Q2 2020 IAA Inc Earnings Call
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Good morning.
Welcome to the high.
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Let's go to a refund med Vice President Treasurer. Please.
Please go ahead.
Thanks, Dave Good morning, everyone. Thanks for joining us today for a second quarter fiscal 2020 earnings conference call.
They are John.
<unk> President Betsey Johnson.
Our Chief Financial Officer.
We will open the call into question.
Well, we begin I would like to remind you that certain comments made during this call regarding our plan strategy and goals and our anticipated financial performance constitute forward looking statements and are made pursuant to the within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Such forward looking statements are based.
The management's current assumption electric uncertainties that could cause actual results could differ materially from such statements.
Well, it's important factors are referred to in a press release issued today.
Included in our annual report on form 10.
Doesn't 90.
Well if you did you see on March 18, 2020, then our form 10-Q first were filed with the FCC on May six 2020.
Forward looking statements made today are as of the date of this call NIH does not undertake any obligation to update these forward looking statement.
Finally, you can refer to certain adjusted or non-GAAP financial measures on this call.
We will get makers billable.
A copy of today's press release, maybe I've seen by visiting the Investor Relations page of the website at Www Dot <unk> Dot com.
I'll now turn call over to John John.
Thanks, Larry.
Yes for our second quarter earnings call.
Starting out we'd like to.
Workers for their tremendous up.
Over 19 has had a far reaching effects from across the <unk>.
For our employees, who have been impacted I want to extend all of our well wishes to you.
Okay.
This.
Hey, as we continue to navigate through the impact of macro headwinds.
Got quickly focused on the task at hand, and respond to implementing actions to ensure the safety of our employees serve our customers manage cross to align with the reduced volume yeah.
I'm proud to say that we were very successful in each of these initiatives.
As we discussed at length on our last conference call you'll be effects of the response to the pandemic.
Stay at home orders drove significant declines in miles driven.
Resulting in a sharp reduction assignments.
On that.
That's economies began to reopen.
In late April.
We had anticipated that as these dynamics changed we win as well as assignments.
Since our call in early May even faster rate than originally anticipated.
At the time of our Q1 call miles driven were down approximately 30% from <unk>.
To cope with levels.
The main this it improved being down.
Approximately 10%.
By the end of the quarter miles, driven where essentially back that pre covert 19 levels.
Assignment volumes consistent with the trend miles driven were up approximately 35% from that.
And continuing to increase quarter down less than 15%.
From pre cobot 19 levels.
Units sold bought an increase that a gradual pace.
Three week for the rest of the quarter is significant increase in net revenue per unit driven by several factors.
Buyer demand outpacing supply.
Our move to 100% digital auctions platform, including 360 view.
We also.
So noted our Q1 call, but revenue per unit it started to exceed pre covert 19 levels.
Revenue from.
Turning to continue to increase gradually for the remainder of the quarter, reaching new record levels in the second half of the quarter.
So while revenue fell about 19% for the quarter overall versus the prior year. We're pleased with the improvement we saw in assignments unit per unit from their respective trough levels.
The EBITDA fell approximately 27% for the second quarter.
For the period.
Yes.
We took swift actions on the expense side realigning expenses.
The current volume levels, while continuing to prudently invest.
To advance our strategic priorities.
Yes in combination with the higher revenue per unit, we experienced helped mitigate the magnitude of de leverage we would normally see with the night as volume trends continue to ramp back up certain costs.
Including labor hours as branch operations across many locations.
Again to normalize.
Well, our second quarter financial results were materially impacted by macro developments I am proud of our teams resiliency and focus during this time.
As we already disclosed in early April to digital only auctions.
And eliminated physical auctions in the U.S.
From shifting to a fully online.
Model are flowing through our financial results as we have reduced costs associated with the physical appliances to auction day labor.
Additionally, we realized.
The revenue benefits from online fees associated with these digital sales.
Along with the financial benefits from this transition.
We continue to received very positive feedback.
And our online auction plant.
Form and enhanced services is 360 view.
While we accelerated the timing of our digital transformation, our remaining margin expansion initiatives remain.
I mean, we communicated back in March.
We're already seeing some early progress in the tolling area through implementing improved route.
During the quarter. We also continue to execute against our other strategic growth priorities and as a result, our second quarter benefited from our first and sellers.
In May we announced the introduction of I interact the industry's first comprehensive merchants that leverages image.
As a nation and key tools, such as 360 view feature tour and virtual engine start.
This merchandising platform was designed using extensive research to create.
Greater digital trust and efficiencies for buyers, which in turn.
Bidding and buying.
Iraq has been very positive.
During the quarter, we also enhance our service offerings globally by introducing threesix.
Envision salvage management system in the UK.
While still early days for many of these tools. We are pleased with the progress we are much.
Baking in both our us.
We've also.
So continue to strengthen our real estate portfolio ability, we now have as an independent Standalone company.
As an example, after considering both the financial and strategic.
Dick implications, we recently company.
We've also expanded so putting additional capacity to support growth.
With our strong cash flow, we will continue to maximize opportunities with regards to real estate.
Utilizing both.
Correct purchases of land.
Second quarter was better than we anticipate.
While we are cautiously optimistic, but the worst of the covance.
Thank you and impact is behind US I am situation continues to be uncertain and evolving and we are actively monitoring developments in the different markets.
Given the lag effect the decline in assignments asked with regards to volume.
We are continuing to see an impact being sold.
So far this quarter, we've seen improvements in both assignment volumes and units sold since the end of the second quarter.
Revenue per unit remains consistent with what we experienced at the end of the second quarter.
Our finance.
It's a position and balance sheet remained very strong with over $540 million of liquidity.
Providing us with the financial flexibility to invest for the long term thing I want to thank all of our teams for their content.
And the resiliency adaptability teamwork and customer focus that they have demonstrated throughout this period.
I was recently named a 2020 best workplaces in Chicago, and a great place to work in the U.S.
Yes.
These certifications and recognition could not be achieved without our great people that I will turn the call over to vans.
As John mentioned earlier, while our second quarter performance was materially impacted by Cobot 19, we did see stronger than anticipated rebound in me underlying drivers of the business and we're continuing to see stable.
Before I touch on our current.
Current trends, let me first review key financial highlights for Q2 performance.
I will focus my discussion today in our adjusted non-GAAP results and just touch on some.
Please see today's press release for more details on our Q2 financial performance and our methodology when calculating non-GAAP results.
For the second quarter consolidated revenues decreased 19% to 296.8 million from 366.4 million in the second quarter of fiscal 2019 organic revenues, which excludes the impact of our DDIY acquisition as well as form foreign currency.
Cline, 90.3% to 295.6 million.
For the fourth for the quarter volumes declined approximately 28.8%, which was partially offset by higher revenue per vehicle as John reviewed we have seen higher proceeds due to strong demand and more limited supply and we're also seeing benefits from Threesixty view and our enhanced merchandising platform along with.
Duration of Internet purchases all of these factors are driving higher revenue per vehicle.
Ranch consigned inventory declined by 16.6% versus the prior year, primarily due to the impact of coded 19 as noted we did see assignments gradually improve throughout the quarter.
Looking at our geographic performance volumes were impacted for both our us and international segments due to the impact of code 19 on vehicle miles traveled important to also remember regardless or international segment, we're comparing to a strong performance from last year that saw revenues increased 39% where the pie.
I have here for the prior period, driven primarily by a higher mix of purchased vehicles.
Gross profit decreased to 111.7 million from 138.7 million in the second quarter of fiscal 2019.
Despite the lower volume gross margin was only down 30 basis points in the quarter.
Benefited from both strong revenue per unit as well as the completion of our buyer digital transformation and other cost reductions.
As DNA expenses were 34.3 million compared to $33.7 million in the prior year adjusted asking expenses were 32.9 billion, an increase of 4.1% compared to 31.6 million in the prior year period. The increase was driven by public company costs.
And a higher reserve for credit losses, as well as cost specific to the odd which was acquired in late July 2018, partially offset by lower incentive compensation and overall cost and expense discipline as we manage through the pandemic.
Adjusted EBITDA decreased by 26.5% 78.9 million from 107.3 million in the second quarter of fiscal 2019, primarily due to the decline in revenue.
Moving the impact of foreign currency as well as VDI organic adjusted EBITDA was 79.3 million for the second quarter fiscal 20 point a decrease of 26.1%.
The effective tax rate was 24.4% versus 27.9% in the second quarter of fiscal 2019.
Second quarter 2019 had certain discrete tax items associated with the spinoff from car, which adversely impacted the rate last year by 107 basis point.
We also benefited this quarter from the implementation of certain tax optimization initiatives.
Net income decreased to 33.2 million from 51.3 million in the prior year adjusted net income decreased to 36.6 million or 27 cents per diluted share compared to 59 million for 44 cents per diluted share in the second quarter fiscal 2019.
Turning to our cash flow and balance sheet capital expenditures for the quarter were 11.5 million compared to 15.9 million in the prior year. We continue to take a disciplined approach to capital spend although we did acquire some land opportunistically.
As John mentioned, our balance sheet remains strong for the first six months of fiscal 2020, we generated free cash flow of 195 million ending the period with a leverage ratio of 2.9 times, we generated strong kit free cash flow due to the work working capital benefit associated with lower assignments as well as the differ.
Hello, certain cash tax payments, including federal state local and provincial taxes in the us Canada and UK.
Cash benefits from taxes taxes is expected to mostly reverse in Q3, and we would expect working capital the use of cash in the back half of the year at assignments recover.
We're ending cash balance was 187 million and total liquidity was 542 million, which is more than double the level that we had at year end.
Our financial strength gives us the flexibility to manage through the Golden 19, pandemic, while continuing to invest in and execute our strategy.
As noted in earnings release, given the continued uncertainty regarding code 19, we're not providing guidance. Today. However, let me share some color that may be helpful quarter to date as John said, we have seen an improvement in both assignment volumes and units sold since the end of the second quarter and revenue per unit trends have feedback.
That rate.
While this is encouraging it is hard to determine the duration of these elevated revenue per unit levels that we would expect that out supply returns the strong revenue per unit trends may moderate.
In addition in Q3, we will also be anniversary the price increases implemented in July 2019, with that we'll open up the call to questions operator.
Yes. Thank you.
We'll now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
You are using the speakerphone, please pick up your handset before pressing the keys.
To withdraw your question.
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At this time, we will pause momentarily to assemble a roster.
Our first question comes from Stephanie Benjamin of Trust. Please go ahead.
Hi, good morning.
Hi, good morning, Stephanie.
Thank you for the question I wanted to touch a little bit on that.
If you could give some color on I guess in June trends I know you noted noted that assignments going down less than 15% is that from trico, the gal levels or is that year over year.
You mentioned that there has been going into Q3, Q, what that ending level was for the second quarter.
Yes definitely this is Vance, yes, what we mentioned on the call being 50% down that relates to pre coven levels AWS.
So that's a we're assignments.
Relative to where we were.
Before the pandemic hit us.
You further clarification and then I was hoping you could touch a little bit on that.
And that the new yards that you court heard during the quarter, you know with an opportunity where.
Yeah, that's based on geographic opportunity or maybe just some more color.
No. This was the longer decision to expand your.
Real stay with existing yards.
Great. So you just talked about before.
Yes.
Any investment that we make we're going to look at what we believe economic returns are there is also a strategic element to it.
About where it's at where we think.
And the relative and again and the relative value of the Atlanta itself. So in a car.
Buying it made more sense than leasing it.
Made where we went out and lease property to expand our our footprint.
Got it and then did you are bredesen walkman, Jay grants or kind of you know Baird.
The you know somewhere closer to the ocean than others for that.
I really wasn't it was really more around where we saw their growth.
Potential for us.
Got it well. Thank you so much for your time.
Thank you. Thank you. Thank you Stephanie.
Thank you. Our next question comes from Daniel Enbrel of Stephens, Inc. Morning, guys. Thanks, David.
Good morning, Warner start on the.
Strengthen revenue per unit, obviously, a nice Dan.
You would affect your John between supply demand and online. He can you help parse out kind of what was the stronger of those drivers maybe public bucket or rank order the strength.
You include any benefit from your pricing optimization, you called out in your long term plan or is that not rolling and yet.
Well, so I'll take part of a Vance you can you can weigh in you know, it's always hard to parse out what drives proceeds higher whether you know the certainly.
Because of supply and demand, we really believed that our new platform, we're seeing really great engagement with buyer. So were attributing at least a portion of it too to our own efforts.
But as you know like we always talk about with proceeds there's a variety of factors that go into it theres metal prices used car prices.
Parts prices, all those things enter into what's driving the selling price of the auction and again, we believe with it we have developed a platform. That's it's all things considered equal.
And then in terms of price optimization band Yeah, Yeah totally notice Echo what John said that we believe that all those things are contributing.
It's tough to really break out maybe more than the others. Although we do you think that limited.
Why is having an impact.
On on proceeds in revenue per unit.
As it relates pricing optimization we.
We have.
Or just really kicking that off.
And so we have that's really not part of what the impact is today.
Great. That's helpful color and then you know switching over the buyer didnt all the things from cost savings there.
We're already seeing the full run rate benefit I think when you first quarter. It out it was you know.
45 million annually at the midpoint already seeing the full.
Full run rate benefits of that I'd be thinking about long in the back half of the or.
Yes, Dan as you may recall.
Our digital transformation has really there's really three drivers of those benefits. There's the reduction in cost of for auction day cost and reducing auction your cost and other auction the labor costs and other cost associated with a live auctions. There then the increase in internet be so going from.
Let's say, 70% of our 200% now so that no 100% of the units are we're getting yet and then third component is.
The implementation of things like three safety features or things of that nature to our plan we face.
Given that we know how to benefit on proceeds and revenue per unit.
So those are all things that impacted on the cost.
So first and foremost we're now completely done we've transitioned to complete online digital marketplace. So in effect, we are full run rate.
Going forward however, two of those three.
Factors, our volume dependent so the internet fees relative to what we laid out on our previous call. The Internet BJ be volume driven so we are effectively on a on a run rate, but we're not on the run rate that we kind of laid out because that was somewhat volume dependent same thing threesixty EU is it.
Relates to lime auction costs were on a full run rate there because it's not volume that makes sense.
Yes, no. That's helpful and then a lot one of our technique it and maybe just stepping back from the quarter. A you know last year competition, but the big focus of the market. Obviously, you guys acknowledge that but some of the share shifts can use as you look you're offering today going or how do you think with the changes you've made you do that go competitively are there any areas and your network.
You do still be no need for further improvement or just any update on how you're thinking given the improvements you made your business. Thanks.
Very good again with the implementation of hi, they interact we really think that we have deployed.
A leading platform vehicles sense and we feel very.
Good about that as well as the bound once all of our portfolio from both a buyer and seller perspective.
You know, what we've done with loan payoff and inspection.
Services and our title procurement products on the seller side and then we've talked already this morning about we're going to the buyer side I know I think we've got a really really good offering for both buyers and sellers. That's that's and again, we're getting we're getting good traction from both buyers and sellers.
In response to it.
Okay. That's good luck guys.
Thanks, Dan Thanks.
Our next question comes from Bob Labick CJS Securities.
Good morning.
Turning to Bob.
Hi.
Great.
That's one thing you've given us a lot of color already answered. Thank you for that once we get a sense of how you're thinking about the slope of miles driven recovery and how youre.
Budgeting to return labor.
To the auctions to the sites and thing that times, you said you gave us a little bit of the trend through July how are you thinking about things through year end just more generally as your return people back to the you know sort of sites.
Yeah I mean.
So we've got pretty decent visibility into miles driven.
And again, our assignment volume because there's a bit of a lag we can we can match up labor pretty well with.
Assignment volume so yeah, as we said no. It's it's basically back to where it was in terms of miles driven and assignment volumes are.
Our coming back as well so yeah I mean, we've got a we've got a flexible labor model that we can that we can.
Adjusted as we need.
Okay, Great and then in terms.
It gave us a sense of the buyer base and how they have reacted through this in terms of international buyers and I know.
You probably haven't been out prospecting as much and certainly not traveling but.
Who can the primary.
The drivers of the increase proceeds has it been more domestic buyers has it been rebuilders any kind of sense.
The buyer base and what's happening there.
Yeah, you know or early on it was much more domestic it early on it I mean in the pandemic as you're beginning to sell vehicles, we saw more disruption from international buyer community, but but the international buyers have been coming back we have seen steady progress in growth and international activity. So really it's been a pretty balanced.
Response, and again, we believe through our platform. We're re we're we're reaching and penetrating either buyers we didn't have before or buyers that we did did do business with are doing more we've deployed a number of digital marketing tools on the buyer side to recruit.
And interact and engage with buyers that.
You know a lack of travel isn't isn't really hurting our marketing efforts in that regard. So yeah. It's it has been a pretty broad recovery in terms of the buyers.
Sure. Okay. Thank you very much.
Yes, Bob Thanks, Bob.
Okay again, if you have a question please press.
Star then one.
Our next question will come from Gary Prestopino of Barrington Research.
Hey, good morning, everyone.
Good morning, you're hearing.
I just want to make sure I got this list right because there's a lot you gave US you said miles driven are almost back to pre called levels.
At this juncture right assignments up 35% from the trough in May but there are only currently is the are up close to about 85% of pre kobin levels right now is that correct.
As as of the ended the quarter.
Okay.
All right. We also we also commented that says the into the quarter that assignments in units sold to continue to increase from there as well.
Okay, that's fine.
Do you you said you consignment inventory was down 16.6% what what was your total inventory down can you give us that with the purchase vehicles or do you don't make that public.
Yes, Gary that's something we have made public previously and remember.
Purchase volumes that are small portion.
Right.
No I I understand.
I understand I, just Oh, so do you a lot of this that's where you're seeing assignments roll up and stuff like that.
Could some of that be explained by the fact, they know miles driven are up because some of that that'd be explained by the fact that you now you know when this cold, but then was was really hitting in the quarter that you know the insurance companies will more or less just totaling l. cars without a because they couldn't get the adjusters out in the.
Field to look at them.
It's hard to say you know we've heard some anecdotes around that but nothing nothing across the board that would that would.
Tell us that was our common trend or common thing.
Okay, and then in Hey miles driven are up in most major markets right even in the the areas that have it pretty badly with Cowen.
Yes, I mean, I think they're coming back.
So certainly from yeah, Gary certainly from the trough right to think about you know versus you know caught a 10 weeks after the pandemic.
So yeah across all markets, it's bounced back from their varies by market.
Alright, thank you.
Thanks, Gary Thanks, Terry.
Our next question comes.
Hey, good morning, guys.
Right.
When you first rolled out the Threesixty product you sort of comment that on what the incremental yield was yeah.
Yeah, but anyway to sort of quantify what you're seeing cienega on a like for like car basis from the digital off.
Engine recording or the for the digital.
360 in the in the second quarter.
Okay.
Yeah, I mean, Brett again, it's hard to pick apart the walls, what we're doing internally they all sort of.
There are all part of the Russell.
It is difficult for us.
Isolate the impact of one versus another.
Okay, I guess, the but the trajectory of that digital Threesixty product is seeing higher yields you think on a like for like.
Basis.
We believe so yes.
Okay and then a question on units I guess you commented in the prior or about share gain versus last do you have any way to quantify what the loss or gain impact was in the second quarter.
With us.
Something that you know theres a lot and breakfast.
Was it.
And we.
Quantify share gains per unit.
Right, Yeah, I know its a.
We certainly have it for one it is both insurance and Noninsurance right.
We have a sense of kind of.
But what the shared looks like some portion of the insurance.
Hi, that's much more difficult to quantify.
Given.
I mean, there's multiple aspects of noninsurance multiple players that are involved in that.
Right. So that's much more difficult okay, great. Thank you.
Thanks, Brett maybe.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
For your time and your attention on your.
To support of I, Oh, we look forward to updating you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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