Good morning ladies and gentlemen. Thank you for attending today’s IAA Second Quarter Earnings Conference Call. My name is [indiscernible], and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Caitlin Churchill with Investor Relations. Caitlin, please go ahead.

Good morning, everyone, and thanks for joining us today for IAA's second quarter fiscal 2022 earnings conference call. Speaking today are John Kett, Chief Executive Officer and President; and Susan Healy, our Chief Financial Officer. After John and Susan have made their formal remarks, we will open the call to questions. Before we begin, I would like to remind you that certain comments made during this call regarding our plans, strategies, and goals and our anticipated financial performance constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from such statements. Those important factors are referred to in IAA's press release issued today and in the Risk Factors section included in our annual report on Form 10-K filed with the SEC on February 28, 2022 and in our quarterly report on Form 10-Q filed with the SEC on May 10, 2022. The forward-looking statements made today are as of the date of this call, and IAA does not undertake any obligation to update these forward-looking statements. Finally, the speakers will refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is available in IAA's press release issued today. A copy of today's press release may be obtained by visiting the Investor Relations page of the website at www.iaai.com. I will now turn the call over to John. John?

Thanks, Caitlin. Good morning everyone and welcome to IAA’s second quarter earnings call. My plan today is to first provide some highlights from our performance in the quarter and then review our continued progress against our strategic initiatives. I will then turn the call over to Susan to discuss our financial results and outlook in greater detail. Let me begin by telling you how pleased I am with our team's focus and serving our customers at the highest level even in a period of economic uncertainty. As we reported this morning, organic revenue grew by approximately 9% in the quarter and as expected adjusted EBITDA declined. Despite some top line headwinds, which I'll discuss in more detail, our U.S. volume grew nearly 5% in the second quarter versus the second quarter of last year, excluding the loss from the top customer that we've talked about in the past. We are encouraged that our overall market share not only remained stable throughout the period, but our efforts to increase share also continue to build positive momentum. That said, we were impacted by several industry headwinds in Q2, including a decline in the percentage of vehicles declared a total loss, driven primarily by high retail or used car prices, as well as lower [non-CAT] [ph] weather related volumes, compared to what we normally experience in the second quarter of the year. Outside of insurance, our dealer, commercial, and consumer facing volume was also soft during the period, driven primarily by the continued low inventory in wholesale markets. Switching to the cost side of our business, like most companies in today's market, we continue to experience inflationary cost pressures, primarily in towing and branch labor. While these higher costs were anticipated, we are actively working to offset them by further driving operational efficiency…

Thank you, John. I will focus my discussion today on our adjusted non-GAAP results and touch on some key highlights. Please see today's press release for more details on our financial performance and our methodology when calculating non-GAAP results. Overall, during the first half of 2022, we continue to benefit from industry tailwinds related to elevated used car prices, which along with our strategic initiatives drove organic revenue growth of 14.4% for the period. Organic adjusted EBITDA declined 3.6% for the first half of this year, including an expected decline in Q2, driven by the margin headwinds we previously outlined, partially offset by continued strength in ARPU. For Q2 specifically, consolidated revenues increased 16.9% year-over-year to $520.3 million, including $38.2 million from the acquisition of SYNETIQ. Organic consolidated revenue, which excludes the impact of foreign currency and revenue from the Auto Exchange and SYNETIQ acquisitions increased 8.9% to $484.9 million coming from an increase in ARPU of 12.6% and a volume decrease of 3.2%. Service revenue increased by 839%, while vehicle and parts sales increased by 65.7%. The growth in ARPU was driven by an increased mix of purchased vehicles, the impact of internal initiatives, which includes our ability to pass on higher costs through an increase in service fees, and a continuing strong backdrop for used car prices. As a reminder, despite sequential month-over-month softening this year, the Mannheim Index is up approximately 10% at the end of June versus the prior year. With respect to volume, we had expected it to decline sequentially in Q2, due to volume loss from one customer and as John reviewed, the period was also negatively impacted by certain macro headwinds, including a decline in the insurance industry total loss ratio, lower non-CAT weather-related volume, and softness in the dealer commercial and consumer-related…

Absolutely. [Operator Instructions] The first question comes from the line of Daniel Imbro with Stephens. You may proceed.

Yes. Hey, good morning guys. Thanks for taking our questions.

Good morning, Daniel.

I want to start on a little higher level. I think in your prepared remarks, you talked more about some of your initiatives, whether it's data analytics, lender coverage, transport, I guess I'd love to hear why the increased detail? And I'd also love to hear, what is early customer feedback? How long would you expect for these, kind of initiatives to manifest into share wins? Just any kind of thoughts around customer feedback and potential share impacts from all the initiatives you discussed?

Yes. Thanks, Daniel. Yes, I mean, I probably talked more than usual because I'm excited about what we're doing in these areas and I think it's resonating well with our clients, both are – as I said, both are existing and as we look to expand our market position. Whether it's the data analytics where we really are, I gave that example, but we really are unlocking ways and helping sellers find better ways to market their vehicles. And really, we've got tools now that we're using in a way that we've never used before. And we're also again with the data that we have on our buyers really understand, kind of the cohorts of different types of buyers that we have and how they behave so that we can target to them and make sure we're getting the right value. I mean, those are just, kind of both sides of the demand and the supply. And then certainly, loan payoff as we continue to add lenders and now we've got this solution where we basically could handle 100% of liens, it really is resonating well and I think carriers are recognizing now that we've got the critical mass that we need to really help them solve that persistent issue they have in trying to obtain the right paperwork so that we can sell a vehicle. So, yes, I'm excited about all those. The timing of when stuff comes, I wish I had that crystal ball, but I do think we are moving in the right direction and the feedback that I'm getting and seeing gives me confidence.

That's helpful color, John. And then Susan, as a follow-up, can you dig a little more to the total loss rate dynamic? First off, did you say it was [16.8%] [ph] in the quarter? Did we hear you right? And then if so, curious why you think it's dipped down sequentially? I guess used vehicle prices were relatively stable sequentially. I think the year-over-year increases were smaller. Just curious what would drive that down further? Is it lower accident severity? Is it a lack of replacement vehicle. It's just making insurance companies repair more accidents, is it something else? Could you just talk about why the step down if that was the right number?

Yes. You're correct. And we're quoting industry data on our total loss ratio just to make that clear. But John, why don’t you give some more color?

Yes, Daniel. So, I mean one of the other phenomenon that we saw was, while wholesale pricing, kind of flattened retail pricing really hasn't fallen off a lot at least it hasn't through the second quarter. And the ACV, which is what the carriers use, the actual cash value, that's really based on retail pricing. So, as retail pricing has sort of held that ratio of repair cost to retail price has continued to reduce that percentage. So, it is an important distinction to think about retail prices relative to wholesale prices when we're talking about this.

And I think related to that, it's kind of a lag effect, right?

Definitely.

Because I'm [sure trying] [ph] to decide based again on the retail prices whether something's a total loss and then that's what's going to create the additional volume for us. We're not surprised to see a lag effect there on the prices, sort of moderating, and when the volume kicks. You kind of see it on the front side of it, right? So, we saw increasing used car prices and total loss ratio remain high. So, it seems like a disconnect, but if you look at it on a lag basis, it probably makes a lot more sense.

Got it. So, your expectation would be, what you see in this summer with a slight moderation would be all else equal to the back half of the year that's a tailwind to the volume growth relative to the second quarter?

Well, like John said, we can't predict exact timing on that, but we would expect over the long-term that the total loss ratio is going to go back towards that [20%, 20% plus] [ph] that we saw. And as John mentioned, all of the factors that are there that increased the total loss ratio like vehicle complexity are not abating.

That's right.

Okay. Thanks so much for the color guys. Best of luck.

Thanks, Daniel.

Thank you. The next question comes from the line of Bob Labick with CJS Securities. You may proceed.

Good morning. Thanks for taking our questions. I'm going to talk about the [cost processor car] [ph] and you obviously discussed labor and towing as the headwinds there and they've been persistent. I guess, maybe if we could dig in a little more on those, how much of the increased costs are permanent, but when might they start to go back down? Is it in labor, is it just higher wages or is there, maybe higher turnover in your branches that could dissipate as the labor market improves? And in towing, is it like just fuel and labor or have the towing distances changed for whatever reason? I'm just trying to get a sense of when, kind of cost to [process a car] [ph] may come down as well?

Yes, great. So, let me start with labor. It has been primarily around rates, so having to pay more just given what's happening in the overall labor market. Turnover has abated. We certainly saw in the – what was called the great resignation last year. In particular, we did see higher levels turnover than we had experienced ever, but if we – we have certainly seen that begin to calm down. So, we do, but that’s the near term, again as what I talked about is, we are consistently looking at ways to take labor costs out to find ways to automate and simplify processes. So, we need fewer people to do some of those tasks and the people we have can focus on the higher value one. So, that's our approach. That's the phenomenon over the last year and then what we're doing about it going forward. In terms of towing, it was a similar situation is that a year ago or 18 months ago, the tow companies that we use couldn't find drivers. They had trucks and no drivers because they had either just they weren't interested in driving the tow truck. That is again beginning to stabilize as I talked about. In the core rates, really distances haven't changed to your you a specific question. Again, given our footprint and our vast network of facilities, we’ve to a certain extent control for how far we have to go to get cars. Fuel is a phenomenon right now. Obviously, with diesel prices while they're coming down, they're still very, very high. So, we are incurring fuel surcharges that we would expect to abate as fuel prices come back to some normalized level. So, there's a portion of it that we certainly see in the near term from a fuel price perspective, and then again, our towing rates have stabilized. The tow companies we use have been able to start to fill their trucks. And again, we're deploying technology and some of our analytics to help mitigate those costs to find ways to more effectively route to not have to go through a release center to get a vehicle released to dispatch truck right away because our data tells us that it's likely going to be easy to pick up those kinds of things. So, those are short-term phenomenon, but we're certainly just on finding ways to reduce those per unit costs going forward.

Okay, great. Thank you. That's certainly helpful color. And I guess just one other quick one on related to that, but in terms of the dollar strength, obviously, you call that in FX and what's going on there. How has it impacted if at all the international bidders are buying on the U.S. salvage cars at auction, has that impacted the – and obviously ARPU is still very high. So, it hasn't been too negative there, but what are you seeing in terms of international bidding activity in building your international buyer base and has the dollar impacted that right now?

Yes, I mean, I guess I would have at a high level expected some of what you described, but really we haven't seen it. Again, we continue to grow our buyer base. We're finding new markets and new ways to bring those buyers to our marketplace. And again, the robustness of our marketplace, even if they're operating in a currency that's not as strong, they're going to have to bid in dollars to buy the vehicles. So, they're going to need to compete with the domestic base buyers to get that vehicle. So, we really have not seen a negative impact on the bidding side from the strength of the dollar.

Got it. Okay, super. Thank you very much.

Thanks a lot.

Thank you. The next question comes from the line of Bret Jordan with Jefferies. You may proceed.

Hey, good morning, guys.

Good morning, Bret.

On the comment, continue to grow the buyer base, the international bidder for North American cars, is there any way to quantify that? I mean, you've done some push into North Africa and developing, sort of marketing offices over there, but is there a way that we can sort of look at that maybe how much volume is going over there with the change is?

Yes. We've always been hesitant to try and put a percentage on just because of the nature of the U.S.-based export buyers that we have that are shipping vehicles out of the country. So, it's – but we are measuring and the growth we're talking about is our foreign based buyer. So, it continues to be strong in West Africa, the Middle East, Central, and South America, Eastern Europe. You've seen where we have opened some of these – or established these markets partners. It continues to be strong. And I think as I've said before, there's still a lot of room to grow it, but there is –there's a lot of places in the world that we still think we can target or more deeply target to continue to grow that portion of our buyer base.

Okay. And then you commented earlier that market share is stable, I think. And then increasing the bottom-end of the revenue growth rate guide, does that imply that the large insurer who was shifting volume has stabilized or is the market share gains with others offsetting that loss?

I would say, it's sum of both, Bret. So, I think we are stabilized with that carrier and we continue to do well, kind of up and down the Tier 1, Tier 2, and Tier 3 carriers.

Okay. And then I guess one final question. On the SYNETIQ acquisition tailing expectations, I know you've also mentioned that the UK purchased vehicle spreads were going against you, is SYNETIQ impacted by that purchase vehicle spread or is it just the costs of bringing in the new customer in the UK that's impacting SYNETIQ?

It's a bit of both, Bret.

Okay. All right. Thank you.

Thanks, Bret.

Thank you. The next question comes from the line of Gary Prestopino with Barrington Research. You may proceed.

Yes, good morning. Hey, Susan, John, could you maybe just explain some of those market dynamics in the U.K. again just so I'm clear on that, what's going on?

Sure, Gary. So, it's primarily a purchase vehicle market. So, we're buying vehicles based on the ACV or PAV as they call it in the U.K., but you got to think about if a vehicle is damaged today and the insurance company establishes the value and they pay it, then we don't sell that vehicle for 60 or 90 days. It's a different market from when it was purchased. So, as used car prices are moderating there, we're sort of – we're buying and as the prices are falling, so we're having to sell at a spread that we've established isn't as wide as we would have expected. So, we believe it balances out over time, but we're currently in a situation where is sort of in transition as values are starting to come down.

Okay. That's good. And then why is it taking longer or there's more expense incurred from boarding this new client in the UK?

Yes. So one, the volume started coming later than we expected, but then in addition, again for some of these vehicles, because we're buying them, we're then putting them into inventory, but we're still having to incur labor and other costs that we don't capitalize at this point. And then we're not selling the dismantled parts or whatever we're going to sell, that doesn't come until later. So, we've incurred the front-end of the cost, but we haven't been able to realize the revenue yet.

Okay. So, as over time, this should balance out [balance work] [ph]?

Exactly. Yes, that's why. Again, as I said, it doesn't – my view is unchanged of our potential with this business and with that particular account. I think it's really good for us going forward.

Okay. Thank you.

Thanks, Gary.

Thank you. [Operator Instructions] The next question comes from the line of Chris Bottiglieri for BNP Paribas. You may proceed.

Hi, thanks for taking question.

Hi, Chris.

The first one I want to ask about volumes, so, if I heard you right, it sounds like volumes are up 5% in the U.S. ex-kind of top customer loss, but your total loss rates are down materially. I think miles [were down] [ph] slightly year-on-year at this point. So, I guess what would you attribute the 5% volume growth, like what's driving that? Like what are the factors that are pushing volume to this positive [ex-top customer] [ph]?

Yes. Well, I think as I've talked about over the last couple of quarters, we have been gaining share, but when we take that one customer out, we have been gaining share. And I think that's certainly been helpful. We're also continuing to – even though it's a constrained market, our dealer commercial consumer facing is another area where we continue do well to add to volume. I mean Susan, anything else, any other factors that you think about in the second quarter that would have driven growth?

Those are really the two factors that are driving in when you strip away that one customer.

Got you. Okay. That's helpful. And then the next question or last question would be just on SG&A, like pretty big decline in Q2, I haven't processed my model yet to see what the guide implies your back half, but just wanted to get your sense what's happening there? Are you actively cutting costs at this point? Any cost that kind of slipped in the back half? Like just some context there that I think probably the biggest decline estimate we've seen in a while, [that] [ph] would be helpful? Thank you.

Yes, a couple of things there. So, yes, we are actively managing our costs and being super selective and super rigorous about what we're going to invest in. There's also a couple of factors going on here. One is incentive compensation expense. So, last year, we outperformed our budget, we book compensation of that expense. We accrue it based on where we expect to end the year. This year, that's not the case. Obviously, we reset our bar and we make it at a point where we're going to have to work really hard to achieve it. So, that's one thing. And then I think it depends on whether you're looking at adjusted EBITDA – sorry, adjusted SG&A, you look at adjusted SG&A and that increased year-over-year pretty much roughly in line with the SYNETIQ addition. So, we had some one-time cost last year that aren't in the number this year, that aren't in adjusted SG&A.

Got you. Okay. I was looking quarter-on-quarter adjusted SG&A. All right. Thank you.

Thanks, Chris.

Thank you. There are no questions waiting at this time. I would like to pass conference back over to John for closing remarks.

Thank you. Just to reiterate the resilient nature of our business, and the industry overall, I really am confident in our ability to deliver positive results regardless of market conditions. As we further enhance our digital offering, and expand our global buyer base, we'll continue to execute on our strategic initiatives, including this focus on operational excellence and sustainability. We remain well-positioned to generate value for our shareholders in the quarters and years to come. Thank you for joining us and we look forward to updating you again during our third quarter call in November.

That concludes the IAA second quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect your line.