This morning, Jim Kessler, Chief Executive Officer, Eric Guerin, Chief Financial Officer, and Sameer Rathod, VP, IR & Market Intelligence, presented during day three of RBC's Canadian Industrials Conference. Overall, our discussion highlighted the operational improvements at IAA since RBA's acquisition of the company, the long-term trend for salvage rates, management's strategy for growing the whole car auction business, and capital allocation priorities. We highlight key takeaways below:
Giving insurers insight into SLA performance — In an effort to improve transparency and accountability, IAA launched an initiative to proactively provide SLA performance updates to its insurance partners (e.g., ASPs on vehicle sales, pick-up time, perspective on the type of buyer, CAT event performance). Recall that IAA's pickup compliance/tow performance was ~99% in Q1, which we believe indicates that the company is executing on the operational front. Management noted that this initiative has been received well, and while the company has opportunities to improve some metrics, the data shared has highlighted the strong progress/ improvement in their auto business.
Aligning culture and incentive structure at the auto platform (IAA) all the way down to the yard level — In line with previous commentary, management noted that they have reorganized the IAA platform to improve “clarity”/accountability (e.g., in the case that the central dispatching team is unable to process an assignment, IAA now holds a nearby branch accountable for picking up the vehicle in order to ensure timely receipt of assignments), while also realigning incentives down to the operating level. For perspective, IAA is now compensating business unit leaders to a greater extent on business unit performance as opposed to compensation/incentives being based more on company-wide performance, which was the previous practice.
Loss ratio could continue to increase — Recall that the loss rate has been increasing in recent quarters toward pre-pandemic levels, with RBA noting a loss rate of 21.1% in Q1/24 (+1.5pp YoY). Going forward, management highlighted that the long-term secular trend of increasing loss rates remains intact, driven by vehicles continuing to get more complex over time (e.g., autonomous driving systems are becoming more common among new vehicles, causing collision repair costs to rise, which in turn drives an increase in loss rates all else equal). Over the near-term, the loss rate will largely be dictated by the speed at which used vehicle prices normalize (trend lower).
Laying out the opportunity in whole car auctions – Recall that in conjunction with Q2/23 reporting, RB Global terminated IAA's non-compete agreement with KAR, which related to various non-salvage activities (e.g., whole car auctions), approximately one year early. Even while the non-compete was in place, IAA had been operating in the “whole car” space in a limited capacity over the years (and paying a royalty to KAR as a result), focusing on its niche of cars priced at <$4,000 (e.g., repossessions, rental cars, charity vehicles, etc.). With the termination of the non-compete agreement, IAA is looking to grow its share in the markets it currently competes in, while also growing its presence in adjacent markets (e.g., <$10,000 vehicles, noting the company is unlikely to scale into the >$16,000 market as that begins to compete with larger used car players).
Capital allocation: Focusing on paying down term loan A – RBA exited Q1/24 with pro-forma leverage of 2.0x (vs. target of 2.0x by Q1/25). Looking ahead, management noted capital allocation priorities include paying down the term loan A and investing in technology/ operations (recall that RBA reiterated its 2024 capex guide of $275MM-$325MM at Q1 reporting). On M&A, management noted that large acquisitions are not in focus as the company prioritizes integrating IAA; however, bolt-on acquisitions are a possibility going forward. Lastly, share buybacks are not a priority currently, noting the company does not have an NCIB in place at the moment.