Q3 2022 Ritchie Bros Auctioneers Inc Earnings Call
We're 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 transaction and future opportunities for the combined business of Ritchie brothers and IAA.
Are considered forward looking and involve risks and uncertainties. These.
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 enjoined IAA transaction release issued this morning as well as the most recent quarterly report and.
<unk> annual report on Form 10-K.
Each of Ritchie brothers, and IAA, which are available on our respective Investor relations website on Edgar and SEDAR as applicable.
We will also make.
Important filings with the SEC and applicable Canadian Securities regulatory authorities in connection with the proposed transaction you are urged to read those materials carefully when they become available.
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 of Copel.
Copel reconciliation of the two.
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.
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 transaction all figures discussed on today's call 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 and <unk>.
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 Erik will give a brief update on our financial results before we move to discuss the exciting acquisition of IHS.
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 of this while we continue to invest in improving our customers' experience.
The expansion of local yard a new sales coverage model and modernizing our technology.
Let me now hand, the call to Eric Jacobs, So quickly highlight our financial results.
Thank you Ann good morning to everyone.
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.
So I was 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 <unk>, excluding the impact of foreign exchange.
This is especially noteworthy given that we cycled over the almost $100 million.
<unk> 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.
Regards to supply we did see a rebound in volumes this quarter with total lots, increasing 17% year over year.
This growth in loss was driven by several significant deals from our strategic accounts group.
As growth in low value lots.
While we are encouraged by the increase in loss, 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 as a percentage of <unk> expanded 130 basis points to 18, 2%.
This was driven by a strong contribution from other services.
Higher buyer fees.
Inventory return increased 40% <unk>.
$17 5 million.
A 43% increase in inventory sales revenue.
This was driven by strategic accounts and solid execution by the team.
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 few things that wed ask you to consider.
First on <unk>.
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 G TV growth by as much as 500 basis points.
Therefore, despite the strong momentum in our business.
<unk> low to mid single digit D TV growth in the quarter on a us dollar basis.
Next on selling general and administrative expense, you're forecasting that SG&A expense.
Use of share based payments.
Adjustments for unusual or nonrecurring expenses to.
To be between $124 million and $129 million.
Lastly for modeling purposes, we are forecasting interest expense of 10 million to $11 million.
Adjusted tax rate of between 25% and 27%.
Before I hand, the call back to Ed I wanted to highlight for you that the global mail, a leading Canadian newspaper recently selected <unk> as one of the top five Ceos in Canada.
He is being recognized as an 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.
Entire Ritchie brothers team is extremely proud of and for this well deserved honor.
That back to Anne.
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 customers' 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 would 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 reason why we think this is such a compelling combination and our vision for our future as a combined company.
I am proud to be joined this morning by John Cat CEO of IAA, who will also provide you with some background on the impressive business they have built.
Finally, Eric will highlight that attractive combined financial profile of bringing Ritchie brothers in IAA together through this transaction.
This transaction is an important step in advancing the strategic vision that Ritchie brothers announced in December 2020.
To become a leading trusted.
Global marketplace for insight 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.
New sales coverage models and expansion of our satellite yard footprints.
In addition, we made strategic acquisitions, such as routes and smart equipment 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.
This transaction, we will combine complimentary businesses operating in adjacent verticals to unlock accelerated growth.
IAA will increase our scale allows 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 a one plus one equals four.
As we add additional capabilities and our expertise we.
We will further amplify the work that's already underway at IAA.
This transaction is all about creating a stronger Ritchie brothers andi that.
And 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.
At this point, let me cover the key terms of the transaction.
We are acquiring IAA for a mix up $10 in cash and 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 IEA net debt.
The purchase price also represents a transaction multiple of 13 six times IAA last 12 month adjusted EBITDA.
As of the end of the third quarter.
An implied multiple of 11 three times, when including the midpoint of our full run rate cost synergies of $100 million to $120 million plus dollars.
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. So a combination of cash on hand, and new debt we.
We have already secured the necessary bridge financing commitment.
Looking at what this means for our capital structure at closing, we expect to have 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 <unk> 27 per share as we delever 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 for current IAA Board member 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 officers 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 sub.
Subject to approval by both companies' stockholders.
Regulatory approvals and customary closing conditions.
Now to tell you a little more about <unk> business.
And the sector and geographies in which they operate.
Hand, it over to John Cat.
Auto of IAA.
Hello, everyone and thank you Ed for that welcome.
Sure and excitement about this transaction and the incredible opportunities that we see ahead for our combined business.
In terms of a 1000 foot overview of IAA, we are a leading global marketplace that connects vehicle buyers and sellers.
Simply Ritchie brothers are.
Very similar businesses in terms of what we do for our clients is just applied to adjacent verticals.
We operate 210 facilities throughout the U S, Canada and the UK.
On a digital platform that serves customers in more than 170 countries.
Over the last 40 years, we've built deep relationships with our 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.
<unk> multiple bidding and buying digital channels innovative vehicle merchandising and efficient valuation services.
This transaction marks a new chapter for IAA, and we could not think of a better partner than Ritchie brothers.
For our discussions we've come to appreciate just how well and in 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 IAA.
This is an incredible milestone and all of the opportunities that this transaction creates is due to the passion dedication and hard work of the IAA team.
Our team has made significant strides to build out our technology and 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.
To enhance our business for our customers as we grow together.
And of course I'm pleased that 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 U S 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 placement back on the road.
That equates to approximately 12 million vehicles in our market at any time.
You do the quick math, given that there aren't averaged 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, creating and expanding fleet of aging vehicles that propels 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 those periods of compounded average revenue growth rate has been approximately 12, 7%.
We are strong secular <unk> 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.
Owning 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 our recycled parts.
These factors together, our leading to consistent growth for our market and appreciable runway for potential future expansion, we're confident that together 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.
Thank you John in some ways, it's like a homecoming for me and many members of the leadership team as cards and insurance carriers represent a vast amount of our collective background.
Im personally looking forward to reestablishing those relationships as we look towards the future.
It's important to recognize that despite having.
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.
Appraisal and inspection to data and information analytics.
All the way through transaction solutions and services.
At the end of the day the truly complementary 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 with deep knowledge of <unk> business.
We know the vertical.
We know the players.
And we know what it takes to achieve success.
Our 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 vertical.
Through 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 we 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.
The low single digits in the first full year following the transaction in mid teens after that.
Importantly, this accretion exclude potential revenue opportunities that we believe we can unlock together across our expanded addressable market.
The complementary nature of our businesses, including our well aligned customer centric culture.
Will allow us to drive profitable growth and improve returns through efficiencies 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 create more resiliency in our business model.
Our combined company would have a pro forma <unk> of approximately $14 5 billion for the trailing 12 months.
Both of our businesses leverage a consignment and inventory revenue model.
IAA Diversifies, our business by expanding beyond commercial assets into an adjacent vehicle vertical.
With our revenue derived more from sellers and ies 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 facility.
With IAA 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 13600 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 assets 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.
Thanks, Dan.
As one could expect with similar business models we.
We expect to achieve a $100 million to $120 million plus in annual run rate cost synergies by the end of 2025.
We expect these cost synergies will primarily come from the back office.
Financing technology general administrative and operational areas.
While we are only quantifying the expected cost synergies from the transaction today.
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 Brothers financial services.
Priest 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.
And previously discussed the more than doubling of our combined gross transaction value or.
Or GTD from $5 9 billion to $14 5 billion.
Likewise loss.
Last 12 month revenue has also more than doubled growing from $1 6 billion on a standalone basis to $3 8 billion combined.
But it is equally compelling as a doubling of our profitability and cash flows.
Even before we consider synergies.
On a pro forma LTM basis, the combined company would have an adjusted EBITDA of approximately $1 billion.
And as we consider our quick deleveraging post close.
When expected initial leverage ratio of approximately three times.
Combined companies LTM free cash flow of approximately $800 million pre synergies is expected to be extremely helpful.
That I will turn the call back to Ann to wrap up our comments before we take your questions.
Thanks, Eric.
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 insight to help them make the very best decision.
We will do so by bringing together two of the most talented teams in the industry and fostering a customer centric culture rooted in our 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 and.
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 IAA team to Ritchie brothers and coming together as one organization to unlock the incredible opportunity. We see ahead for our combined platform.
Just as a note to participants.
Please ask that you focus your questions on the transaction.
And with that operator, please open the lines.
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 too.
Kindly keep in mind, if you are using a speaker phone to please lift the handset before you enter any case.
Yes.
Your first question will come from John Healy of Northcoast Research. Please go ahead.
Thank you and congratulations to everyone involved here are truly transformative day that I don't think many of us had on our.
Mango card this morning, so congrats.
Wanted to ask two questions.
And then John maybe you could give us a little bit of backstory, maybe it was just about maybe how this acquisition came together with the 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.
Be moving around a little bit thank you.
Hi, John It's Anne let me start and it's not often we can surprise you guys. So I think thats a good thing.
Thank you for asking about the back story, because I do think that really is a fantastic setup. So.
First of all I as a company that I have known and admired and John and his management.
Quite some time.
As a reminder to those on the call.
Previous business that I was with I 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 total loss and then would obviously go into John's ecosystem.
Also as a reminder.
A huge percentage of the leadership team has both a background in this vehicle and insurance ecosystem. So thats 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 Jeremy So when you think about it.
That really comes in two forms so either in terms of M&A right. There is a lot of organic things, but in terms of M&A. We would look at incredible businesses that could accelerate us and some has to do with capabilities like <unk> smart added capabilities to us and some have to do with scale.
When you are a marketplace scale, if you want to pick a single API once the capabilities are behind your scale is it.
Organically takes time to drive if there is an M&A opportunity like this is to increase it's just magical.
So let me just talk about how we saw the IAA business from our scale. So first.
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 in our yard and here's what happens for John in IAA.
Our salvage car shows up in the yard after that largely what happens is pretty much the same we check it in we inspected.
<unk>, if a title and lien as needed.
We then auction it.
And then.
Transacted across our one of our many channels. We then collect money from <unk>.
Buyers and then paid out the seller. So it's wildly complementary which gives us a lot of confidence obviously at the about the economies.
The synergies the cost synergies that we've signed up for.
Whats also incredible about the salvage car business is although cars are cyclical in nature.
Salvage business is actually very similar to ours, where it's both cyclical and countercyclical. So when prices are good used cars are often there is 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 is actually very complementary.
In nature and also similarly, a cyclical to our business, which we love.
And then there is growth and then there is growth and really when we think about the growth of these businesses think about a short mid and long term growth together.
The most obvious shortest example is our ability to leverage the collective yard footprint that we have.
So we quadrupled our footprint for IEC customers that means that in case of catastrophic events. So on and so forth. They can leverage a lot more a lot more ritchie's guards for Ritchie customers that means lower cost of transportation as we 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 GTD growth because youre going to see attachments of services much quicker, obviously, having an all new vertical to attach.
Services to be the 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 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.
And ability to accelerate innovation one that's why we're so confident that one plus one equals four so I know I combine the back story of we knew each other too 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 few we couldn't think of any better suited than IAA 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.
Sure Thanks, Dan and John the answer is no, but obviously as part of the diligence process that there should not be any issues with.
With our structures going forward.
Yes, no just excited about this.
Listening to and thinking about our journey to the spot.
Actually very similar.
As our board and my team.
We're looking at our strategies going forward thinking about how we can continue to scale up.
Build out our frictionless platform that we've been talking about it 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 it really made for a.
An exciting combination so yes.
Great to be here and.
Looking forward to the future of this combined business.
Your next question comes from Michael <unk> of Scotiabank. Please go ahead.
Hey, good morning, guys again, congratulations on the deal.
The question I had was you quantified the cost synergies 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 compare as you think quantified cost synergies.
Obviously longer term just to give us a sense. Thank you.
Yeah, Hi, Michael It's Anne.
It's interesting as we were putting together kind of the package for you guys.
The advice, we were largely given is low cost synergies is the stuff that obviously investors and analyst kind of can take to the bank revenue synergies are largely discounted.
It kind of in the initial days of a transaction, but I will tell you as excited as we are about 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.
Critical customer experience there is an incredible amount of growth on both sides.
Every time, we make it easier and better for the customers to do business with.
Incredible accretive nature and ability to attach services to underlying GTA V 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 will call them like basic building blocks of checkout in my account.
Things that actually drive revenue.
BJ services that we provide directly or through third parties and we take a fee.
Scale is just incredible.
In a marketplace. So again, we're not going to quantify the number.
But then the global piece of it.
For us we have a global footprint as you saw on the chart with the yards.
IAA largely is it doesn't have a huge global footprint. The vast majority of U S. We're also looking forward to our own global expansion as well as driving theirs.
<unk> and again the single biggest cost for all of US is and this is the beauty of an Omnichannel platform is the art 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 IAA transaction entirely online, we transact mostly online.
A few like Orlando, where we kind of.
Do it both ways.
Our yards are busier than they've ever been before as our John's right because what our customers want is they truly want the omnichannel the sellers want that equipment or the vehicles. They wanted 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 value to both sides of the house and it just so happens that we have.
Quite a few yards even in the U S. The complement.
He is very large footprint, especially in the areas of catastrophic events with insurance carriers need us most and then obviously the global expansion, so I'm not going to quantify it less every banker.
Follow the crowd.
<unk>, except to say it is orders of magnitude bigger than the cost synergies that we're quantifying today, it's really incredible.
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 <unk> of Stephens, Inc. Please go ahead.
Hi, guys. This is Joe on for Daniel Thanks for taking our questions.
So on the insurance companies was wondering if Ritchie brothers has preexisting relationships here and if not does that potentially present, a risk or what are your thoughts here.
Hi, Danielle lets and nice to meet you.
Ritchie brothers does not have insurance relationships, but and fan delinquency in 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 Abra collision, we were acquired by our biggest <unk>.
<unk>, we are 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.
<unk>, congratulations and welcome home, so that gives us a little bit a little bit of an indication about the relationships.
That's super helpful. Thank you guys.
Thanks, Joe.
Your next question comes from Gary <unk> of Barrington Research. Please go ahead.
Hi, good morning, all.
First of all.
I would assume there is no go shop provision on this transaction.
Hi, Gary I think Thats, a safe assumption.
Okay, Great and then could you maybe explain.
<unk>.
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 Aia's business to your existing yards in the United States and Canada.
Yes, so Gary Hey, it's an 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 driving the growth partially driving the growth numbers youre seeing from us.
Those are much smaller than our historic footprints.
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 marketplaces 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 IEA yards as helping us facilitate the local yard strategy and our yards, helping facilitate there at a minimum catastrophic events.
Okay. Thank you.
Thank you.
Your next question comes from Michael Feniger of Bank of America. Please go ahead.
Hi, Ron Thanks for taking my question just the first one just to be clear is there customer crossover here.
Typical customer of IAA, who is that and do they use Ritchie brothers had they used the heavy duty use heavy used equipment.
On a daily basis, I guess I'm trying to assess who the main customers that are being servicing on either buyers or sellers side of IAA and if they are similar to two to your current customer base.
Yes, I'll turn that over to John to start yes.
Our typical customers are insurance companies so.
We're selling damaged.
Our high mileage vehicles for insurance companies fleet providers and so on so there is we.
We do sell a small amount of.
Heavy equipment salvage so there is some overlap there are not very much but there is some overlap. So it is it is a difference.
It is a different supply source for sure.
And the buyers there is theres going to be limited overlap to start, but certainly I think.
The virtues of having a much bigger marketplace is going to allow us to expand who we're who we're attracting on both the buy and sell side broadening the supply of assets that we're putting through our platforms.
Yes 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, its 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 apply to <unk>.
Current way so it's really kind of think of diversification and scale in its best form with an incredible cost efficiency and leveraging of commonality that honestly you don't often find.
Your next question comes from Craig Kennison of R. W. Baird. Please go ahead.
Hey, good morning, and John Good to hear from you both and thanks for taking my question and I am curious what the implications are for.
And what this says about momentum behind that platform.
Yes, Greg Thank you for the setup.
We are excited so our inventory management system is.
<unk> is being designed and executed as a ubiquitous kind of hub. If you will for all customer needs. So again, when you think about <unk>. The gateway. It then becomes the gateway into the entire ecosystem, so whether or not you're a construction piece of equipment, you're mining piece of equipment you're.
<unk>.
<unk>.
It all will kind of come together they are that's where all of the data and analytics then start getting attached that's the basis on which services again offered and again it just gives us an incredible scale right. Because when you are investing in an IMS youre investing in the underlying technology the cost of that investment is largely the same.
But now we can <unk>.
Amortize it off.
Much wider degree.
Units sold to the incredible scale play.
Your next question comes from Saba Hot Con of RBC capital. Please go ahead.
Hi, Thanks, and good morning.
If we could maybe just share a little bit on I guess the buyer base for.
Like is it as simple as salvage yards or is it maybe a broader buyer base out there.
Oh, yes.
Thanks for the question of our buyer base is really broad we've got thousands of buyers on our platform every week from across 170 countries Theyre looking at the vehicles for a variety of purposes theres sort of a.
Stereotypical theyre buying it to parted out to use the parts in our 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, a 170 countries, where there are primarily.
A rebuilder so they're they're arbitraging, the labor and to a certain extent parts costs.
That they can obtain.
And our secondary market, where they can buy the damaged vehicle by the parts ship it somewhere else and then repair it and put it back on the road.
To provide affordable transportation and all kinds of emerging.
And first world markets as well, so it's a really deep.
Fragment environment is we have very very low concentration of our buyer base.
We're adding to the pool every month every year.
We're really continuing to reach out to all kinds of different different borrowers.
Okay, Great and then I guess, just given the mix.
Your next question comes from Carolina Jolly of Gabelli. Please go ahead.
Any any anti trust.
Issues here and then.
Also just wanted to ask an actual question just about it.
Is there any I know I E is there any change or differences and the ownership of the vehicles or parts or how they impact the balance sheet across both companies.
So.
The first part of your comment got garbled, but in terms of so we are primarily a consignment model.
Vast majority of the vehicles in the U S and Canada for sure we're just.
They are consigned to us and then we're selling them on behalf of our of our sellers, we do by a very small percentage of the vehicles.
In the U S and the U K, we do have the model in the U K is much more of a.
Purchased.
Market. So we do buy the vehicles from insurance companies there, but it's obviously much much smaller piece of the business than than in the U S. Our accounts.
Perfect and then maybe Eric Scott our CFO can take the anti trust portion of your question. Yes. Thanks, Ann So we don't expect any anti trust issues with this transaction as John talked about we operate in.
And different markets.
Don't expect any challenges.
Your next question comes from Bret Jordan of Jefferies. Please go ahead.
Hey, good morning, guys.
Hey, Greg a quick question for John did you run a full process in the sale and then a question for Anne on the recent market share shifts.
Obviously, some attrition from IAA and you're done.
Due diligence I guess, what gives you confidence that market share has stabilized or is growing from here.
Okay.
So.
The details of how it came together, obviously all being all of the public documents, but thats really it was a merger it was something that.
Almost unparalleled paths.
Richie brothers was thinking about their future.
As we were doing that same kind of work them.
Connected and realize that.
Theres just a lot of similarities to the businesses that we could leverage off one another.
To build a really really powerful business going forward.
Yeah. Thank you for that Jon well side, and let me answer the market share question. So the way that I look at market share is that market share as 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.
Your next question comes from Brian <unk> of Raymond James. Please go ahead.
Yes, good morning, and thanks for taking my question.
John could you just talk a bit about.
<unk> 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.
Yes, so I mean.
Over.
As the team laid out in the in the presentation and even in my comments, we have a long history of.
Solid growth in revenue.
A couple of 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 then at the same time the marketplace prices had gone up as a result of what was happening in the used car market and we were able to leverage and take advantage of that because our.
<unk>.
Our revenue model is really it is.
As a marketplace or charging both sides, both the buyer and the seller.
Higher fees are much more tied to the selling price of the vehicle. So as values were going up we were able to extract.
Higher revenue per unit.
For our services and then the <unk>.
I don't think I would add to it as we continue to also build out our ancillary services. So we're we're now providing much more comprehensive services, particularly on the sell side that were has helped.
Grow our revenue and that really ties back into why this combination is so powerful is because of <unk>.
Many of the ancillary services that Ritchie brothers offers today.
And their vertical we think theres going to be opportunities to take advantage of that.
Further provide levels of service and the.
Insurance and fleet and dealer market.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star one at this time.
Your next question will come from Vincent <unk> of Barclays. Please go ahead.
Thank you and good morning, two part question one is as we go through the press release and a slide deck is it your intent to keep the.
Hey bonds in place and not trigger a change of control and then what is the expected reading the pro forma entity at this point. Thank you.
So thanks, Vincent it's Eric so.
Ill be retiring debt.
Debt as part of the transaction and taking out new data as part of this we have a two up $2 $8 million bridge commitment.
We have $500 million of bonds that we will.
Also figure out the best way to deal with dose. So the total total borrowings will be $3 3 billion.
In terms of the other part of the question was.
The expected pro forma ratings of the combined companies.
So I can't comment specifically on what the actual rating would be until we actually speak with the rating agencies, but we are confident that we are very strong.
And if you look at the DAC or cash free cash flow from the transit pre transaction 12, but last 12 months is $800 million. So we expect to be able to delever very quickly post post this deal.
Okay, and then to clarify both the loans and the bonds will be retired upon closing.
That will be taken out yes.
Thank you.
Your final question will come from Michael Feniger of Bank of America. Please go ahead.
Yes, thanks for letting me follow up I 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 GTD diversified I guess just help similar to understand how this deal helps Ritchie brothers overarching goal of driving penetration in the head.
Used equipment market Tam thank you.
Yes.
Hi, Michael Let's and believe me. This is why I'm at Ritchie brothers is our $300 billion Tam that's what's that's what starts at all.
So think about that this acquisition of IAA and the combination unlocks growth for both sides of the house. Since Youre question is primarily on used equipment and heavy.
Used equipment I'm going to focus there, but understand a similar line of thought is on the growth on IAA side. So.
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.
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 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 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 eyes firmly in place on our $300 billion in all of the pieces that he brings us.
Laos 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 <unk> achieve achieved 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.
Ladies and gentlemen at this time I would like to turn the call back to anthem dozy for any closing remarks.
Perfect. Thank you so much so first of all thank you all for joining our call today, Let me end with this.
At its simplest.
Basis.
Think about this combination and us acquiring IAA is it's a new vertical right. We are 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 marketplaces comment.
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 in our voices.
Our excited about IAA, the IAA team joining the Ritchie brothers 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.
[music].