Rb Global Inc. Q1 FY2023 Earnings Call

Good afternoon ladies and gentlemen. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ritchie Bros. Auctioneers First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now turn the call over to Mr. Sameer Rathod, Vice President of Investor Relations and Market Intelligence, to open the conference call. Mr. Rathod, you may begin.

Thanks, and hello and good afternoon to everyone joining our call today to discuss our first quarter results. Joining me on the call today are Ann Fandozzi, our Chief Executive Officer, and Eric Jacobs, our Chief Financial Officer. The following discussion will include forward-looking statements which can be identified by words such as expect, believe, estimate, anticipate, plan, intend, opportunities, and similar expressions. Comments that are not a statement of fact, including, but not limited to projections of future earnings, revenue, gross transaction value, debt and other items, business and market trends, and expectations regarding innovation of IAA, including the anticipated cost synergies are considered forward-looking and involve risks and uncertainties. The risks and uncertainties that could cause actual results to differ significantly from such forward-looking statements are detailed in our news release issued this afternoon, as well as our most recent Quarterly Reports and Annual Report on Form 10-K, which are available on our Investor Relations website on EDGAR and SEDAR. On this call, we will also discuss certain non-GAAP financial measures, including forward-looking non-GAAP financial measures. For the identification of non-GAAP financial measures, the most directly comparable GAAP financial measures, and the applicable reconciliation of the two, see our news release, Form 10-K and Investor presentation posted on our website. We are unable to present quantitative reconciliation of forward-looking non-GAAP financial measures as management cannot predict all necessary components of such measures. Investors are cautioned not to place undue reliance on forward-looking non-GAAP financial measures. All figures discussed on today's call are in U.S. dollars unless otherwise indicated. Following the prepared remarks, we will open the call to questions. Now, I’d like to turn the call to Ann Fandozzi.

Thank you, Sameer, and good afternoon to everyone joining our call today. Our team continues to deliver great outcomes for our customers with unwavering focus and execution. As a result, we delivered strong first quarter performance, including double-digit GTV and service revenue growth, excluding the impact of the IAA acquisition, which closed on March 20. Our results reflect an acceleration in GTV growth late in the quarter from our Ritchie Bros. customers, particularly from strategic accounts. Over the past several quarters, we have discussed the supply chain issues facing strategic accounts, which have limited their ability to refresh and grow their fleets. Now, supply chains have started to loosen for several categories, and macroeconomic uncertainty has increased. We are beginning to see increased activity in our commercial construction and transportation sectors. Notwithstanding, asset mix pricing continues to be a moderate headwind. Turning to IAA, the financial results were in line with our expectations and included an 8% year-over-year increase in service revenue on a pro forma full quarter basis and approximately a 5% decline in GTV. The increase in service revenue for IAA was primarily driven by previously implemented buyer fee increases. The GTV decline was primarily driven by lower average selling prices, in line with broader industry trends, as well as expected modestly lower unit volumes due to the previously announced loss of significant volume from one customer. Of note, we expect to cycle through the impact of this customer loss in the second quarter. Excluding the loss of volume from this customer, volumes increased by 1.6% driven by organic growth from other insurance customers. We are starting to see a slight increase in the automotive total loss ratio to approximately 19.4% from 18.2% in the same period last year, which is positively impacting volumes. Recall, that the total loss ratio is the number of vehicles deemed salvage as a percentage of total accidents, and it has historically been influenced by used car values. Lower used car values make it more economical to deem a car a total loss after an accident. With the IAA acquisition now closed, we are embarking on an exciting new chapter for our business. To signify this new chapter as a combined company, we are unveiling a new corporate name RB Global. Our new corporate identity reflects our structure as a diverse portfolio of verticals under a singular umbrella and our vision for the future of our company as a premier global marketplace leader. We will continue to do business under the Ritchie Bros. and IAA brands. We expect to be united as one organization under the RB Global name. More broadly, the integration is off to a strong start. We have already kicked off detailed planning through our integration management office and implemented our new senior leadership organization. I'm pleased with how quickly the team has come together and confident that the new organizational structure will allow us to drive accountability across the entire company. As we continue integrating IAA and Ritchie Bros, each member of the leadership team is focused on their area of expertise. For me personally, IAA has been strengthening relationships with current and prospective customers in the automotive vertical to ensure we are doing all we can to drive value for them and reinforced by RB Global is the right partner. As part of this work, we are focusing on driving the very highest levels of service to IAA customers on a more consistent basis and reduce the kind of churn that the salvage industry has experienced in the past. Jim Kessler, our President and Chief Operating Officer, has dived deep into the workstreams that will drive significant value creation from this combination. Jim is focusing on our transaction and service offerings, which will ultimately drive revenue growth and cost savings, meaningfully enhancing the margin profile of the combined business. We are in the process of constructing tests to validate the various opportunities we highlighted during diligence, which will form the basis for prioritization and ultimate execution. As always, we will keep you informed of our learnings and progress as we move forward in the coming quarters. Our Chief Transformation and People Officer is leading the execution of IAA integration planning to drive cost synergies. In the weeks following the close of the transaction, we've already identified and implemented actions that will result in approximately $15 million in annual run rate cost synergies. Based on our progress, we continue to expect to deliver $100 million to $120 million plus of annual run rate synergies by the end of 2025. Finally, I would like to highlight our focus on ESG. We have published our 2022 sustainability reports for both Ritchie Bros. and IAA. Both reports can be found under the Sustainability tab of our Investor Relations website. With that, I will now hand the call over to our Chief Financial Officer, Eric Jacobs, to discuss our financial results for the first quarter, and to provide some additional outlook and commentary.

Thank you, Ann. Welcome everyone who's joining our call this afternoon. Since we are including 11 days of IAA activity in our reported financial results, and we have a considerable number of new investors, we will make some preliminary and other remarks throughout my section that we aren't expecting to repeat each quarter. First, as you look at our results, please note that we are now reporting our financials as one business segment. We made this change to reflect how we are managing the business post the acquisition of IAA and the implementation of our new senior leadership structure. As we have said previously, we view the IAA business as an additional vertical for our broader marketplace. I also want to note that we will be reporting our results on a calendar quarter basis in line with how Ritchie Bros. has done so in the past, but differing from the 13-week fiscal quarter that IAA previously reported on. A couple more preliminary items. To aid in the modeling of the combined company and to allow you to track trends we included five quarters of pro forma combined GTV and revenue data as a supplemental table in our press release today. With the acquisition, we will also update how we report gross transaction value or GTV. We will now report GTV in three sectors or categories; automotive, commercial construction and transportation, and other. Please note that each sector can be comprised of salvage and non-salvage transactions from both Ritchie Bros. and IAA. Automotive is comprised of consumer automotive vehicles. Since automotive vehicles sold by Ritchie Bros. are now included in this category, it will make historical volume figures reported by IAA not comparable. Commercial construction and transportation consists of construction equipment, which is also known as yellow iron. It also includes lift in material handling equipment, vocational transportation trucks, as well as truck trailers. The other category is broadly comprised of transactions from our agriculture, oil and gas, and government surplus verticals, as well as equipment attachments and sundry items. We believe segmenting our GTV by sector will better allow us to talk about various end market trends impacting the business. Now, turning to our actual GTV results. On a reported basis, GTV increased 32% year-over-year. GTV growth for Ritchie Bros., excluding the impact of the IAA acquisition, was 10% for the quarter. This was driven by a continued rebound in unit volume growth, partially offset by lower prices, unfavorable asset mix, and unfavorable foreign currency exchange rates. When you see the negative impact of foreign exchange, GTV growth for Ritchie Bros. standalone increased by 12%. Excluding the impact of the IAA acquisition, lot volumes were up 28% year-over-year in a quarter driven by strategic accounts. However, the average price per lot sold was down 14% versus the first quarter of 2022. In recent quarters, I've discussed the crossover between price and volume that we are experiencing. We are cycling over the all-time high pricing for the first quarter of 2022 and seeing our lot volumes increase and lower dollar value, rental and transportation assets. Geographically, we saw strength in Ritchie Bros' performance in GTV growth in the United States. This growth was partially offset by declines in GTV in Canada and internationally due to significant auction events that did not repeat in those parts of the world, as well as the impact of foreign currency exchange rates. On a pro forma combined basis, GTV increased 1% year-over-year, driven by the strength in the commercial construction and transportation category, offset by the weakness in automotive that Ann discussed. If you plan a model GTV, we expect the trend of higher unit volumes in our commercial construction and transportation sector to continue in the second quarter. This growth will be partially offset by continued pressure on average selling prices due to asset mix and soft category pricing. In the automotive sector, we are expecting a modest increase in unit volumes and continued pressure on average selling prices. Taking all this into account, we expect GTV growth in the second quarter to be up low-to-mid single digits year-over-year on a pro forma combined basis. Moving now to revenue. Let me first discuss our types of revenue. Service revenues comprised of seller commissions, buyer fees, and revenue from our marketplace services. Historically, Ritchie Bros. had a 60% commission rate versus 40% buyer fees. Whereas IAA was about 20% commissions and 80% buyer fees. On a pro forma combined basis, we were at roughly a 35% to 65% split between commissions and buyer fees respectively. Inventory revenue is the gross transaction value of the assets we purchase before they are subsequently resolved through our marketplace. Historically, both Ritchie Bros. and IAA have had inventory revenue. In the commercial construction and transportation category, inventory revenue tends to be driven by consigner preferences, while in the automotive category, it's a combination of contractual obligations and vehicles purchased for dismantling which can also vary quarter-to-quarter. There tends to be more inventory revenue transactions in international markets. Therefore, with higher preferences, large bulk transactions, and/or changes in the dollar amount of international activity, could distort our total revenue growth. Consequently, we continue to suggest that investors look at our total GTV particularly for our commercial construction and transportation sector as another metric to gauge growth and performance. On an as reported basis, our service revenue increased 40% year-over-year, and our take rate, or service revenue as a percentage of GTV was 18.1%. Excluding the impact of IAA in the quarter, service revenue increased 13% with our take rate expanding by 40 basis points to a take rate of 17.4%. The increase in take rate for Ritchie Bros. on a standalone basis was driven by growth in marketplace services revenue and the impact of higher buyer fees, partially offset by lower seller commission rates. As we discussed last quarter, we expect lower commission rates due to the higher mix of GTV from Ritchie Bros. strategic accounts. We expect this trend of lower commission rates to continue in coming quarters with the expected continued growth of strategic accounts. We continue to see strong growth and smart equipment routes. However, Ritchie Bros. financial services experienced stagnated growth in the first quarter due to the impacts of tighter credit standards, higher interest rates, and changes in asset mix. The current environment makes it more difficult to match customers with our lending partners. In some cases, our banking partners have completely stopped lending against commercial transportation assets due to weakness in that end market. Now, let me move to the next slide. On a pro forma combined basis, service revenue increased 10% year-over-year driven primarily by a 160 basis point expansion in our take rate. Both Ritchie Bros. and IAA benefited from higher buyer fees. There was also an increase in marketplace services revenue at Ritchie Bros. The increase in buyer fees helped offset the decrease in seller commission rates, which we previously discussed. Turning to inventory revenue. On an as reported basis, our inventory revenue increased 30% year-over-year with an inventory rate of 11.7%. Excluding the impact of IAA, inventory revenue increased 5% with an inventory rate of 10.2%. As previously stated, we view inventory deals as driven by customer preferences, and we leverage our data and analytics to set appropriate targets for these packages. There was a 160 basis point contraction in the Ritchie Bros. inventory rate compared to the rate in the prior periods. This decrease was due primarily to increased competition and an unfavorable mix of inventory packages in the recent quarter. That said, the Ritchie Bros. inventory rate has been at the higher end of historical ranges more recently. As we focus on accelerating our commercial construction and transportation GTV, we will continue to structure average deals to win where it makes financial sense. On a pro forma combined basis, inventory revenue declined 10%, and the inventory rate declined 300 basis points year-over-year, primarily due to lower used vehicle pricing, coupled with less non-insurance vehicles being purchased due to a tightened supply environment and fewer contractual bulk automotive sales than in the prior year quarter. Before turning to earnings, let me discuss our expense categories. Cost of services includes yards that support weekly auctions, such as IAA yards and Ritchie Bros. GovPlanet locations. Cost of services also includes indirect costs incurred to earn auction revenue or marketplace services, which includes the cost of our inspectors for auction services. This is consistent with how each company has historically reported. Selling, general administrative expenses include yards not used for weekly events, such as our typical Ritchie Bros. yards. It also includes expenses for our corporate functions. Once again, this is consistent with our prior historical reporting. Acquisition-related and integration costs include certain legal finance and advisory and other costs related to acquisitions. It also includes integration costs such as severance. On an as reported basis, our adjusted EBITDA increased 26% year-over-year, and our adjusted diluted earnings per share increased 24%. A substantial portion of the growth in adjusted EBITDA came from the inclusion of IAA this quarter. Please note that in our most recent earnings call, we indicated that we were expecting headwinds in our flow-through on a Ritchie Bros. standalone basis as we continue to add the necessary resources to support higher unit volumes. In the first quarter, we also invested in incremental salespeople to expand our market coverage and continue driving unit growth into our marketplace to sustain strong growth in the coming quarters. Our expenses also increased year-over-year due to headcount investments to process the growth in services revenue and higher levels of travel expenses associated with customer events, industry conferences, and internal annual kickoff meetings. We are in the preliminary stage of determining the fair value of the assets acquired in the IAA acquisition. One adjustment that we've already made is related to IAA's prepaid consigned vehicle charges of $73 million, which were adjusted to their fair value of $9 million in the opening balance sheet. During the first quarter, this adjustment resulted in a $12 million reduction in our costs of services that would have otherwise occurred absent purchase accounting adjustment. This adjustment will also result in an additional $52 million reduction in our cost of services primarily in the second quarter of this year with any remaining amount in subsequent periods. Any income statement benefits from the fair value adjustment of these prepaid costs, as part of purchase accounting, are being treated as a reduction to adjusted EBITDA and adjusted net income in the quarter when we received the benefit. As we continue to work on finalizing purchase accounting, we may identify our value adjustments, which may have an impact on our income statement in the future. Since the close of the acquisition, IAA's adjusted EBITDA has been broadly in line with our expectations. With higher service revenue, offset by incremental higher tow and branch-related costs when you compare that to the prior year. As Ann noted earlier, we have started to implement our integration plan and have already acted on approximately $15 million in annualized run-rate cost synergies in the first quarter. The cost to achieve these synergies in the first quarter was approximately $14 million. We previously highlighted that we expect cost savings from synergies realized net of the cost to achieve those synergies to be a net $28 million incremental expense for 2023. Accounting for synergies and business needs, we expect selling, general, and administrative expenses to be between $175 million and $190 million in the second quarter, exclusive of share-based payments and other adjusting items. Regarding income taxes, we currently expect the effective tax rate, excluding the impact of adjusted items, to be between 24% and 26% for the second quarter. This corresponds to a GAAP tax rate of 26% to 28%. Next slide, please. As of March 31, our total net debt was approximately $2.7 billion and our total net debt to trailing 12 month adjusted EBITDA was 5.4 times. Note that the trailing 12 months adjusted EBITDA only includes 11 days of contribution from IAA. However, if you calculated the ratio on a pro forma basis, we would be below three times. We remain committed to deleveraging to approximately two times by the end of the first quarter of 2025, and as part of our plan we expect to pay down at least $150 million to $175 million of debt in 2023. Our forecast for interest expense in the second quarter is expected to be between $65 million and $68 million including the amortization of deferred financing costs. Our total blended interest rate is currently approximately 8%. At the end of the quarter, our fixed-to-floating interest rate mix was approximately 40% to 60% respectively. Just a quick note on capital expenditures. We previously sold our Bolton facility for a $169 million pre-tax gain in the first quarter of 2022, with the plan of investing proceeds from the sale into several new yards. One of those new yard properties, an AmRest, was originally expected to be purchased in the fourth quarter of 2022. However, the purchase of the AmRest property for $17 million did not actually close until the first quarter of 2023. Therefore, we now expect total capital expenditures to be between $275 million to $290 million on an as reported basis in 2023, driven by continued investment in yard capacity, as well as an increase in internally developed software capitalization. Next slide please. This is the same slide as we saw last quarter. We wanted to continue to highlight how we will be accounting for the convertible preferred equity that was issued in the first quarter and the impact it will have on calculating our earnings per share, both reported and adjusted. As we noted last quarter, we will be using the two-class method as it is expected to be more diluted. The impact of the convertible preferred equity in the first quarter decreased our adjusted diluted earnings per share available for common shareholders by approximately $0.5 per share, and this impact on earnings per share is expected to continue. Thank you all again for your time today. And now back to Ann.

I thank our incredible team for their relentless focus, execution, and dedication to our company. With IAA, we have a brighter future ahead. Operator, you can now open the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question will come from Sabahat Khan at RBC Capital Markets. Please go ahead.

Great, thanks and good afternoon. I guess it's on the $15 million synergies, can you provide maybe a little bit of color on where they came from? And the $14 million of costs?

Yes. Hi Sabahat. Let me start, and good afternoon to everyone on the call. So as we stated, the integration work is off to a very, very strong start with one month reported and already at that level of synergies. So if you recall, the various buckets that we highlighted, we were very clear that the first set of synergies was going to come from redundancy in executive ranks. We took those actions and communicated those changes, which was a big portion of that work. The other piece of it was really thinking about exact duplication of functions, like HR, where we took actions, and the bulk of the one-time costs in order to achieve, thinking about the bulk of those were severances and similar actions. So, again, we are very, very pleased with how the pieces are coming together.

Okay, great. And then maybe we can get a little bit of color on sort of the underlying trends. Maybe in the Ritchie business, I think you called out some fleet realignments that help. Maybe just the base level trends on that business or going and maybe just the dynamics on the IAA side as well, obviously a lot of headlines around used car prices moderating. Maybe how that trend is going, and maybe how volumes are trying to get some base level trends on both businesses at this point in here.

Yes. Perfect. I'd love to. So talk about both businesses, which is why we're so excited. Our both cyclical and counter-cyclical, so do well on both sides of the equation. So for Ritchie Bros. at a high level, and we highlighted this previously, the way to think about our businesses on that side is to think about the kind of construction equipment, that yellow iron that hasn't exactly started to loosen up yet. But other categories, like transportation, like the lower-priced items that you often see in rental, like the aerial equipment, that kind of stuff, we're starting to see more of what you see on the Ritchie Bros. side, and Eric alluded to it in the prepared remarks, as we see growth with our strategic accounts where historically, in the last few years during COVID, they have just not had equipment to sell. So, as they sell equipment, obviously, they're bigger customers, so our seller rates, they are lower than our average business, but the volume coming in is very, very strong. So we're very pleased with that. Net-net again, as Eric said we're expecting to see strong growth and are very happy with what we're starting to see with supply chain shifts and openings, which are not in every category, but we are beginning to see the light at the end of the tunnel. And on the IAA side, as you noticed, as US vehicle prices are expected to reduce, that increases the total loss ratio. And again, as a reminder for certainly the Ritchie Bros. investors that maybe aren't as versed in the IAA business, the higher the US vehicle price, the more likely vehicles become to be fixed, and not deemed a total loss. As the vehicle price falls, the volume more than offsets the reduction in price. So, again, very, very good news on the IAA side. Net-net, again, that is why we're looking for that low to mid-single digit growth that Eric referenced.

Great. And then maybe just one last one, just a high-level question, if you can maybe share some perspective on kind of what your integration team looks like. I think you may have alluded to, at some point thinking about getting some external support there. And how many folks you have dedicated to that, and just what kind of the who's leading the process and just how we should think about it just the evolution of that team and what you'd expect on that front?

Yes, so as at let's pick up. One of the things we committed to, and obviously there's almost a maniacal focus on day-to-day execution. So as we said previously, the percentage of employees that are part of the integration team is a very, very low percentage of employees. Right? We have people, and you see it in the results in the quarter, that are very focused on driving results, driving SLAs, and the full-based approach to the customer— that is the vast majority, over 99% of the employees. The integration team comprises experts across various roles. It was important for us to have the head of integration be our Chief People Officer because so much of the integration work is about bringing the people side together. So that team is very purpose-built and has broken down the cost synergies by functional area; each area is represented, and each area knows what their portion is to deliver of the $100 million to $120 million expectation. And of course, sooner is always better than later. And then similarly, revenue opportunities are prioritized and highlighted, with a portion of the integration team focused on starting to put some tests in place to begin validating hypotheses. We have partnered with external consultants who are known for their integration expertise, which has been instrumental in driving the process forward. So again, a very, very tight team with very high expertise.

Great. Thanks very much.

Thank you, Sabahat.

Your next question comes from Michael Doumet at Scotiabank. Please go ahead.

Hey, Ann. Hey, Eric. A few weeks back, you announced a transaction for land. I wonder if you could talk about how active you think you'll be in terms of making adjustments to the land assets, or the combined land assets in the near term. And on the topic of the largest revenue synergies opportunities, you guys highlighted pre-deal that are required more optimal use of the Atlanta office to gain. You're just wondering how ready you guys are with what you currently have?

Yes. So hello, Michael, let me start and then I'll turn it over to Eric. So let me start with kind of the second part of your question, which is we are, first and foremost, committed to debt paydown and getting to the leverage, so that we committed to our shareholders. So that's number one. Number two, we were clear during diligence, and we are even more clear now that to accomplish the goals that we set forward, we have the real estate footprint to achieve those goals. That's always going to be opportunistic. And candidly, there were things already in the pipeline, which is an announcement that was made. All of those were in the process in terms of the capital plans. In fact, some were meant to happen last year, they just simply were delayed, which is why you saw them recently announced. That said, we are obviously very focused on both driving Ritchie Bros. GTV using IAA real estate as part of our satellite yard strategy. In fact, we have two pilots kicking off in the next 60 days without any permitting issues as we anticipated. Similarly, we are looking to drive IAA share expansion through SLAs, and given where their utilization of the yards stands, there's plenty of room to run. So, feeling very good about it. Eric, don’t know if there's anything else you want to add regarding the real estate acquisitions.

Yes. Just real quick, so the announcement that went out regarding IAA essentially there were three properties that they were purchasing or at least buyouts. One was a new facility. Ritchie Bros., when we sold Bolton, planned on buying three properties, although, as Ann said, those are all reflected in our projections that we had in the last quarter. And so you can kind of get a sense in the near term what our capacity requirements are. Then over time, as we deliver, we'll look at the ROI on buying any additional properties and make that determination.

Very good thing. Thanks. And let me just turn it over. And I think you commented about total loss ratios just above 19% versus pre-pandemic, I think closer to 21%, 22%. Higher salvage volumes will presumably lead to lower salvage prices. IAA has adjusted its fee structure. So I was hoping that you can walk us through the incremental contribution and should dollar impact from higher volumes and lower prices? Ideally, really what the buyer fee is from a fixed variable standpoint?

Yes. So let me just say, we are always better off with volume, even without the service. And obviously, we plan on enhancing at IAA the way we've done at Ritchie Bros. over the last three and a half years. We are always better off with volumes as it is not linear because a big portion of the fee basis is fixed. So as you've noted, the total loss ratio has a long way to go to recover from pre-pandemic levels. Number one. Number two, that is a permanent tailwind with cars obviously getting more complex, and distracted driving is a real issue. So there's a lot of tailwinds in the business. So the bottom line is that we're always better off with volumes. We are seeing those churn and becoming a tailwind for IAA. Also, we are looking ahead to next quarter as it's expected to be the last quarter of the years-long loss of a single large customer. Therefore, we will have clean numbers and allow us to perform and take a lot of the benefit from this total loss ratio recovery.

Perfect, I'm going to try to squeeze in a third in apologies. But for Eric, the expected pay down of $150 to $165 million. If I add the dividends, is that effectively what you are targeting for free cash flow this year?

So, I mean, it's at least $150 to $175 million. We'll evaluate and see whether or not it makes more sense, so the number could be higher. That was more of a minimum target. We declared a dividend of $0.27 per share. For this upcoming quarter, we haven't indicated what our plans are for the remainder of the year at this point. But our working capital may move a little bit with inventory and such, but those are the major things that we're thinking about.

I will pass lines. Thank you guys.

Thank you, Mike.

Your next question comes from Craig Kennison at R. W. Baird. Please go ahead.

Good afternoon. Thanks for taking my question. Ann, it sounds like you've already had conversations with your new insurance customers. What are they telling you about changes you can make and whether it will actually lead to incremental market share?

Yes, correct. Hello. And yes, as I said originally, it's been a homecoming of sorts as for those on the call that may not be aware, the business I ran prior to Ritchie Bros. was called Abra Auto Body and Collision— these same insurance customers, literally the same people, were my customers there. So a lot of refreshing all of those relationships. Look, for me and for those of you getting to know us, we always think of the world as in our control and out of our control. Here, there's an output. That is not the thing that we're controlling. What we are controlling is driving the very best service levels for our customers, understanding what those are very minute the customer by customer, mapping our operations to ensure that day in and day out, we deliver the very best service in the industry, and then market share becomes an output. So absolutely we've been meeting with the top insurance carriers and other customers of IAA as well, understanding again what it is they require and how best we can meet their needs.

Thanks. And then on a different topic, IMS. What should we expect, in the way of disclosure related to IMS adoption rates prior to the IAA acquisition? Of course, that was one of the key performance indicators that we were tracking.

Yes, absolutely. So obviously, Eric added to IMS. Let me just take a step back. So inventory management system is what IMS is, again for those shareholders getting to know Ritchie Bros. We launched at CONEXPO in Vegas in March, a new version of IMS called the route fleet manager. And the reason that was an important launch is, as we said all along, think about IMS now as a route fleet manager as a critical building block of the marketplace. So in thinking about a marketplace, think about the gateway as this route fleet manager, which is the previously known IMS. And then now you want to be able to form transactions. So that very first building block was the IMS. It did incredibly well. It continues to do incredibly well. We didn't publish the number of, but IMS activations increased 184% versus prior year. So again, another stellar performance. What we're focused on now is the next building block, which is really to enhance our transaction capabilities. So we are about to pilot the next building blocks of Ritchie Bros. 2.0, which is the marketplace technology in Sacramento with the transaction engine. So that'll be the first time that we automate the transaction function within Ritchie Bros. 2.0 and items coming into IMS or route fleet manager, so really think about. We've said all along that the IMS, now called route fleet managers, is the gateway. And we are going to be reporting out each of the building blocks as we go. Ultimately, again, those are going to translate to attachments and revenue and services growth. And so at the end, please expect what we've said all along, which is we're going to be driving GTV growth, we're going to be driving service attachments, we're going to be automating how that goes which should drive a higher service revenue than GTV growth, and then running that exact same play on the IAA side of the business. So we are right at that second building block and launching that into Sacramento next month. So we're very excited.

Great, thanks, Ann.

Thank you. Your next question comes from Michael Feniger at Bank of America. Please go ahead.

Hi, everyone. Thanks for taking my questions. You guys guided last quarter for Ritchie Bros. SG&A to be $125 million to $130 million. The P&L has $148 million. Obviously that includes a lot of other costs in the IAA. Did Ritchie costs come in higher than expected? I'm just trying to understand the Ritchie EBITDA grew 3% year-over-year in that bridge chart. Yet your service revenue growth was 13%. So just trying to understand if there's anything we should be aware of in the first quarter on the SG&A as growth picked up?

Yes, Michael. So there's a little bit of noise in there, but it was a couple million dollars higher than we expected. We kind of gave some of the reasons for that. The lower commission rates due to the higher impact of strategic accounts, and on the cost side, you had some events, and you also had a higher cost to process than we were originally expecting. So those contributed. Also, when you think about comparing EBITDA this year versus last year, we had all-time record high pricing last year. And so the flow-through was significantly higher, because you benefited all in price, and higher commission rates. That was a big if you're looking at sort of the trends, what happened.

Okay. And then Eric, you said IAA adjusted EBITDA was in line with expectations. So what are the expectations for this year? I believe the EBITDA last year for IAA was around $540 million. I could be wrong. Is that the number to start with? Are you growing that number in 2023?

So I think right now, when we're talking about expectations, it's what was in the S4 in the proxy statement as you kind of saw in there the plan for Ritchie Bros. and IAA. As we said during the process, particularly that is essentially our budget for the business and what we're operating to. IAA was right on plan, if not slightly ahead of expectations on EBITDA, primarily based on most of the earnings metrics for the business.

If I could just squeeze one in. Like the guidance for Q2 on GTV, what are we kind of thinking for the standalone GTV and standalone IAA? It sounds like the volume should be getting better. So I guess when you're trying to understand the puts and takes for that GTV guidance for Q2 and what with also the quarter Ritchie business seems like it's also saw a pickup in towards the end of the quarter?

Yes, so on a pro forma basis, we saw GTV up 1% for Q1 combined. So we say it's low to mid single digits for Q2 on a combined basis. Keep in mind that IAA had a tough comp for Q1 and it was down by around 5%. So yes, we do expect it to do better. And we expect Ritchie Bros. to do better. I really don't want to break it out in terms of percentages for each since we're just providing a range, but we expect both to do better. I should say, we expect IAA to do better, particularly as Ritchie Bros. had a very strong quarter.

Thank you.

Thank you, Michael.

Your next question comes from Maxim Sytchev at National Bank. Please go ahead.

Hi, good afternoon.

Hi, Max.

Hello. I was wondering if you don't mind commenting on the pro forma CapEx intensity for the business because in the slides you talk about $275 million to $290 million on an as-reported basis. And maybe if you don't mind tying this into your evolving yard strategy for the combined business would be super helpful? Thanks.

Yes. So why don't I take the second part, and I'll let Eric talk about the pro forma CapEx numbers. So as we said before, no further land is required to execute what we put forward. As we're running the local yard strategy, again, the two pilots that are starting and doing we're excited; no issues with utilizing the land at IAA, so on and so forth. Everything we had in our sights, we put into the proxy in terms of CapEx requirements. Like Eric said, the Bolton replacements. The pieces of the building blocks we highlighted in our thesis for the acquisitions are holding strong. Eric, do you want to add anything?

Yes, I think the CapEx goes down in the outer years in the proxy because, as we said, we have line of sight into the replacement properties for Bolton on the Ritchie Bros. side. IAA had some current plans. Just to remind the group, the CapEx number that I gave you is the one that we talked about in the proxy. It really included CPE CapEx, as well as capitalized software, that is internally developed software. Historically, if you look at our CapEx under that definition, more than half for both companies was on internally developed software. We've talked about the investments in Ritchie Bros. 2.0 to our marketplace technology. As part of the integration, we expect to use technology as a way to gain some of the synergies, particularly in finance. For those who have heard me discuss this previously, a lot of the manual nature and processing for Ritchie Bros. gets addressed with some of the technology enhancements that we're doing, which is reflected in our CapEx numbers as well. So it's not just land; it's technology.

Right. Okay, that's great. And then maybe just one follow-up if I may. Ann, do you have any sort of incremental early thoughts on getting traction in international markets on the IAA side? Just wondering where you stand on this right now? Thanks.

Yes. So Max, it is one of our top 10 initiatives as we've put forward. What we're doing now is thinking about—so first of all, we closed 10 days before the end of Q1. So think about where we are right now is scoping and thinking through pilots and partnerships. The other side is extending the integration work to really connect the sales teams together to understand how it is they work. So they're getting the feel for each other's business as we move forward and start executing. So, it's very early days, but I am optimistic. Again, as we're laying out the pilots, don't see any difference on the land side, don't see any difference on the people side, and it’s merely a matter of starting to test things. Again, for those that are new to us, we are fond of tests and learn. I'm a geek engineer. We have a hypothesis; we put tests in place. There is never a good or a bad; there is a learning cycle for us. And then we're very transparent in reporting out to our investors about how we're doing. So those tests are getting identified and put in place as we speak.

Okay, excellent. Thank you so much. That's it from me.

Your last question will come from Larry De Maria at William Blair. Please go ahead.

Hi, thanks. And good afternoon, everybody. I just try to understand the price volume outlook a little bit more. Obviously, you're doing a nice job driving volume, which you've done for a while here. The average prices and mix are headwinds. But just for clarification, do we expect at some point—given what your comments around opening up supply chains that you think mix will substantially change into the second half? Obviously, being an improvement. So curious in your thoughts on really driving better mix? Because pricing will still be under pressure. If that's what you're implying? And secondly, and I know you touched on this even recently on the call here, as it relates to site leverage, should we expect cross-leverage on the Florida site this year or that is something and to test and learn and more likely 2024? Thank you.

Yes, hello, Larry. So yes, so again, no crystal ball, but for those that are new to us, Ritchie Bros., we've had a volume issue, but we've had a very significant mix issue in that the higher-end equipment has been harder and harder to get. We are starting to see the light at the end of the tunnel. It is early days, but we are expecting that to get better, and I am very hopeful for what that translates into for mix. Still again, seeing a light and actually seeing the equipment are two very different things. But again, back in our control and out of our control, we play the hand we're dealt and I think the team is doing an incredible job with driving the volume, holding the margin rate, and really driving an incredible business. And on the IAA side, a very similar story; Eric said we're expecting Q2 there as well.

Just to add, I'm sorry, Larry. How are you doing? Just to your second part of your question regarding Florida. As we said, when we were in the pre-closed phase of this transaction, the way we view Florida is for overflow during catastrophic events. There's never— it's not part of the plan. Not saying that we won't — we won't be able in certain cases to leverage Ritchie Bros. yards, but for day-to-day business, it was really about if there's a catastrophic event in Florida, making available the Ritchie Bros. Orlando location if it was needed. The good news is that we've learned is that IAA has done an incredible job in Florida with recent events over the last couple of years in terms of getting capacity availability when they need it. We should be well covered in Florida and other places as we build out the business and grow.

Thanks. That's what I was getting at. Whether you'd think we'd see some catastrophic business on the Florida site this year. Thank you.

Yes. That would be a total crystal ball situation.

Yes. And here's what’s very interesting. With the recent slide, I know I'm going long, and some years giving us the same guide. With the recent flood in Florida, we were able to see firsthand—it’s one thing during diligence, it’s another thing to see the capabilities. Exactly as they were accessed, the team at IAA has built for catastrophic events with this overflow NASCAR lots and how the storms are tracked and which sites light up for the potential of where the volume is going to go was just incredibly fascinating learning. The team did a stellar job. It wasn’t a big event. But I will tell you, I heard from some of our top customers, insurance carriers in Florida, literally praising the team’s performance. Hopefully, some are listening because it was fantastic to see firsthand.

Okay. Thank you. Obviously, we understand, we can't predict the weather, but hopefully you cite. Thank you.

At this time, we have no further questions. So I will turn the conference back to Ann Fandozzi for any closing remarks.

Wonderful. Thank you. Before I end the call, I would be remiss not to take the opportunity to thank our shareholders for their support of the combination of Ritchie Bros. and IAA. We are deeply involved in the integration work, and it is off to a very strong start. For the shareholders on this call that are new to our quarterly calls, welcome. We are an open book with how we're doing, and things are looking very promising as we drive a very unique marketplace strategy for insights, services, and transaction solutions across verticals. Stellar progress, incredible team, and we thank you for all of your support. And with that, we also thank you for your time and have a wonderful rest of your day and your week.

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for participating and ask you to please disconnect your lines.