Q3 2020 IAA Inc Earnings Call
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I would now like to turn the conference over to a regional Vice President Treasurer. Please go ahead Sir.
Good morning, everyone and thanks for joining us today for a third quarter fiscal 2020 earnings conference call.
Speaking today are John Cat, Chief Executive Officer, and President and Vance Johnston, our Chief Financial Officer.
After John advances made their formal remarks, we will open the call to questions.
Before we begin I would like to remind you that certain comments made during this call regarding our plans strategies and goals and our anticipated financial performance constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Such forward looking statements are based on management's current assumptions and expectations and is subject to risks and uncertainties that could cause actual results to differ materially from such statements.
Those important factors are referred to in the press release issued today and in the risk factors section included in our annual report on form 10-K.
For the year ended December 29, 2019 file with the SEC March 18th 2020.
Updated in our form Q filed with the agency on May six 2020.
The forward looking statements made today are as of the date of this call and 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 non-GAAP financial measures to the most directly comparable GAAP measure.
Is available in our 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 Dot dot.
Dotcom.
I will now turn the call over to John John Thanks.
Thanks Theresa.
Well good morning, and thank you all for joining us on our third quarter earnings call.
As we noted in our Q2 call in early August our third quarter started off strong with continued improvement in our Simon volumes and units sold along with the continuation of the record level revenue per unit that we've experienced in the second quarter.
As the third quarter progress, we continue to see strength across our business as both assignments and units sold continue to improve at a greater rate than we had anticipated.
In fact, we exited the third quarter with assignments down only slightly from pre COVID-19 levels.
As we also noted in our Q2 call. We thought revenue per unit strength might moderate in Q3, but that did not prove to be the case.
Similar to Q2, we ended Q3 with revenue per unit near record levels.
As a result of the stronger than anticipated trends and the benefits. We're seeing from margin expansion plan, we saw a meaningful improvement in our overall results in Q3 with 8.8% growth in organic adjusted EBITDA versus Q3, 29 team, even despite a decline of 4.7% in organic revenue.
Versus last year.
As a follow up to our discussion on the Q2 call. We continue to believe that some of the underlying drivers of higher revenue per unit can be attributed to first the additional revenue that's associated with the full rollout of our digital only auction platform.
Second the positive impact from new products and tools that we are now offering buyers such as 360 view and feature tour as part of the interact platform third.
Third the positive impact that less supply may have on bidding activity and proceeds per vehicle and for higher used car prices.
We are feeling more and more confident that the impact from moving to an enhanced digital only auction model and the tools and information, we're providing as part of the interact platform are having a more significant and sustained impact on proceeds revenue per unit and importantly returns for our seller partners.
At this point it is a bit unclear to the degree to which reduction from the supply of vehicles is impacting proceeds and revenue per unit, but we do believe that elevated used car prices is having a positive impact.
The September Manheim used car index was up 15.2% versus the prior year.
Another notable bright spot in the quarter was the strong growth in our non insurance business, which was primarily the result of a targeted focus from our sales force.
Now, let me shift gears to review our progress against our strategic growth priorities.
With regards to our margin expansion plan following on the successful rollout of the buyer digital transformation in early April in the US we accelerated the transition to online only auctions in Canada in late July and I'm happy to report the transition was without incident similar.
Similar to US we are seeing the benefits from the deployment of 360 view in both Canada and in the UK.
As for the other aspects of our margin expansion plan, we remain on track with the timing and expected benefits from our initiatives around towing optimization pricing optimization.
And branch process improvement and efficiency.
I'd like to turn now to talk about our focused effort on enhancing our buyer network and their experience.
As we have transitioned the business to a fully digital model. We have been focused on continued engagement with our buyer network and remain laser focused on further elevating the buyer customer experience that we deliver across our platform.
We are serving our buyers regularly with both quantitative and qualitative metrics and incorporating their feedback into our platform and service enhancements.
As an example, this feedback we recently have expanded our payment options, including among other changes. The addition of pay Pal, which provides increased purchasing power and flexibility for our buyers.
While COVID-19, initially had impacted buyer attendance, we have seen steady improvement in attendance this quarter.
Domestic buyer attendance was up our prior levels throughout the third quarter and by the end of Q3 International buyer attendance also exceeded the levels of one year ago.
In addition at quarter end the levels of active international buyers was up nearly 15% versus the same time last year.
As we look ahead, we will continue to focus on enhancing our international buyer network, along with making further progress on our other strategic growth initiatives.
Now shifting to talk about our cat response efforts there have been several hurricanes and tropical storms, primarily in the southeastern us over the last couple of months.
We have done an excellent job of serving our provider customers. During this period and the feedback that we've received from them has been extremely positive.
In addition to taking advantage of our deep pool of tolling resources as well as leveraging our NASCAR partnership our flexible capacity model provided safe accessible acreage and towing capacity, where and when it was needed and in close proximity to the affected areas with our customer safety and convenience in mind, we established.
Guards and locations that insured vehicles would not have to be moved far distances.
Our employees put an incredible amount of planning and dedication towards these amounts.
And I continue to thank them for their efforts.
I'm very proud of our teams and the progress we have made on our initiatives throughout 2020, despite a very uncertain macro backdrop.
We're a little over a month into Q4 and continue to see positive trends, but we're also mindful of the uncertainty that remains with the pandemic.
With that I'll turn the call over to Vance to review our financial results Lance.
Thanks, John and good morning, everyone.
As John discussed our third quarter results were stronger than we had anticipated as favorable industry trends drove record level revenue per unit and we continue to benefit from our margin expansion plan and other strategic initiatives.
Before I touch on our current trends, let me first review the key financial highlights of our Q3 performance I will focus my discussion today on our adjusted non-GAAP results and just touch on some key highlights. Please see today's press release for more details on our Q3 financial performance and our methodology in calculating non-GAAP results.
For the first quarter consolidated revenues decreased 5.4% to 338 million from $357.3 million in the third quarter of fiscal 2019 organic revenues, which excludes the impact of our media acquisitions foreign currency and a noncash revenue adjustment in the prior year.
Declined 4.7% to 336.9 million.
For the quarter volumes declined approximately 20.4% primarily due to the impact of COVID-19 and fewer miles traveled this was partially offset by higher revenue per unit as John already reviewed branch inventory increased by 1.2% versus the prior year.
Looking at our geographic performance, both our us and international segments had lower volumes and higher revenue per unit with the international business actually growing slightly due to higher purchase vehicle revenue in Canada.
Gross profit increased to $138.3 million from $136 million in the third quarter of fiscal 2019 gross margin increased 280 basis points in the quarter driven primarily by the benefit of both higher revenue per unit and the cost reductions achieved from our buyer digital transformation as well as some other costs.
Reductions specific decoded 19.
In a sense is were 34.9 million compared to $38.9 million in the prior year adjusted EBITDA expenses were $34.5 million, a decrease of 6.8% compared to $37 million in the prior year period, driven by a reduction in discretionary spending across the organization, including higher.
Any such as travel and meetings as a result of the COVID-19 pandemic.
We are extremely focused on cost containment and continue to find ways to be more efficient.
Adjusted EBITDA increased by 4.7% to $103.8 million from $99.1 million in the third quarter of fiscal 2018.
Excluding the impact of foreign currency, VDI, and 3.6 million non cash revenue adjustment in the prior year organic adjusted EBITDA increased by 8.8% to $103.9 million in the third quarter of fiscal 14 point.
Interest expense declined by $4.2 million to $13.3 million compared to $17.5 million in the third quarter fiscal 2019. The decline was primarily driven by lower interest rates on floating rate debt as well as a slightly lower debt debt balance.
The interest rate on our term loan is currently 2.44%, which is over 200 basis points lower than the third quarter of last year.
Effective tax rate was 25.5% versus 27.3% in the third quarter fiscal 2019, the lower effective tax rate in 2020 was primarily due to the benefit from certain tax optimization initiatives.
Net income increased to 52.8 million from $41.8 million in the prior year adjusted net income increased by 17% to $55.7 million or 41 cents per diluted share compared to $47.6 million or 35 cents per diluted share in the third quarter of fiscal 2009.
Adjusted net income increased more than adjusted EBITDA relative to the prior year due to the benefits of lower interest expense and a lower tax rate as well as a lower level of amortization.
Turning now to our cash flow and balance sheet capital expenditures for the quarter were $19.8 million compared to $18.9 million in the prior year capital expenditures in the quarter were at a higher rate than earlier in the year due to catch up in certain maintenance projects as well as incremental 70 wells related to real estate projects.
Our balance sheet remains very strong and we are excited and we as we exited the third quarter with total liquidity of over 578 million.
Which is over 300 million higher than our year end level.
We ended the period with a leverage ratio of 2.8 times, which is down from 3.2 times at the time of the spin we remain very comfortable with our total liquidity and leverage during the first nine months of 2020, we generated free cash flows of over 223 million.
As we had noted in our last call. We saw a reversal of the benefits from the deferral of certain cash tax payments. This quarter that we expected, but still generated positive free cash flow for the quarter due to the aforementioned improvement in operating results and EBITDA along with improved working capital management, we made good strides in further improving.
Working capital, including extending payment terms.
As noted in our earnings release, given the continued uncertainty regarding COVID-19, we're not providing guidance today, however quarter to date, we have seen assignments units sold and revenue per unit all consistent with the levels. We saw exiting Q3 with that we'll open up the call to questions operator.
Thank you we will now begin the question and answer session.
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Today's first question comes from Craig Kennison with Baird. Please go ahead.
All right. Thanks, so much a question for you on.
Innovation here you released a few press releases on some patents have been awarded I'm curious if you can explain the importance of the toward dispatch and also the auction management patterns and then help us understand whether that innovation is something for which you can get paid either through higher ARPU or higher.
Yes.
Great credit good morning. This is John yes.
The patents that we've that we've announced are really around the processes that we've that we've put.
Put in to to drive higher revenue higher recoveries for our sellers and better service to our buyer. So they are not in and of themselves.
We didnt do im thinking that we're going to monetize them, specifically, but we just think they are all part of our overall offering so that we can continue to drive better and better results for our buyers and sellers.
Okay. Thanks, and then just on the non insurance side sounds like you had a solid growth there are the economics in that business as good as your.
Insurance business or just based on the nature of.
Your some of your relationships and those economics not quite as good.
So the non insurance there is a wide theres a wide.
Breadth of customers and that everything from.
Charities to car dealers rental car companies on the profitability profile also span set based on the value of the vehicles, but.
But all in we it's it's you know we believe that as a strong element of our of our proposition on our growth. We think as it's good business and we're going to continue to capitalize upon it.
Great. Thanks, I'll get back into queue.
The next question today comes from Bret Jordan with Jefferies. Please go ahead.
Hey, good morning, guys.
Gross profit line.
You called out your tolling relationships in response to cat events Youve talked about towing costs, maybe being one about margin drivers could you give us any numbers year over year as far as your your your towing expense.
Yes, Hey, Brett this is Dan we don't.
We don't typically breakout to in excess I think what we have said is that it's a very large contributor.
Cost of sales so in terms of how.
How relevant it is but we haven't given out specific numbers related to that.
But.
As we commented on.
Clearly part of our margin expansion plan is that we have initiatives aimed at optimizing towing expense and reducing that continue to be on track with that.
Okay, probably a similar response to this one but could you give us any color as far as the expansion of the international buyer base you sort of also called out that they were up 15% year over year, but could you give us sort of a benchmark for.
For the volumes.
Yes, somewhat similar Brad I mean, I think we try to give as much color as we could so I think the fact that during a cold Nike endemic that we're able to kind of.
Now see that kind of increase.
Bodes well for the actions that we're taking in developing our global buyer base, which as we commented before our.
A portion of those are around digital marketing search engine optimization things of that nature. So.
Can't give any more specific numbers and what we provided but we did say that because obviously, we feel really good about the progress.
Okay, and then one final one this one should be that that the the driver of revenue per unit is the average age of the vehicle that was being total this year significantly lower year over year I'm sort of thinking about the what the insurance companies are doing that is driving this higher used vehicle values the demographic of the car.
Changing in addition to the underlying Mannheim going up.
We haven't seen anything yet that materially different in terms of average age of the vehicle than maybe what you would have saw last year.
Obviously, thats a contributing factor.
But also I think Brent you're also implying around kind of younger vehicles and be more apt to be told as well, but in terms of the average age across the span of our universe of total loss, we haven't seen anything significantly different at this point.
Great. Thank you.
Thanks, Brett.
And the next question today comes from Daniel Embryo with Stephens, Inc. Please go ahead.
Yes, hi, good morning, guys. Thanks for taking our questions all revenue.
John I wanted to start on a follow up on the Noninsurance business. Yes. It appears that your social media, there's been more of an emphasis on fleet and rental volume in the last few months. Thank you mentioned that the focus gearing sales force can you talk about where you are seeing that growth within non interference and then maybe how different is that from six to 12 months to go within the business.
Yes, I mean it is.
As I said earlier is theres a variety of areas of growth there I mean, the the fleet and rental.
We've we've.
Refocus some of our tools and as we move to this digital platform, we've been able to build some things that are very specific to that market that makes it.
No more attractive to them. So we have been successful at that.
You know versus last year, I think I think we have done some restructuring of our teams to get a more focused on that segment and I think we're we're bearing the fruits of that.
Great and then maybe to follow up on Bretts question on revenue per unit of almost 20% you mentioned in your prepared remarks. Some of it was driven by initiatives such as online fees of ancillary services that you guys offer can you maybe help us quantify then or public parse out how much of the increase is being driven by a specific initiatives.
In your opinion like what can you quantify based on the changes you guys are making.
Yes.
No, it's very difficult to quantify.
Yes, because as you can imagine what were seen play out in first of all as we've alluded to for revenue per unit were at record levels.
And it's tough to quantify the degree to which the things that we've done which we believe are definitely having a positive impact.
Things like the new auctions Bill digital only auction for our platform things like Threesixty view feature tour, you want us to get a pilot.
Some time back on Threesixty view, we commented on the fact that they were having an impact of between 300 and $600 per vehicle in terms of proceeds not revenue per unit, but proceeds per vehicle.
So you can certainly if you think about that that can give you. Some indication. We do continue to believe that 360 view and other tools that we've added since then are all as having a positive impact.
What we don't know, it's very difficult to ascertain is agreed to which supply demand characteristics are impacting it and as we've also alluded to.
Hi.
In addition to supply and demand as used car prices and so it's difficult to kind of calibrate how much of each one of those we.
We do feel that used car prices are having an impact as they kind of went up but thats impacting what of buyers willing to buy for a car paper car all things considered equal, but trying to figure out how much of the difference that makes it very challenging as you can probably appreciate.
Yes, I've never felt that's helpful color and then last one for me just to clarify are on the inventory growth I mean, you've had it up about 1% to end the quarter did the recent hurricanes have a quantifiable impact on that or maybe asked a different way what would inventory growth be if we excluded catastrophic volume from this year and last year, just trying to get a sense of kind of where.
Run rate volume is ex some of the noise from prior guidance.
Yes, I think the best way to think about is there's been obviously a number of.
Storms this year, but in terms of the volume of cars that have come from those storms, it's actually been relatively low.
So we haven't had any.
Thank god for those parts of the country, there hasn't been a extraordinarily significant storms.
You know that it caused you had a massive amount of vehicles. There has been some volume, but the volume relatively speaking it's been inaccessible and the same as last the last year the base compared to last year. This relatively small as Walt yes, Thats right yes.
You looked at last year with and not as many storms, but a similar low level of volume from catastrophe units and so thats what were seeing so it it's not having a big impact.
Yes, that's great guys I appreciate all the color and outlook.
Thank you banking sales.
Our next question today comes from Stephanie Benjamin would trust. Please go ahead.
Hi, good morning.
Good morning, So 27.
Just actually follow up on that.
Question, there I'm curious on how.
No just the inventory number up 1%, but still seeing assignments down slightly.
Pre corporate level.
Can you maybe discuss distance the discrepancy between those two metrics.
Yes so.
Yes, Theres a couple of things that drive inventory levels. So one.
His odyssey amount of assignments that we get.
So we've seen assignments come way back up.
During the third quarter, but.
But in addition to that is also.
The conversion rate in also kind of the time.
Between them to sign them when the units sold and so on so it has.
We're certainly happy and pleased with the fact that we've seen a lot more assignments, we've seen unit sold come back up with that as well.
But we have seen.
Maybe a little bit of decline in some areas around conversion rates nothing.
Nothing significant but thats been one element in addition to the increase in sign that that's kind of.
Resulted in inventory being up which is a good thing because as we go into.
The fourth quarter that means we have more units available for sale.
Got it helpful and then on that some recent announced person the current expansion now.
Yes.
North.
Maybe topicals.
And why you chose to be specific.
Thanks to that project and then you know what it's really in your pipeline for additional opportunity.
Alright, thank you.
This is Stephanie thank you, you're breaking up a little bit, but I think the.
We intend to sense of your question was is that it was around other real estate projects is that correct.
Yes, Im sorry, just on I think some of them not to recent announcements have been primarily in the northeast. So just wondering why you chose specifically those yards and kind of what's your outlook for additional expansions going forward.
Yes.
Stephanie so the I think we've talked about the process of identifying developing getting of getting a new piece of property in to place can take six 912 18 months. So some of this is just the timing of when these particular projects.
No actually got live we're able taken alive, we've got a deep pipeline of expansion. We look very closely at where we're growing where our customers are growing where we see opportunities for growth and we're looking at.
Additional property, where we need it so it's it is an ongoing.
Process that we go through.
And we will continue to invest in real estate again, where we need it and where we believe we've got opportunities and again, where our customers are growing as well.
Got it thank you so much.
Thanks, Evan Thanks, Stephanie.
And our next question today comes from Bob Labick CJS Securities. Please go ahead.
Yes, good morning, it's Pete Lucas for Bob.
Just on a macro level can you talk about from a business industry perspective, when you think that higher Asps will lead to higher total loss frequency is and I think you had said there's been no change in total loss frequency is now, but do you expect that to change.
Yes, Im not sure. We said that there has been no change in fairness I think where there was a question around the average age of vehicles, but okay.
So I do think the most recent data from CCC I think picked up.
Yes, I think what we're seeing as a trend with total loss. Maybe this can help you is is that continues to go up.
Some seasonal adjustments to that but in general and it tends to kind of follow the trend has been which has continued to increase so.
So we're not we're not seeing anything much different than the guidance.
Great and last one from me you talked about the increase in the international buyers is the percentage of units sold internationally now greater or smaller than pre pandemic given the increase that you've had.
No I don't think we broken out between.
What I can we can say two things. One is we commented is that during the pandemic. We had really good response from buyers domestic buyers that you know that was a very good things independently because you want to expect at the onset of the pandemic.
International buyers participation.
We're down a little bit as you have.
Very difficult situation.
Since then discount that really nicely and we continue to have.
Good traction with our domestic buyers and international is picked up as we alluded to in our call and we feel really good about that as well.
Very helpful. Thank you.
Thanks, Peter Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.
Our next question comes from Gary Prestopino with Barrington Research. Please go ahead.
Good morning, all.
[music].
John.
I want to just make sure I'm clear on this when you're doing noninsurance vehicles. They are all total losses is that correct or am I wrong there.
Okay.
They are predominantly damaged vehicles, but its not we do so clear title vehicles for non insurance sellers without okay. Our question.
Alright, and can you give us an idea of.
The growth of that metric in the quarter end or the percentage change or the percentage of non insurance this quarter versus last year at this time.
With that Gary Thats, not something that we're providing as a metric. However, what we did say is that we had really good growth of non insurance in the quarter. So I think from that comment you can one would be able to ascertain that insurances noninsurance rather as a person.
As of our total mix would be up somewhat.
Okay.
By the by the rules of your spin off you cannot go into the dealer market is that correct and sell a whole car right.
Yeah, I mean, it's again a public document it's not quite that simple Gary there are there are elements, where we can continue to grow and there are some royalty payments that would be made if we exceed certain thresholds, okay, great and then lastly, Nick.
Just with the.
New services that you put in.
On the slope than the interact I guess, it's called.
When you talk to your to your your buyers.
What what which one of these services that do they cited as being extremely helpful in helping to make a decision whether to bid on the vehicle.
Yes, I mean, its I don't know that there is one I think we track and measure at several different points from registration right through bidding in buying and we're seeing improvement in all of them I think I think the overall the level of information that we're now providing through interact whether it's 360 viewer fee.
Sure tour, our enhanced vehicle deep detail page if.
We are de risking the transaction and they appreciate that that that gives them the ability to bid with more confidence with the more transparency that we can provide I think generally I'd say, that's that's been the best feedback that we received around interact okay.
Okay. Thank you very much thanks, Gary.
And ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to the management team for any final remarks.
Well. Thank you all for joining us. This morning. Thank you for your continued.
Continued support of Ita and we look forward to talking to you in the future have a great day.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.