me just explain again. For our auction side of the business, which is our primary transaction solution, here's what happens. A piece of yellow iron shows up at a yard. And here's what happens for John and IA. A salvage car shows up at a yard. After that, largely what happens is pretty much the same. We check it in. We inspect it. We market it if a title and lien is needed. We then auction it. and then were transacted across one of our many channels. We then collect money from buyers and then pay it out to sellers. So it's wildly complimentary, which gives us a lot of confidence, obviously, about the economies and the synergies, the cost synergies that we've signed up for. What's also incredible about the salvage car business is although cars are cyclical in nature, the salvage business is actually very similar to ours, where it's both cyclical and counter-cyclical. So when prices of used cars are up and there's a lack of availability, it's the same with us. They have less units, but higher prices. When the cycle turns, they have more units, lower prices. So it's actually very complementary in nature and also similarly acyclical to our business, which we loved. And then there's growth. And then there's growth. And really, when we think about the growth of these businesses, think about a short, mid, and long-term growth together. The shortest example is our ability to leverage the collective yard footprint that we have. So we quadruple the yard footprint. For IAA's customers, that means that in case of catastrophic events, so on and so forth, they can leverage a lot more of Richie's yards. For Richie customers, that means lower cost of transportation, as we've told you guys, and an acceleration of our satellite yard strategy. So that's kind of the very shortest term. Midterm, think about services. So again, we said the magic of Marketplace, how you guys will know we're successful is that our services revenue will outpace our GTV growth because you're going to see attachments of services much quicker. Obviously, having an all-new vertical to attach services to, be they insights or our own services or third parties, it's incredible. And then you move to the kind of mid and long term, and then you can leverage that service scale of the global marketplace incredibly, whether you want to think about a return on any technology investments now being spread across a much bigger ecosystem, an ability to accelerate innovation. That's why we're so confident that one plus one equals four. So I know I combined the backstory of we knew each other to, you know, we are constantly, since December 2020, looking for ways to accelerate the marketplace, the ability to both drive scale, drive synergies, and move that much quicker. There are a few we couldn't think of any better suited than IEA with an incredible management team. And I will, on the change of control for insurance carriers, number two, I am going to turn it over to John to answer that.
spk14: Sure. Thanks, Ann. Yeah, I mean, and John, the answer is no, that, you know, obviously as part of the diligence process, that there should not be any issues with our structures going forward. And, you know, yeah, no, just excited about this, you know, listening to Ann thinking about our journey to this spot, and it's actually very similar in, as our board and my team were looking at our strategies going forward, thinking about how we can continue to scale up and to build out our frictionless platform that we've been talking about. I mean, that fits right into our strategy. And the more that we began to speak with Ann and her team, the more similarities we saw, and it really made for an exciting combination. So, yeah, I mean, it's great to be here and looking forward to the future of this combined business.
spk17: Your next question comes from Michael Dumais of Scotiabank. Please go ahead.
spk03: Hey, good morning, guys. Again, congratulations on the deal. The question I had was, you quantified the cost synergies here expected from the deal in quite some detail. I'm just thinking about maybe a little bit more detail on the revenue synergy opportunity, how that compares, you think, to the quantified cost synergies, obviously longer term, just to give us a sense. Thank you.
spk16: Yeah. Hi, Michael. It's Anne. You know, it's interesting as we were putting together kind of the package for you guys, you know, the advice we were largely given is, look, cost synergies is the stuff that obviously investors and analysts kind of can take to the bank. Revenue synergies are largely discounted, you know, kind of in the initial days of a transaction. But I will tell you, as excited as we are about the 100 and 120, that's the take it to the bank on the cost side. the revenue synergies are orders of magnitude above that, orders of magnitude above that. So let me explain again. Even in the shortest term, the ability for us to leverage our collective yards to drive the critical customer experience, there's an incredible amount of growth on both sides every time we make it easier and better for the customers to do business with. the incredible accretive nature of an ability to attach services to underlying GTV. And we've just more than doubled ours with this transaction. And then the idea of scale in a marketplace. Just think about the incredible power of every investment we make being amortized over that much more volume. Even investments that are kind of, we'll call them like basic building blocks of checkout and my account to things that actually drive revenue, be they services that we provide directly or through third parties. And, you know, we take a fee. That scale is just incredible in the marketplace. So, again, we're not going to quantify the number, but then the global piece of it where, you know, for us, we have a global footprint. As you saw in the chart with the yards, IAA largely doesn't have a huge global footprint. The vast majority is U.S. We're also looking forward to our own global expansion as well as driving theirs collectively. And again, the single biggest cost for all of us is, and this is the beauty of an omnichannel platform, is the arts, right? Because let me explain what omnichannel is just for a minute, again, for those that are maybe new to one or both sides of this business. Even though we transact, IEA transacts entirely online, we transact mostly online. We have few, like Orlando, where we kind of do it both ways. Our yards are busier than they've ever been before as are John's, right? Because what our customers want is they truly want the omni-channel. The sellers want that equipment or the vehicles. They want it gone, and our yards are very busy. and then the buyers want to buy online. And so the yard footprint becomes just an incredible unlock of value to both sides of the house, and it just so happens that we have quite a few yards, even in the U.S., that complement IAA's very large footprint, especially in the areas of catastrophic events where the insurance carriers need us most, and then obviously the global expansion. So I'm not going to quantify it, lest every banker falls on a sword except to say it is orders of magnitude bigger than the cross synergies that we're quantifying today. It's really incredible.
spk17: Ladies and gentlemen, to ensure everyone has a chance to ask their questions, please limit yourself to one question. You may re-queue up, and if time permits, we will definitely take your follow-up. Your next question will come from Daniel Imbro of Stevens, Inc. Please go ahead.
spk09: Hi, guys. This is Joe on for Daniel. Thanks for taking our questions. So on the insurance companies, was wondering if Ritchie Brothers has pre-existing relationships here. And if not, does that potentially present a risk or what are your thoughts here? Thank you.
spk16: Hi, Daniel. It's Ann. Nice to meet you. Ritchie Brothers does not have insurance relationships, but Ann Fandosi and the vast majority of the leadership team does. In the prepared remarks, we said it's a homecoming. The prior business that I ran right before Ritchie Brothers was called Abracadabra. We were acquired by our biggest competitor. We were private equity backed. Our customer base was these very same insurance carriers. So the relationships run deep, including, I'm not going to say how many, but quite a few texts this morning saying congratulations and welcome home. So that gives us a little bit of an indication about the relationships.
spk09: That's super helpful.
spk10: Thank you, guys. Thanks, Joe.
spk17: Your next question comes from Gary Prestapino of Barrington Research. Please go ahead.
spk04: Hi. Good morning, all. First of all, I would assume there's no go shop provision on this transaction?
spk10: Hi, Gary. I think that's a safe assumption.
spk04: OK. Great. And then could you maybe explain you know, these yard synergies. I'm trying to grasp where the synergies can come in, because obviously IAA has much smaller yards and not going to be capable of handling a lot of heavy equipment, or maybe I'm wrong on that. And John, you can comment on that. But are you looking at the synergies more so that you can port some of IAA's business to your existing yards in the United States and Canada?
spk16: Yeah, so Gary, hey, it's Anne. I would say both. So let me explain. Don't think of yards as our traditional yards with the big auditorium. Think of yards as our satellite yard expansion strategy that we have credited with partially driving the growth numbers you're seeing from us. Those are much smaller than our historic footprints. So yes. And then don't forget the way we bring those to market now is that the equipment sits in the satellite yard, but we make it available across our various sales channels, be it Marketplace E with a reserved auction, or we link it into a regional event and make them available virtually. So the answer is both sides. And really think about the IAA yards as helping us facilitate the local yard strategy and our yards helping facilitate there at a minimum catastrophic events.
spk04: Okay. Thank you.
spk16: Thank you.
spk17: Your next question comes from Michael Fenninger of Bank of America. Please go ahead.
spk05: Hey, everyone. Thanks for taking my question. The first one, just to be clear, is there a customer crossover here? The typical customer of IAA, who is that? And do they use Ritchie Brothers? Have they used do they use heavy-use equipment on a daily basis? I guess I'm trying to assess who the main customers that are being servicing on either buyer's or seller's side of IAA, and if they're similar to your current customer base.
spk16: Yeah, we'll turn that over to John to start.
spk14: Yeah, so our typical customers are insurance companies, so we're selling damaged or high mileage vehicles for insurance companies, fleet providers, and so on. So we do sell a small amount of heavy equipment salvage. So there is some overlap there, not very much, but there is some overlap. So it is a different supply source for sure. And the buyers, there's going to be limited overlap to start, but certainly I think the the virtues of having a much bigger marketplace is going to allow us to expand who we're attracting on both the buy and sell side, broadening the supply of assets that we're putting through our platforms.
spk16: Yeah, and that was great, John. Thank you. And Michael, let me just add to that. Think of this as diversification, but with the best possible synergy ability. So think about the fact that It's new sellers giving us a much bigger base. It's new buyers giving us a much bigger base. Completely common business processes allowing us to leverage all of those cost efficiencies. But then the needs of those customers in terms of services, in terms of yards, in terms of a frictionless marketplace, those are the same. They're just applied a different way. So it's really kind of think of diversification and scale in its best form. with an incredible cost efficiency and the leveraging of commonality that honestly you don't often find.
spk17: Your next question comes from Craig Kenison of RW Baird. Please go ahead.
spk18: Hey, good morning Anne and John. Good to hear from you both and thanks for taking my question. And I'm curious what the implications are for IMS and what this says about momentum behind that platform.
spk16: Yeah, Craig, thank you for the setup. We are excited. So our inventory management system is being designed and executed as a ubiquitous kind of hub, if you will, for all customer needs. So again, when you think about IMS as the gateway, it then becomes the gateway into the entire ecosystem. So whether or not you're a construction piece of equipment, you're a mining piece of equipment, you're a vehicle, it all will kind of come together there. That's where all of the data and analytics come. then start getting attached. That's the basis on which services get offered. And again, it just gives us an incredible scale, right? Because when you're investing in an IMS, you're investing in the underlying technology. The cost of that investment is largely the same, but now we can amortize it off on a much wider degree of units. So it's an incredible scale play.
spk17: Your next question comes from Sabahat Khan of RBC Capital. Please go ahead.
spk12: Hi, thanks and good morning. If you could maybe just share a little bit on, I guess, the buyer base for IIA. Like, is it as simple as salvage yards or is it maybe a broader buyer base out there?
spk13: Oh, yeah.
spk14: Thanks for the question. Our buyer base is really broad. We've got thousands of buyers on our platform every week from across 170 countries. They're looking at the vehicles for a variety of purposes. There's sort of the kind of stereotypical, they're buying it to part it out, to use the parts in a repair. But we've got rebuilder buyers who are buying the vehicles to fix them up. We've got a significant export market where we're shipping vehicles out of our home markets into, again, 170 countries where they are primarily rebuilders. So they're arbitraging the labor market. and to a certain extent parts costs that they can obtain in a secondary market where they can buy the damaged vehicle, buy the parts, ship it somewhere else, and then repair it and put it back on the road to provide affordable transportation in all kinds of emerging and first world markets as well. So it's a really deep and
spk13: you know, fragmented buyer base. We have very, very low concentration on our buyer base. We're, you know, we're adding to the pool every month, every year.
spk14: And we really, you know, continue to reach out to all kinds of different, different buyers.
spk10: I agree. And then I guess just given the name.
spk17: Your next question comes from Carolina Jolie. of Gabelli, please go ahead.
spk15: Any antitrust issues here? And then I just also just wanted to ask an actual question just about is there any, I know IAA, is there any change or differences in the ownership of the vehicles or parts or how they impact the balance sheet across both companies?
spk14: So the first part of your comment got garbled, but in terms of, so we are primarily a consignment model. you know, vast majority of the vehicles in the U.S. and Canada for sure, we're just, they're consigned to us and then we sell them on behalf of our sellers. We do buy a very small percentage of the vehicles in the U.S. In the U.K., we do have a, the model in the U.K. is much more of a purchased vehicle So we do buy the vehicles from the insurance companies there, but it's obviously a much, much smaller piece of the business than in the U.S. or Canada.
spk16: Perfect. And then maybe Eric, our CFO, can take the antitrust portion of your question.
spk19: Yes, thanks, Anne. So we don't expect any antitrust issues with this transaction. As Anne and John talked about, we operate in different markets and such. Don't expect any challenges.
spk10: Your next question comes from Brett Jordan of Jefferies.
spk17: Please go ahead.
spk07: Hey, good morning, guys. Quick question for John. Did you run a full process in the sale? And then a question for Ann. On the recent market share shift, you know, obviously some attrition from IAA. In your due diligence, I guess, what gives you confidence that market share has stabilized or is growing from here?
spk14: So, you know, the details of how we came together obviously will be in all the public documents, but this really was a merger. It was something that I think almost on parallel paths Richie Brothers was thinking about their future strategy as we were doing that same kind of work. And we connected and realized that there's just a lot of similarities to the businesses that we could leverage off one another to build a really, really powerful business going forward.
spk16: Yeah. Thank you for that, John. Well said. And let me answer the market share question. So the way that I look at market share is that market share is an output. It is not an input. It is the output of understanding your customer exceptionally well and then providing solutions for that customer that are market leading and truly unique and innovative. I am confident in our ability to do the latter. We've proven it time and time again. And so market share is just something that naturally follows.
spk10: Our next question comes from Brian Fats of Raymond James.
spk17: Please go ahead.
spk01: Yeah, good morning. Thanks for taking my question. John, could you just talk a bit about IAA results over the last couple of years and maybe what led to the large jump in revenue, just trying to get a gauge of the sustainability of that growth?
spk14: Yeah, so I mean, Over, I think as the team laid out in the presentation and even in my comments, we have a long history of solid growth and revenue. A couple things happened over the last few years related to both initiatives that we undertook to move to a fully digital platform, which allowed us to drive higher levels of revenue per unit, and at the same time, the marketplace prices had gone up as a result of what was happening in the used car market. We were able to leverage, you know, or take advantage of that because our... Our revenue model is really, you know, it's a marketplace, so we're charging both sides, both the buyer and the seller. The buyer fees are much more tied to the selling price of the vehicle, so as values were going up, we were able to extract a higher revenue per unit for our services. And then the final thing I'd add to it is just we continue to also build out our ancillary services, so we're now providing much more comprehensive services, particularly on the sell side, that has helped grow our revenue. And that really ties back into why this combination is so powerful. It's because of many of the insulator services that Ritchie Brothers offers today. In their vertical, we think there's going to be opportunities to take advantage of that
spk10: further provide levels of service in the insurance and fleet and dealer market.
spk17: Ladies and gentlemen, once again, if you would like to ask a question, please press star 1 at this time. Your next question will come from Vincent Foley of Barclays. Please go ahead.
spk06: Thank you, and good morning. Two-part question. One is, as we go through the press release and the slide deck, is it your intent to keep the IAA bonds in place and not trigger a change in control? And then, what is the expected rating of the pro forma entity at this point? Thank you.
spk19: So, thanks, Vincent, Eric. So, we will be retiring all the IAA debt as part of the transaction and taking out New debt is part of this. We have a $2.8 million bridge commitment. We have $500 million of bonds that we will also figure out the best way to deal with those. So the total borrowings will be $3.3 billion. In terms of the other part of the question was?
spk06: The expected pro forma ratings of the combined companies.
spk19: So I can't comment specifically on what the actual rating would be until we actually speak with the rating agencies, but we're confident that we are very strong credit. And if you look at the deck, our pre-cash flow from the pre-transaction last 12 months is $800 million. So we expect to be able to deliver very quickly post this deal.
spk06: Okay. Again, to clarify, both the loans and the bonds will be retired upon closing?
spk10: They'll be taken out, yes. Thank you.
spk17: Your final question will come from Michael Fenninger of Bank of America. Please go ahead.
spk05: Yeah, thanks for letting me follow up. Appreciate it. The heavy-used equipment market, the $300 billion TAM, that's always been the goal for Ritchie to penetrate that market. I understand you just doubled your GTV. You diversified. I guess just help some of us understand how this deal helps Ritchie Brothers' overarching goal of driving penetration in the heavy-used equipment market TAM. Thank you.
spk16: Hi, Michael. It's Anne. Yeah, believe me, this is why I'm at Ritchie Brothers is our $300 billion TAM. That's what starts it all. So think about that this acquisition of IAA and the combination unlocks growth for both sides of the house. Since your question is primarily on heavy used equipment, I'm going to focus there, but understand a similar line of thought is on the growth on IAA side. So when we think about $300 billion of equipment, think about the conversations we've had about how do we intend to go after it. First and foremost, a seamless customer experience and an ability to drive, you know, incredible recovery and then attach services to it. So think about what we've been doing. We've been doing local yards, right, to try to get at that. Again, what you just heard now is that that ability just quadrupled, okay, number one. We've been driving IMS and technology investments to do that. What you've just heard is that that is going to get turbocharged, right? So all of those investments now have a much higher ROI, and we can move that much quicker. So now you've heard that. The third is as we keep developing and investing in services, now those services can be applied to not only the heavy equipment, but they can also be applied to equipment. to vehicles, meaning that we can develop more services, we can do it quicker, we can do it at scale. So the short answer to your question is we have our eye firmly in place on our $300 billion, and all of the pieces that IAA brings allows us to accelerate us getting after it as well as, and by the way, there's a similar list on the other side for how we can help IAA achieve their commitments. So this is really an incredible scale. What's in it for the customer is our ability to move quicker and provide them even more than anything we have to date.
spk17: Ladies and gentlemen, at this time, I would like to turn the call back to Anne Fandosi for any closing remarks.
spk16: Perfect.
spk10: Thank you so much. So first of all, thank you all so
spk16: joining our call today. Let me end with this. You know, at its simplest basis, think about this combination and us acquiring IAA is, it's a new vertical, right? We have a marketplace for, again, construction equipment, mining equipment, a lot of assets, and now we've added what is primarily salvage cars as a new vertical. Everything else, the processes, the business, the technology, the marketplace is common. So it's very rare for an ability to drive scale and diversification while getting an incredible synergy on the cost side and a runway for revenue synergies that you rarely see. We are super excited about this combination. I hope you hear it in our voices. We are excited about the IA team joining the Richie others team and we thank you again for joining the call sharing our excitement and I think many of you we will be having follow-up calls with later today so thank you again and have a wonderful wonderful rest of your day ladies and gentlemen this does conclude your conference call for this morning we would like to thank everyone for participating and you may now disconnect your lines
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